- Some events are low probability but high cost. You're unlikely to crash your car, but if you do, it might cost you a heck of a lot to fix. Nearly everyone is in this situation, so it makes sense for everyone to pay a little at a time and give that pot to whoever ends up crashing.
- The insurance pool cares about the average outcome, ie average cost. They need to collect more than this. The insurance buyer cares about the extreme case, where they end up crashing. So in there we have space for a trade. Yes they care about the extremes too of course, since they wouldn't want a bunch of payouts at the same time, but that's something actuaries have thought extensively about.
- You want people in the pool to be similar risks. If they aren't and they know they aren't the low risk people will decide they don't need to insure, leaving everyone else with a higher average cost. Also, the high risk people will see a good deal and join. Adverse selection.
- If the thing you're insuring isn't a catastrophic cost, you're less likely to want to pay over the odds. Maybe your £200 phone doesn't need a £30 annual insurance, because you have lots of money to buy a new phone. If you're really rich maybe that car crash scenario doesn't matter for you either (but of course there are laws about insurance).
- The insurance company holds a free float. All the premiums are coming in, but only pay out now and again. That gives some room for investing the free float.
Yes, and I sometimes think about the inverse - that people like to hate on lottery players (which I'm not) with a clever sounding argument like E[X] < 1, so don't play, you'll lose.
But this fails to acknowledge the harder to model 'but I can pay £1 to play, I won't miss it, who cares, it's insignificant, and on the tiny chance I win, the win is significant'. I.e. 'but Var[X] is massive'.
You have a coin, and each time you don't get heads the payout doubles. Get heads and get the payout. What do you pay to play this?
It turns out that you can't work out an E[X] for this, as it's a series that doesn't converge. But also if you go around and ask people what they'd pay, surprisingly they don't say infinity. Expectation is thus not the last word in decision making.
Turns out utility is a thing that matters, and we can come up with some thoughts on it (von Neumann-Morgenstern etc).
I'm not sure it's that surprising, the expectation is only infinity if you think the person making the payout has the capacity to pay an infinite amount. The second you think this amount is finite (which must always be the case in reality), then the expectation becomes finite and probably quite small.
I agree in the more general point, expectation is not always the best tool for extremely rare / extremely significant scenarios.
In general money has a diminishing utility, your first dollar is worth more to you than your millionth dollar. In order for it to be worth it to play a -EV lottery not only does you utility graph need to be nonlinear, it cannot decrease monotonically. At some point your nth dollar needs to be worth more (to you) than your first dollar. For example, you have one dollar and a life saving drug for your terminal disease costs 1 million dollars. You would see a sudden spike in utility at the 1 million dollar mark. It would be rational to play the lottery in this case.
Another possibility is that the event of winning money or even just the thought of possibly winning that money gives you more value than simply having the money alone, and this tips the scale. This would be like the opposite of insurance. For some people the experience of losing, or worrying about the possibility of losing money is so negative that it still makes it worth it to buy insurance.
Your millionth dollar might have less marginal utility, but you were never going to win 10^6 -1 dollars anyway. So really to consider marginal utility you need 'margins' as wide as the payouts. (Really stretching/breaking the meaning of marginal, but hopefully you see what I mean.)
There is also time. You may be able to afford the lawsuit that will come from the owner of the car you wrecked. But having your insurance company handle that, something they have developed expertise in, can be worth the cost.
I think that is not necessary, and is a choice we have to make for our society.
For example, for health, do we want "sicker" persons to pay more, leaving healthy people the choice to not pay ? Or should we make it mandatory for everyone to pay what they can afford, and insure everyone, even high risks people ?
For cars, it might be a little different, but I think I'd rather have a system where everyone pays the same, and insurance is mandatory (although it's not as critical as health care).
"Sorry to hear you got cancer, here's your cheque. Please don't bother us anymore, as we terminate our contract. All the best."
Health care is more like a flatrate plan where some people receive much more intensive service.
Really the issue is people with incurable conditions. Universal health care is there for them. Private insurance fucks them over.
When you're young you want to think only abt yourself, when you're old you want younger people to think abt you so :D
But for geico (primarily auto), where’s the float? I thought it was like a pyramid scheme: this years payments pay out this year’s claims. There would be minimal float for the future except to cover black swan events like a hurricane hitting a state every 10 years, and that might be what Reinsurance is for (something else BH does a lot of, and probably self-deals a lot). Float would be great for the insureco, but any insurer charging anything more annually than average annual claims will lose all their business.
What are you basing the assumption that insurance companies are working with low margins on? There are many competitors, sure, but what reason is there to believe that they must compete on price?
And yet my car insurance quotes only ask me my age, gender, and what car I drive. They presumably also use my history of car accidents, serious legal issues like DUIs, and car insurance claims (all nonexistent in my case) as input. This strikes me as a comically low amount of information to place me in a risk pool.
https://en.wikipedia.org/wiki/Redlining
https://web.archive.org/web/20170317143050/https://fairhousi...
If you try to ise 10 pieces of information with 10 possible values each, that could give you 10 billion risk pools, i.e. individual person. Alternatively 33 Yes/No questions alsp let you identify an insividual person on planet earth.
Having "individual" insurance has no real meaning, because at that point its not spreading risk.
- That bit of info you give can be used to infer other info. Also it's possible those first three things explain most of the variation. We've all heard that young men in their 20s crash their cars a lot, I get the feeling it's true though I've never checked.
- You only need the risk groups to be granular enough that it isn't totally obvious that people are different risks (footballers and grannies).
But I don't think there is any solution. The further out on the "tail" you go, the more the total risk depends on the accuracy of information and assumptions you have. If there is an extremely large potential loss that is extremely unlikely, then the average becomes unknowable since the probability estimate in particular could be off by orders of magnitude. Nuclear power plants would be sort of the archetype of that, I think.
I mean, I reason like this to justify what I actually observe - that insurance companies don't want to insure things without strict limits. Despite reinsurance existing.
Isn’t that pretty much handled by reinsurance?
In the U.S. at least, you don't need to insure your own car. You just need liability insurance that will pay out to someone else if you're at fault in an accident.
That's why Buffet bought National Indemnity, btw. He wanted the float which, for him, was a cheap way of financing investment.
Not a very folksy move, truth be told.
Since I started driving in CA, I always felt the rate was to high for minimum auto insurance.
The big players have had some competition with pay per mile, but you need a computer connection to use the service, and even then it's gimmicky.
I have been told the Insurance Lobby in Sacramento basically runs the show. They give politicians a lot of money.
I can't prove collusion, but mandatory insurance seems wrong.
And yes--there will be the obligatory story about the uninsured driver, but 15k, 30k, 5k liability doesn't cover much. So little why mandate it?
I would like to see large economy's, like CA, self insure. I bet we could pull it off, and rates might be halfed?
Be it auto, homeowners, etc., I don't think insurance should be mandated, especially for profit.
Generally, it's a better deal to stick with the insurance. The real killer for a car accident is if there is a lawsuit and the insurer can do those much more cheaply than you can.
I do not know how it works in the USA. But in Spain the mandatory insurance is for 3rd parties, for the damage that you may cause to others.
It has historical roots. A driver will crash their car and damage or kill others. That driver has no insurance and no cash. So the victims are left with high costs and probably in poverty. Mandatory for 3rd party insurance assures that when that happens, the victims can collect some money that will alleviate their economic situation.
Selby train crash - a car derailing a train - was £20m!
(Also I’d wager that more people have only the legal minimum liability than not, which even in CA is $5k property, $30k injury)
Is it cheaper to sue and recover money over there / do people actually expect to recover $1M from individuals? Or is it that governments require insurance companies to offer the higher limits to cover actual damages?
(FYI, the real steak and potatoes in that industry is life insurance policies. They can make more on that than anything else combined.)
Capped liability seems stupid to mandate.
In the Netherlands, liability insurance is mandatory and uncapped. The insurance company will pay, and then do their best to recover money from you. It doesn't take you of the hook. It just ensures the hurt party gets their payout immediately and unconditionally.
That seems like a better system than what you described.
If I crash into your $1m stained glass car, that should be mostly your problem. The highway is not a place to store your work of art.
If I sensibly drive a $5k used Toyota that’s easily repairable, that should be good for my insurance, not yours in the way of lower liability premia.
Maybe make it like « the car needs a new paint job, here’s your $1k cheque, we don’t care how difficult the manufacturer made it for you to repaint it. If that’s a problem for you, decide better on your next auto purchase. ». But then insurance adjusters would be out of business and half the reason for insurance, having someone else figure out for me what the damages are so I don’t get screwed, has just disappeared.
Capped coverage does not mean that’s the max a hurt party is able to get, just the max a particular policy will cover per incident. The hurt party’s insurance generally advances any cost they incur immediately as needed and their insurance company recovers the money from the at fault party.
The caps are an important part of the policy because the policy holder can balance the risk of how likely they will be in an at-fault incident and how much that will end up costing total.
- in case of personal injury, €1 200 000 per victim or €6 070 000 per claim, whatever the number of victims
- in case of material damage, €1 220 000 per claim, whatever the number of victims
The TAC charge being a form of third-party insurance and mandatory commonly misleads people into thinking that what’s normally called “third-party insurance” is mandatory, but as you say, it’s not.
You are just insuring your own property and for any damages the insurer will just go after the party at fault if it isn’t you (or “you” as defined in their policy wording). Pretty simple way to keep rates down the r profits up for insurers.
Which is first party insurance.
Like OP says, you should only buy insurance if it’s worth it. I never had an accident in 10 years of driving so I probably would not pay for insurance if I didn’t have to.
Now, if my record wasn’t so clean, I probably would pay voluntarily.
This means that now I pay a little bit but crash-prone people pay less.
…ideally.
Second, it's mandatory because otherwise the incentives don't really line up, especially psychologically, for a lot of people.
After all, the point isn't just to insure yourself, it's also to insure against damage to other property or bodies than your own. If you're poor, old, sick, and drive a worthless car, you wouldn't be so much incentivised to carry insurance to pay out damages when hitting an expensive car another person. It could very well be that without mandatory insurance you'd have all kinds of damages on the road that would never be compensated due to the financial situation of the driver.
> And yes--there will be the obligatory story about the uninsured driver, but 15k, 30k, 5k liability doesn't cover much. So little why mandate it?
You may say 'but it's a small amount so who cares', but that's a bit silly. Either make the argument that the premiums/coverage are too low, or too high, you can't do both. If it'd make sense for $300k coverage but not for $30k, then you'd have to be making the argument that minimum insurance premiums should 10x, not to go away completely.
Self-insure is no magic panacea. For one it typically involves putting up a bunch of cash in a no/low-return bond, typically averaging around 50k, which has opportunity costs (in the form of returns on investment) that aren't too dissimilar from just paying out an insurance premium. After all, if you take the S&P500 returns, cut it by 50% for good measure, you're still at 2.5k a year in opportunity costs, which is a multiple of the average annual car insurance in California.
This idea that rates would be halved comes completely out of nowhere, says who? Hell, insurance companies are de facto law firms, which take much of the headache of many claims out of your hands, and efficiently because it's their bread & butter, and with much more power. Not cheap or fun doing that yourself.
Insurance isn't perfect and the article's discussion on over-insurance is valid, but a lot of insurance packages (if properly negotiated) are actually quite competitive and efficient.
Where mandatory insurance completely sucks is differentiation. For example, if you drive 5% of the average rate, you're overpaying massively. If you're driving in a village with 5% the amount of traffic and lower loss probabilities, you're overpaying massively. But states with self-insurance suffers from the same issues lacking differentiation. It's at the end of the day a data issue you have to solve, regardless of whether you insure yourself or purchase insurance.
Another place is where you really just don’t care about the marginal extra cost for the peace of mind you get, which I believe is what most people consider when taking the majority of the insurance especially stuff like rental cars.
Most major credit cards come with a good amount of rental car insurance.
One of the few cards that provides primary rental car insurance is the Chase United Explorer card. If you rent cars regularly it can be worth the annual fee for that feature alone.
(Assuming you have car insurance to begin with -- if you don't, then there is no difference between primary and secondary coverage)
Here in Europe, for almost all car rentals the maximum you will pay even if you rear end another car is around €1500 (may be higher depending on the class of the car). However as I understand, they are well within their rights to charge you that even for a tiny mark on the bumper.
It is mandatory for all vehicles (rental or not) to have insurance that covers damages to the other party in the event of a RTI - this is on the responsibility of the vehicle owner and covers anyone authorised to drive it. We don't have crazy medical bills so this is usually quite cheap (I pay €120/year). This covers everything, so if you hit a brand new Rolls Royce which ends up being totalled you aren't on the line to pay anything extra. Of course you will need to pay to fix your car.
There is also comprehensive insurance that covers damages to your own vehicle. This takes into account your driving experience and value of your car, so can range from a few hundred to thousands (I pay €600/year for a 12yo Toyota). If I decide one day I feel like driving into a tree, I just need to pay a €100 access fee and the insurance company will fix my car.
The €1500 is the equivalent of that access fee. Paying for the extra rental insurance reduces how much of that €1500 you need to pay (well, I think you still need to pay, but can claim it back). There is also third party car rental insurance providing the same cover, which last time I took it, was something like €50/year.
My perception is that the rental companies are incredibly vigilant about minuscule scratches - my concern would be being charged €hundreds for a tiny scratch caused by a chipped-up stone. I wonder if the companies providing excess insurance are able to negotiate more robustly with the rental companies than the typical private individual?
As an insurance company, I might handle thousands of cases like that a year. It makes financial sense to set up a way to efficiently get rid of those, and once I have that set up, it stops making sense for the car rental place to try to get me to pay. They know I'm just going to sue them. They probably still try, and then voluntarily drop it as soon as they see a response from another insurance company.
Plus I strongly suspect part of the reason they're so stringent about scratches is to push people into paying for the insurance. If someone is already using another insurance company, they're going to be harder to convince to use your insurance than someone who simply has no rental insurance.
Of course, there’s no peace of mind unless you think the insurance is likely to be a better deal for you than just saving the premiums yourself, right?
Peace of mind is about no longer fearing. If my phone were insured, I would dare walk around with it outside of a case. That would give me peace of mind.
Insurance makes people less worried. Both because of financial risk, aswell as some insurance companies also handling the fallout.
Besides that, insurance is paying for risk reduction. Lower risk, in and off itself, gives peace of mind. Not everyone has the same risk tolerance.
For everything else I almost never purchase insurance because I know I will get out ahead. I especially am always surprised that people buy the $20 travel insurance airlines sell at checkout. But for someone who flies once or twice a year, maybe the peace of mind is worth it.
People often purchases based on emotion and insurance is no different.
Don’t most insurance T&Cs require you to disclose known risks like having “butter fingers”? I was going to say I was playing the devil’s advocate, but really I’m not, since I’m personally on the hook for other people’s undisclosed risk through my own insurance.
- More than 90% of insurers in one recent industry survey stated that “exclusions or limitations” are a “methodology for recovery.” Translation: that means they’re expecting not to pay you.
- The Chief Risk Officer of a super-large multinational recently commented that his team realized that they weren’t adequately accounting for the true cost of their insurance policies, as they weren’t including the cost of suing their insurance providers to make sure they actually paid.
- Eliot Spitzer went after the insurance companies in 2005 for “contingent commissions,” which were basically a gray-area form of kickbacks buyers didn’t know they were paying. People paid fines, practices became illegal... Until 2010, when contingent commission became legal again.
There is a lot more I can say about the incredible percentage of your policy that goes into marketing/admin/etc rather than, you know, insuring risk, and so on... If you’re interested in working on something big and meaningful to help protect billions of under- and non-insured people against catastrophic risk, send me an email: numair@numair.com
I'm disabled, Achondroplasia. Insurers in my country have constantly denied me health insurance. I have documented at length my ordeal with top health insurers in the country, Who are in partnership with leading international insurers[1]. Now there is 100% FDI for the insurance industry.
I've appealed to the regulatory body with each instance, But they always side with the insurance company as the former close my requests under totally different pretext (never mentioning that they denied me a policy) e.g. My complaint is that insurer not providing me the policy, Insurer responds to my complaint as 'Your refund will be processed in 10 days' and my regulatory body closes my complaint as 'Insurer has responded'.
This in-spite of clear supreme court verdicts in similar previous cases asking the insurance regulator to ensure disabled are not denied policies.
[1] https://abishekmuthian.com/insurers-are-putting-the-lives-of...
P.S. I will update some latest developments to the blog tomorrow where a insurer asked me to lie about my disability to get the policy.
I don't know about your legal system but in Spain at least it must be proved by the insurer that if you lie about a previous condition that lie is directly related to the payment they are trying to deny you.
https://www.cbc.ca/news/canada/british-columbia/retired-coup...
https://www.cbc.ca/news/canada/british-columbia/hefty-medica...
Here, I'm 100% certain that those who have significant per-existing illness have lied about it to get their policy. But the thing is, I feel the insurers want us to lie so as to deny the claim.
That's why I didn't lie about my per-existing illness to any of the insurers and so got my policy rejected by a clerks based on a business policy, not science.
To add an anecdote to this, I have a friend who used to work for an insurer and now works in reinsurance and regularly jokes that everytime an insurer pays somethings, someone is getting fired.
This is ihmo one of if not the most dishonest field of work in the modern world.
There are some companies addressing this problem for consumers.
Look at Lemonade.com, they do not benefit from not paying out as their margin is fixed or Laka.co makes money when claims are paid.
(Disclaimer: I work for Laka)
Lemonade isn’t fixing anything for consumers except maybe UX.
If there is one thing I’ve learned over decades of startup and corporate experience, people that sell on ‘transparency’ are generally full of shit.
Lemonade reinsurers the vast majority of the risk. Their historical profitability will determine what reinsurers charge them (which is a premium). Basically all of their risk (75%) is reinsured.
If/when reinsurers tire of thin margins and high volatility, they'll hit Lemonade with a rate increase. Lemonade can either retain more of the risk, or pay the reinsurance premiums. The additional capital required to do that will either come from policyholders or shareholders.
To some extent, you get what you pay for, also.
The expense ratio is something like 30 to 40 percent of premium on commercial policies in case anyone was wondering. This figure is found on annual reports.
I'm not sure if insurers should be blamed for that though. Economically, that can be explained by the concave shape of consumers' Von Neumann Morgenstern utility curves describing their degree of risk aversion. It reflects their willingness to pay for a trading an uncertain outcome to a certain one.
If insurance prices change with people's preferences, that's a strong signal the market doesn't have enough competition.
It definitely makes sense if you've got a good emergency fund, but I come from a background of people where cash savings are limited and all their money is in the big purchases (house, car etc.) and work in minimum wage jobs
A £7000 floor flooding scenario would almost certainly put them into hardship without insurance...
The problem with floor flooding is it isn’t the floor that was flooded. The floor is just a symptom. The whole house needs to be stripped and dried after a flood, during which time the house is inhabitable.
No it didn't. The article just gave an example of one financial situation (income + savings) and examples of potential loss events, and showed how to reason through that. It didn't assume that example applied to everyone.
The article is written according to basic principles in a way that it's pretty easy to apply it to other examples or in fact your own financial situation.
As you earn more, and get room to save, you get the option to forego insurance.
When it comes to something like a phone, I just figure 'it's a risk I am willing to take'.
Just a reminder that Europe is not a country, and this statement is not accurate for many Europeans. It's perfectly fine to say this about a country in which you understand the system, but this doesn't even apply to all EU countries, let alone the continent.
(Or about any continent, obviously.)
I feel like the option to insure a phone is a money grab.
An add-on that allows you to upsell a bit more.. it seems like a thing nobody should need.
Same for insuring against have to cancel you vacation.. nobody should ever do that.
But people do, probably because there is a checkbox at checkout that allows you to easily add an "insurance".
I also don't have a separate coverage plan for my phone but my phone, alongside with my computers, TV, etc, are covered by my home insurance. Granted, the deductible is 150 € but it's quite a lot cheaper than replacing the screen on my iPhone 11 Pro, which is about 310 €. And I don't really even want to guess how much it'd be if I spilled a drink on a laptop. And of course, the most important part is that if there's a fire or a pipe breaks, the home insurance also covers that part. And the premium is also only 190 €/year, so I think it's pretty well worth it.
Additional insurance coverage is then against accidents that you yourself cause, vandalism, fire, animal damage, parking mishaps, windscreen damage and so on.
House - as that would be a huge surprise bill. I dont bother with contents. It would suck replacing everything but you can do that over time and much on the cheap. House you cant.
Car - I get comprehensive for 2 reasons. Its good to be able to let friends/family grab the car when visiting and more importantly there is potentially huge liability as while I drive a cheaper car, what happens if you get unlucky and are at fault with a top end Lamborghini etc.
TPD: If Im disabled I want a payout to help life and this comes fairly cheap as part of our super in Australia.
As for their advice: "set the highest possible excess for your insurance" I used to do this as I'm happy to pay a some hundreds to fix something on the car and not deal with insurance but for some years it doesn't seem to make and significant difference when I play around with high thresholds.
And some missing advice is credit card insurance. A bunch of cards will give you 3 months insurance on new purchases and travel insurance. If you're financially responsible it makes sense to use a low fee credit card and get those benefits so if you do drop that new phone 2 months in your covered.
That would be liability insurance, not comprehensive, wouldn't it? Comprehensive insurance covers damage to your car (could be glass, vandals, natural events, hitting something with your bumper, etc.)
Dont some companies have conditions which say only the people who are on the policy can drive the car?
They’re taking risks with the expectation of upside. They are not doing so hedonistically. If you remove the hedonistic part of the definition of gambling, every human activity involving uncertainty—from getting in a car to changing pet food brands—becomes gambling. That isn’t a useful definition of the word.
In gambling you bet $10 in the hope you'd win $100, if you don't, you'll be very unhappy.
In insurance you pay $10 understanding you may otherwise lose $100, but whether it happens or not you're now quite indifferent to. I'm not happy or sad if I pay premiums for years without necessity, nor happy or sad if I pay premiums and I am covered by insurance when a loss event happens. I'm not gambling in the hopes of a potential event that occurs, or doesn't occur, I'm insuring so that I'm indifferent.
Gambling increases risk, insurance decreases it. The Expected Value (EV) of spending $10 to have a 10% chance of winning $100, vs spending $10 to prevent a 10% chance of losing $100, might be exactly the same, but the risk is entirely different. In case A there's 9 losses (cost>EV) and 1 win (cost<EV), in case B the cost=EV every single time, that's what it means to reduce risk. It's very different from gambling in that sense.
The above is a quote from the Wikipedia article. I suspect that with interest rates at an all time low, the environment is not exactly ripe for this kind of insurance model.
almost like clockwork every 2 years since my phone breaks somehow. dropped it off a climbing wall, software boot loop, smashed it on the pavement etc. warranty company sends me a check for the amount I originally paid for that phone, and I buy a new $800 top of the line phone, with a new policy
no idea why this makes sense to them, or if I'm just unusually prone to breakage
In the EU the standard warranty is 2 years, so if there's a software boot issue you'd be covered without insurance, too. But you wouldn't get a new phone or a cheque, you'd typically get to send it in for repairs and be without your phone for two weeks (which is kind of unheard of for many people nowadays, plenty of people I know don't even have a computer anymore. All banking, voting, taxes, booking flights, booking gym classes, work calls etc, is all dependent on that phone), then get back your 2 year old phone that afterwards often gets replaced a year later anyway due to it getting old. Same with if your screen breaks -> send it in for a replacement through a crappy company.
And some insurance companies will only pay-out 'residual value', after all you're not insuring depreciation. So you'd get back what the 2nd hand value pre-breakage would've been...
Add a deductible and people often don't even bother with an old phone.
I took it to the Apple Care team anyway, and they diagnosed it for over 2 hours before finally telling me that one of the RAM modules was faulty, but it wasn't an easy repair because it was soldered to the mobo. They gave me a quote to replace the mobo on the spot.
It was around $900 and had a lead time of a few weeks, so I said I couldn't afford to wait that long. Even though my Apple Care was out of date, they gave me around a 25% discount on a brand new MacBook Pro 15". I was shocked because that's more than I ever paid on Apple Care. And had I walked away at that point, the Apple Care team would have spent 2 hours diagnosing my 3.5 year old broken MacBook for free just because it had Apple Care at some stage.
Apple Care is a user experience, not necessarily just an insurance plan. I wish my car insurance were like that.. Someone rear ended my fairly new car the other day and it has been in and out of repair shops for 8 months with recurring quality problems. I would have loved if I could have said to the insurance company: please, fix up my old car, private sale it for the best price and get me a new one at a discount straight away. I'll pay the difference.
The discount is part of the procedure, and in fact it's part of your premium, too.
Of course not 100% of apple pay customers execute their coverage due to a loss, so it's entirely normal that you'd get a payout that's higher than your premium, it's the point of insurance, and not shocking.
> had I walked away at that point, the Apple Care team would have spent 2 hours diagnosing my 3.5 year old broken MacBook for free just because it had Apple Care at some stage.
These costs, too, are being paid out by your premium. It's not free. The whole insurance package is modelled on probabilities of certain costs, including diagnosis.
> Apple Care is a user experience, not necessarily just an insurance plan
It really is just an insurance. The 'experience' you described is twofold: giving you a discount + diagnosing a problem. Those are both part of your insurance package, for which you paid. You're not getting any favours here.
The fact Apple isn't shady is a user experience, which is great, but you're definitely paying for it through your premiums.
An actual set of examples is vital to communicate the extent of the profit. For my part I offer that the life insurance offered "on the market" in japan cost 10x the actuary table for my young age. An obvious aspect of such self-selecting insurance is adverse selection.
Insurance ironically has many pitfalls. The worst pitfall being fake "financial advisors" who are nothing more than insurance salesmen hoping to convert your savings into premiums and kickbacks. Every country has different restrictions, but here in Japan "financial advisor" is a title almost 100% implying insurance salesman.
There is a reason during the PS3 era it was not TVs, or Cameras, or games, or movies which kept Sony going: it was insurance. It turns out insuring the rich & long living + national healthcare is good business.
You can see here [0] that I'm averaging about 2k per year in costs and he's averaging about 12k a year in costs, or 6x the amount. For us it's actually closer to 0 vs 20k.
No difference in premiums.
Of course it must be noted that the state pays something like 80% of it through taxes which are progressive, my dad on low-income pays essentially nothing, I pay at high-income essentially everything between us.
It makes sense to set a high deductible for me, that's the only way to get a discount on the premiums.
I'm super happy with this system, don't get me wrong. But financially it makes no sense, and if the state allowed it, our premiums would be massively different. (mine much lower, his much higher to the extent of completely unaffordability).
The life insurance market is interesting in that at a young age the rates are really tiny (at least in certain countries, for term-coverage), like the cost of an expensive coffee or a couple sandwiches per month, for those ultra-rare early-death risks. I guess people just aren't that price sensitive around $5 or $15 a month, when insuring against half a million in coverage. Maybe that explains it? Otherwise you'd think the first competitor to offer insurance at say 5x the actuary table instead of 10x would just simply take the market, while still massively profiting.
[0] https://www.rivm.nl/sites/default/files/2018-11/kosten%20van...
We have countermeasures like visits to tge GP being free. But I know of at least one person with complex mental illness who literally cannot afford the deductible it would take to get treatment.
I think the deductible should be income dependent, and higher incomes should have the option to pay more premiums for less deductible.
That amounts to a tax where people can pick their risk-appetite.
Important here is where this kicks in. Place the transition at too low an income, and the extra tax here starts kicking in just as the toeslagen drop and you get marginal rax rates above 100% (in more cases than we already do)
I also have never been in an accident which has written off my vehicle -- staying situationally aware and driving defensively helps a lot.
So what I do is max out my liability and uninsured motorists insurance up to something like $250,000.
I never get insurance for things like phones.
A lot of insurance is tax on poor people and the mathematically illiterate.
Since my used truck was only worth $10k to start with I've saved much more than that in the decade that I haven't bothered carrying collision or comprehensive (probably 3 or 4 times over that).
But I don't bother fixing dents and dings in it, so it looks like a used truck and I won't be turning any heads cruising down by the beach.
I'd rather pay that £200 once a year and have a complete peace of mind about it.
Traditionally it’s much closer to money in equals payouts. But because they have hundreds of billions in funds sitting in a float (required by regulations), they earn interest on the float by putting it in low interest (safe) markets such as bonds. And only a few percent premium on the actual insurance delta.
I think the far more important takeaway is to always have that cash set aside for an emergency. Once you have the breathing space, so many types of poor financial habits seem to just sort themself out.
Not having cash on hand for these kinds of risks is a part of the poverty trap. It is a ststemic issue more than it is a personal one.
Of course, there are people who are chronically unemployed, abused, single mothers whose ex-husband dodges child support etc. For every one person like that, though, there are a dozen who simply live beyond their means, fail to plan for the future and get bowled over by minor hiccups.
I know a couple who have both been in the professional workforce for decades, have a household income of 200k+, own no property and had to take out finance to pay for a bloody Holden Barina (<20k AUD car).
There's a reason that The Barefoot Investor has sold 1.4m copies in a country with a population of 25m. The advice within is golden for those who exist in this state of self-inflicted middle-class poverty.
Even the very best mutual companies charge basically the same rates as public for profit insurance companies. The industry is well regulated and ensures margins aren’t indulgent. Some of the best performing public auto insurance companies are lucky to land a 97% combined ratio, i.e. a 3% profit. Home insurance is fairly similar with slightly better margins but many insurance companies aren’t making much more than a nickel on each dollar that they bring in and most are lucky to break even.
Sure there are plenty of things insurance companies can do better. Lemonade, Hippo, Root and many other high profile disrupters are out there spinning BS about how evil the industry is while profiting first and/or burning other peoples money to recreate the wheel while they are otherwise not breaking even, i.e. not viable long term.
Home insurance, auto insurance are often very competitive.
But these days it's common when you buy a TV, phone, laptop, that the checkout button online also offers "insurance".
I see the same renting a vacation home, offer for a cancellation insurance.
Sure, it sucks if I'm sick and need to cancel my vacation and I can't get my money back -- but insuring against such events is often a bad idea.
There is a lot of unnecessary "insurances" being offered to consumers today.
For the record: health, home, auto, travel, disability, and generic liability insurances is usually a necessity.
What author is saying is don't insure against spilled milk, even if many shops offer these easy add-on "insurances" at checkout.
Personally, I sometimes find it hard to know what I should and should buy when renting a vacation home or car. I don't care for the cancellation insurance, but I do want a liability insurance (which most always include automatically, at-least where I live).
But not all situations are like that.
In theory, couldn't they charge less if the ROI of the premiums was large enough?
1) The article ignores individual risk and pooling of such risk.
Insurance is nothing else than a group of people sharing the cost of claims. If you are a worse risk than the average person in said pool it’s worth insuring (even without excess) if everyone pays the same. The insurers will use signals to price you but most of the time they are pretty rudimentary.
2) That a higher excess is a good way to reduce cost makes sense generally. It drives down claims frequency and thereby operational cost for insurers but in reality how much is that cost? Is it a big enough lever for you to be happy to give away financial flexibility? High risk activities or products make sense to insure if this adds value to you. That’s harder to quantify in numbers.
3) Assuming every insurance runs big margins is a fallacy. Motor insurance in the U.K. runs at a loss for years but insurers see it as an entry point to other products like home insurance where they have healthier underwriting profits.
However, the asymmetry in knowledge on the consumer's part ( eg, knowing the 'chance the house burns down' for his personal case from the blog ) would enable him to make rational decisions.
Without this information, depending on one's risk appetite, one over or under-compensates for it.
There needs to be an application - that works for the consumer - and paid by him -- that calculates his real chance - by collecting a lot of the data from him ( and others similar to him ) and providing him with his real chance.
Armed with this info, the consumer can then choose to buy insurance for this scenario, and if so, what they should do...
Insurers assume you are lazy and can't be bothered switching, and may even expect an increase. They will bump up your insurance because they know they can. Find a better deal elsewhere and ask if they will match it, and be prepared to switch if they won't - but never just pay the increase (unless you really can't find a better deal).
https://www.aeaweb.org/research/regulating-health-insurers-a...
The claim is that the medical ‘loss’ ratio caused insurers to want to pay more for healthcare so that the fixed profit percentage would be a higher gross.
I am not an expert on health insurance, but if it’s like gambling, then I don’t like the idea that a casino is profiting on people’s lives.
i.e. it needs to simply viewed as a hedge. what can you afford to budget for today that will prevent you from having unexpected expenses in the future. The fact that your unexpected expenses are covered is great, however, the pain of having to deal with that situation is probably not worth the fact that you got out more money than you put in.
The right amount of insurance is a highly personal decision and many factors are involved. It's not black and white.
I wish there could be something like a union or similar that would balance power .
JK, I know they’re not popular with the FIRE crowd. These are quite different than other types of insurance though. They may work out in your favor compared to bonds due to the tax advantages.
