Technocrat

Insurance = Legalized Betting

wowbagger
Sun Jul 22 06:31:03 -0700 2007
 (in reply to Extreme Environment Becomes too Costly for Large Insurer ) manage
What folks tend to forget is that insurance is just a form of legalized betting, in which the insurance companies play the role of the bookie.

Consider: Bookies operate by defining a set of events (bets). They offer a given set of odds for that event, based upon their knowledge of the events and the probabilities thereof. They adjust those probabilities based upon the number of people betting on each side of the event — should more people bet on event A than are betting on Not event A, the bookie will raise the odds of A vs. Not-A until the bets are such that the bookie will make money no what the outcome — this can happen because the bookie does not set the probabilities he offers to be symmetric (if A is 2:1, then Not-A is not set to 1:2).

Now, consider insurance companies. They define a set of events. They offer a given set of odds (your rates vs. the level of coverage) based upon their knowledge of the probabilities thereof. They adjust those rates based upon the number of people insuring against the event, such that they are guaranteed to make a profit.

The only real difference is that bookies are not (usually) forced to accept all bets by law, nor are the odds they offer limited by law. If you can contrive to get Pee-Wee Herman in the ring with Mike Tyson, the law will not tell the bookie that he must accept your bet on Pee-Wee at a billion to one.

With insurance, the law tries to force the insurer to take all bets, AND it tries to force the bookie to not set the odds appropriately. That means the bookie isn't going to make as much money as he wishes. Guess what! The bookie will leave for greener pastures.

Now as to the question of "what about houses in Tornado Alley - when will their insurance be cut?" There is a difference between a tornado and a hurricane: in general, while a tornado might destroy my house, it is not going to destroy all houses in the county. Events like the EF5 that destroyed Greensburg are MUCH less likely than a hurricane making landfall in Florida for any given time period. But rest assured, my insurance rates reflect the risk of a tornado hitting my house.

Lastly, there is the observation that "But the insurance companies are making $HUGEVAL dollars a year - OMGWTFBBQ! they should be punished!" Remember, this is all statistics, so it only "works" over a long period of time. If the insurance companies don't make $HUGEVAL most years, then when a year comes in which there are massive disasters (floods, EF5 tornadoes, fires, etc.) they won't have the cash to pay out. (now, that said: the insurance companies have no right to bitch when such a year comes along: they need to pay out quickly and efficiently, and not bitch about running in the red (or simply in the less black) for a year.) But if I consistently win my bets with my bookie, he has the right to either a) stop accepting my bets or b) alter the odds based upon that fact. Why should the insurance companies be any different?

Insurance = Legalized Betting
Uncle Entity
Sun Jul 22 08:25:52 -0700 2007
 manage
The mighty wikipedia says:
Both gambling and insurance transfer risk and reward. The similarity ends there.
Insurance = Legalized Betting
wowbagger
Sun Jul 22 09:27:17 -0700 2007
 manage
Wikipedia says many things, most of which should be taken with on the order of a kiloton of NaCl.

Both gambling and insurance transfer risk and reward. The similarity ends there. Gambling transactions offer the possibility of either a loss or a gain. Gambling creates losers and winners. Insurance transactions do not present the possibility of gain. Insurance offers financial support sufficient to replace loss, not to create pure gain.
Not true. Consider: I insure my car against damage. Before making even the first payment on the insurance, I get hit. Insofar as the transaction between the insurance company and me is concerned, I have gained more money than I have paid in: I have gained.
Gamblers can continue spending, buying more risk than they can afford to pay for. Insurance buyers can only spend up to the limit of what carriers will accept to insure; their loss is limited to the amount of the premium.
Not strictly true: a gambler may risk only what the bookie is willing to allow him to risk, just as an insuree may insure no more than the insurance company is willing to accept.
Gamblers create a risk that may have no link whatsoever to their personal and family situation. Insurance buyers must have an insurable interest in the insurance transaction. Insurance transactions are built around an exogenous relationship, usually economic or familial.
This one I will give them: when I insure my car, I am betting on an event I could "throw": I can engage in risky behavior that can lead to me "winning" my bet. The downside is that with insurance, "winning" my bet usually has sufficient downside as to not be desirable. In theory, I could make a bet with a bookie and arrange to throw the bet. However, in most cases, if the bookie catches me, "downside" will not begin to describe the consequences.
Gamblers, by creating new risk transfer without regard to existing risk, are risk seekers. Insurance buyers are risk avoiders, creating risk transfer in terms of their need to reduce exposure to large losses.
Again, I'll give them this. But this is more the way in which people choose to use the system, not so much intrinsic to the system (see later comment).
Gambling or gaming is designed at the start so that the odds are not affected by the players (their conduct or behavior). However, to obtain certain types of insurance, such as fire insurance, policyholders can be required to conduct risk mitigation practices, such as installing sprinklers and using fireproof building materials to reduce the odds of loss to fire. In addition, after a proven loss, insurers specialize in providing rehabilitation to minimize the total loss.
Again, not quite true, as I stated previously: the odds of a bet are DIRECTLY affected by the bets of the players. However, this is more the unfortunate wording of this paragraph: the intent is to say that players in betting cannot "throw the bet" as stated above. However, the examples of fire suppression equipment are simply the same as saying "Tyson to win in the second round by knockout" vs. simply "Tyson to win". You are altering the odds of the event to reduce the likelihood of payout in order to reduce the amount of the bet, since unlike betting the payout of the bet is (largely) fixed.
Historically, gambling has been considered an uninsurable risk. Recent developments, however, have led to the invention and patenting of new types of insurance to protect against gambling losses. An example is United States Patent 6,869,362, "Method and apparatus for providing insurance policies for gambling losses."
There has always been insurance against betting losses - they are called "hedging your bets". They are not conducted through insurance agents, but rather other bookies. Additionally, there ARE insurance policies that cover bets: for exmaple, when Taco Bell "bet" that MIR wouldn't hit their target in the ocean, they took out an insurance policy in case they lost that bet.
Insurance, the avoiding, mitigating and transferring of risk, creates greater predictability for individuals and organizations. Insurance enables risk to be handled intelligently to achieve stability and growth.
This is just how the system is used. I could just as easily make a bet with a bookie that my house will burn down within some time period, and have him quote me odds and take my money, thus converting a possible large loss into a probable small loss.
Insurance = Legalized Betting
Uncle Entity
Sun Jul 22 10:50:03 -0700 2007
 manage
I insure my car against damage. Before making even the first payment on the insurance, I get hit. Insofar as the transaction between the insurance company and me is concerned, I have gained more money than I have paid in: I have gained.

Yes but for every person who 'gains' much more people must 'lose'. If everybody gained then the insurance company would soon go bankrupt. What have you really gained here, the cost of fixing the damage...you are no better off from when you started. You haven't 'profited' from the experience.

Not strictly true: a gambler may risk only what the bookie is willing to allow him to risk, just as an insuree may insure no more than the insurance company is willing to accept.

Huh? You don't think bookies give credit?

...the odds of a bet are DIRECTLY affected by the bets of the players.

The odds of throwing a seven in craps is affected by the amount the players bet? Hows that work?

for exmaple, when Taco Bell "bet" that MIR wouldn't hit their target in the ocean, they took out an insurance policy in case they lost that bet.

I think they learned by the guy that collected enough Pepsi caps to get a jet that outragous advertising campaigns carry risk. I would imagine that even high risk insurance is still following the basic risk pool model and so is not really betting but spreading the high risk around.

This is just how the system is used. I could just as easily make a bet with a bookie that my house will burn down within some time period, and have him quote me odds and take my money, thus converting a possible large loss into a probable small loss.

Your example is the same as Tyson betting that he would lose in the second round by knockout. Find me someone that will take that bet. Well, unless the bookie will only pay to replace the house then he is only underwriting your risk just like insurance companies.

The entire purpose of insurance is to pool risk. You and a bunch of other people get together not to 'bet' on who's house is going to burn down but that some of the houses in the pool will. So instead of paying the full price to rebuld your house you pay for a certain portion of the risk along with all the others incase your house burns down.
Insurance = Legalized Betting
Mathinker
Mon Jul 23 01:56:48 -0700 2007
 manage
> > Insurance offers financial support sufficient to replace loss, not to create pure gain.

> Not true. .... Insofar as the transaction between the insurance company and me is concerned,

Wikipedia is explicitly not talking only "insofar as the transaction" is concerned, since it is talking about "replacing loss" where that "loss" is not directly connected with the payment to the insurance company. If, as you claim, you are gaining when the insurance pays you to fix the car, let us assume you have magic powers and can cause this to happen a million times. Wikipedia is saying that even in that case, you wouldn't be rich, which is true.

My apologies if you already figured this out (your post seems to indicate that you do understand but have misinterpreted Wikipedia in order to be able to rag on it), but the other poster's rebuttal of this point didn't seem very clear.
 

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