Some natural disasters devastate huge amounts of property and assets costing huge amounts of money that I would assume policy holders would want to claim. Maybe I am naive to the huge amounts of profit that insurance companies make, but how do they survive financially?
In: Economics
As you suggested, “huge amounts of profit that insurance companies make” is the answer here.
For every natural disaster that costs millions or billions of dollars in repairs and claims, there are many months of premiums being collected in which there are no pay outs.
Risk Managers sole purposes are to assign a risk level to any prospective customer to determine how much to charge them for their insurance premiums to mathemtaically hedge their bet and assume that over the lifetime of their contracts they’ll pay out less than they receive in premiums.
That’s the nature of how insurance companies make money. They do massive amounts of research and determine the probability of paying out vs how often they’ll receive monthly premiums and not have to pay.
It’a basically a casino, but instead of betting that you’ll lose roulette more often than not, they’re betting that your house won’t flood more often than it does.
Latest Answers