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Self insuring is a completely valid strategy. People do it all the time - that’s what a deductible is meant to allow for. Only makes sense to pay for insurance

Self insuring is a completely valid strategy. People do it all the time - that’s what a deductible is meant to allow for. Only makes sense to pay for insurance in a financial sense to cover losses you couldn’t comfortably afford to cover yourself or where you are required to by law. Having said that, psychologically there is a behaviour changing effect of insurance even where it’s not financially needed which is also beneficial at least for me - eg you don’t worry about taking your expensive things on holiday, you don’t self ration medical treatment, etc. I value this and so am probably overinsured in a financial sense but I view it as money well spent.

thaumasiotes 8y ago
> psychologically there is a behaviour changing effect of insurance even where it’s not financially needed which is also beneficial at least for me - eg you don’t worry about taking your expensive things on holiday, you don’t self ration medical treatment, etc. This is called "moral hazard".
- vinceguidry 8y ago
  The deductible is also intended to take care of moral hazard. You still have some skin in the game. Insurance companies are wise to never shoulder all of the risk.
  - ravar 8y ago
    Why is this downvoted, this is actually an important part of insurance.
  - AnthonyMouse 8y ago
    That would only fix it if the risk was being taken with no benefit. If the person has a $5000 deductible and could spend $300 to prevent a 5% chance at $50,000 in damage, now they won't, because their expected value of the loss has gone from -$2500 to -$250, which is now better for them than paying the prevention cost. It also makes incentives weird, e.g. with a $5000 deductible you'd prefer a 5% chance at $50,000 in damage (expected value -$250) over a 10% chance at $5000 in damage (expected value -$500).
    - Kubuxu 8y ago
      5% of $50,000 is $2500
      - AnthonyMouse 8y ago
        Which is why the expected value of the loss without insurance is $2500. You have a 5% chance of losing $50,000 and a 95% chance of losing nothing. If you have insurance with a $5000 deductible, that becomes a 5% chance of losing $5000 and and a 95% of losing nothing. Expected value is the sum over all events of (probability of event) times (cost of event). 5% times $5000 is $250, 95% times $0 is $0, total with insurance is $250 instead of $2500. So you risk $50,000 over $300 at 5% probability because $45,000 of the risk is on the insurance company.
- harimau777 8y ago
  I think it would only be a moral hazard if someone behaved irresponsibly because they have insurance. An alternate situation would be someone who was excessively cautious without insurance but responsibly cautious with insurance. Or someone who behaved the same way but worried less due to having insurance. Since people tend not to make rational decisions when they are worried, insurance could even lower their risk. For example, my understanding is that many auto insurance companies cover windshield repair very generously because it reduces the risk that a customer will get in an accident trying to chase down a truck that kicked up a stone and damaged their windshield.
  - mcguire 8y ago
    ...or drive with a broken windshield, risking a larger loss.
- mcguire 8y ago
  Moral hazard requires a fiduciary duty to someone else.
  - URSpider94 8y ago
    The first sentence of the Wikipedia article says: “In economics, moral hazard occurs when someone increases their exposure to risk when insured ...” Can you explain where the fiduciary duty comes in?
- tomatocracy 8y ago
  Although that's true, that wasn't quite what I was tryingt to explain. At some point buying cover for very likely outcomes or reducing deductibles really starts to look more like a payment plan than insurance. By doing this I know I am costing myself money, ie the additional cover costs more than I think I am ever likely to benefit from it. I know this upfront but it is still valuable to me because I can rationalise it as a fixed cost and then simply not have to think about a later spending decision, which means I do things which make me happier and/or healthier, even though I could do those same things for lower cost. It's some combination of valuing certainty and being able to separate the spending from the activity.

thaumasiotes 8y ago

> psychologically there is a behaviour changing effect of insurance even where it’s not financially needed which is also beneficial at least for me - eg you don’t worry about taking your expensive things on holiday, you don’t self ration medical treatment, etc. This is called "moral hazard".

vinceguidry 8y ago
The deductible is also intended to take care of moral hazard. You still have some skin in the game. Insurance companies are wise to never shoulder all of the risk.
- ravar 8y ago
  Why is this downvoted, this is actually an important part of insurance.
- AnthonyMouse 8y ago
  That would only fix it if the risk was being taken with no benefit. If the person has a $5000 deductible and could spend $300 to prevent a 5% chance at $50,000 in damage, now they won't, because their expected value of the loss has gone from -$2500 to -$250, which is now better for them than paying the prevention cost. It also makes incentives weird, e.g. with a $5000 deductible you'd prefer a 5% chance at $50,000 in damage (expected value -$250) over a 10% chance at $5000 in damage (expected value -$500).
  - Kubuxu 8y ago
    5% of $50,000 is $2500
    - AnthonyMouse 8y ago
      Which is why the expected value of the loss without insurance is $2500. You have a 5% chance of losing $50,000 and a 95% chance of losing nothing. If you have insurance with a $5000 deductible, that becomes a 5% chance of losing $5000 and and a 95% of losing nothing. Expected value is the sum over all events of (probability of event) times (cost of event). 5% times $5000 is $250, 95% times $0 is $0, total with insurance is $250 instead of $2500. So you risk $50,000 over $300 at 5% probability because $45,000 of the risk is on the insurance company.
harimau777 8y ago
I think it would only be a moral hazard if someone behaved irresponsibly because they have insurance. An alternate situation would be someone who was excessively cautious without insurance but responsibly cautious with insurance. Or someone who behaved the same way but worried less due to having insurance. Since people tend not to make rational decisions when they are worried, insurance could even lower their risk. For example, my understanding is that many auto insurance companies cover windshield repair very generously because it reduces the risk that a customer will get in an accident trying to chase down a truck that kicked up a stone and damaged their windshield.
- mcguire 8y ago
  ...or drive with a broken windshield, risking a larger loss.
mcguire 8y ago
Moral hazard requires a fiduciary duty to someone else.
- URSpider94 8y ago
  The first sentence of the Wikipedia article says: “In economics, moral hazard occurs when someone increases their exposure to risk when insured ...” Can you explain where the fiduciary duty comes in?
tomatocracy 8y ago
Although that's true, that wasn't quite what I was tryingt to explain. At some point buying cover for very likely outcomes or reducing deductibles really starts to look more like a payment plan than insurance. By doing this I know I am costing myself money, ie the additional cover costs more than I think I am ever likely to benefit from it. I know this upfront but it is still valuable to me because I can rationalise it as a fixed cost and then simply not have to think about a later spending decision, which means I do things which make me happier and/or healthier, even though I could do those same things for lower cost. It's some combination of valuing certainty and being able to separate the spending from the activity.