October 20, 2020
How Risk Management Differs From Insurance
by Chris Burand
If you call yourself a risk manager when you are really only selling insurance, are you representing yourself truthfully?
The new cool lingo and title for producers is “risk manager.” When I interview these “risk managers,” most cannot tell me what risk management actually is — but the title helps increase sales.
Somewhere along the line I’ve realized that many people in the industry do not really understand what insurance does! “It protects in case of an accident” is the most common answer. But what does it “protect” in case of an accident?
Insurance is a subset of risk management. Risk management can be done quite well without any insurance, but insurance can’t really be done well, correctly, without some level of risk management. Insurance is usually sold without any risk management efforts due to many factors, including lack of knowledge among consumers, the difficulty of explaining insurance coverages, laziness on the part of insurance distributors and consumers, incompetency and the fact that selling a complex product like insurance is difficult unless the seller makes it seem excessively simple — hence cartoon animals and bumbling morons selling insurance, and selling it successfully!
Since time began, risk management has always existed, whether definitively or intuitively, in human endeavors. Modern insurance was created when risk managers for banks decided that a financial risk management tool was required to protect the loans they made to ship owners/builders. The banks needed a way to shift the risk of loans not being repaid in the event the ship sank or was pirated. The banks decided they could not cause enough cannons to be added (cannons were the original risk management tool against pirates), nor could the ships of the day be adequately engineered to overcome Mother Nature. So, some people in London created insurance.
Today, most property insurance serves the same function. People buy homeowners insurance policies to satisfy their mortgage company’s requirement. This is why so many people naively quit buying homeowners insurance when they’ve paid off their mortgage, because some insurance agent failed to explain the importance of liability insurance.
Risk management is designed to minimize risk, particularly probable risks. If you look at a normal curve of risk frequency, the large area in between the two ends is where straight, non-insurance risk management solutions shine. For example, in certain environments, the probability of someone slipping and falling is high. Insurance is not the best solution. Fixing the flooring is the best solution.
Insurance is the best solution for known risks that are highly unlikely to occur. Insurance is not designed to be a maintenance policy. Maintenance is known and expected. Insurance is designed for the unexpected and unlikely. Insurance companies would quickly go out of business if insurance covered the expected and likely because their claims would exceed their revenues or the price would be so high no one would buy the policies.
This reality of insurance leads to huge frustration among consumers because they don’t get to “use” their insurance. Who wants to buy something expensive to protect their property from an event that is highly unlikely and unexpected to occur? (Life insurance and health insurance are true exceptions to the unlikely and unexpected rule because death is highly likely. Life insurance is a death timing insurance for your death occurring at an unlikely, and therefore unexpected, time. Health insurance has morphed into an almost unrecognizable distant cousin of true insurance.)
Most agents do not adequately explain that buyers “use” their insurance daily. Insurance enables them to use their house immediately rather than waiting until they can purchase the house in cash. People get to drive, they get to bid on construction jobs, they get to protect their families. It’s hard to explain these benefits in jingles.
If a person is only selling P&C insurance, then, using a normal curve as an example, they are only addressing around 5% of a company’s risk. The other 95% encompasses more straight risk management solutions outside of insurance. If you call yourself a risk manager when you are really only selling insurance, are you representing yourself truthfully only 5% of the time?
This article was originally published at burand-associates.com.