Insurance markets in everything

The University of Illinois at Urbana-Champaign has paid $424,000 to insure itself against a significant drop in tuition revenue from Chinese students.

In what is thought to be a world first, the colleges of business and engineering at the university signed a three-year contract with an insurance broker to pay the annual six-figure sum, which provides coverage of up to $60 million.

The university came up with the idea in 2015 and implemented it last year but received permission from the broker to discuss it in public only earlier this month.

Here is the story.

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Smart move. Here in Australia I don’t think that our government has come to terms with the ability of China to destroy our universities, which seem to be addicted to foreign students at the expense of everything else. We know that the Chinese leadership can be petty and vindictive, and I expect that in the future they will wake up to this new power.

One of the conditions triggering an insurance payout is "visa restrictions". I don't know about Australia, but (speaking from personal experience), US immigration has been very restrictive in handing out visas (for any purpose: business, tourism, study, ....) ever since the Orange Man won the presidency.

If, say, the Chinese government were to tamp down the number of students leaving its shores, it'd be in retaliation for the "petty and vindictive" act of destination countries denying visas arbitrarily and at high rates.

" US immigration has been very restrictive in handing out visas (for any purpose: business, tourism, study, ....) ever since the Orange Man won the presidency."

That's classic example of Fake news. It's not even remotely true. But I have no doubt you heard it from a "trusted source".

In reality, the first 2 years of the Trump Administration has had more Visa issued in both years than 7 of the 8 Obama years.

https://travel.state.gov/content/travel/en/legal/visa-law0/visa-statistics.html

Yes but you are after all a Trump cuck!

Anybody countering my opinions with sourced facts is always a cuck!

Everyone who comes to this blog is a cuck anyway

You can back off, troll. Old news.

https://www.washingtonpost.com/news/monkey-cage/wp/2018/11/29/how-donald-trump-appeals-to-men-secretly-insecure-about-their-manhood/

ok pretty good
how about;
generalissomo bolsanero
? ¿no
¿te gustan las bolsas?

o serrucho Ben Salman;
¿te gusta totebags?

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Surely the premiums are going to rise now when the policy is up for renewal? Now that Trump is president instead of Hillary.

Are you assuming that the Chinese would have found it much easier to bribe Hillary than Trump?

Hillary was at least a free agent, and not somebody else's asset.

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Speaking of assets, how are yours doing? Resting comfortably because of Brexit does not have a Mueller?

Go away.

There is Jeff, the guy who doesn't like to hear real news.

https://www.nybooks.com/daily/2018/11/16/why-britain-needs-its-own-mueller/

I'm a cuck so why would you listen to me anyway!

You are fake news!

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In case anyone doubted that higher ed is a business...

Shut your tiny dick!

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Brexit.

I'm not familiar with the math. But, if we know the insured amount, the price of the yearly prime and with some assumptions of costs & interest, a rough estimate of the claim probability can be calculated. Any actuary around here?

I'm not sure about assumptions for interest. The premium is close to .7% of the coverage but the coverage limit doesn't represent the $ amount the insurer expects to lose in the absence of a limit, And even conditional on a loss occurring it's possible for the actual loss to fall between 0-60M. So you couldn't just assume that say 25% of premium is expenses, divide 60m*.75 by 424K and say there's a 1% claim probability.

THanks!

So, it's not as "simple" as bets =(

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I don't know what this university is worried about, since China's collapse is imminent. At least that's Bret Stephens' prediction in today's column in the NYT: https://www.nytimes.com/2018/11/29/opinion/china-rise-series-declining-economy.html Several comments seem to suggest that China will restrict the flow of students to the U.S. Maybe those students will choose to stay in China because China's universities are now on a par with those in the U.S. I know, that's preposterous. Just ask Mr. Stephens.

China's collapse would, of course, immediately cause almost all of their students to drop out of US schools. So, maybe that's what their worried about?

I’m sure that’s what a cuck like you believes!

That’s my favorite Doobie Brothers song, “What a cuck believes”

Can I join in the cuck dance party?

Imposter.

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On the narrower question of insurance markets in everything, it helps to view insurance and finance as two sides of the same coin. That's how Robert Shiller teaches it in his finance class. [No, I didn't attend Yale (Shiller was still in school himself when I was in college), but his finance class can be "attended" on line.] Shiller doesn't mean that insurance companies make loans, he means that insurance and loans are the same thing: both are investments in the future. The picture becomes clearer when one considers the role and purpose of futures markets. If one can obtain a loan to fund a technology that doesn't yet exist (e.g., a self-driving car), one can obtain a loan to fund the adverse consequences of a technology that doesn't yet exist displacing a technology that does (the behemoths that U.S. car companies currently build and sell). Anyway, Shiller does a much better job explaining this than I can, so "attend" Shiller's finance class.

If I am CFO for GM, I might consider taking out some insurance against the risk that the market for behemoths will collapse. I could buy "insurance" from an "insurance" company or I could buy "insurance" from suckers, I mean investors, by selling stock in the public market so I have ample cash if the market in behemoths collapses. In a perfect market, the "insurance" company and the suckers, I mean investors, will price the "insurance" the same.

GM probably should have taken out some insurance against the risk that the market for small cars and the Volt would collapse.

If they thought Hillary would win, why would they need any insurance beyond bribing her?

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People seem to have a hard time grasping the fact that there's not much fuel economy difference between the tall cars (aka crossovers) that people seem to want and the short cars they don't. GM's best selling crossover (and its best selling vehicle that's not a pickup) is the Equinox, which has a 1.5 liter 4-cylinder engine with front wheel drive and gets over 30 MPG on the highway. A behemoth, it isn't.

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It seems a huge leap of faith to me - to pay someone $424k and expect $60m back.

More likely your return-on-investment is endless lawsuits.

If you read the article, you’d understand that $60 million is their entire exposure.

It also has to be triggered by a specific event, they list a few.

It doesn’t mean that $60 million would be the payout. That’s the maximum possible payout, if zero Chinese students decided to enroll due to a war or whatever.

In contrast, health insurance might cost $10k a year but with an unlimited payout...

So you're saying you only need to worry about getting caught in lawsuits if you're claiming larger amounts?

Same as it always was.

What are you even attempting to communicate here?

I'm not sure you have really disagreed with me, that's all.

Forget the 60 million, do you think any insurer would even hand over 10 or 20 or 30 without arguing in court that the claimant did something to invalidate their agreement?

Medical insurance companies try it for far smaller amounts.

Is this an evidence-free comment? There's a huge market for insurance with big payouts so I think there would be some evidence if you were correct.

I would really expect everybody to have at least second hand experience with denied coverage by insurance companies at this point.

But examples abound.

Geez guys.

Here is a nice one:

https://www.deseretnews.com/article/900040108/elk-ridge-business-insurance-claim-denied-because-fire-wasnt-half-mile-closer.html

The policy said they were covered if a fire got within a mile of their facility. The fire was 1.5 miles away. Furthermore, there was no damage to the facility at all. The claimant was trying to get the insurance company to pay the costs for extra staff and hotel rooms.

Yes policies have actual restrictions. Yes they are binding.

It does not prove your point.

Damn it! I fail for the troll again. Arghhh...

...fell... and I failed.

You certainly failed. They had insurance. They were told to evacuate. The insurance company says we don't care if you were told to evacuate, we have rules.

That's exactly what I'm talking about and that's exactly what would happen if this university tried to claim tens of millions of dollars.

Their lawyers would read the contract to try to find some line that said the coverage could be denied.

I am frankly amazed that you guys know so little about how the world works.

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By the way, if they did close down a Chinese program after taking out the insurance, as described lower on the page, I would ask my lawyers if I was insurer how that affects the contract.

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As insurance ventures into unconventional and exotic risks, I wonder how they lay off the downside?

With conventional risks, they can do the actuary calculation and then sell enough policies to spread it out. Then cross their fingers that the risk tables work.

But when does insuring become more like gambling? Insuring against what amounts to an arbitrary political risk, how do you spread that as an insurer?

I guess it is all gambling, but conventional policies are more like roulette withs its known odds, and chinese tuition policy must be more like the sports book.

In other words what im trying to sort out before the coffee kicks in, if this isnt actuarial insurance, its more like sports gambling, or equity investing. So the university is “shorting” chinese students. The insurer is the intermediary. Who is on the other side of the bet? And how are they laying off their bet? I am wondering in other words, are they in turn shorting the university somehow?

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In the gambling business, the house usually just over assigns the odds and keeps the overround. If the bets come in evenly on both sides they are indifferent to the outcome. Uneven betting introduces exposure and the bookies adjust the odds to counter it.

"how do you spread that as an insurer?"

They might do reinsurance deals to limit or share the exposure. Or they might have enough of these sort of boutique contracts (on different risks) that those form some sort of a pool. Or they only take the deal if someone's really willing to overpay.

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The broker found a mid-tier college to pay it $424K a year on the bet that foreign, cash-rich students will stop attending American schools. It's brilliant, and will pay for some fine home furnishings for the broker.

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@McMike

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If the number of students from any single foreign country represents a tuition revenue risk large enough to be worth considering insuring, that’s a problem in itself.

We should harness anti-trust law to break up China so that they won't control so much of the foreign student market.

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By the way, on American education and funding, I only recently heard of the four-day week thing.

https://www.brookings.edu/blog/brown-center-chalkboard/2017/03/03/a-troubling-contagion-the-rural-4-day-school-week/

https://www.brookings.edu/blog/brown-center-chalkboard/2017/03/03/a-troubling-contagion-the-rural-4-day-school-week/

Wierd, and probably not good.

Oops, those were supposed to be two different links. Anyway, a quick Google will find you many more.

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It should make for a useful study though. Too bad it didn't happen before the iPhone.

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I haven't read the article yet, but it's a pretty classic shift of cost back on the parents, since they need more daycare now, or change their work schedule.

[I know, who should pay for education is a perennial debate]

I am guessing there's a huge uptick in all-day latch-key kids afoot.

And of course, kids putting in even longer days in a chair. Four-ten shifts are tough an adults.

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So that is why Americans fought and died in Korea. So that American universities could get their killers' money.

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TheUniversity of Illinois Urbana-Champaign shut down their China funded and controlled Confucius Institute when the FBI is announced it was investigating the role of China in US higher education.

https://dailyillini.com/news/2018/03/03/university-confucius-institute-closed-months-fbi-monitoring/

But it is unclear whether it continues to be funded by China through other donors or grants. Kirkland and Ellis, for example, is a major donor with strong Chinese ties and offices in several cities.

It remains an open questions whether the US higher education industry, which has strongly resisted President Trump's efforts to strike the chains of US vassalage to China, are just useful idiots or bought and paid for sabateurs, or both.

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If they're not doing it already, big time universities should explore the possibility of insuring against drops in attendance at major sporting events. Some DI NCAA football programs have shown dramatic decreases in fans and total ticket sales have fallen across the country. Maybe Chinese students just don't care about college sports. Or perhaps the once loyal alumni fans are sitting at the old people's homes watching the games on television and the current generation of students are playing video games and goofing around on facebook, which is giving college financial gurus the willies.

That's like trying to buy house insurance when your house is on fire. Your not going to find an insurer to cover it.

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The empty seats are a concern -- but as with the NFL the real crisis will come if and when the TV contracts start shrinking.

Come to think of it, watching the Fighting Illini in action, the U of Illinois might be advised to attract more large and fast young men from Texas and Florida rather than worrying about skinny kids from China.

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The article says that the insurer will pay only if tuition drops to "a specific set of identifiable events" that are outside of the university's control. That greatly reduces the moral hazard problem but I wonder if those events include a Charlottesville-style violent demonstration that's directed against foreign students or even Chinese students. That's an event that could cause the Chinese students to flee the campus, and that is largely out of the university's control -- but not entirely. UVA's administration e.g. was criticized for how it handled or failed to handle the demonstration in Charlottesville.

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Other schools rely on low income students who get grants. But this can backfire if government cuts spending or students drop out in a good economy. I know insurance on this type of strategy would have saved some schools lots of money.

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