By offering protection against losses, an insurance company takes on the risk of each individual. By offering insurance policies to many people, however, the company actually reduces its total risk. Although there is no way to know if any particular individual will suffer a loss, the total amount which must be paid every year is fairly predictable. This is because of the Law of Large Numbers . The benefits of timing Buyer beware 1.
Insurance companies write policies and receive revenues, known as premiums .
If you compare the two costs against the revenues from premiums, you have the combined ratio . Ninety cents of every revenue dollar are spent on expenses, and the combined ratio would be 90. 2. Several decades ago, insurance companies were permitted to get together and set their policy rates such that the combined ratio was 100. By taking in the money now and paying it out much later. But the industry has become intensely competitive and combined ratios well over 100 are now common.