Assorted Links

1) Budget cuts force Santa Cruz police department to invest in preventing crime before it happens.

2) Dead peasant insurance on Texas teachers encouraged by Rick Perry.

3) Bryan Caplan’s advice on writing a non-fiction book.

4. Marijuana Economics 101.

5. Austin Frakt will blog a course this semester, Political Dynamics and Policy Dilemmas.

Comments

Isn't the whole "Dead Peasant Insurance" thing a scam? I mean insurance companies have been selling life insurance for an awfully long time. If there was some way to consistently beat the odds and get more out of it than you pay in premiums wouldn't they have closed that loophole by now?

lff

It's at least possible that the state of Texas would have had inside information that would allow them to gain an edge on the insurance companies. However, I think it more likely that the taxpayer would have been the final bagholder - that is, you would be right and the expected revenues wouldn't offset the premiums, but by then the various elected officials and other involved parties would already have cashed their checks and/or gotten their mileage out of the scheme.

So, it's just investors trying to rob insurance companies that have written bad policies?

Answering my own question - after a little research - it seems the advantage comes from tax incentives. I'm no accountant but suspect corporations can deduct the premiums and pay little or no taxes on the benefits.

It is a scam alright but USG is the victim and as usual the taxpayer pays.

lff

The market for life insurance has become competitive and more efficient than it used to be. Life insurers have long operated in a world where individuals and their family members pay for life insurance. Policies have been priced based on the assumption that a certain number of policy holders will fail to make premium payments each year, thereby allowing their policies to lapse. Investors, who will not miss premium payments, attempt to profit from this now erroneous assumption.

Having represented certain investor groups before Congress and the Treasury, I can tell you that the insurance industry has lobbied hard to prevent rules favorable to this sort of investment scheme. Given the amount of money the insurance industry has spent on their efforts, it is inconceivable to me that these investors are suckers who would end up lining the pockets of apparently ungrateful insurance companies.

I think it could be a scam by the companies that manage the Dead Peasant Insurance portfolios. These companies make their money - the only real profits to be made in the scheme - in commissions/fees. They sell these products to the likes of Perry et al with some kind of complicated sales pitch that shows a pay off and then use a Ponzi or similar arrangement to keep investors happy. Madoff made it clear that even sophisticated investors can be conned.

lff

Based solely on reading the article and the "Dead Peasant Insurance" wikipedia article, this doesn't seem to be a scam. According to the article the proposal was as follows:

Step 1) Texas government waivers law to allow UBS to write life insurance policies against retired Texas teachers
a) (IMO) Texas (tenuously) argues it has an insurable interest since profits are used for retired teacher's health care

Step 2) UBS writes policies against retired Texas teachers and bundles them for sale to investors

Step 3) Profit! UBS profits since insurers are better at pricing premiums and bundling policies than investors are at picking "groups of soon to be dead" people. (Same as how UBS profits from every other life insurance product)

Step 4) UBS cuts Texas government in for a slice of the profits for the access granted in Step 1

If commentor KLO is correct then UBS takes a loss, Texas government doesn't get any money, and the taxpayers are only on the hook for whatever money Texas government put in to get everyone to sign up ($50-$100 per person). Gov. Perry would likely argue this fits his "small government" image since he reduced direct government spending on retired teacher's health care and considered this arrangement as "alternate funding".

Scam? No mention of the split between UBS and Texas government, so it's possible that UBS gets the lion's share. No evidence of this in the article though.

Gambling? Definately, not much investment going on here. Not ethically different than Tribal Casino's though.

J

Good reply. I see the logic, but it's still a bridge too far. An insurable interest means you have an interest in the casualty NOT happening. Payola if the wager pays off can no more bootstrap you into an insurable interest any more than a contract gives a hitman an insurable interest in his mark.

Really, this article underscores the legedermain that passes for 'finance' these days.

But what was left out is

Step 5) US Treasury and Fed bailout UBS for its schemes

Step 6) ECB bails out governments for the similar deals UBS got involved in that required bailouts related to Icesave, Greece, US mortgages, Spanish and Irish real estate speculation.

How could banking go from contributing to economic growth to doing nothing that makes any economic sense and with luck represents only a friction drag on the economy in only three decades. Of course, it is deals like these that ended up being more than friction, but horrid market distorting transactions that harmed economic growth.

I get the feeling that insurance companies are fixated on sales. A firm that was better at modeling might cherry pick the best bets from a database and not have to go to the trouble of sales, especially if they just have to grease some politicians.

What is interesting to me, is that a pension payer already wins when someone dies. Why do they want to double down on life expectancy?

The lack of an insurable interest would render such contracts an unenforceable wager to any sensible jurist. Isn't there a similar problem with the CDS's?

Well, they mention getting the insurance commissioner to waive the insurable interest requirement. I find it weird that various officials can apparently just waive the law under certain circumstances (here and also in the case of the deal the Obama administration is pushing with the state DAs to deep-six the fraud cases against the banks).

It is weird, but not strange.

I would think any employer could argue an insurable interest for any employee. Insurance for upper level executives is pretty common and their value to the firm is more apparent - although I suppose some like Dick Fuld might have had a negative insurable value. However, the cost of replacing even lower level staff could be considered sufficient insurable interest.

lff

1 is pretty fascinating. I think I'm supposed to be excited about the idea of using technology to improve police productivity yet concerned about police questioning people who have committed no crime?

From a comedy standpoint we cannot afford to elect anyone other than Perry. All I know about him is this and his refusal to pardon the innocent death row dad.

The Titanic had its fiddlers. America's whirl down the toilet drain can have a clown

That 1606/lb production cost estimate is about double the real cost of production for a personal grower. I imagine the big guys' production cost is even lower.

Yeah, his methodology was really poor IMO. But if you accept his approach, notice that it incorporates the cost of the risks associated with growing, which in most cases predominate over the cost of the physical inputs.

Ah, thank you, I wondered if that might explain it.

I thought that was pretty crazy too.

This is slightly different than dead peasant insurance; if I understand it correctly, a dead peasant employer seeks to place directional bets against the longevity of its employees (profiting if they die). In this case, it appears that Perry was simply attempting to intermediate without retaining any directional bets.

The only problem I can see with an employer insuring the lives of its employees is that the employer itself may be able to affect the longevity of its employees. In this ase, there was no problem if the government did not retain the longevity risk.

1) There is no great stagnation!!!

So, we can expect any negative story about Perry to be rebroadcast on Marginal Revolution without any critical thinking applied, just partisan spin?

1) I dislike Perry, but I agree that this shouldn't be "an issue"
2) I think Alex was simply reporting the story; it's interesting in its own right, and no commentary needed to be offered

From the article:
"" If a retiree signed a contract allowing the state's teacher pension fund to buy life insurance on them, the governor was prepared to give them between $50 and $100.

"Precious little for what they were giving up," said the meeting attendee. ""

What, pray tell, are they `giving up`? I can't figure that out. They're accepting money to let two other people bet on when they might die. OK, so their families don't benefit. So what? Go and buy your own insurance. I FAIL TO SEE THE PROBLEM HERE (I mean, the ethical/moral problem - not the crazy asset problem). How does this differ from betting on horse races, or the outcome of any other random process (which are legal, and I also fail to see the ethical/moral problem with)?

Why does Texas get anything out of it?

They are holding hostage the rights to insurance of the individual somehow and then paying a pittance for them. In other words, why can't UBS just pay the individual for the right? Maybe Perry is just playing the game with the rules in place, but he is also in a position to change the rules.

It's also kind of stupid for a politician to associate with death bets. If it were some principled stand that would cost him politically, that's one thing. This ain't it.

I agree they are giving up nothing allowing others to bet on their death. But, this doesn't seem like something the government should be involved in though, right? Seems like they are bound to screw it up somehow (unless its a scam from the start) and then the taxpayers hold the bag? Small government, etc?

My perspective is, if this is legit, these private companies can go find those teachers themselves and send them a contract. In fact, if this is legit, my broker can sell me a share in the whole thing, right?

If it is all made profitable by tax breaks, then it is about getting money instead of making money.

UBS can't list a rational reason for insuring an arbitrary individual.

Employers insure key employees to mitigate their loss; let's say every manager is insured, then the cost of disruption of replacing the manager is mitigated. If Apple could have bought a policy on Steve Jobs for $10B, it would have a rational case for doing so - his adverse health moves have caused higher losses in just the primary shareholder's market cap.

Texas school systems could justify policies for teachers to pay for substitutes.

The pension fund buying life insurance policies when the fund pays for medical coverage is a moral hazard - the pension fund wants its pensioners to die sooner which it can promote by restricting health care coverage. However, by the State changing the law to legalize this moral hazard, the State can screw the insurers the States license to operate in Texas - insurers are forced to write these money losing moral hazard policies in exchange for writing policies for all the non-teachers.

Reportedly Perry favors donors to his campaign, so UBS execs contributing to his campaign more than make up for it on the fees from factoring the life insurance policies.

Exactly, it's just another kind of investment. Texas education was full of these kinds of derivative schemes in the 1990s, some did well, others did not.

1. They have enough money to sit around and wait where crimes don't happen, but can't just collect evidence and do police work?

Fire departments have enough money to walk around doing fire inspections on buildings, but they can't just rush over with trucks and put the fire out? Put yourself in the property owner's shoes.

#1

Does the software account for race, age and gender? Because those are huge and very reliable predictors.

"Preventing crime before it happens" is redundant. Thus, I wouldn't be surprised if this approach were to cost twice as much as just preventing crime or just letting it happen.

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