I read a tweet today from an attendee at a venture capital conference that said, “Opportunity is all around you, so take risks.” I 100% agree with that quote, but I would add this caveat to the end, “but eliminate risks that you can, prevent the preventable from occurring.”
Insurance should be used to eliminate the risks that can hinder a company from being successful but are unlikely to happen. Insurance works like this – you pay a relatively low premium to the insurance company and in return they make you whole financially in the event you suffer a loss. The lower the probability of loss occurring, the lower your premium, and conversely, the higher the probability of loss, the higher your premium. A more technical way to look at is that premiums are the outcome of discounted future losses plus some profit for the insurance company.
I go into this because it should help companies understand what types of insurable (i.e. preventable) losses are most likely to occur. Insurance companies spend a lot of money on data and analytics to better understand the probability of risk, knowing how and why they price your risk the way they do might help you determine where it makes the most sense to insure or self-insure. For example, public company Directors and Officers insurance has premiums that are multiples of what a private company would pay for Directors & Officers because losses are larger and more likely to occur. Workers Compensation insurance is inexpensive for a life science company that outsources R&D but for a construction company that might be the biggest insurance spend they have.
How should companies approach “preventing the preventable?” Companies should first figure out what can be insured and what can’t be insured, cost should not even enter the conversation at this point. Companies can do this by sitting down with their broker and identifying all the risks that a company faces. The broker’s job is to then recognize which of those risks are insurable. For instance, you may point to a large company infringing on your patent and your broker should be able to tell you that yes, you can insure the costs to defend your patent. Once the insurable risks are determined then you go through the process of figuring out what it will cost to insure and making a determination of where to spend your insurance dollars. Remember, the larger the premium the more likely a risk is to occur.