The problems with Insurance - Moral Hazard and Selection Bias

in Project HOPE3 years ago



I talked about Insurance in my last post, but, in short, you can think of it as any imaginable way of minimizing risk, either by doing it yourself or by paying a company to do it for you.

The problems

While choosing to buy Insurance or not may seem like a purely mathematical question, comparing the cost of Insurance with the value of the risk mitigation, it's not that simple.

Most of the problems that arise are caused by human's interesting way of behaving, such as:

Moral Hazard

When there is little incentive to prevent risks, people tend to risk more!


A man buys car insurance with full coverage for any damage the car sustains. He will enjoy driving a lot more because he's a lot less stressed about something happening to the vehicle.

That also means that we won't take extra precautions when driving, leading to a higher risk of an accident.

Selection Bias

Only people who need insurance will seek it out!


A company sells health insurance. Most of their clients will either be in poor health or expecting some disease in the future, otherwise, they probably wouldn't buy insurance.

This leads to the company having to charge a higher premium, which further discourages healthy people to buy Insurance.


Insurance is generally a good deal, but our own 'monkey brains' can sometimes lead us to either waste it or simply not take advantage of it if we don't think we need it!

Do you have any ideas on how people and companies can adjust to these human quirks?

Thanks for reading!
Remember to Upvote and Share, so that I can keep making many posts per week!

Take a look at my last posts, about Risks and Insurance!

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