How do insurance companies use descriptive statistics and probability distributions to project health and auto insurance premiums? In regards to age, why is there an inverse relationship between the two premiums?
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Ultimately the insurance company charges more when it is at risk of having to pay out. I didn't realize that insurance was inverse for health and auto, but I can see why it would be. First, to understand this concept you have to suspend the want to point out the exceptions. This being statements like, "I knew a guy that had a heart attack at 20." Statistically, things such as heart attacks in your 20s don't happen often. That being said, it can be easily shown that as your age increases your risk of sickness. Now also bear in mind that the insurance company is concerned with "how much" moreso than "how often." They are a company so they watch the bottom line. In youth you may be sick, but most likely it will not cost much. A prescription vs. surgery etc. Now coming to auto insurance: It is easily shown that the younger the driver the worse the accident can be. This shows why young males are most often the worst to ensure. Statistically, the young male is prone to accidents and usually can be involved in some of the most expensive accidents. Older drivers tend to go slower and when there is an accident it is usually not as severe. In conclusion being younger puts you in better health (usually) and being older makes you a better risk when driving.
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