What insurance is for
Not a way to make money. A way to convert a rare catastrophic loss into a small predictable one.
Insurance moves a risk you cannot absorb onto someone who can, in exchange for a payment you can.
Why it works at all
An insurer covering a hundred thousand houses can predict, quite accurately, how many will burn this year. It cannot predict which. You face the opposite problem: you have one house and no ability to average.
Premiums collected must exceed claims paid plus costs, or the insurer fails. So the expected monetary value of an insurance policy is negative to the buyer. That is not a scandal — it is what you pay for the removal of variance, and variance is the thing that ruins people.
Which risks are worth insuring
One test does most of the work: could you absorb this loss without it changing your life?
- Insure. Losses that would be financially catastrophic — a house, long-term loss of income, liability.
- Do not insure. Losses you could comfortably pay from savings. Extended warranties on small appliances are the standard example.
Small, frequent, vivid risks feel urgent and are cheap to cover, so they get covered. Large, rare, abstract risks — the loss of an earner for a decade — feel remote and get postponed. The financial impact runs in exactly the opposite direction.
The excess
The amount you pay before the insurer contributes. Raising it lowers the premium, and it is a deliberate lever: you are choosing to self-insure the first slice, which is sensible for exactly the losses you could absorb.
What voids a policy
Non-disclosure. Insurance is priced on the information you supply, and an insurer that discovers a material fact was withheld may decline the claim. The incentive to round down on a form is real and it is the one place where doing so is most expensive.