How is insurance profitable for insurance companies?


Take life insurance, for example. A common policy is $20 per occurrence of $100,000. Wouldn’t that take 5000 months (over 400 years) just to break even? What am I missing here?

In: Other

Car, house insurance they know the chance of something happening as very low for most people so it’s easy money.

I believe life insurance usually works by you paying a monthly fee and most times nothing happens to you, once you get really old the chance of them paying you out starts to increase, as does the chance of you not being able to make payments. Can’t make the payments then all that money paid in the past was for nothing.
If you manage to have cover when you die you can bet you’re dead ass they’ll do what they can to weasel out of it.
Missed a payment 20 years ago? Denied.
Had an undisclosed condition that had nothing to do with your demise? Denied.

Depends on the type or insurance. Life insurance makes profit off the investment of the individuals premiums over their life time. Medical insurancel let’s the healthy subsidise the sick basically. Vehicle or household insurance relies on the fact that a small percentage of their clients will lodge a claim compared to the overall client base.
These companies employ actuaries to try predict claim patterns and build models which builds in a certain amount of assurance as to their ability to pay claims VS the premiums that have been received, and on top of that in most countries insurance companies are required by law to keep a certain percentage of reserve funds for in case TSHTF and they have to pay out a large amount of claims.

>What am I missing here?

Risk pools and terms.

The life insurance company is offering you $100k in coverage for $20/month for some fixed amount if time (let’s say 20 years). Their also offering it to thousands of other people too.

Let’s say they think there’s a 4% chance you’ll die over the 20 years. On the surface it seems like they’d get $4,800 and have a 96% chance of not paying out, but for more even odds they’ll pool you with 10,000 other similar risk people so they can expect 400 to die over the term and they’ll have to pay $40M but they’ll pull in $48M in premiums from the whole group. They paid out $40M but still had $8M in profit

As you get older/sicker and your risk of dying during the term increases they’ll either only offer you short terms or high premiums. You can get 20 years for $20/month but your grandma can probably only get a 5 year term for $250/month. They adjust the term and premium so they can always expect a slight profit over the term.

>A common policy is $20 per occurrence of $100,000. Wouldn’t that take 5000 months (over 400 years) just to break even?

For a single person, yes.

But you have thousands, tens, hundreds of thousands of people paying into the insurance, and the odds of people having a claim are low.

There’s an entire branch of statistics, *[actuarial science](,* devoted to risk assessment for exactly this reason.

It is exactly the same way that gambling is profitable for casinos. They know the odds and set the rules to guarantee that they come out ahead.