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Risk: The Morbidity Principle

Risk: The Morbidity Principle


    (Editor’s Note: The following is an excerpt from the book Acts of God and Man: Ruminations on Risk and Insurance by Michael R. Powers. Powers is professor of risk management and insurance at Temple University’s Fox School of Business, and distinguished visiting professor of finance at Tsinghua University’s School of Economics and Management. He serves as chief editor of the Journal of Risk Finance and the Asia-Pacific Journal of Risk and Insurance. In the book, Powers discusses how risk impacts our lives, health, and possessions and proceeds to introduce the statistical techniques necessary for analyzing these uncertainties. This excerpt (originally posted on the Columbia University Press Blog) is from the chapter The Alpha and the Omega of Risk: The Significance of Mortality, where Powers discusses the morbidity principle. For more information please visit http://www.cup.columbia.edu, and follow the author on Facebook.)

    In today’s business world, professional risk managers often construct extensive lists of pure and speculative risks, including every imaginable type of uncertainty to which individuals and firms are exposed. Among pure risks, one finds traditional “insurance” perils such as fire, wind, theft, disease, and professional negligence, along with more complex hazards such as substandard construction, inadequate security, technological obsolescence, and political instability. Speculative risks include real estate, common financial securities (stocks, bonds, commodities, etc.), and interest and currency-derivative products, as well as market- specific changes in the prices of raw materials, human capital, and end-of-line goods and services.

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    Fortunately, a remarkable simplicity underlies these myriad risks. Despite the great number of individual sources of risk, there are only a very few exposures subject to risk. These fundamental exposures are life, health, and possessions.

    One then might ask: Why should we be concerned about the quality of life? I would argue that the following two principles provide the answer:

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    1. The Morbidity Principle. An individual/corporation/society whose quality of life is damaged will have a greater chance of imminent death.
    2. The Lost-Gratification Principle. An individual/corporation/society whose quality of life is damaged may not have the opportunity to enjoy recovery of health or restitution of possessions before death occurs (i.e., “a good quality of life today is worth more than a good quality of life tomorrow”).

    In short, the life exposure underlies all other types of exposures. For individuals and societies, the morbidity principle would have been particularly evident in the Old Stone Age, when human beings had developed useful tools, but were still primarily hunter- gatherers. At that time, quality-of-life exposures, although they existed, could not be separated easily from the life exposure because the loss of health (through injury or illness) or possessions (clothing, shelter, or hunting implements) would increase significantly the chance of death in the near future. Hence, in many cases loss of quality of life would be tantamount to loss of life.

    The morbidity principle continues to apply to individuals and societies today, but not as dramatically. Despite the various “safety nets” that modern governments provide for their more vulnerable citizens, it is still an empirical fact that the injured and ill, as well as the economically poor, die at faster rates than others. This is also true for societies at large, as can be seen in the declines of certain populations in Eastern Europe since the dissolution of the Soviet Union. With regard to corporations, reductions in revenue, market share, and/or profitability are in many cases harbingers of bankruptcy. Although a cursory review of today’s financial products might give the impression that quality-of-life exposures actually overshadow the life exposure — after all, the only financial product that specifically addresses mortality is life insurance — the lost-gratification principle belies such a conclusion. If anything, the role of mortality is difficult to discern because it is so prevalent that we tend to overlook it.

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    The life exposure underlies all traditional insurance policies, whether held by individuals or commercial enterprises. This is because the policies are designed to provide reasonably quick medical attention or restitution of property, presumably before the policyholder’s life terminates. In addition, the life exposure is fundamental to all financial transaction risks. Lenders, whether they be individuals, corporations, or government bodies, must be compensated for the possibility that they will cease to exist before their loans are repaid; and the early death of a borrower can transform this possibility into a certainty. In other words, mortality is the essential reason, even in an economy with no expected change in either income or prices, “a dollar today is worth more than a dollar tomorrow,” and thus the reason the nominal risk- free rate of return (oft en taken to be the nominal return on a U.S. Treasury bill) must be strictly greater than 0.

    (Photo credit: Dice rolling on Business via Shutterstock)

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    Last Updated on March 29, 2021

    5 Types of Horrible Bosses and How to Beat Them All

    5 Types of Horrible Bosses and How to Beat Them All

    When I left university I took a job immediately, I had been lucky as I had spent a year earning almost nothing as an intern so I was offered a role. On my first day I found that I had not been allocated a desk, there was no one to greet me so I was left for some hours ignored. I happened to snipe about this to another employee at the coffee machine two things happened. The first was that the person I had complained to was my new manager’s wife, and the second was, in his own words, ‘that he would come down on me like a ton of bricks if I crossed him…’

    What a great start to a job! I had moved to a new city, and had been at work for less than a morning when I had my first run in with the first style of bad manager. I didn’t stay long enough to find out what Mr Agressive would do next. Bad managers are a major issue. Research from Approved Index shows that more than four in ten employees (42%) state that they have previously quit a job because of a bad manager.

    The Dream Type Of Manager

    My best manager was a total opposite. A man who had been the head of the UK tax system and was working his retirement running a company I was a very junior and green employee for. I made a stupid mistake, one which cost a lot of time and money and I felt I was going to be sacked without doubt.

    I was nervous, beating myself up about what I had done, what would happen. At the end of the day I was called to his office, he had made me wait and I had spent that day talking to other employees, trying to understand where I had gone wrong. It had been a simple mistyped line of code which sent a massive print job out totally wrong. I learn how I should have done it and I fretted.

    My boss asked me to step into his office, he asked me to sit down. “Do you know what you did?” I babbled, yes, I had been stupid, I had not double-checked or asked for advice when I was doing something I had not really understood. It was totally my fault. He paused. “Will you do that again?” Of course I told him I would not, I would always double check, ask for help and not try to be so clever when I was not!

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    “Okay…”

    That was it. I paused and asked, should I clear my desk. He smiled. “You have learnt a valuable lesson, I can be sure that you will never make a mistake like that again. Why would I want to get rid of an employee who knows that?”

    I stayed with that company for many years, the way I was treated was a real object lesson in good management. Sadly, far too many poor managers exist out there.

    The Complete Catalogue of Bad Managers

    The Bully

    My first boss fitted into the classic bully class. This is so often the ‘old school’ management by power style. I encountered this style again in the retail sector where one manager felt the only way to get the best from staff was to bawl and yell.

    However, like so many bullies you will often find that this can be someone who either knows no better or is under stress and they are themselves running scared of the situation they have found themselves in.

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    The Invisible Boss

    This can either present itself as management from afar (usually the golf course or ‘important meetings) or just a boss who is too busy being important to deal with their staff.

    It can feel refreshing as you will often have almost total freedom with your manager taking little or no interest in your activities, however you will soon find that you also lack the support that a good manager will provide. Without direction you may feel you are doing well just to find that you are not delivering against expectations you were not told about and suddenly it is all your fault.

    The Micro Manager

    The frustration of having a manager who feels the need to be involved in everything you do. The polar opposite to the Invisible Boss you will feel that there is no trust in your work as they will want to meddle in everything you do.

    Dealing with the micro-manager can be difficult. Often their management style comes from their own insecurity. You can try confronting them, tell them that you can do your job however in many cases this will not succeed and can in fact make things worse.

    The Over Promoted Boss

    The Over promoted boss categorises someone who has no idea. They have found themselves in a management position through service, family or some corporate mystery. They are people who are not only highly unqualified to be managers they will generally be unable to do even your job.

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    You can find yourself persistently frustrated by the situation you are in, however it can seem impossible to get out without handing over your resignation.

    The Credit Stealer

    The credit stealer is the boss who will never publically acknowledge the work you do. You will put in the extra hours working on a project and you know that, in the ‘big meeting’ it will be your credit stealing boss who will take all of the credit!

    Again it is demoralising, you see all of the credit for your labour being stolen and this can often lead to good employees looking for new careers.

    3 Essential Ways to Work (Cope) with Bad Managers

    Whatever type of bad boss you have there are certain things that you can do to ensure that you get the recognition and protection you require to not only remain sane but to also build your career.

    1. Keep evidence

    Whether it is incidents with the bully or examples of projects you have completed with the credit stealer you will always be well served to keep notes and supporting evidence for projects you are working on.

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    Buy your own notebook and ensure that you are always making notes, it becomes a habit and a very useful one as you have a constant reminder as well as somewhere to explore ideas.

    Importantly, if you do have to go to HR or stand-up for yourself you will have clear records! Also, don’t always trust that corporate servers or emails will always be available or not tampered with. Keep your own content.

    2. Hold regular meetings

    Ensure that you make time for regular meetings with your boss. This is especially useful for the over-promoted or the invisible boss to allow you to ‘manage upwards’. Take charge where you can to set your objectives and use these meetings to set clear objectives and document the status of your work.

    3. Stand your ground, but be ready to jump…

    Remember that you don’t have to put up with poor management. If you have issues you should face them with your boss, maybe they do not know that they are coming across in a bad way.

    However, be ready to recognise if the situation is not going to change. If that is the case, keep your head down and get working on polishing your CV! If it isn’t working, there will be something better out there for you!

    Good luck!

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