Insurance is as far as I can tell a hedge with particularly high overhead, but it is a hedge. You’re paying to reduce your exposure to unwanted risk—a move that as you correctly deduce averages out to putting less money in your pocket, but which can nonetheless be quite rational when you take into account the Gambler’s Ruin and similar effects.
There’s also the psychological effects of risk to consider, as well as the diminishing-returns effect that TobyBartels mentioned.
Insurance is as far as I can tell a hedge with particularly high overhead, but it is a hedge. You’re paying to reduce your exposure to unwanted risk—a move that as you correctly deduce averages out to putting less money in your pocket, but which can nonetheless be quite rational when you take into account the Gambler’s Ruin and similar effects.
There’s also the psychological effects of risk to consider, as well as the diminishing-returns effect that TobyBartels mentioned.