If insurance actuaries could predict with certainty that every year every house in Kansas would be destroyed by a tornado, how much would a Kansan be charged to insure his house against tornado damage? If you think his yearly premiums would be equal to the cost of replacing his house, go back to business school. Since every Kansan who had such insurance would be making a claim, the premiums would be rather more than the replacement cost of a house. After all, insurance is a business, not welfare; businesses exist to make profit. Also, insurance companies must pay for the overhead involved in running a business: salaries, advertising, computers, rent, paperclips, and perhaps even health insurance for the employees. So in our hypothetical Kansas with the really crumby weather, smart Kansans would elect to forego home insurance altogether. Since they’re going to have to eat the costs of their houses whether they’re insured or not, why pay for an insurance company’s...(Read Full Article)