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"Insurance in the limit of perfect information" – that would be the title of my talk if I were ever invited to give one at an insurance company as part of a hir

"Insurance in the limit of perfect information" – that would be the title of my talk if I were ever invited to give one at an insurance company as part of a hiring process or something. I think it's a cute game theoretic problem. See, if an insurer, in the extreme case, can make a perfect prediction of whether the presumptive customer will get the disease (or whatever the insurance is about), then it would offer insurance to the ones who won't need it and not offer insurance (or offer it at a price that is too high to be useful) to the ones who do need it. The customer who is offered insurance will thereby learn that he doesn't need it, and will decline the offer! Is this the end of insurance? Insurance is of value to both sides. Is it really reasonable that we can't extract this value if one side can predict the future? I think the rational solution might be for the insurance company to introduce some randomness when making their offers, so that the customer can't for sure know, by looking at the offer, whether he will be sick or not. I haven't calculated more precisely what the optimal strategy of the insurer would be. It would presumably depend on the utility functions of both parties.

ghaff 9y ago
You can create pools as is the case with group health plans in the US today but then you have the issue of adverse selection if people can opt out.
waterhouse 9y ago
If it's perfectly predictable, but takes effort, then insurance companies would be replaced by (or pivot to) companies that sell the service of telling you your predictions. (If the prediction takes no effort—open source software, very little computation—then this cost will approach zero, and the more tech-savvy would do it themselves. Maybe OS vendors would bundle it as a convenience.) Then each person knows in advance what medical costs they'll have to pay—or choose to not bother with—and can plan accordingly. Realistically, I think that having perfect information about one person and about biology and stuff still doesn't give you enough information to predict whether they'll get various diseases. If there is any validity at all to "exposure to X causes cancer", then no amount of information about one person will help you predict whether they'll get exposed to X. Or whether they'll trip, fall, and break a bone. And, really, I expect that the perfect state of knowledge of human biology would merely allow you to deduce "person X has x% chance of developing disease D during the next ten years; person Y has y% chance". So there would still be a role for insurance companies for the risk-averse.

ghaff 9y ago

You can create pools as is the case with group health plans in the US today but then you have the issue of adverse selection if people can opt out.

waterhouse 9y ago

If it's perfectly predictable, but takes effort, then insurance companies would be replaced by (or pivot to) companies that sell the service of telling you your predictions. (If the prediction takes no effort—open source software, very little computation—then this cost will approach zero, and the more tech-savvy would do it themselves. Maybe OS vendors would bundle it as a convenience.) Then each person knows in advance what medical costs they'll have to pay—or choose to not bother with—and can plan accordingly. Realistically, I think that having perfect information about one person and about biology and stuff still doesn't give you enough information to predict whether they'll get various diseases. If there is any validity at all to "exposure to X causes cancer", then no amount of information about one person will help you predict whether they'll get exposed to X. Or whether they'll trip, fall, and break a bone. And, really, I expect that the perfect state of knowledge of human biology would merely allow you to deduce "person X has x% chance of developing disease D during the next ten years; person Y has y% chance". So there would still be a role for insurance companies for the risk-averse.