How Does Insurance Work?

How Does Insurance Work?

Like more exciting words to start this video with. 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 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, you are 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 ensuring a profit. If you estimated that one in 100 houses burned down each year, but it was actually five in 100. Then you’d be losing money, pretty fast. If you ensured 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 ensure you against that two. This isn’t too far off of reality either. Celebrities will often have parts of their body ensured? 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 in insurance company. Realizes that


they’re overexposed to home. Fire insurance and a hot summer is coming up while they could take out re-insurance policies on their insurance policies to protect them from high losses.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 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 you just tired of hearing my boys. You could click over to the right. It’s probably other people’s videos Enjoy your day. Thanks for learning about insurance. Well uh we’ll see ya, we’ll see you next time.

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