with Raziah Ahmed
is little flame atop the Alma Tunnel in Paris, France, which
marks the site of an historic accident. The tour guide will
tell you that the bus cannot stop, but you can glimpse the
flame as you pass by. A Mercedes S-280, had crashed into the
tunnel's 13th pillar, and three persons had died, among them
Diana, Princess of Wales. Such is the risk exposure to loss
of life and damage to property and person, from the commute,
and royalty is not exempt.
Motor vehicle insurance policies cover loss to vehicles due
to accident, theft and fire, as well as injury to persons
and loss of life, and commonly include loss of use of the
The objective of such insurance coverage is to return the
insured to a financial position similar to where he/she was
before the accident. It is impossible for the insured to make
a profit on the insurance policy if there is a loss. Any such
profit is tantamount to fraud, and is punishable by law. Any
chance of gain is speculative, and cannot be insured.
The role of the insurance company is to facilitate the transfer
of the risk. The insurer accepts the risk, or shoulders the
risk, based on what is called risk selection, or an underwriting
process. The underwriting process seeks to determine whether
the risk is standard, or not. Standard risks are accepted
for a standard premium. Sub-standard risks may still be accepted
with a rating. This is a premium that is higher than the standard
rates. Alternatively, sub-standard risks may be denied altogether.
In this case you will have to shoulder the risk of loss yourself.
Rates are determined on probability studies, and claims experience.
The more property claims there are in a given period of time
and/or geographic area, the higher the claims experience,
and the greater the tendency for higher rates. Hurricanes
and heavy flooding this year, have increased the volume of
claims. The amount of claims will most likely exceed the calculated
probability of loss to property, in a normal year. We can
reasonably expect that next year, property insurance premiums
With respect to life insurance, rates are determined on the
basis of mortality tables. Mortality tables reflect the experience
of death per thousand of population, in every age group, according
to gender. Prior to 2004, mortality tables reflected ages
up to age 100. This year, new mortality tables (not yet in
use by insurers) have been published which push our life expectation
above age 100.
However, this introduces another category of risk: the risk
of living too long. The danger with that is that the pensioner
now has a greater probability of outliving his/her accumulated
savings, and pensions that are guaranteed for a fixed number
Spouses or survivors are especially at risk since pensions
are typically guaranteed for the life of the pensioner, but
not the life of the spouse. Alternative provisions must be
made for survivors who will live beyond the guarantee period.
Note too that women as a group have been living longer than
men. Therein lies another risk!
There are all kinds of risks! In 1996, TWA's Flight 800 crashed
over the Atlantic, killing all 230 people on board. TWA had
just recovered from Chapter 11 bankruptcy, and top executives
were celebrating in London. The financial loss was immense,
and TWA is not a player on the world market anymore.
Sometimes the risk exposure is just too great, risk transfer
cannot compensate, and big pappy executives celebrating
in London, also bite the dust.