Because fire isn't going to affect you, obviously. The "security" of your house is only part of what folks buy such insurance for.
Only the privileged can do such things and get away with it. You'd have to have enough money to have a nest egg large enough to replace the stuff you need and care about, money to replace documents and ID, money for a hotel and travel, and money leftover so that a second even in a short timeframe does not leave you horribly off.
Poor people go without insurance all the time, but that is more the lack of ability to pay the premiums.
And of course they are charging more than they are paying out - much like a retailer charges more for a product than it cost them to make. There are exceptions in both cases: A car accident can mean someone gets more benefits than they pay in and retailers take losses on some things - but it isn't the norm. The entire point, however, is that the risk is spread out so that most folks aren't hit with a life-destroying event when bad things happen. That's the real service you are paying a bit extra for. I find it weird that you'd judge teh company on making money.
You can judge by how well they pay out claims - how much time it takes, what percentage they pay, and so on. Or how much money they make in total - and this should probably be something over a few years to balance out natural disasters.
That nest egg is much better insurance overall though, as it protects in many more scenarios... job loss, bad boss, loss of residence rights...
The basic rule of insurance is "never insure that which you would be able to pay out yourself".
There may be a few exceptions where you know that the risk/premium ratio is in your favour... I twice got my banks purchase protection "insurance" to replace bikes that a bike insurance wouldn't have even insured in that city. And that was with a free bank account.
Self insuring is a completely valid strategy. People do it all the time - that’s what a deductible is meant to allow for. Only makes sense to pay for insurance in a financial sense to cover losses you couldn’t comfortably afford to cover yourself or where you are required to by law.
Having said that, psychologically there is a behaviour changing effect of insurance even where it’s not financially needed which is also beneficial at least for me - eg you don’t worry about taking your expensive things on holiday, you don’t self ration medical treatment, etc. I value this and so am probably overinsured in a financial sense but I view it as money well spent.
> psychologically there is a behaviour changing effect of insurance even where it’s not financially needed which is also beneficial at least for me - eg you don’t worry about taking your expensive things on holiday, you don’t self ration medical treatment, etc.
I think it would only be a moral hazard if someone behaved irresponsibly because they have insurance. An alternate situation would be someone who was excessively cautious without insurance but responsibly cautious with insurance. Or someone who behaved the same way but worried less due to having insurance.
Since people tend not to make rational decisions when they are worried, insurance could even lower their risk. For example, my understanding is that many auto insurance companies cover windshield repair very generously because it reduces the risk that a customer will get in an accident trying to chase down a truck that kicked up a stone and damaged their windshield.
The deductible is also intended to take care of moral hazard. You still have some skin in the game. Insurance companies are wise to never shoulder all of the risk.
That would only fix it if the risk was being taken with no benefit. If the person has a $5000 deductible and could spend $300 to prevent a 5% chance at $50,000 in damage, now they won't, because their expected value of the loss has gone from -$2500 to -$250, which is now better for them than paying the prevention cost.
It also makes incentives weird, e.g. with a $5000 deductible you'd prefer a 5% chance at $50,000 in damage (expected value -$250) over a 10% chance at $5000 in damage (expected value -$500).
Which is why the expected value of the loss without insurance is $2500.
You have a 5% chance of losing $50,000 and a 95% chance of losing nothing. If you have insurance with a $5000 deductible, that becomes a 5% chance of losing $5000 and and a 95% of losing nothing. Expected value is the sum over all events of (probability of event) times (cost of event). 5% times $5000 is $250, 95% times $0 is $0, total with insurance is $250 instead of $2500. So you risk $50,000 over $300 at 5% probability because $45,000 of the risk is on the insurance company.
Although that's true, that wasn't quite what I was tryingt to explain. At some point buying cover for very likely outcomes or reducing deductibles really starts to look more like a payment plan than insurance.
By doing this I know I am costing myself money, ie the additional cover costs more than I think I am ever likely to benefit from it. I know this upfront but it is still valuable to me because I can rationalise it as a fixed cost and then simply not have to think about a later spending decision, which means I do things which make me happier and/or healthier, even though I could do those same things for lower cost.
It's some combination of valuing certainty and being able to separate the spending from the activity.
> "never insure that which you would be able to pay out yourself".
This is silly as a rule, IMHO. I could pay out for all new stuff if there was a fire, but it's a damn site cheaper to pay a few hundred a year for insurance.
The point of insurance isn't that they pay out an individual less than they take in, but the group in aggregate.
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.
Surprised (or perhaps not) to learn that cars can be self-insured in the USA.
Where I’m from, the main objective of mandatory car insurance is to pay for the life of the people you might kill or seruously injure. Thst can be a considerable amount that I’m not sure anyone would be eager to pay out themselves, even if they’ve got the funds.
The compulsory insurance limits in most states are laughably/ludicrously low. In MA, I have to carry $40K bodily injury liability, and $5K property liability.
Literally, I could be responsible for an accident that totals a 15 year old car and gives the driver an ambulance ride and a couple day hospital stay and have my compulsory insurance not be enough to cover the entire liability.
Of course, nearly everyone carries a substantial (10-50x) multiple of the compulsory minimums in auto-specific liability policies, and if you have any amount of wealth accumulated, it's common to have an additional umbrella policy.
Like, it doesn't make sense. My insurance policy is about $600/year and covers up to 25 million(!!!) euro in 3rd party damages. Like, I'd need to crash into several Bugatti Chirons or a plane to actually exhaust my policy.
I guess the reason why US allows it is because the society is so litigious - if you have that amount of money to self insure you also have enough money to fight pretty much any claim against you.
> My insurance policy is about $600/year and covers up to 25 million(!!!) euro in 3rd party damages. Like, I'd need to crash into several Bugatti Chirons or a plane to actually exhaust my policy.
Or one crash where you injure someone so bad that they cannot work anymore for the rest of their life, maybe need specialized support and so on. The damages in property are usually the least important part of a car crash.
You can’t typically self-insure the liability portion, because you are playing with other people’s money. You can choose not to buy collision insurance, which would cover damage to your own vehicle. Even then, you can only do that if you own the vehicle free and clear.
>>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.
That's....insane. Fires happen. Theft happens. Thunderstorms happen. Kids breaking things happen. Yes I can "afford" to replace most things in my house - but why would I risk all of my savings if I can pay ~20 quid a month and not worry about it??
I would change the qualifier to "comfortably afford" , but I do self-insure on most things.
Take an extremely poor insurance bet as an example. The electronics store will offer you an extended warranty plan on your new TV. An LG 55" LED TV (UK6090PUA) is $400 right now at BestBuy. 2 years of "protection plan" on that TV is $50. Do you think that anywhere near 1 in 8 TVs need any kind of service in 2 years, let alone something that would require the replacement of the TV? Sure, there are people who pay $450 for their TV instead of $400 and come out ahead. The vast majority don't and most people can easily shoulder the burden of buying a new TV when their current one breaks. (By the way, that insurance policy allows the insurer, at their sole discretion, to pay you the market value of your TV rather than repair/replace it.)
I self-insure against collision on our cars (meaning I dropped collision coverage). Collision insurance (covering repairing/replacing of our cars) was running around $1000 per year for 2 drivers and 3 cars. In 20 years, between insurance savings and investing the savings, I've banked about $40K by not carrying collision. Not only could I cover a collision now, I could buy 3 replacement cars outright and have money left over and don't have to deal with any insurance paperwork to do so...
I do carry liability insurance (at high limits) for auto. I have our home insured. I have a high-deductible medical insurance plan. I'm not anti-insurance in general; I am anti-insurance for losses that can be easily weathered.
The TV insurance thing is effectively a scam. Your home insurance likely covers accidental damage, and your consumer rights cover any breakdown in that sort of time (depending on where you live).
I agree it's a scam but even if my HO insurance would coverage accidental damage, I'm not making that claim. I have to pay the first $500 no matter what, then my rates will go up.
Worst case, my insurance company drops me and I have to scramble to find another company since lapses in coverage lead to all sorts of issues.
Still, I'm not buying the store's insurance on a TV. I might buy it on my teenager's phone or laptop depending on price and coverage.
Getting a new TV is the kind of thing most people on HN would barely think twice about. At which point the cost benifit simple. But, move up a few rungs to say a 5,000$ massage chair and you could replace it or do without but most people would feel it. Further, the policy is likely to be closer to 1/20th the price at something like 250$.
It’s still a bad deal, but you can feel better about your overall purchase knowing it will last at least X years.
What a weird question. I sometimes feel like people on this website are super ultra rich. Like $100k+/year salaries rich. I feel like anything up to say $300-400 I can "comfortably" replace - but more than that and it's starting to eat into my savings, which obviously I don't want to do. Like, my $800 TV is not expensive by most peoples standards, yet if I had to replace it it would be two months of my savings. That's not trivial or comfortable in any way. Maybe I wouldn't buy a $5000 massage chair, but I own a ~$2000 solid oak table and chairs specifically because I want it to last few decades, it's a really solid table. But I couldn't "comfortably" afford to replace it. That's what insurance is for.
You also rarely need to replace TVs, massage chairs, and solid oak tables.
The other aspect is the need to replace. You can live without a TV while you build up savings, you can live without a solid oak table, but you can't live without a vehicle to get to work, or a home to live in.
This is context you might find interesting, I make less than 40k a year. This is a choice that I have made, and I understand that it has implications for the lifestyle I can afford.
Mostly I am just using it as an example of a durable good.
Let’s say it’s going to last ~5 years on average then that’s a little under 20$ per week you can set aside for the next one. For something used regularly providing 20$ a week in value is a minimal hurdle, but that does not mean they can drop the full cost on a whim. Making the extended warranty a more understandable choice.
I've seen worse insurance bets than that: mobile phone companies offering insurance at fees and excess levels where you'd have to lose or break two phones a year for the insurance company to return more in claims than you pay in premiums!
It must not happen that often, otherwise insurances would not make much money.
Those events likelyhood, the cost of them, and what the insurance will actually pay you back are probably way off what you think it is in your mind.
Now I do think insurance is important for catastrophic events: low likelyhood, but incredible cost, because you can't take this chance at the scale of an entire society.
But for theft or kids breaking things, I'm not so sure.
The insurance company is taking your money, and investing in an index fund, and returning it to you minus their payroll and profit margin.
You can take the same money, and invest it in the index fund, and if and when you need it, sell your assets to pay for the loss. But you get to avoid paying the insurance company's employees.
You wouldn't buy insurance for the bag of rice you buy at a grocery store in case you drop it outdoors, the bag splits open and the rice is ruined. Why? Because you can easily afford buying another bag of rice.
The same reasoning applies to a car. If you have sufficient savings, you can buy yourself a new car if and when you need to. Until then, just invest the savings and reap the investment rewards, exactly like the insurance company will be doing.
But suppose you can afford to buy a new car (like many higher income professionals in the US), but you can't afford to pay for someone else's $500k to $1M medical bills (like almost everyone). Then you would forego the collision insurance for the vehicle, but still purchase the bodily injury liability and personal injury protection insurance.
> You wouldn't buy insurance for the bag of rice you buy at a grocery store in case you drop it outdoors, the bag splits open and the rice is ruined. Why? Because you can easily afford buying another bag of rice.
> The same reasoning applies to a car. If you have sufficient savings, you can buy yourself a new car if and when you need to. Until then, just invest the savings and reap the investment rewards, exactly like the insurance company will be doing.
But it's not the same reasoning. I can afford to buy hundreds of bags of rice every month if I need to, without stretching my budget significantly. Rice for me is pocket change, so yes insurance would make no sense.
For the vast majority of people, a car is not pocket change. Sure high income people might be able to buy another and not go bankrupt, but there's a big difference between being able to afford something, and considering the expense pocket change.
If you can't afford to replace it, then you purchase insurance for it.
Replace "it" with whatever you want. Just because a car is not pocket change, doesn't mean you can't afford to easily replace it. And maybe if you feel that it will cause you stress or stretch you thin, then it doesn't fit the definition of "afford to replace it". Auto insurance company has way more data than you do on how likely it is that they will need to replace your car, so they will charge you appropriately, plus their salaries. So if you have a sufficient emergency fund, then you don't need the insurance, just like you don't need it for the bag of rice.
If it happens once on a lifetime and you can afford it: You just calculate how much it'll cost in insurance policy vs invested in government bonds.
The other point: I think most people here are concerned with the insurance paying up once the real deal happen. Most of the time the insurance will: 1. take a lengthy legal path to exhaust you 2. pull some article that you didn't notice from the contract to get away with it.
So you are screwed twice. ouch.
I'm not claiming insurances are a scam and you should avoid them. I'm using them. But I can understand why some people are frustrated.
You seriously underestimate the cost of a significant wreck in the US. The medical bills alone could reach into the hundreds of thousands. The pain of paying $100/mo for insurance vs having to come up with $250,000 all at once makes insurance a no-brainer.
My state used to allow drivers to self-insure (I think they removed the option for individuals recently). I was a really bad deal though, since you had to give the state a minimum $50,000 deposit interest free. It's cheaper to just pay for insurance and earn the returns on your cash.
Not many people can afford the loss caused by a catastrophic fire, in which case it does make sense to purchase insurance. But if you are a millionaire and have a $200k house, then you don't really need to buy insurance for the house since you have ample funds to purchase or build a new one if the need arises.
Insurance is putting the risk of a loss onto someone else. Millionaires absolutely buy insurance because it is often the smart thing to do. It is no different than buying/selling options to hedge your stocks during a down turn.
> if you are a millionaire and have a $200k house, then you don't really need to buy insurance for the house since you have ample funds to purchase or build a new one if the need arises.
Unless that fire spreads to someone else's property or kills/seriously injures someone, in which case you'll wish you had insurance.
That still makes no sense at all. If you are millionaire with ample funds, you'd still be down massively compared to if you took out the insurance.
Example - The average UK home contains £35K of stuff. The average annual contents insurance premium is £139. You've been paying for ten years and "Oh no! A fire destroyed all my stuff". You're better off by £33600. In aggregate the insurer makes money, but they don't necessarily make money from every individual. This is where the model makes sense for the buyer and the seller.
Your assumptions are massively overestimating the probability of loss. If insurance premium is only $139, then the probability of loss must be correspondingly low such that the insurance company can make a profit (on aggregate) before having to pay out $35k.
Ok. If you are a millionaire who really would think nothing of shelling out $35,000 tomorrow, what's the best case scenario of going without insurance? 30 years saving $139 a year means you've saved $4200 by going uninsured.
$4200 is noise to someone like this. Meanwhile, if you do suffer a loss, you will be down far more.
I really start to struggle with the concept of insurance whenever I imagine the percentage of people working at the insurance company who’s primary incentives involve making sure that I do not get the payout I need should a disaster strike ... how many people are there strategizing the legalese and structure of the policies in a way carefully designed to appeal to me at sale time but to hurt me at claim time ...?
I also shudder at the thought of overly large executive teams milking the profit stream of the company to ensure optimal balance sheet (minimal legal unleveraged asset amounts + maximum access to government lender of last resort backstops).
It’s also very hard for me to imagine the nature of the value chain back to me that comes from the CEO of an insurance company flying around in a private jet at great expense — it’s just not possible for me to imagine that the team of suits in jets running the insurance company could ever be engaging in an activities beneficial to me as they pursue typical corporate business activities...
As a consumer, I think the most sensible strategy for picking insurance involves modeling the profit center clauses of the policies to find who is most likely to be bilked and trying to estimate whether you are more or less likely than the average consumer of the product to hit one of those likely policy “profit centers” ...
In markets where the profitability of insurance companies is regulated, I have a lot of trouble believing that “boondoggle machines” aren’t invented throughout the enterprise to create false cost drivers that ultimately turn profits into costs and higher executive salaries/ bonuses - a kind of profit money laundering.
I think that trust is very valuable but it’s hard for me to believe that insurance companies as a general category are likely to be worthy of trust. If anyone has some arguments how to get over this hangup, would love help shifting my mindset to a less negative outlook here ...
This really isn’t how insurance works. These are regulated industries where pricing, underwriting and actuarial models are under heavy oversight. No one at an insurance company is designing policies for you to get screwed over.
Most insurance companies are relatively low margin enterprises. Most for profit insurance companies manage to turn a 0-5% profit. Claims make up 60-75%, ~15-20% in acquisition related costs and then other expenses like r&d, servicing costs, etc. end up eating the rest. Auto insurance for example is historically a break even business or small loss on underwriting premiums for most companies.
Companies that can underwrite profitably actually help keep the premiums that consumers pay down and keep the market in check from inflating premiums.
I used to work for a car rental company. Actually, it was an insurance company that rented car. Cause 80% of their profits were on the insurance. The car rental part was just to bring more people to insurance part.
Car rental companies seem to deploy exactly the kind of tactics that motivates my skepticism of insurance companies in general.
Car rental companies are notorious for deploying high pressure sales tactics to bully customers into paying for damage waiver or insurance upgrades. I’ve heard of companies basing bonuses for employees on these conversions and I’ve also heard of companies that just have a hard and fast quota with policies like “you need to get this many upsells per unit time or you are automatically fired”.
The fee structure and legalese for rental cars is often customer hostile for the purpose of scaring people into paying for upgrades they don’t need — and in many cases very large categories of risk are excluded from coverage via tricky language ...
I rented from a company called goldcar in Spain recently. Their rental prices are insanely low (paid 30 euro for a car for 3 weeks). They seem to make money entirely on the extras and the float of your excess deposit. They charge you your excess in full when you pick up the car (1200 euro for the car I had) then refund you when you return minus any damages. I’ve rented from them a few times and they do some shadey things which I’ve learned to be careful about.
- They have a range of constantly changing and sometimes screwy refueling policies: buy the tank in advance return empty, “flex fuel” where you pay a (non-refundable!) fee to pay a deposit on the tank and then get refunded your deposit based on how much fuel is in the tank when you return it, and (only sometimes and seemingly at a different rental rate) buy full return full.
- Once they charged my card in dollars rather than euros (without asking) resulting in a huge 5% currency conversion fee by their payment processor - I can’t imagine that fee doesn’t make it back to them in some amount ... (that really pissed me off and I probably wouldn’t ever have rented from them again but I actually didn’t notice this until much later)
I think they’ve gotten dinged in the past for some illegal/deceptive practices. I personally have mostly come our ahead using them — but only by being careful and knowing exactly what to say/do on each rental experience ... I think from recent rental experiences it has gotten less scammy for me.
The mentality necessary to navigate rental car insurance decision making seems the same mindset required to engage in business with other insurance entities - most insurance markets generally seem ripe to me for similar adversarial game playing ...
But how fungible are the categories applied to a given cost source? Suppose a company finds a way to target customers in a way they predict is likely to outperform the actuarial models using “expensive ad tech”. They can shave off some of the claim cost, but avoid underwriting profitably by inflating the cost of customer acquisition (including big bonuses for their “industry leading” customer acquisition performance ...)
To me some variation on this kind of scheme seems likely to be common - am I wrong headed to think these kinds of tricks occur often?
No I don’t think that wouldn’t work long term at a public insurer. Expense measures are fairly well understood by analysts, investors and regulators. If expected claims got out of wack with pricing it would become a problem for an insurer.
Many insurers have near fixed acquisition costs due to distribution channel realities. Agents take a commission, Google and Ad networks take a referral fee, etc. and those with large direct to consumer portfolios may experience challenges in underwriting profitability as is. Insurers will certainly try to manage those acquisition expenses efficiently and to optimize underwriting performance. Executive comp would be anchored on those things rather than allowed to underperform and compensated for.
If you call beating actuarial models a trick, then yes that certainly can occur but that’s kind of the name of the game. You’d rather companies figure this out because models become more efficient, pricing becomes more segmented and risks are priced accordingly.
This is a good point I think — but I don’t find myself biased to perceive buying groceries as entering into an adversarial relationship with my grocery store — maybe because the relationship is transactional and tends to end immediately after the transaction...
Maybe I’m wrong but I don’t think there is as direct a conflict between me and the grocery store — me being happy with a particular purchase is not generally associated with the grocery store being “unhappy” that a particular product “works out for me” when I consume it ...
You can’t say insurances will be there every second in case of life-threatening event, given how many times we’ve seen them ask for a paper you don’t have, and how often it is required to sue them to get the supposed benefits, years later.
Only the privileged can do such things and get away with it. You'd have to have enough money to have a nest egg large enough to replace the stuff you need and care about, money to replace documents and ID, money for a hotel and travel, and money leftover so that a second even in a short timeframe does not leave you horribly off.
Poor people go without insurance all the time, but that is more the lack of ability to pay the premiums.
And of course they are charging more than they are paying out - much like a retailer charges more for a product than it cost them to make. There are exceptions in both cases: A car accident can mean someone gets more benefits than they pay in and retailers take losses on some things - but it isn't the norm. The entire point, however, is that the risk is spread out so that most folks aren't hit with a life-destroying event when bad things happen. That's the real service you are paying a bit extra for. I find it weird that you'd judge teh company on making money.
You can judge by how well they pay out claims - how much time it takes, what percentage they pay, and so on. Or how much money they make in total - and this should probably be something over a few years to balance out natural disasters.