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Risk: The Morbidity Principle

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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 November 15, 2021

    20 Ways to Describe Yourself in a Job Interview

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    20 Ways to Describe Yourself in a Job Interview

    “Please describe yourself in a few words”.

    It’s the job interview of your life and you need to come up with something fast. Mental pictures of words are mixing in your head and your tongue tastes like alphabet soup. You mutter words like “deterministic” or “innovativity” and you realize you’re drenched in sweat. You wish you had thought about this. You wish you had read this post before.

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      Image Credit: Career Employer

      Here are 20 sentences that you could use when you are asked to describe yourself. Choose the ones that describe you the best.

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      “I am someone who…”:

      1. “can adapt to any situation. I thrive in a fluctuating environment and I transform unexpected obstacles into stepping stones for achievements.”
      2. “consistently innovates to create value. I find opportunities where other people see none: I turn ideas into projects, and projects into serial success.”
      3. “has a very creative mind. I always have a unique perspective when approaching an issue due to my broad range of interests and hobbies. Creativity is the source of differentiation and therefore, at the root of competitive advantage.”
      4. “always has an eye on my target. I endeavour to deliver high-quality work on time, every time. Hiring me is the only real guarantee for results.”
      5. “knows this job inside and out. With many years of relevant experience, there is no question whether I will be efficient on the job. I can bring the best practices to the company.”
      6. “has a high level of motivation to work here. I have studied the entire company history and observed its business strategies. Since I am also a long-time customer, I took the opportunity to write this report with some suggestions for how to improve your services.”
      7. “has a pragmatic approach to things. I don’t waste time talking about theory or the latest buzz words of the bullshit bingo. Only one question matters to me: ‘Does it work or not?'”
      8. “takes work ethics very seriously. I do what I am paid for, and I do it well.”
      9. “can make decisions rapidly if needed. Everybody can make good decisions with sufficient time and information. The reality of our domain is different. Even with time pressure and high stakes, we need to move forward by taking charge and being decisive. I can do that.”
      10. “is considered to be ‘fun.’ I believe that we are way more productive when we are working with people with which we enjoy spending time. When the situation gets tough with a customer, a touch of humour can save the day.”
      11. “works as a real team-player. I bring the best out of the people I work with and I always do what I think is best for the company.”
      12. “is completely autonomous. I won’t need to be micromanaged. I won’t need to be trained. I understand high-level targets and I know how to achieve them.”
      13. “leads people. I can unite people around a vision and motivate a team to excellence. I expect no more from the others than what I expect from myself.”
      14. “understands the complexity of advanced project management. It’s not just pushing triangles on a GANTT chart; it’s about getting everyone to sit down together and to agree on the way forward. And that’s a lot more complicated than it sounds.”
      15. “is the absolute expert in the field. Ask anybody in the industry. My name is on their lips because I wrote THE book on the subject.”
      16. “communicates extensively. Good, bad or ugly, I believe that open communication is the most important factor to reach an efficient organization.”
      17. “works enthusiastically. I have enough motivation for myself and my department. I love what I do, and it’s contagious.”
      18. “has an eye for details because details matter the most. How many companies have failed because of just one tiny detail? Hire me and you’ll be sure I’ll find that detail.”
      19. “can see the big picture. Beginners waste time solving minor issues. I understand the purpose of our company, tackle the real subjects and the top management will eventually notice it.”
      20. “is not like anyone you know. I am the candidate you would not expect. You can hire a corporate clone, or you can hire someone who will bring something different to the company. That’s me. “

      Featured photo credit: Tim Gouw via unsplash.com

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