Quote:
Originally Posted by Dirkadirkastan
Insurance works because the sum of a bunch of random variables has a more predictable effect than just one of the random variables. Roll a fair die once, and you could get anything from a 1 to a 6. Roll the die 1,000 times, and you'll most certainly average around 3.5.
A client may not have any clue what they will need to pay in the case of an emergency, because the variance is so high. But an insurance company is willing to shoulder the burden, because it knows pretty accurately what it will likely be paying over 1,000 policies. An insurance policy allows the individual consumer to convert the risk into the same predictable loss that the insurance company experiences overall.
The insurance companies make their money by investing the money earned up front, not just wild overcharging.
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very well stated...
From the consumer's perspective, the most desirable thing (that is also reasonable) is to be placed in a pool with people with similar risk profiles.
The 24 year old yoga instructor doesn't want to be pooled with fat smokers, because the average risk of that pool will be higher than her risk...she'd effectively be subsidizing the fat smokers.
The fat smokers would like to be pooled together with the yoga instructor, but they won't be able to as long as the yoga instructor has some measure of freedom in her choice of insurance plans. The best they can hope for is not to be pooled with the hemophiliac heroin addicts.
At the end of the day, a person can't escape the cost of their own health care any more than they can escape the cost of maintaining their car...their own habits and their genetic fortune or misfortune just comes with the territory.