Gamblers and insurers both place bets on the future, so how do they compare?
Legally and culturally, there is a clear distinction between gambling and insurance. Economically the difference is less visible. Both gambler and insurer agree that money will change hands depending on what transpires in some unknowable future.
Risk-sharing mutual aid societies are now among the largest and best-funded organisations on the planet – we call them “governments”.
The position of the risk takers and the potential outcomes of the bet are what matter and differentiate the two. Insurance serves to share reduced risk whereas gambling serves to increase it.
The reason this matters is because there is a discontinuity in outcomes when the loser loses so much that they are unable to pay their debts (financial, contractual, societal, etc.) and these losses spill over to other people and the rest of society. If someone gets so sick or wounded that they cannot pay their medical bills (the cost of their physical rehabilitation), then not only is the person bankrupt but the hospital’s ability to provide services to others is impacted negatively.
When a gambler bets at a casino, the gambler is increasing their ceiling of possible outcomes while lowering the floor and the average (because the odds are in favor of the house or else they’d go broke). When someone buys insurance, the insured individual is raising their floor of possible outcomes while lowering the ceiling and the average (because the odds are in favor of the underwriter or else they’d go broke).
People with higher floors of possible outcomes can tolerate more risk. Society historically has benefited substantially when this risk is well managed (e.g. due to trading ships possibly getting lost at sea or an experiment failing).
Insurance can also be seen as the abstraction of shared risk (as the article points out). Two merchants could each swap half their goods with the other’s ship to hedge their risk against a single ship sinking. Or one merchant could financially back the other by paying for half the cost, taking half the losses, and receiving half the profit from a single ship. Or an underwriter could issue insurance based on the statistical likelihood of the single ship sinking. It is more abstract, but the desired outcome is the same — someone else is sharing in your life or endeavour, helping you weather setbacks and worse.
Insurance is about protecting your floor of outcomes and those of the people who depend upon you; it’s about avoiding the worst.