Woman makes $420k by buying insurance on flights she predicted would get delayed
mothership.sg
mothership.sg
The policy was sold so the agent could get their commission. There was no credible justification for it. Worse, there was no record showing that I ever signed any paper authorising the charges.
When I talked to the investigation department, they said that off the record, between you and me, record keeping is incredibly poor, and my case was only unusual because I'd questioned the payments - and most people don't.
My partner is going through something similar, but the paper trail in her case is even more tenuous. The only justification on file for thousands of pounds in payments collected from the 90s onwards is a mortgage application she made a few years ago - and didn't even go ahead with.
This is on top of a national Payment Protection Insurance (PPI) scandal which forced insurance companies and banks to return billions of pounds.
Somehow this never seems to be labelled criminal fraud. It's always "Mistakes were made..." and no one is ever personally responsible.
So honestly, I'm finding it hard to be sympathetic to the poor exploited insurers in situations like this.
I once didn't fill in my Dutch VAT taxes (0 euro's by the way, it was an administrative formality) and I was fined.
Another time the tax authorities didn't pay me money back for almost 9 months, and it was only because I found out and they forgot because of some administrative mishap.
However, I'm not allowed to fine them.
I find it weird, because I'm pretty sure the mistake is similar in behavior and intention. Yet, I have to pay up and they don't.
They pay 0.5% (which is better than most of my bank accounts) on all sums they owe as a result of their own mistake rather than either your mistake or some third party screwing up (e.g. your employer fat-fingers paperwork causing you to pay say £1000 extra tax, you don't notice for two years, then you point out the mistake, HMRC are happy to fix it but won't pay you 0.5% interest on the mistake because it wasn't their fault)
Over-booking of flights used to be a huge problem back in the 90's and earlier. You'd get on the plane, someone would be in your seat already, and that's when you found out you didn't get to fly on that flight.
Airlines figured out this pissed people off and started counting tickets before letting people onto flights. If they had too many people waiting to board a flight, they would make an announcement and start offering free stuff to people willing to be bumped or take a later flight (this still happens in rare circumstances today but used to happen on most flights for a few years).
I remember listening to a gate agent threatening to call the cops on a college age guy who was picking up his third free ticket of the week for accepting being bumped off an Oakland to Las Vegas flight. He'd apparently figured out that that flight was always overbooked (which wouldn't have taken a rocket scientist given the high rate of overbooking at the time), and the only reason he got caught was the same agent kept getting assigned to work the counter for that flight often enough to remember his face.
Interestingly, I also flew on a nearly empty flight once during that era. The pilot came on the loud speakers and said "the next time you are wondering why flights are over booked, remember this flight - this plane was booked to 120% capacity (or some other number well over 100%) for this trip."
The most common reason I've seen is a large corporation cancelling or rescheduling an all-hands / quarterly meeting that everyone above a certain level (e.g. directors / VPs) from non-HQ offices travels to HQ to attend.
For an Oakland to Las Vegas flight, I'd guess a conference, music festival, or sporting event was cancelled.
Statistics generally (there are exceptions of course) makes very broad assumptions about independence and random selection of your samples.
For a group of people as correlated as having the same destination at exactly the same time using the same airplane I would be very wary of applying any statistics at all, even ignoring the possibility of a large group.
Hundreds of otherwise independent people can decide to not show up simultaneously due to terrorist attacks, corona, a cheaper alternative, a conference being cancelled, etc.
Got caught doing what exactly? Booking tickets on a flight?
If he wasn't using fake names or anything, it sounds like he was just trading his time for free airfare.
I hope the cops did nothing?
It was the airline's fault for overbooking and they offered bump compensation and the guy took it. It sounds legal to me. If the airline wanted to avoid this they could easily have done that by not overbooking.
I think they don't overbook as much as in the US. They try to avoid bumping off passengers, because the cost of doing it is much higher. They can't just give you an upgrade ticket. They have to reimburse all occurring cost and they have to pay an additional 250-600 EUR compensation depending on the length of the flight.[1]
[1]: https://europa.eu/youreurope/citizens/travel/passenger-right...
I've seen airlines offering compensation worth well more than these minimums, however. Anecdotally it seems fairly common to get hundreds of dollars for a relatively short domestic flight.
Also, the ones they do bump off are the standbys and reduced fare, which is why you don't often hear about fully paying passengers being forced to take another flight - and in any case, if they're still over capacity, the promises of free upgrades and money mostly result in enough volunteers to prevent that from happening.
I'm not sure about any differences in US regulations vs EU regulations for this issue though.
> The ones they checked with now have a clause that says they will not be responsible for any payout should the insured, at the time of buying, already knows or reasonably deduces that the flight can be delayed anytime.
What kind of clause is that?
It's not an unreasonable one.
Sometimes, often in fact, it becomes pretty obvious a flight will be delayed but they just haven't bothered to officially announce the fact yet. Such as if the plane isn't even there because they are delayed on the previous leg, and boarding time is about to start. Or when the airport cancels all flights for an indeterminate time due to incoming bad weather and the airlines wait to update times because they don't know what to say yet.
European laws define mandatory compensations when a flight is delayed or cancelled. This starts after 30 minutes if I remember well and depends how long the delay is and how long (distance) the flight is.
Also, delay is measured on arrival time, not on departure time. Planes frequently depart late then arrive on time, because they fly faster to catch up.
https://europa.eu/youreurope/citizens/travel/passenger-right...
If somebody thinks they are making money out of their insurance contract it is probably fraud or very close to.
If it is a particularly high premium line, and especially if there is a lot of competition, it's more likely that the underwriting profit will be kept minimal or even negative, as the investment profit is so much more lucrative. This is common in the car insurance lines of business, for example.
For retail insurers there are a lot of moving parts here, and they will often not hold much of the final risk, so can't make money from investment anyway. For example, the retailer (sometimes an underwriting agency) may be underwritten by some bigger insurer.
That insurer may have a quota share arrangement with another insurer (I'll take 10% of the risk, you take 90%) with a corresponding premium share.
At each level reinsurance is bought, sometimes on the whole portfolio of risks and sometimes on particular classes of risk or specifc policies, and the costs associated with the reinsurance are priced into the retail premium.
Additionally, when working in an intermediated market with brokers, there are often credit terms of up to 90 days where no payments are made. Anecdotally, it does seem like some brokers do make a large amount of their money on this float.
Adding it all together, there are two main numbers to track from an underwriting profit point of view - your loss ratio (claims incurred / earned premiums, often extended to include projections for future claims and premium for future insured periods) and your combined operating ratio (COR) which includes expenses.
There will be a loss ratio at which a line of business becomes profitable, and final premiums are often calculated by taking the expected losses and grossing up by this loss ratio. For individual accounts it might literally be that simple - "over the last 5 years this account has averaged claims of $100,000 a year, we need a 60% loss ratio so the premium should be $166,667." If there are extra reinsurance costs you might add those, and you might also add a loading for large infrequent losses that aren't captured in your underlying loss ratio (and another loading for catastrophes, a level above that).
The combined ratio needs to be under 100% to be 'underwriting profitable'. I've seen CORs as high as 105-110%, but typically those portfolios were being very closely monitored/remediated/exited. If there is a strong market the COR is allowed to drift higher, but when the market tightens so does the COR.
It's the difference between buying flood disruption insurance because you operate in an occasionally flooded area, and moving your stock to wherever there's a flood warning. Particularly in this case, where the woman cancelled her expected on-time tickets because the tickets had no value to her except as a source of insurance payouts.
Consumer insurance is not exactly the same as stock options: it's not supposed to be a perfectly efficient market. Insurers are often operating under rules which prevent them from denying or repricing insurance due to relevant risk factors and likewise premium holders are usually bound by far more terms and conditions preventing them from taking actions which might change the value of their policy than stocks or futures markets.
I think it's more like, you shouldn't buy fire insurance if you are having a bbq or similar. Or at least somewhere in the middle of these two statements.
Or well you should, but if you wilfully had your house burn down anyway to get insurance money, that's insurance fraud.
You know what the expected outcome is going to be and are securing an agreement deliberately in bad faith. That's not to say insurance companies are always good faith actors (oftentimes not), but it's a very one-sided information flow.
What about someone who notices that they are getting older and are starting to develop aches and pains and decides to start buying health insurance that they had avoided when they were younger because they seemed to have been made out of rubber back then?
Yeah, your first argument makes a lot more sense to normal situations, but mine was aimed at being an analogy to the example at hand from the article.
That's exactly the reason the ACA made health insurance mandatory, to avoid that scenario which would require insurance companies to make the policies more expensive in order to compensate for the higher average age and worsening average health of the insured pool, which further incentivizes the avoidance, and so on, until we're right back in the same situation with a high-risk pool and unaffordable premiums.
Incidentally, that doesn't mean that avoiding health insurance if you are young and healthy with no dependents is actually a good idea at the outset, since many common health conditions like injuries from car accidents don't particularly discriminate by age.
But "reasonably deduces"... that can be used in any such case where mass payouts are a likely outcome. If I can "reasonably deduce" a payout will be needed than so can the insurance company. Under these conditions accepting my insurance purchase should be seen as the company committing fraud. They accept a payment knowing the customer can never collect.
So it's not like the insurance company can say "you should have cancelled the night before because everyone could see the storm coming".
If a regular consumer can "reasonably" deduce (using logic, not some "illegal" insider knowledge) at the time of buying the insurance policy that the flight may be cancelled then the insurance company employing experts and very accurate statistical models can more than reasonably make the same deduction.
Now since we agree that both parties deduced the flight will be cancelled but the company still went ahead and took the money for the insurance contract, this can only be fraud. The company took the money under false pretenses since they implicitly know even before the transaction that the claim is null and void under the "reasonable deduction" paragraph.
I get why the first one is unacceptable but the wording in their agreement fits the second one.
I hope they are reserving this clause for such obvious fraud cases where they can prove prior knowledge and intent. Like the case of this woman who even created fake identities to carry out the plan. Otherwise I see them being stuck in court forever either trying to prove that a random customer had some sort of insight that they didn't despite literally being their job and investing (tens of) millions in this. Or trying to prove that they didn't knowingly sell a policy with the expectation that they will never provide the payout, which is misrepresentation of the service at the very least.
Perhaps we should not rush to finely parse language that has gone through a double translation: from legaleese to reporter and from Chinese to English.
In this case, continual purchasing of insurance on the flights likely to be delayed would be evidence you knew it was going to be delayed.
Without clear condition / clauses, it is possible that they'll deny valid claims by saying that the insured has already know beforehand. Maybe there are more specific information?
That doesn't mean there's no grey area, though. Is it unreasonable to buy tickets and insurance under an assumed identity? Probably, but part of getting your day in court having the ability to suss this out.
When such a contract is made in advance knowledge of likely occurrence of the event, the risk is fully shifted over to the insurer. Thus in absence of shared risk this subverts the contract into an unequivalent monetary transaction, which reasonably amounts to fraud.
Similarly, if there's an advanced knowledge from the insurer on almost certain unlikelyhood of the event, then it's defrauding the policy holder of their premium.
So the insurers must pay off time to time to maintain the perceived fairness of contracts. Meanwhile doing their best to balance their share of the risk... and most importantly price in the 'administrative overhead'.
Most jurisdictions won't enforce a contract entered in bad faith.
I'm no lawyer, but I would guess the hard part is detecting this behavior and/or getting the money back, not so much denying the payments. (Though flight insurances probably don't have much infrastructure for fighting fraud, as there is few ways to do insurance scams)
What? What exactly is bad faith here?
How is buying insurance on things you expect to fail any different than, say, buying options on the stock market, or some other form of intelligent betting?
You have expectation X, you find a third party that disagrees and has expectation Y, and agree to make a bet on the outcome with odds relative to X:Y. If your assessment of the situation was closer to the truth than the other party, you can stand to make money.
The assumptions of the insurance company is that they have superior models and can amortize losses among many people and thus charge only a small margin. They don't always have the best models though, and I really don't see how calling them on it is 'bad faith'.
Insurance, unlike options on equity stock or indexes, require an insurable interest. The pricing of insurance assumes that the buyer of insurance would rather not use the insurance policy; the options contract on stock makes no such stipulation. They are a bit similar in practice but both are structured, regulated contracts and are defined differently.
This lady did not have an "insurable interest" in the flights she was purchasing insurance on, since she did not actually intend to go on on the flight (she bought the insurance to profit from the insurance). Had she bought an "option" and not "insurance" on the flight, fraud maybe would not be in play. However, expect an "option" to be priced differently.
1. you believe you are at higher risk than the typical person buying the insurance (or more practically, that [cost of insurance] < [payout amount] * [likely of payout]).
2. the outcome you're insuring against would otherwise be financially ruinous (e.g. life insurance on family breadwinner, homeowners' insurance on expensive house)
Varying levels of deductible choices hard code this notion even further into the system. If you're farther from zero-bound worries you can essentially buy less insurance with a high deductible.
I pretty much pay them just so I don't have to experience the social ramifications of telling people I didn't have home insurance if something did happen.
The article says the insurance companies have now closed the loopholes she exploited. To me, she deserves every dollar she made for making the insurance market more efficient. I'm sure those errors would have cost these companies much more than $400k over the long run.
But the purpose of healthy gambling is to have fun, and the purpose of insurance is to pay a small amount in most future states of the world to avoid very bad outcomes in some future states of the world. These are both reasonable things to spend money on, but they're very different objectives.
If the person hadn't used false identities, but had still been arrested, that would be a more interesting case (more analogous to legal professional gambling). When false identities are used, it's clearly not above board.
I would assume that in such a case, the insurance company could refer to their terms-and-conditions, and then contest their obligation to pay out. I don't imagine it would be a criminal matter though. (Needless to say I'm not a lawyer.)
how come it's not fraud when insurance companies calculate the odds better than you, and yet it is fraud when you do it to the insurance companies?
There is no win or lose, if insurance is not gambling. If it is, then either side wins money with varying payout schedules.
Eh, I'm not sure that's really true, even.
Flight insurance -- at least, all of the flight insurance I'm familiar with -- is a fixed-cost product. I doubt it is so much that the insurance company couldn't create separate risk pools, from their own analysis, but that it doesn't make sense as a business.
Actuaries spend their careers making these bets. That's why no insurance company will take a policy on a "sure thing".
If she had taken on a similar bet in a market where insurance policies were bundled and sold, instead of a "credit default swap" you'd have a "on-time default swap" and it would be completely legal.
But there isn't such a market, so she effectively made one for herself by using false identities and the arbitrage of being able to pick and choose when she would take her side of the swap.
Such a bold statement
The insurance industry wouldn't exist if that was true. The whole profit there comes from the bias for the insurer.
b) Can you give some specific examples? I'm using State Farm as a place-holder for "large insurance company". They had one really bad year recently where they "only" made 9 figures in net income.
Insurance companies are extremely profitable. Their losses in bad years are more than offset by gains in good years.
In other locations, insurances are not all about profit and reinsurance. Either they're public operated by the government, or they're private and have caps on how much they can charge compared to how much they return and they don't get to choose what they can cover or not.
I am pretty sure my last insurance was directly financing the government. I suppose it makes sense to store billions of euros long term (until a disaster) into dedicated government bonds, which benefits both the government and the company. That is to say, the money fits a larger purpose in the meantime, it's not all evil.
Intentions 100% matter when it comes to insurance fraud.
How do you know this? This may be a pre-emptive strategy
Also, as mentioned in other comments: She didn't use fake identities, she booked on the behalf of family and friends.
Both are equally illegal in most parts of the world. Intentionally muddying your identity to defeat mechanisms put in place to avoid abuse is fraud.
Contrary to what some people on HN seem to believe, most legal systems in the world don't look too kindly on people intentionally abusing contracts. If it can be shown you signed a contract knowing that your understanding of it differed from that of the other party with the goal of exploiting this difference of understanding, which is to say in bad faith, you are very likely to lose in court.
Perhaps we should talk about what actually happened - this woman defrauding companies using fake identities - and not hypotheticals we're making up.
Edit: Reading your comment again, maybe my statement was already implied.
Edit: The article details that part of the strategy employed was to attempt to get a refund for any flight that ended up not being delayed, which would probably qualify as fraudulent intent (I think? IANAL).
Free Advice: if you run afoul of the tax system, pay first and challenge later. You're likley to lose and the punative penalties can bury you.
It was possible to game them because the contracts were not priced correctly.
We know the contracts were not priced correctly because it was possible to game them.
Insurance is NOT a financial instrument. Insurance is supposed to be a safety mechanism that protects you if something bad happens.
We can think of insurance as a call and/or put option. Financially, they behave almost identically to options. But that's not the intended use for the product.
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Where you see inefficiency, I see humanism. The company believes that its users wouldn't act like this, and for the most part... citizens do not commit large scale fraud involving 20+ fake identities.
Virtually all financial instruments are used this way. Insurance is about buying/selling a particular form of risk just like any other financial instrument. The reason we treat it as one isn’t just because it can be modeled that way.
That said this seems like fraud. Using assumed names isn’t removing an efficiency in the market it’s being duplicitous.
I agree this seems like fraud, but why can't it both remove an inefficiency and be duplicitous? From the standpoint of the insurance company's financials this isn't any different from coordinating with 20+ individuals to execute the same scheme. If the latter removes an inefficiency it should follow that this woman did the same.
But it largely doesn’t matter from the pricing point of view. If fraud becomes a big enough risk it will get priced in.
That doesn’t mean it’s legal though. Car insurance is very efficient at dealing with fraudulent claims. Some get paid out some get prosecuted and every thing in between.
But there is a basic agreement that some law is going to be respected otherwise it’s just who has the biggest army. In my personal opinion using assumed names puts you over the line.
Yep, I'm totally with you that using assumed names puts you over the line. In my corner of the world she would probably have been fine legally in that regard with a bunch of shell corporations, but it still seems shady.
> If fraud becomes a big enough risk it will get priced in. Identity fraud aside, the claims themselves aren't necessarily fraudulent though (my rationale: https://news.ycombinator.com/item?id=23529963). Whether they're fraudulent or not, a single malicious actor likely pales in comparison to the large number of people legitimately purchasing insurance for these kinds of flights. That risk _is_ already priced in, and low-risk flights necessarily have higher fees than they need in order to offset these kinds of losses (no matter whether they stem from poor models, fixed pricing, or something else).
Tell that to insurance companies.
Marge: "I'm sure your insurance will cover the house."
Maude: "Uh, well, no. Neddy doesn't believe in insurance. He considers it a form of gambling."
In this case, the risk of never needing insurance is balanced by the gain of whatever is insured if it is lost.
One could argue that this is decreasing risk in exchange for less gain, but that’s still using a tool for balancing risk and gain, aka gambling.
Go too deep and life is gambling.
In The Big Short, for example, when they wanted to short the housing market, the structure that banks set up for them was effectively an insurance policy. They had to pay a huge fee every so often, which represented the equivalent of an insurance policy payment, but in the event that the value of the market dropped below some threshold, they were entitled to a payout...which is exactly what happened.
Just because it's gambling doesn't mean it's risky or not properly risk-assessed.
I personally think it's a bigger leap to argue that Social Security is a form of insurance, but I guess that depends on your political viewpoint when it comes to whether Social Security is a kind of bank account that holds your money in escrow or if it's a government-run social program that provides a guaranteed pension. There is still a kind of gamble going on, but it's more that you're gambling on the government upholding today's promises into the future (when you retire) and if that's immoral then so are many other things in life (such as money).
For example, when someone buys an extended warranty on a new TV they are betting that it will break before a certain date (and after the factory warranty has expired). Most customers lose that bet and wasted their money.
Insurance is literally "hedging your bets". So getting the insurance isn't the gamble, you get insurance when you're about to gamble. So it enables gambling in a way that wasn't possible before.
Also, if Amish are allowed to opt out of social security, why can't Libertarians?
The Social Security opt-out is only possible for members of certain groups, most of which were special carve-outs added when Social Security was first implemented[1]. One of those carve-outs is for individuals which are members of a religious group that has existed continuously since 1950 and have a religious objection to Social Security (those requirements only really match a handful of religions who lobbied for this right during the introduction of Social Security). However, anyone who wants to be excluded from Social Security must have never received Social Security benefits or made Social Security contributions and must be a member of some kind of pension scheme. Some police officers and some teachers are also excluded from Social Security due to different carve-outs but still qualify because those police officers' and teachers' unions have pension funds.
Libertarians don't have any carve-outs (nor do any other political group for that matter).
> How is a "pension scheme" different from "social security", in any way that matters?
There really isn't any difference (at least from the "is it gambling" angle). The main difference is that the pension schemes aren't government-run (unlike Social Security). It was a historical compromise (the groups lobbying against Social Security happened to be okay with being able to run their own pension schemes) which probably looks fairly strange in retrospect, but that's the way it is today.
[1]: https://en.wikipedia.org/wiki/Social_Security_(United_States...
In my mind, the insurance company neglected a particular outcome of their service, and she enacted the loophole. It’s their mistake for not catching it and they’ve now made sure it can’t happen again.
I agree with you that insurance, as a concept, isn’t a means of making money as this woman has treated it. I also think the notion of insurance isn’t as sacred: the company is providing a service not some fundamental right, so this woman isn’t necessarily in the wrong for taking advantage of a “bug”
"Financially, they behave almost identically to options. But that's not the intended use for the product."
It is absolutely the 'intended purpose'.
It just so happens, for some products, there is a 'humanist element' i.e. fire/life/home, but it's still a financial instrument.
You will have an unpleasant surprise ...
How is a tool to manage financial risk NOT a financial instrument?
The insurance companies themselves treat their product as a financial instrument in almost all cases
They do not act very humanistic when denying claims for all manner of technical 6point font on page 186 of terms and conditions document of the policy that says they will only pay out if the event happened on the 8th Tuesday of the month under a full moon during a eclipse...
Today insurance seems more like a protection racket than actual risk mitigation, given that more and more insurance is required by law for a person to get it becomes less of a voluntary exchange where I pay a small amount to hedge my risk and more a mandated extortion for which I will likely get little value in. Granted that does not apply to travel insurance as it is not (yet) mandatory but the industry of insurance is impacted by these external factors
Just look at all of the excuses insurance companies are using to refuse to pay out on Business Interruption Insurance due to COVID-19, or when insurance companies refuse to pay out after large scale storms due to various technical justifications, or any number of 1000's of examples I could cite that highlights the unethical behavior of that industry.
No Insurance companies get exactly zero sympathy from me
(I'm not talking about trying not to pay legit claims that clearly are within the threshold) but the reason these boundaries are there is so they can accurately price the risk.
It would be much more expensive to get a policy that covered "everything" without the fine print, but you certainly can. It's just out of most people's price range.
That is not to say I think insurers are acting in good faith all the time, just that I empathize with the actual purpose of insurance and the complexity of the risk calculations for insurance actuaries.
For example I am from the Midwest, we get tornado's here and one of the routine ways that insurance companies try to get out of paying is to classify the damage as "strait line winds" because apparently if wind is traveling in a strait line insurance does not pay but if it moves in a circle then we have a winner.
My Insurance for Storm Damage should cover all storm damage not have these weird exclusion based on the type of storm
Insurance is like Microsoft Licensing, no one can understand it and no matter what you buy you do not ever have the "right" insurance
If I have Fire Insurance, it should cover me if my house burns down. if I have Pandemic Insurance it should cover me during a pandemic, if I have business interruption insurance it should cover me if my business is interrupted, etc etc etc
I understand that a policy can not cover "everything" but I also so not believe that the insurance company should be allowed to sell "Storm Damage Insurance" then proceed to fine print out many many many types of storms... That should be considered deceptive business practice if not fraud
We have a real problem with Truth in Advertising for Insurance (and many other industries). IMO we should be seeing billion dollar fines coming out of the FTC on a weekly basis if deceptive business practices were aggressively enforced as they should be, instead i can not recall the last time the FTC even investigated anyone... Probably was the "strongly worded letter" they sent to electronics manufacturers about their illegal void if removed stickers
Unless you are attempting to redefine the word insurance you are simply incorrect. Insurance is one of the most commonly used financial instruments in existence. If insurance was somehow not a financial instrument, it would not be insurance, but something else entirely.
Debt is certainly the most common and insurance is the one of the most common
These agreements were never meant to be traded between insurance companies and in most cases simply weren't. The only major exemption from this rule are for companies offering life insurance but they aren't allowed to offer regular insurance.
Instead of acting as financial instruments, insurance companies are required to have, on-hand, the necessary liquidity to pay-out enormous sums.
Just because the insurance companies have higher capital requirements and treat customers differently doesn't mean it's not a financial instrument.
> Financial instruments are assets that can be traded. [0]
> Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. [1]
And my point about about life insurances being financial instruments:
> The asset classes are cash, vehicles, real estate, business, directly held equity, indirectly held equity, fixed income, pension equity, pension fixed income, cash value life insurance. [2]
> Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annuities and endowment policies, are financial instruments. [3]
[0]: https://www.investopedia.com/terms/f/financialinstrument.asp
[1]: https://en.wikipedia.org/wiki/Financial_instrument
[2]: https://www.sciencedirect.com/topics/social-sciences/financi...
Regular insurance doesn't accumulate cash-value and therefor is not a financial instrument.
Here’s what the Financial Accounting Standards Board says: (https://www.fasb.org/cs/ContentServer?c=Page&cid=13510272100...)
Imposes on one entity a contractual obligation either:
A) To deliver cash or another financial instrument to a second entity
B) To exchange other financial instruments on potentially unfavorable terms with the second entity.
Conveys to that second entity a contractual right either:
A) To receive cash or another financial instrument from the first entity
B) To exchange other financial instruments on potentially favorable terms with the first entity.
Sounds like insurance fits in this category. I die next week, you pay me a million dollars, and I’ve only paid you $100 (or whatever small premium)
Furthermore, any agreement can be traded if someone sees an advantage in the trade and can rely on the agreement to hold. Just because someone’s not doing the trade doesn’t mean it’s not trade-able. I guess it could be explicitly prohibited but even then I could see a Dane in the above insurance example securing a home loan because they have this insurance, and would be able to pay out upon death (for example) as a normal thing.
And everyone financially engineers insurance if they have anything resembling a free market.
Reinsurance in denmark: https://www.lexology.com/library/detail.aspx?g=654d1fd4-cffc...
First result for Denmark insurance swaps: https://books.google.com/books?id=XsbFBgAAQBAJ&pg=PA34&lpg=P...
Insurance: the art of spending money now to avoid spending more money later
Seems like an open and shut thing -- insurance is a form of finance, whether consumer cooperatives, for-profit companies, or the government itself.
Unless we're debating the "instrument" part.
But that means you’re gambling, and so is the insurer. You’re making a bet on a certain outcome and so is the insurer. If you “win” that bet, e.g. the cargo on your ship was stolen by pirates and you insured against that, then your insurer “loses” and has to pay out. If nothing happened during the voyage though and you safely delivered your cargo, then the insurer “wins” and you “lose”, but what you’ve “lost” is a fraction of the value of the cargo which is better than the loss of the whole cargo. The insurer makes money by pooling these bets, betting that it will win more bets than it loses.
> Insurance is supposed to be a safety mechanism that protects you if something bad happens.
is a better vision of the way we should approach insurance IMO. My views are not to abolish capitalism at all, but am commenting on one of the pain points of its selfish tendencies.
That’s just not correct. There are plenty of insurance policies where people buy them as an investment with the hope of profiting off the payout when the insured asset has a loss. Credit default swaps being one such instrument.
Not saying that’s a good thing, but it certainly exists.
The scores of fake identities was clearly wrong but just “gaming the system” is generally not a crime. Look up the story about chocolate pudding and airlines.
Back when CDs paid a real return and credit cards gave free cash advances with 6 plus months no interest (neither of which exist anymore) had a lot of friends that would just use their good credit to get a bunch of cards, get “free” cash for 6 months, buy a CD with it (Sometimes from the same bank that gave them the free cash!) and just sit back and let the bank send them free money... then pay off the card when the CD matured after 6 months.
It was totally gaming the system but if the banks were dumb enough to let it happen then it’s sort of on them at some level.
Buying an insurance product - financial instrument or not - under a fake name most likely is a crime or at very least a disqualifying act. It's not "gaming the system" as you describe. Gaming would be a novel approach or changing the scale/magnitude of what a normal person would do; normal people don't fake their identity to buy insurance. Your CD example is gaming the system until I start apply for credit cards with a fake identity; that crosses a clear and obvious line.
https://online.wsj.com/public/resources/documents/april_19.h...
Kills your credit score due to high utilization until the promotion is up and card is paid off though
Your last example is a contract of adhesion where the person setting the terms (and profiting from them on average) assumes responsibility for those terms.
I advocate government provided universal healthcare. That cost is just table stakes for a civil society.
Insurance is more properly relegated for elective decisions, where a person's interests are not (yet) universally shared, and they want to hedge their risks.
Very few countries have the former (the UK famously does), and many societies would be considered civil have the latter.
It's the government's job to lift the floor, set standards, drive progress. There's "no one size fits all."
We will always need room for innovation, experimentation.
Sometimes top down, like ratcheting performance standards. https://www.vox.com/energy-and-environment/2019/5/31/1864690...
Sometimes bottom up, like the neighborhood buurtzorg clinics in the Netherlands. https://en.wikipedia.org/wiki/Buurtzorg_Nederland
Because better is better.
Insurance is fundamentally a financial construct designed to manage risk. And if it's priced too low, it cannot function as a safety mechanism. Funds will be exhausted, and nobody will get their safety.
Where you see kindness, I see financial malfeasance of the sort that undermines the very goal of the thing.
More importantly, why does what is or is not a financial instrument according to your rather specific definition matter?
If you see humanism in underpriced flight insurance, do you see exploitation in overpriced flight insurance? Someone making that much money on well chosen flights means most likely other flights are very much overpriced for insurance.
One of the most useful things insurance does is expose real values for risk and put financial incentives on reducing risk behavior on both the holder and the owner/maker/operator or the insured asset.
For example, fire sprinklers and renters insurance. The owner of the unit is motivated to have sprkinklers present and in working order to lower the total cost of the apartment (insurance would have higher premiums without), the renter wants to pay lower premiums so they will insist they are installed or look elsewhere, and the insurance company will have a motivation to have a good sprinkler inspection program that finds out if they're really installed, done properly, and maintained in a way that provides actual risk reduction. Everybody wins as long as the insurance price is not just "humanitarian" but actually reflects the real risk.
And to others, she was committing obvious fraud. Notably, to her, this was fraud, because she used fake identities to buy the policies.
The "I'm just an agent of libertarian market efficiency" excuse goes out the window once you start trying to hide your tracks.
Dynamic pricing isn't free to implement, and raising prices to account for accurately for delays may result in policies never bought by travelers who find them too expensive or a clear signal to get a better flight instead.
When I read that sentence in the article I immediately thought they closed it by optimising pricing or by challenging airlines. But no - as the next paragraph states - they closed it by adding a clause to the contract which basically forbids doing what this woman did. Go figure.
Any sensible person would just add a clause to the terms.
Just like a stock market is undermined by insider trading, so insurance markets are undermined by fraud. Insider trading and fraud don't mean stocks or policies are mispriced. Insider trading and fraud are breaking the social contract of what the products are meant for, which is why they're illegal.
The article quotes:
> "she was able to receive relevant information beforehand that tells her if the flight was going to be delayed or cancelled."
Which sounds exactly like the insurance equivalent of insider trading. Buying insurance on something you already know is going to happen or not is fraud, plain and simple.
The insurance company had loopholes too, but the loophole that prevented the company from finding out sooner was that she got payment from the airlines directly, rather than the insurance company. That's not mispricing. She was arrested because she committed insurance fraud, plain and simple.
I don’t think that’s quite the right definition. I know I’m going to die. I bought whole life insurance. I have not committed fraud.
So technically you bought life assurance.
Perhaps consumer products are playing fast and loose with the technical terms because everyone says they want "insurance".
...but where there is a legal requirement for everyone in the area to "get insured" so that they don't have to lean on FEMA, and therefore in practice there's the opposite effect to the distribution of risk under public healthcare: rather than forcing healthy people who will get negligible benefit from their policies to get insured, such a requirement forces the insurance company to not be playing the lottery by offering only short-term policies that can maybe avoid a flood, but instead fixes them into always ending up covering a resulting flood (and therefore almost always defaulting in such cases and needing reinsurance coverage.)
what's the statute, or regulation, please. i'm not aware of that.
I fail to see how this is in any way fraudulent.
All three of these takes are pretty basic in their extreme ("we shall see (in court)," "capitalism," and "as long as the law absolves specifically me and people I like." Let's just play it out:
- Did she break some laws? Probably, and whoever broke the law most clearly will lose in court. We'll see what the judge says. Not sure if judges in China are impartial.
- But if she went to court, the insurance company is pretty rich so it will win. Also this is China. As a matter of who should win...
- I will never be an insurance company, even if I sometimes would like cheaper insurance I will never be on the wrong side of justice here, they're a bunch of scoundrels. What about all the ways they rob me?
Here you go, that's every legal perspective you're going to hear, from a commenter or journalist or whatever. Obviously what we want to know is HOW she did it.
If a hedge fund profits from predicting a corporate merger by tracking corporate jet flights, many people would say that's just them doing their research and being well informed. It's just obscure information, not insider information.
If this woman were trading flight insurance in the type of investment market that trades sophisticated insurance products like credit default swaps, her actions would be completely fair.
That she was doing it with retail products is less ideal, but not enough to clearly condemn her.
See also: the tax code. An accountant is just someone who rips off the government for you, to stop the government ripping you off so much. Because that's the game that's being played, as agreed by all players.
In a democratic country the law is supposed to be made by democratic process.
If you feel wronged, pillaging shops is not the way to solve it. The way to solve it is to get informed about what democracy is and cast your votes to get represented by people who will defend and strengthen democratic process.
Instead, what happens is people do not put enough or any due dilligence when casting their vote and the country gets represented by people who don't care about democratic process and only care about their partisan interests.
Get some good laws to make sure the best way to be profitable is to do good to your customers. Let's not be naive that trying to rip off the insurance company is an attempt to alleviate any of current problems (except for personal budget problems).
So while I agree with you in principle, this approach is insufficient.
> If you feel wronged, pillaging shops is not the way to solve it.
Sometimes, it is. For groups of people with little to no political power, protesting, rioting, and causing a bunch of social upheaval is definitely a productive way to force other people to consider and address their grievances. There are a lot of negative tradeoffs, of course, but there's no denying that it's an effective way to raise awareness.
Otherwise, we wouldn't even be having this discussion.
This is a lot like the difference between tax evasion (breaking letter of the law) and tax avoidance (breaking the spirit of the law).
It's also arguable that hedge funds exist to arbitrage the difference between the spirit of contractual arrangements (thou shalt not use pension funds to take out massive loans) and the letter of contractual arrangements (god only knows what you can and can't do with the company pension fund, but you can probably bribe the prosecutor to agree with you).
So, it's normal business practice for businesses and the wealthy to rip others off. The difference between them and us is they have better lawyers and are able to bribe prosecutors who have a different interpretation of the letter of the law.
Better laws are not going to level this playing field because the problem is largely how we practice law and all major parties support the status quo.
I've interacted enough with privatized insurance companies that if insurance wasn't a requirement or near requirement, I'd happily choose other options of mitigating risk. I much prefer self-insuring when feasible.
Only if the information she was using was non-public, e.g. if she were getting information from former colleagues, or had access to such data herself that a normal person would not have. Otherwise, it is not comparable to insider trading.
Is it though? Isn't this just arbitrage based on asymmetrical information (i.e. exactly what insurance companies do)? If she caused the flight to be delayed somehow, that would certainly be fraud, but so would anything the insurance company did to make the delay less likely without adjusting premiums.
She had to use 20 different identities do to this. That should answer your question.
The question wasn't "is this particular case fraudulent for any reason what-so-ever".
The question was "is buying insurance on something you already know is going to happen" plain and simple fraud?
The identity fraud isn't really relevant to that question at all.
FWIW I'm not aware of any law in the USA that makes it illegal to buy insurance when you know the policy will pay. Knowing more than the insurance company's actuaries is not fraud. Making false statements is fraud. Intentionally causing damage to collect insurance payments is fraud. But the hypothetical oracle who knows when the next flood/fire/car accident will hit due to divine inspiration is free to buy a relevant insurance policy the day before. AFAIK.
a) I have a really, really, REALLY hard time understanding how hiring an army of PhDs to build highly proprietary risk models based on extremely expensive (or not-even-for-sale) datasets does not run a foul of uberrima fides. The doctrine only makes sense if it forbids both parties, not just the insured, from concealing information. If I were on a jury and the entire case hung on a reasonable man's interpretation of uberrima fides, I would have a hard time ever finding in favor of a modern insurer who's unwilling to share their models and data with the world. I mean, I might agree that the insured hid information. But I'd be nearly 100% confident that the insurer hid information.
Maybe in 1766 this principle made sense. It aint 1766 anymore.
b) In this case specifically, it would be quite hard to convince me that using publicly available information (e.g., weather reports and history of on time / delayed / cancelled flights) runs a foul of uberrima fides. You can't honestly expect me to believe the insurance company didn't have access to that information. It's equally hard for me to believe that an army of PhD actuaries didn't think to use that information to build their pricing models.
c) In the case of travel insurance, the doctrine has a really big bright-line problem. When I buy any ticket into or out of Boston during the winter months, I tend to buy travel insurance. I never buy travel insurance for flights into or out of Boston in the summer. That is clearly not fraud (or, if it is, that insurance product needs to be regulated out of existence). Now, what if I choose particular weeks? days? Where's the bright line?
d) Even supposing some obligation to share information, how in God's name am I supposed to inform the insurer that I estimate a flight will be almost surely be cancelled/delayed? Call up the 1-800 number? Because I know exactly how that would go: you'd get a first-line support person who's incentivized to sell policies. If I were running a similar scheme, I would definitely record myself calling up the insurance provider and point-blank stating "I think this flight will be cancelled, should I buy your insurance?" I guarantee the answer from the T1 support folks would be "yes, that's what it's for!". It seems totally unreasonable to assume bad faith of anyone who buys an insurance product with large positive expected value, especially when the insurance company is consistently making 10 figures in net income and is unwilling to engage in individual dialogs about "who knows what and when". If I can't get on the phone and talk to the actuary who built the pricing model to figure out if X is shared information, and if there's no list of check-boxes for me to look through in order to determine the same, and if the only company representative I can get access to is probably going to explicitly tell me to buy the policy, then... what the hell?
All of these things taken together: if I were on a jury and uberrima fides was the only reason to find in favor of the insurer, I would certainly do everything I could to sway my fellow jurors toward favoring the insured.
It seems like the right solution here is either a) more sophisticated pricing models, or b) some very clear and well-dilineated bounds on what information is/is not allowed to be used when purchasing travel insurance.
TL;DR: uberrima fides as a fuzzy legal doctrine seems... just... utterly impossible to apply to consumers. The relationship is fundamentally asymmetric, so the insurer should have a burden to explicitly ask about any relevant information (as is done for, e.g., health and life products). As a fuzzy doctrine for deciding on a case-by-case basis, this doctrine seems more relevant when the insurer and insured are more symmetric (e.g., insurance products aimed at large corporations, reinsurance, etc.).
(Of course identity fraud is a problem and this happened in China which doesn't use the same legal system, so this is all just a hypothetical conversation.)
Especially point A.
I used to work for a company that made health insurance claims benefit management software for first and third party administrators.
We would get requests from clients to do data mining in our databases that was well in excess of what was legal - one example included the fact that they were using genealogy services to build family trees and while they couldn't mine DNA for familial information, surely there was no harm in looking over your distant relatives for diagnosis codes, right?
"We can't do that".
"Why not, it's all in the databases, right?"
To the OP's point, that would oblige the traveler to notify their insurance if they got a text from the airline advising of delays, etc.
I'm extraordinarily jaded, but I'm fairly certain that one of the points of funding https://en.wikipedia.org/wiki/Federated_learning research is to side-step regulations in the finance and insurance industries.
Fortunately, in the US, laws about such things are quite strong at the moment. Stay tuned...
The insured has a duty to disclose everything that is or would be material to the insurer, even if that information is known only to the insured.
Fraud is entirely separate.
I wrote a super long comment below, but on a more fundamental level... how?
Especially for something like travel insurance. Anyone the average consumer gets to talk to about a travel insurance policy is going to be some call center jockey being paid on commission.
In fact, my insurance agent sold me a home insurance add-on for personal electronics. Their pricing didn't take into account the cost of the covered electronics. Replaced some very expensive hardware after (inevitable) failures. When I purchased the policy, I sent my agent and email pointing out that I has some super expensive electronics, expected short shelf life, and was pretty damn certain that the policy had positive expected value.
The agent straight up asked why I wouldn't buy the policy in that case!
That product was discontinued, of course. The insurance company tried to claw back one of their payments until I showed them my emails with their agent. But the fact that they even tried is... telling. And I'm just lucky they didn't press the issue, because I probably wouldn't have bothered going to court over a few hundred dollars in wasted payments.
There's a fundamental problem with trying to apply this sort of legal doctrine when most consumers are unsophisticated and don't have access to the same data as the insurer. The fact that we only ever get to talk to sales people compounds the problem.
Failure to disclose material facts renders the contract voidable. Insurance is not supposed to be a method for exploiting information arbitrage, and the law is formed explicitly on that basis.
It doesn't mean there can't be robust discussions about what the contract covers when particularly unexpected sets of facts come up.
But why would I ever invest in a company if I knew that my gains would be stolen by people with secret knowledge?
If you allow insider trading, then you eliminate the incentive for outsider investing
And that means that we don't have public companies, only private companies.
Another way to think of it is that it creates an incentive for corporate espionage, so that outsiders may gain insider information.
In a world where corporate espionage is not itself illegal, the market would then be composed of private companies plus external "auditors" who are slipped in by all interested shareholders whether the private companies like it or not.
...which is oddly similar to governments performing intelligence on allies.
at that point of sale, the reality is the product sucks. but the market still reflects the price of a good product. so they know reality before everyone else, keep everyone else in fantasy, and trade at the fantasy price.
it further undermines the market bc no one will invest in companies who bail out with at the high price and leave them holding the bag. e.g. if someone asked me to buy 1k shares @ $100 each and i buy them: the product is a dud in R&D. the insiders all sell near the $100 price, the product is a dud in the market, share prices tanks to $30.
Next my "friend" asks me to invest I tell him to pound sand.
> In insider trading, famously, nobody quite knows what “legal” means. There is no statute defining or prohibiting insider trading, and the Securities and Exchange Commission rules on it are slim. But there are some judicially created rules that more or less make sense, that focus, roughly speaking, on whether insiders are using someone else’s information for their own gain. (A question that has nothing to do with market fairness, by the way.) But those rules are hazy and much disputed, and they aren’t written down in one place.
https://www.bloomberg.com/opinion/articles/2018-10-15/inside...
When a company employee is told something that's a secret and they trade on it or tell someone else then that's betraying that trust. If someone outside the firm figures it out, say from satellite photos or something like that, then it's not.
Well, from the description of the events, it sounds like she didn't "know" the events were happen, just that they were more likely in a way that's not captured with a sufficient premium. That's not the same as e.g. insuring against your car getting dented, knowing you plan to dent it.
So what she did was more analogous to reasoning that, "Oh, man, people always seem to rear-end you when you're driving a red sports car. Since I drive one, I guess I'll pay extra for the no-deductible option for accidents involving getting rear-ended." She doesn't know she'll be one to get rear-ended, she didn't cause the rear-ending, she just recognizes it as being super-likely and thus a good deal.
With that said, I think there is a sense in which this is fraud. Generally, insurance requires you to have an "insurable interest" -- i.e. independent reason to value the insured thing -- to prevent the kind of asymmetric info/moral hazard situation that breaks their ability to model the risk and which leads to cases like this.
So the contract almost certainly had a clause like, "I am going on this flight for business or pleasure reasons" (or something more lawyer-screened). That would establish the insurable interest: the insured wants to go on this trip, and wants it to go well. So she'd be entering the contract on fraudulent terms if she bought the trips/insurance solely to profit off the payouts.
Still, I have to agree with the OP's comment. If someone is this good at assessing risk, you should hire them to tune your risk model. She did pretty darn good with far less info than the insurer had to work with!
I don't think that is a strong enough statement. She used multiple identities in attempt to keep police off of her trail. The analogy to the red sports car is helpful but lacking in this obviously nefarious effort in its innocence.
If you do well enough at a Casino, they can ask you to leave, and ban you from the premises, even if you're not doing anything illegal.
Do you have a citation for that law?
---
Yes, weather matters, and people can benefit by predicting it.
While it sounds like insider trading, the situation here is quite a bit different. With insider trading, the company has very real and legitimate interest to keep some information private. Private from the general public, including their competition.
In this case, however, the airlines wouldn't have to share this info, apparently known inside the organization, with the general public, but with a single (set of) well defined actor(s). Also, I'm not 100% sure if publishing all the available information on possible delays and cancellations wouldn't benefit their business. (Though, if cancellations happen because of say not enough tickets sold for a flight, it may, because maybe that would induce a self-reinforcing process. Who would want to buy a ticket that is likely to be cancelled?)
> "she was able to receive relevant information beforehand that tells her if the flight was going to be delayed or cancelled. Thereafter, she would purchase the tickets to the flights that are likely to be delayed or cancelled, before checking if there is any extreme weather along the route the flight is going to take that day."
Specifically, I'm not sure what the "before checking for extreme weather along the route" bit is supposed to mean, especially since it seems to imply that she checked for extreme weather after she already purchased the insurance? Something is odd with the grammar here. Furthermore, the quote never specifies what the "relevant information" actually was.
So... does this mean that she received inside information (e.g., from a former coworker) that the flight had been cancelled?
Or does it mean that she was looking at publicly-available information (e.g., weather data) to make the call?
I think the ethics and usefulness of some aspect of this are dependent on the answer to that question, and I'm not sure the article says definitively one way or another.
With that being said, I think the ethical problems with the fake identities seem more clear...
Google Flights will warn you if a flight is often delayed -- does that count as "receiv(ing) relevant information beforehand"?
The travel insurance wouldn't pay out if the flight was cancelled due to weather that was already known about.
If the pricing on insurance isn't dynamic, and gets within the weather window, you can use a 3-day prediction to place a high-likelihood bet that the flight will be cancelled.
Particularly if the insurance sticks with the ticket such that it can be moved if unused.
1. See a bad storm coming in.
2. Buy a fully refundable ticket for the day the storm is going to hit.
3. Buy insurance on that ticket.
4. Storm hits? Cash in.
5. Storm doesn't hit? Change the date on the ticket and the insurance moves with it.
Better cancel all life insurance policies then.
Buying insurance on something you're going to cause to happen (cut down a tree so it falls on your car, leave flammable substances in a hazardous place in your home) is fraud.
Buying insurance on things you think are likely to happen isn't inherently fraud.
Or else it's a tax scheme where you only profit based on the tax-free nature of life insurance proceeds.
The Nanjing police announced on Friday afternoon, June 12, that Li had, on multiple occasions, faked information related to the delaying of flights, and scammed huge amounts of money from insurance companies.
Couldn't agree more. She did nothing wrong in my book. She found a legal exploit, and exploited it. She was playing by the rules, she exposed a flaw, the flaw is now fixed. If she continues to do the exploit that would be a different story.
400k is small price to pay to close this kind of loophole.
So identity fraud is just totally fine as long as you're screwing over insurance companies?
Identity fraud aside, stuff like this drives up the cost of insurance for people who legitimately need it. It's clearly both illegal and immoral.
Isn't it legal to buy an airline ticket for someone else? I've never heard of that being called identify fraud.
>Identity fraud aside, stuff like this drives up the cost of insurance for people who legitimately need it. It's clearly both illegal and immoral.
People have made the argument that what she did was illegal based on laws specific to insurance fraud.
It's a tough to think about how companies, the stock market, banks, packaged securities, hedge funds, governments, and tax codes are all playing games with this but when a normal person does it they get thrown in jail.
It seems we're basically ok with the rich and powerful working all kinds of loopholes in the law but not normal people?
Doesn't seem so clear to me.
She's not buying tickets for someone else. She's buying them for herself using other people's identities. It's not the same thing, and this is covered in the article.
> It's a tough to think about how companies, the stock market, banks, packaged securities, hedge funds, governments, and tax codes are all playing games with this but when a normal person does it they get thrown in jail.
From the article:
> she was able to receive relevant information beforehand that tells her if the flight was going to be delayed or cancelled.
Last I checked insider trading was illegal (and immoral) in the stock market too.
I am saying that I don't agree with your prior statement that it was clearly immoral.
I see it as clouded when one hears of corporations, banks, hedge funds, governments, and other well funded entities getting away with all kinds of financial games to the detriment of the many, pretty much without consequence, and then when someone plays a similar game on a smaller scale it is wrong. That's the part I don't understand.
For example, the Panama papers were a big scoop because of all the rich people hiding their identities. That's legal, but doesn't seem clear if it's really moral. Companies do that to hide money from taxpayers, right?
It seems in the U.S. anything goes as far as making money especially if you are rich, corporations are duty bound to make profits regardless of morality, etc. Otherwise if you are not rich enough to play you need to know your place and follow the rules laid down for non-rich people. Has that compromised our morals? Probably. Is calling what this lady did immoral fair given everything else that goes on? That's what I wondered.
As a litmus test, when the roles are reversed and the insurance company overprices a policy we seem fine with that as a society because even though any individual can have a hugely disproportionate premium the company as a whole has bounded profits (both legally and due to competitive forces). We might even try to argue that an individual can't possibly know their own risk better than a team of actuaries and that they should accept that the premiums are actually correct.
If an insurance company is allowed to knowingly profit 2x, 3x, or more on an individual's premiums based on their best models, why is an individual disallowed from doing the same if only using public information?
If so, where do we draw the line? Is it at a break-even point? What if the insurance company were trying to target an individual for 15% profits; is that person allowed to engage in the contract if they think the company will only earn 3% on average since that would also demonstrate a model better than the company's?
I can definitely see arguments against an individual having any _causal_ effect on the policy (e.g., like burning down a house), but I'm struggling to see why this kind of information arbitrage is inherently wrong.
It’s possible that the root cause of this is simply a mispricing of insurance caused by Chinese regulations.
In a very abstract way there's not much difference between this and betting on sports.
You actually used to be able to purchase life insurance on any other people, although you’re correct on why that’s a bad idea. The darkest examples would be companies in high risk work buying life insurance for workers, which reduces the incentives to provide adequate safety equipment.
Trading instruments like mortgage-backed securities does not constitute "gambling with people's homes." It's not like someone's taking your home away just because of some CDO trades.
"Activist investing" (think Icahn) might, albeit indirectly. But that certainly doesn't make up a big chunk of the market and its activites.
I'm not saying that the GFC wasn't massive (it was) or that people didn't lose their jobs and homes (many did), but MBS were not at fault. Subprime lending was, among other factors.
Arguably the originator banks deserve a lot more blame for that, since they actually were the ones willingly handing out bad loans and/or encouraging bad consumer practices.
Answer: unemployment went from 4.6 to 10%, and it took eight years to recover: http://infographic.statista.com/normal/chartoftheday_8974_us...
That's generally the reason for why it's treated differently, by law.
Aren't hedge funds (nominally) doing the same thing?
With an insurance (especially something like travel/home insurances) you are not trying to game the premium, you are rather protecting risk of a preexisting situation.
Sure you can use it to gamble, like buying a few dozen houses and hoping they catch fire sooner than later.
Similarly with the stock market, stocks unlike a casino chips do produce value and represent real quota ownership of an asset. It can be misused in similar ways but it posses distinct qualities.
I would reserve gambling for something offered to some kind of a consumer/costumer market.
The point is that one party says to the other "I will give you $X once a month, and if event E doesn't happen in that month, you get to keep this money, otherwise you must give me $Y (s.t.Y >> X)".
You can replace E with "my house burning down" or "The red team wins". In either case, I would call this a bet.
Insurance is just a specific type of gambling where you do it because E is bad and you want to be safe in case it does happen.
Gambling is priced as a game, a personal luxury. You pay quite little for a vanishingly small chance at a payout. Notice how there are very few people who actually ever "count on" a lottery ticket to pay out.
Insurance, on the other hand, is priced for the market. People will simply go somewhere else if the insurance company is taking too large of a slice.
In some cases, gambling can start to become insurance, if the gambling market is efficient enough. For example: "Matress Mack" when he insured himself against his "Free matresses if the Astros win the World Series" promotion using phone-in sports betting. Even in this case, however, the "insurance" seems costly at 13 million dollars!
Insurance and gambling have very different legal regulations in almost every jurisdiction.
I see also this one as needlessly reductionist. By that logic also taking a day off from work to interview for a new job is gambling.
The difference I gave are also more than just motive. With insurances you are supposed to desire the risky activity (owning an house, booking a trip, driving) independently from the payout, and moreover the transition to insurance in meant to decrease the variation in outcomes. Two characteristic entirely adverse to the nature of gambling.
In a Russian Roulette analogy, gambling is betting money on who wins pushing people to play more and more as the payout increases hoping to leave a winner; insurance is more complex, it is taking an already running game that you had already chosen to play for your own reason with no money involved and introducing a fee that will payout to the loser's family. You are not supposed to want to "win" that bet, actually it is part of the insurer job to make sure of that.
It is still in the category of "financial probabilistic interaction" which is just one of various requirements for gambling.
In gambling, the unlucky losers pay the lucky winners. The people who picked the winning horse, who threw the better roll of the dice, who invested in the right stock get paid.
In insurance, the lucky winners pay the unlucky losers. The people whose house burned down, who came down with a really expensive disease, who lost their jobs get paid.
However, in theory insurance is more about pooling risk, where payouts from claims do not exceed premiums collected from the risk pool. Though sometimes insurance companies overextended themselves into places where they are not collecting enough from the pool to cover claims.
If you are lucky, you will never be seriously sick in your life, never lose your job, and never have your house burn down. If you are so lucky, all of that money you pay for insurance goes to the people who are less lucky.
Insurance companies achieve the same thing by setting your premiums according to whatever they assess the risk to be. Again, asymptotically, people pay more in insurance premiums than the insurer pays out.
The house always wins.
This nicely aligns with what the practice of insurance actually involves: they do a lot to ensure that the client doesn't want the insured event to happen.
It's actually completely different to sports betting...
Betting on sports is insurance if and only if you bet against your own team for an amount not greater than the winnings.
Of course it gets murkier when people talk about the “rush” of gambling, which is I think what you’re alluding to, but it’s not as straightforward as you make it or the most popular gambles would be those with the longest odds or the highest chance of complete ruin.
Insurance is about spreading loss around to make costs more predictable. Your house burns down, but since we're all paying into our insurance we all cover your costs so you can rebuild and not have your life irrevocably destroyed.
It's the opposite of gambling. It's about reducing randomness, insecurity, and financial shocks.
Contracts like credit default swaps pay out if some organisation fails to meet their (debt) obligations
The payouts on these flights should cause the insurance company - instead of adding terms clauses - to increase the price by recognising some of the same patterns she has, and thus reducing the difference in price (/value) between the 'markets'.
But in a perfect world you wouldn't place those bets against an insurance company but against the transport service itself (of the upstream leg). "I see your ticket price of 50 and raise another 20 against your punctuality SLA." This would create incentives and would be so much less of a hassle than alternative approaches that somehow try to factor in actual damages.
This is incorrect. This is what applies in a totalizator market like some racing betting agencies. They take the pool of money (eg for a win) and deduct a fixed fee before paying out to the winning bet. The "odds" there are determined by which competitor the market thinks is most likely to win.
But bookmakers actually provide odds based on their own assessments. They are taking the "other side" of the bet and can suffer losses.
And yes, there are bookmakers that will take bets on almost anything. They do it the same as any risk takers, by researching the probabilities.
People bet on political outcomes, sports outcomes, all sorts of different real world events.
Aren't there insurance companies (eg. Lloyd's) that will do the same?
Well, she had some kind of inside knowledge where she knew that insurance would probably provide a payout for the flight.
I'd like to know what this inside knowledge is? What did she know that she could use to predict that a flight would probably be delayed?
At least in the USA, information on previous flights (on time / delayed / canceled) is public. Routes are pretty fixed. Combined with weather forecasts, that is probably enough information to turn a profit.
I guess from the article she had "insider information", but I'm not sure why that would be necessary to use this scheme?
https://blogs.wsj.com/chinarealtime/2014/09/25/flight-delaye...
Wait how is that the solution at all? That seems like might be a lot worse for everyone involved, including innocent insurers. I would expect them to somehow reduce the payout to only the cost of the flights or similar, resulting on a net neutral for the insured.
If you only get insurance for outright cancellation, there is a "donut hole" between that and what the airline will cover in the case of longer delays.
BTW, it can be illuminating to read what the slightly more expensive travel insurance packages will cover; things like a helicopter medevac back to civilization, or ransom payments in case of kidnapping.
Well, I noticed that this particular brand/model (Red Octane 2.0 I think) failed pretty quickly[1]. So I always paid the $3, which entitled me to a quick, easily replacement (normally $50) when they inevitably broke down.
[1] Like after a few months -- not soon enough to be annoying, but sooner than they're supposed to last.
The woman faked different identities (illegal) to not fall under regular insurance quotations, and used insider information (illegal/scam in insurance policies, just how insider info is illegal in stocks).
This is akin to someone buying car insurance, faking different identities each time, and plan in advance to crash the car every single time (the insider info part).
It would be more like her driving through a known dangerous intersection, following all traffic laws, and still getting t-boned every few days because of low visibility. She didn't "make" the crash happen, she just knew it would.
The arbitrage function remains useful.
Why does the title say she "predicted" they would get delayed?
I think if burden is on insurer, then insurance can get away with any payout. They can always claim you knew weather is bad. So after all, insirance career is a big winner here.
I know plenty of people who made hudnreds of euros on these low cost flights, it's same people who are buying error fares
there is nothing fraudulent about it
you can do actually same thing with sending packages insured for much higher value than is content to destinations where you know they are very likely to be stolen/lost
The Paper, citing Yangtse Evening Post, said she was able to receive relevant information beforehand that tells her if the flight was going to be delayed or cancelled.
3rd and 4th paragraphs of the article.
Maybe the insurers didn't have sophisticated algorithms, and her prediction was something like: For example on Flightradar24, etc, you could see that a particular plane on a particular date maybe flew New York - Austin, then Austin - Boston and then Boston - New York. On the next day it might be the same or a different plane. On the next day you'd just have to see if the NY - Austin flight is delayed, and you could deduce that since the airline usually uses 1 plane to do the 3 above routes, that plane will be delayed for the Austin - Boston and Boston - New York routes...
Nothing wrong about finding an informational edge over the insurance companies.
That's only part of the story (and trying to manage storage across multiple Dropbox accounts is a pain). The real benefit would be the expanded free storage your primary account gets as a referral incentive.
Was there something in the contract requiring clients to only take out policies on airline tickets they actually intended to use to travel? (The article suggests there wasn't prior to this incident.)
That said, in principle it's analogous to placing two bets from different bookies. Most of the time if you double insured, you'd just lose twice as much money. You'd probably need to look into exactly what constitutes insurance fraud. In this case it's probably fine, because the event actually happened and she was entitled to claim.
The identity fraud bit is really the problem here though.
The insurance also didn't require the person to have checked in.
https://www.bloomberg.com/opinion/articles/2019-06-26/everyt...
"Creating fake identities is playing fair? In which country?"
The question supposed that creating fake identities was by itself unfair, but in the U.S other conditions must also apply for it to be considered unfair.
Here for example is something pertaining to New York, and also some federal statutes https://law.jrank.org/pages/7503/Impersonation.html
Also of course the rules for getting drivers licenses depend on the state (however there are probably federal regulations around drivers licenses as well), and probably the laws of those states say you cannot use a fake name to get a drivers license. This is different than having a law regarding fake names.
As an example of how this might work -
Law 1: The law regarding usage of fake names same you cannot legally use a fake name if you commit fraud with it.
Law 2: The law regarding getting a drivers license says you must provide your true name to get a drivers license.
She assumed she could win in a crooked game by playing fair and by the rules? This is China, the CCP own everything, and having someone take 'advantage' of a seemingly cunning and thoughtful hedging system is actually quite ingenious, but consider the follow:
> But once the flight is delayed, Li said she would make use of one of the insurance company rules that did not require the insured themselves to apply for compensation, and proceed to get compensation from the company.
Traders make the same bets all day by shorting stocks and currencies, but if you try this with the CCP I'd be surprised if this woman not only had all her money and property stolen from her, but she ended up in some labor camp in the South to appease the 'great leader' and was forced to make some forced apology that was subject to the same 1984 style two minutes of Hate.
Really? John Corzine (a former Senator) and MF Global would disagree with your premise; as well as a long list of bankers at Citi, JP Morgan, Goldman Sachs etc...
They make the rules, we don't; they win, we lose.
If _we_ found a loophole that took money away from the big boys, we would be criminals.
Look no further than Nav Singh for proof. He was taking money away from the HFTs and was criminalized for it.
Just because something is possible, doesn't mean it's legal.
I mean you can beat the game of security tags at shops, you'd still be a thief.
This reminds me of the other articles -- parents pay $500k to private university so their kids can be accepted... and then somehow they are arrested.
When articles write about people being arrest, do bother to document what is the violation.
Probably the best reading of "..." nowadays is "and making money is bad, so" or "and this made somebody higher-class than them sad, so".
My understanding of the university admissions scandal was that the parents were defrauding the university by bribing the admissions staff to lie to the university about how good the candidates were. It would have been legal if they had instead been honest with the university and paid however much extra was needed to convince them to accept their children. But that would have cost them more than bribing individual staff.
So I don't think that example fits your mould.
"Unfortunately, the police caught up with her misdeeds and arrested her..."
:)