Friday, April 16, 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 !!