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Comment by roenxi | Hacker News Reader

What if Paul built his house somewhere less flammable? I see options here where Peter doesn't need to be robbed, he could pay a fair rate and Paul could make less risky decisions.

If one pool of people are taking a bad deal vs the market rate when buying insurance then it isn't really insurance any more. It is a transfer payment a.k.a. welfare. Which is cool and all in the sense that welfare is a social tool that exists. But calling it 'insurance' is needlessly polluting the language. If people expect to hoover money off others then they should be charged more until the expected return of everyone in the insured pool is equal. If the payouts are going to be held equal in the event of a disaster then that means the price of insurance has to vary depending on the risk profile of the customers.

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> It is a transfer payment a.k.a. welfare

Its called solidarity and yes, it means some people NOT have to pay more but others recieve more. Paul AND Peter get the security of disaster coverage in exchange. This is what you pay for. A big risk pool and not your individual disaster recovery.

If you want "solidarity" you need a government service. Private insurance has every incentive to price things accurately and not subsidize higher-risk people. If you tell insurance companies what they have to charge, they have every reason to say "nope, I don't want to offer that service at that price, that doesn't make economic sense".

Insurance that is able to quantify risks precisely and set prices individually based on that is useless. If it has to make any profits - or at least pay salaries - it's guaranteed to be a bad deal for everyone. Whereas solidarity can bring a better society - which even those who have to occasionally pay more benefit from in the end.

> If it has to make any profits - or at least pay salaries - it's guaranteed to be a bad deal for everyone.

It is insurance. You pay money, the company takes away the risk. That doesn't make it a bad deal, that makes it a service. That is like complaining about a hypothetical garbage company that charges for taking away trash even though the trash might have some notional value.

Insurance isn't an investment scheme. If you want to pay money for a positive-expected-value deal, go buy stocks and bonds.

whole point of insurance is that you pay for avoiding risk

in other words, you pay more than you would on average loss from bad events - but you avoid catastrophic losses that would break your life

that is why insuring your phone is likely a bad idea (as you can pay for a new one) but liability insurance or insuring your home/flat may make sense

> If it has to make any profits - or at least pay salaries - it's guaranteed to be a bad deal for everyone.

paying 3k per year, to avoid 1% risk of 250k losses may be a good idea, especially if 3k loss is survivable without trouble and 250k loss would be more than 90 times worse.

> paying 3k per year, to avoid 1% risk of 250k losses may be a good idea

You are basically guaranteed to pay 3k to avoid financial risk with a mean value of 2,5k. That sounds like a fallacy to me (isn't it the same as saying that paying 3k for 1% chance of winning 250k is a good idea?), may make sense psychologically though.

That logic is reasonable if you can trivially afford 250k; in that case, you might choose to self-insure. However, that logic does not hold if the 1% event is not something you can afford.

Every dollar does not have the same incremental value. Going from $1B to $1B-$250k is not the same as going from $300k to $50k, and definitely not the same as going from $50k to -$200k.

That is why "and 250k loss would be more than 90 times worse" is there.

If loss of 250k would ruin my life and loss of 3k would be annoying, then paying makes sense.

Similarly, taking bet "double your wealth at 51% chance, lose every single thing you own at 49% chance" likely makes no sense, despite mean value being above zero.

> isn't it the same as saying that paying 3k for 1% chance of winning 250k is a good idea?

not in cases where loss of 250k would be more problematic than benefit of gaining 250k

for example loss of 250k may make someone homeless while gaining 250k would allow them to live a bit more comfortable - in such case bad effects of loss are much greater than gaining 250k

in other words, utility of money is not on a linear scale

It isn't a fallacy, it is plausibly optimal if the person being insured is involved in a non-ergodic process. The statistical argument you are applying is too basic to cover a large number of real-world situations.

> Insurance that is able to quantify risks precisely and set prices individually based on that is useless.

This is simply untrue.

This may be true for health insurance, because there is a strong moral case to be made that is unfair and illiberal to make people pay more for genetics or simple bad luck that result in them being likely to need more health care.

It is not true for home insurance, where people can choose where to live and choose what kind of housing to live in.

The purpose of home insurance is to reduce time-based variance for disaster, not for people in low-risk properties to subsidize people in high-risk properties.

It is not "solidarity" for someone in a steel-and-concrete house with a metal roof who clears brush and trees from around their house to subsidize someone who lives in wooden mansion who doesn't take any fire precautions. It is a perverse incentive.

> If it has to make any profits - or at least pay salaries - it's guaranteed to be a bad deal for everyone.

Again, it is not the purpose of insurance for it to be positive expected value for people in high risk homes! It is expected for insurance to be negative expected value. The point is to reduce variance.

Surely you don’t want your taxes to go into rebuilding other people’s beachfront houses as many times as needed. Show a little empathy!

https://reason.com/2024/01/10/the-feds-shouldnt-subsidize-fa...

> Again, it is not the purpose of insurance for it to be positive expected value for people in high risk homes!

Insurance should not be positive expected value for anyone; if it is, either the actuaries are doing a poor job, or the product is a loss leader, or there's some regulatory reason the company can't pull out of the market. (Or, you are in a very rare circumstance where you actually know better than the actuary.)

Incentivizing people to build homes that are likely enough to burn down as to be economically uninsurable is an absolutely wild abuse of the term "solidarity". Solidarity is the idea that an injury to one is an injury to all, not the idea that choices should have no consequences and the environment shouldn't constrain humans; the only way you can possibly sustain a world in which people actually treat an injury to one as an injury to all, is together with some effort to avoid people from gratuitously exposing themselves to injury.

The tricky thing about global climate change is the "global" part. Funny how that works.

The LA fires aren't a climate fire though.

For other disasters, while climate change is "global", the effects are pretty much localized and to various degrees. Some places have had adapted construction to those kinds of blue moon disasters since centuries, so why should they part with more money?

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