3 ms·

Yep. If you can survive catastrophic loss (for some appropriate definition of survive), then insurance is always a losing proposition.

TheDong 5y ago
> always a losing proposition It is not always, and in fact there are common cases where it has significant positive expected outcomes. Let's assume that you have sufficient wealth (say $40MM) that you can pay for a massive medical bill out of pocket. Let's furthermore say that you know, due to a hereditary illness in your family, that you have 90% chance you will be on the hook for a very large (say $1MM) bill when you're in the age range 20-30. An american health insurance company legally cannot charge you more just because of preexisting conditions or family history, so health insurance will be a winning proposition for you. Similarly, if you have information that the insurance company does not have, then you can "win" at other forms of insurance. If you have an ex-boyfriend who is prone to stealing bikes or setting homes on fire, then insurance covering those will have a higher expected value to you, and the insurance company is unlikely to account for that increased risk. If you happen to know you're a bad driver, but have never been in an accident (only close calls), you might look normal on paper, and thus get a rate that has positive expected returns for you. Said another way, insurance is not always a losing proposition. It can be a winning proposition if the insurance company doesn't understand the risks correctly or if laws prevent the company from accounting for certain risks.
- caminante 5y ago
  Another easy counterfactual is an insurance company's public financial disclosures where the payouts > collected premiums.[0] Not sure I'd argue there was a moral information hazard, but, in retrospect, it's favorable risk transfer per $ for the insured. [0] https://www.reuters.com/business/life-insurers-adapt-pandemic-risk-models-after-claims-jump-2022-01-13/ https://www.reuters.com/business/life-insurers-adapt-pandemi...
phreeza 5y ago
It isn't if you know your own risk is significantly worse than the average buyer. This is called adverse selection.

TheDong 5y ago

> always a losing proposition It is not always, and in fact there are common cases where it has significant positive expected outcomes. Let's assume that you have sufficient wealth (say $40MM) that you can pay for a massive medical bill out of pocket. Let's furthermore say that you know, due to a hereditary illness in your family, that you have 90% chance you will be on the hook for a very large (say $1MM) bill when you're in the age range 20-30. An american health insurance company legally cannot charge you more just because of preexisting conditions or family history, so health insurance will be a winning proposition for you. Similarly, if you have information that the insurance company does not have, then you can "win" at other forms of insurance. If you have an ex-boyfriend who is prone to stealing bikes or setting homes on fire, then insurance covering those will have a higher expected value to you, and the insurance company is unlikely to account for that increased risk. If you happen to know you're a bad driver, but have never been in an accident (only close calls), you might look normal on paper, and thus get a rate that has positive expected returns for you. Said another way, insurance is not always a losing proposition. It can be a winning proposition if the insurance company doesn't understand the risks correctly or if laws prevent the company from accounting for certain risks.

caminante 5y ago
Another easy counterfactual is an insurance company's public financial disclosures where the payouts > collected premiums.[0] Not sure I'd argue there was a moral information hazard, but, in retrospect, it's favorable risk transfer per $ for the insured. [0] https://www.reuters.com/business/life-insurers-adapt-pandemic-risk-models-after-claims-jump-2022-01-13/ https://www.reuters.com/business/life-insurers-adapt-pandemi...

phreeza 5y ago

It isn't if you know your own risk is significantly worse than the average buyer. This is called adverse selection.