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Insurance can provide value even when risk is assessed perfectly! If everyone has a 1 in 100,000 chance of a $100,000 damage incident, they will have to keep $1
by spoonjim 3y ago
Insurance can provide value even when risk is assessed perfectly! If everyone has a 1 in 100,000 chance of a $100,000 damage incident, they will have to keep $100,000 of savings to make sure they can avoid becoming homeless from an accident. But by paying $1.25 in insurance, (25% profit to the insurer), they can use their $100,000 for other purposes and generate much more than $1.25 in income from it.
- toss1 3y agoNot Quite - only if risk is spread across the whole pool does it provide the value you describe. If risk is assessed perfectly, they know that Alan's & Charles' houses will not have a fire, but Bob's house will burn. Alan and Charles (and all the others) pay only the $0.25 overhead/profit, while Bob must pay the $125,000 ratings +profit. Insurance basically disappears, as it adds no value, and we go back to being self-insured.