Can insurance be fair?
The European Court decision to prohibit insurance premiums varying between men and women is going to upset the insurance industry. They are crying that it is not fair, since women drivers, for example, are safer than men.
But it also raises some basic questions about insurance. The whole point about insurance is to share risk. If you are not sharing it, then you are ‘self-insuring’: just paying for disasters yourself as they come along. Many large companies do just this, effectively simply saving up for a rainy day. But it doesn’t so work well for most people.
What people pay for insurance cover is on the whole determined by the risks they run, but that risk depends on how many people and of what kind are sharing or pooling the risk. If the only people who are in that pool are just like you, then you are not sharing risk, you are self-insuring – and paying the insurance company to manage your savings on top.
So the more closely targeted insurance cover is, the more profitable it will be for insurance companies, but the less it will make sense for people to use it.