Insurance and Gambling
Recently I had a discussion with a friend that (ended up) centering on whether or not insurance is akin to gambling.
He was essentially displeased with the idea that insurance is simply gambling, I argued otherwise. His view centers on the idea that insurance is the business of spreading risk thin enough that no one will suffer a loss. You can see this should be true if you look at the number of households and the number of homeowners in the US.
Roughly 75 million owned homes in the US, you can bet that the vast majority of them are insured. We can assume this pretty safely, because most homeowners don’t actually own their homes, they have a mortgage, which almost always requires the home to be insured. This also accounts for the remarkably low cost of homeowners insurance.
The number of homes destroyed or significantly damaged in a year is very low compared to the number insured, thus the risk is sufficiently spread and everyone makes a profit. No real gambling involved. My friend is correct.
It happens that I’m right also, because as any good gambler knows, if you have a reasonable chance of losing, you get out of the game before that happens. Insurance is still simply gambling. With homeowners insurance you are betting that your house will burn down, the insurance company looks at those risks (and the risk of a catastrophe with all of their other policy holders) and takes that bet.
The fact that both you and the company that insures you have well insulated yourselves from risk is irrelevant. It’s still gambling. The insurance company will take a small loss to rebuild your burned home and you get a new house. The fact that the risk is there ensures a steady supply of business for the company to ensure they are always in the black.
It works for all types of insurance, even health, and accounts for the relative cost of each type of insurance.
I still say it is straight gambling, because risk can only be managed, never eliminated, and so persists even with the most prudent companies and consumers.