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Why would insurance being individually priced negate its value? The benefit of insurance is the pooling of the risk. The more individually it is priced, the mor

by mb7733 3y ago

Why would insurance being individually priced negate its value? The benefit of insurance is the pooling of the risk. The more individually it is priced, the more efficiently it works. (Not that I'm a fan of insurers spying on their customers from the sky...)

gmd63 3y ago
Insurance incentives would drive them to want to predict as accurately as possible who is going to cost them money, and then deny them coverage. They make money from selling to people who are afraid of a calamity but likely won't experience one.
- kjkjadksj 3y ago
  Why are they in the business of denying coverage? They are insurance. They estimate their payouts from the entire pool and price your premiums accordingly. Paying out should therefore not really affect their bottom line if they price the premiums appropriately.
  - gmd63 3y ago
    Home insurance companies are leaving Florida because it's not profitable to operate in an area with so much vulnerability to hurricane damage. Also, the only thing stopping medical insurers from denying coverage or increasing prices for people with pre-existing conditions is the Affordable Care Act.
    - t0mas88 3y ago
      There is an important additional factor, regulators are setting limits on rates / rate increases. Florida is not profitable with those limits. If the insurance companies are free to set any rate, they would happily cover a high hurricane risk area. You can get insurance on very risky things. The way it's done is high rates and "reinsurance" which means the insurance company shares the risk (and premium) with a pool of other insurance companies. For policies with a large possible payout (e.g. a big ship or aircraft) this is always done, to avoid issues for the insurance company that gets unlucky enough to have to pay out.
      - gmd63 3y ago
        Well apparently it's not hurricanes or regulation against accurate pricing, it's rampant fraud fueled by a state supreme court decision to incentivize winning cases for policyholders https://www.iii.org/press-release/triple-i-extreme-fraud-and-litigation-causing-floridas-homeowners-insurance-markets-demise-062322 https://www.iii.org/press-release/triple-i-extreme-fraud-and... "Florida, however, is the site of 79 percent of all homeowners insurance lawsuits over claims filed nationwide while Florida’s insurers receive only 9 percent of all U.S. homeowners insurance claims, according to the Florida governor’s Office."
    - imgabe 3y ago
      The whole point of insurance is that there is a relatively low probability of a relatively high expense event happening. In all likelihood, the thing won't happen to you, but if we all pool our money together and you are the unlucky person then you're covered. A pre-existing condition is not a low probability event. It is a 100% certainty that you have to pay for it. In that case the insurance is just a middleman who is increasing the cost of the thing you definitely have to pay for. You pay the insurance company, they take a cut, and they pay the healthcare provider. Why not just pay the healthcare provider directly?
      - gmd63 3y ago
        I imagine insurers are working very hard to identify which low probability events are likely going to happen for specific people. They might be doing detailed continual examinations of their homes for example.
  - theptip 3y ago
    Tail risk / volatility.
- imgabe 3y ago
  At some point the cost of insurance would approach the cost of simply self insuring. Why should I pay the insurance company to maybe replace the roof if I can just keep $20k in a savings account in case I need to replace the roof?
  - mb7733 3y ago
    First of all: the payout you get from insurance does not come only from the premiums you personally pay. If you make a claim, your expenses are covered by the pool of money of all customers, even those that do not make any claims. Second of all: when you take out an insurance policy and pay your first premium, you are immediately covered. If you are "self insuring" by setting aside the same amount monthly, it will take you a long time to even begin to accumulate enough funds to cover yourself in case of catastrophe. (And due to the first point, you may never reach that point.) Finally, yes, of course, there is no need to take out an insurance policy for a risk that you can afford to pay out-of-pocket. It's like how if you have the cash to pay for a house, there is no need to take out a mortgage.
jcims 3y ago
Because at the limit, the size of the pool is one...you.
- mb7733 3y ago
  Accurately pricing insurance doesn't reduce the size of the pool. When you buy insurance, you aren't just pooling risk with other customers with the exact same risk profile as yourself. You're pooling with all customers of the company. (Plus all customers of any reinsurance company, etc.)
  - rrix2 3y ago
    It's not being individually priced, people at higher risks are being forced out of their insurance options leaving only low-risk individuals priced in! Non-renewal isn't just some rate adjustment
    - pishpash 3y ago
      It is just a very high rate if they could charge it, but that's the point: when the uncertainty is nil, the premium will always be the replacement cost when the replacement is about to happen, so that there's no insurance. Put another way, if the insurance company isn't taking on any risk then you are.
    - maxerickson 3y ago
      Are there a lot of downsides to that for home/liability insurance? Obviously with something like medical insurance, where people often carry risks that are no fault of their own, there are downsides.
- maxerickson 3y ago
  It seems perfectly reasonable to treat someone taking singular risks differently than someone taking average risks.
- twoodfin 3y ago
  Exactly. And insurance is still a good deal even if the expected value for that one member pool is negative. In fact, insurance as a market doesn’t work unless the average customer loses out. This is not a bad thing!
pishpash 3y ago
The insurance paradox. If you can price every risk precisely, meaning the variance on your prediction is zero, there's no point to insurance because it would be the same as a savings account. There's no pooling of risk at all.
- edflsafoiewq 3y ago
  Even if you know the probability of an event precisely, you still don't know if it will actually occur. And even if you know it will actually occur, you still don't know when, so insurance still provides diffusion over time.
  - pishpash 3y ago
    There is no "diffusion over time" with variable premia and short terms. Insurance companies already know the probability of an event within a risk pool over a term. That's not what this is talking about. They are looking to condition on more and more information so as to slice a risk pool towards a 0-1 risk, which, because they are positive EV, will make their profit more and more certain. They are looking to eliminate the negative tail, the existence of which is the whole point of paying out that positive EV. In the end, this is going to happen. Insurance companies will be soothsayers and get paid for essentially making advisory predictions, not offloading risk, while society will have to agree to bear the cost of known outcomes over which people generally have no individual agency.
dragonwriter 3y ago
> Why would insurance being individually priced negate its value? Perfectly accurate insurance pricing would be for each policy to cost exactly the amount of covered losses in the period covered plus the overhead of managing the insurance, which obviously would be pointless.
- shepherdjerred 3y ago
  That wouldn't be pointless, because you would have a predictable expense instead of an unpredictable expense. What you're describing is actually the ideal scenario for both individuals and companies.
  - lamontcg 3y ago
    Yes, so the insurance company should underwrite your roof for a fixed cost (adjusted for inflation) on your home. After 20 years of paying into that pool they shouldn't be able to just drop you now that your roof is old and pocket all the money and walk away and leave you with a roof that needs replacement. What I'd expect is that you pay into the pool and then after 20 years you've more than paid for the new roof and so you get a new roof. It should be slightly stochastic financing of your new roof and since a roof has a finite lifetime there should be a new roof at the end of it. It shouldn't be "hey, looks like your roof is about to have issues now, and we only insure new roofs, thanks for the profits, byeeeeee...."
    - trogdor 3y ago
      Insurance protects against unexpected losses during the policy period. An insurance policy is not a home warranty. If your roof has a finite lifetime and is approaching the end of its life, the cost of insuring your roof will be close to the cost of a new roof. If your insurance company is not allowed to increase your rate to match your risk (which seems to be the case in California), they will drop you as a customer. Your previous premium payments insured against the risk of unexpected loss during those earlier policy periods only. They have nothing to do with your current insurance rate.
  - 3y ago

by mb7733 3y ago

gmd63 3y ago

Insurance incentives would drive them to want to predict as accurately as possible who is going to cost them money, and then deny them coverage. They make money from selling to people who are afraid of a calamity but likely won't experience one.

kjkjadksj 3y ago
Why are they in the business of denying coverage? They are insurance. They estimate their payouts from the entire pool and price your premiums accordingly. Paying out should therefore not really affect their bottom line if they price the premiums appropriately.
- gmd63 3y ago
  Home insurance companies are leaving Florida because it's not profitable to operate in an area with so much vulnerability to hurricane damage. Also, the only thing stopping medical insurers from denying coverage or increasing prices for people with pre-existing conditions is the Affordable Care Act.
  - t0mas88 3y ago
    There is an important additional factor, regulators are setting limits on rates / rate increases. Florida is not profitable with those limits. If the insurance companies are free to set any rate, they would happily cover a high hurricane risk area. You can get insurance on very risky things. The way it's done is high rates and "reinsurance" which means the insurance company shares the risk (and premium) with a pool of other insurance companies. For policies with a large possible payout (e.g. a big ship or aircraft) this is always done, to avoid issues for the insurance company that gets unlucky enough to have to pay out.
    - gmd63 3y ago
      Well apparently it's not hurricanes or regulation against accurate pricing, it's rampant fraud fueled by a state supreme court decision to incentivize winning cases for policyholders https://www.iii.org/press-release/triple-i-extreme-fraud-and-litigation-causing-floridas-homeowners-insurance-markets-demise-062322 https://www.iii.org/press-release/triple-i-extreme-fraud-and... "Florida, however, is the site of 79 percent of all homeowners insurance lawsuits over claims filed nationwide while Florida’s insurers receive only 9 percent of all U.S. homeowners insurance claims, according to the Florida governor’s Office."
  - imgabe 3y ago
    The whole point of insurance is that there is a relatively low probability of a relatively high expense event happening. In all likelihood, the thing won't happen to you, but if we all pool our money together and you are the unlucky person then you're covered. A pre-existing condition is not a low probability event. It is a 100% certainty that you have to pay for it. In that case the insurance is just a middleman who is increasing the cost of the thing you definitely have to pay for. You pay the insurance company, they take a cut, and they pay the healthcare provider. Why not just pay the healthcare provider directly?
    - gmd63 3y ago
      I imagine insurers are working very hard to identify which low probability events are likely going to happen for specific people. They might be doing detailed continual examinations of their homes for example.
- theptip 3y ago
  Tail risk / volatility.
imgabe 3y ago
At some point the cost of insurance would approach the cost of simply self insuring. Why should I pay the insurance company to maybe replace the roof if I can just keep $20k in a savings account in case I need to replace the roof?
- mb7733 3y ago
  First of all: the payout you get from insurance does not come only from the premiums you personally pay. If you make a claim, your expenses are covered by the pool of money of all customers, even those that do not make any claims. Second of all: when you take out an insurance policy and pay your first premium, you are immediately covered. If you are "self insuring" by setting aside the same amount monthly, it will take you a long time to even begin to accumulate enough funds to cover yourself in case of catastrophe. (And due to the first point, you may never reach that point.) Finally, yes, of course, there is no need to take out an insurance policy for a risk that you can afford to pay out-of-pocket. It's like how if you have the cash to pay for a house, there is no need to take out a mortgage.

jcims 3y ago

Because at the limit, the size of the pool is one...you.

mb7733 3y ago
Accurately pricing insurance doesn't reduce the size of the pool. When you buy insurance, you aren't just pooling risk with other customers with the exact same risk profile as yourself. You're pooling with all customers of the company. (Plus all customers of any reinsurance company, etc.)
- rrix2 3y ago
  It's not being individually priced, people at higher risks are being forced out of their insurance options leaving only low-risk individuals priced in! Non-renewal isn't just some rate adjustment
  - pishpash 3y ago
    It is just a very high rate if they could charge it, but that's the point: when the uncertainty is nil, the premium will always be the replacement cost when the replacement is about to happen, so that there's no insurance. Put another way, if the insurance company isn't taking on any risk then you are.
  - maxerickson 3y ago
    Are there a lot of downsides to that for home/liability insurance? Obviously with something like medical insurance, where people often carry risks that are no fault of their own, there are downsides.
maxerickson 3y ago
It seems perfectly reasonable to treat someone taking singular risks differently than someone taking average risks.
twoodfin 3y ago
Exactly. And insurance is still a good deal even if the expected value for that one member pool is negative. In fact, insurance as a market doesn’t work unless the average customer loses out. This is not a bad thing!

pishpash 3y ago

The insurance paradox. If you can price every risk precisely, meaning the variance on your prediction is zero, there's no point to insurance because it would be the same as a savings account. There's no pooling of risk at all.

edflsafoiewq 3y ago
Even if you know the probability of an event precisely, you still don't know if it will actually occur. And even if you know it will actually occur, you still don't know when, so insurance still provides diffusion over time.
- pishpash 3y ago
  There is no "diffusion over time" with variable premia and short terms. Insurance companies already know the probability of an event within a risk pool over a term. That's not what this is talking about. They are looking to condition on more and more information so as to slice a risk pool towards a 0-1 risk, which, because they are positive EV, will make their profit more and more certain. They are looking to eliminate the negative tail, the existence of which is the whole point of paying out that positive EV. In the end, this is going to happen. Insurance companies will be soothsayers and get paid for essentially making advisory predictions, not offloading risk, while society will have to agree to bear the cost of known outcomes over which people generally have no individual agency.

dragonwriter 3y ago

> Why would insurance being individually priced negate its value? Perfectly accurate insurance pricing would be for each policy to cost exactly the amount of covered losses in the period covered plus the overhead of managing the insurance, which obviously would be pointless.

shepherdjerred 3y ago
That wouldn't be pointless, because you would have a predictable expense instead of an unpredictable expense. What you're describing is actually the ideal scenario for both individuals and companies.
- lamontcg 3y ago
  Yes, so the insurance company should underwrite your roof for a fixed cost (adjusted for inflation) on your home. After 20 years of paying into that pool they shouldn't be able to just drop you now that your roof is old and pocket all the money and walk away and leave you with a roof that needs replacement. What I'd expect is that you pay into the pool and then after 20 years you've more than paid for the new roof and so you get a new roof. It should be slightly stochastic financing of your new roof and since a roof has a finite lifetime there should be a new roof at the end of it. It shouldn't be "hey, looks like your roof is about to have issues now, and we only insure new roofs, thanks for the profits, byeeeeee...."
  - trogdor 3y ago
    Insurance protects against unexpected losses during the policy period. An insurance policy is not a home warranty. If your roof has a finite lifetime and is approaching the end of its life, the cost of insuring your roof will be close to the cost of a new roof. If your insurance company is not allowed to increase your rate to match your risk (which seems to be the case in California), they will drop you as a customer. Your previous premium payments insured against the risk of unexpected loss during those earlier policy periods only. They have nothing to do with your current insurance rate.
- 3y ago