I think this is too reductionist as an interpretation.

With an insurance (especially something like travel/home insurances) you are not trying to game the premium, you are rather protecting risk of a preexisting situation.

Sure you can use it to gamble, like buying a few dozen houses and hoping they catch fire sooner than later.

Similarly with the stock market, stocks unlike a casino chips do produce value and represent real quota ownership of an asset. It can be misused in similar ways but it posses distinct qualities.

You've identified a difference in motive between recreational gambling and insurance, not a mechanical difference. The woman in this article had different motives to the usual insurance customer.

The point is that one party says to the other "I will give you $X once a month, and if event E doesn't happen in that month, you get to keep this money, otherwise you must give me $Y (s.t.Y >> X)".

You can replace E with "my house burning down" or "The red team wins". In either case, I would call this a bet.

Insurance is just a specific type of gambling where you do it because E is bad and you want to be safe in case it does happen.

Insurance and gambling are the inverses of each other.

In gambling, the unlucky losers pay the lucky winners. The people who picked the winning horse, who threw the better roll of the dice, who invested in the right stock get paid.

In insurance, the lucky winners pay the unlucky losers. The people whose house burned down, who came down with a really expensive disease, who lost their jobs get paid.

Not really. I don't think the insurance company thinks of themselves as a lucky winner when they have to payout a claim. They lost the bet.

However, in theory insurance is more about pooling risk, where payouts from claims do not exceed premiums collected from the risk pool. Though sometimes insurance companies overextended themselves into places where they are not collecting enough from the pool to cover claims.

The insurance company isn't really taking the other side of the bet, it's the rest of the risk pool.

If you are lucky, you will never be seriously sick in your life, never lose your job, and never have your house burn down. If you are so lucky, all of that money you pay for insurance goes to the people who are less lucky.

So the insurance company is the bookie.

Well, this is also how casinos work. Games are invented so that asymptotically, the gamblers will, on average, loose money.

Insurance companies achieve the same thing by setting your premiums according to whatever they assess the risk to be. Again, asymptotically, people pay more in insurance premiums than the insurer pays out.

The house always wins.

Per narrator's comment above [1], a better way to explain the difference is that, for insurance, the insured doesn't want the event to happen, even knowing they'll get a payout, while in gambling, the insured wants the event to happen because of the payout.

This nicely aligns with what the practice of insurance actually involves: they do a lot to ensure that the client doesn't want the insured event to happen.

[1] https://news.ycombinator.com/item?id=23527972

> You've identified a difference in motive between recreational gambling and insurance, not a mechanical difference.

I see also this one as needlessly reductionist. By that logic also taking a day off from work to interview for a new job is gambling.

The difference I gave are also more than just motive. With insurances you are supposed to desire the risky activity (owning an house, booking a trip, driving) independently from the payout, and moreover the transition to insurance in meant to decrease the variation in outcomes. Two characteristic entirely adverse to the nature of gambling.

In a Russian Roulette analogy, gambling is betting money on who wins pushing people to play more and more as the payout increases hoping to leave a winner; insurance is more complex, it is taking an already running game that you had already chosen to play for your own reason with no money involved and introducing a fee that will payout to the loser's family. You are not supposed to want to "win" that bet, actually it is part of the insurer job to make sure of that.

It is still in the category of "financial probabilistic interaction" which is just one of various requirements for gambling.

There is also a difference in pricing.

Gambling is priced as a game, a personal luxury. You pay quite little for a vanishingly small chance at a payout. Notice how there are very few people who actually ever "count on" a lottery ticket to pay out.

Insurance, on the other hand, is priced for the market. People will simply go somewhere else if the insurance company is taking too large of a slice.

In some cases, gambling can start to become insurance, if the gambling market is efficient enough. For example: "Matress Mack" when he insured himself against his "Free matresses if the Astros win the World Series" promotion using phone-in sports betting. Even in this case, however, the "insurance" seems costly at 13 million dollars!

> a mechanical difference

Insurance and gambling have very different legal regulations in almost every jurisdiction.

There was a slumlord in my area that used to buy flood insurance before a major flood, and then put a bunch of broken appliances in the units, prior to the flood, to claim the damages.

That sounds like insurance fraud. At least if that person declared known broken appliances as working I am almost sure it is insurance fraud.

For sure, the guy was a scumbag.

What you are outlining are the "extra steps" that the GP was alluding to. We call it "risks" but it turns out to be a kind of a gamble that the insurance company takes us up on, but with the house advantage.

But then it is the insurance that is betting on you. Sort of like a Mr Beast video.

I would reserve gambling for something offered to some kind of a consumer/costumer market.

The major difference is that insurance is not supposed to put you in a better position than you were before the loss. (This gets slightly tricky when, for example, you insure an item at its replacement cost, instead of its depreciated cost...but that's about as far as it is supposed to extend.)

Except the part where losing your house ruins your life, meanwhile your team losing just ruins your evening. That is the key difference. I agree that for easy to replace items, insurance and sports betting is the same, thou. (If you bet against your own team)

Except for the case where you have bet your house on your team...

That's one's own stupidity then. This is why gambling falls under specific rules - to prevent people from doing stupid things.

But this is the point, betting creates the risk in this case, insurance exist to reduce a preexisting risk.

Financial products can usually be traded for three purposes: speculation (or betting), hedging (or insurance) and arbitrage. The product is the same, the name of the action depends on what the buyer is trying to do.

But "insurance" isn't strictly a financial product (the kind that's traded on exchange). For example, if you buy life insurance, you can't then resell it (equivalently, I cannot buy insurance on your life) because that would cause some pretty unethical incentives.

You can buy life insurance for other people if there’s an insurable interest.

You actually used to be able to purchase life insurance on any other people, although you’re correct on why that’s a bad idea. The darkest examples would be companies in high risk work buying life insurance for workers, which reduces the incentives to provide adequate safety equipment.

You as a client may be unable to resell the insurance (for the unethical incentive reason you mentioned), but big bundles of life insurance policies are definitely traded on a secondary market by the insurance companies. This is called "reinsurance" and allows the insurance company to reduce volatility in cashflows, thereby decreasing capital requirements per policy written and this increasing the total amount of policies that can be written.

Actually, it seems like you can do that in Germany.

Insurance is gambling that reduces your risk, rather than increases your risk.

That's generally the reason for why it's treated differently, by law.

> Insurance is gambling that reduces your risk, rather than increases your risk.

Aren't hedge funds (nominally) doing the same thing?

Yes, but hedge funds have a larger counterparty risk. Their hedge is more likely to not work out, than your insurance is to fail to pay up. (And this aspect of insurance is quite heavily regulated.)

People (typically) buy house insurance to manage their risk to a level that they will tolerate. This creates security and allows for greater investment in something.

It's actually completely different to sports betting...

It's actually interesting that a lot of countries has laws regulating gambling because of how destructive it can be for an individuals economy, life and general health. Yet, it's still possible for rich people to gamble using thousands of peoples homes and jobs as insert on the stock-market.

> Yet, it's still possible for rich people to gamble using thousands of peoples homes and jobs as insert on the stock-market.

Trading instruments like mortgage-backed securities does not constitute "gambling with people's homes." It's not like someone's taking your home away just because of some CDO trades.

"Activist investing" (think Icahn) might, albeit indirectly. But that certainly doesn't make up a big chunk of the market and its activites.

2009 disagrees.

Who exactly lost their home while paying their mortgage on time?

I'm not saying that the GFC wasn't massive (it was) or that people didn't lose their jobs and homes (many did), but MBS were not at fault. Subprime lending was, among other factors.

MBS were the engine that kept a housing mania going. But as you said, they didn’t make people over leverage their own houses.

Arguably the originator banks deserve a lot more blame for that, since they actually were the ones willingly handing out bad loans and/or encouraging bad consumer practices.

How many people lost their jobs and got into financial problems, is the question you should be asking.

Answer: unemployment went from 4.6 to 10%, and it took eight years to recover: http://infographic.statista.com/normal/chartoftheday_8974_us...

A lot of countries have laws regulating stock markets.

No, you bet on nothing happening. Nobody wants to see their holiday ruined, their house burnt, or their health go to shit, but you get insurance so that IF it does happen, and you hope it doesn't, you won't get fucked over financially.

Insurance is done to reduce risk, gambling to increase risk.

Betting on sports is insurance if and only if you bet against your own team for an amount not greater than the winnings.

Gambling does increase risk, but it is not done TO increase risk. Risk is accepted (or embraced) to increase reward.

Of course it gets murkier when people talk about the “rush” of gambling, which is I think what you’re alluding to, but it’s not as straightforward as you make it or the most popular gambles would be those with the longest odds or the highest chance of complete ruin.

No-one gambles to increase risk. Waging a bet against a payout is only superficially different from waging a premium against a catastrophe.

What?

Insurance is about spreading loss around to make costs more predictable. Your house burns down, but since we're all paying into our insurance we all cover your costs so you can rebuild and not have your life irrevocably destroyed.

It's the opposite of gambling. It's about reducing randomness, insecurity, and financial shocks.

By this logic, any industry that involves measuring probability and minimizing risk is "gambling".

Agreed wholeheartedly (I posted something similar but hadn't seen your comment before doing so.)