I'd like to pose a related question. Why is insurance structured as up-front payments and unlimited coverage, and not as conditional loans?
For example, one could imagine car insurance as a options contract (or perhaps a futures) where if your car is totaled, you get a loan sufficient for replacement. One then pays off the loan with interest.
The person buying this form of insurance makes fewer payments upfront, reducing their opportunity costs and also the risk of letting nsurance lapse due to random fluctuations. The entity selling this form of insurance reduces the risk of moral hazard (ie. someone taking out insurance, torching their car, and then letting insurance lapse the next month).
Except in assuming strange consumer preferences or irrationality, I don't see any obvious reason why this form of insurance isn't superior to the usual kind.
Well, look at a more extreme example. Imagine an accident in which you not just total a car, but you're also on the hook for a large bill in medical costs, and there's no way you can afford to pay this bill even if it's transmuted into a loan with very favorable terms. With ordinary insurance, you're off the hook even in this situation -- except possibly for the increased future insurance costs now that the accident is on your record, which you'll still likely be able to afford.
The goal of insurance is to transfer money from a large mass of people to a m...
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This thread is for the discussion of Less Wrong topics that have not appeared in recent posts. If a discussion gets unwieldy, celebrate by turning it into a top-level post.
(After the critical success of part II, and the strong box office sales of part III in spite of mixed reviews, will part IV finally see the June Open Thread jump the shark?)