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Date:2009-03-20 00:14
Subject:The economics of insurance

I was once drawn to a discussion on insurance - specifically, health insurance (although the specifics are probably not important) - where a heated debate ensued on whether insurance was absolutely necessary or not. Needless to say, opinions were very divided with many claiming it to be necessary while others were resolutely against the idea and, being the sort of person that I am, I considered whether a middle path would work. Yes, I am resurrecting my favourite answer, "It depends."

It strikes me that this sort of thing is best explained by ways of logical analysis so here's what I think. It would help if one considered the mechanism by which insurance companies generate their (sometimes quite substantial) profits.

Let's take some of the simpler products out there - life insurance. The policyholder receives a contract where the insurance company pays the policyholder in the case an "event", e.g. illness, hospitalization, death, etc. occurs. To compensate the insurance company for this deal, the policyholder makes a payment of a monthly premium to the insurance company.

This then begs the question, how do insurance companies make money? Well, the mechanism is very simple - if the monthly premiums are substantial enough, and the event doesn't occur, the policyholder is essentially making direct payments for the insurance company to get something for which he derives no benefits. Of course, if an event occurs, the insurance company has to compensate the policy holder. In essence, the insurance makes money if the payments made by policyholders exceeds the payments the insurance company needs to make to cover the events.

How do the insurance company know that they won't have to cover the events? Well, they don't. But this is why basic products, like life insurance, have been driven to the point that they have been commoditized - it is fairly easy to get life insurance as long as you fill in the very comprehensive forms. But what the insurance company knows is that, given the information you have provided to them, and assuming that you have provided accurate information, the insurance company knows the probability of an event occurring. Over large numbers, they can weight the premiums in such a way that the insurance company will have a positive expected value. Volume is therefore the name of the game. 

But, there is another way by which insurance companies can make money and that is largely due to the timing of the payments. Let's give another simple example.

Suppose you got an insurance contract which requires you to make monthly payments. Will you immediately have an event where you can claim compensation from the insurance company? You might, and you might not. In the event that you don't, all that money is building up in the insurance company's account, and what do you think they do with it?

That's right, they invest it. They may invest it in securities such as stocks and bonds, or even derivatives like those mortgage-backed securities we've all heard lots about the past few months. It's a great deal for the insurance company - they essentially have been able to get a "loan" for zero cost of capital, and can then use that amount (known as the float) to generate even higher returns for their shareholders.

So, what does this all mean? This essentially means that the average person who buys health insurance, in this case, will probably be worse off economically - he is essentially "investing" money at which his expected rate of return will be lower than average. A more reasonable way to do this would therefore be - to save the money (which would have otherwise been used to pay insurance premiums) and then invest it wisely in some form of security (whether risky or less risky, it's up to your risk appetite) at which you can generate a rate of return higher than what you'd be getting from the insurance company. If such an event occurs, you'd probably be more likely to be able to repay the bills out of your own pocket.

Of course, this simple analysis does not take into account intangibles like the peace of mind you get from buying insurance, and is by no means an outright denial of the worth of insurance. But nonetheless, I hope it convinces you that there is a more nuanced approach to this debate than just "Yes, you must buy" or "No, you absolutely must not buy".

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Date:2005-10-27 08:55
Subject:Something I've been thinking about

I've been suffering from insomnia again lately as I have been, to a large part, thinking about certain issues. Sadly not directly related to my thesis, but sort of an offshoot to that.

Throughout history, there have been places that can be characterised as "clusters of creativity", i.e. geographically limited places with a high concentration of people who produce enduring (or potentially so) works to humanity. Examples include Florence during the Renaissance, Vienna in the era of the Classical composers, or Silicon Valley today. Now of course we would naturally want to apply the "birds of a feather flock together" cliche to explain this, but why such a prodigal output in what are really quite a small number of places?

I heard an interesting story from a friend about a theory for the prevalence of artists in Renaissance-era Florence. The rising mercantile class and the lack of accurate weight measurement in that period meant there was a large amount of people who had the ability to judge volume (important, I suppose, for appreciating art that deals with 3D projections on a 2D canvas) and who had the money to sponsor lasting works of art. Of course, we know the mainstay of many musicians in 18th and 19th century Vienna was largely due to the number of wealthy patrons who could finance their activities.

What drove Silicon Valley, though? I'm pretty sure venture capitalists and investment bankers only flocked to Silicon Valley after they found that money could be made in the area.

The question then becomes: is the availability of a "friendly environment" a necessary precursor to the creation of a "cluster of creativity" or are there just many nascent "innovators" (to use the term loosely) who only emerge when there is an environment conducive to the development of their ideas? If it's the latter, what kind of policies would be needed to encourage this activity?

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Date:2004-12-04 14:18
Mood: contemplative

After four months, the Adaptation Phase of the MSc programme I'm attending draws to a close. Ten subjects and hopefully, one killer caffeine addiction, completed. As I have not been obliged to do any resits, I have had the luxury to lie on a couch and meditate on lessons learned and experiences gained.

I think the fact that I've been pretty much out of touch with everyone is indicative of the level of commitment I've had to put into work - not just academically. Experiencing the enclosed environment of a university once again has taken some readjustment which is a chore in itself. However, I've managed to glean a few facts about myself.

I seem to have major issues working in random groups of people. It was rather insightful of myself to pick that out as a "weakness" before coming here, but experiences I've had here only seem to support that. I have very little patience for inefficiency, preferring to attend to the task at hand rather than bother with superficial social niceties. Which I'm sure is not very endearing but, as I've said time and time again, I'm not here to be loved.

I've also reinforced my disdain for group think. As such, I have not joined the student union. Of course, it could have been entirely possible for me to join and play the social game to manoeuvre myself into a position where I didn't have to do anything, but why bother in the first place? There are some elements of a fraternity that I find personally disturbing - the insistence that the society is greater than oneself and that it can do no wrong, for a start.

Oh, did I also mention that I find irritating people who cannot seem to comprehend the importance of applying rigour (whether intellectual or otherwise) into solving a problem? A solution is pretty much useless unless it can be backed up with some supplementing evidence indicating the approach to the solution, justification of actions taken, a summary evaluation of alternatives and why they fall short. This is partly why I've been extremely busy during the past few months, as I have had to enhance the level of any group work that I've had to do which falls short of my personal standards. I'm pretty sure I appear to be a dictator to some of the people I've worked with, but so be it. I think the results tell their own stories.

To end off this longish rant, I should say that there have been bright moments in my time here. There are of course the people who I feel privileged and enriched to have met, and who I've had the fortune of being able to spend many of my hours and days with. Thank you, it goes some way to renewing my faith in humanity.

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Date:2004-09-24 00:41
Subject:On being 25

Several days ago, I ended up being closer to 30 than 20. I don't like to make a big deal out of birthdays, but since the Romans used to believe that you become a completely new person every 7 years, I thought it was a good idea to reflect on where I was 7 years ago and where I am now.

About this time in 1997, I was a callow medical student in Cambridge thinking I had things sorted out. Along the way, things got diverted (a long story). Now, I'm in business school in Nyenrode and I *think* I have my career sorted out. Deja vu? Hopefully not.

I haven't had much time to write because I've been extremely busy with multiple assignments and midterm examinations but, this time at least things look like they're pretty much on schedule. Sure, the workload is heavy but I find some enjoyment in what I do.

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Date:2004-08-22 23:05
Subject:Classes begin tomorrow

Finally, the moment I've been waiting for has arrived. The university has arranged for a "Business Administration Overview" session to give us all an idea of what to expect for the Master of Science program, why it is we have come all this way and probably a last chance to get out while we still can. Nyenrode's programme makes extensive use of case studies (probably modeled after Harvard Business School), and tomorrow will also be our first opportunity to experience it.

Classes begin in earnest on Wednesday, starting with Marketing Strategy, followed by the rest of the subjects in this first block - International Financial Markets, Financial Information Systems, Statistics for Business and Managerial Economics. This, of course, is exactly what I have come here to learn and I'm hoping that it will be up to my expectations.

I've given a stab at the statistics course and it seems the material covered by the first two sessions revisit the stuff that I did in my A Level statistics course. I did reasonably last time, so that's reassuring although I'm sparing some thought for those of my coursemates who don't have a mathematics background. In 2 weeks, the midterm exam for statistics will begin, and the amount of work covered is equivalent to one module, and a bit, of that A Level. And it took us 3 months in school to cover that much ground. Yikes.

Of course, they will probably have some background with the other subjects since most of them came from business/economics/finance degrees previously.

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Date:2004-08-18 23:55

After a few days in business school, I've started having some misgivings about the place. As such, I have not attended the rather formalised, three day long induction run by the students union. What this probably means is that I will end up being barred from all student events for the rest of my time in Nyenrode as attendance is compulsory, but actually I don't particularly care.

When I made the decision to return to full-time education, I decided that my goals would be to:

- Have a scholarly and introspective time at university again. The last time I was at university, I strayed from the straight and narrow path and ended up lost. I view this as an opportunity to return and experience the things that I missed out on the last time round.
- Build stronger relationships with the people I encounter. I like to do this on a personal level, and the idea of running through a rigorous and artificial induction to do this seems contrary to that goal.

Some of my other concerns are to do with whispers I've heard and impressions I've made, nothing really substantial.

- As the induction program is quite physically demanding and seniors can sometimes be quite condescending towards juniors, there is talk amongst some of my peers to give the future students and even harder time. I find this disturbing as surely the idea of an induction should be to ease people in to a new and unfamiliar environment, not some cruel form of amusement.
- I've been looking at the society offerings of the student union and while there are the requisite rugby, rowing, hunting, eating, drinking and financial clubs - where are the other important considerations that every responsible and successful business people should have? The philosophical societies, or the ethical committees? Having a hunting club but nothing on ethics is worrying.

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Date:2004-08-14 06:58
Subject:Finally arrived

After months of making repetitive trips to the Dutch embassy and the Malaysian Ministry of Foreign Affairs, I managed to get everything in order in the nick of time and have just arrived in the Netherlands.

The campus grounds of Universiteit Nyenrode look very impressive even from the entrance. With its centuries-old architecture, the place looks like a Cambridge college although with deer and other wildlife roaming the parks, I'd say I like it even more than my old alma mater in Cambridge (Clare College).

Registering to collect my room key brings back a wealth of memories as I was handed a thick pack of information to sift through - rules and regulations, policies and the obligatory induction pack from the students' union. The induction to the students union (the Nieuw Compagnie van Verre) sounds a little daunting - I'm supposed to run around the Netherlands and get strange things like "an empty Heineken beer crate", "3 used HP printer cartridges" and - my favourite yet - "a Slobberkom, Necktrecker and Clawbag". Wha....? It lasts for five days and, from what I've been told, doesn't sound too different from the induction that Malaysian students are put through.

There was a mentor evening as well, so that new students will be assigned to a senior who will guide them and hopefully make life in Nyenrode more manageable in the early stages. I've been assigned to a pleasant girl from Jakarta who mentioned that the induction period isn't really as necessary as the student union makes it sound - I'd be so busy studying anyway for my courses.

Speaking of which, the courses here are organised into two phases - the adaptation phase (4 months) and the main phase (12 months). The adaptation phase is divided into two blocks, each with five courses. I initially thought that I would have to pick one course for each block, and was weighing the costs and benefits of each one. Turns out I have to do them *all*. Eep, no wonder they said Nyenrode was tough.

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Date:2004-07-20 22:42
Subject:Left the old job

A little diversion from the general theme of the blog, but it's a fairly momentuous event. Last Friday, I finally left my employers. There have been some good moments and certainly some extremely frustrating ones but on the whole a genuinely positive experience with some good lessons to take with me to the Netherlands.

Still waiting for the confirmation e-mail from the university that my visa application has been successful, so the next chapter of my life can begin.

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Date:2004-07-13 14:41
Subject:Storm clouds brewing

Only several weeks into the visa application process and I've already hit a snag. Let me try to explain.

Before a visa for long term stay in the Netherlands is approved, the Dutch government must be absolutely convinced that I am financially able to support myself throughout my stay without recourse to public funds. This means that I need to have a certain amount of money in the bank, or a similarly large amount of liquid assets (bonds or shares come to mind).

In my case, there have been some inconsistencies in my bank account details and the Dutch Ministry of Justice has some doubts about its validity. To cut a long story short, they believe one of two things: my bank account may be fraudulent, or my bank may not even exist. Good reputation you've got there, Maybank, largest bank in Malaysia and a sovereign government even doubts your existence.

On a happier note, a letter from another one of my banks seems to be satisfactory, so the crisis has been averted.

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Date:2004-07-04 16:40
Subject:Preparing for the trip

Trip preparations can sometimes be more stressful than making the trip itself. Before going to live in the Netherlands, the Dutch government requires the student to get a "Machtiging tot Voorlopig Verblijf" (MVV) which entitles the holder to stay in the country for a preset period of time. This is technically not too difficult, because all I need to send is a verified photocopy of my passport, birth certificate and proof of sufficient funds for the stay.

The problem arises when you have to get the photocopied passport verified by the Ministry of Foreign Affairs. Since the ministry has now relocated to Putrajaya, this meant a 100 km round trip. Oh well, at least the drive was scenic and largely congestion-free.

The birth certificate posed its own little challenge. Since Malaysian birth certificates are in Malay, they need to be translated into either Dutch, English, French or German. I wasn't masochistic enough to try looking for a Dutch translator in this country, so it took about two trips to the Sessions Court in Bangunan Sultan Abdul Samad to get that sorted (which meant getting stuck in frustratingly congested streets).

All that being done, I just had to reward myself with a nice IBM Thinkpad T41. For work purposes entirely, of course. :P

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Date:2004-06-22 17:52

There is no real content on this page yet. I've created this page to chronicle my life in business school in the Netherlands (Universiteit Nyenrode) so I'll only start writing stuff when I've actually started my new life.

Prior to this, I was a shift worker who didn't really like working at night, so I've got a page up called, imaginatively enough, "Working Nights Sucks". You can read it here, although I can't really imagine why you would want to. :)

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