This is what insurers already do. Using whatever information they can get on all their anticipated customers, they make it so the expected value of your costs is less than the expected value of all your payments. Going purely by expected value, insurance is a losing game for the customer.

The reasons it's a great idea are (1) you don't get to borrow from your future savings account's balance, and (2) insurers often encourage not-totally-rational customers to practice better habits to reduce costs. The first point is what customers want: avoidance of bankruptcy.

That's not quite true. A pool has less variability than an individual.

My expected cost of future accidents might be N, with variance M >> N.

The insurance pool can absorb it if I have a catastrophic outcome, but I can't.

So it may be worth buying an insurance contract with a negative expected value to hedge risks.

> If an insurer could see the future, he would give me a policy that costs (cost of my future accidents + X% profit)/(my lifetime)

But what happens when (cost of my future accidents) is very high? Are you as an individual just uninsurable? Is that the best outcome?

Distribution of cumulative healthcare costs maybe looks something like a lognormal distribution. Most people fall into a "normal" range but then there are outliers who can cost far, far more. But even though their individual costs are high, their absolute numbers are low compared to the total pool. So everyone can pay something like a normal expected cost, plus a small fraction, plus the profit overhead, and thereby cover those outliers.

Large employers will negotiate pooled coverage like this for their employees. That's why the 21-year-old with zero health issues pays the same as the 60-year-old with dialysis. But, it's the fact that this is essentially a monopoly market on those employees that allows this. They can create a single pool because there's no alternative market. (At least functionally, because the costs of those external market players don't get the employer subsidizing the plan.)

Without that monopoly and subsidy, market forces come into play. For those people who have a high likelihood of lower costs, if an insurer can create a pool targeting people with those same signals, then they can offer that pool lower rates and capture business. However, that necessitates that the remaining pools become more expensive. This is a classic race to the bottom, but with the added complexity of a zero-sum game.

Your stated position is the logical end-game of this direction. But it's not the only functional solution. One could also switch instead to a single pool over the entire population -- aka, single payer.

So, what happens in less mental markets (like auto or home) is the following: - new source of data becomes available, Insurer A starts using it

- They price policies based on the new information, causing some customers rated as high risk to move to other insurers without access to this data.

- Insurer B realises that they are making less money (or more realistically, losing more) and invests in source of data.

- Higher risk customers end up paying more for insurance.

- Smaller competitor comes in and insures higher-risk customers (Quote Devil in the UK are a good example here), and offloads the risk to reinsurers. Additionally, because not all high risk customers will claim, smaller competitor can make money.

- New source of data becomes available, rinse and repeat.

Note that the difference between insurers having more granular data vs aggregated data is not less price discriminination, it's price discrimination based on coarser features (zip/post code, age, etc).

Calling the home insurance market less mental to someone in Tampa Bay is laughable. The only reason I'll even be considered by insurance companies other than the public-run Citizens is because I'm not in a flood zone [0]. Most every other company won't cover Florida, because why include high-risk areas if you have a choice? Just exclude them and be done with it, right?

And that's the whole point behind my prior comment. As long as insurers can directly exclude individuals -- or indirectly exclude through price discrimination -- this is a completely sane way for them to behave. But it's not the only way to build the system, and this is definitely one of those times to ask, "Is this the best this society can do? Is this what our society actually wants?"

And I also have a feeling auto insurance is more sane in the UK due to the public healthcare being offloaded. In the US they severely cap medical payouts. We're talking like tens of thousands, which is laughably small here for anything serious. That will cover one ER visit. Instead, they give a big number for liability coverage of injury caused to others. So if the incident wasn't your fault, you're relying on that other person's liability coverage to make you whole, not your own insurance. Unless of course they were uninsured and you have uninsured motorist coverage. And if you're found at fault, then better hope you have some other way to cover that gap.

[0] But I still go with Citizens as long as they'll keep me. Because I'd rather pay directly into the public system than pay some for-profit company that's just going to beg for public bailouts when something big happens anyway.

Yeah, I worked in the industry for a while based in Europe, so that's the context of my comment. I deliberately avoided health insurance, both because I don't know a huge amount about it, and because it's so mental in the US.

I do agree with you in terms of the societal benefit piece, but was just trying to give some insight with respect to how the industry works now (without taking a position on how it should work).

My personal belief is that we should only allow individual level features to be considered, because otherwise you end up in a position where people living in richer areas both have more money and pay less for insurance (which is rational from an insurer perspective).

That being said, insurance doesn't really make any money, and is probably something that would be better provided by the state (especially for things like auto, which people are forced by the state to have).

> Yeah, I worked in the industry for a while based in Europe, so that's the context of my comment.

Just want to let you know that I appreciate the info. Cheers!

Insurance should pool random risks but it's not meant to pool all risk. You know your pool of 100 people all have 5% chance of a heart attacks. You don't know who will actually have a heart attack, that risk is pooled. But you don't pool people with a 1% or a 20% chance of a heart attack the same if you can avoid it.