Monday, 23 November 2015

Insurance.. Oh Dear! (Part 2).




Insurance simplifies life, right? Unfortunately the insurance industry would not know simplicity if it tripped over it on a dark night.

Everything in the City looks so solid. There is a reason they make it look this way.

A photo posted by Richard Ford (@richard.ford) on

Fleet St and the view towards St Paul's.

Insurance companies aim to avoid collapse by diversifying the risks they cover. Imagine one has capital of five million pounds. The company feels secure in covering twenty five million pounds of risk or even more provided these risks differ from one another.

In other works a company may guarantee a harvest in the Untied States, an oil tanker and an office building in the UK- all with the same capital. They can do this because they feel fairly sure that only one of these risks will go bad in any one year.

Furthermore, they do not keep all the money in a safe deposit. Insurance companies invest in many risky ventures but they apply the same logic to this too. Equities may tank, but forestry may remain buoyant. By balancing these assets together using a process known as MPT Modern Portfolio Theory they hope to avoid collapse.

It worries some people that this may be pronounced 'empty'.

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