How do insurance companies profit?
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There are way more people paying for insurance who don’t end up needing it, than there are people who actually need it.
Simplified example: There are 100 people in a city. Each person has $100. Every year, 1 person on average has their house randomly burn down, causing them to lose all of their $100. The insurance company says “if you give me $2 this year, I will give you $100 if your house burns down this year.” Everyone in the city agrees to this deal, so each person pays the insurance company $2.
The insurance company collects $200 that year, but if only one person has their house burn down, the insurance company only gives $100 back, so they make $100. However, if there are two fires in a year, the insurance company doesn’t make any money. If there are three or more fires, the insurance company loses money.
Insurance companies basically look at the statistics of how often people get into accidents and how much money they need, then charge their customers enough that on average they make more money than they give out. But if there are more disasters than they predicted, they can go bankrupt because they run out of money to give back to people.
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