Why does insurance get cheaper when an insurance company has more people covered?

I get that the company will be getting more premiums from people, but won't this then be cancelled out by their exposure to more claims from people?

Best Answer:

michael: There are fixed costs too. For example, they have a building in the city. The rent costs them $50,000 a year, regardless of how many customers they have. If they have 1 customer they need to charge $50,000 just to cover the building! But if they have 100,000 customers each customer need to pay $0.50 to cover the building.

Same with advertising. If they want to run ads that is easier to afford with more customers.

They can also have less wasted time. Imagine they have 1 customer. They expect to be able to call from 8 am to 8 pm. They need someone working the phones 12 hours a day, when they field maybe 1 call a year! But if you have many customers it's much more efficient.

Other answer:

michael:
http://www.weaverbros.com/blog/insurance…

If you ever take an insurance class, one of the basic terms you learn is the law of large numbers. You take a number of people, and based on "prior" history can determine how many claims you will have, and also pay in any given year.

http://www.naic.org/cipr_newsletter_arch…
Just like every insurance company has to have ($X) amount in reserves, based on their prior losses. The key is, when you have a claim, you expect your insurance company to issue you a check.

Greg:
The magnitude of the risk is reduced as it is spread over more people. If one person submits a very large claim and is the only customer, the effect is much less when they have a number of customers. The odds that all the customers make major claims reduces as the number of customers increases.
Casey Y:
Its all about economy of scale, once you hit a certain level though, they're all pretty consistent.
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