If you could write a check and go on with your life, don't insure against it(messymatters.com)
messymatters.com
If you could write a check and go on with your life, don't insure against it
http://messymatters.com/insurance
16 comments
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.
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.
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.
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.
Wow, that's crazy! Oh, wait, in Oakland, nevermind. :)
But I think this is a red herring because the fraudsters wanted to sue you for damages like a fake neck injury or something. So it's your liability insurance that would pay (or call them out on their fraud). And liability insurance is legally required (and is probably a good idea anyway, for theoretical reasons described in the article, as well as your anecdote).
The article is just arguing against buying things collision insurance.
But I think this is a red herring because the fraudsters wanted to sue you for damages like a fake neck injury or something. So it's your liability insurance that would pay (or call them out on their fraud). And liability insurance is legally required (and is probably a good idea anyway, for theoretical reasons described in the article, as well as your anecdote).
The article is just arguing against buying things collision insurance.
Nope, they didn't claim any injuries. They staged the accident using a car that was already damaged.
How was your accident staged? That sounds interesting.
They had a car with rear-end damage, and they idled it late at night in the leftmost lane of 880 just around a curve to the left. I came around the curve at normal freeway speed, and it took me a few seconds to process that they were only going a few miles an hour (with no brake lights, either idling or perhaps riding the brakes with the brake lights disabled). I got on the brakes too late and hit them from behind. Something about the accident, possibly a comparison of the damage to each car, set off a fraud investigation at my insurance company, which was State Farm at the time. I don't know what happened after that, because like I said, I didn't really have to be involved.
My best guess is that the driver was charging people to stage accidents so they could collect insurance when they weren't able to collect in the original accident. Or maybe he was in cahoots with a dirty body shop and he was helping people collect a few thousand dollars for repairs on cars that were actually headed to the junk yard. Something penny-ante like that. There was a woman in the car with him, and somehow I got the impression that it was her car and she didn't know or trust him. I think she got out and watched us exchange information like she wanted to make sure he wasn't doing anything behind her back. He may have told me the car was hers, but I don't really remember. At the time I thought the whole thing between them was weird, but I never thought of fraud until the insurance company told me that's what was going on.
My best guess is that the driver was charging people to stage accidents so they could collect insurance when they weren't able to collect in the original accident. Or maybe he was in cahoots with a dirty body shop and he was helping people collect a few thousand dollars for repairs on cars that were actually headed to the junk yard. Something penny-ante like that. There was a woman in the car with him, and somehow I got the impression that it was her car and she didn't know or trust him. I think she got out and watched us exchange information like she wanted to make sure he wasn't doing anything behind her back. He may have told me the car was hers, but I don't really remember. At the time I thought the whole thing between them was weird, but I never thought of fraud until the insurance company told me that's what was going on.
There's a lot of it going on the UK too:
http://www.bbc.co.uk/news/uk-11044315
A favorite is to stop very suddenly for no obvious reason. Of course, if you run into the back of anyone it is your fault. But the other party will then claim for injuries, hire cars, storage of the vehicle, etc. far in excess of what is reasonable.
Insurance companies claim this costs everyone £44 in extra premiums per year.
http://www.bbc.co.uk/news/uk-11044315
A favorite is to stop very suddenly for no obvious reason. Of course, if you run into the back of anyone it is your fault. But the other party will then claim for injuries, hire cars, storage of the vehicle, etc. far in excess of what is reasonable.
Insurance companies claim this costs everyone £44 in extra premiums per year.
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.
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.
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.
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.
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.
"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
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
This also introduces the Ear Full of Cider Principle, as articulated by Marlon Brando's character in "Guys and Dolls":
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.
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.
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.
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.
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.
I am truly insuring against fraudsters. If someone does attempt to defraud me by way of a staged automobile accident, the insurance company is there to take on the responsibility of enacting the legal system to bring the perpetrators to "justice." That's really the benefit of insurance.
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.
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.
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.
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.
"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."
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."
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:
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.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).
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).
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).
I'm not so sure, largely because of Apple's overpriced accessories. The battery of a laptop is pretty much guaranteed to need to be replaced within three years, and the power cords on the pre-unibody macbook pros were guaranteed to fray at the connection point within a few months. I bought a used laptop that came with AppleCare, and got two replacement cords and one battery, which would have retailed over $300.
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.
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.
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.
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.
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.
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.
Hells yes. Applecare is ridiculous. Somehow their sales people are so good though that they make me feel like it's a good idea (and just a couple hundred more dollars when I'm already spending thousands!) until I snap myself out of it. It's mathematically impossible for it to be a good idea to buy this!
> It's mathematically impossible for it to be a good idea to buy this!
No more than any other form of insurance. Insurance companies make a profit, but that hardly makes it a bad idea to buy insurance. I'd be rather screwed if my family were responsible for the seven figures of medical care we've incurred in the last two years.
No more than any other form of insurance. Insurance companies make a profit, but that hardly makes it a bad idea to buy insurance. I'd be rather screwed if my family were responsible for the seven figures of medical care we've incurred in the last two years.
As for applecare, the argument actually makes sense. After all, the most you can lose is the cost of one computer.
For health insurance though... You are not just betting a few thousand bucks. You are risking your life.
For health insurance though... You are not just betting a few thousand bucks. You are risking your life.
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.
"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.
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.
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.
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.
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."I totally agree. Hell, my small home, which I own outright, isn't insured. Ditto my small, piece-o-shit commuter car.
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).
(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).
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.
* 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.
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).
Hence, insurance company (professional accident cost removal companies).
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.
Insurance is like open source software in reverse. Not having it is only free if your time (and anxiety) is worth nothing to you.
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).