Why Get Insurance?
By Arnold Kling
My best guess is that most insurance is bought not to reduce risk but instead to signal prudence and caring. The first life insurance companies had a terrible time selling “bets on their death,” and only succeded when they framed insurance as what a caring and prudent husband and father did to take care of his family. While simple adverse-selection theories predict that high risk folks buy the most insurance, in fact low risk folks buy more insurance. And we don’t want to insure our big life risks because such a desire would signal a lack of confidence in our prospects.
Of course, that is Robin Hanson.
Of course, prudent people may select insurance because they really are prudent. The trick is to measure how much additional demand for insurance is motivated by the desire to signal prudence.