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?
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 $0.50 to cover the building.
Same with advertising. If they want to run ads that is easier to afford with more customers.
They can also have less wasted time. Imagine they have 1 customer. They expect to be able to call from 8 am to 8 pm. They need someone working the phones 12 hours a day, when they field maybe 1 call a year! But if you have many customers it's much more efficient.
If you ever take an insurance class, one of the basic terms you learn is the law of large numbers. You take a number of people, and based on "prior" history can determine how many claims you will have, and also pay in any given year.
Just like every insurance company has to have ($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.
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.
Its all about economy of scale, once you hit a certain level though, they're all pretty consistent.