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 minority that happens to be struck by an improbable catastrophic event (with the insurer taking a share as the transaction-facilitating middleman, of course). Thus a small possibility of a catastrophic cost is transmuted into the certainty of a bearable cost. This wouldn't be possible if instead of getting you off the hook, the insurer burdened you with an immense debt in case of disaster.
(A corollary of this observation is that the notion of "health insurance" is one of the worst misnomers to ever enter public circulation.)
Alright, so this might not work for medical disasters late in life, things that directly affect future earning power. (Some of those could be handled by savings made possible by not having to make insurance payments.)
But that's just one small area of insurance. You've got housing, cars, unemployment, and this is just what comes to mind for consumers, never mind all the corporate or business need for insurance. Are all of those entities buying insurance really not in a position to repay a loan after a catastrophe's occurrence? Even nigh-immortal institutions?
To whom it may concern:
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?)