Insuring Better Decisions

Many things in society are shaped by prosaic, almost invisible, factors. One of the most profound prosaic factors is insurance. Access to insurance to a large extent determines what will be build where and how. It is the defacto way we plan. The risk management industry is now addressing environmental risk on a much bigger scale. This is a great development, but it will lead to much gnashing of teeth if it really works.

The good new is that we will be able effectively to protect many low lying coastal areas, wetlands and easily eroded slopes just by allowing insurers to make the necessary risk adjustments. These are places where it is risky to build because nature tends to push people off. Nobody would be able to get affordable insurance to build on barrier islands, flood plains or parts of New Orleans if the risk were properly assessed and passed along.

The danger is that government will, as it has in the past, step in to subsidize insurance or force firms to cover bad risks. This is very bad. Why this is bad requires a brief digression.

Access to insurance is very persuasive because it is a good combination of carrots and sticks – incentives and coercion.

It depends on what you are trying to accomplish and how. Coercion is direct. A threat will often produce very quick action. On the other hand, coercion will not encourage innovation and its effects wear off over time, i.e. those coerced figure out ways to cheat or to get out from under the threat. Beyond that, you need a fairly robust enforcement regime and the use of coercion brings with it serious questions about the legitimate exercise of power. Incentives work slower and the immediate effects are harder to predict, but a properly designed incentive system encourages innovation. People think up new, better and less expensive ways to get incentives. A good strategy combines the two in a mix that provides incentives while implying threats.

The insurance and risk management are ideal tools to encourage good decisions with a combination of incentives. Much of the progress we have made in areas such as fire protection, reduction in workplace injuries and product safety are the result of these tools. Risk management does not mean reducing negative results to zero. The perfect is the enemy of the good. Risk is a statistical measure. Mistakes are inevitable, but over time we can design systems to minimized them and mitigate their impact.

The ability to manage risk is a very recent development. For most of human history, societies had no ability to do this systematically. The statistical, mathematical and theoretical tools of risk management began to be developed just a few centuries ago. The great civilizations of Egypt, Greece, Rome, Medieval Islam & China were unable to manage risk the way a modern society can. Instead they relied on the will of God, destiny, luck or magic. A big advantage Europeans had in the 19th Century, beyond their guns, germs and steel, was their theoretical and mathematical ability to assess risk.

With the help of computers and better data, we are getting much better at assessing risk. As we face challenges such as global warming, environmental degradation and changing settlement patterns, the risk management industry is now beginning to assess and evaluate environmental risk on a much bigger scale. This is a great development. Insurance firms are requiring as a condition of insurance that home owners take reasonable steps, such as fireproof roofs and brush clearing in fire prone areas or storm shutters in areas typically threatened by hurricanes. They are also modifying their rates to adjust for riskier decisions.

Risk management can also help us avoid losses by discouraging construction in risky areas. That beach home may look less attractive if you cannot get your fellow citizens to subsidize your risk. But this is where we run into problems. Some people have developed feelings of entitlement. They feel it is fair that they can insure their homes or businesses at affordable rates no matter what the cost to their fellow citizens or the environment. Unfortunately, such selfishness has some political resonance.

Growing among us now is the most misbegotten chimera of all: private risk and greed backed by government’s ability to tax and coerce supported by misplaced populist notions of being fair to the “little guy”. With government acquiesce and even encouragement, we have private insurers selling policies with premiums too low to pay out in the case of reasonably expected occurrences. Who will pay? The taxpayers. We have some people not getting proper insurance at all expecting the taxpayers will bail them out in the event of a disaster. We have governments trying to force insurers to cover risks that everybody knows are too high. And we have individuals and firms taking advantage of all this by cheaply developing in high risk areas, making their own profit or enjoying the good times and then sticking the bill to everybody else.

And we the people pay for selfish individuals with more than money. These guys are building in places and ways that are environmentally damaging. When they build a house on a wetland in the likely path of hurricanes they are not only asking to suffer themselves, but also degrading the environment around them (and us). We could make a law against it, but that is very heavy handed and it does not well account for the dynamics of risk. A fundamentally political process cannot make fine distinctions. Insurance is a more subtle tool. It may well be that a good home site sits 100 meters from a terrible one. The law would not make the distinction. Insurance might.

Managing risk is a risky business. We cannot say whether a disaster will hit today or tomorrow, or in some cases never. That is why we have insurance. But we can reasonably estimate the risk of disasters when we deal with a large number of occurrences. By looking at risk analysis this way, we can also determine the relative cost of particular types of situations and behaviors. We can take advantage of this knowledge and expertise ONLY if we make reasonable distinctions and treat different situations differently. This will mean riskier behaviors paying more and it may mean that reasonable people will not do some things, like build below sea level, on flood plains or erosion prone barrier islands, for example.

To the extent that we refuse to take these actions, or even worse to the extent that laws prevent it out of a perverted sense of fairness, we are no better at dealing with risk than our ignorant ancestors who just didn’t know any better. Just like the man who does not read is no better off than the man who cannot read, we are just modern people depending on fate, luck or voodoo.

Posted by Jack at June 7, 2007 9:54 PM
Comment #222599

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Happy June.


Posted by: eric at June 7, 2007 11:54 PM
Comment #222602

So those smart actuarials figued out that it is just too risky to insure nuclear power plants so the federal government had to assume the risk/ You are correct. We should listen to the insurance companies.

Posted by: BillS at June 8, 2007 12:55 AM
Comment #222644

Far more important is for voters to understand the philosophical premises of risk insurance.

First, they need to understand that carrying insurance is, by definition, and investment in catastrophe. We see this everywhere on our roadways, where legally mandated insurance relieves drivers of the fears associated with being financially responsible for an accident damaging the lives and property of others.

We have seen evidence of this in construction firms who take cost saving short-cuts to the engineer’s designs, only to have a catastrophic failure such as the Tea Room Balcony collapse at the Hilton in Kansas City some decades ago, or, Ford’s risk assessment that it was cheaper to pay for the burned Pinto car owners than to recall the Pinto vehicles and correct the bolt protruding toward the gas tank that would ignite the tank’s contents upon rear end impact.

The inventors of insurance, The Ancient Greeks, were shipping merchants who insured each other against losses caused by nature upon the Aegean Sea. An all too common occurrence. The Greeks however, would have revolted against the concept of insuring people’s negligent and willful behaviors, such as driver’s who speed or run stop signs and red lights.

Which brings us to the second premise of insurance, insurance breeds risk takers. If the risks to be undertaken are necessary and unavoidable, paying premiums for insurance makes sense. If on the other hand, the absence of insurance would mandate taking a different but, just as productive course, the insurance concept is being abused. In otherwords, insurance carries with it an inherent ethical value system, which dictates that if a somewhat more costly measure will produce the same or better result with less risk of loss of life or financial devastation, insurance should not be used as a substitute for prudent and sound judgment and exercise of care and due diligence.

Reducing the speed limit on our highways dramatically reduced the annual deaths on our highways. Insuring lower gasoline prices in order to move speed limits back up to 70 and 75 miles per hour was an unethical application of the insurance concept, all other things being equal.

Another example would be in housing. In tornado alley, for housing not subject to river flooding, building earth bermed housing eliminates 70% of the risk associated with owning that home: since, 70% of the risk of owning that home comes from wind, hail, and lightning damage, all of which are reduced or eliminated by earth bermed construction. There is a threat to life and limb for the inhabitants of such homes, and therefore, insurance profits and sales should be no substitute for developer’s assuming the greater risks of above ground housing in tornado alley and passing those risks on to an ignorant buying public. (A similar argument can be made for the fact that earth bermed housing is significantly more energy efficient, as our nation faces terrible liabilities for our dependence upon fossil fuels.)

The 3rd philosophical premise of insurance is that self-insurance is, in a great number of situations, more cost effective than purchasing insurance. That is to say, that putting the money one would have paid to an insurance company aside in a savings or investment account, as a contingency fund for loss, will result in less money spent on loss recovery and insurance, overall, for most people assuming that risk.

Example, if drivers who are trained and willing to observe defensive driving techniques self-insured by setting aside a sufficient amount of savings and credit availability to cover a potential driving accident for which they are liable, most of those drivers would pocket a lifetime of premiums for use as retirement funds, instead of having paid those funds to insurance companies or claimants.

Posted by: David R. Remer at June 8, 2007 12:43 PM
Comment #222650

David: I have never been at fault in the several automobile accidents in which I have been involved in 30+ years of driving. Of the four accidents, only one of the liable drivers has had insurance, even though it is required by law. In essence, I was self insured because I chose to carry only liability rather than comprehensive insurance. The best you can do is get a judgement and hope that one day you can collect. The fact is, there are willful and negligent persons whom are driving down the road. Are you suggesting that they shouldn’t have insurance? I presume that you don’t apply self-insurance to liabilty insurance, and that your concept is that not having comprehensive coverage makes one a more careful driver. The fact is, there is no guarantee that the other driver will have adequate coverage (or even insurance), especially if major medical problems result. That’s why I think buying insurance for other’s negligent behavior can be a rational decision.

Posted by: Mike in Tampa at June 8, 2007 2:49 PM
Comment #222654

Mike, as I said, there are circumstances where the criteria is met, that insurance makes perfect sense.

Mandatory liability insurance for American drivers is one, BUT, it carries the liability of creating more risk takers on our roads, and more risk takers means more loss of life, limb, and property. That is the opportunity cost of mandatory liability insurance.

Now if imprisonment were the consequence of causing an accident in which life or limb of another were lost, there is no question the accident rate would drop significantly. But, in America, we call negligence at the wheel an accident, and having started down that slippery slope, we wound up with “No Fault” insurance schemes, as if accidents were not caused by drivers at all.

The very terminology surrounding auto insurance speaks to the idea that insurance replaces due diligence and care. Precisely what the insurance companies desire. Afterall, if 99.5% of all drivers followed the rules and exercised care, the auto insurance companies would be out of business.

Posted by: David R. Remer at June 8, 2007 3:59 PM
Comment #222665

ah yes.Another reason the rich get richer. In CA for example all drivers must carry insurance(many do not)OR post a bond of about $50,000 dollars. Not many people I know can just set aside that much and if they do have it it is locked up in retirement funds. Same with a house. If you can cash into it there is no requirement to even have insurance. If you have the money and the roof blows off just have it replaced.Over time this amounts to a huge savings in most cases.

There are very few places in the country that do not face risk as far as buildings go. The entire West Coast is prone to earthquakes. The East to Hurricanes. The mid-west to tornados.We cannot abandon risky ares.New Orleans ,at the mouth of the Mississippi, is a major port. There IS going to be a city there,wise or not.The developement of the surrounding flood plains was a joint government-private blunder abetted by the insurance industry and a testament to the undo effects of money on land use policy.

Posted by: BillS at June 8, 2007 6:10 PM
Comment #222674


I understand your point about the moral hazard of insurance, but I do not think insurance makes us a nation of risk taking drivers. An accident involves a lot more than money. If I am about to run into a truck at 65 mph, who is going to pay for it is not high on my list of priorities. The threat of death or injury keeps us from doing most really silly things. Risk takers, such as teenagers, are not big on thinking ahead in general.

Your point on moral hazard makes a lot more sense in the way that I am using it. A reasonable person will still want to avoid a car accident despite insurance, but many will build a house on a flood plain steep hill side BECAUSE of insurance. He gets the advantages of the location and effectively passes the risk on to others. This is the true moral hazard that we need to address.

In any case, the prescription is similar. We should price insurance based on risk. The bad drivers should pay more. The guy who builds a house in a known risky area should pay more. The safe drivers or the sensible home owners should pay less. And government should not subsidize insurance nor require firms to insure bad risks.


Re Nukes - You are confusing risk with uncertainty. Risk is what we can assess. Take the simple case of the lottery. There is 100% chance that somebody will win the lottery. We just do not know who, but we can fairly easily estimate how much the “risk” of winning is worth to each participant (BTW – it is a lot less than the price of the ticket).

Re risk - We can assess the risk of building on a flood plain, in low lying areas or steep hillsides because we can make reasonable projections based on experience. In the case of nuclear power, we cannot do that. Past data indicates that nobody has ever died from nuclear power in America, but we know that we cannot conclude that it is perfectly safe. There is uncertainty, so we have to make some guesses.

When dealing with something as big as power, we have to assess the RELATIVE effects. How does nuclear power stack up against coal, oil etc? Is the uncertainty surrounding global warming more of a threat than the uncertainty of nuclear power? These are questions we should address, but the idea that we merely reject this form of power because of uncertainty makes little sense.

Re Risk 2 - no place is w/o risk, but risk is relative.

There will be a city like New Oreans. It can and should be much smaller and the houses and firms can be built on the local higher ground. It makes no sense and does nobody any lasting good to subsidize foolish behavior of building low.

You last point about the joint responsibility of government, private firms and insurance companies is right. Do you want to let it happen again, or should we fight against greed and stupidity. Low lying areas will make nice parts and forest reserves. They help protect against floods and are not much harmed by them.

Posted by: Jack at June 8, 2007 8:26 PM
Comment #222676

Risk vs uncertainty,semantic hogwash. Heed your own advice. Insurers did not want to touch nuke developement without extrordinary premiums because of the RISK. Paying off on a Chernobl would bankrupt them. Wieghing the threat posed by climate change and nuclear development is a false choice. There are other alternates.The Federal governments assumption of the risk is another example of the undo effect moneied interest have on policy,just like New Orleans.Yes we should fight greed and stupidity.
PS. The oft stated myth that no one has been killed by nukes in the US is incorrect. google it.Plus to say ‘in the US ‘is a qualifyer. Its like saying no one was killed on tuesday so its safe.. People have been killed by nuclear plants.

Posted by: BillS at June 8, 2007 8:55 PM
Comment #222679


The U.S. nuke industry is much safer than the communist ones. A lot of things happened in communist countries that did not happen elsewhere. The designs and management were totally different. That is why we have to make that distinction. Nuclear power in the western world has been very safe.

We should indeed have a debate re nuclear power. Is it safe compared to the alternatives? That is not the subject here however. It is a matter of uncertainty and not risk. That is much more than a semantic difference. You can reasonably quantify risk. Uncertainty is just that.

Some places there is actually a certainty of disaster. The only question is when. Build on a flood plain, a barrier island or a coastal wetland and your house WILL be destroyed sometime(s) in an average lifetime. We just do not know exactly when, but the risk analysis will give us an estimate.

We CAN assess risk for many things. We should assess risk so that we can fight the greed and stupidity and do not help people build on wetlands, steep slopes, barrier islands etc. If they insist on doing it, let them bear the costs.

I have no love for firms that build on these places. Screw them all and all their accomplices, or more correctly, let them screw themselves.

Posted by: Jack at June 8, 2007 9:35 PM
Comment #222722

Insuring Better decisions -

One good example of government accountability:

An international outcry about has China’s safety record has the government worried that its goods could be banned from overseas markets. The country’s dismal drug safety record was underscored this week by a Chinese court’s decision to sentence to death the country’s former top drug regulator.

Posted by: jrjr at June 9, 2007 3:33 PM
Comment #222724


Actually that is not what I was talking about. Beyond that, many suspect this guy getting the death penalty is just the scapegoat for higher party memebers. Dead men tell no tales.

We are also unsure if they have figured out what went wrong and how to fix it.

Posted by: Jack at June 9, 2007 5:41 PM
Comment #222731

OK.Take it as a challenge. I have looked into nukes furthur and they may well be a valuable option. Explain to me how with the government tacking on the responsibilty of the “uncertianty” of the private insurance industry and government financeing to an extroaedinary scale have no ownership rights to the industry in question?Explain to me why the French socialist system,that provides 80% of their power and has a remarkable safety record, is fundemataly inferior to any private system we may develope?Could it be that scientist have the final word and not acuontants? This is important stuff.What say you?
I know that you are willing to bend sometimes to a mixed market approach. That is what thoughtful people do at times,consider options. Again,what say you?

Posted by: Bills at June 9, 2007 9:58 PM
Comment #222738


The free market consists of rule of law, reasonable regulation and use of the market mechanism.

I do not see any contradictions. A nuclear power plant anywhere in the world is heavily regulated by the government. You really cannot just build your own. Scientists (or more correctly engineers), not accountants, have the final word in both the French and the U.S. systems. The problems with nuclear power was in communist countries, where politicians (or party members), not accountants or scientists, had the final word.

My idea re the insurance and risk analysis is simply to assess which risks are too great and/or make those taking the risks pay their own way. I object to government stepping in to subsidize known risks. I object to it on both economic and ecological grounds. Government guarantees and risk reduction allow/enable building on wetlands, steep slopes, barrier islands etc. Few people would be rich enough, foolish enough or both to do those things if they could not shift the costs to the taxpayers. I just want that to stop. I do not expect it will stop, but I think the more we can expose it for what it is, the better.

I have long praised the French for their use of nuclear power. Of course, you know that while the French get a larger % of their electricity than the U.S., we have more installed capacity and also an excellent safety record. Something nuclear power is beyond the usual purview of risk assessment and insurance for several reasons. One of the least obvious reasons is the very rarity of danger. We have no basis on which to assess the risk. We can assume an accident could be catastrophic, but so far that has not been our experience. Based on the experience of the past 60 years, when nobody has died, we would keep no reserves. That is the whole idea of uncertainty.

Posted by: Jack at June 9, 2007 11:34 PM
Comment #222739

Jack, I liked the Greek shipping model of insurance. The Ancient Greek shipping firms insured each other.

Excellent model for today. That is to say, it would be far more economical for the public, and a far more accurate risk/responsibility equation if those building on coastal areas insured each other. Those living in tornado alley insured each other. And doctors insured each other through cooperative risk identity based self insurance compacts.

This would of course raise the rates for those in the risk identity group, because they would not have the whole population of homeowners bearing elevated premiums for the risk takers. But, you and I appear to agree that the risk takers should bear the cost of their own risk taking and not attempt to share the premiums with non-risk takers, which is in fact, what the American insurance industry does. And that paradigm diminishes the cost of risk taking for the risk takers, which breeds more risk taking.

Which was one of my central points.

Posted by: David R. Remer at June 9, 2007 11:42 PM
Comment #222743


The Greek system did not work very well and was never systematic. It was just a couple of guys making a pact. It was not until Lloyds of London made a real risk system that we began to assess risk and figure out ways to reduce it.

I do not object to your idea of group insurance, but you would have to have the ability to exclude of discipline bad actors.

Your system would have many of the good effects I propose. For example, residents of flood plains, barrier islands, steep slopes or low lying regions of New Orleans could never afford to live there if they had to insure themselves. Your system would clear those guys out much faster than mine. Good.

Posted by: Jack at June 9, 2007 11:55 PM
Comment #222774

Jack said: “The Greek system did not work very well and was never systematic. It was just a couple of guys making a pact. It was not until Lloyds of London made a real risk system that we began to assess risk and figure out ways to reduce it.”

Your knowledge of the history is wanting, Jack. The Greek shipping system prevented shippers from becoming defunct as a result of an Aegean storm by spreading the loss amongst all shippers. Since, the shippers were also, back then, also large merchants and not a separate specialized shipping industry, there were far, far more than just a couple guys making a pact.

And you miss the fundamental of insurance entirely when you cite Lloyd’s of London assessing risk. Assessing risk has been around since the dawn of civilization. Sharing risk as a sound business practice, absorbing others losses in return for insuring against your own potential losses, was the innovation of the Ancient Greeks, still emulated by all modern insurance systems, today.

Do you really believe the Greeks were not capable of summing the total number of ships taking to sea each year amongst their members, and dividing that number by the number of ships sunk each year, to assess the risk, as a selling point to potential merchant/shipppers to become members? If so, your knowledge of Ancient Greek math and history is wanting, indeed.

Posted by: David R. Remer at June 10, 2007 5:24 PM
Comment #222786

David R. Remer, you are talking about a form of “self insurance” that is an extreme, everyone can practice self insurance on every day purchases with far less risk than your driving analogy.

The correct way to view self insurance is this. Insure yourself for the things you can easily cover and purchase insurance for the things that can bankrupt you or ruin your financial future.

So one SHOULD insure their driving (if they injure or kill someone), their home, their work (Doctors, etc), anything that might be subject to a lawsuit from John Edwards who would build yet another edition on to his house with money he might suck out of you and your future!

So what do you self insure? Over the years I’ve been offered insurance on toasters, insurance on TV’s, insurance on coffee makers, insurance on computers, insurance on printers, insurance on cameras, insurance on furniture, insurance on blenders, insurance on home humidifiers, etc etc.

These are things we should wisely NOT insure. Buy a good product and DON’T buy the insurance. Insuring every day items that are likely not to break down on us a multi billion dollar industry that manufactures rake in and rarely have to pay out.

But anything Big, anything that busts the bank, bankrupts you, harms your financial future, those are the things you should insure.

Posted by: Stephen at June 10, 2007 10:48 PM
Comment #222788


I could read classical Greek and studied their history in college. If you have some sources on the Greek ability to assess probability and use it effectively in insurance, I would appreciate seeing it. A primary source, not a modern writer who just filled in the details based on his own modern understanding.

Summing the total number of ships and dividing the number is not an assessment of risk, BTW. It is merely a spreading of the costs and precisely the primitive thing I was talking about. W/o data, statistics and a good understanding of probability (which the Greeks did not possess) you cannot assess risk, only spread it. If we divide all the costs incurred by Americans homeowners and divide it among them, we will subsize the silly behaviors I mentioned above. Those who are prudent in avoiding risk will subsidize the worst offenders.

Stephen & David

Stephen is right re insurance. You insure against risk, not against sure things that affect everyone. You should also insure only those things you need to replace. Insurance salesmen often rip off old people by selling them life insurance, for example.

Posted by: Jack at June 10, 2007 11:13 PM
Comment #222813

Jack said: “Summing the total number of ships and dividing the number is not an assessment of risk, BTW.”

Sorry, I have no confidence in your math skills, Jack. Dividing the number of shipments by the number of ships lost at sea DOES INDEED produce a percentage of risk assessment associated with shipping. If 5% of all shipments set to sea are lost in Aegean storms, you have a risk assessment. Remember, the Ancient Greeks didn’t have the WeatherChannel, and weather forecasting was not yet invented on an empirical scientific basis, provided you don’t accept the Oracle at Delphi as empirical science.

Hence, they did know what the risk was, and could assess in monetary amounts the probable losses to any shipper over time based on how many ships they put to sea each year. Dr. Nikhil Bhattacharya is an excellent source on the relationship between Aegean storms, shipping, and the invention of insurance for shippers by the Ancient Greeks. Anyone who has a degree and thinks they covered all knowledge on any subject is living proof that the educated can be ignorant fools in the extreme. GW Bush has a degree. Another living proof that education is wasted on far too many students.

If you know your Greek Geography, you know that shipping on the Aegean was the primary modality for all Greek transportation of goods. And if you know your climatology of the Aegean, you know how quickly and without naked eye visible signs, storms can arise on the Aegean. And if you know anything about non-motorized sailing vessels, you know how a storm can drift your vessel from known safe waters into jagged rocks above and below the water level when hugging the Greek mountainous coastline.

A couple guys making a compact, indeed. The entire Greed city-state economies depended directly upon this shipping of goods and wealth upon the Aegean. Try hauling large urns of olive oil, silver, or gold, on donkey over Greek mountains in 400 B.C. You won’t go many miles before quickly changing your mind to ship by sea.

Modern archeology too has much to contribute in exposing the massive ships and the merchandise carried on Ancient Greek ships. Oil and wine amphorae the size of my bedroom have been found in the remains of ships on the Aegean floor. The calculated weight of these amphorae was a shock to modern scientists as they pondered and pored over the necessary design elements of these great merchant ships able to carry such tremendous weight.

This was major big business and the losses when a ship went down were very large and expensive, not only for the manufacturers and shippers but, for the customers who never received their shipment. Insurance was a logical and predictable outcome of centuries of such economic activity conducted by sea. And mathematicians capable of calculating the risks and losses and shared recovery of losses amongst shippers were part and parcel of their shipping industry.

Posted by: David R. Remer at June 11, 2007 2:57 PM
Comment #222836

David R.,

I’m interested in the ancient Greeks, but not terribly interested in insurance. Regardless, I thought the common understanding of how risk was handled concerning shipping was that private banks would make many loans to individuals with shipping interests. Because they financed many merchants, the bank’s risk was minimized, but not the individual borrower’s. Now the borrower most likely had a patron (since in both the Greek and Roman worlds patronage was huge) who could absorp some of the shock of a loss — and because he was often required to co-sign, was liable. But I’ve never heard of a widespread, formal insurance scheme in ancient Greece. Not to say it didn’t exist, just that it’s news to me. I don’t have your source on my bookshelf, and a quick Google search didn’t seem to help.

Posted by: Gerrold at June 11, 2007 6:18 PM
Comment #222844

Gerrold, the first insurance in Greece was self insurance by a cooperative of shippers/manufacturers who were in large part one and the same. The Greeks had participated in specialization of labor and expertise, but, not to the extent that we know today, nor to the extent developed by the Roman Empire.

In part, what our insurance industry should be more like is that of the Ancient Greeks, where homeowners who want to live on the coastal areas should insure each other rather than force ALL homeowners throughout the country to share the premiums for their unique risk taking.

Banking and underwriting by investors in insurance not directly exposed to the risk losses personally, was a development of insurance as later contrived and developed in part by the Romans; brought full blown into existence around the time of the late Renaissance in Europe, also spurred by the costly losses of shipping goods on the high seas, especially after the Marco Polo’s opening of trade with the East.

My wife teaches insurance for the third largest home and auto insurance company in America. Some of my history of the insurance industry comes from her resources.

Posted by: David R. Remer at June 11, 2007 6:58 PM
Comment #222883


It is a very primitive assessment. You lump the good and the bad risks in the same pool. Beyond that, they probably could not figure the percentages that well given the very uncertain nature of their world.

Re the Greeks, you are projecting modern (and your own) ideas back on them.

Re the Greeks in general, I am not depending on my degree to pull rank. You may have noticed that is NOT something I not do in general. I have forgotten much of what I knew and I do not think I can read Greek anymore after 25 years of atrophy. However…I do recall the discipline that goes into following the story down to the primary source and then assessing whether the primary source was credible.

I am only saying that in my experience with Greek literature and historians, I have seen nothing that resembles the modern assessment of risk. Since the science of statistics did not begin to be developed until the 18th century, the Greeks lacked the concept of zero, could not do algebra, did not use double entry bookkeeping and did not have the capacity to create long term data bases, I do not see how they COULD have assessed risk in any but the most rudimentary way.

I HAVE read lots of Greek literature where they depend on oracles and divination for decision making. When people rely on those sorts of things, they reject generally the principles of probability.

I cannot find Nikhil Bhattacharya among noted historians of ancient Greece. As with the above re insurance the lack of evidence does not prove the negative, but given the ubiquity of Internet sources, it is not a good sign. Beyond that, you cannot use a modern historians as proof of an ancient occurrence. They are not the primary sources.

So I think we have reached a bottom line on this. A person with a modern outlook might project a concept backward, perhaps like a 20th Century man might see Jules Verne as the originator of space flight. But the general idea is very different from the specific application. Jules Verne never got off the launch pad. Details matter.

Beyond that, in my article, I tried to explain how modern methods of risk analysis allow the fine tuning of risk. I argued against the practice of treating all behaviors and places the same - precisely the abuse what the mere averaging of risk would engender. We have come a long way from the Greeks.

So if the Greeks at some times and places practiced the primitive form of insurance, their concept and practice was far from ours. Perhaps the analogy might be Thales and Einstein. They are both scientists. Or maybe Hippocrates and your modern heart surgeon. I do not think I would trust Hippocrates with that bipass.

Posted by: Jack at June 11, 2007 10:50 PM
Comment #222953

Without expressing an opinion on the extent of insurance in ancient Greece, I do want to say I agree wholeheartedly with Jack’s insistence on examining primary sources. I won’t claim that I know all the ancient Greek texts, but I know quite a few, and I often quibble with the histories I read because I know the primary source has problems. They are often written centuries after the fact, the writers have their own perspectives, and often the pieces are sheer propaganda. That’s not to say these sources are not valuable, of course — often they are all we have.

So I too would like to see what primary sources exist re: insurance.

Jack, in an earlier post you expressed doubt that Socrates was essentially as he was protrayed in Plato. I think we have enough contemporary sources that confirm in basic outline that he was — Xenophon and Aristophanes, primarily (the playwright parodies Socrates, but the parody essentially confirms how other writers protray the philosopher). Other sources are largely lost, but later references to them don’t seem to challenge the picture we get from the sources we do have. That doesn’t mean that Socrates said everything attributed to him, but it does seem to confirm his basic method and his reputation for supremacy in debate (though even Plato shows him being bested at times).

Posted by: Gerrold at June 12, 2007 10:22 AM
Comment #222984


I see Socrates like the old guy at the tavern who always is asking questions and tying up people with his cleverness. I suppose he was like that. What I think was fictional is the way his interlocutors fall into his verbal traps so easily. After a little experience with Socrates or at least hearing about him, people would probably be a little more circumspect in granting his premises. It is like the old guy at the bar. If he tells you that he can make a little man come out of the beer glass and spit in your face, you know he has some way to make that seem to happen and you do not take him up on the dare.

I have a more fundamental problem with Plato re the idea of ideal types.

Posted by: Jack at June 12, 2007 1:39 PM
Comment #222986


Well, since this is all really off topic, I’ll just say a couple of things. I think we see a variety of interlocutors in the dialogues, and some of them are far more capable than others. In the Parmenides, for example, Socrates gets his head handed to him. And in the Protagoras, the best we might say Socrates got was a draw. At any rate, he emphasized logically coherent accounts and didn’t make an exception for himself.

I like the guy, you don’t, and that alone probably is enough of an explanation for our different takes.

Re: the forms. Plato knew the problems with that proposition, as is evidenced in some of the dialogues in which he hurls objections against them (one of the reasons I like Plato; he often gives his opponents very strong argumetns). I see Plato searching for a good argument for the forms more than claiming he found one. By the end of his life he seems to have given up on “ideals” — the Laws, for example, give a much more pragmatic view of the state than the idealistic view we saw in the Republic.

Posted by: Gerrold at June 12, 2007 2:45 PM
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