Insurance Thought Experiment

I got a notice in the mail from my insurance company about a little rider policy I had been carrying for years. Most insurance companies will not cover certain extra-valuable things -- jewelry, art, musical instruments, cameras, etc. -- on their regular home-owners policies. Now, we've never been a part of the diamond-wearing, fur-sporting, expensive-painting-owning set by a long shot, but we do have what practically every middle-class family has, namely, a diamond engagement ring. And, like a conscientious fellow, I got it insured. The thought of one's single most valuable posession, a tiny, immanently losable thing at that, walking around on one's person day in an day out . . . well, that just called out for some insurance.

Fast forward ten years. We still have the policy, and we still have the ring. And I'm wondering. . . do I renew the policy?

Now, the first answer, the easy answer, is, "Why yes, of course. Why wouldn't you?" The ring is no less valuable than before. And it gives you a feeling of cozy security to know that it's "protected" by insurance. And the premium -- about $30 a year -- seems negliable in the grand scheme of things.

But then I start thinking about another way. Would you buy a $1 lottery ticket every week for the rest of your life, knowing that you might, just might, win a prize of a couple thousand dollars some day? Not a multi-million dollar jackpot, just a couple thousand dollars. The answer to that question is a resounding No, because I have never played the lottery, not even once, not even for a $100 million dollar jackpot, much less a couple thousand dollars.

The two question are, in terms of risk and investment, nearly identical. Over the next thirty years, I could spend nearly a thousand dollars insuring something worth a couple thousand dollars. Do I think the odds of the ring being stolen or lost in my lifetime are about 50%? I am essentially gambling on the outcome, as surely as if I was playing the lottery.

Ah, but what a difference the words make! Smart, consciencious middle-class people insure their possessions. Reckless, avericious, low-class stupid people play the lottery. How we mentally assess risk depends a lot on whether we think we are "protecting" something we have (especially something to which we are emotionally attached), or "gambling" to attain something more.

All this only underscores the very nature of insurance. Insurance does not lower the overall level of risk in the world. Insurance only displaces the risk, lowers the risk to an acceptable level. Some events -- a catastrophic illness or accident, a fire in your home or business, the death of a wage-earner -- are so costly that almost no one can afford to carry the cost. And those are the things that nearly everyone insures. But the process of displacing risk does cost money, and so in general you are well advised to only displace the risks that you have to. It is entirely possible for someone to write an insurance policy against the loss of pocket change. You could insure your pocket change, but why would you? If you lose your pocket change, it will not ruin you.

So, will I renew the policy on that ring? Ironically, I suspect that I will. There are more factors to these decisions than mere risk and reward. What would my wife say, if I told her I didn't think her wedding ring was worth insuring? What would my mother-in-law say? Intellectually, they might agree entirely with my reasoning . . . but emotionally, they might think I was cheap, or worse, think that I didn't value the marriage that is symbolized by the ring. Human emotions may not be logical, but they are very real, and well worth a low monthly premium to protect.