note: I had intended to publish this months ago. But I never finished it, and now I’m struggling to get a post out in time, so I’ve tried to make this one acceptable.

There was recently news that State Farm insurance is leaving California, and will no longer accept new customers. Perhaps they may even kick old customers off their plans and refuse to do any business in California at all. This caused a wave of reactions, from consternation that a company could be so mean to California, to demands that State Farm “reimburse” customers who have paid for years with no claims, to calls to nationalize the insurance companies because “clearly” they’re just stealing from the little guy.

All these reactions will be addressed in turn, but first, let’s talk about how insurance works. If you recall my post from way back about Ric Flair and his gym, insurance is just a way to reduce your downside risk in exchange for a small lose of your upside gain. You pay a little every month and in exchange if your house or business is destroyed, you get some money back.

What’s important is that insurance is structured like a bet: the insurance company is betting that nothing bad will happen to your property during the period of your insurance, if they win the bet they keep your money and you get nothing in return (except maybe peace of mind). While they only pay out if they lose the bet and your property *is* damaged. Because of this, many people see insurance as a scam. Why would I ever pay if I don’t expect my property to be damaged? Well you’re mitigating risk, maybe there’s only a 1% chance your home is destroyed, but that’s a 1% chance that you lose *everything* and are left utterly homeless unless you have insurance to cover the cost of rebuilding your home. Isn’t it worth it to pay a little to ensure you aren’t homeless from an act of God?

Now first, I want to quickly call out a very dumb line of reasoning I’ve seen floating around regarding insurance. I’m not quoting any one tweet or post, but synthesizing what I’ve seen in many places at many times:

Why isn’t there a refund check for insurance like taxes? I’ve paid so much without using the policy, and even if I make a claim, they find ways to avoid paying. Total scam!

This sentiment belies a complete failure to understand insurance on even the most *basic* level. To start with, if you want a refund because you’ve paid in without using the policy, should the insurance company be able to demand more money if you paid in and then *did* use the policy? Of course not, you’d call them insane and selfish. But realize that it’s the identical situation, in reverse.

An insurance policy is simple: you pay regularly and they pay if certain conditions are met. Of course “certain conditions” can be interpreted differently by different people. And insurance companies are profit-maximizing (like all companies) they’ll try to avoid paying when they can. But this is a necessary evil, better the company try to limit payouts than it go bankrupt overpaying it’s customers. Because then every *other* customer would suddenly lose their insurance.

So finally, why is State Farm leaving California? Because they can’t make a profit. Most states regulate insurance incredibly heavily, to the extent that they put price caps on insurance premiums. That way the company cannot raise prices without the state’s say so. And if the state won’t let a company raise prices to cover rising costs (and costs ARE rising because of inflation and climate change), then the insurance company is not obligated to subsidize a state with coverage cheaper than costs.

As is so common, people blame the free market for a government-run system.