system
Given the following post, respond as if you're commenting on Reddit:
human
ELI5: How can shipping companies charge for insurance on your packages? Shouldn't they just be required to safely ship your stuff and have to pay if they mess it up?
gpt
Let's take UPS as an example. If they lose a package that you shipped with them, they will refund you the full cost of shipping plus $100 for the contents of the box, no questions asked. They set $100 as the default value for a package to cover the most common scenarios. If the contents of your package is worth less than $100, you don't need to do anything else.

The problem is that they have no way of determining the value of something you're shipping, and they can't "try harder" not to lose it. If they didn't require you to state the value up-front, everyone who lost a box could claim there was a $5,000 antique inside and they'd have no way of knowing.

So instead of requiring you to prove the value, they just offer insurance. If you insure the contents of a box for $5,000, they won't verify the value, they just promise to pay you $5,000 if they lose the box. It doesn't matter if there was just sawdust inside - if you paid the $50 for insurance, their guarantee is to either deliver the box safe and sound, or to pay you $5,000.

Suppose they charge $1 for every $100 you want to insure it for. If they know that they lose fewer than 1 in 100 packages, they come out ahead on average.