so I thought the actual role of insurance is to cover the case where the difference from the arithmetic average cost (i.e. average of all cases, consisting overwhelmingly of neutral cases, but with some rare negative possibilities) and the negative event is so large that the rare negative event would be life-changing but the average case is trivial.
for example, it might make total sense for a tiny startup to take out a policy against a total, multi-day AWS outage. This is because that event is basically impossible to occur, but if it did it might bankrupt them immediately. (You can use your imagination as to why this might be.)
So the basic role of insurance is to reduce the variation - get things closer to the arithmetic average case.
But does this work if people don't know the average case?
It is easy to find nationwide accident rates, one could make an educated guess about it. But if insurance companies are tracking your every turn and coming up with a unique offer - what is to say it is remotely fair?
How can anyone tell if their insurance comapny, "You, personally, have driving habits that give you a 10% chance of having an accident this year, and it's remarkable that you haven't had any in the past 8 years you've been driving. You've simply been lucky."
If they're a big-data insurance company, who are you to argue? After all, your friends have been in accidents, you know it's risky.
What I'm getting at is there is huge information-asymmetry if the insurance company has access to a lot more information than the person buying the insurance does!
What's to keep them from selling you tsunami-insurance at Japanese or Californian rates, even though you live in Minnesota?
In the status quo, it's because you KNOW that you live in Minnesota. But if your every choice is being tracked, doesn't that assumption go out the window?
Of course, some kind of a legal requirement to share their actuarial calculations with you would never work, because there is not a company in the world that wouldn't figure out how to lie - you can't get companies to share their profit margins or to keep to a certain profit margin, it's just literally impossible. (It would be like getting your SO not to think of anyone else during sex, no matter how fleetingly. That is just not a possible goal, and I use this analogy because companies' internal calculations are similar to what is going on in someone's head.)
So if private companies can't be held to a profit margin, is the answer state-issued insurance? This would be beneficial in many ways: for example, if someone's behavior is so risky that their average case is pretty bad, then perhaps the state can still choose to subsidize them from less risky customers. A private company might choose to fire them as a customer (or offer them an unaffordable rate.)
The difference is, when prices are close to unaffordable, can insurance companies mislead customers into thinking that it is because they, personally, really are that risky?
How do we stop this? I think the answer is to simply not allow this level of personalization.