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> She finally did find a new insurer, but the price has gone way up -- negating her original claims. This isn't a scam at all. That's exactly what you'd expec

> She finally did find a new insurer, but the price has gone way up -- negating her original claims. This isn't a scam at all. That's exactly what you'd expect from insurance. Insurance isn't there to save you money. In fact, the expected value of an insurance plan is always going to be negative on an infinite time horizon[0]. The whole point of an insurance plan is to smooth risk: instead of the small possibility of a catastrophic failure, you take the relative certainty of having a fixed monthly payment (your premium). At a very high level, it's sort of similar to taking on consumer debt (credit card debt): in the long run, you'll always pay more than if you just paid cash up-front, because of the interest. The difference between credit cards and insurance is that you don't know when the expensive event is going to happen, so you agree to always pay the monthly payment regardless of what happens. And while banks charge interest based on the risk that you won't pay back and the opportunity cost of that money, insurers charge you a premium in exchange for the luxury of not having to guess whether next month will have an expensive event or not. In your friend's case, the fact that she had two claims adjusted her relative risk profile, which means that her premium had to adjust accordingly. [0] If it weren't, there'd be no point to going into business as an insurer, because you'd be guaranteed to make an operating loss. The only way you'd be able to make any money is based on the investments that you make, at which point you might as well eliminate the insurance side of your business and operate as a bank. (Interestingly, this is why the relationships between banks and insurers are so close in many countries, and also why most insurance markets - car insurance and health insurance[1] being two notable exceptions - have surprisingly slim profit margins). [1] Health insurance is a special case because, strictly speaking, it's not really "insurance", but that's a whole separate discussion.

deciplex 11y ago
So if they're adjusting premiums such that they're net positive on every single account, does that mean they'll refund your money if you end the contract without ever having made a claim?
- chimeracoder 11y ago
  > So if they're adjusting premiums such that they're net positive on every single account, does that mean they'll refund your money if you end the contract without ever having made a claim? No, because you're paying for the peace of mind that comes with knowing that your worst-case scenario has been mitigated, on the off-chance it happens. Even if there is no disaster, you still benefited from not having to worry about it as much (knowing that the insurer would cover some portion of it). Let's play a game: you're allowed to flip a coin ten times, and I will pay you $1 for each time it comes up heads[0]. Your expected value is $5, but you could make as much as $10 or as little as $0. Someone else comes up to you and offers to pay you a guaranteed minimum of $2 at the end of the game. In exchange, you have to pay him $.25 every time you flip the coin, regardless of whether it comes up heads or tails. In expectation, you're going to come out behind, but this game tightens the variance on your outcome. The worst case is that you lose $.50 (you pay the insurer ten quarters, flip ten tails, and receive $2 from the insurer). The best case is that you receive $7.50 (you pay the insurer ten quarters, flip ten heads, and receive $10 from me). The expected outcome is lower, but the range of possible outcomes is $8, not $10. In the real world, you're insuring against money being taken from you, but mathematically it's the same, and I find it's easier to explain it this way. Most people have a more intuitive sense of earning money than losing it. Go figure - psychology is weird. [0] One notable difference here is that the distribution of coin flips is approximately normal (binomial), whereas most insured events have a very long tail, with a mode of 0.
  - deciplex 11y ago
    I understand how insurance works, but you haven't really addressed what I'm talking about, which is that insurance companies often don't seem to understand how insurance works. You can't expect to make a profit off of every account - it defeats the purpose of an insurance scheme altogether. If an insurance company raises the premiums on a person after they make a claim, or drops them from coverage, even when the nature of that claim does not raise their risk profile, then they're doing it wrong.
    - unclebucknasty 11y ago
      You're right. The parent comment is explaining only the actuarial risk model of insurance schemes, which is not the same as raising rates on a customer for makng a claim, even when his/her risk profile is unchanged. The purpose is clearly to discourage you from making a claim, which is what makes insurance a legal scam.
hyperbovine 11y ago
What? The point of insurance is to pool risk. The expected value of insurance is not automatically negative. Look up the term "actuarially fair". Yes, there is moral hazard in insurance and it is sometimes necessary to exclude bad actors to prevent markets from unraveling, but to not to the extent which has become common in many sectors. Your whole post reads like an specious apology for bad behavior in the insurance industry.
- chimeracoder 11y ago
  > The point of insurance is to pool risk. The point of insurance is to smooth risk, not to pool it. Pooling risk is not the point of insurance as a product; it's the mechanism by which that product (risk smoothing) becomes feasible as a business model. > Look up the term "actuarially fair". There's really no need to condescend by telling me to look up basic terminology; I am quite well-versed in this topic. I didn't bring up moral hazard in this post, because it actually isn't necessary to explain why insurance has a negative expected value (which is equivalent to the statement that premiums are always non-zero[0]). It sounds like you're confusing a few different concepts here. [0] Moral hazard is generally addressed by deductibles, not by premiums.
  - TeMPOraL 11y ago
    Could you ELI5 it all then, please? I was always under the impression that the whole point of insurance is that expensive accidents don't happen to everyone, so if everyone pays a little regularly, then there's enough money to both pay out the ones who end up having an expensive accident AND for the insurer to make money. On an infinite timescale it may not add up but it surely can on any practical one, right?
    - mreiland 11y ago
      The best description I've seen is that insurance is peace of mind. from an individual perspective, insurance means you don't have to worry about unexpected expenses from things beyond your control (ie, peace of mind). Now, the mechanism by which this is achieved may be described as a pool in that it's a single company with a pool of money that everyone pays into and the input into that pool necessarily must be greater than the output. But from the "customers" perspective, insurance is peace of mind. ie, it smooths their total risk over time.
danieltillett 11y ago
While I agree with you that you should only insure the risk you can’t carry yourself there should be a profitable business opportunity insuring individuals that have been dropped by other companies provided the reason from the drop is not predictive of future risk.
- cortesoft 11y ago
  I am pretty sure that insurance companies know this. I bet that they have data showing that, even in cases where it seems like the cause of a claim was outside a person's control, that person is still more likely to make a second claim than someone who has never made a claim.
  - danieltillett 11y ago
    I would think so too, but I would not be surprised if there is some sort of industry wide collusion to not try and change the situation. The key is separating out the risks that are truly higher from those that are not. If they are applying this as a blanket policy on all claimants it suggests that collusion is the culprit.
    - cortesoft 11y ago
      Or it suggests that the extra work needed to differentiate between the truly higher risks and those who are not is cost prohibitive. It may be more cost effective to just stick with the blanket policy.
      - danieltillett 11y ago
        Given how easy it would be to data mine this out of the claim history I find this explanation hard to buy. There must be a whole set of specific claim types that show no correlation with future claims. If you can’t find these in your data you are not looking very hard. Of course if no one else is looking why give up the easy money - after all it is not like the customer can buy a new policy without the massive markup. Collusion does not need to be explicit, it can be accomplished just through everyone using the same systems and rules.
irixusr 11y ago
I hate to agree because what the insurance company did is nasty. But you're right. Which is why I'm skeptical of the AMA requirements to cover certain recurrent health services (annual checkups, contraception). If they're unavoidable than its not insurance!
- matthewmcg 11y ago
  One correction: it is the ACA ("Affordable Care Act") not the AMA. The AMA is the lobbying organization for providers. Also, most health insurance plans have always covered checkups, contraception etc. The ACA specifies that these should be covered without copayments and deductibles. This is intended to be an incentive for the insured to get these kinds of preventative procedures instead of waiting till more costly problems develop. This tends to reduce the total cost of care to be reimbursed and (in theory) should lower premiums.
  - irixusr 11y ago
    Lol. I was going to call it Obamacare, but I thought it would be needlessly divisive.
- gnopgnip 11y ago
  Its about the total cost accounting. Many types of insurance offer discounted, or even free services for things that lower your total risk. You get a break on home insurance for having an alarm system. Car insurance will replace the windshield for free if it is chipped. It is cheaper for them in the long run to replace the glass and have people driving with an unobstructed view. Yearly checkups for some insurance plans will actually pay you to go.
  - irixusr 11y ago
    Sure, and the same things can be said about contraception. On the other hand an insurance company could argue that since you didn't avoid getting sick/pregnant by going to the check up they're not going to cover it. Which is an absurd way of thinking about it, but there you are.
rahimnathwani 11y ago
"In your friend's case, the fact that she had two claims adjusted her relative risk profile" For car insurance it makes sense, as the risk is specific to the driver, so the number of claims tells you something about the insured's driving. But, for home insurance, isn't it mainly about the property rather than the individual? And isn't that mostly about location and property type? Will this continue to affect her premiums if she moves? Will it also affect the new owner of her home, even though they weren't party to the previous claims?
- Cakez0r 11y ago
  > For car insurance it makes sense, as the risk is specific to the driver, so the number of claims tells you something about the insured's driving. Not necessarily. One of my friends had his parked car hit by a drunk driver while he was not in it. His insurance premiums still went up after claiming for the damage.
  - wfunction 11y ago
    > One of my friends had his parked car hit by a drunk driver while he was not in it. His insurance premiums still went up after claiming for the damage. What the heck? Can you elaborate on this? How is this even legal?
    - gambiting 11y ago
      Very simple. If he knew who caused the damage, then that person and their insurance would have paid for it. His premiums wouldn't go up by a bit. But if you got hit by a drunk driver, and they disappeared, then you are using your own insurance to fix your car - so of course your premiums will go up. That's exactly why, if someone damages your car while you are driving it(breaks off the mirror, scratches the side, breaks the fender), at least try to write down the registration number of the other car if you can. Otherwise the damages will be coming out of your insurance, not theirs :P
  - avar 11y ago
    Even in that situation there's an element of avoidable "own risk" that could be priced into the premiums. Someone whose parked car gets hit by a drunk driver is more likely to: - Not park their car in a garage overnight, exposing them to various damage to the car. - Not park their car in a garage when they go downtown. - Park their car near bars or other places statistically more likely to have drunk drivers around. I'm not saying your friend did any of that and that it wasn't a complete freak accident, but on the scale of everyone that's being insured there's surely correlations like that that justify the premiums going up.
suls 11y ago
Re [1]: From a probability perspective, wouldn't it be better for the insurer to get a new customer right after an event? P(cat|cat) must be much smaller than P(cat)?

deciplex 11y ago

So if they're adjusting premiums such that they're net positive on every single account, does that mean they'll refund your money if you end the contract without ever having made a claim?

chimeracoder 11y ago
> So if they're adjusting premiums such that they're net positive on every single account, does that mean they'll refund your money if you end the contract without ever having made a claim? No, because you're paying for the peace of mind that comes with knowing that your worst-case scenario has been mitigated, on the off-chance it happens. Even if there is no disaster, you still benefited from not having to worry about it as much (knowing that the insurer would cover some portion of it). Let's play a game: you're allowed to flip a coin ten times, and I will pay you $1 for each time it comes up heads[0]. Your expected value is $5, but you could make as much as $10 or as little as $0. Someone else comes up to you and offers to pay you a guaranteed minimum of $2 at the end of the game. In exchange, you have to pay him $.25 every time you flip the coin, regardless of whether it comes up heads or tails. In expectation, you're going to come out behind, but this game tightens the variance on your outcome. The worst case is that you lose $.50 (you pay the insurer ten quarters, flip ten tails, and receive $2 from the insurer). The best case is that you receive $7.50 (you pay the insurer ten quarters, flip ten heads, and receive $10 from me). The expected outcome is lower, but the range of possible outcomes is $8, not $10. In the real world, you're insuring against money being taken from you, but mathematically it's the same, and I find it's easier to explain it this way. Most people have a more intuitive sense of earning money than losing it. Go figure - psychology is weird. [0] One notable difference here is that the distribution of coin flips is approximately normal (binomial), whereas most insured events have a very long tail, with a mode of 0.
- deciplex 11y ago
  I understand how insurance works, but you haven't really addressed what I'm talking about, which is that insurance companies often don't seem to understand how insurance works. You can't expect to make a profit off of every account - it defeats the purpose of an insurance scheme altogether. If an insurance company raises the premiums on a person after they make a claim, or drops them from coverage, even when the nature of that claim does not raise their risk profile, then they're doing it wrong.
  - unclebucknasty 11y ago
    You're right. The parent comment is explaining only the actuarial risk model of insurance schemes, which is not the same as raising rates on a customer for makng a claim, even when his/her risk profile is unchanged. The purpose is clearly to discourage you from making a claim, which is what makes insurance a legal scam.

hyperbovine 11y ago

What? The point of insurance is to pool risk. The expected value of insurance is not automatically negative. Look up the term "actuarially fair". Yes, there is moral hazard in insurance and it is sometimes necessary to exclude bad actors to prevent markets from unraveling, but to not to the extent which has become common in many sectors. Your whole post reads like an specious apology for bad behavior in the insurance industry.

chimeracoder 11y ago
> The point of insurance is to pool risk. The point of insurance is to smooth risk, not to pool it. Pooling risk is not the point of insurance as a product; it's the mechanism by which that product (risk smoothing) becomes feasible as a business model. > Look up the term "actuarially fair". There's really no need to condescend by telling me to look up basic terminology; I am quite well-versed in this topic. I didn't bring up moral hazard in this post, because it actually isn't necessary to explain why insurance has a negative expected value (which is equivalent to the statement that premiums are always non-zero[0]). It sounds like you're confusing a few different concepts here. [0] Moral hazard is generally addressed by deductibles, not by premiums.
- TeMPOraL 11y ago
  Could you ELI5 it all then, please? I was always under the impression that the whole point of insurance is that expensive accidents don't happen to everyone, so if everyone pays a little regularly, then there's enough money to both pay out the ones who end up having an expensive accident AND for the insurer to make money. On an infinite timescale it may not add up but it surely can on any practical one, right?
  - mreiland 11y ago
    The best description I've seen is that insurance is peace of mind. from an individual perspective, insurance means you don't have to worry about unexpected expenses from things beyond your control (ie, peace of mind). Now, the mechanism by which this is achieved may be described as a pool in that it's a single company with a pool of money that everyone pays into and the input into that pool necessarily must be greater than the output. But from the "customers" perspective, insurance is peace of mind. ie, it smooths their total risk over time.

danieltillett 11y ago

While I agree with you that you should only insure the risk you can’t carry yourself there should be a profitable business opportunity insuring individuals that have been dropped by other companies provided the reason from the drop is not predictive of future risk.

cortesoft 11y ago
I am pretty sure that insurance companies know this. I bet that they have data showing that, even in cases where it seems like the cause of a claim was outside a person's control, that person is still more likely to make a second claim than someone who has never made a claim.
- danieltillett 11y ago
  I would think so too, but I would not be surprised if there is some sort of industry wide collusion to not try and change the situation. The key is separating out the risks that are truly higher from those that are not. If they are applying this as a blanket policy on all claimants it suggests that collusion is the culprit.
  - cortesoft 11y ago
    Or it suggests that the extra work needed to differentiate between the truly higher risks and those who are not is cost prohibitive. It may be more cost effective to just stick with the blanket policy.
    - danieltillett 11y ago
      Given how easy it would be to data mine this out of the claim history I find this explanation hard to buy. There must be a whole set of specific claim types that show no correlation with future claims. If you can’t find these in your data you are not looking very hard. Of course if no one else is looking why give up the easy money - after all it is not like the customer can buy a new policy without the massive markup. Collusion does not need to be explicit, it can be accomplished just through everyone using the same systems and rules.

irixusr 11y ago

I hate to agree because what the insurance company did is nasty. But you're right. Which is why I'm skeptical of the AMA requirements to cover certain recurrent health services (annual checkups, contraception). If they're unavoidable than its not insurance!

matthewmcg 11y ago
One correction: it is the ACA ("Affordable Care Act") not the AMA. The AMA is the lobbying organization for providers. Also, most health insurance plans have always covered checkups, contraception etc. The ACA specifies that these should be covered without copayments and deductibles. This is intended to be an incentive for the insured to get these kinds of preventative procedures instead of waiting till more costly problems develop. This tends to reduce the total cost of care to be reimbursed and (in theory) should lower premiums.
- irixusr 11y ago
  Lol. I was going to call it Obamacare, but I thought it would be needlessly divisive.
gnopgnip 11y ago
Its about the total cost accounting. Many types of insurance offer discounted, or even free services for things that lower your total risk. You get a break on home insurance for having an alarm system. Car insurance will replace the windshield for free if it is chipped. It is cheaper for them in the long run to replace the glass and have people driving with an unobstructed view. Yearly checkups for some insurance plans will actually pay you to go.
- irixusr 11y ago
  Sure, and the same things can be said about contraception. On the other hand an insurance company could argue that since you didn't avoid getting sick/pregnant by going to the check up they're not going to cover it. Which is an absurd way of thinking about it, but there you are.

rahimnathwani 11y ago

"In your friend's case, the fact that she had two claims adjusted her relative risk profile" For car insurance it makes sense, as the risk is specific to the driver, so the number of claims tells you something about the insured's driving. But, for home insurance, isn't it mainly about the property rather than the individual? And isn't that mostly about location and property type? Will this continue to affect her premiums if she moves? Will it also affect the new owner of her home, even though they weren't party to the previous claims?

Cakez0r 11y ago
> For car insurance it makes sense, as the risk is specific to the driver, so the number of claims tells you something about the insured's driving. Not necessarily. One of my friends had his parked car hit by a drunk driver while he was not in it. His insurance premiums still went up after claiming for the damage.
- wfunction 11y ago
  > One of my friends had his parked car hit by a drunk driver while he was not in it. His insurance premiums still went up after claiming for the damage. What the heck? Can you elaborate on this? How is this even legal?
  - gambiting 11y ago
    Very simple. If he knew who caused the damage, then that person and their insurance would have paid for it. His premiums wouldn't go up by a bit. But if you got hit by a drunk driver, and they disappeared, then you are using your own insurance to fix your car - so of course your premiums will go up. That's exactly why, if someone damages your car while you are driving it(breaks off the mirror, scratches the side, breaks the fender), at least try to write down the registration number of the other car if you can. Otherwise the damages will be coming out of your insurance, not theirs :P
- avar 11y ago
  Even in that situation there's an element of avoidable "own risk" that could be priced into the premiums. Someone whose parked car gets hit by a drunk driver is more likely to: - Not park their car in a garage overnight, exposing them to various damage to the car. - Not park their car in a garage when they go downtown. - Park their car near bars or other places statistically more likely to have drunk drivers around. I'm not saying your friend did any of that and that it wasn't a complete freak accident, but on the scale of everyone that's being insured there's surely correlations like that that justify the premiums going up.

suls 11y ago

Re [1]: From a probability perspective, wouldn't it be better for the insurer to get a new customer right after an event? P(cat|cat) must be much smaller than P(cat)?