Insurance at Risk

The information access revolution taking place over the past 10-15 years has had a number of unintended consequences. Certain professions have been marginalized as with many technological innovations. The rise of do-it-yourself and sharing among amateurs have allowed us to undertake things with more confidence and without the need to consult an expert in many cases. Personal privacy has been put in doubt and the concept of privacy will have to be re-evaluated. Another unforseen change is an undermining of the notion of "pooled risk," a principle that modern insurance is based on.

Insurance companies offer to pay for personal loss of a subscriber only if the pool of buyers is large enough to sufficiently cover the costs of a catastrophe and if the estimated frequency of such a catastrophe is low enough to ensure that claims do not exhaust the accumulated subscriber payments.

But today we know (and can know) a lot about people including an increasingly accurate estimate of their chances for encountering misfortune. With medical records, increasingly sophisticated actuarial tables, public health data, genomics and other information sources that can more accurately predict the likelihood of certain occurrences, insurance companies will become more discriminating in the policies they write and their premiums will more accurately reflect the chances that a subscriber will one day make a claim. Insurance policies will soon be based on data sources that were unavailable just a few years ago.

Computer models which estimate rates of crime, traffic, health problems and which also assess the monetary level of potential damages from these are getting better all the time. I suspect that soon they will be so good as to almost render the notion of pooled risk inconsequential. The uncertainty accompanying risk will be reduced so much that the marketplace for insurance will become nearly unsustainable.

For example, most of us know today that the vast majority of lifetime expenditures on health care take place within the last year of a person's life. The hospitalization, home care, therapies and drugs that characterize the chronically ill octogenarian's last year dwarfs expenditures made throughout his or her life. Of course, there is the possibility of catastrophic illness throughout our lives (such as cancer or permanent disability from accidents) but if we could eliminate those freak occurrences, we would all delay health insurance purchases until we were at retirement age since we probably won't need much in the way of benefits until the last years of our lives. (Health insurance is an odd case and I only use this example to illustrate the way that emerging information resources could guide decisions on insurance purchasing.) In fact, government regulation is the only thing keeping the health insurance market afloat as many insurers would eagerly cancel policies for those who develop a predisposition to illness. Such as the elderly.

Taken together with the burdensome economic situation that many insurance companies are facing, it may be that we can say goodbye to insurance as we have known it for many years. After all, if we can know so much about a person's chances for encountering misfortune, then the risk is removed for both parties. Only those who learn that their chances of having an accident or illness are high will purchase a comprehensive policy but insurance companies will only issue policies with large coverage to those whose chances of an accident or illness are very low.

This assumes that information flows freely; it is likely that corporations (insurance companies and their finance parent companies) will have an advantage in the collection and processing of this information.

But that's a topic for another post.

Market State v. Nation State

Many people (including myself) have said that the modern nation-state--just over 250 years old--is nearing the end of its useful life. Some day I will go into the reasons or the causes but for now I will just point to the many others who have said the same thing. The lesson may be that governance over more than just a few hundred thousand people is impractical in today's world but regardless, the days of the nation-state are numbered.

Some say that it will be replaced with what could be characterized as a market-state. I don't know much about this theory except that it appears to align with the long-standing assertion that we owe more and more of our allegiance and livelihood to the private sector (corporations, etc.) than to the government to which we remit our cash in the form of taxes. Again, I will save the details on corporate rule for another post but only note that the market-state, most commonly associated with the author, Philip Bobbitt, supports the growing recognition that multi-national corporations rule the world--including those presidents, prime ministers, legislators and members of parliament who are purported to govern.

Reconciliation of Historical Disparities in Standards of Living

A reconciliation between the standards of living in the industrialized countries of Europe and North America on one hand and the developing countries of Asia, Africa and Latin America is inevitable. Just as in the physical sciences, particles with a negative charge and those with a positive charge cannot exist for long without a spark jumping between them to eliminate the disparity, the vast uneven-ness of our income and wealth distribution over the last 50-100 years will inevitably change.

Nothing illustrates this more clearly than the almost irresistible flow of migrants from these poor countries to Europe and North America in search of work and wealth--even in jobs requiring heavy physical labor and paying near minimum wage. Migrants save and borrow what is to them large sums of money only to spend it on human smugglers and often extremely dangerous transport across desert or sea to reach the place where the industrial revolution cultivated an opulence that these migrants feel they can achieve only by risking their homes, years away from their children and in some cases, their very lives.

And because of the difference in numbers between the global haves and have-nots, it is more likely that the reconciliation which takes place will mean the standard of living in the industrialized rich world be reduced far more than they will be raised for the poor, developing world. In other words, U.S. lifestyles will fall far more than African lifestyles will rise. Most of us would agree that despite their desire for western lifestyles, it is unsustainable for 2 billion Chinese and Indians (to say nothing of the others) to eat meat and have personal and recreational use of automobiles on the level that has existed in North America for so long. There are just too many poor and too few wealthy for the reconciliation to happen any other way.

Still, some friends of mine argue that there is no solid reason why this is going to happen. They believe that things will stay basically the same as they have throughout their (admittedly short) lifetimes. But I answer that what I call the "Third world-ization" of the U.S. is happening now. Consider the characteristics of what we traditionally call a Third World country:

• Enormous disparities in wealth and a very small middle-class
• Crumbling infrastructure (e.g. roads, bridges, public utilities)
• The export of raw materials and import of finished goods

These are only a few but I think any first-time visitor to the less developed world notices these things. What they may not notice is that we are beginning to see these developments in the U.S.Clearly a middle class is growing in the less developed world. For most of the last century, these countries were characterized by extreme wealth among a small minority and grinding poverty for an overwhelming majority. The increasingly easy of movement of capital, information and labor occurring in the last 25 or so years facilitated economic investment by multinational corporations and that has brought millions out of poverty. (There have been harmful by-products of this investment by foreign corporations, but I will leave that for another essay.)

Creative Destruction in Finance

Economists and economics professors talk about something called, "creative destruction." The phrase may appear to be a contradiction but it basically means that something is dismantled, torn down or otherwise destroyed in the process of creating something better or more efficient that takes its place. Although there is destruction, it is all in the name of building something better

Title Explanation

It may be necessary to explain the title of this blog briefly. I have been thinking for many years about the misconceptions that many Americans have toward the history of their country, especially regarding the economic advantage that they have enjoyed in the last century. My impression is that many Americans attribute the boom years of 1945- as some sort of reward for a virtue that is found only in the U.S. population

However the truth is that much of the accumulation of wealth that characterized the last half of the 20th century was due to historical accident more than to any status that we have enjoyed as "chosen" or destined to lead.

Each great civilization lives and dies like any organism. It is born, it grows and develops, it flourishes, dominates, declines and eventually succumbs to an illness or some other attack.

I think it was Arnold Toynbee who said that of all the world's civilizations, most have died and the progression has been the same: from slavery to great faith; from faith to courage; from courage to liberty; from liberty to abundance; from abundance to apathy; from apathy to dependence and from dependence back into slavery.

Can you guess which phase the U.S. is in right now?