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Insurance


What is insurance?

Insurance is the transfer of risk.

The main idea of an insurable risk is that 
  1.  the occurrence of event in a certain population is known with some degree of reliability AND 
  2.  the likelihood of said event occurring to a particular individual is unkown

Origins of insurance


Insurance is gambling

Insurance has all the characteristics of gambling. You place your stake (insurance premium) and agree terms for a payout. Then if you are right and the unfortunate event happens, you win the bet. The client may not see this as gambling, but that is because they already have a risk that the unfortunate event and consequences wont happen and insurance is just cancelling out that default gamble. But none the less Insurance is a gamble.

Problems with modern insurance


Insurance companies always
  1. Make it hard to understand the terms and conditions, so the client cannot compare prices and may agree to an invalid policy.
  2. Deny the claim when client comes to collect (some people think they cannot take it any further, so that is profit for an insurance company)
  3. Make it difficult to claim, in the hope that the client gives up, or gets lost in the bureaucracy, it also slows the claim down. 
  4. Delays payment in the hope that the client forgets to chase up,dies and can use those funds to invest
  5. After a claim is made they put the premiums up for that client in a bid to get back the money that was paid out.
In addition to this, sometimes a claim might cover a clients living costs, but not the premium of continuing an insurance policy, meaning the policy is cancelled.

Attributes of insurance

The idea of insurance is that you pay another party a premium and for that premium they accept the risk of taking on expense of some scenario on your behalf.

Mixed insurance

Some insurance masquerades is not insurance at all, it is just a payment plan.

Take dental insurance for instance, this usually allows for 1 check-up a year and covers costs for treatments.
Insurance cost                 100
Yearly check-up cost       - 60
True insurance cost           40

As the $60 check-up is not really insurance as it has almost 100% probability of occurring. The real cost of insurance is $40. 

This is a problem for the client because
  1. Credit - The client now pays the premium up front losing the use of the $100 for the full year.
  2. Waste - When the client goes in for a check-up, they must print, fill in, get signed the form(by dentist), send it in to the insurance company and then check the funds are paid back. 
    In the case of not having insurance they just have to pay when they go. This would be cheaper for the dentist which may allow them to reduce check-up fees, would take less of the customers time and postal stamps, and would be cheaper for the insurance company as it wouldn't incur the administration costs. Maybe the insurance would only be $35/year without the check-up included.
  3. Value - The client gets a payout each year for the cost of the check-up and feels they are getting something back for their premium. Without this, the client would maybe feel the insurance is not worth it. Hence why the insurance include a payment plan in the insurance policy, creating a sense of false value.
Equate the example above with car insurance. Have you ever hear of one that includes:
  • Cost of oil change
  • Car washes
  • Tire changes
  • Window wiper fluid etc etc
These are not included as they are maintenance costs and not things that can be insured.

Compulsivity of  insurance

  • Compulsory - like car insurance
  • Agreed - as part of a deal like life insurance when house buying required by banks
  • Advisable - like mobile phone insurance
Subpages (1): Moral Hazard
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