Megan McArdle has a column I am going to excerpt at great length (sorry Ms. McArdle). This is great article on a topic I have tried to explain many times here
After all, the insurance company has to make money. That has to mean that the expected value of the claims they pay out is lower than the expected value of the premiums their customers pay in. In some sense, then, the expected value of your insurance premium is negative.
But insurance does make everyone better off, because it covers very large costs that most people would have trouble paying. Even most really good savers would have a hard time replacing the value of their house, or paying off a $250,000 judgement for an auto accident. The expected value of those incidencts is very, very negative--more than just the value of the cash, you have to factor in the horror of being homeless or bankrupt. When you factor in the homelessness, the bankruptcy, and so forth, the slighly negative expected financial value is more than outweighed by the positive value of being protected against personal catastrophe. Not to mention the peace of mind one gets from not having to worry about homelessness, etc.
This is the magic of risk pooling. But notice that it's the catastrophe which makes insurance a good deal. You wouldn't get much value from buying "grocery insurance". At best, you'd be paying an extra administrative fee to route your routine expenses through an insurer, rather than paying them directly. At worst, you'll end up with bills skyrocketing as all sorts of perverse incentives appear. After all, if the insurer is paying all your grocery claims, why not load up on filet mignon instead of ground turkey?
But insurers try very hard never to sell insurance for less than the cost of your expected claims. If you expect to buy $10,000 worth of groceries next year, it will not charge you less than that for a "grocery policy". And if we all drive up the costs of grocery insurance by consuming more, the insurer can do one of two things: raise everyone's "insurance premiums" to cover a filet mignon budget, or create a list of "approved groceries" that it will cover, and start hassling anyone who tries to file an excessively expensive claim.
This is why you should always have liability insurance, but should think twice about collision damage coverage. It's why high deductibles are a good idea--for small expenses, it's better to self insure. And it's why "catastrophic" health plans, which only cover the sort of extremely expensive events that most people would have difficulty financing, are a much better deal than the soup-to-nuts plans that most people get through their employers. Those plans are expensive, both because they're paying for a higher percentage of your expenses, and because they drive up utilization--which means that they drive up next year's premiums even more. Imagine what your car insurance would cost if it covered gasoline, routine maintenance, and those little air freshener trees you hang from the rearview mirror. Then stop asking why health insurance costs so much.
But Kathleen Sebelius, the Secretary of HHS, thinks that catastrophic insurance isn't really insurance at all.
At a White House briefing Tuesday, Health and Human Services Secretary Kathleen Sebelius said some of what passes for health insurance today is so skimpy it can't be compared to the comprehensive coverage available under the law. "Some of these folks have very high catastrophic plans that don't pay for anything unless you get hit by a bus," she said. "They're really mortgage protection, not health insurance."
She said this in response to a report from the American Society of Actuaries arguing that premiums are going to rise by 32% when Obamacare kicks in, as coverage gets more generous and more sick people join the insurance market. Sebelius' response is apparently that catastrophic insurance isn't really insurance at all--which is exactly backwards. Catastrophic coverage is "true insurance". Coverage of routine, predictable services is not insurance at all; it's a spectacularly inefficient prepayment plan.
The last two lines are why I knew from the very beginning that the promise I would get to keep my health insurance was a lie. Because I have true insurance, rather than a pre-payment plan for incidental health-related expenses, and the folks who wrote Obamacare think of insurance as pre-paid medical care (in fact, I believe they think of private insurance as a Trojan Horse for all-inclusive single payer government health care).