4 ms·

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 div

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
      None of what you said contradicts what I said. Unemployment insurance generally has a limit (even if the risk you are trying to insure against is not). Is that limit within the reasonable bounds of self insurance? Probably so for many people, but maybe not for others. Insurance is good for the really huge stuff, like giant medical bills or a house fire. For little stuff, there are so many risks that if something happens, it's probably not listed on whatever policies that you do have.
  - TheCoelacanth 10y ago
    But most people do self insure most risks that are as small as $10k. The most popular forms of insurance are for risks that are much larger and could not easily be self-insured. For instance, with home insurance, the potential risk would be hundreds of thousands of dollars to replace a house that was entirely destroyed. With health insurance the potential risk is millions of dollars to treat something like cancer. With car insurance, the potential risk is hundreds of thousands of dollars of liability if you injure someone. You can't exactly expect someone to keep millions of dollar lying around to cover the possibility that they get cancer or their house burns down.

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
    None of what you said contradicts what I said. Unemployment insurance generally has a limit (even if the risk you are trying to insure against is not). Is that limit within the reasonable bounds of self insurance? Probably so for many people, but maybe not for others. Insurance is good for the really huge stuff, like giant medical bills or a house fire. For little stuff, there are so many risks that if something happens, it's probably not listed on whatever policies that you do have.
- TheCoelacanth 10y ago
  But most people do self insure most risks that are as small as $10k. The most popular forms of insurance are for risks that are much larger and could not easily be self-insured. For instance, with home insurance, the potential risk would be hundreds of thousands of dollars to replace a house that was entirely destroyed. With health insurance the potential risk is millions of dollars to treat something like cancer. With car insurance, the potential risk is hundreds of thousands of dollars of liability if you injure someone. You can't exactly expect someone to keep millions of dollar lying around to cover the possibility that they get cancer or their house burns down.