[ska]

Risk pooling is fundamental to insurance, but not all pools are the same.

The observation is that if you aren't able to discriminate at all or subdivide the pools, the only response is to up the average rate to cover the aggregate risk as best you can estimate it. This gets tricky if your ability to change rates is constrained, also.

These things are always in fundamental tension, and also in tension with privacy. It's not an easy problem.

[brogrammernot]

Yup, exactly.

Even worse for the consumer is that insurance rules say you have to “offer” insurance in the state to get your license.

Well, you don’t want to drop your license but really don’t want to have a bunch of policies. What do you do?

You make it impossibly difficult to get insurance. I’m not going to name names but a lot of insurance companies in California are doing this.

No online applications, have to call in, have to fax in or mail paperwork required and so on…

[michael1999]

That sounds like informal underwriting. If you are forbidden by law from better underwriting, then selecting by conscientiousness is a sensible proxy.

[hilux]

Yup - I have experienced this trying to buy health insurance (pre-Obamacare) in California.

I was very confused until I realized they were doing exactly what you said.

[ls612]

In extreme cases forcing too much pooling can cause market failure. The intuition is that the least risky customers decline to purchase (much) insurance, making the average risk higher, increasing prices, making more people decline insurance, in a vicious cycle. It’s fundamentally similar to Akerlof’s market for lemons.

[brogrammernot]

This is always a fun topic for me.

If everybody is sharing all the risk that’s the same thing (obviously I’m being simplistic) as them underwriting the risk themselves.

[lazide]

They’re opposites though?

Someone underwriting their own risk might as well not have actual insurance, as they’re just on the hook for actual damages correct?

So if they get sued for $1M, then they are on the hook for $1M (as an individual).

If everyone is sharing the risk, then everyone is on the hook for $1M/number of people.

So the individual that gets sued for $1M in a large state, might only be on the hook for a couple cents for their own lawsuit. Though they’d also be in the hook to the same degree for some other asshole getting sued.

Which is why insurance creates moral hazard (for things someone can control), and reduces catastrophic damage to individuals (for things someone cannot control).