It doesn't matter to an insurance company how likely car crashes are -- that just determines what the company charges in premiums. All that matters is that the likelihood is well understood and that the company has enough customers to stay solvent.
Insurance companies essentially work by the Law of Large Numbers: that in a large enough number of trials, the average value should approach the expected value. In real world terms, if the chance of a house burning down in a fire is 1 per year per 1000 homes at an average cost of $200k each to repair (totally bogus numbers), then an insurance company can break even by charging a homeowner $200/year to insure the home against fire.
Over a large enough number of homes, that should be reasonably close to the actual amount they have to pay out. Tack on a profit margin, and you have a business model.
Edit: Fixed numbers a bit. Thank goodness I'm not an actuary.
Insurance companies essentially work by the Law of Large Numbers: that in a large enough number of trials, the average value should approach the expected value. In real world terms, if the chance of a house burning down in a fire is 1 per year per 1000 homes at an average cost of $200k each to repair (totally bogus numbers), then an insurance company can break even by charging a homeowner $200/year to insure the home against fire.
Over a large enough number of homes, that should be reasonably close to the actual amount they have to pay out. Tack on a profit margin, and you have a business model.
Edit: Fixed numbers a bit. Thank goodness I'm not an actuary.