Compare Gambling And Insurance
Some people think that buying insurance is like gambling. They say that if we end up using it, we win and the insurance company loses. If we never end up using it, we lose and the insurance company wins.
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The casino relies on the law of large numbers for their business model. Players are hoping to have the occasional short-term run of luck. The casino knows that these short-term runs of luck are more than compensated for by the actual expected results on all the other bets being placed constantly throughout the casino. Gambling.com Compares the UK's Best Online Gambling Sites and Games. Independent product reviews & exclusive sign up offers. Some people think that buying insurance is like gambling. They say that if we end up using it, we win and the insurance company loses. If we never end up using it, we lose and the insurance company wins. However, buying insurance is actually very different from gambling.
Why Insurance is Not Gambling
However, buying insurance is actually very different from gambling. When we enter into a gambling engagement, such as buying a lottery ticket or putting money in a slot machine, we create risk of loss that did not previously exist. In other words, there was no risk of losing money to gambling until we bought the lottery ticket or put the money in the slot machine.
Insurance takes a naturally existing risk and transfers it from one entity to another. Total risk in the world is reduced, because the insurance company combines a lot of risks, and the risk of its portfolio is smaller than the sum of the risks of the individual policies. Gambling creates an artificial risk. Insurance is not Gambling (Explained) Insurance and gambling were considered alike because there is an uncertainty of events and payment is made when the event occurs. Like gambling, the insured is unaware of the time and amount of loss. If the event occurs, the insured like the gambler gains; otherwise, they are experiencing the loss.
Conversely, the risk of financial loss from other causes already exists whether we purchase insurance or not. For example, my home faces the same risk of being burned down by a fire whether I buy homeowners insurance or not. If I do not have homeowners insurance, I am faced with the possibility of having to pay completely out of my pocket to rebuild my home in the event of a fire.
How Insurance is Better than Gambling
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Even if we never end up using our insurance, we still benefit from it because it enables us to live a full, fun, free life that is unencumbered by constant fear of loss. If insurance did not exist, we may not feel comfortable buying or doing many of the things we now consider to be no big deal. When we are properly insured, we feel free to buy expensive homes, drive our own cars down the freeway, fly to Hawaii, cruise through the mountains on ATVs, ski down black diamond runs, and maybe even hike through the rainforests of South America.
How the San Francisco-Oakland Bay Bridge Illustrates the Benefit of Insurance
Have you ever driven across the majestic San Francisco-Oakland Bay Bridge that spans the San Francisco Bay in California? It is very impressive. According to the California Department of Transportation, it is 4.5 miles long (one of the longest spans in the world), 5 lanes wide, and stands about 200 feet above the water level of the bay. On average, 280,000 vehicles use the Bay Bridge per day. The speed limit for most of the bridge is 50 MPH, so thankfully it is equipped with hefty guardrails on each side.
For those of you who have driven across the Bay Bridge, have you ever hit one of the guardrails? I am sure that a very small percentage of the 280,000 vehicles that cross the bridge every day have ever hit the guardrails. However, if the guardrails were removed, how fast do you think people would drive across the bridge, even though they have never needed to use the guardrails in the past? 20 MPH? 10 MPH? Some of you may quip that you have never been able to drive more than 10 MPH over the bridge anyway because you are always crossing at rush hour, but you get my point.
Even if no one ever hits them, the presence of the guardrails still improves the lives of everyone who crosses the bridge because they can enjoy the drive without having to worry about falling into the water, and they can drive much faster than they would dare to drive otherwise. Would any of these passengers argue that building the guardrails was a waste of money?
Much like guardrails, insurance benefits our lives by increasing our efficiency and reducing our fear, even if we never end up using it. We must carry adequate insurance coverage in all of the essential areas if we are serious about maintaining financial security throughout our entire lives.
Are You Properly Insured?
At Capstone Capital, we help simplify your life by managing your financial assets so you can have peace of mind and focus on the most important things in life. If you have questions about your own insurance coverage, please contact us to schedule a free consultation.
Adam Dawson, CFP® is a Principal at Capstone Capital and the author of Timeless Principles of Financial Security.
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In my early years in the insurance field, it was quite difficult to convince myself, let alone others, that insurance is not the same as gambling. In those days, any attempt to convince someone on the need to buy insurance was almost always met with resistance and a concluding remark that, “No, I can’t buy your insurance. I don’t like gambling.”
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As I progressed in the profession, it gradually became clearer to me that insurance is distinct from gambling. But the fact remains that many people out there still remain difficult to convince. They hold strongly to the view that insurance is gambling and, for many of these people, they would never have anything to do with any of the two.
From the surface, insurance and gambling look alike: they have to do with risks, they are both contracts, and payment is made from a pool of fund in both cases. Insurance and gambling fall within the aleatory category of contracts. By definition, aleatory contracts are those “contracts in which the performance of one or both parties is contingent on a particular event.” They are both contingent on “something happening.”
For gambling, you take a bet and if you win, you get paid. But if you lose, the other party profits by pocketing your money or whatever you bet with. For insurance, you get paid if the insured event occurs. If you are lucky (or, is it unlucky as some people claim?) that you do not suffer any loss; the insurance company keeps your premium so you get nothing from them. When one looks at insurance from this perspective, it becomes quite easy to conclude that insurance is the twin sister of gambling.
I must accept the fact that this was actually the way people perceived insurance at its early stage of development. The first life insurance law which was enacted in Great Britain in 1774 was aptly titled Gambling Act 1774 (or Life Assurance Act 1774). It illegalized gambling with people’s life. Prior to the advent of this law, it was possible for David to insure the life of Charles with a view to profiting from the death of Charles, whether or not there was any financial interest or relationship between the two of them. In other words, before the passing of the Life Assurance Act (Gambling Act) on 20th April, 1774, one could take out a life insurance policy on anybody’s life (including a criminal) with the expectation that the person insured would die before a specified date. If death occurred as expected, profit would be made by the one who arranged the insurance as he would receive a payment. The law stopped all this form of gambling practices.
One of the easiest ways of differentiating between insurance and gambling in this modern days is to look at what gamblers and those who buy insurance do. A gambler pays to take an unnecessary risk. He creates a risk for himself and he knows full well that he would either win (and make profit) or lose (and bear the risk of losing his money). On the other hand, someone who buys insurance is actually paying the insurance company to avoid the consequences of risks that are necessary. The risks are already there for him, duly identified, and he is paying to avoid or minimize the negative financial effects those risks could have on him. Such risks being insured against are essential for human development and they include, among many others, the risk of accident while travelling in a car, the risk of fire while manufacturing goods in a factory, and the risk of falling and dying while constructing a 25-storey building.
Gambling belongs to the class of risks known as “speculative risks.” These speculative risks present one with the probability of making a profit or losing. There is no in-between. You either lose or win. Insurance, on the other side of the coin, belongs to the “pure risk” classification of risk where one either suffers a loss or remains in the same position (i.e. neutral). One does not profit from a pure risk exposure. If you insure your car for a year and no loss is recorded, you simply continue to ‘cruise’ your car around (i.e. neutral).
If the above still confuses you, I think you can just distinguish between insurance and gambling by looking at your insurance premium as the price you pay to buy yourself peace of mind from identified risks. Once you pay the premium to the insurance company, you buy peace of mind because of the promise you receive from the insurance company that payment would be made if you suffer a loss. You don’t buy such peace of mind when you put down your money in a bet. In fact, when you put your money down in gambling you actually buy yourself some worries and apprehension. You are scared that you may lose and say goodbye to your money forever. But if you win, luck is probably on your side. Unlike insurance, nobody promises you that payment would be made if you lose in a gambling attempt.