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The System Isn’t Designed to Help You

The System Isn’t Designed to Help You

If climate change doesn’t kill you, it will bankrupt you.

It’s been about two months since the Lahaina fire, and the long term nature of their recovery is just starting to set in — for some at least. I know from first-hand experience that it takes months for some people to emerge enough from the fog of trauma to even start thinking about recovery.

Personally, I don’t like the word “recovery”.

It makes it sound like things can — and do — go back to the way they were before the fire (or the hurricane or the flood — pick your own mass climate disaster).

But they don’t. They can’t. Lahaina is gone. Forever.

Sure, something will come back — probably cookie-cutter multi-million dollar condos that the former residents can’t even dream of affording. But Lahaina is gone. Its residents can move forward, but they can’t “recover”. There is no going back.

And “moving forward” itself a long and cruelly painful process, and one during which I personally came to understand that the “system” — everything from FEMA to insurance companies to the tax system to banks to the government to the legal system — isn’t designed to help you, the disaster victim.

It isn’t that the system doesn’t work. It works exactly as designed.

But it’s just not designed to help you.

It helps others, or maybe no one at all, but if you manage to get what you need from the system, it’s almost by accident, or unintentional, or a byproduct of helping someone else.

I know a lot of people reading this will say, “you’re overreacting” or “you just had a bad experience”. I know that because I’ve been told this before by people who have never been through a climate disaster and who are just repeating the reassuring platitudes that we’re all programmed to repeat.

…click on the above link to read the rest…

State Farm Halts Home Insurance Sales In California

State Farm Halts Home Insurance Sales In California

Faltering California took another economic hit on Friday, as America’s largest personal lines insurer said it would immediately stop selling new home insurance policies in the state. California is the largest property and casualty insurance market in the country.

State Farm attributed the decision to three factors: “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.” Reinsurance is a method of transferring some of an insurer’s risk to other insurers.

Existing policies will stay in effect — for now. There’s always the possibility that, if things keep deteriorating, State Farm could decide to “non-renew” current policy-holders. That’s what AIG did last year, sending thousands of high-end homeowners scrambling to find new coverage.

The announcement’s timing — on a Friday afternoon heading into a long holiday weekend — seemed intended to minimize publicity. In statement, State Farm said it “will cease accepting new applications including all business and personal lines property and casualty insurance, effective May 27, 2023. This decision does not impact personal auto insurance.” The halt seems to include renters insurance, though the announcement wasn’t explicit on that count.

Inflation has been taking a harsh toll on insurers, who are pressing regulators to approve rate hikes to compensate for rising claim costs. Earlier this month, for example, San Antonio-based USAA posted the first ever annual loss in its 100-year history — a $1.3 billion setback.

In California, insurers have also been contending with high wildfire risks, and many have curtailed coverage in wildfire-prone regions, or clamped down on homes that lack certain fire-thwarting characteristics, which range from building materials to clearing space between the structure and surrounding trees.

State Farm diplomatically acknowledged the California government’s efforts to make the state a viable place for property insurers to operate in, but implied their efforts to date have been insufficient:

…click on the above link to read the rest…

America Can’t Afford to Rebuild


Adolphe Yvon Genius of America c1870
A number of people have argued over the past few days that Hurricane Harvey will NOT boost the US housing market. As if any such argument would or should be required. Hurricane Irma will not provide any such boost either. News about the ‘resurrection’ of New Orleans post-Katrina has pretty much dried up, but we know scores of people there never returned, in most cases because they couldn’t afford to.

And Katrina took place 12 years ago, well before the financial crisis. How do you think this will play out today? Houston is a rich city, but that doesn’t mean it’s full of rich people only. Most homeowners in the city and its surroundings have no flood insurance; they can’t afford it. But they still lost everything. So how will they rebuild?

Sure, the US has a National Flood Insurance Program, but who’s covered by it? Besides, the Program was already $24 billion in debt by 2014 largely due to hurricanes Katrina and Sandy. With total costs of Harvey estimated at $200 billion or more, and Irma threating to cause far more damage than that, where’s the money going to come from?

It took an actual fight just to push the first few billion dollars in emergency aid for Houston through Congress, with four Texan senators voting against of all people. Who then will vote for half a trillion or so in aid? And even if they do, where would it come from?

Trump’s plans for an infrastructure fund were never going to be an easy sell in Washington, and every single penny he might have gotten for it would now have to go towards repairing existing roads and bridges, not updating them -necessary as that may be-, let alone new construction.

…click on the above link to read the rest of the article…

Taken to the Cleaners

Introduction

Should regulators call the market? It has been a matter of vigorous debate in the regulatory community since the crisis. ‘Cleaners’ think you shouldn’t mess around with the market, although be prepared to clean up if markets collapse. ‘Leaners’ take the opposite view, divided between those who want to lean on the asset side of overheated balance sheets, principally by increasing capital requirements, and those who want to lean on overheated liabilities, using an ingenious accounting method called ‘matching adjustment’, which allows firms to reduce the present value of future liabilities by increasing the rate at which they are discounted. If spreads blow out on your assets you are allowed to add some of that spread to the discount rate for your liabilities, which cushions the impact in the short term.[1]

This article focuses on whether economists can identify trends or bubbles in the residential property market. The question is important for insurers, whose balance sheets have been damaged by the protracted fall in long gilt yields, and who are hunting for yield in alternative assets such as commercial and residential property. I asked three economists for their views.

John Cochrane of Stanford’s Hoover Institution, author of the magisterial Asset Pricing, complains about a common misunderstanding: ‘people say the market can’t be efficient, because it didn’t predict the 2008 crash. That’s exactly backward. Efficient markets theory says that the market aggregates all information that people have – and no more. The market is not clairvoyant.  Consequently, the central empirical prediction of the efficient markets hypothesis is precisely that nobody can reliably tell where markets are going – neither benevolent government bureaucrats, nor crafty hedge-fund managers, nor ivory-tower academics. This is probably the best-tested proposition in all the social sciences.’

…click on the above link to read the rest of the article…

Dave Janda: Bad Medicine

Dave Janda: Bad Medicine

A doctor’s reasons for quitting the profession

In our ongoing discussion of how our Health Care system (or more aptly-named “Sick Care” system) has been hijacked by those who profit most from it, we interview Dr. Dave Janda this week, who recently and very publicly announced he was walking away from his clinical practice in protest of how poorly the quality-to-cost ratio has dropped in his profession.

Dr. Janda’s perspective is informed not just from his years as a practicing surgeon and researcher, but also through his involvement with health initiatives for the Reagan and Bush I administrations, as well as the National Institute of Health. His overall conclusion is that the health system now exists to serves its corporate and administrative owners, to the detriment of patients and practitioners:

I decided I needed to retire from medicine the clinical practice of medicine because I truly felt that I could no longer take care of people the way I was trained to take care of people in a high quality manner. Now I have been involved 27 years in the clinical practice of medicine. I have battled insurance companies every day of my professional career since I got done with my residency program 27 years ago. The formula that insurance companies use and government uses to cut healthcare costs is the most inhumane and unethical means of cutting costs; and that’s the rationing and denying of care. It’s what I have fought against my entire career. My approach is, if you are really sincere about cutting healthcare costs, quit trying to deny the availability and access to care — which is what insurance companies try to do. If you’re really sincere about cutting healthcare costs prevent healthcare needs. It’s the single greatest bang for the buck.

…click on the above link to read the rest of the article…

My Passion is Puppetry

Campaign
Company
Launch Date
epsilon-theory-progressive-insurance-1 “Flo” Progressive Insurance 2008
epsilon-theory-geico-2 “Rhetorical Question”
“Happier Than A … ”
“Did You Know?”
“It’s What You Do”
GEICO 2009
2012
2013
2014
epsilon-theory-allstate-3 “Mayhem” Allstate 2010
epsilon-theory-farmers-ins-4 “University of Farmers” Farmers Insurance 2010
epsilon-theory-state-farm-5 “Magic Jingle” State Farm 2011
2011
epsilon-theory-esurance-6 “That’s Not How It Works” Esurance 2014
epsilon-theory-nationwide-7 “Chicken Parm You Taste So Good” Nationwide 2014

We are supposedly living in the Golden Age of television. Maybe yes, maybe no (my view: every decade is a Golden Age of television!), but there’s no doubt that today we’re living in the Golden Age of insurance commercials. Sure, you had the GEICO gecko back in 1999 and the caveman in 2004, and the Aflac duck has been around almost as long, but it’s really the Flo campaign for Progressive Insurance in 2008 that marks a sea change in how financial risk products are marketed by property and casualty insurers. Today every major P&C carrier spends big bucks (about $7 billion per year in the aggregate) on these little theatrical gems.

This will strike some as a silly argument, but I don’t think it’s a coincidence that the modern focus on entertainment marketing for financial risk products began in the Great Recession and its aftermath. When the financial ground isn’t steady underneath your feet, fundamentals don’t matter nearly as much as a fresh narrative. Why? Because the fundamentals are scary. Because you don’t buy when you’re scared. So you need a new perspective from the puppet masters to get you to buy, a new “conversation”, to use Don Draper’s words of advertising wisdom from Mad Men. Maybe that’s describing the price quote process as a “name your price tool” if you’re Flo, and maybe that’s describing Lucky Strikes tobacco as “toasted!” if you’re Don Draper. Maybe that’s a chuckle at the Mayhem guy or the Hump Day Camel if you’re Allstate or GEICO.

…click on the above link to read the rest of the article…

Diversify Into Gold As An “Insurance Policy” Against Geopolitical Risk

Diversify Into Gold As An “Insurance Policy” Against Geopolitical Risk

“Investors could be forgiven for heading for the hills given the tumultuous start to 2016,”  so writes Andrew Oxlade in The Telegraph today who advises investors to diversify into gold as an “insurance policy”:

We have long been advocates of exposure to gold as an insurance policy. This was demonstrated once again in the recent sell-off when the price of bullion surged from $1,061 (£762) an ounce on New Year’s Day to $1,246 (£895) by early February. In times of fear, gold is in demand. The price also rises when inflation becomes a danger.

Deflation remains the bigger threat for now, which is partly why gold has been a poor investment in recent years, but the money printing excesses of central banks could yet unleash inflation. In the meantime, the gold price offers some protection during repeat episodes of buckling confidence.

Gold_GBP
Gold in GBP – 5 Years

The Telegraph, like GoldCore, had warned of such turbulence at the start of the year. John Ficenec, editor of the Questor column, warned of the real risk of volatility and falls in stock markets.

We believe that the tragic events in Brussels show the continued very high degree of geopolitical risk and the need for an insurance policy.

Further attacks are quite possible, including in the U.S., and this should support gold.

Geopolitical risk is frequently underestimated and it would be unwise to discount the risk of a September 11 style attack in the coming months. Intelligence agencies and ISIS themselves are warning of such attacks and investors need to be diversified to hedge this growing risk.

It gives us no pleasure to be the bearer of this bad news but it is important that the reality of the real risks of today are considered in order to protect and grow wealth in these uncertain times.

…click on the above link to read the rest of the article…

Global Financial Meltdown Coming? Clear Signs That The Great Derivatives Crisis Has Now Begun

Global Financial Meltdown Coming? Clear Signs That The Great Derivatives Crisis Has Now Begun

Global Financial Meltdown - Public DomainWarren Buffett once referred to derivatives as “financial weapons of mass destruction“, and it was inevitable that they would begin to wreak havoc on our financial system at some point.  While things may seem somewhat calm on Wall Street at the moment, the truth is that a great deal of trouble is bubbling just under the surface.  As you will see below, something happened in mid-September that required an unprecedented 405 billion dollar surge of Treasury collateral into the repo market.  I know – that sounds very complicated, so I will try to break it down more simply for you.  It appears that some very large institutions have started to get into a significant amount of trouble because of all the reckless betting that they have been doing.  This is something that I have warned would happen over and over again.  In fact, I have written about it so much that my regular readers are probably sick of hearing about it.  But this is what is going to cause the meltdown of our financial system.

Many out there get upset when I compare derivatives trading to gambling, and perhaps it would be more accurate to describe most derivatives as a form of insurance.  The big financial institutions assure us that they have passed off most of the risk on these contracts to others and so there is no reason to worry according to them.

Well, personally I don’t buy their explanations, and a lot of others don’t either.  On a very basic, primitive level, derivatives trading is gambling.  This is a point that Jeff Nielson made very eloquently in a piece that he recently published

…click on the above link to read the rest of the article…

 

Guaranteed Financial Security Is a Fantasy

Guaranteed Financial Security Is a Fantasy

Guarantees based on extracting higher taxes, borrowing trillions of dollars and creating trillions more out of thin air only guarantee eventual systemic implosion.

It is difficult for those living through tectonic social and economic shifts to recognize the passing of one era and the emergence of a new era. We are clearly in such a tectonic shift, yet it is slow enough and uneven enough that those who hope the old era will somehow endure despite the erosion of its foundations can find evidence to support their beliefs.

1. The faith that risk can be identified and managed to the point it cannot disrupt the payment of promised pensions, benefits, yields, etc.One such cherished belief is the faith that financial security can be guaranteed. This faith has two components:

2. The faith that the system can pay what has been promised by one means or another.

If tax revenues are inadequate, taxes can always be raised. If tax revenues fail to rise, then the money needed to pay the promised pensions, benefits, etc. can be borrowed. If the money cannot be borrowed, then it can simply be created out of thin air by central banks or printed by government treasuries.

Before the advent of high finance, lowering risk could only be achieved by spreading the risk over a large populace. To lower the risk to individuals that their house would burn down in an accidental fire, insurance was sold to 1,000 homes. If one or two of the 1,000 homes burned down each year, the insurance could pay the claims and still build up reserves for future claims.

…click on the above link to read the rest of the article…

 

 

 

Did An Obscure IMF Document Start A Global Bail-In Revolution? by Daniel Amerman

Did An Obscure IMF Document Start A Global Bail-In Revolution? by Daniel Amerman.

When revolutions start, it’s not uncommon for almost nobody to notice. It may take years or even decades before historians can look back, point a finger and say “that’s where it really began.”

An obscure International Monetary Fund “Staff Discussion Note” may have already started a “Bail-In” financial revolution that could transform the global investment world.

In this quite remarkable document, the staff discusses a world where risks to the global financial system have not gone away – but are worse than ever. As candidly discussed, the “SIFI” (systemically important financial institution) problem has not been improving, but instead has been getting worse than ever – and there doesn’t appear to be any solution under existing contract law and bankruptcy law.

More risk than ever is concentrated in fewer financial institutions, while there is no way under existing law to unwind a failure of one of these institutions without risking triggering global financial chaos. Moreover, there is a deadly feedback loop between these “too-big-to-fail” institutions and sovereign governments. That is, as the IMF staff discusses, the bailing out of these massive institutions can bankrupt sovereign governments, and sovereign governments going bankrupt can wipe out the “too-big-to-fail” institutions.

So the IMF staff has come up with an audacious plan for how the globe can emerge from this seemingly impossible situation. The key word is “insurance”.

 

…click on link above to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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