Friday, 16 April 2010

Oh be obese


Should a life insurance company invest in the shares of fast food companies ? They have been accused of “dining” on fast food profits while preaching the gospel of healthy eating to their customers in a paper that was published yesterday by Harvard researchers. Only somebody from Harvard can do research on such a crucial, life critical (pun intended) and urgent issue facing the business world.

Insurance companies are exhorting their customers to have healthy eating habits and not gorge on Big Mac and fries. And then what do they do ?? They invest in shares in McDonald’s. Terrible isn’t it ? Wrong.

Insurance companies invest the moneys they receive from you as premium in the most profitable investment possible. If, McDonald’s is a damned good investment, then surely they must invest in it. Maximising returns from investment should be a key business priority. Right ? Wrong.

Even if you forget the morality of it all, financially it’s a stupid thing to do. For if McDonald’s do well, more and more people will gorge on the Big Mac and Fries. If so, they’ll die earlier. If they die earlier, the insurance company has to pay out more. So financially it’s a dumb idea. Right ? Wrong.

If the insurance company did not buy McDonald’s shares, then somebody else will. Any which way McDonald’s will do well if it’s a well run business and consumers want Big Macs. So all that will happen if the insurance companies do not invest would be that somebody else will be benefiting from McDonald’s performance, while people would continue to die at the same rate . Might as well make the money on McDonald’s shares. Right ? Wrong.

If insurance companies do not invest in McDonald’s it will attract a lot of publicity. Pension funds will be tempted to follow suit. More publicity. Then mutual funds will be forced to offer a “fat free” option. More and more people won’t invest in McDonald’s shares. If they don’t, its share price will fall. If its share price falls, its business will be affected. Less Big Macs. Less people die. Less payouts. Meanwhile insurance companies can invest in Goldman Sachs and make even more money. Right ? Wrong.

That’s really a dumb argument. Actually insurance companies want people to die at a reasonable age rather than at 103. If people die earlier, then that means the average life expectancy is lower. Insurance premiums are determined by life expectancy. The lower the life expectancy, the higher the premium. Then the insurance companies can make more profits. New insurers pay the higher premium while they will die only decades later. Meanwhile report higher profits.

Right ? Wrong !!!

I suspect I can apply for a job as a Harvard researcher !!

12 comments:

  1. Congrats, first. You now have a profile picture. Nanny broken?

    For all this, you should join Boston Consultancy Group. :-) :-) http://tech.mit.edu/V130/N18/dubai.html

    kuzhappo kuzhappu kuzhappitteenga. :-D

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  2. @RamMmm - Oh what a brilliant article you linked to. Thanks. It is a great read.

    I am still in the nanny's embrace. Crossed the border for a day trip ,to where the nanny does not reach and hence I now have a picture !

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  3. kiwibloke16/4/10

    Nice blog. For your readers to share here is a cartoon on how 'science research' becomes 'news' through a new mechanism called Churnalism (not journalism) http://physicsworld.com/blog/2009/05/how_to_make_headlines_with_you.html
    the research from some of the venerable institutions unfortunately gets churned like this.

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  4. Nice write-up! Text book example of "Analysis & Paralysis"!

    ---------------------------

    And on your idea of becoming a Harvard Researcher- RamMmm must have sent you that awesome write-up just to dissaude you, lest you got serious about it even a tad bit!
    -----------------------------

    @ kiwibloke's cartoon- How about I throw in a headline from a corny hindi news channel- "aapki ki duniya me aaya ek nayaa khooni darinda --- A; 'Kal-tak' ne dhoondh nikaala is darinde ka raaz" :D:D

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  5. First of all, i am very happy you took off the Thiru K'ung Zhu from your blog. While i still personally feel very nice with the name, i felt very sad after preeti's comment - while i can understand that preeti was just commenting on what it sounded like and after i referred her to your comment thread and then she understood the background - i still felt guilty for being instrumental in you going thru this awkwardness. But would sign off the name with a note that that it was fun all along and thanks to you for this.

    And your profile picture is amazing. however, you potray yourself, please understand that you continue to be the heart throb for many a people (adiyen included :-)

    Now I agree with the harvard author. I believe that insurance companies are unjust and i have the following recommendations for them

    In the interest of equality, insurance companies should not differentiate people on appearances (weight included). it is incidental that Sandhya is just about 30 kgs more than Ramesh. But that does not mean Insurance companies can differentiate between the two and charge a higher premium for the former.

    the insurance companies need to understand that while the former may be overweight in appearance, the intensity of the brain which the latter carries is 1 million times more and hence, the former should get a discount for an empty top compartment.

    Further, the latter camouflages his intellectual weight behind his unassuming and light nature and thereby is guilty of deceiving the insurers.

    Further,i wish to place on record that the latter carries so much of warmth and energy which only grows as he transmits it to all others and hence the insurers should consider this in their estimation

    Lastly, however, i pray to God that he gives the latter all the energy and health that he should never need an insurance ever. Amen!!

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  6. Spoken like a true academic :P Loved how you worked in a little dig at Goldman Sachs in the middle of all this. This issue has some of the aspects of the social investing debate - should we be investing in companies that are doing something we believe is "wrong". I guess here the logic for the insurance companies is: if you cant beat them (McDonald's) join them. But the sad fact in the US is that it is not easy to buy a healthy meal at a low cost and these fatty fried food becomes an attractive option. I think it is easy to say, cook your meals but I also believe inexpensive options should be available like we have in India - the equivalents of our Udupi restaurants or the sandwich guys in the Bombay train stations. It is interesting to see more and more chains include the calorie count on their posted menus (Starbucks, among others) and it does change how you order stuff. But then I am rambling off-topic here....

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  7. @kiwi - haha - another nice link. This post is triggering some superb reading.

    @Deepa - Wah Wah !!!! Now you have to provide an English translation for Gils!!! He seems to be absconding though ...

    @Sandhya - Oh no ; I don't mind the name at all; in fact mightily tickled. Preeti's comments were light hearted too. Now you ARE a Harvard Prof. Only the doyen of academia can produce a comment like this !!!

    @J - I strongly believe in social investing. Its absolutely incorrect to say money has no colour - how you earn it does matter. Would we invest in a criminal enterprise ? Would we invest in a drugs ring ?? Of course not . Similarly, even for legal industries, we should adopt an ethical filter as well. And each person's filter may be different according to his values. I for one would not discriminate against the fast food industry, but that's my view and I would respect somebody who says he doesn't want to do so. What I am against is forcing others to toe a particular line; which is why I rant against pressure groups.

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  8. insurance kambenis kay investment tipsa!!! tiru kung fu rocks :D :D neenga oru wayward researchera illama harvard researchera maara all thaguthi u've got :D

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  9. Than a harvard researcher,you should change your job title into social investment advisor and the job descriptioni is as follows,who applies ethical filtering on investments and who see to that a fair investment is made with justice and social values.

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  10. @gils - not even qualified to be categorised as a wayward researcher.

    @ambulisamma - Not a bad idea. Ethical investment advisor ?? Sounds nice ...

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  11. It is just amazing to see how many different perspective you can apply to one simple subject... Ethical Investment Advisor... hmm hmm Not bad... !!!

    As regards this post, I tend to go back to few of your posts that you had written about consumer preference and an outsider's role in influencing consumer's behaviour. Definitely, they can be accused of "dining" on fast food profits, but they are not deciding what consumers are eating. For a moment, it may look like so. But as long as they are taking care of premiums by investing in most ideal deal as on date and providing a very reasonable insurance services, they may be given benefit of doubt. There may be several more logic behind this rally, though!

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  12. @Vishal - Oh thanks. Sure they don't decide what consumers eat, but if enough investors decide that way then the share price of the company would suffer and would impact the business.

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