> In the case of accidents, liability insurance presents no moral hazard. The ordinary person is not going to leave a broken railing in his house that could cause a guest to fall and injure himself just because he has homeowner's insurance.
Maybe not if repairing the railing costs $15, but what if the safety repairs would cost $15,000? When not doing it could cause someone who gets hurt to render you bankrupt and homeless, you find the money. When you're insured, you may have other priorities.
> Similarly, the ordinary person doesn't seek out automobile accidents on account of having mandatory automobile insurance.
It's not about seeking them out. You don't want an accident, but you do want to read that text you just got, and you're more likely to wait until you're stationary if an at fault accident could ruin you instead of just raising your insurance premiums.
> Perhaps most strikingly, the moral hazard theory would suggest that life insurance policy holders are more likely to commit suicide, but in reality they are less likely to!
Isn't suicide an exception to nearly all life insurance polices, among other reasons to remove that very incentive?
Only if you put zero value on the peace of mind that comes with having insurance against risks that, if they happened, would bankrupt you. But if you put zero value on that, you wouldn't buy insurance.
> Personal liability in an accident is potentially unbounded. This is an example of an unbearable loss that must be protected against, even if it costs money on average.
Why it is "unbearable loss"?
There is saying about that:
If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem.
That may seems unethical, but if you think about it - it's reach people, who lives in our society, who needs to be careful to take care of their risks.
Of course, if you have assets to lose - you need to protect them (by buying insurance), but if you are "individual with limited resources" - it's not much different with / without insurance.
What I often hear is that poor people (with limited resources) needs to buy extra insurance to protect reach people from their risks. I disagree.
Unless you know something the insurance seller does not that makes you more likely to be paid out than others, then it is a waste of money to buy insurance for a loss that you can afford.
Assuming you have no extra information that gives you an edge over the insurance company, insurance is only beneficial for a loss which you cannot afford. Otherwise you’re basically paying someone else to invest your money when you can do it for 3 basis points at Vanguard/Fidelity/Schwab.
This is also why whole life insurance is a waste of money, ignoring any tax advantages which don’t apply to most people.
Edit: This is also why states allow people with sufficient funds to self insure their vehicle. If you have a couple million liquid assets, you don’t need to pay someone else to pay for your lawyers and and healthcare costs, you can just do it yourself.
After working in or for the insurance industry for 15 years, I came to the conclusion that it is not right, and that it is the moral equivalent of gambling.
I understand that the vast majority of people rationalize insurance as a good thing because the cost is relatively low when compared to catastrophic loss, and even have a couple of personal anecdotes to add to those of the advocates of insurance that demonstrate the wondrous utility of insurance, but I am convinced that it is wrong.
I quit the insurance business and moved to a completely different career. I only buy the insurance that is required by law (what a ridiculous concept! does the government have to mandate that you also buy food?) and have paid the tax penalty for foregoing Obamacare.
I know this will likely not be well received here, but I thought I'd share my position for any who read this and wonder if they're the only ones who understand it this way.
This is mad (especially from a UK perspective!) and it doesn't cover the key point of insurance: you insure risks that you couldn't afford if they went wrong.
I insure my house, my life and my car because it'd be financial ruin for me and my partner if the worst case scenario happened to any of those. Sure, I could avoid going through insurance for small things and negotiate with 3rd parties to get bills down, but that wouldn't make a difference to a £500k house rebuilding cost, car crash settlement, or medical bill.
Similarly, if something went wrong then I couldn't go back and insure that risk afterwards! You can't insure unpredictable events as and when you need them, and there's no point in my organising insurance from the wreckage of my car, house or health.
There are (admittedly imperfect) rules for insurance sales that attempt to minimize the moral hazard, though. One must normally have an "insurable interest" to buy insurance, i.e. the potential to actually yourself suffer some harm if the insured-against event happens. So you can't just buy insurance as a pure bet, where if an event happens, you get a payout without suffering any harm from the event. For example, you can take out property insurance on your own property, but not on your neighbor's property, or on Stanford University's property, or on the World Trade Center (unless you own one of those).
Insurance isn't a bet. It's a hedge. The bet is, you're not gonna wreck your car, or burn down your house. The gamble, in your scenario is not getting insurance.
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