These insurance people have to be taking in more money than they spend. It’s basic math. On average, they’re receiving more in payments than they’re sending out.
Let’s leave out “peace of mind” and other intangibles. We’re talking strictly dollars in, dollars out, and probability of getting more than you pay into the system. From that perspective, is insurance a losing gamble?
Insurances I’ve “profited” from:
Health
Auto
Insurances I haven’t “profited” from:
Life
YMMV
ETA: Another thing to remember is that they can negotiate lower payments for services rendered than you or I can, saving all three of us money.
Yes-up until the moment when your house catches on fire, a tree falls on it, your car is stolen or struck by an uninsured motorist, or you have the misfortune of causing an accident resulting in personal injury to another. At that point, insurance becomes a good thing, because even if you had wisely invested every penny spent on premiums, and earned a high rate of interest, it still could be much less than you need.
The arithmetic mean return on purchasing insurance, for a uniform random distribution over the population, is negative. This does not automatically entail that insurance is a waste of money. It just entails that if insurance is worthwhile, than arithmetic mean return is not the metric by which investments are judged. For example, there could be elements of risk aversion in play, which is probably the canonical response to this question. Incidentally, I argued once before in this thread that it was flawed to take lottery-playing as automatically entailed irrational by its negative arithmetic mean return, on the grounds that the same conditions apply to the purchase of insurance and yet it certainly seems plausible that the purchase of insurance is rational.
On the other hand, if you have enough money to buy the insured property outright, then you can act as an insurance company for yourself and profit as much as the insurance company would have.
It’s the weirdest form of gambling: You bet the insurer that you will get sick, die etc and hope like hell you lose.
Nice to have when you need it, though.
Life involves risk. Risk is an unpredictable value for individuals, with economic consequences that are also unpredictable. Insurances companies exist because generally, risk is predictable for large groups. The economic consequences are manageable with appropriate preparation, and legal strategy. The difference between the magnitude of risk, and the value of the assumption of that risk is the profit margin available to the insurance company.
They make a good bet, that they can afford to lose. If you make the same bet, it’s theoretically a good bet, but you cannot afford to lose, and you can generally afford the bet.
Health insurance, and auto insurance, are almost a good bet for you. But in both cases, the consequences are far worse for you than the insurance company. All the other forms of insurance depend on how much you have at risk, and how much you care about keeping it. Personal choices.
Tris
The expected value of insurance is negative. However, you should look at expected utility, which is positive in many cases. Most people are risk adverse, the risk nuetral person would not buy insurance.
Basing your insurance decisions on the expected return from a policy doesn’t account for the possibility of catastrophic loss. The average person can bounce back from losing a small or moderate amount of money, but if they’re found liable for a million dollars worth of property damage as a result of an auto accident (not likely, but possible), they’re pretty much out of the game. The proper reason to buy insurance is not so that you’ll come out ahead of your premiums, but so that you don’t suffer the full effects of a catastrophic loss.
I’m not quite sure I follow this, but I think you’re missing the fact that a large part of an insurance companies profitability comes from the fact that they insure a large number of properties/lives/what have you. This helps to bring down the variance of the profit per policy.
Actually no, they don’t take in more than they spend.
Insurance companies do not just stuff your premiums into a mattress. They invest the money and earn interest.
Those investment earnings reduce the amount that policy holders need to pay.
If you think insurance is a bad idea, wait till you have to write a $10,000 check to fix your wrecked car, or $100,000 for cancer treatment. Then come back and give us your thoughts.
Well, every dollar the insurance companies makes as interest on my money is a dollar I could’ve made for myself as interest on my money had I not paid that money to the insurance company. So it’s irrelevant to the question of average return on insurance.
(But I agree with the last part of your post)
While I tend to agree with that (you are assuming that you can make the same return as the professional money managers at the insurance companies) it does not alter the fact that the insurance company does not need to collect more than they spend.
Say that the odds of something happening which requires insurance is 1 in 1000 per year. This means that the amount of money available if you are that “1” is that of yourself plus 999 other people (minus the insurance company’s profit), rather than just your own. If you and the other 999 people are each paying $50 a year, and the insurance company is taking 20% off the top, then that means that you can theoretically afford up to ($50 * 1000 * 0.8 =) $40,000 against whatever that emergency was.
It would take a long time to save up $40,000 at $50 per year increments.
But, of course, there’s only a 1 in 1000 chance that you’ll actually need that money to begin with.
On the other hand, if you can afford $40,000, then don’t get the insurance and you free up $50 each year. So, in some cases, insurance is a complete waste of money.
It’d be very possible to just set aside money for yourself and invest it, and this money would strictly be there to “cover” health emergencies, automobile problems and et cetera.
It’d be pretty easy to get the same return as the professional money managers at the insurance companies because you can just invest in a mutual fund which is managed by those same professional money managers.
Look at all the insurance premiums you’ve ever paid in your entire life. Total them up and then calculate a reasonable return on investment and see if you’ve gotten more money from insurance companies than you would have gotten had you just invested all that money yourself.
I think for many, many Americans if they just invested their own money and put nothing into insurance they would come out way ahead, even if they had to cut checks for $10,000 car accidents.
The benefit of investing your money in that manner is that it still remains your money, meaning technically you can use it for other stuff if you ever decide you don’t need your safety net anymore (say you’re 85 and are prepared to meet death, you may not really worry about getting sick and paying for expensive medical treatment at that point.)
However the problem with this whole approach is:
If you have a large cost early in life, say your 20s or so, it’s very unlikely you’ve had the chance to accumulate enough money in your safety-net account to cover it, screwing you mightily.
Even if you invest very well a truly catastrophic injury will still fuck you. Serious spinal cord injury can cost hundreds of thousands of dollars in medical treatment and unless you’re just outright so wealthy that such figures are irrelevant to you then insurance is definitely a better route to go.
I have to wonder if Bill Gates or Warren Buffet have insurance.
I’m guessing they have auto insurance since it is legally mandated to at least have liability insurance. But why would a guy like Gates or Buffet have health insurance?
My parents (who are decently wealthy) have insurance. I imagine that it’s largely because it just makes things easier (you can just hand your dentist or doctor your insurance card), but probably also just because why risk a million or so dollar bill from a doctor if there’s an emergency, when you can get that much value via insurance for much less.
I’d personally guess that Gates does have insurance.
If they lived in Texas, they wouldn’t need insurance, just proof that they were bonded at a certain amount ($10K?) in case of accident.
I was just thinking the other day about how my vision insurance provider can possibly turn a profit.
I just had my yearly exam and ordered a year’s worth of contact lenses. The exam was free, paid 100% by insurance. The contacts were a total of $140; my insurance allows for up to $130 per year in contact lenses. Total out of pocket expense to me: $10.00.
I believe the exam is $60 or so. Total cost paid by insurance: $190.00.
My weekly deduction for vision insurance: $1.92. Yearly cost: $99.84. Net gain to me: $90.16.
If every subscriber was like me, the insurance company would tank faster than you could say astigmatism. I figure they make money because most people aren’t like me.
Your employer is subsidizing this cost as a benefit to employees. If they didn’t do this, they could probably afford to pay you more than the “savings” you are so giddy about, although taxes would eat into it.