Conversation Topics: Accident Insurance
In it's simplest form, accident insurance is man's antidote for the fear of the future unknown. Its power lies in the assurance that if something bad happens to you, then something good -- a payout of a large sum of money -- will also happen to you, and while the original problem might not be remedied, with money, we'll all be a whole lot happier than we would be without it.

The humorist Mark Twain, in a speech delivered in 1874 in America's insurance capital, Hartford, Connecticut, poked fun at this idea of money for suffering. Speaking tongue-in-cheek, he remarked, "Certainly there is no nobler field for human effort than the insurance line of business -- especially accident insurance....[since, as a result of it,] there is a charm about a railway collision that is unspeakable."

Many of us take accident insurance for granted since in most states we're required by law to have a policy if we have a car. But accident insurance of any form, whether covering trips by car, plane, or train, wasn't always available. In fact, accident insurance, which pays in the event of death, dismemberment, or other loss of ability to support oneself and one's dependents, only became popular in the late 1800's, coinciding with the rise of train travel.

Transportation prior to the train had been mostly by wind, animal, or human power, and thus, not very fast. But in the late 1700's, James Watt (who didn't event the steam engine -- that honor goes to the ancient Greeks) created improvements in the design of the steam engine that enabled it by the early 1800's to be significantly more powerful and to be put to productive uses in factories and for moving people. During the 1800's, as railways began to connect major cities, more people took to riding them. With their growing prominence as a means of transportation, trains also came a source of tragic newspaper headlines, and analogous to flying, the general public became concerned about the likelihood and potential consequences of being involved in a railway accident. On its heals came the response from the insurance industry: accident insurance designed to compensate in financial terms the loss and suffering of the policyholder.

Here's how it works: first, the insurance company estimates the total amount that it is likely to pay for all claims made by holders of accident insurance policies during the life of the policies and adds to that the cost of selling the policies and processing the claims. They then subtract from that the money to be gained by investing the policyholders' payments prior to any claim (remember, the insurance company collects the money in advance). They then take that total and add a "risk/reward premium" -- the amount that it takes to convince someone (say a banker or an investor) to gamble that the insurance company's estimate of the costs is accurate. Finally, they divide that sum by the number of policies to be issued and arrive at the cost of the insurance.

Insurance companies count on statistics running towards averages over time and with increasing numbers of samples. Take a lottery as an example of how this looks from the policyholder's perspective: if he wins, he wins big, but much more often, he loses. While the price of the ticket is small and the potential payout huge, the likelihood of payout is also very small. Band together a thousand lottery players and you theoretically increase the likelihood that someone will win, but you also increase the likelihood that most everyone else will lose. If you set the price right, what the losers pay will cover the payout to the winners. Insurance companies look at it from this perspective.

On occasion, a tragedy can strike a number of policyholders at once and cause a considerable financial drain on an insurance company. To offset the likelihood of this, insurance companies "diversify their risk" by trying to have a wider base of policies, or they count on the fact that it is very unlikely that two such events will happen in a row, and thus they can refill their funds with new payments from policyholders.

Accident insurance becomes, then, a way of leveling out the odds, of giving a little all the time to make sure that if you have to give a lot, you'll get a lot. Is it worth it? For that question, I recommend, if you enjoy humor, to read Mark Twain's short essay called, "The Danger of Lying in Bed."

Updated September 30, 2003 - go to our home or life advice page