John Armstrong, actuary and health economist (and also my cousin) tells me
It is rational for insurers to remove the benefit for suicide because of adverse selection. Thus, the key question is why do insurers cover such cause of death or pay benefits in such circumstances?
The logic as discussed is a social responsibility. The logic is that it is unfair to the families who may be financially dependent to completely remove the benefit. So what happens in practice (certainly in Ireland, the United Kingdom and I think the United States) is that insurers pay a benefit in some restricted circumstances following death by suicide.
The set of circumstances that can be considered includes:
a. Where the period since the inception of the policy is sufficient to suggest that the presence of adverse selection has been limited to an acceptable level. Thus, where claim events happen after four or more years after the inception of the policy benefits are paid.
b. Where the death by suicide arises often insurance companies pay a lesser payment because of this ‘social responsibility’ objective. It is often also because they do not want the adverse publicity of explaining why they didn’t pay the benefit to a family who have no other source of income.
From an actuarial perspective I would say that the cost of suicide as a cause of death is also relatively very small so the ‘extra’ cost of paying this benefit is probably quite small. For example, suicides in Ireland and most other OECD countries are predominantly in age profiles where the take-up of insurance is very small so the additional cost is even smaller.
Another issue is the cost in investigating claims. It is said that without the option of death benefit from suicide, there will be a lot more elaborate ‘accidents’. Therefore, it is cost effective to provide the benefit and incorporate the additional suicide payout risk in the premium than to disallow any such benefit and have to investigate claims. There is an additional cost to investigating and distinguishing accidents from suicides, even though it may be very small. In the end, it comes down to balancing the social costs and adverse selection problems.
Shiro,
The paper you mentioned doesn’t seem to cite this, but the big amendments to Japan’s Moneylenders Law in 2006 prohibited lenders from getting borrowers to take out life insurance policies nominating the lenders as beneficiaries. (These reforms and the background are outlined in my posting on “Consumer Overindebtedness in Japan …’, and the Sydney Law School Research Paper on http://www.ssrn.com cited there.)
The reason was that this insurance practice exacerbated the “sarakin san-aku (three evils of loansharking)”: high interest rates, aggressive marketing, aggressive debt collection. Prof Mark D West of Michigan Law School wrote a paper around 2000 (also on SSRN, included in his 2005 book of essays) including some econometrics linking many Japanese suicides to overindebtedness (while acknowledging that culture also played a role).
As Prof Kozuka and I explain in a forthcoming book chapter following on from our SSRN paper, although information assymetries on the part of borrowers and lenders do help explain the dramatic rise and the “sweat box” business model of unsecured consumer lending in Japan, as in other countries a lot can be explained by behavioural economics. Japanese lenders, like credit card companies in Australia and the US (and subprime mortgage lenders there), have cleverly exploited biases and heuristics less well-known or addressed by borrowers.
Luke
I would just like to suggest that as many Japanese people have very high reading skills in English that any articles dealing with mental health issues in Japan could usefully provide contact details for hotlines and support services for people who are depressed and feeling suicidal.
Inochi no Denwa (Lifeline Telephone Service):
Japan: 0120-738-556
Tokyo: 3264 4343
AMDA International Medical Information Center:
http://amda-imic.com/
Tokyo Counseling Services:
http://tokyocounseling.com/english/
http://tokyocounseling.com/jp/
Counseling and Psychotherapy in Japan
http://www.counselingjapan.com