About risk

Risk has interesting cost behavior. There was a time when the cost of risk was reduced by “managing” risk ... meaning that the various elements of risk were minimized so that bad things did not happen.

Health ... health insurance and pre-payment

There needs to be a careful differentiation between insurance and pre-payment. Because this differentiation is rarely made, the analysis is usually wrong.

Insurance is needed so that when there is a big event, there can be resources available to address the problem. Ordinary day to day matters are paid for in the normal course of living life. A catastrophic accident ... a big event ... gets paid for from an insurance fund. But it is insurance, and the expectation is that few people will have such events, and small premiums spread over a lot of people pays for the infrequent large disbursements.

A prepayment program is very different and it should not be referred to as insurance. A premium is paid, and the expectation is that this premium will pay for the services that will be used. There may be some imbalance between years ... but broadly speaking the premiums balance the disbursements. As disbursements for services has increased, so have premiums, and other ways to fund the programs have been sought, mainly from government.

Fishing fleet insurance and reinsurance

I was responsible for risk management for a fleet of fishing trawlers operating around the world. How best to reduce the risk of loss? How best to provide in case of loss. With a fleet of more than 80 vessels, it was reasonable to think in terms of selfinsurance. The premium for insurance could be saved, and used to build a selfinsurance fund for possible losses ... and the risk/reward for doing this was very good. But what would happen if an unusual storm sank several of our vessels? What then? This is what re-insurance is needed for ... and for a modest premium the fleet was insured for this unlikely event.