Principles of Risk Management and Insurance, 13th Edition

Insurance and Gambling Compared

Insurance is often erroneously confused with gambling. There are two important differences between them. First, gambling creates a new speculative risk, whereas insurance is a technique for handling an already existing pure risk. Thus, if you bet $500 on a horse race, a new speculative risk is created, but if you pay $500 to an insurer for a homeowners policy, which includes coverage for a fire, the risk of fire is already present. No new risk is created by the transaction.

The second difference is that gambling can be socially unproductive, because the winner’s gain comes at the expense of the loser. In contrast, ­insurance is always socially productive, because neither the insurer nor the insured is placed in ...