It's the number of players in the pool, and whether there is any lumpiness in the pool itself. If you spread Social Security obligations over all workers, the pool is the largest possible and the steady premiums should cover most contingencies for payouts (other than the federal government raiding the premium kitty as now happens). This is why tremendous risk occurs when you allow participants to opt out and invest their premiums any way they see fit. It is a Trojan Horse for destroying Social Security, and the Republicans know it.

In the insurance industry the reinsurance practice spreads the risk, but you are still only talking about a few hundred players. Not only does your problem of monoculture infection come into play, but the pool is very lumpy and dependent on the health of the very largest players. Systemic risk may actually be made worse in such an arrangement.

Add to that the merger propensity of the past 25 years and you have a risk concentration problem that wasn't there when reinsurance was invented. This problem exists doubly in the interbank market because bank mergers have concentrated global banking risk in about 20 names. Systemic risk was less of a problem in the old days of Chemical Bank, Manufacturers Hanover, JP Morgan, Chase Manhattan, Bank One, First Chicago, National Bank of Detroit, Valley Bank, Texas Commerce - all of them top 20 banks in the U.S., and now just one big behemoth.

One of the big stories over the past few years has been the phenomenal success of the financial industry relative to the economy as a whole. However, running down the factors of production -- land, labor and capital -- finance doesn't appear. It's one of those nonproductive factors, like crime. It plays a role but doesn't add anything material. Unlike crime, e.g., fraud, it can play a positive role, like reducing concentrations of risk through risk spreading as insurance is meant to do, or increasing the liquidity of markets makng them more orderly as speculation is supposed to accomplish.

However, those who engage in finance do not do so primarily to fill these desirable economic functions, any more than most businesses produce products and service to satisfy customer needs and wants. They do it to make a profit.

Technically speaking in economics, making a profit applies to providing a product or service that contributes to the economy. When specious means are used to do this, the enterprise is flirting with fraud, which is a crime -- taking without giving in return. The way much business works is to keep a bevy of lawyers on hand to keep the business just over the line of legality so it can make as much as possible. Often, this line is drawn as opaquely as possible so that it would be difficult to produce evidence to convict. One often here's business execs caught with their hands on the scale excusing their obviously unethical behavior by claiming that nothing illegal was done.

This is especially true in the financial field, where the primary motive is rent-seeking in the sense of extracting wealth from the system without contributing a product or service of corresponding value. In other words, it's largely a shell game in which the sophisticated but unprincipled game the system, capturing what they can because they can.

Therefore, the financial industry is especially in need of regulation and oversight to reduce and ideally eliminate such craven behavior bordering on fraud if it is not actually fraud. Therefore, the financial industry is generally in the forefront of lobbying for loose regulation and oversight and contributing to parties and candidates that line up behind so-called free markets.

The answer is, first, to identify the legitimate service that the insurance and financial industry is providing and put regulations and oversight in place to make sure that this is happening according to the rules. Secondly, moral hazard needs to be preserved by insurng that players not only play straight but take responsibility for their mistakes instead of relying on public bail-outs when things go south through their errors or overreach.

The problem here, of course, is that the legislators and elected executives who are responsible for legislating and enforcing such regulation and oversight are the very ones that can be bought off. Therefore, until we get money out of politics through comprehensive campaign and lobbying reform, the status quo will continue.

One aspect of regulation is making sure that the industry as whole is not walking off the cliff by following the leader. The industry cannot be assumed to be acting in the interests of the economy as a whole, and when the industry is "too big too fail," so that a public bail-out is "required" to protect the system, then legislation needs to be in place establsihing the requisite oversight reducing the possibility of this happening through concerted error and overreach on the part of industry.

If the industry objects to this as "creeping socialism," then they should be told that there will be no more "socialism for the rich" bail-outs, and this should be enshrined in law and become a litmus test for judges too. Of course, this could never happen unless the money is gotten out of politics.

Do you understand how Lloyd's works? The names (people comitting their entire wealth, without limit), the partnerships, and the underwriting?

Not the model you describe in you article.

The difficulty is that there is a monoculture of a few largish dinosaurs. I would not be at all sad to see JP Morgan and Chase fail. The evilness of these companies is just beyond me. They really don't give a damn about the small creatures under their feet, and will be quite surprised when they fall and these small little warm creatures take over from the cold blooded bastards....

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”

Charles Darwin

Have they done something to you?...

Recently had an client with a FICO score of 713, with high credit card limits, and a high amount of debt. The interest rate on his cards was 30%, one from Amex, one another lender.

He refinanced out of these cards to another with a 0% teaser rate for a year, and was able to recover.

I've never seen 30% interest before. That was high!

Regarding insurance companies and reinsurance. It's not too often that an insurance company goes under. When an insurance company is on shaky ground, the domicile state will usually take them over and eventually another insurance company will buy the distressed company.
Insurance companies have stricter reserve requirements than banks.

There are some deep philosophic issues that have to be worked out here. The political split of the last century has emphasized the dichotomy between public and private. Communism effectively discredited the public side of the equation and we are suffering from over compensation. The fact is that the modern monetary system is a form of public utility, just like the road system. It is supported and financed as a public utility, yet profits go to private individuals. The result is the same as if the road system were treated similarly. Everything would be paved over, but no one would be able to get anywhere when trust froze up. A major part of the investment pie is public debt. If the government was not borrowing this money back and recycling it through public projects, there would be much less ability to save. It's the same with the idea of privatizing Social Security, in that there aren't sufficient investment vehicles to save that much wealth, so, like electricity, it gets used as it is produced, with the government promising a return. The fact is that for a stable society, there has to be some balance between rights and responsibilities. One way to do this is to specifically define money as a public utility. That way, people will not be as obsessed with possessing it, as increased wealth means increased responsibility, so they will invest time and effort into improving their personal environment and community, rather then trying to maximize the return into their own accounts. It might also work to develop local currencies, just like we have local governments, as cells within the larger organism. A healthy society, a healthy environment and a healthy economy don't have to be mutually exclusive.

This is an essay I wrote on this;

Revolution Happens