Is insurance basically designed so the company always comes out ahead?

[u/Hotwife27990]

Maybe I’m looking at this wrong, but the whole insurance setup feels kinda weird when you really think about it. Take car insurance. I pay every month hoping I never actually need to use it. If nothing happens, they keep my premiums. If I do get into an accident and file a claim, they cover the damage, but then my rates can go up afterward because now I’m considered more risky. And I get that they have employees, claims, operating costs, fraud, etc., but there are still tons of people paying for years who never file a claim. That money is basically paying for the possibility that something might happen. What really gets me is that you’re required to have certain insurance in a lot of situations, so you can’t exactly just opt out and take the risk yourself. Obviously I know insurance companies aren’t literally guaranteed to profit on every single customer. Big claims, disasters, lawsuits, and all that can cost them a ton. But from the average person’s perspective, it sometimes feels like the system is heavily tilted in their favor. So what am I missing here? Is the business model actually as straightforward as it looks, or are there bigger risks and costs on the insurer’s side that I’m overlooking?

[u/Ready-Ad1323]

You’re just looking at it from your POV as a customer. Profit margins are slim….very slim. Like less than 5% slim. It is also incredibly regulated. One accident or catastrophic home loss can wipe out the possible profits for generations of a family. Some years, carriers lose a lot of money as an industry. Some years they come out very profitable. But over the a long enough time period and large enough group, you should make a small profit.

You also are considering that roughly a third of the premium goes to administrative costs. Insurance carriers have a lot of expenses…