The premiums of the “many” pay for the claims of the “few”
Each policyholder pays a premium, which is a small amount relative to the potential loss they could experience. These premiums form a pool of funds.
When a policyholder experiences a covered loss, they file a claim with the insurance company. The insurer uses the pooled funds to pay out claims.
Because only a fraction of policyholders (6-7% of drivers each year) will experience a significant loss at any given time, the pooled funds are sufficient to cover these losses.