The Law of Large Numbers
Insurance is simply a way to share the costs that most people incur over their lifetimes. By pooling money, it is easier for everybody to get their needs met. You may not be able to pay tens of thousands of dollars for that procedure today, but you will very likely pay tens of thousands of dollars into the health-insurance system over your lifetime. If you don't, chances are that your employer will.
The law of large numbers suggests that only a portion of people in a group will need the most expensive treatments in a given time. For example, consider stomach cancer. According to the American Cancer Society, one person in one hundred is likely to develop stomach cancer at some point in their lives. This means that ninety-nine out of 100 consumers help to pay for that one person's treatment. Don't let this bother you, the person with stomach cancer likely helped pay for a treatment you received that he didn't.
Increasingly, the law of large numbers is only part of the cost equation. Credit scores and other consumer data are also used to determine rates. You might think that your consumer data has little to do with the timing of your death or the likelihood that you get in an auto accident. Insurers disagree, and charge rates accordingly.
Insurance companies employ armies of actuaries to crunch the numbers and predict what is most likely to happen. An actuary can tell you how likely you are to get sick, die, be involved in a car accident, or suffer hail damage to your roof. They are the ones who interpret the laws of large numbers. Based on their findings, insurance companies charge you more or less based on the likelihood of a claim.
While there may be problems and inequalities in the insurance system, you are usually better off with insurance than without it. Medical care is expensive, and getting more expensive.
