That is why insurers traditionally excluded from coverage “Acts of God or the King's enemies.” Losses associated with war or natural disaster tend to be highly correlated. In such circumstances, there would be no benefit from insurance, and no rational agent would buy or sell it. If, by contrast, adverse events were perfectly correlated - either everyone's house burns down next year, or no one's does - then pooling the risks does not reduce them, and the insurer faces exactly the same risk as each of the insured individuals. Whether or not you die next year does not influence my chances. The probability of your death (in the next year, say) is not correlated with the probability of mine. is much more predictable, as is the corresponding loss - so long as the risks faced by each member of the pool are not correlated with the others. But the number of such adverse events that will occur among a large number of similar persons, houses, etc. Whether a particular person will die, or a house burn down, or a car/driver be involved in an accident, or the occurrence of any other adverse event, is inherently unpredictable. Insurance companies pool individual risks. The whole episode raises serious questions as to the quality of corporate governance and the incentives faced by top management. Both involve violation of elementary insurance principles in pursuit of market growth, but one in particular demonstrates the fundamental weaknesses of private markets for health insurance (hence this column). An investment in this blue-chip a decade ago would, at time of writing (June 2011), have lost about 20% of its value. The share price did then recover with the overall market, but only to the mid-$20 range, and by August 2010 was back near $11. The August dividend was cut to $0.13, a level not seen since February 2005. The capitalized value of the company had fallen by three-quarters. In March 2009, Manulife shares were trading under $10. These are the sort of moves that can put a stock on the DL for a long time. … Over the past two years, it has halved its dividend, diluted existing shareholders by doubling the number of outstanding shares and reported bafflingly inconsistent earnings from quarter to quarter. Once a darling of the Canadian stock market, has fallen on hard times. Riches to Rags: Manulife Financial in the 21st Century Entre-temps, la haute gestion récolte les honneurs et est richement récompensée. Pour les actionnaires, les résultats ont été catastrophiques. Manuvie a commis la même erreur en vendant des rentes liées aux valeurs boursières de pair avec des seuils de garantie - essentiellement une assurance contre le déclin du marché boursier. La croissance de l'espérance de vie affecte l'ensemble des contrats. La mise en commun des risques ne fonctionne que si les risques individuels ne sont pas en corrélation. Mais l'erreur de gestion fondamentale a été d'assurer les risques de corrélation. Les porte-parole de la compagnie jettent le blâme sur un accroissement inattendu de l'espérance de vie. Des millions de baby-boomers bien établis, soucieux de protéger leur bien contre l'expropriation aléatoire de la dépendance institutionnelle : quel marché! Mais pour Manuvie, qui perd 1,5 million de dollars par jour en réclamations pour SLD auprès de sa filiale John Hancock, ce type de soins devient un véritable cauchemar. L'assurance pour soins de longue durée (SLD) est le rêve de tout vendeur.
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