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Originally Posted by seventythree
Z,
Tell me if you agree with the way I re-iterate your argument:
If the $6~8K repair bill most Boxster owners are concerned about, in the case of a complete engine replacement for example, represents a significant portion of the owner's net worth, then buying breakdown insurance makes good sense. Otherwise, self insuring is the way to go.
Net worth = $100K, buy extended coverage
Net worth = $1M, self insure
Regards
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Close re-iteration, except it's missing the part where the VOLATILITY (range) of the random process is compared to its AVERAGE (which approx equals the annual premium minus the insurer's profit margin). If the average is much smaller than the volatility (i.e. premium is low enough) it may be better for both (net worth) cases to just buy the insurance. If the average is comparable to the volatility (i.e. premium is comparable to the worst case scenario) then it may be better for both to just self-insure as they will both be able to invest the premium into a "worst case" account and be able to cover the worst case scenario themselves.
But to answer your question -- and without getting into issues like liquid vs. non-liquid assets, utility functions, risk of ruin, etc. -- the richer guy should be able to self-insure much easier than the other guy, so your final conclusion seem to be correct but not at ANY price (premium), of course.
Z.
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