Sunday, April 12, 2015

Our Financial House Doesn't Actually Need A Roof

I read a New York Times piece this morning about the insurance business. You should read it. You wouldn't believe the kinds of tricks and schemes they get away with. I've learned some new terms for trickery. "Captive Reinsurance" for example. "Hollow Assets" is another. Some of the names of these shell companies will make you laugh. "Tapioca View." Is that a company you'd trust with your money? Insurers used to be the most careful people in the world, but they've changed. Fast and Loose makes bigger profits, at least in the short term...

Imagine paying for the insurance policy on your house with shingles from your roof?

When it isn’t raining, insurance companies think their financial structures don’t need a roof. As long as the sun shines and the premiums pour in they don’t need to have a functioning brain.

They’ve behaved the same way about climate change and the enormous risks––beyond enormous risks––sea level rises present to insured coastal properties and port facilities. "If it’s not happening now it will never happen” seems to be the bizarre logic of insurance giants.

“What me worry?"

How can they be so foolish? Because foolishness earns more in the short run. And the more a division earns this quarter the more important it is. And the more colossal the foolishness the likelier the government will bail them out. Insurance companies used to be more careful and responsible than that.

Well, a few of them are beginning to come around and behave responsibly. Finally.

Why did it take them so long? I suspect it’s because the big insurers have changed from thinking of themselves as insurance companies into thinking of themselves as investment companies. The side of the company that invested the premiums became sexier and more profitable. Also, low interest rates made secure, safe investments like bond funds less profitable and therefore less sexy. Life threatening risks might be bringing their attention back to their jobs. Is it in time?

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