How Does Insurance Work?

Insurance wow that was um that was probably one of my more exciting words to start this video with um so we’re going to talk about insurance today and i promise i’m going to do my best to make this really interesting um maybe but uh if you want to learn how insurance works stay tuned because

That’s what we’re talking about but back to the video insurance it’s the annoying necessity that we all pay for to make sure we don’t end up in massive amounts of debt if our house burns down if we crash our car or if something tragic happens insurance helps us maintain peace of mind knowing that even if something bad does happen someone else is going to pay for what it costs to fix it though to an untrained eye this can be a little

Perplexing i mean if you pay 200 a month for home insurance and after only six months your home burns down the insurance company will buy you a new house likely in the matter of hundreds of thousands of dollars but you would have only given them 1200 why would they do that that’s the power of insurance baby the basic concept of insurance is that a

Company the insurer offers a guarantee for a certain risk that may or may not occur then another party the insured pays the insurer in exchange for protection against that risk when a bunch of people do the same thing for the same risk eventually the insurer is getting a lot of income but the probability of that risk happening is spread out among a bunch of people and stays about the same insurance companies make money by figuring out how much

Money they need to bring in to turn a profit on a given risk with a given probability that calculation then influences how much each of the insured pays each month in general it’s simple math but in actuality insurance companies have highly complex models for all of this not every insurance company offers the same insurance most insurance companies

Will specialize in their own kind of insurance this is because each company has to develop a complex model to ensure that they can make money insuring a profit if you estimated that 1 in 100 houses burned down each year but it was actually 5 in 100 then you’d be losing money pretty fast if you insured those houses you’d probably charge too little for everyone’s insurance and then end up on the hook for those four extra houses there are many types of insurance

Companies from auto to health to life to homeowners most people in the world have these core insurance policies some of which are legally required to be held like auto insurance you might be wondering though why wouldn’t you just want to save your money each month get to hold on to it in a bank account then if nothing bad ever happens you have a lot more money well while that may be true it makes you the one exposed to the risk if you put away 200 a month for a

Year to save on home insurance you’ll have an extra 2400 at the end of the year however if your house burns down the next year well then you’re going to be out the few hundred thousand dollars that it’s going to take to fix it a pretty bad deal is that a risk you’re willing to take chances are it isn’t that’s why getting insurance is generally a good thing it takes all of the risk and anxiety and financial burden off of you and puts it

Onto a much larger company that can afford it when you understand insurance as just a way of paying a company to assume your risk you can start understanding that insurance could in theory be offered on virtually anything anything are you worried that while you’re toasting a cinnamon raisin bagel your toaster will overheat one of the raisins causing it to burst into a spontaneous plasma and destroy your

Entire pantry full of stockpiled bags of lucky charms and baked beans well that’s oddly specific but someone could probably insure you for that exact thing likewise maybe you’re really attractive and worried that if you fall one time you’re going to hit your face stop being attractive and be depressed because no one will like you anymore well somebody could probably insure you against that 2. this isn’t too far off

Of reality either celebrities will often have parts of their body insured because their image is a source of their income there’s a few more pieces to the puzzle here though and we should talk about reinsurance and insurance claims when an insurance company wants to buy insurance on their own insurance policies well then they buy something called re-insurance

That is not a joke say an insurance company realizes that they’re overexposed to home fire insurance and a hot summer is coming up while they could take out reinsurance policies on their insurance policies to protect them from high losses in case all their houses they ensure just burst into flames because global warming and whatnot then all the risk is all on the reinsurance agency this is a necessary

Thing two think if an insurance company insured everyone in florida’s cars but then a hurricane came through and destroyed all the cars well that insurance company may owe more in payouts than they have and once they run out of money well then no one would get money for their destroyed car like they thought they would reinsurance is necessary and important to ensure that insurance companies remain profitable and solvent to pay insured when there

Are claims in terms of claims insurance companies also don’t just automatically pay out if you have car insurance and you show them a crashed car the insurance company will investigate to make sure that you didn’t intentionally crash your car to get the payout if they find out that you did do that well that’s called fraud and you can go to jail

Faking insurance claims actually does happen quite frequently people see it as a way to either get a big cash windfall if they’re in hard times or get out of a car or house payment that they can’t afford however car insurance agencies employ top-of-the-line investigators to make sure that they don’t make faulty payouts so now you can likely see insurance is a big business and if you have the right models assume the right kinds of risk

And have good investigators to make sure that you are not defrauded well then you can make a lot of money conversely if you buy insurance and something bad happens it can save you a lot of money in most cases insurance is a winning formula for all parties involved it helps consumers be less worried about bad events and it makes companies a lot of money and that’s basically how insurance works see i told you it was going to be

Interesting maybe hopefully hopefully that was interesting otherwise i don’t know why you’re still here um but we have more videos that you could probably click on right here that might be interesting or or there’s probably if you’re just tired of hearing my voice you could click over to the right there’s probably other people’s videos but

Enjoy your day thanks for learning about insurance we’ll uh we’ll see you we’ll see you next time bye you

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