Preventing Risk - How Insurance Works
Just like we saw in my last post, every single decision we make carries with it some risk. So, how can we minimize the chances that bad outcomes will materialize?
Well, beyond just not doing something risky, there is one major option available:
Insurance works by aggregating and evaluating risk so that every client pays accordingly to their own situation.
If this is done correctly, the insurance company will always have money to give to the few clients that actually see a bad outcome come to reality, such as their house burning down or their investments going poorly.
This creates two main benefits for the consumer:
The buyer of insurance is now responsible for their future, they have an even bigger incentive to save now and buy insurance, to mitigate any future losses.
Insurance allows people to not be dependent on the state or charity to help them in case of a disaster
After the Insurance company studies the client's risks, they're pushed to share that information, because the client likely wants to know why their insurance is so cheap/ expensive.
Insurance is everywhere
And, due to its nature, insurance is everywhere, be it with a company doing most of the work, or by having you personally do it, like in these three cases:
When investing in a coin, you can also short it has a form of Insurance, for example.
When buying a house, you can short the real estate market, as a way to Insure yourself against a market crash
Government/ Corporate Bonds
Finally, if you buy bonds from a government, you can short its currency to Insure yourself against default and, in the case of corporate bonds, you can short their stock!
Insurance is a way to very effectively protect yourself against risks, even if you're limiting your upside a little!
What types of Insurance do you think are more necessary? Which seem superfluous?
Thanks for reading! Remember to Upvote and Share, so that I can keep making many posts per week!
Take a look at my last posts, about Risks and Finance!
- Risk - Why nothing is risk-free and how to compare different Risks!
- Finance is a Tool - What does that mean for Society?
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