The problem with your explanation lies in the way companies calculate the cost of insurance. They do not base it solely on the nominal value of potential losses; instead, they account for the real value. For instance, if there’s a potential loss of $1,000, insurance companies calculate the cost by considering its real value, including factors like the money they’ll collect and invest over time, leveraging the compounding effect. As a result, compounding does not make insurance profitable for the insured in the long run.
When evaluating insurance, the key fa... (read more)
The problem with your explanation lies in the way companies calculate the cost of insurance. They do not base it solely on the nominal value of potential losses; instead, they account for the real value. For instance, if there’s a potential loss of $1,000, insurance companies calculate the cost by considering its real value, including factors like the money they’ll collect and invest over time, leveraging the compounding effect. As a result, compounding does not make insurance profitable for the insured in the long run.
When evaluating insurance, the key fa... (read more)