Wednesday, 27 February 2008

Linkage

Insuring against certainty


Robert Bruce Thompson:

The entire concept of insurance is based on the idea of a pool, the members of which are fungible insofar as the level of risk... But what if there were no need to depend on the law of large numbers? What if, like Robert A. Heinlein's Doctor Pinero in Life-Line, there was a way to determine exactly which of those 60-year old men would die, or exactly which of those 30-year-old women would become pregnant, or exactly which of those 17-year-old boys would be involved in a car accident?
...
DNA tests are essentially such foreknowledge...
But foreknowledge in the absence of intervening circumstances. (The 17-year-old boy targeted for a traffic accident next Tuesday might fall down the stairs next Monday and wind up spending Tuesday in the hospital, in traction.)

Thompson raises the problem of obtaining coverage for predicted conditions, or at least coverage that anyone could afford.
Why would any insurance company sell you such a policy, knowing ahead of time that they'll have to pay out on it?
(Well, in some cases they might not have to. What if you sign up for cancer coverage, then walk out the door and get hit by a truck?)
Or, if they did sell you such a policy, it would really just amount to a prepayment of the costs they know they'll incur.
Big companies do that all the time.[1] And individuals do, too. Ever heard of life insurance?

We insure against certainty all the time. Even if you live in Florida you can still buy hurricane insurance.[2]  So the insurance industry will take care of itself.  But then there’s the government...

RTWT.


Via: Jerry Pournelle’s mailbag.

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[1] It’s called self-insurance, and they do it when the cost of a third-party policy exceeds the actual cost of losses minus the return obtainable from creating a reserve fund and then investing it.
[2] Not as cheaply as hurricane insurance would be for someone in North Dakota, but as risk approaches certainty, the cost goes up. TANSTAAFL.

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