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Betting On Insurance

>> Sunday, October 3, 2010

Casinos are all the rage right now and it seems timely to relate it to another form of risk related item which most would prefer not to talk about, insurance.

In the financial planning line, it is common to hear remarks that one does not believe in insurance. These remarks are often made by people who feel that insurance is similar to gambling at the casino. They liken it to placing a bet with the insurer that the insured event does happen.

On the surface, the similarity of money wagered for a chance event is obvious. However, taking a deeper comparison, there are two main underlying differences.

Firstly, there is a fundamental difference in the chance event involved. In gambling, the event creates a new risk that has not existed before. For example, if one was to bet on dice, the event is the outcome on the dice. This event could happen without any dire consequence if no one betted on the outcome or would not have mattered if the dice was not even rolled on purpose in the first place.

However, in insurance, it is transferring the risk of an existing event. For example, if one was to bet with the insurer on one’s death by accident. If the outcome happens, the family of the insured would suffer and it is a risk that existed already.

Secondly, the next difference is in the “interest” of the outcome. In gambling, the winner gains at the expense of the loser. Both parties hold opposing interest by betting against each other.

In insurance, the insurer and the insured hold the same interest. They both do not wish for the chance event to happen. The insured has indeed paid money, although the event does not happen, he has bought a peace of mind for financial protection.

Therefore, insurance is socially productive compared to gambling. Insurance allows risk transferring of an existing event and giving comfort that it can restore the insured financially if a loss occurs. Whereas gambling creates unnecessary new risk and never restores the loser to his former financial position.

- Written for IMSavvy


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