Insurance is big business and is load-bearing for many industries. It has gained popular acceptance. Prediction markets have not. This is despite clear similarities between the two domains.

One can list similarities:

• You are trading financial contracts about the odds of real world events.
• The market price of a policy elicits and aggregates information about the forecasts of professional traders and this price can inform the publics' view of risk.
• Insurance is a tax on BS (If one underwriter says to you "that policy you wrote, its a steal, that boat's never gonna sink" you can say "wanna bet?" and let them reinsure you.)

Or you can consider this extract from an official history of Lloyd's of London^[1]:

It was possible to get a policy - which is a dignified way of saying a bet - on almost anything. You could get a policy on whether there would be a war with France or Spain, whether John Wilkes would be arrested or die in jail, or whether some Parliamentary candidate would be elected. Underwriters offered premiums of 25 per cent on George II's safe return from Dettingen; there were policies on whether this or that mistress of Louis XV would continue in favour or not.

One particularly grisly form of speculation, quoted by Thomas Mortimer in a book published in 1781 and engagingly entitled The Mystery and Iniquity of Stock Jobbing, was this:

> A practice likewise prevailed of insuring the lives of well-known personages as soon as a paragraph appeared in the newspapers, announcing them to be dangerously ill. The insurance rose in proportion as intelligence could be procured from the servants, or from any of the faculty attending, that the patient was in grave danger. This inhuman sport affected the minds of men depressed by long sickness; for when such persons, casting an eye over a newspaper for amusement, saw that their lives had been insured in the Alley at 90 per cent, they despaired of all hopes; and thus their dissolution was hastened.

It is possible that at Lloyd's such activities where limited to a few. Even so the reputation of the coffee house was endangered.

So, given the many and obvious similarities between insurance markets and prediction markets, why have insurance markets succeeded where prediction markets have not?

1. ^{^}

   Taken from pages 26-28 of Hazard Unlimited by Anthony Brown.