First, let me explain that I hail from a place where one doesn’t search for a Pro-V1 (an expensive golf ball, for you bowlers out there) lost in the woods, or walk past a crooked stick without a level of suspicion. Yes, poisonous snakes are a real hazard in Florida. Thus, when considering an analogy for the commercial insurance buying process, I naturally drifted toward the uncomfortable possibility of being bitten by a rogue viper. Bear with me, I think I can pull this off.
The Setup: Snake Boots
Imagine you are preparing to go on a 10 mile hike through the Okefenokee Swamp Trails. Yes, people do this. Yes, I am asking you to imagine you’re such a person. This particular trail is known to have venomous snakes along it. In spite of their presence, there have been very few actual attacks or bites reported over the past decade. Those who stay aware, act cautiously, and use common sense, generally complete the trail without incident. However, the attacks that have occurred have been fatal.
You are not an avid hiker, so in preparation you look into buying new hiking boots. Your basic, and I mean basic, requirements are that they are high-tops, have comfortable rubber soles, and are lace up. You whittle your options down to two: Brand A, which meets all the requirements and cost $100, and Brand B, which meets all the requirements PLUS provides evidence of being impervious to snake fangs, which cost $200.
Remember, there hasn’t been a snake bite in years. There’s a great possibility that you will complete the hike without even seeing a serpent. In the event that you do, the cheaper boots may provide a little protection, while the expensive boots will guarantee that you survive. So what do you do? How do you make the decision? Do you put more weight on the probability of a bite or the possibility of a bite? Do you analyze the true cost if you are bitten without proper protection? How much is the risk worth to you? Perhaps you save a little in other areas with less catastrophic implications and pay more for the boots? Regardless of your risk appetite, I would assume you would be grateful to have an experienced hiker explain to you all of the risks and potential protections (there’s the plug for competent, active independent agents).
Bringing the Analogy Home: Insurance
Many insurance buying decisions are influenced by weighing how improbable certain events are versus acknowledging their possibility and considering the impact should they occur. Of course, risk and uncertainty are the underpinnings of all insurance. However, commoditizing insurance policies, i.e., considering all to be created equally, is much like treating all hiking boots the same. Unfortunately, many insurance advisors promote the concept that most policies are similar and that saving a few bucks on something “you hope you don’t need anyway” is a smart decision.
Considering only the most widely accepted hazards exposes the buyer to considerable risk. In the hiking example, if the hiker only worries about blisters and not the snake bites, they can save 50%, or $100. They won’t get a blister, but will that $100 savings help them when confronted by an angry rattlesnake? It almost seems like you should risk the blister in order to protect against a more catastrophic snake bite, even though it is much less likely to occur. Similarly, if fire damage to your manufacturing plant is your only concern, most property policies will do. Find the cheapest one with all the “basics” and hope that you do not encounter a dependent property business income claim, or loss of income due to an extended period of reduced market share, or increase reconstruction costs due to building code changes. For general liability, you could base your decision on “basic” coverage and low premium and hope you don’t get tripped up by an onerous “Notice & Knowledge” provision, or an absolute pollution exclusion, or any other language that prevents or inhibits protection from an “improbable” occurrence. Walk the trail in sturdy but basic boots and hope you don’t get bitten. The latent, less obvious and less likely, but more catastrophic threats are the ones that can often be overlooked or excluded in policies.
The Conclusion: The Florida Panther
Everyone approaches risk and probability differently. The key is to really know the exposure to risk and to think about the cost of insuring and the cost of not insuring. It sounds easier than it is. Would you buy the snake boots if they cost $10,000 or would you risk it (or, perhaps, cancel the trip)? There are always hazards that fly below the radar or occurrences that happen once in a lifetime. The key is to get a clear picture of the possibilities, a true comparison of available options, and a firm understanding of the cost implications of insuring or self-insuring. A business can do everything right with respects to risk control, insurance protection, and safety and still encounter unforeseen hazards. It would be like buying the expensive snake boots and encountering a rabid Florida Panther instead; not much you can do.
Stay tuned. Next week I will discuss a mountain lion, surety bonds, and a talking elephant. Just kidding.
by Todd Piersol