> Sure. And how many people do that today? Ummmm....

Can you explain why you think people will act like rational actors and buy insurance rather than act like rational actors and save that same money in mutual fund for emergencies?

I never understand arguments that boil down to "people' won't do X smart thing, they'll do Y smart thing because I support Y".

Sometimes people are forced to buy insurance. In the UK it is mandatory to have car insurance (else the police will literally take away and crush your car). My mortgage demands that I take out home insurance. And of course the state provides a kind of health and unemployment insurance which is mandatory for UK taxpayers.

You aren't forced to have savings.

In many (most?) jurisdictions you can post a bond for liability insurance. This is typically used by fleet managers etc, but is also available to HNW individuals.

Essentially you prove to an insurer (by posting a bond) that you can and will pay for any third party damage you cause, and in return they give you a practically free (or cheap, super-high-deductible) policy.

In the UK you can post a bond in lieu of having motor insurance, but it's something like £250,000 so rather out of the range of the ordinary car driver. (It's mainly used for commercial vehicle fleets as you say.)

You aren't forced onto this private unemployment insurance either, which was what was being replied to.

Sure. Because, at the rate you pay premiums, it would take somewhere between 8 and 20 years to save up the full coverage amount. So either a) You had to have started saving as early as possible, or b) You have to save a much larger percentage of your income to catch up

Also, you might have rational purpose for not saving that much, so you can deploy your income in a more productive way.

Similarly, why would people get a car loan? Just save up and pay cash!!!!! Why waste money on interest payments (particularly when interest rates on loans were much higher.) Some people could do that, some couldn't. Now you have an option you didn't have before.

> Not necessarily. Most insurers pretty much break even on the insurance, and make their money on investing the premiums. Auto in particular.

That's surprising to me. I'm not familiar with the industry but logically I'd expect that if the company is breaking even that means that after operating costs they are paying out the rest the money in claims, so what's left to invest?

If they're not just breaking even, and are building large cash deposits, surely they would be needed quickly in the event of a sudden burst of claims, so their investment options would have to be a lot of more liquid.

Insurance is a business with a strong, predictable, and constant cash flow. People are paying premiums virtually every day of every month.

Payouts are more sporadic. So you're able to invest and make money on those premiums until needed for payouts.

But wait, you don't need to liquidate those investments to make your payout. Just don't invest your incoming cash flow, and pay out from that instead?

Bigger blip than usual and not enough cash flow to handle outgoing expenditures? Borrow against your illiquid assets at fantastic rates because of your predictable cash flow and solid asset portfolio. Gives you enough runway to either pay that debt down with a longer timeframe of cash flow or to liquidate those assets, if servicing that debt is worse than your asset return.

^^ General thought process of insurance. Geico is special in trying to maintain a breakeven on premiums vs payouts and source all profit from investment income. But doing so allows them to have competitive premiums in most risk pools, amass a large amount of market share, and provide Berkshire Hathaway with enormous liquid assets to invest. Many insurance companies bake a target profit margin into their actuarial models, and derive profit from a mix of premiums and investments. But the higher your premiums, the lower your market share, and the less capital/leverage your investment arm has available. So it's a balancing act based on business priorities.

>> Not necessarily. Most insurers pretty much break even on the insurance, and make their money on investing the premiums. Auto in particular.

>That's surprising to me. I'm not familiar with the industry but logically I'd expect that if the company is breaking even that means that after operating costs they are paying out the rest the money in claims, so what's left to invest?

Well, see http://www.insurancejournal.com/news/national/2015/08/10/377... for example. GEICO had a 99%+ combined ratio. (Combined means it includes other expenses, not just claims). Claim payments would be about 2/3 of that, then costs relating to handling claims about half the remainder, then the rest more typical overhead. GEICO might also be able to get your car repaired cheaper than you could get it repaired if you self-insured as well. So yes, auto insurance is a good deal. That's a "good" year for a very healthy insurance company. if there is a big hurricane and thousands of cars get destroyed, they might have a combined ratio of 120% plus that year. They do try to get 6%+ investment returns on the premiums...which is basically their profits.

>If they're not just breaking even, and are building large cash deposits, surely they would be needed quickly in the event of a sudden burst of claims, so their investment options would have to be a lot of more liquid.

That why the State makes sure they are adequately reserved against loss, and/or reinsured properly.