Re: AltInst: Legislation insurance

From: George L. O'Brien <>
Date: Fri May 08 1998 - 10:51:46 PDT

>Peter McCluskey said:
> Credit card companies have a source of large amounts of unbiased data
>that comes as a natural byproduct of their operations.
> Insurors trying to get data directly from their customers are limited
>by customers desire to mislead insurors about their risks, and are often
>hampered by privacy concerns and lack of automation when trying to get
>data from sources such as doctors.
> Also, credit card companies tend to use the data for things such as
>fighting theft, where success causes few complaints. Insurors use
>data mainly to separate the risk aversion functions of insurance from
>the wealth-redistribution effects, which many customers consider wrong.
>This has probably created some legal restrictions on discrimination
>against riskier customers.

Financial risk management is somewhat different than insurance risk. In
the area of financial risk, the issues to cover include:

1. How likely is it that the borrower will default?
2. How likely is it that the borrower will pay but only pay late?
3. If the borrower defaults, how much can be gained through legal action
to collect the debt (ie what is the overall net worth and available
4. How expensive will collection be if there is default or slow payment?
5. What is the duration of the loan?
6. What happens if there is major increase in interest rates?

In every case, the likelyhood of the lender being repaid is primarily under
the control of the borrower. This does not mean that major economic
changes might now drive the borrower into bankrupsy, but that usually the
borrower can act to ensure the money is repaid. Only rarely is default an
"act of God".

In theory, insurance covers those things that are not under the control of
the insured. If the insured acts to create the situation, typically this
is called "fraud."

In general, lenders can reduce their effective risk through increased
investigation of the borrower. For most general insurance (other than
accident ad liability), the analysis is external rather than interal.

For liability and accident insurance, it is not uncommon for the insurer to
dictate changes in practices as a condition for getting the insurance.
This kind of intervention is relatively uncommon for lenders, although the
power is sometimes available.

George L. O'Brien

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Received on Fri May 8 11:10:30 1998

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