RH is RIGHT about insurance

I think Robin Hanson is essentially correct about his views on why microinsurance is such a hard sell.

Last week I wrote that people think that their decisions influence the outcome of those decisions. This is especially true with buying insurance. Buying insurance, for most people, on even risky things is a tacit admission of fallibility. Auto insurance is mandated, health insurance is used often and life insurance is about the family. But we simply do not insure against some of life’s biggest risk (and, since I’m reading Taleb, we’re not even talking about Black Swans here, which you can’t really insure against anyway by definition).

But I wonder what other incentive signals might be at play. Is there really no market for microinsurance, is government signals creating too many moral hazards to make people view this type of insurance as a necessary cost?

Prospect theory tells us that people are very risk averse and overweight the likelihood of extreme events occurring. Why then do we not insure against those events?

Perhaps I am correct in postulating that we think that deciding not insuring ourselves against these risks is effectively protecting us against them (or at the very least, what we ignore cannot bother us). It’s a frightening thought, and explains catastrophes like Katrina or 9/11 are apparently made worse by poor disaster management strategies.


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