Let’s put aside the many, many problems of insurance companies in reality and talk in terms of two parties acting in good faith for ease of demonstration.

Let’s take random person Alice who has insured her wrench set at Insurance Company X. Her wrench set is very important to her job and she only believes in high quality tools, so it is quite expensive. So expensive, that if something were to happen to it, she might not be able to replace it right away. Instead, she pays Company X for an insurance policy. Alice can afford to pay a little bit every month and so this is a good set up.

Uh oh, an impromptu stomp band raided Alice’s store and appropriated her wrenches as drumsticks. They’re ruined! Luckily, Alice is insured and Insurance Company X pays her for replacement wrenches.

Unfortunately for Company X, Alice needed new wrenches before her monthly payments would exceeded the price of the wrenches. So how did they have the money? Well, they have more customers than just Alice. They use some of the money that they get from others to help buy the wrench set in the same way some of Alice’s money is used with other problems as a way to socialize the losses.

As you might guess, this requires more people. More people contributing at once means a bigger pool of money that can cover bigger individual losses when the time comes. As such, Insurance Company X uses a portion of the money they get to recruit more users and thereby make their system work better.

But also greed. Lots and lots of greed.