By Dennis H. Pillsbury
--Mechlin Moore
Risk management issues are of critical importance to independent agents who often serve as the risk manager for many of their clients. The broadening role of risk management was discussed at a recent property insurance conference. The comments are especially cogent for those agents who are engaged in risk management or who are looking into that field.
"Risk managers and corporate management need to think about operations in a holistic manner, viewing loss prevention and risk management as the protector of productivity, efficiency and market share," according to Gordon W. Kreh, president and chief executive officer of The Hartford Steam Boiler Inspection and Insurance Co. Speaking at LRP Publications' First Annual Property Insurance Conference & Expo in New Orleans, Kreh said that risk managers who take this approach go beyond the traditional role of "insurance buyer" to consider the entire business enterprise, its strategic goals and the total cost of risk.
Kreh noted that many strategic issues, such as changing the concentration of assets, also are risk management issues and cited the example of a major manufacturer that canceled plans to expand a plant and instead built a new one some distance away after a risk manager's evaluation of the risk of concentrating assets changed the economic model management was using. "A risk manager with an enterprise-wide perspective and a focus on helping his or her company achieve future earnings targets can positively influence corporate strategies," Kreh said.
Of critical importance to a holistic approach to risk management is the total cost of risk as compared to the premium alone. "The premium is just one component." Under a holistic approach, Kreh added, risk managers not only answer the question: "How much is saved by eliminating engineering and inspection services in a low-bid insurance contract?" but also look at "How much do the risks increase?"
Citing data that show a strong correlation between loss prevention and equipment reliability, Kreh called for stronger partnerships between risk managers, loss prevention professionals and those responsible for equipment reliability. "This has one of the greatest potentials to add value and save companies money," he said.
Kreh predicted that demands from top management for bottom line accountability in all functions, including risk management, will lead companies to abandon the traditional goal of reducing the cost of coverage in favor of a holistic approach. "In today's ever-changing business world, managing risk effectively is one of the critical keys to staying competitive and avoiding potential loss," he concluded.
Mechlin Moore, president of MDM Communications, pointed out that "the function of risk management is recognized as a vital component of strategic planning in most large companies today." In his luncheon address at the conference, Moore added that "chief financial officers look to the risk manager for advice on all forms of risk elimination, reduction, retention and transfer, not just on the purchase of conventional insurance. 'Holistic' seems to be the buzzword for the broader approach to risk management being taken by some major companies. The holistic approach involves examining the risks associated with the company's processes, not just its property.
"According to Todd Williams, risk management consultant for Arthur Andersen Company, 'Business risk must be redefined as any event or action that prevents an organization from achieving its objectives, and the job of managing risk must be shared by executives in all operating disciplines.' Most risk managers focus primarily on finding ways to prevent, fund, transfer, avoid or control losses associated with pure risks. Under the holistic approach risk managers focus on the speculative risks, or uncertainty as to whether a specific activity is likely to produce a gain or a loss."
Moore continued that "risk management is no longer confined to hazardous risks. Political risks, currency exchange risks, and balance sheet risks are on today's risk manager's agenda in many companies. Risk managers also are being asked to take an integrated look at health insurance, workers compensation and disability to find combinations that will produce cost savings.
"The risk manager should be informed not only on the widely used alternative risk transfer mechanisms, but on the new capital market vehicles that are surfacing on Wall Street. Some insurance companies are looking to the capital markets for catastrophe risk protection. Among the devices being used or proposed are debenture financing, surplus notes, bonds, standby lines of credit, derivatives, and catastrophe futures," Moore said. "As risk managers, you must understand these new devices in order to evaluate the program proposed by your broker or insurer."
Moore went on to discuss the changes that communications technology brings to the insurance and risk management communities. "Technology has brought . . . new forms of communication to the business world in the last few years. They are making dramatic changes in the way business is conducted. Companies that embrace the new communication technologies will move ahead. Others will be left behind. What impact will electronic commerce have on risk managers?
"E-mail is well on the way to becoming a universal means of business communication," he continued. "It won't replace the telephone but somewhere down the road it may make paper memos about as obsolete as the typewriter is today. Checking your e-mail has become as routine as checking your voice mail. For risk managers, as for others in business, e-mail has provided another fast, convenient means of direct communication. No time or money is wasted on intermediaries. Your message goes directly to your boss, your broker, your insurance company. Nobody has to open an envelope or add to the stack of paper on your desk. When you're traveling, just plug in your laptop, check your e-mail, and you're connected to the world. Your office is wherever you are . . .
"The Internet enables you, as a risk manager, to obtain instant information about any insurance company or other insurance provider. It won't be too long before insurance transactions are conducted routinely on the Internet. The Internet is growing at an incredible pace. Estimates range up to 40 million users worldwide today, with 15 million of them using the Net on a regular basis. Business and industry have embraced the World Wide Web as a place to sell products, to advertise, to exchange information."
Moore said that "the sophisticated risk manager today uses the Internet as: a tool to construct a tailored news clipping service about specific industry issues; a way to obtain financial and security information on insurers, brokers, and alternative risk providers; a way to facilitate coordinated claims defense by bringing together risk managers, carriers, and defense counsel; a forum to share information with other risk managers on rates, terms, conditions in the market, and to coordinate lobbying on risk management issues; a way to communicate with HMOs, PPOs and carriers; and a research vehicle for insurance topics and new technology.
"The possibilities are almost infinite," Moore concluded. "As more and more business is conducted through electronic commerce, risk managers will be faced with new and different risks. You will be challenged to identify your company's operations that will be vulnerable to new categories of loss. Senior management will look to you for in depth knowledge of all the ways available to mitigate, fund, or transfer those risks...And the breathtaking changes in communications technology will offer you direct access to insurance companies and alternative markets the world over."
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The author
Dennis Pillsbury has more than 20 years' experience in insurance journalism, both as an editor and freelance writer.