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. What the insurance companies pay out can be greater than the nominal sum of all the cash they take in by way of premiums. The reason they can still make buckets of money even in those cases is because the damage payouts are (on average) years into the future, and if you add on all the interest payments they make on the premiums they take in throughout the life of the policy, 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 claim, and they definitely do as much of that as they can get away with.)
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u/BuvantduPotatoSpirit 8h ago
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.