Surprised to see something insurance-related on the front page of HN; very nice! I’m building something in this space, so let me throw in three more data points:
- 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
Hi thanks for doing what ever you're doing to help under- and non-insured people.
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.
This is why public health insurance is so important and why I feel so lucky to be covered by one: my brother had brain hypoxia during birth and even in a country (Spain) with a solid public system it places considerable personal and financial strain on our family.
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.
That's a nice law. In Canada, most aspects of medical insurance are single payer, but other aspects (like out-of-country travel medical insurance) give too much latitude to the insurance companies. If you make any false statement when applying for insurance, when you try to use your insurance, the company will refuse your claim and declares the policy null and void. For example, theoretically, if you don't disclose even the smallest details (e.g. that you had a chest x-ray done 10 years ago that did not show any abnormality), and then you get something completely unrelated, like getting stabbed during your travel and have to go to the hospital, the insurance company can and will refuse to pay out. It's ridiculous.
Technically yes, but practically no. The difference between paying nothing out of a 100k hospital bill and paying 1k out of a 100k hospital bill is approximately the whole bill.
> We reimburse, at pre-set rates, the cost of hospital services received as a result of a sudden illness or an accident, as follows:
> * a maximum of CA$100 per day for hospitalization
> * up to CA$50 per day for healthcare received at a hospital outpatient clinic
At those rate, I wouldn't even bother submitting the forms to RAMQ for reimbursement.
Actually in most of the world this is not so bad at all. It's insufficient in the US or many third world countries, but if I were to fall ill in, say, Africa or South East Asia (+China) it would be pretty good.
I hope your brother is doing well and the law you mentioned clearly shows your Govt.'s attitude to protect the rights of insured over corporate profits; Congratulations for making that happen.
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.
> 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.
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.
Sorry but Lemonade’s ‘fixed margin’ is BS. I’m not aware of any other insurance company that benefits from a fixed margin or spins what is otherwise OIE as profit. Most other carriers in the US pay for distribution, e.g. agents selling their policies or Google and other targeted ad platforms. Most carriers pay out a distributor margin and then are on the hook for the full risk.
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.
> Look at Lemonade.com, they do not benefit from not paying out as their margin is fixed
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.
Events worth insuring against are so rare that you can't use experience from the last time to pick a better insurance company.
Hence, why the market is regulated.
Actually, I think my both renters and auto insurance contains a legal assistance insurance component, which is probably useful if I need to sue the insurance company :)
(I'm not sure it's as large as it ought to be, but the idea is nice)
really? I mean - from my anecdotal experience and observations, I'd conclude, that an insurer refusing payment without an understandable reason is still very rare.
> incredible percentage of your policy that goes into marketing/admin/etc
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.
I think prompting people with removing risk at the checkout counter might result in a different appetite for risk aversion than if they came to the decision on their own over a period of time. So maybe folks are being corralled into a losing bet?
Hum... Competition should make insurance prices independent of the consumers preferences for risk, just like it makes any other good's price independent of their value to consumers.
If insurance prices change with people's preferences, that's a strong signal the market doesn't have enough competition.
It just strikes me as an intensely bad equilibrium where the best priced insurance should be the one that advertises least, yet insurance is the most heavily advertised industry.
It makes sense why, it’s basically entirely 0 sum. There’s no innovation to be made, just stealing customers from other companies. Further, I don’t see how competition is improving the industry, as they have next to no tech. I see that competition may keep things honest, but especially in the cases like health insurance I can’t see how it has. Whether that’s entirely caused by bad policy I don’t know.
For all the above, in my dim understanding, it seems like one of the few truly ideal cases for being government run. I’d love to hear reasons why not.
you can compete on price, or you can compete on quality. price competition can take various forms, from operational efficiency (better actuarial science, more efficient claims, etc.) to marketing efficiency (better targeting, simpler product, etc.). quality competition would encompass more sophisticated products/product lines, better customer service, etc.
so there is a lot of room for competition to drive down price (and increase quality) without it being a zero-sum game. the problem is that markets for financial products are irresistable to the greedy (as it's stripped down to the bare essence of pursuing money itself) making ethically dubious decisions under greedy incentive structures. the government can create a more competitive market through regulation and enforcement but chooses not to (because of its own perverse incentives), so it's not a given that a government monopoly would necessarily be any better.
with most issues like this, the default option should be to do both: have government-run options (with no unfair advantages) in competition with (for-profit and non-profit) market participants. this is a pretty rare configuration however, since it removes the obvious (unfair) leverage points for taking advantage of a market.
When 40 some percent of your price is customer acquisition I don't buy the price being competitive.
Health I can see has some room for quality, but still some high 90% of the market doesn't go outside the bottom three plans across almost any type of insurance.
I can see the case for allowing insurance alongside. No need for monopoly, though the level of greed in the industry and ability to manipulate through ads is a weird balance - they're incentivized to keep you a bit paranoid.
it's not that the price is necessarily competitive, but rather, that there is (and can be) competition along multiple dimensions even in markets with high acquisition costs. of course, there could just not be enough competition in totality to drive prices down near the marginal cost of production, but significant customer acquisition costs don't necessarily indicate an inefficient market, since complex products (like insurance) require more effort toward customer education (e.g., sales & marketing).
my guess, however, is that the current equilibrium point above the marginal cost of production is likely more a function of regulatory capture. insurance went through a broad round of demutualization over the past few decades, and some of the capital gains of that process surely went into legal and political initiatives.
to the article's point though, insurance is an adversely-incentivized industry driven to over-financialize every possible risk, which is where it veers into gambling (just like equities and derivatives) and sensationalizing paranoia (just like news). insurance should be reserved for unlikely but impactful natural events, not common or man-made ones, which is what insurance has expanded into.
To your point about there being no innovation to be made. Better risk models would be a tech advantage that would allow one company to offer more accurate premiums.
My take as a finance person but not an insurance person:
- 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're absolutely right, the thing to look at here is the St Petersburg problem.
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.
The parent is correct, and shouldn't be downvoted IMO. If you set the max payout to world gdp of ~$100 trillion, you get an expected value of ~$50 for the game. So people are actually calculating expected value correctly with their intuition. It's just that in their instinctive calculation they're also making better assumptions about reality than mathematicians do.
Indeed, it is one of the proposed solutions as listed in the corresponding wikipedia article on the St. Petersburg paradox. There is a table with quite low expected values, mapping the wealth of the bank to the expected value.
I think there's two factors. One is the nonlinear utility of money, and the other is the cost/value of losing/winning.
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.
Payouts are also non-linear though, with enormous discontinuities.
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.)
You frequently see this same pattern in games. A low cost gamble with a low chance of success, but a huge payout. Players seem to (often) view it as worthwhile, because if you do succeed then the payout changes the entire experience. Keeping the cost spent on the gamble, however, would make little difference.
Not a series of insignificant losses that, due to the low win-probability is such a long series, amounts to more money than the lottery win, and thereby cannot be called insignificant anymore, which is by definition how lotteries are set-up.
> You're unlikely to crash your car, but if you do, it might cost you a heck of a lot to fix
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.
insurances cost a lot of time too. I don't think you can really avoid that, we're in a society where everybody believe that other people's time and attention are disposable.
Not only time, also market knowledge in certain exceptional insurance fields: the insurance that takes care of flying you out when you end up in a hospital abroad likely knows a thing or two about procuring that service that you don't know.
> - 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.
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).
Universal health care is basically a special case of “people in the pool having similar risk,” because the idea is to have only one pool with everyone in it. The “with everyone in it” part solves the adverse selection problem.
I don't think so. At least every insurance I ever bought had very precise definitions of the monetary obligations for each party. I think the highest would be my car's mandatory insurance (capped at, I think 20M€ per damaged person). My health "insurance" doesn't have such a cap. In fact, they are forced by law to pay for everything that I would ever need from a certain catalog of services. Also, the rates are not negotiable in my case but a fixed percentage of my income. It's similar for the pension "insurance" which is more like a perpetual pyramid scheme than an insurance.
You can put scare quotes around insurance, but they're really just counterexamples to your claim.
Many forms of insurance include a cap to reduce the insurer's risk, but that doesn't mean such a cap is necessary for it to be called insurance. The height of the premium can be defined by law, but it's still an insurance premium.
Pensions can be hard to understand because longevity risk is a bit counterintuitive, but depending on how they work in your country they can definitely be a form of insurance.
Your health insurance does have a catalog. It doesn't just pay for everything and anything.
Depending on your country this catalog is also shrinking and pushed into private insurance. Since there is such variability between countries and their systems these discussions become 'hard' to have because something that is normal for one guy works the opposite in the other guy's country.
In Germany I had dental covered by the state. Like you said, fixed percentage of my income covered all that (and all the other health insurance needs with a catalog of services). No need to think about it. Except someone actually decided on that catalog based on monetary concerns and calculations. Also while there is a fixed health insurance cost as a percentage of your salary, there are different actual insurance companies and they add a variable premium to this which they 'compete on' for clients. This is the public system which must cover you and you can go fully private (and never be admitted back into the public system if you do) which gives you "better service" (like private rooms being standard at the hospital and such).
Then they added private insurance on top for some stuff that wasn't covered by the public dental plan any longer. In Canada just a regular filling needs to be paid out of pocket and I really want private/employer extra insurance. Different for kids where I pay out of pocket for a white filling but Amalgam would be covered. I don't even know if this is the same in other provinces maybe.
Pension: Germany has a pyramid scheme and it collapsed a while back. Not enough payers any longer and suddenly they had to tax people's pensions. People who they told need not worry about their pension ever. Suddenly they were told they would need to pay tax on their pensions and oh btw. you should really have started paying into private pension like a decade or so ago. From after tax income. They do have various private insurance schemes that lower your taxable income but the fees are sky high and returns meager. It's a way to shuffle money into insurance companies. Thank's government! And other than that, you can get ~800 EUR of tax free interest/dividends per year. Everything else is taxed at 25%.
This is way different in Canada again where Old Age Security and your pension are not covering you and everyone knows. People either work longer because they can't afford extra insurance or have an RRSP (kinda like a 401k) they pay into. You know you will be taxed on this later but you aren't now. And all your money grows tax free in that account. Never pay a single dollar of taxes on those dividends over the years. And a non pension tax free savings account on top of that. Sure it's after tax income in there but you can take it out any time. No need for any insurance company fees either if you don't want to. Sure you can buy mutual funds and such but you arent forced to just to be tax exempt.
> Pension: Germany has a pyramid scheme and it collapsed a while back.
The system did just fine, but was plundered by politics. During the German reunification, the people from the former Eastern Germany were added to the public pension fund without ever having anything payed in. This drastically increased the amount of recipients without bringing in additional money.
Politics decided that. They also decided to not put any tax money in the pension pool to re-balance it.
No matter how you design a pension fund: If you bring in an additional country as recipients without any additional capital, that pension fund won't survive.
> Never pay a single dollar of taxes on those dividends over the years.
The complicating issue here being that you’ll eventually pay income tax rates on those dividends instead of (usually) lower dividend tax rates. If your income is high when you retire, you might pay more in taxes this way with the deferral. And it’s hard to know in your 20s and 30s what your income will be when you retire. But as a form of insurance, you should still build that nest egg.
You are correct in that, though dividend tax rules are complicated and differ all over the place too. In Germany you pay a flat 25% (which is already better than it used to be. You used to pay your regular tax rate, whatever that would've been. Probably higher than the 25%. But 0% sounds better to me.).
Now here in Canada you pay something like half of your tax rate and its different whether they're "eligible" or not and such things. But all that is only outside of tax sheltered accounts and at least on my end I don't make enough to worry about calculating that. Then again at least here in Canada you also need to be aware of the whole withholding tax thing on US stocks and the implications for your dividends coz the US recognizes RRSPs as tax sheltered but not TFSAs...
Of course I won't really know whether I maybe make more in retirement than I do now but I personally believe that I will definitely make less than I do now. And if I really do earn more in retirement than I do now then I am probably very well off an it will in part be because my RRSP and TFSA contributions were able to grow without loosing 25% of the dividends all the time. So if compounding then does its thing and make me rich (I doubt I'll actually be rich from that though) then I'm fine with being taxed on it then.
> I personally believe that I will definitely make less than I do now.
It's not so much about whether you'll make less or not, but if you'll make enough less to land in a lower tax bracket to take advantage of the deferral. And avoid dying and having to pay tax on it all at once (unless you can shift it to your spouse, but then they may have a high income problem too, negating the benefit of the deferral).
RSPs can be great, but I think they're oversold to the working class as a tax advantage.
If you don't mind my asking, what kind of income are you talking about if you are not gonna be in a lower tax bracket in retirement?
Different question since you seem not to like tax deferral. What makes you not like tax deferral and compounding on the extra ~25% of dividends you keep?
I can't do much about when I'll die. I do advocate for 'living now' btw. If you can do that 'trip around the world' now or put money into a pension fund, do it now. Don't wait, have kids and tell yourself you'll do it when you retire. That day may never come or you might not be up to it any longer for various reasons.
>The complicating issue here being that you’ll eventually pay income tax rates on those dividends instead of (usually) lower dividend tax rates.
This is the wrong analysis. While it's true that when you withdraw you pay taxes at the marginal rate, you also need to realize that your contributions are before tax. When you're withdrawing, you're not paying income tax rates on the gains/dividends, you're paying income tax that you previously deferred. The gains are still tax free.
> Suddenly they were told they would need to pay tax on their pensions and oh btw. you should really have started paying into private pension like a decade or so ago.
That's not true. The taxation of pensions in Germany is a gradual shift accompanied by a parallel shift to tax-free payments into the pension funds.
It is absolutely true and your extra information is also correct. It is gradual, you are correct but still people that didn't know they were gonna have to pay tax got hit with it. And when they were told you should've been privately saving already. I know because I have relatives there who have to pay tax (though like you said not at 100%) and it is not pretty.
Then your relatives did not tell you the whole story or should go to court over their taxation. German courts have made it pretty clear that pension income that was taxed when paying must not be taxed again. The decision is from May so you might want to talk to your relatives about that topic again ;).
Arguably a taxpayer funded service is still a form of insurance. In the UK we pay "national insurance" which is a form of income taxation (but gets accounted for separately), much if which gies towards paying for our health service.
I don't think in a free market private insurance would necessarily fuck people over. For example the idea of creating a catastrophic insurance plan for healthy, fit young people would be wildly profitable and beneficial for those who would sign up for it, but the government wouldn't allow it to exist because it "discriminates" against those who are unhealthy or made different lifestyle choices.
It depends on your definition of "fuck people over". The insurance plan for healthy, fit, young people would likely be cheap. However, they were subsidizing older and/or less fit people. The rates for the "not young, fit and healthy" plan are going to go up. Drastically. I would also be unsurprised to see that the "healthy, fit, and young" group ends up becoming the "average" group, and that they use the other group to lump together people they don't want to insure, with rates so high people can't afford to pay them.
I.e. they keep you in the healthy, fit and young group until you get cancer, and then they move you over to the $7,000/month group.
The current system just averages that out. Your rates are higher than they have to be when you're young, but your rates are lower than they have to be when you're old. It negates the risk by lumping everyone together. Your form of insurance doesn't do much to reduce risk because you can always be moved to another category. The insurer really just becomes a middleman between you and your medical providers then, if the goal is to allow people to pay for what they use. It's basically an HSA.
And if it was beneficial, how could you describe the people to whom it was beneficial as "healthy and fit"? Aren't they really just people who the screening failed to identify as unhealthy?
Do you think there should be differences based on lifestyle? For instance, should someone that works out everyday pay the same as someone who is 400 pounds?
That seems really unfair to me. I would definitely be against that system. If someone chooses to smoke or heavily drink or eat too much it shouldn't be my responsibility to subsidize them.
What if someone's work makes them subject to more diseases, like a factory worker ?
Should they pay more ?
What about people that are not as well educated as you are, and thus don't know that too much sugar is bad for them ? Should they pay more ?
What about overweight people that are from a genetic pool of people that are more subject to this issue ?
Sometimes it's hard to know if a disease comes from lifestyle or other factors.
Just to explore the idea further, are you also against care for people who get snake bites while hiking, have a beer once a week, or choose to live in an area with environmental toxins?
I mean, it's about the statistical consequences of your lifestyle. I would expect hiking overall to have a positive impact on your health and health expenses statistically even with the risk of a snakebite, and a beer a week to have no impact at all. I'm talking about the people who come home and drink whiskey every night. And I'm not against my insurance paying for peoples care, I'm against paying the same insurance rate as them. Health insurance should be higher if you live in a area with high environmental toxins, as well, sure. Should everyone in the country carry flood insurance so that people in flood planes can pay less?
It seems to me a lot of this is about responsibility to society, but that only goes one way. If it's my responsibility to pay into social Healthcare, why is it not their responsibility to not be a heavy smoker, or morbidly obese, or a heavy drinker? It seems to me that the moral tables are turned around in this argument, where I'm a bad person for not wanting to pay, but they arnt bad people for doing things that virtually garuntee they will need payouts.
I suspect the people who are "virtually guaranteed" to need payouts are a small population compared to the majority of people that live somewhere in the gray zone between the two extremes.
Then, to quantify the people in that gray zone, it becomes a question of which variables to we include? Sure, alcohol is bad, and junk food is bad. But what is junk food precisely? And if you run ultra-marathons, it surely doesn't matter as much. If you live in a city with higher pollution, if you drive a cheaper older car with a worse safety rating, if you work two jobs and thus have higher stress levels, on and on.
And if we're talking about social healthcare, do you really want a faceless bureaucracy to be tasked with calculating those risks and putting a price on all your life choices?
An example to the last part in the real-world: Geico is widely known to be the cash float of Berkshire Hathaway, Buffett’s main investment vehicle. It’s basically a costless margin loan for Berkshire that it can freely use in investment. The main savings Geico passes onto you in part comes from the fact that they have a better use for capital (i.e. BH is wildly good at investing) than most other insurance companies.
I’ve always wondered about this logic: it makes sense for life insurance where the average person pays in for decades before withdrawing.
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.
> 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?
> You want people in the pool to be similar risks.
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.
They use a heck of a lot more than that. They use your name and DOB to run a backdoor credit pull and it turns out that is a pretty reliable indicator of what risk pool you belong in. There is also a "credit check" for insurance (You can get your report from LexisNexis) and they can see how many times you applied for other insurance products and how long you had them, which is another indicator.
Also your address, which is surprisingly useful in predicting likely outcomes (even if the range of outcomes in a neighborhood are wide at the extremes).
It really is depressing just how much information, from life expectancy to health outcomes, can be gathered from a simple five digit zip code. Very accurate too.
Insurance companies apparently seem to think it’s useful, but I find it extremely hard to believe it would be more useful than, say, even the most basic information about one’s driving behavior, like whether one drives 1,000 miles a year or 50,000.
They mostly deal with numbers on the macro scale. If 10,000 miles per year is a good representation of how much the general populous drives, it’s good enough for them. This is why we’re seeing more niche insurance companies pop up (MetroMile, et al) who can offer “smarter” rates based on a more granular assessment of risk.
All else equal a driver who does 5000 miles a year will have half the adverse events of Someone driving 10,000 miles/year. That’s a huge difference that makes no sense of lump together. And yet only a few (non-commercial) insurers, like metromile, account for it. It makes no sense.
I don't think that'd be less useful, but they can't trust what you say: "sure, I only drive very little, very carefully, and very slowly" is not something they can check.
If they can, they'll use it: that is why black box car insurance exists.
I also think the simpler the algorithm, the harder it is to game.
“Oh wait, I almost never drive, but when I do, I’m either drunk or speeding. Well, I’ll sign up with this insurance company which offers me a discount because I drive so little!”
To use more information, you make more granular risk pools. The pools need to ne large enough to actually pull risk.
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).
> that's something actuaries have thought extensively about
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.
That's correct. As an insurance company you buy reinsurance to insure yourself from catastrophic outcomes (i.e too many claims for your reserves to handle).
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.
It's usually possible "self-insure," too. Basically, you put up some amount of money (of order $30-50k) to the DMV as a surety bond. Then if you're held liable for an accident the state doesn't have to worry about you paying up because they already have the money.
I wonder if there should be a per-vehicle cap on damage where a vehicle is so expensive that the owner insures it for any damage over some amount, say $60,000, or the 95th percentile new car sale price.
Damage to vehicles isn’t the problem. The tail is hitting a car full of surgeons and ruining their careers so you are paying out gazillions in personal damage.
That’s the theory, I would be surprised if the reality wasn’t more messy with a lot of insuring money going into marketing, management, IT, with insurance price more based on what salespeople are able to decently add to a product, and company profitability discovered afterwards.
The post didn’t cover an essential part where insurance makes sense: I.e. when you believe you know the odds of the adverse event happening is much higher than what the actuaries estimate (either because the actuaries are wrong or don’t care or have a bigger model than that particular insurance, or because you know something about yourself that they don’t). For example phone insurance, a friend always buys it because she knows she’s butterfingers and she has also used them. Another is stuff like applecare. I don’t buy it for most products but I did buy it for my AirPods Pro, because I believed apple would have made it not that well. Further, apples warranty policy in india is weird where they’re more liberal in replacements as long as you have a care plan. So I took the care plan and am happy about it.
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.
I rent cars frequently and never take their predatory extra insurance. It can frequently add 50% to the cost of the rental, and in about 50 rentals I've only had to pay damage out of pocket 3 times (all three because of parking bumps while the car was parked over night and the other person just left without leaving a note or anything). The out of pocket costs easily come below the total amount of insurance fees I'd have paid. Plus you always have a maximum you'd have to pay out of pocket that is not even close to the total cost of the vehicle, usually under €1.5k, and with minor bumps from parking or something like that it won't ever get even close to the max, sometimes it's even under what the insurance would've cost in the first place. I think it makes no sense and the "piece of mind" is overrated, even if you drive in to return a car with minor damage they'll just charge your card, it's not like you have any extra work or worries to deal with.
2 of the 4 credit cards in my wallet have greatly restricted the coverage they provide for rental cars in the last 2 years. Check your cards to be sure you're still covered.
Almost all credit cards I've seen only provide secondary insurance, which means that if you already have normal car insurance, the credit card insurance only kicks in after that is exhausted.
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)
If you're not otherwise covered, I think it makes sense to accept their liability insurance, since that could involve significant sums. But yes, most should decline damage waivers etc.
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.
You can buy car rental excess insurance from another insurer, much more reasonably priced than the rental companies' extra insurance.
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?
Probably yes. It's the same issue as class-action suits. If they want $200 for a scratch in the paint that I don't think is my fault, I can either just pay them, or I can hire a lawyer to bicker about $200. It's not worth it as an 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.
Even if they charge you €200 for a scratch that didn't do, insurance is usually at least €50 a day, so you'd need a scratch every 4 days or more to justify it.
Conversely I usually get the insurance when I rent U-Hauls. It's pretty cheap and I feel like it's pretty tough driving a big, bulky truck with poor visibility and a heavy load. A Camry? No thanks, I'll just use my personal auto insurance / credit card insurance.
> Another place is where you really just don’t care about the marginal extra cost for the peace of mind you get
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.
This was an important consideration in deciding to purchase pet insurance for my British Shorthair. As far as insurance goes it probably falls under the category of "not necessary." I added up the cost of the premiums over my cat's lifetime and realized I would probably break even at best. But in this one instance the peace of mind is worth it.
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.
> you know something about yourself that they don’t
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.
I’m no expert but AppleCare seems priced highly enough that they cover butterfingers too. I’d expect regular insurances to charge much less for a similar service (except definitely not as convenient)
You might have to disclose: I broke X phones in the last 12 months, but most likely the insurance already knows really well how often a phone screen breaks and you're not that special. I think those kinds of insurance calculate with "when" instead of "if". So if I pay $10 a month for phone-screen insurance, it costs $100 to replace it (after X months) and the screen breaks on average after 20 months, the insurance has a nice profit.
You can post a bond as an alternative to insurance in most states (it's $35,000 in California). The system is opt-out and people can self-insure if they feel like it's a bad deal.
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 can't prove collusion, but mandatory insurance seems wrong.
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.
This is how it works in the states or at least in California which I am most familiar with. It’s divided into two parts: liability (damage payout to other party if you are at fault) and comprehensive (damage to your vehicle where someone else’s is not at fault). If you get into an accident and are at fault, your insurance liability pays out to the 3rd party and your comprehensive coverage pays out to fix your stuff if you opted in. Only liability (property and medical) are required as that makes the other party whole if you’re at fault.
The mandatory 3rd party insurances in Germany caver a minimum of 5 million Euro per case, mine is 10 or 12. Makes sense, especially if factor in stuff like loss if life and disability.
Does anyone know why in the US it is common to only be car liability insured up to around $200k while in Europe the standard is tens of millions? (The US maximum that I've seen possible is $2m when adding "umbrella" insurance.) This just doesn't make sense to me, especially in the face of local health care cost: what do you do if you're at fault in an accident that disables a family a four who have to spend millions in health care costs over the next several decades? (I'm even more confused because US car liability insurance is not cheaper than in Europe, despite two orders of magnitude difference in coverage.)
The cost of suing, proving damages, and recovering the money is such that it rarely makes sense to try to recover money from individuals. 99.9% of the time, a policy limit settlement is the most you’ll recover, and that kinda disincentives insurance companies from voluntarily offering higher policy limits.
(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?
Thanks, this makes a lot of sense. Essentially the legal system is too broken. In Germany, the legal minimum is about €9m, but standard coverage is €50-100m. Not sure how things go regarding enforcement, but there are a couple of stories where an accident destroys a bridge etc leading to very large payouts. I guess if you get into a bad crash with a travel bus this could also lead to massive liability.
Here in Japan, car insurance with unlimited/unlimited liability for person/property is pretty basic. It is considered that why unlimited is important is because normal people isn't good to estimate how much max liability is needed. Anyway no one would abuse unlimited insurance (but may abuse within limited range) so set it unlimited won't up insurance fee much. IIRC Some insurance also offer something like 50M JPY limited plan but it just save about 2k JPY per year (YMMV). Anyway, the point of insurance is to cover very rare unpayable reparation event, so why not unlimited?
I guess insurers want to avoid being bankrupted by a single disaster, and prefer that the insured person goes bankrupt instead. Unclear what is the socially optimal policy, but I'd anyway assume if a car accident ever causes like $1B in damages, government will end up paying the bill.
If health care wasn't covered publicly in Europe you'd be paying out those larger amounts more often which would cause rates to rise and then differentiation with cheaper lower capped offerings.
Eh, I know people who work in insurance (Cali specifically) and auto insurance is not their bread winner. It's _heavily_ regulated, and not in the insurer's favor. So any supposed "collusion" isn't really helping them. If you're with a reputable company and took the time to set up your policy optimally, your auto insurance ends up being about as good a deal as you're going to get anywhere.
(FYI, the real steak and potatoes in that industry is life insurance policies. They can make more on that than anything else combined.)
> 15k, 30k, 5k liability doesn't cover much. So little why mandate it?
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.
I wish we did cap (or even fix?) liability to repair the other’s vehicle.
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.
I don’t think it’s as different as it appears at first glance.
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.
I lived in Melbourne, AU for a while, and their system seemed good. The third-party insurance wasn't mandatory (like here in the EU), only recommended. But you could buy insurance (something like reverse third party insurance) where if someone crashed into you, the insurance would pay you for the damages and then they'd get the money from the other person. It was very cheap.
Note, however, that a form of third-party insurance is included in the vehicle registration fees: https://www.vicroads.vic.gov.au/registration/registration-fe.... For a regular car, the TAC charge and its 10% insurance duty are somewhat more than the registration fee (my most recent annual renewal had a $302.40 registration fee and a $413.60 TAC charge + insurance duty, as one garaged in a low-risk zone; that increases to $532.40 if you’re in a high-risk zone, which looks to be not far off “metropolitan Melbourne”).
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.
It depends on how it’s implemented, but mandatory insurance should help lower the premium of everyone.
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.
Not sure I fully follow. Indeed in a way it's a gift to the industry to make insurance mandatory as it creates a bigger market. But there's no 'mandatory profit'. At the end of the day the world of finance is highly competitive, there's thousands of insurance companies. These are all pushing pricing down to the average costs of the loss events. The fact insurance is mandatory doesn't prevent that competition, if anything, it increases it, and through economies of scale makes it more efficient. I'd bet that ceteris paribus, the premiums for an insurance package for a large market are closer to the average uninsured costs than insurance for small niche markets.
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.
The article assumes that everyone has a lot of savings tucked away for the "lesser" damages like floor flooding (which might spiral out of control once the true extent of the damage is revealed...)
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...
As someone whose floor was flooded, it did not cost £7000. It cost the insurance company £274,000, just to (badly) fix it, then a further £15k in compensation for everything they screwed up on the way, then another £100k for loss of value as a result of their contractors.
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.
It's surprising how quickly costs can escalate. One of my neighbours flooded. During repairs they quickly discovered there was asbestos everywhere. I don't know what the costs were but they weren't back home for two and half years.
There’s a parallel to software here, somewhere. When you take out insurance against an event even if you think you could absorb it anyway, what you’re really insuring against is the costs you don’t foresee. I’m having a ‘build vs buy’ discussion at work which is surprisingly analogous.
I find this debate interesting, but I can see this argument being used by both sides. Is your point that you don’t foresee external issues by buying like the supplier going under/the product becoming unmaintained or that you don’t foresee internal issues by building like some critical security oversight?
It's an interesting discussion, for sure. I'm on the buy side right now, because it's an accounting solution, and I'm scared we don't know enough to build a competing product in a regulated space. We're more legaltech than fintech, so it feels like we'd be committing resources to the wrong place.
> The article assumes that everyone has a lot of savings
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.
The article actually says that you should insure only if it creates financial distress. So, in the case you describe they should insure for the floor flooding eventuality but not for the dog ruining the carpet (as a cheaper example).
This is a great example of how poverty is a trap. You cannot afford insurance premiums, so you are stuck without insurance for situations you cannot handle.
As you earn more, and get room to save, you get the option to forego insurance.
This article's core thesis is wonderful and correct, but the article is weakened by only focusing on theory.
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.
Indeed, same with healthcare. For example here in the Netherlands there's universal (mandatory) healthcare. The basic premium for full standard coverage (which is pretty much anything you'd want that affects health) is about $150 a month regardless of age. So me (30) and my dad (75) pay the same amount.
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.
I dislike our deductible choice. It forces the poor to choose between less income and "I am in severe pain but cannot afford specialist care".
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)
Well, the maximum mandatory deductible is about 30 euros a month. It's not nothing, but it's also hard to find many situations where it's completely unaffordable, I'd guess this would amount to a small number of people. Those people all get 'zorgtoeslag', which covered virtually the entire premium of 100 a month, leaving only that deductible which can be paid monthly. And if that can't be paid, municipalities have all kinds of programs (e.g. bijzondere bijstand). It can be tricky to navigate the system, but the amount of people who cannot access care due to the deductible after exhausting all options really is quite low.
Having no deductible at all creates moral hazard problems for the other 17 million people in the Netherlands, which increases the total costs going towards ineffective care, and thus total premiums, making healthcare potentially less affordable. It's a tricky pros/cons assessment that must be done, but I have to say the current deductible set-up isn't too crazy to me.
What I would like to see are more deductible exceptions, particularly for issues with a low-moral hazard chance. For example my dad is on chronic medication for two decades, and will likely be for the rest of his life. Deductibles make no real sense here as there's no moral hazard issue.
> 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.
Well it's to start with a tax on income. I think that's completely fine, but we already have that massively. About 80% of healthcare costs in the Netherlands are paid by the state. In the Netherlands the richest 25% about 77 %of the income taxes. [0] The lowest 25% pay 1.3%. In other words, effectively the vast majority of healthcare costs are already income-based.
The second part is people setting their risk-appetite, but that has big adverse selection issues. There's massive correlation between health and income. If you'd split the population in two groups, low-income vs high-income, and let the market offer a competitive rate, the true premiums for the rich would be much lower than for the poor. This makes healthcare unaffordable for those who really need it. You can create a similar situation of having different insurance rates for rich/poor by having the same standard premium, but adjustable deductibles. Letting people set deductibles always increases insurance premiums for those who need insurance, which is why the Netherlands caps it at something like 800 euros. If you'd uncap it you'd find a lot of rich, healthy folks essentially self-insure, which means their premiums go down and the premiums for the unhealthy and poor tend to go up.
Always wondered why perpetual insurance isn’t more popular. It has an interesting model we’re you make a single payment at the start of the policy and claims are paid out from the proceeds of the investment income. You also get your principal back if you ever chancel your policy. Only found out about this after hearing an ad for The Baltimore Equitable Insurance Company a few years back.
> The insurer must earn enough income from investing the deposits to cover losses and operating expenses for the model to be economically viable
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.
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.
> what happens if you get unlucky and are at fault with a top end Lamborghini
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.)
At least in my country, at fault accidents give you a worse premium for the next few years (one or two right now, but more than ten if I had an accident on the years immediately after I got my first insurance). So you would still end up paying something.
Yeah I've got enough money, and I don't buy brand new vehicles (expensive depreciating assets) so I don't bother with collision or comprehensive and I "self-insure".
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.
No, the biggest part is collision and comprehensive. Liability is comparatively small. You save tons by self-insuring.
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.
Another reason to have insurance: you are required by law, or contract. In the US at least you need liability auto insurance if own a car, you have to pay a tax penalty if you don't have health insurance, many apartments require you to have some level of renters insurance, if you have a mortgage you are almost certainly required to have homeowners insurance, and possibly mortgage insurance depending on the size of your downpayment. And then there is title insurance, rather expensive insurance that you have to pay in case the company you are paying to research the title makes a mistake.
Because for like £200 a year I get insurance for literally all of my appliances including the boiler. And yes, boilers break and need replacement, that's usually at least £1500. Washing machines are cheaper but not insignificant. Same with the dishwasher, the dryer, the hob, the oven......
I'd rather pay that £200 once a year and have a complete peace of mind about it.
I'm guessing that insurance works differently in the US (assuming that it's where this author lives) since the question about insuring against hitting random Bentleys is a non-issue here: motor liability insurance is mandatory for all drivers. And really the most important thing about the insurance isn't even the fact that it covers super-expensive luxury cars like Bentleys (who even has one?) but rather that it covers healthcare costs for both parties.
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.
Liability insurance is legally required in the US as well, yet it’s still common to pay for “uninsured driver insurance” in case you get hit by a driver who is illegally driving without insurance. There’s also “underinsured driver insurance” for cases where the at-fault driver has only the legal minimum insurance coverage and your medical bills are higher than that.
The problem is that even though US has mandatory 3rd party liability insurance the liability limits can be stupidly low. In the EU the absolute minimum any policy has to provide is 5 million euro for 3rd party damage, you'd need to crash into multiple Bugatti Veyrons to actually run out of coverage. And then actual insurance is usually way higher than that, I'm with the cheapest of the cheap insurers here in UK(Hastings Direct, I pay £300 a year for a fully comprehensive policy) and my liability limit is 25 million pounds.
If there's someone driving an uninsured car illegally in Finland, the state will actually pay out all of the damages and then fine the ininsured person (I believe at around three times the rate that the insurance would actually be). And I think there's no maximum coverage for our mandatory motor insurance, so there's no under-insured issue either.
Additional insurance coverage is then against accidents that you yourself cause, vandalism, fire, animal damage, parking mishaps, windscreen damage and so on.
the uninsured in my city tend to be illegal immigrants or poor. government is never going to recover from them so it just ends up being an insurance you pay for with your taxes doesn't it..?
This is actually terrible advice based on naive assumptions. Insurance has a cost of capital and cost of operations just like any other business. You are not getting ripped off.
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.
> The industry is well regulated and ensures margins aren’t indulgent.
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).
There are 3 things this article ignores that are crucial to evaluate your risk/value from insurance.
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.
The article explains in simple terms when one should or should not do it..
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...
So many in India treat it like an investment, if they were really worried about insuring lives they should take out term insurances instead of being promised of arbitrary lumpsum at the end of a life insurance policy but in reality with horrible returns
The one good point in the article (apart from not paying for insurance you don't need) is to always look for a better deal, and this goes for anything like your phone/Internet, electricity, mortgage.
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).
I live in CA and often considered getting earthquake insurance but the premium and deductible are bonkers that it almost never makes sense to me. A $2500 premium for 20% deductible on everything separately(construction, personal belongings, construction premium, loss of use...). So in the event of a massive earthquake I am supposed to shell out > $200k out of pocket for the deductible before the insurance kicks in, why would anyone pay for this?
If the earthquake was so big then coming up with the cash needed for the deductible would be at the bottom of my list. Instead I would try to find an alternative place to live for 6-12 months. If there was an insurance that covers living and mortgage expenses for an year, I would totally buy that.
My understanding of insurance was that they don’t double the premium vs risk as per the article.
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.
Yes this is true. They often lose money on the premiums, actually, and then make money on the float. A very simplified example: You pay $1,000 per year for 10 years on home insurance. Then a hail storm ruins your roof and it costs about $10k to replace. So they end up paying out the $10k in premium they collected over 10 years, but were able to make money on the interest they made while they held it.
Well the payout to repair the cars and pay medical bills or whatever maybe around 66% of the money customers in aggregate pay them, the other 33% mostly goes to pay the claims adjusters, hire lawyers to defend against fraud, and do a ton of other stuff. At the end of the day they’re going to have just a couple percent of profit directly from the actual premium payments if they are lucky. But then the investment returns gets them more profit.
I always assumed it was common sense to stash away some cash for a rainy day, but so many people we know live paycheck to paycheck and rely on credit cards and insurance to cope with the anxiety/illiquidity this causes.
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.
It requires more than common sense to stash away cash. It requires sufficient income, and a stable situation. No medical debt, no family that needs help with their car to keep their job.
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.
Speaking from an Australian perspective here, so many of the traps that exist in the US (medical debt, credit card debt persisting post-bankruptcy, low minimum wage etc.) just simply don't exist here.
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.
I only ever get insurance for significant life disasters. Home insurance, vehicle and overseas medical insurance (European so I don't need domestic health insurance).
When it comes to something like a phone, I just figure 'it's a risk I am willing to take'.
> European so I don't need domestic health insurance
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.
I agree that it's obvious to both of us, but there are regularly comments that seem to indicate that it's not always the case for people from other regions. No one needs more generalizations about the continent. :)
I can buy another phone if I broke my phone, but I prefer to sign up insurance for about 1-2 years as a fee to use my phone roughly. It makes me to be able to use phone without much care, like using a case and avoid water even though the phone is IPX8.
You have probably done this already anyway, but it is worth checking the travel insurance included with your credit card. Many people are overinsured when it comes to travel (overseas medical) insurance.
An overlooked fact in the article is that each individual
engages in different degrees of risk. Some people engage in more risky behaviour than others and insurance is more profitable for them.
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 haven't paid for a cellphone since 2012. back then I bought a 3 year, no deductible phone insurance policy with accidental protection for ~$150
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
The crazy part is that they don't attempt to repair, nor have any deductible, nor use residual values. That's usually how they prevent people from executing on their insurance rights. You got a really nice package, or the company has very loose procedures at the claims department.
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.
what I always said. insurance is like gambling, except you don't want to win the jackpot.
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.
Lloyd's of London literally started off as people in a coffee shop betting on whether ships would safely make it to their destination. The BBC ran an interesting article about it a few years ago: https://www.bbc.co.uk/news/business-38905963
This is oversimplified nonsense and borders on irresponsible, particularly the line saying that if your car suffers $3,000 of damage you should pay for it out of pocket, simply because you have $10k in savings.
The right amount of insurance is a highly personal decision and many factors are involved. It's not black and white.
I hate insurance. It is a necessary evil (car, health and maybe life). On top of that theres a conflict of interest when executing the insurance because the Insurer profit depends on NOT paying you when something happens. So it's an uphill battle for the little person.
I wish there could be something like a union or similar that would balance power .
So what I’m hearing is to go all-in on a permanent life insurance policy.
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.
Thank you for this informative post. I love exploring stuff like this, and it's even better that there are so many factors which I need to adjust and change my behavior on. Thanks!
Apple Care are truly helpful beyond just replacing your product. My MacBook was damaged by a cast iron tonka truck dropped off the balcony above directly on top of it, but it was about 6 months out of Apple Care. Much to my surprise, a few keys on the keyboard were destroyed, but apart from that it looked like it should have been fine. Anyway, it was not. It wouldn't turn on.
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.
> 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.
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.
Also my laptop was outside insurance cover when it was finally destroyed, but they didn't seem to mind. Most insurance companies are very binary in how they treat their customers. 3yrs apple care => laptop destroyed 3yrs 6mo.
Gambling is a hedonistic enterprise. If you get a thrill from buying car insurance, I guess it could be considered gambling, but for most people it’s more akin to a chore.
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.
- 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