A way to combine the worst features of gambling and paperwork.

You place a bet with the bookie that (for example) your vehicle will be damaged. If the vehicle remains shiny and happy, you lose!
But if you win, and the vehicle is hit by a bus or crushed by a falling tree, then you get to fill out paperwork! And then you might win enough money for a new vehicle and you can keep gambling until you lose!

Yes, you kids think insurance is just for dummies, don't you? Only a fool would pay good money for that stuff. You're just betting against the house, eh?

Well, let's take this example, concerning cars. You are leaving a party one night and you've been doing things you should not do. You light a cigarette and after a couple of drags, it falls out of your hands onto the floor. You reach over to pick it up, and are a bit too slow doing so. Next thing you know, you've just rear ended a car with Mom and Dad in the front and two little kids in the back. Your deed puts the two kids in the hospital for several weeks. Hopefully, they recover.

Regardless, Mom and Dad would like to speak with you: Not just right now, but for the rest of your sorry little life. If you have automobile insurance, the bills will be paid, Mom and Dad will be compensated, and you may live a normal life after this incident. If you do not have insurance, your entire life is now totally screwed.

Another example. You finally buy a house. You don't feel like betting against the house, so you fail to purchase homeowner's insurance. (Yeah, no decent mortgage company is going to allow this, but just play along for fun.) One cold winter day, someone slips and falls on your slippery sidewalk. Not your fault, right? Wrong, my uninsured friend. You have a nice liability claim on your hands now. Insured? No problem. Uninsured? Big problem. You'll be working a lot of hours to pay that little bill handed you by the leading contributors to the Democrats in any election cycle.

I could go on here for a long time, but take a look at example number three before I go. You have your own kid. (Yeah, I know that's a big stretch for a lot of you to imagine, but try real hard.) You have a life insurance guy come by to see you. You tell him to hit the road, Jack: That's the last thing I'm spending my money on! Your wife is pregnant with number two. You're the sole breadwinner because you want Mom to stay home with the kids, and that's what Mom wants to do, too. In fact, she's got no real skills except being a good wife and mother; not that these skills aren't crucial to the species. I'm speaking of marketable skills.

You are coming home one night in your BMW and some uninsured drunk crosses the median and smacks you so hard you don't have time to say, "Shit!" before you're taking a dirt nap.

So what does Mom do now? One on the floor; one in the oven. No paycheck. Beg from the family that remains? Pretty degrading. They may not be charitable. Get a job for low pay and spend it all putting the kids in daycare? Hit the streets as a hooker?

No matter what happens, you could have avoided this problem for the price of a family meal at a good restaurant once a month.

I know many of you are young and don't feel the need. But please don't denigrate things you really don't understand, OK?

Insurance for that +10 Sword of Slaying?

MMORPG and other online games have become so popular that online auctions of game items occur regularly. The fact that one may buy a virtual game item for real money brings up some interesting questions. One such question is: "Will a virtual item sell for enough money that one will be able to insure it?" It may sound silly but sometimes so do the prices that people are willing to pay for that uber sword.

Suppose you've bought your great sword for some large amount, say $1000, and for some reason your computer crashes and you've lost your game files. What do you do? With car insurance, if you have an accident and crash your car, you can file a claim and get some money back. Why not have data insurance for your computer files? Hey, you bought that sword for $1000 after all. How about if a thief breaks in and steals your computer. In the police report can you include that your great sword was stored in the game files? I doubt that the police officer filing the report will take you seriously.

Assume for a moment that you are able to buy insurance for your game item and something happens. What now? Will the insurance company be very willing to pay you money for that lost piece of data stored in your computer? Not likely, they'd probably want you to recover the lost game item in some way. You can't easily just copy a game item or else why did you ever pay $1000 for it in the first place? One can argue though that you simply make a backup of your files, and when something happens, simply restore your character. If you could do this, then what is to stop you from selling the sword, then restoring your files. No game item would be worth any great amount of money then.

Most likely, your game items are stored in a company server somewhere, so losing your computer files isn't all that drastic. Simply reinstall the game and voila, there's your character. So you keep on playing when suddenly there's a server crash and your character files are lost. It's lucky that you know your character's traits and items by heart, so it's just a simple matter of asking the game operators to restore your character, right? Not so fast... if they can create characters, what's to stop them from creating items to sell online, thus effectively collapsing the ebay MMORPG item economy, making your investment worthless?

Even if your files are secure with the game company and employees can be trusted to not sell created items online, where does your trust in the value of your item lie? With the US dollar, we accept its value based upon the basic belief that our Federal Reserve will back up that dollar. It used to be backed by gold, but today I guess we just accept it with faith in our government. With the virtual items, the value is based upon the belief that the game will continue running without problems, making the game companies a sort of Federal Reserve for the game item economy. Once you start considering intermixing economies of virtual and real items, the picture takes a whole new bizarre twist.

Yes, this whole argument is silly and hopefully we'll never see game items selling for outrageous prices. However this is an extreme example of a more fundamental question of the value of information and ownership of data. If our economies continue to grow toward an information age, these questions may have to be answered and the consequences could be messy.

Note: This writeup focuses on general insurance, which is in contrast to life insurance, which may differ. Life insurance covers you when something happens (ie your dying or surviving to a certain age) as opposed to general insurance which covers you if something happens. The principle source of this information is my experience from working in the motor insurance industry in the UK, so the examples I use are from that side of things. Most insurances throughout the world are based on the same models and are subject to comparable laws. IANAL YMMV, etc etc.

A writeup above, and the general feeling of many is that insurance is like a kind of bet or wager that you have to take, and you will probably lose. Whilst it certainly seems that way, and it can humoursly (or cynically) looked at in that manner, there is a fundamental difference between the two.

There is, believe it or not, a set of principles of insurance. The difference between a wager and insurance is the principle of insurable interest.

Insurable interest

This principle basically defines what can and cannot be insured by any party. Basically, the party seeking to insure something must have a financial interest in the thing being insured. If the object being insured is damaged, destroyed or stolen etc the insured must suffer financially unless insurance was taken out.

What that boils down to is that I can't insure your vehicle from getting in a crash. If I did, that would be a wager "I bet you'll crash your vehicle". I would gain if the vehicle was damaged, and would not lose if I wasn't insured.

Insurable interest is not always obvious. You don't have to own something to have an insurable interest in it. You might have borrowed something which you are now responsible for the wellbeing of. If the object is damaged or stolen, you would be expected by the owner to replace or repair the item - thus you would have insurable interest. Likewise, a repairer holding a customer's property for repairs has an insurable interest in the property (for example a garage repairing someone's vehicle) since they would be held liable should anything happen to it.


The purpose of insurance is to put the insured back to the same financial situation they were in immediately before the loss. This may seem obvious but it has implications. First off it means that if you insure something twice, you don't get paid twice. The two insurance companies may both put some money towards the payout (this is covered later). The idea here is that one should not profit from insurance.

The issue of excess (or deductible as it also known) should be raised here. The excess represents an agreement the insured takes out to be held liable for part of any loss that arises. With an excess of £200 the insured has agreed to pay the first £200 of any claim. This helps keeps premiums low, and prevents lots and lots of little claims being made, driving premiums even higher.

If a claim is made, and the insurer discovers the insured was underinsured then the difference might be deducted from any settlement. An example from car insurance:- You buy a car for your 18 year old son, and then you become a policyholder for the vehicle and name your son as an additional driver (even though he is the only or main driver of the vehicle). This is known as a 'fronted policy', and is technically fraud. If you are discovered you may find that the insurance won't pay out. They may still settle with you but they would subtract from the settlement the difference in premiums had your son been declared as the main driver. I don't recommend this - it will undoubtedly be recorded and may affect future insurances...and you can bet any future deviations of good faith will not be handled so amicably.

Good Faith

Good faith is basically another way of saying "You promise not to commit insurance fraud". OK, it goes deeper than that. First, the insurance company should act in good faith. Attempting to resolve issues quickly, process claims in a timely manner, and look for reasons to pay out a claim rather than reasons for denying it. Second, the insured should not omit material facts that could affect the risk the insurer is accepting. Previous claims, job descriptions, usage of the vehicle (how many miles its expected to do, if its for business use etc) etc.

It's not just omission but commission that can be a breach of utmost good faith. This would take the form of actively trying to commit fraud.


This is the most misunderstood concept of insurance in my experience. If someone is rear ended at a set of traffic lights, they might expect their insurance company to claim from the other party's insurance on their behalf. This is not strictly speaking true because of subrogation.

If you claim from your own insurance company and received full indemnity then the loss becomes the insurance company's, not yours. You have no longer suffered a loss, so you cannot pursue any third parties. Your insurance company is now the one who has suffered the loss - they have subrogated (traded places so to speak) with you. The insurance company, therefore, has the right to recover that loss and they can not pursue it should they so choose.

This leads to some upset people who got the wrong end of the stick. In cases where the insured does not feel the incident was their fault, the liability might get split and they have a claim on their policy. This is an important point: Your insurance company is not an accident management company. All they have to do is settle the claim with you, they are not obligated to manage everything for you (unless specified in the documentation) and they can choose to settle for less than their costs if they choose. If you allow your insurance company to subrogate the loss, you are no longer in control of the outcome of the claim. This is an important point that needs bolding and italicizing, it really is that important.

If you want to avoid the risk of a claim being made on your policy for a non-fault incident, don't have your own insurance indemnify you. You are perfectly entitled to claim your costs from the third party insurers yourself (or use an accident management company to do it for you).

One further point, that I should mention here. There are occasions where insurance companies have not pursued a third party with suitable vigour, and the financial ombudsman succesfully (for the insured) intervened. Don't count on this though.


I discussed contribution partially in the indemnity section. If something is covered twice or more the insurers will divide the value of the claim between them and both contribute towards it. For example, if you have a jacket stolen from your car, you might be able to claim on both the car insurance and the home insurance. If the jacket was worth £100, the two insurance companies may contribute £50 each.

Insurance companies rip us off

I'm sure it may seem like that, but its not necessarily true. In most (if not all) countries the premiums and the costs of the claims should roughly balance. Insurance companies cannot make a profit by selling insurance. Crazy, huh? To illustrate this we turn to the UK motor insurance industry. In one recent year motor insurers paid out £100,000,000 more than they took in premiums. If we look at the trends over the past few years we see this is not uncommon.
Year              Underwriting result
1992                    Loss
1993                    Gain
1994                    Gain
1995                Slight Loss
1996                    Loss
1997                    Loss
1998                    Loss
1999                    Loss 
2000                    Loss
2001                    Loss
2002                Slight Loss
I like to think of it as the baker's dozen of insurance. Insurance companies can't be seen to be taking more than they pay out - otherwise they are making a profit from insurance. A phenomenon known as the insurance cycle comes into play here as well. Insurance companies reducing premiums to the point where they are making a loss just to increase their market share. Like banks, the majority of profits come from stock trading with the money they have access to rather than by selling something for more than it is worth. Indeed, in the UK insurance investment accounts for 17% of all investments in the stock market.

Rising Premiums

Premiums are almost always rising. Why is that? Well it depends, in the motor trade the two main factors for this are personal injury claims which are on the increase in many countries with the 'no win, no fee' explosion. This has been popular in the States for some time, so I'm not sure whether injury claims are on the increase there or not. Another factor is the price of parts which also generally rises.

Tying in with personal injury claims of course is the ever present shadow of fraud. Some studies show that 7% of people have committed insurance fraud and most people would commit insurance fraud if the opportunity presented itself.

Finally, there is the problem of uninsured drivers. There is little that can be done about these leeches, but here in the UK the Motor Insurers Database helps the police quickly check if a vehicle or driver is insured. The Motor Insurers Bureau provides a means to get indemnified for a non fault incident involving an untraced or uninsured driver without having to make a claim on your own insurance.

Most of the information comes from my training and experience in insurance. As such it might be inaccurate. Please inform me of any mistakes, or if your country does things radically different. Statistics and figures came from http://www.abi.org.uk

In*sur"ance (?), n. [From Insure.]


The act of insuring, or assuring, against loss or damage by a contingent event; a contract whereby, for a stipulated consideration, called premium, one party undertakes to indemnify or guarantee another against loss by certain specified risks. Cf. Assurance, n., 6.

⇒ The person who undertakes to pay in case of loss is termed the insurer; the danger against which he undertakes, the risk; the person protected, the insured; the sum which he pays for the protection, the premium; and the contract itself, when reduced to form, the policy.

Johnson's Cyc.


The premium paid for insuring property or life.


The sum for which life or property is insured.


A guaranty, security, or pledge; assurance.


The most acceptable insurance of the divine protection. Mickle.

Accident insurance, insurance against pecuniary loss by reason of accident to the person. -- Endowment insuranceassurance, a combination of life insurance and investment such that if the person upon whose life a risk is taken dies before a certain specified time the insurance becomes due at once, and if he survives, it becomes due at the time specified. -- Fire insurance. See under Fire. -- Insurance broker, a broker or agent who effects insurance. -- Insurance company, a company or corporation whose business it is to insure against loss, damage, or death. -- Insurance policy, a certificate of insurance; the document containing the contract made by an insurance company with a person whose property or life is insured. -- Life insurance. See under Life.


© Webster 1913.

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