19 ms·

Insurance is like gambling, don't overdo it

230 points by vicek22 5y ago

thirdplace_ 5y ago
An overlooked fact in the article is that each individual engages in different degrees of risk. Some people engage in more risky behaviour than others and insurance is more profitable for them.
- chii 5y ago
  This assumes that by taking more risk, you end up gaining more if the risk didn't pan out. But not all situations are like that.
369548684892826 5y ago
The worst is appliance insurance, like for a washing machine. It _will_ stop working at some point, why pay an insurance company a premium to fix it?
- randomlurking 5y ago
  Insurance for those cases only makes sense if you can’t afford for the washing machine to break. In that cases, however, it might be the right call
- gambiting 5y ago
  Because for like £200 a year I get insurance for literally all of my appliances including the boiler. And yes, boilers break and need replacement, that's usually at least £1500. Washing machines are cheaper but not insignificant. Same with the dishwasher, the dryer, the hob, the oven...... I'd rather pay that £200 once a year and have a complete peace of mind about it.
max_ 5y ago
I always have the same feeling towards products like Apple Care
- aetherspawn 5y ago
  Apple Care are truly helpful beyond just replacing your product. My MacBook was damaged by a cast iron tonka truck dropped off the balcony above directly on top of it, but it was about 6 months out of Apple Care. Much to my surprise, a few keys on the keyboard were destroyed, but apart from that it looked like it should have been fine. Anyway, it was not. It wouldn't turn on. I took it to the Apple Care team anyway, and they diagnosed it for over 2 hours before finally telling me that one of the RAM modules was faulty, but it wasn't an easy repair because it was soldered to the mobo. They gave me a quote to replace the mobo on the spot. It was around $900 and had a lead time of a few weeks, so I said I couldn't afford to wait that long. Even though my Apple Care was out of date, they gave me around a 25% discount on a brand new MacBook Pro 15". I was shocked because that's more than I ever paid on Apple Care. And had I walked away at that point, the Apple Care team would have spent 2 hours diagnosing my 3.5 year old broken MacBook for free just because it had Apple Care at some stage. Apple Care is a user experience, not necessarily just an insurance plan. I wish my car insurance were like that.. Someone rear ended my fairly new car the other day and it has been in and out of repair shops for 8 months with recurring quality problems. I would have loved if I could have said to the insurance company: please, fix up my old car, private sale it for the best price and get me a new one at a discount straight away. I'll pay the difference.
  - IkmoIkmo 5y ago
    > It was around $900 and had a lead time of a few weeks, so I said I couldn't afford to wait that long. Even though my Apple Care was out of date, they gave me around a 25% discount on a brand new MacBook Pro 15". I was shocked because that's more than I ever paid on Apple Care. The discount is part of the procedure, and in fact it's part of your premium, too. Of course not 100% of apple pay customers execute their coverage due to a loss, so it's entirely normal that you'd get a payout that's higher than your premium, it's the point of insurance, and not shocking. > had I walked away at that point, the Apple Care team would have spent 2 hours diagnosing my 3.5 year old broken MacBook for free just because it had Apple Care at some stage. These costs, too, are being paid out by your premium. It's not free. The whole insurance package is modelled on probabilities of certain costs, including diagnosis. > Apple Care is a user experience, not necessarily just an insurance plan It really is just an insurance. The 'experience' you described is twofold: giving you a discount + diagnosing a problem. Those are both part of your insurance package, for which you paid. You're not getting any favours here. The fact Apple isn't shady is a user experience, which is great, but you're definitely paying for it through your premiums.
basedgod 5y ago
I haven't paid for a cellphone since 2012. back then I bought a 3 year, no deductible phone insurance policy with accidental protection for ~$150 almost like clockwork every 2 years since my phone breaks somehow. dropped it off a climbing wall, software boot loop, smashed it on the pavement etc. warranty company sends me a check for the amount I originally paid for that phone, and I buy a new $800 top of the line phone, with a new policy no idea why this makes sense to them, or if I'm just unusually prone to breakage
- dataflow 5y ago
  Do you use a cell phone cover or anything to protect it...?
- tshaddox 5y ago
  Who sells you that insurance policy?
- IkmoIkmo 5y ago
  The crazy part is that they don't attempt to repair, nor have any deductible, nor use residual values. That's usually how they prevent people from executing on their insurance rights. You got a really nice package, or the company has very loose procedures at the claims department. In the EU the standard warranty is 2 years, so if there's a software boot issue you'd be covered without insurance, too. But you wouldn't get a new phone or a cheque, you'd typically get to send it in for repairs and be without your phone for two weeks (which is kind of unheard of for many people nowadays, plenty of people I know don't even have a computer anymore. All banking, voting, taxes, booking flights, booking gym classes, work calls etc, is all dependent on that phone), then get back your 2 year old phone that afterwards often gets replaced a year later anyway due to it getting old. Same with if your screen breaks -> send it in for a replacement through a crappy company. And some insurance companies will only pay-out 'residual value', after all you're not insuring depreciation. So you'd get back what the 2nd hand value pre-breakage would've been... Add a deductible and people often don't even bother with an old phone.
giantandroids 5y ago
I only ever get insurance for significant life disasters. Home insurance, vehicle and overseas medical insurance (European so I don't need domestic health insurance). When it comes to something like a phone, I just figure 'it's a risk I am willing to take'.
- pvitz 5y ago
  You have probably done this already anyway, but it is worth checking the travel insurance included with your credit card. Many people are overinsured when it comes to travel (overseas medical) insurance.
- vinay427 5y ago
  > European so I don't need domestic health insurance Just a reminder that Europe is not a country, and this statement is not accurate for many Europeans. It's perfectly fine to say this about a country in which you understand the system, but this doesn't even apply to all EU countries, let alone the continent.
  - giantandroids 5y ago
    Northern European then (although its quite obvious what I meant).
    - vinay427 5y ago
      I agree that it's obvious to both of us, but there are regularly comments that seem to indicate that it's not always the case for people from other regions. No one needs more generalizations about the continent. :) (Or about any continent, obviously.)
- jopsen 5y ago
  > When it comes to something like a phone, I just figure 'it's a risk I am willing to take'. I feel like the option to insure a phone is a money grab. An add-on that allows you to upsell a bit more.. it seems like a thing nobody should need. Same for insuring against have to cancel you vacation.. nobody should ever do that. But people do, probably because there is a checkbox at checkout that allows you to easily add an "insurance".
Danieru 5y ago
This article's core thesis is wonderful and correct, but the article is weakened by only focusing on theory. An actual set of examples is vital to communicate the extent of the profit. For my part I offer that the life insurance offered "on the market" in japan cost 10x the actuary table for my young age. An obvious aspect of such self-selecting insurance is adverse selection. Insurance ironically has many pitfalls. The worst pitfall being fake "financial advisors" who are nothing more than insurance salesmen hoping to convert your savings into premiums and kickbacks. Every country has different restrictions, but here in Japan "financial advisor" is a title almost 100% implying insurance salesman. There is a reason during the PS3 era it was not TVs, or Cameras, or games, or movies which kept Sony going: it was insurance. It turns out insuring the rich & long living + national healthcare is good business.
- IkmoIkmo 5y ago
  Indeed, same with healthcare. For example here in the Netherlands there's universal (mandatory) healthcare. The basic premium for full standard coverage (which is pretty much anything you'd want that affects health) is about $150 a month regardless of age. So me (30) and my dad (75) pay the same amount. You can see here [0] that I'm averaging about 2k per year in costs and he's averaging about 12k a year in costs, or 6x the amount. For us it's actually closer to 0 vs 20k. No difference in premiums. Of course it must be noted that the state pays something like 80% of it through taxes which are progressive, my dad on low-income pays essentially nothing, I pay at high-income essentially everything between us. It makes sense to set a high deductible for me, that's the only way to get a discount on the premiums. I'm super happy with this system, don't get me wrong. But financially it makes no sense, and if the state allowed it, our premiums would be massively different. (mine much lower, his much higher to the extent of completely unaffordability). The life insurance market is interesting in that at a young age the rates are really tiny (at least in certain countries, for term-coverage), like the cost of an expensive coffee or a couple sandwiches per month, for those ultra-rare early-death risks. I guess people just aren't that price sensitive around $5 or $15 a month, when insuring against half a million in coverage. Maybe that explains it? Otherwise you'd think the first competitor to offer insurance at say 5x the actuary table instead of 10x would just simply take the market, while still massively profiting. [0] https://www.rivm.nl/sites/default/files/2018-11/kosten%20van%20ziekten.jpg https://www.rivm.nl/sites/default/files/2018-11/kosten%20van...
lorlou 5y ago
Neddy doesn't believe in insurance. He considers it a form of gambling.
djhworld 5y ago
The article assumes that everyone has a lot of savings tucked away for the "lesser" damages like floor flooding (which might spiral out of control once the true extent of the damage is revealed...) It definitely makes sense if you've got a good emergency fund, but I come from a background of people where cash savings are limited and all their money is in the big purchases (house, car etc.) and work in minimum wage jobs A £7000 floor flooding scenario would almost certainly put them into hardship without insurance...
- cfn 5y ago
  The article actually says that you should insure only if it creates financial distress. So, in the case you describe they should insure for the floor flooding eventuality but not for the dog ruining the carpet (as a cheaper example).
  - rocqua 5y ago
    This is a great example of how poverty is a trap. You cannot afford insurance premiums, so you are stuck without insurance for situations you cannot handle. As you earn more, and get room to save, you get the option to forego insurance.
- ddek 5y ago
  As someone whose floor was flooded, it did not cost £7000. It cost the insurance company £274,000, just to (badly) fix it, then a further £15k in compensation for everything they screwed up on the way, then another £100k for loss of value as a result of their contractors. The problem with floor flooding is it isn’t the floor that was flooded. The floor is just a symptom. The whole house needs to be stripped and dried after a flood, during which time the house is inhabitable.
  - tonyedgecombe 5y ago
    It's surprising how quickly costs can escalate. One of my neighbours flooded. During repairs they quickly discovered there was asbestos everywhere. I don't know what the costs were but they weren't back home for two and half years.
lordnacho 5y ago
My take as a finance person but not an insurance person: - Some events are low probability but high cost. You're unlikely to crash your car, but if you do, it might cost you a heck of a lot to fix. Nearly everyone is in this situation, so it makes sense for everyone to pay a little at a time and give that pot to whoever ends up crashing. - The insurance pool cares about the average outcome, ie average cost. They need to collect more than this. The insurance buyer cares about the extreme case, where they end up crashing. So in there we have space for a trade. Yes they care about the extremes too of course, since they wouldn't want a bunch of payouts at the same time, but that's something actuaries have thought extensively about. - You want people in the pool to be similar risks. If they aren't and they know they aren't the low risk people will decide they don't need to insure, leaving everyone else with a higher average cost. Also, the high risk people will see a good deal and join. Adverse selection. - If the thing you're insuring isn't a catastrophic cost, you're less likely to want to pay over the odds. Maybe your £200 phone doesn't need a £30 annual insurance, because you have lots of money to buy a new phone. If you're really rich maybe that car crash scenario doesn't matter for you either (but of course there are laws about insurance). - The insurance company holds a free float. All the premiums are coming in, but only pay out now and again. That gives some room for investing the free float.
- tshaddox 5y ago
  > You want people in the pool to be similar risks. And yet my car insurance quotes only ask me my age, gender, and what car I drive. They presumably also use my history of car accidents, serious legal issues like DUIs, and car insurance claims (all nonexistent in my case) as input. This strikes me as a comically low amount of information to place me in a risk pool.
  - csa 5y ago
    Also your address, which is surprisingly useful in predicting likely outcomes (even if the range of outcomes in a neighborhood are wide at the extremes).
    - rolleiflex 5y ago
alfu 5y ago
>Insurance companies (same as betting companies) always need to bill you more than the chance you get your big payoff. In theory, couldn't they charge less if the ROI of the premiums was large enough?
- djbebs 5y ago
  Yes, but the restrictions on investment that insurance companies are under means that you'd be better of if you invested it yourself
hellbannedguy 5y ago
Think of the gift government gives the insurance industry when it mandates it? Since I started driving in CA, I always felt the rate was to high for minimum auto insurance. The big players have had some competition with pay per mile, but you need a computer connection to use the service, and even then it's gimmicky. I have been told the Insurance Lobby in Sacramento basically runs the show. They give politicians a lot of money. I can't prove collusion, but mandatory insurance seems wrong. And yes--there will be the obligatory story about the uninsured driver, but 15k, 30k, 5k liability doesn't cover much. So little why mandate it? I would like to see large economy's, like CA, self insure. I bet we could pull it off, and rates might be halfed? Be it auto, homeowners, etc., I don't think insurance should be mandated, especially for profit.
- lalaland1125 5y ago
  You can post a bond as an alternative to insurance in most states (it's $35,000 in California). The system is opt-out and people can self-insure if they feel like it's a bad deal. Generally, it's a better deal to stick with the insurance. The real killer for a car accident is if there is a lawsuit and the insurer can do those much more cheaply than you can.
- vicek22 5y ago
  I lived in Melbourne, AU for a while, and their system seemed good. The third-party insurance wasn't mandatory (like here in the EU), only recommended. But you could buy insurance (something like reverse third party insurance) where if someone crashed into you, the insurance would pay you for the damages and then they'd get the money from the other person. It was very cheap.
  - zerni 5y ago
    It’s called first party insurance. You are just insuring your own property and for any damages the insurer will just go after the party at fault if it isn’t you (or “you” as defined in their policy wording). Pretty simple way to keep rates down the r profits up for insurers.
AussieWog93 5y ago
I always assumed it was common sense to stash away some cash for a rainy day, but so many people we know live paycheck to paycheck and rely on credit cards and insurance to cope with the anxiety/illiquidity this causes. I think the far more important takeaway is to always have that cash set aside for an emergency. Once you have the breathing space, so many types of poor financial habits seem to just sort themself out.
- rocqua 5y ago
  It requires more than common sense to stash away cash. It requires sufficient income, and a stable situation. No medical debt, no family that needs help with their car to keep their job. Not having cash on hand for these kinds of risks is a part of the poverty trap. It is a ststemic issue more than it is a personal one.
  - AussieWog93 5y ago
    Speaking from an Australian perspective here, so many of the traps that exist in the US (medical debt, credit card debt persisting post-bankruptcy, low minimum wage etc.) just simply don't exist here. Of course, there are people who are chronically unemployed, abused, single mothers whose ex-husband dodges child support etc. For every one person like that, though, there are a dozen who simply live beyond their means, fail to plan for the future and get bowled over by minor hiccups. I know a couple who have both been in the professional workforce for decades, have a household income of 200k+, own no property and had to take out finance to pay for a bloody Holden Barina (<20k AUD car). There's a reason that The Barefoot Investor has sold 1.4m copies in a country with a population of 25m. The advice within is golden for those who exist in this state of self-inflicted middle-class poverty.
Hamuko 5y ago
I'm guessing that insurance works differently in the US (assuming that it's where this author lives) since the question about insuring against hitting random Bentleys is a non-issue here: motor liability insurance is mandatory for all drivers. And really the most important thing about the insurance isn't even the fact that it covers super-expensive luxury cars like Bentleys (who even has one?) but rather that it covers healthcare costs for both parties. I also don't have a separate coverage plan for my phone but my phone, alongside with my computers, TV, etc, are covered by my home insurance. Granted, the deductible is 150 € but it's quite a lot cheaper than replacing the screen on my iPhone 11 Pro, which is about 310 €. And I don't really even want to guess how much it'd be if I spilled a drink on a laptop. And of course, the most important part is that if there's a fire or a pipe breaks, the home insurance also covers that part. And the premium is also only 190 €/year, so I think it's pretty well worth it.
- tshaddox 5y ago
  Liability insurance is legally required in the US as well, yet it’s still common to pay for “uninsured driver insurance” in case you get hit by a driver who is illegally driving without insurance. There’s also “underinsured driver insurance” for cases where the at-fault driver has only the legal minimum insurance coverage and your medical bills are higher than that.
  - Hamuko 5y ago
    If there's someone driving an uninsured car illegally in Finland, the state will actually pay out all of the damages and then fine the ininsured person (I believe at around three times the rate that the insurance would actually be). And I think there's no maximum coverage for our mandatory motor insurance, so there's no under-insured issue either. Additional insurance coverage is then against accidents that you yourself cause, vandalism, fire, animal damage, parking mishaps, windscreen damage and so on.
    - denimnerd42 5y ago
      the uninsured in my city tend to be illegal immigrants or poor. government is never going to recover from them so it just ends up being an insurance you pay for with your taxes doesn't it..?
vkat 5y ago
I live in CA and often considered getting earthquake insurance but the premium and deductible are bonkers that it almost never makes sense to me. A $2500 premium for 20% deductible on everything separately(construction, personal belongings, construction premium, loss of use...). So in the event of a massive earthquake I am supposed to shell out > $200k out of pocket for the deductible before the insurance kicks in, why would anyone pay for this?
- IkmoIkmo 5y ago
  Because of the 80% preventing financial ruin?
  - dilyevsky 5y ago
    If earthquake is powerful enough to cause this much damage aint nobody gona pay that
    - vkat 5y ago
      yeah, exactly my thinking. Insurers would just go bust.
      - pomian 5y ago
        That's when the government declares "A state of emergency", so that the insurance companies are baled out.
    - thehappypm 5y ago
      This seems silly -- a small earthquake can cause catastrophic damage to just one house if that one house is unlucky.
  - vkat 5y ago
    If the earthquake was so big then coming up with the cash needed for the deductible would be at the bottom of my list. Instead I would try to find an alternative place to live for 6-12 months. If there was an insurance that covers living and mortgage expenses for an year, I would totally buy that.
dwd 5y ago
The one good point in the article (apart from not paying for insurance you don't need) is to always look for a better deal, and this goes for anything like your phone/Internet, electricity, mortgage. Insurers assume you are lazy and can't be bothered switching, and may even expect an increase. They will bump up your insurance because they know they can. Find a better deal elsewhere and ask if they will match it, and be prepared to switch if they won't - but never just pay the increase (unless you really can't find a better deal).
Gustomaximus 5y ago
I insure for 3 things: House - as that would be a huge surprise bill. I dont bother with contents. It would suck replacing everything but you can do that over time and much on the cheap. House you cant. Car - I get comprehensive for 2 reasons. Its good to be able to let friends/family grab the car when visiting and more importantly there is potentially huge liability as while I drive a cheaper car, what happens if you get unlucky and are at fault with a top end Lamborghini etc. TPD: If Im disabled I want a payout to help life and this comes fairly cheap as part of our super in Australia. As for their advice: "set the highest possible excess for your insurance" I used to do this as I'm happy to pay a some hundreds to fix something on the car and not deal with insurance but for some years it doesn't seem to make and significant difference when I play around with high thresholds. And some missing advice is credit card insurance. A bunch of cards will give you 3 months insurance on new purchases and travel insurance. If you're financially responsible it makes sense to use a low fee credit card and get those benefits so if you do drop that new phone 2 months in your covered.
- bonzini 5y ago
  > what happens if you get unlucky and are at fault with a top end Lamborghini That would be liability insurance, not comprehensive, wouldn't it? Comprehensive insurance covers damage to your car (could be glass, vandals, natural events, hitting something with your bumper, etc.)
  - Gustomaximus 5y ago
    That's correct. I also like to be able to lend people my car and not have a 'who pays' situation if there's an at fault accident hence comprehensive.
    - bonzini 5y ago
      At least in my country, at fault accidents give you a worse premium for the next few years (one or two right now, but more than ten if I had an accident on the years immediately after I got my first insurance). So you would still end up paying something.
ramraj07 5y ago
The post didn’t cover an essential part where insurance makes sense: I.e. when you believe you know the odds of the adverse event happening is much higher than what the actuaries estimate (either because the actuaries are wrong or don’t care or have a bigger model than that particular insurance, or because you know something about yourself that they don’t). For example phone insurance, a friend always buys it because she knows she’s butterfingers and she has also used them. Another is stuff like applecare. I don’t buy it for most products but I did buy it for my AirPods Pro, because I believed apple would have made it not that well. Further, apples warranty policy in india is weird where they’re more liberal in replacements as long as you have a care plan. So I took the care plan and am happy about it. Another place is where you really just don’t care about the marginal extra cost for the peace of mind you get, which I believe is what most people consider when taking the majority of the insurance especially stuff like rental cars.
- Tabular-Iceberg 5y ago
  > you know something about yourself that they don’t Don’t most insurance T&Cs require you to disclose known risks like having “butter fingers”? I was going to say I was playing the devil’s advocate, but really I’m not, since I’m personally on the hook for other people’s undisclosed risk through my own insurance.
  - tshaddox 5y ago
    Surely not? I’ve never heard of anything like that for consumer insurance plans like AppleCare.
    - contriban 5y ago
      I’m no expert but AppleCare seems priced highly enough that they cover butterfingers too. I’d expect regular insurances to charge much less for a similar service (except definitely not as convenient)
      - Hamuko 5y ago
zerni 5y ago
There are 3 things this article ignores that are crucial to evaluate your risk/value from insurance. 1) The article ignores individual risk and pooling of such risk. Insurance is nothing else than a group of people sharing the cost of claims. If you are a worse risk than the average person in said pool it’s worth insuring (even without excess) if everyone pays the same. The insurers will use signals to price you but most of the time they are pretty rudimentary. 2) That a higher excess is a good way to reduce cost makes sense generally. It drives down claims frequency and thereby operational cost for insurers but in reality how much is that cost? Is it a big enough lever for you to be happy to give away financial flexibility? High risk activities or products make sense to insure if this adds value to you. That’s harder to quantify in numbers. 3) Assuming every insurance runs big margins is a fallacy. Motor insurance in the U.K. runs at a loss for years but insurers see it as an entry point to other products like home insurance where they have healthier underwriting profits.
deleted 5y ago
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villgax 5y ago
So many in India treat it like an investment, if they were really worried about insuring lives they should take out term insurances instead of being promised of arbitrary lumpsum at the end of a life insurance policy but in reality with horrible returns
shmerl 5y ago
It's not like gambling, it is gambling.
- IkmoIkmo 5y ago
  I wouldn't say so. In gambling you bet $10 in the hope you'd win $100, if you don't, you'll be very unhappy. In insurance you pay $10 understanding you may otherwise lose $100, but whether it happens or not you're now quite indifferent to. I'm not happy or sad if I pay premiums for years without necessity, nor happy or sad if I pay premiums and I am covered by insurance when a loss event happens. I'm not gambling in the hopes of a potential event that occurs, or doesn't occur, I'm insuring so that I'm indifferent. Gambling increases risk, insurance decreases it. The Expected Value (EV) of spending $10 to have a 10% chance of winning $100, vs spending $10 to prevent a 10% chance of losing $100, might be exactly the same, but the risk is entirely different. In case A there's 9 losses (cost>EV) and 1 win (cost<EV), in case B the cost=EV every single time, that's what it means to reduce risk. It's very different from gambling in that sense.
- JumpCrisscross 5y ago
  Gambling is a hedonistic enterprise. If you get a thrill from buying car insurance, I guess it could be considered gambling, but for most people it’s more akin to a chore.
  - shmerl 5y ago
    It's more of a gambling for insurance companies.
    - JumpCrisscross 5y ago
      > more of a gambling for insurance companies They’re taking risks with the expectation of upside. They are not doing so hedonistically. If you remove the hedonistic part of the definition of gambling, every human activity involving uncertainty—from getting in a car to changing pet food brands—becomes gambling. That isn’t a useful definition of the word.
numair 5y ago
Surprised to see something insurance-related on the front page of HN; very nice! I’m building something in this space, so let me throw in three more data points: - More than 90% of insurers in one recent industry survey stated that “exclusions or limitations” are a “methodology for recovery.” Translation: that means they’re expecting not to pay you. - The Chief Risk Officer of a super-large multinational recently commented that his team realized that they weren’t adequately accounting for the true cost of their insurance policies, as they weren’t including the cost of suing their insurance providers to make sure they actually paid. - Eliot Spitzer went after the insurance companies in 2005 for “contingent commissions,” which were basically a gray-area form of kickbacks buyers didn’t know they were paying. People paid fines, practices became illegal... Until 2010, when contingent commission became legal again. There is a lot more I can say about the incredible percentage of your policy that goes into marketing/admin/etc rather than, you know, insuring risk, and so on... If you’re interested in working on something big and meaningful to help protect billions of under- and non-insured people against catastrophic risk, send me an email: numair@numair.com
- genedan 5y ago
  > incredible percentage of your policy that goes into marketing/admin/etc The expense ratio is something like 30 to 40 percent of premium on commercial policies in case anyone was wondering. This figure is found on annual reports. I'm not sure if insurers should be blamed for that though. Economically, that can be explained by the concave shape of consumers' Von Neumann Morgenstern utility curves describing their degree of risk aversion. It reflects their willingness to pay for a trading an uncertain outcome to a certain one.
  - state_less 5y ago
    I think prompting people with removing risk at the checkout counter might result in a different appetite for risk aversion than if they came to the decision on their own over a period of time. So maybe folks are being corralled into a losing bet?
  - marcosdumay 5y ago
    Hum... Competition should make insurance prices independent of the consumers preferences for risk, just like it makes any other good's price independent of their value to consumers. If insurance prices change with people's preferences, that's a strong signal the market doesn't have enough competition.
state_less 5y ago
I’m curious of folks take on this health insurance article: https://www.aeaweb.org/research/regulating-health-insurers-aca-medical-loss-ratio https://www.aeaweb.org/research/regulating-health-insurers-a... The claim is that the medical ‘loss’ ratio caused insurers to want to pay more for healthcare so that the fixed profit percentage would be a higher gross. I am not an expert on health insurance, but if it’s like gambling, then I don’t like the idea that a casino is profiting on people’s lives.
compsciphd 5y ago
what I always said. insurance is like gambling, except you don't want to win the jackpot. i.e. it needs to simply viewed as a hedge. what can you afford to budget for today that will prevent you from having unexpected expenses in the future. The fact that your unexpected expenses are covered is great, however, the pain of having to deal with that situation is probably not worth the fact that you got out more money than you put in.
xtracto 5y ago
I hate insurance. It is a necessary evil (car, health and maybe life). On top of that theres a conflict of interest when executing the insurance because the Insurer profit depends on NOT paying you when something happens. So it's an uphill battle for the little person. I wish there could be something like a union or similar that would balance power .
lamontcg 5y ago
Yeah I've got enough money, and I don't buy brand new vehicles (expensive depreciating assets) so I don't bother with collision or comprehensive and I "self-insure". I also have never been in an accident which has written off my vehicle -- staying situationally aware and driving defensively helps a lot. So what I do is max out my liability and uninsured motorists insurance up to something like $250,000. I never get insurance for things like phones. A lot of insurance is tax on poor people and the mathematically illiterate.
- thehappypm 5y ago
  This is interesting, how much do you save? I imagine that liability insurance has to be the lion's share of a more vanilla policy, no?
  - lamontcg 5y ago
    No, the biggest part is collision and comprehensive. Liability is comparatively small. You save tons by self-insuring. Since my used truck was only worth $10k to start with I've saved much more than that in the decade that I haven't bothered carrying collision or comprehensive (probably 3 or 4 times over that). But I don't bother fixing dents and dings in it, so it looks like a used truck and I won't be turning any heads cruising down by the beach.
debug-desperado 5y ago
So what I’m hearing is to go all-in on a permanent life insurance policy. JK, I know they’re not popular with the FIRE crowd. These are quite different than other types of insurance though. They may work out in your favor compared to bonds due to the tax advantages.
pmorici 5y ago
Always wondered why perpetual insurance isn’t more popular. It has an interesting model we’re you make a single payment at the start of the policy and claims are paid out from the proceeds of the investment income. You also get your principal back if you ever chancel your policy. Only found out about this after hearing an ad for The Baltimore Equitable Insurance Company a few years back. https://en.m.wikipedia.org/wiki/Perpetual_insurance https://en.m.wikipedia.org/wiki/Perpetual_insurance
- opportune 5y ago
  That sounds like self-insuring but with zero control over the investments?
  - pmorici 5y ago
    Unlike self insurance they are still pooling risk among all their policy holders.
- sygma 5y ago
  > The insurer must earn enough income from investing the deposits to cover losses and operating expenses for the model to be economically viable The above is a quote from the Wikipedia article. I suspect that with interest rates at an all time low, the environment is not exactly ripe for this kind of insurance model.
grouphugs 5y ago
insurance is a scam and a poor excuse for bad services and products
globular-toast 5y ago
Lloyd's of London literally started off as people in a coffee shop betting on whether ships would safely make it to their destination. The BBC ran an interesting article about it a few years ago: https://www.bbc.co.uk/news/business-38905963 https://www.bbc.co.uk/news/business-38905963
thayne 5y ago
Another reason to have insurance: you are required by law, or contract. In the US at least you need liability auto insurance if own a car, you have to pay a tax penalty if you don't have health insurance, many apartments require you to have some level of renters insurance, if you have a mortgage you are almost certainly required to have homeowners insurance, and possibly mortgage insurance depending on the size of your downpayment. And then there is title insurance, rather expensive insurance that you have to pay in case the company you are paying to research the title makes a mistake.
rubyfan 5y ago
This is actually terrible advice based on naive assumptions. Insurance has a cost of capital and cost of operations just like any other business. You are not getting ripped off. Even the very best mutual companies charge basically the same rates as public for profit insurance companies. The industry is well regulated and ensures margins aren’t indulgent. Some of the best performing public auto insurance companies are lucky to land a 97% combined ratio, i.e. a 3% profit. Home insurance is fairly similar with slightly better margins but many insurance companies aren’t making much more than a nickel on each dollar that they bring in and most are lucky to break even. Sure there are plenty of things insurance companies can do better. Lemonade, Hippo, Root and many other high profile disrupters are out there spinning BS about how evil the industry is while profiting first and/or burning other peoples money to recreate the wheel while they are otherwise not breaking even, i.e. not viable long term.
- jopsen 5y ago
  > The industry is well regulated and ensures margins aren’t indulgent. Home insurance, auto insurance are often very competitive. But these days it's common when you buy a TV, phone, laptop, that the checkout button online also offers "insurance". I see the same renting a vacation home, offer for a cancellation insurance. Sure, it sucks if I'm sick and need to cancel my vacation and I can't get my money back -- but insuring against such events is often a bad idea. There is a lot of unnecessary "insurances" being offered to consumers today. For the record: health, home, auto, travel, disability, and generic liability insurances is usually a necessity. What author is saying is don't insure against spilled milk, even if many shops offer these easy add-on "insurances" at checkout. Personally, I sometimes find it hard to know what I should and should buy when renting a vacation home or car. I don't care for the cancellation insurance, but I do want a liability insurance (which most always include automatically, at-least where I live).
foolinaround 5y ago
The article explains in simple terms when one should or should not do it.. However, the asymmetry in knowledge on the consumer's part ( eg, knowing the 'chance the house burns down' for his personal case from the blog ) would enable him to make rational decisions. Without this information, depending on one's risk appetite, one over or under-compensates for it. There needs to be an application - that works for the consumer - and paid by him -- that calculates his real chance - by collecting a lot of the data from him ( and others similar to him ) and providing him with his real chance. Armed with this info, the consumer can then choose to buy insurance for this scenario, and if so, what they should do...
jgerrish 5y ago
Thank you for this informative post. I love exploring stuff like this, and it's even better that there are so many factors which I need to adjust and change my behavior on. Thanks!
deleted 5y ago
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dhsysusbsjsi 5y ago
My understanding of insurance was that they don’t double the premium vs risk as per the article. Traditionally it’s much closer to money in equals payouts. But because they have hundreds of billions in funds sitting in a float (required by regulations), they earn interest on the float by putting it in low interest (safe) markets such as bonds. And only a few percent premium on the actual insurance delta.
- notdan 5y ago
  Yes this is true. They often lose money on the premiums, actually, and then make money on the float. A very simplified example: You pay $1,000 per year for 10 years on home insurance. Then a hail storm ruins your roof and it costs about $10k to replace. So they end up paying out the $10k in premium they collected over 10 years, but were able to make money on the interest they made while they held it.
- mint2 5y ago
  Well the payout to repair the cars and pay medical bills or whatever maybe around 66% of the money customers in aggregate pay them, the other 33% mostly goes to pay the claims adjusters, hire lawyers to defend against fraud, and do a ton of other stuff. At the end of the day they’re going to have just a couple percent of profit directly from the actual premium payments if they are lucky. But then the investment returns gets them more profit.
stewx 5y ago
This is oversimplified nonsense and borders on irresponsible, particularly the line saying that if your car suffers $3,000 of damage you should pay for it out of pocket, simply because you have $10k in savings. The right amount of insurance is a highly personal decision and many factors are involved. It's not black and white.
helloSam43 5y ago
long-time HN lurker. insuring you in TX GA TN IN CT MS AL - reach out, quite possibly we speak the same language.

230 points by vicek22 5y ago

An overlooked fact in the article is that each individual engages in different degrees of risk. Some people engage in more risky behaviour than others and insurance is more profitable for them.

chii 5y ago
This assumes that by taking more risk, you end up gaining more if the risk didn't pan out. But not all situations are like that.

369548684892826 5y ago

The worst is appliance insurance, like for a washing machine. It _will_ stop working at some point, why pay an insurance company a premium to fix it?

randomlurking 5y ago
Insurance for those cases only makes sense if you can’t afford for the washing machine to break. In that cases, however, it might be the right call
gambiting 5y ago
Because for like £200 a year I get insurance for literally all of my appliances including the boiler. And yes, boilers break and need replacement, that's usually at least £1500. Washing machines are cheaper but not insignificant. Same with the dishwasher, the dryer, the hob, the oven...... I'd rather pay that £200 once a year and have a complete peace of mind about it.

max_ 5y ago

I always have the same feeling towards products like Apple Care

aetherspawn 5y ago
Apple Care are truly helpful beyond just replacing your product. My MacBook was damaged by a cast iron tonka truck dropped off the balcony above directly on top of it, but it was about 6 months out of Apple Care. Much to my surprise, a few keys on the keyboard were destroyed, but apart from that it looked like it should have been fine. Anyway, it was not. It wouldn't turn on. I took it to the Apple Care team anyway, and they diagnosed it for over 2 hours before finally telling me that one of the RAM modules was faulty, but it wasn't an easy repair because it was soldered to the mobo. They gave me a quote to replace the mobo on the spot. It was around $900 and had a lead time of a few weeks, so I said I couldn't afford to wait that long. Even though my Apple Care was out of date, they gave me around a 25% discount on a brand new MacBook Pro 15". I was shocked because that's more than I ever paid on Apple Care. And had I walked away at that point, the Apple Care team would have spent 2 hours diagnosing my 3.5 year old broken MacBook for free just because it had Apple Care at some stage. Apple Care is a user experience, not necessarily just an insurance plan. I wish my car insurance were like that.. Someone rear ended my fairly new car the other day and it has been in and out of repair shops for 8 months with recurring quality problems. I would have loved if I could have said to the insurance company: please, fix up my old car, private sale it for the best price and get me a new one at a discount straight away. I'll pay the difference.
- IkmoIkmo 5y ago
  > It was around $900 and had a lead time of a few weeks, so I said I couldn't afford to wait that long. Even though my Apple Care was out of date, they gave me around a 25% discount on a brand new MacBook Pro 15". I was shocked because that's more than I ever paid on Apple Care. The discount is part of the procedure, and in fact it's part of your premium, too. Of course not 100% of apple pay customers execute their coverage due to a loss, so it's entirely normal that you'd get a payout that's higher than your premium, it's the point of insurance, and not shocking. > had I walked away at that point, the Apple Care team would have spent 2 hours diagnosing my 3.5 year old broken MacBook for free just because it had Apple Care at some stage. These costs, too, are being paid out by your premium. It's not free. The whole insurance package is modelled on probabilities of certain costs, including diagnosis. > Apple Care is a user experience, not necessarily just an insurance plan It really is just an insurance. The 'experience' you described is twofold: giving you a discount + diagnosing a problem. Those are both part of your insurance package, for which you paid. You're not getting any favours here. The fact Apple isn't shady is a user experience, which is great, but you're definitely paying for it through your premiums.

basedgod 5y ago

I haven't paid for a cellphone since 2012. back then I bought a 3 year, no deductible phone insurance policy with accidental protection for ~$150 almost like clockwork every 2 years since my phone breaks somehow. dropped it off a climbing wall, software boot loop, smashed it on the pavement etc. warranty company sends me a check for the amount I originally paid for that phone, and I buy a new $800 top of the line phone, with a new policy no idea why this makes sense to them, or if I'm just unusually prone to breakage

dataflow 5y ago
Do you use a cell phone cover or anything to protect it...?
tshaddox 5y ago
Who sells you that insurance policy?
IkmoIkmo 5y ago
The crazy part is that they don't attempt to repair, nor have any deductible, nor use residual values. That's usually how they prevent people from executing on their insurance rights. You got a really nice package, or the company has very loose procedures at the claims department. In the EU the standard warranty is 2 years, so if there's a software boot issue you'd be covered without insurance, too. But you wouldn't get a new phone or a cheque, you'd typically get to send it in for repairs and be without your phone for two weeks (which is kind of unheard of for many people nowadays, plenty of people I know don't even have a computer anymore. All banking, voting, taxes, booking flights, booking gym classes, work calls etc, is all dependent on that phone), then get back your 2 year old phone that afterwards often gets replaced a year later anyway due to it getting old. Same with if your screen breaks -> send it in for a replacement through a crappy company. And some insurance companies will only pay-out 'residual value', after all you're not insuring depreciation. So you'd get back what the 2nd hand value pre-breakage would've been... Add a deductible and people often don't even bother with an old phone.

giantandroids 5y ago

I only ever get insurance for significant life disasters. Home insurance, vehicle and overseas medical insurance (European so I don't need domestic health insurance). When it comes to something like a phone, I just figure 'it's a risk I am willing to take'.

pvitz 5y ago
You have probably done this already anyway, but it is worth checking the travel insurance included with your credit card. Many people are overinsured when it comes to travel (overseas medical) insurance.
vinay427 5y ago
> European so I don't need domestic health insurance Just a reminder that Europe is not a country, and this statement is not accurate for many Europeans. It's perfectly fine to say this about a country in which you understand the system, but this doesn't even apply to all EU countries, let alone the continent.
- giantandroids 5y ago
  Northern European then (although its quite obvious what I meant).
  - vinay427 5y ago
    I agree that it's obvious to both of us, but there are regularly comments that seem to indicate that it's not always the case for people from other regions. No one needs more generalizations about the continent. :) (Or about any continent, obviously.)
jopsen 5y ago
> When it comes to something like a phone, I just figure 'it's a risk I am willing to take'. I feel like the option to insure a phone is a money grab. An add-on that allows you to upsell a bit more.. it seems like a thing nobody should need. Same for insuring against have to cancel you vacation.. nobody should ever do that. But people do, probably because there is a checkbox at checkout that allows you to easily add an "insurance".

Danieru 5y ago

This article's core thesis is wonderful and correct, but the article is weakened by only focusing on theory. An actual set of examples is vital to communicate the extent of the profit. For my part I offer that the life insurance offered "on the market" in japan cost 10x the actuary table for my young age. An obvious aspect of such self-selecting insurance is adverse selection. Insurance ironically has many pitfalls. The worst pitfall being fake "financial advisors" who are nothing more than insurance salesmen hoping to convert your savings into premiums and kickbacks. Every country has different restrictions, but here in Japan "financial advisor" is a title almost 100% implying insurance salesman. There is a reason during the PS3 era it was not TVs, or Cameras, or games, or movies which kept Sony going: it was insurance. It turns out insuring the rich & long living + national healthcare is good business.

IkmoIkmo 5y ago
Indeed, same with healthcare. For example here in the Netherlands there's universal (mandatory) healthcare. The basic premium for full standard coverage (which is pretty much anything you'd want that affects health) is about $150 a month regardless of age. So me (30) and my dad (75) pay the same amount. You can see here [0] that I'm averaging about 2k per year in costs and he's averaging about 12k a year in costs, or 6x the amount. For us it's actually closer to 0 vs 20k. No difference in premiums. Of course it must be noted that the state pays something like 80% of it through taxes which are progressive, my dad on low-income pays essentially nothing, I pay at high-income essentially everything between us. It makes sense to set a high deductible for me, that's the only way to get a discount on the premiums. I'm super happy with this system, don't get me wrong. But financially it makes no sense, and if the state allowed it, our premiums would be massively different. (mine much lower, his much higher to the extent of completely unaffordability). The life insurance market is interesting in that at a young age the rates are really tiny (at least in certain countries, for term-coverage), like the cost of an expensive coffee or a couple sandwiches per month, for those ultra-rare early-death risks. I guess people just aren't that price sensitive around $5 or $15 a month, when insuring against half a million in coverage. Maybe that explains it? Otherwise you'd think the first competitor to offer insurance at say 5x the actuary table instead of 10x would just simply take the market, while still massively profiting. [0] https://www.rivm.nl/sites/default/files/2018-11/kosten%20van%20ziekten.jpg https://www.rivm.nl/sites/default/files/2018-11/kosten%20van...

lorlou 5y ago

Neddy doesn't believe in insurance. He considers it a form of gambling.

djhworld 5y ago

The article assumes that everyone has a lot of savings tucked away for the "lesser" damages like floor flooding (which might spiral out of control once the true extent of the damage is revealed...) It definitely makes sense if you've got a good emergency fund, but I come from a background of people where cash savings are limited and all their money is in the big purchases (house, car etc.) and work in minimum wage jobs A £7000 floor flooding scenario would almost certainly put them into hardship without insurance...

cfn 5y ago
The article actually says that you should insure only if it creates financial distress. So, in the case you describe they should insure for the floor flooding eventuality but not for the dog ruining the carpet (as a cheaper example).
- rocqua 5y ago
  This is a great example of how poverty is a trap. You cannot afford insurance premiums, so you are stuck without insurance for situations you cannot handle. As you earn more, and get room to save, you get the option to forego insurance.
ddek 5y ago
As someone whose floor was flooded, it did not cost £7000. It cost the insurance company £274,000, just to (badly) fix it, then a further £15k in compensation for everything they screwed up on the way, then another £100k for loss of value as a result of their contractors. The problem with floor flooding is it isn’t the floor that was flooded. The floor is just a symptom. The whole house needs to be stripped and dried after a flood, during which time the house is inhabitable.
- tonyedgecombe 5y ago
  It's surprising how quickly costs can escalate. One of my neighbours flooded. During repairs they quickly discovered there was asbestos everywhere. I don't know what the costs were but they weren't back home for two and half years.

lordnacho 5y ago

My take as a finance person but not an insurance person: - Some events are low probability but high cost. You're unlikely to crash your car, but if you do, it might cost you a heck of a lot to fix. Nearly everyone is in this situation, so it makes sense for everyone to pay a little at a time and give that pot to whoever ends up crashing. - The insurance pool cares about the average outcome, ie average cost. They need to collect more than this. The insurance buyer cares about the extreme case, where they end up crashing. So in there we have space for a trade. Yes they care about the extremes too of course, since they wouldn't want a bunch of payouts at the same time, but that's something actuaries have thought extensively about. - You want people in the pool to be similar risks. If they aren't and they know they aren't the low risk people will decide they don't need to insure, leaving everyone else with a higher average cost. Also, the high risk people will see a good deal and join. Adverse selection. - If the thing you're insuring isn't a catastrophic cost, you're less likely to want to pay over the odds. Maybe your £200 phone doesn't need a £30 annual insurance, because you have lots of money to buy a new phone. If you're really rich maybe that car crash scenario doesn't matter for you either (but of course there are laws about insurance). - The insurance company holds a free float. All the premiums are coming in, but only pay out now and again. That gives some room for investing the free float.

tshaddox 5y ago
> You want people in the pool to be similar risks. And yet my car insurance quotes only ask me my age, gender, and what car I drive. They presumably also use my history of car accidents, serious legal issues like DUIs, and car insurance claims (all nonexistent in my case) as input. This strikes me as a comically low amount of information to place me in a risk pool.
- csa 5y ago
  Also your address, which is surprisingly useful in predicting likely outcomes (even if the range of outcomes in a neighborhood are wide at the extremes).
  - rolleiflex 5y ago

alfu 5y ago

>Insurance companies (same as betting companies) always need to bill you more than the chance you get your big payoff. In theory, couldn't they charge less if the ROI of the premiums was large enough?

djbebs 5y ago
Yes, but the restrictions on investment that insurance companies are under means that you'd be better of if you invested it yourself

hellbannedguy 5y ago

Think of the gift government gives the insurance industry when it mandates it? Since I started driving in CA, I always felt the rate was to high for minimum auto insurance. The big players have had some competition with pay per mile, but you need a computer connection to use the service, and even then it's gimmicky. I have been told the Insurance Lobby in Sacramento basically runs the show. They give politicians a lot of money. I can't prove collusion, but mandatory insurance seems wrong. And yes--there will be the obligatory story about the uninsured driver, but 15k, 30k, 5k liability doesn't cover much. So little why mandate it? I would like to see large economy's, like CA, self insure. I bet we could pull it off, and rates might be halfed? Be it auto, homeowners, etc., I don't think insurance should be mandated, especially for profit.

lalaland1125 5y ago
You can post a bond as an alternative to insurance in most states (it's $35,000 in California). The system is opt-out and people can self-insure if they feel like it's a bad deal. Generally, it's a better deal to stick with the insurance. The real killer for a car accident is if there is a lawsuit and the insurer can do those much more cheaply than you can.
vicek22 5y ago
I lived in Melbourne, AU for a while, and their system seemed good. The third-party insurance wasn't mandatory (like here in the EU), only recommended. But you could buy insurance (something like reverse third party insurance) where if someone crashed into you, the insurance would pay you for the damages and then they'd get the money from the other person. It was very cheap.
- zerni 5y ago
  It’s called first party insurance. You are just insuring your own property and for any damages the insurer will just go after the party at fault if it isn’t you (or “you” as defined in their policy wording). Pretty simple way to keep rates down the r profits up for insurers.

AussieWog93 5y ago

I always assumed it was common sense to stash away some cash for a rainy day, but so many people we know live paycheck to paycheck and rely on credit cards and insurance to cope with the anxiety/illiquidity this causes. I think the far more important takeaway is to always have that cash set aside for an emergency. Once you have the breathing space, so many types of poor financial habits seem to just sort themself out.

rocqua 5y ago
It requires more than common sense to stash away cash. It requires sufficient income, and a stable situation. No medical debt, no family that needs help with their car to keep their job. Not having cash on hand for these kinds of risks is a part of the poverty trap. It is a ststemic issue more than it is a personal one.
- AussieWog93 5y ago
  Speaking from an Australian perspective here, so many of the traps that exist in the US (medical debt, credit card debt persisting post-bankruptcy, low minimum wage etc.) just simply don't exist here. Of course, there are people who are chronically unemployed, abused, single mothers whose ex-husband dodges child support etc. For every one person like that, though, there are a dozen who simply live beyond their means, fail to plan for the future and get bowled over by minor hiccups. I know a couple who have both been in the professional workforce for decades, have a household income of 200k+, own no property and had to take out finance to pay for a bloody Holden Barina (<20k AUD car). There's a reason that The Barefoot Investor has sold 1.4m copies in a country with a population of 25m. The advice within is golden for those who exist in this state of self-inflicted middle-class poverty.

Hamuko 5y ago

I'm guessing that insurance works differently in the US (assuming that it's where this author lives) since the question about insuring against hitting random Bentleys is a non-issue here: motor liability insurance is mandatory for all drivers. And really the most important thing about the insurance isn't even the fact that it covers super-expensive luxury cars like Bentleys (who even has one?) but rather that it covers healthcare costs for both parties. I also don't have a separate coverage plan for my phone but my phone, alongside with my computers, TV, etc, are covered by my home insurance. Granted, the deductible is 150 € but it's quite a lot cheaper than replacing the screen on my iPhone 11 Pro, which is about 310 €. And I don't really even want to guess how much it'd be if I spilled a drink on a laptop. And of course, the most important part is that if there's a fire or a pipe breaks, the home insurance also covers that part. And the premium is also only 190 €/year, so I think it's pretty well worth it.

tshaddox 5y ago
Liability insurance is legally required in the US as well, yet it’s still common to pay for “uninsured driver insurance” in case you get hit by a driver who is illegally driving without insurance. There’s also “underinsured driver insurance” for cases where the at-fault driver has only the legal minimum insurance coverage and your medical bills are higher than that.
- Hamuko 5y ago
  If there's someone driving an uninsured car illegally in Finland, the state will actually pay out all of the damages and then fine the ininsured person (I believe at around three times the rate that the insurance would actually be). And I think there's no maximum coverage for our mandatory motor insurance, so there's no under-insured issue either. Additional insurance coverage is then against accidents that you yourself cause, vandalism, fire, animal damage, parking mishaps, windscreen damage and so on.
  - denimnerd42 5y ago
    the uninsured in my city tend to be illegal immigrants or poor. government is never going to recover from them so it just ends up being an insurance you pay for with your taxes doesn't it..?

vkat 5y ago

I live in CA and often considered getting earthquake insurance but the premium and deductible are bonkers that it almost never makes sense to me. A $2500 premium for 20% deductible on everything separately(construction, personal belongings, construction premium, loss of use...). So in the event of a massive earthquake I am supposed to shell out > $200k out of pocket for the deductible before the insurance kicks in, why would anyone pay for this?

IkmoIkmo 5y ago
Because of the 80% preventing financial ruin?
- dilyevsky 5y ago
  If earthquake is powerful enough to cause this much damage aint nobody gona pay that
  - vkat 5y ago
    yeah, exactly my thinking. Insurers would just go bust.
    - pomian 5y ago
      That's when the government declares "A state of emergency", so that the insurance companies are baled out.
  - thehappypm 5y ago
    This seems silly -- a small earthquake can cause catastrophic damage to just one house if that one house is unlucky.
- vkat 5y ago
  If the earthquake was so big then coming up with the cash needed for the deductible would be at the bottom of my list. Instead I would try to find an alternative place to live for 6-12 months. If there was an insurance that covers living and mortgage expenses for an year, I would totally buy that.

dwd 5y ago

The one good point in the article (apart from not paying for insurance you don't need) is to always look for a better deal, and this goes for anything like your phone/Internet, electricity, mortgage. Insurers assume you are lazy and can't be bothered switching, and may even expect an increase. They will bump up your insurance because they know they can. Find a better deal elsewhere and ask if they will match it, and be prepared to switch if they won't - but never just pay the increase (unless you really can't find a better deal).

Gustomaximus 5y ago

I insure for 3 things: House - as that would be a huge surprise bill. I dont bother with contents. It would suck replacing everything but you can do that over time and much on the cheap. House you cant. Car - I get comprehensive for 2 reasons. Its good to be able to let friends/family grab the car when visiting and more importantly there is potentially huge liability as while I drive a cheaper car, what happens if you get unlucky and are at fault with a top end Lamborghini etc. TPD: If Im disabled I want a payout to help life and this comes fairly cheap as part of our super in Australia. As for their advice: "set the highest possible excess for your insurance" I used to do this as I'm happy to pay a some hundreds to fix something on the car and not deal with insurance but for some years it doesn't seem to make and significant difference when I play around with high thresholds. And some missing advice is credit card insurance. A bunch of cards will give you 3 months insurance on new purchases and travel insurance. If you're financially responsible it makes sense to use a low fee credit card and get those benefits so if you do drop that new phone 2 months in your covered.

bonzini 5y ago
> what happens if you get unlucky and are at fault with a top end Lamborghini That would be liability insurance, not comprehensive, wouldn't it? Comprehensive insurance covers damage to your car (could be glass, vandals, natural events, hitting something with your bumper, etc.)
- Gustomaximus 5y ago
  That's correct. I also like to be able to lend people my car and not have a 'who pays' situation if there's an at fault accident hence comprehensive.
  - bonzini 5y ago
    At least in my country, at fault accidents give you a worse premium for the next few years (one or two right now, but more than ten if I had an accident on the years immediately after I got my first insurance). So you would still end up paying something.

ramraj07 5y ago

The post didn’t cover an essential part where insurance makes sense: I.e. when you believe you know the odds of the adverse event happening is much higher than what the actuaries estimate (either because the actuaries are wrong or don’t care or have a bigger model than that particular insurance, or because you know something about yourself that they don’t). For example phone insurance, a friend always buys it because she knows she’s butterfingers and she has also used them. Another is stuff like applecare. I don’t buy it for most products but I did buy it for my AirPods Pro, because I believed apple would have made it not that well. Further, apples warranty policy in india is weird where they’re more liberal in replacements as long as you have a care plan. So I took the care plan and am happy about it. Another place is where you really just don’t care about the marginal extra cost for the peace of mind you get, which I believe is what most people consider when taking the majority of the insurance especially stuff like rental cars.

Tabular-Iceberg 5y ago
> you know something about yourself that they don’t Don’t most insurance T&Cs require you to disclose known risks like having “butter fingers”? I was going to say I was playing the devil’s advocate, but really I’m not, since I’m personally on the hook for other people’s undisclosed risk through my own insurance.
- tshaddox 5y ago
  Surely not? I’ve never heard of anything like that for consumer insurance plans like AppleCare.
  - contriban 5y ago
    I’m no expert but AppleCare seems priced highly enough that they cover butterfingers too. I’d expect regular insurances to charge much less for a similar service (except definitely not as convenient)
    - Hamuko 5y ago

zerni 5y ago

There are 3 things this article ignores that are crucial to evaluate your risk/value from insurance. 1) The article ignores individual risk and pooling of such risk. Insurance is nothing else than a group of people sharing the cost of claims. If you are a worse risk than the average person in said pool it’s worth insuring (even without excess) if everyone pays the same. The insurers will use signals to price you but most of the time they are pretty rudimentary. 2) That a higher excess is a good way to reduce cost makes sense generally. It drives down claims frequency and thereby operational cost for insurers but in reality how much is that cost? Is it a big enough lever for you to be happy to give away financial flexibility? High risk activities or products make sense to insure if this adds value to you. That’s harder to quantify in numbers. 3) Assuming every insurance runs big margins is a fallacy. Motor insurance in the U.K. runs at a loss for years but insurers see it as an entry point to other products like home insurance where they have healthier underwriting profits.

deleted 5y ago

[deleted]

villgax 5y ago

So many in India treat it like an investment, if they were really worried about insuring lives they should take out term insurances instead of being promised of arbitrary lumpsum at the end of a life insurance policy but in reality with horrible returns

shmerl 5y ago

It's not like gambling, it is gambling.

IkmoIkmo 5y ago
I wouldn't say so. In gambling you bet $10 in the hope you'd win $100, if you don't, you'll be very unhappy. In insurance you pay $10 understanding you may otherwise lose $100, but whether it happens or not you're now quite indifferent to. I'm not happy or sad if I pay premiums for years without necessity, nor happy or sad if I pay premiums and I am covered by insurance when a loss event happens. I'm not gambling in the hopes of a potential event that occurs, or doesn't occur, I'm insuring so that I'm indifferent. Gambling increases risk, insurance decreases it. The Expected Value (EV) of spending $10 to have a 10% chance of winning $100, vs spending $10 to prevent a 10% chance of losing $100, might be exactly the same, but the risk is entirely different. In case A there's 9 losses (cost>EV) and 1 win (cost<EV), in case B the cost=EV every single time, that's what it means to reduce risk. It's very different from gambling in that sense.
JumpCrisscross 5y ago
Gambling is a hedonistic enterprise. If you get a thrill from buying car insurance, I guess it could be considered gambling, but for most people it’s more akin to a chore.
- shmerl 5y ago
  It's more of a gambling for insurance companies.
  - JumpCrisscross 5y ago
    > more of a gambling for insurance companies They’re taking risks with the expectation of upside. They are not doing so hedonistically. If you remove the hedonistic part of the definition of gambling, every human activity involving uncertainty—from getting in a car to changing pet food brands—becomes gambling. That isn’t a useful definition of the word.

numair 5y ago

Surprised to see something insurance-related on the front page of HN; very nice! I’m building something in this space, so let me throw in three more data points: - More than 90% of insurers in one recent industry survey stated that “exclusions or limitations” are a “methodology for recovery.” Translation: that means they’re expecting not to pay you. - The Chief Risk Officer of a super-large multinational recently commented that his team realized that they weren’t adequately accounting for the true cost of their insurance policies, as they weren’t including the cost of suing their insurance providers to make sure they actually paid. - Eliot Spitzer went after the insurance companies in 2005 for “contingent commissions,” which were basically a gray-area form of kickbacks buyers didn’t know they were paying. People paid fines, practices became illegal... Until 2010, when contingent commission became legal again. There is a lot more I can say about the incredible percentage of your policy that goes into marketing/admin/etc rather than, you know, insuring risk, and so on... If you’re interested in working on something big and meaningful to help protect billions of under- and non-insured people against catastrophic risk, send me an email: numair@numair.com

genedan 5y ago
> incredible percentage of your policy that goes into marketing/admin/etc The expense ratio is something like 30 to 40 percent of premium on commercial policies in case anyone was wondering. This figure is found on annual reports. I'm not sure if insurers should be blamed for that though. Economically, that can be explained by the concave shape of consumers' Von Neumann Morgenstern utility curves describing their degree of risk aversion. It reflects their willingness to pay for a trading an uncertain outcome to a certain one.
- state_less 5y ago
  I think prompting people with removing risk at the checkout counter might result in a different appetite for risk aversion than if they came to the decision on their own over a period of time. So maybe folks are being corralled into a losing bet?
- marcosdumay 5y ago
  Hum... Competition should make insurance prices independent of the consumers preferences for risk, just like it makes any other good's price independent of their value to consumers. If insurance prices change with people's preferences, that's a strong signal the market doesn't have enough competition.

state_less 5y ago

I’m curious of folks take on this health insurance article: https://www.aeaweb.org/research/regulating-health-insurers-aca-medical-loss-ratio https://www.aeaweb.org/research/regulating-health-insurers-a... The claim is that the medical ‘loss’ ratio caused insurers to want to pay more for healthcare so that the fixed profit percentage would be a higher gross. I am not an expert on health insurance, but if it’s like gambling, then I don’t like the idea that a casino is profiting on people’s lives.

compsciphd 5y ago

what I always said. insurance is like gambling, except you don't want to win the jackpot. i.e. it needs to simply viewed as a hedge. what can you afford to budget for today that will prevent you from having unexpected expenses in the future. The fact that your unexpected expenses are covered is great, however, the pain of having to deal with that situation is probably not worth the fact that you got out more money than you put in.

xtracto 5y ago

I hate insurance. It is a necessary evil (car, health and maybe life). On top of that theres a conflict of interest when executing the insurance because the Insurer profit depends on NOT paying you when something happens. So it's an uphill battle for the little person. I wish there could be something like a union or similar that would balance power .

lamontcg 5y ago

Yeah I've got enough money, and I don't buy brand new vehicles (expensive depreciating assets) so I don't bother with collision or comprehensive and I "self-insure". I also have never been in an accident which has written off my vehicle -- staying situationally aware and driving defensively helps a lot. So what I do is max out my liability and uninsured motorists insurance up to something like $250,000. I never get insurance for things like phones. A lot of insurance is tax on poor people and the mathematically illiterate.

thehappypm 5y ago
This is interesting, how much do you save? I imagine that liability insurance has to be the lion's share of a more vanilla policy, no?
- lamontcg 5y ago
  No, the biggest part is collision and comprehensive. Liability is comparatively small. You save tons by self-insuring. Since my used truck was only worth $10k to start with I've saved much more than that in the decade that I haven't bothered carrying collision or comprehensive (probably 3 or 4 times over that). But I don't bother fixing dents and dings in it, so it looks like a used truck and I won't be turning any heads cruising down by the beach.

debug-desperado 5y ago

So what I’m hearing is to go all-in on a permanent life insurance policy. JK, I know they’re not popular with the FIRE crowd. These are quite different than other types of insurance though. They may work out in your favor compared to bonds due to the tax advantages.

pmorici 5y ago

Always wondered why perpetual insurance isn’t more popular. It has an interesting model we’re you make a single payment at the start of the policy and claims are paid out from the proceeds of the investment income. You also get your principal back if you ever chancel your policy. Only found out about this after hearing an ad for The Baltimore Equitable Insurance Company a few years back. https://en.m.wikipedia.org/wiki/Perpetual_insurance https://en.m.wikipedia.org/wiki/Perpetual_insurance

opportune 5y ago
That sounds like self-insuring but with zero control over the investments?
- pmorici 5y ago
  Unlike self insurance they are still pooling risk among all their policy holders.
sygma 5y ago
> The insurer must earn enough income from investing the deposits to cover losses and operating expenses for the model to be economically viable The above is a quote from the Wikipedia article. I suspect that with interest rates at an all time low, the environment is not exactly ripe for this kind of insurance model.

grouphugs 5y ago

insurance is a scam and a poor excuse for bad services and products

globular-toast 5y ago

Lloyd's of London literally started off as people in a coffee shop betting on whether ships would safely make it to their destination. The BBC ran an interesting article about it a few years ago: https://www.bbc.co.uk/news/business-38905963 https://www.bbc.co.uk/news/business-38905963

thayne 5y ago

Another reason to have insurance: you are required by law, or contract. In the US at least you need liability auto insurance if own a car, you have to pay a tax penalty if you don't have health insurance, many apartments require you to have some level of renters insurance, if you have a mortgage you are almost certainly required to have homeowners insurance, and possibly mortgage insurance depending on the size of your downpayment. And then there is title insurance, rather expensive insurance that you have to pay in case the company you are paying to research the title makes a mistake.

rubyfan 5y ago

This is actually terrible advice based on naive assumptions. Insurance has a cost of capital and cost of operations just like any other business. You are not getting ripped off. Even the very best mutual companies charge basically the same rates as public for profit insurance companies. The industry is well regulated and ensures margins aren’t indulgent. Some of the best performing public auto insurance companies are lucky to land a 97% combined ratio, i.e. a 3% profit. Home insurance is fairly similar with slightly better margins but many insurance companies aren’t making much more than a nickel on each dollar that they bring in and most are lucky to break even. Sure there are plenty of things insurance companies can do better. Lemonade, Hippo, Root and many other high profile disrupters are out there spinning BS about how evil the industry is while profiting first and/or burning other peoples money to recreate the wheel while they are otherwise not breaking even, i.e. not viable long term.

jopsen 5y ago
> The industry is well regulated and ensures margins aren’t indulgent. Home insurance, auto insurance are often very competitive. But these days it's common when you buy a TV, phone, laptop, that the checkout button online also offers "insurance". I see the same renting a vacation home, offer for a cancellation insurance. Sure, it sucks if I'm sick and need to cancel my vacation and I can't get my money back -- but insuring against such events is often a bad idea. There is a lot of unnecessary "insurances" being offered to consumers today. For the record: health, home, auto, travel, disability, and generic liability insurances is usually a necessity. What author is saying is don't insure against spilled milk, even if many shops offer these easy add-on "insurances" at checkout. Personally, I sometimes find it hard to know what I should and should buy when renting a vacation home or car. I don't care for the cancellation insurance, but I do want a liability insurance (which most always include automatically, at-least where I live).

foolinaround 5y ago

The article explains in simple terms when one should or should not do it.. However, the asymmetry in knowledge on the consumer's part ( eg, knowing the 'chance the house burns down' for his personal case from the blog ) would enable him to make rational decisions. Without this information, depending on one's risk appetite, one over or under-compensates for it. There needs to be an application - that works for the consumer - and paid by him -- that calculates his real chance - by collecting a lot of the data from him ( and others similar to him ) and providing him with his real chance. Armed with this info, the consumer can then choose to buy insurance for this scenario, and if so, what they should do...

jgerrish 5y ago

Thank you for this informative post. I love exploring stuff like this, and it's even better that there are so many factors which I need to adjust and change my behavior on. Thanks!

deleted 5y ago

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dhsysusbsjsi 5y ago

My understanding of insurance was that they don’t double the premium vs risk as per the article. Traditionally it’s much closer to money in equals payouts. But because they have hundreds of billions in funds sitting in a float (required by regulations), they earn interest on the float by putting it in low interest (safe) markets such as bonds. And only a few percent premium on the actual insurance delta.

notdan 5y ago
Yes this is true. They often lose money on the premiums, actually, and then make money on the float. A very simplified example: You pay $1,000 per year for 10 years on home insurance. Then a hail storm ruins your roof and it costs about $10k to replace. So they end up paying out the $10k in premium they collected over 10 years, but were able to make money on the interest they made while they held it.
mint2 5y ago
Well the payout to repair the cars and pay medical bills or whatever maybe around 66% of the money customers in aggregate pay them, the other 33% mostly goes to pay the claims adjusters, hire lawyers to defend against fraud, and do a ton of other stuff. At the end of the day they’re going to have just a couple percent of profit directly from the actual premium payments if they are lucky. But then the investment returns gets them more profit.

stewx 5y ago

This is oversimplified nonsense and borders on irresponsible, particularly the line saying that if your car suffers $3,000 of damage you should pay for it out of pocket, simply because you have $10k in savings. The right amount of insurance is a highly personal decision and many factors are involved. It's not black and white.

helloSam43 5y ago

long-time HN lurker. insuring you in TX GA TN IN CT MS AL - reach out, quite possibly we speak the same language.