Powers was appointed deputy insurance commissioner for the Commonwealth of Pennsylvania, and served as member of the Pennsylvania Health-Care Cost Containment Council during its formative years. He has consulted on a variety of regulatory and tax concerns for clients in both the public and private sectors.Powers applied the “Page 99 Test” to his new book, Acts of God and Man: Ruminations on Risk and Insurance, and reported the following:
Reports abound that the realm of risk and insurance – with its chary underwriters, cynical claim adjustors, and calculating actuaries – is dry and forbidding. In Acts of God and Man, I challenge this notion by proposing a “science of risk” that entails:Learn more about Acts of God and Man at the Columbia University Press website and Michael Powers's webpage.
The book is a congeries of temperate instruction, robust opinion, overwrought speculation, and strained humor, in roughly equal parts. The a priori probability that page 99 would fall into the first of these categories is therefore approximately 1/4. Knowing this, the F. M. Ford-inspired reader will experience a level of “surprise” of about 2 (i.e., the negative of the log [base 2] of 1/4, as explained on page 183), but a level of “happiness” that depends entirely on personal preferences (as asserted on page 80).
- a fundamentalist Bayesian (i.e., subjective/judgmental) approach to modeling uncertainty and assessing probabilities;
- a formal distinction between the primarily natural “aloof” risks of insurance and the largely artificial “non-aloof” risks of other financial markets; and
- a personalized scientific method that casts off the shackles and inconsistencies of more orthodox methods too burdensome for the study of risk.
In fact, page 99 marks the beginning of the formal discussion of aloof and non-aloof risks:
So what are the essential differences between insurance and other financial services? And will these differences persist into the future?In subsequent paragraphs, I explain that aloof risks are those that can influence all financial risks as they propagate through time, but are themselves immune to the effects of their non-aloof counterparts. For example, a satellite-damaging solar flare that imparts adverse effects on earthbound financial markets is entirely aloof, whereas the economy-sensitive market price of gold is clearly non-aloof.
Traditionally, distinctions between insurance and other financial risks have relied on either: (1) regulatory definitions and institutional terminology/jargon; or (2) attempts to draw a theoretical difference between the categories of pure risks (characterized by the negative outcomes – i.e., losses – common to insurance) and speculative risks (characterized by both positive and negative outcomes). Although the latter approach may be intuitively attractive, it possesses little mathematical rigor. All that is needed to transform a pure risk into a speculative risk is to subtract its expected value; then, like a market price, it will have the potential of both increasing and decreasing.
As an alternative to the pure risk/speculative risk dichotomy, I would distinguish between the “aloof” and “quasi-aloof” risks of insurance and the “non-aloof” risks of other financial services markets.
Beyond page 99, Acts of God and Man will appeal to a broad assortment of readers. For those attracted by immoderate opinion, there is a categorical denunciation of observational studies (which happen to form the basis for most business-related empirical research). For those preferring wanton speculation, I adduce personal evidence of the paranormal. And for those contented by repeated attempts at feeble humor, a series of end-of-chapter dialogues divided into three “Acts” – featuring God, angels, saints, ordinary people, and even a lawyer and statistician – will likely suffice.
--Marshal Zeringue
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