If you already know that an adverse event is highly likely for your specific circumstances, then it is likely that the insurer will refuse to pay out for not disclosing “material information”—a breach of contract.
Loss leaders are common, but rely on a reasonably accurate prediction of what that loss will be. and simple errors are of course common.
I think “nobody knows what they’re doing” is an overstatement. Insurance companies make significant profit, and very rarely fail. The usual complaint I see from investors is that some years an insurer has made less profit than others—which is exactly what one should expect, so clearly these investors don’t understand what they’ve invested in.
Your bike example sounds like bad luck.
An event with a probability of 1% per year can still happen three years running.
It would be interesting to consider the inverse Kelly—given an insurance premium X, what are the reasonable bounds of assumed probability of an adverse event costing Y?
I’m not sure how the wealth of the underwriter could be estimated though.
“If you already know that an adverse event is highly likely for your specific circumstances, then it is likely that the insurer will refuse to pay out for not disclosing “material information”—a breach of contract.”
Having worked in insurance, that’s not what the companies usually do. Denying explicitly for clear but legally hard to defend reasons, especially those which a jury would likely rule against, isn’t a good way to reduce costs and losses. (They usually will just say no and wait to see if you bother following up. Anyone determined enough to push to get a reasonable claim is gonna be cheaper to pay out for than to fight.)
If you already know that an adverse event is highly likely for your specific circumstances, then it is likely that the insurer will refuse to pay out for not disclosing “material information”—a breach of contract.
Loss leaders are common, but rely on a reasonably accurate prediction of what that loss will be. and simple errors are of course common.
I think “nobody knows what they’re doing” is an overstatement. Insurance companies make significant profit, and very rarely fail. The usual complaint I see from investors is that some years an insurer has made less profit than others—which is exactly what one should expect, so clearly these investors don’t understand what they’ve invested in.
Your bike example sounds like bad luck. An event with a probability of 1% per year can still happen three years running.
It would be interesting to consider the inverse Kelly—given an insurance premium X, what are the reasonable bounds of assumed probability of an adverse event costing Y?
I’m not sure how the wealth of the underwriter could be estimated though.
“If you already know that an adverse event is highly likely for your specific circumstances, then it is likely that the insurer will refuse to pay out for not disclosing “material information”—a breach of contract.”
Having worked in insurance, that’s not what the companies usually do. Denying explicitly for clear but legally hard to defend reasons, especially those which a jury would likely rule against, isn’t a good way to reduce costs and losses. (They usually will just say no and wait to see if you bother following up. Anyone determined enough to push to get a reasonable claim is gonna be cheaper to pay out for than to fight.)