[actuary]

This is quite incorrect.

I am a credentialed actuary responsible for the pricing of insurance risk. It is absolutely true that the consumer cannot price his or her own insurance policy (and I can). However, the end result of this is not some nefarious scenario where insurance companies are charging consumers ten times the fair price to insure their car or home. There is a functioning market for insurance, and consumers are going to tend to select the lowest-price option from amongst their choices in that market. This means that if you overcharge your customers, you will lose them to a competitor. Systematic mispricing of policies relative to the competition will lead to adverse selection, which is even worse - the insureds that you were making money on leave, and the insureds that you were losing money on stay.

Because of these factors, the insurer's goal is to price your policy as accurately as possible. Profit margins in the personal lines are so thin that many insurers engage in what's called cash-flow underwriting. The only money they make on the policy is the investment income they earn on your prepaid premium.

On top of all this, insurance (especially insurance marketed to consumers) is heavily regulated. Rate changes and new rating plans are scrutinized by each state's department of insurance. These regulators function like you wish the banking regulators did. They have enormous authority and their relationship with insurers is adversarial.

I could go on at some length but I will cut it off here. Suffice it to say that insurance, particularly property/casualty insurance in the United States, is about as far from a scam as you can get.

[gbog]

Hi,

Your strongest point is competition, but competition only works fully for economically rational agents, which we are not.

Regulations are making my point stronger: they exist because without them the clients would be defenseless.

Sorry to be short, I'm on a phone.

[actuary]

Like any other product you buy, there is a reasonably transparent and competitive market for personal insurance.

Unlike any other product you buy, the price of insurance may not be excessive, inadequate, or unfairly discriminatory. This is the law. Unlike any other product you buy, personal insurance prices must be filed with regulators who have the power to block the sale of any insurance product that does harm to the public. Unlike any other product you buy, an entire profession is devoted to the pricing of insurance. You cannot even propose to sell an insurance policy if your pricing scheme has not been signed off on by a credentialed actuary. Those credentials are not easy to come by, and actuaries are bound by standards of practice that preclude us from doing anything unethical.

If my employer asked me to violate an actuarial standard of practice, I would quit on the spot, and I don't know any other actuary who wouldn't do the same. And finding an actuary willing to throw away their livelihood would only be the first step in the process of attempting to charge a consumer an excessive rate. There are so many safeguards in place that bypassing them all doesn't seem like it would even be possible, and even if it were, the insurer would not reap any rewards due to the force of adverse selection.

I don't often post on HN, and I know that the actuarial profession is not very well known, but arguing with an actuary about the pricing of insurance is like arguing with a heart surgeon about where the aorta is. I can tell you with the authority of an expert that you are mistaken.

[gbog]

Well I certainly have no special authority in the matter, but maybe Kahnemann has? He got a Nobel after all. To be true he didn't say insurance was a scam, he equated it to lottery in the fact that it plays on the difficulty to evaluate rare events probability, and also the psychological reward in buying a lottery ticket (temporary dreams of massive wealth, e.g. how many Ferrari will I buy...) or insurance (peace of mind).

I have friends in the insurance business and I think it is a very honorable profession in most of the cases but you can't wipe out 1) the door to door insurance salesman scamming fragile old people, 2) the possibility that, much like finance, the whole insurance profession is based on wrong equations that makes it apparently robust but inherently fragile (in the sense of Nassim Taleb).