@Cmastication do you know of a calculator for "in hindsight, was this insurance 'worth it'?"
to put it another way: what magnitude of claim will make having this insurance better than regularly saving & investing the same amount as the premiums
I can imagine working all of this out from first principles, but would be even nicer to just find a calculator or explainer on the subject
@jennybryan This is actually a good dinner conversation when with risk nerds. The angle that breaks this is the "risk of ruin" conundrum. Take home owners insurance. The expected value for everyone one less than the premium they pay. Because we all pay into a risk pool and the companies running the pool make a profit. But... if you don't buy insurance and your house burns down, you're ruined for life. You'll never dig out of that.
@jennybryan So we buy insurance not because we expect the payouts to exceed the premium, but because for 10% of the folks who participate the payout exceeds the pay in and for 90% of us it does not (those percentages are made up because I can't be fussed with the actual calculations even though I could go pull some data and figure them out. I'm lazy. sorry)
@jennybryan so after a 25+ year career here is how I buy insurance. My wife and I discuss: "if disaster X hit, would it change our life style dramatically? or would we recover in a year and not really feel it?"
I end up asking insurance agents for deductibles that they think are unreasonable. And then I discuss limits that they think are odd. Because I am doing what we call "buying out the tail"
@jennybryan I want to remove the improbable but catastrophic. And by definition my expected payout is negative. But in the 99th percentile I expect recovery that greatly exceeds my premium. And if I didn't have insurance, that 99th percentile would cause me huge pain and suffering.
as this thread illustrates, I have big thoughts and big feelings. Happy to discuss more! but self conscious of thread length.
@Cmastication@jennybryan Could this be expressed in therms of a utility function that is non-linear on the expense to make the exoected utility positive? That is, the negative utility of a 99th percentile event is so much more negative than the premium, that ok average the utility is positive?
but my original quest was for a simpler analysis, i.e. purely in terms of the economic opportunity cost, with the idea that you could then overlay other facts and preferences onto that
@Cmastication honestly I guess some generic savings calculator would be a good start and I'm was just hoping someone had scratched this exact itch before 😅
in the LTC scenario, it does feel like the insurance is 'worth it' (can pay for X months of care at cost of $Y/month) at the beginning because the save and invest strategy has a cold start
but at some point, you would have amassed enough to cover the thing you're worried about, for some definition of that
@jennybryan yep, the "cold start" problem is solved by the LTC product.
What are you looking for in a savings calculator beyond P*e^rt? Monthly contributions? I typically do a quick spreadsheet to illustrate, but there are a lot of simple online calls: https://www.nerdwallet.com/calculator/savings-calculator
@jennybryan I worked for an LTC company as risk manager for a few years. Buying LTC coverage is tricky. As a buyer you are taking considerable credit risk that in 30 years the company will be there if needed. And most policies allow rate increases over time.
My wife and I don’t have LTC partially bc I can’t buy a deductible as big as I’d like. And partially because of credit & premium risk.
@jennybryan@Cmastication Very interesting thread. What I haven't considered before, and clear now, is that your risk profile changes with age.
And, no, I didn't insure my pets either.
@andrie@jennybryan both age and financial reserves greatly impact risk tolerance.
As a consultant I would try to do exercises to get executives to express their risk tolerance on financial work issues. People are FAR from “rational” about risk. Even sophisticated execs. I’m sure I’m the same. But it’s wild how folks will act highly inconsistent about risk in one area vs another.
@alexpghayes@noamross@jennybryan it gets “ranty” as I get into how evolution has not prepared us for skewed risk distributions with catastrophic tails. Our intuitions about risk are honed around the mean because, by definition, most of our species experience is around the mean.
All old risk managers ultimately morph into some version of Nassim Nicholas Taleb, much to my wife’s chagrin and dismay.
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