Art. 27 · Reducing the risk · 3 min read

Rare, ruinous events

Every one of them is individually insurable. All of them together are unaffordable. Choosing between them has a method.

Terrorism. Major flood. A cyber extortion event. Losing your largest customer. A pandemic-style shutdown. A key person dying. Each is rare, each would be severe, and each has a product available.

Buy all of them and the certain, monthly drain of premium becomes a more reliable threat to the business than any of the uncertain events it protects against. This is the trap: insuring against ruin can itself be ruinous.

The first thing that helps is realising these decisions are mostly independent. You do not need to rank flood against cyber and pick a winner. Each one gets compared with its own price and nothing else. That turns one impossible decision into six manageable ones.

Then three questions per risk, in order:

Would it end the business, or dent it? Not "would it hurt". Would you still be trading in eighteen months? Only the first category is a candidate. Most things people worry about are dents.

Is the price close to the risk cost, or a large multiple of it? Some catastrophe cover is priced tightly because the market is competitive and the data is good. Some carries a loading of several times the underlying risk because nobody can price it confidently. The second kind is often better handled by preparation than by purchase.

Would the money arrive in time to matter? A payout that settles in fourteen months does not save a business that runs out of cash in four. Cover for a ruinous event is only useful with a plan for the gap between the event and the payment.

One more thing worth saying plainly, because it is easy to be sold against. A risk being frightening is not the same as a risk being likely, and a vivid catastrophe with a genuinely tiny probability may deserve a paragraph in a continuity plan rather than a line in a budget. Rank by how close the risk takes you to fatal, not by how alarming it sounds.