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
An insurance company works based on sharing the cost out.
The average user will ultimately make a loss – they will pay their insurance premiums, and never make any big claims – so saving that money instead would have been beneficial to them in the end.
The thing is however, that not everyone is the average user – if your are the person who was unlucky enough to experience a catastrophic house fire and lose your home and all of your possessions, then your insurance policy will pay out many times the amount you have paid in to it.
The insurance company is averaging out that risk over many people, so that just enough people are paying in money and taking out nothing to cover the few people that do need to claim, plus a little profit on top.
Latest Answers