Monday, January 25, 2010


We all know that part of what drove our economy into a tailspin in 2008 were the incredibly stupid bets market players made. These bets are called credit default swaps. Essentially they are unregulated insurance contracts written and sold by market players who never intended on paying out if things went wrong (primarily because they didn't have the capital on hand).

What the "insurance writers" were really after were the premiums. When the unregulated insurance writers found out that they couldn't pay out on the bets that went bad (like subprime mortgage securities), all financial hell broke loose.

Well, hang on to your hats. It looks like we're going to do this financial stupidity all over again, but on another level. Only this time the big market players are banking on death. Here's how it works.

Traditionally if you purchase a life insurance policy the expectation is that you will pay premiums. In return you have a life insurance policy that can pay anywhere from $100,000 on into the millions. Your family, or your designee, receives a payment upon your death. If you decide you want to cash out, for whatever reason, you cancel the insurance policy and settle with the insurance company. You get a fraction of what you paid into the policy. Most insurance companies anticipate people cashing out, which helps to keep their costs down (since they don't have the big payout at the end). Pretty simple, huh?

Today, however, Wall Street's investment banks want to purchase your life insurance policy and turn it into a security. Specifically, the idea is to get life insurance policy holders to sell their policies to Wall Street. In return the insured party (you, for example) receive a fraction of what you paid into the policy. The new beneficiary of your death are Wall Street market players.

To be sure, Wall Street market players continue making payments on your insurance policy. But instead of waiting for one person to die, what they do is bundle up hundreds, if not thousands, of insurance contracts. These contracts - and the future payouts - are then sold to market players as securities. So you could conceivably have 10,000 life insurance policies wrapped into one security.

What we end up with is a system that creates what economists call "perverse incentives" because of how they encourage the holders of these securities to cheer on your death. Worse, it provides Wall Street and the market players who buy into these securities a financial incentive to oppose national health care initiatives, to stall the release of new medicines, or to hinder medicinal patent sharing proposals. Anything that might prolong your life is viewed as bad news for this security market.

Death is money.

As economists Marshall Aueback and L. Randall Wray put it, we could see the evolution of a powerful alliance where:

Big Pharma and Big Finance might well try to keep new miracle drugs off the market; or, if these drugs were capable of extending life and thereby reducing profits on the securities, make them prohibitively expensive, thus curbing access.
Aueback and Wray add that it's "fairly easy to see some profitable synergies developing between financial firms marketing bets on death and health insurers opposed to universal, single-payer health care."

By keeping health insurance policies alive the securitization of death could bankrupt the insurance industry. Keep in mind that insurance companies have traditionally banked on policy holders canceling their policies long before they pass on. Keeping policies alive for Wall Street undermines this approach.

Or, Wall Street could do an end run around the insurance industry - as they did with credit default swaps - and create securities with the sole purpose of purchasing insurance policies. Another unregulated market, with a focus on encouraging death. Great.

Apart from the financial issues involved, there are also the ethical ones (which I discussed with reference to Dead Peasant Insurance in my book). Should we allow market players to literally bank on death in a way that might encourage them to oppose the release of medicines and public policies that make our lives healthier?

In my view, markets should neither encourage nor cheer on death. Like Dead Peasant Insurance, banking on death through the creation of death securities is not an industry that needs to be encouraged.

- Mark

Post Script: Here's a video with some interestings numbers on death.

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