# INSURANCE-Why are we buying this shit? **URL:** \ **Category:** The BBQ Pit\ **Created:** [February 28, 2003, 8:58am UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089 "2003-02-28T08:58:30Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![kabbes](https://avatars.discourse-cdn.com/v4/letter/k/e99b99/32.png) [@kabbes](https://boards.straightdope.com/u/kabbes)\ **Post date:** [February 28, 2003, 1:41pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/21 "2003-02-28T13:41:54Z")
Is the Cabbal related to the kabbes? ---
**Author:** ![Gary\_Kumquat](https://avatars.discourse-cdn.com/v4/letter/g/4491bb/32.png) [@Gary\_Kumquat](https://boards.straightdope.com/u/Gary_Kumquat)\ **Post date:** [February 28, 2003, 1:46pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/22 "2003-02-28T13:46:08Z")
> [@](#): > > \*Originally posted by kabbes \* > \*\*Is the Cabbal related to the kabbes? \*\* Distantly on your Great Aunt’s side, as I recall. So what is the 4th form of insurance. I’m curious. ---
**Author:** ![Odesio](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/odesio/32/20003_2.png) [@Odesio](https://boards.straightdope.com/u/Odesio)\ **Post date:** [February 28, 2003, 1:50pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/23 "2003-02-28T13:50:15Z")
> [@](#): > > \*Originally posted by Gary Kumquat \* > \*\*You know, that really is a most vivid description, but it does seem quite deserved. \*\* Uh, thanks. I think. Marc ---
**Author:** ![kabbes](https://avatars.discourse-cdn.com/v4/letter/k/e99b99/32.png) [@kabbes](https://boards.straightdope.com/u/kabbes)\ **Post date:** [February 28, 2003, 1:52pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/24 "2003-02-28T13:52:23Z")
> [@](#): > > \*Originally posted by Gary Kumquat \* > \*\*So what is the 4th form of insurance. I’m curious. \*\* No no no - you have to _guess_ 😃 ---
**Author:** ![jjimm](https://avatars.discourse-cdn.com/v4/letter/j/ba8739/32.png) [@jjimm](https://boards.straightdope.com/u/jjimm)\ **Post date:** [February 28, 2003, 1:59pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/25 "2003-02-28T13:59:32Z")
Huntin’? Shootin’? Fishin’? ---
**Author:** ![Gary\_Kumquat](https://avatars.discourse-cdn.com/v4/letter/g/4491bb/32.png) [@Gary\_Kumquat](https://boards.straightdope.com/u/Gary_Kumquat)\ **Post date:** [February 28, 2003, 2:10pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/26 "2003-02-28T14:10:02Z")
> [@](#): > > \*Originally posted by kabbes \* > \*\*No no no - you have to _guess_ 😃 \*\* Ooh, okey dokey. How about either legal or medical malpractice? ---
**Author:** ![Airman\_Doors\_USAF](https://avatars.discourse-cdn.com/v4/letter/a/e36b37/32.png) [@Airman\_Doors\_USAF](https://boards.straightdope.com/u/Airman_Doors_USAF)\ **Post date:** [February 28, 2003, 2:11pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/27 "2003-02-28T14:11:32Z")
OK, let’s look at these numbers, based on my own assumption of how insurance works. Assume for the sake of argument that no employees have to be paid, no buildings, etc. Let’s just go with ten people. Ten people are paying in a total of $1,000, for a group total of $10,000. In the course of that year one person has an accident, costing the insurance company $3,000, and another has an accident costing $4,000. The insurance company then has $3,000 profit, because that money is never consumed by anyone else. Further, they raise the rates of the two people who had the accidents in order to make up for their “losses”. Except, as the math has shown, they didn’t lose anything. They bet on 10 drivers’ abilities to avoid accidents and were wrong twice. But the interesting part is that they bet with someone else’s money. Their net gain for the year on those ten people is $3,000. It didn’t cost them a thing. On an even greater scale, with thousands of suckers paying much more than $1,000 a year, and every driver in the US paying into the pot, you would have a hard time convincing me that insurance companies aren’t making money hand over fist. Even with the comparatively large number of accidents in the US, the insurance companies tend to pay low values for your car and they try to minimize their financial loss in every way possible. Essentially, I think they’re legalized, professional bookies. ---
**Author:** ![Gary\_Kumquat](https://avatars.discourse-cdn.com/v4/letter/g/4491bb/32.png) [@Gary\_Kumquat](https://boards.straightdope.com/u/Gary_Kumquat)\ **Post date:** [February 28, 2003, 2:13pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/28 "2003-02-28T14:13:51Z")
> [@](#): > > \*Originally posted by Airman Doors, USAF \* > \*\*Essentially, I think they’re legalized, professional bookies. \*\* Bet you $20 they’re not. ---
**Author:** ![GingerOfTheNorth](https://avatars.discourse-cdn.com/v4/letter/g/cdc98d/32.png) [@GingerOfTheNorth](https://boards.straightdope.com/u/GingerOfTheNorth)\ **Post date:** [February 28, 2003, 2:21pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/29 "2003-02-28T14:21:59Z")
**Doors** - don’t forget overhead and things such as salaries. I didn’t work for more than one company who made a profit in 200-2001. You also don’t realize the incredibly high loss ratio that these places carry. It isn’t one or two losses out of 10, and it isn’t for $3 or $4k - it’s in the millions. ---
**Author:** ![jjimm](https://avatars.discourse-cdn.com/v4/letter/j/ba8739/32.png) [@jjimm](https://boards.straightdope.com/u/jjimm)\ **Post date:** [February 28, 2003, 2:26pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/30 "2003-02-28T14:26:03Z")
I’d say that **Airman’s** analogy is correct only up to the point that the claims are so low. If all the players are putting 1K into the pot, and the claims total 11K then they’re out. Don’t forget exaggerated claims, lawyers’ fees and fraud, too. ---
**Author:** ![kabbes](https://avatars.discourse-cdn.com/v4/letter/k/e99b99/32.png) [@kabbes](https://boards.straightdope.com/u/kabbes)\ **Post date:** [February 28, 2003, 2:28pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/31 "2003-02-28T14:28:13Z")
> [@](#): > > \*Originally posted by jjimm \* > \*\*Huntin’? Shootin’? Fishin’? \*\* Nope, nope and… nope. But not a zillion miles away. > [@](#): > > _Gary this time_ > **Ooh, okey dokey. How about either legal or medical malpractice?** If I may quote the Churchill dog: oooooooooh nonononono. One more guess, then I’ll give. **Doors** gets his answer in another post. pan ---
**Author:** ![Airman\_Doors\_USAF](https://avatars.discourse-cdn.com/v4/letter/a/e36b37/32.png) [@Airman\_Doors\_USAF](https://boards.straightdope.com/u/Airman_Doors_USAF)\ **Post date:** [February 28, 2003, 2:33pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/32 "2003-02-28T14:33:39Z")
Yeah. Notice I discounted the salaries. Believe me, I have nothing against the salespeople. They’re doing a job in accordance with company policy. I’m sure they don’t like hosing people any more than anyone else does. But a big monolithic corporation like, say, State Farm, has millions of people paying in, and thousands of people like me who paid in around $2,500 a year. Again, just for the sake of simplification, assume everyone pays an average of $1,000 a year and there are a million people paying in. That’s a billion dollars right there. Do they pay that much out every year on claims per thousand people? I doubt it. ---
**Author:** ![Gary\_Kumquat](https://avatars.discourse-cdn.com/v4/letter/g/4491bb/32.png) [@Gary\_Kumquat](https://boards.straightdope.com/u/Gary_Kumquat)\ **Post date:** [February 28, 2003, 2:36pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/33 "2003-02-28T14:36:11Z")
A leisure pursuit? Something to do with the sea? Damn you kabbes, I demand satisfaction. ---
**Author:** ![Airman\_Doors\_USAF](https://avatars.discourse-cdn.com/v4/letter/a/e36b37/32.png) [@Airman\_Doors\_USAF](https://boards.straightdope.com/u/Airman_Doors_USAF)\ **Post date:** [February 28, 2003, 2:41pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/34 "2003-02-28T14:41:01Z")
> [@](#): > > \*Originally posted by Airman Doors, USAF \* > \*\*Do they pay that much out every year on claims per thousand people? \*\* Make that thousand in the above quote a million, please. My goof. ---
**Author:** ![kabbes](https://avatars.discourse-cdn.com/v4/letter/k/e99b99/32.png) [@kabbes](https://boards.straightdope.com/u/kabbes)\ **Post date:** [February 28, 2003, 2:41pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/35 "2003-02-28T14:41:44Z")
Alright **Doors** , I’ll give some outline of an answer. But please bear in mind that, despite appearances, the theory behind insurance is _exceptionally_ complicated. I studies maths for three years in Cambridge and then studied for 4 years post-graduation (and average is 7 years) and I _still_ have stuff to learn. One post ain’t going to 'fess it all up. You’re trying to establish what is known as an _experience rated_ insurance system with your example. Specifically, a retrospective one. This is where next year’s rates are dependent on what has happened in the past. The trouble is, the way you’ve gone about it doesn’t work in the real world. It lacks _risk transfer_ - i.e. the notion that the risk is taken on by the insurer. If an insurance company actually tried it this way, then: Step 1) No claims would be made for some years. The insurance company would then reduce its rates, ultimately to below the theoretical risk premium level. Step 2) Claims exceed the premium levels. The insurance company attempts to put its rates up to recoup its losses **Step 3 - the bit you missed** ) Insurance Company QuickBux steps in and offers the theoretical risk rate as an alternative. The employer goes with QuickBux because they are cheaper. But uh-oh! That means that the original insurance company has paid out all these claims but has no way of recouping the losses! In other words, competition ensures that you’ll always lose constructing your insurance in this way. Instead, experience rating - when it is applied - works on a _credibility_ basis. The aim is to calculate the true underlying theoretical premium rate for the risk being covered. You do this by assuming initially that the risk is the same as everything else in the market and then, as time goes by, you gradually allow bit by bit of actual performance to the extent that it is statistically justified as credible. I could write pages more on this stuff. Maybe I will, but I’ll see if there are any question first! pan ---
**Author:** ![kabbes](https://avatars.discourse-cdn.com/v4/letter/k/e99b99/32.png) [@kabbes](https://boards.straightdope.com/u/kabbes)\ **Post date:** [February 28, 2003, 2:43pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/36 "2003-02-28T14:43:28Z")
Oh and the answer is **horse-riding establishments**. Bet you didn’t see _that_ one coming 😃 pan ---
**Author:** ![kabbes](https://avatars.discourse-cdn.com/v4/letter/k/e99b99/32.png) [@kabbes](https://boards.straightdope.com/u/kabbes)\ **Post date:** [February 28, 2003, 2:44pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/37 "2003-02-28T14:44:59Z")
**Doors** - a billion dollars? It is to laugh. A billion is chickenfeed. I deal with two piddly little Syndicates whose claims total a billion each. State Farm could eat them for breakfast and still be hungry. pan ---
**Author:** ![kabbes](https://avatars.discourse-cdn.com/v4/letter/k/e99b99/32.png) [@kabbes](https://boards.straightdope.com/u/kabbes)\ **Post date:** [February 28, 2003, 2:48pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/38 "2003-02-28T14:48:06Z")
I should add: what insurers are really concerned at are the big claims. You scratching your Geo doesn’t concern them. What concerns them is you swerving on the highway, causing a multiple-car pile-up with 5 passengers made into paraplegics and closing a major route for a day with corresponding loss of revenue. Claims can top a million dollars without too much sweat. It happens. And not even too infrequently. pan ---
**Author:** ![Airman\_Doors\_USAF](https://avatars.discourse-cdn.com/v4/letter/a/e36b37/32.png) [@Airman\_Doors\_USAF](https://boards.straightdope.com/u/Airman_Doors_USAF)\ **Post date:** [February 28, 2003, 3:12pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/39 "2003-02-28T15:12:32Z")
So let me ask you something, then. If insurance companies are running at a loss, then why do they continue to insure? Being privately (or for that matter, publicly)owned, profit-oriented companies, if they’re not profiting, then why don’t they just pack it in? I think there’s more to this than I’m hearing from you guys. ---
**Author:** ![Jonathan\_Chance](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/jonathan_chance/32/701_2.png) [@Jonathan\_Chance](https://boards.straightdope.com/u/Jonathan_Chance)\ **Post date:** [February 28, 2003, 3:13pm UTC](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089/40 "2003-02-28T15:13:20Z")
Damn straight. But I’m not accepting (without sending my accountant to audit their books) the over-riding claim of losses. That rings my ‘paper loss’ alarm pretty damn loud. These are some of the finest (Hi kabbes!) mathematicians on Earth. There’s simply no means by which, if they’re at all competent businessmen, they should be losing money for any extended length of time. Yes, they can have ‘bad years’ in which a hurricane or some such can cause huge losses but those should be factored into the equation. Really, I’m buying that just as much as I’m buying Major League Baseball owners pleading poverty. It’s an extraordinary claim that’s going to require extraordinary proof. [Previous page](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089.md?page=1) [Next page](https://boards.straightdope.com/t/insurance-why-are-we-buying-this-shit/158089.md?page=3)