Maybe AIG has a point?

Matty Ebs hit me with an interesting concept the other day. Let me throw this one out to the crowd to see how it flies.

Let's say you ran a poker room, legitimate or otherwise. Let's further say that you make money by charging either a 'time charge' or a rake of the pot. Some of your players might be upset at the amount you have to charge to stay in business. What if you could enhance your income by offering a service to the players? The service would be 'pot insurance'. No, this is not paying to have someone watch your weed!

Here's how it would work:

Players 1 and 2 get into a big hand. For the sake of this discussion, we'll say player 1 has AA and player 2 has KK. Both push all in PF after some betting and re-raising. The pot contains $1000. In some places, at this point, players would be allowed to negotiate to 'run business', that is run the board multiple times. In our room, however, running business would be banned, replaced by the insurance concept. The dealer would offer each player, once they've shown their cards, of course, the option to buy insurance. The insurance offered to each player would allow them to be paid the full value of the pot if they lose, for a fee. The fee would be determined by a formula that takes into account the size of the pot, the chances the player has to win the pot and the profit the house wishes to make on the insurance (the 'spread').

Taking our example and assuming the house wishes to have a 5% 'spread', the dealer would offer a price of $240 to the player with AA and $810 to the player with KK. If both players take the insurance, the house would take in $1050 in revenue and pay out $1000 in insurance to the losing player. But the spread would still apply no matter who takes the insurance.

The basic formula (subject to tweaking) for offering insurance would be: (Size of Pot - (1-Odds of Player winning hand)) + ('spread' percentage * (Size of Pot * Odds of Player winning hand))

There are some logistical issues to work out.

1. With margins being tight, how can you train dealers to accurately offer the right price. Matty thought about a cheat sheet with standard pricings being offered based on number of outs, which seems sensible.
2. How do you pay the players and/or take the money? It seems strange to pay out/receive chips because that would violate the 'table stakes' rules. If you do everything off the table, the dealer would have to have some sort of way of keeping accurate track and the house would need a way to collect at the end of the night.
But logistical issues aside, how do you like this in theory? I know what some of you are going to say. Why give up 5% EV? It seems a sucker bet in the long run, and that's true. BUT, what you are selling here is a reduction of volatility. And lots of gamblers will take odds against them anyway, or hadn't you heard of this thing they have called 'casinos'. :-p