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

An insurance company needs to make profit to stay afloat financially, but how they make profit is by spreading your risk. You might pay $1000/year to insure a house you own 30 years, and if you have no loss, you’re only out $30,000. If you have a fire, but no insurance, you could be out for the whole cost of the house. So, by spreading your risk among all the insured, it limits the amount you could lose.