Fri, 02 Jun 2006
The insurance you don't need
I have a friend who likes to have everything insured, just in case something happens. He has even been trying to persuade me to buy an insurance for something, and he was offering to share his rebate with me. At that point I thought that from a basic fact of "the insurance company needs to make a profit" it is clear that every insurance is in fact (on average) a loss for the insured person.
So I think the insurance is only worth it, when you are not expected to have money to cover the damage yourself (such as when you buy a new car, and do not have money to immediately buy another one, when the first one is totaled or stolen). But for things like damages in order of low tens of thousands CZK (cca 30 CZK = 1 Euro), the insurance is acutally a nonsense, because you can well cover the damage yourself, without routing the money through the insurance company.
Today I have found an interesting article on K5: it has a title Don't buy insurance you don't need!, and the author gives my above thougths a more clear wording, and mentions also another things like deductible money. You may also want to read the comments, especially this one, which mentions the role of a bonus for claim-free time.
2 replies for this story:
Milan Zamazal wrote:
"From a basic fact `the insurance company needs to make a profit' it is clear that every insurance is in fact (on average) a loss for the insured person." This statement is based on incomplete assumptions (thus its conclusion may be both true or untrue), as often happens in economy theories. In your thoughts, you must consider at least two additional facts: 1. The insurance probably has influence on behavior of people and thus the total damages. For instance, insurance companies are motivated to reduce the damages, so they can invest part of the money into various means to achieve that and that may reduce or increase your total spendings on damages + insurance. Or thanks to the insurance you may become less motivated to protect your posessions and thus the total spendings on damages + insurance increase. Frauds on both sides should be counted too. 2. By buying insurance, the usage value of your car may increase. For instance, you may be less afraid to travel when your car and household are insured. This way you spend your money not exactly just on covering damages, but on getting more from your car. Such money may be just another investment, not a loss. So I'd say the decision whether to insure something is much less trivial (in all directions) than you suggest.
I think the two additional facts you mention, while being true, are apparently pretty marginal (especially the second one): I think it is far worse to handle (for example) the repairs of the car, or the task of buying another one, (which you have to do no matter if you have an insurance or not), than actually paying for the damage.