I recently collected nearly £2500 from an insurance company because a policy had been mis-sold when I bought a house.
The policy was sold so the agent could get their commission. There was no credible justification for it. Worse, there was no record showing that I ever signed any paper authorising the charges.
When I talked to the investigation department, they said that off the record, between you and me, record keeping is incredibly poor, and my case was only unusual because I'd questioned the payments - and most people don't.
My partner is going through something similar, but the paper trail in her case is even more tenuous. The only justification on file for thousands of pounds in payments collected from the 90s onwards is a mortgage application she made a few years ago - and didn't even go ahead with.
This is on top of a national Payment Protection Insurance (PPI) scandal which forced insurance companies and banks to return billions of pounds.
Somehow this never seems to be labelled criminal fraud. It's always "Mistakes were made..." and no one is ever personally responsible.
So honestly, I'm finding it hard to be sympathetic to the poor exploited insurers in situations like this.
I once didn't fill in my Dutch VAT taxes (0 euro's by the way, it was an administrative formality) and I was fined.
Another time the tax authorities didn't pay me money back for almost 9 months, and it was only because I found out and they forgot because of some administrative mishap.
However, I'm not allowed to fine them.
I find it weird, because I'm pretty sure the mistake is similar in behavior and intention. Yet, I have to pay up and they don't.
Huh. HMRC in the UK realised they owed me money back in, IIRC 2018 and kept sending me actual paper cheques as their computer worked through consequences of the mistake year by year for the next few weeks. It was tiresome actually because I had to go to a physical bank, but I guess if it annoyed me that much I needn't have paid the cheques in.
They pay 0.5% (which is better than most of my bank accounts) on all sums they owe as a result of their own mistake rather than either your mistake or some third party screwing up (e.g. your employer fat-fingers paperwork causing you to pay say £1000 extra tax, you don't notice for two years, then you point out the mistake, HMRC are happy to fix it but won't pay you 0.5% interest on the mistake because it wasn't their fault)
Though you may not know it, you may still be eligible for penalty interest on the sum. State and governmental bodies often don't bother to mention loopholes that goes against their favour, however, so you'll have to look them up yourself. I don't know Dutch tax laws, sadly.
This kind of thing goes way back and used to be much easier.
Over-booking of flights used to be a huge problem back in the 90's and earlier. You'd get on the plane, someone would be in your seat already, and that's when you found out you didn't get to fly on that flight.
Airlines figured out this pissed people off and started counting tickets before letting people onto flights. If they had too many people waiting to board a flight, they would make an announcement and start offering free stuff to people willing to be bumped or take a later flight (this still happens in rare circumstances today but used to happen on most flights for a few years).
I remember listening to a gate agent threatening to call the cops on a college age guy who was picking up his third free ticket of the week for accepting being bumped off an Oakland to Las Vegas flight. He'd apparently figured out that that flight was always overbooked (which wouldn't have taken a rocket scientist given the high rate of overbooking at the time), and the only reason he got caught was the same agent kept getting assigned to work the counter for that flight often enough to remember his face.
Interestingly, I also flew on a nearly empty flight once during that era. The pilot came on the loud speakers and said "the next time you are wondering why flights are over booked, remember this flight - this plane was booked to 120% capacity (or some other number well over 100%) for this trip."
For a flight to have gone from 120% to nearly empty would mean that some large group didn't show up. Maybe an entire tour bus was delayed by a flat tire or something. Statistically speaking, a hundred people simultaneously missing their flight is vanishingly unlikely.
Many corporate travelers can book and re-book with no change fees, so this happens more than you would expect.
The most common reason I've seen is a large corporation cancelling or rescheduling an all-hands / quarterly meeting that everyone above a certain level (e.g. directors / VPs) from non-HQ offices travels to HQ to attend.
For an Oakland to Las Vegas flight, I'd guess a conference, music festival, or sporting event was cancelled.
Statistics generally (there are exceptions of course) makes very broad assumptions about independence and random selection of your samples.
For a group of people as correlated as having the same destination at exactly the same time using the same airplane I would be very wary of applying any statistics at all, even ignoring the possibility of a large group.
Hundreds of otherwise independent people can decide to not show up simultaneously due to terrorist attacks, corona, a cheaper alternative, a conference being cancelled, etc.
Sorry this isn't a direct reply to your story, but I'm interested if anyone knows, does overbooking happen regularly in Europe? Becuase I'm in the UK and I've literally never heard of anyone getting bumped from a flight. I'm sure it happens occasionally, but is there just a massive divide between the US and EU here? Is there a systemic issue with regulation, is it just consumer attitude, or is the EU actually the same as the US?
Yes, it's common. It happened to me once and some of my colleagues as well.
I think they don't overbook as much as in the US. They try to avoid bumping off passengers, because the cost of doing it is much higher. They can't just give you an upgrade ticket. They have to reimburse all occurring cost and they have to pay an additional 250-600 EUR compensation depending on the length of the flight.[1]
It's incredibly common in Europe as well, yes, but usually the numbers just about work out with some no-shows and reshuffling people across classes.
Also, the ones they do bump off are the standbys and reduced fare, which is why you don't often hear about fully paying passengers being forced to take another flight - and in any case, if they're still over capacity, the promises of free upgrades and money mostly result in enough volunteers to prevent that from happening.
I'm not sure about any differences in US regulations vs EU regulations for this issue though.
> I remember listening to a gate agent threatening to call the cops on a college age guy who was picking up his third free ticket of the week for accepting being bumped off
I hope the cops did nothing?
It was the airline's fault for overbooking and they offered bump compensation and the guy took it. It sounds legal to me. If the airline wanted to avoid this they could easily have done that by not overbooking.
I caught an airline bumping the whole flight I was on once. They told US that there were mechanical issues. Then herded everyone to another terminal. 10 minutes later they lead another large group onto the plane and it took off.
> The Paper later found out that many insurance companies have already fixed the loopholes that Li took advantage of to get rich.
> The ones they checked with now have a clause that says they will not be responsible for any payout should the insured, at the time of buying, already knows or reasonably deduces that the flight can be delayed anytime.
Perhaps we should not rush to finely parse language that has gone through a double translation: from legaleese to reporter and from Chinese to English.
This may be treated as "insider knowledge" but I expect the burden is on the insurance company to prove prior knowledge.
But "reasonably deduces"... that can be used in any such case where mass payouts are a likely outcome. If I can "reasonably deduce" a payout will be needed than so can the insurance company. Under these conditions accepting my insurance purchase should be seen as the company committing fraud. They accept a payment knowing the customer can never collect.
That doesn't mean there's no grey area, though. Is it unreasonable to buy tickets and insurance under an assumed identity? Probably, but part of getting your day in court having the ability to suss this out.
Most jurisdictions won't enforce a contract entered in bad faith.
I'm no lawyer, but I would guess the hard part is detecting this behavior and/or getting the money back, not so much denying the payments.
(Though flight insurances probably don't have much infrastructure for fighting fraud, as there is few ways to do insurance scams)
> Most jurisdictions won't enforce a contract entered in bad faith.
What? What exactly is bad faith here?
How is buying insurance on things you expect to fail any different than, say, buying options on the stock market, or some other form of intelligent betting?
You have expectation X, you find a third party that disagrees and has expectation Y, and agree to make a bet on the outcome with odds relative to X:Y. If your assessment of the situation was closer to the truth than the other party, you can stand to make money.
The assumptions of the insurance company is that they have superior models and can amortize losses among many people and thus charge only a small margin. They don't always have the best models though,
and I really don't see how calling them on it is 'bad faith'.
I think the main point is about risk distribution. In a normal insurance contract the main risk of an uncertain event (the damage) is assumed by the insurer, while the policy holder's risk is tied to losing the paid premium.
When such a contract is made in advance knowledge of likely occurrence of the event, the risk is fully shifted over to the insurer. Thus in absence of shared risk this subverts the contract into an unequivalent monetary transaction, which reasonably amounts to fraud.
Similarly, if there's an advanced knowledge from the insurer on almost certain unlikelyhood of the event, then it's defrauding the policy holder of their premium.
So the insurers must pay off time to time to maintain the perceived fairness of contracts. Meanwhile doing their best to balance their share of the risk... and most importantly price in the 'administrative overhead'.
IMO, the problem is how to prove / what is the condition.
Without clear condition / clauses, it is possible that they'll deny valid claims by saying that the insured has already know beforehand. Maybe there are more specific information?
You analogy is incorrect as it would mean that she would buy the insurance when the flight is officially delayed. Here she is making a prediction, which may or may not be correct. It is exactly the same as when you are buying option or contract on the stock market. Here the issue is that the insurance company has a fixed premium which not based on the likelihood of delay. This is completely on the insurance side. Otherwise the stock market will have big issue if you apply the same analogy.
This new clause is in effect a blanket one to not pay anything... if you pay for an insurance you have the conviction that the flight might be delayed... otherwise there would be no point to buy it....
More like buying fire insurance for a house as you see an arsonist walking slowly toward it.
You know what the expected outcome is going to be and are securing an agreement deliberately in bad faith. That's not to say insurance companies are always good faith actors (oftentimes not), but it's a very one-sided information flow.
As the sibling said "it would mean that she would buy the insurance when the flight is officially delayed"
I think it's more like, you shouldn't buy fire insurance if you are having a bbq or similar. Or at least somewhere in the middle of these two statements.
If the insurance companies were so consistently mis-pricing their contracts, instead of calling the police they should have hired this woman and used her expertise to design dynamic pricing algorithms.
The article says the insurance companies have now closed the loopholes she exploited. To me, she deserves every dollar she made for making the insurance market more efficient. I'm sure those errors would have cost these companies much more than $400k over the long run.
Its kind of sad that the #1 comment right now is basically saying "the company involved here should have been charging its customers far, far more money", instead of protecting their customers and looking out for the best for them.
Insurance is NOT a financial instrument. Insurance is supposed to be a safety mechanism that protects you if something bad happens.
We can think of insurance as a call and/or put option. Financially, they behave almost identically to options. But that's not the intended use for the product.
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Where you see inefficiency, I see humanism. The company believes that its users wouldn't act like this, and for the most part... citizens do not commit large scale fraud involving 20+ fake identities.
Unless you are attempting to redefine the word insurance you are simply incorrect. Insurance is one of the most commonly used financial instruments in existence. If insurance was somehow not a financial instrument, it would not be insurance, but something else entirely.
That’s just not correct. There are plenty of insurance policies where people buy them as an investment with the hope of profiting off the payout when the insured asset has a loss. Credit default swaps being one such instrument.
Not saying that’s a good thing, but it certainly exists.
The scores of fake identities was clearly wrong but just “gaming the system” is generally not a crime. Look up the story about chocolate pudding and airlines.
Back when CDs paid a real return and credit cards gave free cash advances with 6 plus months no interest (neither of which exist anymore) had a lot of friends that would just use their good credit to get a bunch of cards, get “free” cash for 6 months, buy a CD with it (Sometimes from the same bank that gave them the free cash!) and just sit back and let the bank send them free money... then pay off the card when the CD matured after 6 months.
It was totally gaming the system but if the banks were dumb enough to let it happen then it’s sort of on them at some level.
“ Insurance is supposed to be a safety mechanism that protects you if something bad happens.”
Virtually all financial instruments are used this way. Insurance is about buying/selling a particular form of risk just like any other financial instrument.
The reason we treat it as one isn’t just because it can be modeled that way.
That said this seems like fraud. Using assumed names isn’t removing an efficiency in the market it’s being duplicitous.
You're getting slammed for saying insurance is not a financial instrument. I hope what you meant is that it's not supposed to be highly profitable for the insurer. Even then while most customers would like to agree, most insurers would not want to.
> Insurance is NOT a financial instrument. Insurance is supposed to be a safety mechanism that protects you if something bad happens.
Insurance is fundamentally a financial construct designed to manage risk. And if it's priced too low, it cannot function as a safety mechanism. Funds will be exhausted, and nobody will get their safety.
Where you see kindness, I see financial malfeasance of the sort that undermines the very goal of the thing.
You really weaken your argument about insurance not being a financial instrument by comparing them to call and put options in the next paragraph, saying they behave almost identically. On hacker news, no less "not the intended use" isn't a solid argument about what something is or is not.
More importantly, why does what is or is not a financial instrument according to your rather specific definition matter?
If you see humanism in underpriced flight insurance, do you see exploitation in overpriced flight insurance? Someone making that much money on well chosen flights means most likely other flights are very much overpriced for insurance.
One of the most useful things insurance does is expose real values for risk and put financial incentives on reducing risk behavior on both the holder and the owner/maker/operator or the insured asset.
For example, fire sprinklers and renters insurance. The owner of the unit is motivated to have sprkinklers present and in working order to lower the total cost of the apartment (insurance would have higher premiums without), the renter wants to pay lower premiums so they will insist they are installed or look elsewhere, and the insurance company will have a motivation to have a good sprinkler inspection program that finds out if they're really installed, done properly, and maintained in a way that provides actual risk reduction. Everybody wins as long as the insurance price is not just "humanitarian" but actually reflects the real risk.
Debt is such a common financial instrument that other financial instruments (like credit derivatives) refer to themselves as buying and selling insurance.
Your argument would make perfect sense if we were talking about insurance coops or government-issued insurance. But as long as we're talking about for-profit insurance companies, they can get fucked. There is literally no difference between for-profit insurance and gambling. They knew the risk they were taking, and now they're trying weasel out of paying.
You may be thinking of public goods, like healthcare, fire departments, etc.
I advocate government provided universal healthcare. That cost is just table stakes for a civil society.
Insurance is more properly relegated for elective decisions, where a person's interests are not (yet) universally shared, and they want to hedge their risks.
You would get more sympathy for your argument if the insurance companies acted like they were humanistic and not financial companies
The insurance companies themselves treat their product as a financial instrument in almost all cases
They do not act very humanistic when denying claims for all manner of technical 6point font on page 186 of terms and conditions document of the policy that says they will only pay out if the event happened on the 8th Tuesday of the month under a full moon during a eclipse...
Today insurance seems more like a protection racket than actual risk mitigation, given that more and more insurance is required by law for a person to get it becomes less of a voluntary exchange where I pay a small amount to hedge my risk and more a mandated extortion for which I will likely get little value in. Granted that does not apply to travel insurance as it is not (yet) mandatory but the industry of insurance is impacted by these external factors
Just look at all of the excuses insurance companies are using to refuse to pay out on Business Interruption Insurance due to COVID-19, or when insurance companies refuse to pay out after large scale storms due to various technical justifications, or any number of 1000's of examples I could cite that highlights the unethical behavior of that industry.
No Insurance companies get exactly zero sympathy from me
I’m not sure I’d pick either efficiency or humanism to describe what’s going on here. Personally, I’m not as optimistic as you seem to be about the nature of the service that insurance companies provide but I can still see why the case isn’t clear cut.
In my mind, the insurance company neglected a particular outcome of their service, and she enacted the loophole. It’s their mistake for not catching it and they’ve now made sure it can’t happen again.
I agree with you that insurance, as a concept, isn’t a means of making money as this woman has treated it. I also think the notion of insurance isn’t as sacred: the company is providing a service not some fundamental right, so this woman isn’t necessarily in the wrong for taking advantage of a “bug”
Where you see a good point, I see virtue signalling. This has threads of communism / socialism to me. The whole point of capitalism is market efficiency. When we choose to go in favour of “humanism” rather than efficiency, is when we choose to be “soft” just so that we don’t offend each other (and by soft I don’t mean the real, actual, genuinely helpful kind of soft).
It's hard to look at her work as anything but criminal when she used 20 fake identities to pull this off. Once she ran out what she could do under her own name and started using fake ones, she crossed a line.
On a moral level, how does this differ from companies spinning up LLCs to gain advantage in deals being made? Consider Disney doing it so that they could buy land without people realizing who the buyer was.
Even without the fake identities, she committed insurance fraud. She found a loophole and abused it; that's not the fault of the loophole being there or the insurance companies, but the person abusing it.
I don't doubt it's criminal the way she did it, but I'm not so sure it would have been criminal had she done similar things to securities on the stock market. I mean, isn't this exactly what those people do?
This is one of the clear evidences that the insurance industry is a dolled-up, glorified gambling industry, and they want to be able to play as a casino, without losing if someone other than the house games the system.
It's clear evidence that the insurance industry is based on risk assessment and probabilities. Of course it is the same as gambling, except that the "game" is not necessarily biased in either direction.
Actuaries spend their careers making these bets. That's why no insurance company will take a policy on a "sure thing".
If she had taken on a similar bet in a market where insurance policies were bundled and sold, instead of a "credit default swap" you'd have a "on-time default swap" and it would be completely legal.
But there isn't such a market, so she effectively made one for herself by using false identities and the arbitrage of being able to pick and choose when she would take her side of the swap.
You're right in some particulars, both gambling and insurance let customers enter transactions with an uncertain payoff that favors the house, and both are relatively aggressive legally when customers try to get an edge.
But the purpose of healthy gambling is to have fun, and the purpose of insurance is to pay a small amount in most future states of the world to avoid very bad outcomes in some future states of the world. These are both reasonable things to spend money on, but they're very different objectives.
Insurance policies such as these are priced very simplistically for practical reasons allowing the product to be distributed widely on systems that may not be internet-connected at the time of sale. The pricing can be made more accurate reducing the potential for arbitrage but that needs to be traded off the additional overheads and ease of sale. Its not that insurers are stupid its more that we know some things are easier-solved with anti-fraud measures than fancier Rube Goldberg machines
Can you explain more about how web apps may deal with 1/3 or 1/4 lapsed internet-connection? What sort of processes can you delay or smooth over? What kind of improvements do you see?
Just like a stock market is undermined by insider trading, so insurance markets are undermined by fraud. Insider trading and fraud don't mean stocks or policies are mispriced. Insider trading and fraud are breaking the social contract of what the products are meant for, which is why they're illegal.
The article quotes:
> "she was able to receive relevant information beforehand that tells her if the flight was going to be delayed or cancelled."
Which sounds exactly like the insurance equivalent of insider trading. Buying insurance on something you already know is going to happen or not is fraud, plain and simple.
The insurance company had loopholes too, but the loophole that prevented the company from finding out sooner was that she got payment from the airlines directly, rather than the insurance company. That's not mispricing. She was arrested because she committed insurance fraud, plain and simple.
Insurance companies don't exactly respect their social contract when refusing to pay out legitimate claims on technicalities. She was arrested because she angered a wealthy institution, not because she did wrong by a virtuous one.
Unfortunately, this article leaves the exact nature of information she was relying on vague/confusing.
> "she was able to receive relevant information beforehand that tells her if the flight was going to be delayed or cancelled. Thereafter, she would purchase the tickets to the flights that are likely to be delayed or cancelled, before checking if there is any extreme weather along the route the flight is going to take that day."
Specifically, I'm not sure what the "before checking for extreme weather along the route" bit is supposed to mean, especially since it seems to imply that she checked for extreme weather after she already purchased the insurance? Something is odd with the grammar here. Furthermore, the quote never specifies what the "relevant information" actually was.
So... does this mean that she received inside information (e.g., from a former coworker) that the flight had been cancelled?
Or does it mean that she was looking at publicly-available information (e.g., weather data) to make the call?
I think the ethics and usefulness of some aspect of this are dependent on the answer to that question, and I'm not sure the article says definitively one way or another.
With that being said, I think the ethical problems with the fake identities seem more clear...
>Which sounds exactly like the insurance equivalent of insider trading. Buying insurance on something you already know is going to happen or not is fraud, plain and simple.
Well, from the description of the events, it sounds like she didn't "know" the events were happen, just that they were more likely in a way that's not captured with a sufficient premium. That's not the same as e.g. insuring against your car getting dented, knowing you plan to dent it.
So what she did was more analogous to reasoning that, "Oh, man, people always seem to rear-end you when you're driving a red sports car. Since I drive one, I guess I'll pay extra for the no-deductible option for accidents involving getting rear-ended." She doesn't know she'll be one to get rear-ended, she didn't cause the rear-ending, she just recognizes it as being super-likely and thus a good deal.
With that said, I think there is a sense in which this is fraud. Generally, insurance requires you to have an "insurable interest" -- i.e. independent reason to value the insured thing -- to prevent the kind of asymmetric info/moral hazard situation that breaks their ability to model the risk and which leads to cases like this.
So the contract almost certainly had a clause like, "I am going on this flight for business or pleasure reasons" (or something more lawyer-screened). That would establish the insurable interest: the insured wants to go on this trip, and wants it to go well. So she'd be entering the contract on fraudulent terms if she bought the trips/insurance solely to profit off the payouts.
Still, I have to agree with the OP's comment. If someone is this good at assessing risk, you should hire them to tune your risk model. She did pretty darn good with far less info than the insurer had to work with!
>Which sounds exactly like the insurance equivalent of insider trading.
Only if the information she was using was non-public, e.g. if she were getting information from former colleagues, or had access to such data herself that a normal person would not have. Otherwise, it is not comparable to insider trading.
> Buying insurance on something you already know is going to happen or not is fraud, plain and simple.
Is it though? Isn't this just arbitrage based on asymmetrical information (i.e. exactly what insurance companies do)? If she caused the flight to be delayed somehow, that would certainly be fraud, but so would anything the insurance company did to make the delay less likely without adjusting premiums.
Wasn't the problem here that the insurance company didn't know these facts as opposed to she knowing them?
While it sounds like insider trading, the situation here is quite a bit different. With insider trading, the company has very real and legitimate interest to keep some information private. Private from the general public, including their competition.
In this case, however, the airlines wouldn't have to share this info, apparently known inside the organization, with the general public, but with a single (set of) well defined actor(s). Also, I'm not 100% sure if publishing all the available information on possible delays and cancellations wouldn't benefit their business. (Though, if cancellations happen because of say not enough tickets sold for a flight, it may, because maybe that would induce a self-reinforcing process. Who would want to buy a ticket that is likely to be cancelled?)
Relevant information could have been a weather report.
If the pricing on insurance isn't dynamic, and gets within the weather window, you can use a 3-day prediction to place a high-likelihood bet that the flight will be cancelled.
Particularly if the insurance sticks with the ticket such that it can be moved if unused.
1. See a bad storm coming in.
2. Buy a fully refundable ticket for the day the storm is going to hit.
3. Buy insurance on that ticket.
4. Storm hits? Cash in.
5. Storm doesn't hit? Change the date on the ticket and the insurance moves with it.
OT but I never understood the issue with insider trading. Obviously it's unfair to unknowing traders but isn't this essentially just making the market more reflective of reality? How does it undermine the market?
> Buying insurance on something you already know is going to happen or not is fraud, plain and simple.
Better cancel all life insurance policies then.
Buying insurance on something you're going to cause to happen (cut down a tree so it falls on your car, leave flammable substances in a hazardous place in your home) is fraud.
Buying insurance on things you think are likely to happen isn't inherently fraud.
insider trading is about theft, not about social contracts or whatever. It means that someone stole information that I could trade on. Since it's stolen from me, they can't trade on it. That's what makes it illegal. It's similar to intellectual property, in a way
The difference between insurance and gambling is insurance is when the event that triggers the insurance is something one doesn't want to happen. In this case, she was indifferent to the outcome, so it was essentially just gambling.
> The article says the insurance companies have now closed the loopholes she exploited.
When I read that sentence in the article I immediately thought they closed it by optimising pricing or by challenging airlines. But no - as the next paragraph states - they closed it by adding a clause to the contract which basically forbids doing what this woman did. Go figure.
This is the only reasonable solution for them though. If you don't close it like this, you could end up spawning a whole market, and you're no longer selling a product (maybe not the most "optimized" product, but which still satisfies all parties), instead you're competing against this market of your own creation.
Any sensible person would just add a clause to the terms.
This is considerably less consumer hostile response than the realistic 'price-optimisation' alternative of excluding the flights people are most likely to need insurance for from the insurance pool [though it sounds like they've given themselves very broad scope to deny claims]
An easy loophole is to stop selling insurance to someone who has burned you for tens of thousands of dollars already. Except she used fake identities, which doesn't seem fair, or legal for that matter when it comes to air travel.
If you don't take the flights, I don't see why this would be illegal "when it comes to air travel". People book flights for other people or with fake names (as placeholders, for example, in a group booking) all the time. On the insurance side, it does sound like fraud.
> To me, she deserves every dollar she made for making the insurance market more efficient. I'm sure those errors would have cost these companies much more than $400k over the long run.
Couldn't agree more. She did nothing wrong in my book. She found a legal exploit, and exploited it. She was playing by the rules, she exposed a flaw, the flaw is now fixed. If she continues to do the exploit that would be a different story.
400k is small price to pay to close this kind of loophole.
> The 45-year-old woman, surnamed Li, used 20 other identities in addition to her own, to take out almost 900 travel insurance policies from 2015 to 2019.
So identity fraud is just totally fine as long as you're screwing over insurance companies?
Identity fraud aside, stuff like this drives up the cost of insurance for people who legitimately need it. It's clearly both illegal and immoral.
There are numerous factors in pricing and one input is the sophistication of the buyer and their common behaviors. The pricing is just fine for typical travelers who want to insure their trip and are not using their past experience to distill high-probability delays with 20+ identities.
Dynamic pricing isn't free to implement, and raising prices to account for accurately for delays may result in policies never bought by travelers who find them too expensive or a clear signal to get a better flight instead.
Of course, high cost of insurance is not necessarily a bad thing. If there are other viable, less risky flights, this would, I feel, be a healthy pressure.
I think you missed the point where it says she lied about the flights being delayed.
The Nanjing police announced on Friday afternoon, June 12, that Li had, on multiple occasions, faked information related to the delaying of flights, and scammed huge amounts of money from insurance companies.
Maybe they weren't mis-pricing. She had to use fraud and deception and fake names to buy all those contracts. Maybe they know that for one individual not trying to play pricing games, they can sell these contracts at a competitive price (don't forget they have to compete against other insurance companies) and still make a profit because most people aren't trying to game the system for a single contract for a single flight.
Ignoring the identity fraud and supposing the information obtained were public, this thread seems to have a lot of people who believe that applying information arbitrage to insurance is in and of itself inherently wrong, and that's not a stance I think I can agree with.
As a litmus test, when the roles are reversed and the insurance company overprices a policy we seem fine with that as a society because even though any individual can have a hugely disproportionate premium the company as a whole has bounded profits (both legally and due to competitive forces). We might even try to argue that an individual can't possibly know their own risk better than a team of actuaries and that they should accept that the premiums are actually correct.
If an insurance company is allowed to knowingly profit 2x, 3x, or more on an individual's premiums based on their best models, why is an individual disallowed from doing the same if only using public information?
If so, where do we draw the line? Is it at a break-even point? What if the insurance company were trying to target an individual for 15% profits; is that person allowed to engage in the contract if they think the company will only earn 3% on average since that would also demonstrate a model better than the company's?
I can definitely see arguments against an individual having any _causal_ effect on the policy (e.g., like burning down a house), but I'm struggling to see why this kind of information arbitrage is inherently wrong.
I agree completely. I think it’s a super interesting discussion whether she’s actually done anything morally wrong (again, barring the identify fraud).
It’s possible that the root cause of this is simply a mispricing of insurance caused by Chinese regulations.
Well, insurance is just gambling with extra steps. Usually, you bet on something bad happening like your house getting burgled or your flight getting delayed, and the insurance company takes you up on that bet.
In a very abstract way there's not much difference between this and betting on sports.
I think this is too reductionist as an interpretation.
With an insurance (especially something like travel/home insurances) you are not trying to game the premium, you are rather protecting risk of a preexisting situation.
Sure you can use it to gamble, like buying a few dozen houses and hoping they catch fire sooner than later.
Similarly with the stock market, stocks unlike a casino chips do produce value and represent real quota ownership of an asset. It can be misused in similar ways but it posses distinct qualities.
You've identified a difference in motive between recreational gambling and insurance, not a mechanical difference. The woman in this article had different motives to the usual insurance customer.
The point is that one party says to the other "I will give you $X once a month, and if event E doesn't happen in that month, you get to keep this money, otherwise you must give me $Y (s.t.Y >> X)".
You can replace E with "my house burning down" or "The red team wins". In either case, I would call this a bet.
Insurance is just a specific type of gambling where you do it because E is bad and you want to be safe in case it does happen.
There was a slumlord in my area that used to buy flood insurance before a major flood, and then put a bunch of broken appliances in the units, prior to the flood, to claim the damages.
What you are outlining are the "extra steps" that the GP was alluding to. We call it "risks" but it turns out to be a kind of a gamble that the insurance company takes us up on, but with the house advantage.
The major difference is that insurance is not supposed to put you in a better position than you were before the loss. (This gets slightly tricky when, for example, you insure an item at its replacement cost, instead of its depreciated cost...but that's about as far as it is supposed to extend.)
Except the part where losing your house ruins your life, meanwhile your team losing just ruins your evening. That is the key difference. I agree that for easy to replace items, insurance and sports betting is the same, thou. (If you bet against your own team)
Financial products can usually be traded for three purposes: speculation (or betting), hedging (or insurance) and arbitrage. The product is the same, the name of the action depends on what the buyer is trying to do.
But "insurance" isn't strictly a financial product (the kind that's traded on exchange). For example, if you buy life insurance, you can't then resell it (equivalently, I cannot buy insurance on your life) because that would cause some pretty unethical incentives.
People (typically) buy house insurance to manage their risk to a level that they will tolerate. This creates security and allows for greater investment in something.
It's actually completely different to sports betting...
It's actually interesting that a lot of countries has laws regulating gambling because of how destructive it can be for an individuals economy, life and general health. Yet, it's still possible for rich people to gamble using thousands of peoples homes and jobs as insert on the stock-market.
> Yet, it's still possible for rich people to gamble using thousands of peoples homes and jobs as insert on the stock-market.
Trading instruments like mortgage-backed securities does not constitute "gambling with people's homes." It's not like someone's taking your home away just because of some CDO trades.
"Activist investing" (think Icahn) might, albeit indirectly. But that certainly doesn't make up a big chunk of the market and its activites.
No, you bet on nothing happening. Nobody wants to see their holiday ruined, their house burnt, or their health go to shit, but you get insurance so that IF it does happen, and you hope it doesn't, you won't get fucked over financially.
Gambling does increase risk, but it is not done TO increase risk. Risk is accepted (or embraced) to increase reward.
Of course it gets murkier when people talk about the “rush” of gambling, which is I think what you’re alluding to, but it’s not as straightforward as you make it or the most popular gambles would be those with the longest odds or the highest chance of complete ruin.
Insurance is about spreading loss around to make costs more predictable. Your house burns down, but since we're all paying into our insurance we all cover your costs so you can rebuild and not have your life irrevocably destroyed.
It's the opposite of gambling. It's about reducing randomness, insecurity, and financial shocks.
Yes, but I'd compare it to - or even say that it is a form of - arbitrage.
The payouts on these flights should cause the insurance company - instead of adding terms clauses - to increase the price by recognising some of the same patterns she has, and thus reducing the difference in price (/value) between the 'markets'.
I don't really understand how she made money. She apparently still bought tickets. If they weren't delayed she refunded the ticket early. But wouldn't otherwise the insurance payout just offset the price of the ticket? Or was there a premium on top of that?
She received about $500 per delayed flight as delay compensation. It's supposed to cover extra travel/hotel/inconvenience arising from a significantly delayed flight. Since the amount involved is fairly small, payout is pretty automated...they're not checking if you actually incurred the additional expense, or even if you showed up for the flight...
It's unclear, but it sounds like there's insurance available in China that will simply pay you money if your flight is delayed by a certain amount of time. The amount you get paid is not tied to the cost of the ticket it's simply a feature of the contract, so obviously there's a trade-off there with a profitability = Insurance Payout * Probability of Delay - Flight Cost
I mean, I'm sure such policy could be arranged elsewhere too as a custom thing, but it's basically gambling at that point. You might as well go to a bookie and place a bet that a flight will or will not be delayed(most bookies would be happy to accept such bet too).
Connecting flights can be a big use case if you can't get the whole itinerary from a single vendor (or if laws/regulations/terms and conditions fail to make the single vendor responsible for missed connections).
But in a perfect world you wouldn't place those bets against an insurance company but against the transport service itself (of the upstream leg). "I see your ticket price of 50 and raise another 20 against your punctuality SLA." This would create incentives and would be so much less of a hassle than alternative approaches that somehow try to factor in actual damages.
If she had 30-40 insurance policies as it says in the article, maybe she was able to get each ticket refunded 30-40 times? And then did this with each of her 20 identities.
> What did she know that she could use to predict that a flight would probably be delayed?
At least in the USA, information on previous flights (on time / delayed / canceled) is public. Routes are pretty fixed. Combined with weather forecasts, that is probably enough information to turn a profit.
I guess from the article she had "insider information", but I'm not sure why that would be necessary to use this scheme?
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The policy was sold so the agent could get their commission. There was no credible justification for it. Worse, there was no record showing that I ever signed any paper authorising the charges.
When I talked to the investigation department, they said that off the record, between you and me, record keeping is incredibly poor, and my case was only unusual because I'd questioned the payments - and most people don't.
My partner is going through something similar, but the paper trail in her case is even more tenuous. The only justification on file for thousands of pounds in payments collected from the 90s onwards is a mortgage application she made a few years ago - and didn't even go ahead with.
This is on top of a national Payment Protection Insurance (PPI) scandal which forced insurance companies and banks to return billions of pounds.
Somehow this never seems to be labelled criminal fraud. It's always "Mistakes were made..." and no one is ever personally responsible.
So honestly, I'm finding it hard to be sympathetic to the poor exploited insurers in situations like this.
I once didn't fill in my Dutch VAT taxes (0 euro's by the way, it was an administrative formality) and I was fined.
Another time the tax authorities didn't pay me money back for almost 9 months, and it was only because I found out and they forgot because of some administrative mishap.
However, I'm not allowed to fine them.
I find it weird, because I'm pretty sure the mistake is similar in behavior and intention. Yet, I have to pay up and they don't.
They pay 0.5% (which is better than most of my bank accounts) on all sums they owe as a result of their own mistake rather than either your mistake or some third party screwing up (e.g. your employer fat-fingers paperwork causing you to pay say £1000 extra tax, you don't notice for two years, then you point out the mistake, HMRC are happy to fix it but won't pay you 0.5% interest on the mistake because it wasn't their fault)
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Over-booking of flights used to be a huge problem back in the 90's and earlier. You'd get on the plane, someone would be in your seat already, and that's when you found out you didn't get to fly on that flight.
Airlines figured out this pissed people off and started counting tickets before letting people onto flights. If they had too many people waiting to board a flight, they would make an announcement and start offering free stuff to people willing to be bumped or take a later flight (this still happens in rare circumstances today but used to happen on most flights for a few years).
I remember listening to a gate agent threatening to call the cops on a college age guy who was picking up his third free ticket of the week for accepting being bumped off an Oakland to Las Vegas flight. He'd apparently figured out that that flight was always overbooked (which wouldn't have taken a rocket scientist given the high rate of overbooking at the time), and the only reason he got caught was the same agent kept getting assigned to work the counter for that flight often enough to remember his face.
Interestingly, I also flew on a nearly empty flight once during that era. The pilot came on the loud speakers and said "the next time you are wondering why flights are over booked, remember this flight - this plane was booked to 120% capacity (or some other number well over 100%) for this trip."
Got caught doing what exactly? Booking tickets on a flight?
If he wasn't using fake names or anything, it sounds like he was just trading his time for free airfare.
The most common reason I've seen is a large corporation cancelling or rescheduling an all-hands / quarterly meeting that everyone above a certain level (e.g. directors / VPs) from non-HQ offices travels to HQ to attend.
For an Oakland to Las Vegas flight, I'd guess a conference, music festival, or sporting event was cancelled.
Statistics generally (there are exceptions of course) makes very broad assumptions about independence and random selection of your samples.
For a group of people as correlated as having the same destination at exactly the same time using the same airplane I would be very wary of applying any statistics at all, even ignoring the possibility of a large group.
Hundreds of otherwise independent people can decide to not show up simultaneously due to terrorist attacks, corona, a cheaper alternative, a conference being cancelled, etc.
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I think they don't overbook as much as in the US. They try to avoid bumping off passengers, because the cost of doing it is much higher. They can't just give you an upgrade ticket. They have to reimburse all occurring cost and they have to pay an additional 250-600 EUR compensation depending on the length of the flight.[1]
[1]: https://europa.eu/youreurope/citizens/travel/passenger-right...
Also, the ones they do bump off are the standbys and reduced fare, which is why you don't often hear about fully paying passengers being forced to take another flight - and in any case, if they're still over capacity, the promises of free upgrades and money mostly result in enough volunteers to prevent that from happening.
I'm not sure about any differences in US regulations vs EU regulations for this issue though.
I hope the cops did nothing?
It was the airline's fault for overbooking and they offered bump compensation and the guy took it. It sounds legal to me. If the airline wanted to avoid this they could easily have done that by not overbooking.
> The ones they checked with now have a clause that says they will not be responsible for any payout should the insured, at the time of buying, already knows or reasonably deduces that the flight can be delayed anytime.
What kind of clause is that?
Perhaps we should not rush to finely parse language that has gone through a double translation: from legaleese to reporter and from Chinese to English.
But "reasonably deduces"... that can be used in any such case where mass payouts are a likely outcome. If I can "reasonably deduce" a payout will be needed than so can the insurance company. Under these conditions accepting my insurance purchase should be seen as the company committing fraud. They accept a payment knowing the customer can never collect.
That doesn't mean there's no grey area, though. Is it unreasonable to buy tickets and insurance under an assumed identity? Probably, but part of getting your day in court having the ability to suss this out.
Most jurisdictions won't enforce a contract entered in bad faith.
I'm no lawyer, but I would guess the hard part is detecting this behavior and/or getting the money back, not so much denying the payments. (Though flight insurances probably don't have much infrastructure for fighting fraud, as there is few ways to do insurance scams)
What? What exactly is bad faith here?
How is buying insurance on things you expect to fail any different than, say, buying options on the stock market, or some other form of intelligent betting?
You have expectation X, you find a third party that disagrees and has expectation Y, and agree to make a bet on the outcome with odds relative to X:Y. If your assessment of the situation was closer to the truth than the other party, you can stand to make money.
The assumptions of the insurance company is that they have superior models and can amortize losses among many people and thus charge only a small margin. They don't always have the best models though, and I really don't see how calling them on it is 'bad faith'.
When such a contract is made in advance knowledge of likely occurrence of the event, the risk is fully shifted over to the insurer. Thus in absence of shared risk this subverts the contract into an unequivalent monetary transaction, which reasonably amounts to fraud.
Similarly, if there's an advanced knowledge from the insurer on almost certain unlikelyhood of the event, then it's defrauding the policy holder of their premium.
So the insurers must pay off time to time to maintain the perceived fairness of contracts. Meanwhile doing their best to balance their share of the risk... and most importantly price in the 'administrative overhead'.
In this case, continual purchasing of insurance on the flights likely to be delayed would be evidence you knew it was going to be delayed.
Without clear condition / clauses, it is possible that they'll deny valid claims by saying that the insured has already know beforehand. Maybe there are more specific information?
It's not an unreasonable one.
You know what the expected outcome is going to be and are securing an agreement deliberately in bad faith. That's not to say insurance companies are always good faith actors (oftentimes not), but it's a very one-sided information flow.
I think it's more like, you shouldn't buy fire insurance if you are having a bbq or similar. Or at least somewhere in the middle of these two statements.
Or well you should, but if you wilfully had your house burn down anyway to get insurance money, that's insurance fraud.
The article says the insurance companies have now closed the loopholes she exploited. To me, she deserves every dollar she made for making the insurance market more efficient. I'm sure those errors would have cost these companies much more than $400k over the long run.
Insurance is NOT a financial instrument. Insurance is supposed to be a safety mechanism that protects you if something bad happens.
We can think of insurance as a call and/or put option. Financially, they behave almost identically to options. But that's not the intended use for the product.
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Where you see inefficiency, I see humanism. The company believes that its users wouldn't act like this, and for the most part... citizens do not commit large scale fraud involving 20+ fake identities.
Unless you are attempting to redefine the word insurance you are simply incorrect. Insurance is one of the most commonly used financial instruments in existence. If insurance was somehow not a financial instrument, it would not be insurance, but something else entirely.
That’s just not correct. There are plenty of insurance policies where people buy them as an investment with the hope of profiting off the payout when the insured asset has a loss. Credit default swaps being one such instrument.
Not saying that’s a good thing, but it certainly exists.
The scores of fake identities was clearly wrong but just “gaming the system” is generally not a crime. Look up the story about chocolate pudding and airlines.
Back when CDs paid a real return and credit cards gave free cash advances with 6 plus months no interest (neither of which exist anymore) had a lot of friends that would just use their good credit to get a bunch of cards, get “free” cash for 6 months, buy a CD with it (Sometimes from the same bank that gave them the free cash!) and just sit back and let the bank send them free money... then pay off the card when the CD matured after 6 months.
It was totally gaming the system but if the banks were dumb enough to let it happen then it’s sort of on them at some level.
Marge: "I'm sure your insurance will cover the house."
Maude: "Uh, well, no. Neddy doesn't believe in insurance. He considers it a form of gambling."
Virtually all financial instruments are used this way. Insurance is about buying/selling a particular form of risk just like any other financial instrument. The reason we treat it as one isn’t just because it can be modeled that way.
That said this seems like fraud. Using assumed names isn’t removing an efficiency in the market it’s being duplicitous.
How is a tool to manage financial risk NOT a financial instrument?
Tell that to insurance companies.
You will have an unpleasant surprise ...
Insurance is fundamentally a financial construct designed to manage risk. And if it's priced too low, it cannot function as a safety mechanism. Funds will be exhausted, and nobody will get their safety.
Where you see kindness, I see financial malfeasance of the sort that undermines the very goal of the thing.
More importantly, why does what is or is not a financial instrument according to your rather specific definition matter?
If you see humanism in underpriced flight insurance, do you see exploitation in overpriced flight insurance? Someone making that much money on well chosen flights means most likely other flights are very much overpriced for insurance.
One of the most useful things insurance does is expose real values for risk and put financial incentives on reducing risk behavior on both the holder and the owner/maker/operator or the insured asset.
For example, fire sprinklers and renters insurance. The owner of the unit is motivated to have sprkinklers present and in working order to lower the total cost of the apartment (insurance would have higher premiums without), the renter wants to pay lower premiums so they will insist they are installed or look elsewhere, and the insurance company will have a motivation to have a good sprinkler inspection program that finds out if they're really installed, done properly, and maintained in a way that provides actual risk reduction. Everybody wins as long as the insurance price is not just "humanitarian" but actually reflects the real risk.
"Financially, they behave almost identically to options. But that's not the intended use for the product."
It is absolutely the 'intended purpose'.
It just so happens, for some products, there is a 'humanist element' i.e. fire/life/home, but it's still a financial instrument.
I advocate government provided universal healthcare. That cost is just table stakes for a civil society.
Insurance is more properly relegated for elective decisions, where a person's interests are not (yet) universally shared, and they want to hedge their risks.
The insurance companies themselves treat their product as a financial instrument in almost all cases
They do not act very humanistic when denying claims for all manner of technical 6point font on page 186 of terms and conditions document of the policy that says they will only pay out if the event happened on the 8th Tuesday of the month under a full moon during a eclipse...
Today insurance seems more like a protection racket than actual risk mitigation, given that more and more insurance is required by law for a person to get it becomes less of a voluntary exchange where I pay a small amount to hedge my risk and more a mandated extortion for which I will likely get little value in. Granted that does not apply to travel insurance as it is not (yet) mandatory but the industry of insurance is impacted by these external factors
Just look at all of the excuses insurance companies are using to refuse to pay out on Business Interruption Insurance due to COVID-19, or when insurance companies refuse to pay out after large scale storms due to various technical justifications, or any number of 1000's of examples I could cite that highlights the unethical behavior of that industry.
No Insurance companies get exactly zero sympathy from me
In my mind, the insurance company neglected a particular outcome of their service, and she enacted the loophole. It’s their mistake for not catching it and they’ve now made sure it can’t happen again.
I agree with you that insurance, as a concept, isn’t a means of making money as this woman has treated it. I also think the notion of insurance isn’t as sacred: the company is providing a service not some fundamental right, so this woman isn’t necessarily in the wrong for taking advantage of a “bug”
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How do you know this? This may be a pre-emptive strategy
Also, as mentioned in other comments: She didn't use fake identities, she booked on the behalf of family and friends.
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Actuaries spend their careers making these bets. That's why no insurance company will take a policy on a "sure thing".
If she had taken on a similar bet in a market where insurance policies were bundled and sold, instead of a "credit default swap" you'd have a "on-time default swap" and it would be completely legal.
But there isn't such a market, so she effectively made one for herself by using false identities and the arbitrage of being able to pick and choose when she would take her side of the swap.
But the purpose of healthy gambling is to have fun, and the purpose of insurance is to pay a small amount in most future states of the world to avoid very bad outcomes in some future states of the world. These are both reasonable things to spend money on, but they're very different objectives.
Just like a stock market is undermined by insider trading, so insurance markets are undermined by fraud. Insider trading and fraud don't mean stocks or policies are mispriced. Insider trading and fraud are breaking the social contract of what the products are meant for, which is why they're illegal.
The article quotes:
> "she was able to receive relevant information beforehand that tells her if the flight was going to be delayed or cancelled."
Which sounds exactly like the insurance equivalent of insider trading. Buying insurance on something you already know is going to happen or not is fraud, plain and simple.
The insurance company had loopholes too, but the loophole that prevented the company from finding out sooner was that she got payment from the airlines directly, rather than the insurance company. That's not mispricing. She was arrested because she committed insurance fraud, plain and simple.
> "she was able to receive relevant information beforehand that tells her if the flight was going to be delayed or cancelled. Thereafter, she would purchase the tickets to the flights that are likely to be delayed or cancelled, before checking if there is any extreme weather along the route the flight is going to take that day."
Specifically, I'm not sure what the "before checking for extreme weather along the route" bit is supposed to mean, especially since it seems to imply that she checked for extreme weather after she already purchased the insurance? Something is odd with the grammar here. Furthermore, the quote never specifies what the "relevant information" actually was.
So... does this mean that she received inside information (e.g., from a former coworker) that the flight had been cancelled?
Or does it mean that she was looking at publicly-available information (e.g., weather data) to make the call?
I think the ethics and usefulness of some aspect of this are dependent on the answer to that question, and I'm not sure the article says definitively one way or another.
With that being said, I think the ethical problems with the fake identities seem more clear...
Well, from the description of the events, it sounds like she didn't "know" the events were happen, just that they were more likely in a way that's not captured with a sufficient premium. That's not the same as e.g. insuring against your car getting dented, knowing you plan to dent it.
So what she did was more analogous to reasoning that, "Oh, man, people always seem to rear-end you when you're driving a red sports car. Since I drive one, I guess I'll pay extra for the no-deductible option for accidents involving getting rear-ended." She doesn't know she'll be one to get rear-ended, she didn't cause the rear-ending, she just recognizes it as being super-likely and thus a good deal.
With that said, I think there is a sense in which this is fraud. Generally, insurance requires you to have an "insurable interest" -- i.e. independent reason to value the insured thing -- to prevent the kind of asymmetric info/moral hazard situation that breaks their ability to model the risk and which leads to cases like this.
So the contract almost certainly had a clause like, "I am going on this flight for business or pleasure reasons" (or something more lawyer-screened). That would establish the insurable interest: the insured wants to go on this trip, and wants it to go well. So she'd be entering the contract on fraudulent terms if she bought the trips/insurance solely to profit off the payouts.
Still, I have to agree with the OP's comment. If someone is this good at assessing risk, you should hire them to tune your risk model. She did pretty darn good with far less info than the insurer had to work with!
Only if the information she was using was non-public, e.g. if she were getting information from former colleagues, or had access to such data herself that a normal person would not have. Otherwise, it is not comparable to insider trading.
Is it though? Isn't this just arbitrage based on asymmetrical information (i.e. exactly what insurance companies do)? If she caused the flight to be delayed somehow, that would certainly be fraud, but so would anything the insurance company did to make the delay less likely without adjusting premiums.
I don’t think that’s quite the right definition. I know I’m going to die. I bought whole life insurance. I have not committed fraud.
While it sounds like insider trading, the situation here is quite a bit different. With insider trading, the company has very real and legitimate interest to keep some information private. Private from the general public, including their competition.
In this case, however, the airlines wouldn't have to share this info, apparently known inside the organization, with the general public, but with a single (set of) well defined actor(s). Also, I'm not 100% sure if publishing all the available information on possible delays and cancellations wouldn't benefit their business. (Though, if cancellations happen because of say not enough tickets sold for a flight, it may, because maybe that would induce a self-reinforcing process. Who would want to buy a ticket that is likely to be cancelled?)
If the pricing on insurance isn't dynamic, and gets within the weather window, you can use a 3-day prediction to place a high-likelihood bet that the flight will be cancelled.
Particularly if the insurance sticks with the ticket such that it can be moved if unused.
1. See a bad storm coming in.
2. Buy a fully refundable ticket for the day the storm is going to hit.
3. Buy insurance on that ticket.
4. Storm hits? Cash in.
5. Storm doesn't hit? Change the date on the ticket and the insurance moves with it.
what's the statute, or regulation, please. i'm not aware of that.
Better cancel all life insurance policies then.
Buying insurance on something you're going to cause to happen (cut down a tree so it falls on your car, leave flammable substances in a hazardous place in your home) is fraud.
Buying insurance on things you think are likely to happen isn't inherently fraud.
Do you have a citation for that law?
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Yes, weather matters, and people can benefit by predicting it.
When I read that sentence in the article I immediately thought they closed it by optimising pricing or by challenging airlines. But no - as the next paragraph states - they closed it by adding a clause to the contract which basically forbids doing what this woman did. Go figure.
Any sensible person would just add a clause to the terms.
Couldn't agree more. She did nothing wrong in my book. She found a legal exploit, and exploited it. She was playing by the rules, she exposed a flaw, the flaw is now fixed. If she continues to do the exploit that would be a different story.
400k is small price to pay to close this kind of loophole.
So identity fraud is just totally fine as long as you're screwing over insurance companies?
Identity fraud aside, stuff like this drives up the cost of insurance for people who legitimately need it. It's clearly both illegal and immoral.
Dynamic pricing isn't free to implement, and raising prices to account for accurately for delays may result in policies never bought by travelers who find them too expensive or a clear signal to get a better flight instead.
The Nanjing police announced on Friday afternoon, June 12, that Li had, on multiple occasions, faked information related to the delaying of flights, and scammed huge amounts of money from insurance companies.
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And to others, she was committing obvious fraud. Notably, to her, this was fraud, because she used fake identities to buy the policies.
The "I'm just an agent of libertarian market efficiency" excuse goes out the window once you start trying to hide your tracks.
As a litmus test, when the roles are reversed and the insurance company overprices a policy we seem fine with that as a society because even though any individual can have a hugely disproportionate premium the company as a whole has bounded profits (both legally and due to competitive forces). We might even try to argue that an individual can't possibly know their own risk better than a team of actuaries and that they should accept that the premiums are actually correct.
If an insurance company is allowed to knowingly profit 2x, 3x, or more on an individual's premiums based on their best models, why is an individual disallowed from doing the same if only using public information?
If so, where do we draw the line? Is it at a break-even point? What if the insurance company were trying to target an individual for 15% profits; is that person allowed to engage in the contract if they think the company will only earn 3% on average since that would also demonstrate a model better than the company's?
I can definitely see arguments against an individual having any _causal_ effect on the policy (e.g., like burning down a house), but I'm struggling to see why this kind of information arbitrage is inherently wrong.
It’s possible that the root cause of this is simply a mispricing of insurance caused by Chinese regulations.
In a very abstract way there's not much difference between this and betting on sports.
With an insurance (especially something like travel/home insurances) you are not trying to game the premium, you are rather protecting risk of a preexisting situation.
Sure you can use it to gamble, like buying a few dozen houses and hoping they catch fire sooner than later.
Similarly with the stock market, stocks unlike a casino chips do produce value and represent real quota ownership of an asset. It can be misused in similar ways but it posses distinct qualities.
The point is that one party says to the other "I will give you $X once a month, and if event E doesn't happen in that month, you get to keep this money, otherwise you must give me $Y (s.t.Y >> X)".
You can replace E with "my house burning down" or "The red team wins". In either case, I would call this a bet.
Insurance is just a specific type of gambling where you do it because E is bad and you want to be safe in case it does happen.
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That's generally the reason for why it's treated differently, by law.
Aren't hedge funds (nominally) doing the same thing?
It's actually completely different to sports betting...
Trading instruments like mortgage-backed securities does not constitute "gambling with people's homes." It's not like someone's taking your home away just because of some CDO trades.
"Activist investing" (think Icahn) might, albeit indirectly. But that certainly doesn't make up a big chunk of the market and its activites.
Betting on sports is insurance if and only if you bet against your own team for an amount not greater than the winnings.
Of course it gets murkier when people talk about the “rush” of gambling, which is I think what you’re alluding to, but it’s not as straightforward as you make it or the most popular gambles would be those with the longest odds or the highest chance of complete ruin.
Insurance is about spreading loss around to make costs more predictable. Your house burns down, but since we're all paying into our insurance we all cover your costs so you can rebuild and not have your life irrevocably destroyed.
It's the opposite of gambling. It's about reducing randomness, insecurity, and financial shocks.
Contracts like credit default swaps pay out if some organisation fails to meet their (debt) obligations
The payouts on these flights should cause the insurance company - instead of adding terms clauses - to increase the price by recognising some of the same patterns she has, and thus reducing the difference in price (/value) between the 'markets'.
But in a perfect world you wouldn't place those bets against an insurance company but against the transport service itself (of the upstream leg). "I see your ticket price of 50 and raise another 20 against your punctuality SLA." This would create incentives and would be so much less of a hassle than alternative approaches that somehow try to factor in actual damages.
Well, she had some kind of inside knowledge where she knew that insurance would probably provide a payout for the flight.
I'd like to know what this inside knowledge is? What did she know that she could use to predict that a flight would probably be delayed?
At least in the USA, information on previous flights (on time / delayed / canceled) is public. Routes are pretty fixed. Combined with weather forecasts, that is probably enough information to turn a profit.
I guess from the article she had "insider information", but I'm not sure why that would be necessary to use this scheme?