Quora Answer: Is the Concept of Private Insurance in a Capitalistic Society Inherently Flawed?

The following is my answer to a Quora question: “Is the concept of private insurance in a capitalistic society inherently flawed?  Are all businesses not driven by optimising profits, which would render policyholders unable to receive the service they pay for?” 

I do not follow your logic.  The purpose of insurance is to mitigate risk by pooling funds to be managed by an entity to cover loss.  If 100 people buy coverage for death, I am quite certain 100 people will die.  The question here is when death occurs.  It is unpredictable at an individual level, but becomes statistically predictable the larger the population.  These people, these policyholders, then insure themselves against an inadequate estate by paying a premium calculated based on the payment term, their predisposition to illness, the risk inherent in their jobs, and many other factors.  Some die earlier, and their estate collects based on a shorter payment period.  Some die decades later, and their estate collects less when we calculate payout to premium.  However, in almost every case, the premium is always lower than the payout.  How is that possible? 

The entity, which in this case, is the insurer, mitigates against depreciation, against risk such as inflation and political exposure, by investing that money.  The insurer is itself a fund manager, or has a business relationship with a fund manager.  And this is the simplest form of insurance, basic whole life.  Some people mitigate against death for a specific term.  Should they outlive the term, they have paid for insurance that they never claimed, but that apparent loss is simply a business cost against a larger, catastrophic loss.  It is a form of financial inoculation for the estate. 

As insurance evolved since it began, covering loss of cargo at sea, it has become more sophisticated, involving complex mathematics and a deepening understanding of the nature of risk.  This is a business and societal need. I t is natural, within a capitalist structure, that someone would take advantage of that need and create a business. 

Capitalism is founded on the basic premise that as long as there is a customer for something, someone will make money providing a service or means to address need, real or perceived.  In the pursuit of addressing that need, this provision of goods and service, the business seeks to maximise profit.