The Grand Illusion
The original idea behind insurance was to provide financial protection for infrequent, but catastrophic and unexpected events that a reasonable and prudent person could not expect to be able to pay, such as dying young, major damage to or destruction of a house or building, injury to others in an automobile accident, loss of an entire merchant ship and cargo… and similar events.
Insurance started out essentially as a form of mutual risk sharing for events that didn’t happen that often but which, when they did, could devastate an individual or a business. At that time, people were (theoretically) supposed to save for smaller adverse “rainy day” occurrences.
Yet now, rainy-day-savings seem to have vanished, replaced by what seems like insurance for everything. Not only do we have health insurance (which has become a necessity, given the high cost of medical care), but dental insurance, and nursing home insurance. The latest insurance bombarding the media is car repair insurance, but there’s now also appliance repair and replacement insurance, as well as pet insurance (possibly because veterinary medical costs have also skyrocketed). That doesn’t include roughly twenty other types of insurance, such as boat or ATV insurance and identity protection insurance and personal liability coverage.
The fact that so many types of coverage exist might just go hand in hand with the fact that the U.S. has a surfeit of attorneys, but the attorneys could easily counter with the fact that Americans tend to argue over everything.
Add to that the technological and legal complexity of our modern world and the increasing costs of everything, and the failure of working-class wages to keep up with the cost of living… and, unfortunately, because people have trouble in making ends meet in paying for the basics, insurance for everything becomes the default, because few Americans can save enough to pay for all possible adverse eventualities, particularly in a litigious society.
I remember being struck when Manny in Heinlein’s classic The Moon Is a Harsh Mistress is asked about insurance on the lunar colony, and, once it’s explained to him, says he’s heard of a few bookies taking bets like that.
LEM, you’re right that it’s risk-sharing…but it’s a wager too. And, as you point out, in our litigious and expensive society, it’s a bet you kind of have to take.
I think part of the situation is not completely prioritizing as well.
Extended warranties are basically repair insurance. If a refrigerator dies outside of warranty, and you can’t afford the repair, that’s a major problem. If a dishwasher dies outside of warranty and you can’t afford the repair, that’s an inconvenience because you can still hand wash the dishes.
For pet insurance, it really comes down to how much you value the pet, especially since most pet insurance policies have deductibles and max coverage per year and lifetime. So while I love my dog, I just don’t see the value in pet insurance, and there is a point that if the vet bill was going to be too large I would say a sad goodbye.
In the UK, extended warranty insurance on appliances was long ago exposed as a scam that allowed retailers to profit from seemingly discounted goods. I would be surprised if it were different in the USA (although perhaps the basic consumer protections are less there).
I remember hearing ten years ago that for far too many people, an unexpected bill for $500 could be a tipping point into financial difficulty. Is that still the case, or has it got worse?
In 2018 it had improved, from 50% of households would struggle in 2013 to 41% would struggle. Since then it’s largely stabilised at about 37%.
https://www.federalreserve.gov/publications/files/2023-report-economic-well-being-us-households-202405.pdf
I’d expect that in most western economies, that would pretty consistent, NZ for example tends to have 35-40% rating income as not enough or just enough, and median weekly household housing costs are around 33% of weekly median household income after taxes. So for half the households their housing costs more than a third of their income. That puts a lot of pressure on people, especially as food costs keep rising.
In the UK, food bank usage has skyrocketed post pandemic, with the demand coming from people who would have been entirely self sufficient before.