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Comment by Mz | Hacker News Reader

No, that isn't why. I worked in insurance. Not homeowners insurance, but I had a certificate and processed claims.

The reason is that most human settlements occur in flood plains because we cannot live without water. We drink it. We bath in it. We irrigate crops with it. Flood plains have fertile soil. We use rivers and oceans for essential cargo transit.

Insurance is about risk management. It is a form of betting. And there is no bet here because there is no question of if it will flood. The question is only when will it flood?

That's a fool's bet to say "I will pay you X amount of money if it floods" when it is guaranteed to flood sooner or later. That amounts to charity, not insurance.

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Hey, I work in insurance too - as a non-life actuary for the last almost 8-9 years. Your description is not at all how insurance works, and insurance is not a form of betting or gambling but really distinctly different. What it's really about is just risk pooling; my share of the risk pool is smaller than if I would keep the risk to myself.

Insurance companies don't mind insuring risks that they know will happen at some point, e.g. most property policies will have some claims, and life term contracts (as have been stated below) of course will have a claim at some point (unless the policy is lapsed). However, they have an idea of how often and how costly these claims will be, and through risk pooling diversification, this is lower (per policy) than the cost to the individual. Thus there is an incentive to buy the policy, and an incentive to sell it - as the difference can be made as profit to the insurer.

In addition there's a timing element to insurance: insurers take in premiums "now" for claims that will be paid out "later", so they can invest the money in the meantime. Large insurance companies may have $200bn investment portfolios.

EDIT: So the point is that flood insurance can of course be sold by private companies, however they know the risk is too high and won't offer competitive premiums. If we only had private flood insurance in the US, in the long term this would lead to people having to move to places with cheaper flood insurance. In this way it actively promotes people moving away from risky places (which I think is a good thing) - but it makes it difficult for people in the short term.

You're both right. Cost pooling and betting are two ways of thinking of the same thing. If anything, betting is closer to marginal thinking than cost pooling, but the two are not exclusive viewpoints.

I find this a little confusing, because one can also purchase life insurance, and mors certa, hora incerta.

A lot of life insurance is term insurance. So the bet is "will you die during the years that your policy is in force?" Whole life is much, much more expensive.

Could you then have the same kind of structures for flood insurance policies? I had to pay every year to renew my renter's insurance policy, it only covered losses during the course of that year, and the insurance carrier had discretion to adjust the premiums or not to renew it.

In the US, flood insurance is provided by the government. And the premiums still jump insanely sometimes.

It gets handled this way for the same reason our government provides welfare et al: it makes no sense as a business, but the cost to the nation to do nothing is a bigger problem.

There is some private flood insurance these days, but I don't know who offers it, in what locations, what the premiums are, and what kinds of exclusions there are. Since it's a new thing, I think the claim that it'll be vastly better than NFIP is invisible hand waving. Nevertheless... http://www.insurancejournal.com/magazines/features/2017/07/1...

I think the bigger issue is that there is an inherent incompatibility between free markets (or strict laissez faire, non-intervention of any kind) and democracy. Of course people, in the millions, are going to say "help us" and direct it at their various layers of government, and punish those who don't at the election booth.

Therefore it stands to reason in major floods like this, that everyone is going to get some kind of relief even if they didn't have flood insurance. What I'm not sure of is whether the insured get 100% payouts and those not insured get partial payouts? What's the incentive to have flood insurance, except in smaller, localized, 50 or 100 year floods?

This is asset destruction and the only way to properly handle it is through savings. So it's either made compulsory or you do end up with something of a free loader problem. Whether that free loader problem is a real problem, I don't know.

How could term insurance for homes be possible? Homes are (despite some fluctuations) relatively good stores of value that you want to pass on to later generations. Comparatively, once a typical human retires from working, he isn't producing much of insurable value (and presumably, his offspring are capable of achieving financial independence).

Homeowners insurance is all term insurance, the contract only covers a short period of time. At the end of the contract, the policy holder doesn't have anything.

I had to look it up to confirm: "death is certain, its hour is uncertain" (latin)

That's not the problem. Private insurance does not offer flood insurance because A) it tends to all be due at the same time requiring a very large fund. B) It also promotes people living in flood prone areas. C) It's very hard to asses risks. Combined and you end up with bankrupt insurance companies.

The industry also feels B makes selling flood insurance a bad idea. That said, there are Private policies you can buy in some areas.

PS: Insurance companies like frequent small scale random events like car accidents, because they are easy to plan for.

> it tends to all be due at the same time requiring a very large fund.

i don't quite see that.

if the flood insurer covered a broad variety of geographically dispersed areas across North America, or even just the US, would that be true?

The company would have to be huge to pull it off. One event like what happened in Houston could easily wipe out a big chunk of any fund they could amass. That kind of diversity could also be a problem if there are shared waterways, think back to the Mississippi/Missouri flood from 1993. I'm seeing 15 billion as the damages there, which is a large percentage of the "cash" pile Apple is claimed to have.

https://en.m.wikipedia.org/wiki/Great_Flood_of_1993

Edit: fix an extraneous wording mistake.

What does this have to do with Apple? Is that just a reference to them hoarding large amounts of cash or are they in the reinsurance business?

I believe it's a reference to the fact that even large companies, Apple is $800b, don't have all that cash on hand. To convert $15b into cash takes time. Disaster victims can't exactly pay for hotels or buy foods with bonds or stock certificates.

btw, Apple has far more than $15 billion in its cash pile. it's over $250 billion by some accounts

https://www.cnbc.com/2017/05/02/apples-cash-hoard-swells-to-...

I was using them as an example of a large company that would be reasonably familiar to the audience here.

I don't think point B is valid. Following your reasoning, the industry would also think that health insurances are a bad idea because they would promote an unhealthy livestyle.

That's one of the arguments for high deductibles. The reverse promotes frivolous trips to the doctor.

Being sick is it's own deterrent. However, people like living near water and it's often cheaper in the short term.

That's a fool's bet to say "I will pay you X amount of money if it floods" when it is guaranteed to flood sooner or later. That amounts to charity, not insurance.

A statement with profound implications in other areas of insurance, notably health insurance. You're insuring against expensive losses that will almost certainly happen at some point... which suggests that traditional insurance isn't the right framework for solving the problem at hand.

I have said that repeatedly on HN. Obamacare is a terrible idea and we need another solution.

well. ok. but, i don't see placing the blame on Obamacare. i mean that was not the origin of the concept of health insurance.

Yes, but health insurance worked differently before Obamacare. Insurance companies simply did not cover chronically ill people or people with preexisting conditions, thus they were able to arrange a "bet." Obamacare removes the element of a "bet" from the system.

Just like the government provides fire protection in the form of fire departments, the government needs to provide health care. What we are doing currently is broken.

Structuring healthcare as an insurance doesn't work because pretty much everyone needs it at some point. It needs to be structured like a tax, because the rate at which you pay in has no correspondance with how much you need to get back out, but in aggregate the total sum paid matches the total care provided. That's why the successful healthcare systems in the world are typically single payer systems. However, such systems are politically untenable in the U.S. and so you get obamacare. I'm sure if it was within the overton window of acceptable political thought obamacare would have been a single payer system.

> Structuring healthcare as an insurance doesn't work because pretty much everyone needs it at some point. It needs to be structured like a tax, because the rate at which you pay in has no correspondance with how much you need to get back out, but in aggregate the total sum paid matches the total care provided.

you've just outlined a money-losing system run by the government.

the reason private health insurance systems fail is not merely because everyone needs it at some point. it's because everyone uses much more of it than they've paid for with their premiums. (which is why, pre-Obamacare, insurance companies used to reject applicants with pre-existing conditions and why they put lifetime caps on benefits paid.)

but a government run single-payer system is not magic. the extra cash must come from somewhere.

one way a single-payer system could obtain the additional funds needed is by taking cash from some other government source (which is exactly what Obamacare does when it provides refundable tax credits to help low income people pay their otherwise unaffordable health insurance premiums.) but there's no end to the amount of money that could require.

another thing the government can do is limit services to patients, i.e. take a certain amount of decision making authority, by law, away from individuals, especially old individuals who are very sick. ("i'm sorry, but we're not paying for that new chemotherapy. it's hospice care for you.")

in addition, a single-payer system can also uniformly limit the prices health care providers, pharma companies, hospitals, etc can charge. (i.e take some decision making authority away from that sector of the economy, again, by law.)

I live in a single payer system country and it's nothing like what you describe.

First, how it is paid. It's text book socialism. People pay into it based on ability and receive benefits based on need. It doesn't run at a loss.

Second, the level of care. Basically the government puts a lower bound on health care and uses taxation to do it. You're guaranteed a basic level of care regardless of your situation. You can opt for private insurance that stacks on top of that. A basic level of treatment is covered by the government, but anything experimental or exorbitant you will likely have to pay yourself, unless you have the aforementioned gold-plated insurance. Insurance is much cheaper because it only needs to cover unusual care, but of course I do pay a lot of taxes.

It's not different from a private system, because you can't receive unlimited care, but unlike a private system you're always guaranteed a minimum care.

that sounds a lot like what i described. it avoids being a money-losing system by limiting how much care people can receive.

If I'm not mistaken, they also had yearly or life-time limits, removing the "losing" part of the betting from the system. Insurances are not bets, not more than other commercial undertakings. They are, for the insured, hedges against bets. The bet is: I will not get sick with something that will ruin me financially. Or: My house will not burn down. You pay a steady, comparably small (to the risk) amount of money. Still the total amount of money paid by everybody is bigger than the total amount of pay-outs.

In the case of these massive flooding, it's hard to make the pool big enough. That's why reinsurance companies exist, which can mix the risk pool of different types and locals.

> they also had yearly or life-time limits

Usually, both. Plus, if you had high expenses they'd actively search for an (even unrelated) pre-existing condition as a pretext to cancel your coverage (recission).

Insurances are not bets

Origin story for Lloyd's of London:

The patrons bet, for example, on whether Admiral John Byng would be shot for his incompetence in a naval battle with the French. He was.

The gentlemen of Lloyd's would have had no qualms about taking my bet on my own life.

Edward Lloyd realised his customers were as thirsty for information to fuel their bets as they were for coffee, and began to assemble a network of informants and a newsletter full of information about foreign ports, tides, and the comings and goings of ships.

His newsletter became known as Lloyd's List.

Lloyd's coffee house hosted ship auctions, and gatherings of sea captains who would share stories.

If someone wished to insure a ship, that could be done too: a contract would be drawn up, and the insurer would sign his name underneath - hence the term "underwriter". It became hard to say quite where coffee-house gambling ended and formal insurance began.

http://www.bbc.com/news/business-38905963

https://news.ycombinator.com/item?id=13911451#13912524

Obamacare is not a terrible idea, it's a transitional idea as we're already doing this with insurance; it's an evolution of the system in the right direction, it's not a final solution. Add a national exchange, offer a public option, bam medicade for all.

bam medicade for all.

That is called single payer, government provided coverage. I would support that.

That is not remotely what Obamacare does. Obamacare requires private insurance to cover people with pre-existing conditions and it requires everyone to buy private insurance. It is busted as all fuck and I would like to see it go die in a fire.

I am aware what we were doing before Obamacare sucks and we need a real solution and to not simply go back to that. But this is not a real solution.

Of course it's not what Obamacare does, you can't go from a private insurance market to a single payer government system in one single step. Obamacare is the transition between the two.

> Obamacare requires private insurance to cover people with pre-existing conditions and it requires everyone to buy private insurance.

So does single payer, we just call "buying" taxes and we replace insurers with government. You're still forced to pay and the insurer is still forced to provide for everyone regardless of pre-existing conditions. So it would seem you're simply against the name Obamacare.

> But this is not a real solution.

It's not supposed to be, everyone isn't blind, they see that single payer is the solution, but you can't simply declare the private insurance industry we already have dead in one fell swoop. Obamacare or something just like Obamacare is a necessary step to get to single payer. We need to get everyone into a public option, and then have that option slowly kill off private insurance by simply operating cheaper than they can until the public option is pretty much what is insuring everyone, at that point, it's effectively single payer.

Huh? Why?

Just charge more money for your insurance. Boom! Profitable business.

The people who most need healthcare tend to have low incomes because they are chronically ill. So, no, that Boom! fundamentally does not work.

> That's a fool's bet to say "I will pay you X amount of money if it floods" when it is guaranteed to flood sooner or later. That amounts to charity, not insurance.

The bet is more like, "I will pay you X amount of money if your damages from flooding exceed your deductible within the next year." It's not at all given that it will flood at all this year, or that your losses will exceed the deductible.

It's true that it would require substantial diversification or re-insurance, since flooding is a clustering event.

You wouldn’t be provided with a fixed lump sum, but rather your costs would be covered up to a limit.

So it’s about determining the expected value of losses for a given risk. You’re right that given a long enough time, there is a near-certain chance of a flood, but the question is more about how much that’s likely to cost.

That is entirely insurance.

That reasoning fails in the face of there existing earthquake insurance in the Bay Area.

Major earthquakes are less frequent than major flooding. If the time frame is large enough and the timing uncertain enough, it can still make sense as a bet.

Frequency only changes premiums, car insurance is much more likely to pay out than earthquake insurance per year. That just means it costs more money per year relative to the payout.

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