The speaker walked to the podium holding a large jar filled with M&Ms. She asked: “Who likes M&Ms?” Hands went up. She then asked, “If I offered each of you $10 for each M&M you could eat, how many would eat some?” More hands went up. Finally, she said, “If I offered you $100 for each M&M you ate, who would get in line for a fistful of these chocolate treats?” All hands were raised, and a line to the podium started to form.
Then she said, “But understand – one of these M&Ms is infected with a deadly poison, and, if that M&M touches your lips, you will die. Any takers?” All hands went down, and folks forming the line returned to their seats.
She said, “This simple example provides insight into the underlying principles of risk management and insurance:
- Don’t risk a lot for a little.
- Don’t risk more than you can afford to lose.
- Don’t measure your chance of loss as a statistic; measure it in terms of the consequences if it happens to you.
As professionals in the insurance industry, our challenge is not just to sell insurance but also to help our clients manage their risks. Our purpose should be to facilitate our clients maximizing the good in their world, minimizing the bad and, when the bad does occur, mitigating the damage done. Risk management is the process. Insurance is the last step in that process.
In 1972, as a G.I., I was blessed to visit the Notre Dame cathedral in Paris. It was a magnificent edifice. Today, it is smoldering ruins. The history remains; the vast majority of the structure does not. I have no idea of the insurance involved. My first question would be: Is it enough? My answer would be: “Probably not.”
I’m assuming the liability carriers of the organizations responsible for the loss and the assets of these same organizations will provide the down payment on this disaster. The Catholic Church, billionaires, the French government and the people in the world will probably “re-insure the rest of the loss.” The facility will never be the same.
My experience indicates that too many policyholders (risks) measure their losses in terms of losses they have experienced and are comfortable with. They are hard-pressed to venture into the unthinkable. Many residents/business owners in New Orleans were insured for wind and flood but not to the extent that a lady named Katrina delivered to their world. The people in Houston knew rains and floods but “misunderestimated” what 70 inches of rain can do.
See also: In a Crisis, Will You Be Ready?
As agents and brokers, we and our clients guess, “How much is enough? We don’t know for sure until it’s too late to change our decision.
I insured (circa 1975) a new hospital on the north shore of Lake Ponchartrain. I had been put on notice of a small fire loss that burned a fence and some grass. A dumpster had caught on fire. I was to report to the board soon, so I called the adjuster to be certain that all was well. The adjuster said, “Mike, I was getting ready to call you to advise you that I had reserved policy limits on this case.” (I almost threw up.) He further explained that the “little grass fire” had burned hundreds of acres adjoining the hospital.
On the good news side, the landowner was an older man whose timberland had burned before, and this was the first time anyone had come forward to accept responsibility. He walked away from his claim. He appreciated our honesty and we appreciated his generosity.
Bart was one of the best clients I ever had. In the mid-1980s, he had been carrying a $1 million umbrella. I suggested he raise the limits to $5 million. He said, “Mike, what could we ever do wrong that would result in that much damage?” I responded, “One of your trucks could run a busload of attorneys off the bridge and into the river.” He responded: “Oh my God, give me the higher limits.” (Two years later, we paid a multimillion-dollar auto loss.)
In 1975, Louise (not her real name) was our agency bookkeeper. She had handled the books for decades. She was a blue-haired church lady who never caused trouble or had been a concern. The agency hired a newly minted accounting graduate to help the agency in the future but would let Louise work as long as she wanted out of respect for her decades of loyal service. In the first week, our new CPA discovered that Louise was more slick than innocent or loyal. We ended up discovering a loss of more than $33,000 (no one will ever know how much she stole).
Fast forward about 12 years. I was insuring one of the fastest-growing and most profitable ENT practices in town. The practice was tubes in the ears into to gold via the operating room. The doctors realized the need for a more sophisticated accounting system for their practice. They hired a new CPA to be their office leader. He was the son of a prominent business leader. He had literally grown up next door to one of my agency's principals. He was a professional.
We raised the employee bond limit to cover the new success of the practice. The carrier asked for additional details on this new employee. We forwarded the request. The information was not forthcoming. We made requests. The new employee used the excuse of “busy.” We believed him; the carrier did not. It sent a notice of cancellation.
A few days later, the managing partner called and asked if the practice had a fidelity bond. I joked, “Don’t tell me he went south with the money.” Total silence. He was gone, as was a large sum of money. The good news for us: The prominent father of this “CPA” paid the claim to make other charges go away. It turned out that his son was not a CPA, and other legal issues were about to surface.
As an agent/risk manager, I was not nearly as good as I thought. I was lucky. You may not be so lucky. Manage the risks as they are, not as you are or as you hope them to be.
Today’s world is not as simple, innocent or honest as the world we left behind. Marcus Welby M.D. and Ozzie and Harriet are dead, and so is the world they lived in. With technology, your accounts can be cleaned out by a techie crook who can’t even spell CPA. Oftentimes, drugs today motivate dishonesty to support a habit.
See also: With Innovation, Keep It Simple, Stupid
In the world of tort in Louisiana, there are more attorneys on billboards than there are underwriters trying to protect their carriers from them. Your Daddy’s Oldsmobile is a distant memory. The invincible AIG of my early years has been bankrupt, as have Arthur Andersen and other icons of yesterday.
As a buyer and seller of insurance, as an agency owner and a business owner, as a center of influence in your own world, BE PREPARED. Be prepared for the world as it is now, not as you would like it to be. Remember that technology has made crooks much more effective at mischief than it has made us efficient at self-preservation!
How much is enough protection? I don’t know. Do you?
