Insurance for your portfolio

HAVE you ever wondered what it means when we buy an insurance policy? Is it simply about making a bet as to whether something awful might happen? For instance, when we insure the contents of our homes, is it a wager with an insurer on whether we might be burgled? There is, perhaps, some truth in that.

But consider this scenario. One million households voluntarily contribute $100 a year into an insurance pool every year. If something terrible should happen to any of the homes, then they would be compensated from the money collected. It could be financially crippling for any one of those households to shoulder the burden of an expensive repair by itself. But it is less onerous if it should only cost a hundred bucks a year to pay for a repair that might cost thousands of dollars. So, insurance is collective risk management.

Winners and losers