Humans have always been attracted to fast money like moths to flames. Nothing is new in human behavior, at least in this regard. The difference today though is how technology can now measure how strongly attracted the moths are to the flames.
An old-fashioned analysis of a gold rush is a good example of people chasing easy, fast money. This example is very relatable versus discussing financial engineering, huge debt loads that are not really debt but sort of is debt, derivatives, cyber currencies, and so forth. In an old-fashioned gold rush, the Klondike is maybe the most assessable example because the old photos show the gold rush so plainly: a stark dark grey line of men going straight up a white mountain. Thousands of men with no mining experience gave everything they had, including their lives, for the potential of becoming insanely rich for nothing but their labor and whatever grubstake they could gain and spend. They had to climb that huge mountain multiple times because the Canadians posted guards at the top not letting the men go further until they had packed enough materials to meet the Canadian asset requirement. This requirement was designed to prevent the miners from starving because once at the mountain top, they still had to walk and float down rivers for hundreds of additional miles. It was arduous and the journey claimed many lives.
Almost none of the miners got rich and few made any material money. Who made money? Those mercantilists selling them the gold pans, shovels, saws, axes, rafts, and food. Some significant fortunes were made by these retailers. People selling their claims for high prices, land that didn’t have any gold did all right too. Sometimes these were honest sales where in a seller’s market, the seller took advantage of the buyer’s short-sighted greed. In other cases, the seller salted the claim and took even greater advantage of the buyer’s greed. The saloons and alcohol sellers did well too, as did some of the steamship owners. All these entities made much more than 98% of the miners.
Gold fever was a good name for this kind of lust for fast riches.
Most of the time though, measuring the intensity of this lust has historically been difficult to impossible. One of the great things about the internet is the ability to count views. Of course, valuing a company based on views is ridiculous. However, measuring the interest in subjects and with the right technology, even identifying why interest exists (i.e., the social media interest-based algorithms), is possible.
What does all this have to do with insurance? We have new short-term, fast money interests coming into the industry that probably are not going to be healthy.
The new, fast money is related to investors either propping up new carriers or starting new carriers in difficult markets, such as cyber. Please do not read the following as throwing every such entity under the bus because I’m not. Some of the new markets are being developed by people more capable than many of the people running regular insurance companies. Quite a few of these entrants are not only more capable, but they’re also after fast money.
A common example is when someone starts or invests in a company and then charges that company a service fee. Usually, this fee is around 20%. Insurance carriers’ total underwriting expenses including reinsurance and commissions needs to be less than 30% if they have a hope of surviving (some exceptions exist in specialty lines). If the charge prior to commissions is 20% and commissions average even 10%, there is no money left for carrier salaries, reinsurance, IT, or anything else. But the investor gets their 20% of premiums anyway, slowly eating up surplus unless the carrier can achieve a superb loss ratio, which most don’t achieve. And if the carrier goes bust, the investor does not have to return the 20% of annual premiums for the years they collected. And frankly, in analyzing some of these service agreements, I can’t figure out what they are providing that is worth 20%.
The damage is especially problematic if the investor gets their hands on surplus and pulls that surplus out of the carrier, leaving the carrier in a precarious position. I hope the insurance commissioners are watching these developments carefully.
Enough carriers are weak after making horribly bad investing decisions (who would have ever thought interest rates might increase from historic lows?) that they need significant capital contributions. We have geographies that have serious insurance deficiencies. Sharks see the easy prey perhaps like the hucksters who took the steamboats to the goldfields getting there prior to the miners climbing the enormous mountain.
The miners’ greed made them culpable even if the fraudsters committed the actual crime. And the greed among agents is significant. We can measure how many people read articles that address the opportunity to make fast money versus the number who read articles related to how to increase a firm’s value or increase operational efficiency or anything that requires effort. If this article was about getting rich quick: “The 3 things that will generate $100,000 in new sales this month,” it would be read by 100 times more people. A sensational article on sales would be fake, but the lust for riches creates focus on fake.
My grandmother told my grandfather that if he wanted to be a gold miner, he needed to learn how to be a miner and how to mine profitably. He obtained a degree in mining engineering, a difficult degree especially before computers when all the math had to be done manually. People generally would rather roll the dice to try to get rich quick rather than working for a better probability of making good money methodically.
But the people and firms that work methodically make so much more money over time and usually simultaneously build something good for society. One of the reasons methodical-work is more assuredly successful is there is less competition. If everyone is chasing the same pot of gold at the same relative speed, only a few can ever succeed because the competition is too intense. With fewer people working methodically, less competition exists.
The miners making multiple trips over Chilkoot Pass in the Klondike were desperate, stupid or simply so consumed with gold fever they became desperate and stupid. And at every stage someone more methodical was willing to take advantage of them.
Only a few people will read this article but the probability of the people who do read it being methodical in nature is high. My suggestion is to build a strategy that works in the long term by taking advantage of the myriad mistakes people with get rich quick minds will make. But always beware not to fall into this trap yourself. Gold fever can be contagious!
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