It is amazing, almost miraculous, but it isn’t magic, it isn’t a miracle
It is mathematics
The small premium you pay for insurance buys huge benefits. In rough numbers, suppose you have a $200,000 home. The premium for insuring it is about $1,200/year. (my numbers are not at all exact, just very rough estimates).
If your home were wiped out by fire or windstorm, your insurer will pay $200,000, plus another $100,000 or so to replace personal property that was in the home, and maybe pay some temporary housing expense. All together around $320,000.
You paid $1,200, received benefits of $320,000!
Actually just mathematics. Some smart guys studied statistics. They studied:
* Frequency – how many claims will happen among 1,000 homeowners
* Severity – the average cost per claim
* Expenses – how much the insurance company will spend to be in business
*Profit – about 5%
And divided the answer by the number of homes insured. And came up with $1,200/year for a $200,000 home. All the buyers of insurance paid their share of the total. Only a few actually had a loss/claim in the year. The premium paid by those who didn’t have a loss paid for the damages suffered by those who did.