Information Asymmetry

From the Economist Schools Brief

 IN 2007 the state of Washington introduced a new rule aimed at making the labour market fairer: firms were banned from checking job applicants’ credit scores. Campaigners celebrated the new law as a step towards equality—an applicant with a low credit score is much more likely to be poor, black or young. Since then, ten other states have followed suit. But when Robert Clifford and Daniel Shoag, two economists, recently studied the bans, they found that the laws left blacks and the young with fewer jobs, not more.

Before 1970, economists would not have found much in their discipline to help them mull this puzzle. Indeed, they did not think very hard about the role of information at all. In the labour market, for example, the textbooks mostly assumed that employers know the productivity of their workers—or potential workers—and, thanks to competition, pay them for exactly the value of what they produce.

You might think that research upending that conclusion would immediately be celebrated as an important breakthrough. Yet when, in the late 1960s, George Akerlof wrote “The Market for Lemons”, which did just that, and later won its author a Nobel prize, the paper was rejected by three leading journals. At the time, Mr Akerlof was an assistant professor at the University of California, Berkeley; he had only completed his PhD, at MIT, in 1966. Perhaps as a result, the American Economic Review thought his paper’s insights trivial. The Review of Economic Studies agreed. The Journal of Political Economy had almost the opposite concern: it could not stomach the paper’s implications. Mr Akerlof, now an emeritus professor at Berkeley and married to Janet Yellen, the chairman of the Federal Reserve, recalls the editor’s complaint: “If this is correct, economics would be different.”

In a way, the editors were all right. Mr Akerlof’s idea, eventually published in the Quarterly Journal of Economics in 1970, was at once simple and revolutionary. Suppose buyers in the used-car market value good cars—“peaches”—at $1,000, and sellers at slightly less. A malfunctioning used car—a “lemon”—is worth only $500 to buyers (and, again, slightly less to sellers). If buyers can tell lemons and peaches apart, trade in both will flourish. In reality, buyers might struggle to tell the difference: scratches can be touched up, engine problems left undisclosed, even odometers tampered with.

To account for the risk that a car is a lemon, buyers cut their offers. They might be willing to pay, say, $750 for a car they perceive as having an even chance of being a lemon or a peach. But dealers who know for sure they have a peach will reject such an offer. As a result, the buyers face “adverse selection”: the only sellers who will be prepared to accept $750 will be those who know they are offloading a lemon.

Smart buyers can foresee this problem. Knowing they will only ever be sold a lemon, they offer only $500. Sellers of lemons end up with the same price as they would have done were there no ambiguity. But peaches stay in the garage. This is a tragedy: there are buyers who would happily pay the asking-price for a peach, if only they could be sure of the car’s quality. This “information asymmetry” between buyers and sellers kills the market.

Is it really true that you can win a Nobel prize just for observing that some people in markets know more than others? That was the question one journalist asked of Michael Spence, who, along with Mr Akerlof and Joseph Stiglitz, was a joint recipient of the 2001 Nobel award for their work on information asymmetry. His incredulity was understandable. The lemons paper was not even an accurate description of the used-car market: clearly not every used car sold is a dud. And insurers had long recognised that their customers might be the best judges of what risks they faced, and that those keenest to buy insurance were probably the riskiest bets.

Yet the idea was new to mainstream economists, who quickly realised that it made many of their models redundant. Further breakthroughs soon followed, as researchers examined how the asymmetry problem could be solved. Mr Spence’s flagship contribution was a 1973 paper called “Job Market Signalling” that looked at the labour market. Employers may struggle to tell which job candidates are best. Mr Spence showed that top workers might signal their talents to firms by collecting gongs, like college degrees. Crucially, this only works if the signal is credible: if low-productivity workers found it easy to get a degree, then they could masquerade as clever types.

This idea turns conventional wisdom on its head. Education is usually thought to benefit society by making workers more productive. If it is merely a signal of talent, the returns to investment in education flow to the students, who earn a higher wage at the expense of the less able, and perhaps to universities, but not to society at large. One disciple of the idea, Bryan Caplan of George Mason University, is currently penning a book entitled “The Case Against Education”. (Mr Spence himself regrets that others took his theory as a literal description of the world.)

Signalling helps explain what happened when Washington and those other states stopped firms from obtaining job-applicants’ credit scores. Credit history is a credible signal: it is hard to fake, and, presumably, those with good credit scores are more likely to make good employees than those who default on their debts. Messrs Clifford and Shoag found that when firms could no longer access credit scores, they put more weight on other signals, like education and experience. Because these are rarer among disadvantaged groups, it became harder, not easier, for them to convince employers of their worth.

Signalling explains all kinds of behaviour. Firms pay dividends to their shareholders, who must pay income tax on the payouts. Surely it would be better if they retained their earnings, boosting their share prices, and thus delivering their shareholders lightly taxed capital gains? Signalling solves the mystery: paying a dividend is a sign of strength, showing that a firm feels no need to hoard cash. By the same token, why might a restaurant deliberately locate in an area with high rents? It signals to potential customers that it believes its good food will bring it success.

Signalling is not the only way to overcome the lemons problem. In a 1976 paper Mr Stiglitz and Michael Rothschild, another economist, showed how insurers might “screen” their customers. The essence of screening is to offer deals which would only ever attract one type of punter.

Suppose a car insurer faces two different types of customer, high-risk and low-risk. They cannot tell these groups apart; only the customer knows whether he is a safe driver. Messrs Rothschild and Stiglitz showed that, in a competitive market, insurers cannot profitably offer the same deal to both groups. If they did, the premiums of safe drivers would subsidise payouts to reckless ones. A rival could offer a deal with slightly lower premiums, and slightly less coverage, which would peel away only safe drivers because risky ones prefer to stay fully insured. The firm, left only with bad risks, would make a loss. (Some worried a related problem would afflict Obamacare, which forbids American health insurers from discriminating against customers who are already unwell: if the resulting high premiums were to deter healthy, young customers from signing up, firms might have to raise premiums further, driving more healthy customers away in a so-called “death spiral”.)

The car insurer must offer two deals, making sure that each attracts only the customers it is designed for. The trick is to offer one pricey full-insurance deal, and an alternative cheap option with a sizeable deductible. Risky drivers will balk at the deductible, knowing that there is a good chance they will end up paying it when they claim. They will fork out for expensive coverage instead. Safe drivers will tolerate the high deductible and pay a lower price for what coverage they do get.

This is not a particularly happy resolution of the problem. Good drivers are stuck with high deductibles—just as in Spence’s model of education, highly productive workers must fork out for an education in order to prove their worth. Yet screening is in play almost every time a firm offers its customers a menu of options.

Airlines, for instance, want to milk rich customers with higher prices, without driving away poorer ones. If they knew the depth of each customer’s pockets in advance, they could offer only first-class tickets to the wealthy, and better-value tickets to everyone else. But because they must offer everyone the same options, they must nudge those who can afford it towards the pricier ticket. That means deliberately making the standard cabin uncomfortable, to ensure that the only people who slum it are those with slimmer wallets.

Hazard undercuts Eden

Adverse selection has a cousin. Insurers have long known that people who buy insurance are more likely to take risks. Someone with home insurance will check their smoke alarms less often; health insurance encourages unhealthy eating and drinking. Economists first cottoned on to this phenomenon of “moral hazard” when Kenneth Arrow wrote about it in 1963.

Moral hazard occurs when incentives go haywire. The old economics, noted Mr Stiglitz in his Nobel-prize lecture, paid considerable lip-service to incentives, but had remarkably little to say about them. In a completely transparent world, you need not worry about incentivising someone, because you can use a contract to specify their behaviour precisely. It is when information is asymmetric and you cannot observe what they are doing (is your tradesman using cheap parts? Is your employee slacking?) that you must worry about ensuring that interests are aligned.

Such scenarios pose what are known as “principal-agent” problems. How can a principal (like a manager) get an agent (like an employee) to behave how he wants, when he cannot monitor them all the time? The simplest way to make sure that an employee works hard is to give him some or all of the profit. Hairdressers, for instance, will often rent a spot in a salon and keep their takings for themselves.

But hard work does not always guarantee success: a star analyst at a consulting firm, for example, might do stellar work pitching for a project that nonetheless goes to a rival. So, another option is to pay “efficiency wages”. Mr Stiglitz and Carl Shapiro, another economist, showed that firms might pay premium wages to make employees value their jobs more highly. This, in turn, would make them less likely to shirk their responsibilities, because they would lose more if they were caught and got fired. That insight helps to explain a fundamental puzzle in economics: when workers are unemployed but want jobs, why don’t wages fall until someone is willing to hire them? An answer is that above-market wages act as a carrot, the resulting unemployment, a stick.

And this reveals an even deeper point. Before Mr Akerlof and the other pioneers of information economics came along, the discipline assumed that in competitive markets, prices reflect marginal costs: charge above cost, and a competitor will undercut you. But in a world of information asymmetry, “good behaviour is driven by earning a surplus over what one could get elsewhere,” according to Mr Stiglitz. The wage must be higher than what a worker can get in another job, for them to want to avoid the sack; and firms must find it painful to lose customers when their product is shoddy, if they are to invest in quality. In markets with imperfect information, price cannot equal marginal cost.

The concept of information asymmetry, then, truly changed the discipline. Nearly 50 years after the lemons paper was rejected three times, its insights remain of crucial relevance to economists, and to economic policy. Just ask any young, black Washingtonian with a good credit score who wants to find a job.

Regulatory Capture? Insurance Regulator rules in Favour of Insurance Industry

City regulator will not intervene over businesses ineligible for payouts writes Kalyeena Makortoff in The Guardian 

 

Small and medium-sized businesses fear they will not be able to survive the economic impact of the coronavirus lockdown. Photograph: James Veysey/Rex/Shutterstock


Most UK businesses will not be eligible for insurance payouts over the Covid-19 lockdown, the City watchdog has warned, adding that it was not prepared to intervene on their behalf.

In an open letter to insurance chief executives on Wednesday, the Financial Conduct Authority said it found that most claimants on business interruption policies did not have the right coverage to warrant a payout during a pandemic.

“Based on our conversations with the industry to date, our estimate is that most policies have basic cover, do not cover pandemics and therefore would have no obligation to pay out in relation to the Covid-19 pandemic,” the FCA’s interim chief executive, Christopher Woolard, said.

“While this may be disappointing for the policyholder we see no reasonable grounds to intervene in such circumstances.”

The move is likely to anger small and medium-sized business owners who fear they will not be able to survive the economic impact of the coronavirus outbreak.

Typical business interruption policies pay up to £100,000 to cover the cost of keeping a company running if it is forced to shut for reasons beyond its control, such as flooding or fires.

However, while large insurers such as Hiscox sold policies before the lockdown that promised to pay out if businesses were forced to shut because of a notifiable disease, business owners say their claims have been denied because the policies do not specifically cover pandemics. A group of brokers and loss adjusters are planning legal action against some of Britain’s largest insurance companies.

The FCA said some small businesses – that earn less than £6.5m in revenues and employ fewer than 50 employees – can still take claims worth up to £355,000 to the Financial Ombudsman Service, which could result in faster decisions than if they were taken through the courts.

However, in a warning shot at the wider financial sector, the watchdog announced that it was also launching a new small business unit that would keep an eye on how smaller firms are treated by financial services during the outbreak.

The FCA also said insurers should be acting quickly to get money to businesses who have legitimate and undisputed claims, and should give partial payments where only part of the claim is under review.

Citizenship for sale: how tycoons can go shopping for a new passport

Jon Henley in The Guardian


It’s the must-have accessory for every self-respecting 21st-century oligarch, and a good many mere multimillionaires: a second – and sometimes a third or even a fourth – passport.

Israel, which helped Russian billionaire Roman Abramovich out of a spot of bother this week by granting him citizenship after delays in renewing his expired UK visa, offers free nationality to any Jewish person wishing to move there.

But there are as many as two dozen other countries, including several in the EU, where someone with the financial resources of the Chelsea football club owner could acquire a new nationality for a price: the global market in citizenship-by-investment programmes – or CIPs as they are commonly known – is booming.

The ‘golden visa’ deal: ‘We have in effect been selling off British citizenship to the rich’



The schemes’ specifics – and costs, ranging from as little as $100,000 (£74,900) to as much as €2.5m (£2.19m) – may vary, but not the principle: in essence, wealthy people invest money in property or businesses, buy government bonds or simply donate cash directly, in exchange for citizenship and a passport.

Some do not offer citizenship for sale outright, but run schemes usually known as “golden visas” that reward investors with residence permits that can eventually lead – typically after a period of five years – to citizenship.

The programmes are not new, but are growing exponentially, driven by wealthy private investors from emerging market economies including China, Russia, India, Vietnam, Mexico and Brazil, as well as the Middle East and more recently Turkey.

The first launched in 1984, a year after young, cash-strapped St Kitts and Nevis won independence from the UK. Slow to take off, it accelerated fast after 2009 when passport-holders from the Caribbean island nation were granted visa-free travel to the 26-nation Schengen zone.

For poorer countries, such schemes can be a boon, lifting them out of debt and even becoming their biggest export: the International Monetary Fund reckons St Kitts and Nevis earned 14% of its GDP from its CIP in 2014, and other estimates put the figure as high as 30% of state revenue.

Wealthier countries such as Canada, the UK and New Zealand have also seen the potential of CIPs (the US EB-5 programme is worth about $4bn a year to the economy) but sell their schemes more around the attractions of a stable economy and safe investment environment than on freedom of movement.

Experts from the many companies, such as Henley and Partners, CS Global and Apex, now specialising in CIPs and advertising their services online and in inflight magazines, say that unlike Abramovich, relatively few of their clients buy citizenship in order to move immediately to the country concerned. 

For most, the acquisition represents an insurance policy: with nationalism, protectionism, isolationism and fears of financial instability on the rise around the world, the state of the industry serves as an effective barometer of global political and economic uncertainty.
But CIPs are not without their critics. Malta, for example, has come under sustained fire from Brussels and other EU capitals for its programme, run by Henley and Partners, which according to the IMF saw more than 800 wealthy individuals gain citizenship in the three years following its launch in 2014.

Critics said the scheme was undermining the concept of EU citizenship, posing potential major security risks, and providing a possible route for wealthy individuals – for example from Russia – with opaque income streams to dodge sanctions in their own countries.

Several other CIPs have come under investigation for fraud, while equality campaigners increasingly argue the moral case that it is simply wrong to grant automatic citizenship to ultra-high net worth individuals when the less privileged must wait their turn – and, in many cases, be rejected.

The Caribbean

The best-known – and cheapest – CIP schemes are in the Caribbean, where the warm climate, low investment requirements and undemanding residency obligations have long proved popular. Five countries currently offer CIPs, often giving visa-free travel to the EU, and have recently cut their prices to attract investors as they seek funds to help them rebuild after last year’s hurricanes. In St Kitts and Nevis a passport can now be had for a $150,000 donation to the hurricane relief fund, while Antigua, Barbuda and Granada have cut their fees to $100,000, the same level as St Lucia and Dominica.

Europe

Almost half of the EU’s member states offer some kind of investment residency or citizenship programme leading to a highly prized EU passport, which typically allows visa-free travel to between 150 and 170 countries. Malta’s citizenship-for-sale scheme requires a €675,000 donation to the national development fund and a €350,000 property purchase. In Cyprus the cost is a €2m investment in real estate, stocks, government bonds or Cypriot businesses (although the number of new passports is to be capped at 700 a year following criticism). In Bulgaria, €500,000 gets you residency, and about €1m over two years plus a year’s residency gets you fast-track citizenship. Investors can get residency rights leading longer term to citizenship – usually after five years, and subject to passing relevant language and other tests – for €65,000 in Latvia (equities), €250,000 in Greece (property), €350,000 or €500,000 (property or a small business investment fund) or €500,000 in Spain (property, and you have to wait 10 years to apply for citizenship).

Rest of the world

Thailand offers several “elite residency” packages costing $3,000-$4,000 a year for up to 20 years residency, some including health checkups, spa treatments and VIP handling from government agencies. The EB-5 US visa, particularly popular with Chinese investors, costs between €500,000 and $1m depending on the type of investment and gives green card residency that can eventually lead to a passport. Canada closed its CA$800,000 (£460,000) federal investment immigration programme in 2014 but now has a similar residency scheme, costing just over CA$1m, for “innovative start-ups”, as well as regional schemes in, for example, Quebec. Australia requires an investment of AU$1.5m (£850,000) and a net worth of AU$2.5m for residency that could, eventually, lead to citizenship, and New Zealand – popular with Silicon Valley types – an investment of up to NZ$10m (£5.2m).

Whiplash: the myth that funds a £20bn gravy train

Patrick Collinson in The Guardian


Ten years ago I was in a country lane in Leicestershire, indicating to turn right to go into a hotel for a family event. Seconds later my car was a write-off after a young driver careered round the bend, smashing into the rear of my VW Golf. Fortunately I stepped out uninjured. And from that moment I was pestered, again and again, to make a false whiplash claim.

One of the hotel’s guests was first in. “You’ve got to get down the doctors, tell them your neck is really hurting. You’ll easily get £3,000,” said one (I’m summarising here). But my neck, while a little stiff, wasn’t in pain. Others told me I was mad not to apply. But a decade later there is no evidence the crash caused anything other than a mild sprain that lasted a couple of days. And certainly not deserving of the £3,000-£6,000 that is routinely paid out to “victims” of even the mildest of rear-end shunts.

Now one brave consultant neurosurgeon, who has carried out thousands of operations involving neck and back issues, has declared that whiplash is a myth, nothing more than a multibillion-pound gravy train for lawyers, doctors and the victims suffering from “mainly non-existent injuries”.

In a remarkable piece for the Irish Times, Dr Charles Marks, a lecturer at University College Cork, says the medical profession is as guilty as the lawyers. “For 20 years I wrote medical reports which were economical with the truth … the truth being, there was very little wrong with the vast majority of compensation claimants that I saw. I was moving with the herd.” In Ireland, where payouts have reached levels that even the most avaricious ambulance-chasing lawyer here can only dream of, a doctor can earn as much as £3,000 a week in fees after spending 20 minutes with someone involved in a minor car crash, then writing a largely templated report. “It’s a fee of around €350 and you can easily do 10 a week,” Marks says.

Yet whiplash is “almost impossible to prove”, says Dr Marks, with patients self-diagnosing pain that can never be detected using sophisticated imaging techniques such as MRI and bone scans. “All whiplash is minor. Moderate or permanent whiplash is simply non-existent.”

He cites one study of 40 “demolition derby” drivers in the US who had an average of 1,500 collisions each over a couple of years. Compare that to a mild shunt in slow-moving traffic that, somehow, warrants payouts of thousands. Yet just two of the demolition derby drivers reported post-participation neck pain that lasted more than three months.

Dr Marks adds that in Greece and Lithuania, where there is no expectation of financial gain from whiplash, chronic neck pain following a car crash appears simply not to exist.

But one (British) consultant in Ireland is barely sufficient evidence. So I spoke to another whiplash expert, Dr Stuart Matthews, consultant surgeon in major orthopaedic trauma at the Leeds Teaching Hospitals. He sounded even more dismissive than Dr Marks. “There is not a single test that shows abnormality directly attributable to this condition. Diagnoses are purely on the say-so of the person involved. Many orthopaedic surgeons do not believe it is a genuine condition.”

He says early research that provided medical endorsement for whiplash claims has subsequently been rejected. “It’s the emperor’s new clothes. People just go along with it, there is a bandwagon.”

Neck sprain is genuine, he says, but recovery is relatively quick with little evidence of significant physical injury.

Yet the victims of whiplash receive £2bn a year in payouts, a fair chunk of which goes to personal injury lawyers. That’s £20bn over the past decade, paid for out of galloping increases in car insurance premiums. The forthcoming election means that reforms to whiplash payouts, promised in the prison and courts bill, have been shelved.

A new government, of whatever complexion, should reinstate the reforms – and order a major medical review to determine if we have all been conned for years.

Japanese company replaces office workers with artificial intelligence

Justin McCurry in The Guardian

A future in which human workers are replaced by machines is about to become a reality at an insurance firm in Japan, where more than 30 employees are being laid off and replaced with an artificial intelligence system that can calculate payouts to policyholders.

Fukoku Mutual Life Insurance believes it will increase productivity by 30% and see a return on its investment in less than two years. The firm said it would save about 140m yen (£1m) a year after the 200m yen (£1.4m) AI system is installed this month. Maintaining it will cost about 15m yen (£100k) a year.

The move is unlikely to be welcomed, however, by 34 employees who will be made redundant by the end of March.

The system is based on IBM’s Watson Explorer, which, according to the tech firm, possesses “cognitive technology that can think like a human”, enabling it to “analyse and interpret all of your data, including unstructured text, images, audio and video”.

The technology will be able to read tens of thousands of medical certificates and factor in the length of hospital stays, medical histories and any surgical procedures before calculating payouts, according to the Mainichi Shimbun.

While the use of AI will drastically reduce the time needed to calculate Fukoku Mutual’s payouts – which reportedly totalled 132,000 during the current financial year – the sums will not be paid until they have been approved by a member of staff, the newspaper said.

Japan’s shrinking, ageing population, coupled with its prowess in robot technology, makes it a prime testing ground for AI.

According to a 2015 report by the Nomura Research Institute, nearly half of all jobs in Japan could be performed by robots by 2035.

Dai-Ichi Life Insurance has already introduced a Watson-based system to assess payments - although it has not cut staff numbers - and Japan Post Insurance is interested in introducing a similar setup, the Mainichi said.

AI could soon be playing a role in the country’s politics. Next month, the economy, trade and industry ministry will introduce AI on a trial basis to help civil servants draft answers for ministers during cabinet meetings and parliamentary sessions.

The ministry hopes AI will help reduce the punishingly long hours bureaucrats spend preparing written answers for ministers.

If the experiment is a success, it could be adopted by other government agencies, according the Jiji news agency.

If, for example a question is asked about energy-saving policies, the AI system will provide civil servants with the relevant data and a list of pertinent debating points based on past answers to similar questions.

The march of Japan’s AI robots hasn’t been entirely glitch-free, however. At the end of last year a team of researchers abandoned an attempt to develop a robot intelligent enough to pass the entrance exam for the prestigious Tokyo University.

“AI is not good at answering the type of questions that require an ability to grasp meanings across a broad spectrum,” Noriko Arai, a professor at the National Institute of Informatics, told Kyodo news agency.

Silence from big six energy firms is deafening

If this were a competitive market, our fuel bills would be £850 a year instead of £1,100

Patrick Collinson in The Guardian


 

UK consumers are not seeing their tariffs cut despite the fall in wholesale gas and oil prices. Photograph: Alamy


You cannot hope to bribe or twist the British journalist (goes the old quote from Humbert Wolfe) “But, seeing what the man will do unbribed, there’s no occasion to.” Much the same could be said about Britain’s energy companies. You cannot call them a cartel. But seeing what they do without actively colluding, there’s no occasion to.

Almost every day the price of oil and gas falls on global markets. But this has been met with deafening inactivity from the big six energy giants. Their standard tariffs remains stubbornly high, bar tiny cuts by British Gas last year and e.on, this week.

If this were a competitive market, which reflected the 45% fall in wholesale prices seen over the last two years, the average dual-fuel consumer in Britain would be paying £850 or so a year, rather than the £1,100 charged to most customers on standard tariffs.

But it is not a competitive market. The energy giants know that around 70% of customers rarely switch, so they can be very effectively milked through the pricey standard tariff, which is, itself, set at peculiarly similar levels across the big providers. The advent of paperless billing probably helps the companies, too, with busy householders failing to spot that they are paying way over the odds.

The gap between the standard tariffs and the low-cost tariffs is now astounding – £1,100 a year vs £775 a year. Yes, the 30% of households who regularly switch can, and do, benefit. But why must we have a business model where seven out of 10 customers lose out, while three out of 10 gain?

The vast majority would rather have an honest tariff deal where their energy company passes on reductions in wholesale prices without having to go through the rigmarole of switching.

Instead, we have a regulatory set-up which believes that the problem is that not enough of us switch. It thinks that it will be solved by getting that 30% figure up to 50% or more. Unfortunately, too, many regulators have a mindset that is almost ideologically attuned to a belief in the efficacy of markets, and the benefits of competition. If competition is not working, then they think the answer is simply more competition.

What would benefit consumers in these natural monopoly markets would be less competition and more regulation. We now have decades of evidence of how privatised former monopolies behave, and what it tells us is that they are there to benefit shareholders and bonus-seeking management, rather than customers.

In March we will hear from the Competition and Markets Authority about the results of its investigation into the energy market. Maybe it will conclude that privatisation and competition have failed, but my guess is that it won’t. The clue is in the name of the authority.

• A final word about home insurance. Last week I said every insurer is in on the game, happy to rip-off loyal customers, particularly older ones. I received a letter from a 90-year-old householder in Richmond Upon Thames, who, for 20 years has bought home and contents cover from the Ecclesiastical Insurance company.

After seeing my coverage, he nervously checked his premiums, as he had been letting them go through on direct debit for years without scrutiny.

To his delight, he discovered that Ecclesiastical had, unprompted, been cutting his insurance premiums.

One company, at least, doesn’t think it should skin an elderly customer just because it can probably get away with it. We should perhaps praise the lord there is an insurer out there with a conscience.

Is Ecclesiastical the only “ethical” insurer, or are there any others who are not “in on the game”, asks our reader from Richmond. Let me know!

Understanding Risk - Risk explained to a sixteen year old

By Girish Menon

Risk is the consequence one has to suffer when the outcome of an event is not what you expected or have invested in.

For e.g. as a GCSE student you have invested in getting the grades required by the sixth form college that you wish to go to.

The GCSE exam therefore is the event.

From an individual's point of view this event has only two possible outcome viz. you get the grades or you don't.

Your investment is time, money and effort in order to get the desired outcome.

The risk is what you will have lost when despite all your investment you did not get the desired grades and hence you are not able to do what you had wanted to do.

From a mathematical point of view since there are only two possible outcomes one could say that the probability of either outcome is 0.5.

Your investment with spending time studying, taking tuitions, buying books.... are to lower the probability to failure to as low a figure as possible.

Can you lower the probability of failure to 0? Yes, by invoking the ceteris paribus assumption. If all 'other factors' that affect a student's ability to take an exam are constant, then a student who has studied all the topics and solved past papers will not fail.

Else, some or all the 'other factors' may conspire to bring about a result that the student may not desire. It is impossible to list all the 'other factors' and hence one is unable to control them. Hence, the exam performance of even a hitherto good student remains uncertain.

If the above example, with only two possible outcomes, shows the uncertainty and unpredictability  in the exam results of a diligent student then one shudders to think about other events where all the outcomes possible cannot be identified.

Let's move to study the English Premier League. Here, each team plays 38 matches and each match can have only three outcomes. When one considers picking a winner  of the league one could look at the teams, the manager etc. But, 'other factors' such as injury to key players, the referee...... may scupper the best laid plans.

When one looks at investing in the shares of a company one may study its books of accounts. Assuming that these books are accurate, this information may be inadequate because it is information from the past and the firm which made a huge killing last season may now be facing turbulent conditions of which you an outside investor maybe unaware of. The 'other factors' that may impinge on a firm's performance will include the behaviour of the staff inside the firm, behaviour of other firms, the government's policies and even global events.

Yet, as a risk underwriter one has to take into account all of these factors, quantify each factor based on its importance and likelihood of happening and then estimate the risk of failure. The key thing to remember is that the quantitative value that you have given each factor is at best only a rough estimate and could be wrong. Which is why every risk underwriter follows Keynes' dictum, 'When the facts change, I change my mind'. George Soros, the celebrated investor, has been rumoured to say no to an investment decision that he may have approved only a few hours ago.

Even if Keynes and Soros may have changed their minds on receipt of new information I am willing to bet that their investment record will show many wrong decisions.

So if the risk in investment decisions itself cannot be accurately predicted imagine the dilemma a politician makes when he decides to take his nation to war.

Hence the best way sportsmen, businessmen and politicians overcome the uncertainty of decision making is by posturing. Pretending that you are the best and everything is within your control. They hope that this will scare away the challengers and doubters and victory becomes a self fulfilling prophecy. Alas! It unfortunately does not work every time either. 

(The author is a lecturer in economics.)

The easiest way to get rich quick is to work for the banks

MARK STEEL 

Thursday 12 December 2013

The easiest way to get rich quick is to work for the banks and badger the vulnerable to buy insurance

Once you’ve accepted the rules – all that matters is selling a policy – there are no moral barriers

Who’d have guessed this? Lloyds has been fined £28m, for encouraging staff to sell policies to people who neither needed nor wanted them. Those who sold the most won cases of champagne, and those that didn’t could have their salary halved.

This proves that the banks take regulations seriously, as they’re adamant that members of staff who don’t break the regulations will be dealt with severely, and only those who break them all day long will be given any rewards.

This illustrates one of the many changes in the 50 years since the Great Train Robbery, as now Ronnie Biggs would make more money and satisfy his urge to rob much more, if he got a job WITH the bank.

One member of Lloyds staff was so terrified at not reaching his quota, that he sold a policy to his own wife. It’s just as well they’ve been caught or he’d start on his kids next, saying: “You don’t want an ice cream like your stupid friends. Instead I’ve sold you a Lloyds Super Value Triple Interest Bonanza scheme. You might cry now, but you’ll thank me for it in 10 years when it’s worth sod all.”

They must have been desperate to sell these packages, pleading with the elderly that: “You’ve got to put your savings into a Lloyds Advanced Finance Protection Account dear, otherwise with interest rates the way they are, you’ll have to sell your grandchildren to an Albanian child trafficking gang and that could be quite nasty. Don’t worry about the form, I’ll fill in the details.”

This wasn’t the result of a few maverick uber-salesmen. It was the bank’s policy to create a culture of sell sell sell with no excuses for failure. They were probably sent on motivational courses, with a team leader explaining: “If a customer is hesitant about whether to sign, give them a nudge, by dragging them into a basement and getting a colleague to make a film as you stand by him with a sword, preaching there’s no place on Earth for those who don’t believe in the almighty Lloyds Bonus 5-Year Investment Fiscal Funtime Account. That should close the deal.”

One policy they were offering was a “critical illness” insurance, one of these schemes they sell by looking earnest and saying: “We all hope it doesn’t happen, but if, God forbid, you DO get pecked to death by a pterodactyl, normal policies won’t cover you and then your loved ones will face a life of destitution and heroin abuse, so it’s worth it for peace of mind and it works out at only £8 a minute’.

Once you’ve accepted the rules of this game – that all that matters is selling another policy – there are no moral barriers. If you got up at a team talk and announced you’d sold a policy to someone with Alzheimer’s, then went back the next day and sold them another one as they’d forgotten they’d bought one already, there’d be high fives and your name would be written on a “dude of the day” board. But a Lloyds spokesman said: “The group recognises its oversights during the period in question and apologises.” Oversight? How could mis-selling billions of pounds worth of twaddle be an oversight?

Does it need to be on a “to-do” list, that goes: “Clear boot of car – water plant – don’t bark at thousands of staff that they’re pathetic maggots if they don’t sell lorry loads of scuzzy investment plans – buy Sugar Puffs”.

Those train robbers must wish they’d thought of that. “Your honour, we recognise that taking up our positions by the railway line, assaulting the crew, running off with sacks of cash and planning to spend it on a life of debauchery was an oversight. Only we’ve been very busy lately, so it slipped our mind, but we do apologise.”

Where you have to give the banks credit, is this took place after the crash, after they’d been told they really should try harder next time to not bring down the world economy. It was after the £80bn bailout, after the world gasped: “How did we let it happen”, and they’ve carried on exactly the same.

But who can blame them? Unlike the crash in the 1930s, no new regulations followed to stop them behaving like this. The banks could be caught squirting uranium into the eyes of kittens, it could turn out that the deaf signer on the podium in Soweto is a chief executive of Royal Bank of Scotland who’s been awarded a bonus of £40m, and that the England cricket team was injected with ketamine by the board of Northern Rock. And they’d apologise for the oversight and the Government would announce an enquiry to report in the year 5000.

And this is the business method we’re informed is essential to make anything work properly. So now it must apply to everything else as well. The Royal Mail, for example, was too sluggish without private investment and initiative, so hopefully that will now be free to go the same way. You’ll pop into the Post Office for a stamp and be told: “You know it really would be sensible to post a parcel as well. I’d suggest you should send one to Brazil, and to be really secure, fill it up with rubble first. There we are, that will be £700.”

Because they only need three like that a day to win a weekend break in Dorset. 

To all friends who have relatives visiting from outside the UK

You are aware about the way NHS hospitals prey on foreigners who happen to fall ill during their visit to the UK -for details please visit
http://giffenman-miscellania.blogspot.com/2011/08/uk-tourists-beware-cambridge-hospital.html

I have now created an e-petition on the government website which states 'a Visitor's visa fee should include provision of medical insurance to cover emergencies'. It requires signatures of 100, 000 folks resident in the UK for it to be discussed in parliament. This will I hope prevent predatory behaviour from staff at NHS hospitals. Kindly sign this petition if you agree with it. Also please forward it to as many UK residents you know so that the petition reaches the discussion stage in parliament. You can sign the petition here.

http://epetitions.direct.gov.uk/petitions/15381

Thank you
 
 

UK TOURISTS BEWARE – Cambridge Hospital Staff Demand Instant Money from Sick and Ailing Indian Tourist

Cambridge Hospital Staff Demand Instant Money from Sick and Ailing Indian Tourist

The UK likes to portray itself as a friendly and inviting place for tourists. Its visa regime informs tourists who possess medical insurance that in case of an emergency they will receive adequate medical treatment without any need to pay the money upfront. But this is not true in reality as the following story illustrates.

VM, aged 73, is an Indian tourist visiting her family in Cambridge UK since June 2011. On Thursday 18 Aug she was admitted to Cambridge's famous Addenbrooke's hospital for an emergency illness and she received good medical care. Her medical insurers contacted the hospital on Friday 19 August in order to confirm her medical insurance cover and to guarantee payment. Yet on Tuesday 23 August and Wednesday 24 August VM received a rude shock in her hospital bed. Staff from the finance department beseiged her sick bed and demanded that she sign a carte blanche document agreeing to pay any/all charges the NHS may levy for her treatment. When it was pointed out that her insurance company was willing to offer a payment guarantee for her treatment they refused to listen and threatened to deport the tourist.

This issue becomes even more important as London prepares to invite tourists for the 2012 Olympic games. As the following article shows, NHS hospitals have made it a policy to use such high handed behaviour to extort cash from patients in their ailing beds.

http://www.dailymail.co.uk/news/article-562980/Foreigners-asked-produce-cash-hospital-beds-crackdown-health-tourists.html

In short if this behaviour is allowed to continue, if a luckless tourist finds himself in an NHS hospital s/he will not only have to hope to get better soon in a foreign land, but also try to figure out how to arrange large amounts of cash to fob of the finance staff of these hospitals.

You have been warned, visit the UK only if you or your relatives have large amounts of instant cash. Else you and your relatives will be in peril should you have a medical emergency as NHS hospitals fail to honour the legal commitment made when you obtained your visa.

THE DAILY MAIL ARTICLE

Foreigners asked to produce cash in their hospital beds in crackdown on 'health tourists'

By OLINKA KOSTER
Last updated at 17:54 30 April 2008

A hospital is pioneering a "get tough" attitude on health tourists - by throwing them out of hospital before their treatment is complete unless they pay up.
It means that foreigners who travel to Britain to get free care on the NHS will now be asked to produce cash or a credit card at their hospital bed.
The new approach has already saved the West Middlesex University Hospital in Isleworth up to £700,000 a year. Its proximity to Heathrow Airport makes it a particular target for immigrants.
If all hospitals did the same, the NHS could recoup tens of millions of pounds a year from health tourists.
Scroll down for more...

Crackdown: West Middlessex University Hospital is getting tough on illegal 'health tourists'

Andy Finlay, the hospital manager in charge of collecting the money at the Middlesex trust, said patients had to pay up-front - or face being discharged within 48 hours.
"We will discharge a patient before they are well," he insisted.
"We will discharge a patient when they are stable, when we have provided what we have to provide - the minimum benchmark.
"Generally, within the first 48 hours after admission they will be given a price on how much, roughly, their treatment is going to cost.
"If I'm interviewing an inpatient I will be at that patient's bedside and I will ask them there and then for a visa, MasterCard, debit card, or cash. We don't take cheques."
Under the current system, anyone who needs emergency care, such as for a heart attack or accident and emergency treatment after an accident, does not have to pay.
But patients not eligible for free care who attempt to use the NHS for ongoing care or treatment that is not immediately necessary have to pay.
These so-called health tourists normally receive a bill on departure from hospital - but only an estimated 30 per cent of the money is recovered.
Under the pilot scheme, they will be asked to pay at their hospital bed for non-emergency care, or told to leave.
However, they would only be discharged after three consultants have agreed their condition is stable.
In the case of a heart attack victim, NHS patients would normally stay in hospital for 10 days. But anyone not eligible for free care could be asked to leave after 48 hours if they are judged stable.
Most patients told to leave did so willingly, Mr Finlay added - but not all of them.
"I've had two death threats, I've been held up against a wall, I've been grabbed round the throat, I've been manhandled by relatives - verbal abuse is almost day-to-day," he said.
"You have to have a very thick skin."
Last year, a secret Government report based on figures from 12 NHS trusts suggested that the bill for treating health tourists was at least £62million a year.
This did not include the cost of treating foreigners entitled to free healthcare, such as asylum seekers and students.
Health tourists not entitled to free treatment include pregnant women who arrive on holiday visas and give birth here.
Many foreign HIV sufferers also target UK hospitals for treatment, the study from 2005 revealed.
In the case of an HIV patient, a clinical decision would be made as to whether emergency care was needed.
At the time the figures were revealed, Conservative MP Ben Wallace said hospitals appeared to be pursuing a "don't ask, don't charge and don't chase policy".
Cash-strapped hospitals are being pushed further into debt because they are failing to claim the millions owed to them by those abusing the system.
As well as the West Middlesex University Hospital, the Leeds Teaching Hospitals NHS Trust and the Luton and Dunstable NHS Foundation Trust have been chosen to take part in the pilot scheme because their catchment areas contain both a "major point of entry to the UK" and a large proportion of asylum seekers.
Mr Finlay said his methods had received an enthusiastic response from across Whitehall - and saved the trust between £600,000 and £700,000-a-year.
"They think it is a fantastic idea, a solution to a relatively new problem," he said.
"It is up to the Department of Health to see how brave they will be to use innovative ways to tackle health tourism."
A spokesman for the Department of Health said: "It is important that those who are not entitled to NHS services pay for any they receive.
"The Government is currently reviewing access to primary and secondary care for all foreign nationals.
"In doing this we must take into account the implications of any such decisions on the key preventative and public health responsibilities of the NHS.
"We always treat people and do not charge them for emergency treatment, but the thinking behind the pilot schemes is that the NHS is there first and foremost for people who live here."