Wager (noun) : is a. An agreement under which each bettor pledges a certain amount to the other depending on the outcome of an unsettled matter. b. A matter bet on; a gamble.
The meaning of ‘wagering’ is staking something of value upon the result of some future uncertain event, such as a horse race, or upon the ascertainment of the truth concerning some past or present event. In UK “ All contracts or agreements, by way of gaming or wagering are null and void; and no suit can be brought or maintained in any court of law or equity for recovering any sum of money or valuable thing alleged to be won upon any wager”. In every Insurance contract, insurable interest and the principle of Indemnity ensures that no body recovers more than what was lost. Insurance cannot be for gain. Sec 6 of Marine Insurance Act 1963 – states (1) Every contract of marine insurance by way of wagering is void.
Today chanced upon an article in BBC by Tim Harford titled ‘ What makes gambling wrong but Insurance right’ ? ~ here is the article reproduced in its entirety with full credits to its author and BBC.co.uk.
Almost a decade ago, I tried to place a bet with a leading UK betting shop that I would die within a year. They should have taken the bet - I am still alive. But they will not gamble on life and death. A life insurance company, by contrast, does little else.
Legally and
culturally, there is a clear distinction between gambling and insurance.
Economically the difference is less visible. Both gambler and insurer agree
that money will change hands depending on what transpires in some unknowable
future.
Gambling tools such as
dice date back millennia - perhaps five thousand years in Egypt. Insurance may
be equally old. The Code of Hammurabi - a law code from Babylon, in what is now
Iraq - is nearly 4,000 years old. It includes numerous clauses devoted to the
topic of "bottomry", a kind of maritime insurance bundled together
with a business loan. A merchant would borrow money
to fund a ship's voyage, but if the ship sank, the loan did not have to be
repaid. Many of the provisions of the Code of Hammurabi - as seen on the
stone stele - deal with matters of contract and trade.
Around the same time,
Chinese merchants were spreading their risks by swapping goods between ships.
If any single ship went down, it would contain a mix of goods from many
different merchants. But all that physical shuffling around is a fuss. Much
more efficient to structure insurance as a financial contract instead,
something the Romans did a few millennia later. Later still, Italian city
states like Genoa and Venice developed ever more sophisticated ways to insure
the ships of the Mediterranean.
Then, in 1687, a coffee
house opened on Tower Street, near the London docks. Run by Edward Lloyd, it
was comfortable and spacious, and business boomed. Patrons enjoyed the fireside
tea and coffee, and - of course - the gossip. There was much to gossip about:
London's great plague, the great fire, the Dutch navy sailing up the Thames,
and a revolution which had overthrown the king. But above all, the inhabitants
of this coffee house loved to gossip about ships: what was sailing from where,
with what cargo - and whether it would arrive safely or not. And where there was gossip, there was an opportunity for
a wager.
Lloyd's patrons were happy
to speculate on the likely death of Admiral John Byng, who was shot in 1757. The
patrons bet, for example, on whether Admiral John Byng would be shot for his
incompetence in a naval battle with the French. He was. (a separate post on
Admiral and his being shot down is posted) ..
The gentlemen of Lloyd's would have had no qualms about taking my bet on
my own life. Edward Lloyd realised his customers were as thirsty for
information to fuel their bets as they were for coffee, and began to assemble a
network of informants and a newsletter full of information about foreign ports,
tides, and the comings and goings of ships. His newsletter became known as
Lloyd's List. Lloyd's List was published daily until 2013, when it became
online-only. Lloyd's coffee house hosted ship auctions, and gatherings of sea
captains who would share stories.
If someone wished to
insure a ship, that could be done too: a contract would be drawn up, and the
insurer would sign his name underneath - hence the term
"underwriter". It became hard to say quite where coffee-house
gambling ended and formal insurance began. Eight decades after Lloyd had
established his coffee house, a group of underwriters who hung out there formed
the Society of Lloyd's. Today, Lloyd's of London is one of the most famous
names in insurance.
Lloyd's is not an insurer:
it is a marketplace in which multiple financial backers, grouped in syndicates,
come together to pool risk. But not all modern insurers have their roots in
gambling. Another form of insurance developed not in the ports, but the
mountains. Alpine farmers organised mutual aid societies in the early 16th
century, agreeing to look after each other if a cow - or child - fell ill.
While the underwriters of Lloyd's viewed risk as something to be analysed and
traded, the mutual assurance societies of the Alps saw it as something to be
shared. And when the farmers descended from the alps to Zurich and Munich, they
established some of the world's great insurance companies.
Deep pools of risk : Risk-sharing
mutual aid societies are now among the largest and best-funded organisations on
the planet - we call them "governments". Governments initially got
into the insurance business as a way of making money, typically to fight a war
in the turmoil of Europe in the 1600s and 1700s. Instead of selling ordinary
bonds, which paid in regular instalments until they expired, governments sold
annuities, which paid in regular instalments until the recipient expired. Easy
to supply, and much in demand. Annuities are a form of insurance: they protect
an individual against the risk of living so long that all their money runs out.
Providing insurance is no longer a mere
money-spinner for governments. It is regarded as a core priority to help
citizens manage some of life's biggest risks - unemployment, illness,
disability and aging. Faced with these deep pools of risk, private insurers
often merely paddle.
At least, citizens in
richer economies expect insurance from their governments. In poorer countries,
governments are not much help against life-altering risks, such as crop failure
or illness. And private insurers tend not to take much interest, either. The
stakes are too low, and the costs too high. That is a shame, because there is
growing evidence that insurance doesn't just provide peace of mind, but is a
vital element of a healthy economy. A recent study in Lesotho showed that
farmers were being held back from specialising and expanding by the risk of
drought - a risk against which they couldn't insure themselves. The Red Cross
has called Lesotho's current water shortages "the worst drought in a
lifetime". When researchers created an insurance company and started
selling crop insurance, the farmers bought the the insurance and expanded their
businesses.
Today, the
biggest insurance market of all blurs the line between insuring and gambling:
the market in financial derivatives. Derivatives are
financial contracts that let two parties bet on something else - perhaps
exchange rate fluctuations, or whether a debt will be repaid. They can be a
form of insurance. An exporter hedges against a rise in the exchange rate. A
wheat farming company covers itself by betting that the price of wheat will
fall. The ability to buy derivatives lets companies specialise in a particular
market. Otherwise, they would have to diversify - like the Chinese merchants
four millennia ago, who didn't want all their goods in one ship. The more an
economy specialises, the more it tends to produce. But unlike regular
insurance, for derivatives you don't need to find someone with a risk they need
to protect themselves against. You just need to find someone willing to take a
gamble on any uncertain event anywhere in the world.
It is a simple matter to
double the stakes - or multiply them by a hundred. As the profits multiply, all
that is needed is the appetite to take risks. Before the international banking
crisis broke in 2007, the total face value of outstanding derivatives contracts
was many times larger than the world economy itself. The real economy became
the sideshow, the side bets became the main event.
.. – and ~ that story did not end well.
Tim Harford writes
the Financial Times's Undercover Economist column. 50 Things That Made the
Modern Economy is broadcast on the BBC World Service.
With regards – S.
Sampathkumar
20th Mar 2017.
