An Expected Value Comparative Analysis Study on the Pricing of Commonly Purchased Insurance Policies in the United States

In the present study, an expected value analysis was conducted on 23 commonly purchased insurance policies which were listed in ranked order by value and percentage return. The cost of each policy was compared with its expected value which was determined by multiplying the payoff amount with probability. Policy cost, probability, and payoff estimates were obtained from mainly industry sources referenced in the review of literature. Not surprisingly, all the insurance policies had an expected loss with the more expensive policies showing a greater expected loss than the cheaper policies. Only three of the 23 commonly purchased insurance policies had a return greater than 50 cents on the dollar, and most of the insurance policies analyzed had an expected return of less than 25 cents on the dollar. Over a third of the policies had a return that was less than 10 cents on the dollar. Expected value equations showed that insurance does not provide economic value. However, many policy holders believe that insurance provides intrinsic value, evident by the fact that the insurance industry represents 12% of the entire U.S. economy. For most, purchasing insurance is not an attempt to save money, but to minimize risk.