All aspects of life involve risk, e.g., fire, theft, auto accidents, injury. Insurance provides a means of transferring the financial consequences of certain risks from yourself to the insurance company. It cannot eliminate the risk, e.g., fire. All it does is to transfer a portion of the financial consequences of that risk, i.e., if a fire occurs, insurance will help you recover from the financial loss.
The insurance company tries to insure enough property or automobiles or liability exposures to permit it to have a predictable frequency of losses. This allows the company to determine how much premium it will have to charge to cover expenses and anticipated losses. Insurance companies collect premiums from this large number of individuals and hope the number of claims is small enough to allow the company to make a profit. If insured individuals take the approach that they “deserve” to get back everything they pay in premiums, the company will quickly be bankrupt.
Insurance works only if the money paid in claims is given to the relatively few individuals who take a “big hit.” Most of us, fortunately, do not have many big hits, so most of us do not “profit” from the insurance we buy.
All aspects of life involve risk, e.g., fire, theft, auto accidents, injury. Insurance provides a means of transferring the financial consequences of certain risks from yourself to the insurance company. It cannot eliminate the risk, e.g., fire. All it does is to transfer a portion of the financial consequences of that risk, i.e., if a fire occurs, insurance will help you recover from the financial loss.
The insurance company tries to insure enough property or automobiles or liability exposures to permit it to have a predictable frequency of losses. This allows the company to determine how much premium it will have to charge to cover expenses and anticipated losses. Insurance companies collect premiums from this large number of individuals and hope the number of claims is small enough to allow the company to make a profit. If insured individuals take the approach that they “deserve” to get back everything they pay in premiums, the company will quickly be bankrupt.
Insurance works only if the money paid in claims is given to the relatively few individuals who take a “big hit.” Most of us, fortunately, do not have many big hits, so most of us do not “profit” from the insurance we buy.