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Thursday, May 06, 2010

Guest Post: AREIVIM and Why I Don't Like IT

With great thanks to "Old Frum Actuary" who is publishing a response to a heavily advertised plan by the name of Areivim that I believe is a disaster waiting to happen and is nothing more than a poorly conceived tzedakah disguising itself as life insurance. Like my guest poster, I don't care how big names appear as endorsers. The math simply doesn't work and the level of accountability is low, to put it politely. Regular readers know that I don't regularly publish the name of a tzedakah organization when I comment on trends, but I am making an exception because I feel so strongly about the important of life insurance and I believe that anyone who enrolls in this plan is not only buying into something that is simply unsound, but is playing into a trend of form over substance, and ultimately delaying an introduction of substance. Guest post follows:

AREIVIM and Why I Don’t Like It

This is just my opinion so you are more than free to disagree. Of course some numbers to back up any counter claims should be a requirement.

Here is the Areivim plan:
A group of 14,286 (families) enroll by submitting an application and a credit card number. If someone in the group dies, the remaining members will be charged $7 per surviving unmarried child, for a total of $100,000 per child. No more than $28 will be collected per member per month. For example, if someone dies and has 7 children, the first month’s collection will be $400,000 (14,286*$28) and the second month’s collection will be the remaining $300,000. If there are no deaths, there are no charges.

Now for the problems:
With 14,286 people and a maximum charge of $28 a month, the maximum amount that can be collected in one year is 14,286*$28*12 = $4.8 million. This means the maximum number of children that the group can pay for in any year is $4.8m/$100k = 48 per year. Since this arrangement is marketed to the Chasidic and RW communities, I am going to assume that the average family has 6 children. With an average of 6 kids per family, that means the fund can handle no more than no more than 8 deaths per year.

How many deaths can we expect from a group of 14,286 people? The answer of course depends on the age of the cohort. But from the mortality tables I looked at, there is no way that this will work. Remember, that there is no underwriting. Furthermore, the latest mailing states that not only will they give $100,000 per child, they will also give money to a surviving female spouse with 3 or more children. Last, it also appears that they will pay money to the surviving children whether it is the father or mother who pass way. This means that in the cohort of 14,286, there are actually over 28,000 people at risk for dying. Assuming 8 deaths or less from a group of 28,000 is well below any mortality table at any age.

Another question I had was as follows: As more people die the group gets smaller, so that later deaths do not have 14,286 people each chipping in $7 per child. So unless there is a constant flow of new people signing up and paying, by definition the plan fails. And any plan that requires constant new entrants to be able to pay the older ones is not an insurance plan but rather a Ponzi scheme.

Furthermore, credit cards get cancelled or expire. Who is going to track down the large number of uncollectable funds after each death? Isn’t there a cost for collecting money out of credit cards? Who is paying for that?

Yet another issue I have is regarding their rule on what happens to the $100k after collection. According to their brochure, ‘special accounts’ will be set up with the oversight of rabbonim, run by askonim who will distribute the money over time, to and through the wedding. I am pretty sure that Bernie Madoff himself would have passed the “rabbonim oversight” test. If there is any potential for fraud and abuse, this is it. Having a multi-million dollar fund in the hands of an ‘askan’ is a recipe for disaster. And cynics like me will be the first to point it out to anyone who asks.

Last but not least, are the distortions and outright lies in their most recent mailing. The brochure begins by stating that after two years the program is working, so all the naysayers were wrong. First, I am not sure two years would be enough time to prove any such thing. Second, according to my sources inside the organization, they still do not yet have a cohort of 14,286 people, so how can they say this? Third, this statement is completely un-auditable. We have no idea how many people have signed up, how many deaths there were, and whether or not outside collections were used to pay for them.

Later in the brochure they state that as of now 3 out of every 5 people have not yet signed up for Areivim. Using my brilliant analytical skills I determined that they are therefore saying that 2 out of every 5 people have signed up. Do you believe that 40% of Klal Yisroel has signed up for this plan? Let’s put it this way, do you know anyone who has?

The brochure also says that ALL the Gedolim in EY and America have endorsed it. Well, my son’s Rosh Yeshiva put up a sign in his Yeshiva saying that he doesn’t; though perhaps all that proves is that my son’s RY is not a Godol. J My Rov was also asked to endorse and he too refused.

The brochure makes mention that the number of deaths experienced so far is far lower than ‘Al Pi Derech Hatevah’ (expected). This is in fact quite possible even if I can’t audit them. And perhaps that can be their selling point - join Areivim and Hashem will bless you with a lower-than-expected mortality. But I think we are all better served by buying insurance from a reputable insurance company, with an annual financial statement and appropriate reserves, that pays the beneficiaries upon death.


A Young Life Insurance Actuary said...

Kudos. Thanks for the analysis. I couldn't agree more.

Tzadaka tazil m'maves should be their ONLY claim, not insurance.

tesyaa said...

What?? People should trust a goyishe insurance company??

P. Almonius said...

Could you also ask the actuary to comment on the shidduch age-gap idea?

JS said...

Good post.

I pretty much agree with everything you said. To me, the biggest problem is in oversight and management. However, I disagree that the need to accept new members makes it a Ponzi scheme. It's different here in that all non-dying members are used to pay benefits to dying members. It's not just new money being used to pay out benefits.

I think the real issue which is hinted at, is that assuming the benefit is maxed out every year (if mortality rates are such that this is likely to happen), the non-dying members will be paying out $28/month*12 months/year = $336 per year. This may or may not be a good system (assuming money is paid and oversight is good, etc) depending on the person's age, health, number of kids, etc as compared to life insurance. As an example, if the person has 6 kids and thus can expect to get $700k if he dies (6 kids + wife) so maybe it's a good deal, but if he has 2 kids and can only expect to get $200k, probably not such a good deal.

Also, what happens in management when there is a "backlog" of beneficiaries waiting to get paid?

The whole thing sounds like a logistical nightmare based on the silly idea that people just don't die all that often.

Anonymous said...

The shidduch issue is better left to an expert in game theory, which is not really an actuary's specialty. Basically, the idea is that too many girls are looking for the "best boy in lakewood". Those same boys will only pick the youngest and best of the litter. Girls who aren't eventually start to look elsewhere, but no one wants to be the girl's second pick.

The age-gap theory itself is unsound enough that it doesn't require an actuary to debunk it.

Offwinger said...


I think what you're getting at is that this is being created independent of actual risk tables and risk pooling data. Or in other words, they are trying to make "insurance" without actually using any of the elements that make insurance functional both for insurance companies AND beneficiaries!

Insurance works because people are willing to pay a little bit to insure the cost of catastrophic events. Statistically, not everyone will face that event. But the amount you charge has to be linked to the actual payouts ancitipated, and it doesn't work to the extent the people in your group do not represent an independent statistical sampling of the population and/or are not being charged in proportion to their actual risk.

It's a logistical nightmare because they are trying to create an insurance market without knowing the first thing about how it's actually done. And it's scary, because there IS specific government regulation/oversight of insurance markets and fiduciaries precisely because it is a set-up that invites people who don't understand the details to be ripped off.

Insurance is not an investment and it's not a tzedakah fund or gemach, and anything calling these plans insurance just further confuses people about how to protect themselves from risk.

Anonymous said...

I may be overly cynical, but looking the "Areivim" website, there is next to no information on who is actually running this organization. It is either an extremely amateur operation or an outright scam.

Anonymous said...

As another old frum actuary I couldn't agree more.

I would like to comment on the age-gap theory. As one who now has a daughter in the shidduch parsha, I have actually spent a fair amount of time thinking about this and have come to the following conclusions:

1) I think there is unquestionably some validity to the theory and it is definitely a contributing factor to the current shidduch situation.

2) Having said that, it is extremely naive at best and irresponsbile at worst for respected communal leaders to promote this theory as the primary contributor to the "girl problem" or to suggest that it adequately explains what is being experienced by so many girls currently in the parsha.

I would be happy to go into this in more detail as a guest post if there is any interest.

conservative scifi said...

I also received the Areivim brochure. My wife is in insurance and each state has extensive regulation of what can and cannot be said in insurance offerings. I doubt very highly that Areivim is in compliance with these regulations.

Anonymous said...

conservative sci-fi:

I'm the previously anonymous actuary, and I can tell you that Areivim most certainly is not in compliance with insurance law.
However, Areivim does not claim to be insurance and is not regulated by such law.

But as the poster has pointed out that's the least of its problem's

Anonymous said...

Just came across this (I know it's only marginally related, but I think it would make for a good post):

Anonymous said...

Just because they claim not to be insurance does not mean that it is not subject to insurance laws and regulations. They are potentially heading for some serious legal problems.

What I want to know is why does everything have to be a gimmick.

Orthonomics said...

another frum actuary with a daughter in the parsha, I'd welcome a guest post. Please keep this blog going as I hibernate with some work. I have another guest post going up soon. Thanks everyone!

megapixel said...

doesnt age also affect death rates? if the group of 14,000 is mostly young people, explains why there were not alot of deaths but as they age deaths may become more frequent

old frum actuary said...

Megapixel: Of course you are correct that age affects the death rates. However, (1) 8 out of 28,000 is too low at any age; (2) Without any underwriting or rules nothing is stopping a bunch of 50 year olds from signing up; and (3) as you end up noting if the plan gets away with it for a few years, as people age there will be unfortunately deaths and the mathematics says it will blow up.

DAG said...

I am troubled by the assumption that the primary expense for a large family that loses the father is paying for weddings. IMHO, that should be VERY low on the list.

What about food, shelter, clothes, etc?

Zach Kessin said...

I'm the previously anonymous actuary, and I can tell you that Areivim most certainly is not in compliance with insurance law.
However, Areivim does not claim to be insurance and is not regulated by such law.

It fails the "Duck" test. I looks like an insurance plan, it sounds like an insurance plan, it is one.

someone needs to send this the state insurance regulators in whichever state it is running in.

Anonymous said...

I just read an article about Areivim in the Jewish press here
The author states that monies would be disbursed when the child is married. If the child is not married by age 35, no money is given. Also, no money is given to widows and widowers. The whole scheme seems to be about a fund for a newly married couple(apartment, kolel), not the support of a widow and children with basic living expenses as one might assume.

Anonymous said...

I just read an article about Areivim in the Jewish press here
The author states that monies would be disbursed when the child is married. If the child is not married by age 35, no money is given. Also, no money is given to widows and widowers. The whole scheme seems to be about a fund for a newly married couple(apartment, kolel), not the support of a widow and children with basic living expenses as one might assume.

Anonymous said...

Why the Jewish Press? Areivim has a web site where they clearly say they will give money to the widow. And their mailing says the same thing as well as the fact that the money is not only for an apartment.
Of course a close reading of the web site seems to give them enough wiggle room to get out of paying anyone when they don't feel like it.

Anonymous said...

This sounds a little like a fraternal benefit society, some of which have been quite successful and beneficial. There are ways to structure a fraternal benefit society that work.

My biggest concern is that people who sign up will think they don't also have to buy life insurance to protect their families.

For all the reasons discussed above, this program, even if it does some good for some widows and orphans, has no contractual rights or protections for the members and, is not likely to be able to pay out what it promises.

BTW - Their webiste is a joke - testimonials by people saying that as soon as they signed up their parnassa improved and their children behaved better. Makes it sound like a segulah.

Anonymous said...


I agree that Areivim would probably be wise to make sure they seek the proper legal guidance to avoid running afoul of insurance law, but I belive the "Duck" test for insurance is a bit more complex.


- does not collect any up-front premiums
- makes no guarantees of payment
- makes it fairly clear that the intent is simply to automate the process of after-the-fact tzedaka collection with no guarantee that it will work

Nonetheless, they should probably speak to a lawyer (or two).

Anonymous said...

Fraternal benefit societies are exempt from many, but not all, insurance regulations.

Anonymous said...

Whether or not it's insurance and whether or not there are any legal issues, I suspect that many people are signing up thinking that it's like insurance and their families will be protected. As an orthodox affiliated group, they should go out of their way to make sure no one is mislead, even unintentionally. They may be doing that and explaining clearly to everyone signing up that this i primarilly a means to raise tzedaka money, that there is no guaranty that their loved ones would benefit if they were to die and being a member is not a substitute for life insurance.

MiMedinat HaYam said...

besides the legal issues,

1. the "gedolim" who endorse this do NOT give an endorsement, they're just pictured putting $ in a big grand paper tzedaka box and / or signing cryptically written statements with cryptic contents of non committal, etc.

as for the "board of directors" (i'll call it that -- none exists, i'm sure) who decides who gets paid and who doesnt, we'll see that askan's buddy will get a payoff check, that askan's buddy will get other checks, and the real almana will get -0-

and if they're using credit cards to charge you, i'd like to see them get a merchant's account!

Mike S. said...

The internet has made the selling of term life insurance a brutally competitive industry. I doubt a fraternal group without economies of scale can undercut their prices without being actuarially unsound.

Yet another middle-aged frum actuary said...

Just a week or two ago my husband mentioned the Areivim scheme to me, and I was aghast...

jewinjerusalem said...

I wonder if this areivim plan is independent of the plan in israel or not. officially the idea of $100,000 is in order to be able to purchase an apartment for the orphans. This is a way of life in charedi/israel. Not so in the US. Originally they advertised that they had several philanthropists behind this idea who were funding the advertisements, paperwork, bank charges, etc. It is assumed that this is a good use of tzadaka money as arevim will solve problems.
Officially no one is promised any money. Therefore, if one has only a couple of kids he won't receive a payment [if there's not enough available]. The logic: "he doesn't need it." I've been told explicitly that I wouldn't get. That's only one reason I didn't join.
You ask how can this work with roughly 28,000 people. Don't forget that they signed up many elderly people such as Rav Elyashiv. He doesn't have young children and therefore is only a contributor and will never get anything. There are more like him. How many? You're guess.
Recently there's a new problem. I know someone who tragically died suddenly. I was positive he sined up. But of course Iwas asked for money anyway. Why? I said that the principle is reserved for weddings but the interest is supposed to cover living expenses. They explained that interest rates are low and the family needs to eat.
There are many other questions. The actuary here does a good job. Even an insurance company is more transparent than this. Several years ago a famous rav in Yerushalayim was finally kicked off the Vaad rabbanim. More than ONE million dollars is reported to be unaccounted for. he's known to be a cheat and B"H he's out.
If the Rabbonim wanted then they could force the tzibbur to purchase life insurance.

Anonymous said...

To the fellow blogger.
Its interesting what u r pointing out of KYA is totally different what you say.
I called KYA they have answered all my question.
looking on their web site its not stating 1 word about what is being written here I'm very confused I think people are mistaking I just cant get an hold where the mistake is I'm going to my home work I will let you know what I find

Maylene Vidler said...

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