MMM Decides to Self insure his house?

[patchyfacialhair]

This thread is a total math failure.  Surprising given the number of smart individuals on this site.

Assuming insurance companies do math and statistics correctly (which is their job), you always pay a premium for insurance over the risk times the estimated damage from a claim.  That's why you don't get insurance for things you can afford to lose.

We all get that when we refuse the extended warranty at Best Buy for the $100 gadget (or whatever the current example of such things is).  Best Buy pushes it because they make money off each warranty because they've priced the risk correctly, and you understand that and know that you can afford to lose the $100 item and so refuse the warranty.

The exact same analysis applies to a house.  If you are truly indifferent to the loss, then you should not pay a premium to insure against it.  MMM is likely safe on two fronts: (1) he can afford a total loss of $400k (really probably only $200k replacement costs) without any impact on his finances, and (2) he knows how to build things, which reduces his out-of-pocket expense if disaster strikes.

But the idea that it's just a few bucks to insure, so of course do it is a logical fallacy.  Assuming the insurance companies priced the risk correctly, those few dollars are more than (1) the likelihood of claim times (2) the amount of claim.

There is only one exception to this rule that I can think of: the cost of repair/replacement.  If the insurance company can pay less than you for the repairs (e.g., because Geico owns the auto repair facility and therefore pays the hourly wages of the workers rather than the hourly fee you pay for service), that might increase the odds in your favor.  You see this with medical insurance where the doctor's "fee" is $200 but the doctor agrees to take $50 from Blue Cross.  But that should be the only factor in play other than whether you can afford to bear the loss.

There was a similar thread on life insurance a while back, btw, and the same results apply.  Insurance companies are better than you at statistics, so life insurance will statistically always be a loser.  You get life insurance if there are things that you have to provide for and cannot if you die.  Once you get past that point (i.e., have enough assets to cover those who depend on you), there is no reason to have life insurance.  It's just math.

I don't disagree with you at all regarding the dwelling/belongings coverage of the policy.

However, you're missing the whole liability portion of the equation (yes, I know the same math applies; insurance companies price it based on the risk including an expected profit).

Pete's got MILLIONS of unique eyeballs on him, his house, and his lifestyle, which means the risk of a liability suit goes up. Liability insurance is dirt cheap. If he wants to decline it...sure that makes him badass for going against the grain I guess... but it seems that most seasoned mustachians* think it's a "penny wise, pound foolish" mistake.

*I don't speak for mustachianism in general, as that would make me a hypocrite. My savings rate and carbon footprint isn't as high/low as it could be.

[FIPurpose]

This thread is a total math failure.  Surprising given the number of smart individuals on this site.

Assuming insurance companies do math and statistics correctly (which is their job), you always pay a premium for insurance over the risk times the estimated damage from a claim.  That's why you don't get insurance for things you can afford to lose.

We all get that when we refuse the extended warranty at Best Buy for the $100 gadget (or whatever the current example of such things is).  Best Buy pushes it because they make money off each warranty because they've priced the risk correctly, and you understand that and know that you can afford to lose the $100 item and so refuse the warranty.

The exact same analysis applies to a house.  If you are truly indifferent to the loss, then you should not pay a premium to insure against it.  MMM is likely safe on two fronts: (1) he can afford a total loss of $400k (really probably only $200k replacement costs) without any impact on his finances, and (2) he knows how to build things, which reduces his out-of-pocket expense if disaster strikes.

But the idea that it's just a few bucks to insure, so of course do it is a logical fallacy.  Assuming the insurance companies priced the risk correctly, those few dollars are more than (1) the likelihood of claim times (2) the amount of claim.

There is only one exception to this rule that I can think of: the cost of repair/replacement.  If the insurance company can pay less than you for the repairs (e.g., because Geico owns the auto repair facility and therefore pays the hourly wages of the workers rather than the hourly fee you pay for service), that might increase the odds in your favor.  You see this with medical insurance where the doctor's "fee" is $200 but the doctor agrees to take $50 from Blue Cross.  But that should be the only factor in play other than whether you can afford to bear the loss.

There was a similar thread on life insurance a while back, btw, and the same results apply.  Insurance companies are better than you at statistics, so life insurance will statistically always be a loser.  You get life insurance if there are things that you have to provide for and cannot if you die.  Once you get past that point (i.e., have enough assets to cover those who depend on you), there is no reason to have life insurance.  It's just math.

I won't necessarily disagree with you, but why the comparison to BestBuy? I worked at BestBuy for a season when I was in college, and while I would agree that most were terrible deals there were a few where I thought BestBuy was way off on pricing. Sometimes there was a 4 year extended warranty on a $1000 TV for $40 (and for some TV's with bad manufacturing that could almost be a garauntee in 4 years)

Anyways, comparing BestBuy upselling to Home insurance is not a 1:1 comparison, as even if you couldn't afford to replace an electronic, I wouldn't suggest BestBuy warranties to anyone. Not because people can afford to replace their own electronics, but because they're a bad deal in general.

I am also worried about people's general assumption on this thread for greatly underestimating the cost of repair/replacement. Real Estate prices are pegged to building costs. If there were $100,000 bucks of spread between building or buying there would be a lot more home construction. There have been a lot of people in this thread making wild generalizations and assumptions about the profitability of insurance companies and greatly downplaying repair costs. Heck one sizable earthquake in the Denver area and several insurance companies would likely fold.

Maybe I'd feel differently if I were worth multiple millions of dollars, but at the moment it's hard to imagine.

[bacchi]

Q: Would an insurance company insure a house remodel that included replacing/adding beams and rafters if the structure wasn't evaluated by an engineer?

A: No.

[beastykato]

Sorry, those of us that are in favor of the insurance aren't "failing" at math.  Often times those warranties department stores offer are like $25 on a $200 item.  Most of use are smart enough to get the same warranty simply by purchasing it on a credit card and thus getting the warranty for free.  So, as said that comparison isn't a 1:1 at all. 

I can see where some of you are coming from, but many of you are saying "Oh, he can survive an 80% reduction in net worth" or "Oh he goes from 160x salary to 144x salary after the rebuild costs".   Is it worth such a reduction though?

For the measly cost of home insurance, which wouldn't even be noticeable with his income, he could avoid such catastrophic losses regardless of whether he could weather the storm or not. 

You're talking about potentially losing years, decades, or more of savings for most of us to save what?  $400-1500 a year in most cases?  Keep telling yourself it won't happen to you.  Hopefully, it doesn't, but the risk is too great for MOST of us.

And most people are just talking about a fire.  There are floods, wind, fire, theft, intential damage, injury and medical, earthquakes, riots, etc.  Whether this stuff applies to you, is frequent enough to warrant insurance, and many other factors apply to whether it would be worth it or not.  This is not purely a math equation.

[Cycling Stache]

the risk is too great for MOST of us.

This right here is the error.  The risk is not too great for you (or anyone else).  It is the size of the loss if the risk materializes that may well be too great. 

Your projected cost is (1) risk of event happening multiplied by (2) loss if risk materializes.

Insurance companies price that risk better than you do, and they charge you a premium for insuring against that risk.

If you can't bear the loss if the risk happens, then yes, you should absolutely have insurance.  For most people, a house is one of those "can't bear the loss" items.  But if you can bear the loss, then no, you should not have insurance.

You can see this more easily in an example that is the reverse of insurance.

(1) Would you pay $1 for a 50% chance to make $1.50 (or zero)?

(2) Would you pay $100 for a 50% chance to make $150?

(3) Would you pay $1,000 for a 50% chance to make $1,500.

(4) Would you pay $100,000 for a 50% chance to make $150,000?

The answer should be no in every circumstance because the expected outcome is never worth the cost times the probability of the payout.

Now go back to insurance, and don't use the term house.

Would you insure against a $100 loss if the odds were the same as (2) above?

Would you insure against a $1,000 loss if the odds were the same as (3) above?

Would you insurance against a $100,000 loss if the odds were the same as (4) above?

The answer will depend entirely on whether you can bear the loss--which has nothing to do with the risk of occurrence.

The fact that a house is involved, and a house seems like a big deal, is skewing the analysis for most people.  Do you think Warren Buffet or Bill Gates should insure their house?  Probably no concern because you know they can eat the loss.  MMM is the same way because a $400k loss (and really much less than that--many property tax bills distinguish between the value of the land and the value of the improvements--e.g., house) would have no impact on him whatsoever.  Zero.  That's what it means to be FI with an additional $400k per year coming in from his blog.

The fact that doesn't describe the situation for most people doesn't change the math in any way.  It just changes the ability of the person to absorb the loss.  Because most people can't absorb the loss of their house, they get insurance, and that's the right thing to do in that situation.

Finally, I wasn't picking on Best Buy in particular.  It was just an example of what is effectively insurance for a low-priced item.  Most people intuitively understand that doesn't make sense.  It highlights the point that it's the size of the potential loss that matters, not the likelihood of the loss occurring.

[BoonDogle]

Sorry, those of us that are in favor of the insurance aren't "failing" at math.  Often times those warranties department stores offer are like $25 on a $200 item.  Most of use are smart enough to get the same warranty simply by purchasing it on a credit card and thus getting the warranty for free.  So, as said that comparison isn't a 1:1 at all. 

I can see where some of you are coming from, but many of you are saying "Oh, he can survive an 80% reduction in net worth" or "Oh he goes from 160x salary to 144x salary after the rebuild costs".   Is it worth such a reduction though?

For the measly cost of home insurance, which wouldn't even be noticeable with his income, he could avoid such catastrophic losses regardless of whether he could weather the storm or not. 

You're talking about potentially losing years, decades, or more of savings for most of us to save what?  $400-1500 a year in most cases?  Keep telling yourself it won't happen to you.  Hopefully, it doesn't, but the risk is too great for MOST of us.

And most people are just talking about a fire.  There are floods, wind, fire, theft, intential damage, injury and medical, earthquakes, riots, etc.  Whether this stuff applies to you, is frequent enough to warrant insurance, and many other factors apply to whether it would be worth it or not.  This is not purely a math equation.

That should be expenses, not salary.  Anyway, the point is that in some cases the cost of rebuilding in the event of a total loss becomes so insignificant compared to their overall wealth that paying someone else to insure the value of the property is not necessary.  It may still be desirable, in order to sleep at night, if he can't stomach a loss that size.  However, he doesn't need it and chooses not to have it.  Several people have made the case that the cost of insuring is so minimal that he should get it, even if he doesn't need it.  That is not much different than saying I should buy this item since it is on sale even if I don't need it.  If I lose the one I have, I will wish I had bought it.  However, I don't need it so it is an unnecessary purchase.

I will turn the question back to you.  At what point of wealth do you think it is unnecessary for him to pay someone else to insure his house?  10 million NW, 40 mil, 100 mil?  Or do you think he should always buy insurance no matter his level of wealth?  Most would agree that Warren Buffet doesn't need to insure his home.  What is the point at which you think it is not necessary?  He has more money than he will likely spend in his lifetime and the way the blog is earning profits, in short order he will have more than he will spend in 2 or 3 lifetimes.

[FIPurpose]

the risk is too great for MOST of us.

This right here is the error.  The risk is not too great for you (or anyone else).  It is the size of the loss if the risk materializes that may well be too great. 

Your projected cost is (1) risk of event happening multiplied by (2) loss if risk materializes.

Insurance companies price that risk better than you do, and they charge you a premium for insuring against that risk.

If you can't bear the loss if the risk happens, then yes, you should absolutely have insurance.  For most people, a house is one of those "can't bear the loss" items.  But if you can bear the loss, then no, you should not have insurance.

You can see this more easily in an example that is the reverse of insurance.

(1) Would you pay $1 for a 50% chance to make $1.50 (or zero)?

(2) Would you pay $100 for a 50% chance to make $150?

(3) Would you pay $1,000 for a 50% chance to make $1,500.

(4) Would you pay $100,000 for a 50% chance to make $150,000?

The answer should be no in every circumstance because the expected outcome is never worth the cost times the probability of the payout.

Now go back to insurance, and don't use the term house.

Would you insure against a $100 loss if the odds were the same as (2) above?

Would you insure against a $1,000 loss if the odds were the same as (3) above?

Would you insurance against a $100,000 loss if the odds were the same as (4) above?

The answer will depend entirely on whether you can bear the loss--which has nothing to do with the risk of occurrence.

The fact that a house is involved, and a house seems like a big deal, is skewing the analysis for most people.  Do you think Warren Buffet or Bill Gates should insure their house?  Probably no concern because you know they can eat the loss.  MMM is the same way because a $400k loss (and really much less than that--many property tax bills distinguish between the value of the land and the value of the improvements--e.g., house) would have no impact on him whatsoever.  Zero.  That's what it means to be FI with an additional $400k per year coming in from his blog.

The fact that doesn't describe the situation for most people doesn't change the math in any way.  It just changes the ability of the person to absorb the loss.  Because most people can't absorb the loss of their house, they get insurance, and that's the right thing to do in that situation.

Finally, I wasn't picking on Best Buy in particular.  It was just an example of what is effectively insurance for a low-priced item.  Most people intuitively understand that doesn't make sense.  It highlights the point that it's the size of the potential loss that matters, not the likelihood of the loss occurring.

Man you did it again. You were making sense but then you create this nonsensical hypothetical that is not at all the actual scenario.

1. Insurance is not a 50/50 chance of a 50% gain.
2. Projected cost is the cost only when your the one writing the insurance. It is the cost per person averaged over a large swath of people. Therefor only insurance companies can use projected cost when estimating what to charge.

For the individual the deal is more like this:

Your in a room with 1000 other people. 1 of you will suffer a $200,000 loss this year. You can either take your chances or pay $300 upfront to cover the loss if it happens to you.

Is that a good deal? At least that's a somewhat accurate representation of what we're arguing. There seem to be three main arguments:

1. If my chances are only 1/1000 then a fair insurance should cost $200. I don't want to pay that extra $100 because it's just profiting someone else.
2. Even if I pay this fee my entire adult life, I won't even come close to paying 15% of what it covers. So even if I get blown out once, I'll have come out ahead.
3. I'm worth $10 million. I could take this hit 40 years in a row and it won't affect my lifestyle. Therefor I don't need it.

Each situation above describes a different place in life and a different security profile, but I don't necessarily think any of them are completely right or wrong. I personally happen to fall in number 2. I've lived in tornado alley. I lived in Tuscaloosa, AL during the 2011 tornado epidemic. When tornadoes blow through your town and destroy 12% of your entire town, you realize that destruction is real and it's an actual possibility. I feel that several here have never experienced destruction, and so you feel immune from it, but we're all one step away.

[BoonDogle]

I feel that several here have never experienced destruction, and so you feel immune from it, but we're all one step away.

I agree with you that most of us need the insurance.  Given my level of NW, I wouldn't get caught without it.  I thought the question was more along the lines of whether MMM needs it.  In his case, I say no, he does not (for reasons mentioned earlier).

[Jack]

Each situation above describes a different place in life and a different security profile, but I don't necessarily think any of them are completely right or wrong. I personally happen to fall in number 2. I've lived in tornado alley. I lived in Tuscaloosa, AL during the 2011 tornado epidemic. When tornadoes blow through your town and destroy 12% of your entire town, you realize that destruction is real and it's an actual possibility. I feel that several here have never experienced destruction, and so you feel immune from it, but we're all one step away.

Emotional arguments are irrelevant. After all, insurance doesn't stop the destruction from happening!

The only question is whether the money provided by the insurance settlement would alleviate the financial hardship the loss creates. No hardship = no need for insurance.

[beastykato]

So, we can all agree that most of us need it who aren't extremely rich, because it would cause us financial hardship.

Now when we become rich (at what amount I don't know?),  4mil, 40mil ,400mil.  I mean whatever.  To me I would have so much disposable income at that point growing my money wouldn't be hard.  So, why not carry insurance?  I mean especially if you live like a true mustachian or at least are somewhat careful with your money. 

That's just my mindset.  It seems minimal compared to the potential loss.  To me it seems the more you have, the more wealth you accumulate, the more beneficial insurance would become.

Honestly, this seems more like an asset allocation question for stocks.  Some people seem to have way more risk tolerance than others, but it doesn't make one wrong.  I tend to lean toward keeping my insurance, but to each their own.

[Metric Mouse]

.

Now when we become rich (at what amount I don't know?),  4mil, 40mil ,400mil.  I mean whatever.  To me I would have so much disposable income at that point growing my money wouldn't be hard.  So, why not carry insurance?

Because it's mathematically sub-optimal. Sure it's not financially devastating, it's just a poor decision from a loss/reward perspective. ESPECIALLY for a true mustachian who knows that they would have 'enough' even if they had to replace their house, as is the case for Pete.

No one is suggesting that no one should buy insurance. They're simply stating that for some people it is a wise choice, mathematically speaking, not to.

Unlike CyclingStache, I am unsurprised by the number of people on this board who are poor at math.  Posters on this site have an average grasp of math and statistics, and it's clearly evident in threads such as this.

[Dicey]

I think it's funny that this thread is three pages long and everyone is assuming that Pete does not carry insurance.  I still believe the pea is merely under a different shell.

[ender]

I think it's funny that this thread is three pages long and everyone is assuming that Pete does not carry insurance.  I still believe the pea is merely under a different shell.

I think the problem is that he very creatively categorizes his expenses in order to always have "low spending" and hides a lot of expenses.

If he's doing the same with homeowners insurance (I don't see it on the 2015 report) and he explicitly said regarding homeowners insurance:

I am self-insured for now, since the cost (and extremely low probability) of replacing the house would not be a significant burden.

then I guess he's a pretty blatant liar.

[Dicey]

I think it's funny that this thread is three pages long and everyone is assuming that Pete does not carry insurance.  I still believe the pea is merely under a different shell.

I think the problem is that he very creatively categorizes his expenses in order to always have "low spending" and hides a lot of expenses.

If he's doing the same with homeowners insurance (I don't see it on the 2015 report) and he explicitly said regarding homeowners insurance:

I am self-insured for now, since the cost (and extremely low probability) of replacing the house would not be a significant burden.

then I guess he's a pretty blatant liar.

Calling him a blatant liar is extreme. I have no problem if his choice is to self-insure his home, which is a tiny fraction of his net worth. I do find it interesting that so many feel the need to stridently condemn his decision, sans possession of complete facts.

Please don't assume that statement you quoted proves he carries no insurance at al.

Here's just one possible scenario: Mr. MMM doesn't care about HO insurance, but Mrs. MMM does, so she pays for it out of her business earnings and deducts it as an expense of her Real Estate business. Who really knows? Besides, what Pete does for himself may not be what is best for you.

This is the guy who said he put his "last" 100k into some high-fee investment firm that specializes in harvesting tax losses. That firm pays him handsomely to promote a concept that may be valuable to a tiny portion of his own burgeoning portfolio, but is wildly inappropriate for most newbie investors. I could cry every time I see a case study where a beginner is so proud of his XXXX account.

[Khaetra]

I don't condemn him as it's his choice to insure or not and he's willing to take that risk.  I'm not willing to, nor could I afford to.

[ender]

Calling him a blatant liar is extreme. I have no problem if his choice is to self-insure his home, which is a tiny fraction of his net worth. I do find it interesting that so many feel the need to stridently condemn his decision, sans possession of complete facts.

Please don't assume that statement you quoted proves he carries no insurance at al.

Assuming that it is true (the MMM family carries homeowners insurance, in spite of the linked budget/claim), the veracity of which is not established, I find it really hard to not consider it blatant lying to write what he said there.

Blurring personal/business expenses is fine. The problem comes if you trumpet low household expenses by moving personal expenses into business expenses. That is deceptively misleading, and if it happens I am absolutely fine saying doing so is blatantly lying.

[FIPurpose]

Each situation above describes a different place in life and a different security profile, but I don't necessarily think any of them are completely right or wrong. I personally happen to fall in number 2. I've lived in tornado alley. I lived in Tuscaloosa, AL during the 2011 tornado epidemic. When tornadoes blow through your town and destroy 12% of your entire town, you realize that destruction is real and it's an actual possibility. I feel that several here have never experienced destruction, and so you feel immune from it, but we're all one step away.

Emotional arguments are irrelevant. After all, insurance doesn't stop the destruction from happening!

The only question is whether the money provided by the insurance settlement would alleviate the financial hardship the loss creates. No hardship = no need for insurance.

Well just shake me down and call me Jimmy. Excuse me for telling my story; guess I'm in the wrong place for that.

I guess if you want to ignore everything else I posted and re-frame the question with your own and call yourself the winner you can do that then.

[FIPurpose]

.

Now when we become rich (at what amount I don't know?),  4mil, 40mil ,400mil.  I mean whatever.  To me I would have so much disposable income at that point growing my money wouldn't be hard.  So, why not carry insurance?

Because it's mathematically sub-optimal. Sure it's not financially devastating, it's just a poor decision from a loss/reward perspective. ESPECIALLY for a true mustachian who knows that they would have 'enough' even if they had to replace their house, as is the case for Pete.

No one is suggesting that no one should buy insurance. They're simply stating that for some people it is a wise choice, mathematically speaking, not to.

Unlike CyclingStache, I am unsurprised by the number of people on this board who are poor at math.  Posters on this site have an average grasp of math and statistics, and it's clearly evident in threads such as this.

Demeaning people on this thread is really not helpful whatsoever. You know we have these debates all the time on this forum. People who demand that owing your mortgage as long as possible is "mathematically" superior. And everyone here probably already knows that Pete doesn't have a mortgage anymore. Well I guess that just makes him bad at math.

I understand that after some point of wealth it isn't worth the bother. I personally don't think 4mil is high enough. I think if I had $4mil, $400k would still feel like a heck of a lot money. I said earlier in this post I think my personal threshold would be around <5% of net worth. I think the same is true for mortgages, at some point the benefit of what you get out of leveraging your mortgage isn't worth managing the account.

There has also been a lot of conflating different insurance products. Not all insurance is made equal, and extended warranties are definitely not equivalent to what were talking about.

Is life insurance worth it? If you like going skydiving, then yeah you're probably at a higher risk than average; it would be easy money then (ie you know that your lifestyle leaves you EV+ on the life insurance). If you just like reading books, and don't have dependents, then probably not. I think to a certain extant the same is true for home insurance. Do you live in tornado/hurricane land? Is your area ravaged by fires, floods, or landslides? I think everyone should have an idea about what their risk is for each of these. If you live in an area of likely damage every 10-20 years, then you're probably in an EV+ area. Just as everyone else has stated, a large section of safe housing of the nation pays for the rest.

What are Pete's risks? I don't know. I've never lived in CO. I don't know what trees are around him, how frequently large fires happen in his area. But if you live in an area known as a 10-year flood zone, well then I guess that's some pretty easy math to figure out.

[deeshen13]

This thread is a total math failure.  Surprising given the number of smart individuals on this site.

Assuming insurance companies do math and statistics correctly (which is their job), you always pay a premium for insurance over the risk times the estimated damage from a claim.  That's why you don't get insurance for things you can afford to lose.

We all get that when we refuse the extended warranty at Best Buy for the $100 gadget (or whatever the current example of such things is).  Best Buy pushes it because they make money off each warranty because they've priced the risk correctly, and you understand that and know that you can afford to lose the $100 item and so refuse the warranty.

The exact same analysis applies to a house.  If you are truly indifferent to the loss, then you should not pay a premium to insure against it.  MMM is likely safe on two fronts: (1) he can afford a total loss of $400k (really probably only $200k replacement costs) without any impact on his finances, and (2) he knows how to build things, which reduces his out-of-pocket expense if disaster strikes.

But the idea that it's just a few bucks to insure, so of course do it is a logical fallacy.  Assuming the insurance companies priced the risk correctly, those few dollars are more than (1) the likelihood of claim times (2) the amount of claim.

There is only one exception to this rule that I can think of: the cost of repair/replacement.  If the insurance company can pay less than you for the repairs (e.g., because Geico owns the auto repair facility and therefore pays the hourly wages of the workers rather than the hourly fee you pay for service), that might increase the odds in your favor.  You see this with medical insurance where the doctor's "fee" is $200 but the doctor agrees to take $50 from Blue Cross.  But that should be the only factor in play other than whether you can afford to bear the loss.

There was a similar thread on life insurance a while back, btw, and the same results apply.  Insurance companies are better than you at statistics, so life insurance will statistically always be a loser.  You get life insurance if there are things that you have to provide for and cannot if you die.  Once you get past that point (i.e., have enough assets to cover those who depend on you), there is no reason to have life insurance.  It's just math.

Winner. This should not be a 4 page thread.

Insuring a house (or buying many other types of insurance) is -EV (negative expected value) for the purchaser of insurance. The reason you take a slightly negative EV bet is that it is a risk that you cannot bear if it were to come to fruition.

If it is a risk that you are willing and able to bear, you should not buy insurance.

Most people do not consider self-insuring their home because they are not able (lack of assets) or are unwilling (low risk tolerance). That does not mean the above math fails.

[bop]

I think it's funny that this thread is three pages long and everyone is assuming that Pete does not carry insurance.  I still believe the pea is merely under a different shell.

I think the problem is that he very creatively categorizes his expenses in order to always have "low spending" and hides a lot of expenses.

If he's doing the same with homeowners insurance (I don't see it on the 2015 report) and he explicitly said regarding homeowners insurance:

I am self-insured for now, since the cost (and extremely low probability) of replacing the house would not be a significant burden.

then I guess he's a pretty blatant liar.

If you look at the comments on the 2015 report that you linked to, you will see that MMM twice says that he is planning to get homeowners insurance; he just hadn't done so on his new house at the time of that report.  I pointed out those comments earlier in this thread (page 2). 

[Metric Mouse]

This thread is a total math failure.  Surprising given the number of smart individuals on this site.

Assuming insurance companies do math and statistics correctly (which is their job), you always pay a premium for insurance over the risk times the estimated damage from a claim.  That's why you don't get insurance for things you can afford to lose.

We all get that when we refuse the extended warranty at Best Buy for the $100 gadget (or whatever the current example of such things is).  Best Buy pushes it because they make money off each warranty because they've priced the risk correctly, and you understand that and know that you can afford to lose the $100 item and so refuse the warranty.

The exact same analysis applies to a house.  If you are truly indifferent to the loss, then you should not pay a premium to insure against it.  MMM is likely safe on two fronts: (1) he can afford a total loss of $400k (really probably only $200k replacement costs) without any impact on his finances, and (2) he knows how to build things, which reduces his out-of-pocket expense if disaster strikes.

But the idea that it's just a few bucks to insure, so of course do it is a logical fallacy.  Assuming the insurance companies priced the risk correctly, those few dollars are more than (1) the likelihood of claim times (2) the amount of claim.

There is only one exception to this rule that I can think of: the cost of repair/replacement.  If the insurance company can pay less than you for the repairs (e.g., because Geico owns the auto repair facility and therefore pays the hourly wages of the workers rather than the hourly fee you pay for service), that might increase the odds in your favor.  You see this with medical insurance where the doctor's "fee" is $200 but the doctor agrees to take $50 from Blue Cross.  But that should be the only factor in play other than whether you can afford to bear the loss.

There was a similar thread on life insurance a while back, btw, and the same results apply.  Insurance companies are better than you at statistics, so life insurance will statistically always be a loser.  You get life insurance if there are things that you have to provide for and cannot if you die.  Once you get past that point (i.e., have enough assets to cover those who depend on you), there is no reason to have life insurance.  It's just math.

Winner. This should not be a 4 page thread.

Insuring a house (or buying many other types of insurance) is -EV (negative expected value) for the purchaser of insurance. The reason you take a slightly negative EV bet is that it is a risk that you cannot bear if it were to come to fruition.

If it is a risk that you are willing and able to bear, you should not buy insurance.

Most people do not consider self-insuring their home because they are not able (lack of assets) or are unwilling (low risk tolerance). That does not mean the above math fails.

This.  Understanding the math in full, seeing both sides of the equation and then choosing a different option is fine. But arguing that the math is wrong because of feelings or annecdotes does not help the people on this forum make better choices.