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Insurance is weird. It operates by taking events that are unpredictable individually and grouping them together such that they are predictable in aggregate. Th

Insurance is weird. It operates by taking events that are unpredictable individually and grouping them together such that they are predictable in aggregate. The larger the groups are, the better this works. At the same time, there’s a competitive advantage to using smaller groups, if you can reliably discriminate. Except that once you take it too far, you approach the individual case again and insurance ceases to have a point. A life insurance company that buckets everyone together will lose out to one that divides people up into groups based on their risk. That one in turn would lose out to a company that has an accurate death clock they can use on every customer to provide perfectly individualized coverage. And yet the death clock company won’t be able to sell any insurance at all, unless they can keep it a total secret, because people could accomplish the same thing on their own.

lotsofpulp 8y ago
People would need to have sufficient cash on hand to be able to accomplish insuring themselves.
- mikeash 8y ago
  With an accurate death clock, the premiums on a life insurance policy will cost even more than that.
criddell 8y ago
Do you know if the factors insurance companies can consider is regulated? It seems like it would have to be to ensure pools stay large.
- mikeash 8y ago
  Yes, definitely. This story is about the decision of one such regulating body.
  - criddell 8y ago
    I wasn't able to read the entire story because WSJ wants me to subscribe, but it starts saying they can use the information as long as it doesn't unfairly discriminate. I wonder what that means? The fact that it reduces the pool size at all seems like a negative.
    - mikeash 8y ago
      That’s referring to things like racial discrimination, which is definitely illegal. Insurance companies sometimes try to use proxies for race or other protected classes to get around such restrictions, and that has resulted in a situation where any technique for evaluating people needs to show that it’s not being used as such a proxy. The goal isn’t to keep pools large, but rather to keep pool assignment fair in some sense.
robkop 8y ago
I think you're missing something important in this. If you make the fundamental assumption that what happens to people has a level of randomness to it (don't think we'll ever be able to escape this assumption) then insurance always will have a point even if your bucket size is the size of the individual. This is because insurers provide a hedge against a certain amount of negative randomness over a time peroid. They calculate the risk on a policy as if they provided it to you a million times and then base their pricing on that. Since they do this across a body of customers the pooling system still functions, it just is more accurately priced. So as long as there is a risk instability over time they eill have the ability to provide a service worth paying for.
- mikeash 8y ago
  You're right that there's always some utility as long as there's randomness, but that utility decreases the more accurate your predictions get. Rather than a magical death clock, let's say that actuarial science gets to the point where it can figure out an individual's life expectancy ±5 years with a 90% hit rate. The possibility of being hit by a bus or having some unknown wild-card disease means you could die much younger, and you might beat the odds and die much older, but 90% of people die within their predicted range. Now, Bob goes to sign up for life insurance and he's predicted to die at age 50. He really wants this insurance to ensure his family can survive without him, but the premiums are completely outrageous, so he passes. Alice is predicted to die at age 100 so her premiums are cheap, but she sees little point in it, so doesn't sign up. In this world, I see a lot of accidental death insurance being sold, but almost no general life insurance. Some people would buy it, as it would have some utility, but not a whole lot.
  - Spooky23 8y ago
    Bob needs to participate in a group policy.

lotsofpulp 8y ago

People would need to have sufficient cash on hand to be able to accomplish insuring themselves.

mikeash 8y ago
With an accurate death clock, the premiums on a life insurance policy will cost even more than that.

criddell 8y ago

Do you know if the factors insurance companies can consider is regulated? It seems like it would have to be to ensure pools stay large.

mikeash 8y ago
Yes, definitely. This story is about the decision of one such regulating body.
- criddell 8y ago
  I wasn't able to read the entire story because WSJ wants me to subscribe, but it starts saying they can use the information as long as it doesn't unfairly discriminate. I wonder what that means? The fact that it reduces the pool size at all seems like a negative.
  - mikeash 8y ago
    That’s referring to things like racial discrimination, which is definitely illegal. Insurance companies sometimes try to use proxies for race or other protected classes to get around such restrictions, and that has resulted in a situation where any technique for evaluating people needs to show that it’s not being used as such a proxy. The goal isn’t to keep pools large, but rather to keep pool assignment fair in some sense.

robkop 8y ago

I think you're missing something important in this. If you make the fundamental assumption that what happens to people has a level of randomness to it (don't think we'll ever be able to escape this assumption) then insurance always will have a point even if your bucket size is the size of the individual. This is because insurers provide a hedge against a certain amount of negative randomness over a time peroid. They calculate the risk on a policy as if they provided it to you a million times and then base their pricing on that. Since they do this across a body of customers the pooling system still functions, it just is more accurately priced. So as long as there is a risk instability over time they eill have the ability to provide a service worth paying for.

mikeash 8y ago
You're right that there's always some utility as long as there's randomness, but that utility decreases the more accurate your predictions get. Rather than a magical death clock, let's say that actuarial science gets to the point where it can figure out an individual's life expectancy ±5 years with a 90% hit rate. The possibility of being hit by a bus or having some unknown wild-card disease means you could die much younger, and you might beat the odds and die much older, but 90% of people die within their predicted range. Now, Bob goes to sign up for life insurance and he's predicted to die at age 50. He really wants this insurance to ensure his family can survive without him, but the premiums are completely outrageous, so he passes. Alice is predicted to die at age 100 so her premiums are cheap, but she sees little point in it, so doesn't sign up. In this world, I see a lot of accidental death insurance being sold, but almost no general life insurance. Some people would buy it, as it would have some utility, but not a whole lot.
- Spooky23 8y ago
  Bob needs to participate in a group policy.