Good old insurance companies, always looking for ways to get out of having to pay out for claims.
I mean, I guess it is their job, so can't really fault them for that.
I mean, I guess it is their job, so can't really fault them for that.
1. Know your insurance contract, know what's actually covered and what not (sometimes describing the same facts in two different yet truthful ways will result in your claim being accepted or denied) and have a non-shit insurance company (check reviews that talk about how they handle claims or ask friends that had claims).
2. "Self-insure" risks where the variance won't hurt you. In other words, if you can grudgingly eat the loss if it happened, don't get insurance and eat the loss if it happens. If you have a lot of disposable income, you don't need insurance for something that won't noticeably shift your budget. Likewise, pick high deductibles. What would you rather do: Eat a $300 loss, or have paid $200 in additional premiums and spend two hours of filling out their paperwork?
3a. An exception is if you just really want the peace of mind, are willing to pay for that, and think you can find an insurance company that will actually pay.
3b. Another exception is if you think they miscalculated the premiums. I know that this is unlikely, but it ties into the "peace of mind" criteria - if you think a risk is more likely than it actually is, just insuring it might be an easy way out. The premium might also be accurate for the average, but you might also think or know that you are at a significantly higher risk than average.
For the latter two points, I like to consider insurance cost "per decade" or "per lifetime".
No, premiums don't need to cover payouts. You have to pay the premiums before you get any payouts, so the company invests them and makes money that way.
When it does work is when insurance has no influence on the price of goods, and is a minor consumer. For example, when fire insurance pays to replace your goods that burnt up.
When it doesnt work is when insurance is the predominant purchaser of those goods. A good example would be US health insurance, which has an 80/20 rule just like your proposal. Health insurers by law (ACA) must pay out 80%, with 20% allowed for opex and shareholder returns. The Hazard is that as an industry, to increase returns, you want the cost of care as high as possible, thereby maximizing your allowable profit.
It is a similar problem to how power is regulated in California, which has a mandated profit cap as a percent of costs. As a result, these regulated companies have the highest opex and cost of power in the nation of approximately $0.50/kwh
My proposal even doesn't say what the ratio should be. If there wasn't legally defined maximal price margin (say 20%), I don't see what it would change in your argument - the companies would be free to ask for even more. Conversely, there is nothing that prevents the companies from lowering the margin as a result of competitive pressure from consumers.
The difference between a cap system and a uncapped system is the incentive to increase the base price as well.
My question is about the incentive to decrease prices (e.g. due to competition). Why it should be affected by the price cap? That's what you need to explain.
You usually see %profit caps as a failed band-aid in markets with poor competition. For example, customers usually dont have a choice in electric company.
There is also really poor competition in health insurance for a number of reasons. Insurance is tied to employment and both options and mobility are limited. Within those options, it is verry difficult to discern differences. I certainly cant tell if a 10% cheaper plan is that way because it is more efficiently run, or if it provides 10% worse coverage.
Last, while firms may compete on total price, they can collaborate to raise the costs for the industry at large. For example, health insurance companies would want to wholesale price of drugs to rise for everyone.
Im not saying that %profit caps are worse than unfettered monopolies (although they might in some cases). My Point is that profit can have huge market distortions, and economically sound solutions would focus on addressing the fundamental issue of poor competition.
Generic, cookie-cutter, boilerplate policies probably net the insurance companies a fair amount of profit. People who actually care about the actual items they are insuring are possibly the highest risk, and as such, the premiums are also the highest. In my state, an umbrella policy that would cover my home, land, frontage, vehicles, farm equipment, well pump, etc is ~$500/month, with limits of around $1mm (this was 8 years ago or so, they probably went up in premiums). a half million on two vehicles is only about $200/month and homeowners varies but is ~<$100/month. The issue is how i'd get the rest of the stuff i said insured, because in my state, the homeowner's policy doesn't cover anything but the home (and contents to a limited extent) and whatever you call a tree on your property falling down and causing injury or damage not due to negligence.
Would you mind explaining what the perverse incentive is here? If I want to insure a pillow that I claim is worth $1 million, why should it matter what others are willing to pay for it?
Even in the legit cases the insurance companies have to account for the "don't worry, it's insured" mindset. Keeping the ceiling on the insurance value is intended to leave at least some of the incentive to prevent the damage with the owner.
The insurance companies cannot rely solely on the "don't be careless" contract clause.
So what, though? Can't they just adjust the premium to account for that? It's not like they can't do their own modeling of what the item is likely worth -- if they see it's 1% of what you stated, then they can just as well cite you a ridiculous premium so that you wouldn't feel it's worth it. What's wrong with that?
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> For example, if I had a 15 year-old, unremarkable used car but insured it for $1m, then I'd have an incentive to leave it parked (but locked!) in sketchy areas of town in the hopes that it would be stolen.
No, you wouldn't if the premium is high enough (i.e. your net gain from doing so is small enough).
We'd have to fund the courts to resolve the inevitable insurance fraud accusations, not to mention the additional firefighting crews to put out the additional fires that consume the $1 pillows.
It makes the market for insurance much better if everyone actually has insurance. Because it reduces cost. It also keeps the industry legitimate, preventing gambling legislation from applying, and anti-gambling activists from targeting insurers.
You'll have to go to a bookie if you want to gamble.
I don't get the comparison to gambling either, that reads more like an appeal to emotion than actual reasoning.
https://en.wikipedia.org/wiki/Insurable_interest
(I don't know if that will make you more sympathetic to the legal rule or not.)
As far as insurance gambling goes, it feels fundamentally different? In gambling, the "house" that sells you the ticket sets the rules and introduces the element of chance. In insurance, the entity selling the financial product here is in no way in control of the outcome, which is the exact opposite of gambling.
By demanding an insurable interest, insurance companies keep out gamblers and frauds. It also helps strengthen the idea that insurance shouldn't be abused or manipulated for a payout.
I don't see why this is true. The insurer still knows the item and its market value. So if the insured amount is higher than the market value then it only needs to increase the premium in those cases, not for everyone else.
This doesn't pass the smell test, though. The premium would take care of that. You've told them you have a pillow, and that you want it insured for $1M. They could easily look at it and go "hm, this is worth $10", and give you a absurd premium of $999,900 in exchange for your absurd valuation. So happy accidents won't be worth it anymore. What's wrong with just letting the premium take care of it?
Offering a deal that nobody honest would take is a waste of time for everyone involved.
I'm not suggesting any insurer should be forced to offer a deal. They're welcome to just shrug and tell you to pound sand. What I don't see is the logic behind having an international code prohibiting the offering of such deals. Is the international code trying to dictate to the insurance company what is worth their time?
There are ways to bet on things where you don’t have that underlying risk: gambling, derivatives markets, prediction markets, etc.
These aren’t insurance and aren’t regulated as such.
Because the actual value of the item determines your incentive to commit fraud.
If you insure a $10 pillow for $10, when you damage your pillow, you personally will definitely be out $10's value in goods in the hope you'll recover that $10 later. Since your only outcome is mildly negative, you don't have any incentive to file a false claim.
If you insure your $10 pillow for $1 million, as soon as the insurance is in hand, will have a strong incentive to destroy the pillow and try to collect a million dollars, since $1 million - $10 = $999,990.
This incentive exists regardless of what premium you had paid for the insurance (since it was a prior cost), and can't really be perfectly mitigated. Yes, you can criminalize fraud, ask for evidence, etc. but courts aren't perfect and it's always possible to be clever and fool people.
Also, some people are honest, and others are dishonest. An insurance company can't perfectly tell ahead of time who is who. Let's say I quote you $500k premium to insure your pillow for $1mm. A fraudster will see this as an opportunity to profit by $500k - $10. An honest person would see this as a terrible deal. Therefore only fraudsters would take this deal. If you continue to work backwards, as an insurance company you know there's no premium that you could quote that would end up in honest people taking this deal—there's no stable equilibrium where the premium charged ends up outweighing the (potentially fraudulent) claims.
Btw, this situation is famously described in George Akerlof's paper The Market for Lemons (he called it "market collapse"):
https://en.wikipedia.org/wiki/The_Market_for_Lemons#Conditio...
Another way to see this: rationally as an insurance company, if you ask me for a policy for $1mm on a pillow, due to the risk of fraud I will likely be quoting you close to $1mm as the premium. You (as an honest person) rationally would never take this policy. Therefore, I shouldn't even bother offering it, to save everyone involved time and energy.
I would love a clause in the contract where for non-rare goods you have the option to have the insurance company make you whole by buying you a same model, same trim or higher, same miles or lower, same year or newer car. Like you claimed the market price was less then half of what I can buy it for, use whatever contacts you clearly have and buy it for that.