Insurance Agencies are almost to a one, a scam.
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The concept of pooled risk is sound. It's basically the reverse of gambling- somebody is going to be a big loser, so we all pay a little to mitigate that risk. The problem really stems from how insurance is run.
As soon as you pay your premium, the money belongs to the company, and any claims they pay out is just money out of their bottom line. It would work correctly if they only got to keep an administrative fee and the bulk of your money had to be deposited in a fund for the purpose of paying claims.
The company is still incentivized to not pay spurious claims, because it would deplete the fund, but denying all claims and allowing the fund to grow to billions of dollars wouldn't benefit them, because it's not money they get to keep.
If they were required to publicly post their premiums and information on how often and how much they pay, the competition would be to attract the most customers by walking that fine line of paying every claim you could, because the only way to increase profits would be to increase your customer base.
The concept of pools risk is fundamentally unsound. The insurance company has costs.
For example. Lets say we have 100 customers and an event that occurs at a rate of 1 in 10 per year. That event cost 100 dollars. Thus the total cost per year for the 100 people is 1000 dollars.
Now lets add an insurance company to the mix. They have to extract 1000 dollars per year to cover the payouts from the 100 people, so 10 dollars per person, so far. In addition they have to extract enough to pay their employees. Lets assume they have 1 employee working 1 hour a week at minimum wage. That is an additional $750 a year the insurance company has to extract. Thus the total yearly cost for this insurance is $17.50, and the total yearly profit for the insurance company is $0. Insurance, like banking is a scam, adding cost to things that should have no cost.
The ideal insurance is self insured.
Nothing about what you said makes the fundamental concept of pooled risk unsound though. You're just taking issue with the fact that there is some added cost even under the most ideal scenario, which is a separate issue.
True, which is why most of the largest companies opt for self-insurance.
0.0Are we talking about health insurance here or real insurance? Either way all I say is as long as it is voluntary, whatever. Forcing people to buy insurance is a racket.
Your estimate of frequency is way too high and of expense way too low, though. 1 in 10 customers might have some sort of auto accident, but you're looking at thousands, minimum, per incident. But the 1 in 10 part is why auto insurance is a scam and they have to force people to buy it. Any sane person would save for an event that is extremely likely to happen once in your life.
The figure you're complaining about is called "Expense Ratio".
For life insurance, the industry average expense ratio is about 10.5%. For property casualty, it's about 27%.
Health Insurance uses a reversed figure called Medical Cost Ratio, which is legally required to be at least 80%-85% (depending on some criteria). This is because unlike Life and P&C, health insurance is basically always a money losing venture.
A possible form of insurance is one where people get their money that is not used for premiums back (minus the admin cost).