Insurance pools small premiums from many people to pay big claims for the few who suffer losses.
Quick check
Insurance has a negative expected value for the buyer on average. Why buy it anyway?
Key terms
- Premium — what you pay (monthly or yearly) for cover.
- Deductible / excess — the slice of any claim you pay yourself first.
- Claim — a request for payout after a covered loss.
- Coverage limit — the most the insurer will pay.
Try it
A 1-in-500 chance of a $50,000 loss. What's the 'fair' yearly premium?
Expected loss = 50,000 / 500 = $100/year. A real premium is higher — that gap covers the insurer's costs and profit.
Insure what you can't afford to lose (home, health, income); self-insure the small stuff by raising deductibles to cut premiums.
Expected payout per dollar of premium is always less than 1 — that's how insurers stay in business. You're paying for risk transfer, not expected gain.