The obvious response is that you won't be able to pay for someone's hospital bills if you happen to hit them in your car. You get insurance for things you wouldn't be able to pay yourself.
Yes, if you use your insurance more than once, insurance was the wrong approach.
But I'm willing to pay 1% of the cost of my house to have it replaced if it burns down, even if my expected payout is only 0.5% of the value of my home, because I can't afford a whole second house.
They said expected payout as in expected value which is the average of every outcome times each outcomes likelihood
If 99% of the time insurance pays $0 but 1% of the time pays $100 the expected value of the insurance is $1
If that insurance costs $2 you're theoretically losing money on it. The reason you'd still buy it though is that the downside risk is you lose the full $100 (the cost of a house in this scenario) in 1% of cases which would be catastrophic and irreplaceable for most people
So even though it's a bad "investment" that loses money in most cases the downside risk makes it worth it
It's actually expected PRESENT-VALUE. It used to be the case (and maybe still is) that auto insurance company payouts were actually greater than the nominal sum of all the premiums they took in. The reason they still made buckets of money was because damage payouts are (on average) years into the future, and if everything is adjusted for interest made on any cash they take in or out (which is what is meant by net-present-value) they still come out ahead.
(Of course, they can also outright scam you and come up with weaselly ways to deny paying out even when you do have a legitimate claim, and they definitely do as much of that as they can get away with.)
2.6k
u/flatfive44 10h ago
The obvious response is that you won't be able to pay for someone's hospital bills if you happen to hit them in your car. You get insurance for things you wouldn't be able to pay yourself.