Saturday, 18 August 2007

Why Insurance Is Exactly The Same As Bookmaking

At a first glance, there might not appear to be much in common between the bookmaking and insurance industries. Think again. The two sectors are virtually identical.
The basic foundation of the business models for bookmakers and insurers involves the accurate analysis of risk assessment and management. These market makers have an aversion to risk and create strategies whereby any exposure is diversified and/or hedged away from the risk profile of the company. This may be achieved in a range of ways.
All insurance companies rely on the reinsurance sub-sector. These industry giants charge the smaller operators for effectively offering an enhancement of the risk profiles of the small operators. Lloyds of London, Swiss Re, Berkshire Hathaway etc will then trade these probabilities between themselves as financial risk is shunted around the global insurance sector. The resulting structure is opaque, to say the least, as risk is converted into a tradeable asset. As the international financial markets are discovering in the current credit squeeze, in a time of crisis nobody can be sure where the real exposure to risk lies. This, as The Economist states "has shown weaknesses in some of the foundations of modern finance". Mathematical models involving algorithmic and neural network black box techniques are fine at spotting patterns in times of market calm but any new systemic infrastructures render such modelling worse than useless - Goldman Sachs were financially compromised last week via a market occurrence that their proprietary analysis told them should happen once every 100,000 years!
Bookmakers behave similarly. Whether the template is Ladbrokes returning their off-course liabilities to the rails and betting rings of British horseracing courses or Ladbrokes behaving similarly in the illegal Far East football betting markets, the prime aim of market makers is to hedge any risk that they do not wish to keep on their trading books. The European bookmakers also trade directly between themselves in private markets which serve the purposes of risk removal and informational and/or disinformational proprietary strategies. This is high stakes manipulated poker relating to the outcome of sports events.
The major infrastructural difference between these two industry sectors merely relates to the expansiveness of the area covered by their operations. The big picture to be analysed by an insurer is global whereas the bookmakers are dealing with an enclosed system. This is a major dichotomy and, yet, the two sectors move back towards equivalence by their respective responses.
Every effort is made by both the insurance and the bookmaking industries to tilt the playing field markedly in their favour. Insurers utilise such strategies as regulatory capture, abusive clause creation and arbitrary charges and loss adjustments to remove value from the consumer to the favour of the company. Such tactics are omnipresent in any insurance policy whether personal or business and, in our estimation, undermine any logic in getting insured in the first place as the market is priced significantly against a clients interests when viewed holistically.
The closed system of football is even more manipulated. Football bookmakers employ all the same tactics as the insurance sector and then some. The traditional bookies use the overround percentage to tilt the market in their favour before layering their more corrupt trading strategies on top. To the uninitiated, the degree of overround is a built-in bias in the marketplace. For example, for tomorrow's Manchester derby match, Ladbrokes are offering prices of City 7/2, United 8/11 and the Draw 21/10 which represent actual probabilities of approximately 22%, 58% and 32% which results in a book overround of 112%. Based on a 100% book, these prices should be 4/1, 10/11 and 13/5. So, if the Reds were to win, a £1000 bet would return £727 as opposed to £909 without any market tilt. But this machination is only the start of it.
The bookmakers control the outcome of football matches through the coercion of insiders. Players, referees and/or management work together with the bookies to ensure an outcome suitable to the bookmakers bottom line. When a match is under the direct control of any particular bookmaker, there is no need for the manipulating bookie to hedge or offset any liabilities as the match outcome is known prior to the event taking place. Consequently, incredibly skewed books are established for these corrupted events as the market makers happily take any amount of money on outcomes that they KNOW will not occur. The difference between this type of event and a truly competitive event is obvious as, in the latter case, a bookmaker will be seeking to merely achieve a balanced book to avoid exposure to a future reality outside of their proprietary influence. This market strategy is evident to all professional gamblers by the response of the bookies to positions traded in the marketplace. Beneficial prices are offered by the layers on positions that are guaranteed losers while price scalping occurs in all other scenarios.
The bookmakers are always on the lookout for valuable inside information which might solve a particular football match outcome. By offering preferential trading conditions to industry insiders and professional market analysts and brokers, a bookmaker is able to develop a market strategy that increases profits by the buying of information. In this manner, the betting markets are highly regressive with those least able to accommodate losses being charged the most for the trading experience. Not content with this collection of highly abusive business templates, the bookmaking sector has a further pair of aces up its collective sleeve. Firstly, gambling winnings are not enforceable under law and, consequently, all professional traders must build in to their trading strategies the unpleasant reality that the final payment from a bookmaker will not be made. Secondly, once it is apparent to the industry that you are a winning client, there are very few bookmakers who will accommodate your trading positions. In the same manner that casinos bar card-counting blackjack players, Ladbrokes and their like will inform you that "it is not in our economic interests to continue to offer you trading facilities."
As the systemic risks in the global insurance industry become more unpredictable due, in particular, to issues related to climate change, a similarly abusive infrastructural attitude is developing. The breakpoint for this new attitude in insurance was 9/11. The insurance industry haggled, bartered and battled for several years arguing that the demolition of the Twin Towers was one event rather than two separate events. This unethical posturing was profit-motivated and this strategy has now been fine-tuned and, in a direct equivalence with bookmakers, the insurers will now not take on certain types of risk. Following Hurricane Katrina, American insurance companies either refused to insure in hurricane zones or made the cost of such insurance prohibitively expensive. The parallels between insurance, bookmakers and casinos is startlingly similar.
A further intriguing area to focus on is the psychology of risk. Gambling is an addiction that incorporates a whole spectrum of personality attributes and disorders. For example, magical thinking enforces all players of the National Lottery to go to ridiculous lengths to ensure that they purchase their tickets each week as the FEAR that their numbers might come up in the very week where they choose to do something else with their money is colossal. And irrational... Similarly, the insurance industry thrives on fear. The likelihood of being burgled in England has significantly fallen over the last decade which is not a piece of good news that one finds trumpeted throughout the media. The insurers wish for us to remain terrified of burglary, mugging, theft, loss of belongings while travelling etc to an extent massively beyond the real probability of such an occurrence actually coming to fruition. Even better still, from the perspective of the insurance industry, is regulatory capture which enforces insurance on the population whether they desire such cover or not. Health insurance in America is a particularly hot potato at the moment while compulsory car insurance in England is another prime example of regulatory capture.
The marketing of insurance and gambling products show similar equivalence of strategy. William Hill's homepage is currently offering four introductory offers. These offers are very revealing as to where the bookmaker wishes you to place your bets. £50 ($100) bonuses are offered for opening sports betting or casino accounts and £20 for bingo. But, for the highly corrupt poker platforms offered online, Willie Hill's offer a $500 introductory bonus. As we have stated before, it is beyond our comprehension why any individual would trust the efficacy of an online poker game where the cards, the table, the other players and the reality of the game are so opaque and open to rampant manipulation that the format is a magnet for the criminalised businessperson. Similarly with insurance where, for example, it is almost impossible to buy any object with a plug on it or to make any travel booking without some slimy agent informing us of the risks related to the purchase.
So, how should the person on the street deal with these corrupt edifices? With gambling, the solution is simple. Unless you are a professional analyst or have access to privileged inside information, forget it. You are a patsy and you will lose your hard-earned cash. With regard to insurance, the basic strategy should be similar. Apart from areas of compulsory insurance, do the mathematics and determine the value (or, more often, the lack of it) in insuring yourself against a particular risk. If it appears that the insurance company has mispriced the risk then, by all means, seek cover but one should remember that the insurers have highly developed business models and the likelihood of mispricing is minimal.
Personally, I possess no insurance whatsoever anywhere. I minimise my risks by creative work/life balancing and have developed a type of individual amortisation account to provide a safety net against potential future occurrences that are outside my control. Similarly, I never hedge any trading positions unless I am certain that my market exposure has become incorrect due to externalities.
I refuse to pay others for the maintenance of an adequate risk profile and I would advise everybody to behave similarly. We do not need any external cover.

© Football Is Fixed/Dietrological