Posted by Johnnymac 5:17 PM
I am glad I was able to explain insurance in an off-line email to my fellow poster here on the blog. Insurance in big bet poker is simply a side bet made with a third party on the outcome of the last card in a head-up all-in situation one of the two players does not have a suffciently sized stack to call a (theoretically perfect) last bet on the end. In other words, if your opponent has the worst of it and goes all-in before calling the last bet, he is not paying the "full price" that his call should theoretically cost him in expected value, and by offering insurance, the house (or another player) is giving you a chance to get your full expected value from your hand.

(Insurance can only be taken by the player who has the best of it when the cards are shown. If you ram and jam the pot all the way to the end and then see that your all-in opponent has a much better hand against you, you can't take insurance against your own misfortune, which would be expected given your less-than-even odds of winning. In that case, your opponent can take a bet instead and table stakes don't apply. Some houses allow players to make the insurance bet between themselves, but in that case table stakes rules would have to be relaxed, by definition, so what's the point?)

That said, the insurance proposition is typically a bad bet, as Craig explains below, because a savvy gambler is going to want to have an inherent edge built into the wager as his "fee" for making the bet in the first place. This is where the posted house odds come in: the house is willing to offer the bet because, in paying less than the true odds of the situation, it has a positive expected value and will make a profit in the long run no matter the outcome of any particular hand. Other players are allowed to step in front of the house, however, and lay the bet themselves in exchange for slightly less profit than the house will demand, and thus, as Craig explained, the edge being given to the insurance maker can be negotiated downward.

After saying all of that, I sincerely doubt that one would ever be able to get another player to negotiate into taking the worst of it when laying insurance for you. Perhaps - perhaps - you might get to even odds (a fair bet) if you were negotiating with a friend and that friend owed you a favor, but I doubt anyone, even your friends, will offer to lay you a bet that would be a losing proposition to them. Why? Because anyone sophisticated enough in the first place to understand the concept of making an isurance bet is going to understand it well enough to know that the value of the bet lies in the opportunity to arbitrage a profit margin underneath the true odds of the bet. This is why Doyle Brunson explains in Super System that taking insurance against a hand should never be done, because he is assuming that the other player is always looking out for himself and not offering a fair bet, thus there is no need to even examine the merits of the bet if it is already presumed to be inherently bad.

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