Their research is done on the population level, and they consider adverse selection effects somewhat (people with increased risk are more likely to insure against that risk), but it’s far from perfect. I’ve worked in insurance and profited from insurance financially in cases where I expected the insurance to be positive EV beforehand.
Professional experience (Germany):
Some insurance products run at an (accepted) deficit, as they acquire customers who then buy more (money making) insurance products. Examples: Personal Liability Insurance, Motor vehicle liability
There is significant friction between the different departments within an insurance and with the insurance agents, causing mispricing from a risk-perspective (some parties care more about raw sales volume).
Nobody really knows what they are doing.
Personal experience:
Personal Liability insurance is dirt cheap in Germany and makes money off people who don’t report their damages (e.g. will pay for a friend’s phone or camera they dropped themselves).
Insurance for bikes in Berlin. 3 of my bikes were stolen within 3 years and the insurance costing <€100/yr covered all of them.
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.)
Their research is done on the population level, and they consider adverse selection effects somewhat (people with increased risk are more likely to insure against that risk), but it’s far from perfect. I’ve worked in insurance and profited from insurance financially in cases where I expected the insurance to be positive EV beforehand.
Professional experience (Germany):
Some insurance products run at an (accepted) deficit, as they acquire customers who then buy more (money making) insurance products. Examples: Personal Liability Insurance, Motor vehicle liability
There is significant friction between the different departments within an insurance and with the insurance agents, causing mispricing from a risk-perspective (some parties care more about raw sales volume).
Nobody really knows what they are doing.
Personal experience:
Personal Liability insurance is dirt cheap in Germany and makes money off people who don’t report their damages (e.g. will pay for a friend’s phone or camera they dropped themselves).
Insurance for bikes in Berlin. 3 of my bikes were stolen within 3 years and the insurance costing <€100/yr covered all of them.
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.)