Insurance and Redundant Systems

by Edward Henkler on May 14, 2013

Insurance is great except when it isn’t.  In its original concept, insurance was intended to protect us from catastrophe, extraordinary expenses that might bankrupt an individual but could be risk managed over a pool of subscribers.  That concept remains quite valid.  The problem arises when we begin to use insurance to cover routine needs.  David Goldhill writes about the absurdity of using insurance to pay for routine purchases in “How American Healthcare Killed My Father”.  Jonathan Haidt takes the concept a step further in “The Righteous Mind”.  He discusses the miracle of the supermarket, which allows us to buy virtually anything, often at very low rates.  This happens because all of the supply chain participants are incented to operate as efficiently as possible.

What happens if we shop with a food insurance card?  We pay a flat fee each time we shop plus the monthly subscription fee, leaving little incentive to compare prices.  If anything, we might tend to buy more upscale products as the impact is disconnected, unlikely to affect us until at least the next renewal cycle.  The supermarket and supply chain now have little incentive to control the cost, increase the quality, or drive more effectiveness into the supply chain.  In fact, their true incentive is to only stock foods which net the highest insurance payments.

This example may explain why there is so much dysfunction in our healthcare system but it may not seem personally relevant.  I believe the same phenomenon exists at many companies and it takes the form of redundant equipment and shadow organizations.  I want to focus on redundant equipment now and save shadow organizations for another day.

Can you have too much backup????

Can you have too much backup????

Most companies employ emergency generators, UPS systems, double-ended substations (for larger companies), manifolds on utility systems, and other redundancies to ensure continuity of service.  It’s a great concept in practice but the breakdowns occur when backup is provided for non-critical systems.  In layman’s terms, if everything is important, then nothing is important.  With time, it becomes too expensive and cumbersome to routinely operate and test the backup systems and they fail when they are most needed.  Like insurance, it would be better to only insure (backup) the most critical systems, then follow a rigorous maintenance and testing schedule to ensure that they operate as intended when needed.  Sometimes less is more….

{ 2 comments… read them below or add one }

Bill Mecaughey May 14, 2013 at 11:10 pm

Ed makes some excellent points. Insurance can be easily overdone, and careful consideration should given to whether insurance is necessary, and if so, and scrutiny of deductible limits given recent experience should be thoughtfully applied.

Similarly, redundant systems (or teams) can be extremely wasteful of capital and human resources when computer systems (or employee resources) are other than critical, as Ed prudently notes. Valuable food for thought, Ed!


Edward Henkler May 14, 2013 at 11:29 pm

Thanks Bill – it’s ironic that when we try to protect ourselves more, we often create an unintended and undesirable outcome.


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