Yes, some life insurance companies can make mistakes or get unlucky. after a few went bankrupt from whatever you are imagining, you'd think that the remaining companies would change their risk models or simply charge higher premiums?
No. Many people have family/kids and want to care for them, and their plan A is to work until retirement. If they die prior to that, the family/kids would be in dire straits. That's plan B, the issue life insurance solves perfectly well.
That, in fact, is the general (and beneficial) function of insurance: You only need to provision for the expected loss (plus some fee for the insurance), not the maximum loss (which many people could not afford).
Suppose you want to insure your home against fire, which could create damage of say $1m with probability 0.1%.
Without insurance, you'd have to put aside savings of $1m (the maximum loss), that would remain untouched with 99.9% probability, and be used to cover the fire damage otherwise.
With insurance, you'd pay the insurer $1m * 0.1% = $1000, plus a bit on top to cover their cost and profit. In case of fire, they cover your loss. Everyone wins.
So, with insurance you replace provisioning for the maximum loss by provisioning for the expected loss plus a fee.
(That's why one should not get insurance for small items (where one can cover the max), such as baggage or mobile phones or so, but for large items, such as house, life, health).
Oh, that's what you mean. Yes, insurance is there to smooth out risks. And I agree that items you can self-insure, you probably should.
Similarly, I can't really understand insuring against expenditures that are certain. Eg insuring for the cost of routine pregnancy (as opposed to insuring for complications only). Or even worse: yearly allowances like 100 dollars flat for new glasses: just decrease my insurance premiums by that 100 dollars, please. (Unless it's a tax dodge, then it makes sense.)
Perhaps some life insurance products fall into that category. For many families, though, term life insurance plays a big part into ensuring financial security if one income earner dies prematurely.
It doesn't matter whether your counterparty for your insurance is a collective or a single individual like Warren Buffett.
The 'collective' part is a distraction when trying to understand insurance.
Similar for insurance to work you don't need to have a group of people who are in the same situation as you: in principle an insurer can work out the risks, even if you are in a unique situation.
It's just that working these things out costs time and money, so it's cheaper for you, if you are like everyone else.
Life insurance, in the past, was frequently illegal.
I'd argue that it should be illegal again, as a moral hazard (directly contributing to countless murders and other schemes) and as a particularly morbid form of gambling.
In the US, a reasonable estimate is dozens of murders per year. I don't know if we can do any better without running a study: There's no good data easily available; the murder clearance rate in the US is now quite low; most insurance killings are, of course, staged to look like accidents.
Jeez.... I guess in that scenario I become a billionaire because it will be very easy to scoop up some VC money to snoop up some of those newly unemployed actuaries to monopolize the market at a profit margin an order of magnitude larger than any of my now non-existent competition, because this is a financial product and doesn't require months of building a factory or something to offer.
If you think it's that simple, you have no idea what you're talking about.
How many years experience do you have in the insurance industry that you're so confident to talk like this?
> because this is a financial product and doesn't require months of building a factory or something to offer.
How many financial instruments have you launched? If the answer is zero, you should refrain from any conversations on the topic because your opinion literally means nothing.
I think you are misunderstanding the counterfactual.
Right now, it would be hard for an amateur to make a living starting up a new life insurance company, because there's lots of competent competition.
However, _if_ all existing life insurers went bankrupts, then, yes, you could easily make a killing by starting a new slightly less incompetent life insurance company.
I do actually think it's that simple, yes. Term life is just not that complicated a product at heart.
Onus is on you to prove that if every single life insurance provider was suddenly Thanos snapped out of existence tomorrow, we wouldn't see a swarm of hungry financial professionals swoop right back in to recreate the service within weeks. That seems like a laughable claim to me, but maybe you know something I don't.
(Edit, for future readers: ecb_penguin seems to have missed the question earlier in the thread I was responding to:
>... and the question was about the aggregate effect. What happens if all life insurers go bankrupt?
Emphasis mine. This was to clarify that yes, the original commenter meant literally all providers.)
Ok, so you have no experience and you're just making things up.
> Term life is just not that complicated a product at heart
Sure, it's easy if you don't know what you're talking about and just make stuff up!
> Onus is on you to prove that if every single life insurance provider was suddenly Thanos snapped out of existence tomorrow
Literally nobody said that would happen. Now you're arguing points that nobody made.
You have no experience in the area, arguing things nobody said. You're perfect for VC money, lmao.
> That seems like a laughable claim to me
Nobody made that claim. Why are you laughing at things nobody is saying? That's weird.
> That seems like a laughable claim to me, but maybe you know something I don't.
I would 100% guarantee people that have worked in an industry know more about it than you do.
Textbook demonstration of the Dunning-Kruger effect. You have no knowledge or experience in an area, but you're confident you know how it works, moreso than the actual experts. https://en.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect
"the Dunning–Kruger effect is the thesis that those who are incompetent in a given area tend to be ignorant of their incompetence, i.e., they lack the metacognitive ability to become aware of their incompetence. This definition lends itself to a simple explanation of the effect: incompetence often includes being unable to tell the difference between competence and incompetence."
I think this very accurately sums up your comments.
