I think you’re confusing expected value with expected utility.
When I buy insurance, I fully anticipate that the bet will have negative expected value, that is, the present value of all my future premium payments is more than the present value of all future payouts from the insurance company. That’s mainly how insurance companies make a profit — by aggregating risk. (They actually do somewhat better than that, because they take our money and invest it more efficiently than we can.)
So why buy insurance? Because I am purchasing utility, not value. (Try googling “Expected Utility Theory” if you don’t understand this statement). By allocating part of my earnings to insurance, I greatly reduce the disruption and unhappiness of a major medical bill, or a car wreck. In plain terms, a bill for $10,000 is far more than 100 times as inconvenient as a $100 bill — and a $100,000 obligation can definitely change your life for the worse, through bankruptcy, loss of home, etc. What I am purchasing is risk reduction, without the expectation of earning a net profit on the transaction.
I think your views would have more impact if you actually understood how insurance works.
Having said that, your fundamental point is still valid — for some people, their expected utility for insurance is negative and thus it is not a good buy. However, it’s not the young single person that is the paradigm — it’s Bill Gates. Consider when you drop by your local Best Buy to purchase a DVD player. You are always offered an extended warranty, and you should always decline, if you can afford to purchase a replacement DVD player. Similarly, Bill Gates doesn’t need to pay Blue Cross / Blue Shield for the peace of mind that he will never have to pay a $100,000 medical bill. But of course, working up sympathy for Bill Gates is a tough row to hoe….
Regards
BBB
