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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There’s lots of good answers here but nobody touched on shared risk yet so let me take a shot.
Insurance is a shared risk initiative.
So take automobile insurance for example, if you needed decent coverage for yourself you’d likely calculate the average vehicle price where you live, your vehicle pay off and a rough estimate of medical bills. You’re looking at $50,000.00 at very least to self insure assuming you’d need to pay for the damages you potentially caused.
But perhaps an insurance company has found out that accidents happen (completely fabricated number here) once a year per 25 people.
So rather than every person needing to save $50,000.00 as a bond in case of an accident, an insurance company (which is essentially a risk management firm) can collect $50,000 per year from the statistical 25 people, which comes to $2k/yr or about $170/month per person.
It makes protecting yourself and others more attainable for the average person, and it frees up money on an individual level. So even if you could afford to put 50k aside, that money would be much better spent collecting interest, dividends, rents or be invested into a business venture
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