alt Hacker NewsThe math of insurance suggests that, if it needs to be widely carried (either due to things like mortgage requirements, or the simple realization most people don't have enough resources to absorb a major catastrophe themselves), the most economical way to go is to have a single risk pool that's as broad and diverse as possible, so it can swallow a large clustered crisis more easily. Yes, this is a bit of robbing Peter to pay Paul.
I always found it funny when insurance marketing talks about "personalized rates", when the goal is to DE-PERSONALIZE the risk. If you have 10,000 customers in Los Angeles, and 5 million elsewhere, you can either isolate the LA customers and charge them the "real" price of the risk, which will be unviable as a business and probably politically touchy too, or you can include them in the broad pool, and the people with a full-cinderblock home in a non-flammable state pay $20 more a year so the entire endeavour can work.
The concept probably works better if you have some concept of social cohesion to lean on-- you might not get the best possible outcome personally, but the system itself is more robust for everyone.
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> If you have 10,000 customers in Los Angeles, and 5 million elsewhere, you can either isolate the LA customers and charge them the "real" price
That's the only way.
> which will be unviable as a business and probably politically touchy too
Why would it be? If you live in Los Angeles - doesn't mean you don't need insurance (even if it several times the cost of insurance in the safer areas).
> or you can include them in the broad pool
No, you can't. Your competitor who doesn't do this will offer cheaper insurance - because they doesn't distribute high risk of small group to everybody else.
> the people with a full-cinderblock home in a non-flammable state pay $20 more a year so the entire endeavour can work.
Why would they do that? 20 bucks is 20 bucks.
> The concept probably works better if you have some concept of social cohesion to lean on
You mean if you with totalitarian governance deprive people of the ability to choose? Yeah, that could work. I mean, that's how the gulags were justified.
Except if insurance company A does that, insurance company B will call the full-cinderblock home and say "hey, we can save you $20".
If it's a product you actually want everyone to carry (like health insurance) it should probably be the government offering it.
you can either isolate the LA customers and charge them the "real" price of the risk, which will be unviable as a business
NOT lining up the premium with the actual risk is what's non-viable.
> or you can include them in the broad pool, and the people with a full-cinderblock home in a non-flammable state pay $20 more a year so the entire endeavour can work
And you immediately start loosing customers to insurers that either did the former or left LA alltogether. This changes $20 surcharge into $25 surcharge, causing more customers to leave, causing surcharge to increase and so on.
> I always found it funny when insurance marketing talks about "personalized rates", when the goal is to DE-PERSONALIZE the risk.
Actuarial science is not often associated with “fun” but they have been partying for centuries.
“In 1662, a London draper named John Graunt showed that there were predictable patterns of longevity and death in a defined group, or cohort, of people, despite the uncertainty about the future longevity or mortality of any one individual. This study became the basis for the original life table. Combining this idea with that of compound interest and annuity valuation, it became possible to set up an insurance scheme to provide life insurance or pensions for a group of people, and to calculate with some degree of accuracy each member's necessary contributions to a common fund, assuming a fixed rate of interest.”
> you can either isolate the LA customers and charge them the "real" price of the risk […] or you can include them in the broad pool
Maybe you don’t understand that the insurance business is based on including everyone in one pool (so it can swallow a large clustered crisis more easily) AND charge them (more than) the real price of the risk.
This completely ignores incentives. If insurance isn't allowed to charge people more who live in fireprone or floodprone areas, more people will live in such areas, and overall society will have to spend more money rebuilding when disasters inevitably hit those areas. Personalised insurance pricing would allow insurers to charge much more to people living in such areas, which incentivises people not to live there. It's also a moral issue: if everyone pays the same rate, then people who did the right thing and chose to live in an area that wasn't fire or flood prone are subsidising people who did the risky thing.
By eliminating personalization you’re doing the same thing - removing price as a signal.
It’s good when insurers personalize! Install screens to prevents embers from entering roof vents? Great. You should get a discount!
It’s a win-win. Consumers are incentivized to take measures to reduce risk.
What if Paul built his house somewhere less flammable? I see options here where Peter doesn't need to be robbed, he could pay a fair rate and Paul could make less risky decisions.
If one pool of people are taking a bad deal vs the market rate when buying insurance then it isn't really insurance any more. It is a transfer payment a.k.a. welfare. Which is cool and all in the sense that welfare is a social tool that exists. But calling it 'insurance' is needlessly polluting the language. If people expect to hoover money off others then they should be charged more until the expected return of everyone in the insured pool is equal. If the payouts are going to be held equal in the event of a disaster then that means the price of insurance has to vary depending on the risk profile of the customers.