These days it’s getting harder and harder to save money while maintaining a decent standard of living in much of the Western world. There are many elephants in the room, and I intend to criticize modern insurance. Let’s take the example of car insurance. The theory is that throughout your many years of driving a car, there’s a positive probability that you will get into an accident. Events for which probabilities can be estimated can be defined in infinitely many ways, many of which are valuable to actuaries. For example, if you are a regular driver, there is a nonzero probability that tomorrow you will be involved in an accident; there is also a nonzero probability that in the next ten years you will be involved in seven car accidents, or that you will never be involved in one for the rest of your days. These probabilities can be estimated with much higher accuracy if actuaries have at their disposal information about your demographic and biological traits, which is why you fill out a long form when signing up for your insurance.

The job of actuaries is to find averages and other functions of random variables that describe these events. Laymen have an inkling that insurance companies are stealing their money, and their instincts are in most cases right. This is surely the case when they signed a contract against their will.

For the sake of simplicity, let us consider a contract that covers all repair costs for your own vehicle and for damages to other vehicles for which you are liable. In this case, the insurance company will access their data for people who are “like you,” of which there are many. The company will calculate the average of all repair costs for the owners’ vehicles and damages to other vehicles, let us call this number X. By the law of large numbers, which is fair to invoke in this large-sample scenario, the company will neither make profits nor losses if it charges X to everyone who is “like you” for the same contract. For any other, general insurance contract, the same number X can be found with the same process.

The chief selling point for these contracts is that large sums of money will have to be incurred if uninsured when an accident takes place, the contract will allow you to spread out the cost in small monthly installments. If uninsured, the lower and middle classes would often be unable to pay what they owe and be then left in a situation more unpleasant than that of paying insurance. The problem with modern insurance is twofold, and both parts are intimately connected: Insurance companies charge (1+Y)X for a contract, and Y is obscenely large. The government forces citizens to buy insurance.

If Y was large but governments didn’t force us to sign the insurance contract, then fewer people would sign it, and profits would reflect the true value of the contract, which is bad business. If Y was chosen fairly, such that most citizens voluntarily choose to buy the contract, then the damage done by the obligatory nature of the contract would be negligible.

How can we make insurance fairer than it is today? I propose to have two general classes of insurance contracts: class A will be contracts mandated by the government; class B will be the rest. For class B I support the unforgiving free market, that market where lies and deceit are all-too common. A market that can be so harsh, yet no guns will ever be drawn, at which point the name is not trade but theft. For class A I support a system where the government will be the supplier. A privately held company will not be allowed to provide government-mandated contracts. X will be calculated as explained before, and Y will be chosen to cover other costs, like paying the salaries of the employees involved. The books used to make these calculations will be open to the public. In short, X and Y will be chosen to maintain a state of profitlessness. Petty laws and useless officials will be avoided.

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