After my first blog on the funny differences on Life Insurance I received a response stating that actuaries just do their jobs, marketing complicates things.
Now, I really don't know (and don't want to know) if there is someone to blame. I don't think those funny differences are really something bad.
But I agree: Market people can make things difficult. I have been working with really imaginative marketing people. They could invent a plan like "you can receive a discount of 5% in the premium or (if you have teen agers) a mountain bike or (if your employer agrees) you can have disability insurance for free for two years or... and if...".
But actuaries are also fantastic innovators. In a mathematical way, they can conceive surreal insurance plans.
One of my favorite stories occurred in Israel at the start of the eighties. In Israel, at this time, the industry was monolithic, Life Insurance companies sold the same products, marketing was in its childhood and actuaries dominated the scene. The inflation was very high and in 1984 arrived at its peak of 450 %. It was not really a problem because the premium, sum assured and savings were linked to the consumer price index.
But, then, the banks started to sell savings with some risk insurance attached. It was not big, the amounts were not great, but it was a menace. And the newspapers started publishing articles of professors stating that it is better to put the money in savings in the banks and buy collective risks than to buy life insurance. They also published tables stating that the banks made more money for the insured than the Insurance companies.
Insurance companies started to explain that they did not take into account the "two indexes".
The “two indexes” - They even tried to explain it but, of course, nobody understood.
Till now the story is simple but, from now on things get complex: what is the "two indexes"?
Before I continue, a warning: go easy! It is confusing and if you don’t understand, don't worry - I don't understand it either and I programmed it in the computer!
Let's assume two plans – one on the bank and a hypothetical life insurance plan pure savings that you can surrender any time you want.
Let's also assume that the index for January is 1000 (the January index is published on February 15th), for February 1100, for March 1200 and so on a hundred points every month.
If I deposit 5000 shekel in the bank on March 25th and withdraw it from the bank in May 1st I’ll receive the same 5000 shekel (it is "March" money). Only in June I would receive an inflation correction. (Known index on first of June against the March index).
On the side of Insurance companies, they need to collect the premium, so they need to send the insured a bill with the amount to be collected. The bill I paid on March 25th (same date as the bank deposit) was calculated according to the index of January published on February 15th and the known index on March 1st (date they printed the bill).
Let's say, I paid 5000 shekel like in the bank. If I ask for the money on May 1st the surrender value will be 5000 * 1200 / 1000 (index known on first of May against the index known on the first of March).
Each withdraw of Life Insurance would receive two indexes more than in the bank. In 1984 there was two months that the difference was 40%!
Complex? Yes!
They tried to explain it to the people, the so called "masses".
Of course nobody could understand so a committee of actuaries invented the "factor of the two indexes".
From 1983 they reduced the life insurance tariff and started to collect the premium with simulation of the inflation, meaning:
The March premium will be multiplied by the factor of the known index of March 1st divided by the known index of January 1st. So, it will not be 5000 anymore it will be more or less 6000 shekels.
Confused? It gets worse. Just let actuarial thinking flow over you…
In my company at the time we used to buy the employees Life Insurance policies and the premium was calculated as 18.333% of the salary. We recruited a new employee – Shuky -and my partner told Danny (the broker) to issue him a policy. His salary was 10000 shekel so the premium was supposed to be 1833. When the bill arrived the premium was 2291. My partner came to me to verify the sum and I explained to him: "that's the factor". What factor? I told him the whole story I tried to tell you guys. But then he said: I am supposed to pay 18.333% of the salary, not 22.91%. The authorities will not recognize this sum as tax exempted.
Then I told him to tell Danny to remake the policy, this time with the two indexes included on the 18.333%. Danny came back with a new policy, with the bill of 1833 shekels and everything was OK till we handed the policy to Shuky (the employee) and he said: Hey, my salary is 10000 and it is written here that the salary is 8000!! ( Salary = premium/ (factor two indexes * 18.333)).
Our luck was that Shuky was part of the team that programmed the new factor to some insurance companies and he could understand the explanation.
In other words, actuaries (at least some of them) can make things difficult.
Again: I am not complaining. On the contrary, I make my living out of those things. If everything was simple anyone could do it.
Now, I really don't know (and don't want to know) if there is someone to blame. I don't think those funny differences are really something bad.
But I agree: Market people can make things difficult. I have been working with really imaginative marketing people. They could invent a plan like "you can receive a discount of 5% in the premium or (if you have teen agers) a mountain bike or (if your employer agrees) you can have disability insurance for free for two years or... and if...".
But actuaries are also fantastic innovators. In a mathematical way, they can conceive surreal insurance plans.
One of my favorite stories occurred in Israel at the start of the eighties. In Israel, at this time, the industry was monolithic, Life Insurance companies sold the same products, marketing was in its childhood and actuaries dominated the scene. The inflation was very high and in 1984 arrived at its peak of 450 %. It was not really a problem because the premium, sum assured and savings were linked to the consumer price index.
But, then, the banks started to sell savings with some risk insurance attached. It was not big, the amounts were not great, but it was a menace. And the newspapers started publishing articles of professors stating that it is better to put the money in savings in the banks and buy collective risks than to buy life insurance. They also published tables stating that the banks made more money for the insured than the Insurance companies.
Insurance companies started to explain that they did not take into account the "two indexes".
The “two indexes” - They even tried to explain it but, of course, nobody understood.
Till now the story is simple but, from now on things get complex: what is the "two indexes"?
Before I continue, a warning: go easy! It is confusing and if you don’t understand, don't worry - I don't understand it either and I programmed it in the computer!
Let's assume two plans – one on the bank and a hypothetical life insurance plan pure savings that you can surrender any time you want.
Let's also assume that the index for January is 1000 (the January index is published on February 15th), for February 1100, for March 1200 and so on a hundred points every month.
If I deposit 5000 shekel in the bank on March 25th and withdraw it from the bank in May 1st I’ll receive the same 5000 shekel (it is "March" money). Only in June I would receive an inflation correction. (Known index on first of June against the March index).
On the side of Insurance companies, they need to collect the premium, so they need to send the insured a bill with the amount to be collected. The bill I paid on March 25th (same date as the bank deposit) was calculated according to the index of January published on February 15th and the known index on March 1st (date they printed the bill).
Let's say, I paid 5000 shekel like in the bank. If I ask for the money on May 1st the surrender value will be 5000 * 1200 / 1000 (index known on first of May against the index known on the first of March).
Each withdraw of Life Insurance would receive two indexes more than in the bank. In 1984 there was two months that the difference was 40%!
Complex? Yes!
They tried to explain it to the people, the so called "masses".
Of course nobody could understand so a committee of actuaries invented the "factor of the two indexes".
From 1983 they reduced the life insurance tariff and started to collect the premium with simulation of the inflation, meaning:
The March premium will be multiplied by the factor of the known index of March 1st divided by the known index of January 1st. So, it will not be 5000 anymore it will be more or less 6000 shekels.
Confused? It gets worse. Just let actuarial thinking flow over you…
In my company at the time we used to buy the employees Life Insurance policies and the premium was calculated as 18.333% of the salary. We recruited a new employee – Shuky -and my partner told Danny (the broker) to issue him a policy. His salary was 10000 shekel so the premium was supposed to be 1833. When the bill arrived the premium was 2291. My partner came to me to verify the sum and I explained to him: "that's the factor". What factor? I told him the whole story I tried to tell you guys. But then he said: I am supposed to pay 18.333% of the salary, not 22.91%. The authorities will not recognize this sum as tax exempted.
Then I told him to tell Danny to remake the policy, this time with the two indexes included on the 18.333%. Danny came back with a new policy, with the bill of 1833 shekels and everything was OK till we handed the policy to Shuky (the employee) and he said: Hey, my salary is 10000 and it is written here that the salary is 8000!! ( Salary = premium/ (factor two indexes * 18.333)).
Our luck was that Shuky was part of the team that programmed the new factor to some insurance companies and he could understand the explanation.
In other words, actuaries (at least some of them) can make things difficult.
Again: I am not complaining. On the contrary, I make my living out of those things. If everything was simple anyone could do it.
Some life insurance policies are so hard to understand that one really needs a solicitor or lawyer to decipher them!
ReplyDeleteديكور
ReplyDeleteLife insurance is also a big benefit of life.
ReplyDeleteIncome Tax Refunds
Life insurance is very important in life.
ReplyDelete