Some Chinese insurance companies are taking a big chance on the possible spread of avian influenza among humans as an opportunity to expand their business. Beijing Minsheng Life Insurance on November 7th was first to launch a policy that would pay the insured if they are infected by the H5N1 virus. Four days later, Shenzhen based Hua-an Property Insurance followed. The Hua’an policy costs 100 yuan for each 200,000 yuan of compensation. It is valid for a year for anyone aged 3 to 70. Analysts say the odds are that the two insurers will make money given what they consider is the low probability of a serious pandemic.
SimonWorld comments. In my view, the business model captures pure profit. If avian flu kills many humans, the company would in any case go bankrupt. In the meantime it rakes in cash from "positive selection," which is the opposite of adverse selection. Often the people who buy insurance are the super-safe ninnies, afraid they might not do something they were supposed to. On the other hand, if you are still a chicken culler in China, you are probaby somewhat reckless, or too poor to buy life insurance.
“If avian flu kills many humans, the company would in any case go bankrupt”
This is a generic problem in several insurance markets. For example, right now a popular strategy among insurance companies is to underwrite the upper tranches of risk on a pool of investment grade credit risk, i.e. senior tranches of CDOs. If enough investment grade companies default to require payment, the insurance company has likely already gone bankrupt at that point.
[If you're a poor chicken farmer, you scrape together 1000 yuan for the policy, knowing your chances of getting bird flu should it jump to humans are much higher than average]
Surely not. If it “jumps to humans”, then it will be a human virus, not a chicken virus, and the people who are most likely to catch it will be people who live in close proximity to lots of humans, not lots of chickens.
Also note that if it mutates, then there is no guarantee that the mutated form will be particularly deadly. In the event where lots of people catch H5N1 but suffer nothing worse than a sniffle, the insurance company still pays out.
(I’d finally note that while it may be “pure profit” in Tyler’s sense, the practice of writing a lot of insurance against an epidemic when you believe that your company will be bankrupt if the insured event occurs, is not a prudent or honest underwriting practice)
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