Why Insurance Is Not Gambling

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.”

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.