Divorce Insurance

The New York Times Bucks Blog (of August 6, 2010) has a fascinating article by Jennifer Saranow Schultz on the first-ever offering in the United States of divorce insurance, the WedLock policy issued by a start up insurance company in North Carolina, Safeguard Guaranty Corp.  Markets in everything, etc.

The casualty insurance is designed to provide financial assistance in the form of cash to cover the costs of a divorce, such as legal proceedings or setting up a new apartment or house. It is sold in “units of protection.” Each unit costs $15.99 per month and provides $1,250 in coverage. So, if you bought 10 units, your initial coverage would be $12,500 and you’d be paying $15.99 per month for each of those units. In addition, every year, the company adds $250 in coverage for each unit.

Then, if you get divorced and your policy has matured (see below for the maturation rules), you would send WedLock proof of your divorce. In return, you’d receive a lump sum of cash equivalent to the amount of coverage you had purchased.

There are a couple of classic insurance questions explored in the NYT article.  One is how to prevent people who know they are going to get divorced from signing up; the key element is a maturation clause (a little bit like suicide riders in life insurance policies) that requires 48 months (reducible to 36 if you buy an additional rider) before the policy will pay off.  A second is how the company sets its rates – it does so based around the factors summarized,  more or less, in its “divorce probability calculator,” for which it claims a 13% margin of error (curiously, I thought, it does not ask how many years a married person has already been married, but maybe I err in thinking that is especially relevant).  A third is moral hazard, in the sense of inducing riskier behavior, in this case presumably lowering the inhibitions on behaviors that might lead to divorce; the approach of the policy seems to be to treat it like any other accident insurance, as an independently bad enough thing (even if monetarily compensated) so that in effect moral hazard doesn’t really operate.

The article finally explores the question of whether, at the premiums charged, it is such a good deal for a consumer couple; Schultz suggests it is not.  Will this kind of policy catch on?  My guess is not too widely, for the same reasons that prenup agreements haven’t become a standard part of marriages.  I myself would probably try to market this insurance not to couples as such, but as the “responsible” thing to take out with the children as beneficiaries – the economic effects might be exactly the same, but were I marketing it, I’d market it as the right thing to do in advance for the kids.

But the policy is a new kind of insurance, and it is hard to say what will happen.  Might such policies – this one really is modeled closely on standard casualty insurance – evolve into something quite different, something closer to a system of side-bets?  A swap market in divorce annuities, anyone?  How might we securitize marriage – or divorce?  Not to mention the problems of insurable interests and empty creditors.  (I wonder what the newly-wed Megan McArdle thinks, actually.)

(I’ll have more to say about this in another post about ‘theatre for a post-credit society’, but I will add that in some ways, this resembles a bit that very great play from the 1950s, Friedrich Durrenmatt’s somewhat forgotten The Visit of the Old Lady.  I will leave this as a cryptic teaser for the moment, however.)

Update: Folks, I have a worry that the comment thread is going to slide into various proposals for how to scam the policy, based on my summary above. I’d suggest people read the NYT article, and then if you want to propose ways to game the system, go to the company site and read the policy before proposing something. I think you’ll find that the insurance lawyers who drafted the policy are not quite as dumb as one might think based on a two graf summary above.