> "If a group of ten people all have a one in one-thousand per year chance of a million-dollar loss each year"
More importantly, each person in this group has a different chance of a million-dollar loss each year, and it's important if you're going to write a policy to get that chance as accurate as possible.
Some members of the pool have a 1-in-1000 chance per year, others have a 1-in-10 chance.
An efficient insurance market assess who has what risk, and offers premium commensurate with risk. If you're one of the 1-in-10 people you pay more.
A risk pool combines resources to pay out for losses that are otherwise individually unaffordable by each member of the pool. It is explicitly not a mechanism - nor is the intent to - have members with wildly different risk exposure pay the same premium. In fact the only way it can sustainably function is if each member's risk level is accurately gauged to some level of precision.
There are risk pools where the intent is to subsidize higher-risk members, where we believe that such subsidy is a social good - health insurance for example is one of those things.
But I don't see a good argument that home insurance is, or should be, one of these types of risk pools.
The EV of insurance is negative, in the sense that the expected money that one can expect to get out of insurance is less than the premium.
Insurance is for catastrophic losses. I don't pay for insurance to make a profit, I make it to avoid the large tail loss of having the house destroyed and having to pay the value of the mortgage to the bank.
No, it's still very valuable since I'll never have to pay out of pocket for that million-dollar incident. The point isn't to save money, it's to distribute the incident payments over a long term.
These kinds of questions are a little mind-binding. Insurance is a financial services business. If the net EV of insurance was positive, how could any insurer remain solvent?
More importantly, each person in this group has a different chance of a million-dollar loss each year, and it's important if you're going to write a policy to get that chance as accurate as possible.
Some members of the pool have a 1-in-1000 chance per year, others have a 1-in-10 chance.
An efficient insurance market assess who has what risk, and offers premium commensurate with risk. If you're one of the 1-in-10 people you pay more.
A risk pool combines resources to pay out for losses that are otherwise individually unaffordable by each member of the pool. It is explicitly not a mechanism - nor is the intent to - have members with wildly different risk exposure pay the same premium. In fact the only way it can sustainably function is if each member's risk level is accurately gauged to some level of precision.
There are risk pools where the intent is to subsidize higher-risk members, where we believe that such subsidy is a social good - health insurance for example is one of those things.
But I don't see a good argument that home insurance is, or should be, one of these types of risk pools.