Reasons We Buy Insurance
- We believe that the probability of us experiencing the event that we are insured against is high.
- The claim that we may get in event of something happening is substantial with the cost of premium being on the lower side (basically a bargain).
- To offset substantial costs by paying less. This is when we know it's a bad deal, but the potential risk can be catastrophic and severe, so we are happy to pay more to avoid a probable calamity later.
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The Insurance Calculation
The calculation for insurance runs like this: The company is profitable when the cost of premiums that we pay is greater than the future claim that we may ask for (having a certain probability).
Cost of Premium > (Cost of claim) x (Probability of claim)
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