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0 pointsAnthonyMouse2y ago0 comments

> I thought risk pooling was the point?

The point is pooling unpredictable risk. You don't know ahead of time if your house is going to flood. You do know ahead of time if your house is on a flood plane. Therefore, people with houses on a flood plane pay more for flood insurance.

The alternative is that low risk customers can't get insurance because they'd have to pay the same as high risk customers and that isn't worth it. Additionally, then people build tons of houses in extremely high risk areas because they can buy insurance for the same price as someone not doing something stupid, which is a moral hazard. Existing regulations have already caused this to happen in many cases.

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Terr_2y ago

> The point is pooling unpredictable risk.

This is important point about knowledge which I feel leads towards another kind of hazard: Which party is capable of predicting risk and how that information asymmetry may be exploited.

We already spend a lot of time thinking about one direction, where the insured hides a pre-existing condition or their nefarious plan to commit arson, or whatever.

But what about the other direction? What about when the insurer has tools and relationships to determine something but doesn't tell the insured?

That might either be because there's not enough competitive pressure to make them lower the premium, or perhaps they raised the premium to cover the higher risk but refuse to disclose exactly what the risk is or how they determined it.

AnthonyMouseOP2y ago

That is the problem solved by competition. If insurers know that your risk is below average then they'll want your business and therefore want to underbid other insurers in order to get it. But so will the other insurers, until your premium comes down to reflect your risk. This works even if you don't know your own risk because all you have to do is pick the most attractive price.

Of course, if you don't have enough competition that doesn't work, but then your problem is that you don't have enough competition. Which, especially in insurance markets, is generally caused by regulatory barriers.

zamfi2y ago

> is on a flood plane.

You mean like this one? https://www.yahoo.com/news/united-airlines-flight-diverted-t...

…I’ll see myself out.

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