Solving the Protection Problem: Leverage When Young, Savings When Old

Take Case A: a mutual-aid group of 1,000 people in which one person a year suffers misfortune and receives 300,000 yuan. Each member of this group can obtain protection for 300 yuan. 300 : 300,000 = 1 : 1,000 — high leverage.

Take Case B: a mutual-aid group of 1,000 people in which 100 people a year suffer misfortune and receive 300,000 yuan each. Each member of this group spends 30,000 yuan a year to obtain protection. 30,000 : 300,000 = 1 : 10 — low leverage.

The two cases above can be seen as mutual aid among the young and mutual aid among the old. Clearly, mutual aid among the young has high leverage: a very small sum buys relatively high protection. But when the leverage ratio of mutual aid among the old is this low, how many people would still be willing to stay in such a group?

This is why mutual-aid groups make age the single most important control variable. The true price of protection (against serious illness or death) rises steadily with age — it is just that many protection products nowadays smooth this out so that users will accept them. The result of the smoothing is that you do not strongly feel the protection cost soaring with age. But the principle of smoothing is simply to have you pay more when young and receive a return when old (there is a so-called investment return in between, but it is extremely low), which is in fact a disguised form of savings.

A mutual-aid group cannot solve the problem for a lifetime: even if we had lifetime mutual aid, you might not be willing to take part in it over the long term. So we hope members will adopt this idea: the ultimate solution to protection is leverage when young and savings when old. Members who stay in the Commune — go earn and save more!