But our explanation, that "Lottery tickets are foolish 
  because they have a negative expected return" isn't 
  exactly credible if we think insurance is a good deal.

It's my experience that if you offer homeowners the opportunity to gamble all their properties, double-or-nothing on a gamble biased 60:40 in their favor, no-one will take you up on that. Even though the gamble has a positive expected value.

My theory is the marginal utility [1] of your first home, which you stand to lose, is greater than the marginal utility of a second home, which you stand to gain.

[1] http://en.wikipedia.org/wiki/Marginal_utility