I’ve been wrestling with a chronic problem we in the insurance industry haven’t been able to crack for centuries.
It’s called denial.
I’m referring to the seemingly innate refusal of the human mind to appreciate the gravity of a potential disaster before actually experiencing one. As humans, our bias toward denial tempts us to roll the dice, buy scratch tickets, drive fast, jump off cliffs, eat fatty food, ignore our retirement funds and generally take too many chances.
We let smoke detector batteries die. We build homes in the same flood plains where our last ones were destroyed. When a monster hurricane like Michael is bearing down, some of us ignore evacuation orders thinking our grit will enable us to ride it out. It happens every time.
You see denial on the macro level, too. Global companies rely on risky partners only to see their supply chains snap. Power blackouts endure for weeks because no one bothered to build a resilient infrastructure. Skyscrapers go up in flames because they have flammable cladding yet no automatic sprinklers.
"Generally, people don’t respect the power of potential disasters, and they don’t adequately plan for them."
"Generally, people don’t respect the power of potential disasters, and they don’t adequately plan for them."Malcolm Roberts, Executive Vice President, FM Global
Generally, people don’t respect the power of potential disasters, and they don’t adequately plan for them.
My colleagues did some research on denial a while back. Ninety-six percent of the financial executives we surveyed said their operations were exposed to natural catastrophes like hurricanes, floods and earthquakes. Yet fewer than 20 percent said their organizations were “very concerned” about such disasters hurting their bottom line.
Let’s face it. Denial is hope on steroids.
In a report we published in 2010, Flirting with Natural Disasters, we described, for instance, the Gambler’s Fallacy — the misconception that what has recently occurred will affect what occurs next even if the two events are unrelated. For example, if flipping a coin nine times results in nine instances of “heads,” probability still applies: There’s a 50 percent chance the tenth flip will be heads. By the same reasoning, there’s no objective basis to think that the Carolinas won’t see another Florence-class storm this year, or next year.
We also outlined some other facets of denial: A person can worry about only so many things, so seemingly remote possibilities like natural disasters often fail to make the cut. Short-term pleasure is more appealing to consider than long-term consequences. It’s easy, but wrong, to conflate the inevitability of a natural disaster with the supposed inevitability of life and property loss. People think insurance makes you whole. (If you think that, ask a disrupted business that lost its market share to resilient competitors if it was made whole.) And: Most people are followers, thus institutionalizing the practice of denial.
To try to snap people out of their denial, my insurance colleagues and I share real-life tales with anyone who will listen. And we try to recast the notion of probability like this: A hundred-year flood doesn’t happen every 100 years; rather, it has a 1 percent chance of happening every year.