In my book I wrote about dead peasant insurance. It worked something like this. Companies would take out insurance policies on their employees. Those on the lowest rung of the totem pole would be offered a $10-25,000 insurance policy when they were hired. When they died their family would collect the money.
This is where it gets interesting.
What the companies didn't tell their employees is that when they took out policies the policies actually paid out anywhere from $100-300,000, and some times more. But the family members still only received $10-25,000. The companies could do this because of favorable legislation that gave them tax credits (as a business expense) to purchase the insurance policies.
This means that
Anyways, we're now seeing the evolution of another death based financial contract. It turns out that Goldman Sachs and the usual suspects on Wall Street want to peddle insurance contracts to pension "investors."
Sound good so far? Not really. Here's why.
Because people are living longer, each additional year of life expectancy adds as much as 4% to future pension requirements. This cuts into profits. Longevity cuts into the bottom line. However, by providing insurance to pensions and other retirement institutions Goldman Sachs hopes to convince the pension groups that they are dumping the expense of each additional life year onto insurance providers.
But here's the catch.
The "insurance" providers are not categorized as insurance companies. As a result the pension insurance system isn't regulated like regular (car, home, etc.) insurance companies. These insurance providers don't have to have the reserves on hand to pay out if something really goes wrong (you know, like in 2008).
Instead, these market players are considered as part of our unregulated derivative and/or "swap" market. Call it the "death derivative" market. But, at the end of the day, they don't legally need to have the money to pay out claims. To be sure, they can collect premiums, and can suck the financial life out of their customers. But, like the economic zombies they're sure to become when the going gets rough, they're not legally obligated to give anything back.
So, instead of selling insurance Goldman Sachs and other banks are really selling "death derivatives" - which are contracts that derive their value from an underlying asset, and can be bought and sold to others with few if any oversight (similar to an earlier class of "death securities" I wrote about over a year ago).
In plain language what this means is that if the insurance providers collecting premiums today go belly up tomorrow because more people suddenly die, many pensions who think they have insurance will find themselves facing a shortfall, big time.
Goldman Sachs, and their band of snake oil salesmen, are saying "Don't worry ... private market players know what they're doing ... and besides, insurance companies don't go bust." Huh?
Incredibly, these guys have already forgotten and moved past Lehman Bros. and A.I.G. And why not? They got their money.
We should know better. The motive here isn't insurance. It's revenue. These guys need to be regulated. But they won't be.
It's de javu all over again.