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Is the concept of insurance a load of garbage?
Heartlash
Registered User regular
Registered User regular
We, in the US, have insurance for pretty much everything: cars, health, homes, apartments, possessions, purchases, shipping, etc. It employs millions and is considered an integral part of monthly bill paying and routine. However, the inherent idea of commercialized insurance is still captive to a single fact:
Insurance companies must make more money than they give to sustain themselves.
The same rule governs every business, of course, but not every business is nearly as obligatory as certain kinds of insurance. Consumers of insurance must give the insurance companies, on average, more than they receive.
And so I posit the question: Does this make widespread obligatory insurance a load of bullshit? If not, what are the circumstances that create a dependency on insurance, or make insurance appropriate? Likewise, how, if you think at all, is it exploited?
Insurance companies must make more money than they give to sustain themselves.
The same rule governs every business, of course, but not every business is nearly as obligatory as certain kinds of insurance. Consumers of insurance must give the insurance companies, on average, more than they receive.
And so I posit the question: Does this make widespread obligatory insurance a load of bullshit? If not, what are the circumstances that create a dependency on insurance, or make insurance appropriate? Likewise, how, if you think at all, is it exploited?
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I think in any other instance, it is useful, and wise to have, but should not be mandatory.
Insurance companies must make enough money to sustain themselves, and pay out potential losses (meaning having a store of available funds), but there's no other way it could work. The money has to be there and people must be paid in order to operate the company.
I also disagree with the idea that the profit-motive is inherently wrong, but that's a separate discussion.
Right now, I'm feeling like it's bullshit, because I pay $200/month to insure my two cars for me and my wife. A good 75% of that cost is mine solely because I have a penis, and probably 15% of it is because I drive a small coupé.
But my father, who was T-boned last summer, still hasn't fully recovered, and is booked in for yet more surgery this Christmas? I bet he's glad he doesn't have to foot those bills out-of-pocket.
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Now, my auto insurance is definitely a tougher pill to swallow, since I consider myself a decent driver and it's much more expensive. But last winter when I slid off a patch of black ice and into a guardrail, I was glad not to be paying for all $3,000 worth of damage to the side of my car.
Now, specific insurance policies...
Oh, its raining, all my shit is ruined.
Seriously, insurance is a vital part of modern society considering the fact that the cost of fixing a major problem can often be far more than it's simple price if you can't afford to pay yet. While it's true over the life of the policy you should expect to pay more than you recieve on average, if you are worse than average then you are bankrupted and your life is ruined without it as you are if you have an average problem, but while you haven't had time to save the money up.
Insurance + Big Accident = OK
Insurance + Average Accident = A few $ out of pocket
Insurance + No accident = Many $ out of pocket, but also you didn't have an accident.
No Insurance + Big Accident = Totally screwed
No Insurance + Average Accident Early = Screwed
No Insurance + Average Accident Late = OK
No Insurance + No Accident = Great
In the UK, the only insurance I can think of that you're obliged to have is to cover your legal liabilities to third parties in the event of an at-fault accident. To me that's reasonable, because car accidents can cause quite spectacular amounts of damage.
I'm obliged to have insurance that covers the fabric of my home by my mortgage provider, because they not unreasonably want their investment protected. Again, costs can be ludicrously high. An example from my professional experience (claims handling is my job) a leaking sewer pipe under a house that went unnoticed. Total cost of repair once it was discovered was around £275,000. The foundations had come under chemical attack from the sewage, so the whole building had to be shored up, the existing foundation and all the contaminated soil removed, then fresh soil and foundations laid.
If it had gone unnoticed for another year or so, we'd have bulldozed the house and rebuilt it (that costed out to around £400,000).
I bet that woman is glad she paid her £125 a year buildings insurance.
That being said, my neighborhood was recently made part of a revised flood plan, which in the long and the short of it, will require me to have flood insurance, which can be EXTREMELY expensive. This is on top of homeowners insurance. I'd bitch more, but I have work to do
I think the issue is that in the case of insurance, the profit-motive is completely opposite to the very purpose of insurance.
You see this alot in Health Insurance, where it's in the companies best interest to NOT pay out as much as they possibly can, despite the fact that the point of insurance is to pay out that money.
I think this is really more of an issue of regulation.
In the UK, if you think you're being dicked over by your insurance company, you can go to the FOS (which is free, and in fact costs the insurance company money) who will arbitrate. As long as the complainant accepts the FOS decision, it's binding on the insurance company and sets precedent.
My experience of dealing with them is that the FOS will always decide in favour of the customer in the event of any ambiguity.
Health Insurance is sort of unique in that you're playing with a lot of variables that can't be wholly taken into account, which is why it really needs to get worked over. Life Insurance &c. is a lot more straightforward since we've got the actuarial tables telling 'em when you're going to die.
Of course it's a gamble but you'd have a stack of money that would only be spent when something bad happens.
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Consumers of EVERY product give on average more than they receive. That's called profit.
I'm a little confused as to why this is a discussion issue, when it's really one of those facts of life people learn in elementary school.
No, because a) you might have to pay more in bills than you have right then, b) having an insurance provider lets you disperse the risk between thousands of people, lessening the need for everyone to save like crazy, and c) there's not just a giant pile of money sitting there that you aren't allowed to spend, tempting you.
Except that this only works if something happens on the back end rather than the front. If you get out a policy and something bad happens in the first month you 'win.' If something bad happens in the last month they 'win.' and if something happens in the middle you more or less come out even. If you want to bet that nothing is going to go wrong tomorrow then you're fine, but most people need to safeguard against tomorrow, not 10 years from it.
Because while there are psychological factors involved (e.g. peace of mind), insurance is one of those few things that is about paying money to get money.
If I purchase a product, I am purchasing it for more than it cost to make, but I am still receiving something tangible that is not money.
Also, I haven't formulated my own opinion yet, which is why my OP is full of questions and doesn't stipulate answers. I really want to see what people discuss so I can better figure out how I feel.
Our first game is now available for free on Google Play: Frontier: Isle of the Seven Gods
How is having a stack of money that you can't spend (except in case of emergency) any different from paying an insurance company (that'll pay out in the event of an emergency)?
At least if you're paying the insurance company you aren't fucked if you need more money than you saved in your emergency fund.
If you total your car, it's worthwhile. If you send someone to the hospital, it's worthwhile. If you contract diabetes, it's worthwhile. And if your house burns down, it's worthwhile. But for covering the day to day shit that it's supposed to really be used for? Rarely is it useful or anything more than a bad loan.
But for events that would otherwise ruin your life or bankrupt you, yeah insurance is great. Of course, plenty of people have insurance yet still run into that because of insurance refusing to pay, or refusing to pay enough...
Still, the concept is fine. It's the practice that needs work.
Further, I have a problem when these insurance companies start jacking up rates based on location and in some cases, credit score. It is the very definition of a racket and seriously needs some regulations put in place.
It isn't really. It's about offsetting risk.
Think about it this way: You are paying an amount that you can predict, to offset costs that you can't. Most people would rather pay a small fixed cost than be stuck with a cost they can't afford to pay.
In that sense, it's not much different from using taxes to pay for fire department, police, etc. If your house doesn't catch fire and you never have to call the police, you "lost money," but if your house burns down due to arson, you win!
In general, though, yes, it can be expected that you will spend more money on premiums than you will get out in payouts. If you were to never buy insurance, never buy extended warranties, and so on, you would expect to have more money in your pocket over your life than if you did.
'Course, you also need to weigh the risk of catastrophe, and what that would mean. If my TV suddenly stopped working, would it be the end of the world? No? Fuck it, then, I don't need warranties. What if I contracted cancer? Yeah, okay, maybe I'll get me some health insurance.
And so on.
This is a good point, I can definitely see how someone would rather pay $50 a month for 10 months than $450 all at once, even if they end up paying more with the monthly plan.
Are you concerned with the ways in which this can be exploited, however. And does it seem like a system that is, by nature, more prone to exploitation than typical commercial exchanges?
Our first game is now available for free on Google Play: Frontier: Isle of the Seven Gods
I work in the insurance industry. My observation is that a lot of the time, people form very negative impressions of insurance because they don't understand what they're purchasing. I don't mean that as any kind of judgement, most insurance products are not immediately and clearly comprehensible, and I don't think insurance companies and especially insurance brokers particularly go out of their way to explain them.
Having said that, it is an industry that absolutely must be strongly regulated. My limited observations of the way things work in the US suggest that this is not something that happens there.
The benefit is that you profit from the interest rate rather than the insurance company. The negative is that you have to save up the exact amount you are going to need in the event of a catastrophe (or more) and need to get that huge rainy day fund setup immediately since you don't know what's going to happen tomorrow. Over the long run if nothing ever happens you'd have been better off sticking it in a CD/savings account/index fund. Over the short term you very well may not be, and that's what happens first.
If I have a policy they'll refund part of my stolen crap and jack up my costs. I was saved from this theft but I'll end up paying it back through increased fees. If I don't have a insurance I'll have to dig in the emergency funds account and replace what's most important based on available funds. But will someone break into my place?
Considering I live in an appartment building on a 3rd floor with non-shady people in a pretty calm area I think my possessions are pretty safe.
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It doesn't make the concept of insurance garbage, though.
EDIT: The example that I generally think most people can do without is crappy mobile phone insurance of the type that the salesman tried to talk you into when you signed up for your contract. This is because mobile phones tend to be low-ish value (though generally more than people think) and the chances of it being dropped or stolen relatively high.
When it comes to renter's insurance, it's like $60 a year. I was really happy to have it when someone broke in and stole my xbox, gamecube, PS2, and about 30 games about two years ago. I got a $1,300 settlement check when the actual cost to replace everything would have been closer to $800-900. I wound up with an LCD tv and a 360 in the deal. Not only that, but what if my neighbor starts a fire? Renter's insurance is a great deal.
Property/car insurance is good and typically pretty well-run. The health insurance industry is fucking evil. I can't wait for it to be destroyed by a publicly run system.
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In an ideal world, why would you need insurance to cover day to day events. The point of insurance is to mitigate risk. Something that occurs on a predictable basis isn't really risk any longer and using an intermediary is going to incur extra cost. Which is part of the problem with health insurance IMO. Regular activities (physicals, mammograms, etc) have fallen under the aegis of for profit health insurance, obfuscating the cost to consumers.
You buy insurance to lower your risk. In the case of activities that have an adverse effect on others, like driving, said risk mitigation is mandated to shield the rest of society from that risk since someone is going to bear it. Mandated health insurance is being pushed for somewhat similiar reasons. In other areas you can generally choose how much risk exposure you are willing to take on by adjusting the presence or amount of insurance.
I'd say most people form negative impressions of insurance because you pay them money every month, then when you need their services, they dick you around to try and avoid paying out, and then up your rates.
Hell, sometimes you don't need to do anything. "The company isn't doing too great right now, rates are going up.".
Everyday stuff, sure. There's no "forgetfulness" insurance so you can get a new iPod because you lost yours.
But what about exceptional occurances that aren't very expensive? I have homeowners insurance so that if my house catches on fire, I'm not destitute. But if someone breaks in and smashes my television, smashes my double bass, and smashes my computer, I have to file a claim for something like $5000 -- not pocket change, but not enough to bankrupt someone. Deductible is $1000 so that's 20% that I have to pay anyway. And then my rates go up -- is the amount of increase going to offset the $4000 I'm getting out of my claim? Does it wind up that I save a mere $500? Or even cost me more than $5000 in the short term (2-3 years)?
Now if my house catches fire and I lose the house and all my possessions, a $1000 deductible is negligible.
And if you reduce your deductible, your rates increase anyway.
So insurance is great for low-risk, high cost catastrophes. It's significantly lacking for more common risks at lower costs -- costs that are still significant to the majority of individuals. But that's just it -- insurance is billed as being suitable for a variety of risks, when it's often worthwhile only for relatively low-risk, high cost situations.
However, there's a caveat to all that. Car-insurance is mandatory in the US, which means I need to pay for it if I want to drive legally. I could pay for the cost of my vehicle several times over and I will never see any return on it. It's like reverse gambling. It rewards people who get into more accidents (well, except for that climbing premium of course, but that's less of a concern on a shitty car) while virtually punishing people who never do, until years of accident-free driving. Furthermore, there's a good chance that, if I'm not paying top-dollar for my insurance, I have a shitty deductible, and I'm going to end up paying out of pocket anyway for my, or your, car.
I think the concept of insurance works, but the execution needs work. I'd really like to see a return on my investment in car-insurance - at some point, when I have single-handedly payed for the value of an entire vehicle, maybe I shouldn't have to keep paying until I cause an accident? Or maybe I should get some amount of money, no matter how small, at the end of the year? Maybe a free membership to AAA? SOMETHING?
Equally, in my experience it's rare for premiums to go up on the basis of a single claim. It tends to be patterns of claims that bump you into a higher risk category.
I don't know how much of this to put down to transatlantic differences.
This flies in the face of almost every dealing anyone I know has ever had with insurance.
Car being the worse. Shit, you don't even need to make claims to have your premiums go up.
It's not the cost of your vehicle you're insuring against, it's the damage that you might end up being liable for. Most people don't tend to see that side of things, but if, for example, you run into the back of someone on the motorway and it ends up as an accident involving five or six cars, the costs you will be liable for will easily be six figures plus. More if anyone's injured, and huge amounts of money if you permanently disable someone.
The cost of repairing or total lossing the actual insured vehicle averages around about the £1000 mark.
Right, which is why it's cheap to add a 2nd car to 1 driver, but it's expensive to add a person to a single car. Likewise why removing collision insurance on a car doesn't reduce the insurance to almost nothing. And it's also why renter's insurance is so cheap -- stuff is cheap, compared to health care. Especially considering that something that lands you in the hospital could become a lifelong problem.
But japan, your rates are definitely a transatlantic discrepancy. The deductible on our car insurance is $500, and the deductible on our homeowners is $1000. I think pretty much the lowest car insurance deductible that's at all reasonable is $250, because the rates start increasing. Deductibles here are included in the rates, so most people opt for high deductibles so they can actually afford the insurance.
And last winter, my wife skidded on a patch of icy road and bumped into a wooden post, causing about $1500 damage to our car. Someone behind her skidded on the same icy patch (incidentally, someone before her has also skidded and ruined his car) and rear-ended my wife, causing $500 damage (which we received a check in the mail for). So we owed $500 of our money and got a check for $1000 for filing the claim through our insurance company.
We then received a notice that our insurance was increasing $400 a year. And that will probably last for 3 years. So because my wife bumped the car and did some minor body damage on icy roads, our insurance went up 50%, and we're in the situation where we "got" $1000 and will pay $1200 in increased premiums -- and have a claim on our record, so that we're unable to change car insurance companies for the next 3 years unless we want to pay $rape as our insurance rate.
And yes, we would have simply paid the money out of pocket if there weren't multiple cars involved and a police report. Which is stupid, really -- we have car insurance, and were paying for collision insurance, for this exact reason, and our car is a '98 Corolla, and as mentioned above, the "good driver" gets screwed.
The SUV that rear-ended my wife was totaled, easily, and while his rates will also go up, he also gets a brand new car.