Nice article! I’m practice you can get positive expected value insurance though, since you know more about your risk (in some cases) than the insurance does.
The other way around in some cases the insurance is better at estimating your risk and might “rip you off” if they (correctly) assume you overestimate your risk.
Another common case where you get positive EV insurance is when the cost paid by you and the cost paid by the insurerer, when the bad event happens, are significantly different.
For example, if you get extended phone / device insurance from a manufacturer, when the device fails you would have to pay the retail price for a new device. The manufacturer however only needs to pay the production price, which given margins can be a small fraction of the retail price. Thus the manufacturer can set a premium that is (in expectation) somewhere in between those two prices, and you both benefit.
In the majority of cases the insurer has more knowledge, as they can afford the time to do the research.
This is of course why any insurance market must have a great many suppliers. If there are only one or two insurers, they can easily set the premiums to make supernormal profits because they are ‘competing’ against consumers with very little knowledge, instead of other insurers who have similar knowledge levels.
Nice article! I’m practice you can get positive expected value insurance though, since you know more about your risk (in some cases) than the insurance does. The other way around in some cases the insurance is better at estimating your risk and might “rip you off” if they (correctly) assume you overestimate your risk.
Another common case where you get positive EV insurance is when the cost paid by you and the cost paid by the insurerer, when the bad event happens, are significantly different.
For example, if you get extended phone / device insurance from a manufacturer, when the device fails you would have to pay the retail price for a new device. The manufacturer however only needs to pay the production price, which given margins can be a small fraction of the retail price. Thus the manufacturer can set a premium that is (in expectation) somewhere in between those two prices, and you both benefit.
In the majority of cases the insurer has more knowledge, as they can afford the time to do the research.
This is of course why any insurance market must have a great many suppliers. If there are only one or two insurers, they can easily set the premiums to make supernormal profits because they are ‘competing’ against consumers with very little knowledge, instead of other insurers who have similar knowledge levels.