The economics of travel insurance

TIm Harford, at his always thought-provoking blog, The Undercover Economist, recently dealt with the question of whether purchasing travel insurance makes sense economically. A questioner wrote in, saying that his girlfriend wanted him to purchase a policy, but he was reluctant, thinking that it was a waste of money. Harford figured that because any medical expenses incurred on their trip would be relatively inexpensive-- damn EU citizens and their cheap health care-- the man would essentially be purchasing "rucksack insurance."

Harford called this unnecessary, stating, "Over the course of your life you will earn thousands of times the price of your rucksack and contents. It is better to save on premiums and take occasional losses on the chin-- you'll come out well ahead in the long run. I have."

I've often heard economists say that most insurance we buy is unnecessary, except for policies covering extremely valuable items (like a house), major medical emergencies, or life insurance. I'd add that travel insurance is probably unnecessary in the vast majority of cases, except for possibly a big trip such as a honeymoon. Of course, if your girlfriend really insists, it might be wiser to pony up the money. As Harford recognized: "You saw the bigger picture, and did exactly what your girlfriend told you. Smart move."

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