[malteof]

Hey, I work in insurance too - as a non-life actuary for the last almost 8-9 years. Your description is not at all how insurance works, and insurance is not a form of betting or gambling but really distinctly different. What it's really about is just risk pooling; my share of the risk pool is smaller than if I would keep the risk to myself.

Insurance companies don't mind insuring risks that they know will happen at some point, e.g. most property policies will have some claims, and life term contracts (as have been stated below) of course will have a claim at some point (unless the policy is lapsed). However, they have an idea of how often and how costly these claims will be, and through risk pooling diversification, this is lower (per policy) than the cost to the individual. Thus there is an incentive to buy the policy, and an incentive to sell it - as the difference can be made as profit to the insurer.

In addition there's a timing element to insurance: insurers take in premiums "now" for claims that will be paid out "later", so they can invest the money in the meantime. Large insurance companies may have $200bn investment portfolios.

EDIT: So the point is that flood insurance can of course be sold by private companies, however they know the risk is too high and won't offer competitive premiums. If we only had private flood insurance in the US, in the long term this would lead to people having to move to places with cheaper flood insurance. In this way it actively promotes people moving away from risky places (which I think is a good thing) - but it makes it difficult for people in the short term.

[ianai]

You're both right. Cost pooling and betting are two ways of thinking of the same thing. If anything, betting is closer to marginal thinking than cost pooling, but the two are not exclusive viewpoints.