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Insured

When American Airlines flight 1549 skidded safely into the Hudson River, most of New York was in a state of panic.  It was, after all, the first low-flying commercial plane in that corridor since 9/11.  As word of the amazing landing got out, people were relieved that this time it was heroism, not terrorism, that brought the plane in low.  But there was far more in common with a disaster in the financial district, just down the Hudson, than most people might realize at first.

Flying on an airline is something you do at your own risk, meaning that if you have some kind of loss from flying you are on your own.  When the passengers of Flight 1549 added up bills for lost luggage, laptops, and emotional distress they found out that their great fortune had an interesting cost for this reason.  Since there appears to have been no signs of negligence, the insurance carrier has no obligation to pay out at all.  Heroism may have saved their lives, but in the process prevented insurance from kicking in.

The passengers on this plane were stunned.  There are very few things in our lives where all the risk is assumed by one person or another without insurance.  For example, if a train or a bus wound up in the Hudson, all items damaged would have been covered by insurance without question.

Being perfectly insured against loss of any kind is what we do in this nation, which is why it is ironic that US Airways’ insurer is AIG.  This is the same company that was the largest seller of a kind of insurance called “credit default swaps”.  Just down the Hudson on Wall Street the search for a perfectly insured financial world with no risk at all wound up failing disastrously.

The process by which everything fell apart in the risk-free, guaranteed return world is an interesting one, at least in the sense that it’s very complicated.  It’s so interesting that way that most people would rather describe it as “tedious”, in fact.  It’s what is called “endogenous uncertainty”, meaning risk that the system creates by itself through its own choices.  Basically, if everyone is on their own and completely uninsured they have a chance of failing – but if that risk is shared, there is a risk that the whole system might fall apart.

It’s almost refreshing to find out that there is something in this world where the risk is assumed by the consumers, at least as long as I don’t have to swim off a wing into the Hudson.  If everything in our life is insured against loss and thus risk-free, our lives are completely integrated in ways that we are rarely going to understand.  In fact, it’s hard to be personally responsible for anything in a perfectly insured world.

The passengers of the flight in question are still pretty ticked that AIG isn’t going to refund their losses, and I understand that.  Their reaction to the situation, which is surprise that insurance doesn’t kick in, is what I find the most interesting.  We expect that everything is fully insured lately, with no risk taken by anyone.  Not understanding what that means has a lot to do with the terrible disaster that took place on the Hudson.  Not the airplane ditching, that was brilliance made real.  I’m talking about Wall Street and its own inability to understand just what it really created.

4 thoughts on “Insured

  1. This reminds me of the Simpsons episode where Flanders doesn’t have insurance on his home because “insurance is a form of gambling.” I guess it’s why I never opt for the extra travel & accident insurance that always seems to be offered by my credit cards.

  2. Pingback: Copyright Eternal « Barataria – the work of Erik Hare

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