I’ve been thinking this for a long time … the amount of money I spend on my house or vehicle in order to keep them insured is starting to outweigh the benefits of having insurance. I spend money on these things to remove as much risk as possible and always make me cautious about doing anything unusual or dangerous because I might not get paid by my insurance. I’m starting to think that it might just be better to pay for everything as if I’m being insured by the most strict policy and then not bother paying insurance. Minimize risk on everything which is what having insurance does to me.
I’ll never do it but it really makes you think.
A few years ago I helped my wife file taxes for her mother who died that year. End of life taxes and we had to calculate a whole bunch of stuff. One thing I noticed was her house insurance. She had owned her small house for over 60 years, paid house insurance to the same company year after year and never filed a claim. I calculated how much it all was and adjusted for inflation with quick and dirty calculations it amounted to about $90,000 which was basically what the small house was sold for. (This is all in a small northern town away from the city in a small two bedroom house from the 1920s)
It really made me think that instead of paying money like that with the risk that the company might refuse to help you in a major event … why not just keep paying but just deposit it into a savings account for just such as emergency. After ten years, you’d have quite the savings and you would have still done everything as risk free as possible anyway.
That’s called self insurance, and it works if you can afford it. The thing about insurance is that it is fundamentally a negative expected value financial product. That negative EV is the premium you pay for the reduced risk. And the risk reduction happens immediately, instead of needing to wait a decade for your self insurance fund to build up.
One way to see this is to look at what the people who most understand insurance do. Insurance companies have a problem if too many people make claims at once. They could self insure against this risk, but that takes a lot of capital that they do not want to spend. Instead, insurance companies go out and buy insurance to cover them in case something happens that results in a lot of claims (this is called reinsurance).
You can actually pull a similar truck with your own insurance. Self insure for the amount that you can handle, then treat your insurance provider like a reinsurance provider to cover large events beyond your capacity. In this case, we call it having a high deductible plan. And you can increase the deductible as your savings increase.
Of course, once you have enough capital to self insure the full value of a house, you need to ask if self insuring is the most profitable use of that capital. You could also pay a premium to insurance companies for the financial service of risk reduction, then invest what would be your self insurance fund in something that you expect to produce higher returns.
Of course, now you have the risk that this other investment might perform poorly and you want to insure against that. In this case, you might invest in something you expect to perform relatively poorly, but would do well in circumstances that makes your other investment do poorly. Of course, figuring this out is difficult, so you can instead pay a premium to an investment fund that specializes in hedging their bets.
Well, insurances are profitable companies. No matter how you look at it, in average they will always make more money of a single insuree than what they pay out.
Knowing this, if you can afford the potentially expensive hit, it’s better to not insure or insure as little as possible.
That been said, not many people can afford to not have an insurance as a big hit can create a lifelong debt. Whereas when you do have an insurance, they find a way to not pay and you end up with a lifelong debt. Oh wait…
the real solution is co-operative insurance (i think there’s a more proper term but blegh), grab some people you trust and write an agreement to keep a collective pool of money saved away for emergencies.
The more people you can get to agree, the safer everybody is.
Scale that up and the final form is insurance that’s controlled by the government. I fully support that btw, the government is supposed to represent the interests of the people (at least in an ideal democracy)
The real solution is to reduce the real risk. Cooperative insurance goes on top of that and you have to argue within your cooperative to reduce the risks and not have some members be reckless or selfish bastards.
That’s basically the conclusion I reached for my car insurance, once I started having somewhat nicer/recent cars I used to put the highest insurance on them. I had two minor incidents (one my fault one not), during which they said “sure, we’ll cover the costs to repair your vehicle, but we’ll also make the monthly premium go up by X and by the time it’s back to normal you’ll have paid 10x what it would cost to just fix the thing”.
So now I get the minimal legal insurance and I’m just ready that I’ll have to pay myself for my own car (which I already was anyway due to issue described above).
I’ve been thinking this for a long time … the amount of money I spend on my house or vehicle in order to keep them insured is starting to outweigh the benefits of having insurance. I spend money on these things to remove as much risk as possible and always make me cautious about doing anything unusual or dangerous because I might not get paid by my insurance. I’m starting to think that it might just be better to pay for everything as if I’m being insured by the most strict policy and then not bother paying insurance. Minimize risk on everything which is what having insurance does to me.
I’ll never do it but it really makes you think.
A few years ago I helped my wife file taxes for her mother who died that year. End of life taxes and we had to calculate a whole bunch of stuff. One thing I noticed was her house insurance. She had owned her small house for over 60 years, paid house insurance to the same company year after year and never filed a claim. I calculated how much it all was and adjusted for inflation with quick and dirty calculations it amounted to about $90,000 which was basically what the small house was sold for. (This is all in a small northern town away from the city in a small two bedroom house from the 1920s)
It really made me think that instead of paying money like that with the risk that the company might refuse to help you in a major event … why not just keep paying but just deposit it into a savings account for just such as emergency. After ten years, you’d have quite the savings and you would have still done everything as risk free as possible anyway.
That’s called self insurance, and it works if you can afford it. The thing about insurance is that it is fundamentally a negative expected value financial product. That negative EV is the premium you pay for the reduced risk. And the risk reduction happens immediately, instead of needing to wait a decade for your self insurance fund to build up.
One way to see this is to look at what the people who most understand insurance do. Insurance companies have a problem if too many people make claims at once. They could self insure against this risk, but that takes a lot of capital that they do not want to spend. Instead, insurance companies go out and buy insurance to cover them in case something happens that results in a lot of claims (this is called reinsurance).
You can actually pull a similar truck with your own insurance. Self insure for the amount that you can handle, then treat your insurance provider like a reinsurance provider to cover large events beyond your capacity. In this case, we call it having a high deductible plan. And you can increase the deductible as your savings increase.
Of course, once you have enough capital to self insure the full value of a house, you need to ask if self insuring is the most profitable use of that capital. You could also pay a premium to insurance companies for the financial service of risk reduction, then invest what would be your self insurance fund in something that you expect to produce higher returns.
Of course, now you have the risk that this other investment might perform poorly and you want to insure against that. In this case, you might invest in something you expect to perform relatively poorly, but would do well in circumstances that makes your other investment do poorly. Of course, figuring this out is difficult, so you can instead pay a premium to an investment fund that specializes in hedging their bets.
Well, insurances are profitable companies. No matter how you look at it, in average they will always make more money of a single insuree than what they pay out. Knowing this, if you can afford the potentially expensive hit, it’s better to not insure or insure as little as possible.
That been said, not many people can afford to not have an insurance as a big hit can create a lifelong debt. Whereas when you do have an insurance, they find a way to not pay and you end up with a lifelong debt. Oh wait…
the real solution is co-operative insurance (i think there’s a more proper term but blegh), grab some people you trust and write an agreement to keep a collective pool of money saved away for emergencies.
The more people you can get to agree, the safer everybody is.
Scale that up and the final form is insurance that’s controlled by the government. I fully support that btw, the government is supposed to represent the interests of the people (at least in an ideal democracy)
The real solution is to reduce the real risk. Cooperative insurance goes on top of that and you have to argue within your cooperative to reduce the risks and not have some members be reckless or selfish bastards.
That’s basically the conclusion I reached for my car insurance, once I started having somewhat nicer/recent cars I used to put the highest insurance on them. I had two minor incidents (one my fault one not), during which they said “sure, we’ll cover the costs to repair your vehicle, but we’ll also make the monthly premium go up by X and by the time it’s back to normal you’ll have paid 10x what it would cost to just fix the thing”.
So now I get the minimal legal insurance and I’m just ready that I’ll have to pay myself for my own car (which I already was anyway due to issue described above).