By Donald D. Brown
October 25, 2011
Gambling and insurance are two different things. Honestly.
I often hear people joke about how insurance is really nothing more than gambling, i.e., betting that something may or may not happen to their home. Beyond the science of actuaries, there is a distinct difference. It really all comes down to risk.
Gambling introduces risk where none exists. Gambling is the wagering of money or something of material value (referred to as “the stakes”) on an event with an uncertain outcome with the primary intent of winning additional money and/or material goods. Typically, the outcome of the wager is evident within a short period. Put another way, gambling is “speculative risk” where there is a chance of loss or gain.
Insurance mitigates risk where risk exists. Because contracts of insurance have many features in common with wagers, insurance contracts are often distinguished under law as agreements in which either party has an interest in the “bet-upon” outcome beyond the specific financial terms. E.g.: a “bet” with an insurer on whether one’s house will burn down is not gambling, but rather insurance — as the homeowner has an obvious interest in the continued existence of his/her home independent of the purely financial aspects of the “bet” (i.e., the insurance policy). Nonetheless, both insurance and gambling contracts are typically considered aleatory contracts under most legal systems, though they are subject to different types of regulation. Insurance for the consumer handles “pure risk” where there are two outcomes, loss or no loss vs. loss or gain.
Said another way, insurance and gambling are two institutionalized approaches to risk-taking:
– Gamblers pay to take unnecessary risks
– Buyers of insurance pay to avoid the consequences of necessary risks
Think about it. What is the chance you are going to roll a seven at the craps table? You are at no risk of rolling a seven.
What is the chance you or I will die tomorrow? I guarantee that both you and I will die at some point – hopefully not tomorrow – but it will happen. Guaranteed. There is a certain and unavoidable risk that we will die.
There are four ways to handle risk.
1) Retain the risk.
2) Avoid the risk.
3) Transfer the risk. Transferring the risk is insurance.
4) Mitigate the risk.
Retaining the risk – without transferring it – is self-insurance. You will bear the cost of the loss in entirety.
Avoiding the risk – walking to the store instead of taking the car will keep you from being a driver in a car accident.
Transferring the risk – purchasing an insurance policy makes a third party – the insurance company – liable for payments due to someone that you injure or are indebted due to your actions. If you hit a pedestrian with your car, your insurance company is contractually obligated to defend you in court and to pay any damages to the injured party to the extent of the policy you have with the insurance company.
The fact that risk is not tangible creates a certain comfort level within even the most reasonable people. It will always happen to the next guy. Risk is real. It continually surrounds us. It can be tragic not to believe in its existence.
About the Author: Don Brown is an insurance agent in DeFuniak Springs, FL, a Senior Fellow at The Heartland Institute, former member of the Florida House of Representative and Chairman of the House Insurance Committee.
