5 ms·

I was about to post but saw yours, so I'll reply with basically the same position. ---- This will be a contrarian opinion, but personal insurance, in general

by pdq 10y ago

I was about to post but saw yours, so I'll reply with basically the same position. ---- This will be a contrarian opinion, but personal insurance, in general is a ripoff. You are taking a monthly bet (ie an insurance policy) against another party that an event will occur. The other party must administer the insurance and also make a profit, so the overall expected return is negative. The only smart reason to get these types of insurance is if you know you can make a claim in the short term (in other words you have insider information that you will be laid off soon). The smarter thing to do is save and build up your own "rainy day" fund, where once you have funded it properly, you no longer have to pay into it.

DavidSJ 10y ago
That's not the same position. You're saying you should get insurance only when EV is positive. Parent is saying you should get insurance only when the insured outcomes would be ruinous, despite negative EV.
csense 10y ago
EV isn't everything; you also have to consider risk. If you put too much of your bankroll on the line, making even repeated high +EV bets will eventually lead to ruin with probability approaching 1. There's another element at play here due to your finite bankroll; that element is usually called "risk." Even though it's -EV, insurance can have a real benefit to the buyer through removing their exposure to otherwise ruinous risk.
superuser2 10y ago
In general: insurance premiums aren't held in cash, they're invested. An insurance company 1) has access to better investments than you do, and 2) has the diversification and scale to be unfazed by transient market downturns If you attempted to self-insure through a savings account or other low-risk investments, you'd need to pay higher "premiums" to account for the lack of returns. If you attempted to self-insure through index funds, you'd be SOL if your "claim" fell in, say, 2008. Large corporations whose finances are similar to insurance company finances can and do practice self-insurance, where the "big pool of money" is held by the company and an insurance company is just contracted to do the paperwork.
- peteretep 10y ago
  Thank you for writing this. To add another couple of points to yours: - Insurance companies have a much much better handle on any given risk than you do - Insurance companies have the scale to mean they are charging you only for the insurance you need; for insuring against costs that are variable and unpredictable, you are highly likely to over-save or under-save - Insurance companies are prevented from price-gouging the difference (mostly, and in theory anyway) via a competitive market
  - jeffdavis 10y ago
    But self-insuring for, say, $10000, allows you to deal with all risks less than $10000, not just those listed on a policy. In other words, self-insurance offers a pool across different risks, while commercial insurance pools the same risk across different people. Also, commercial insurance creates bad incentives leading the insured to take more risks. And there's asymmetry of information, where the insured knows the risk is greater than the insurance company knows. That means the insurance company needs to charge more to make up for the dishonest people.
    - vertex-four 10y ago
      > But self-insuring for, say, $10000, allows you to deal with all risks less than $10000, not just those listed on a policy. Have you checked what e.g. a long-term medical disorder will cost you year on year? For cancer, $10,000 is a drop in the bucket, and will not even cover your medical bills if you have additional money to go live in India while curing it. Costings for cancer for the NHS in the UK are £40,000 per cancer patient per year - floating significantly up and down depending on the type of cancer, etc etc - suggesting that it's not solely down to the US's private healthcare system. You can find similar examples of nearly unbounded. unexpected costs for nearly every type of insurance. Personally, I put a lot of stock in not dying when I don't have to, and not having to spend the rest of my life in a squat because of something I could've insured against.
      - jeffdavis 10y ago
zanny 10y ago
Insurance only makes sense for events so unlikely to occur but so catastrophic if they do that any rainy day fund will not be sufficient - where an insurance company must, by nature of the costs, use the income from multiple people to cover the extremely rare instance of a claim. As has been said, that is home and some health insurances are for. Most people will never live in a house that is destroyed that prompts a home insurance payout, and if you are someone who has their home destroyed, you will get back way more than you would put in in a lifetime because the average likelihood of it happening is so low. But not having the insurance would wipe out your wealth - you lose the house and writeoff the loss and have nothing left after the fact, and at best you spend an entire rainy day fund with a mortgage on the land to rebuild, and even then you are doing significantly more impactful damage than any rainy day fund could account for. Same with catastrophic health insurance. Most people do not get debilitating diseases that don't kill you but will require lifelong care like Parkinson's or Dementia, but if you do get one of them you would be destroyed trying to pay the constant upkeep costs. And strangely? enough, both are often best handled by the state. In some countries property owners are not insured privately but by the township to avoid problems where disasters wipe out multiple homes and some people do not have such a rainy day fund to afford to rebuild. And first world countries provide single payer healthcare to make up for the rare catastrophic conditions. If you want to have these costs borne out across the entire population to offset the individual costs when they happen to you, having them be society wide is often the least expensive option.
- deleted 10y ago
  [deleted]
- phonon 10y ago
  > Most people will never live in a house that is destroyed that prompts a home insurance payout, and if you are someone who has their home destroyed, you will get back way more than you would put in in a lifetime because the average likelihood of it happening is so low. But not having the insurance would wipe out your wealth - you lose the house and writeoff the loss and have nothing left after the fact, and at best you spend an entire rainy day fund with a mortgage on the land to rebuild, and even then you are doing significantly more impactful damage than any rainy day fund could account for. Homeowners insurance has broadened considerably from simple catastrophic fire coverage. Most claims are relatively small, and can involve things like pet bites, stolen property, guests being injured, wind damage, etc.
rayiner 10y ago
That viewpoint ignores risk. You pay a small premium to shift a risk onto a different party. Whether it's a net benefit to you depends on both the premium and your valuation of the risk. Self-insuring is often not efficient. It makes more sense if you think about a group of people. If there is a 1% chance of getting into a car accident that could cost $1 million in medical bills, it is economically inefficient to have 100 people keep $1 million each in liquid funds for such a contingency. Insurance creates value by allowing those funds to be allocated to more efficient purposes. Out of that value, the insurance company takes a cut to compensate it for its risk, and each individual gets some economic benefit for having shifted that risk to the insurance company. Not saying that's the case here, but in general insurance creates value by eliminating inefficient contingency funds.
- mseebach 10y ago
  That makes sense for insurance where the "upside" (for lack of a better word) is very high - say, millions. Very few people could save millions in liquid assets, and for most of those who could, a million dollar event is still catastrophic enough that it makes sense to insure against. But, as in this case, when the upside is capped at a fairly low number, which is entirely achievable in savings for most people who could afford the premium in the first place, savings are by a wide margin preferable.
  - rayiner 10y ago
    Yeah agree with that.
IanCal 10y ago
It's perfectly possible the bet is good for both sides, just as it is possible the bet is bad for both sides. You are equating money with utility. A 1 in 1000 bet that I'll get 1001 times my money back if I play with my life's savings is a terrible terrible bet for me to make even though it has a positive average return. It's also a bad bet for the bookies because they will lose on average. The larger the cost the more likely it'll be worth taking out insurance.
eru 10y ago
There's another smart reason to take out insurance: taxes. Eg my health insurance allows me to spend 300 bucks per year on new glasses. Why don't they just cancel this and make the health insurance 300 bucks cheaper? Because my employer buys the insurance with pre-tax money, I presume.
- dsr_ 10y ago
  Not everyone in the covered group wears glasses, so the cost to the insurance company is less than $300 * N. Offering that is a nice benefit to the people who do need glasses. In the meantime, Zenni is sending me good-looking properly made glasses for as little as $30/pair shipped. (Single vision, polycarb, titanium memory alloy frames. Arrived 4 days after I ordered them last week.) So much of the $300 is really going to line the pockets of Luxottica https://en.wikipedia.org/wiki/Luxottica https://en.wikipedia.org/wiki/Luxottica
  - eru 10y ago
    Yes, though it's still weird as an `insurance': most adults already know whether they ever need glasses or not.

by pdq 10y ago

DavidSJ 10y ago

That's not the same position. You're saying you should get insurance only when EV is positive. Parent is saying you should get insurance only when the insured outcomes would be ruinous, despite negative EV.

csense 10y ago

EV isn't everything; you also have to consider risk. If you put too much of your bankroll on the line, making even repeated high +EV bets will eventually lead to ruin with probability approaching 1. There's another element at play here due to your finite bankroll; that element is usually called "risk." Even though it's -EV, insurance can have a real benefit to the buyer through removing their exposure to otherwise ruinous risk.

superuser2 10y ago

In general: insurance premiums aren't held in cash, they're invested. An insurance company 1) has access to better investments than you do, and 2) has the diversification and scale to be unfazed by transient market downturns If you attempted to self-insure through a savings account or other low-risk investments, you'd need to pay higher "premiums" to account for the lack of returns. If you attempted to self-insure through index funds, you'd be SOL if your "claim" fell in, say, 2008. Large corporations whose finances are similar to insurance company finances can and do practice self-insurance, where the "big pool of money" is held by the company and an insurance company is just contracted to do the paperwork.

peteretep 10y ago
Thank you for writing this. To add another couple of points to yours: - Insurance companies have a much much better handle on any given risk than you do - Insurance companies have the scale to mean they are charging you only for the insurance you need; for insuring against costs that are variable and unpredictable, you are highly likely to over-save or under-save - Insurance companies are prevented from price-gouging the difference (mostly, and in theory anyway) via a competitive market
- jeffdavis 10y ago
  But self-insuring for, say, $10000, allows you to deal with all risks less than $10000, not just those listed on a policy. In other words, self-insurance offers a pool across different risks, while commercial insurance pools the same risk across different people. Also, commercial insurance creates bad incentives leading the insured to take more risks. And there's asymmetry of information, where the insured knows the risk is greater than the insurance company knows. That means the insurance company needs to charge more to make up for the dishonest people.
  - vertex-four 10y ago
    > But self-insuring for, say, $10000, allows you to deal with all risks less than $10000, not just those listed on a policy. Have you checked what e.g. a long-term medical disorder will cost you year on year? For cancer, $10,000 is a drop in the bucket, and will not even cover your medical bills if you have additional money to go live in India while curing it. Costings for cancer for the NHS in the UK are £40,000 per cancer patient per year - floating significantly up and down depending on the type of cancer, etc etc - suggesting that it's not solely down to the US's private healthcare system. You can find similar examples of nearly unbounded. unexpected costs for nearly every type of insurance. Personally, I put a lot of stock in not dying when I don't have to, and not having to spend the rest of my life in a squat because of something I could've insured against.
    - jeffdavis 10y ago

zanny 10y ago

Insurance only makes sense for events so unlikely to occur but so catastrophic if they do that any rainy day fund will not be sufficient - where an insurance company must, by nature of the costs, use the income from multiple people to cover the extremely rare instance of a claim. As has been said, that is home and some health insurances are for. Most people will never live in a house that is destroyed that prompts a home insurance payout, and if you are someone who has their home destroyed, you will get back way more than you would put in in a lifetime because the average likelihood of it happening is so low. But not having the insurance would wipe out your wealth - you lose the house and writeoff the loss and have nothing left after the fact, and at best you spend an entire rainy day fund with a mortgage on the land to rebuild, and even then you are doing significantly more impactful damage than any rainy day fund could account for. Same with catastrophic health insurance. Most people do not get debilitating diseases that don't kill you but will require lifelong care like Parkinson's or Dementia, but if you do get one of them you would be destroyed trying to pay the constant upkeep costs. And strangely? enough, both are often best handled by the state. In some countries property owners are not insured privately but by the township to avoid problems where disasters wipe out multiple homes and some people do not have such a rainy day fund to afford to rebuild. And first world countries provide single payer healthcare to make up for the rare catastrophic conditions. If you want to have these costs borne out across the entire population to offset the individual costs when they happen to you, having them be society wide is often the least expensive option.

deleted 10y ago
[deleted]
phonon 10y ago
> Most people will never live in a house that is destroyed that prompts a home insurance payout, and if you are someone who has their home destroyed, you will get back way more than you would put in in a lifetime because the average likelihood of it happening is so low. But not having the insurance would wipe out your wealth - you lose the house and writeoff the loss and have nothing left after the fact, and at best you spend an entire rainy day fund with a mortgage on the land to rebuild, and even then you are doing significantly more impactful damage than any rainy day fund could account for. Homeowners insurance has broadened considerably from simple catastrophic fire coverage. Most claims are relatively small, and can involve things like pet bites, stolen property, guests being injured, wind damage, etc.

rayiner 10y ago

That viewpoint ignores risk. You pay a small premium to shift a risk onto a different party. Whether it's a net benefit to you depends on both the premium and your valuation of the risk. Self-insuring is often not efficient. It makes more sense if you think about a group of people. If there is a 1% chance of getting into a car accident that could cost $1 million in medical bills, it is economically inefficient to have 100 people keep $1 million each in liquid funds for such a contingency. Insurance creates value by allowing those funds to be allocated to more efficient purposes. Out of that value, the insurance company takes a cut to compensate it for its risk, and each individual gets some economic benefit for having shifted that risk to the insurance company. Not saying that's the case here, but in general insurance creates value by eliminating inefficient contingency funds.

mseebach 10y ago
That makes sense for insurance where the "upside" (for lack of a better word) is very high - say, millions. Very few people could save millions in liquid assets, and for most of those who could, a million dollar event is still catastrophic enough that it makes sense to insure against. But, as in this case, when the upside is capped at a fairly low number, which is entirely achievable in savings for most people who could afford the premium in the first place, savings are by a wide margin preferable.
- rayiner 10y ago
  Yeah agree with that.

IanCal 10y ago

It's perfectly possible the bet is good for both sides, just as it is possible the bet is bad for both sides. You are equating money with utility. A 1 in 1000 bet that I'll get 1001 times my money back if I play with my life's savings is a terrible terrible bet for me to make even though it has a positive average return. It's also a bad bet for the bookies because they will lose on average. The larger the cost the more likely it'll be worth taking out insurance.

eru 10y ago

There's another smart reason to take out insurance: taxes. Eg my health insurance allows me to spend 300 bucks per year on new glasses. Why don't they just cancel this and make the health insurance 300 bucks cheaper? Because my employer buys the insurance with pre-tax money, I presume.

dsr_ 10y ago
Not everyone in the covered group wears glasses, so the cost to the insurance company is less than $300 * N. Offering that is a nice benefit to the people who do need glasses. In the meantime, Zenni is sending me good-looking properly made glasses for as little as $30/pair shipped. (Single vision, polycarb, titanium memory alloy frames. Arrived 4 days after I ordered them last week.) So much of the $300 is really going to line the pockets of Luxottica https://en.wikipedia.org/wiki/Luxottica https://en.wikipedia.org/wiki/Luxottica
- eru 10y ago
  Yes, though it's still weird as an `insurance': most adults already know whether they ever need glasses or not.