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In extreme cases forcing too much pooling can cause market failure. The intuition is that the least risky customers decline to purchase (much) insurance, makin
by ls612 3y ago
In extreme cases forcing too much pooling can cause market failure. The intuition is that the least risky customers decline to purchase (much) insurance, making the average risk higher, increasing prices, making more people decline insurance, in a vicious cycle. It’s fundamentally similar to Akerlof’s market for lemons.
- brogrammernot 3y agoThis is always a fun topic for me. If everybody is sharing all the risk that’s the same thing (obviously I’m being simplistic) as them underwriting the risk themselves.
- lazide 3y agoThey’re opposites though? Someone underwriting their own risk might as well not have actual insurance, as they’re just on the hook for actual damages correct? So if they get sued for $1M, then they are on the hook for $1M (as an individual). If everyone is sharing the risk, then everyone is on the hook for $1M/number of people. So the individual that gets sued for $1M in a large state, might only be on the hook for a couple cents for their own lawsuit. Though they’d also be in the hook to the same degree for some other asshole getting sued. Which is why insurance creates moral hazard (for things someone can control), and reduces catastrophic damage to individuals (for things someone cannot control).
- deleted 3y ago[deleted]