The ancient Jewish sources hardly make a mention of insurance. The only definite instance is found in the case of an association that makes a mutual guarantee to replace a donkey or ship that is lost to one of the group. Apparently, insurance was a rare phenomenon, one that would only be considered in an especially risky situation such as travel in a desert or by sea. By the time of the rishonim, however, the practice had become more common, in the form of a payment to an insurer agreed upon in advance to guarantee lost or stolen merchandise, and shipments by sea remained the primary focus of legal discussion. As insurance approached its modern form in the last two centuries it extended not only to particularly risky ventures such as transferring freight by sea but to the risks in many aspects of everyday life (such as house, car, or life insurance).
Jewish law itself only sporadically presents an actual obligation to avoid the risk of loss. The trustee of an orphan’s estate is allowed to invest the orphan’s property only where profit is likely and risk is minimal, and we do find the authorities requiring someone handling an orphan’s money to purchase insurance for the orphan son’s inheritance before transporting it on a dangerous journey. But someone who is handling his own money is permitted to choose to accept as much risk as he can afford to lose.
The scant references to insurance (and we’ll discuss other sources shortly) masks genuine profundity about its true importance, which many people seem not to grasp in contemporary society. Many consumers avoid insurance, thinking they are just wasting money on premiums; they would rather invest their money. Others, of a more cautious nature, sometimes over-insure and thus overpay.
Yet investing and insuring serve different but complementary purposes. Investing is about taking risk, whereas insurance is about managing risk. We invest to increase our capital; we insure not to lose it. As Rashi comments on the first of the Kohanic blessings: “May God bless you” with wealth, “and guard you” not to lose the wealth – the idea being that possessing wealth is of no use if the wealth is lost.
A donkey or a ship was a person’s or group’s work vehicle, something whose loss would constitute a wipe out, if it were lost far from home away from all of the money with which one might otherwise be able to buy another. Because one cannot bear such a loss and remain solvent, it is worthwhile to moderately limit one’s earnings by paying premiums to a third party to insure against such a loss.
But because investing and insuring are based on different kinds of thinking, people do not always successfully transition between the two. The extremely risk-averse sometimes insure everything, from letters mailed at the post office to home appliances that might break. Yet consumers can generally afford to replace these costs, especially if they keep a portion of their funds in cash (as discussed in chapter 5). It would be wiser to pay the premiums to themselves, that is, to their own self-insurance fund, rather than to an insurance company. If something breaks or is lost, the funds are readily available; if all is well, they themselves keep the money.
In contrast, those with a risk-taking bent will often neglect to insure items whose loss would bring them, or their loved ones, to financial ruin. Death, disability, catastrophic health care expense, property damage or liability in a car accident are the sort of risks worth paying an insurer to manage. That way a husband’s untimely death does not leave his widow and orphans helpless if the mother is preoccupied with child rearing, and a workplace accident that prevents him from pursuing his occupation need not cripple his family’s finances. In contrast, for young people, who are generally healthy, it may be worthwhile to forgo comprehensive health coverage in favor of cheaper, more limited coverage while insuring against something major and unexpected, such as rehabilitative care. (In Israel, this is not an issue because of the comprehensive coverage to which all citizens are entitled.)
Jewish thought on risk management goes beyond insurance proper. The Talmudic asset allocation we previously discussed is unique specifically because of its built-in risk management via a one-third allocation to cash. Most equity mutual funds keep only a small percentage of cash in order to handle day-to-day fund redemptions; keeping a lot of cash would be a drag on returns during times that markets are going up and would likely end the career of any portfolio manager who did so. But the difference between Talmudic thought and Wall Street practices is that the former is concerned with long-term viability whereas the latter’s focus is on short-term marketing.
It is no wonder that surveys consistently show that mutual fund shareholders consistently underperform not just the market as a whole but the very funds they themselves are invested in. An annually updated study by Dalbar quantifies the gap between investment returns and investor returns, i.e., the returns captured by real investors tracked through records of mutual fund purchases and sales. What Dalbar routinely finds is that investors lose out for behavioral reasons, chasing the performance of hot funds, dumping cold ones and the like.
Though counterintuitive (since inflation erodes the value of uninvested money over time), a stash of cash affords the dry powder – that is, psychological self-control – needed to invest intelligently and effectively. A person without it will feel increasing pressure to sell at a loss, amidst a severe downturn, convinced that the only prudent thing to do is preserve what he can of his rapidly diminishing portfolio. Even somebody with steadier nerves capable of toughing it out may lose his job and just need access to the money. Cash is the key to avoiding either of these highly typical scenarios. Consequently, the Talmudic tripod of land, movable goods and cash accepts risk but manages it.
In negotiating this tripod, we ought to address its substance–should we be buying stocks or property and if so, which stock and which property? Jewish wisdom places the focus (as we noted in chapter 5) where it should be: on asset classes (cash, land and merchandise) rather than drilling down too much. What this teaches is that we should be investors – we should buy and hold assets, unlike the beleaguered U.S. investors surveyed by Dalbar who consistently underperform.
Depending only on one’s labor income (that is, not investing) is itself quite risky if our ability to work is suspended because of sickness or disability; owning but trading (in and out of mutual funds, for example) excessively resembles gambling, which negates the stability advantage of asset ownership over time.
Specifically, the Rambam’s two categories of movable goods and a field offer a clear enough indication of what we should be investing in. In halachic discussions, a field (sadeh) or land (karka) do not generally refer to real estate in the sense of a personal residence (which is usually referred to as a bayit, or home) but to agricultural land on which marketable produce is grown. In contemporary terms, we are speaking of productive farmland or, perhaps more broadly, commercial or residential rental properties that yield a regular income.
Movable goods could encompass the merchandise that we buy from suppliers and sell in our local markets for a profit. If we stretch our thinking a bit, they may be reckoned as stocks of companies that sell products. (These shares are often traded on expectations of a company’s future performance, and are probably more volatile than the products or services themselves, but there is some relationship between the shares and the products they represent.)
One who lacks sophistication in stock-picking (but doesn’t lack sophistication in investing) may benefit from purchasing a low-cost index fund or exchange-traded fund. The advantages of doing so would be to speedily achieve portfolio diversification and, on the flip side, to avoid concentrating risk in one or a few volatile stocks.
As the wise King Solomon put it, “Distribute portions to seven, even to eight, for you never know what calamity will strike the land.” It seems the wise king was thinking in terms of broader asset classes, i.e. if the land has a bad year, it will help to have invested in various business interests or commodities, so that at least some of them will have risen in value despite or because of the disaster.
If you own your home, have ties to one or more businesses (such as your and your spouse’s jobs) and have some cash, then securities markets may provide a convenient place to fill out the rest of King Solomon’s eight portions via the purchase of stock funds and the like.
 Bava Kamma 116b.
 Maharashdam, Responsa Choshen Mishpat 46; Rabbi Mosheh Alshich, Responsa 38. The Talmudic passage and responsa cited are cited and discussed in Rabbi Menachem Slae, Insurance in the Halachah, trans. Bracha and Menachem Slae(The Israel Insurance Association, 1982).
 Bamidbar 6:24.
 Quantitative Analysis of Investor Behavior, published annually by Dalbar 1994 to present, for sale by Dalbar and reviewed by the financial press.
 Kohelet 11:2.