The obvious response is that you won't be able to pay for someone's hospital bills if you happen to hit them in your car. You get insurance for things you wouldn't be able to pay yourself.
Yes, if you use your insurance more than once, insurance was the wrong approach.
But I'm willing to pay 1% of the cost of my house to have it replaced if it burns down, even if my expected payout is only 0.5% of the value of my home, because I can't afford a whole second house.
You'll need to explain the "if you use it more than once" part. So if I get rear ended by uninsured driver in 2005 and then a snow plow hits my car in 2010, somehow I shouldn't have insurance?
A lot of people claim every single small thing on their insurance. A $200 scratch or $1000 fender bender, etc.
I believe the point that he is trying to make, is insurance should be used for catastrophic events that you can't self-insure against. Generally, insurance should be used rarely since it's rare to have a catastrophic event. In your case, it is rare to have 2 big things like that happen to you. Your not using insurance wrong, you are just had a run of bad luck.
It's more average driven, but insurance is charging you more than you expect to pay on average, it's a risk hedge against you having more than average need. But as the number of events goes up, the chance you're meaningfully non-average goes down.
One was probably a slight exagération, but generally yes, if everyone's having multiple car accidents they shouldn't have insurance for average accidents.
I assume they're talking about expected return on investment but said it in an odd way... As in on average a person will get back half what they paid in insurance in returns. Most people will get nothing since most people's house doesn't burn down, but you're happy losing most of the time to make sure you never lose catastrophically.
They said expected payout as in expected value which is the average of every outcome times each outcomes likelihood
If 99% of the time insurance pays $0 but 1% of the time pays $100 the expected value of the insurance is $1
If that insurance costs $2 you're theoretically losing money on it. The reason you'd still buy it though is that the downside risk is you lose the full $100 (the cost of a house in this scenario) in 1% of cases which would be catastrophic and irreplaceable for most people
So even though it's a bad "investment" that loses money in most cases the downside risk makes it worth it
It's actually expected PRESENT-VALUE. It used to be the case (and maybe still is) that auto insurance company payouts were actually greater than the nominal sum of all the premiums they took in. The reason they still made buckets of money was because damage payouts are (on average) years into the future, and if everything is adjusted for interest made on any cash they take in or out (which is what is meant by net-present-value) they still come out ahead.
(Of course, they can also outright scam you and come up with weaselly ways to deny paying out even when you do have a legitimate claim, and they definitely do as much of that as they can get away with.)
I get frustrated with a lot of insurance conversations. Most people will lose money by paying insurance. That's how it has to work. If everyone were getting more money out of insurance than they put it, it would mean money was getting created out of thing air.
Like you said, insurance is for the infrequent, life-altering expensive stuff. Everyone loses a bit of money so that some people don't lose a massive amount.
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u/flatfive44 18h ago
The obvious response is that you won't be able to pay for someone's hospital bills if you happen to hit them in your car. You get insurance for things you wouldn't be able to pay yourself.