I argue that they can eliminate risk. What happens is the top 10% of the people who cost insurance get the boot.

Now, unless they choose just to not pay out, they can still reduce their risk levels below threshold of the industry. That's what actuarial science is founded on.

> That's what actuarial science is founded on.

Oh, you mean "that branch of science that everyone ignores because it's politically unpalatable?"

"Gee, we promised the moon for our pension obligations and funded them at an absurdly low level, and now we're bankrupt? I don't know how this could have happened!" ~ Municipal governments

For some types of insurance, "top 10% get the boot" may not be possible, as there might be laws requiring the insurer to write a policy for anyone willing to pay the premium.

When I drive slower and quit smoking cigarettes, I very much am reducing my risk of getting into a car accident or dying from lung cancer.

But for every cigarette you don't smoke, someone else has to smoke it! You're just shifting the lung cancer to someone else!

You can diversify risk which is almost the same thing. The whole point of insurance is that each person has x% probability of dying, so they pay x% * the sum assured, and, as the pool of insured gets large enough, there is enough cheese in the fridge.

Yes, the pool is not always large enough, so you can throw it into a reinsurer from the insurance company. Yes, the reinsurance pool isn't always large enough, so you can retrocede to a few other reinsurers for diversification.

That pool isn't aways large enough, so you can securitise away the tail risks and aggregate loss risks into a cat bond, or a pandemic bond, or a longevity swap, or something fun.

These will then in turn be bought up by pension companies, in order to diversify against their market risks, and the needle returns to the start of the song, and we all sing along like before.

They had better be paying more than x% * sum assured, or else the insurance company is going out of business.

They make money from the float. http://www.wikinvest.com/wiki/Float

The price is x% of the sum assured discounted at the risk neutral rates, plus admin expenses, plus customer acquisition cost, plus a target percentage of the economic capital (because their is a wee bit of risk), plus adjustments based on your demographic's price sensitivity profile, combined with adjustments based on the market cycle. Of course, you should also factor lapse rates in. Then maybe factor in whether this is a good beginner product for new customers.