Originally published at: https://boingboing.net/2020/08/27/the-complex-insurance-math-tha.html
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“Reinsurance is a staggeringly lucrative endeavor: Munich Re had $56 billion in revenue and $3 billion in profit last year.”
Looking at one year’s data is pointless. Reinsurers are operating at the extreme end of the probability distribution. Their results are extremely volatile. Get a year with few catastrophes and they look wonderful. Get a year with several catastrophes and a few more go insolvent.
Also, I’m not sure I’d describe the maths as complex. The difficulty is that you’re using inadequate data to try to estimate the frequency of very rare events, so there’s a lot of room for error in the estimates. Given you can’t accurately estimate the parameters anyway, making the models more complex usually doesn’t make it more reliable, so the models tend to stay simple. This is particularly true when the parameters are continually changing due to climate change. The actuaries I’ve known who went into reinsurance weren’t the most mathematically competent; they were the relaxed individuals who could live with the continual stress of knowing a run of catastrophes could wipe out their company within a month. The more complex maths occurs in the situations where there’s enough data to accurately set the parameters for more complex models, which is in the direct insurers, not the reinsurers.
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Insurance companies are perhaps a necessary evil given where we stand in capital driven economies. They are however a good bell weather indicator in this system, for example these are one of the few corporate entities that were early adopters of climate science - kinda because they have to to survive in the marketplace. Climate change was on the agenda back in the 70’s.
Exactly. Reinsurers are only extremely profitable for their owners if they take the money out of the business in good years, in which case they’re not doing their jobs and will go insolvent long before paying out all their claims in bad years.
[quote=“Howiemoticon, post:3, topic:178998, full:true”]
Insurance companies are perhaps a necessary evil …[/quote]
I wouldn’t classify insurance companies as evil. There have certainly been individual cases where particular insurers have behaved in an evil manner, but as a whole they seem ethical to me, particularly so if compared to the rest of the financial sector. I’m not aware of any research showing the prevalence of evil activities in either life or general insurance is higher than other industries, in or outside the financial sector
When surveys ask people to nominate the most ethical professions, doctors often take out the top spot, (and in my opinion that is deserved), but it’s still possible to find doctors involved in fraud or attempting diagnoses beyond their expertise.
But outside my own country, my experience of the insurance sector is limited. Was your “evil” accusation intended to apply to a particular country?
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