Health Care Debate II

Here's a quote from President Obama's health care talk in Portsmouth, NH, yesterday (per seacoastonline):

"A recent report actually shows that, in the past three years, over 12 million Americans were discriminated against by insurance companies because of a pre-existing condition. Either the insurance company refused to cover the person, or they dropped their coverage when they got sick and they needed it most, or they refused to cover a specific illness or condition, or they charged higher premiums and out-of-pocket costs. No one holds these companies accountable for these practices."

Where to start...

(1) Insurers ARE held accountable -- in several ways, but especially through the competitive marketplace.

(2) Insurers are not endowed with a bundle of money which they can to choose to either pay out or not. Pricing of an insurance policy is predicated on the frequency and severity of potential losses stemming from the risks being underwritten and insured in the policy. The policy -- which is a legal contract -- spells out the conditions, exclusions, etc., under which the indemnification relationship between the insurer and policyholder will operate. Generally, and in theory, when an insurer makes a coverage decision regarding whether a policy should respond to a particular situation, it is based upon the provisions of the policy (which, again, is a legal contract). (This is not to say that an insurer never acts "inappropriately" -- but that's a different issue that has little, if anything, to do with the broader public policy debate.)

(3) It is not "discrimination" for an insurer to enforce a pre-existing condition exclusion in an insurance contract. Such exclusions, when a part of an insurance policy, are there from the start. They are common, agreed to, and they impact the level of premium charged for the policy. Among other things, the impact of a policy exclusion is typically to make the policy affordable (or more affordable) and/or prevent moral hazard and/or... Thus, elimination of such an exclusion is certainly possible -- but the premium would need to increase in order to cover the additional risk which the insurer is taking on.

(4) When one encounters statements along the lines that an insurer "refused to cover" someone or something, remember: an insurer is a financial firm with a fiduciary obligation to ALL its policyholders (and owners and other stakeholders). When the price of its product is based upon a certain scope of coverage, the insurer potentially violates that fiduciary responsibility if it pays out more than the contract specifies.

There are very real PUBLIC POLICY issues involved in the current health care debate. It is reasonable to discuss, AS A SOCIETY, whether a certain type or level of coverage should be mandated. Most of us have mixed feelings about these things -- it's hard not to, when there are ample personal anecdotes floating about involving health and medical care. But the debate needs to start from a fair and realistic perspective regarding insurance and its role in society and the economy.

- Rick

Health Care Debate I

Here is a very interesting and informative article on the current health care debate - and it's also a good and fun read. "Health Care Mythology," by Clifford Asness, managing and founding principal of AQR Capital Management. Cliff and I worked together in graduate school for a year or two, at the University of Chicago. He went off to become a big name on Wall Street; I became a little name, in academia. But I think I may have more hair...

- Rick

Data Mining

"Data Mining" is one of those terms that can have either good or bad connotations. The "good" side is that lots of companies have huge databases, and data mining can be an indispensable statistical skill for culling important fcats and insights from the data -- insights that could potentially lead to a competitive advantage, or to the recognition of a critical relationship.

A recent Wall Street Journal article -- "Data Mining Isn't a Good Bet for Stock-Market Predictions" -- highlights the potential negative side of data mining. As I frequently mention in classes, "correlation" is one thing, but "causation" is something else. A relationship discovered in financial, economic, and insurance data should make sense, and should have an intuitive explanatory basis, before being used as a foundation for predictive modeling.

- Rick

"Statistics" is the Word

Always nice when the mainstream media gets it right!

"For Today's Graduate, Just One Word: Statistics," The New York Times, 8/5/09.

- Rick

Actuarial Science a "Lucrative" Degree

“Actuarial Science” has made the list of the “Most Lucrative College Degrees,” according to CNN and its reporting on a National Association of Colleges and Employers survey. Act sci is the only degree in the top 14 that is not an engineering/CS degree.

The ranking is based on college graduates’ starting salaries. I suspect that, if future earnings potential and the possibility of salary increases in the first 5-10 years of a career were considered, actuarial science could well be ranked even higher.

As a whole, the list certainly suggests the importance and power of mathematical skills!

- Rick

Pensions and Actuaries

A commentary in today's Wall street Journal, "Public Pensions Cook the Books." It concerns how two public pension plans in Montana are handling their actuarial services. Must reading for actuaries...

- Rick

Towers Watson

A big merger was just announced in the actuarial consulting world:

Towers Perrin + Watson Wyatt = Towers Watson.

This is being announced as a “merger of equals.”

- Rick

The Public Option

One of the big issues in the current health care reform discussions is the "public option": introducing a public provider to compete with private health insurers. Actuaries and others familiar with the insurance industry have seen this movie before, in health care and other lines of insurance -- with respect to both proposed and implemented public insurers.

Here are a couple of nice articles discussing the public option in an economic context:

(1) "The 'Public Plan' Would be the Only Plan," by Scott Harrington (professor at the Wharton School, University of Pennsylvania), Wall Street Journal, June 15, 2009.

(2) "The Pitfalls of the Public Option," by N. Gregory Mankiw (professor at Harvard University), New York Times, June 27, 2009.

- Rick

A "Brief" Article on Economics

Hmmm... Perhaps economics need not be dull after all...

From MSN Money: "How your undies track the recession," by Michael Brush.

- Rick

Hyundai: Insurance and Marketing

An article about the South Korean automaker Hyundai, from The Economist. Note their use of insurance:

"...Hyundai is also benefiting from a novel scheme, launched in January, in which it offers to buy back cars from customers who lose their jobs within a year of their purchase. (The company essentially offers a smaller discount and then uses the money to buy an insurance policy.)"

Another reason for actuaries to study macroeconomics and modeling...

- Rick

Agent-Based Modeling

An article on agent-based modeling from The Economist. Lots of potential for applications in insurance, actuarial science, and risk management. This is one of the research topics in our actuarial science undergraduate research program at the University of Illinois.

- Rick

The Gaussian Copula

An article from Wired about the Gaussian copula. The question is how to model inter-relationships -- correlations. Students may not understand every reference in this article, but it has some good analogies and gets the point across nicely.

- Rick

State Farm Drops Out of the Florida Homeowners Market

According to an artcle in today's Wall Street Journal, State Farm is leaving the Florida Homeowners Insurance Market. It will reduce its policy exposure over the next two years or so.

It's interesting that "the state-created insurer of last resort, Citizens Property Insurance Corp.," is also characterized as having "been trying to shed policies."

- Rick

Putting the "R" in InsuRance (ARRR, ARRR)

Traveling the high seas? You might want to consider pirate insurance.

Per the Chicago Tribune today, Aon is promoting piracy insurance -- specifically, a policy which covers the time delay associated with a pirated shipment.

- Rick

Is Economic Uncertainty Decreasing?

A posting on Vox titled "The Recession Will Be Over Sooner than You Think," by Stanford economists Bloom and Floetotto, suggests that several measures of economic uncertainty have fallen recently. In fact, they say, "economic uncertainty is now dropping so rapidly that we believe growth will resume by mid-2009."

Nice to hear an occasional optimistic voice!

Hmmm...

- Rick

Market Turmoil, Regulation, and Efficiency

Two of the top financial economists in the world, Gene Fama and Ken French, recently started an online forum. They have a Q&A section in which they respond to relevant finance questions, at least a couple of which would probably be of interest to actuarial science students (as well as practitioners):

(1) "Some people have argued that the turmoil was caused by a lack of government regulation. What do you think? Do we need more regulation?"

I think the reference to the possibility of more regulation "stifling financial innovation" is very important. Also interesting is the comment that "regulators are eventually captured by the regulated. As a result, regulation often has results opposite those intended."

(2) "Is the market turmoil a sign that markets are not efficient?"

The Fama-French response identifies two market turmoil factors: expected cashflows (e.g., future dividends and growth rates), and their discount rates. Those of you who have taken my Math 210 course may recall a homework problem I always ask, which is intended to demonstrate potentially how little has to change in order to result in a significant change in the stock market. Using the dividend discount model (P = D / (i - g), where P is the price of the stock or market index, D is the next dividend, g is the growth rate of dividends, and i is the discount rate)), for example, for certain fixed values of D and i, the market consensus regarding the growth rate g need not change much in order to significantly change the price P.

- Rick

The Big Ones

A summary of the most financially significant 2008 property-casualty catastrophes, from insurancenewsnet.com . For P/C insurers, catastrophes are often the risk that causes the most concern.

- Rick

Modeling Risk-Aversion

From The Economist of January 8th, a short article ("The Bonds of Time") summarizing research indicating that "people born at different times make very different financial choices, even in similar economic environments."

Perhaps not surprising -- but think about the implications for the modeling of economic and financial behaviors (which in turn will potentially impact future economic and financial conditions). One more level of complexity to be considered...

- Rick

Retirement and 401(k)s

An article in the Wall Street Journal today - "Big Slide in 401(k)s Spurs Calls for Change" - discusses how significantly the financial crisis has affected some people's 401(k) retirement accounts. This kind of thing is why I hesitate to conclude, as some have, that the retirement actuarial function is becoming a thing of the past. The movement from defined benefit to defined contribution / 401(k)-type plans over the recent decades might suggest a decrease in the future demand for pension actuaries -- but concerns like those expressed in this article suggest that DC/401(k) plans may not be a panacea. The entire approach to pension/retirement continues to evolve, and I think that actuaries, with their quantitative skills, have a lot to say about risk management in a context of economic and financial volatility.

A couple of comments about this article (among the many that come to mind):

(1) It's true that individuals managing their own 401(k)s have largely lost money recently - and they may need to make better decisions and be better educated regarding their financial choices. But professional money managers have also lost money.

(2) While the whole 401(k) industry and process could probably use some tweaking (and there's plenty of research going on these days regarding some possible changes, for example to the ways alternative investment choices are presented to employees), it may be a bit rash to generally indict 401(k)s based on the current financial situation.

- Rick

Stimulating the Economy

A very nice and easily understood article on issues involved in stimulating the economy, from today's Wall Street Journal:

"Boost Private Investment to Boost the Economy," by Hal Varian.

Varian is a very well-known academic economist -- and happens to also be the chief economist at Google.

This article should feel very comfortable to any student who has taken even basic macroeconomics.

- Rick

Psychological Influences of the Crisis

Short, nice piece (by William Watson, the Montreal Gazette) about psychological influences on the current economic crisis. I love the line "We've gone from the subprime to the ridiculous"...).

- Rick

Top Dogs

Today, another ranking of jobs / careers came out (JobsRated.com), and, as usual, “actuary” has one of the top positions in the rankings. Here are the top five:

(1) Mathematician
(2) Actuary
(3) Statistician
(4) Biologist
(5) Software Engineer

The complete list and story is at

http://www.careercast.com/jobs/content/JobsRated_Top200Jobs

Across the years, and the different producers of such rankings, “actuary” is the one position that ALWAYS seems to be in the top few. Others come and go (as I recall, a few years ago, “actuary” was second to “website designer”), but “actuary” seems to have been consistently in the top several positions for over 20 years.

- Rick

Defined benefit vs defined contribution vs...

"Retirement Engine Rebuilt," an article from Harvard Magazine in which Nobel prize-winning finance professor Robert Merton opines on the future evolution of retirement plans:

Definied benefit ==> defined contribution ==> SmartNest.

- Rick