A retired hedge fund manager sent me this 7-minute pitch (plus questions) for divorce insurance.
- half of marriages fail, most within the first 8 years (one third of people will reach a 25th anniversary)
- Divorce reduces the average person’s wealth by 77% (why not only 50%? see “Litigation, Alimony, and Child Support in the U.S. Economy” for transaction costs and how people change their behavior in response to family law)
- Taxpayers end up on the hook for $112 billion (Parent A sues Parent B and prevails in winning custody, but due to choosing a non-wealthy sex partner, child support revenue does not increase total income enough to disqualify for subsidized housing, health care, food, smartphone, etc.)
- Insurance policy will pay $10,000 to $2 million in the event of divorce (can rise with time)
I don’t see how this can work. “America, Home of the Transactional Marriage” (Atlantic) says that Americans tend to follow the money. Every U.S. state offers an inexpensive divorce procedure for parties who can agree on terms (in our survey of a Massachusetts courthouse, 17 percent of filings were “joint petitions”). What would stop two people from divorcing, splitting the insurance policy’s cash, and then getting back together? The Social Security system already provides a $128,000 cash bonus for people who divorce at 65 and remarry at 70 (see “Social Security and our world of no-fault divorce“). Why not spend $1,000 on an amicable divorce, pocket $128,000 from Social Security, pocket $2 million from this startup insurance company, and then remarry if it turns out that remarriage transaction is financially beneficial?
The Q&A session is interesting for what it reveals about America’s venture capitalists. None of them ask the above question, i.e., “If we live in a world of no-fault, no-social-consequence divorce, why wouldn’t a huge percentage of policyholders take the cash?” So the loss rate would go from the budgeted 50 percent to 90 percent, at which point the “insurance” ends up being simply a “savings account” with high fees and about 10 percent of customers who abandon their property.