Insurance contracts are often seen as a form of gambling. That is
because they appear as a type of wager that takes place over the
lifetime of the policy. Basically the insurance company is willing to
bet that you and your property will not suffer the loss insured against.
In exchange for making this bet, and taking on the risk, the receive
your premium. If they win the bet, they keep the premium, if they lose,
they make the payout. In this sense, they are often compared to a type
of long term financial casino.
The difference between your premium amount, and the amount the
insurance company will have to pay out if the loss occurs, is simply the
odds the insurance company is getting for taking on the bet. Its just
like going to the horse races and betting on a horse that pays out 10 to
1.
This view of insurance has led to a number of people and religious
communities disapproving of insurance because of its similarities to
gambling. Among those groups that avoid insurance are the Amish and
Muslim communities. What these people do instead is create a system of
what is known as social insurance. What this means is that if there is a
disaster and someone suffers a heavy loss, then the whole community
will step forward and help them to deal with their loss and rebuild.
While this system is very simple, it has the potential to be just as
effective a safety net as insurance. However, it requires that the
community actually does step forward and help those who suffer from
disasters. This means that it is more successful in small closed and
closely knit communities than in large modern societies.
Social insurance systems therefore are not always effective. Often
the community that is supposed to adopt it is not suitable. Also, in
very large disasters the system can break down as a small community will
not be able to rebuild itself completely without outside assistance.
This is why larger modern insurance systems can be more robust. However,
in extremely large disasters, modern insurance systems can also run
into difficulties. This is witnessed by the fact that it is impossible
to insure against certain risks such as floods and earthquakes. This is
because the damage would be simply on too large a scale for the
insurance companies to cope with.
There are other ways in which insurance doesnt follow the gambling
model. For instance insurance companies seek to reduce the risk of the
loss occurring constantly, for instance by requiring the installation of
fire alarms, or by reducing the loss if the insured against event does
occur, for example by providing rehabilitation to accident victims.
Therefore insurance is like a gamble in the reward and risk elements,
but other elements are different.
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