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Comment by dragontamer | Hacker News Reader

Its kind of sad that the #1 comment right now is basically saying "the company involved here should have been charging its customers far, far more money", instead of protecting their customers and looking out for the best for 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.

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> Insurance is NOT a financial instrument

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.

I can't speak for insurance markets everywhere but in Denmark, you are simply incorrect. Insurance companies have existed as consumers' co-operatives since the first insurance 'company' in Denmark, founded after a city-wide fire in Copenhagen in 1728.

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.

In the US there's basically a 110% chance that whatever insurance policy you took has become a part of some derivative contract with swaps or whatever.

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...

Even the "110%" number is apt to be correct, as someone has probably sold one of those derivatives short.

Good point - I meant that as hyperbole but if you want to start counting shorts and swaps on swaps and swaps on shorts and shorts on swaps and reinsurance and swaps on reinsurance and so and and so forth, well, that gets really big really fast. Let's just say there was a reason we were so worried about AIG going under during the previous financial crisis.

Just because it's not traded doesn't mean it is not a financial instrument. You are paying into a pool of money that promises to pay you a certain sum of money above your contribution if something happens. That is defined by a monetary contract. It's a financial instrument, by definition.

Just because the insurance companies have higher capital requirements and treat customers differently doesn't mean it's not a financial instrument.

You're not right simply because you say you are. If we're going to talk about definition, tell me where you found yours. I'll help you with some I just googled, that support my definition:

> 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...

[3]: https://en.wikipedia.org/wiki/Insurance#Life_insurance

So, if I'm holding un-vested RSUs in a tech start-up, it isn't a financial instrument because the monetary contract stipulates that I can't _trade_ it?

No, unvested RSUs are financial instruments for the same reason life insurance is. Your unvested RSUs accumulate cash-value over time and can be traded at the time of vesting. One might call them a derivative financial instrument.

Regular insurance doesn't accumulate cash-value and therefor is not a financial instrument.

Sure, good point. I’ll bite. The first sentence Wikipedia “monetary contract between two parties” definition leaves out the trading bit you include from other places.

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.

It sounds like you have a very specific history of insurance and way of thinking about it in your country, but insurance goes back to the Ancient world and was one of the first financial instruments if not the first. When you take out a policy, yes you are mitigating the risk of “something bad” happening, to you, and of it does happen, then the insurer makes you whole as far as the contract was concerned.

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.

Finance: the art of trading money now vs more money later

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.

Parent meant that it's not an arms-length transactional investment. It's meant to be a fiduciary service like an accountant or finacial advisor. They are supposed to make money by helping you and taking a percentage fee, not by tricking you or outsmarting you.

The American capitalistic perspective tainted the nature of insurance. The comment

> 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.

Debt would like a word...

OP said “one of the most...”

Debt is certainly the most common and insurance is the one of the most common

“Insurance is not a financial instrument”

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.

>> The scores of fake identities was clearly wrong but just “gaming the system” is generally not a crime.

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.

I think we agree. Saying fake identifies = not cool. Gaming the system (without fake identities) may not be nice but probably not illegal (in most places).

Companies will buy life insurance on their employees if they think they can make money on the policy. Walmart famously made the news for this.

https://online.wsj.com/public/resources/documents/april_19.h...

I've had two cards with 18 month interest free promotions recently. If you invest the cash you would have normally used to pay the card off, than that's a free 8-15% gains!

Kills your credit score due to high utilization until the promotion is up and card is paid off though

Your first example was an abuse of insurance that crashed the economy, which says something about what should be.

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.

Reminds me of that bit from The Simpsons:

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."

That's not really so much a Simpsons bit as it is a reference to the Amish and Mennonites, who both consider insurance to be immoral because they see it as a form of gambling. As an aside, this is why they are generally exempt from Social Security and the associated taxes (though they do by law have to have their own pension scheme).

A curious way of thinking. I would say insurance is exactly the opposite of gambling.

No, it's not. It's actually a way of shorting something, you are effectively betting that the covered entity will fail. If priced appropriately to risk and the value of the entity, it can be thought of as low-risk hedge, but it's still a bet.

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.

If someone sells you insurance, they are taking a bet that you will (on average) not cash out any more money than you put in through your premiums minus any profit margin. So you could argue that in the casino analogy, the insurance company is the player and the policy holder is the house. I believe that they find it immoral to be involved in any aspect of gambling, including being on the "house side" of a gamble.

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).

Insurance is marketed as opposite of gambling, which is brilliant. Psychology says that people would rather not lose $10 than win $10 so reframing it as "protection from loss" is great move.

Gambling is taking risks with an expectation of possible gain.

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.

Gambling at a casino is trading expected value for more variance of outcome. Insurance is trading expected value for less variance.

I come from a poker background, so I would only ever increase variance in order to also increase my expected value. I call that gambling.

If something decreases both expected value and variance, it's pretty hard to call it gambling.

Insurance is exactly the same thing as gambling.

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.

> I would say insurance is exactly the opposite of gambling.

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.

I believe a similar sentiment exists in Japanese culture, where life insurance took many decades to take hold.

How is a "pension scheme" different from "social security", in any way that matters?

Also, if Amish are allowed to opt out of social security, why can't Libertarians?

> 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...

“ Insurance is supposed to be a safety mechanism that protects you if something bad happens.”

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.

> 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.

I’m not nearly the economist to know what counts as an inefficiency.

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.

> 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).

> Insurance is NOT a financial instrument.

How is a tool to manage financial risk NOT a financial instrument?

>Insurance is NOT a financial instrument. Insurance is supposed to be a safety mechanism that protects you if something bad happens.

Tell that to insurance companies.

>Insurance is NOT a financial instrument. Insurance is supposed to be a safety mechanism that protects you if something bad happens.

You will have an unpleasant surprise ...

You're getting slammed for saying insurance is not a financial instrument. I hope what you meant is that it's not supposed to be highly profitable for the insurer. Even then while most customers would like to agree, most insurers would not want to.

> Insurance is NOT a financial instrument. Insurance is supposed to be a safety mechanism that protects you if something bad happens.

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.

You really weaken your argument about insurance not being a financial instrument by comparing them to call and put options in the next paragraph, saying they behave almost identically. On hacker news, no less "not the intended use" isn't a solid argument about what something is or is not.

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.

Debt is such a common financial instrument that other financial instruments (like credit derivatives) refer to themselves as buying and selling insurance.

Your argument would make perfect sense if we were talking about insurance coops or government-issued insurance. But as long as we're talking about for-profit insurance companies, they can get fucked. There is literally no difference between for-profit insurance and gambling. They knew the risk they were taking, and now they're trying weasel out of paying.

Insurance is precisely a financial instrument.

"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 may be thinking of public goods, like healthcare, fire departments, etc.

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.

This is perhaps a rather pedantic point, but do you really mean government _provided_ healthcare, or simply government _funded_ healthcare?

Very few countries have the former (the UK famously does), and many societies would be considered civil have the latter.

I'm ambivalent about the implementation, who signs the paycheck.

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.

You would get more sympathy for your argument if the insurance companies acted like they were humanistic and not financial companies

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

The technicality in six point font is the risk you're not allowed to take because it would cost you more. The whole point of it is to spread this risk out as broadly as possible for the cheapest price possible based on known risk. Known risk requires some boundaries.

(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.

While I understand that, the risk IMO needs to be more generalized

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

I’m not sure I’d pick either efficiency or humanism to describe what’s going on here. Personally, I’m not as optimistic as you seem to be about the nature of the service that insurance companies provide but I can still see why the case isn’t clear cut.

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”

I expect that any resemblance between an insurance company's behavior and "humanism" is transient and illusory.

Where you see a good point, I see virtue signalling. This has threads of communism / socialism to me. The whole point of capitalism is market efficiency. When we choose to go in favour of “humanism” rather than efficiency, is when we choose to be “soft” just so that we don’t offend each other (and by soft I don’t mean the real, actual, genuinely helpful kind of soft).

Everything is a financial instrument. Some are simply not labeled as such. This is how humans operate.

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