
If you could write a check and go on with your life, don't insure against it - dreeves
http://messymatters.com/insurance
======
haberman
I've seen this argument before, but I think it's totally backwards.

The article calls insurance "a wager with the insurance company." It is not a
wager at all. A wager is when you bet some amount of money on the hopes that
you'll get back a bigger amount of money. It introduces greater uncertainty
and volatility into your financial situation: you'll take either a gain or a
loss depending on the outcome of some not yet determined event.

 _Not_ buying insurance is a wager with life. You wager your belongings, and
if nothing happens to them you "win" the money you saved by not buying
insurance. Like any wager, you have greater uncertainty and volatility than if
you hadn't taken the wager.

Buying insurance is the anti-wager: you have a known outcome (you'll be out
the premium but still have your belongings), which gives you decreased
uncertainty and volatility. Yes, insurance companies make a profit by charging
more in premiums than the expected value of their claims. But the alternative
is to make a big wager with life (the value of your house, car, etc) for a
relatively small return (the savings from not paying an insurance premium).

(This is ignoring any of the practical conveniences of having a pro handle all
the logistics in the case of an accident).

~~~
DougWebb
I think the point is that the premium is part of your belongings, and the
probability is that the premium over the period you have insurance is more
than the amount of any claims you'll get reimbursed from the insurance. You're
therefore better off paying those premiums to yourself until you've built up a
large enough fund to replace whatever you wanted to insure. Now you're self-
insured in-perpetuity, with no further costs.

The risk is that you're going to have an accident before you've built up that
fund. Insurance helps there, but they're going to jack up your premium rates
and make you pay for the claim. In essence they're giving you a high-interest
loan to pay for your accident, except the loan payments never stop. If you've
got credit, an actual loan is probably better than the insurance for this
situation.

------
dkarl
Why, if you have plenty of money, would you make a decision based entirely on
saving a few dollars and possibly losing some conveniences at the same time?

For example, I was in a car accident on 880 in Oakland that was staged by
insurance fraudsters. I had no clue; I was just a little worried because
superficially it looked like my fault but it really wasn't. My insurance
company knew right away what was going on. My end of it was limited to talking
to them on the phone a few times, and they took care of everything else.

Also, consider your insurance company's ability to deal with the other
driver's insurance company. Insurance companies are relatively civilized with
each other, because they don't want lawsuits driving up their costs, but will
they be fair with an uninsured driver who is negotiating on his own behalf?
They might be fair after you hire a lawyer, but that costs money and time.

I get that the willingness to take on huge hassles to save a few bucks is one
way people get ahead in the first place, but it's no way to enjoy your money
if you've got it.

~~~
ianterrell
How was your accident staged? That sounds interesting.

~~~
patrickyeon
One common way to do it is with two cars. The one car is directly in front of
you, the second has you boxed in so that you can't switch lanes (a perfectly
normal situation to be in while driving). The one in front of you slams on the
brakes, and you hit it. It's not especially easy to convince anyone that rear-
ending a car is not your fault.

~~~
bryanlarsen
If you're boxed in and the car in front of you slams on the brake and you hit
it, pretty much the only way it isn't your fault is if the car in front of you
has broken brake lights.

As you said, being boxed in is a common situation, and there are a million
legitimate reasons why the car in front of you might slam on the brakes. Just
because the car in front didn't have a legitimate reason doesn't mean that
you're not at fault for hitting them. They could be charged with insurance
fraud, but you could still be charged with a driving offense.

------
lionhearted
Agree with the article as a general principle, but there are some exceptions.

By definition, successful insurance companies are offering negative expected
value bets to their customers, all else being equal.

But all else isn't equal. The insurance company has efficient legal
representation, so a situation with legal liability might be +EV for both of
you. The insurance could cost you less than (legal fees + damages)*chance-of-
event, whereas the insurance company specializes in the case law and has in-
house staff, meaning lower legal fees and lower average damages/settlements.

Sometimes insurance is tax advantaged. And it can take stress of your head.
And they might take some time hassle off your head - a girl I dated some years
back got the full maintenance/insurance package from the dealer when she
bought a car, which I thought was crazy... but then she knew that all she
needed to do was stop at the dealership instead of screwing around with
mechanics, and they treated her very nicely consistently. Your time in a
situation like that might be worth more than the bucks you save.

So yeah, all else being equal, insurance on things you can eat the cost of
isn't a good buy. But all else isn't always equal.

~~~
arebop
"Let me emphasize again that cost-free float is /not/ an outcome to be
expected in the [property-casualty] industry as a whole: In most years,
industry premiums have been inadequate to cover claims plus expenses"
[buffet].

So another thing to consider is that if the insurance company is a better
investor than you are, the proposition might not be a negative expected value
bet for you at all.

[buffet] <http://www.berkshirehathaway.com/letters/2010ltr.pdf>

------
dreeves
This also introduces the Ear Full of Cider Principle, as articulated by Marlon
Brando's character in "Guys and Dolls":

    
    
        One of these days in your travels a guy is going to show
        you a brand-new deck of cards, on which the seal is not yet
        broken. Then this guy is going to offer to bet you that he 
        can make the jack of spades jump out of this brand-new deck 
        of cards and squirt cider in your ear. But, son, you do not 
        accept this bet. Because as sure as you stand there you’re 
        going to wind up with an ear full of cider.
    

(Economists call this the no-trade theorem.)

And to quote from the article:

What does it have to do with insurance? Buying insurance is, quite literally,
accepting a wager with the insurance company. You’re betting that you will
crash your car and the insurance company is betting that you won’t. The ratio
of your premiums to the payout for the possible claim establishes the odds
that the insurance company is giving you. They wouldn’t offer you those odds
unless the bet was a savvy one for them.

Which makes you the sucker.

~~~
rm445
That's a very pessimistic way of looking at insurance. Sure, extended
warranties on consumer goods and so on are things to be avoided, but insurance
would still exist in a world of informed and rational people.

When you buy insurance you get reduced expected value (over going it alone)
but you also reduce the variance - the cost of driving a car around becomes a
somewhat predictable constant rather than there being the ever-present risk of
a large cost.

Yes, if you are in a financial position where the cost of a car is something
you can take on the chin, then it is up there with extended warranties as
something to avoid. But for the vast majority of people in the real world,
that is not the case.

------
lmkg
My view on this, is that insurance companies are performing arbitrage across
_objective functions_. Insurance companies car about the expected return of
their premiums. For individual car-owners, it's not the expected value that
matters so much, it's that you don't want to not have a car. In other words,
they're optimizing against the Minimax objective function (minimizing the
maximum loss). The insurance company can average across hundreds of accidents,
but an individual car-owner cannot. So yeah, if you look at the expected
values of your premiums, it's a loss. But that doesn't necessarily mean it's a
sucker's bet.

This is, of course, predicated on the idea that a car accident is a relatively
catastrophic event. If you have enough money in savings that you can sign a
check and walk away, than it's not really in that category anymore, and the
Minimax may not make sense as an objective function. So, I guess I do agree
with the headline, just not the article behind it.

------
Derbasti
I politely disagree. The article seems to say that since insurance companies
run a profit, they can not be worthwhile. And of course, for most people, they
_are_ not worth their money since most people never have a huge emergency that
costs more than the sum of their premiums.

But then, the very point of insurance is to help in case of an emergency where
you can _not_ help yourself any more.

Someone once drove my car through a wall in an accident. The car was old and
worthless, but the wall would have cost me 15000€ to repair had I not had car
insurance. With health insurance it is even worse: You are risking not 'just'
money but you very life.

------
dustingetz
_"They wouldn’t offer you the insurance if you could, in expectation, come out
ahead from it."_

Agreed in principle, but maybe its not that simple: 1) there may be enough
small claims to look linear, but large claims (the ones that cause lawsuits
over medical fees) probably aren't linear 2) regulation gives the market
friction and makes it non-ideal

competition and regulation has squeezed this industry to the point of
competing solely on price. unlikely that margins are high, and quite likely
that some of the small, cheaper players are to price even closer to
expectation, won't be able to absorb a few non-linear events in a really
unlucky timespan, but drives down market prices to below profitable anyway.

edit: he actually acknowledges this in the article: " _...market efficiency
suggests that their profits not be too obscene overall, which means the
effective odds you’re offered shouldn’t be too skewed.... buying insurance may
only be slightly stupid, not ear-full-of-cider stupid._ "

~~~
dreeves
I'm not sure I understand point 1, about non-linearity. Is there any
conceivable way that could cause the odds to shift in your favor?

Point 2 I think could only make the odds worse for you if it involves
increased overhead for the insurance company.

Your last point is a good one, though. There's a bit at the end of the article
about this:

    
    
        Of course, “sucker” might be hyperbolic. After all, insurance 
        is ostensibly a competitive industry so market efficiency 
        suggests that their profits not be too obscene overall, which 
        means the effective odds you’re offered shouldn’t be too 
        skewed. Fundamentally, it’s an empirical question though, 
        hinging on claims paid vs. premiums collected. I could well 
        be proved wrong: buying insurance may only be *slightly* 
        stupid, not ear-full-of-cider stupid.

------
gte910h
At best this means "Ge a higher deductible" for most car insurance.

You very likely WANT an insurance company to deal with the fallout of an
accident.

It sucks to deal with that crap yourself.

Homeowners property damage, similarly, you want a relatively high deductible
(as you will pay many times over for repeated small claims).

------
orangecat
I agree completely. I'm always in the minority telling people not to get
AppleCare unless having to replace their Mac would be financially disastrous.
(In which case they probably shouldn't be buying it in the first place).

~~~
seabee
But it would be wrong to suggest that people shouldn't place an upper bound on
their spending because the average case is lower.

The loss of a computer might not be financially disastrous. The loss of
another gadget might not be, either. But if you get a bad roll and lose
multiple things within a short period of time, do you think you can withstand
it financially? _That_ is the real question. Don't look at these things in
isolation.

~~~
dreeves
So buy extended warranties on all your electronics in case everything breaks
at once and you couldn't afford to replace them all?

That's too far-fetched for me. I'd assume that you could scrape together
enough money (especially with all the money you saved not buying extended
warranties!) to replace the most critical things first and the rest later.

~~~
seabee
You're missing the point and attacking a strawman to boot. Nobody suggested
you take out a warranty on things you can probably live without, like a
toaster, iPod or TiVo.

Other things like a washing machine, you might do, because losing access to it
incurs extra costs: taking things to the laundrette, travel to friends, etc.
(if you're in a rural area I hope you know people there). This is especially
the case if it's work-related equipment.

In the case of something that is too expensive to replace without insurance,
you just decided that the cost of insurance is greater than the opportunity
cost of using a cheaper/inferior good _over the time period covered by the
insurance_. Do you really think that's true in all circumstances?

What you should not do is look at insurance narrow-mindedly and declare it a
great big scam because the mathematics works in their favour. Well, no shit.
They are paid to remove risk, they can't do that if it's an unsustainable
business. If you can operate on the same business model as them and make an
amortised net profit, do that - but don't assume everyone else can.

------
rvb
From one of the author's responses to comments:

"It’s that insurance is fundamentally zero-sum — the only transaction is money
going back and forth. When you buy a refrigerator, say, your value for it is
huge. (If refrigerators cost $50k you’d probably suck it up and buy one — how
the hell are you going to live without a refrigerator?) So you come out way
ahead when you get it for [I haven’t actually the faintest clue what a
refrigerator costs]. And Maytag or whoever does too. Win-win! Insurance is
fundamentally either win-lose or lose-win."

I don't think that's true. The consumer also gains a reduction in the variance
of his or her expected outcomes. This is a good for people who have
diminishing marginal utilities of wealth (most of us).

There're two components to the money going back and forth: the actual costs of
the claims, and the insurance company's margin. The costs of the claims are
like Maytag's production costs.

We buy the refrigerator if we value refrigeration more than the margin we give
Maytag. Similarly, we buy insurance if we value the reduction in variance more
than the margin we give the insurance company.

Whether or not the price is worth the value we get from the service is a
different question; but it is not fundamentally win/lose.

------
waterlesscloud
Another factor, though, is that insurance companies don't just put premiums in
a lockbox and pay out as needed, they invest the premiums and thus have more
capital than what the customers paid in.

------
rayiner
By the logic of this article, buying anything makes you a sucker. A store
would never sell you something unless they were coming out ahead, after all.

Insurance companies sell certainty. You buy insurance if you value that
certainty more than the cost of your premiums. The insurance company wins,
because they get the premiums, and you win, because your net value is greater
than the premiums you pay.

~~~
bsoule
There's a huge difference between insurance and buying stuff from a store --
at a store I buy things when I have a higher utility for the item than the
cost to the manufacturer to produce and sell it to me. Insurance is a zero-sum
game. Actually, the article addresses that:

    
    
        "The difference is quite fundamental. It’s that insurance is fundamentally
        zero-sum — the only transaction is money going back and forth. When you 
        buy a refrigerator, say, your value for it is huge. (If refrigerators cost
        $50k you’d probably suck it up and buy one — how the hell are you going to
        live without a refrigerator?) So you come out way ahead when you get it for
        [I haven’t actually the faintest clue what a refrigerator costs]. And
        Maytag or whoever does too. Win-win! Insurance is fundamentally either 
        win-lose or lose-win."

~~~
rayiner
Insurance is only zero-sum if there is no value in certainty, which is just
plain false (huge amounts of money are spent managing and trading risk).

~~~
bsoule
I think that's kind of the point of the article: When you can afford the worst
case, there really isn't any value in certainty.

------
SageRaven
I totally agree. Hell, my small _home_ , which I own outright, isn't insured.
Ditto my small, piece-o-shit commuter car.

------
rm445
The example at the end of the article is terrible.

(The Nash equilibrium for the two-people-writing-down-a-price puzzle, the
Traveller's dilemma, is for them both to write down that the item is worth the
bare minimum, but that has no relevance to an article about insurance in the
real world).

------
georgieporgie
As someone who generally carries liability-only, and who has had two other-
guy's-fault interactions, you should carry collision insurance if:

* You let other people drive your vehicle. Incurred costs can ruin relationships.

* You don't like defending your own best interests against potentially hostile parties. Getting paid for damages can be a massive headache.

~~~
gte910h
As a person who values my time (it actually has a dollar cost I quote all the
time to my customers), I couldn't imagine litigating something like a non-
injury car accident. It would take so much time for so little money
comparatively speaking.

Hence, insurance company (professional accident cost removal companies).

~~~
georgieporgie
I've experienced one of each. Progressive was excellent to deal with. The
Yellow Cab Cooperative in SF was a nightmare. But hey, that's what lawyers are
for.

------
ahoyhere
Insurance is like open source software in reverse. Not having it is only free
if your time (and anxiety) is worth nothing to you.

