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Wouldn't an efficient insurance market be worthless since the expected net payout for everyone insured would trend to zero?
by harimau777 3y ago
Wouldn't an efficient insurance market be worthless since the expected net payout for everyone insured would trend to zero?
- jfim 3y agoThe EV of insurance is negative, in the sense that the expected money that one can expect to get out of insurance is less than the premium. Insurance is for catastrophic losses. I don't pay for insurance to make a profit, I make it to avoid the large tail loss of having the house destroyed and having to pay the value of the mortgage to the bank.
- aqfamnzc 3y agoNo, it's still very valuable since I'll never have to pay out of pocket for that million-dollar incident. The point isn't to save money, it's to distribute the incident payments over a long term.
- dannyw 3y agoGenerally insurance premiums are invested into relatively safe assets, like bonds, which yield quite a bit right now.
- tptacek 3y agoThese kinds of questions are a little mind-binding. Insurance is a financial services business. If the net EV of insurance was positive, how could any insurer remain solvent?