Well, I’m glad not to have paid $178,000 for a liver transplant for a family member. I think the copay was $5.
In Australia plenty of government bodies “carry their own risk”. In other words they have no insurance for the reasons suggested by the OP. If say. it cost 5% of a building’s value to insure it and you own 100 buildings, then unless more than 5 are destroyed you profit by carrying your own risk.
I was under the impression that it is very common for large car rental companies to do the same thing.
You could try to underwrite every potential loss yourself - for example, every time you send something valuable by post, just put the money you would have paid for secure shipping in a savings account - every time you make a loan repayment, put aside a little extra in case you lose your job and can’t keep up the repayments, and so on.
The reasons this is often less desirable than taking out insurance (with a company that is really only doing the exact same thing) are:
-You have to be disciplined enough to actually put the money aside
-You have to have some sort of appreciation of the likely risk, so that you can decide how big the premiums need to be, in order to amass the necessary capital to pay out in the event of failure
-Some potential losses, are - although quite unlikely - too great for you to be able to underwrite on your own - it’s unlikely, for example, that your house will burn to the ground, but it’s also most likely beyond your means to save up to rebuild it in this unlikely event.
Insurance companies lump it all together into a single fund that should be adequate to cover the small, likely losses, and the larger ones that only befall a few people.
It’s like flipping a coin, just because there’s a 50:50 chance that you’ll get a head instead of a tail, doesn’t mean you won’t end up with 3 heads in a row. Don’t discount the possibility you’ll need payouts from all of the three insurances above in short order.
Here’s hoping I won’t need to cash in my life insurance (or have my solicitor do it for me) but less than a year after getting car insurance my car was written off.
Not necessarily true. I was discussing this with a friend some years ago who used to work at Norwich Union. At the time they took in less in premiums than they were giving out in payouts and salary. They made up the difference - and their profit - from the interest from the premiums.
This is like asking if getting a haircut is a waste of money by leaving out the “intangible” benefit of having nice looking hair.
Insurance is a service, services cost money. The service you get from insurance isn’t the expected payout, it’s protection from financial ruin. Big companies can self insure because the typical risk they need to cover isn’t the sort of thing that would cause financial ruin. Big companies would insure a building, perhaps, but wouldn’t buy insurance when shipping a laptop computer. The young person who needs a computer, and can’t afford to buy a second one… he should drop the price of a Frappiccino on insuring his laptop delivery.
Whether or not insurance is a waste depends entirely on how you feel about the risk you are insuring against.
That sounds like an argument for buying lottery tickets; it’s a waste of money, until you win the jackpot.
There are alternatives to buying lottery tickets where the figures add up in favour of them, savings over a few years, the UK’s Premium Bonds. What alternative is there to insurance?
It may be the same argument – but it’s WAY different odds. Frinstance, the chance that a 30-year old will die before reaching age 31 is around 1/1000. The chance of winning the lottery is, what, 1/10,000,000 ?
As others have noted, insurance is a question of risk protection. My father used to say that he was delighted to waste money on insurance, and he hoped he’d never get his money back. “Getting his money back” would mean major auto accident, house fire, heart-transplant, etc.
Yes, they charge for their services and they want to make some profit. But the “on average” is deceptive. Following September 11, 2001, the property/casualty insurers certainly did not receive more in payments than they sent out. The insurers are managing financial risk – it’s all about the odds, and over multiple years. If they didn’t think they could make a profit at it, they wouldn’t be in business.
You’re receiving services (financial protection against risk) for your money. Getting your money’s worth is about risk, not about payback.
I save a lot of money on insurance by carrying what most people would consider very high deductibles, upwards of $2000 on both auto and homeowners. I consider insurance to be a tool for protecting me against catastrophic loss, not minor parking lot collisions or hail damage to my roof. Basically I figure that if I can cover a loss myself, I don’t need insurance for it. This way I’m covered if my car is totalled or my house burns down, but I have the benefit of being self-insured for most damages.
I bought my first house about 15 years ago. Since then, I’ve paid approximately $800/year for homeowner’s insurance. That’s about $12K total.
Last summer, there was a hail storm that did about $30K damage to my roof and siding. Insurance company wrote a check without even blinking.
I don’t think insurance is a waste of money.
All the anecdotes in the world don’t make the case that insurance isn’t a waste of money.
I imagine that by this time in my life, between home, car, health, I’ve probably paid out $100,000 in insurance premiums.
I might have collected on $5000-$10,000 worth of claims.
And, there’s probably a lot more of ME than YOU.
It doesn’t make insurance a waste. What I would really like is drastically lowered premiums, and greatly increased deductibles, but that’s not always easy to find. I now have the financial discipline to put money away, and I just want to be covered against catastrophic loss.
I forget the exact words, but someone said insurance is an investment in protecting that which you cannot afford to lose. From that perspective, it’s not a waste of money.
From the OP perspective of strict dollars in/dollars out, the answer depends upon whether or not you suffer a loss. Unless you can accurately predict the future, it cannot be answered until after you suffer said loss (e.g. house burns down) or eliminate the possibility of loss (sell house). Can’t say I see what good that after-the-fact answer does anyone, though.
It’s all a gamble, but sometimes pays off very well. I just bought an 2008 vehicle, my insurance premium is $600 a year. A Maple treetop fell on it this past weekend, 
the repair bill is $5,500, which will be covered under comprehensive insurance for a $50 deductible. This one incident will put me ahead for the next 9 years of premiums! At least on that vehicle. Of course I have other vehicles that I’ve never made a claim on, although their insurance isn’t as expensive.
Home owner’s insurance I’ve never made a claim on, but it’s not as expensive and can pay huge amounts of money in the event of major damage to your home.
Insurance is an important topic in game theory, especially (as discussed earlier) for risk aversion.
The following games all have an expected value of $10:
A coin flip (odds of 1:2) for $20.
1:10 chance at $100.
1:100 chance at $1000.
1:1000 chance at $10,000.
1:100,000 chance at $1,000,000.
In a lottery, you are paying for the chance at winning the prize, but you don’t have to play the game if you don’t want to. In insurance, it’s the other way around – you are paying to avoid the chance, as you don’t have an option to avoid playing entirely.
Let’s take the last game as an example – a 1 in 100,000 chance of losing $1M, which in terms of money is a standard amount for umbrella liability coverage. For the sake of discussion, assume that there is that chance of getting hit with a $1M judgement. A risk-neutral person would be willing to pay $10 to avoid the chance of paying that judgement. A risk-averse person may be willing to pay $20 or $50, or even $100 a year for life, to avoid the chance. This is because to the risk-averse person, the utility of avoiding the catastrophic judgement is greater than the premium they pay, and is sufficient to offset the reality that from a game theory POV, the premium exceeds the expected value of the judgement.
Yeah, increasingly high deductibles make sense, if you’re disciplined – AND if you are significantly less accident prone/careless than average.
We have what we call an ‘entropy and insurance’ savings account. Every time we buy something of significant value, we find out what its expected life span is. Divide the purchase price by the lifespan in months, and adjust the amount we add to that savings account each month to cover it. If the salesman attempts to sell us an extended warranty, we also deposit whatever the warranty would cost into the same savings account. The account also gets the difference between what it would cost for a ‘normal’ deductible insurance on the house and car and the ‘high deductible’ or ‘reduced coverage’ insurance we actually buy.
Over the years, that particular fund has grown to quite a significant amount DESPITE the fact that we use it to pay cash for replacements for dead whatevers AND repair bills. The thing is, we’re not ‘gotta have the latest feature’ people, and husband is great about diy minor repairs, and we aren’t careless or clumsy as a rule – the result is, pretty much everything we own lasts longer than the ‘average lifetime.’ Much longer, generally.
It only makes sense – those average lifetimes take into account people like my neighbor. He thinks that letting his grandkids and their friends (ages 10 and up) use his lawn tractor to play games and have fun racing around his yard is a good idea, despite having massive outcroppings of good ole New England granite sticking up in various places around his yard. Result: he’s gown through three lawn tractors in the past five years. “Good thing I bought the insurance,” he has remarked on more than one occasion. Uh-huh. Everybody who buys a insurance policy on their new lawn tractor is subsidizing idiots like my neighbor.
There are a lot more of you. That is how the insurance industry stays afloat. In health insurance they say 20% of people are responsible for 80% of the money paid out. The system would fall apart if only sick people had health insurance, if only bad drivers had auto insurance and only the nearly dead had life insurance.
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Yep, the rule of thumb I’ve heard, that makes sense to me, is that it’s a waste of money to buy insurance against any expense that you could easily afford to cover.
The point of insurance is to replace the possibility of a large expense that you can’t afford with the sure thing of a small expense that you can afford.
Whether insurance will be a waste of money to you personally, in the sense that you’ll pay out more than you benefit from it, is something you can’t possibly know ahead of time (unless you’re planning to commit insurance fraud 
). Chances are good that it will be. But that doesn’t mean that insurance is necessarily a bad deal. As T_SQUARE pointed out, you need to consider not only expected value (how much money you pay out or collect, and the odds) but also utility (the actual effect it would have on your life to pay out or collect those amounts in the circumstances).
As long as you have the cash and the discipline to not touch it, I’d say to insure yourself. But if you have a mortgage on your house or you have a car loan, you don’t have any choice but to have insurance.
Also, the bodily injury coverage amounts on my car insurance are not something I could imagine paying out of pocket. So you gotta have insurance for that.