Catastrophic medical expenses are large, infrequent and unpredictable. Risk aversion explains why people buy insurance which covers such catastrophic events.

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Risk aversion refers to the preference for avoiding losses over acquiring equivalent gains. Since catastrophic medical expenses can be financially devastating, unpredictable, and infrequent, individuals purchase insurance to mitigate the financial risk associated with these events. Insurance provides a safety net by spreading the cost of potential losses across a larger group, making it a rational choice for risk-averse individuals.

Catastrophic Medical Expenses Are Large, Infrequent and Unpredictable