6 ms·

The math of insurance suggests that, if it needs to be widely carried (either due to things like mortgage requirements, or the simple realization most people do

by hakfoo 2y ago

The math of insurance suggests that, if it needs to be widely carried (either due to things like mortgage requirements, or the simple realization most people don't have enough resources to absorb a major catastrophe themselves), the most economical way to go is to have a single risk pool that's as broad and diverse as possible, so it can swallow a large clustered crisis more easily. Yes, this is a bit of robbing Peter to pay Paul. I always found it funny when insurance marketing talks about "personalized rates", when the goal is to DE-PERSONALIZE the risk. If you have 10,000 customers in Los Angeles, and 5 million elsewhere, you can either isolate the LA customers and charge them the "real" price of the risk, which will be unviable as a business and probably politically touchy too, or you can include them in the broad pool, and the people with a full-cinderblock home in a non-flammable state pay $20 more a year so the entire endeavour can work. The concept probably works better if you have some concept of social cohesion to lean on-- you might not get the best possible outcome personally, but the system itself is more robust for everyone.

roenxi 2y ago
What if Paul built his house somewhere less flammable? I see options here where Peter doesn't need to be robbed, he could pay a fair rate and Paul could make less risky decisions. If one pool of people are taking a bad deal vs the market rate when buying insurance then it isn't really insurance any more. It is a transfer payment a.k.a. welfare. Which is cool and all in the sense that welfare is a social tool that exists. But calling it 'insurance' is needlessly polluting the language. If people expect to hoover money off others then they should be charged more until the expected return of everyone in the insured pool is equal. If the payouts are going to be held equal in the event of a disaster then that means the price of insurance has to vary depending on the risk profile of the customers.
- snacksmcgee 2y ago
  The tricky thing about global climate change is the "global" part. Funny how that works.
  - fakedang 2y ago
    The LA fires aren't a climate fire though. For other disasters, while climate change is "global", the effects are pretty much localized and to various degrees. Some places have had adapted construction to those kinds of blue moon disasters since centuries, so why should they part with more money?
- throwawayqqq11 2y ago
  > It is a transfer payment a.k.a. welfare Its called solidarity and yes, it means some people NOT have to pay more but others recieve more. Paul AND Peter get the security of disaster coverage in exchange. This is what you pay for. A big risk pool and not your individual disaster recovery.
  - JoshTriplett 2y ago
    If you want "solidarity" you need a government service. Private insurance has every incentive to price things accurately and not subsidize higher-risk people. If you tell insurance companies what they have to charge, they have every reason to say "nope, I don't want to offer that service at that price, that doesn't make economic sense".
    - oytis 2y ago
      Insurance that is able to quantify risks precisely and set prices individually based on that is useless. If it has to make any profits - or at least pay salaries - it's guaranteed to be a bad deal for everyone. Whereas solidarity can bring a better society - which even those who have to occasionally pay more benefit from in the end.
      - roenxi 2y ago
        > If it has to make any profits - or at least pay salaries - it's guaranteed to be a bad deal for everyone. It is insurance. You pay money, the company takes away the risk. That doesn't make it a bad deal, that makes it a service. That is like complaining about a hypothetical garbage company that charges for taking away trash even though the trash might have some notional value. Insurance isn't an investment scheme. If you want to pay money for a positive-expected-value deal, go buy stocks and bonds.
      - purple_turtle 2y ago
        whole point of insurance is that you pay for avoiding risk in other words, you pay more than you would on average loss from bad events - but you avoid catastrophic losses that would break your life that is why insuring your phone is likely a bad idea (as you can pay for a new one) but liability insurance or insuring your home/flat may make sense > If it has to make any profits - or at least pay salaries - it's guaranteed to be a bad deal for everyone. paying 3k per year, to avoid 1% risk of 250k losses may be a good idea, especially if 3k loss is survivable without trouble and 250k loss would be more than 90 times worse.
logicchains 2y ago
This completely ignores incentives. If insurance isn't allowed to charge people more who live in fireprone or floodprone areas, more people will live in such areas, and overall society will have to spend more money rebuilding when disasters inevitably hit those areas. Personalised insurance pricing would allow insurers to charge much more to people living in such areas, which incentivises people not to live there. It's also a moral issue: if everyone pays the same rate, then people who did the right thing and chose to live in an area that wasn't fire or flood prone are subsidising people who did the risky thing.
- ashoeafoot 2y ago
  He wrote about risky business too https://substack.com/home/post/p-154965705 https://substack.com/home/post/p-154965705
- snacksmcgee 2y ago
  What about the people who drive cars, vote for more suburban sprawl, and actively work against reducing CO2 emissions? When are we going to charge them THEIR fair share?
- Ray20 2y ago
  > This completely ignores incentives. For socialists this is a goal, not an obstacle.
patmcc 2y ago
Except if insurance company A does that, insurance company B will call the full-cinderblock home and say "hey, we can save you $20". If it's a product you actually want everyone to carry (like health insurance) it should probably be the government offering it.
- 15155 2y ago
  Which implicitly means: "everyone must always pay into the government pool." If low-risk individuals are allowed to make their own choices, they will choose an insurer that caters to their group, thus depriving the government "option" of "premiums." Just like with school property tax vouchers: if people are allowed to directly appropriate the benefits of their funds, less "desirable" schools would receive less funding. Mandated government "insurance" is a form of welfare.
  - patmcc 2y ago
    >>>Mandated government "insurance" is a form of welfare. Yes? Of course? That doesn't make it a bad idea.
    - int_19h 2y ago
      It doesn't, but we really should stop calling that "insurance".
kgwgk 2y ago
> I always found it funny when insurance marketing talks about "personalized rates", when the goal is to DE-PERSONALIZE the risk. Actuarial science is not often associated with “fun” but they have been partying for centuries. “In 1662, a London draper named John Graunt showed that there were predictable patterns of longevity and death in a defined group, or cohort, of people, despite the uncertainty about the future longevity or mortality of any one individual. This study became the basis for the original life table. Combining this idea with that of compound interest and annuity valuation, it became possible to set up an insurance scheme to provide life insurance or pensions for a group of people, and to calculate with some degree of accuracy each member's necessary contributions to a common fund, assuming a fixed rate of interest.” > you can either isolate the LA customers and charge them the "real" price of the risk […] or you can include them in the broad pool Maybe you don’t understand that the insurance business is based on including everyone in one pool (so it can swallow a large clustered crisis more easily) AND charge them (more than) the real price of the risk.
- hakfoo 2y ago
  I understand. The goal is to make the biggest possible pool, which means a single, preferrably government-run carrier (to limit profit-maximization on a service that's more or less essential)
refurb 2y ago
By eliminating personalization you’re doing the same thing - removing price as a signal. It’s good when insurers personalize! Install screens to prevents embers from entering roof vents? Great. You should get a discount! It’s a win-win. Consumers are incentivized to take measures to reduce risk.
- HPsquared 2y ago
  A lot of the "big boy" insurance on ships etc actually have inspectors - they'll come and inspect your ship (or industrial plant etc) periodically to confirm it meets the agreed safety standards. And if it doesn't, no insurance! That really aligns incentives.
  - refurb 2y ago
    This is a good point. You also have insurance companies that will incentivize risk reduction by subsidizing alterations - if you clear any trees within X ft of home, they will give you $1000 towards it. But yes on the inspections. I’ve had home insurance inspections around electrical and plumbing. They wanted to make sure it was at code as it was an older home.
- kristjansson 2y ago
  And this is exactly what the new agreement b/w the insurance commissioner and providers does. Which went into effect ... Jan 1, unfortunately.
andy800 2y ago
you can either isolate the LA customers and charge them the "real" price of the risk, which will be unviable as a business NOT lining up the premium with the actual risk is what's non-viable.
Ray20 2y ago
> If you have 10,000 customers in Los Angeles, and 5 million elsewhere, you can either isolate the LA customers and charge them the "real" price That's the only way. > which will be unviable as a business and probably politically touchy too Why would it be? If you live in Los Angeles - doesn't mean you don't need insurance (even if it several times the cost of insurance in the safer areas). > or you can include them in the broad pool No, you can't. Your competitor who doesn't do this will offer cheaper insurance - because they doesn't distribute high risk of small group to everybody else. > the people with a full-cinderblock home in a non-flammable state pay $20 more a year so the entire endeavour can work. Why would they do that? 20 bucks is 20 bucks. > The concept probably works better if you have some concept of social cohesion to lean on You mean if you with totalitarian governance deprive people of the ability to choose? Yeah, that could work. I mean, that's how the gulags were justified.
- Folcon 2y ago
  I'm trying to understand how what you're suggesting is different from mandating everyone just get a personal savings account, where they must pay some specified minimum calculated to cover them in the event of a loss of their personal property? Are you saying that we should only pool risk between people in the same risk bucket? How do you aim to determine the resolution of that risk? Not to mention calculating it accurately?
  - 15155 2y ago
    > Are you saying that we should only pool risk between people in the same risk bucket? People should be free to make that choice even though it increases net costs for higher-risk or less-affluent individuals. > How do you aim to determine the resolution of that risk? Not to mention calculating it accurately? By allowing private actuaries to make these pricing decisions: skilled organizations will succeed, others will fail.
    - Folcon 2y ago
      I'm trying to work out how what you're describing works, first I have to understand you before I can form an opinion on it :)... Ok, I get how you want to value risk, independent actuaries. I suppose, there's some bias there as insurers might lean on them to adjust the risk to be more favourable to them and as they'll be repeat business, they're likely to comply, but let's assume we find some really honest ones. So given say a pool of people with similar risk profiles, say young professionals in high earning careers, and you calculate that they're effective risk is the same so you pool them together. Now, what do you believe an insurer would insure them against? And of the things, what would not take them out of the pool they've been placed in and put them into a different, perhaps smaller pool?
kilotaras 2y ago
> or you can include them in the broad pool, and the people with a full-cinderblock home in a non-flammable state pay $20 more a year so the entire endeavour can work And you immediately start loosing customers to insurers that either did the former or left LA alltogether. This changes $20 surcharge into $25 surcharge, causing more customers to leave, causing surcharge to increase and so on.

by hakfoo 2y ago

roenxi 2y ago

What if Paul built his house somewhere less flammable? I see options here where Peter doesn't need to be robbed, he could pay a fair rate and Paul could make less risky decisions. If one pool of people are taking a bad deal vs the market rate when buying insurance then it isn't really insurance any more. It is a transfer payment a.k.a. welfare. Which is cool and all in the sense that welfare is a social tool that exists. But calling it 'insurance' is needlessly polluting the language. If people expect to hoover money off others then they should be charged more until the expected return of everyone in the insured pool is equal. If the payouts are going to be held equal in the event of a disaster then that means the price of insurance has to vary depending on the risk profile of the customers.

snacksmcgee 2y ago
The tricky thing about global climate change is the "global" part. Funny how that works.
- fakedang 2y ago
  The LA fires aren't a climate fire though. For other disasters, while climate change is "global", the effects are pretty much localized and to various degrees. Some places have had adapted construction to those kinds of blue moon disasters since centuries, so why should they part with more money?
throwawayqqq11 2y ago
> It is a transfer payment a.k.a. welfare Its called solidarity and yes, it means some people NOT have to pay more but others recieve more. Paul AND Peter get the security of disaster coverage in exchange. This is what you pay for. A big risk pool and not your individual disaster recovery.
- JoshTriplett 2y ago
  If you want "solidarity" you need a government service. Private insurance has every incentive to price things accurately and not subsidize higher-risk people. If you tell insurance companies what they have to charge, they have every reason to say "nope, I don't want to offer that service at that price, that doesn't make economic sense".
  - oytis 2y ago
    Insurance that is able to quantify risks precisely and set prices individually based on that is useless. If it has to make any profits - or at least pay salaries - it's guaranteed to be a bad deal for everyone. Whereas solidarity can bring a better society - which even those who have to occasionally pay more benefit from in the end.
    - roenxi 2y ago
      > If it has to make any profits - or at least pay salaries - it's guaranteed to be a bad deal for everyone. It is insurance. You pay money, the company takes away the risk. That doesn't make it a bad deal, that makes it a service. That is like complaining about a hypothetical garbage company that charges for taking away trash even though the trash might have some notional value. Insurance isn't an investment scheme. If you want to pay money for a positive-expected-value deal, go buy stocks and bonds.
    - purple_turtle 2y ago
      whole point of insurance is that you pay for avoiding risk in other words, you pay more than you would on average loss from bad events - but you avoid catastrophic losses that would break your life that is why insuring your phone is likely a bad idea (as you can pay for a new one) but liability insurance or insuring your home/flat may make sense > If it has to make any profits - or at least pay salaries - it's guaranteed to be a bad deal for everyone. paying 3k per year, to avoid 1% risk of 250k losses may be a good idea, especially if 3k loss is survivable without trouble and 250k loss would be more than 90 times worse.

logicchains 2y ago

This completely ignores incentives. If insurance isn't allowed to charge people more who live in fireprone or floodprone areas, more people will live in such areas, and overall society will have to spend more money rebuilding when disasters inevitably hit those areas. Personalised insurance pricing would allow insurers to charge much more to people living in such areas, which incentivises people not to live there. It's also a moral issue: if everyone pays the same rate, then people who did the right thing and chose to live in an area that wasn't fire or flood prone are subsidising people who did the risky thing.

ashoeafoot 2y ago
He wrote about risky business too https://substack.com/home/post/p-154965705 https://substack.com/home/post/p-154965705
snacksmcgee 2y ago
What about the people who drive cars, vote for more suburban sprawl, and actively work against reducing CO2 emissions? When are we going to charge them THEIR fair share?
Ray20 2y ago
> This completely ignores incentives. For socialists this is a goal, not an obstacle.

patmcc 2y ago

Except if insurance company A does that, insurance company B will call the full-cinderblock home and say "hey, we can save you $20". If it's a product you actually want everyone to carry (like health insurance) it should probably be the government offering it.

15155 2y ago
Which implicitly means: "everyone must always pay into the government pool." If low-risk individuals are allowed to make their own choices, they will choose an insurer that caters to their group, thus depriving the government "option" of "premiums." Just like with school property tax vouchers: if people are allowed to directly appropriate the benefits of their funds, less "desirable" schools would receive less funding. Mandated government "insurance" is a form of welfare.
- patmcc 2y ago
  >>>Mandated government "insurance" is a form of welfare. Yes? Of course? That doesn't make it a bad idea.
  - int_19h 2y ago
    It doesn't, but we really should stop calling that "insurance".

kgwgk 2y ago

> I always found it funny when insurance marketing talks about "personalized rates", when the goal is to DE-PERSONALIZE the risk. Actuarial science is not often associated with “fun” but they have been partying for centuries. “In 1662, a London draper named John Graunt showed that there were predictable patterns of longevity and death in a defined group, or cohort, of people, despite the uncertainty about the future longevity or mortality of any one individual. This study became the basis for the original life table. Combining this idea with that of compound interest and annuity valuation, it became possible to set up an insurance scheme to provide life insurance or pensions for a group of people, and to calculate with some degree of accuracy each member's necessary contributions to a common fund, assuming a fixed rate of interest.” > you can either isolate the LA customers and charge them the "real" price of the risk […] or you can include them in the broad pool Maybe you don’t understand that the insurance business is based on including everyone in one pool (so it can swallow a large clustered crisis more easily) AND charge them (more than) the real price of the risk.

hakfoo 2y ago
I understand. The goal is to make the biggest possible pool, which means a single, preferrably government-run carrier (to limit profit-maximization on a service that's more or less essential)

refurb 2y ago

By eliminating personalization you’re doing the same thing - removing price as a signal. It’s good when insurers personalize! Install screens to prevents embers from entering roof vents? Great. You should get a discount! It’s a win-win. Consumers are incentivized to take measures to reduce risk.

HPsquared 2y ago
A lot of the "big boy" insurance on ships etc actually have inspectors - they'll come and inspect your ship (or industrial plant etc) periodically to confirm it meets the agreed safety standards. And if it doesn't, no insurance! That really aligns incentives.
- refurb 2y ago
  This is a good point. You also have insurance companies that will incentivize risk reduction by subsidizing alterations - if you clear any trees within X ft of home, they will give you $1000 towards it. But yes on the inspections. I’ve had home insurance inspections around electrical and plumbing. They wanted to make sure it was at code as it was an older home.
kristjansson 2y ago
And this is exactly what the new agreement b/w the insurance commissioner and providers does. Which went into effect ... Jan 1, unfortunately.

andy800 2y ago

you can either isolate the LA customers and charge them the "real" price of the risk, which will be unviable as a business NOT lining up the premium with the actual risk is what's non-viable.

Ray20 2y ago

> If you have 10,000 customers in Los Angeles, and 5 million elsewhere, you can either isolate the LA customers and charge them the "real" price That's the only way. > which will be unviable as a business and probably politically touchy too Why would it be? If you live in Los Angeles - doesn't mean you don't need insurance (even if it several times the cost of insurance in the safer areas). > or you can include them in the broad pool No, you can't. Your competitor who doesn't do this will offer cheaper insurance - because they doesn't distribute high risk of small group to everybody else. > the people with a full-cinderblock home in a non-flammable state pay $20 more a year so the entire endeavour can work. Why would they do that? 20 bucks is 20 bucks. > The concept probably works better if you have some concept of social cohesion to lean on You mean if you with totalitarian governance deprive people of the ability to choose? Yeah, that could work. I mean, that's how the gulags were justified.

Folcon 2y ago
I'm trying to understand how what you're suggesting is different from mandating everyone just get a personal savings account, where they must pay some specified minimum calculated to cover them in the event of a loss of their personal property? Are you saying that we should only pool risk between people in the same risk bucket? How do you aim to determine the resolution of that risk? Not to mention calculating it accurately?
- 15155 2y ago
  > Are you saying that we should only pool risk between people in the same risk bucket? People should be free to make that choice even though it increases net costs for higher-risk or less-affluent individuals. > How do you aim to determine the resolution of that risk? Not to mention calculating it accurately? By allowing private actuaries to make these pricing decisions: skilled organizations will succeed, others will fail.
  - Folcon 2y ago
    I'm trying to work out how what you're describing works, first I have to understand you before I can form an opinion on it :)... Ok, I get how you want to value risk, independent actuaries. I suppose, there's some bias there as insurers might lean on them to adjust the risk to be more favourable to them and as they'll be repeat business, they're likely to comply, but let's assume we find some really honest ones. So given say a pool of people with similar risk profiles, say young professionals in high earning careers, and you calculate that they're effective risk is the same so you pool them together. Now, what do you believe an insurer would insure them against? And of the things, what would not take them out of the pool they've been placed in and put them into a different, perhaps smaller pool?

kilotaras 2y ago

> or you can include them in the broad pool, and the people with a full-cinderblock home in a non-flammable state pay $20 more a year so the entire endeavour can work And you immediately start loosing customers to insurers that either did the former or left LA alltogether. This changes $20 surcharge into $25 surcharge, causing more customers to leave, causing surcharge to increase and so on.