Wackynomics: Insurance, finance and economics lampooned


Risk

Official definition: Uncertainty of a financial loss

Real meaning: Judging from how insurance company headquarters buildings dominate the skylines of every city in America, there is absolutely no uncertainty. The odds of an INCO (insurance company) sustaining a loss are about the same as sighting an aircraft carrier in Montana.

Pure & Speculative Risk

Official definition:   INCOs cover only pure risks, which involve the chance of loss only. Speculative risk, because it involves the chance for loss or gain--as in betting on a stock or a horse race--is not insurable.

Real meaning:   Everyting is insurable. INCOs must speculate. If they insured only losers, how could they make money?

Insurers hate risk, so they spread it, like pudding on a dance floor, until everyone slips on it. But no matter how far you smear it, it's still pudding and it’s still a mess.  One can imagine an INCO risk spreader’s duties. It surely is a highly coveted upper-management insurance job. He or she walks around the countryside spreading risk, perhaps by pushing one of those garden gadgets that broadcast seeds, or they spew it from a crop duster all over Dallas and Pensacola. Pretty soon, there's risk here, there and everywhere--everywhere except, of course, in the insurance company's back yard. Later, like some somnambulant mutant giant Brussels sprout or a fourteen-armed pox-laden droid from a scifi movie, risk wakes from its sleep, and attacks a village in a hurricane or buries a mountain condo community in a mudslide.

When I get life insurance, my risk gets spread to someone else, right? That worries me. The poor schmucks who get stuck with my risk--the riskees or spreadees, take your pick—what about them? Do they get a vote? Will the spreadees get nervous with me, the riskor, what with all that peril hanging over their heads, and come and kill me? Does taking out life insurance seal my coffin? If life insurance were eliminated, would the homicide rate drop? Just knowing that some guy's out there gunning for me--I'm cancelling my policy first thing in the morning. And I'll demand the insurance company send a certified letter telling him or her—the spreadee/riskee—they're off the hook, so they disarm the time bomb in the trunk of my car.

Cars and risk, how does that work? Spreading risk, it seems, is like a bookie laying off a big bet on a hundred-to-one long shot. If the bookie can’t balance the giant wager with bets on the favorites, and the long shot wins, he’s wiped out. Say BIG FRED Insurance Company covers a huge fleet of long shot cars—a few thousand Beemers and Lexi and Mercedes convertibles owned by an oil sheik—and BF can’t lay off the bet because all its cash cow Buicks and winter beaters switch to GLIECO at once. The next day, every bored teenager in the sheikdom, looking for a new thrill, crashes into one another in a Middle Eastern version of demolition derby, and BIG FRED is toast. Scary to ponder, if you're a pushing a risk spreader down the boulevard.

Law of Large Numbers

Official definition: As the number of insurance risks increases, the more predictable actual results will be.

Real Meaning: When insurers deny selected large numbers of certain people coverage, and not pay large numbers of large claims, their profits are very LARGE NUMBERS.

Life Insurance

There are many forms of life insurance.   Here are a few:

Whole Life--A popular version provides coverage in case you die from an overdose of natural grain bread or cereal. A lesser-known variant pays $1 billion to any NFL running back who is accidentally killed while moving the ball exactly nine yards. Other versions of whole life cover lethal collisions with enchiladas, balls of wax, and magillas.

Hole Life--This is an obscure, cheap form of insurance that pays off only if you die from specific causes. To collect, you must choke to death on a the center of a donut; fall into a sewer or mine shaft; collapse after hitting a hole-in-one; expire from Swiss cheese poisoning; get your head stuck in a wheelbarrow tire; and so forth.

Term Insurance--One form covers politicians while in office; when they are voted out or impeached, they can convert it to Vatical Insurance.

Another form, called Full Term, is a policy that, for a mere $100 in premium, insures a pregnant woman for $10 million but pays off only if she carries her baby for exactly 38 weeks and 11 seconds from the moment of conception.

Terminal Insurance--Covers one's demise after becoming hysterical over losing one's luggage in an airport. Berkshire Hathaway, Warren Buffet’s conglomerate, sells this coverage through a network of property and casualty insurers. BH also owns a luggage company, so he makes money no matter what.

Vatical Insurance--Life after death insurance issued by the Pope, underwritten by the Vatican, and administered by nuns in a French convent who say the rosary thrice daily to save souls from burning in hell. Since no policyholder has ever called from the other side to report, some conjecture that this coverage may not be cost-effective.

Universal Insurance--there are several forms:
  1. Universal Life Insurance (UL)—also known as Everlasting Life, this is the holy grail of life insurers, the super Holstein of corporate cash cows. UL policyholders believe they will live forever, so they allow insurers to bill them for eternity, and never pay out a death benefit.
  2. Universal Appeal Insurance (UA)—one of the most lucrative of financial service products, UA insures articles everyone loves: the Swiss Alps, pizza, hot dates and quick-loss diets.Some underwriters worry about huge claims losses if everyone on earth suddenly stops watching infomercials.
  3. Universal Joint Insurance (UJ)—this covers contortionists; and death due to explosion of automotive transmissions and similar mechanisms. Sometimes confused with Universal Joint Life Insurance, which provides coverage to the owners of low rent diners, strip bars and tattoo parlors.
  4. Universal Solvent Insurance (US)—this could be a great product for insurers, if only they could write a policy.Originally designed to insure death by drowning in any and every body of water on earth when H2O was incorrectly thought to be the universal solvent. Had to be re-evaluated when insurers realized that a universal solvent would dissolve its own container.
  5. Universal Serial Bus Insurance (USB)--a low premium, high value policy with rigorous underwriting requirements. Only individuals who are entirely compatible and interchangeable with every other human on the planet are eligible.
  6. Universal Truth Insurance (UT)--Also know as Failure To Pay. Protects against the universal truth of insurance: that no matter how great your policy is, whatever happens, you're not insured for it. UT is insurance on insurance, or lack thereof, or what shoulda been but ain't. You figure it out.
Single Pay Life Insurance--modestly priced temporary coverage available at refreshment counters and coat rooms at opera houses. It is bought chiefly by nervous people who have been warned that it really is over when the fat lady sings.
Disability Insurance

Official Definition: Insurance that pays a monthly income when one is sick or injured and unable to work.

Real Meaning: If you have dis ability (you can flush a toilet) or dat ability (you can channel surf without passing out) or doze abilities (you can sleep and breathe at the same time), then you're not really sick, so get back to work. Also, if you annoy, outrage, or generally dis people, you're obviously healthy enough to punch a time card.

You won't get red-shirted or put on an insurer's disabled list with a pulled Achilles tendon or a bummed ALS. To qualify, one must, well, qualify: have a condition or world view or political opinion or video gaming habit or foot fetish expected to end in death, last forever, or both. Take fly fishing for example. Insurers view this activity as foolish and slothful. If you're injured tying your own flies, Mr. Insurer will deny any and all benefits on the basis of undisclosed dementia. They set the rules, so get over it

Elasticity of Demand

Official Definition: When the price of a good rises, consumers buy less, and if it costs less, they buy more. Price elasticity of demand measures the responsiveness of a change in quantity demanded for a good or service to a change in price. Price Elasticity of Demand (PEoD) is mathematically:

ElasofDemand
  = I don't know anything about economics, but I know what I like.

PEoD theory works like this: if the Home Shopping Network offers $1000 vacuum cleaners for ten bucks, ladies will swoon and buy them in truckload quantities, because vacuums are loveable and their prices are elastic, even if vacuums themselves are quite rigid. If HSN prices the same vacuum at $5000, viewers will laugh, because no vacuum is that charming, even those that suck up bowling balls or create fascinating little dust tornadoes in their handles.

So far so good.  If, on the other hand (price elasticians seem to have several hands) HSN reduces roofing nails from $1 to 10 cents a pound, shoppers will not buy more nails. They’ll switch to QVC because it has more exciting products. Therefore, nails are price inelastic (and ugly, too).

Economists thus can “prove” that rigid vacuums are elastic and rigid nails are inelastic. If economists were physicists objects in motion would be at rest. If they were meteorologists, it would be 116 and snowing in Phoenix at the same time. Psychiatrists, of course, would see no contradiction and diagnose all these situations as cases of multiple personality disorder.

What about rubber bands, which ARE elastic, especially if they're picked when they’re ripe. Can they be inelastic? According to economists, yes, because no one buys more of them when their price goes down, nor fewer when their price rises. That’s a safe bet: when was the last there was a run on rubber bands and bungee cords?

So to an economist rubber bands are inelastic elastics. Sort of like weightless cement or Norwegian Swiss cheese.

Bars are very inelastic: try slamming a shot glass on one some time and see how much bounce back you get. Yet, the more bars there are, the more people drink, which would imply an elasticity of demand. To further confuse the matter, when a solid mahogany bar is moved from a rundown neighborhood saloon to a Tony uptown watering hole, the price of a cocktail goes way up, again hinting at the elasticity of something, even if it's merely drinkers’ tolerance to outrageous bar tabs.

Today there are 1000 times more talking heads on radio and TV than a generation ago. They blab about everything—sports, politics, OJ Simpson, religion, global warming, Brittany Spears, even economics. To the dismal scientists (that’s what REAL scientists call economists), their explosion in numbers, according to PEoD, could never have occurred without a dramatic drop in prices, but that’s not what happened. These personalities are raking it in, big time, not buying gas a gallon at a time to get them to their next payday. Is Rush Limbaugh flying coach? Does Chris Matthews order off the McDonald’s dollar menu? Is Bill O’Reilly clipping pork and bean coupons?

To be fair to economic theory, some articles are price-insensitive and behave according to supply-demand forces no matter what. When cheap slaves were recruited to build the extremely inelastic Egyptian pyramids, the prices of these structures plummeted. One would have predicted every two-bit Pharaoh in the realm fabricating them en mass, and pyramid developments sprouting everywhere. But only three of consequence were ever constructed, demonstrating that cheap doesn’t necessarily put folks in a buying mood.