Insurance: Why do we put up with it?

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Insurance: What an interesting concept

First off: Insurance is not a good deal. You pay money each month (bad deal), then you must trade your health to get the “benefits” (bad deal). To see any money back, to get “your money’s worth,” you need to use the system, and using the system means you are not independently healthy… so it’s a lose-lose.

Same goes for Life Insurance. Gotta die to get the moneyzz. Bad Deal.  But I do it anyway… you too.

No one is !happy! with their insurance, right?  Well, that might not be true; it all depends on your comfortability with risk. Some benefits may exceed your expectations even! It’s mostly in what you

think you are getting for your money, what you think you are “owed” because of your premiums, how much it hurts to pay those premiums, if those premiums changed with no change in value/quality… it is a complex beast.

It is basically a huge risk assessment.  Which is how we get suckered in to the idea in the first place.  We are, as humans, loss averse and risk averse.

What do we think the term “insurance” means anyway? On face value it means that you pay a little bit, more often, to be covered/cared-for when something too big to handle comes along.

There are some assumptions made there and that can be where the trouble is. What do I consider “being covered” and what is “paying a little”?

… current insurance is not really “paying a little and then be covered when things get crazy.” You pay per month, and then you pay when you use the system. There are loops and stop-gaps and fine print and exclusions… the real version is not that clear. This is where we can get upset as well, when our anticipation of service is not met and our expectations are under-served. Womp womp.

So the above statement (pay a little, then you’re covered) is a false pretense that the current system still holds to… somehow I still feel like that’s how it works.  And you and I buy in… we fear the risk.

The Psychology of Insurance:

Risk Aversion: In general Risk-aversion is a preference for a sure outcome, over a gamble with higher or equal expected value. In the case of insurance, we prefer $500/mo guaranteed loss to the chances of a $13,000 event. We are so risk averse to the big pay-out, that we choose not to spend $0 month after month… (we even have difficulty saving $500 month after month to prepare for an event, just because we fear the risk that an event may come before we have our sta$h together.  We spend $500 and call it safe.

Loss Tolerance: Daniel Kahneman (see short video here) has shown that humans are also loss averse, meaning we dislike loosing things way more than we like getting things. (the full psychology of Risk/Loss is above my pay grade, I turn you to Thinking Fast and Slow for the most digestible form of understanding this stuff.)

Turns out we dislike Loss more than 2x greater than we like gains. Ex: We are willing to bet $1000 to gain $2000 (research supports this), so in essense, willing to lose/risk $1000 (which would hurt) but it’s only worth it for a double return.  We are not willing to risk $2000 to get $1000… or even risk $1000 to get $1000… the thought of loosing the $1000 is too great and not worth the gain, even though it is a gain.

How can insurance companies can take the Loss? Well, in the example above, if you are a billionaire, risking $1000 is not a big deal, almost no matter the odds, the risk is dampened due to your perceived value of the dollars… which is much less than a typical citizen.  So you, the billionaire, are willing to take the risk to make gains.

Insurance companies are the same.  They are willing to risk paying $15,000 for a hospital stay at random times, if you give them $500 a month for the rest of your life… the deal works for them because they are protected from the Loss, and the upside is income on income.

Those protected from risk/loss are free-er to capitalize on those fearful of risk/loss.  Choose any financial example from the past decade, including the housing boom/bust, the economic decline, etc… it is those that lost some in the turmoil… but were willing to risk, that made out nicely.

So your psychology is keeping you in the insurance game.  It might be the right thing to do, I can’t say that it’s not.  I have home insurance because if that tree falls, I want the protection. But I pay a price for the fear of that risk. If I could hold off on my fears, save my own money (for the tree-fall or health) then the decisions about who is paying and how, certainly change. (this is the trend… right?! HSAs, #cashPT, etc)

Now, this all does not address current issues, like the fact that costs are hidden and distorted by insurance and copays, or that somehow a risk mitigating service (Insurance) has taken control of an entire industry (health), etc… those seem like other branch topics altogether.

Really interesting stuff to think about, and the impact of these risk decisions is far reaching. It makes me want to explore the behavioral-cultural concepts around these things much more…

Perhaps we do have some control. If you could take the risk to pay yourself, instead of a company, to “insure” yourself… well, would you risk it?

Matt D

*If you really want to nerd out you can crack your brain over this article: Prospect Theory: An analysis of Decision under Risk. This one, too, I barely have the mental clearance for…

6 thoughts on “Insurance: Why do we put up with it?

  1. Insurance is a concept that has existed for thousands of years.
    There is no free market without insurance.
    Most entities cant afford a big loss, so they “sell” that risk to another entity, who has many such clients, and they cover the loss.
    Premiums are collected, invested, and insurers stay in business if they pay out in losses and expenses less than the total of premiums and investments.
    As for individuals, car ins and home ins and life ins are true insurance.
    Small premium for a big loss that one hopes won’t happen.
    Health ins is really not ins in the traditional sense, because it is a known that it WILL be used. No one has a health ins policy that isn’t used.
    So the dynamics are different.
    The current system with employer’s paying for much of it has no real logic, but it has been so since about WWII, I think.
    Many other models are possible.
    Much to say, but ins is impt and needed and necessary.


    • Right, G.
      Health ins is payed to buy a service/product. Other insurances are stop-gaps to major loss…and seem to be providing something else…

      Indeed the semantics are fascinating, but the behavioral aspects and insurance’s role in our society is such a phenomenal construct…
      I’m attempting to understand 1)the basis for traditional ins. 2) how we got to, and asked for , allowed for, the current system.
      As always, thanks for reading and commenting
      -Matt D


  2. In early 1900’s hospitals were places where people went to die.
    Then they marketed themselves- come have your baby here-
    Blue cross was created, but few bought it.
    Great depression made it tough.
    Then came WWII.
    To get employees, businesses said they will pay for workers health care. This worked. Got many women out of the home.
    Then IRS said er payments not taxable benefit to worker.
    And away we go.
    Short version.


  3. I think the only thing we actually need would be catastrophic insurance in case a major event happens. Regarding all our other healthcare costs ( OV, Meds, Dental, Vision, PT, OT, Chiro) should be paid out of pocket. Labs and diagnostic tests included in our out of pocket costs, that $500/month premium could be a one time payment for an MRI or CT scan that is needed.


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