People do not make insurance decisions logically. They make them emotionally.
That may not sound obvious, but it explains why so many individuals and businesses spend money protecting relatively small losses while leaving themselves exposed to risks that could genuinely damage their finances or future.
A person may buy a five-year extended warranty on a television without hesitation. The same person may decline umbrella liability coverage that protects against a catastrophic lawsuit.
A business owner may insist on a $500 deductible to avoid small out of pocket costs while carrying no cyber coverage, no employment practices liability coverage, or no business income insurance.
Why? Because people tend to insure what they can easily picture:
- A cracked screen
- A stolen tool
- A dented vehicle
These are tangible, familiar, emotionally understandable losses. Large liability claims, cyber extortion, reputational damage, or prolonged business shutdowns feel abstract and distant. They are harder to visualize, so people underestimate them.
Behavioral economists sometimes refer to this as availability bias. We judge risk partly by how easily we can imagine the event happening.
There is also the issue of frequency versus severity.
People often focus on losses that are likely to happen rather than losses that would be financially devastating. A contractor may worry constantly about replacing stolen equipment because theft is common. At the same time, the contractor may give little thought to the possibility of a serious auto accident involving an employee driving a company vehicle.
One loss is familiar and annoying. The other could threaten the entire business. This is where insurance decisions can become distorted. Insurance is not meant to eliminate every inconvenience or absorb every predictable expense. Its greatest value is often protecting against low frequency, high severity events that would be difficult or impossible to absorb personally.
That does not mean small losses are unimportant. Deductibles, maintenance costs, and minor property damage still matter.
But many people unknowingly spend disproportionate amounts of money insuring relatively manageable risks while underinsuring catastrophic exposures. The result is often an insurance program that feels comforting but may not actually provide strong financial protection where it matters most.
Good risk management requires stepping back from emotion and asking a different question: What loss would create a serious financial problem for me or my business?
That answer is not always obvious. And it is not always the loss people spend the most time worrying about.
