Jasz
VIP Contributor
While it is easy to be positive about the advantages of insurance, it is important to also think about the disadvantages of insurance as well. Insurance is a form of investment and so it has both advantages and disadvantages just like other forms of investments.
Insurance, which is a financial contract in which one party undertakes to make payments to a second party if certain specified events occur, has certain disadvantages. The amount of the premium—which is the price that must be paid for acquiring insurance protection—is influenced by the cost of paying for such protection. The cost of paying for insurance protection depends upon two factors: the per capita risk that is insured and the profit margin that is sought. However, there are also other relevant costs, such as those of obtaining information bearing upon an insured risk or those of monitoring an insurer's behavior.
The primary disadvantage of insurance is that it adds cost to the transaction. If a seller can get $100 for a good that would otherwise cost $110 to replace, the seller has an incentive to sell without insurance. This can lead to adverse selection, where only high-risk buyers want insurance, so that sellers will only sell insurance to such buyers.
It is important to remember that any insurance, even if you never need it, can pose several difficulties and disadvantages.
Insurance, which is a financial contract in which one party undertakes to make payments to a second party if certain specified events occur, has certain disadvantages. The amount of the premium—which is the price that must be paid for acquiring insurance protection—is influenced by the cost of paying for such protection. The cost of paying for insurance protection depends upon two factors: the per capita risk that is insured and the profit margin that is sought. However, there are also other relevant costs, such as those of obtaining information bearing upon an insured risk or those of monitoring an insurer's behavior.
The primary disadvantage of insurance is that it adds cost to the transaction. If a seller can get $100 for a good that would otherwise cost $110 to replace, the seller has an incentive to sell without insurance. This can lead to adverse selection, where only high-risk buyers want insurance, so that sellers will only sell insurance to such buyers.
It is important to remember that any insurance, even if you never need it, can pose several difficulties and disadvantages.