The Insurance Dilemma: Why Everyone Hates Buying Insurance

Nobody likes buying insurance. It’s a fact.

As the CEO of a risk management company, where insurance planning is a big part of what we do, I get it. In fact, I hate buying insurance, too.

If you knew you wouldn’t need it, no one would buy it. At the same time, if you pay for it and never use it, it can feel like a waste of money. But if you didn’t have insurance and something happened, it could put you out of business.  

So you make the safe bet – and yet it’s still a gamble.

What if something happens, but your policy doesn’t cover that exact incident? What if something happens that exceeds your insurance limit? What if?

Insurance ‘surprises’ are all too familiar

Omaha sits inside of “Tornado Alley,” and as a result, we get a lot of severe weather – especially hail.  

One year, after a particularly vicious storm, my friend, we’ll call him Bob, had to have the roof on his home replaced. Everything was going fine with his insurance company until the workers discovered that the plywood under the shingles wasn’t up to the latest code – it needed to be a quarter-inch thicker.

When Bob told his home insurance provider, he found a surprise: His policy didn’t cover code upgrades. (It could have, but Bob chose not to opt into that coverage to save money when he first bought the house.)

Bob was (understandably) frustrated. After paying for home insurance for years without ever using it, now that he needed it, it wasn’t doing its job.

No wonder people hate buying insurance.

In Bob’s case, he just had to pay a couple thousand dollars. But imagine if that same thing (or something worse) happened to your company’s warehouse.

In 2024, a company came to us for help because they lost their headquarters to a tornado. It seemed like a cut-and-dry case, but when they started looking into rebuilding, they came across their own surprise: The area where their property was located had recently been designated a floodplain, and their insurance policy didn’t cover the necessary work to bring it up to the new regulations. If they wanted to rebuild on the same site, they would have to spend at least $100,000 to raise the land up a couple feet. Suddenly, they were faced with an unexpected decision: move their headquarters or take out a big, unplanned loan.

I’m sure you have your own story when you or someone you know was let down by an insurance policy. Tales of insurance headaches are so common you could probably use them as an icebreaker at your next company event.

What is it about insurance that makes such an important risk management tool so widely disliked?

The Problem with How We Understand Risk

At the bottom of it all, the underlying issue is that we approach risk the wrong way – especially when it comes to commercial insurance.

No matter what industry you’re in, your business carries three types of risk:

• Business
• Strategic
• Hazard

And every business can manage those three risks in any of five ways:

• Prevent
• Mitigate
• Transfer
• Finance
• Assume

Let’s look a little closer.

The 3 Types of Risk Every Business Carries

Every business in every industry faces risk in unique ways, but every risk fits into three categories. To bring it into the real world, I included some examples of each type for a company that produces and sells widgets.

Business Risk

Definition: The day-to-day risks inherent in any business.

Examples: 

• Someone calls out sick for the day and you have to find someone to cover for them (or do it yourself) in order to still produce your quota of 500 widgets that day.
• You find out that a competitor just started making widgets that are nearly identical to yours, and is selling them much cheaper. 
• The bank calls and says the interest rate on your line of credit is going to double next month, severely impacting your financial decision-making.

Strategic Risk

Definition: Risks related to future planning for your business.

Examples: 

• You’re considering selling your widgets overseas, a decision which carries its own liabilities, margins, etc.
• You want to make a new kind of widget, so you need to know the competition, public safety considerations, etc.
• You want to retire in the next 10 years and you need an exit plan. How do you find another owner, pass on your knowledge, and make the transition smoothly?

Hazard Risk

Definition: The risk of damage to your business, either physical, legal, or otherwise.

Examples: 

• Your building catches fire, destroying inventory and equipment.
• You get sued by a disgruntled former employee.
• Someone slips and injures him or herself on the job.

Of the three types of risk, hazard is the only one covered by insurance. And, as you’ll see, it doesn’t even fully address it.

5 Ways Businesses Can Manage Risk

• Prevent: You realize a risk could be there and choose to avoid it entirely, thus preventing the risk from existing in your company. For instance, if you considered making a new widget but decided not to because the margins are too thin.
• Mitigate: You know a risk exists and you create a way to keep the damage in check if it arises, thus mitigating the problem. A fire sprinkler system is a perfect example. A fire would still do some damage, but the sprinkler system would lessen it.
• Transfer: You recognize a risk and pass it off to a contractor/subcontractor, thus transferring the responsibility for that risk to someone else. This particular way of dealing with risk is the reason contracts exist.
• Finance: Here is our old friend, insurance. The point of insurance is literally to finance risk. Insurance companies determine how much you would have to pay them to fund certain risks, and then if that risk occurs, they pay the costs for you.
• Assume: Last but not least, if you decide a risk is worth taking, you can just assume it. People assume risk on a business and personal level every day in one of two ways:
  • Knowingly – Do an assessment, recognize, and choose to take on the risk.
  • Unknowingly – The risks we don’t recognize often carry the biggest potential for doing lasting damage.

The Insurance Dilemma

There is nothing wrong with insurance in and of itself. It is a powerful tool that can protect your business against a multitude of risks.

The problem is that the conversation around risk management for businesses often begins and ends with insurance. As a result, businesses – especially smaller businesses with 200 people or less – view insurance as the all-encompassing solution to their risk needs.  

The truth is that insurance is a moneymaker. Just recently, Warren Buffett revealed that Berkshire Hathaway has $6.7 billion invested in an insurance company called Chubb Ltd. Add that to BH’s existing holdings in companies like Geico and National Indemnity, and you can see why their 2023 letter to shareholders called insurance the “core of Berkshire’s well-being and growth.”

It’s no wonder so many companies exist for the sole purpose of selling insurance – it’s far and away the single biggest revenue stream in the realm of risk management.  

But if we take our original risk graphic and shade the portion that insurance addresses, you can see how incomplete of a solution it is on its own.  

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In short, insurance is just one way of dealing with one type of risk.  

And so we’re left with what we call the “Insurance Dilemma,” which can be broken down like this:

• Insurance is just part of risk management, yet many agencies focus only on one type of solution (finance) to one type of risk (hazard) and ignore the rest.
• Insurance is mostly distributed through insurance agencies, which are paid to sell insurance, so it gets the most attention as a risk management solution.
• Insurance consumers (businesses and individuals) internalize this approach and view insurance as the best way to manage risk.
• Consumers buy insurance and assume they have done all they can to address risk for their business.

Again, there’s nothing wrong with insurance! When viewed appropriately, it can protect your business from a myriad of risks. Tornados, car accidents, lawsuits, errors and omissions, code upgrades, floodplain designations – policies exist that cover pretty much any hazard you can imagine (and if they don’t exist already, chances are you could find an insurance company that would create one for you).

It’s how we view insurance that creates the dilemma.

Consumers and sellers alike take a bottom-up approach, where we start with the management method and then only manage what that approach can cover. It’s kind of like if your town only had a fire department. Sure, you’d have ways to address fires, car accidents, cats in trees, etc. But if you consider all the possible risks in your town, it’s easy to see why you need a police department, ambulance, and other emergency response teams.

It’s the same with insurance. In order to properly address all risks, we need to take a top-down approach, where we begin with the risks present in your business and work our way to solutions (of which insurance is one).

How can you avoid the Insurance Dilemma? Simple: You have to be a better insurance buyer. Once you understand what your business needs and what is available to you, you can make an informed decision. Start from the top and work your way down.  

Come back next time, when we’ll talk about the basics of being a smarter consumer of insurance. In the meantime, talk to our team about a free risk evaluation and we’ll walk you through the process – from the top down.