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Metus comments on Open thread, July 28 - August 3, 2014 - Less Wrong
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Since we are way too confident that bad things won't happen to us I have been researching how to prepare for several rare events with disastrous consequences. Starting the research I realised I have yet to find out what those events exactly are. So far I have found these, remedy given if known:
Some of these are more economic in nature, some take a massive psychological toll. To deal with an event means to either reduce its possibility or to reduce its impact. Insurance helps with the latter, psychological preparation further takes the edge off. Reducing the possibility can be through more expenses e.g. higher quality items or through change in behaviour.
This project is very much a work in progress. Should I complete or abandon it I will share the state I leave it in. Please post all your thoughts and relevant material. I am especially interested in some numbers such as probabilities of these things happening (like the oft-stated number of 50% divorce rate).
Anytime you're thinking about buying insurance, double check whether it actually makes more sense to self-insure. It may be better to put all the money you would otherwise put into insurance in "rainy day fund" rather than buying ten different types of insurance.
In general, if you can financially survive the bad thing, then buying insurance isn't a good idea. This is why it almost never makes sense to insure a $1000 computer or get the "extended warranty." Just save all the money you would spend on extended warranties on your devices, and if it breaks pay out of pocket to repair or get a new one.
This is a harshly rational view, so I certainly appreciate that some people get "peace of mind" from having insurance, which can have a real value.
Though note that an insurance may regardless be useful if you have self-control problems with regard to money. If you've paid your yearly insurance payment, the money is spent and will protect you for the rest of the year. If you instead put the money in a rainy day fund, there may be a constant temptation to dip into that fund even for things that aren't actual emergencies.
Of course, that money being permanently spent and not being available for other purposes does have its downsides, too.
Agreed on all points.
I appreciate the extention on my thought process. It is very clear to me that since you have to pay an insurance premium buying insurance is necessarily a net loss. Buying insurance is very meaningful before a rainy day fund is filled up, if emergency financing methods are not available through a credit card or very trustworthy person and if the insurance contracts include other services, e.g. getting liabilities of the other party paid in case of their unwillingness to pay.
This is implicit in my phrasing
but made explicit by your post and will be included in the end report. Generally I come to the conclusion that buying insurance is a necessity unless you are perversely rich and even then there is some meaning found in insurance as even insurance companies themselves are insured. Just go for contracts with high co-pay to lower the exposition to the insurance premium which is basically just unnecessary bureucracy in case of small claims, as in the example of the $1000 dollar computer. For things in that price class I read an interesting sentence "if you can not afford to buy it twice, you can't afford it in the first place" alluding to self-insurance.
An excellent maxim, which has crystallised for me why I am so reluctant to move to a bigger house, even though I would like one, and I could buy one immediately for cash plus the price I'd get for my current house. It's because I can't afford to do that twice. With an extra cost-of-a-house in the bank I might.
It sounds like we're largely on the same page, noting that what counts as "disastrous" can be somewhat subjective.
I believe that some foreign large-scale catastrophes could also negatively impact one’s well-being. Extreme example: imagine if everyone in the world suddenly died except the citizens of your country. Psychological toll aside, your country’s necessary transition from international trader to autarky would be painful. Losing trading partners = losing ability to specialize = reducing economic efficiency = falling wages.
The reinsurance markets often deal in the risks of the disastrous. Maybe you can evaluate reinsurance offering documents and prices in order to extract the market’s implied probability of similar events.