The worst contract in the world

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BeerBottle
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The worst contract in the world

Postby BeerBottle » Mon Apr 13, 2015 9:30 am UTC

For anyone who has ever been stung by the small print in a contract - this may make you feel a bit better. In the 1990s French life insurance companies offered investment policies that allowed investors to buy and sell funds AT LAST WEEK'S PRICES. Yes that's right you can buy and sell at historical prices, so you can buy a fund that rose in value at the price before it rose and pocket the profit. It's like buying a ticket for last week's lottery. When the insurance companies (there were several) realised the error they tried to buy everyone out for paltry sums (c. $10). Many accepted, obviously not realising the value of what they had, but some people still have these policies, including this guy Max-Herve George (see articles below), who sends in his detailed trading instructions every week, betting on known events and always winning. Problem is the insurance company is refusing to play ball, but George keeps winning court cases and some think he will end up bankrupting a major insurance firm.

Got to be the worst contract ever written.

http://ftalphaville.ft.com/2015/02/27/2 ... va-france/

http://www.independent.co.uk/voices/max ... 69086.html

Spoiler:
When he was seven years old, Max-Hervé George was given a magic ticket by his father. It lets him turn back the clock, to invest with perfect hindsight week after week, steadily accumulating a fortune.

The ticket is a life insurance contract and Mr George, now 25, has fought for years in the French courts to preserve its magic. He could be a billionaire by the end of this decade and, by the end of the next, his contract would be worth more than the insurance company which stands behind it, Aviva France.

There is no mystery to the financial magic, however. Instead it is a story of grand stupidity, of how a French insurer wrote the worst contract in the world and sold it to thousands of clients.

The company was L’Abeille Vie. In 1987 it began to offer a special deal to its richer clients, a Fixed Price Arbitrage Life Insurance Contract.

Life insurance is a popular savings product in France, and typically the customer allocates their money among different investment funds offered by the insurer. But this contract was not typical: prices for the funds were published each Friday, and clients were allowed to switch funds at those prices anytime before the next price was published, even if markets moved in the meantime.

L’Abeille Vie called this an arbitrage, but really it was a gift. Is the stock market up this week? Just call your broker to buy it at last week’s price and pocket the difference.

In a world where the price of everything is now a mouse click away, offering a hindsight investment service seems incredible, if not suicidal. Yet thirty years ago prices for funds were published infrequently. Trading involved calling your broker, visiting him person, or maybe sending a fax. It could take days for the trade to be processed, during which time the market could move again.

L’Abeille Vie was not alone in the madness. Other insurers, including Axa and a group now owned by Allianz, also offered “known price” contracts to rich customers.

It may be that the opportunity to talk to the wealthiest clients on a regular basis was the incentive, or executives thought the work involved meant few would take full advantage of the opportunity. Perhaps life insurance was a great business and they didn’t ponder the consequences.

As financial information became more accessible in the 1990s, insurance companies began to realise the danger of hindsight terms. They started to persuade customers to amend the contracts, paying them to give up the right to trade at week-old prices.

The important thing to realise about insurance is the sanctity of contract. You might finagle the meaning of a particular term, but the whole point is for the writer to stand behind what was agreed. Regulators do not let insurers unilaterally change their terms.

In 1997 L’Abeille Vie’s known price deal was still available and Mr George senior took out polices for the whole family, depositing Fr50,000 (almost E8,000) in the name of young Max-Hervé.

Shortly afterwards, Abeille Vie — which had by then been absorbed into Commercial Union — stopped selling magic tickets. It could not tear up thousands of contracts, so it tried a more subtle tactic: policy holders were sent new papers, with the offer of 100 francs for the trouble (about £10). It is a measure of the bureaucrat’s art that almost all did sign, but the Georges declined.

Mr George grew up with a fine appreciation for the power of paperwork and the French legal system. Each week the family would switch their money into the best fund. “At the beginning I could send the document by fax, so it was really easy. Soon after they told me no, only by letter”, he said. To make sure nothing goes awry in the post, Mr George pays for a court appointed bailiff to deliver each set of instructions. The paper has piled up almost as fast as the money: “I would need to take one Boeing to bring all of the documents with me”, he said.

In 2002, Commercial Union took part in the merger of insurance companies which formed Aviva. Around that time legal cases began to appear as holdouts tried to assert their right to hindsight, represented by Nicolas Lecoq-Vallon, a lawyer who would later become celebrated in France for representing victims of the ponzi schemer Bernie Madoff. In 2005 Aviva told Les Echos around 30 holders of the magic contracts had taken legal action.

The family George won their first court judgement in 2007, which affirmed the validity of their contracts. A subsequent appeal court ruling went their way, as did a September 2014 ruling from the Cour de Cassation, France’s highest legal authority. According to Mr Lecoq-Vallon, “established case law exists and my office alone has constituted no fewer than 64 decisions which are unfavourable to Aviva”.

What remains a matter of continued litigation is the value of those contracts. An expert was appointed to assess the claims, and a Paris District court approved his findings, effectively that the families investments grew in value at 68.6 per cent a year for a decade from 1997. As of 2007 the family’s investments were worth €9.6m, out of a €21m total for all court awards so far, with €1.4m belonging to Max-Hervé.

Mr George continues to arbitrage time. For instance, he might have his money in an Aviva fund invested in the French stock market. Lets say the Nikkei 225 rises 5 per cent during the week. He’ll tell Aviva to move his investments into its Japanese fund, at the price before the market moved.

So he is now in a strange position. Each week he grows his fortune by trading the past with precision, but cannot say how rich he is. “This report is until 2007, so what about 2007 to 2014?”, said Mr George. “The amount of the arbitrage is 100 per cent exactly, because I don’t know the amount of my contract.”



Estimating the size of his windfall is an illustration of exponential growth. Assume the growth rate of 68.6 per cent a year continues, and €1.4m becomes €93m. There was quite a significant market crash in 2008, but imagine you were able to pick the best performer each week as markets rebounded in 2009.

An appeal court, and potentially the Cour de Cassation, will still have the chance to settle the matter. Aviva said in a statement:

Aviva France strongly contests this compensation claim and believes that the Court will rule against the speculative and excessive compensation levels being sought.

Were Aviva not to prevail, the numbers become more significant every week the George’s bailiff arrives with instructions. Consider the effect of a liability growing at 68.6 per cent a year from here:



Mr George has also started to add fresh capital to the account governed by the contract, €19.9m last year, helped by a loan from the Swiss arm of a French Bank. (He is a French citizen, but lives in Switzerland). He said the contract terms allow him to add more cash to the pot. “I can take all the money in the world and invest it, there is no limit”.

Some policy holders may have died, but a handful of such cases would start to become a material number, even for an insurer of Aviva’s size, were court decisions to go against it. The company said “Aviva France remains appropriately reserved”. The absence of some plaintiffs from subsequent litigation suggests settlements were reached in some cases. Mr George’s father is no longer a claimant, for instance. The family declined to comment on the status of his policy.

His son claimed to be resolute, however. “With 64 decisions in favour the jurisprudence is a reality” he said. “After everything I just want to go for the maximum of justice. I don’t want money, I just want my contract.”

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Vahir
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Re: The worst contract in the world

Postby Vahir » Mon Apr 13, 2015 4:42 pm UTC

I don’t want money, I just want my contract.


...What!?

Tirian
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Re: The worst contract in the world

Postby Tirian » Mon Apr 13, 2015 4:58 pm UTC

So this is a life insurance policy? It ends the day the guy dies?

I'm just saying.

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Re: The worst contract in the world

Postby Derek » Mon Apr 13, 2015 7:06 pm UTC

Tirian wrote:So this is a life insurance policy? It ends the day the guy dies?

I'm just saying.

More realistically, if the company declares bankruptcy they could probably get the contract nullified. Other than that though, they may well be shit out of luck.

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Re: The worst contract in the world

Postby Chen » Tue Apr 14, 2015 11:49 am UTC

Probably makes more sense to wait for him to die, hope they can somehow contest the death being legit (suicide or some such that's not covered). If they can't contest it, just refuse to pay and force the family to go to court over it. Try to then offer the family a settlement and tell them if they don't accept, they'll declare bankruptcy and the family will get a pittance instead.

elasto
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Re: The worst contract in the world

Postby elasto » Tue Apr 14, 2015 10:30 pm UTC

Chen wrote:Probably makes more sense to wait for him to die, hope they can somehow contest the death being legit (suicide or some such that's not covered). If they can't contest it, just refuse to pay and force the family to go to court over it. Try to then offer the family a settlement and tell them if they don't accept, they'll declare bankruptcy and the family will get a pittance instead.


They may not have the luxury of that. As an insurance firm there may be laws that say they have to have a percentage of the liabilities in ring-fenced liquid assets. Long before the guy dies they'll have a liability in excess of world GDP.

Also the firm is managing hundreds of billions of investor assets. Declaring bankruptcy on all that would be extremely messy and costly - and even the threat of bankruptcy could cause them much lost custom: Would you take out an insurance policy with Aviva if bankruptcy is on the horizon - even a decade or two hence? They need a better strategy than that.

Finally, why would the family necessarily get a pittance in bankruptcy? I would bet that bankruptcy law for insurance companies - especially in France - is heavily biased in favour of policy holders. It's not inconceivable this family could receive the firm's entire assets. Depends on how much 'common sense' the law shows.

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Re: The worst contract in the world

Postby Qaanol » Wed Apr 15, 2015 1:44 am UTC

I think (or at least hope) we’d all agree that if it were the other way around—if the contract were something like, “The insurance company can choose which funds to invest in at last week’s prices, the family must keep paying the monthly premium, and the family cannot unilaterally end this agreement”—then if the insurance company were always “investing” in the worst stocks and pocketing the difference there ought to be a law the family could appeal to on grounds of it being an unfair and abusive contract.

The family wouldn’t likely get reimbursed for their past monthly payments, and they probably wouldn’t even receive whatever pittance the funds ended up being nominally worth, but they should at least be able to end the contract. It shouldn’t matter if the family was well aware of the terms when they signed the agreement, abusive contracts should not carry force of law.

I don’t see much difference with it the other way around. Why should a company—and by extension its customers, employees, and owners—be liable for continuing to uphold an egregious (emphasis on “egregious”) contract that some previous manager at the company had thought was acceptable 20+ years ago? Yes, the insurance company should have to pay the full value of the policy as it stood on the day they filed the lawsuit to overturn the contract, maybe even with an interest adjustment for the man’s expected remaining lifetime. That is tens or hundreds of millions of dollars at least. But it makes no sense for contract law to be so absolute as to give no recourse in a situation like this.

All that said, the very concept of life insurance in the first place, “Pay us every month until you die. If you stop paying you get nothing,” strikes me as basically gambling against one’s own life, so I am opposed to the idea on principle.
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Re: The worst contract in the world

Postby Tirian » Wed Apr 15, 2015 3:11 am UTC

Qaanol wrote:All that said, the very concept of life insurance in the first place, “Pay us every month until you die. If you stop paying you get nothing,” strikes me as basically gambling against one’s own life, so I am opposed to the idea on principle.


A more charitable way of looking at it is as a hedge against a family's catastrophic loss of income. Take a husband with a high-paying job, a stay-at-home wife, and three young kids. You'd want life insurance for the husband so that his widow could pay off the mortgage without his income. You'd might also want life insurance for the wife so the widower could afford a maid/nanny without cutting into their quality of life. Anyone who buys life insurance for their children and pets, though, is unclear on the concept.

And it sounds from one of the articles like the French perceive whole life insurance as being a major investment vehicle. If people in the United States didn't have IRAs or 401(k)'s and the only way to have tax-deferred mutual fund investments was to do it through an insurance company, we'd probably line up for it.

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sardia
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Re: The worst contract in the world

Postby sardia » Wed Apr 15, 2015 3:31 am UTC

Tirian wrote:
Qaanol wrote:All that said, the very concept of life insurance in the first place, “Pay us every month until you die. If you stop paying you get nothing,” strikes me as basically gambling against one’s own life, so I am opposed to the idea on principle.


A more charitable way of looking at it is as a hedge against a family's catastrophic loss of income. Take a husband with a high-paying job, a stay-at-home wife, and three young kids. You'd want life insurance for the husband so that his widow could pay off the mortgage without his income. You'd might also want life insurance for the wife so the widower could afford a maid/nanny without cutting into their quality of life. Anyone who buys life insurance for their children and pets, though, is unclear on the concept.

And it sounds from one of the articles like the French perceive whole life insurance as being a major investment vehicle. If people in the United States didn't have IRAs or 401(k)'s and the only way to have tax-deferred mutual fund investments was to do it through an insurance company, we'd probably line up for it.

This sounds more like the weird hybrid insurance+ stock market schemes I've been hearing about recently. Not your stereotypical life insurance.

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Diadem
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Re: The worst contract in the world

Postby Diadem » Wed Apr 15, 2015 9:37 am UTC

Qaanol wrote:I don’t see much difference with it the other way around. Why should a company—and by extension its customers, employees, and owners—be liable for continuing to uphold an egregious (emphasis on “egregious”) contract that some previous manager at the company had thought was acceptable 20+ years ago? Yes, the insurance company should have to pay the full value of the policy as it stood on the day they filed the lawsuit to overturn the contract, maybe even with an interest adjustment for the man’s expected remaining lifetime. That is tens or hundreds of millions of dollars at least. But it makes no sense for contract law to be so absolute as to give no recourse in a situation like this.

This. very much this.

There should be ways to end abusive contracts. I have no problem with someone profiting hugely from a blunder by a major company, but there is still a big difference from making a huge profit and completely bankrupting the company. This guy already made many, many times what you'd expect to make from such a contract even in the best case scenario. So even if a judge rules that the company can buy off the contract for a reasonable sum, this guy is still a very, very lucky man.

Insurance companies are massive companies that generally don't hesitate to screw over there customers. A story of a little man sticking it to them sounds awesome. But first of all this guy is not a little man. He was already very rich (This program was aimed at rich clients. Also he took out a 19 million dollar loan just to leverage this further. How many people can just go to a bank and ask to fork over 19 million without being laughed at?). And secondly bankrupting an insurance company hurts not the management of the company, but all the millions of people who will suddenly see their investment disappear. It's a huge dick move.
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Re: The worst contract in the world

Postby elasto » Wed Apr 15, 2015 10:29 am UTC

Diadem wrote:This. very much this.

There should be ways to end abusive contracts. I have no problem with someone profiting hugely from a blunder by a major company, but there is still a big difference from making a huge profit and completely bankrupting the company. This guy already made many, many times what you'd expect to make from such a contract even in the best case scenario. So even if a judge rules that the company can buy off the contract for a reasonable sum, this guy is still a very, very lucky man.


I agree. Personally I think the 'common sense' solution would be for the law to take the best performing policy other than this across the industry, maybe add 50% or so for good measure, and then give that as a fair valuation at which the company can buy him out.

However, for some there is a principle at stake: That companies should not be able to unilaterally renege on contracts - especially if they'd fight tooth-and-nail to deny you the same courtesy.

Imagine if you placed a bet with a gambling firm that a twelve-year-old would win the 2016 Master's Golf, and the firm offered you a billion to one, and somehow it happened - would you be happy if that firm was allowed to say 'well, it was stupid of us to offer odds that big and it would be unfair to other customers if we had to pay that out so we'll pay it out at a thousand to one instead'. It's not like they were planning to return your money if you lost!

Also he took out a 19 million dollar loan just to leverage this further. How many people can just go to a bank and ask to fork over 19 million without being laughed at?).

That doesn't mean he is rich; He could have borrowed against this contract. What bank wouldn't loan against a business with a proven return of 68% a year..?

He probably is rich but I don't think that's terrible relevant to the principle that companies should honour their commitments to us if they'd force us to honour our commitments to them.

It's only because it's such an extreme example that I think the common sense solution is to allow the company to buy themselves out.

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Re: The worst contract in the world

Postby leady » Wed Apr 15, 2015 11:14 am UTC

Yeah but you have to acknowledge that if he personally bankrupts the company / division, its all the little guys that need their life insurance that are going to be screwed, not the senior employees and probably not even the "owners" depending on the corporate structure. That's not a good outcome (well actually being France I imagine the government will end up bailing it all out - which is just as bad)

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Re: The worst contract in the world

Postby elasto » Wed Apr 15, 2015 11:48 am UTC

leady wrote:Yeah but you have to acknowledge that if he personally bankrupts the company / division, its all the little guys that need their life insurance that are going to be screwed, not the senior employees and probably not even the "owners" depending on the corporate structure. That's not a good outcome

I thought I did acknowledge that when I said the law should come up with a fair valuation and buy the guy out - and I even suggested how to arrive at a generous but fair valuation - but only because of how exceptionally bad this screw-up was. And if the law needs to be changed to do that because the judges have no leeway, well then the law should be changed.

But the insurance industry in particular is notorious for holding policy holders to the letter of a contract and not its spirit - or in other words attempting to find loopholes as to why they don't need to pay out. And companies in general are notorious for writing voluminous and impenetrable small-print which no ordinary person could comprehend without a lawyer - even for something so simple as to sign up for an email account - and then forcing people to be held accountable.

In less extreme cases it would be galling if they are not held to the same standards they demand of us.

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Re: The worst contract in the world

Postby oxoiron » Wed Apr 15, 2015 8:34 pm UTC

Tirian wrote:[Life insurance is] a hedge against a family's catastrophic loss of income. Anyone who buys life insurance for their children [...] is unclear on the concept.
Right! I have never understood why people insure their children. I can't think of a sadder windfall. What the fuck do you even want that money for?

Spoilered for possible trigger:
Spoiler:
If my kid checks out, I won't be far behind him.
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Re: The worst contract in the world

Postby Angua » Wed Apr 15, 2015 8:44 pm UTC

Yeah cause losing your child could in no way impact your ability to earn.

Also children funeral costs must be loads cheaper than adults.
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Re: The worst contract in the world

Postby Vahir » Wed Apr 15, 2015 9:37 pm UTC

Damn but this discussion got morbid fast.

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Re: The worst contract in the world

Postby Tyndmyr » Wed Apr 15, 2015 10:26 pm UTC

My first inclination was to post "Replacement sources of organs ain't cheap".

Not sure that's helping.

But yeah, insurance is a little like a bet, really. A particularly morbid one, in the case of life insurance. Bets do need to be clear and well laid out...yeah, insurance companies are sometimes dodgy in this regard, but this guy being crappy about this doesn't really fix that. Some sort of buyout seems entirely reasonable. Any valid contract should have exit clauses built in, right? If they forgot that as well...damn.

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Re: The worst contract in the world

Postby Diadem » Thu Apr 16, 2015 6:56 am UTC

I'm now just wondering if having lots of kids, insuring them all, and then storing all your cleaning products in an unlocked ground-level cabinet, would be a good investment policy. What kind of payouts are we looking at here?
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Re: The worst contract in the world

Postby Chen » Thu Apr 16, 2015 11:51 am UTC

Diadem wrote:I'm now just wondering if having lots of kids, insuring them all, and then storing all your cleaning products in an unlocked ground-level cabinet, would be a good investment policy. What kind of payouts are we looking at here?


Had to go even more morbid eh?

Also I'm pretty sure the insurance doesn't pay out if you insure someone and then cause their death.

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Re: The worst contract in the world

Postby jareds » Fri Apr 17, 2015 5:24 am UTC

It seems like the explanation for why someone might buy life insurance on their children is in Tirian's own post. There are definitely jurisdictions where life insurance has a tax advantage over a straight-up inheritance, and is therefore popular for that reason. Buying life insurance on your child would then be a tax-advantaged way to leave money to your (future) grandchildren (or, if your child doesn't end up having children, someone else that your child cares about enough to leave money to). And leaving money to grandchildren is a normal thing to do if you can afford it.

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Re: The worst contract in the world

Postby elasto » Fri Apr 17, 2015 8:16 am UTC

Heh. Here's a similar but much less extreme story:

The scam – and I say that with some affection – is this: life insurers offered products that allowed you to invest your money in stuff and then, when a “reference life” or “annuitant” – a person, normally but not necessarily you – died, you got back the greater of (1) your original investment (plus interest sometimes!) and (2) the value of the stuff. So if the stuff went up, you profited; if it went down, you broke even (or did a little better). In exchange for this guarantee you paid a tiny fee every month, and I guess actuarially those fees were supposed to add up to the fair price of the put that the insurer was selling you.

But the trick comes when you decide, as amazingly you can, to make the annuitant not you but rather someone you found in an AIDS hospice and then bamboozled into signing up for the scheme by giving him a $2,000 payment that you told him was a charitable donation so he didn’t have to report it to the IRS. Then you end up paying almost nothing – well, $2,000 and change – for that put that the insurer is selling you, meaning that you get it for way under its fair value. And if you have a free put, you might as well combine it with the most volatile thing you can find. And our guy did. Actually he did a little better than that:

With decent gains locked in, he would take flyers on the riskiest investments possible. Sometimes, he would invest his clients’ money in two variable annuities, one that paid out if the market went up and the other if it declined. It didn’t matter. When the annuitant died, Caramadre’s client, at the very least, would get both principals back plus the gains from whichever fund paid out.

AAHAAHAAH THAT IS AMAZING. I think I love this guy even more than ProPublica obviously does. I mean, not the scamming dying people. But the scamming insurance companies! It’s so … efficient.

Anyway, the story goes on: the insurers figured it out, they sued him repeatedly, they lost every time because this was obviously allowed by their documents, they revised their products, and ultimately the FBI decided this was pretty shitty – to the dying annuitants, they say, though you might cynically read it as “to the insurers” – and so they’re accusing the guy of criminal fraud, basically because he tricked these dying reference-life people into signing the documents.

Which, yeah, if the prosecution is even half-right, he wasn’t exactly nice to those people, though be careful about exactly how they were harmed – they got $2,000 for signing a piece of paper, and it’s not like that signature lost them or their survivors any other benefits.


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Re: The worst contract in the world

Postby Diadem » Fri Apr 17, 2015 9:40 am UTC

Uh, if he basically gave them 2000 for their signature, without any downsides, then why did he have to lie about it?

There must be a catch here. The guy must have had a reason to lie to these dying people. If you have a brilliant and entirely legal way to make money, why turn it illegal by lying when you don't have to?
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Re: The worst contract in the world

Postby PeteP » Fri Apr 17, 2015 10:36 am UTC

Diadem wrote:Uh, if he basically gave them 2000 for their signature, without any downsides, then why did he have to lie about it?

There must be a catch here. The guy must have had a reason to lie to these dying people. If you have a brilliant and entirely legal way to make money, why turn it illegal by lying when you don't have to?

Well going by the pro publica article that is the narrative of the persecution, so it might simply not be true. But you might do it if people are squeamish about participating in such things and you have trouble finding willing participants.

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Re: The worst contract in the world

Postby elasto » Fri Apr 17, 2015 11:29 am UTC

PeteP wrote:But you might do it if people are squeamish about participating in such things and you have trouble finding willing participants.

I think there's also an element of greed on all sides here.

He had no incentive to explain the contract in any more detail than the person demanded (because maybe they'd demand a bigger cut) and the families got annoyed at the 'unfairness' of it: The families don't see it as 'he gave my father $2k for doing nothing', they see it as 'he made $20k and only gave $2k of it to my father'. Somehow the latter is felt to be 'exploitative'...

There's lots of psychological experiments where people would prefer to get $4 and the other person $3 than to get $5 but the other person $6. I think there's an element of that envy going on here...

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Re: The worst contract in the world

Postby Chen » Fri Apr 17, 2015 12:25 pm UTC

elasto wrote:I think there's also an element of greed on all sides here.

He had no incentive to explain the contract in any more detail than the person demanded (because maybe they'd demand a bigger cut) and the families got annoyed at the 'unfairness' of it: The families don't see it as 'he gave my father $2k for doing nothing', they see it as 'he made $20k and only gave $2k of it to my father'. Somehow the latter is felt to be 'exploitative'...

There's lots of psychological experiments where people would prefer to get $4 and the other person $3 than to get $5 but the other person $6. I think there's an element of that envy going on here...


It's not clear if he actually told them there would be more money being made at all. Though I have to wonder at how you'd sign a life insurance policy without knowing that someone was getting more money than they were giving you.

Seems the insurance company probably should have also been checking on the health of these people it was selling life insurance too. I'm pretty sure if you're close to dying from AIDS you're not normally going to be granted life insurance...

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Re: The worst contract in the world

Postby Diadem » Fri Apr 17, 2015 1:12 pm UTC

Chen wrote:Seems the insurance company probably should have also been checking on the health of these people it was selling life insurance too. I'm pretty sure if you're close to dying from AIDS you're not normally going to be granted life insurance...

There wasn't really any need, for normal use. The lifetime of the contract doesn't really affect the insurers bottomline under normal use. It's a scheme where you get back what you put in, minus fees, plus any profit you made from investments. Meanwhile they too are of course investing the money you gave them. So as long as you don't do significantly better than them on your investments, the insurance company makes a profit.

Life insurance isn't really insurance. Insurance means replacing a small risk of a big loss with the certainty of a small loss. But dying isn't a small risk, it's already a certainty.
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Re: The worst contract in the world

Postby Zamfir » Fri Apr 17, 2015 1:52 pm UTC

Seems the insurance company probably should have also been checking on the health of these people it was selling life insurance too.

Yeah, that's the crucial mistake that allowed th guy to turn the product from a personal insurance into a source of put options for a professional investment business.

To me, that's an important difference with the French story: Caramadre found a loophole to use the product in a very different way than the insurer expected or intended.

The Georges in the OP on the other hand are using their products exactly as advertised: they insured themselves and close relatives, then changed the portfolio to the best index at every opportunity. Which was the headline feature of the product.

Life insurance isn't really insurance. Insurance means replacing a small risk of a big loss with the certainty of a small loss. But dying isn't a small risk, it's already a certainty.


Regular life insurance doesn't insure against the financial consequences of death, but against those of early death. If you live to the statistically expected age, you are expected to lose money on the insurance.

In fact, it's pretty common to cancel a life insurance before you die, once you're older and your dependents can bear the consequences. For example because a retirement fund will continue paying your partner after your death. In that case it works exactly as you describe: you lose over the years a (relatively) small amount with certainty, to replace the big risk of dying during those years.

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Re: The worst contract in the world

Postby Diadem » Fri Apr 17, 2015 2:05 pm UTC

Zamfir wrote:Regular life insurance doesn't insure against the financial consequences of death, but against those of early death. If you live to the statistically expected age, you are expected to lose money on the insurance.

In fact, it's pretty common to cancel a life insurance before you die, once you're older and your dependents can bear the consequences. For example because a retirement fund will continue paying your partner after your death. In that case it works exactly as you describe: you lose over the years a (relatively) small amount with certainty, to replace the big risk of dying during those years.

True. But that's a different type of life insurance than what is described in this story. What we're talking about here is more like a life annuity.
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Re: The worst contract in the world

Postby Zamfir » Fri Apr 17, 2015 2:53 pm UTC

It looks like these contract would pay out as lump sums, not as annuities?

I'd say these products (both the OP and the AIDS patients example) are not so much life insurance, more a form of investment insurance that happened to be attached to a death instead of a fixed date. And sold by companies without experience in selling professional hedging instruments, who didn't realize the potential of their products.

There's a parallel here with AIG, where some department took the next step and decided to sell hedging instruments directly to professional investors.

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Re: The worst contract in the world

Postby Tyndmyr » Fri Apr 17, 2015 3:03 pm UTC

Diadem wrote:Uh, if he basically gave them 2000 for their signature, without any downsides, then why did he have to lie about it?

There must be a catch here. The guy must have had a reason to lie to these dying people. If you have a brilliant and entirely legal way to make money, why turn it illegal by lying when you don't have to?


Well, the whole "I want to bet on you dying" is a wee bit uncomfortable.

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Re: The worst contract in the world

Postby rath358 » Fri Apr 17, 2015 4:54 pm UTC

I was taught in high school that there are two rather different kinds of life insurance:
Term life insurance, which you pay a standard premium into, and receive more than you paid into if you die early. Only lasts for so long, and/or costs go up with age. We were taught this is a good option to carry until your kids grow up a little if you work a more risky job or something. Not everyone is expected to receive a payout.

Permanent life insurance, which seems more like an investment account. Pay into it your whole life, and it gets paid out when you die or reach the age of 100 or something.

I got confused as to which type people were talking about while reading this thread.

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Re: The worst contract in the world

Postby Tirian » Fri Apr 17, 2015 6:28 pm UTC

jareds wrote:It seems like the explanation for why someone might buy life insurance on their children is in Tirian's own post. There are definitely jurisdictions where life insurance has a tax advantage over a straight-up inheritance, and is therefore popular for that reason. Buying life insurance on your child would then be a tax-advantaged way to leave money to your (future) grandchildren (or, if your child doesn't end up having children, someone else that your child cares about enough to leave money to). And leaving money to grandchildren is a normal thing to do if you can afford it.


I should have been more clear that I was talking about traditional American life insurance and not this French hybrid. The father of the guy in the OP was a genius to see that the Internet was changing the world and this policy was about to become a blank check for life, and buying it for his five year-old son made a world of sense. Even without it, if this is a traditional investment vehicle in France, then buying a policy for your kid would be just the same as an American buying a kid a college-based mutual fund or a savings bond.

For the most part, though, American insurance for children and pets are made on an emotional level. "You love your kids, so they deserve the best. You have a life insurance policy, why shouldn't they?" Well, unless they're the stars of a family sitcom, you're not going to miss their income, and you're not going to take that windfall and go on a trip around the world to get over your grief. Yes, funeral expenses are not insignificant (averaging $4k according to a quick Google search). But I've never seen the community not financially rally around a family that lost a minor child, and quickly editing that Google search revealed that it costs an average of $245K to raise a child to put that expense in perspective.

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Re: The worst contract in the world

Postby Zamfir » Sat Apr 18, 2015 11:20 am UTC

It's in the OP, but I don't get their references to how the internet Completely Changed stuff. It's not like these insurances are from some age where you had to wait for the sailing ship to arrive to know the last quotes. The FT article itself mentions that the Georges made a large return from the first years on already.

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Re: The worst contract in the world

Postby KnightExemplar » Sat Apr 18, 2015 12:54 pm UTC

For the most part, though, American insurance for children and pets are made on an emotional level. "You love your kids, so they deserve the best. You have a life insurance policy, why shouldn't they?" Well, unless they're the stars of a family sitcom, you're not going to miss their income, and you're not going to take that windfall and go on a trip around the world to get over your grief. Yes, funeral expenses are not insignificant (averaging $4k according to a quick Google search). But I've never seen the community not financially rally around a family that lost a minor child, and quickly editing that Google search revealed that it costs an average of $245K to raise a child to put that expense in perspective.


The sales pitches I hear are along the lines of "If your child gets whole life insurance when they're 5, look how cheap it is compared to your ripe old age!!". The child needs to maintain their life insurance policy when they get older, but it is extremely cheap since the insurance companies take advantage of the compounding gains of the market.

Otherwise, I don't know anyone who gets term life insurance for their children.
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Re: The worst contract in the world

Postby Diadem » Sat Apr 18, 2015 1:18 pm UTC

Zamfir wrote:It looks like these contract would pay out as lump sums, not as annuities?

You are right. I had the wrong word. Hmm, what's the word for one of those investment plans that you pay into for a fixed amount of time, and then they pay out as a lump-sum?
It's one of those irregular verbs, isn't it? I have an independent mind, you are an eccentric, he is round the twist
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Re: The worst contract in the world

Postby Tirian » Sat Apr 18, 2015 2:29 pm UTC

Zamfir wrote:It's in the OP, but I don't get their references to how the internet Completely Changed stuff. It's not like these insurances are from some age where you had to wait for the sailing ship to arrive to know the last quotes. The FT article itself mentions that the Georges made a large return from the first years on already.


No, but they were from an age when they only published the quotes once a week to their preferred customers. I don't remember the exact dates, but things like Yahoo Finance which could give you 15-minute delayed quotes on anything that was traded were relatively unknown to the general public for quite a while. (Or perhaps it was earlier yet and the father got a day-trader license so he could see real-time data.)

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Re: The worst contract in the world

Postby morriswalters » Sat Apr 18, 2015 8:12 pm UTC

Read the articles.
The company was L’Abeille Vie. In 1987 it began to offer a special deal to its richer clients, a Fixed Price Arbitrage Life Insurance Contract.
So stone age. Computers existed before the internet and trading was being computerized well before that date. Research 1987 and the stock market, global.

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Re: The worst contract in the world

Postby Tirian » Sat Apr 18, 2015 10:17 pm UTC

morriswalters wrote:Read the articles.
The company was L’Abeille Vie. In 1987 it began to offer a special deal to its richer clients, a Fixed Price Arbitrage Life Insurance Contract.
So stone age. Computers existed before the internet and trading was being computerized well before that date. Research 1987 and the stock market, global.


Wow, get off that pedestal before you hurt yourself. The plan was assuming that ordinary people couldn't get mutual fund price quotes without going through an intermediary like a broker, and they couldn't in 1987. That assumption went sour in the late 90's when the Internet brought the power to investigate and trade stocks directly to the masses with services like Yahoo Finance and E*TRADE.

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Re: The worst contract in the world

Postby morriswalters » Sun Apr 19, 2015 3:09 am UTC

If you say so. It would seem to be the type of thing whom only people who could afford a broker would buy, but perhaps you are correct and I am mistaken. However if you assume a certain amount of knowledge on the part of the people of how the market moved and knowledge of what was in the fund that they could connect the dots. The internet moved it from difficult to easy. However, my pedestal is indeed cracked so I will climb off.

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Re: The worst contract in the world

Postby HungryHobo » Mon Apr 20, 2015 9:39 pm UTC

Qaanol wrote:I think (or at least hope) we’d all agree that if it were the other way around—if the contract were something like, “The insurance company can choose which funds to invest in at last week’s prices, the family must keep paying the monthly premium, and the family cannot unilaterally end this agreement”—then if the insurance company were always “investing” in the worst stocks and pocketing the difference there ought to be a law the family could appeal to on grounds of it being an unfair and abusive contract.


They don't just get to take it back just because they made a poor choice. If you signed up for a contract with them to get a loan you wouldn't get to strike it down just because you'd been stupid and hadn't realised you couldn't pay the interest rate, you'd have to go bankrupt. Hint: why should companies get to weasel out of things that would bankrupt them, individuals don't.

Also the difference, the big difference, the huge difference is that they wrote it themselves as a standard contract, they had full control and they offered a really good deal.

And even if it wasn't treated symmetrically there is absolutely no reason why the law should treat 2 entities, one a wealthy business with full access to teams of fully trained lawyers who have total control of the terms and the other an individual who has no legal training the same.

For example in the UK, if there is no "meeting of the minds" and you're presented with a standard consumer contract by a company and later there's a dispute the courts can simply decide that some of the terms were "unfair" to the consumer and ignore them because it's part of the companies duty to make sure that such standard contracts are fair to the consumers. The company which wrote the contract themselves can't avail of the same protection and that's exactly how it should be.

http://www.adviceguide.org.uk/scotland/ ... tracts.htm

In the US there have been cases where airlines needed quick cash and so sold "lifetime" tickets.
Roll on a few years and they don't want to honour them and are trying every trick in the book to screw the people who paid for lifetime tickets because they turned out to be a really good deal for some customers.

http://articles.latimes.com/2012/may/05 ... t-20120506

When American introduced the AAirpass in 1981, it saw a chance to raise millions of dollars for expansion at a time of record-high interest rates.

It was, and still is, offered in a variety of formats, including prepaid blocks of miles. But the marquee item was the lifetime unlimited AAirpass, which started at $250,000.


If you're selling something it's your duty and your duty alone to make sure you don't give the buyer too good a deal.
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