Sunday, August 23, 2009


When I think about it, insurance is a really strange industry. It's betting on unlikely outcomes, to rebalanced risk. Take buying life insurance. That's basically this:
Me: Hey insurance company, bet you a million dollars that I'll die.
Insurance Company: We bet you $250 per month that you won't.
Me: You're on.

Thereafter, every month that I don't die, I give them $250, and if I die, my heirs get $1,000,000. This is most useful if I am a young father, and my family will be devastated without the income that I earn. After all, my hypothetical baby is expensive, and my hypothetical wife quit her job to raise hypothetical baby. This is not useful if you're like the actual me and just starting out your career. The risk to my family if I should suddenly die would be their immense sadness, not a financial problem.

Or take driving insurance.
Me: Hey car insurance company, I want to drive a car, but I don't have $30,000 (or whatever the hell it is in this state) to deposit at the DMV, will you cover me?
Car Insurance Company: Hum, well, let's look over your record, we see that you've had one accident and one speeding ticket in the last ten years, which puts you in that particular risk category, which means we'll provide the money for $300 per month.
Me: Nice
Car Insurance Company: Oh, and if you have an accident or we catch you doing anything stupid with your car, we'll quintuple that rate. We don't need to pay out unnecessarily.
Me: Eep.

Insurance policies are good at distributing risk to allow things that would otherwise be intolerable, like allowing me to drive as a 20 year old, when most people my age were doing stupid things like ghost riding the whip, street racing, drifting, and driving with whackjob friends who think startling the driver is hilarious. (Male and 16-25 is the category most expensive to insure, because they're the group most likely to have an accident. For the four reasons I listed above.) However, insurance does cost money, and probably isn't worth it for scenarios that one could recover from without. Some things can't be insured against, especially some of the scenarios that scare me the most.

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