For example, if I get car insurance and get into an accident, why should that increase my premiums. I’m insuring against that risk, so the fact that I had an accident surely shouldn’t change by risk factors.
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Insurance companies want to attract a lot of low risk steady clients that will likely never need a big insurance payout and are just a steady stream of money. To do that they want to charge them a low rate. In order to facilitate that low rate they need to charge the higher risk people more. So if I need 1 million dollars to fund payouts and admin costs for 1000 clients 500 who are low risk and 500 high risk, I could charge $1000 each evenly or I could charge the high risk people each $1500 and the low risk people $500. In the first scenerio I’d get more high risk people wanting to use my plan as they save money but the low risk people wouldn’t like it. In the second scenerio I’d get more low risk people who want to save money and the high risk people, who frankly I don’t want to insure, basically are stuck paying the extra unless some other company actively courts them with low rates.
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