Let’s face it: Insurance gets a bad rap.
The way most people think about insurance goes something like this: You make a wager that you might get in more trouble than you can afford to get yourself out of at some point—and when you do, the insurance company has to bail you out. If the amount they pay to cover you is greater than the amount you pay to keep the deal in place over time, you win! If not, you lose.
And there’s a good reason people think of insurance in terms of wagers: The whole industry actually grew out of gambling.
Insurance for self-interest
It’s true— the first commercial insurance company started in the late 1600s in a London coffee shop by the docks where patrons jacked up on caffeine got in the habit of placing wagers on which ships would sink and which would come safely back to port. Eventually the ships’ backers got in on the action, happily willing to pay a relatively small amount in exchange for the promise of a large payout to help cover costs if the ship went down. Eventually the wagers evolved into contracts, the risk assessment into a formal underwriting process, and the modern insurance industry was born. Edward Lloyd’s coffee shop became insurance titan Lloyd’s of London.
These days Lloyd’s of London is worth $60 billion. In gambling terms, that’s a lot of losing bets they’ve collected over the last 300 years. Which is why, if you think of insurance as a wager, it’s a bitter pill. Sure, maybe it’s a necessary evil, but it’s a zero-sum arrangement where there’s always a loser—you just hope it’s the company and not you. And as we all know, the house usually wins.
This might be why a 2014 study found that 38% of people don’t trust life insurance companies and just 16% trust that health insurers put patients’ health over profits as their top priority.
Insurance for the greater good
And our skepticism about insurance is understandable—health insurance especially is a notorious mess and most of us have had infuriating experiences with denied claims, overcharges, and incomprehensible bills.
But a lot has changed since the 1600s and even with the convoluted health industry, its special interests and sketchy lobbying, there’s a better way to think about how insurance works:
A modern insurance pool is basically a collective of people who agree to have each other’s backs. The premiums paid by people who don’t need help now fund the needs of those who do, and the protection afforded by participating is worth it because we’re all human, vulnerable, and we never know when our number will come up.
It’s the same idea behind Social Security: Sure, it kind of sucks to have those taxes come out of your paycheck. But it’s nice to know you’ll get a kickback later. More importantly, it’s worth it to live in a culture with some safety net, where we don’t just leave our elderly completely destitute.
This idea of "distributed risk" is what’s driving the healthcare debate right now—how to get enough healthy people who don’t cost insurers much to help cover the costs of the sick. The same principle applies to renters insurance, where all the people who never have their stuff damaged end up covering the costs for those who do, life insurance, where all the families who don’t experience a tragedy pay for the ones who do—or any kind of insurance.
This is way different than a casino, which takes a little money from many and gives a lot of it to a very few not to fill any real need but usually so they can go blow it on extra stuff. Like boats.
Of course, insurance isn’t all altruism—insurance companies make a lot of money, and historically they haven’t had the greatest customer satisfaction track records.
The industry hasn’t changed much in the last hundred years, but that’s changing now, too. New startups are rethinking insurance, bringing more transparency and a friendlier user experience to the process, making it easier to buy and file claims online, enhancing more of what’s good about insurance and retiring some of what has been bad.
And yes, there’s a big business opportunity here—the emergent "insurtech" field raised more than $46 billion in 2015. New renters insurers like Lemonade and Trov, health insurers like Oscar and Clover Health, as well as PolicyGenius, which lets you comparison shop across multiple insurers, have all raised tens of millions in the last couple years.
But big business and good business can go hand in hand. The reality is that Ben Franklin’s adage about the only sure things in life being death and taxes falls short—within a big enough group of people, all kinds of other bad things happen, too. People get sick, their apartments catch fire, their stuff gets stolen on vacation.
And when those things happen, they have real consequences. In 2007, before everyone was made to buy health insurance with the ACA, 62% of foreclosures and more than half of all bankruptcies stemmed from huge medical bills. That number should be falling post-Obamacare, but we’re vulnerable in all kinds of ways. Most of us couldn’t cover a $400 emergency—a burst pipe or our dog catching a nasty disease at the dog park could wreak more havoc than many of us could hope to pay for.
If you look at your insurance policy strictly in terms of what it costs you and what you might get back, then you may be able to put a price tag on your peace of mind. But you should also consider that by buying your policy you’re directly participating in the health and welfare of others. These days, it feels more important than ever.