4 ms·

Quite the opposite. The point of insurance is to replace a high variance distribution of potential losses with a low variance distribution, but with a similar

• jtbayly 7y ago
  How is perfect insurance different from everybody paying their own losses directly? If I correctly understand what you said, then perfect insurance would lead to nobody buying it, so they could avoid paying the useless additional “small premium.”
  • virgilp 7y ago
    It's basically "no insurance, plus a credit to pay for the losses". Except that you start paying the rate before you incur the loss itself. I still think this form of "perfect insurance" is bad - part of what I like about the insurance is exactly the dispersion of cost in the larger population. Should a chronically-ill person pay a very high insurance, or should the society cover the costs? I'm in the second camp, even though I'm not chronically-ill. It's part of the benefits of having an actual society - we don't need to stand alone.
    • unpopular42 7y ago
      That is indeed part of what people call insurance these days, but in fact it isn't one. It's just a social solidarity scheme, and no one has the balls to call it that way, so it gets mingled into insurance. Without getting into whether it's good or bad, it's just not the true meaning of the term "insurance."
      • izacus 7y ago
        If "everyone" uses a word for something, then that is de facto the "true meaning" of a term.
        • torstenvl 7y ago
          No. Even for vernacular natural language, it only matters what native speakers think. Wéijī will never quite mean "danger and opportunity," no matter how many people view it that way, because native Mandarin speakers don't view it that way.
        • leetcrew 7y ago
          constantly having the prescriptivism vs descriptivism debate is tiresome and pedantic. what we call "health insurance" clearly works very differently than any other kind of insurance I'm familiar with. it's not wrong to try and maintain the distinction between two different concepts.
      • zAy0LfpBZLC8mAC 7y ago
        You are definitely not a scotsman.
    • MagnumOpus 7y ago
      There is a benefit in separating the parts that are actually just insurance that replaces low-probabily low frequency costs with a predictable payment (and thus can be efficiently provided by competing capitalist companies) with the parts that are social redistribution schemes. The latter are necessarily the government's remit, and the political discussion on whether they are desirable can be had in an informed manner if costs are clear and they are not commingled with insurance elements.
    • leetcrew 7y ago
      healthcare is a bad fit for the concept of insurance. an obvious example is that people use their "insurance" to pay for routine doctors appointments which have highly predictable costs and are scheduled in advance. the chronically ill person in your example enrolls in insurance knowing upfront they will never pay enough in premiums to cover their claims. what we call "health insurance" is really just a payment planning and collective bargaining service rolled into one. it doesn't really work like most other kinds of insurance.
  • stult 7y ago
    You never have to pay a large lump sum. So it’s similar to having savings and always covering your own losses. But with the added benefits of covering you even if you have not had time to save sufficiently to cover your losses (or lack the discipline to do so), or are unlucky and suffer multiple large losses in closer proximity than your savings and income can absorb.
  • unpopular42 7y ago
    It's not useless. You pay premium for the privilege of never having to pay catastrophically large amounts. And that's exactly the difference and the point of insurance: limiting the maximum loss.
    • jtbayly 7y ago
      The perfect insurance would know that I was going to have to pay catastrophically large amount and would therefore charge me a catastrophically large amount.
      • mannykannot 7y ago
        There is a difference between estimating a risk with exactitude and predicting with exactitude that an event will or will not happen. Suppose we can accurately say that I have an annual risk of a certain event happening to me as 1/1000 - this is neither a prediction that it will happen to me nor that it will not. If we form an insurance pool of 1000 people all with the same risk, and we each annually put in 1/1000 of the cost of the event to one person, we would have coverage against being unlucky (subject to the usual caveats of liquidity, uncertainty and changing circumstances.)
      • unpopular42 7y ago
        There's a difference between knowing the risk distribution and knowing the future. The perfect insurance would know how likely it is that you are going to have to pay a catastrophically large amount, and would charge you amount*probability. If probability=1.0, then sure, they should charge you the whole amount.
        • jtbayly 7y ago
          Ah. This makes sense of it. So even if they reduce the pool size to one, they are still multiplying by my unique probability.
        • perl4ever 7y ago
          The future becomes completely predictable as it approaches, so probability necessarily evaporates in the limit. As the data gathered increases, the probability eventually reaches 1.0. For instance, if an insurance company could legally gather all telemetry from your car at a high enough frequency and cancel your policy at will, then it could determine that your car was on an unavoidable collision course and eliminate losses. This may sound like a silly thought experiment, but I think it demonstrates that in principle, there must be some point at which we draw the line on discrimination to have insurance, so if you find yourself defending all discrimination then you've gone wrong somewhere. Either there's a principle that has been missed, or it is valid to just set the rules in society that people are comfortable with.
  • rubyfan 7y ago
    That’s not what they said. That small premium is the cost of not paying directly for the large actual loss, you are paying for your predicted risk not the loss. There isn’t likely a perfect loss prediction to be had, e.g. predicting and understanding risk itself influences the likelihood of avoiding a loss favorably. An ideal scenario might be that people become aware of risky behavior then adjust and therefore change the future prediction. Health insurers do it all the time. Helping at risk customers avoid large losses actually helps the customer and the rest of the less risky customers in the pool (everyone’s premium should go down if the risky become less risky).
• sideshowb 7y ago
  So if for example health insurance is based on genetic screening and only those with certain genetic markers get a huge premium would you consider that a step towards perfection?
• croon 7y ago
  > Getting a better risk estimate doesn't get you closer to "not having insurance", but rather closer to "perfect insurance" where everyone gets a distribution that exactly matches their risk profile. You say "Quite the opposite", and proceed to rephrase the same thing as GP said, except for the conclusion, which also is the same thing, yet you claim it isn't. Not having insurance IS "perfect insurance", in that you pay exactly your own costs, with the added benefit of having no overhead. Most of us don't want that though, in the same way as we don't want children to have to pay their own healthcare, or chronically debilitated people to die to darwinism (whether we succeed here is another point). But a perfect "risk estimate" also happens to be the same thing as prescience, and if we had that we wouldn't need insurance for other reasons. Not having insurance = paying for yourself = distribution by exact risk profile.
  • unpopular42 7y ago
    No, you miss the point. Not having insurance means losses follow your exact risk distribution, with a non-zero risk of a catastrophic loss. Having a perfect insurance means your losses follow a distribution with the same average as your risk profile suggests (+premium), but much lower variance and with zero density on the higher end, meaning you never have a catastrophic loss.
    • zAy0LfpBZLC8mAC 7y ago
      > No, you miss the point. Quite the contrary. > average And that right there is where you are hiding all your assumptions. There is no such thing as "your risk profile", there is only your risk profile according to some risk model, which approaches what actually will happen to you individually the more detailed you make it and the better your predictive capabilities get, because as you do that, you are shrinking the pool of individuals that this average is calculcated over, approaching only you as one individual in the limit, at which point the average is the same as the actual thing. > and with zero density on the higher end, meaning you never have a catastrophic loss. Also, that's not a thing.
      • leetcrew 7y ago
• madsbuch 7y ago
  This is the view of an insurance as the reversed loan, where you pay the loan before you get the principal paid out. It guess the "perfect insurance" could be obtained by reversing the reversed loan? In case of something catastrophically happening, you are simply guaranteed a loan (with fair interest rates). To me, the aspect of redistribution is important in insurance. The acceptance that the world is chaotic and we can not predict all the bad luck that might happen to us. Hence, I pay for yours bad luck, if you pay for mine.
• boomlinde 7y ago
  > Getting a better risk estimate doesn't get you closer to "not having insurance", but rather closer to "perfect insurance" where everyone gets a distribution that exactly matches their risk profile. That is the same thing if you have produced a perfect risk profile. The perfect risk profile completely predicts reality, and all costs can be accounted for. If it doesn't completely predict reality, it's not perfect. So with the perfect risk profile, insurance is a zero sum game. Instead of paying a small premium you can put your money in a bank account and instead have them pay you "a small premium" in the form of interest. And no, I don't believe that there can ever be a perfect risk profile, but as risk assessment gets more fine grained, insurance approaches that zero sum game.
  • taffer 7y ago
    > So with the perfect risk profile, insurance is a zero sum game. The utility of insurance is to reduce variance, it is not a zero-sum game.
    • boomlinde 7y ago
      Yes, that's the point. By using more fine grained risk assessment, you attain less useful insurance. If the utility of insurance is to reduce variance, and utility increases as variance is reduced, the insurance with the highest utility is one that completely ignores individual and demographical circumstances. Perhaps you understand the word "perfect" in a different sense than I do. A better risk estimate to me is (to me) one that is more accurate. A perfect risk estimate is one that can not be more accurate. If a better risk estimate brings you closer to perfect insurance (which the GP concludes), a perfect risk estimate should leave you as close to perfect insurance as is possible. It would be cool if you could address my reasoning instead because now I have no idea what exactly you disagree with other than the conclusion.
      • taffer 7y ago
        We probably disagree on definitions, because the term risk can sometimes refer to the expected damage and sometimes to the variance of the damage. So I will try to express myself more clearly: Let's say you have a house worth $100,000 and statistically it burns down once in 1000 years. This means that the expected damage is $100 per year, but the variance is very high because once the house burns down, the damage is 1000 times greater than the expected damage. With insurance, however, the variance is zero because you pay the same amount every year, whether your house burns down that year or not. I would argue that with a perfect insurance you would only pay the expected loss, i.e. $100 per year, and not more or less, because ideally the insurance has accurately assessed the expected loss and diversified the variance away. However, with less ideal risk assessment, you could pay more or less because other houses burn more or less often.
• Frost1x 7y ago
  That's not at all the purpose of having insurance. Essentially, in that world, you're just outsourcing the cost of estimating what to set aside to self-insure so you know how much to save and when. Shared risk pools are exactly the original point of insurance. Now that insurance is a lucrative business, the point of insurance as described by those profiting from it will forever morph into whatever is most profitable. If the intent described were truly the case, explain Medicare and Medicaid.
  • taffer 7y ago
    You're missing the point. Risk pools are there to reduce variance through diversification, not to reduce your expected loss.