At the extreme, imagine a future world where long term health is so predictable that there's no uncertainty. You definitely can't offer an optional insurance policy here (at least, the insurer either isn't going to make any money, or the policy costs will make buying it pointless). In a similar way, you won't do very well selling retrospective fire insurance, as only those people with burnt-down houses will buy it.
Insurance needs 1) a large pool of coverage, where the combined average costs will cover the peak extremes. It also needs 2) variability: you have to have people with lower-than-average costs to balance out the higher-than-average costs. If everyone has average costs then once again, you've lost the uncertainty and any benefit of insurance.
To get 1), you could enforce insurance on people. To get 2), you have to ensure insurance products aren't ultra-specific. Neither of these are popular!
Yet, the end game is that everyone can predict risk so thoroughly that insurance is pointless.
Not true. Suppose you have a 0.01% chance of needing a $10M treatment in your lifetime. First of all you can't say, "Oh I'll just self insure" because few people have $10M. Second, you may decide that paying $10,000 over the course of your lifetime is preferable to risking a payment of $10M.
Removing uncertainty doesn't eliminate the need for insurance, it just reduces the opportunity for risky subscribers to socialize their risk, and for insurance companies to reap gross profit.
Yes true. I was just trying to demonstrate a point, and it's easier with absolutes.
The real world scenario is that a combination of better startistics/ML, and access to a lot more data moves us increasingly closer to that world where medical insurance doesn't make any sense. Insurance works for unknown/unknowable situations.
Spontaneous combustion insurance is cheap because it could happen to anyone.
The funny thing with insurance is that if they ever become too good at estimating risks, they will destroy themselves. You don't need insurance if you can perfectly predict the future.
Though I don't think we particularly close to this point, so I doubt they care too much.
Insurance only makes sense for events so unlikely to occur but so catastrophic if they do that any rainy day fund will not be sufficient - where an insurance company must, by nature of the costs, use the income from multiple people to cover the extremely rare instance of a claim.
As has been said, that is home and some health insurances are for. Most people will never live in a house that is destroyed that prompts a home insurance payout, and if you are someone who has their home destroyed, you will get back way more than you would put in in a lifetime because the average likelihood of it happening is so low. But not having the insurance would wipe out your wealth - you lose the house and writeoff the loss and have nothing left after the fact, and at best you spend an entire rainy day fund with a mortgage on the land to rebuild, and even then you are doing significantly more impactful damage than any rainy day fund could account for.
Same with catastrophic health insurance. Most people do not get debilitating diseases that don't kill you but will require lifelong care like Parkinson's or Dementia, but if you do get one of them you would be destroyed trying to pay the constant upkeep costs.
And strangely? enough, both are often best handled by the state. In some countries property owners are not insured privately but by the township to avoid problems where disasters wipe out multiple homes and some people do not have such a rainy day fund to afford to rebuild. And first world countries provide single payer healthcare to make up for the rare catastrophic conditions. If you want to have these costs borne out across the entire population to offset the individual costs when they happen to you, having them be society wide is often the least expensive option.
But my point is by hyper-optimising for individuals it will at some point cross a line where it's not really insurance as you understand it any more. The unlikely event is that the insurance company gets it wrong, for example your house floods in an area that was not predicted to flood for millennia. As the insurance company gets better, the chance of an unlikely event gets smaller. How small can that chance get before you decide to just take the risk yourself?
Without the government playing default insurer, it's difficult for market insurance to cover extreme cases and externalities. Consider cases such as all employees develop cancer after 10 years, employees working years reduced by 20 years due to wrist/back/eye injuries, or .5% of employees die onsite.
For insurance carried by or provided the employer, any event that happens after employment ends is an externality and not covered. Extreme cases involving death will be underpriced as the employee won't have use for the money if they're dead.
In my own finances I carry a life insurance policy less than 1/10th of my nominal future earnings.
Here's the deal. Insurance is a simple concept. Take house fires. They are fairly rare, but they do happen. We could all just save up enough money to cover a house fire ourselves, or, since we know that house fires are rare, we can pool our money together as friends and neighbors and when one of us in that pool gets unlucky and has their house burn down, it can be covered by insurance. A lot of us pay a little money for peace of mind that if a rare catastrophic event does hit us, we'll be OK.
This same concept applies to some medical issues, but there are a lot of medical issues it does not apply to. Getting a routine infection and needing antibiotics? Everyone is going to need that. It makes no sense to pool our money and pay out for the rare person that needs money for that. How many other medical expenses are like that? Even things that are rare for a group of 20-year olds like heart attacks are actually a lot less rare (more common than house fires, probably) for an older age group. So while it might make sense for a group of 20-year olds to pool money together to pay for the rare heart attack amongst that group, it might not make any sense for an over-50 group of people to do that same. It definitely doesn't make sense for a 20-year old to join that group. Yet this is exactly what we do. We all pool our money together and use it to pay for every medical expense that comes up. Minor infection? Use insurance! Need a couple stitches? Use insurance. Routine screening? Wow, didn't see that coming, good thing I have insurance.
This is insane, and this is the root of all our problems.
You're suggesting something like a fire insurance that you can buy when your house has already burnt down?>
No, it would be like buying fire insurance during a small fire that would only payout if your house burned down completely. The insurance guy would arrive, examine the fire, and determine that it had a 90% of being stopped with most of the house intact, and a 10% chance of destroying everything. Then, he would calculated how much you would need to replace your house in the case of complete destruction, and model the premiums accordingly.
>The last 10 years there have been double-digit increases in the amount of people who have such insurances, so it's really something of the last decade.
But the poor are going to be the last people to get such insurance.
Insurance with perfect info would be an amazing social good. If they could say "you can build a house there, but it will burn down in a forest fire 15 years from now", we could make an informed decision on if we want to build that house.
I think it is really just the high probability stuff that isn't insurable. Low probability high cost things should also be covered by catastrophic insurance.
I don’t think you can predict risk well enough for that to come true. No matter the predictive power, real life still carries probabilistic nature. We can assign 0.0001 probability to somebody’s house burning down, but in real life it either will, or will not.
They can then choose to skip insurance, and carry a very small risk of loosing a lot of money. Or buy insurance, and carry a very high probability of wasting much smaller amount of money.
Why would there be no insurance? Surely we would just pool our money together in a big pot for when people have their houses burnt down? Kind of like we do now - except possibly without someone skimming a huge profit off the top.
taken to the extreme, if complete data availability allowed to predict the future with enough precision, then everyone would pay an insurance premium corresponding to their insured negative events. In practice insurances wouldn't have any reason to exist. The foundational premise of the insurance concept is that risk is spread across every participant in an equal manner.
The problem is that it isn't. You need insurance for catastrophic loss, not for everyday expenses -- that's the problem with existing medical insurance.
Suppose you needed a new garage door opener for your house. If fire insurance was medical insurance then you would have the insurance company buy you one because it would be dangerous to not be able to get out of your garage if there was a fire. Then garage door openers and plumbing and doorknobs and smoke alarms would all cost ten times as much because people aren't price conscious when the insurance is paying for something, and fire insurance premiums would get completely out of hand.
I thought, the way insurance worked was, I take a little money from a lot of people, and when some rare event happens, I pay out that one person whose house burned down. I don't know the math off the top of my head to calculate how likely a lightning strike, or bad wiring or whatever might cause a house to burn down, but I'm sure such tables exist. So I bet every month that no more than one house will burn down. If no houses burn down, I'm in great shape and put that money in the stock market or whatever and get a better return. Maybe I get unlucky and have to rebuild 2 houses.
The sort of sense I get is, the insurance companies can't calculate the probability of catastrophic weather. So there's no way to pick how much to charge for premiums.
I get that it's a continuous curve. But if the cost of the premium is half the cost of rebuilding the house, why buy insurance? If I can squeak by one year without having to rebuild, I should just keep the money and rebuild out of pocket.
Perhaps I'm way way wrong. But insurance is cheap. If it's not cheap, why bother? if it's annually a big chunk of the total value of the asset, is there any point? Why put a $100 lock on a $50 bicycle?
The chances of getting cancer are so low you’d think some smart insurance company would want to sell you a catastrophic cancer policy with a low monthly premium. Then it wouldn’t have to mean financial ruin, the same way I have homeowners insurance (without which a fire would spell financial ruin for most).
Why isn’t this a thing? Can someone in the industry chime in?
The whole point of insurance is to distribute risk. At some point, if coverage granularity becomes too high, insurance will just become pointless, right?
Insurance needs 1) a large pool of coverage, where the combined average costs will cover the peak extremes. It also needs 2) variability: you have to have people with lower-than-average costs to balance out the higher-than-average costs. If everyone has average costs then once again, you've lost the uncertainty and any benefit of insurance.
To get 1), you could enforce insurance on people. To get 2), you have to ensure insurance products aren't ultra-specific. Neither of these are popular!
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