I am asked this question almost daily, “Why do we buy insurance?” I have found that the easiest way to understand why is to assume insurance did not exist.
Ownership of property is an expensive experience. Loan payments can push personal budgets to the limit. Property needs regular maintenance, and sometimes costly repairs. As a property owner, you have a risk that you might need to spend money. Planning for that expense can reduce the risk. This is called “risk management” and there are four aspects to managing your risk.

1. You can avoid the risk. If you own a home, sell it. You are avoiding the risk of expenses to maintain your home. You won’t have to worry about the cost to fix a leak in your roof because you won’t have a roof anymore.

2. You can maintain the risk. You can put together a financial plan to save money and have an expert perform regular inspections of your roof. Then, if an inspection reveals a problem, you have the money (or at least some of the money) saved up for the repairs.

3. You can accept the risk. There are some things you just can’t plan for. If they happen, you just have to accept the repair cost.

But that leaves a pretty big exposure. There are a lot of things that can happen unexpectedly. Some are small, like a rock shot through a window by a landscaper’s lawn mower. And some, by comparison, are larger, like the cost to repair fire damage. Is there a way to manager those larger, unexpected, expenses? Yes, it’s called insurance.

4. The fourth aspect of a risk management program is insurance, or the transfer of risk to another party. That party, the insurance carrier, agrees to provide financial assistance to you, the insured, if an event, called a peril, causes damage to your property. In exchange, you agree to pay the carrier a premium and accept some of the repair cost, called the deductible.

Now, the carrier doesn’t cover all of the events that could damage property. Otherwise, the carrier might as well own the property. The carrier excludes maintenance-related damage, for example (which is part of your risk management program). But for certain perils, the carrier will bear the cost of repairs. The trade-off of a premium that is a small percentage of the overall exposure is the transfer of risk. For example, assume your house would cost $250,000 to build from the ground up. You probably don’t have $250,000 in the bank in order to accept the risk yourself. But, you can pay an insurance company about $2,500 per year and the carrier will accept the risk. For less than 1% of the exposure, you can be protected for certain perils.

Take the house out of the examples above and replace it with condominium association. Does your association have the [likely] multiple millions of dollars needed to replace all of the association buildings if they are destroyed in a fire? How about just one building? Likely no. Insurance is a good thing.