Insurance is purchased to safe guard something from total loss. When you buy insurance from a company, they are taking the risk that many people share and pooling the money to be paid out to the statistical loser as it were.
Okay for example Let's say that a tomato plant costs $10, if statistically one in ten tomato plants die and you, along with 9 other tomato plant owners pay the Tomato Insurance Company $1.10 a year for tomato plant insurance, then the insurance company knows that it will probably pay out $10 in claims and draw in $1 in profit. The tomato plant owners are paying a little more for the plants but they are now safe from losing their whole investment.
But what happens if one tomato plant owner is careless and kills 2 plants. Now the insurance company loses $9 (they take in $11 in premium and pay out $20 in claims), so next year they will need to charge more to break even. They can do one of two things, raise the premium for the careless grower or raise the premium for everyone.
Lets say that the insurance company decides to raise every one's premium to cover the losses and break even. The second year everyone will pay $2 for their insurance and one plant will die so the company will bring in $20 and pay out $10 which will give them a net of $10 profit this year and -$9 last year so for the two years they made $1.
Okay, but now remember that the grower was careless so why should the other insureds and the insurance company pay for the carelessness of one grower? Lets see what happens if the insurance company just raises the premium of the careless grower. So instead of raising every one's premium by 90 cents the company raises the one grower's by $1.50. So year two the insurance company gets $11.40 in premium and pays out $10 in claims and is $1.40 to the good for this year but still has the $9 loss last year to contend with and so is at a net of -$7.60 so the careless grower will have to pay the higher premium for 5 more years to correct the profit loss from that one year of extra loss. But when you take the $1.50 increase that the careless grower in paying and multiple it by the 6 years that he is paying it ... yep that's right, even though the insurance company paid out $20 in the first year for him ... his total increased premium amounts to $9 more than the other insureds.
So even if the insurance company raises your rates you will still come out ahead with the higher premium in most cases. Now if that is all there is to it why do some people get canceled by their insurance companies?
Well, sometimes it is too costly to insure someone, even if you can charge them an enormous premium. Insurance companies make a profit with their premium and they deserve it because they take the risk of statistical loss, but their profit will quickly evaporate with a few big storms or careless growers. If that happens they will sometimes withdraw from a market (like some national carriers have done in Florida) or cancel a customer that has cost them more than they can recover with the possibility of greater loss in the future.
Insurance companies have a lot of cash ... they are mandated by law to maintain enough to pay the claims that occur during the year. They will often have enough cash reserves to invest and improve their profit but not at the expense of claims that are due.
Insurance is a good thing but it is a contract and it has limitations. Be sure to read the limitations of any policy that you buy. The contract is not flexible so you need to know what is covered and what is not ... and if it is not covered you need to accept that and don't expect them to break the contract to "help you out" ... in the same way don't let the insurance company break the contract by not paying you what is due if you have a covered claim.
That's all I have to say about that ...
J
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