Insurance, Investment And Gambling

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Are insurance and investment like gambling? This is the question on everybody’s mind whether said or unsaid.

It can be answered simply or it can be a lengthy debate.

If gambling is defined as a game or venture involving taking of risks of making money or losing money, then it can be said there is this element in insurance and investment also.

One person has neatly summed up the motives of financial ventures as either the fear of loss or desire for gain.

Some ventures combine both motives, and one of the objectives of a good financial plan is to take care of both risk management and investments.

Personal life insurance is to protect against financial losses due to loss of earning power or the incurring of expenses e.g. medical.

Fire and casualty insurance protects against loss of assets due to perils like fire, accidents, theft, etc.

To purchase ‘pure’ protection, you pay a price (premium) for a probable payout (death benefit, fire claim, etc.)

Since the event insured against may not happen, you may stand to ‘lose’ the premium or to win the insurance payout. There is this element of losing and winning, although for pure protection life insurance, winning is not what one would wish for. If there is no claim, the premiums paid could be viewed as the price you pay for peace of mind. Term insurance is a good example of such a life insurance product – you either lose the premium or ‘win’ the claim (death or total and permanent disability). For the record, only about three per cent of term insurance policies pay  out, according to statistics I came across for the USA.

Personal accident policies which insure against accidental causes only, is another example. Even lesser percentage of this type of policies actually result in claims. But it is a good ‘bet’ to take to protect the family for a small premium.

Investments, which can range from money investments (time deposits, etc.) to equities, bonds, unit trusts, and alternative investments (hedge funds, managed futures, life settlements, etc.), also have the element of losing and winning.

Risks are involved and one of the important objectives is to understand and manage risks while aiming for wins.

Just as there are many kinds of investments, there are many kinds of investors who use many kinds of strategies, all hoping to do better than others. Financial Advisers, bankers, Fund Managers, analysts, etc. aim to advise and help investors to do better with their money, for a fee or commission of course.

Investment is definitely more complex than insurance and more uncertain. Invariably, the risk of losses is borne by the investor.

Terms like “guarantee” and “capital protected” have been used loosely and investors have learnt the hard way that even apart from the risk of fraudulent schemes like Ponzi scheme, a guarantee is only as good as the financial strength of the guarantor, and capital protected is not the same as guarantee. In fact, this term will not be used any longer after the Lehman Brothers saga.

So we see that there is a common factor in gambling, insurance and investment – the risk of losing part if not all of the capital.

Obviously to sweeten or cushion the deal, product providers have come up with cash back and guarantees. For example, whole life insurance if kept till death, has a definite payout, and moreover has a cash back feature called cash value or cash surrender value. Some investments have capital guaranteed features as well.

In the case of insurance interestingly, not buying life insurance is itself a form of gambling with your life that the feared 3 Ds – death, disability, diseases, would not happen. This is often called self-insurance.

Similarly, in general insurance, a property owner who does not insure his property against the perils of fire and other perils like earthquake, aircraft falling, etc. is taking the risks himself.

But there is a vital difference between insurance and gambling. In the case of insurance, the risks already exist and insurance is to cover the risks. In the case of gambling, no risks exist until you start to gamble.

In a sense, investment is more similar to gambling than insurance because before you invest, you don’t run the risk of losing your money (except losing to inflation).

What then is the difference between investment and gambling?

The key thing is the degree of dependence on chance.

There are many forms of gambling and investments. A friend wisecracked that the biggest casino in Singapore is not Resort World or Sands, but the stock exchange. Is it?

Gambling can range from hundred per cent chance (without any skill required) to games prided for the higher degree of intelligence and experience required e.g. mahjong. I am not a expert in gambling given my conservative family and religious background and all my knowledge is theoretical. But it is common knowledge that certain gambling like 4D and Big Sweep are pure chance (probability), while other forms do require a certain degree of skill.

Investments differ from gambling in that it requires both the science and the art of investing. It may be debated whether the science (analysis, fundamental technical analysis, tactical strategies, etc.) outweighs the art, and at times random picking outperforms the professional analysts, but on balance, most people would prefer to depend on analysis and asset allocation and other strategies than just “hantam” or randomly picking stocks, bonds, or unit trusts.

Active management and trading strategies still depend on analysis and judgement, and not done haphazardly or randomly.

Can gambling qualify to be a form of investment? There are professional gamblers in reel life and probably in real life as well. And I know of friends who visit casinos often and who would take umbrage if you call them gambling addicts. They prefer the title “high rollers”.

Legalised gambling is a big business (some say the RSW and Sands is a big gamble themselves), but few investors would invest money with gamblers to “invest” in playing whatever games they are good at. The risks involved are generally higher in gambling than investments, and the “trades” are quicker. The motive is clearly a desire for gain (greed to some).

It is probably true that gambling is more exciting as you have live action, and the gambling operators provide frills, and jackpot players get a kick out of the sound of coins crashing into the till.

But those who know the odds would probably put more bets on investments like property, equities, bonds and even alternative investments.

What the layman gambler does not know is that the high rollers could lose and still are okay because of their big reserves.

Those who are depending on gambling to make their living would be the ones most at risk to themselves, their families and society.

Better to put your hard-earned cash into insurance protection in the roulette of life and death.

And safer to put your savings in investments backed by real assets (property, equities, unit trusts) and not chance.

There are indeed differences between insurance, investment and gambling.

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