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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.

Categories: Uncategorized
  1. 2011/08/31 at 21:55

    Good to see the conversation has been moved here. Let me hit my point home.

    NOT buying insurance is gambling. Please tolerate my bogus numbers. Say there’s a Bad Thing that will cost me $100 to fix, but it rarely comes up. An insurance company says they’ll pay for it if it happens if I pay them $1 every month.

    If I keep paying that $1, I know exactly what my cost will be. I will lose $12 a year in a predictable fashion. If the Bad Thing ever comes up, in this simplified plan I will not pay more than $12 a year. I am insulated from the risk, and financially speaking, the Bad Thing doesn’t bother me anymore.

    Now suppose I don’t pay $12 a month and I take my chances that the Bad Thing won’t happen. That’s a gamble. Maybe it pays off, maybe it doesn’t. Isn’t driving recklessly a gamble? Isn’t not putting 25 cents in the parking meter hoping you won’t get a $25 ticket?

    My argument is that buying insurance is the OPPOSITE of gambling. You don’t profit from the Bad Thing happening, you are instead insulated from it.

  2. 2011/08/31 at 22:14

    Suppose you pay 1$ a month for 101 months. You have now spent more trying to insulate yourself from the bad thing than the bad thing would have cost you otherwise.

    The fact that you may be insulating yourself does nothing to change the fact that you are more likely not to need the insurance than to need it. If it were the other way around you’d be lucky to find someone willing to insure you at a reasonable rate.

    Both not buying AND buying insurance is a gamble. The magnitude of the gamble may change, but the nature of the issue is the same.

  3. 2011/08/31 at 23:29

    Two things. First, I object to the opening premise that Nate has friends. Second, this all very much depends on how one defines “gambling”. I wouldn’t call a call of poker gambling since it involves a lot of skill (which is why there are consistently good and bad players out there), but that doesn’t mean chance isn’t a major factor.

    So to the specific point here, if we’re going to define gambling as simply something which involves risk (thereby including poker as gambling contra me), then I agree with Nate that no matter what one does, gambling is involved so long as insurance is an option. But if we want to define gambling as the presence of unpredictable risk, I have to agree with Michael.

  4. 2011/08/31 at 23:47

    You get insurance because you have predicted the risk.


    You can only get insurance when the risk is predictable.

    I define gambling as any instance where the outcome is uncertain. Therefore you as the consumer have no way of knowing whether your house will burn or not. The insurance company also has no idea. You are both taking a shot in the dark.

    Your house may never burn. You lose money through premiums for something you never needed.

    Your house burns down. Insurance company has to pay out.

    The company takes the biggest risk, like I changed companies than a week later backed my car into a telephone pole. 1649.34 later, the insurance company lost. My premiums are only about 1250 a year. Full coverage.

  5. 2011/09/01 at 00:56

    I almost forgot, your mother.

  6. 2011/09/01 at 10:35

    I agree that insurance is gambling, but I think it’s insurance companies that our doing the gambling. Actuarial tables and betting calculation tables have a lot in common.

    Good to see you have joined the blogging world again.

  7. 2011/09/01 at 10:35

    I hate when any discussion involves going back and defining a word, but I looked up some definitions of Gamble and Gambling and almost all of them said there is an element of risk involved.

    How could spreading out risk be risky?

    I understand the argument that you have to calculate the odds of needing the insurance in the first place, but again, that’s my point that not being insured is gambling.

  8. 2011/09/01 at 11:39

    Does spreading peanut butter on a sandwich make it not peanut-buttery?

  9. 2011/09/01 at 12:36

    If anything involving risk is gambling, then literally everything is risk, so long as we are not dead. For instance, by living in the Universe, we’re risking being swallowed by a black hole. But that isn’t a very good way to go about this sort of discussion.

  10. 2011/09/01 at 13:08

    I think jack has a point, and it’s roughly what I have been trying to say. If insurance were a sure thing for all parties, you would never get turned down. Yet people do all the time.

    If insurance were a universally good and worthwhile thing, everyone would have flood insurance, yet everyone does not. Not because they can’t get it, but because they don’t see the risk of having a flood as high enough to justify the payments. Although they would almost certainly be lower, even over a lifetime, than the cost of rebuilding.

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