Many educated Americans, who have lost their job for nearly a year, find that their unemployment benefit is running out. They are desperate to get a job. Some are willing to work for free, to show that they can contribution and wait for a chance to get a full time job later. Many are willing to work as day labor to get paid by the day.
In the past, during boom times, the free market was able to create jobs. Most of these jobs are created by small businesses. In difficult times, these businesses are not able to get credit, as banks are more cautious. Without credit, these small entrepreneurs cannot grow their business and employ the available labor.
Many people hope that the economic situation will improve. But, it could get worse - and this is the more likely outcome. There has been so much loss of trust in our business, financial institutions and even in the free market.
Many governments reduced interest rate to reduce business cost and encourage business owners to expand this business and create more jobs. This strategy does not seem to be working. It is now time for governments start to create jobs directly. It may be necessary to reduce the length of the work week so that the available jobs can be shared by more people.
The economic system has to change. We may have to go back to some form of central planning.
Tan Kin Lian
Wednesday, December 2, 2009
Avoid over insurance and moral hazard
There was a case of a person who bought personal accident insurance from many insurance companies, and had an accident where he lost an eye. The total amount claimed under the insurance companies amounted to more than $2 million.
The insurance companies suspected that the accident was intentional,i.e. moral hazard. But they were not able to prove their case in court. They lost the case and had to pay the claims.
To avoid moral hazard, some insurance company adopt the following approaches:
a) ask the applicant to declare the total amount that is insured under all existing policies
b) restrict the total amount that can be paid under a claim.
If the applicant declares a total insurance that is excessive, the insurance company is likely to reject the application to avoid moral hazard. If the applicant fails to disclose this material fact in the application, the insurance company has the grounds to reject the claim.
If an insurance company provides insurance for $500,000 and sets a limit of $1 million for all claims for the same event, and the insured has insured for a total of $2 million, the insurance company is required to pay only half of the insured sum, i.e. $250,000.
Tan Kin Lian
The insurance companies suspected that the accident was intentional,i.e. moral hazard. But they were not able to prove their case in court. They lost the case and had to pay the claims.
To avoid moral hazard, some insurance company adopt the following approaches:
a) ask the applicant to declare the total amount that is insured under all existing policies
b) restrict the total amount that can be paid under a claim.
If the applicant declares a total insurance that is excessive, the insurance company is likely to reject the application to avoid moral hazard. If the applicant fails to disclose this material fact in the application, the insurance company has the grounds to reject the claim.
If an insurance company provides insurance for $500,000 and sets a limit of $1 million for all claims for the same event, and the insured has insured for a total of $2 million, the insurance company is required to pay only half of the insured sum, i.e. $250,000.
Tan Kin Lian
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