No, because the utility of money isn't linear. It often makes sense to pay a bit more than $1000 to mitigate a 1% chance of losing $100k.

If insurance pricing is perfect, they’ll charge you $100k+ if you’re going to have a $100k claim.

That's not how insurance works.

You buy insurance if there is an uncertain outcome, e.g. a 1% probability of having a $100k claim. In which case you can expect to be charged around 1% of $100k (plus admin costs and whatnot).

Perfect information means you know the exact probability of the event happening. It doesn't mean that you know with certainty whether an event will happen or not. That would require a crystal ball or a time machine.

If I'm going to have a $100k claim I'm not going to drive. There is nothing in life worth doing despite it causing a $100k claim. It can wait (or I'll pay for a taxi). However I need to do things and there is a small chance I will do something wrong and thus incure that $100k claim.

Underrated comment. perfect prediction turns insurance into a payment plan.

A really crappy payment plan that has a ton of overhead you pay extra to make up for.

Hanford has low rates and payouts. But their inspections were very demanding. They invented the Hanford Loop that keeps feed water in the boiler in case of a break, etc, etc. Being insured by them meant you'd be safe!

That sounds... fine? If the prediction algorithm really is perfect, and it predicts my next trip is going to result in a fender bender, I'm certainly going to take uber or public transit. Even if it ends up costing an extra $50 or 2 hours of my time, that's still better than paying for hundreds/thousands of dollars worth of repairs.

If you know the future exactly, then sure. If your knowledge of the future is just in expected values, then it can still make sense. Imagine the radio station doing a "we'll give you a million bucks if X happens" promotion, when X is truly random. The radio station doesn't have a million bucks to front that randomness, but the insurance company can do it.

On average you will pay more, but not all at once, which may be prohibitively expensive. There will still be value in insurance.

That's the same as putting it in a piggy bank, isn't it? Or even better in a fixed income account.

No, because the amount of money you have in a bank account accumulates linearly, so you can only pay up to what you have put in. With insurance, you can get a payout more than what you have contributed up to that point, which is necessary for covering catastrophic damages.

But in this hypothetical the insurance company has perfect information, so they won’t sell you that policy that has to be paid out for more than you’ve contributed.

It’s just a thought experiment, but the more information they have on us, the more relevant it becomes.

They can’t predict the future, they can’t predict exactly when you’ll get in an accident.

Perfect information means they know your risk level to the best possible accuracy, which would really only apply to populations.

Perfect information means they insure 1000 people and predict they’ll have one bad accident per year. After ten years they covered for ten accidents. All ten could have occurred in the first year and they would still be correct.

> They can’t predict the future, they can’t predict exactly when you’ll get in an accident.

That’s why it’s a thought experiment, and not real life.

> Perfect information means…

No, that’s not what was meant by perfect information in this instance.

Then it’s a boring thought experiment. It hardly deserves the name “experiment”.

Sure. I can’t speak for Scoundreller, but I don’t think it was meant to be particularly interesting, just pointing out to wbl that if insurance was to become perfectly fair, it will also have become pointless.

There’s a pretty big leap between perfectly fair and having perfect knowledge of the future. You can know that a fair coin gives exactly 50% chance to flip heads or tails without knowing what the outcome of the flip is going to be.

The original context was unsafe drivers, with the gist of the response being that when you have everyone paying for exactly the costs they themselves incur, insurance has become meaningless.

It’s hyperbole of sorts, but it highlights that until such a time, raising the cost of insurance doesn’t just punish the people who actually cause the damage.

Except insurance also covers for costs that are not your fault or not anyone’s fault. An insurance premium could be divided into two components: one based on individual risk and the other component based on no-fault risk that applies to pretty much everyone equally. How are you going to get bad drivers to pay for hail damage? How are you going to get bad drivers to pay for a tree falling on your car? How are you going to get bad drivers to pay for an accident caused by a random tire blowout?

The personal risk component can be accounted by “perfect” information and that component can get bigger or smaller depending on your definition of perfect, but there’s another component which can’t.

With interest, the growth is superlinear

What if you have perfect information and conclude that your chance of being in a terrible accident, requiring tens of millions of dollars of medical care and property repair, is 1% for every billion miles of driving, and you’re the unlucky person who happened to be behind the wheel. Will you have enough money in your piggy bank to cover it?

Maybe you could argue you shouldn’t have to cover medical expenses if we had a single payer system—the money to mitigate medical risk from driving still has to come from somewhere.

Maybe you could argue that damage to property should come from those property owners’ insurance.

What if you don’t get into a terrible accident, you just get into a boring accident where you total your car and don’t hurt anyone. You know the odds of this are low, chances are it won’t happen in your life, but it will probably happen to someone you know. What if it happens to you, when you’re very young and have a new car? You haven’t had a chance to put away any money in your piggy bank yet. You need to replace your car now. How does a piggy bank help you?

Exactly the same, as long as you don't get unlucky and have an accident before you've saved up enough. Which is the entire point of insurance.

Time for a credit union version of insurance coverage.

They exist, they are called mutual insurance companies.

https://en.wikipedia.org/wiki/Mutual_insurance

This already exists. I believe State Farm is one of them.

Correct. As a State Farm policy holder, I get an annual letter reminding me that I am also an owner and have governance rights (basically a proxy vote). More similar to Vanguard than a credit union.