Comment by fnordsensei | Hacker News Reader

Comment by fnordsensei | Hacker News Reader

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During my decade or so as a consultant, I did a project with one of the oldest insurance companies in my country of residence (they've been around for well over 200 years). They made sure I was aware of their history, in order to understand their business.

They started out insuring farms against calamities. If a farm burned down, it was a proper disaster: for the farmer, for everyone who worked there, and for the surrounding area relying on the farm for food. So the farmers got together and started the insurance company on the premise that it's better for all of them, together, to take a continuous economic hit than to live under a constant existential threat, individually.

It's not only that they continuously pay to be insured before the disaster happens, it's also the fact that if they are helped during a disaster, they can continue to contribute afterwards, for as long as the farm exists. Whereas, if disaster hits and they are permanently gone, that's a permanent end to their contributions, as well as a hit to the community in countless other ways.

This particular insurance company was non-profit from the start, and still is.

For device insurance, I agree that you pay mostly for peace of mind. But like parent, I'm not sure I'm willing to write off all insurance as a racket.

I'm staunchly anti-insurance in most cases, as once someone is making a profit it can't be a positive-expected-value deal.

But that angle seems to have been covered already so just to be different - insurers also have the strongest incentives in the market to make sure risks don't play out. There is nobody with more at stake in the event of a bad flood or other disaster. The incentive structures around insurance (in a free market, though) are actually really healthy. It is probably the strongest argument against insurance being a racket short of not-for-profits.

It is fun to imagine a big US insurance cartel acting as the counterbalance to Big (Insert Industry Here) in a city planning meeting because they are worried about the risks.

It might not be positive expected value (dollars) but it's often positive expected utility.

This is usually because insurance hedges against tail risks that wipe out the individual, and in these cases utility is a nonlinear function of dollars.

Most people would rather pay 1% of their net worth to deterministically avoid a 1/100 chance of losing their entire net worth.

Because insurers pool risk, it ends up being simultaneously rational for the individual to carry insurance and profitable for the insurer to write insurance policies.

Investments are a similar kind of risk pooling, but for upsides. You would not gamble your entire net worth on a prospect with uncertain profitability, but a large number of investors each risking a small fraction of their wealth make it possible to raise capital for risky but possibly valuable projects.

I like to think of it as: insurance = risk pooling = “socialism”, whereas markets = information pooling = “capitalism”, and risk is simply the negative of information.

> as once someone is making a profit it can't be a positive-expected-value deal.

This isn't true. There are risks an entity with a billion dollars can profitably take on that a person with a thousand dollars can't. Insurance can reallocate those risks to leave both parties better off in expectation.

I was told by a working political consultant, that insurance industry lobbiests basically control Sacramento.

They poured a lot of money into political coffiers when CA decided to go to demanding auto insurance at DMV. (Before auto insurance was required, but not demanded. So basically if you wanted to chance it, you could drive witout insurance.)

Thus guy told me the Insurance induesty gives politicians the most amount of money, behind unions.

Why is the insurance industry so concerned with state bills?

I think we all know the answer. And I'm at odds at what the Insurance Commissioner does all day? I guess a VPS to Pornhub?

I pay £30 a month to insure an £X00k bill if my house develops a catastrophic problem. That’s +ve EV regardless of the numbers because the risk avoidance has “value”.

It’s +EU (expected utility), but probably not +E$ (expected money). Traditionally, EV is talked about as E$, not EU.

When you bring in peace of mind and avoiding risk of ruin, those are utility concerns (which make purchase of -EV insurance sensible in many cases).

> I'm staunchly anti-insurance in most cases, as once someone is making a profit it can't be a positive-expected-value deal.

Are you also against loans?

Insurance is just a way offload risk onto someone else for a fee. An insurance companies profits are not risk free, but they hope a large diverse pool of insured will keep them from being wiped out in a large event.

Most of us don't have a choice on whether to carry insurance or take out loans. I think it's more interesting to look at what the rich do, and from my reading it seems to be mixed depending on cost.

Very much in favour of loans. I am normally willing to lend at about 5-8% depending on estimated creditworthiness, although nobody has offered me that in the last decade.

Historically, insurance companies didn't make money on premiums. Most of the profits came from investing the premiums over time.

This model is clearly breaking down with really low interest rates, hence why you see insurance companies actually caring about premiums and investing in new technology/data to reduce the cost of claims/increase premiums on high risk customers.

A little off topic but are we talking about Country Companies? I know of them only because I worked at Iomega in the late 90's and they had purchased a lot of Jaz drives and had a very high failure rate.

I went on-site to check it out. The company was amazing to me. A massive, newish building in the middle of a very wide expanse of corn fields. I felt like I had landed in the wrong state.

In the end, I thought their SCSI terminators seemed awful small. I brought one back with me and the hardware engineers found that the company making their computers had skimped on the terminators in some way. Switching to Iomega's own terminators solved the problems.

I think you're misconstruing the parent's point, and actually saying the same thing they are. They're not saying that insurance is an evil scam empire. They're saying it's a simple calculation: if you can't afford to replace it, buy insurance. If you can, don't.

In your example, the farmers can't afford to replace their farms, so they buy insurance.

The fact that the insurance company in your example is a non-profit is incidental. The farmers have two risks when paying insurance: paying too much and the insurance company not paying out in a disaster. If the insurance company has perfect information, premium == risk probability and everyone wins. Since they don't, they probably have to slightly overcharge - which is OK for the farmers bc they can't afford to replace their farms. If they undercharge, that's also a big risk for the farmers, since insurance in a geographic area faces massive correlation risk. If an earthquake burns down all the farms and the insurance company goes under, the farmers just lost their farms AND all the premiums they've been paying.

The big difference here is that most folks won't be bankrupted if their iPad breaks.

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