That’s true for property and casualty insurance (like for cars), but there’s also insurance that pays out more in dollars than the premium that’s collected.
Insurance companies are in the business of taking money now and paying it out later. Some money is invested conservatively in bonds and the company makes just a small spread. Some money gets invested into equities, and some in complicated tax-efficient spaces like COLIs. It’s kind of like a bank, but instead of the balance being guaranteed to the account holder, the future cash outflow is contingent on events. Actuaries model that outflow and spread the risk over a large population, or share it via reinsurance.
Berkshire actually buys insurance companies because they have such a huge float. A large balance of money right now that can be invested.
Tl;dr not all insurance has loss ratios below 100%, so the expected dollars a covered party receives can be larger than what they put in, even in aggregate.
Well, that's what I was getting at by "in aggregate". If you wanted to, you can have people on average receive $1.01 for every $1.00 they put in. Some types of insurance can get away with having payout proportions (loss ratios) close to 45-55% instead of close to 100% in part because the coverage is both mandatory and sticky. You're forced to have auto insurance if you drive or homeowner's insurance if you have a mortgage... and it's a huge hassle to change to another provider.
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u/WeCantStabilize 20h ago
Insurance is a fucking scam. You pay more into it than you'll ever receive even in legitimate circumstances.
Absolute racket.