Tag: insurance

Mogul Moral Hazard

by live an untethered life, posted in Untethered Mind

cold-cool-man-47356 (1)Moral Hazard describes a situation in which one party becomes more inclined to enter into risky behaviors knowing that they are protected against the risk and the other party will incur the cost.

This came to mind when I finally went downhill skiing after a twenty year hiatus. Back in my high school and university days, my life revolved around skiing and planning to ski. Not that I have ever been seriously injured while skiing, but the possibility came top of mind recently.

Skiing has changed. I went to the rental shop and they pulled out these new innovations. The skis now have this parabolic shape. I remember reading about them years ago, but I was not aware of what they looked like up close. Bodacious comes to mind. The boots weren’t much different, thankfully.

There was an entire rack of helmets, so I picked up one these things also. Amazingly, back on the ski hill everything worked out. No one got hurt. This new equipment did make it far easier to ski and I was likely way more aggressive wearing the helmet.

I was quite ready to admit at the beginning of the day that I was a less than average skier considering all of the time that had passed, but after a couple of runs all of that confidence came back. Perhaps false confidence, but confidence all the same.

But this is where behavioral economics comes in. When it comes to activities such as driving for example, about 90% of people feel that they are better than the average driver. Almost no one wants to place themselves in the bottom half of drivers by suggesting that “yep, I’m far worse than the average driver.’ This suggests that people are far more confident in their abilities than statistics and the Darwin Awards actually show.

This raises the question of whether insurance induces people to engage in risker behavior than they would if they didn’t have insurance. For myself, I have perhaps an excessive amount life insurance at eight time’s annual salary in the case of accidental death along with some great long and short term disability. I don’t think having this insurance modified my behavior. I certainly wasn’t skiing eight times faster knowing that I would leave a very nice estate.

Moral hazard arises from asymmetric knowledge. One party knows more than the other party. In this instance, the insurer may not completely understand that I intend to engage in risk taking behaviours since mentally I still feel 20 years old. Emotionally, perhaps a bit younger. Physically, perhaps 3 times that. How can the insurer foresee that I might undertake some ‘dumbass’ skiing behaviours while my mental, emotional and physical ages are several decades apart? Perhaps that is already worked into their mathematical models.

This represents a type of ex ante moral hazard, or before the event. I am not a major fan of using an opaque terms of describing a vague concept. But this generally means that I change my behaviours based on the fact that I am now insured. Perhaps ex dumbass ante moral hazard captures the concept.

This compares nicely to the ex post moral hazard. After the insured event has occurred, you are more prone to claim insurance benefits exactly because they are available. Admittedly I use our health care spending account for this purpose. I spend a bit more to get the compressed lens for my glasses to avoid the coke bottle effect I would otherwise need to see what I am doing. I feel enabled.

Insurance companies do take steps to address this increase in use of insurance benefits by adding deductibles and co-insurance. Again behavioral economics tells us that people are twice as adverse to losses as they are to gains. Here we can see that insurance companies do recognize that the rationale person that traditional economic models rely upon does not exist except perhaps only the in the earlier fairy tale type of economic texts. But insureds would still be prone to take care to avoid incurring a loss since there is the frustration factor.

This frustration factor becomes apparent when claiming travel health insurance. My wife and I made plans for a bike trip in Asia. Being the prudent people we are, we purchased the complete trip cancellation insurance. This may be similar to purchasing the extended warranty which turns out to be a costly insurance premium for a low probable event. But buying trip cancellation is the easiest thing in the world. You put in the length of your trip, your age, price of the trip, your credit card number and off you go. You get a nice little brochure almost instanteously.

Unfortunately, my wife got ill just before the trip and had to cancel. Now, there is no way to fill in a claim form on-line. You have to download the policy and figure out how to fill in a claim. This necessitated printing out the form, photocopying receipts and physically mailing the entire package. The number of doctors visits increased since now we also had to provide written reports on why she couldn’t travel and how this was not a pre-existing illness.

Admittedly, this acts as a type of disincentive. Even as a lawyer, I found the amount of paperwork, and I mean actual paper, excessive. The 10 month time and effort to claim under the insurance exceeded the 10 minute time and effort to arrange the insurance. One would hope that the arrangement time and the claim time would be comparable. Fortunately, my wife are completely hung up on this completion thing and made this a personal project to complete.

Research seems to show that insurance does not increase the ex dumbass ante behavior. Insurance does seem to negate some preventative behavior that’s difficult to maintain. It seems to be easier to take drugs to alleviate diabetes than it is to avoid those sugary laced slushy drinks. Insurance does increase use of health benefits, but this may reduce even more costly medical intervention later.

Mark Twain in his speech on accident insurance had this to say.

“I have seen an entire family lifted out of poverty and into affluence by the simple boon of a broken leg. I have had people come to me on crutches, with tears in their eyes, to bless this beneficent institution. In all my experiences of life, I have seen nothing so seraphic as the look that comes into a freshly mutilated man’s face when he feels in his vest pocket with his remaining hand and finds his accident ticket all right.”

So insurance companies, and lawyers, face a discerning public. I am sure I should apologize to one group for placing those two groups together. But like anything, once you really need insurance, or a lawyer, you’re glad it’s there.

Pixabay

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Working with Insurance Companies Can be Fun

by live an untethered life, posted in Untethered Mind

slip-up-danger-careless-slippery

The title may be a bit of misnomer since I don’t think most people ever had fun with insurance, or would at least admit to it. I just wanted to see what the words working, insurance and fun would look like together on the same line. Now that I look at it, the combination does not seem as engaging as I had hoped. So insurance may not necessarily be fun, but the people working there, well now you have something.

Going through law school, I thought it would be helpful to at least spend some time in an actual office setting just to see what that might be like. I spent the previous five field seasons up north or in some other remote part of the country. And when you live in Canada, remote means remote. I mainly spent this time catching, measuring, weighing, gutting and sexing fish. The last one simply meant determining what sex the fish was, not whatever popped into your mind first.

So when an opportunity came up to work downtown for an insurance company, I brushed off the fish scales from my resume and sent it in to their human resources. I got an interview quickly enough. This compelled me to buy a shirt, tie and some shoes that didn’t have to come up to my knees and have the essential component of being waterproof. Mind you, the tie was one of the neat woven ones. Whatever they make rope out of, I think this was about the same material. I could have used it to tow a car.

The interview process began easily enough. They were interested in my background and the fact that I had a previous science degree and one year of law. The company was bringing in a brand new process. A computer program that didn’t use those IBM punch cards. This is how far back we are going here. The company was relatively young. I don’t know for sure, but I don’t think any of their clients died yet to allow the beneficiaries a chance to claim any of the life insurance proceeds. The Company thought this was a great business model. People just give you money and there’s no outflow.

In any event, the interviewing manager asked me to write out a process on how to tie your shoes. This seemed relatively straight forward. I visualized what I would normally do. If I knew there was going to be a test on this I wouldn’t have worn my slip on hush puppies that day.

Anyway, I laid it out fairly simply in about 10 numbered steps. They looked it over, went out and talked, and came back in after a few minutes and surprisingly, they were somewhat surprised. No one they had interviewed before had bothered to write out a simple follow the numbers process. Everyone else, arts majors I suppose, wrote out a nice narrative prose with a beginning, middle with a bit of character development, and a dramatic unrequited love ending. Usually tragic. My stripped down version would have flunked me in English but I got an A as in accepted the position.

So, I started the following Monday. I never saw my boss again after that. She had been a few months pregnant at the time and her blood pressure shot up. She was told to stay off her feet. I’m fairly confident that I had nothing to do with that. Her blood pressure I mean.

So, I then reported to her boss instead. Unfortunately my first manager was the point person on this entire project and my new boss was not completely sure what was required. My title of methods analyst/technical writer didn’t quite make a lot of sense to him at the time or what I was supposed to be doing.

My new boss oozed management from every pore. He sported one of those stylish porn king type of mustaches that every male seemed to have back then. He walked fast, talked fast and thought just as fast. Whether he had directional plan on where he should be going or simply used confidence to make up for the lack of planning I couldn’t really tell. He could have launched himself off a pier, climbed back up wringing wet and confidently state that the launch went far better than expected.

So this gave me a fair bit of time to read up on what insurance actually did for people. I also walked around a fair bit and talked to people about what they did and sometimes why. Who I was and why I was there mystified some since without a proper introduction, I had a difficult time articulating why I was there. I epitomized the stranger in a strange land scenario, and I met with anyone that seemed friendly and not too scared of me. A few people did seem to be somewhat scared since they must have thought I was an efficiency expert or something. If I was documenting processes, well I could document them out of a job quite possibly. My emotional intelligence may not have been my best attribute. I merrily met with all those nice keypunch operators and innocently told them that this new system would likely mean that we didn’t have to do anymore keypunching. The fact that this was their livelihood didn’t strike me at the time.

The new computer manual on how to operate the system went on for hundreds of pages. The main issue seemed to be how to integrate this new system into the company’s operations. After completing my MBA years later, I learned the importance of overall change management. But back then, I was happily opening up new process grenades in the various departments. Without an immediate manager, my approach may have been a bit chaotic and a lot anarchic.

During one of the training demonstrations on the system, I looked up one of the shorter processes. Just to get my feet wet, now that I didn’t have to do that literally any longer. Fisheries you know. So I tried the log off process, entered some of the preliminary codes and my screen logged off. The interesting part was that all of the other terminals in room also logged off at the same time. I did learn the important difference between logging off, which is what I was trying to do, and a system shut down, which is what I actually did. For the entire company. I demonstrated the importance of having a practice dumbass sandbox for just this reason.

They gave me an office somewhere in the middle part of the hallway. My boss had his corner office a couple of floors up and overlooked the main street and some trees. He seemed to be far too busy to look out and see what was happening. He told me about the upper reserved floor. They reserved these floors for the most mythical of creatures.  Actuaries. He told me that it would be better if I didn’t interact or speak with them lest I startle or scare them away somewhat. These creatures demanded great penance at the time such was their ability to pack up and join another company. I don’t think I actually ever did meet one, not that it would have been obvious. Mid management always seemed to have their suit jackets off and sleeves rolled up. The actuaries always kept their jackets on. And although they didn’t have the single horn of the mythical unicorn for example, the actuaries always did present themselves as having an ethereal inner glow. This may have been more of a glow of self-satisfaction, but it was hard to tell at my respectful distance.

I also don’t think they allowed sales staff to mingle with the actuaries. If the other group ever found out what the others were thinking, it wouldn’t be an oil and water situation. It would be more like gasoline and electricity. Under controlled situations, the result can create tremendous power. In uncontrolled situations, well the result has never turned out to be optimal.

I came across a series of books that comprised the Insurance course at the time. I scanned the first book relatively quickly since it only covered the very basics. The second book became far more detailed in its accounting descriptions. That managed to dissuade me a bit more from reading further along the course. This increased my respect for numbers people, and I did keep my respective distance from the actuaries lest I scare one and be further responsible for a company-wide actuarial system shutdown.

I did spend a week speaking to some nice people in purchasing. They saw the opportunity of someone documenting their procedures for them. I am sure I must have tired them out with some constant quizzical questions and looks as to why they did what they did. Seeing something for the first time can give you that childlike sense of wonder. So annoying.

At the end of the summer I learned a fair bit about insurance and a lot about office politics. Some of the lessons may have been somewhat earth, myth and ideal shattering, but the experience put me in good stead for the rest of my office career.

They did offer me a job in some capacity. This would have meant giving up the law career which I had also fallen into. I politely declined, but I wonder about the road not taken at the time. Never too late perhaps.

 

 

Pixabay

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 +Source: pixabay.com

Character Homes need insurance but demand sacrifice

by live an untethered life, posted in Untethered Mind

pexels-photo-567186

For several millennium, societies celebrated sacrifices towards their various deities. Some societies were interested in the harvest, some were interested in the hunt, and some were interested in a great ROI, return on investment. The last one seems to have taken great favor as of late. I am interested to see what will happen next. Perhaps in my lifetime, or perhaps the next one in that we will not worry about time, just life.

However, for now, our character home demands sacrifice. Perhaps not like a human sacrifice, even though that’s what it feels sometimes. It may be more along the lines of a needy toddler. A helpless infant has needs, but a toddler has even greater needs since they can get into reams of trouble if you are not constantly supervising. Our present house also had some growing pains.

Renovations to our 1912 home cost about twice as much as the price of our very first home, which was sort of tiny. In order to maintain the character of our character home, we didn’t alter anything you could actually see. We, and of course I mean they, only modified the things we could not see. Infrastructure.

A major one was the cast iron plumbing system. Cast Iron. Even the term sounds durable and worthy of any character home. It sounds like Iron Man. Strong, durable, invincible. Scared of lions.

The funny thing about iron of course is that it’s scared of lions. This sounds confusing, but the concept helped get me through chemistry in university. Using the concept of lions our professor taught us that lions were called LEO. A loss of electronics is oxidation. Whenever you have a LEO, you have GER. A gain of electronics is reduction.

Of course I am mainly talking about oxidation. Rust. Although our prof was a great teacher, I cannot look at any rusted object, and I mean any rusted object, without going through this entire LEO/GER subject in my mind. It can be exhausting.

So the cast iron plumbing seemed to have lasted for several decades. Ten decades appeared to be enough, so it seemed to be time to replace everything. Do you know how sometimes you go through a very traumatic event and you just hold things together until relief comes? Well, this is what happened to the cast iron. The house saw or realized that relief was here and collapsed into our arms.

We, and I mean they, tracked down and replaced all the cast iron running up the walls and replaced it with an even more durable metal. I think it may be platinum. Or beryllium. I am just going by the cost as opposed to actually looking what’s there.

We established a very trusting and close relationship with all of our contractors. I simply kept a cardboard box full of cash outside the front door with a little sign saying ‘Help yourself’. I think the occasional stranger did help themselves but I didn’t mind so much since it cost me less than the contractors.[1]

The replacement of the cast iron kept everyone happy. Any by this I actually mean our insurance brokers. I didn’t know that cast iron replacement was even ‘a thing’, but apparently the failure of cast iron really is a thing. The brokers would come around and ask questions about the replacement and what stage things were at. I thought we were at 99%, but even being a little bit pregnant still gets a check mark of the ‘CAST IRON’. Insurance premiums reflected this accordingly. I think they finally managed to get that last little bit of cast iron out. The cost of doing that was unfortunately not offset by the long-term savings in insurance premiums, but it was worth a shot.

Since we had seven people living in the house at one time, we installed two additional hot water heaters. The third floor water heater for the kids had to be electric since there was no way to run natural gas up to the third floor. In order to install this electric water heater, we, meaning they, had to cram it into a slanted closet. This meant that the heater could only be half the size of a regular heater.

I recommend this fix for any parent with teenagers. Telling them they are getting their own separate water heater may sound like a bonus to them. No more complaints. They don’t really have to know the size restrictions on overall hot water available at any one time. Your secret would be safe with me.

Soon the electrical system demanded sacrifices. This became immediately apparent when my in-laws presented my wife and me with a very generous gift of a chandler to go into the dining room. The chandler appeared way too heavy to be installed by mortal persons, I doubled my personal efforts by doubling the size of the cardboard box outside holding the free cash. This attracted other saviors.

The electrician savior removed the existing light fixture, more of a kerosene holder it seemed like, and suggested we have a look. Instead of your normal electrical utility box, there was just a wire hanging out of the ceiling. And not your normal plastic wire. The wire had the look of a black snake. And not a shiny new black snake. But a frayed black snake that died while it was shedding its skin and disgorging the contents of its stomach at the same time. Not pretty.

So there was none of the safety utility boxes infrastructure that would contain sparks from the electricity. And one would think that sparking would be common since nothing basically separated the hot wire from anything else. And there was no support to even hold up the chandler in the first place. So that discovery initiated another series of changes trying to run wiring throughout the house.

After a while, I realized that running new wiring did not necessarily mean removing the old wiring. In the basement there is a maze of those old ceramic pillars and posts running old black snake-skin electrical wires. We will have to get that done eventually also.

Every time we get someone new in, they look around in awe somewhat. They have that ‘I’ve heard about but never seen one of these before!’ kind of looks. I find their sense of awe helpful. It helps me decide the size of the new cardboard box I have to get for the front door.

I am fearfully waiting for the open jaw assessment when we finally get around to removing the asbestos from that pipe in the boiler. Do they still make those cardboard boxes for moving hanging clothes? I remember them from the 60s anyway.

Another fun thing we have not gotten around to changing would be the thermostat. It’s basically just a brass speaking tube that communicates with the basement asking the worker to add more coal to the furnace. Actually, the brass extensions have been removed and you can only see the brass connections in the baseboard. Just in case.

Actually what we still use is a round iconic Honeywell thermostat. One of these classics can be found in the Smithsonian apparently. On ours if you pop off the cover, you can see a goodly sized spring with a small container of mercury sliding around in a glass capsule. I do remember playing around with these things when I was younger. When I moved the dial back and forth I could see the mercury blob around as it sparked when making contact with the electrical connectors. More often than not, I would remember to put the temperature back where it should have been. This amused me than I care to mention.

Funny thing about that style of thermostat.

We do get our place cleaned professionally once a month. Being busy professionals with two large, shedding golden retrievers, getting someone in has been a major relief. But the two young, very eager to please, cleaners are not familiar with the 1950 style of round thermostat and how they work or what they do. No digital readouts here.

So when dusting the thermostat, the impact on the house depends on whether they dust the dial on the thermostat in a clockwise or counter-clockwise movement.

One fine winter day, one of the cleaners wiped the thermostat in a clockwise motion. This drove the heater to the top of the scale. And like any boiler on an old navy ship, you don’t notice it right away. Usually it takes the following day.

One day after the cleaners leave, the house seemed unnaturally warm. We are used to that since the temperatures outside can drop dramatically, it takes time for the house to accommodate the temperatures. But this time one of the radiators began spitting out scalding steams and bits of boiling water. I guess about 10 years ago I removed one of the regulators from a radiator to allow more heat to warm up sunroom.  However, my little ‘life hack’ did become immediately apparent that I removed the safety device. In my defense my intentions were good and pure. I tried to get heat into the room where we kept a lot of our potted plants for the winter so that they would get the necessary sun. But I got busted and schooled. So, I mopped up the water and reinstalled the safety regulator.

We should have mentioned the thermostat issue to the cleaners.

Because, there was another funny thing about that.

After the cleaners finished on another occasion during the winter, my wife and I headed out to the cottage with our two dogs. We spent a lovely day snowshoeing, making dinner, cuddling by the fire. Later that night, at 2 am, I get a call from the security company. They have a low temperature signal from our house.

This becomes a major issue since no one is in the house to say what is happening. I enter a bit of a panic mode and start calling the emergency line for the plumbers. It’s early Sunday morning and who knows if anyone will be available till Monday. I get someone on the line and tell them the situation so we have a backup plan.

My wife and I pack everything up and within an hour we are back on the road for the 90 minute drive back to the house. Of course we have a bit of freezing rain and snow happening so the roads are exceptionally treacherous. This is when I am particularly driven to get back to the house in a hurry. Getting trapped in the ditch would be a good half day wait for a tow truck assuming they could find you.

We don’t end up in the ditch and we finally arrive home. The house is not all that cold at about 10 degree centigrade, 50 degrees Fahrenheit. I head down to the basement and check out the boiler. It rests quietly.

The water to the boiler appears to be still on and working. The moat surrounding the boiler remains empty and the boiler has not disgorged its contents. No major catastrophic failures at the very least.

I turn the main breaker off and on to see if that wakes the boiler. I have never done this before, but what could go wrong? I mean I have never kicked a hibernating grizzly before, but I am sure that would end badly. They are both the same size, coloration and, most likely, disposition. Nothing happens. Good or bad.

I remove the main panel and see that the pilot light is still burning in a chipper fashion. Ready for action.  The little pilot finally lights a little thought in my mind. I head back up the second floor bedroom and see that the cleaners were in a counter-clockwise cleaning mood that day. The thermostat has been cleaned all the way over to off essentially. I turn the temperature back to normal and I immediately hear the ‘whoosh’ as the boiler furnace momentarily removes all oxygen from the basement and starts burning merrily. It looks more like a cheerful conflagration as I replace the panel on boiler.

So, exciting times. But well worth it for such as staid looking and satisfied character home.

[1] Old modified joke, but I couldn’t resist.