Author: Jay Jiyuan

The best way to know is to read my thoughts on the blog site: Ideabins.blog. I have been a managerial consultant for 10 years and then college teaching for 12 years. Entrepreneur in heart, interested in financial leteracy

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Did You Know? Life insurance

Insurance for Properties & Protecting Life

The Takeaways:

  1. Property insurance and life insurance are two major categories with different purposes, for different people, and covering different things.
  2. A trend of late is to see property insurance rate moving up, while real life insurance rate going down.
  3. One important but little known way of predicting insurance cost is to look at reinsurance cost insurance firms pay to reinsurance company.
  4. More competition, advanced technology for underwriting, increased life expectancy, better risk management and more informed consumers, these all contribute to a lower cost of life policies.

Property Insurance vs. Life Insurance: An Overview

Did you know one way to divide insurance business is to separate them into property insurance and life insurance? Yes that’s true and property and life insurances make up the biggest categories, in addition to a few other “biggies” like commercial insurance, liability insurance and health insurance.

Property insurance is about protecting physical assets (e.g., personal homes and personal belongings, businesses building and business properties, vehicles) against financial losses from covered perils (i.e., direct causes of loss that your insurer will pay you for) like fire, theft, weather damage and natural disasters. They differ from life insurance in two ways: What they cover and for whom. Simply put, (1) property insurance is always protecting properties while life insurance is always protecting loss of human lives; and (2) property insurance is always designed for property owners, while life insurance is mostly designed for the loved ones of the policyholder, occasionally for the policyholder themselves.

Note property and property insurance are not always the same. It is easy to think of property insurance as for autos and homes. After all, for most families the biggest asset is the house. But insurance terminology does not always work that way. Strictly speaking property insurance does not cover everything related to your house or autos. Remember property insurance only protects property owners? That means whenever your insurance pays money to someone else, that part of coverage belongs to liability insurance, not property insurance.

Consider an easy example: Say you were driving under influence, and you hit Joe’s car, your auto insurance will pay Joe for his bodily injury and his car damage. That money received by Joe is not strictly from your property insurance but rather your liability insurance, even though the same (comprehensive) auto policy of yours will cover both.

Life insurance, on the other hand, protects financial loss caused by the loss of human lives, not physical properties. While property insurance protects property owner(s), life insurance mostly protects others — your loved ones — although it can protect oneself (i.e., the policyholder, see more details below).

Because life insurance mostly protect your loved ones, “death benefits” is a big term that appears in all life insurance policies. This is for a good reason: Death benefits often are the biggest chunk of insurance payment. It is called death benefits because they must be paid after the policyholder is dead, only to beneficiaries (i.e., recipients of insurance payment).

But death benefits are not the only benefits in a life insurance policy. Sometimes we can receive “living benefits” that are unique in two ways: They are paid to policyholders themselves rather than to their loved ones, and they are paid when policyholders are still alive.

This is a topic for another day, and I will not get into details in this post. What I will say is a quick fact that term life insurance can have living benefit as well, contrary to a misconception some may have. For example, a terminal illness rider is typically included automatically on term life policies, providing a lump sum payment if the policyholder is diagnosed with a terminal illness and has a life expectancy of 12 months or less.

Insurance vs Reinsurance

One of the reliable ways for predicting how much premium you and I will pay for our insurance policies is to look at reinsurance cost for the insurance companies like in this report of January 2023.

Many if not most of us have never heard the word “reinsurance” before, or have but did not bother to dig deeper into it. It sounds more complicated than insurance and yet seems to be one of those things that we can afford to ignore in our lives.

In truth, reinsurance has lot to do with how much you and I will pay for our insurance premium. Let me explain. Reinsurance is simply insurance of the insurances, and only insurers or insurance companies can and will buy it, not individuals. That said, the way it works is the same: We pay premiums to the insurers for the right to receive insurance payment in case we have financial loss due to the agreed perils or direct causes of loss. Insurers also pay premium to a reinsurance company so that if during catastrophic events there are more claims than the insurers can pay, they will ask reinsurer to pay it.

Reinsurance is especially important for catastrophes like earthquakes, hurricanes, floods, wildfires, and volcanic eruptions. Human-caused catastrophes can include industrial accidents, terrorist attacks, wars, and pandemics.

Catastrophes could be disasters for any particular individuals, businesses and governments alike. But they are especially bad news for insurance companies as they bring significant financial losses for insurance companies that are unable to cover the costs of claims made by policyholders.

Insurance industry has a quantitative threshold for an event to be designated a catastrophe “when claims are expected to reach a certain dollar threshold, currently set at $25 million, and more than a certain number of policyholders and insurance companies are affected.” According to this article by Triple-I.  

You probably think insurance companies all have a deep pocket that can survive any catastrophes with no problem paying insurance claims. In truth, some insurance companies are pretty vulnerable to disasters, which is why you often hear the news that some insurers got themselves into insolvency, meaning they run out of money to pay the claims from their policyholders or clients.

By buying reinsurance, insurance companies transfer some of the risk they have taken on by insuring their customers to another insurer.

From Reinsurance Cost to Insurance Cost

Here is what ChatGPT has to say about how reinsurance premium is related to our own insurance premium to be paid to our insurer.

“Yes, generally higher reinsurance costs can lead to higher insurance premiums for customers… When reinsurance costs are higher, it means that the insurance company is paying more to transfer its risk to another company. To make up for this added cost, the insurance company may pass on the cost to customers in the form of higher insurance premiums.”

Of course, there are many factors that can affect insurance premiums, like the level of risk being insured, the insurer’s expenses, and competition in the insurance market. But reinsurance cost is one of the major factors because it is the cost for the insurers to do business, which is always significant just like in any other business.

But how does reinsurance firm determine how much it will charge insurers? It is not much different from how an insurer determines our premium. The key factors are risks involved, past frequency and severity of claims made, plus industry trends and the overall cost of risk across insurers, allowing reinsurers to set more accurate prices for their coverage.

ChatGPT tells us the following: “If reinsurance rates are high, it may indicate that reinsurers are pricing their coverage more cautiously, which suggests that the overall cost of risk in the insurance market is high. This can lead insurance companies to increase the premiums they charge customers to compensate for the increased cost of risk.”

“Overall, while reinsurance rates are not the only factor that insurance companies consider when setting premiums, they can be a useful indicator of the overall cost of risk in the insurance market and may play a role in determining the prices that customers ultimately pay for insurance coverage.”

Property Insurance Rate Goes Up, Real Life Insurance Rate Down

ChatGPT tells us the following that “it appears that property insurance rates are indeed on the rise in the US. A report by Gallagher Re shows that property catastrophe reinsurance rates for loss-hit US accounts increased by between 45% and 100% at Jan. 1 renewals, indicating a significant increase in rates for property insurance policies in some areas. This trend of increasing property insurance rates is also supported by a recent analysis by Bankrate.com, which found that the average homeowner spends about 1.91% of their household income on home insurance, a figure that has been rising over time.”

This report in Business Insurance cites a report from Amwins Group Inc as saying: “Property markets will remain hard with no softening in the foreseeable future.” “Due to the challenges in the property market, however, reinsurers are being ‘extremely cautious’ with all their capacity.” The reason for property insurance market getting tough is “the combined effects of a major hurricane making U.S. landfall in five out of the last six years, wildfires engulfing thousands of acres, unprecedented winter storms and Midwest flooding. All ‘have played a major role in hardening the insurance marketplace.’”

What about life insurance premium? ChatGPT tells us that the trend of premiums for life insurance policies has remained relatively stable in recent years. This may not sound exciting but wait for taking inflation into account: Life insurance prices remained relatively the same throughout 2021 despite inflation and an increase in death claims. The average monthly cost of a $250,000 policy only increased by a small amount from January 2021 to December 2021.

Combining the above I’d say the “real” (i.e., inflation adjusted) life insurance premium has gone down.

While there is no specific data provided for California, it is likely that the trend of stable premiums applies to the state as well.

It should be noted that while the cost of premiums may remain relatively stable, they can still vary depending on factors such as age, gender, and health status.

Explaining the Decreasing Real Life Insurance Cost

ChatGPT offers several reasons why life insurance rate may go down (with my edit):

  • Improved Health: One of the primary factors that influence life insurance premiums is the health of the policyholder. If you have made positive lifestyle changes that have led to improved health, such as quitting smoking or losing weight, then you may be eligible for lower premiums. Note this is an individual specific reason, although modern medical technologies can certainly benefit anyone.
  • Increased Competition: As more insurance companies enter the market, there is greater competition to offer more affordable policies. This can lead to lower prices for consumers as companies try to attract more business.
  • Lower Risk: Insurance companies base their premiums on risk factors such as age, health, and lifestyle. If these risk factors decrease over time, then insurance companies may lower their premiums accordingly.
  • Advances in Technology: With advancements in medical technology, it has become easier to diagnose and treat various illnesses. As a result, life insurance companies may be more confident in their ability to predict the life expectancy of policyholders, and this can lead to lower premiums. The other reason is the use of technology in underwriting, such as using Google Maps for homeowner policies and wearable devices for monitoring personal fitness.
  • Economic Conditions: Finally, economic conditions can also impact life insurance costs. If interest rates are low, for example, insurance companies may need to lower their premiums in order to remain competitive and attract new policyholders.
Categories
Property Insurance

Do You Really Know the House You Live in?

The Takeaways:

  1. Thousands of buildings in California share a flaw with many buildings collapsed in Turkey and Syria with the non-ductile concrete that does not have much steel reinforcement and holds up poorly in earthquake conditions.
  2. While the number of non-ductile concrete buildings in California are alarming, they aren’t nearly as common as they are in Turkey, primarily because such buildings stopped being erected in the United States after a 1971 earthquake in San Fernando. 
  3. Estimates of California non-ductile buildings range between 7,000  to as many as 17,000 buildings in the highest-risk counties.
  4. Cities in California are actively working to retrofit non-ductile concrete buildings, although one major obstacle is the cost.
  5. We can learn 7 things from the recent Hurricane Ian in Florida: replacing aged roof covering, a fully sealed roof deck, roof to wall connections, windows rated for high wind pressure and debris, unbraced garage door, elevated structures or foundation and having flood vent.

Two Reports on Building Materials You Should Know

I’ve read two recent pieces that I’d like to share with you. The first is more newsworthy and relevant to California, with a title that says: “Some California buildings share a flaw with the ones that fell like ‘pancakes’ in Turkey quake, but similar devastation is unlikely.”

The second is indirectly relevant, as it talks about ways to protect your home in 2023. It is more directly relevant to Florida, as “experts reveal how hurricane mitigation efforts … have created more resilient homes – and how homeowners can further build upon this in 2023.” You must admit that the title is attractive: Who would not want to learn to make their home stronger?

A NASA article has the following words for California: “There’s an old adage (with several variations) that California has four seasons: earthquake, fire, flood and drought. While Californians happily cede the title of Hurricane Capital of America to U.S. East and Gulf coasters, every once in a while, Mother Nature sends a reminder to Southern Californians that they are not completely immune to the whims of tropical cyclones.”

The commonality behind them however is about how to make your home stronger to resist natural disasters like earthquake or hurricane. Although the latter does not happen frequently, all houses will benefit from the extra strength families can add to their beloved building.

Ways to Make Your House Strong

None of the seven ways of protecting a house is mysterious and perhaps all have been heard of before by most Californian homeowners.

The first way is roof covering or to replace aged roof coverings. It is highly expected that intact roof coverings minimize water intrusion, while aged shingles may become unsealed and more prone to damage by high wind. In Florida the term “aged roof” refers to 7-10 year old, although without hurricane the age of shingles can be longer in California.

The second is roof deck, which refers to the last line of defense for preventing water intrusion if the shingles or roof coverings are displaced in a hurricane of storm. Florida experience says a fully sealed roof deck will help minimize interior damage in future hurricane events.

The third is roof to wall connections, although this one is unlikely to be as important as in Florida, where it shows a roof that does not have a connection that fully wraps around the roof truss and connect to the walls is more likely to be lifted completely off the structure in high winds.

Window is the next item. From Hurricane Ian Floridian found that windows rated for high wind pressure and debris impacts are critical to structure survivability, which limit major interior damage and structural failures in Hurricane Ian.

The fifth is garage doors need to be braced, as unbraced garage door can buckle under high wind pressure allowing the interior of the structure to pressurize, putting the home at risk of a major structural failure.

The sixth is foundation. This time with Ian more than 10 feet of storm was recorded. Elevated structures built to current building codes suffered limited damage while structures built directly on the ground were severely damaged.

The last one is flood vent that can be found in many newer homes on the Southwest Florida coast, which helps mitigate foundation failures due to storm surge. The flood vents allow storm surge to move in and out of the structure without creating excessive pressure on the walls.

Categories
Did You Know?

How to Protect Myself During a Trip? What Insurance Will Cover Me?

The Takeaways:

  1. There are numerous ways for your trip to go wrong. Most Americans however are likely not interested in buying trip insurance.
  2. Common reasons for saying “no” to travel insurance include safe trip before, low cost trips and saving money. Safe trip before does not mean safe trip today or tomorrow, as insurance is mostly about covering unexpected events.
  3. Travel insurance mostly protects oneself — during the trip, with coverages ranging from trip cancellation, travel medical insurance, lost or damaged baggage, emergency evacuation and travel accidents.
  4. The most unique feature of travel insurance is not necessarily low coverage payment but short duration: It ends when the trip ends, although sometimes they offer short extension. For this reason, having travel insurance is not enough for most people, as we need longer lasting and more comprehensive insurance like auto insurance, homeowner insurance and life insurance.

The Scaring News from the US Airports

Did you know that roughly 18 guns were seized every day at US airports last year? It is true according to the Transportation Security Administration (TSA) that intercepted 6,542 guns last year, which translated to roughly 18 guns per day, at airport checkpoints across the country. 

Guns are not the only thing to be worried. Today on February 23, 2023, the news says a brutal winter storm is walloping the entire country coast to coast. Flights are cancelled, highways closed, “trapped drivers in cars, knocked out power to hundreds of thousands of people and prompted the first blizzard warning in Southern California in decades — and the worst won’t be over for several days.”

The Low Prevalence of Travel Insurance

Travel insurance is not the most popular choice for most American travelers. In a survey of more than 1,200 Americans planning on traveling (during the pandemic), only 23% would definitely buy insurance and 21% might do so. 56%, the majority, had no plan to buy any travel insurance.

Insurers were still happy to see these figures because the thought was that in this particular study “most imminent travel looks to be family- and friends-oriented — and perhaps less expensive and closer to home — may account for the lack of interest in trip insurance.” 

A more recent study published by Business Insider in 2023 of 971 US adults however shows that explanation is not strong. “About 62% of travelers surveyed did not purchase travel insurance; of those travelers, 35% said their primary reason to forgo insurance was because they’d traveled before and never needed it. About 19% said they didn’t think their trip was expensive enough for insurance, and about 14% said they were trying to save money. About 13% said travel insurance never occurred to them.”

These reasons revealed the typical mindset not just on travel insurance but insurance in general.

Should We Forego Travel Insurance Because We Had Safe Trip Before?

I asked the above question to ChatGPT, and it comes back with the following:

“No, you should not forego travel insurance simply because you have had safe trips before. Even if you have been lucky in the past, unexpected events such as natural disasters, medical emergencies, and cancellations can still occur and ruin your trip. As a rule of thumb, if you are spending more than $5,000 on a trip, it is considered a big-ticket purchase, and travel insurance is recommended to protect your investment.”

I agree that “big ticket” travel plans (those above $5,000) should be covered by travel insurance, although smaller ones should as well. Remember in the earlier report about 19% said they didn’t think their trip was expensive enough for insurance? That is a myth. Short trips are associated with smaller airplanes and there can be cancellation and unexpected events just like big trips.

Considering that the travel insurance cost on average of 6% of the total travel cost, for a trip that costs $200, the travel insurance part only takes $12 from you. This differs significantly from the $300 you would have to pay for a $5,000 trip.

A Deeper Question about Insurance

There is a deeper reason for buying insurance, including travel insurance: Insurance is about unexpected events or accidents, designed to protect us from financial losses resulting from accidents, illnesses, natural disasters, and other unforeseen circumstances.

This is why you still need to buy travel insurance even though your previous trips were all safe.

Ask yourself if you can expect all future trips to be safe just because the previous trips were safe. If the answer is yes, then you don’t need to buy insurance from now on. But of course the answer has to be no, like what they say for investment: Past successes does not guarantee future success.

What about expected events? Well, most of them will NOT be covered by insurance. You know your car needs maintenance in the future, so your car insurance will not cover that. Similarly, you know you will need to replace your roof due to normal wear and tear, so your homeowner policy will not cover that.

This is not saying insurance excludes all expected events. For example, some health insurance policies may cover routine medical care or preventative services, even though these events are expected to occur. This is risk management of your insurer because routine medical checkups help reduce the loss for them — and for you.

What Do You Get from Travel Insurance

Once again from ChatGPT we have the following list:

  • Travel Medical Insurance: This type of insurance provides coverage for medical emergencies and expenses that may arise while you are traveling. It can cover things like doctor visits, hospitalization, and emergency medical transportation that’s not covered by your regular health insurance plan.
  • Trip Cancellation Insurance: This type of insurance provides coverage if you need to cancel your trip due to an unforeseen circumstance, such as a medical emergency or a natural disaster. Sometimes “cancel for any reason” is provided as well.
  • Personal Accident Insurance: This type of insurance provides coverage for accidental injury or death that occurs during your trip. This is a first-party coverage, meaning for yourself rather than for anyone else.
  • Emergency Evacuation Insurance: This type of insurance provides coverage for emergency medical evacuation if you are injured or become seriously ill while traveling and need to be transported to a medical facility. You could be taken to the nearest hospital or flown home if necessary when you’re injured, or you get sick on a trip.
  • Travel Insurance with Medical Coverage: This is a comprehensive insurance policy that combines several types of coverage, including medical coverage, trip cancellation coverage, and other travel-related coverage. It provides more extensive protection than a single policy and can be customized to fit your specific needs.

In many ways, travel insurance is like car insurance with a focus on self-protection rather than protecting “third party” or anyone else involved in an accident.

Note in addition to the above list, other coverages are possible like lost, stolen or damaged baggage & personal belongings, rental car damage and even finding a lawyer abroad.

Cancellation Insurance vs Free Hotel Night(s)

Don’t confuse trip cancellation insurance with free hotel night(s) provided by airlines. The former means you can get your booking money back even for non-refundable expenses like airfare, hotel bookings, and tours if for unexpected reasons such as illness, injury, death in the family, natural disaster, or other covered reasons you had to cancel your trip. The coverage may also apply if you have to interrupt your trip and return home early due to covered reasons.

Cancellation insurance can be purchased as a standalone policy or as part of a comprehensive travel insurance plan.

On the other hand, free hotel night(s) provided by airlines when a flight was cancelled has little to do with insurance. instead it is a benefit by some airlines to their customers who experience flight delays or cancellations due to reasons within the airline’s control, such as mechanical issues, crew scheduling, or weather. In reality, airlines do that even for reasons beyond their control, like bad weather conditions.

Travel Insurance for Foreign Trips

What about your plan for a foreign trip? I asked ChatGPT and here is what I got:

“If you are planning to travel abroad, it is important to consider purchasing travel insurance to protect yourself in case of injury or illness during your trip. Here are some types of insurance that can provide coverage for injuries sustained during a foreign trip:”

  • Travel Medical Insurance: This type of insurance provides coverage for medical expenses that you might incur while traveling abroad. It typically includes coverage for emergency medical treatment, hospitalization, emergency medical evacuation, and repatriation of remains in case of death.
  • Accidental Death and Dismemberment Insurance: This type of insurance provides coverage for accidental death or permanent disability resulting from an accident that occurs during your trip.
  • Personal Liability Insurance: This type of insurance provides coverage for damages or injuries that you might accidentally cause to others while traveling abroad.
  • Trip Cancellation Insurance: This type of insurance provides coverage for non-refundable expenses if you have to cancel your trip due to a covered reason, such as illness or injury.

As you can see, the coverage are basically the same as domestic coverages, even though the way ChatGPT presented may have created an impression that only foreign travel insurance will cover accidental death and dismemberment insurance as well as personal liability insurance. The truth is both domestic and foreign travel insurance can make those coverage available.

As the news told us earlier, death or dismemberment insurance can be even more important in this country than in foreign trips given the number of guns intercepted at the airports within this country.

Looking at the Big Picture

Do not forget the big picture in which travel insurance is just a small part, and normal and travel insurance can be related to each other.

If your “normal” liability insurance policy includes coverage for personal liability, it may cover you while you are traveling. For example, if you accidentally injured someone while on vacation or damaged someone else’s property, your liability insurance may cover those for you. However, if you are traveling internationally, your liability insurance policy may not provide coverage in certain countries or may have limited coverage.

Life insurance may be related to travel insurance as well. Some travel insurance policies may offer coverage for accidental death or dismemberment, which could be seen as a form of life insurance. Additionally, some life insurance policies may also offer travel benefits, such as emergency medical coverage while traveling abroad.

There will be overlapping between the two. That said, life insurance is a long-term insurance designed to provide financial protection to your loved ones in the event of your death, while travel insurance is designed for the traveler. Life insurance is also intended to cover a broad range of expenses, such as funeral costs, outstanding debts, and the loss of income that your loved ones would experience after your death.

It is not that travel insurance policies only pay small amounts in the event of financial loss. The payment amount for death in travel insurance for example can range from a few thousand dollars to several hundred thousand dollars, depending on the policy and the level of coverage you have chosen.

On the other hand, some small life insurance policies, especially term life insurance (those covering for a fixed number of years up to 30 years), typically have face values (i.e., the amount they will pay your beneficiaries or your loved ones) starting at around $25,000 or $50,000.

So payment amount is not crucial as one can always pick and choose the amount of payment desired for both travel and life insurance. The most important feature for travel insurance is its relatively short coverage duration. Once the trip is over then typically the coverage is over, although some travel insurance policies may have a coverage extension period that provides limited coverage for a specified number of days after the trip has ended. For this reason, we typically need both travel insurance and life insurance.

Categories
Did You Know?

Financial Disclosure Is Crucial for All, Here Is Why

The Takeaways:

  1. Mormon church and affiliated non-profit settled SEC charge with $5 million for hiding its vast investment portfolio, valued at $32 billion in 2018.
  2. The requirement to file timely and accurate information on Forms 13F applies to all institutional investment managers, including non-profit and charitable organizations.
  3. Although securities claims are major coverage under the Directors & Officers (D&O) insurance policies, many insurance contracts have exclusions, limits or deductions that make cases like SEC settlement difficult to receive D&O payment.

The News Involving the Mormon Church

Today on February 21, 2023, news has it that “The Church of Jesus Christ of Latter-day Saints, the leading Mormon denomination, and a nonprofit operating under it will pay $5 million to settle SEC charges that the church failed to disclose its relationship to shell companies.”

Turns out that “Ensign Peak Advisers Inc., the Utah-based nonprofit that manages the church’s investments, hid the size of the church’s equity portfolio under 13 limited liability companies — including 12 “clone LLCs” — from 1997 through 2019.”

“The nonprofit also failed to file Forms 13F, which are required to disclose the value of certain securities overseen by investment managers, according to the SEC. The forms were filed in the name of the shell companies, instead of Ensign Peak Advisers.”

More Interesting Details of the Case

The above CNBC report missed a few interesting details that were told by this report from Forbes. First of all, the whole case was disclosed by a whistleblower, David Nielsen—a member of the church and former Ensign Peak investment manager, who filed a complaint to the IRS in November 2019 and made the church agree to pay $1 million, while Ensign Peak agreed to pay $4 million.

Another interesting detail: The same whistleblower Nielsen “tipped the IRS that the firm had amassed $100 billion in a little-known charitable fund it collected from donations. None of that money had been spent for 20 years.”

Even more interesting is the potential motive behind hiding the huge funds. “Nielsen said the firm’s leader had instead suggested to staff that the church intended to keep the money for the ‘second coming of Christ,’ which, according to Mormon teachings, will be marked by war.”

How interesting is that for the church to prepare for highly unusual time when Chris himself is coming back to the world.

Similar Case Before

Turns out that this is not the first time Mormon church got itself into trouble with SEC. ChatGPT tells us another similar but smaller case:

In September 2021, the Church of Jesus Christ of Latter-day Saints (commonly known as the Mormon church) reached a settlement with the U.S. Securities and Exchange Commission (SEC) regarding allegations that the church had misled its members about a $100 billion investment fund it had established. As part of the settlement, the church agreed to pay $250,000 to the SEC.

The SEC had alleged that the church had created a non-profit entity, Ensign Peak Advisors, to manage its investment funds and had told members that the funds were being used for charitable purposes. However, the SEC claimed that the church had not disclosed that it was also using the funds for other purposes, such as building a shopping mall in Salt Lake City.

The church denied any wrongdoing in the settlement and stated that it was happy to put the matter behind it. The settlement does not include any admission of guilt or liability on the part of the church.

Nobody and No Cause Can Justify Financial Disguise

The question is, can a case of “noble” cause or causes (e.g., reserving a huge fund for the second coming of Jesus Chris) be used to justify for financial in-disclosure?  

The answer must be “No,” otherwise there won’t be SEC action and payment of million dollars for settlement.  

More generally, the same laws and regulations must apply to everyone in the society to make it powerful. If there is to be exceptions, they must be pre-installed and pre-stated. Otherwise the laws will have no “teeth” and people will find all kinds of excuses to be exempted from the laws.

D&O or E&O, Which Is Right for Me?

Most if not all entities (organizations, firms, agencies, even individuals) will buy commercial insurance, which can mean either Directors & Officers (D&O) insurance or Errors and Omissions (E&O) insurance. Both D&O and E&O are liability insurance, which is a type of insurance protecting individuals or businesses from being legally liable for something such as malpractice, injury, or negligence — but not intentional wrongdoings.

How do these two insurances differ from each other?

D&O insurance, which again stands for “Directors and Officers” insurance, is designed to protect the personal assets of company directors and officers in the event that they are sued for a wrongful act in their capacity as a director or officer of the company. It typically covers claims related to alleged breaches of fiduciary duty, neglect, errors or omissions, or misleading statements made by the insured person in their capacity as a director or officer of the company. D&O insurance is meant to protect individuals and organizations from management decisions that result in legal actions against them.

On the other hand, E&O insurance, also known as “Errors and Omissions” insurance, is designed to protect businesses from financial losses due to claims of inadequate or negligent work. It covers claims related to professional services, such as errors or omissions made by a professional, breach of duty, or failure to perform professional services. E&O insurance is typically purchased by businesses that provide services to clients, such as lawyers, doctors, or financial advisors.

Simply put, D&O is covering decision makers of an entity, while E&O is covering the entire entity.

Notice that some professionals just have oneself plus one or two staff members, like an attorney’s office or a financial service agency, protecting the entire entity therefore is like protecting the one principal.

Is Mormon Church Likely to Be Covered?

The Mormon church case fits D&O insurance better because it is the decision makers of the church that is directly responsible for the financial disguise. Now that the Church paid its money to SEC, could it file a claim with the insurer to ask payment for its loss of multi-million dollars? More importantly, will the insurer agree to pay for the Church?

This is a good case to ask ChatGPT for, which gives the following answer:

“It depends on the specific terms and conditions of the insurance policy in question.

“Some insurance policies may provide coverage for SEC settlements or fines, while others may not. Typically, insurance policies will have exclusions for intentional or criminal acts, which may include securities fraud or other violations of securities laws that could lead to SEC settlements.

“Additionally, even if an insurance policy does provide coverage for SEC settlements, the coverage may have limits or deductibles that could affect the amount of reimbursement the insured entity ultimately receives.

“If an entity is concerned about whether its insurance policy would cover SEC settlements, it should review the policy’s terms and conditions, and consult with its insurance broker or legal counsel.”

Basically the answer says the church may have a hard time to ask for D&O payment from its insurer. ChatGPT is right that we really need to take a look at the original policy to decide.

Difficulties with Securities Claims

Assuming the Church bought D&O insurance, then “securities claims” are a common type that can be covered under D&O insurance.

Securities claims generally arise when shareholders or investors allege that a company or its directors and officers have made misrepresentations or omissions in the company’s financial statements, public disclosures, or other communications related to the company’s securities. These claims can also arise from alleged violations of securities laws or regulations, such as insider trading or market manipulation.

The above statement fits well with the Mormon case: The Church did misrepresent the financial statements, did not follow the public disclosure rules and regulations and potentially violated securities laws or regulations, which explain the SEC involvement.

Under a D&O insurance policy, coverage for securities claims typically includes legal defense costs and damages that may be awarded to claimants in lawsuits or settlements. Of course, as pointed out by ChatGPT earlier, coverage may be subject to certain exclusions and limitations, depending on the specific terms of the policy.

Now let’s say the D&O policy the Mormon church bought did not exclude legal defense costs, meaning the insurance company must pay to cover the legal cost for the church. The only complication is that the case never went to court but settled outside the court. Should the insurer pay the $5 million to cover the church?

We don’t know the answer for sure because we have no access to the original insurance contract or policy. However, by looking at similar cases it does not seem good that the D&O insurer will pay that $5 million. Here is a historical case similar to the case we are talking about.

This legal article discusses a case involving the auto rental firm Hertz Global Holdings in 2013 that was settled in 2021.

A plaintiff (i.e., the one who filed lawsuit) shareholder filed a securities class action lawsuit against Hertz and certain of its directors and officers in the District of New Jersey. In September 2014, the SEC issues a formal order of investigation that specifically stated that the SEC had “information that tends to show” violations of the securities laws and authorized SEC officials to issue subpoenas for witnesses and documents. In December 2018, Hertz entered a settlement agreement with the SEC, which provided for a $16 million penalty. Hertz claimed to have incurred $27 million in connection with the investigation. Hertz sought to have its D&O insurers reimburse the company for its costs incurred in connection with the investigation.

Unsurprisingly, Hertz’s insurers denied coverage for the company’s investigative costs. The defendant insurers filed a motion to dismiss the coverage lawsuit on the grounds that the company had failed to state a claim for breach of contract.

Guess what made the insurer so sure and won in the end? Turned out there was a phrase in the insurance policy that defined securities claim specifically as “a Claim, other than an investigation of an Organization … alleging” violation of securities laws or regulations. This is the language that used by the judge to against Hertz and in favor of the insurer. The judge made it clear that if something is specifically excluded in writing, it must be honored in the court of law. Simple like that. The Mormon case does not fit exactly with Hertz’s because this time we have a whistleblower and the SEC investigation never really started before the church decided to settle by paying the money. What the insurer is most likely to argue is that the church intentionally committed something wrongdoing, which is excluded by most, if not all, insurance policies.

Categories
Property Insurance

The Risks in Owning a Tesla You Should Know

The Takeaways:

  1. Tesla has recently recalled 362,758 vehicles for flaws with its “full self-driving” software.
  2. Risks of battery safety, cyber vulnerabilities, and high cost of entry, these are the three commonly listed barriers, to which I would add two more: software immaturity and high maintenance and insurance costs.
  3. This is not discouraging the purchase of EVs, as I have faith in the new technology, just a friendly reminder that EVs are not perfect but will get better and safer as we speak.  

The Good & Bad News for Tesla

All new vehicle sales in California last year dipped 10% (nationwide it dropped by 7.9%). Yet the hybrid market share continues to steadily grow, the report from the California New Car Dealers Association shows. The California hybrid/EV market share was 31.1 % last year, according to the association.

Yet on February 16, 2023, news had it that “Tesla is recalling 362,758 vehicles because a version of its “full self-driving” software may increase the risk of crashes, according to the National Highway Traffic Safety Administration in response to a notice Tesla sent the agency on Wednesday.”

More specifically, the full self-driving software may cause the vehicles to travel “straight through an intersection while in a turn-only lane, [enter] a stop sign-controlled intersection without coming to a complete stop, or [proceed] into an intersection during a steady yellow traffic signal without due caution.” In addition, “the system may not respond sufficiently to changes in posted speed limits, or not adequately account for the driver’s adjustment of the vehicle’s speed to exceed posted speed limits.”

The recall affects 2016-2023 Model S and Model X vehicles; 2017-2023 Model 3 vehicles; and 2020-2023 Model Y vehicles.

General Risks with EV

As with any mode of transportation, there are risks associated with owning an electric vehicle. One risk highlighted by an article in Forbes is battery safety. While electric vehicle batteries are generally safe, there are still potential risks that owners should be aware of, such as thermal runaway and fire hazards. It’s recommended that owners follow smart everyday battery safety practices to mitigate these risks.

As this article of Insurance Journal points out in November 2022, “A key concern with EVs is fire from lithium batteries.” Most of us have had the experience that when you get to the airports, one of the first things at the safety check-in spot was to take out your lithium batteries from your electronic devices. This is because the spontaneous fire exposure risks that first-generation lithium batteries presented.

But what you may not be aware of is risk associated with the growing number of E-bikes.

“The National Law Review recently published a warning of a ‘recent surge in electric bike fire in New York City,’ listing four causes of fires from the lithium batteries in E-bikes: design flaws; battery damage; exposure to heat; and use of the wrong charger. Storing and charging electric bikes and scooters in homes and apartments thus exposes occupants to a potential severe fire risk.”

“In the last 18 months, there were over two dozen lithium fires investigated in New York City public housing buildings. The increased frequency and severity of scooter and E-bike fires has led the New York City Housing Authority to consider a ban of these vehicles in public housing.”

But E-bike fire hazard is no comparison with that of EVs, because “(t)he size of the batteries in EVs, as well as the combustible materials that make up the automobile, provide both a fuel source and source of ignition.” It’s like putting matches next to a heap of explosions — although I’m sure precautious steps and designs have taken that into account by now.

Furthermore, the Insurance Journal article tells us that EV fires “can be very difficult to extinguish, and water can have little firefighting impact. Vehicles have been observed in some cases to reignite after they have been towed away.”

Things that can be done by EV owners include parking EV away from combustible structures or other vehicles, especially when charging. If an EV is in an accident, an immediate inspection of its electrical system and batteries is necessary and highly recommended. Any impact could damage the battery and/or electrical system, leaving the EV more vulnerable to ignition.

A Surprising Risk with EV

Another risk associated with electric vehicles is cyber vulnerabilities. Many owners perhaps do not realize this, but it is true. As electric vehicles become increasingly connected, they become more susceptible to cyber-attacks, system outages, and other issues. There have already been product recalls in the automotive sector as a result of cyber security issues. This could also have implications for insurance claims, as the complexity of these issues could make it difficult to determine liability.

A Financial Risk

Finally, one of the present-day disadvantages of electric cars is their cost. Electric vehicles are generally more expensive than traditional gasoline vehicles, largely due to the cost of the battery. Modern batteries require lithium, which can only be mined in a handful of countries, leading to potential supply chain issues that could drive up the cost of electric vehicles. This high cost could be a risk for some potential owners who may not be able to afford the prohibitive entry price of electric cars.

An Insurance Headache?

This report by Insurance Journal brings another risk to our attention: the cost to repair. A new report “shows sales of electric vehicles in California rose by more than 50% last year from 2021 with an estimated increase in market share of 17.1%.”

Even in California, EVs are still relatively few, which means scarcity of replacement parts. Both push up repair costs.

The most recent data on EV claim frequency and severity from 2020 shows the frequency of crashes tend to be lower because of the advanced driver-assistance features included in most of these new vehicles. However, the figures show collision severity is higher.

A report from Verisk last year shows the cost of insuring electric vehicles tends to be higher than gas-powered vehicles. 

Mercury Insurance, a large California auto insurer, reports EV repair costs can be nearly 20% higher than the average vehicle repair cost on first-party coverages, such as collision.

“EVs are full of technologies that go beyond simple auto maintenance and repair,” said Justin Yoshizawa, Mercury’s director of product management. “So many of these features – like self-driving, safety, entertainment and comfort tech – are unfamiliar ground to many technicians and, even with familiarity, more time is required to evaluate and address potential issues with such features. It makes EVs costly to repair. And that’s not even taking into account the ongoing constraints of supply chain issues and labor.”

Categories
Liabilities Insurance

Am I Covered for Covid-19 Under Workers’ Compensation Insurance?

The Takeaways:

  1. There is no universal answer to the title question, coverage depends on where you live and your particular conditions.
  2. If you are a federal employee, you are mostly in luck as The American Rescue Plan Act of 2021 (ARPA) makes it much easier for federal workers diagnosed with COVID-19 to establish coverage under the Federal Employees Compensation Act (FECA).
  3. In California, all workers, not just essential workers, will extend workers compensation coverage to include COVID-19 as a work-related illness.
  4. Some employers are required by law to provide paid sick leave or other benefits for COVID-19-related absences, regardless of whether the infection is deemed work-related or not.

What Does It Mean I’m Covered for Covid-19?

If COVID-19 becomes coverable in Workers Compensation insurance, it means that workers who contract the virus in the course of their employment may be eligible for compensation benefits.

According to National Conference of State Legislatures or NCSL on January 24, 2022,

“Beyond providing medical treatment at no cost to the employee, workers’ compensation also provides wage replacement benefits for lost wages resulting from time away from work. If a worker dies due to a qualifying condition, the worker’s family could be eligible for financial death benefits.”

In addition, “Most states have a dedicated workers’ compensation court system where judges make the final decision on claims and benefits awarded.”

Am I Qualified for Covid-19 Coverage?

The criterion for eligibility varies depending on the state and the specific insurance policy. In some states, such as Washington, COVID-19 claims are generally denied unless the worker can demonstrate that their contraction of the disease was not incidental to the workplace or common to all employment.

In other cases, such as under the Federal Employees’ Compensation Act (FECA), compensation is payable if the worker can demonstrate they have COVID-19 via a positive test result or a medical professional’s diagnosis, excluding home tests and exposure without a COVID-19 diagnosis.

Some states have amended their policies to include a presumption that COVID-19 infections in certain workers are work-related and therefore covered under workers compensation, making it easier for those workers to file successful claims.

A common approach is to amend state policy so that COVID-19 infections in certain workers are presumed to be work-related and covered under workers compensation. This presumption places the burden on the employer and insurer to prove that the infection was not work-related making it easier for those workers to file successful claims.

Some employers and insurers have raised concerns that these presumption policies will increase insurance costs for employers at a time when businesses are already facing significant financial challenges.

National Conference of State Legislatures or NCSL summarized on January 24, 2022,

“Every state has its own unique workers’ compensation policy landscape. States apply varying coverage requirements and standards based on industry, occupation, and the size and structure of a business.”

Generally, workers’ compensation does not cover routine community-spread illnesses like a cold or the flu because they usually cannot be directly tied to the workplace. Some states have made exceptions for certain workers who develop chronic illnesses, like cancer, resulting from repeated exposure to harmful materials and environments.

According to the National Council on Compensation Insurance, prior to the COVID-19, at least 19 states had policies stating that when firefighters and other first responders develop lung and respiratory illnesses, those conditions are presumed to be work-related and covered under workers’ compensation. It is unclear if those existing policies would include COVID-19 illnesses.

The Unique Challenge of Covid-19

The COVID-19 pandemic presents a unique circumstance where the many jobs that are not typically considered hazardous have suddenly become very dangerous for the workers. Workers deemed essential including health care workers, mass transit operators and grocery store workers are at a high risk of exposure to the virus while at work.

States are taking action to extend workers’ compensation coverage to include first responders and health care workers impacted by COVID-19.

In total, 28 states and Puerto Rico have taken action to extend workers compensation coverage to include COVID-19 as a work-related illness. 11 states have enacted legislation creating a presumption of coverage for various types of workers. Utah and Wisconsin limit the coverage to first responders and health care workers.

Illinois, New Jersey and Vermont cover all essential workers while California and Wyoming cover all workers, which is unsurprisingly more generous than other states. States have also used executive branch authority to implement presumption policies for first responders and health care workers as a part of their COVID-19 emergency responses. However, many of those executive orders have expired following the end of the state of emergency in certain states. 

Categories
Liabilities Insurance

Do You Know What Is “Silent Cyber?”

The Takeaways:

  1. Colonial Pipeline ransomware attack was one of the best known cyber insecurity incidents in the US. It potentially cost the firm multiple millions on ransom and disruption of operation for days with the largest fuel pipeline system.
  2. Cyber security threats range from phishing, ransomware, malware, Distributed Denial of Service, Advanced Persistent Threats, Zero-day exploit, social engineer, insider threat and Internet of Things (IoT) threat.
  3. The best approach to dealing with cyber security is to do both risk management and risk transfer.
  4. Risk management covers fields of identifying vulnerabilities (knowing where weaknesses are), prioritizing risks (knowing which risk brings bigger loss), developing risk mitigation strategies (firewalls, access control, incidence response plans and regular testing), monitoring for threat (staying up to date with the latest threat) and continuing improvement (regular review, invest in new technologies).
  5. Risk transfer means purchasing cyber insurance, which helps companies hedge against the potentially devastating effects of cybercrimes such as malware, ransomware, distributed denial-of-service (DDoS) attacks, or any other method used to compromise a network and sensitive data. It cover the costs associated with a cyberattack, including loss of business income due to the attack and additional direct costs such as forensic expenses. In some cases, policies can even cover losses from an attack on a third-party such as a vendor or partner. It can also incentivize companies to implement stronger cybersecurity measures as many insurance policies require businesses to meet certain security standards in order to be eligible for coverage.
  6. It’s worth noting that traditional insurance policies like property liability, general liability, or directors and officers insurance, may not cover some of the consequences of a cyber-attack. This concept is known as “Silent Cyber,” where traditional insurance policies are silent on whether they will cover cyber-related losses.
  7. Cyber insurance is designed to protect companies from these primary risks through four distinct insuring agreements: first-party coverage, third-party coverage, crime coverage, and cyber terrorism coverage.

The Cyber Insecurity Story

On May 13, 2021, Colonial Pipeline, the largest fuel pipeline system in the United States, allegedly paid an unknown amount to a ransomware group named DarkSide, despite FBI’s advice for not paying it.

For those not familiar with ransomware attack, it is an attack of criminal groups holding data hostage until the victim pays a certain amount of money as they demanded. In this case, the demanded sum was nearly $5 million, and the CEO of Colonial Pipeline said he authorized a ransom payment of $4.4 million.

The attack resulted in the company shutting down its operations of 5,500 miles of pipeline, carrying 45 percent of the East Coast’s fuel supplies for several days, which caused fuel shortages and price increases in many parts of the country, a move that has led to panic buying and massive lines at gas pumps.

As New York Times pointed out, “In recent months, officials note, the frequency and sophistication of ransomware attacks have soared, crippling victims as varied as the District of Columbia police department, hospitals treating coronavirus patients and manufacturers, which frequently try to hide the attacks out of embarrassment that their systems were pierced.”

Turns out that paying ransom in cryptocurrencies is a bad idea as it’s harder to trace perpetrators and exacerbated attacks “’hitting soft targets like hospitals and municipalities, where losing access has real-world consequences and makes victims more likely to pay,’ said Ulf Lindqvist, a director at SRI International who specializes in threats to industrial systems. ‘We are talking about the risk of injury or death, not just losing your email.’”

Cybersecurity Top Threats

A CNN Report tells us that “CISA and the FBI confirmed that DarkSide was used as a ‘ransomware-as-a-service,’ in which developers of the ransomware receive a share of the proceeds from the cybercriminal actors who deploy it, known as ‘affiliates.’” In other words, people are now calling themselves ransomware professionals offering specialized “services” for any clients with such a need.

Now is the good time to look at the top cybersecurity threats. ChatGPT lists the major types, to which I did addition search to add more details to each:

Phishing: This is a type of cyber-attack that can target both individuals and businesses. Phishing starts by an attacker sending fraudulent emails, text messages, or other electronic communications that appear to be from a legitimate source in order to trick the recipient into providing sensitive information such as login credentials, credit card numbers, or other personal data.

Phishing is also one of the most common cybersecurity threats. According to a report by Verizon, 36% of data breaches involve phishing. It is also relatively easy to execute through email, social media, SMS, or phone calls.

Ransomware (like in the Colonial Pipeline case): This is a type of malware that encrypts a victim’s files and demands a ransom payment in exchange for the decryption key.

Ransomware is a type of malware that has become increasingly common in recent years. According to a report by Cybersecurity Ventures, ransomware damages will cost the world $20 billion in 2021, up from $11.5 billion in 2019. The report also estimates that a business will fall victim to a ransomware attack every 11 seconds in 2021, up from every 14 seconds in 2019.

In addition, ransomware attacks have become more sophisticated and can now target specific organizations and industries.

It is important for individuals and organizations to take steps to protect themselves against ransomware, including regularly backing up important data, using strong passwords, and implementing security software and practices that can help prevent and detect attacks.

Malware, to which ransomware is one type, is any software that is designed to harm, disrupt, or gain unauthorized access to a computer system. It can include viruses, worms, Trojans, spyware, and adware.

Malware is a significant threat to individuals, businesses, and governments and can cause a wide range of problems, including theft of sensitive data, disruption of critical systems, financial losses, and damage to an organization’s reputation.

I should know because I have been hit by malware myself. It’s not a big deal but it switched my search engine from Google Chrome to Yahoo — without my knowledge. I finally called Microsoft supports and they had to use a tool to access my computer screens and after 2 hours they still cannot change the machine back to Chrome. In the end, I had to set up another new login account to move everything over in order to be able to use Chrome again.  

Malware can lead to legal liabilities and compliance violations, as well as loss of customer trust. According to a report by AV-TEST, there were over 700 million malware instances in 2020, a significant increase from previous years and highlights the growing threat of malware.

In addition, the report notes that the majority of malware is designed to steal data or gain unauthorized access to systems, making it a serious threat to organizations of all sizes.

Distributed Denial of Service (DDoS) attacks are designed to overwhelm a target system with traffic, making it unavailable to its intended users. An attacker floods a website, server, or network with a large amount of traffic, overwhelming its ability to respond to legitimate requests.

Imagine you are a Prime member of Amazon and one day you want to log onto your account to order something there. DDoS however could make the website appearing too busy to allow your access to the account.

A DDoS attack is typically carried out by a network of compromised devices, known as a botnet, that are controlled by the attacker. These devices can include computers, servers, routers, and even IoT devices. The attacker can use various methods to gain control of these devices, such as exploiting vulnerabilities or using social engineering tactics.

Needless to say, DDoS attacks can have serious consequences for businesses and organizations, such as loss of revenue, damage to reputation, and legal liabilities. In addition, DDoS attacks are often used as a distraction or smokescreen for other types of attacks, such as data theft or malware installation.

Zero-day exploits are a funny name because they are vulnerabilities in software or hardware that are unknown to the legitimate owners and are exploited by attackers before a patch or update is released. “Zero day” means threat discovered before the vendor or programmer is made aware of it.

In recent news, Apple released updates to its operating systems and Safari browser to fix a zero-day vulnerability in its WebKit browser engine that was actively being exploited.

Hackers like zero-day exploits as they can provide a way to gain access to sensitive data, systems, or networks without being detected. Because there is no patch or fix for the vulnerability, organizations may not be aware of the threat until it has already been exploited.

Keep in mind that it is always a game of time to see who moves faster than others.

Insider threats are threats that come from within an organization, such as employees or contractors who have access to sensitive information and use it for malicious purposes.

Social engineering is a technique used by attackers to manipulate people into revealing sensitive information or performing an action that is against their best interests. This type of attack usually involves psychological manipulation or deception rather than exploiting technical vulnerabilities.

Cloud securities are becoming more complex, such as data breaches, insecure APIs, and unauthorized access as the use of cloud service increases.

Internet of Things (IoT) securities are vulnerable to attacks due to their limited security features and the lack of standardization in IoT security protocols.

How Risk Management Helps Reduce Cyber Risk

Risk management is a process that helps entities and individuals identify, assess, and prioritize risks, and then implement strategies to mitigate those risks. Risk management is a key component of an effective cybersecurity strategy and can help reduce cyber risk in several ways:

  • Identifying vulnerabilities: Through risk assessments, entities and individuals can identify potential vulnerabilities in their systems, networks, and processes that could be exploited by cyber-attackers. By knowing these vulnerabilities, they can take steps to address them, such as implementing stronger passwords, regularly updating software, and conducting employee training.
  • Prioritizing risks: Not all risks are created equal, and risk management can help entities and individuals prioritize which risks addressing first. This ensures that resources are used most effectively to mitigate the most significant risks.
  • Developing risk mitigation strategies: Once risks have been identified and prioritized, entities and individuals can develop strategies to mitigate those risks. This may include implementing technical controls such as firewalls and intrusion detection systems, implementing policies and procedures such as access controls and incident response plans, and regularly testing and reviewing those controls.
  • Monitoring for threats: Risk management also involves ongoing monitoring for new threats and vulnerabilities. This allows entities and individuals to stay up-to-date with the latest threats and adjust their risk management strategies accordingly.
  • Continual improvement: Risk management is an ongoing process, and it requires continual improvement to stay effective. Entities and individuals should regularly review and update their risk management strategies to ensure they are keeping up with evolving threats and new technologies.

Why Firms and Individuals Need Cybersecurity Insurance

Cybersecurity insurance, also known as cyber insurance or cyber liability insurance, can help entities and individuals in several ways:

  • Financial protection: Cybersecurity insurance can provide financial protection in the event of a cyber-attack. It can cover the costs associated with data breaches, such as legal fees, forensic investigation expenses, and notification costs. It may also cover costs related to business interruption, lost income, and damage to computer systems.
  • Risk management: Cybersecurity insurance can also help entities and individuals manage risk by providing resources and tools to prevent cyber-attacks from occurring in the first place. Many policies offer risk assessments, cybersecurity training, and access to cybersecurity experts to help organizations better understand their risks and mitigate them.
  • Reputation protection: Cybersecurity insurance can help entities and individuals protect their reputation in the event of a cyber-attack. Some policies may cover the costs of public relations and crisis management, helping to minimize the damage to an organization’s reputation.
  • Compliance: Many industries have regulations and compliance requirements around data protection, and cybersecurity insurance can help ensure compliance by covering the costs of regulatory fines and penalties.
  • Peace of mind: Cyber-attacks can be complex and costly, and cybersecurity insurance can provide peace of mind knowing that there is a plan in place to help mitigate the damages should an attack occur. It can also help organizations and individuals feel more confident in their cybersecurity strategies and risk management plans.

What Does Cyber Insurance Cover?

Cyber insurance works similarly to other types of insurance. Entities or individuals purchase a policy from an insurance provider, pay a premium, and in the event of a covered cyber-attack, the insurance company provides financial assistance to help mitigate the damages.

The specific details of cyber insurance policies can vary depending on the insurance provider and the policy purchased, but there are a few key elements that are common to most policies:

  1. Network security and privacy liability – this coverage can include both first party (i.e., yourself as the policyholder, such as costs related to data breaches, such as legal expenses, notification costs, and credit monitoring services) and third-party (i.e., someone else) who suffers losses due to damages covered by the policy.
  2. Network business interruption – this coverage can protect a company from lost income due to a cyber-attack that disrupts business operations. This is first party protection for yourself.
  3. Media liability – this coverage can protect a company from claims of copyright infringement, defamation, or other types of media-related liability arising from the company’s website or social media activities. Again this is first party protection.

Errors and omissions – this coverage can protect a company from claims related to errors or omissions in the services or advice provided to customers in the course of doing business.

Categories
Did You Know?

When a State Has 80% Homeowners Lawsuits in the Country, How Can We Do Better in Risk Management?

The Takeaways:

  1. Risks are inevitable, losses don’t have to be — if we do risk management right.
  2. One-way attorney fees and assignment of benefits (AOB) are the two big legal loopholes pushing up insurance cost and lowering down private insurance affordability and availability in Florida.
  3. Four technological platforms or tools are very useful in risk management: ChatGPT, Smart Contract, Internet of Things (IoT) & Tango. Together they have the potential to revolutionize insurance business by significantly reducing insurance costs and increasing fare & efficient insurance coverage.
  4. ChatGPT will be trained to read and explain lengthy and complicated legal documents such that ordinary citizens can quickly understand the gist of a 200-page contract. This will significantly reduce the currently indispensable role of human attorneys (they may be needed to proof check the ChatGPT answer but that should not take very long.)
  5. Another ChatGPT development is customized, always on, mobile and industry- or even firm-specific ChatGPT. The program will be locally pre-trained by records of past risks and past losses, and then provide intelligent and insightful answers to inquiries of all employees in dealing with new but similar problems.
  6. Smart contract associated with blockchain will effectively reduce the problem of legal system abuse, over-crowed or jammed court rooms, long waiting lists of scheduled litigations — by drafting really smarter contracts that are filled with very detailed, context specific “what if” terms and conditions (ChatGPT can help draft and interpret the document), taking into account all relevant historical cases and eliminating extra spaces for misinterpretation and post hoc litigation, while keeping the feature of automatic execution of a predetermined agreement.
  7. Internet of Things (IoT) will establish a field monitoring network at critical junctions of business operation to record objective evidence admissible to the court of law, deterring frivolous lawsuits and prevent predatory practices of trial attorneys.
  8. Tango is the easiest and most intuitive training tool for employees by providing step by step guides with intuitive screenshots every step of the way that everyone can understand and easy to follow. In the future new employee orientations will be mostly done by watching Tango generated PDF files. Numerous risk management field guides can be developed with context specific Tango flowcharts to reduce the chances of misbehavior and mishandling.

This is a more detailed (and longer) version of my proposal for the “In2Risk23” Conference to be held on October 5-7 in Washington D.C. by the CPCU Society of the Insurance Information Institute or the Triple-I as it is called.  

Bad & Then Good News from Florida

Don’t get me wrong, I only have California state insurance (and financial) license so what happens in Florida does not really concern me. Yet insurance everywhere bears similarities, and it doesn’t hurt to learn from the mistakes in another big state like Florida.

The Insurance Information Institute (Triple I), one of my favorite sources of insurance related information, has recently issued a two page news brief on Florida Property /Casualty (P/C) Insurance crisis. It tells us the bad news first, and then some good news.

Perhaps the best way to start a story is by providing some quick statistics: “Florida accounts for nearly 80% of the nation’s homeowners’ insurance lawsuits, but only 9% of all U.S. homeowners’ insurance claims are filed.”

Wow, there are disproportionally way more insurance lawsuits than other states adding together! As a result of excessive or runaway lawsuits, it “costs every Florida household more than $5,000, and the state more than 173,000 jobs annually,” according to the American Tort Reform Foundation’s “Judicial Hellhole” report.

So what’s going on here?

“Legal system abuse and misuse of assignment of benefits ‘are creating a lose-lose, contributing enormously to the net underwriting losses for the few remaining insurers in the state,’ said the Triple-I CEO Sean Kevelighan.”

The CEO only talked about assignment of benefit or AOB problem in Florida, another is “One-way attorney fees” to be discussed later in more detail.

The good news is that, as the above briefing points out, “Reforms put in place in the closing weeks of 2022 and proposed in the first quarter of 2023 suggest Florida is now quite serious about fixing the fraud and legal system abuse that have contributed to the state’s insurance crisis.”

The Underwriting Losses in Florida

Let’s look at another shocking figure from Florida:

“Florida’s homeowners insurers cumulatively incurred net underwriting losses of more than $1 billion in both 2020 and 2021 and expect larger losses for 2022 when year-end results are tabulated.”

The figure of $1 billion loss in Florida has to be placed in the context of national figures to make more sense. According to this report, “In 2021, the insurance industry experienced a $3.8 billion net underwriting loss, after a $5.2 billion underwriting gain in 2020.” In other words, the entire country had a gain in 2020 when Florida had a loss, and of the national loss of $3.8 billion in 2021, Floridan contributed $1 billion, more than 25% of it.

One crucial term in the above news is “underwriting losses.” According to ChatGPT, “Underwriting loss is the financial loss incurred by an insurance company as a result of the claims paid out to policyholders being greater than the premiums collected from those policyholders. In other words, underwriting loss occurs when an insurance company pays out more in claims than it receives in premiums.”

Simply put, underwriting losses happen when insurance companies have to pay out more money for insurance claims than they received from policyholders’ premiums. You don’t have to be a genius to figure out that is not good.

To be sure, insurance companies make money in several ways, not just from premium. Therefore, underwriting losses are not the only factor to determine the company’s overall financial health. Investment income is another major source of revenue.

When an investment company receive policyholder’s premium payment, they won’t let the money sit there collecting dust. Instead, they invest the premiums to security market to generate additional income.

In addition, operating expenses such as salaries, rent, and marketing costs can also affect an insurer’s bottom line. If an insurer has high operating expenses, it may be more challenging to achieve profitability even if its underwriting results are strong.

Still, other things equal, having an underwriting loss is definitely not a good news.

Trouble with Assignment of Benefit AOB

Assignment of Benefits or AOB is common primarily in property & casualty insurance but also in others like healthcare insurance. it is a legal agreement that involves the transfer of insurance benefits from the policyholder to a third party, such as a contractor or healthcare provider.

It seems to be a harmless arrangement. For example, say you have some illness and your physician successfully treated you. If that illness is covered by healthcare insurance, you know you will be reimbursed. So instead of you paying the physician and then get reimbursed from your insurance, you can choose to assign your physician to get all the insurance payment because he did all the job and earned it, right?

The answer is not that simple. While AOBs can be useful in certain situations, they are generally not recommended because they can lead to a variety of problems for both the insured and especially the insurer (i.e., the insurance company).

A main problem is insurance fraud. In some cases, contractors or healthcare providers may exaggerate the cost of their services to get paid for work they never did. Or they can perform unnecessary work in order to increase their profits, sometimes charging the patients with free medicines they received from marketer, for example.

I know this happens a lot in China, where hospitals over-examine patients because those imported medical equipment (e.g., an MRI scanner) cost a lot of money and hospitals don’t want the machine sitting there collecting dust. Doctors ask most if not all patients to have a medical imaging done first, even though it is clearly not necessary for some, and the procedure sometimes costs enough to send a family back to poverty!

Another issue with AOBs is to make it difficult for insurance companies to manage their claims because there is a third party involved in the claims process. The insurance company have to verify the work that was done and to ensure that the costs are reasonable. Delays and higher costs become common.

The bad news is that ultimately it is the insured person will bear the extra cost due to AOB. If the third party performs work that is not covered by the insurance policy, the insured person may be responsible for the additional costs.

Problems with One-way Attorney Fee

Another major problem in Florida that reduces insurance affordability and availability is the so called “One-way Attorney Fees,” also called “fee shifting.” This determines who is responsible for the litigation cost and to pay the attorney(s) involved in the case.

One-way attorney fees are meant to shield policyholders from legal bills if they need to sue an insurer, but critics say attorneys and contractors exploit the law to file unnecessary suits with the goal of collecting attorney fees.

The Triple-I briefing has this to say: “Before the reform, state law required insurers to pay the fees of policyholders who successfully sued over claims, while shielding policyholders from paying insurers’ attorney fees when the policyholders lose.”

Here is how one way attorney fees work: Policyholder can sue their insurer at limited risk for legal fees. If they win the case, insurance company will pay for their attorney fees; but if they lose, they will only pay their own attorney fees and let insurance company pay their own.

Honestly, the name “One way attorney fees” may have created the impression that win or lose the policyholders won’t have to pay for any legal cost, and insurer will take care of that. That is not true. A better way is to call it “asymmetric attorney fees,” where the asymmetry exists in demanding for more financial responsibility from insurance company such that if they lose the case, they will have to pay for attorneys for both sides. But if they win, they cannot ask policyholder to do the same for their legal cost — although policyholder still must pay for their own lawyer(s).   

Such a legal arrangement is not out of line but rather reasonable. After all, insurance companies have a deeper pocket than an insured.

But perhaps this is one of the things where the rule looks fine on paper but not so in practice. The reality is that there are way too many lawsuits filed by policyholders against insurance companies. As a result, several private insurance companies either had closed down or packed up to leave Florida.   

What are the problems? There are several:

  • Increased Litigation against insurance companies, caused by the asymmetric (i.e., lower) financial responsibility for policyholders than for insurance companies. We have marginal or meritless legal dispute that people just hope to extract a favorable settlement from the insurance company.
  • Difficulty in estimating claims costs, a relatively minor problem: One-way attorney fees can make it difficult for insurance companies to estimate the total costs of a claim, as it is challenging to predict the outcome of a lawsuit, which determines whether the insurance company will have to pay the plaintiff’s attorney fees.
  • Higher Settlements: One-way attorney fees can push up settlement amounts for claims. This is because insurance companies may be more willing to settle claims, even if they have a good chance of winning in court, to avoid the possibility of having to pay the plaintiff’s attorney fees in the event of a loss. This means settlement is better than attorney fees.

Going from Florida to the Nation

Florida insurance crises are basically supply sided problems. I mean look at how many private insurance companies left or shut down there. But if we look around the entire country, you’ll find insurance losses across lines but especially in Property & Casualty.

Prove to yourself by entering the search phrase “News about insurance underwriter loss” and you will see many headline pieces. For example, “Private U.S. property/casualty insurers saw a $5.6 billion net underwriting loss in the first nine months of 2021,” according to this report on February 15, 2022.

State Farm provides another example, as its main auto unit generated $8.6 billion in underwriting losses through the first nine months of 2022.

One obvious solution is to raise insurance rates. This USA Today report tells us that auto insurance rate will go up this year. “Drivers nationally are spending an average of 2.93% of their income on car insurance this year, based on an average annual premium of $2,014 for full coverage insurance.” and “car insurance rates increased by nearly 14% between 2022 and 2023, compared with an overall rise in yearly inflation of 6.5% in December.”

What about California? “Progressive recently received approval for a 19% rate increase for those renewing their policies or buying new ones.”

Risk Transfer & Risk Management

In insurance business, there is a familiar saying that risk is inevitable, loss does not have to be — if we do risk management right.

Compared with raising price, risk management is a more efficient, sustainable and proactive way of lowering insurance cost and ensuring just and fair coverage for losses.

ChatGPT says the following: “Risk management and risk transfer are two different approaches to managing risks, and each has its own advantages and disadvantages. However, risk management is generally considered a better approach than risk transfer for several reasons:

  • Retaining Control: Risk management allows an organization to retain control over the risks it faces. By implementing risk management strategies, an organization can identify and assess potential risks and take steps to mitigate or avoid them. In contrast, risk transfer involves passing the risk to another party, which means giving up control over how the risk is managed.
  • Cost Effectiveness: While risk transfer can be a quick solution, it can be more costly in the long run. Risk transfer often involves paying premiums to an insurer, which can add up over time. Risk management, on the other hand, can involve implementing cost-effective measures to reduce the likelihood and impact of a risk.
  • Tailored Approach: Risk management allows an organization to tailor its risk management strategies to its specific needs and circumstances. This can result in more effective risk management than a one-size-fits-all approach, which is often the case with risk transfer.
  • Reputation: In some cases, risk transfer can damage an organization’s reputation, particularly if the transfer is seen as an attempt to avoid responsibility. In contrast, implementing effective risk management strategies can enhance an organization’s reputation by demonstrating a commitment to responsible and proactive management.”

The above answer provides a good overview of why risk management is better than risk transfer (i.e., insurance). However, the best approach is to do both risk management AND risk transfer. We cannot bet entirely on risk management because there are things out of our control. But we can do everything in our power of control to reduce and/or control risks. I propose the followings along that line:

  1. The key to risk management is to empower employees and/or clients to quickly and easily learn the right and crucial things to improve risk reduction. The term “risk management” sounds like only managers are the stakeholder but that’s not the case. The best risk management is to mobilize all employees and clients to get the job done. Reaching that goal requires first and foremost modern technological tools.
  2. ChatGPT, Smart contract, Internet of Things (IoT) & Tango are the four most important technologies for risk management with the potential to revolutionize insurance business by proactively and significantly reducing insurance cost and making insurance sustainable. Of the four, ChatGPT is likely to play the most important role because it is approachable by ordinary employees and clients. All we need to do is to expand its functionality to make it useful to professionals.
  3. ChatGPT will not just give everyday texts for fun but will be trained professionally to understand, and then to explain, complicated legal documents such that even ordinary citizens can comprehend the gist of a 200 page legal document. This will significantly reduce the currently indispensable role of human attorneys (they may be needed to proof check the ChatGPT answer but that should not take very long.) The key is to reduce our reliance on the middlemen like attorneys by empowering the end users.
  4. Another ChatGPT development is customized, always on, mobile and industry- or even firm-specific ChatGPT. The program will be locally pre-trained by records of past risks and past losses, and then provide intelligent and insightful answers to inquiries of all employees in dealing with new but similar problems. Localized and customized ChatGPT can do many things faster, better and cheaper.
  5. Smart contract associated with blockchain will effectively reduce the problem of legal system abuse, over-crowed or jammed court rooms, long waiting lists of scheduled litigations — by drafting nothing less than really “smarter” contracts that are filled with very detailed, context specific “what if” terms and conditions (ChatGPT can help draft and interpret the document), taking into account all relevant historical cases and eliminating extra spaces for misinterpretation and post hoc litigation, while keeping the feature of automatic execution of a predetermined agreement. The idea is to work with a better beginning to save time and energy toward the end.
  6. Internet of Things (IoT) will establish a field surveillance network at critical junctions of business operation to record objective evidence admissible to the court of law, deterring frivolous lawsuits and prevent predatory practices of trial attorneys. Even with caseload remaining the same as before, having historical field evidence will still speed up the litigation process.
  7. Tango is the easiest and most intuitive training tool for employees by providing step by step guides with intuitive screenshots every step of the way that everyone can understand and easy to follow. In the future new employee orientations will be mostly done by watching Tango generated PDF files. Numerous risk management field guides can be developed with context specific Tango flowcharts to reduce the chances of misbehavior and mishandling.
Categories
Health Insurance

A Mississippi Physician Received Five Years for Hospice Fraud, What You Need to Know About Error & Omission Insurance?

The Takeaways:

  1. There have been repeated healthcare fraud cases related to hospice for financial gain, lack of oversight, complexity of hospice care and pressure to meet targets.
  2. E&O insurance, also known as professional liability insurance, provides coverage for professionals who make errors or omissions while performing their duties, such as medical professionals.
  3. Medical professionals, like physicians, should carry E&O insurance to protect themselves in case of claims of negligence or malpractice. In this case, if the physician had E&O insurance, they may have been able to use the coverage to pay for legal fees and damages awarded to the victims.
  4. E&O insurance, however, does not cover intentional acts of wrongdoing such as fraud like in this case.

Repeated Offenses in Hospice Fraud

According to Fox News on February 9, a Mississippi physician named Nelson has been sentenced to five years in prison plus $15 million in restitution for healthcare fraud connected to hospice operations.

Evidence showed the physician referred numerous patients to hospices even though they were not terminally ill. A quick background information: To qualify for hospice care, doctors must certify a patient has six months or less left to live to receive Medicare coverage. In case the patient improves with increased life expectancy, the hospice is forced to discharge them from their care — otherwise it is considered hospice fraud.

In the above Mississippi fraud case, some patients were able to testify at the trial almost 10 years after Nelson put them on hospice care. You can imagine how bad the system misuse is.

Unfortunately, the case is far from being alone.

According to this report of December 2, 2021, two doctors who helped a local hospice agency scam Medicare were sentenced to a combined 23 years in prison. This case in 2017 also for hospice fraud. Another in 2020 the same. Still another in Texas in 2020.

What Is Hospice Fraud

According to this article, Hospice fraud revolves around hospice care and hospice patients. “It happens when caregivers, facilities, or organizations commit fraud against hospice patients or the public health systems responsible for covering hospice costs.”

The four major types are false claims (the most observed type that defrauds government-funded healthcare programs like Medicare or Medicaid, or charging patients for unnecessary services), kickbacks (incentives hospice providers give to nursing homes for patient referrals), false diagnosis (like in the Mississippi case), and improperly delivered services or products.

Hospices do not always provide needed or adequate care to their patients. These improper cares are called “deficiencies,” which is also a type of fraud. A recent study by the Office of Inspector General at the US Department of Health and Human Services found that over 80% of the hospices they reviewed had at least one deficiency.

Why Hospice Fraud So Popular

Several reasons explain for the frequent fraud related to hospice care:

  • Picking Uncle Sam’s pocket: Hospice care is often funded by government programs like Medicare and Medicaid, which can create easy target for fraudulent activities. A common case is overbilling for services or charging for services that were never provided.
  • Lack of oversight: The hospice industry is largely self-regulated, which means there may be a lack of oversight and enforcement of rules and regulations.
  • Complexity of hospice care: Hospice care can be complex and difficult to navigate, which can create confusion and opportunities for fraud. Patients and families may not fully understand the services they are entitled to, and providers may take advantage of this confusion.
  • Lack of education and training: Some hospice providers may not be properly trained in the regulations and laws surrounding hospice care, which can lead to unintentional violations or fraud.

If you ask me, I’d say anything related to seniors in this country is always vulnerable to crime, as many criminals specifically target this subpopulation. Similarly anything related to Uncle Sam is also crime or abuse prone. Hospice care happens to sit at the crossroad of both seniors and government. Fraud is almost inevitable.

What Is Error & Omissions Insurance

Error & Omissions Insurance can help — at least to a certain extent. But first, what is E&O insurance?

E&O is really just professional liability insurance, and is designed to protect professionals and businesses from financial losses that may arise from claims of negligence or mistakes in the services they provide.

Examples of professionals and businesses that may need E&O insurance include:

  • Doctors, dentists, and other healthcare professionals
  • Lawyers and legal professionals
  • Accountants and financial advisors
  • Architects and engineers
  • IT consultants and software developers
  • Real estate agents and brokers
  • Insurance agents and brokers
  • Advertising and marketing professionals
  • Event planners and organizers
  • Any business that provides professional services, advice, or expertise to clients.

It seems fair to say that most fields covered by E&O insurance are “brainy businesses.”

Ways E&O Can Help

Here are some ways in which E&O insurance can help professionals:

  • Legal costs: If a professional is sued by a client or customer for an alleged error or omission in their work, E&O insurance can help cover the legal costs associated with defending against the claim. In the Mississippi case, the physician could use his E&O to cover the legal costs.
  • Damages and settlements: If a professional is found liable for a client or customer’s financial losses due to an error or omission, E&O insurance can help cover the damages or settlements awarded to the plaintiff. Importantly, E&O does not provide coverage for intentional acts of wrongdoing like fraud. So this guy will be out of luck and would have to pay from his own pocket for the $15 million in restitution that the judge ordered.
  • Reputation protection: A professional’s reputation can be seriously damaged by a claim of professional negligence or error. E&O insurance can help cover the costs of hiring a public relations firm or marketing professional to restore their reputation. Again, intentional act of fraud does not deserve the protection of reputation.
  • Peace of mind: Knowing that they are protected by E&O insurance can give professionals peace of mind, allowing them to focus on their work and serve their clients without worrying about the potential financial consequences of a mistake or error. Again, physicians committed fraud cannot and should not maintain peace of mind from E&O insurance.

In sum, E&O is not designed for fraud but before you are convicted, E&O can certainly help you out. Do not take this benefit lightly. Hiring a top criminal defense attorney can help improve your outcome if you’ve been accused of hospice fraud. Hospice fraud accusations require expert legal assistance and time to clear the charges. These cases involve thorough investigations by multiple agencies. You need an experienced attorney for the best defense.

Categories
Life insurance

Is Annuity a Good Idea with Inflation?

The Takeaways:

  1. Investing in a time of inflation is essentially buying the best physical and financial products to preserve the value or the purchasing power of your money. The goal is to invest so that your rate of return on investment will beat the inflation rate.
  2. An annuity is mostly a retirement product offered by insurance companies to provide protected, reliable income for life after retirement. It can help bridge the income gap between the savings you’ve accumulated over time, traditional sources of retirement income, like Social Security and the goal of living a comfortable retirement life.
  3. The chain of reactions: Inflation entices fed to raise interest rates, which in turn push bond yield high, and potentially lead to higher annuity income. Bond yield is the rate of return earned by an investor who buys a bond and holds it until maturity (i.e., Annual Interest Payment / Face Value x 100.).
  4. The higher the interest rate, the more money you earn on your annuity. When you’re ready to retire, you’ll have more wealth in your account as a result of earning higher interest, also with regular payment that is inflation adjusted to keep the same purchasing power for your retirement money.

A Common Question People Ask

I’m not sure about you but in my experience one of the most common questions people have asked is what the best investment is today. We can be curious for different reasons — sometimes just for the sake of striking a conversation, other times deadly serious about investing and making money.

Of course, you do not need me to tell you that one of the biggest concerns for today is inflation. Thus, the above question becomes what investment tool we should choose that can beat inflation.

Let’s find out first what ChatGPT has to say. Below is the heavily edited answer, as the original version was too “plain vanilla” for lacking a better word. My hope is to make the explanation easier and livelier.

Inflation means price hikes for goods (e.g., gas, eggs, meat) and/or services (e.g., ridesharing price), which lowers down how much goods you can buy with the same amount of money (e.g., $10).

Sometimes people ignored the fact that inflation must be sustainable for a period of time rather than a short-term phenomenon. You may also hear people saying inflation is “general” price hike, although inflation can be “sectorized,” meaning different sectors of an economy can receive different impacts rather than all sectors move together.

In a farming economy, food price can be a major driver of inflation, but in an energy or natural resource centered economy like Russia, oil price change plays a big role.

A simple, hypothetic example is $1 buys 3 eggs now, compared with 4 eggs before inflation. The value of your $1 decreased and it took one egg away from you (or 25% of its original value was “eaten” by inflation.)

Formally, we say the value of your money decreases, even though a $10 bill will always be $10 on the face value, no matter how long it sits in your wallet. Another way to say the same thing is consumer’s “purchasing power” goes down when inflation goes up. Note value of money comes from its purchasing power, in addition to other factors like its intrinsic value (e.g., gold or silver), acceptance, scarcity, stability, government backing.

General Principle of Investment During Inflation

Regarding what investment is the best for inflation, the idea is this: During inflation most if not all goods are getting more expensive or priced higher. This is the time to ask yourself what specific goods you should buy so that not only your initial investment will not be washed away or severely reduced by inflation, but you make money beyond the invested money — despite inflation.

Let me use an example to illustrate the point. If you believe the price of pork will be significantly higher one year from today, it will be a good idea for you to buy piglets and raise them so that one year later you can not only get your investment money back but with a large profit margin.

The pig example involves physical property. Another example of physical property is real estate. For those not know yet, real estate is known for its value in fighting inflation because housing price and rental income both tend to go up during inflation.

They are like boats: When the water level is up, boats go up with that.

As you can see from the above example, the key to fight inflation is to compare two rates. The first is inflation rate, typically measured by Consumer Price Index (CPI). The CPI is a measure of the average change in the prices paid by urban consumers for a basket of goods and services over time.

The second is your rate of return on investment. Say one year later the inflation rate hits 5%, but selling pigs gets you 10% of return, you win because your return is twice the inflation rate. On the other hand, with the same 5% inflation rate but your pig sales only offered you 4% of return, you know your real return is actually 4% – 5% = -1% or negative 1%, because real return must be adjusted against inflation.  

Note sometimes you hear people mixing up “rate of return on investment” and “profit margin.” They are related but not the same. Briefly, profit margin focuses on measuring the efficiency of a company’s operations, while the rate of return on investment is on evaluating the performance of a particular investment, although both are percentage figures.

Investing in Financial Products

Investing in physical properties (pigs, real estate) sometimes is not the most convenient thing to do to earn a high return. To raise pigs you will need the piglets, the feed, the pig farm, the labor and the veterinary, to name just a few. To invest in rental income you must do a good job in maintaining the properties and also in dealing with dishonest renters.

Is there anything else that allows profit but is easy and fast to operate?

You bet. They have a special name “financial products” to differentiate from physical property. The former possess ideal features and should be among your first consideration for investing.

Speaking of investable financial products, in the old days gold came first but not anymore, as there are financial products that do better nowadays. I won’t get into the list of all the investment portfolio options for inflation purpose here. Let’s just consider one financial product that will benefit from inflation: annuity.

A Sideline Story of Eggs

Before proceeding, let me tell you a side story to lighten up the reading a little bit.

Assuming my previous hypothetic example of egg price in inflation is real, does it mean we should all stop buying eggs because their prices are so high and $1 now only gets you 3 eggs instead of 4?

I actually asked ChatGPT this egg question just for fun. Interestingly, although the database of ChatGPT does not cover the latest news, WebChatGPT, a free Google Chrome extension, does that. Every time you ask a question, the app will search three pieces of latest news related to the inquiry and then ask ChatGPT to present a conversational answer drawing from these reference.

Perhaps you already know the answer but formally, no, we don’t want to stop buying eggs if they are important to us. WebChatGPT also correctly points out that “the increase in egg prices is not directly caused by inflation, but rather as a result of various market factors.”

We need to separate consumption from investment, as well as separating segments of consumers. For some people eating eggs is a daily necessity and eggs are their staple food that nothing else can substitute. Others however will be happy to explore alternative sources of protein that are more affordable, such as beans, lentils, and canned fish.

Now let’s switch to the topic of “Annuity and Inflation.”

Nature of Annuity

Let’s begin from ChatGPT again. The following is an edited version of the answer.

An annuity is a financial product that provides regular payments to the owner over a certain period, often for the rest of their life. This means you won’t be too far off if you link annuities to retirement, as they are frequently retirement related investments products.

I say “not far off” because some annuity like immediate annuity provides regular income payments right away for a set period of time or for life, and you don’t have to wait until retirement. Instead, you can begin receiving payments immediately after purchasing the annuity with deposited fund.

Similarly with deferred annuity you may or may not have to wait until retirement — as long as you wait long enough to enter annuity’s “annuitization” phase (i.e., time to receive annuity payment).

You may hear some people calling annuity “annuity insurance” but that is not exactly right — even though annuity is a type of insurance contracts between insurance company and the person receiving annuity payment, or “annuitant” as they are called.

For one thing, insurance, especially life insurance, is designed to benefit one’s loved ones (i.e., spouse or children or any designated party), while annuities are mostly for oneself.

Secondly, annuities usually do not need a particular “trigger event” to start the payout, as long as enough money has been accumulated to pay. Life insurance however always requires that (most likely death but also terminal or chronical illness) to start the payout. In other words, you can’t start receiving insurance payment just because you feel like it. You must convince the insurance company that it’s time for them to pay you according to terms of the insurance policy. Annuity does not need you to do anything in particular, as everything is in the contract and is predetermined.

Finally, most annuity features regular payouts over a fixed interval, while life insurance can have a lump-sum payment to the beneficiaries.

Parties in the Annuity Contract

The typical parties listed on an annuity contract are:

  1. Annuity owner: The person who buy the annuity either in a lump sum payment or more typically through a series of regular contributions in order to receive regular payments either immediately or wait for a period of accumulation.
  2. Annuity issuer: The company or institution that issues the annuity and is responsible for making the payments to the annuity owner. This is generally an insurance carrier but can also include other financial service firms.
  3. Annuitant: The person whose life expectancy is used to calculate the annuity payments. The annuitant can be the same person as the annuity owner or a different person. This is why I say annuity is mostly designed to protect oneself.
  4. Beneficiary: The person or persons who will receive any remaining funds in the annuity upon the death of the annuity owner or annuitant. However, unlike a life insurance policy there is no guarantee for annuity beneficiary to receive money. It all depends on whether there is fund left in the annuity account when the annuitant died.

Let’s use a hypothetic example to show how annuity works on the high end. I made the human characters up, but the rest of story is reasonably realistic.

Owning a Luxurious Shipboard Condo

Beth is in her 50s and has never married with no child. As a company executive, her personal assets are in the millions. One day she received a phone call from her friend Gloria who is also in her 50s and a female executive in another firm. Gloria suggested Beth to check out the sales materials she received and invited Beth to own one of the “private residential yacht” apartment rooms next to her, in the world’s largest residential ship called MS The World with 12 decks, 165 luxurious shipboard condos built 13 years ago and equipped with every possible modern convenience in each apartment, costing from $825,000 to $7.3 million. Beth and Gloria each must prove a net worth of at least $5 million, then add another 10 to 15 percent for annual maintenance and other fees based on your apartment size.  

Beth and Gloria have no problem with provable net worth, the concern is with the regular annual payment for maintenance and other fees. They both want to set up a way to take care of the money. Beth has a Farmers insurance agent friend named Tiffany who heard the issue and offered to help. Tiffany told Beth, and through her to Gloria, that since they both will own the shipboard condos after retirement, annuity would make sense for them.

How Annuity Works

The steps are listed below:

  • You make either a lump sum payment or a series of payments into an annuity account. For Beth and Gloria, a one-time only, lump-sum investment makes sense.
  • The annuity provider (or issuers, in this case, Farmers insurance) invests money from Beth and Gloria in a portfolio of assets such as stocks, bonds, and other securities.
  • The investments generate interest, dividends, or capital gains, which accumulate in the annuity account and are tax-deferred until you withdraw them. Here “tax deferred” means taxpayers owe IRS taxes on investments, revenues, or profits but they don’t have to pay now and can be “delayed” or “postponed” to the future. (If you know the concept of “time value of money,” you know $1 today carries more value than $1 next year, so delayed tax payment is a good thing.)  
  • Depending on the type of annuity, you may receive payments immediately — if you made a lump sum investment into the annuity like Gloria and Beth will do, or at a future date, either for a fixed period or for the rest of your life. Most people will choose not to receive a lump sum payment. The whole reason they invest in annuity is to get a stream of regular payments month to month, quarter to quarter and year to year. In that case, the annuity issuer (i.e., Farmers in Beth and Gloria case) will write you a check on a regular basis and it’s worry free.  
  • The amount of the payments depends on several factors, such as the size of the initial payment, the duration of the annuity, and the interest rate or returns generated by the investments.

An important thing to know is that sometimes an annuity can pay you (the annuitant, like Beth and Gloria) more money than you initially invested because the earnings from stock and/or interest rate from bonds are higher than expected.

Beth and Gloria each will invest $500,000, but Beth picks a “Single Premium Immediate Annuity (SPIA)” that provides a guaranteed income stream for life (or a specified period). This annuity is ideal for those who want to convert a lump sum into a guaranteed income stream. It is possible that Beth’s $500,000 may turn out to be $550,000 in the end, due to good marketing performance of the investment by the annuity issuer.

Gloria on the other hand decides to invest in a variable annuity, which is for annuitant with a higher risk tolerance and wants to invest in a range of mutual funds or other investment options within the annuity. Variable annuities can offer potentially higher returns but come with more risk and fees.

Why Is Annuity More Attractive During Inflation?

When price increases during inflation, annuities become a more attractive investment option because it provides a fixed income stream that is immune to inflation. For others without owning annuity, inflation lowers their purchasing power of money. An annuity, however, can provide a guaranteed income stream that is typically linked to inflation, meaning that the income increases along with inflation. This can help protect annuity owners from the negative effects of inflation on their purchasing power.

For example, say an investor (not Beth nor Gloria) purchases an annuity that promises to pay her $1,000 per month and inflation is 3%, the annuity may increase the payout to $1,030 per month to keep up with inflation. This has a special name for it: cost-of-living adjustments (COLAs), which helps her payments keep pace with inflation and keep her purchasing power over time, even if the general cost of living goes up.

Of course, money does not fall from the sky. The reason annuities can afford to pay COLA is because the insurer (or annuity issuer) will invest the annuity premiums in assets that will provide a higher return to offset the impact of inflation. According to this report, “In general, insurance companies earn more in bond yields when the Federal Reserve raises interest rates. As a result, they can offer their customers higher rates.”

Remember the “boat” metaphor I used earlier for real estate? When price level goes up, rental income and housing price goes up as well. This applies to annuity which is guaranteed income to annuitant.