Insurance may not be far from Mr Ponzi’s famous scheme.

Insurance requires regular deposits of amounts based on the assessment of a risk crystallizing. If the risk is realized under certain agreed conditions, a compensating payment is made. The insurance company indemnifies their clients. It is paid protection, and it is hedging your bets—forcefully (by law) or otherwise by choice.

If project ‘x’ fails, the insurance claim payment (project ‘y’) could help reduce or eliminate the impact of the loss in project x.

The practice of insurance is risk management. It needs to balance contributions by the many (the pool) and the potential need to ‘help’ the few (claimants), in the hope that the few who need help will remain few enough, asking for not too much. A game of chance and opportunity.

What is it with the unending quest for deposits and premiums? They’ve got bills to pay in addition to claims. The less they have to give, the more they can keep for themselves and/or invest to reduce or eliminate dependence on premiums to pay their bills. We need profit for long life.

It would be trouble if they come to need premiums continuously (over an extended period) to pay claims because they have insufficient cash in the pool et al—Ponzi-craft now.

In gambling, playing the lottery …, people pool monies together to benefit the few. The balance is kept by the organisers. Bets are like deposits and premiums, and winnings like claims. The well implemented system is such as is near guaranteed to not evolve into a Ponzi scheme. Also, we hear that the ‘house’ always wins, so it is much less likely to need a bail out. Insurance isn’t gambling, but they both follow the principle of shared risk. Most customers lose.

Actuaries do the maths for insurance companies to minimize the possible event of an insurance scheme turning quasi-ponzi. There are jobs for actuaries in casinos and bet houses too.

They gave sureties and guaranteed more than they could give: AIG insurance, years ago, bit more than it would chew so it came suddenly to a halt when it had to pay all at once. Who knows tomorrow, so we may want insurance then. They got a bail out (feels like a claim) from Uncle Sam for reasons best known to him. It may not be so now if it happens again.

Insurers go full-throttle lottery mode: limit the number of winners by design. Or lobby to make people pay, or ….

Whatever is not paid as claim, reserved, invested, or spent as an expense in the year is good game for profit. Fair for the risks they bear? If they make a loss, thats okay where its manageable. And it had better be infrequent.

Risk Management—An Optimization Problem.

Risk management is information gathering about, and analyses of actual or potential risk scenarios, that leads to facts and assumptions (or intelligence); on the basis of which, systems and structures or a programme of action, are designed, implemented and maintained in order to ensure that the crystalisation of the risk scenario (or its possibility) is averted, eliminated, or minimised.

It involves creating and maintaining risk prevention, aversion, and minimisation structures to maximise the likelihood of an identified success or positive objective: the minimisation of any negative effects of risk crystallisation, and/or prevention or elimination of risk situations.

A necessary implication in practice is that this attempt to maximise a status, tends towards minimising the crystallization of potential or actual threats (risks). Here lies the basis for the definition of the desired ‘success’ or positive objective.

The objective narrative, to minimise risk, puts one in ‘aversion’ mode. But, the practice of risk management is better viewed from the perspective of preservation rather than of aversion, its dual. In the sense of the above paragraph, to maximise rather than minimise. Reason being that there might be a myopia in the formation of the corresponding constraints for a minimisation of risk that may lead to potential restrictions or non-consideration of legitimate or acceptable means of business. Maximization thinking gives consideration to actual business objectives and facilitates more possibilities (open thinking) with respect to the constraints while trying to adequately manage risks.

When a risk has crystallized you slip into the crisis management aspect of risk management, which may be an optimization problem — to get the best out of an unwanted situation. Some might argue that this is not an aspect of formal risk management practice. Considerations and implementations differ. What is important is that, because risk is what it is, there should be a system to deal with crystallized risks (when your fears come to pass). Trying to alleviate the effects, finding and using some gain in them, managing (live with/through) them or countering them are possible approaches. Regardless of the situation, the optimisation objective remains the maximisation of a utility.