Buying Risk

Typically, in the insurance business, we think of companies and agents as "selling insurance", and customers as "buying insurance." But how might our perspective change if we thought of this transaction in a different light? What if we spoke of carriers as "buying risk" and individuals as "selling risk"?

For isn't that essentially what really happens here? A driver/homeowners/business manager/etc possesses a measure of risk. A level of risk that is too much for them to keep. Think of the simple example of a driver. There's the risk of a $25,000 vehicle being stolen, totaled in an accident, caught in a hailstorm, or what have you. The risk of being injured in an accident, or causing injury to other people. And from that, the risk of being sued to pay for those injuries, plus some sort of punitive penalty. Most people cannot afford to keep that risk all to themselves. They need to unload it or share it with others. That's why insurance exists.

So they must sell off some of that risk. That's where the insurance company comes in. The insurance company steps in, offering to buy the risk that the individual (or corporation) wants to unload. And since risk has a negative value to its holder, the price would also be negative. Meaning, that the individual is willing to pay money to someone else to unload that risk.

If you want to sell your risk, what price would you set for it? If you want to buy risk, how would you determine how much to charge for it? Most obviously, you'd set your price – in either direction – based on the amount of risk being exchanged. Pure and simple.

So when a risk-seller misrepresents (lawyerly term for lying) how much risk is being exchanged, that is fraud. It's akin to a shady car dealer who rolls back odometers, or perhaps a Wall St. banker offering top-notch-rated mortgage derivatives for a bundle of Las Vegas homes.

I think there's more to this to be fleshed out, and I'd be interested, as always, to hear your thoughts.