Why do people pay for insurance? If they have the money to ensure protection in the case of damage or loss that isn’t guaranteed, why not save the money for when something actually happens?
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let’s say I have a widget that costs 100$ and I can afford to put aside 1$ a year for it. That means that only after 100 years of saving I would be able to handle a catastrophe.
Now let’s say that I have a group of 20 friends, and we’re somehow guaranteed by an all-knowing oracle that only one of our widgets is ever going to break. We can each put aside 1$ a year and we’ll have the emergency fund “ready” in 5 years.
Insurance companies deal with such large numbers that they’re basically “guaranteed” everything will work out according to probability:
If a widget has a 5% chance of breaking, then our group of 20 friends can assume only 1 will break, but it’s not guaranteed (we could have 2, or even 3 break). If an insurance company works with 20,000 “friends” (customers), then it could be that more than 1,000 will break, but it’ll never be *drastically* more…
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