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The conflict of interest is that they have financial incentives for you to believe failure rates are worse than they are. Insurance may need accurate assessment

The conflict of interest is that they have financial incentives for you to believe failure rates are worse than they are. Insurance may need accurate assessments for a sustainable business model, but their business model also relies on people assessing risk as higher than their assessment or at least that an accurate risk assessment + overhead fees to assess it is less than my own. As a consumer, I only want insurance if I think they've assessed the value to be lower than what I'd pay out of pocket to 'self insure.' As an insurance company, I want people the opposite, that reality of risk lies lower than what you think it is, so I can make money. I want a bunch of worried low risk people to pay overhead and marginal fees so my margins are frothier.

gotoeleven 5y ago
Since they're an insurance company, doing this kind of assessment is their core business.. they have every incentive to not over or under estimate it. So you're positing that they have some real numbers on failure rates that they keep secret and some exaggerated numbers they tout publicly? That would require dishonesty at a level that would ruin the company if it was found out, so it seems unlikely they would risk it.
- Leherenn 5y ago
  The funny thing with insurance is that if they ever become too good at estimating risks, they will destroy themselves. You don't need insurance if you can perfectly predict the future. Though I don't think we particularly close to this point, so I doubt they care too much.
  - quickthrowman 5y ago
    It does seem clairvoyance would negate the need for insurance, but that prompts another question: why do you think a clairvoyant person or machine is possible in any way? Also, if an insurance company had perfect knowledge of future claims by being clairvoyant, they could charge a suitable risk premium to write policies where they wouldn’t lose any money, since they would also know how many policies they would be writing.
setr 5y ago
> As a consumer, I only want insurance if I think they've assessed the value to be lower than what I'd pay out of pocket to 'self insure.' I don’t think that’s entirely right — the main value add of insurance is to the rare, mind numbingly expensive events — ER visits, crashing into a RR, house burning down, etc. You’re paying to minimize tail risk, including risk you couldn’t possibly self-insure against in reasonable time (my payments to insurance is not going to reach the value of my home — the bet is whether my home will ever burn down). Regardless, it’s still a conflict of interest in this case
- Frost1x 5y ago
  I agree completely, but there are two common/popular perspectives to insurance value add. One views it as a risk pool for catastrophic events like you describe. Another views it as a service that prices risk for you to help you pay it in installments. OP seemed to be gunning for the second perspective of what insurance does based on language. However you want to interpret insurance, there's clearly a conflict of interest that the business based entirely around assessing and managing risk publishes information that risk is higher than people thought and they are therefor more relevant as a business than people thought.
polynox 5y ago
You're right that they do have an interest, but I think it is wrong to go as far as if the expected value of the loss is more than the premium then one shouldn't buy insurance. Consider a risk of losing $200 with probability 5% on an asset of $2000. The expected value of the loss is $10. So under your argument, if the insurance company charges over $10, it's worth it to self-insure. But what does self-insure actually mean? I assume it means keep $200 lying around. If you only keep $10 around then you won't have the money to actually fix the problem, and convert a loss of $200 (say, repair costs) to a loss of $2000. Under my values here it would take over 20 years' of premiums to build up what you would need to save to self-insure! As a consumer, I pay a premium (literally) to get rid of the risk and cap my expenditures. So in my example, there is some price between $10 and $200 where the insurance company can profit and I still come out ahead because I can take $200-P and do something else with it. Of course, you are still correct that within the $10 to $200 do have an interest in making you believe that the value of the insurance is on the higher end of the range than the lower.

gotoeleven 5y ago

Since they're an insurance company, doing this kind of assessment is their core business.. they have every incentive to not over or under estimate it. So you're positing that they have some real numbers on failure rates that they keep secret and some exaggerated numbers they tout publicly? That would require dishonesty at a level that would ruin the company if it was found out, so it seems unlikely they would risk it.

Leherenn 5y ago
The funny thing with insurance is that if they ever become too good at estimating risks, they will destroy themselves. You don't need insurance if you can perfectly predict the future. Though I don't think we particularly close to this point, so I doubt they care too much.
- quickthrowman 5y ago
  It does seem clairvoyance would negate the need for insurance, but that prompts another question: why do you think a clairvoyant person or machine is possible in any way? Also, if an insurance company had perfect knowledge of future claims by being clairvoyant, they could charge a suitable risk premium to write policies where they wouldn’t lose any money, since they would also know how many policies they would be writing.

setr 5y ago

> As a consumer, I only want insurance if I think they've assessed the value to be lower than what I'd pay out of pocket to 'self insure.' I don’t think that’s entirely right — the main value add of insurance is to the rare, mind numbingly expensive events — ER visits, crashing into a RR, house burning down, etc. You’re paying to minimize tail risk, including risk you couldn’t possibly self-insure against in reasonable time (my payments to insurance is not going to reach the value of my home — the bet is whether my home will ever burn down). Regardless, it’s still a conflict of interest in this case

Frost1x 5y ago
I agree completely, but there are two common/popular perspectives to insurance value add. One views it as a risk pool for catastrophic events like you describe. Another views it as a service that prices risk for you to help you pay it in installments. OP seemed to be gunning for the second perspective of what insurance does based on language. However you want to interpret insurance, there's clearly a conflict of interest that the business based entirely around assessing and managing risk publishes information that risk is higher than people thought and they are therefor more relevant as a business than people thought.

polynox 5y ago

You're right that they do have an interest, but I think it is wrong to go as far as if the expected value of the loss is more than the premium then one shouldn't buy insurance. Consider a risk of losing $200 with probability 5% on an asset of $2000. The expected value of the loss is $10. So under your argument, if the insurance company charges over $10, it's worth it to self-insure. But what does self-insure actually mean? I assume it means keep $200 lying around. If you only keep $10 around then you won't have the money to actually fix the problem, and convert a loss of $200 (say, repair costs) to a loss of $2000. Under my values here it would take over 20 years' of premiums to build up what you would need to save to self-insure! As a consumer, I pay a premium (literally) to get rid of the risk and cap my expenditures. So in my example, there is some price between $10 and $200 where the insurance company can profit and I still come out ahead because I can take $200-P and do something else with it. Of course, you are still correct that within the $10 to $200 do have an interest in making you believe that the value of the insurance is on the higher end of the range than the lower.