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How insurance works
Insurance is NOT a bet between yourself and the insurance company to see if a loss may or may not happen to you. Rather it is a cooperative effort in which a large number of people like yourself agree to share losses by contributing to a pool by way of a premium.
Statistically, something is bound to happen some time to someone. When there is a claim, the unlucky ones will be compensated or their losses reduced by the insurer paying their claims. The lucky ones who do not have any claim can rest assured that if they suffer a claim the same compensation or assistance will be available to them.
Insurance companies manage the pool via disciplined underwriting and distributes funds (settlements of claims) to those who have genuinely suffered a loss. They also purchase re-insurance from re-insurers to cover those claims that exceed their projection. For this effort they get to keep any profit. Insurance companies must have adequate reserve and in Australia, authorised insurers are monitored by the Australian Prudential Regulatory Authority (APRA).
A point to bear in mind: No one will be better off after an insurance claim. Each of us must do our best to prevent or avoid claims, rather than to rely solely on insurance.
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