Systemic Risk and Deposit Insurance Premiums

Posted on December 4, 2016 in Uncategorized

In the wake of the financial crisis, many economists are trying to come up with creative new ways to deal with systemic risk: the risk of a “wholesale bank failure” and failure of the financial system in general. I just finished reading Judge Posner’s recent book, A Failure of Capitalism. In it, Judge Posner makes a convincing case that individual bankers can (and did) make rational decisions that, at least in the aggregate, greatly increase systemic risk. I don’t wish to go into the details of that analysis here; I just want to assume its truth.

When rational actors make decisions that create negative externalities, it often falls upon the government to adjust the incentives to account for those outside costs. In banking, for instance, Citigroup might make certain decisions that increase its risk of bankruptcy to 1%. For a smaller bank, that risk would only be negligibly important: the bank could fail and go into receivership. But for Citigroup, of course, such a failure would have broader effects: it would not be able to keep the (many) promises of payment it regularly makes to other banks (cascades); it would create a “fire sale” situation wherein bank assets would have to be sold by the FDIC at a sharp discount; and confidence in the economy overall would sharply decline. A systemic risk regulator would intervene to prevent a Citigroup (or one of its similarly-sized cohorts) from taking these individually rational (but systemically risky) actions. Even Tyler Cowen suggests that we might need such a regulator, and it probably needs to be the Federal Reserve. I respectfully disagree.

I think the best way to regulate systemic risk is to use the insurance premiums charged to banks by the FDIC’s Deposit Insurance Fund (DIF). In very simple terms, the FDIC charges banks an insurance premium that is used to cover depositor losses when banks fail. Under the current system, under 12 U.S.C. 1817, the FDIC charges a “risk-based” premium that is supposed to be based on: (1) the probability that the DIF will incur a loss for that institution (i.e., that the institution will fail); (2) the likely size of any such loss; and (3) the revenue needs of the Fund. Trouble is, the premium is only based on the individual size of each bank’s risk to the Fund. Therefore, when calculating Citigroup’s premium, the FDIC does not include any of the “contagion” effects noted above. The FDIC isn’t actually charging for the real “likely size of any loss” that the bank will suffer from a big, interconnected bank’s failure.

I’ve seen a few different studies outlining how we could actually set the premiums to account for the systemic effects of a bank failure. I’m not going to venture into that. My only point is this: properly scaled, deposit insurance premiums that include systemic risk would obviate the need for any “systemic risk regulator.” If banks that create systemic risk faced increased premiums of any significant size, one would expect them to adjust their behavior to reduce the risk. In fact, the best approach might to charge punitively high premiums. One could anticipate that these punitive premiums could quash the moral hazard created by government bailouts; banks would know that they would pay a high price for setting themselves up to be “too big to fail.” Best of all, even if a bank was so brazen as to generate systemic risk in the face of high premiums, the money collected from the bank’s premiums would be enough to clean up the (system-wide) mess resulting the bank’s failure.

Of course, to accurately assess the premiums and let the market work its magic, the FDIC would need access to an enormous amount of information at banks. Not a problem! The FDIC has the right to examine any FDIC-insured institution if the FDIC’s board of directors finds the examination is necessary “for insurance purposes.” 12 U.S.C. 1820(b)(3). That would simplify the issue of setting up an entirely new systemic risk regulator with the authority to examine the books of market participants.

Still, I recognize there’s a big sticking point: any effective premium would probably have to apply to financial institutions that do not even operate with tradititionally FDIC-insured deposits. I also recognize that “excessive insurance premiums may hinder a financial institution’s capacity to resolve its bad loan problems and/or reinforce its owned capital.” (Financial Crises in Japan and Latin America, pg. 82.) And, lastly, there’s always a chance that FDIC systemic risk premiums would be miscalculated. There is some suggestion, for instance, that the FDIC misjudged the systemic risk posed by the failure of Continental Illinois National Bank in 1984. Even so, I think that’s better than just handing the keys over to the Fed, which has enough to worry about (like managing inflation).

How is Life Insurance Premium Calculated?

Posted on November 26, 2016 in Uncategorized

What is life insurance premium?

It is regular amount pays to insurance company to purchase a policy and to keep it in force; in return the insurance company agrees to pay your nominee or beneficiary a sum of money upon your demise. In the event you suffer total and permanent disability, the payment will be made to you; in these circumstances the money is usually payable in installments.

How is your life insurance premium calculated?

Life insurance companies don’t take risks to cover an insured when they are determining the rates, they want to take precautions to ensure the insured won’t die prematurely, because the pay out will be more than the amount the insured paid.

The insurance companies collect the premiums from the policyholders and pay for the overhead and administrative expenses, they invest the money to create a pool of money to pay claims and make their profit from investment, premiums collected are not enough to sustain, so they have to calculate precisely, otherwise their business will be at a loss.

The calculation of life insurance premium is based on age, gender and health

A younger person has a longer life span, so his/her policy has a longer maturity, and it is axiomatic that his premium will be cheaper. According to mortality table women outlived men, so women have lower rates on life insurance. Family medical history also plays an important role, for example if a person’s parents or family members suffered diabetes or high-blood pressure he may have to go for medical check-up before he buys a policy, and he is classified as high risk buyer, the insurance company will access him and consider whether or not to take the risk to insure him.

Each an every insurance company sets its own rates of life insurance premium, the type and amount of insurance you purchase and your lifestyle habits also affect your premiums, such as if you are a smoker you will pay a higher rate.


Health Insurance Premiums and the Problem of the Cost

Posted on November 18, 2016 in Uncategorized

Premiums will rely on many factors including health history, age, amount of family members, deductibles and co-pays chosen and your location. The plan required truly relies on the individual or family.

There are two main factors influencing health insurance policy rates and premiums. The first is your own health history in addition to your family health. Second cause is age.

Most of insurance companies give plans with costlier premiums to those with critical or chronic states such as disease of coronary, cancer, diabetes or elevated blood pressure.

Due to the rising price of health care in the U.S., medical insurance is at the present a serious problem. For that reason, standard health insurance premiums, which are simple to pay, could make sure insurance coverage for the majority of Americans.

If you are amongst the 47 million Americans devoid of health insurance, you are almost certainly looking for alternatives to assist lower premiums in order that they fit in your own family financial plan. With very various alternatives, it could be demanding to decide which policies and which characteristics are the best for you and your family’s wants.

Health insurance premiums will be different from company to company, policy to policy, state to state and so on. That’s the cause why we constantly suggest that people get a number of health insurance quotes prior to they make a decision on a policy since it’s likely that with a little extra inquiry they may be capable of considerably lower their health insurance prices.

However, the problem for many individuals is price. Premiums for health insurance have been increasing as the prices of drugs and treatments raises. But, like any type of insurance, there are a number of straightforward steps you could take to decrease your risk to insurers and consequently the price to you.

As you could see in your mind’s eye health insurance may be expensive if you’re being ill with any health connected problems. But, if you live in shape and attempt to hold to a healthy way of life then possibilities are good your insurance premiums will reveal your health aware choices in the form of a low-price or lowered insurance premium.

You could take assistance from autonomous insurance agents. These agents act for several insurance agencies and could direct you to choose the appropriate type of health insurance policy and then plan your premiums at an affordable rate. Because autonomous agents will fight to get the business – thus you’ll get serious agreements rapidly.