Insurance as Gambling

Are you willing to bet that your house will burn down? You are if you own fire insurance. Buying insurance constitutes gambling. When you purchase fire insurance, you are betting with the insurance company that your home will burn down. If it burns down, you win, and the insurance company pays off. If your house doesn’t go ablaze, you lose your bet, and the insurance company keeps your premium payments and gives you nothing.

Although insurance is gambling, it’s a form of gambling that actually reduces your risk. Imagine that for some strange reason you were forced to bet $50,000 that the Buffalo Bills will win their next football game. This bet is obviously very risky. If you can’t cancel this bet, another way to reduce your risk would be to make another $50,000 bet that the Buffalo Bills will lose their next game. If you bet $50,000 that the Bills will both win and lose the game, then you are assured of breaking even. Your two bets cancel out and you have eliminated the risk from the first bet. When gambling, two bets are sometimes safer than one.

Owning a home automatically forces you to take a bet that your house will not burn down. If you own a home but don’t have insurance, then you are far worse off if it burns. When you buy fire insurance, you are making an opposite bet that your home will burn down. These two bets mostly cancel each other out and reduce the risk in your life.