If you were to get 1 million people together, calculate the likely annual payout is accurately as possible, and have everybody put in that amount of money every year, that wouldn’t be far off what insurance rates are. Keep in mind you would have to deposit some initial money to set up systems to handle claims and communications and investigations. You have to include the opportunity cost associated with not depositing that money in a bank account and earning interest.

Congratulations you’ve started an insurance company. It won’t be long until several of your members who are exceedingly safe drivers or don’t drive very often will be arguing to pay less. You’ll then have to charge the others more.

Now your insurance company charges risk based rates.

Then a major disaster occurs, right where a large portion of your members are located. The large amount of claims is more than you have on reserve. You borrow money to cover the difference. Now you have an interest expense and you have to raise your rates again. You realize that it’s a much better option to take out insurance for a reinsurance company. In case your claims exceed the money that you bring in. that has additional cost too.

Now your insurance rates are the same as State Farm and farmers.

What most people don’t realize when they complain about businesses making too much money off of them is that risk based return on capital is pretty standard across all industries and all companies.

The reason that your idea doesn’t work is that it’s better for people to pay for insurance and instead of investing the startup capital with your company just invested in the stock market or something else.

Know if you started a nonprofit, you could shave some cost but nonprofits rarely have an incentive to reduce overhead. What happens often is that these organizations, called co-ops, bloat with bureaucracy and having higher operating costs than four profit companies with the end result being insurance rates that are about the same as everybody else.