What makes gambling wrong but insurance right?
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Gambling involves the creation of risk where none previously existed, while insurance is solely about the transfer of risk from one party to another (or more than one).
both gambling and insurance are slightly-negative-expectation plays with occasional large payoffs. With gambling the payoff is random, but with insurance the payoff is coupled predictably to an external negative event.
I worked in insurance. I am not a fan of it. But you need insurable interest in someone to take out life insurance on them. Otherwise, people would just insure random strangers and then kill them.
This is not hypothetical. One of the forms of insurable interest is key employee life insurance. There have been cases where a business decided to call entry level employees "key employees" so as to take out life insurance, and then these "key employees" kept dying." There have also been historical cases where female serial killers were offing relatives for the insurance money.
When you take in account that personal utility functions aren't linear, insurance and gambling are no longer slightly-negative-expectation, but usually positive.
In other words, if U() is your utility function, U($1M) != 1MU($1). For most people, U($1M) > 1MU($1) and U(-$1M) < 1M*U(-$1).
Is there an example of a voluntary transaction where the expectation is negative?
But then you're not talking about a pure monetary transaction. More like a trade. Which goes back to your point: nobody makes a voluntary transaction where they get less value than they provide.
Take charity donations, for example: people value the warm feeling from helping others and a clear consciousness more than the money they are giving.
You have to get through a few steps to agree though! You could disagree by saying that people's "revealed preferences" are their "actual preferences", or by saying that people's utility function after accounting for hyperbolic discounting is their "actual utility function."
Diminishing marginal utility implies that you gain more utility by acquiring your first penny than you do acquiring your hundredth. Now, at such small levels of money, you could certainly argue that almost nothing is for sale at 1 penny, but once you get above the level where the disutility of carrying around a coin is dwarfed by the utility of the money itself, diminishing marginal utility applies pretty well.
Losing $10k when you have $20k hurts less than losing $10k when you have $10k.
There are even some techniques to discover and plot your own utility curve, which is quite useful when you're handling things like investing and insurance.
For example:
* Would you give $1 for a 10% chance of receiving $10?
* Would you give $1 for a 9% chance of receiving $10?
* Would you give $10,000 for a 1% chance of receiving $1M?
* Would you give $10,000 for a 0.9% chance of receiving $1M?
* Would you receive $10 for a 1% chance of losing $1000?
* Would you receive $10,000 for a 1% chance of losing $1M?
* Would you rather do nothing or have a 50%/50% chance of winning $1000 and losing $1000?
* Would you rather do nothing or have a 50%/50% chance of winning $1M and losing $1M?
* Would you give $1 for a 1% chance of winning $100?
* Would you give $1 for a 1.1% chance of winning $100?
* Would you give $1 for a 1.2% chance of winning $100?
.
.
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* Would you give $1 for a 10% chance of winning $100?
Insurance is defensive while gambling is offensive.
You could also say that gambling is net negative sum, while insurance is net positive sum. The positive part being the long-term economic benefit of people not having their lives harmed or ended by low-frequency, high-expense events.
When transactions are truly consenting (which is not the case with addicts) and have no negative externalities, sure, we should default to letting people do their thing. But when that's not true, voters, who are the real insurers of last resort for societal risks, end up having to make value judgments.
Really? I had no clue that it was that bad.
Banking might be the "most heavily regulated part of the economy", but the regulations that mattered were also disbanded one by one in the 2 decades leading to the crisis.
The government gave free reign to those "private actors".
Besides government, when it doesn't play its role as being there for all citizens interests, is just a lackey for private interests and powerful lobbies (and, no, "no government" wouldn't be a solution: just more of the problem).
And if I go bankrupt gambling society won't bail me out, I need to get a job.
If you go bankrupt, that is society bailing you out. We cancel your debts and let you go free of them.
We also won't let your family starve, we'll pick up a chunk of your medical coverage, and you'll be consuming all sorts of public goods without paying your share until you're back on your feet. If you ever get there, because gambling addictions that go as far as bankruptcy can be devastating personally.
And consent is not a clear, tangible thing that makes it all OK when its given.
An abused woman might justify her husband, for example, and find all kinds of excuses and say it's OK.
Also, just because someone can consent to something because it's better than the alternative, doesn't mean the deal they are given is OK. Someone on the verge of starvation might be OK with a rotten deal. We might just need to assist them and fix what caused them to starve starvation in the first place, instead of validating the "benefactor" that came up with the deal.
It is probably true for eg. real estate insurances, but there are also quite a lot of extremely overpriced insurances for all kind of products (eg. cellphone) that people certainly can afford to lose, but they are fooled by loss aversion and hyperbolic discounting.
Those who can, not necessarily those who will. It's not as simple an equation as "transfer the risk and you're good".
Isn't the second part of this statement false? How could insurance companies stay in business if their profits are negative? Isn't it a net negative sum for the customer base by design of the actuarial tables?
Basically, we could all do this the same way. Take all the money you pay into insurance and invest it. When you have an incident, take it out. The only downside is if you have an incident larger than what you have invested so far. People also have set up collectives that do this as a group inside of paying others.
A more concrete way of stating this is: the purpose of gambling is to try to earn an outsized return, while the purpose of insurance is to make you whole in case of loss.
A gambler, on the other hand, is indifferent to the outcome of the roulette wheel except for the monetary payout. Same goes for buying options unless there is ownership of the underlying security.
A gambler had an incentive to cheat to make the transaction go their way. An insurer has an incentive to help make the event the insured does not want to happen not happen.
The risk of each client is not transferred, but eliminated.
Also, arguing by definition is pointless, put since we're already debating pointless semantics, google 'risk transfer' and see what comes up.
Pooling risks makes things more predictable (not sure what's the avg. profit of insurance companies)
A small correction, it's: "its own question"
It varies by company and type of insurance but profit margin seems to be in 5% range or so.
The risk of losing money gambling to me seems less relevant than the risk of getting addicted to gambling and making irrational decisions. There's a 100% chance that when I buy a BMW that I'll lose money, but of course no one believes there's a problem with car addicts that the government needs to solve. There is, however, a real problem of gambling addicts, not too different from heroin addicts.
That said, solving the problem with prohibition creates the normal prohibition problems (rational adult gamblers lose their rights, black markets are setup, etc). I tend to like the self banning programs that many states have set up. If you feel you are addicted, you can sign a form banning yourself from casinos for a period of time / life. If you go back, you can be arrested for trespassing.
And of course, the governments do-gooder motivations seem suspect when the government makes lotteries illegal, but then sets up their own lottery monopoly with absurdly low payout rates.
That's because there are concrete benefits from doing so (going from one place to another). And even with that, there are all sorts of regulations for getting a license to drive a motorcycle, where and how to drive one, what to wear while riding one (a helmet is mandatory in many countries), etc. And even so, if motorcycle related accidents where that many that it would matter, driving one would have been outlawed altogether probably.
>There's a 100% chance that when I buy a BMW that I'll lose money
Yeah, but you also get a BMW. With gambling you on average just get nothing.
In one of them you get a luxury item -- with both use value, status value, and resale value.
In the other you get nothing at all. Not even status.
For some people, luxury cars are a waste of money. Everyone has their own priorities on what is important to spend their money on. Some people like expensive cars and spend their money on it. Some people just want something that won't break down and can get them to work so they can spend their money on whatever hobby they really like.
Gambling certainly gets you status - walk around Vegas and check out the businesspeople playing together. Or for a non-casino version, read about people playing Liar's Poker on Wall Street (in, aptly, Liar's Poker).
And on a smaller scale, it gets you enjoyment. I've had some fun times playing low-minimum blackjack, chatting to other players and the dealer. It got me "nothing at all", but in the same sense that a concert or the markup on drinks at a bar gets you "nothing at all".
It's the money (they can spend) that gives those businesspeople status.
Nobody looked at them and said "they are gamblers, hence they have status".
>And on a smaller scale, it gets you enjoyment.
Heroin too. But nothing lasting and nothing sociably valuable.
I know people who are literally homeless because they'd rather spend their money following bands around. Some of those bands are too niche to be "socially valuable". Does that mean we need to equate music with heroin, too?
The existence of addicts, or the lack of a social movement or physical product, does not determine whether something is worthwhile. Applying your standard would cut out everything up to "going for a walk in the woods", unless by socially valuable you just mean "things I find aesthetic".
In the end, it becomes a problem when it's no longer entertaining (just a game), but rather pathological.
I've certainly seen movies bad enough that I would have happily spent my money playing dollar blackjack instead.
Craps is also a very low (<1%) house edge, and it's a more social and exciting game compared to blackjack (to me atleast)
This is an even better example. I didn't cite it because I couldn't remember the edge on good play, but it's a solidly social experience which can be had for a very reasonable price.
Not necessarily disagreeing, but it raises the specter of double sided moral hazard: what about people who buy houses near flood plains and either don't insure or under insure them because they expect emergency relief government funds to rebuild and thereby recoup their loss at public expense? What about young people for whom health insurance premiums are uncomfortably high, so they instead show up at the emergency room and don't pay? What about parents who do not purchase life insurance and if one dies, the othe goes on public assistance? I realize this may be a US centric issue.
If you drive almost any highway in Germany, you'll see a great number of (goverment-funded) posters against speeding. If you commit enough driving offences, you may need to pass so-called "medical-psychological examination" (MPU - "Medizinisch-Psychologische Untersuchung") which is dubbed "idiocy test". This will cost you time, money and dignity. There are also campaigns agains short-distance driving etc.
So I think what you say is not true, quite many people believe that there is a real and present problem with car addicts that the goverment needs to solve.
buying medicine vs using medicine vs drug abuse
Buy a Harley/BMW, and come to regret it? You can sell it, and claw back at least part of your mistake. (and if you bought it Used in the first place, that sidesteps most of the depreciation argument)
Blow your paycheque gambling? You have no recourse.
Granted, gambling does give you betting markets which may help predict the future as well. But I would guess for broader topics only. Perhaps someone could enlighten me otherwise.
Insurance isn't supposed to have big paydays, it's just supposed to make you whole. Your house insurance might pay out a million dollars, but only if that's what it actually costs to rebuild your house.
It's telling that when insurance starts to get away from this model, like people insuring stuff for far more than it's worth, or taking out life insurance policies on strangers, both the law and morality start to frown it.
The loss you're supposed to be covering is your lost income and other less tangible but quantifiable benefits to your family. Although I'm no expert, I'm guessing underwriting becomes more difficult for policies that are completely out-of-line with your income. There has to be some justification for the payout to meet underwriting standards, which in essence is considering the size of the loss. If you're asking for a policy that is very unusual, it will be much more expensive, if you can get one at all.
This matches the historical and in-practice role of the insurer: they try to keep you from overinsuring things, or insuring things you don't have an interest in preventing from happening ("insurable interest"). Both of these create a so-called "moral hazard", the same category that make gambling bad, and vastly increases the fraud they have to deal with.
[1] or rather "the kinds of risk transfer we want to allow" vs those we don't
With that said, given appropriate modifications, your example could legitimately be called insurance. If
- There were a quantifiable decline in prestige from the loss (per sibling comment), and
- the payout were low enough that the insurer thought that you'd still prefer winning to loss+payout, and
- this were a common enough thing
Then yes, it would look a lot more like insurance and merit being regulated like that and less like gambling.
http://www.cnbc.com/2014/03/14/buffett-insures-billion-dolla...
Those challenges are all free, though you could get really deep and argue that consumers are paying incremental value for providing email addresses and marketing leads to the customer.
gambling sometimes provides a huge payout after a small
loss, whereas insurance provides a payout roughly equal
to the loss. Insurance isn't supposed to have big
paydays, it's just supposed to make you whole.
To compare apples-to-apples, gambling sometimes provides a huge payout ("winnings") after a small loss ("bet"), whereas insurance sometimes provides a payout ("winnings") in the event of a loss in return for insurance payments/deductible ("bet").
I place a $5k bet that has a $1M payout. I win, and I'm up $995k. I don't take the bet, and I don't make anything. That's a $995k net ($995k - $0).
I buy a $5k insurance policy against my $1M home. It burns down, and I'm only out $5k (the cost of the policy). I don't buy the policy, it still burns down, and now I'm out $1M. My net is still $995k ([-$5k] - [-$1M]).
The "lose your bet" / "buy insurance but your house doesn't burn down" scenarios are the same either way (-$5k).
By only looking at the net benefit, you're arbitrarily ignoring that. Of course if you ignore the thing that makes them different, they look the same.
If I knick a priceless artifact (e.g. baseball card), the loss is practically nothing, but socio-economically noticeable via devaluation.
"Professional" gamblers treat gambling as trading time (looking for opportunity, like in Poker) versus risk. Bad gamblers (e.g. slot, roulette, etc) play out games where there is no possible benefit from time investment. No consistent reward for trading any commodity.
There's no difference between many kinds of gambling and insurance, other than the regulations and mediums involved. The insurance companies are still managing risk vs reward.
With insurance, only the first two parts can happen. The third part can't happen, because the second part only happens to compensate you for a loss. When gambling, all three can happen. Of course, on average it won't, but it's possible to put in a dollar and get out a million dollars with no losses besides the dollar and a little bit of time.
It is sometimes possible to arrange all three with constructs we call "insurance," like taking out a life insurance policy on someone you don't like, but my argument is that this is where we start to see insurance as "wrong" too.
[0] e.g., someone formally attached to a team in a sport and having a financial interest in their performance also betting against the team as a hedge.
Arguably, that's the entire point of insurance: mitigating the risk of the insured activity so that it is more acceptable as a choice (because unmanaged risk can make an activity less acceptable than average expected net benefit would suggest.)
It's pretty hard to lose your car/house/job to an insurance addiction. Your risk differences are part of an underlying mechanism that results in this outcome.
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.
My source is having done investment in and diligence on a couple insurance companies (which I've since sold.)
Gambling with your health...
All of these various experiences made me realize that a) American justice is really solely about the transfer of money from one party to the other, and is rarely equitable (sometimes one way, sometimes the other); and b) the entire industry is really a way for a small group to direct the investments of and reap the profits from the small capital excesses of millions of people.
Also, in my country you are obliged to have an insurance that covers costs in case you cause an accident in traffic. Suppose you would hit me, it's your fault but you don't have money? I don't buy anything from you going to jail, you should have insurance.
Maybe you would argue that the state should in such cases pay, then I could agree with you. The fact that insurance companies of obligatory insurance have stock holders is a perverted concept with big (political) conflicts of interest.
I do not have health insurance. I recently had major surgery that others have helped me to pay for, but I was in fact completely prepared to die, as odd as that may sound to most.
Our lives on this earth are finite. Most people don't deal with that reality in any meaningful way, even when they acknowledge that it is true intellectually.
Why didn't you have the courage to say no to them and simply die according to your principles?
The only difference between you and me in this area is that I can admit that I'd rather not die now, and my relationship with the people who would pay for my major surgery is a little more formal.
This business about how health insurance is a terrible idea and you're prepared to die from a lack of it would be a lot more convincing if you were paying for your own care and foregoing major interventions.
I understand the whole thing to be saying, I accept mortality and it wouldn't have been so bad to forego the surgery and die. Which makes me wonder why he went ahead with the surgery and foisted the resulting high cost onto their mysterious benefactors.
I could understand (if not agree with) "I was prepared to die, and it wasn't worth the cost, so I'm dying now." I could understand "I was prepared to die, but preferred to live, even though it came at a high cost." But I can't understand "I was prepared to die, but preferred to live using other people's money, but by the way insurance is terrible and I only buy the minimum required by law."
And frankly, I would have preferred to leave here, but it was not my choice. In fact, I have not dealt with it well at times, and even got drunk a little over a week ago. Shameful to admit, but true.
I have commented further in this thread at https://news.ycombinator.com/item?id=13917089 .
Well, that's not the direction I was expecting for this. Probably not much point in arguing, since you're not coming at it from a rational perspective to begin with.
Still, I can't resist trying one thing. Do you look for cars before you cross the street? Assuming yes, how is that any less of an act of unbelief than buying insurance?
At the same time, I am not so arrogant as to think that I have control over the larger circumstances in which I find myself. The economy could collapse, my family members could fall ill, war and famine could break out, society could become degraded and violent, the government could oppress me and those I love because of our beliefs. To me, it is far less rational to think that insurance or any of the other social structures available today will be of any assistance in those circumstances.
And it is completely irrational to believe that man has created all of the universe, or that somehow order was imposed on chaos without some divine intelligence directing things. On a more practical note, it is also irrational to assume that the very favorable (at least for a majority of the people) circumstances that have prevailed in the U.S. for the last couple of centuries will continue indefinitely. History demonstrates that the opposite of that is more likely in the long run.
But you're right, there's probably not much point in arguing, since you're not coming at it from a rational perspective to begin with. ;p
The alternative (barring socialized medicine) would be to refrain from treating people unless they can proved their ability to pay, which sets you up for dying unnecessarily just because you forgot your wallet or something. And I'd really rather not have it be like that.
Of course, our current insurance mandate requires a lot more coverage than is necessary just for that, but at least a big chunk of it resembles the auto insurance requirement.
The worst case would be that everybody saves huge amounts of money on their own, not touching it, for the case of a catastrophic event. If the catastrophe doesn't happen, or not as bad as feared, you wasted money. If the catastrophe is larger than expected, or happens when you are too young to have saved enough money, you are out of money despite the savings.
Either way, this is the exact opposite of solidarity. Also, in that setting, not saving any money would be some kind of gamling, too.
Solidarity means that if somebody had really bad luck, their peer will help them, because it could have happened to any of them. But that doesn't work well for large groups. On the other hand, we do want large groups to cover catastrophic events, because only then it is affordable. So we need some entity to coordinate their efforts: An insurance, a state, or something in between like a non-profit organization.
Or, am I overlooking something here?
As fragmented as society is today, I can understand why people believe insurance is an absolute necessity, but I also believe that mechanisms like insurance contribute to and frequently cause that fragmentation.
Insurance in particular warps normal market forces. For example, it seems likely to me that the very existence of huge pools of insurance money has contributed greatly to the hyperinflation in health care costs that has continued unabated and really unopposed for the last two generations. My mother told me recently that it cost a total of $80 for her to give birth to my sister in a hospital in 1959. I'm sure the billed cost for hospital birth today is many times that amount. That is an example of the great harm that insurance can do to society, as opposed to any perceived good.
> I am a member of a community that takes
> care of its members.
> Insurance in particular warps normal
> market forces.
Where church, family can be more down to earth and driven by moral obligations towards person that needs help.
That is how I seen stuff working in asian societies, if you are not helping your fellows you quickly find out that no one will help you. Where for profit institution has all incentives to not help or help as little as they are obliged. They also can spend more on legal help which will protect them from spending. Predatory insurance companies are not insuring people who are likely to get sick. Family or church will provide help despite they know that person will have expensive treatment.
Sad thing is that more and more people find themselves with no close family, organizations, because of how society in western countries (cities) develops.
If you don't want to hand over the gains to a private (or publicly) owned insurer then join an insurance mutual, or if one doesn't exist then start one.
GEICO was founded because they though they could provide needed insurance cheaper direct through the mail, rather than through an expensive army of sales-people. They've saved their customers huge amounts of money over the last 60 years (for disclosure, I don't work for or use GEICO, I actually use USAA which is based on same premise).
In church, you have a leader who is milking the flock for an unconscionable amount of tithing, and a bunch of people milking their religious connections to get more business. Of course they will all tell you to help each other out, it's part of how they scam the flock.
And insurance can only work if it's priced according to it's risks. If you have an expensive illness or are likely to get one, it's actually selfish to think that an insurance company will take a massive loss to help you out. If you had purchased medical insurance from the company before you got sick, you'd still be covered and your costs/risks would have been part of a large pool that was correctly priced at the time.
That's the problem with Obamacare, people wanting a free lunch. It destroyed the private insurance market by banning the consideration of prior health conditions, so now only sick people buy Obamacare. Before Obamacare I paid $400 a month for a $5,000 deductible coverage for my family. My first year of the ACA a similar plan cost $1,100 a month, second year $1,300 a month, and this year it's $1,800 a month.
So now my family is on short term insurance and if I get sick it ends after 6 months. Plus I get to pay massive tax penalties for the privilege of having insurance that's not ACA approved. I'd like to go back to my old plan but the ACA banned it.
This isn't true. The incentive of paying penalties is so that young healthy people like me get insurance, so that I can dilute the risk pool for my sicker, fellow citizens. Insurance companies denying you based off of pre-existing conditions was the status quo because it was profitable (for the insurance companies, not for society at large) to insurance mostly healthy people. However, those sick people still need care, and so they end up at the hospital anyways and in doing so, caused outsized (due to severity) externalized costs (that the insurance companies got to avoid by pitting it onto hospitals / government programs). I notice that everyone who claims the ACA's fundamental premise of getting more people into the insurance pool is flawed also mentions their insurance premiums going up. The people (companies) getting a free lunch in this country are those who get to externalize the true and total costs of their actions.
Inflation of healthcare costs is directly caused by government regulation.
There's a lot of bad regulations in the US, on top of my head: public hospitals are not allowed to negotiate the price of medical equipment, so pay 5-10x the price paid in France, for instance. Gross margin of health insurances is capped as a % of the underlying medical cost, so the higher the costs, the higher the profits.
US healthcare system is simply crazy. I (and my family) have very very good coverage thanks to my current job, but I'm out of the country as soon as the situation change (not that I'd have much merit doing so: my visa doesn't allow me to change job, so if I'm fired or my employer collapse, we will have to leave anyway).
> In its 2000 assessment of world health care systems, the World Health Organization found that France provided the "close to best overall health care" in the world.
> the rising cost of the system has been a source of concern
> Like most countries, France faces problems of rising costs of prescription medication, increasing unemployment, and a large aging population.
Something like automotive insurance or disaster insurance is completely different.
Most notably health insurance was previously used as a tax free way to provide benefits to employees, has always provided access to phenomenally lower healthcare costs and now legally provides some fashion of free preventative care.
How is the money wasted if you still have it saved?
Rather, it would have been wasted if you gave it to the insurance company instead of saving it yourself.
You don't want to keep your emergency fund in non liquid investment or high risk one.
However, if you had paid that money out to the insurance company rather than saved it yourself, then you lost both the opportunity cost and the principal.
Also, my knowledge on Canadian car insurance policies is severely limited, but if you can fulfil your insurance requirements by setting aside a lump sum of money, then I'm assuming you're either still liable for all damage over $35k, or the Canadian government will cover that part, which is still an insurance, except you pay it through taxes.
When you pay money to the insurance company, you can't withdraw it, and there's no guarantee you'll ever get anything back from them.
See the difference?
There are legal system problems. The guy who loaned my mortgage has a good idea if I'll pay him back and even then its barely financially sustainable. Making my plumber go thru the same credit gyrations to figure out if I'm about to get into a car wreck and need to declare bankruptcy because I can't pay my car loan without a car and the side effect of that bankruptcy is the plumber gets stiffed as yet another unsecured creditor is asking too much to get a toilet installed and a bill sent. The cost of doing all services as cash and carry is too high especially for general contractors. Imagine a GC on a jobsite having to do payday at the top of every hour handing out cash to every sub.
bankruptcy works as a social policy for financial disasters but applying them to other disasters is a mess. Its more disruptive to have a financial system clogged with bankruptcies due to wild fires destroying homes than to just balance it all out via insurance payments.
You could kinda sorta work around it by exploding the concept of government disaster area financial giveaways to include fender bender car accidents but the government is incredibly inefficient compared to letting little insurance companies provide basically the same service. It would be like calling for a Marine Amphibious Assault Force because a neighbors dog pooped on my lawn.
Banning insurance like behaviors like church food banks would be problematic. Things start scaling up and at some arbitrary point between soup kitchens and current day Catholic Financial Life Inc you'd have to draw a contentious line.
Another similar solution to bankruptcy would be making past due accounts disappear rather than living forever. I had a girlfriend who was judgment proof and didn't make nearly enough money to get health insurance and wasn't set up under medicare either long before obamacare back when most 20-somethings spent some time uninsured. Anyway the collections people tried to collect, but she had nothing, not even worth garnishment, so eventually the debt just disappeared. Without collections agencies, if collecting were more expensive, the end result would likely be a lot of small businesses losing money and the destruction of the credit system oriented economy, which would probably be a net long term positive.
Suppose there is a low frequency event such as a comet heading for earth; the right thing to do is build a shield or way to reflect it. Suppose there is a flood once in 500 years; the right thing to do is to build dikes.
Money is a virtual thing, we sometimes forget.
Technology and innovation can oftentimes be the alternative for insurance.
Some guesses:
1) Insurance companies' gross margins are too high, due to asymmetric information, scare-mongering or similar?
2) People buy insurance to cover shocks that they are perfectly able to bear themselves?
3) People buy insurance to cover risks that have effectively zero chance?
4) People buy insurance that doesn't cover them in the way they expect (i.e. the insurance company would deny the types of claims they're expecting to make)?
?
Cheap insurance for rare catastrophic loss of high-value capital assets (ie shipping, buildings and contents): fine. The oldest form of insurance (Lloyds).
Expensive small-value insurance (phones, PPI): probably a bad deal for the consumer.
Mandates to insure other people (motor vehicle, public liability, etc): here the cost of the premiums are a useful incentive to avoid inflicting unnecessary risk on bystanders. Although that can make it prohibitively expensive for young people to drive.
Disguised forms of saving (life insurance): it's complicated. Also a surprisingly old product. Maybe best handled by mutual societies rather than for-profit businesses, although the actuarial considerations of estimating death are the same.
Insurance-flavoured things that push the risk outward (credit default swaps): sophisticated investors only, and even then someone's getting taken for a ride. Some cities lost a lot of money by investing in these.
Health: should be dealt with at national level, not the private sector. Nobody should be refused coverage and people should not be financially ruined by medical conditions. I'm quite happy with the NHS system in which private "topup" insurance is permitted but uncommon.
Insurance companies make billions in profit each year.
By definition, insurance is a bad deal for the consumer.
Sure, it spreads out the "payments" into a manageable sum in the case of house fire or some other major incident, though by definition, on average, you will pay a lot more for insurance than it will ever pay you.
But buying insurance for small stuff, you're just donating money to insurance companies.
The biggest scam is 'insurance' for eyeglasses. It's a fixed, predictable cost for most people. Eyeglass frames are ridiculously overpriced, the market is practically a monopoly ran by Luxottica. Insurance companies and Luxottica manage to get people to pay $600-700 for a pair of glasses (300$ for frame, $150 for lenses, x1.5 because low insurance payout rates) by hiding the cost in monthly premiums. No one would pay that much upfront.
The problem is that the mantra of "maximize shareholder value" often causes insurance companies to engage in practices that are immoral or even illegal. I think the insurance industry in the US is in serious need of a major regulatory overhaul. Perhaps all insurance companies should be forced to operate as nonprofits. Maybe the federal government should start using its enormous wealth of faith and credit to provide competitively-priced, no-bullshit insurance.
Your 15 years' experience provides you with some authority; people will listen because of that. But you failed to tell _why_ you believe so.
First, I don't believe in chance. That puts me pretty much out of the mainstream right there, even among christians, but so be it. I don't really want to get into a lengthy philosophical / theological debate about it, since I have found such debates to be utterly fruitless, but basically I believe that God orders our lives for our good and his glory.
Anyway, if something happens to me or if I do something that has negative consequences, that is between me and God with regard to personal consequences. Do I have faith that he will provide? Do I have faith that, even if he doesn't, it is still for my ultimate benefit? It's easy to say I do when everything is going well. It's quite another to demonstrate that I do in adverse circumstances.
So, second, to me, buying insurance is an act of unbelief. It's fine with me if the rest of the world wants to do it, but I cannot, since it would be a clear demonstration of my lack of faith that God will provide, even if that provision is what the world calls catastrophic. (Perhaps a little catastrophe is just what I need to make me pay attention to something I've been neglecting! This is not a popular view, obviously.)
Here's an article that explains it better than I have here, but I will say ahead of time that it will be unlikely to make sense if you do not believe in God.
"[It should be a serious question with a child of God, ere he avails himself of an assurance company, whether in the matter of fire or life, "Am I, hereby, distrusting God? or, am I seeking by human agency to counteract divine visitations? There is something sadly anomalous in a Christian's insuring his life. He professes to be dead, and that Christ is his life: why then talk of insuring his life? But many will say, "We cannot bring Christianity into such things." I ask, Where are we to leave it? Is Christianity a convenient sort of garment, which we put on on Lord's day, and at the close of that day take it off, fold it carefully up, and lay it on the shelf till the following Lord's day? It is too often thus. People have two characters; and what is this but the leaven of the Pharisees, which is hypocrisy? Insurance offices are all very well for the men of this world, who should certainly avail themselves of them, inasmuch as everything around and within is so uncertain, but to the child of God, all is sure. God has insured his life for ever; and, hence, he should regard insurance offices as so many depots of unbelief.] These things do very well for men who are only governed by now; but the disciple of Christ is to be governed by then. This makes all the difference; and truly it is a serious difference."
(From http://www.stempublishing.com/authors/mackintosh/Bk2/TIMETER... )
A comment from the same author on practice:
http://www.stempublishing.com/authors/mackintosh/Shrt/SHORTP...
It suggests that you can simultaneously believe that God will provide/save/whatever and still take material opportunities presented to you.
(I don't have the same belief system as you, and I do not seek to change your view. Just sharing a different perspective that I remember hearing many years ago.)
OTOH, the kind of insurance I think is extremely shady is the U.S. health insurance industry.
This means, even for "0 sum" games where there isn't a house taking a cut, gambling will typically have an average net utility loss. You make as much money as you lose, but that's money worth more when you lose it then when you make it (past the first $epsilon).
Insurance on the other hand will typically have a net utility gain despite being a net dollar loss. When you "win", you would otherwise have very little money, so the money is worth a lot of utility. When you lose, you have lots of money so it only costs you a small amount of utility.
The author describes four classes of financial risk-taking 1. Investing 2. Speculating 3. Market making (I think) 4. Gambling
Investing is risking capital with a strong probability of maintaining the principle while receiving a reasonable return.
Gambling is when you have a negative-sum chance at keeping your principle.
As a result, one person with limited information and portfolio diversity could "gamble" on apple stock while another person with more diversity is "investing."
Fundamentally, they're more about information and risk than anything else.
At a minimum, if you have children, lack of insurance should not be an option.
Then again, I'm also in favor of decreasing U.S. freeway/highway speed lilims and enforcing them strictly (like Japan) for risk reduction reasons... I suspect that my antipathy to American libertarian machismo is far from universal ;)
The entire car insurance industry, for example, could easily function with a fraction of its current workforce. We have the statistics on car crashes, we have the statistics on driver demographics. All that's required is to aggregate the data and target some number to achieve, say, 3% economic profit.
You could eliminate the jobs of many risk analysts and sales and have the entire industry function without the overhead of having to pay 90% of useless workforce.
Is it a cruel way to look at it? Absolutely. Killing jobs is political suicide. But could it be done? The risks are known.
The most famous example, of course, is the German Autobahn:
"The autobahn fatality rate of 1.6 deaths per billion-travel-kilometers compared favorably with the 4.6 rate on urban streets and 6.5 rate on rural roads."
Also your link says:
> In 2012, the leading cause of autobahn accidents was "excessive speed (for conditions)"
It's a useless "fact". What highway in any place in the world would have something other than excessive speed (for conditions) as the leading cause of accidents? The only thing I can think of is landslides/avalanches in very mountainous regions, and even then I'm sure there are more than enough accidents/fatalities due to taking a corner faster than you should.
I also stated that "absolute speed is not the deciding factor in road fatalities". Absolute speed is different from excessive speed for given conditions. Going 60km/hr on an unplowed, snowy, black-ice ridden road can easily be more dangerous than going 160km/hr on a dry surface with clear conditions.
The purpose of this system is not profits, but to uphold the principle of "bear ye one another's burden". The principles of takaful are as follows:
- Policyholders cooperate among themselves for their common good. - Policyholders contributions are considered as donations to the fund (pool) - Every policyholder pays his subscription to help those who need assistance. - Losses are divided and liabilities spread according to the community pooling system. - Uncertainty is eliminated concerning subscription and compensation. - It does not derive advantage at the cost of others. ...
When I insure my house against fire neither I nor the insurance agent want my house to burn down.
When I gamble on Man Utd to win 2-0 with Pogba to score the bookie doesn't want that to happen and I do.
Anything that is co-operative is insurance, anything that is adversarial is gambling.
A bookmaker (as defined) in a normal? environment shouldn't care for a particular result in a gamble. All they care for is the profit they make from squeezing the odds on both ends of a gamble. See https://en.wikipedia.org/wiki/Mathematics_of_bookmaking
Both insurance and gambling lower your returns, but the change in variability for insurance has a -1 correlation with a risk you currently have (canceling it out), therefore significantly reducing the overall variability of your portfolio.
Gambling isn't related to any other risk you already have, therefore introducing more variability into your portfolio.
So insurance is just a form of gambling where the payout is correlated with a risk you currently carry, instead of being "random".
My understanding of insurance is that if there's say 1/100 chance of some event costing you 100 dollars, then you might pay $5 at some rate for some period of time to protect you in the case that the event occurs, costing you 100 bucks.
However, if you knew the odds of certain somewhat expected events in your life were, how could you capitalize on that? You could save, but generally people don't make enough for that to be worthwhile.
It's true that in aggregate, insurance buyers lose, but no specific insurance buyer lives in aggregate. Either you have that $500,000 claim, or you don't. The only way to self-insure is to have $500,000 on hand.
>if you knew the odds of certain somewhat expected events in your life were, how could you capitalize on that
If you know that something has a 50% chance of happening across 100,000 people, you write insurance policies such that you can deal with it happening about 50,000 times.
If an event has a 50% chance of happening for you, preparing by saving 25% of its cost isn't going to help much. Expected value calculations don't make sense for N=1.
Yes you do.
But it doesn't have to be a zero sum game anyway. Both you and the insurer could be better off.
Life insurance is a dumb idea. But if you're human then sometimes dumb ideas stress you out. So to pay to lower that stress might be worthwhile.
But it's complicated. If you have a fire in your house sure it'd be nice to be insured.
But OMG you house just burned to the ground, you might have died, what if it happened at night, something way worst might have happened.
Your energy is better spent on fire proofing your house. You should never plan for events where you might die, you should reduce the risk of dying. If you really think theres a chance you house might burn down, perhaps you should move houses. That is more logical but less human.
Not if your beneficiaries depend on you for support that you can no longer provide if you're dead, and if you care about what happens to them.
If you die, your spouse can marry again, your kids will be able to work at some point and so on, there are no additional costs. If you're disabled, it becomes a massive, long-term, cost burden.
Please, compare the costs of:
* Widow(er) raising two kids
With:
* Married couple raising two kids, while one of the adults has a severe permanent disability, requiring constant care, huge medical bills, etc.
Do you understand now why disability insurance is more important than life insurance?
Remarrying rich and the kids eventually getting jobs is not a plan I would be ok with.
If you have to choose between disability and life insurance, go with disability insurance. If you have enough money to pay for both, pay for a lot of disability insurance and some life insurance. Probably 10-20 times more disability than life.
You explained your suggested alternative to life insurance. Really don't think I need to copy paste that to you. Try the parent button.
Gambling does the reverse, turning a fixed amount of money in to bursty payouts in exchange for a premium, adding variance.
One is basically the opposite of the other.
You can even use roulette as an event randomizer to make your trips to Vegas more exciting. (Games with probabilistic loot are more "fun" than predictable loot.)
Whilst I enjoy a good old punt on a horse like many a Brit or Irish racing fan, and enjoy the odd bet on a football game or cricket match, I believe that I - and fellow gamblers I know who make a profit - do not actually gamble the way most people do.
We treat it more like insurers see the issuance of insurance. First, we'll look at data. Second, we realise money management - and liability exposure vs. income - is critical to success. We look for situations where there is an edge in our favour which we call "value". When we see an edge we can quantify, we'll exploit that using Kelly or Maximal Exponential Growth strategies.
Genuinely, I look at some sports events using techniques and strategies that would not look alien to a statistician who has trained to become an actuary. They have more data with stronger statistical significance, and their thinking may be more rigorous, but they are my inspiration: with the right numbers, you can model risk, and identify what odds you're prepared to accept and what odds you're not.
I will play in casino games for recreational fun, not for profit. Same with slots/fruit machines, lotteries, and so on. Tiny amounts of money. It is impossible to beat these beyond the medium term without some form of luck. In the long run, games with house advantage will only ever be won by the house who has the advantage.
Sport though? Something where I can do some data analysis and start finding informational arbitrage over others in the market? That's potentially investment. And so far, it's done me well.
And so the honest answer is, nothing much is different, it's just that most gamblers and most people who buy insurance are people who do so without thinking and without understanding mathematics and liability, etc.
A few of us though, a small number on Betfair or perhaps inside the sacred walls of Lloyds of London, see the World a little differently and play a game with maths at our side that few others are interested in playing.
Insurance is different -- its there to pool and quantify risk. That's why we don't have people hopelessly addicted to buying car insurance. It's not there to give you a rush.
Insurance is too but to a much lesser degree. If I buy fire insurance and my house burns down, I get rewarded (as in operant conditioning). But only punished when my house lasts until I die or sell it.
In the case where your house burns down, you're 'rewarded' in the insurance contract, but you should be close to net indifferent (after insurance) over whether your house burned down or not.
That's why we don't let people buy insurance on other people's houses -- it creates a perverse incentive for the insurance purchaser to force a certain outcome.
“Well, suppose you have a ship loaded with, say, gold bars. It might run into storms or, or be taken by pirates. You don’t want that to happen, so you take out an inn-sewer-ants-polly-sea. I work out the odds against the cargo being lost, based on weather reports and piracy records for the last twenty years, then I add a bit, then you pay me some money based on those odds—“
Color of Magic, Terry Pratchett, page 45
That's the passage I found googling. It actually goes on and compares insurance and gambling. Highly recommended book (as is almost everything by the author of course)
It's hard to sell insurance based on the promise of riches, the best you could do is fear-mongering risks of not having insurance.
https://en.wikipedia.org/wiki/Tontine
They are not mentioned in the article, but they are (were) IMHO the missing link between life insurance and gambling.
One difficulty is the discrepancy in the probabilities of outcome. Insured events are rare and cost a lot. Gambling often cost you a little bit but sometimes you earn a lot.
When you go to a casino to gamble, your gains expectancy is negative because of the house's cut. You pay to have more risk. When you go to your insurance company, your gains expectancy is negative as well, because the insurance company is profitable. You pay to have less risk.
So people pay to have more risk, and other people pay to have less. I'd like to know if those two groups can meet.
If anything I imagine gambling to be introducing risk of ruin while insurance is protecting against it.
The house sets the rules and the house has to make money. Occasionally the house sets bad rules [1] [2]. Those houses go out of business, leaving a greater fraction of the surviving shops demonstrating the rule.
[1] https://www.theatlantic.com/magazine/archive/2012/04/the-man...
[2] http://www.businessinsider.com/heres-the-untold-story-of-how...
It's the same thing with insurance. If you multiply the size of the payout with the probability of getting a payout, it will be less that your insurance premiums. It's how the insurance company makes money.
https://en.wikipedia.org/wiki/Expected_value
E[x] = prize*winning_probability - cost < 0
Of course this is all theoretical as baby euthanasia is illegal.
Making another child is many times far from "simply"
Let me guess, you are a man. A woman will have a different opinion.
It should be noted of course that gambling is generally not illegal as long as the government (read: the people) is benefiting. Whether one agrees with gambling as a tax or not is another discussion. Unregulated gambling is typically illegal because it benefits no one.
Both rely on the expected value calculation.
If you own an object that has a 10% chance in any given year to spontaneously self-annihilate (and a 90% chance to continue existing as usual), then you would expect that its value next year will be ( 0.1 * 0 + 0.9 * v = ) 0.9 times its value right now.
Gambling is to watch it for a year. If it continues to exist, you still have it, and it is worth the same. You beat the odds. But if it vanishes, you lost everything.
Insurance is to accept the reality that you can't keep winning that game forever. You can spread the risk of loss over multiple years, while abandoning any gambling windfalls you might have enjoyed. You pay 10% of the value of the object every year to your [mathematically simplified] insurer, who agrees to pay 100% of its value in the event it is lost. In any year it still exists, you "lost" 0.1 of the value you "won" by still having it. In the year it vanishes, you lost 1.0 the value of the item itself, but got a net 0.9 of the value of the item in non-self-destructing cash, "losing" 0.1 total. From your end, you get exactly the value you expect mathematically from owning the item, year after year, with zero risk to you.
The non-simplified math is a bit more complex, but ensures that while you will always eventually lose the self-destructing object itself, you will never lose all of its value all at once. It also means your insurer is essentially investing the gains you would have otherwise realized by gambling. Once their bet is closed by disappearance of your object, they pay you off from their investment portfolio and pocket the difference or absorb the loss.
The smart play for you would be to neither gamble nor insure, sell the self-destructing asset right away, and invest the proceeds normally, in something that has a positive expected value. Eliminating the risk is always worth more than managing it.
With insurance you might win exactly when you need it.
Is this serious?
In insurance, I cannot say, "I want to quintuple-down on having a car accident this year; let me pay a $5000 premium instead of $1000 for a 5X payout!"
Insurance typically covers specified perils. When they occur, the payout is in proportion to the actual damages, not to the rarity of the odds.
If insurance were like gambling: "Oh man, I won the insurance jackpot! My house was leveled by a rare meteor---500:1 payout---not just your everyday 4:1 fire."
Also, there is the obvious general observation: insurance compensates for losses. You don't win; you lose stuff and are compensated. You don't get compensated unless you lose first. People don't always feel adequately compensated by money. Money won't bring back the memorabilia you lost that got burned up in the fire. It won't grow back a severed arm, or replace people who died.
In gambling you don't lose anything to win; just your time and the bets, which loosely correspond to insurance premiums. The win is a pure win, not a compensation for loss.
`Nuff said.