system
Given the following post, respond as if you're commenting on Reddit:
human
Why should getting a health insurance ever be a profitable decision for the consumer, when the profitability of all insurance companies depends on paying less on claims than whatever they bill in premiums?

I get the value of insurance for farmers and merchants because it amortizes breakage over millions of people over decades, so one sunk ship or one bad harvest don't drive people to bankruptcy. But health insurance seems different.

For me to benefit from health insurance, I should get more in healthcare value than any dollar value I lose in my monthly premium. But for the insurance company to benefit from my subscription, they should deliver less healthcare value than the dollar value I pay to them + overhead + profit margins. And that's assuming all insurances companies act in good faith and pay what they promise and in time. And if you count the penalties against pre-exsiting conditions, it seem like health insurance can only pay off if you will suffer from unexpected health conditions after signing the contract, which is a really poor way of "turning profit".

So why should insurance ever be more affordable than paying out of pocket? It seems like insurance is  a gamble. You bet you're going to get sicker than what you pay for, and the insurance company bets you're going to be healthier than what you pay. Being that any bet the insurance company makes against you (anything they quote you is bet they feel confident making) is backed by more data and analytics than you will ever be able to match them. Sure some people can profit, but in practical terms, the house always comes out on top. So why is it ever beneficial to have a health insurance?
gpt
Consumers are assumed to be loss-averse, so their utility from losses and gains are assymetric, as such they're willing to pay a premium to avoid the possibility of a loss.

Let's say the expected value of your annual health-care costs are $1,000, but could be zero or could be $100,000. Depending on the shape of your individual utility function, it could be reasonable to pay $1,200 per year to avoid the possibility being bankrupted by the $100,000 bill.

The problem with health insurance though, is you have asymmetric information, leading to adverse selection i.e. if you're healthy and unlikely to claim, you're less likely to buy insurance than someone who knows they're sick. Insurance companies respond by pricing the insurance to cover the claims of sick people, which makes insurance even less attractive for healthy people, setting off a vicious cycle.

In order to function effectively, insurance markets need the probability of buying insurance to be independent from the probability of a claim. Hence, auto insurance works fairly efficiently, as it’s mandatory, as does property insurance, where there isn’t the same degree of asymmetric information.