Probability, Financial Mathematics & Underwriting.
These three subjects are very important pillars on which Life Insurance stands. In this article we will see how the principles of these subjects can be used by everybody to the most advantage.
Probability.
The theory of probability tells us that good or bad events happen to everybody and that we have got an even chance of getting these events. While we need not be prepared for the events with a good outcome we should be prepared for the bad events. Normally we all wish that good events should happen and bad events should not happen. But we cannot avoid bad events from happening. I used to hear elderly persons saying “don’t think that bad events may happen. Hope for the best. Have belief, faith that only good events will take place etc.” But in spite of all beliefs, bad events do happen.
When we see others suffering from such events and think that we may also be subject to such events and be prepared for them, then the impact of these will be much less.
But many people do not think about this, and always think that what happens to others may not happen to them. To quote one example, in electric trains in Mumbai, there are many accidents of people falling from the train, either injuring themselves or losing their limbs or life. But in spite of this, a large number of people travel hanging from the trains even when there is sufficient place inside the train. What is the logic for this? The general feeling seems to be that what happens to others may not happen to me.
There are many such instances. Even though people see other persons suffering from lung cancer etc due to smoking, people continue to smoke. Even after seeing the ill effects of drinking people continue to drink.
Only a quote comes to mind. Wise people learn from the experience and mistakes of others. Middle level people learn from their own experiences and mistakes. But many people do not learn from others’ or their own experiences and commit the same mistakes again and again and suffer the consequences.
Probability is nothing but the estimation of past experiences of a large number of people. We can use probability theory usefully for solving many of our life’s problems.
Financial Mathematics.
This subject is studied in Life insurance for the purpose of investing policyholder’s money so that they can be returned to them as and when necessary. But knowledge of finance and compound interest is very useful for everyday life and every person can try to understand and utilize these principles to his/her advantage.
But how many people understand these principles. Even educated persons do not bother about the consequences of too much of spending and borrowing. Let us see an example of credit cards. Credit cards are to some extent useful for certain occasions. But do all the people who own credit cards use them wisely. What is the interest rate on credit cards? Approximately 2.95% per month or 36% per annum, which is quiet high. Why we should pay our hard earned money towards such a high rate of interest? There is another drawback of the credit card. Suppose we go out with Rs. 1000 in our pocket and see some article worth Rs. 1500. We may come without buying, and on second thought may decide not to buy that article, thereby saving Rs. 1000. But if we are having a credit card we may tend to buy the article, as many times we may not be able to control the
momentary temptation. In spite of these disadvantages many people go on getting credit cards and buying without bothering about repayment. What will happen in the long run?
I give below a news item that came in a newspaper on 20-07-2003.
Debt-ridden mother kills self, 3 children.
“A South Korean mother struggling with huge credit card debts pushed 2 of her children out of a high-rise apartment window and then jumped to her death with her youngest child in her arms, police have said, Reuters report from Seoul. The four deaths in the port city of Inchon near the capital Seoul on Thursday underscored South Korean’s mushrooming credit card debt problem. Media have reported bizarre robberies and kidnappings spurred by debt.”
This year there were suicides of farmers due to heavy debts. Because of drought conditions, they could not repay their debts, which resulted in their committing suicide. One of the main reasons for many suicides is a financial problem. If the trend of credit card use by a large section of middle level income people continues, we may hear about more credit card suicides in our country also, in the not distant future.
There are scores of persons who earn very well in their youth, but because of lack of financial knowledge, spend most of their money in wasteful ways and suffer in the old age. The number of old age homes for destitutes are increasing alarmingly.
Further lack of financial and compound interest knowledge makes many people fall a prey to the glittering advertisements and attractive offers of fly by night operators and lose their entire life’s savings.
Underwritng.
What is underwriting? It is the assessment of risk of a person based on material facts relating to his health, occupation, habits etc. This essentially relates to the health of a person and the knowledge of underwriting is nothing but the knowledge of the functioning of the body and the factors, which are useful for good health, and the factors which are not good for the health. Again this is very important to all people, as we are concerned about our health.
We spend a lot of time in choosing our clothes, keeping our body clean by bath and using cosmetics and spend a lot of time in standing before the mirror. Why do we spend so much of time on these? We want to impress others with our appearance and personality. That is, we take so much care and spend so much of time for the outside appearance of our body. But do we give that much attention to what is happening inside our body? How many of us know what is the standard weight? Whether we are overweight or underweight? What should be our standard BP? What should be our normal chest expansion?
Health is one of the important aspects of our life, next to wealth. There is so much of knowledge and information that is available in books, journals and on Internet. But how many of us bother to know about these, which are very essential for our health?
The most widely prevalent problem of health for people beyond the age of 45 is gastric problem. The medicines like Eno, Gelusil and Digene may be the highest selling drugs in the market. But how many of us know that by changing our food habits and taking to more fruits, vegetables (uncooked) and sprouted pulses etc., in our diet, we can easily control the gastric problem. Even if we know, we may not try them, as we are interested more about eating spicy and tasty foods even though they are harmful in the long run.
A Doctor asked his patient “What is your problem?”
The patient replied : “It is for you to find out.”
The Doctor replied : “ Go to the next door. There is a Veterinary Doctor who only will diagnose without asking any questions to the patient.”
A Doctor advised his patient to eat more fruits. The patient returned the next day complaining of stomachache. He told the Doctor that he followed the advice given by the Doctor and ate only one fruit and got stomachache. The Doctor wondered how by eating one fruit he can get stomachache and asked him “What fruit did you eat?” The patient replied that he ate a jackfruit.
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