Thursday, March 12, 2009

Can I Have My Cake And Eat It?

Cold calls are often far from cold as they make my blood boils.

OK, fine, they do have a better sounding name for what I have just growled about. They call it telemarketing.

Telemarketing agents are salespersons who call prospective customers to buy their products or services. Negative perceptions are often linked to these people as they are known to be associated with scams and frauds, such as pyramid schemes. However, to be fair, many telemarketing agents are decent people making an honest living.

I often received calls from unknown insurance agents who was enthusiastic (as least from how they have sounded over the phone) to inform me of their new products. I never gave them a chance and would abruptly cut them off. Even though I really was not keen to give them my time, cutting them off usually left a dash of guilt in me.

The thing is, insurance is really essential but few would take it seriously.

Most of the time, we will be advised to insure against life, health, disability, home and vehicle. Increasingly, as people get more affluent and informed, they would insure against less conventional stuff such as contact lens, camera, mobile phone and notebook.

Put it simply, you would want to take up an insurance policy for something important to you.

A pianist will have his fingers insured. A top model will have her long sexy legs insured. A soprano will have her vocal cords insured.

It was reported recently that a Gennaro Pelliccia from London has insured his tongue for £10m with Lloyd London. Wow! That is a lot of money!

Mr Pelliccia has an unusual occupation as he works as a coffee taster. He claims that he is able to distinguish between thousands of flavors and he feels that his sensory skills are very crucial. According to Lloyd, the insurance he has taken up is one of the biggest single insurance policies taken out for one person.

When you take up an insurance policy, you immediately straddle into a confused state of mind.

On one hand, you feel relieved because you know that if something should happen to the insured persons or items, the insurance company will compensate. On the other hand, you wish any of those incidents will never take place.

And when it is time to make a claim, you wish your case is nothing too unusual, like these two:

  • A man made a claim for his damaged television. There is nothing strange about this except that he was the one who destroyed it when meddling with his old guns.
  • Another man made a claim for his lost spectacles. According to him, he woke up to see a magpie fly into his room, picked up his spectacles and flew out of the window.
Whatever it is, insurance companies are in a business which takes risk on uncertainties. They never know when the insured will die. They never know when the driver will crash into a road divider. They never know when your notebook will be stolen. In fact, they never know for sure for all the insurance policies taken up with them.

So, how do they decide on the price of the insurance? It seems that the Actuaries have the answer.

An Actuary is a person who computes premium rates according to probabilities based on statistical records.

For example, based on statistics such as demographic profile and national average life expectancy, the Actuary may 'think' that a person will live till 75. Given the current age, the insured amount and the profit margin, the Actuary is able to compute the premium rate payable. The same computation is applied to everyone with the same profile, as he assumes that all these people will expire at age 75.

Based on the Actuary's computation, sufficient premium would have been paid by the time the insured reaches, say 40 years of age. If he lives beyond that, he is bringing in more profit to the insurance company everyday.

So mathematically, the insurance company will make a loss if the insured dies prematurely before 40. On the other hand, a person who lives beyond 40 will add profits to the company.

As you can see from here that there is some form of cross subsidization. The longer we live, the more we subsidize those who die untimely.

My thoughts are blurring now. Should one live a long life or not? The best scenario is when the insured dies (not by way of suicide) the moment he takes up the insurance. But, that is such a morbid way to 'make money' from an insurance plan. For heaven's sake!

I really do not know. Life is full of contradiction and I can't have the cake and eat it.

I shall just live the fullest life I can!

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