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> 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
by 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 agoCould 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 agoThe 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.
- vinceguidry 11y ago"Peace of mind" is false advertising, you should not expect insurance to provide that to you. You will always have to worry about unexpected expenses, because insurance companies are never going to insure everything that could possibly happen, even if you get a good policy that doesn't dick you around on claims. If you are expecting insurance to protect you from not knowing the risks, then you are taking a much bigger risk than not having insurance at all, because of the complacency that the belief you're insured engenders.
- TeMPOraL 11y agoWe have a whole subthread here about how insurance companies will refuse to pay when push comes to shove; I don't really believe in the peace of mind anymore. What I'm looking for is the ELI5 for what insurance really is about (especially from the POV of insurers) given that, if I understand correctly, 'chimeracoder is disputing the insurance-as-everyone-pooling-money model.
- mreiland 11y agoFor some definition of "reall", amirite? people and business purchase insurance to cover unexpected loss, ie, "peace of mind". Maybe insurance companies are evil scumbags, but that's STILL the reason why people PURCHASE insurance.
- mreiland 11y agoFor some definition of "reall", amirite? people and business purchase insurance to cover unexpected loss, ie, "peace of mind". Maybe insurance companies are evil scumbags, but that's STILL the reason why people PURCHASE insurance.
- zo1 11y agoI'm a tad disappointed that people are downvoting you on this. It sounds like you have quite a bit of knowledge in this area, and if you are wrong, I'd prefer if the individuals actually commented how/why you're wrong, and back it up. It would yield more information/insight to all of us reading the discussion.