Another reason is what I believe economists call it "the law of decreasing marginal utility". Every extra dollar you have is (usually) worth less and less, since you pay for the things you want/need the most first, and money is only worth what you buy with it.
Your expected utility is not your expected dollars. The average person will pay more into insurance than they get out of it. However it's worth it for the small chance that disaster could strike and you could lose everything. Better to sacrifice a small amount of utility to prevent losing a large amount from becoming homeless.
My point is not that insurance in itself is a scam. It would be rational to pay a small fee to a common account and get back much more when needed. It is how most communities work.
My point is that the current insurance system and price is a scam, because it is much too expensive and covers to many silly cases. That's because it is very hard for human beings to evaluate the risk of something rare and its price. While this evaluation is exactly the job of insurance companies. It is the classic situation for a scam: the buyer can't know the real price. And we also have the symptoms: way too much money is spent on luxury in this industry, they have the most expensive tv ads, etc.
I am a credentialed actuary responsible for the pricing of insurance risk. It is absolutely true that the consumer cannot price his or her own insurance policy (and I can). However, the end result of this is not some nefarious scenario where insurance companies are charging consumers ten times the fair price to insure their car or home. There is a functioning market for insurance, and consumers are going to tend to select the lowest-price option from amongst their choices in that market. This means that if you overcharge your customers, you will lose them to a competitor. Systematic mispricing of policies relative to the competition will lead to adverse selection, which is even worse - the insureds that you were making money on leave, and the insureds that you were losing money on stay.
Because of these factors, the insurer's goal is to price your policy as accurately as possible. Profit margins in the personal lines are so thin that many insurers engage in what's called cash-flow underwriting. The only money they make on the policy is the investment income they earn on your prepaid premium.
On top of all this, insurance (especially insurance marketed to consumers) is heavily regulated. Rate changes and new rating plans are scrutinized by each state's department of insurance. These regulators function like you wish the banking regulators did. They have enormous authority and their relationship with insurers is adversarial.
I could go on at some length but I will cut it off here. Suffice it to say that insurance, particularly property/casualty insurance in the United States, is about as far from a scam as you can get.
Like any other product you buy, there is a reasonably transparent and competitive market for personal insurance.
Unlike any other product you buy, the price of insurance may not be excessive, inadequate, or unfairly discriminatory. This is the law. Unlike any other product you buy, personal insurance prices must be filed with regulators who have the power to block the sale of any insurance product that does harm to the public. Unlike any other product you buy, an entire profession is devoted to the pricing of insurance. You cannot even propose to sell an insurance policy if your pricing scheme has not been signed off on by a credentialed actuary. Those credentials are not easy to come by, and actuaries are bound by standards of practice that preclude us from doing anything unethical.
If my employer asked me to violate an actuarial standard of practice, I would quit on the spot, and I don't know any other actuary who wouldn't do the same. And finding an actuary willing to throw away their livelihood would only be the first step in the process of attempting to charge a consumer an excessive rate. There are so many safeguards in place that bypassing them all doesn't seem like it would even be possible, and even if it were, the insurer would not reap any rewards due to the force of adverse selection.
I don't often post on HN, and I know that the actuarial profession is not very well known, but arguing with an actuary about the pricing of insurance is like arguing with a heart surgeon about where the aorta is. I can tell you with the authority of an expert that you are mistaken.
Well I certainly have no special authority in the matter, but maybe Kahnemann has? He got a Nobel after all. To be true he didn't say insurance was a scam, he equated it to lottery in the fact that it plays on the difficulty to evaluate rare events probability, and also the psychological reward in buying a lottery ticket (temporary dreams of massive wealth, e.g. how many Ferrari will I buy...) or insurance (peace of mind).
I have friends in the insurance business and I think it is a very honorable profession in most of the cases but you can't wipe out 1) the door to door insurance salesman scamming fragile old people, 2) the possibility that, much like finance, the whole insurance profession is based on wrong equations that makes it apparently robust but inherently fragile (in the sense of Nassim Taleb).
The buyer never knows the real price in any industry. How many people know how much it takes to build a factory, to pay the wages of all the workers, transportation costs, material costs, etc, etc. Competition is supposed to lower the price to it's actual amount. I don't see why this isn't true in the insurance industry.
Your expected utility is not your expected dollars. The average person will pay more into insurance than they get out of it. However it's worth it for the small chance that disaster could strike and you could lose everything. Better to sacrifice a small amount of utility to prevent losing a large amount from becoming homeless.