You have it backwards. The bet you need to look at is the risk you’re insuring against, not the insurance transaction.
Every day you’re betting that your house won’t burn down today. You’re very likely to win but you’re not making much of a profit when you do. What fraction of your bankroll is your house worth, how likely is it to survive the day and how much will you make when it does? That’s what you need to apply the Kelly criterion to.
You have it backwards. The bet you need to look at is the risk you’re insuring against, not the insurance transaction.
Every day you’re betting that your house won’t burn down today. You’re very likely to win but you’re not making much of a profit when you do. What fraction of your bankroll is your house worth, how likely is it to survive the day and how much will you make when it does? That’s what you need to apply the Kelly criterion to.
Have you read my reply to RichardKennaway? I explicitly look at the case you mention.