Thursday, December 02, 2010

Innovative Actuarial Award of the year

So this is great great stuff: New Pittsburgh plan centers on pensioner's death

Before anything else.....Far be it from me to quibble on spelling and style, but I think they mean pensioners' deaths.

First off... there is a certain pathological genius to it.  That's not to say it has merit, but hold that thought.

Second, I have a great story.  This all isn't a new idea at all.  Decades ago a friend was going to a unnamed school in the northeast where their chancellor had a very similar idea.  Not to use life insurance on pensioners as an investment vehicle, but to use life insurance on students as an investment vehicle.  You are talking about a long term investment for sure.  The scheme would not cost students anything, but the school would take out and pay premiums on policies on individual students, with the school named as benificiaries.  Someone had determined that it made sense as an investment, and I am sure by some prism it did.

For some reason it was determined that the subject insured needed to at least acquiesce to all of this.  So the school went to their honor students first, thinking they felt the biggest obligation to their institution, to sign on the dotted line.   It really went that far, and even though I am not quite sure what happened later on, I think it all died (bad bad pun) on the vine.

It all makes me wonder about the efficiency of insurance markets if anyone really thought this made any sense whatsoever from the standpoint of the insurance company itself.  As for the policyholders (or investors I guess in this case) long term contingent claims are always a bit risky and potentially mispriced... I would bet that the long term risk was not fully priced in somewhere.

But the thing that really got me is that if it all happened, it would have given the school a vested interest in killing its students, or at least facilitating their deaths... and the sooner much the better.  Kind of a perverse pathological moral hazard.

As for our case.  I really am speechless other than to say this is not an idea that originated on the 5th floor.  Not to imply there are not a lot of smart creative folks up there 9-5.. but it just didn't.  I really would be curious to know who floated this idea in the first place; an idea I fully acknowledge is part genius.  That and I really would be curious who anyone thinks is going to be writing these policies, or backing them I guess.  I won't get into the really funny actuarial sidenote on this that city's actuary is on public record (his only public record?) that city workers die off a lot faster than they ought to be dying (read down about halfway in that).  There is a truly perverse efficient markets thing in all of this that is actually awfully scary to ponder. My brain is beginning to hurt.

and I really thought there was going to be nothing to comment on today.


Anonymous MH said...

Does this explain why those with 25 years of service are now allowed to smoke on the job?

Thursday, December 02, 2010 10:06:00 AM  

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