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
In the first place, buying and selling goods and services (like insurance) should not be conceptualized as a win-lose scenario – trading benefits both parties if conducted rationally. For example purchasing food, the buyer values the food more than the money and the seller values the money more than the food they have in stock – both therefore gain from the trade.
In the case of insurance (which, in reality, is highly complex) the simplest model is that the insurance company maintains a large portfolio of customers. Each additional customer adds relatively little to their overall risk (risk in their case is equivalent to cost) – and therefore can be added at little additional cost or risk to the insurance company. Therefore the company can offer insurance at a reasonable cost (premium). To the insurance buyer, the individual risk is low (say fire) but if that eventuality occurs, the cost is very high. Therefore the buyer trades their low risk and high cost situation with the insurance company for a premium. Both parties “gain” from this exchange.
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