How do insurance companies profit?
In: 2
They are gamblers.
Insurance doesn’t make sense with just one person. It’s a bad deal. For the insurance company to profit, you would KNOW that they are charging you more than it would take to pay for the disaster. In that case, you’re better off saving the money yourself.
Now divide that across 100 people. Let’s say the numbers indicate over a year, ONE of those 100 people is going to have a car accident that costs $4500 to deal with. If each individual person has to cover that risk for themselves, they have to put $375/month into savings to cover it. But if we divide that over 100 people, the insurance company breaks even if they charge all 100 people $3.75/month. In reality, they might charge more like $6/month. That means they make 6 * 100 * 12 = $7200, and the statistics indicate they only need to pay out $4500 of it to claims. That’s a profit of $2700.
Further, the accident happens *later*. The insurance company can invest the money they’ve taken. That’s more profit, and the people paying for policies aren’t entitled to that.
This goes poorly if there is bad luck, and, say, 5 people get in an accident. Then the insurance company has to pay out more than they expected. In reality, the factors mitigating this are:
* Insurance companies have thousands or millions of customers. The more people are in “the pool” the more accurate the statistics become.
* Usually if something goes way outside of expected statistics, it’s because of a disaster like a hurricane. Governments tend to give people aid in those scenarios and, because of that, many insurance policies limit their coverage when those events happen. (You can get more coverage, but you have to pay them more to deal with the higher risk.)
The only exception is excess deaths due to some mysterious cause over the past few years. For some reason, life insurance companies are seeing claims rise by 10% and sometimes even as high as 40% over the last 3 years. Nobody knows what could be accounting for all of these extra deaths, but their previous bar for “catastrophic financial loss” was around 5% above their expected rate. It’s a real big mystery and we’re working hard to do nothing about it, if it sinks their company then they made bad individual choices.
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