How does insurance work?
Companies use actuaries to determine how much money they should pay out to people who have suffered losses
Actuaries calculate the probability that a particular loss will occur in any given year
They then multiply this number by the expected value of the loss to determine what amount of money they should set aside each year to cover potential losses
This calculation is known as the premium rate.
If a company has enough money to cover its premiums, then it can afford to pay out claims if a loss occurs
But if it doesn't have enough money to pay out claims, then it won't be able to pay them at all.
That's why insurance companies need to make sure they have enough money to pay their claims before they start paying them out.
In conclusion, Insurance companies use math to determine how much money you should pay out each year. They also make sure you don't overpay.