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00:00Insurance.
00:01Wow, that was probably one of my more exciting words to start this video with.
00:09So we're going to talk about insurance today.
00:11And I promise I'm going to do my best to make this really interesting, maybe.
00:16But if you want to learn how insurance works, stay tuned, because that's what we're talking
00:22about.
00:23But back to the video.
00:24Insurance.
00:26It's the annoying necessity that we all pay for to make sure we don't end up in massive
00:30amounts of debt if our house burns down, if we crash our car, or if something tragic happens.
00:37Insurance helps us maintain peace of mind, knowing that even if something bad does happen,
00:42someone else is going to pay for what it costs to fix it.
00:46Though to an untrained eye, this can be a little perplexing.
00:49I mean, if you pay $200 a month for home insurance, and after only six months, your home burns
00:55down, the insurance company will buy you a new house, likely in the matter of hundreds
01:00of thousands of dollars.
01:02But you would have only given them $1,200.
01:06Why would they do that?
01:07That's the power of insurance, baby.
01:13The basic concept of insurance is that a company, the insurer, offers a guarantee for a certain
01:19risk that may or may not occur.
01:21Then another party, the insured, pays the insurer in exchange for protection against
01:27that risk.
01:28When a bunch of people do the same thing for the same risk, eventually the insurer is getting
01:34a lot of income.
01:35But the probability of that risk happening is spread out among a bunch of people and
01:39stays about the same.
01:41Insurance companies make money by figuring out how much money they need to bring in to
01:45turn a profit on a given risk with a given probability.
01:49That calculation then influences how much each of the insured pays each month.
01:54In general, it's simple math, but in actuality, insurance companies have highly complex models
02:00for all of this.
02:05Not every insurance company offers the same insurance.
02:09Most insurance companies will specialize in their own kind of insurance.
02:13This is because each company has to develop a complex model to ensure that they can make
02:17money ensuring a profit.
02:20If you estimated that 1 in 100 houses burned down each year, but it was actually 5 in 100,
02:26then you'd be losing money pretty fast if you insured those houses.
02:31You'd probably charge too little for everyone's insurance and then end up on the hook for
02:35those 4 extra houses.
02:37There are many types of insurance companies, from auto to health to life to homeowners.
02:43Most people in the world have these core insurance policies, some of which are legally required
02:47to be held, like auto insurance.
02:50You might be wondering though, why wouldn't you just want to save your money each month,
02:54get to hold onto it in a bank account, then if nothing bad ever happens, you have a lot
02:59more money?
03:00Well, while that may be true, it makes you the one exposed to the risk.
03:05If you put away $200 a month for a year to save on home insurance, you'll have an extra
03:10$2,400 at the end of the year.
03:12However, if your house burns down the next year, well then you're going to be out the
03:17few hundred thousand dollars that it's going to take to fix it.
03:21A pretty bad deal.
03:23Is that a risk you're willing to take?
03:26Chances are, it isn't.
03:27That's why getting insurance is generally a good thing.
03:30It takes all of the risk and anxiety and financial burden off of you and puts it onto a much
03:36larger company that can afford it.
03:39When you understand insurance as just a way of paying a company to assume your risk, you
03:44can start understanding that insurance could, in theory, be offered on virtually anything.
03:52Are you worried that while you're toasting a cinnamon raisin bagel, your toaster will
03:56overheat one of the raisins, causing it to burst into a spontaneous plasma and destroy
04:01your entire pantry full of stockpiled bags of Lucky Charms and baked beans?
04:07Well, that's oddly specific.
04:09But someone could probably insure you for that exact thing.
04:13Likewise, maybe you're really attractive and worried that if you fall one time, you're
04:18going to hit your face, stop being attractive, and be depressed because no one will like
04:23you anymore.
04:24Well, somebody could probably insure you against that, too.
04:29This isn't too far off of reality, either.
04:31Celebrities will often have parts of their body insured because their image is a source
04:36of their income.
04:37There's a few more pieces to the puzzle here, though, and we should talk about reinsurance
04:42and insurance claims.
04:48When an insurance company wants to buy insurance on their own insurance policies, well then
04:53they buy something called re-insurance.
04:56That is not a joke.
04:58Say an insurance company realizes that they're overexposed to home fire insurance and a hot
05:03summer is coming up.
05:05Well they could take out re-insurance policies on their insurance policies to protect them
05:09from high losses in case all their houses they insure just burst into flames because
05:15global warming and whatnot.
05:17Then all the risk is on the re-insurance agency.
05:21This is a necessary thing, too.
05:23Think if an insurance company insured everyone in Florida's cars, but then a hurricane
05:28came through and destroyed all the cars.
05:30Well that insurance company may owe more in payouts than they have, and once they run
05:34out of money, well then no one would get money for their destroyed car like they thought
05:38they would.
05:39Re-insurance is necessary and important to ensure that insurance companies remain profitable
05:44and solvent to pay insured when there are claims.
05:52In terms of claims, insurance companies also don't just automatically pay out if you
05:57have car insurance and you show them a crashed car.
06:00The insurance company will investigate to make sure that you didn't intentionally
06:03crash your car to get the payout.
06:06If they find out that you did do that, well that's called fraud and you can go to jail.
06:11Faking insurance claims actually does happen quite frequently.
06:14People see it as a way to either get a big cash windfall if they're in hard times,
06:18or get out of a car or house payment that they can't afford.
06:21However, car insurance agencies employ top of the line investigators to make sure that
06:25they don't make faulty payouts.
06:28So now you can likely see insurance is a big business, and if you have the right models,
06:33assume the right kinds of risk, and have good investigators to make sure that you are
06:37not defrauded, well then you can make a lot of money.
06:41Conversely, if you buy insurance and something bad happens, it can save you a lot of money.
06:46In most cases, insurance is a winning formula for all parties involved.
06:50It helps consumers be less worried about bad events, and it makes companies a lot of money.
06:56And that's basically how insurance works.
06:59See, I told you it was going to be interesting.
07:02Maybe.
07:03Hopefully.
07:04Hopefully that was interesting.
07:05Otherwise, I don't know why you're still here.
07:07But we have more videos that you could probably click on right here that might be interesting.
07:13Or there's probably, if you're just tired of hearing my voice, you could click over
07:16to the right.
07:17There's probably other people's videos.
07:21But enjoy your day.
07:24Thanks for learning about insurance.
07:26We'll see you next time.
07:28Bye.