You Pay To Outsource Your Worries
There is a mismatch between outsourcing your risks and concerns and getting something back for your money.
The Teardown
Thursday :: January 23rd, 2024 :: Approx. 5 min read
👋 Hi, this is Chris with another issue of The Teardown.
This post is a temporary departure from technology. Instead, I wrote some brief thinking about wildfires and insurance. We’re forgetting (in my view) some of what it means to outsource risk to someone else.
Back to regularly scheduled technology-ish programming on Tuesday.
Wildfires are the worst.
I’ve studied them and hurricanes and earthquakes and other natural catastrophes for most of the last 20 years. These catastrophic events ruined weekends, holidays, and vacation. And before you say it, fortunately, not more of my life and my home.
Many California residents are living a two-faced dream from hell: increasing risk from all sorts of problems (climate, fire, water) and less protection from that risk. Insurance companies don’t think it’s reasonable1 for them to do business in many areas of the state - including recent areas in/around Los Angeles.
I buy insurance, too. There are lots of reasons, some legal, some financial, but they all circle around this concept: outsourcing my worries. You outsource your worries too.
Not long ago, I talked with an insurance friend about a misconception that plagues many types of insurance and infuriates people. In short, lots of people pay premiums and expect something in return. What? Perhaps premium discounts. Perhaps discounts for other products adjacent to insurance. Maybe something (a device) for free. There must be tangible ROI.
I’ve spent most of my time in property insurance. And, in property insurance, the average person pays to protect what is often their single biggest asset: a home. A mortgage lender is a typical catalyst, requiring insurance to provide a loan.
Over time, things happen. Some are insurance events. Some are not. The best way to think about an insurance event is that it is severe and unpredictable.
So, you’re not calling your insurance company to help you (with money) when twigs and acorns fall on your roof. That happens every time the wind blows. Every year. You’re not calling your insurance company when you scratch a few millimeters of paint from your car.
Instead, you call them when something anomalous happens - a wildfire destroys some or all of your house, or your car is totaled in a highway pile-up.
What you’re doing is leaning on the system that accepted your worry (and risk) in the first place: insurance. You want it precisely in those moments.
This trade (buying insurance) involves risk and concern. I don’t have to execute sophisticated financial hedges to protect my home and mortgage interests. Instead, I pay a company to help me (with money) when I need it (severe, unpredictable) and give me peace of mind.
Why do we lose clarity on the purpose of this trade? I’m not sure.
Perhaps we’re trained more and more to understand that no one looks out for us - just themselves. So, we need to take what’s ours. We pay people and companies and we get something tangible in return. If not, we find a way to make our frustration obvious.
Can you feel that frustration? It’s pervasive. American society seems sick with the idea that everyone’s taking and we’re not getting. Do you agree? And if not, how do you characterize it instead?
Also, there are plenty of other adjacent trade-service industries where you get something you pay for, in theory. You pay a pest control company to spray and tend to nests via some monthly cost. At least you can see that they did it. A nest doesn’t expand. A plumber fixes a sink and the sink works, so you fork over an outrageous sum of money.
The ongoing L.A fire catastrophe and unruly flood of commentary about healthcare claims convince me more than ever that we need to fix the get-something-in-return problem.
Insurance isn’t a get-something-in-return product. It wasn’t and shouldn’t be. You’re paying to protect your assets from the unpredictable, and you’re paying to outsource your worries.
And what is that worth to you?
This is a major oversimplification. In short, companies that are legally required to adhere to insurance rates approved by the state choose between losing money or walking away from the state. Many chose (and still choose) the latter. Another class of companies operates in a sub-market that does not need rate approval from the state. They charge whatever they want for insurance. Some of the very high absolute premiums you read about come from these companies.
This was really good Chris. I think a lot of what you are talking about comes from people thinking the world at large owes them something. It doesn’t. My 3rd grade educated grandfather used to say, “buy as much insurance as you can afford and be glad you bought it.”