The Difference Between Insurance and Gambling

I've mentioned this before: Insurance resembles gambling. The odds are always stacked in favor of the "house". This means that both your insurer and your favorite casino are not charitable institutions, but organizations looking to make money.

Here's where the analogy ends: Casinos will always welcome you back as long as you aren't ripping them off. Your money is always good. But that isn't so with insurance companies. In fact, you have to play very carefully with some insurance companies. Although they are supposed to determine a fair premium that actually "covers" you in case you need to make use of their service, in some cases, just when you need them, they can decide that they don't want you as a customer any more.

Let's look at an example: I know of an acquaintance who had insurance on his home. He'd been a good customer with his insurer for years, always paying his premiums on time. Then, the unthinkable happened, and his home was broken into. He called his agent.

His agent (straight shooting guy that he was) told him flat out that if he claimed on his insurance, he could lose his house. My associate was stunned. He asked how this was possible. The agent said that if he claimed, the claim would be honored. The insurer would pay out. Then they'd cancel his insurance, because he'd become a "significant risk". (Of course, insurance is supposed to cover you from risk, but let me finish the story...)

Once his insurance had been cancelled, he would find that other insurers would treat him as a significant risk as well because all insurers share a central information source on customers. So, no one else would insure him either. As soon as his insurance was cancelled, his lender would then require his mortgage to be paid in full, because -- after all -- he's now raised the risk to them. Without insurance, if anything happens to the house, the mortgage lender is going to be out of luck. He couldn't possibly afford to pay his mortgage off immediately. And so... he was told not to claim on his insurance.

It's not illegal for the insurance company to decide that you are "high risk". A lawyer couldn't necessarily help him. In the end, my acquaintance paid for his losses himself.

The moral of the story? Pick your insurance company carefully. If you can get insider information, so much the better. Try to find out their customer service history (including claims policies and risk rating approach) whenever you can. The lowest cost premium is not always the best buy. Check the web for complaints about insurers and take them seriously. Or otherwise, just when you need your insurer to be your advocate, they could become your worst adversary.

2 comments
Posted by John D on June 7,2006 at 11:27 AM
Insurance is where we invest small amounts on the risk that we will be financially better off in the long run.  

Insurance is where we invest with a company on the hope that we will win big at their expense.  For the purpose of the investment is to have the company suffer what misery may befall us by accident or neglect.

Insurance is not gambling if the only purpose is to gain protection from being harmed.  For fire insurance replaces only what is lost, and accident insurance strives to undue the damage done.

For the word insurance means protection, and when we bet on the hope of winning back more then we lost, then we are gambling, then we are taking an unnecessary risk.

In regards to safety, because insurance gives us a feeling of being safe from financial harm, it also gives us a cavalier feeling of being safe from mortal harm.  And because of this great care needs to be taken, otherwise insurance may makes us more careless, more accident prone, and more inclined to cause harm to others.  

For over half of vehicle fatalities are caused by alcohol, and if a law was passed allowing insurance to pay for damage only after a drunk's life savings had been exhausted, then hardly anyone under the influence would climb behind the wheel.  

For research studies show that most traffic accidents are premeditated, in that people take calculated risks knowing the harm they may cause, and weigh it against the risks involved.
Posted by John Ellis on June 4,2006 at 4:26 PM
It has been said that insurance gives drivers a cavalier attitude toward safe driving, and as such is the major cause of accidents.  And so, what would happen if an insurance company were to give drivers who had never caused an accident a super discount if they agreed to be self-insured? In short, pay for the harm they caused to the extent that insurance would pay for damage only after a driver's life savings had been exhausted.  Why, would not that insurance company be the hero of the world?
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