Stratoserve LLC

Managing risks, actuaries and lessons from AIG- where was the human factor?

Actuarial sciences are primarily mathematical and depend on past data. Since there was no past data the risk of insuring the mortgage-backed securities was underestimated. AIG insured banks for the securities they bought and these debt swaps were an unknown collection of mortgages- some of whom were simply bad loans.

It is not yet clear as to what happened to the human factor in all of this. Maybe the insurance piece was handled from London and there was no real understanding of what was happening on the ground in the US as AIG went on taking on balooning risks. For example, several years ago someone mentioned about a real estate agent he knew who just collected her 6% commission on a home sale being totally uncertain as to how the buyer was going to pay the mortgage. This kind of information was available and discussed accross communities in America as the AIG crisis was building up.

The buyer,seller, real estate agents, real estate closing lawyer, the bank's lawyer in every now defaulting loan closing day would have had a sense of the dubious nature of the loan. Why did not the risk guys at AIG pick it up? Or did they -and nobody listened? 

Banks know that there is risk  and that is why they buy insurance and that is why AIG is paying up and US tax payers have to foot the bill of this now enormous risk.

Going forward, business will have to re-examine their methods of gathering not just past data but new data that is readily available but in this case had not been built into the actuarial models. Raw numbers and technology cannot replace the human factor where human, qualitative real time input must be sought from the ground to get a better sense of the real risks.

Medical Outsourcing

Had been hearing about this since last year and now the Time magazine article has done an excellent piece on medical outsourcing. Consider this  from the article that at current rates US would be spending $1 out of every $5 of GDP on health care by 2015. Yet, 1 out of 4 Americans would be under-insured or uninsured.

Clearly medical outsourcing is a solution for non-urgent care. A quad bye pass surgery in India can cost less than 20% of what it costs in the US. The quality of care is excellent and now accreditation agencies like the Joint Commission will certify quality. Many Indian doctors are trained in the US and have an MD from the US or UK and that gives additional comfort. Insurance companies can extend their markets  and service providers like some companies have done in the Mexico border for inexpensive dentistry. More people can be insured and treated at low cost and insurance companies are exploring about giving an incentive - take your family member for the tour and take $5000 ! Even those who have insurance in the US are apparently finding this attractive...