How is it better to pool risks to the group rather
than the individual paying a for that risk?
Imagine a population of 10,000 people, 1000 live in fire-prone areas, and 10 will have their $100,000 house destroyed by a wildfire for a total cost of $1,000,000.
(1) If the state pays for wildfire damage, the 10000 people will pay $100 each whether they're in a fire-prone area or not.
(2) With home insurance including wildfire insurance, insurers set individual premiums based on their best risk models, and the 1000 people in fire-prone areas will pay $1000 each, whether their home burns down or not.
(3). If there is neither (1) nor (2), the 10 people whose houses were destroyed will pay $100,000 each.
Some people would say that (2) is the morally correct level of cost distribution, as (1) unfairly subsidises risky behaviour, while (3) bankrupts disaster victims at random.
(1) If the state pays for wildfire damage, the 10000 people will pay $100 each whether they're in a fire-prone area or not.
(2) With home insurance including wildfire insurance, insurers set individual premiums based on their best risk models, and the 1000 people in fire-prone areas will pay $1000 each, whether their home burns down or not.
(3). If there is neither (1) nor (2), the 10 people whose houses were destroyed will pay $100,000 each.
Some people would say that (2) is the morally correct level of cost distribution, as (1) unfairly subsidises risky behaviour, while (3) bankrupts disaster victims at random.