19 May 2006

co-op style

Gambling is a Bad Thing, so when someone described insureance as gambling I started to think and decided that there are two ways to look at insurance.

Insurance as a gamble: you buy insurance because something might go wrong and instead of maybe paying a large sum, you pay–for sure–a smaller sum. Essentially, you're gambling that something will go wrong.

Insurance as Capitalist-Communist Mashup: Given that calamity generally doesn't strike everyone at the same time, we all chip in a fixed amount of money on a regular basis. When problems occur, we dip into the kitty. Sometimes we're helping others and sometimes we're being helped.

If we look at it this way, insurance clearly isn't gambling. However, two questions remain: How do the insurers look at it? and How would a different point of view affect insurance policies?

I won't pretend to answer the first question, since anything I say will probably be too simplistic. Moving on to the second question, here's an idea for a new kind of insurance business: co-operative insurance.

In co-op insurance, the premium is not fixed. Every month, the total cost of claims approved is divided among the policy holders. If no claims are approved, no one pays more than the basic administration fee. In a month with a higher number of claims, everyone's premiums jump up.

The idea here is that the cost would be lower because the insurer is not being paid to take a risk. The uncertainty is spread across all the co-op policy holders, not concentrated in one insurance firm.

This is simply the germ of the idea. It would be interesting to flesh it out a little to see what it might look like in more detail. It would also be interesting to contrast it with Lloyds of London's insurance market.

At any rate, it's an idea that moves insurance away from gambling, and may even result in reduced costs.