Insurance has sometimes been compared with gambling. After all, an insurance company acts like a casino as it asks its clientele to wager on whether they will live or die, whether they will be healthy or sick, whether their house will burn down or not, whether they will be victimized by thieves, or other sad circumstances. It would seem that characteristics of insurance could meet the elements in the definition of gambling: Customers put up money (consideration), and they win a settlement (prize) depending upon a factor of chance (whether or not they become a victim). And of course, like a casino, the insurance company charges a fee for the service of offering its product, and the insurance company also sets the prize structure so that it will make a profit – the odds are in the favor of the insurance company.
These things being said, or to a degree admitted to be true, there are still major distinctions between gambling and insurance, distinctions that allow me to neglect the concept of insurance in the remainder of this encyclopedia. Paul Samuelson’s seminal volume on economics points out the differences. In his section on economic impacts of gambling, Samuelson writes that gambling serves to introduce inequalities between persons and instabilities of wealth. Insurance has the directly opposite consequences. Insurance gives people the opportunity to achieve stability in the face of risks that are often inherent in the nature of things – risks of disease, of fire, of lost property. For a small sum of money, people can purchase policies that will guarantee that the costs of a disaster will not ruin their lives or their families. Gambling purposely introduces risk into a society that is stable; insurance purposely exists to avoid risks. Actually, the insurance company spreads the risks of disasters to a single person among a very large number of persons who buy insurance policies.
Insurance companies may sell policies that cover only a certain set of circumstances. The person purchasing insurance is limited to buying coverage only for “insurable interests”. The insurable interest cannot be as frivolous as the turning of a card or where a ball falls on a spinning wheel. The interest must be a real concern to the policyholder. One can insure his or her own life but cannot insure the life of a total stranger. Insurance companies must limit the amount of insurance sold to values relative to the risks the insurance seeks to avoid. A house can be insured against fire, but only up to the full value of the house. Similarly, health can be insured up to the cost of treatment and collateral losses such as wage losses. The limits on insurance coverage preclude the gambler’s behavior of chasing losses. If the “bad” event does not occur, and a premium payment is thus lost, the insured person cannot simply double the bet for the next period of time. The insurance company and the insured both have disincentives for purchasing excessive policies. Insurance companies make those wishing to have large life insurance policies subject themselves to many medical examinations, including full health screenings. Newly covered persons with health insurance may not be able to receive benefits for a number of months.
By gambling, a person is seeking risks that might severely upset his or her financial stability. By buying insurance, a person is avoiding risks. On the other hand, if a person with a house, other property, or a family dependent upon him or her does not insure the house or property against destruction or himself or herself against illness or death, that person is gambling with fates that strike people often randomly, albeit with some rarity (in short periods of time), but almost certainly over large periods of time.
Gambling activity can be and often is very destructive to personal savings. Insurance, on the other hand, can be seen as an alternative means of savings—savings for a rainy day in some cases. In the case of whole life insurance, savings and investment are encompassed into the policies. Although in some respects the notions of insuring against the occurrence of certain natural events and betting on the occurrence of contrived events may appear quite similar, in actuality they are not very much alike.
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