Final answer:
It is true that insurance companies price their policies based on the likelihood and size of claims. They use premiums to cover claims, administrative costs, and ensure profitability. Negotiating power with service providers also helps manage overall costs.
Step-by-step explanation:
The statement is true: insurance companies indeed price their insurance policies to reflect the probability of a claim and the size of that claim. These companies rely heavily on the premiums collected from policyholders to cover claims. However, they must also account for the costs of operating a business, which include administrative costs and the costs associated with hiring workers and processing claims.
Beyond claim payments, insurance premiums are subjected to several other uses. They need to cover the administrative costs of the business, potential investment into reserves, and must still allow for profit margins. The balance of premiums, expenses, and profits is crucial for the sustainability of insurance firms.
Moreover, due to the vast number of clients that insurance companies have, they possess the bargaining power to negotiate with health care and service providers for rates lower than what an individual would typically get. This negotiating strength further helps insurance companies extend the benefit to consumers and manage costs effectively when paying out claims.