Eli5: If an insurance company is willing to sell you insurance, does that mean the insurance company is expecting to make profit and therefore you will make a loss and should not take up insurance?

Question

Eli5: If an insurance company is willing to sell you insurance, does that mean the insurance company is expecting to make profit and therefore you will make a loss and should not take up insurance?

In: Economics

Answer 1

You buy insurance for losses you cannot afford to absorb but the insurance company can. That ability to absorb larger losses than you is the product they are selling.

For example, if you purchase something that costs 20 times your disposable yearly income, that loss could be so great you could never fully recover and so you should never buy that product. However, if you could pay a fee to ensure that the loss would never happen (financially), then you could buy that something.

For this reason it’s not generally a good idea to buy insurance for things you can afford to replace, as the product has no value to you.