Eli5: How does insurance work ? How is it a good deal for both the customer and the company ?
In: Economics
So early insurance back in the olden days worked like this. Early insurance came from boats. Boats were used to carry around cargo in the Mediterranean Sea. Being boats from the old times, they were not so well made and would occasionally sink. If you were wealthy, you might own 10 boats, if one of them sinks, you still have the other 9 to earn enough money to cover your losses on the 10th.
But if you only had one boat, and lost it, you would not be able to cover the loss. Insurance was invented where someone, usually a wealthy and trusted person or group of people, would offer a produce where several boat owners would pay them insurance money based on what type of boat they have and what cargo they were carrying.
The insurance company did the math and realized that only about 1 in say 50 boats sank per year year (I don’t know what the real figure was). So if they had 150 boats in their insurance pool they would have to pay out for three of them. An individual boat owner could afford insurance, but could not afford to lose their boat.
Its a good deal for the customer because they could operate their shipping business knowing that if they lost a boat it would be covered. It was good for the insurance company because they would collect more money than they would need to pay out.
Early insurance companies were sort of like banks too. What they figured out was that they could take all the money that they are collecting, and then loan it out, collect interest on those loans, and still be able to have enough income coming in to cover the cost of a lost ship. They would usually have something in their policy that the reimbursement would be paid out after a certain period of time, because they would be collecting interest and loan payments from people who they were lending money to.
Latest Answers