By John Grant
Insurance and gambling are often compared to one another, but they are different in significant ways. Gambling is putting down a stake in the hope of bettering your financial position. A definition of gambling is:
Gambling is the wagering of money or something of material value 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.
However, insurance is all about managing risk and is defined as;
Insurance ... is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.
Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. Gambling is taking a wager to better your position, and insurance is a risk management technique as a means of avoiding a loss.
So why are the two confused?
Probably because occasionally insurance crosses the line where outcomes improve someones financial position following a claim.
This can occur with some policies where you insure for an event like the loss of a house. If fire destroys the property then most insurers will pay for the building to be fully reinstated. The insured's position may have improved by 'upgrading' from an older property to a brand new property, and no doubt seeing a corresponding leap in value at the same time.
Insurers would argue that it is doing nothing more than reinstating what was there, and after all it's not possible to rebuild a to a "used, second-hand residence" standard.
With life insurance it can be even more confusing for life or living benefits insurance. Here you or your estate/beneficiaries will 'profit' from an insurance policy. Or will they? Insurers will argue that the value of a human life is almost unquantifiable, and insurance is only making up for part of the loss based on coverage choices made by the policy holder.
The closest place linking insurance and gambling could be by considering self-insurance or carrying all or part of the risk yourself. This could well be regarded as a pure gamble due to the potential chance of losing money.
The easy way to differentiate is that with insurance you are reimbursed for part or all of your loss if and when it occurs. With gambling you are taking a wager where you get a chance to put yourself in a better financial position. Insurance puts you back to where you were if you suffer a loss - gambling offers the uncertain chance of a [big] gain.
So the next time a insurance bill arrives, take some comfort in this being part of your personal risk management program; it is not a wager.