It’s still hard to argue with people questioning why I don’t buy insurance for my $25k or so of household contents in a relatively secure building.
I don’t care how cheap the policy is, I’m assuming they’re charging more than they payout on average, and I lock my doors consistently.
This would be absolutely devastating to most people in America (and the world). Being able to tank a $25k loss without any insurance help is a very privileged position.
I don't have a point of contention with your comment. I just wanted to make that observation, because I think it can be easy for many of us to forget it.
Toiletries and soaps.
Towels and washcloths.
The shower caddy and the shower curtain.
The cleaners under the sink.
The books on the back of the toilet.
Now do the same calculation in your kitchen, your bedroom, your family room. The couch, those chairs, a TV, your mattress and box spring and bedsheets and blankets, dishes and glassware and silverware, pots and pans, and so on. Even if you own cheap stuff, that all adds up very quickly into a loss most people can't readily absorb, even when you factor out the pile of stuff you don't wear any more and really ought to donate. I think we could inventory a lower/middle-income renter's belongings and spend $25K pretty easily.
If you feel overwhelmed by the prospect of purging, try doing it a piece at a time. Even make a game of it: when you get dressed in the morning, you also need to pick an item. That item goes into a box near your front door.
When the box is full, go donate it, burn it in the back yard, what-have-you.
I had it happen once in a move: At 23, all my possessions got squeezed into 6 packages (5 of which were media mail), a bookbag, and a checked luggage. Everything else got thrown out or given away. I'd been living in a furnished room. At the new location, the only thing I needed to replace was a computer monitor.
Moral hazard and adverse selection are real issues insurance faces: that being covered makes the insured more reckless, and that people with higher risk self-select to sign up for insurance.
OTOH, insurance companies make more money the less claims they pay.
In general, we want to run our lives like people instead of like miniature conglomerates. Peoples' tendency not to want to live like automata is not the problem: the problem is the system they are trapped in which forces them to live as automata.
Water damage due to a sudden burst of a pipe. Required expensive drying of walls, replacement of part of the drywall and replacement of the flooring. Dealing with insurance was extremely pleasant.
Burglary of house. Lost laptops, camera, time machine, diamond earrings. Similar experience. Surpringly, the rule was: if you want to be reimbursed in cash, you get the current value (which is close to zero for a 6 year laptop). But if you buy a new laptop, you get the original purchase price reimbursed. “Hello new MacBookPro!” Zero complaints about the insurance.
Wow! How much was the replacement cost for that?
Only the privileged can do such things and get away with it. You'd have to have enough money to have a nest egg large enough to replace the stuff you need and care about, money to replace documents and ID, money for a hotel and travel, and money leftover so that a second even in a short timeframe does not leave you horribly off.
Poor people go without insurance all the time, but that is more the lack of ability to pay the premiums.
And of course they are charging more than they are paying out - much like a retailer charges more for a product than it cost them to make. There are exceptions in both cases: A car accident can mean someone gets more benefits than they pay in and retailers take losses on some things - but it isn't the norm. The entire point, however, is that the risk is spread out so that most folks aren't hit with a life-destroying event when bad things happen. That's the real service you are paying a bit extra for. I find it weird that you'd judge teh company on making money.
You can judge by how well they pay out claims - how much time it takes, what percentage they pay, and so on. Or how much money they make in total - and this should probably be something over a few years to balance out natural disasters.
There may be a few exceptions where you know that the risk/premium ratio is in your favour... I twice got my banks purchase protection "insurance" to replace bikes that a bike insurance wouldn't have even insured in that city. And that was with a free bank account.
Having said that, psychologically there is a behaviour changing effect of insurance even where it’s not financially needed which is also beneficial at least for me - eg you don’t worry about taking your expensive things on holiday, you don’t self ration medical treatment, etc. I value this and so am probably overinsured in a financial sense but I view it as money well spent.
This is called "moral hazard".
Since people tend not to make rational decisions when they are worried, insurance could even lower their risk. For example, my understanding is that many auto insurance companies cover windshield repair very generously because it reduces the risk that a customer will get in an accident trying to chase down a truck that kicked up a stone and damaged their windshield.
It also makes incentives weird, e.g. with a $5000 deductible you'd prefer a 5% chance at $50,000 in damage (expected value -$250) over a 10% chance at $5000 in damage (expected value -$500).
You have a 5% chance of losing $50,000 and a 95% chance of losing nothing. If you have insurance with a $5000 deductible, that becomes a 5% chance of losing $5000 and and a 95% of losing nothing. Expected value is the sum over all events of (probability of event) times (cost of event). 5% times $5000 is $250, 95% times $0 is $0, total with insurance is $250 instead of $2500. So you risk $50,000 over $300 at 5% probability because $45,000 of the risk is on the insurance company.
By doing this I know I am costing myself money, ie the additional cover costs more than I think I am ever likely to benefit from it. I know this upfront but it is still valuable to me because I can rationalise it as a fixed cost and then simply not have to think about a later spending decision, which means I do things which make me happier and/or healthier, even though I could do those same things for lower cost.
It's some combination of valuing certainty and being able to separate the spending from the activity.
Can you explain where the fiduciary duty comes in?
This is silly as a rule, IMHO. I could pay out for all new stuff if there was a fire, but it's a damn site cheaper to pay a few hundred a year for insurance.
The point of insurance isn't that they pay out an individual less than they take in, but the group in aggregate.
Assuming you have no extra information that gives you an edge over the insurance company, insurance is only beneficial for a loss which you cannot afford. Otherwise you’re basically paying someone else to invest your money when you can do it for 3 basis points at Vanguard/Fidelity/Schwab.
This is also why whole life insurance is a waste of money, ignoring any tax advantages which don’t apply to most people.
Edit: This is also why states allow people with sufficient funds to self insure their vehicle. If you have a couple million liquid assets, you don’t need to pay someone else to pay for your lawyers and and healthcare costs, you can just do it yourself.
Literally, I could be responsible for an accident that totals a 15 year old car and gives the driver an ambulance ride and a couple day hospital stay and have my compulsory insurance not be enough to cover the entire liability.
Of course, nearly everyone carries a substantial (10-50x) multiple of the compulsory minimums in auto-specific liability policies, and if you have any amount of wealth accumulated, it's common to have an additional umbrella policy.
I guess the reason why US allows it is because the society is so litigious - if you have that amount of money to self insure you also have enough money to fight pretty much any claim against you.
Or one crash where you injure someone so bad that they cannot work anymore for the rest of their life, maybe need specialized support and so on. The damages in property are usually the least important part of a car crash.
Or injure a single person to an extent that requires lifelong fulltime medical care.
That's....insane. Fires happen. Theft happens. Thunderstorms happen. Kids breaking things happen. Yes I can "afford" to replace most things in my house - but why would I risk all of my savings if I can pay ~20 quid a month and not worry about it??
Take an extremely poor insurance bet as an example. The electronics store will offer you an extended warranty plan on your new TV. An LG 55" LED TV (UK6090PUA) is $400 right now at BestBuy. 2 years of "protection plan" on that TV is $50. Do you think that anywhere near 1 in 8 TVs need any kind of service in 2 years, let alone something that would require the replacement of the TV? Sure, there are people who pay $450 for their TV instead of $400 and come out ahead. The vast majority don't and most people can easily shoulder the burden of buying a new TV when their current one breaks. (By the way, that insurance policy allows the insurer, at their sole discretion, to pay you the market value of your TV rather than repair/replace it.)
I self-insure against collision on our cars (meaning I dropped collision coverage). Collision insurance (covering repairing/replacing of our cars) was running around $1000 per year for 2 drivers and 3 cars. In 20 years, between insurance savings and investing the savings, I've banked about $40K by not carrying collision. Not only could I cover a collision now, I could buy 3 replacement cars outright and have money left over and don't have to deal with any insurance paperwork to do so...
I do carry liability insurance (at high limits) for auto. I have our home insured. I have a high-deductible medical insurance plan. I'm not anti-insurance in general; I am anti-insurance for losses that can be easily weathered.
Worst case, my insurance company drops me and I have to scramble to find another company since lapses in coverage lead to all sorts of issues.
Still, I'm not buying the store's insurance on a TV. I might buy it on my teenager's phone or laptop depending on price and coverage.
Getting a new TV is the kind of thing most people on HN would barely think twice about. At which point the cost benifit simple. But, move up a few rungs to say a 5,000$ massage chair and you could replace it or do without but most people would feel it. Further, the policy is likely to be closer to 1/20th the price at something like 250$.
It’s still a bad deal, but you can feel better about your overall purchase knowing it will last at least X years.
The other aspect is the need to replace. You can live without a TV while you build up savings, you can live without a solid oak table, but you can't live without a vehicle to get to work, or a home to live in.
Let’s say it’s going to last ~5 years on average then that’s a little under 20$ per week you can set aside for the next one. For something used regularly providing 20$ a week in value is a minimal hurdle, but that does not mean they can drop the full cost on a whim. Making the extended warranty a more understandable choice.
Those events likelyhood, the cost of them, and what the insurance will actually pay you back are probably way off what you think it is in your mind.
Now I do think insurance is important for catastrophic events: low likelyhood, but incredible cost, because you can't take this chance at the scale of an entire society.
But for theft or kids breaking things, I'm not so sure.
You can take the same money, and invest it in the index fund, and if and when you need it, sell your assets to pay for the loss. But you get to avoid paying the insurance company's employees.
You wouldn't buy insurance for the bag of rice you buy at a grocery store in case you drop it outdoors, the bag splits open and the rice is ruined. Why? Because you can easily afford buying another bag of rice.
The same reasoning applies to a car. If you have sufficient savings, you can buy yourself a new car if and when you need to. Until then, just invest the savings and reap the investment rewards, exactly like the insurance company will be doing.
But suppose you can afford to buy a new car (like many higher income professionals in the US), but you can't afford to pay for someone else's $500k to $1M medical bills (like almost everyone). Then you would forego the collision insurance for the vehicle, but still purchase the bodily injury liability and personal injury protection insurance.
> The same reasoning applies to a car. If you have sufficient savings, you can buy yourself a new car if and when you need to. Until then, just invest the savings and reap the investment rewards, exactly like the insurance company will be doing.
But it's not the same reasoning. I can afford to buy hundreds of bags of rice every month if I need to, without stretching my budget significantly. Rice for me is pocket change, so yes insurance would make no sense.
For the vast majority of people, a car is not pocket change. Sure high income people might be able to buy another and not go bankrupt, but there's a big difference between being able to afford something, and considering the expense pocket change.
If you can't afford to replace it, then you purchase insurance for it.
Replace "it" with whatever you want. Just because a car is not pocket change, doesn't mean you can't afford to easily replace it. And maybe if you feel that it will cause you stress or stretch you thin, then it doesn't fit the definition of "afford to replace it". Auto insurance company has way more data than you do on how likely it is that they will need to replace your car, so they will charge you appropriately, plus their salaries. So if you have a sufficient emergency fund, then you don't need the insurance, just like you don't need it for the bag of rice.
The other point: I think most people here are concerned with the insurance paying up once the real deal happen. Most of the time the insurance will: 1. take a lengthy legal path to exhaust you 2. pull some article that you didn't notice from the contract to get away with it.
So you are screwed twice. ouch.
I'm not claiming insurances are a scam and you should avoid them. I'm using them. But I can understand why some people are frustrated.
$1500 auto insurance / yr x 60 yrs of driving is less than the cost of a single catostrophic wreck, even if no one dies.
My state used to allow drivers to self-insure (I think they removed the option for individuals recently). I was a really bad deal though, since you had to give the state a minimum $50,000 deposit interest free. It's cheaper to just pay for insurance and earn the returns on your cash.
As an individual, if there is a catastrophic fire a few years into a policy, I am down tens of thousands, having paid out a few hundred in premiums.
Unless that fire spreads to someone else's property or kills/seriously injures someone, in which case you'll wish you had insurance.
Example - The average UK home contains £35K of stuff. The average annual contents insurance premium is £139. You've been paying for ten years and "Oh no! A fire destroyed all my stuff". You're better off by £33600. In aggregate the insurer makes money, but they don't necessarily make money from every individual. This is where the model makes sense for the buyer and the seller.
$4200 is noise to someone like this. Meanwhile, if you do suffer a loss, you will be down far more.
In the long run, all things being equal, it's cheaper to never insure and instead pay out of pocket for your losses.
I'd only insure for truly financially ruinous scenarios. Not for material goods or airfare, etc.
Only in aggregate, not necessarily for any given individual.
I also shudder at the thought of overly large executive teams milking the profit stream of the company to ensure optimal balance sheet (minimal legal unleveraged asset amounts + maximum access to government lender of last resort backstops).
It’s also very hard for me to imagine the nature of the value chain back to me that comes from the CEO of an insurance company flying around in a private jet at great expense — it’s just not possible for me to imagine that the team of suits in jets running the insurance company could ever be engaging in an activities beneficial to me as they pursue typical corporate business activities...
As a consumer, I think the most sensible strategy for picking insurance involves modeling the profit center clauses of the policies to find who is most likely to be bilked and trying to estimate whether you are more or less likely than the average consumer of the product to hit one of those likely policy “profit centers” ...
In markets where the profitability of insurance companies is regulated, I have a lot of trouble believing that “boondoggle machines” aren’t invented throughout the enterprise to create false cost drivers that ultimately turn profits into costs and higher executive salaries/ bonuses - a kind of profit money laundering.
I think that trust is very valuable but it’s hard for me to believe that insurance companies as a general category are likely to be worthy of trust. If anyone has some arguments how to get over this hangup, would love help shifting my mindset to a less negative outlook here ...
Most insurance companies are relatively low margin enterprises. Most for profit insurance companies manage to turn a 0-5% profit. Claims make up 60-75%, ~15-20% in acquisition related costs and then other expenses like r&d, servicing costs, etc. end up eating the rest. Auto insurance for example is historically a break even business or small loss on underwriting premiums for most companies.
Companies that can underwrite profitably actually help keep the premiums that consumers pay down and keep the market in check from inflating premiums.
Car rental companies are notorious for deploying high pressure sales tactics to bully customers into paying for damage waiver or insurance upgrades. I’ve heard of companies basing bonuses for employees on these conversions and I’ve also heard of companies that just have a hard and fast quota with policies like “you need to get this many upsells per unit time or you are automatically fired”.
The fee structure and legalese for rental cars is often customer hostile for the purpose of scaring people into paying for upgrades they don’t need — and in many cases very large categories of risk are excluded from coverage via tricky language ...
I rented from a company called goldcar in Spain recently. Their rental prices are insanely low (paid 30 euro for a car for 3 weeks). They seem to make money entirely on the extras and the float of your excess deposit. They charge you your excess in full when you pick up the car (1200 euro for the car I had) then refund you when you return minus any damages. I’ve rented from them a few times and they do some shadey things which I’ve learned to be careful about.
- They have a range of constantly changing and sometimes screwy refueling policies: buy the tank in advance return empty, “flex fuel” where you pay a (non-refundable!) fee to pay a deposit on the tank and then get refunded your deposit based on how much fuel is in the tank when you return it, and (only sometimes and seemingly at a different rental rate) buy full return full.
- Once they charged my card in dollars rather than euros (without asking) resulting in a huge 5% currency conversion fee by their payment processor - I can’t imagine that fee doesn’t make it back to them in some amount ... (that really pissed me off and I probably wouldn’t ever have rented from them again but I actually didn’t notice this until much later)
I think they’ve gotten dinged in the past for some illegal/deceptive practices. I personally have mostly come our ahead using them — but only by being careful and knowing exactly what to say/do on each rental experience ... I think from recent rental experiences it has gotten less scammy for me.
The mentality necessary to navigate rental car insurance decision making seems the same mindset required to engage in business with other insurance entities - most insurance markets generally seem ripe to me for similar adversarial game playing ...
To me some variation on this kind of scheme seems likely to be common - am I wrong headed to think these kinds of tricks occur often?
Many insurers have near fixed acquisition costs due to distribution channel realities. Agents take a commission, Google and Ad networks take a referral fee, etc. and those with large direct to consumer portfolios may experience challenges in underwriting profitability as is. Insurers will certainly try to manage those acquisition expenses efficiently and to optimize underwriting performance. Executive comp would be anchored on those things rather than allowed to underperform and compensated for.
If you call beating actuarial models a trick, then yes that certainly can occur but that’s kind of the name of the game. You’d rather companies figure this out because models become more efficient, pricing becomes more segmented and risks are priced accordingly.
Maybe I’m wrong but I don’t think there is as direct a conflict between me and the grocery store — me being happy with a particular purchase is not generally associated with the grocery store being “unhappy” that a particular product “works out for me” when I consume it ...
In summary, if losing $25k is no big deal to you, you can on average save money by not buying insurance. If losing $25k is life changing, you should pay some money to reduce the risk.
Health insurance negotiators for example often save you more money than their profit margins. It’s dead weight to society but personally it’s a net gain.
What about the risk of your insurance company going bankrupt? Or the risk of your insurance company fighting tooth and nail to avoid paying you?
For most insurance ordinary people would have, except possibly life insurance , coverage comes into effect fairly soon after you pay your premium. If your current insurance company is showing any signs of insolvency, you should be able to switch to someone else and get covered.
If there were no warning signs that your insurance company is in trouble and they unexpectedly go bankrupt, but at a time when you don't need to make a claim, you can quickly switch to someone else.
If they go bankrupt and you are making a claim, it should be covered by your state's guarantee fund. Insurance is a regulated industry, regulated by the states. Part of that regulation includes the state establishing a fund paid for by the insurance companies that is essentially insurance that the insurance companies can pay claims.
If you pick a large, diverse insurance company, probably the only real risk that they might unexpectedly go bankrupt at a time when you need to make a claim, and the state guarantee fund might not be able to cover it, would be during some major widespread disaster that causes severe damage over a wide area. You might be screwed then, although there will probably be some kind of Federal disaster recovery aid available then.
 I have never looked into details of life insurance so am not sure how that works.
If the loss you are insuring is large enough, the acceptable profit is quite large for it still to be a worthwhile investment.
As an individual though you only really need to make one non-tribal claim on a home insurance policy to end up making a profit on the deal. The pathological example is a fire gutting your entire home, destroying everything - in that case you’re going to see $25k paid out to you, on average in the UK home insurance costs about £130, which would be about $170. You’d have to pay into that policy for almost 150 years to end up making a loss on that deal.
Even a fairly minor issue like a burglary requiring the replacement of $5,000 worth of possessions you only end up making a profit by self insuring after 30 years.
The other misunderstanding you seem to have is a pretty common one: “I lock my doors consistently”. Burglary is the thing insurers pay out least frequently on. Everyone locks their door and takes basic precautions to avoid it, even if someone does break in you’re not going to lose much in most cases. The big risks are fire, which is infrequent, but expensive, and flood. Flood is much more frequent than most people realise, and can easily result in paying out hundreds of thousands of dollars to replace contents, rip out all your floor boards and replace them, redecorate the house, and if you’re in an upper level flat potentially to do the same for everyone below you. Flooding is what keeps insurance pricers awake at night, wondering if they’ve accidentally under priced an unknown flood plain.
In Australia there was an exception in the "flood" policy (required for a mortgage I think) for rising river levels.
The exception used a very unfamiliar word (that I can't remember at the moment!)
Besides, even if insurance is negative expected dollars, it's positive EV given loss aversion in most cases.
The calculation you need to make is "how is MY life effected by this decision".
If you choose to pay the small insurance amount you probably won't even miss the money in your day to day life.
But when that unexpected event happens, one version of you can come back strong while the sucker can console himself with the thought that the average human is at least being happy.
Thats not the correct "math". The value insurance provides is that the cost of the risk is higher than the cost of the premium. The whole point of insurance is how much are you willing to pay to avoid catastrophic scenarios.
Health care is a special case where you usually "win" if you always paid premiums but never have to make a claim (because claims often can't repay bad health).
And if you are a socialist, you can be happy because your premiums go to the health losers (had to make claims but their life might be shorter or shitier).
How would an insurance company stay in business if it were any other way?
> Insurers receive premiums upfront and pay claims later. ... This collect-now, pay-later model leaves us holding large sums -- money we call "float" -- that will eventually go to others. Meanwhile, we get to invest this float for Berkshire's benefit. ...
> If premiums exceed the total of expenses and eventual losses, we register an underwriting profit that adds to the investment income produced from the float. This combination allows us to enjoy the use of free money -- and, better yet, get paid for holding it. Alas, the hope of this happy result attracts intense competition, so vigorous in most years as to cause the P/C industry as a whole to operate at a significant underwriting loss. This loss, in effect, is what the industry pays to hold its float. Usually this cost is fairly low, but in some catastrophe-ridden years the cost from underwriting losses more than eats up the income derived from use of float. ...
What I’m saying is that since the same investment earnings are available to the premium payer, it is true that the insurance company charges more than they pay out, hence the original poster is right in avoiding insurance whenever they can (i.e. they can afford to pay for a loss they might have been planning on purchasing insurance for). All they need to do is invest it in one of the many nearly free index funds, and they’re in the same boat as the insurance company, but without having to pay for the salaries of the insurance company’s employees.
1) come along later
2) not be wel reimbursed (eg: 60%), so if it can wait, many will until they have employment and better coverage.
You read a story about about a special case for a policy four orders of magnitude larger than your own common case.
The results of your cost/benefit analysis are that you should generally avoid insurance policies.
I hate to defend the insurance industry, but it sounds to me like you're exactly the type of person who needs to have insurance.
(If I recall correctly, I had liability coverage through renters insurance in the US, when I lived there)
Cover liability in case you run someone over on a bike and they are severely disabled.
You are approaching this wrong. Yet, they charge more than they pay out, on average. But they charge everybody, and they pay out only to small percentage of people. The point of insurance is not making profit for you, it's to cap your losses to predictable small upfront payment, instead of large ruinous random loss at random moment in the future. Yes, if you can easily afford the loss of everything in your household, then insurance makes no sense for you. But if losing significant part of it could be ruinous, by paying a small sum upfront you avoid the possibility of being ruined. The thing you are buying is limiting of the losses.
The entire “cyber” insurance thing has seemed extremely questionable to me. Technology is changing too fast and software propagates far to quickly to meaningfully quantify risk based on anything which has happened in the past.
My in-laws just went through an event like this. A sewer backed up and basically destroyed about 60% of everything they owned — everything from HVAC to clothes to kitchen.
It’s not a hazard that is likely to happen at that scale, but for the ridiculously cheap cost of that insurance it’s certainly something worth careful consideration. Getting a boiler replaced on an emergency basis in January is an expensive proposition.
Low probability, high impact risks are the best risks to insure. Home/renter insurance isn’t a scam.
Junior clerk is going to check paperwork and process your claim.
$100M claim is a different story.
If I'm going broke because of a war, why shouldn't my insurance company?
Similar, with natural disasters, those should be covered by default -- insurance companies can easily spread the risk geographically..
These exceptions feels like legacy from the "good" old days when wars were common and globalization limited.
The entire model breaks down in cases of systemic risk, unless that has been accounted for and dealt with. Which is why it's a major element of insurance policies.
So why we keep allowing insurance companies to make these exclusions?
If there is systemic risks to the entire planet, then an insurance company should just go bankrupt.. I mean the survival of a company isn't very important if we talking about the apocalypse :)
In general, we don't have to "allow" contracts between two private parties to happen. We can "not allow" (i.e., outlaw) certain contracts, but an insurance company and a private party can (and should!) set up the contract between them however they please. Especially in a case like this, where the contract is huge, and probably had teams of lawyers from both sides going over all its details.
If they are stealing, they aren't doing it very well! Insurance companies tend to only have profit margins around ~5%.
And what does that mean about insurance buyers? Are they all idiots for buying insurance, since it just means their money will get stolen?
Insurance companies can't afford to pay out any more than they need to; doing so would raise premiums for all customers and make their products less appealing in a fairly competitive industry.
Whether NotPetya was an "act of war" (a legal term of art), is a legitimately interesting discussion! To have it reduced to "those insurance companies are stealing" is depressingly simplistic.
The DMHC randomly selected 90 instances where Anthem Blue
Cross canceled the insurance of policy holders who had
been diagnosed with costly or life-threatening illnesses,
to find how many of these cancellations were legal. The
agency concluded that all these cancellations were
On 17 March 2010, WellPoint announced it was reclassifying
some of its administrative costs as medical care costs in
order to meet new loss ratio requirements under the health
care law, which requires insurers to spend at least 80% or
85% of customer premiums on health care services,
depending on the type of plan.[5
Anthem's 4% margins are well below the S&P 500 average of 11%. If Anthem was simply stealing surely their margins would be a little higher? And who are the idiots buying Anthem insurance? I mean, if it was just stealing, everyone would take their money somewhere else, no?
Of course the truth is not simple, but rather complex. Most any company has a "Controversies" section on their wikipedia page. Toyota once shipped a car with bad brakes. What does it mean? Are all companies simply stealing?
Yes, insurance companies are incentivized to decline coverage, so that they can lower premiums (to compete) and increase margins. But they are also incentivized to payout because if they don't, people stop buying insurance.
> Falling on "it was an act of war" when no government has declared such a war is nothing more than creative accounting. (this is also Anthem)
Quite certain that is not how the courts will interpret the term "act of war." In international law, for example, there is certainly no precedent that a government declaration of war is required for an act to be considered an act of war. Any aggressive act can potentially be considered an act of war.
If Russia decided to blow up a bunch of US freighters, sans-declaration of war, fairly certain the act could pass as an act of war.
What is it if it's not stealing when you take people's money in exchange for a service but illegally close their account and keep the money they paid instead of providing the service?
In May 2014, Anthem Blue Cross refused to pay for the
hospitalization of a Sonoma County, California man for
stage four cancers, although he had paid Anthem over
$100,000.00 in premiums. Anthem ended up paying
for coverage following public outcry..
1. Anthem Insurance stole from policy holders.
2. Ergo, Zurich Insurance stole from Mondelez.
If you are going to make a claim that all insurers are systematically stealing from their customers, I think you are a long way off. So Toyota sometimes ships cars with bad breaks. Ergo all car companies are trying to kill drivers?
specifically covered “all risks of physical loss or
damage” and “all risk of physical loss or damage to
electronic data, programs or software” due to “the
malicious introduction of a machine code or instruction.”
Then there are the sales and administration costs that need to be paid. On both their side (coming out of my premium) and on my side (coming out of my free time). I don't like keeping receipts and I don't like filing claim.
All in all I'd lose much more than 5%.
The real business models for insurance companies isn't underwriting profits, it's arbitraging the time value of money (pay premiums now, pay claims later) via investing the float.
I think Zurich's point of view is not untenable. If a Russian military submarine had sunk a Mondelez freighter, would it be an act of war? I think possibly. What if a Russian military cyber hacking squad steals their money with ransomware? Less clear, but still certainly a belligerent act on Russia's part.
Of course Zurich will need to present a convincing case that the cyber attack was committed by the Russian government.
Will be an interesting case.
There is essentially no risk that cannot be insured, but the standard pricing is going to exclude a bunch of tail risks that would be prohibitively expensive to include by default
> it seems hard to imagine there is a price that will make sense to both parties.
The price you'd have to pay is likely to be extremely high due to the value at risk and level of uncertainty, and yes insurance companies would also be modelling their exposure and stop selling at some point. A single tanker, for example, could almost certainly find a price at Lloyds.
Some insurance policies cover acts of god (extremely rare disasters), some don't. They are priced accordingly. I'm sure it is no different with acts of war or anything else.
Insurance companies pretty consistently report ~5% profit margins. Surely if they were simply stealing, their margins would at least be reaching Google levels?
Yes, insurance companies only want to pay out when they are contractually obligated to do so. That is patently obvious. If insurance companies paid out when they weren't, insurance would be much more expensive than it is now.
If an insurance company is unsure a situation is contractually covered, they will not pay, and a court will decide the case. Once such ambitious cases are clarified, all future parties benefit.
I don't see anything shady or underhanded about any of this. Especially since it is all basically part of the definition of what an insurance company is!
Which makes this case even more important: how could any insurance company guarantee to pay damages caused by a computer virus, when many viruses are designed to quickly spread across many systems?
disclaimer, I know nothing about the insurance industry, but for sake of intellectual argument:
insurance companies already have to deal with scenarios like this e.g. home earthquake insurance in California.
They do this by re-selling the income and risk from their policies in the "re-insurance" market. This spreads the risk out to counter-parties (who are in the other parts of the US and the world) who buy this stream of income+risk.
In turn, those counter parties are probably buying the income+risk of all kinds of insurance policies from different geographies so any one event of earthquake or war is less likely to catastrophically affect them.
Why do we allow these exclusions in the contracts?
I'm sure we have regulation on what can and cannot be part of the insurance terms.
In the US, at least, Zurich’s attempt to wriggle out of payments would be an uphill battle at best — there are unfavorable judgments in the context of international terror attacks, as well as (in Multi-Foods vs United Commercial) Russian seizure of goods. In the absence of actual war or war-like activities (such as Korea or Vietnam), hard to see how they win. But, hey, even a 5% chance of victory is probably worth the cost of litigation.
Their duty is to shareholders vs policy holders.
The reason companies with very intelligent risk managers keep paying Zurich money is that Zurich reliably pays out covered claims, as you would expect from a highly-regulated entity. HN’s incredulity about insurance companies routinely paying out claims staggers the imagination. They’re highly regulated publicly traded companies which denominated claims expenses in (in this case) billions of dollars; that isn’t code for “Psych we actually just bought mountains of cocaine and would have successfully hoodwinked all counterparties, regulators, and courts but for the diligence of Internet commenters.”
Put mostly the dim view of insurance companies comes from health insurance in the US, which is a catastrophe.
Or someone gets cut rate car insurance and has trouble with a claim. How do you think they keep the rates so low?
All we’re talking about is whether or not they are right to not pay out this specific claim. Do you have any justification for this being an act of war? What is your position on that particular issue? Your comment portrays a world in which lawyers don’t disagree because they all meticulously defined and agreed to a contract. I think it’s very fair to conjecture neither side thought of this particular scenario, and that as a result, there is a legitimate problem about which reasonable people (and lawyers) disagree.
Moreover, I think it’s fair to have the orthogonal - but related - debate about whether or not “acts of war” should be covered, even if they ultimately prove not to be in this scenario. I think it’s okay if we debate this even if we’re not all experts in law, insurance and risk pooling. We’re not directing policy here, we’re commenting on a message board.
Note that I’m not crusading against insurance, nor am I saying lawyers are dumb or malicious. But I am trying to convey the very even-handed position that people are fallible. Your comment strikes me as more of a lecture than a substantive response to whether or not fallible people could be making a mistake in rejecting a claim. Consider the spirit of the comment to which you replied - yes, this may turn out to be by the book for this insurance firm. But if that’s the case, it can still be true that potential customers will not want to purchase coverage from them because “act of war” hacking is a risk they want to (quantifiably) share.
I think Zurich is very plausibly right by the letter and spirit of the bespoke contract which they struck with a sophisticated counterparty who had competent legal advice.
You should certainly price in the risk that, if you have an uncovered loss that you wish your insurance company would cover, your insurance company will point to the contract and say “Uncovered loss; no.”
Not the parent, but the if the hackers are employees of the Russian government and the ransom money was collected by the Russian government, that seems pretty "act of war"-ish to me.
If a Russian military submarine held up an American freighter, boarded, commandeered the vessel and took the goods back to Russia, wouldn't that be an act of war? Of course this case is different, but I think it is similar enough that taking this case to court is not at all unreasonable.
A reasonable person would certainly think that a policy sold as cyber insurance would cover a cyber attack. And presumably a large multinational like Mondelez would have had the policy reviewed by their legal department before signing and paying the premiums.
So far as regulations - in the US standard types of policies (such as auto, home, etc.) are regulated by the states not the feds. A policy that isn't one of those likely has very few regulations around it. In which case the policy language (aka the contract) governs the relationship.
If Zurich wanted to limit the total damages, they should have put that in the policy. And then resell some of that risk to a reinsuror.
This is going to have to be settled in the courts. But in the meantime, I would be hesitant to purchase any cyber insurance from Zurich (or any other insuror) because of the uncertainty that a claim would be paid that this action introduces.
When buying insurance, you shouldn't rely on payments for claims in the third bucket, especially not without a legal fight.
Many consumers don't understand any of this. But I expect (hope) that most large businesses are sophisticated enough to understand this.
I don't think this will hurt Zurich's business, because most of their customers probably understand this.
I assert that the line between cyberwar and cybercrime is very faint.
I used to use the "smart money" heuristic a lot in my thinking - for all of the reasons you list above, and more.
Then the 2007/2008/2009 mortgage meltdown and liquidity crisis occurred and we saw that a lot of the "smart money", including the very insurance providers and investment banks (or subsidiaries thereof) were caught unawares. AIG, for instance, which was in very much the same league as Zurich RE, et. al.
I would take the size of these companies, and the billions at stake, and their regulators ... and all of it ... with a big grain of salt.
Fire at a port in China; $600 million in losses from single incident, with the meter still running.
Mondelez likely threatened Zurich with extensive lawsuits when they realized the companies were an order of magnitude apart (10 vs 100mm), and Zurich threatened back with their version of Judge Smalls -- you'll get nothing, and like it!
To a commentator below who doubted they could prove Act of War conclusively in court: they will never have to -- this would be a civil case, they only have to achieve "more likely than not," which may not be difficult given the extensive declarations, as mentioned in the article, from FBI, DoD, Pentagon, etc.
It's easy to grin, when your ship comes in, and you've got the stock market beat ... but the man who's worthwhile, is the man who can smile, when his pants are too tight in the seat!
Insurance companies make risk management mistakes too, and this is what it looks like when they do. The money Mondelez is owed isn't there.
A lot of comments jump on the war and cyber war definitions, but the article states the exclusion is based on a "hostile or warlike action", which is a much looser definition.
Based on the announcement of multiple governments that this attack is from Russian origin this exclusion might very well be justified.
1. Insurance that covers nation-backed cyber attacks becomes very expensive, or
2. Countries start treating nation-backed cyber attacks as actual acts of war.
- it wasn't elective surgery. I would have died!
- but you elected to live.
Conceptually, such a clause represents you guaranteeing a particular standard of non-negligence in exchange for lower premiums.
It would be in both of their best interests to do so. Mondelez would see that they need to get their security house in order and Zurich would gain some expertise in what to look for in their clients.
Auto insurance industry works with the automakers and regulators to develop and enforce standards for crash safety, airbags, crumple zones, collision avoidance systems, etc. and employs litigators to recover damages from the at-fault party.
Insurance companies aren't just professional gamblers. They are risk managers. You pay them to deal with the nitty gritty of risk mitigation in whatever domain because it's not your speciality.
How are you going to manage the risk of enemy damage in war? You're going to wield more violence than the threat, and seize its assets to make yourself whole. Instead of settlement or recovery, we call it reparations.
The free legal counseling hotline my insurance provides helps me at least twice a year with the right approach to tackle problems. And they have such a large network of lawyers that I'm always speaking to a specialist in my problem's area.
The combination of legal counseling and the simple fact that I had legal insurance helped me compromising in my favor or outright win all legal disputes I had since buying the insurance without actually using it.
Legal insurance is also probably a very lucrative insurance model. They avoid a lot of cases for their customers by their pure display of power and can advise their clients about which battles are worth fighting for in the first place. Furthermore (afaik) the losing side pays most of the legal fees of both parties.
Is this an unreasonable request? :)
Whenever I get insurances through work I rarely get terms and conditions? If I do, I rarely get something specific, it's very ambiguous.. and contains unqualified conditions.
I find that agents can rarely answer questions I have, how was I suppose to understand things?
* Russia is actively pursuing an Active Measures (активные мероприятия ) political war against the west
* Russian companies & persons charged by Mueller have actively used the defense in filing that their actions were Acts of War, and so not illegal. These defense claims have not yet been ruled upon, AFAIK.
* The Russian govt, former KGB organization, Oligarchs, Russian Mob, and hacker community have effectively morphed into a single operation entity.
Nevertheless, it is a bit of a stretch to consider a specific hacking event as part of the Active Measures war. Not that it is surprising that the insurance company tries it. They'll st least delay any payments.
This may, interestingly, raise the stakes on any cooperation with such operations (e.g., being a funds conduit, renting out a botnet to deploy the malware) from standard criminal conspiracy charges right up to treason. Not sure if it will play out that way, but I wouldn't want to be the one testing the prosecutors' discretion, or the inclination of the NatSec organizations to get involved. Totally changes the risk profile of getting involved for those inclined to play around the edges.
Net win for society from my perspective.
To use a good old car analogy, if car insurance stopped paying out people wouldn't all immediately become better drivers.
If I had any insurance policies with this company I would cancel and look elsewhere. The insurance company must have modeled both scenarios.
In addition to more victims, the second compounding effect of this would be that giving money to hacker groups means they would become bolder. That might even mean they’d potentially blur the line from State-sponsored to something that outgrows even the authority of a (rogue) State.
> Zurich American Insurance Company points to the official statements of national security officials from the UK, Canadian and Australian governments, all of which blamed Russia for the cyber attack in February 2018. Even the White House in the United States said the cyber attack was part of Kremlin efforts to destabilize the Ukrainian government.
Which means the policy wording clearly matched the covered event.
They quote the language in the policy and quote the national security apparatus as having made a determination that this was hostile action by a foreign government or their affiliates. Contractual disputes are often substantially less well-grounded in assertable facts than this one.
what a steaming load.
insurance companies trying to squirm out of paying something is as certain as the sun rising.
These exclusions were largely inserted into new policies for risk management after 9/11. If you’re negotiating a 9 figure insurance policy, you have lawyers who read the thing and can debate the issue with the insurance company’s lawyers if there is a dispute over exactly what the bespoke language you signed meant.
I’m not unsympathetic to the insurance company here. The intent of this language is “We did not sign up to take on Russia. We are willing to do that, but it isn’t free.” If somebody doesn’t negotiate for that, well, you pays your money and you takes your chances.
The standard to survive an attempt to dismiss will be approximately “even reading all factual representations as true in the most charitable reasonable way to the suing party, no reasonable finder of fact would see a justiciable controversy here.” You’re welcome to ask a lawyer on whether the suit would pass that burden.
So much for the court as last instance of truth. So what, do they have to go to the international war courts where genocide is prosecuted instead, to rectify the unfair situation in which the claimant is caught between two hard places and the rock that is burden of proof?
In contrast, in civil trials the plaintiff need only convince the fact-finder, whether jury or judge, that the plaintiff's legally-cognizable claim is more likely than not to be factually justified, even though reasonable minds might well differ. That's what's known as the preponderance of the evidence standard.
(Think of the image of the scales of justice: If the plaintiff fails to adduce enough properly-admissible evidence to tip the scales in favor of the plaintiff's version of events, then the plaintiff loses. This includes cases where the scales are equally balanced, referred to as the evidence being in "equipoise.")
Exception: In a few special types of civil case, such as allegations of fraud, the plaintiff typically must demonstrate factual support for its claim by clear and convincing evidence, which the U.S. Supreme Court has defined as "plac[ing] in the ultimate factfinder an abiding conviction that the truth of its factual contentions are 'highly probable.'" 
Another exception: By statute in the U.S., a claim that a patent is invalid or unenforceable must be supported by facts proved by clear and convincing evidence. The Supreme Court reaffirmed this standard in the Microsoft v. i4i case, 564 U.S. 91 (2011). 
Incidentally, in a criminal trial, when a jury returns a verdict of "not guilty," it's a misnomer: The verdict should really be "not proved beyond a reasonable doubt." (I understand that this is in fact a permissible form of verdict in Scotland.) The defendant could still be held liable for damages — but not imprisoned — in a civil trial under a preponderance standard.
That's what happened to OJ Simpson: He was acquitted in his criminal trial, because the jury found that the prosecution had failed to prove his guilt beyond a reasonable doubt. Afterwards, though, the families of Nicole Brown Simpson and Ron Goldman successfully sued Simpson in civil court for wrongful death. The families persuaded a different jury that Simpson was more likely than not to have killed the two. The jury awarded the families some USD $33 million in damages. Much of Simpson's property — including his Heisman Trophy — was seized and sold at auction to pay (part of) the damage award. 
The intent of the language doesn't matter in the least. What matters is the language itself and the meeting of minds that existed when the policy was purchased. Cyberattacks, whether perpetrated by Russians or the script kiddie down the street, do not fall under anyone's legal definition of "war."
If I'm wrong about that, then great -- now we can legitimately bring up the subject of treason charges against those who were complicit in the DNC hack and subsequent email dissemination.
I suspect you'll be a lot more sympathetic when you file a claim and your insurance company interprets your policy on the basis of a dictionary they wrote themselves.
This insurance company is going to lose. It's simply unbelievable that people here are defending them, even on a site known for turning devil's advocacy into a religion.
It's not like the courts opinion would force a change in the government position, and governments don't necessarily treat all examples of conventional state aggression as war (or at least not as war they want to concern themselves with) either.
So i wonder if this puts insurance companies in a position where they benefit from classified operations are outed to bolster the case that this was indeed an act of war.
Others cited the exclusion to be worded as "hostile or warlike action in time of peace or war", further tilting the scales in the insurance's favor.
I'm not sure why this would be any different, but for the "cyber" that gives HN something to talk about. After all, a bloodless coup or invasion would be an act of war without retaliation.
Normal civil standards of proof would be all that's needed.