Hello...
Do u think it's rational to buy insurance?
I guess people buy insurance to protect themselves for example if
an accident happens and u end up in a hospital, then the insurance
will cover your bills. In this case you are hedging a risk by
buying insurance. But then.......this risk is supposed to be
measurable or not measurable? And more importantly, is this risk
underestimated or overestimated? How confident are you?
If someone buys insurance, he has to pay the premium. In other
words he pay somebody else to carry risk for him. In this
transaction one party shifts the risk to another party.
Who sets the price in this transaction? The buyer or seller? The
seller, in this case the insurance company, the carrier of risk. He
sets the premium price himself and you choose to buy. He agrees to
carry risk for you as long as you compensate him in the form of
premium.
That means for insurance companies not to go bust, they have to
measure the risk like the probability of you getting hit by a car
in the next 10 years (or whatever) and then set a higher price for
the premium.
And for you not to lose, you have to get hit by a car sooner, in a
higher probability than it is covered in the premium
calculation.
In this transaction one of the party must be a sucker.
Is it you or the insurance company?
(to be continued)
