Friday, August 3, 2007

Severance Insurance

Why would an insurance company want to offer severance insurance? And to balance out the discussion, why wouldn't an insurance company want to offer severance insurance? The answer to the first question is probably pretty simple...but also pretty naive. An insurance company would want to offer it, because it would be a new line of insurance, a new opportunity to improve returns on invested capital to benefit its shareholders, a new oportunity to differentiate itself from its competitors, a new opportunity to add a "short tail" product.

But for every one of these answers (and there are plenty more, I'm sure), I suspect the insurers would say there is an offsetting risk. And I'm sure they will hang their hats on the "adverse selection/moral hazard" argument, that those who would buy the coverage would be those who controlled the risk. For instance, a corporation would only buy the coverage, if they knew they were going to need it, or an individual would only buy a retail version of severance insurance if s/he thought they were at risk for getting fired.

No question, if there really is an insurance product out there, it has to deal successfully with this issue. The question is how could that happen. The answer...I don't know.

I'll keep digging.


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