Using EV calculations beyond the poker table

I appologize if this post is too off topic for the forum and if it gets locked so be it.

I was having a interesting discussion with some friends about different types of insurance and why they are or are not worth purchasing. The thought of doing an EV estimate occured to me. Has anyone thought of insurance from this perspective? I.e. on average do you expect to gain or lose money from purchasing some type of insurance. I say you lose money on average otherwise how would the companies be making money? Is it possible to make approximate calculations for the EV of any kind of insurance, i.e. car insurance, life insurance, insurance for your ipod. Thoughts? /images/graemlins/diamond.gif

[illegit]

If you are equipped with some real world data it can be done. i.e. if you were buying car insurance you might want to know the % of people a year (maybe narrowing it down by sex/age) that get in accidents and how much on average they get after the deductable etc. Once you know all that it's pretty straightforward.

[UATrewqaz]

I work in the insurance industry and had a brainstorm

Ok you pay like what $125 a month car insurance let's say (some are more, some are less). Ok you also have say a $500 deductible on your car.

Instead of having insurance what if you put $125 in a personal savings account every month. After a year you would have roughly $1500 (excluding interest). This should be enough to cover any minor fender bender.

After 2-3 years you will have a substantial sum of money should you get into a serious accident you can use to fix your car, in full.

There are only two risks.

1. YOu get into a serious accidnet early in the car's life.

2. You complete total your car at some point, ie catestrophic loss , say 10K +

All you need to do a +EV calculation ont his is the % of drivers who total their cards, and when is the average time frame when they total it.

You also have ot factor in driving skill, as some people are worse drivers and therefor more prone to accidents.

You also have to factor in the risk of the car getting stolen or vandalized.

Good point however theres more to car insurance than all that. I believe the main reason that car insuance is manditory is NOT to fix your car when you run into the tree in your front yard, it is to pay some hospital 100,000$ when you cause an accident thats your fault and you injure someone severely. How would this factor in to the calculation? Because if you don't have insurance and you hurt someone else you will probobly lose everything you own.

This factor makes me think its pretty hard to make EV calculations with car insurance. Unfortunately I don't really know a lot about other types of insurance.

What about something like house insurance that you don't actually have to buy, something where you actually have to make a decision (that should factor in EV in my opinion) about whether or not its worth it. Even if it was aproximated as -EV could it still be worth buying insurance just because of how much is at stake (a 300K house would be a lot to lose)? /images/graemlins/diamond.gif

[dabluebery]

Everyone has to have car insurance for this reason. It's a law. That's not what he's talking about.

There's no law saying you have to have collision or other comprehensive coverage, like glass, theft, etc. You collect on those claims when you have to make a claim on your vehicle and you're at fault. That's it.

Having collision and glass is essentially betting against yourself, period. So making savings approximately equal to the insurance premiums is +EV, because on average, insurance companies make money on your premiums.

That is, of course, assuming that you're confident you won't total your car / need to make claims.

Have you ever heard of an actuary? Actuaries are the people at insurance companies that do the EV calcs that you are talking about. And yes, those premiums are designed to be negative EV, b/c the company will calculate both explicit profit margins and contingency charges for taking on the risk.

The main reason insurance is popular is because people can't handle the variance, but the insurance company can. They are collecting premiums on 1000s or millions of people, so when a few have accidents, need transplants, or have their house burned down, on average the company can swing it with no trouble.

Excellent answer. So the only way I should be getting something insured is if I couldn't financially handle losing it?

[Jimbo]

[ QUOTE ]
Excellent answer. So the only way I should be getting something insured is if I couldn't financially handle losing it?

[/ QUOTE ]

Peace of mind should enter into your decision as well. Also you should consider the value of loss of use or time lost and it's value to you. Inflation is another factor as well as obsolesence.

Each item you wish to insure should be considered seperately for the above reasons.