The whole point of insurance is to manage risk by spreading it across all consumers. If my insurance rates go up based on my usage or individual risk factors, it’s just an elaborate money making scheme. It should be like “everyone has to pay x to get insurance to get covered and if the claims start going up, everyone has to pay more”.
Suppose your house would cost $400k to rebuild if it got destroyed, and the average interval between things happening at your location that would destroy it is 1000 years.
If those events happened regularly every 1000 years starting from the year you built the house then you could deal with this simply by setting aside $400 every year in a house rebuilding fund.
But if those events occur more randomly, still averaging 1000 years apart but with a large variation, that doesn't work. If you want a 99.9% chance of your fund not going bankrupt and we assume covered events are normally distributed you need a very large fund.
If you have 10000 houses still each being destroyed on average once every 1000 years, and contributing annually for each house the same amount as under the "everyone handles it themselves" scenario, then thanks to the Central Limit Theorem the size of the fund you need is way way way smaller than the combined sizes of all the funds when each house is handled separately.
Note there is nothing in here that requires the same annual contribution for all houses. What is required is that the total annual contribution matches the total average annual loses.
There may be good policy reasons for requiring some kinds of insurance to charge the same amount to everyone, or at least to group people into broad groups where everyone in the group gets charged the same.
Yes, but this does not imply that customers with (potentially vastly) different risk profiles should pay the same rates.
The canonical example is that 18-year-old single males with previous speeding tickets pay more for auto insurance than married 40-year-old women with clean driving records.
If the same argument is to be followed why does a person with potentially large medical bills not pay a disproportionately larger premiums than a healthy person?
It's clearly the case that people who are overweight, smoke, or consume alcohol heavily should pay more for health insurance based on massively increased risk of loss.
Fortunately, other forms of insurance (e.g., homeowners, automobile) are not regulated in this uneconomical fashion.
Why should someone who has an unpatched hole in their roof pay the same rate as someone who maintains their roof?
Because otherwise the insurance companies can just look at your completely maintained roof that will last another 20 years and ask for a full replacement because it is 10 years old. And if you don’t comply they will drop you. (Happened to me)
If we mandate that insurers keep premiums equal for everyone, get ready for a lot of people to have zero access to insurance as they're deemed too risky to cover.
So someone with cancer should be charged $20k/month then? I am completely healthy and haven’t used my insurance much in the last 10 years. Why are my premiums so high? And why are 65+ year olds not footing most of the bill? I am not advocating for that but just pointing out that were obviously okay with charging for some risk profiles but not others.
You're right - I really should be paying less due to the unpatched holes in one section of my roof. I obviously need no coverage on this part of the house, as the damage (both already occurred and ongoing) are not covered causes of loss. If you know a way I can express this to my insurance company to receive a discount, without them going "this is weird, we're actually raising your rates", please let me know.
But then again, there's presumably some sort of balance. If someone insists on building and rebuilding in a flood or fire zone, it's not obvious that everyone else should see their premiums go up to cover that. One option is for the insurance company to just cease insuring the property(ies), but I suspect there's more overall negatives to that than if they bump the premiums of clients in specific locales.
I haven’t laughed so hard in years.