Risk Managers’ Forum
Risk management guidelines, formal insurance-related education or not
Today, more and more young people are intentionally finding their way into the field of risk management. They finish high school and either enter or end up in a formal post-secondary insurance or risk management program. Of course, many follow a less clearly defined educational path, combining college or university business and risk management education and landing a risk management job after they graduate.
Perhaps the majority of risk managers—and I’ll include among this group people who act as, but don’t necessarily carry the title of, risk manager—wind up in the role by chance. I suspect many reading this article are among this group. I am.
After receiving my undergraduate degree in business administration and personnel management from the University of Tennessee-Knoxville and a subsequent stint in the Army, I entered graduate school at the University of Memphis. While earning my MBA, I worked for doctors in the Memphis area, where I focused primarily on physician practice management. That job provided me some rudimentary risk management experience in the area of medical professional liability.
From there, I joined my dad’s insurance agency in Germantown, Tennessee, and before long became a partner in the firm. To build knowledge, I took my first Certified Insurance Counselor (CIC) course, way back in 1977. That was my formal introduction to the insurance industry.
After my father retired, I navigated a number of business changes—mergers, ownership of different agencies, and partnerships in cluster arrangements, where I owned the business and produced new business. That continued until October of last year, when I hung up my agency principal hat after 41 years.
The agent’s path
Those following a formal insurance or risk management education generally come away with expertise in two key areas: general business knowledge and fundamentals of risk management.
A broad understanding of business is important because opportunities exist in vastly different industries—everything from contractors to hospitals to manufacturers to retail businesses and, well, every other kind of business there is. Of course, as an agent, you probably work with clients in all of these.
A general business education also provides insight into the different functions within an organization: finance, marketing, people management and more. My undergrad degree and MBA offered a breadth of knowledge that helped prepare me to understand my clients’ needs.
The second key education area is risk management. Understanding what the discipline entails is absolutely critical. Students graduating from college and university risk management degree programs are armed with this formal knowledge from the start. Options include The Institutes’ Associate in Risk Management (ARM) program and the Certified Risk Manager (CRM) program offered by The National Alliance.
To be a good risk manager, you may think you have to understand it all; in many cases, it’s a matter of simply surrounding yourself with others who complement what you do.
Of course, these programs provide a foundation. Experience—on-the-job training, if you will—builds on that and is an important element of becoming someone who can successfully manage risk. Many agents—and nearly all risk managers—find it useful to become involved with organizations like RIMS, the Risk & Insurance Management Society, or, if you’re working with public entities, PRIMA, the Public Risk Management Association. Both organizations offer national and online resources, as well as some local opportunities to connect.
If you’re heavily involved in risk management, you know insurance is just one part of the process. In fact, the insurance purchasing function is almost an afterthought. Almost. The first step is to identify what can happen, or what risks or exposures exist. Then, these are analyzed from the standpoint of how bad they might be and how often they might occur. Loss controls are applied to help reduce the severity or frequency. And then, financing the remaining risk comes into play. In other words, how will the insured pay for the losses?
Paying for losses
There are only two ways to pay for losses: use the insured’s own money or someone else’s. After deciding how much money the customer is willing to pay, it’s time to turn to the insurance marketplace for help with those losses that they can’t afford or would rather not pay.
Those losses that a client chooses to retain might include small losses within their deductible limit; large, catastrophic losses that might be too expensive to insure (such as earthquake); losses that have a very low probability of occurrence (flood); or losses that have a low severity (shoplifting). There are also perils that customers must retain, because there is no insurance policy available.
Within the risk management function, insurance is not a consideration until all the exposures, perils, and hazards have been identified, analyzed in terms of frequency and severity, and controlled to keep them from becoming losses. Then does the option of insurance as a financing technique come into play. Clearly, an insurance agent who might consider becoming a risk management consultant has to think outside of the insurance “box.”
Risk managers need to be able to listen to people. People will share what kinds of uncertainties they have in their world and what kinds of risks are floating around. It’s important to be quiet and listen to them.
More than simply listening, you really have to be a detective. Ask questions and try to understand what’s going on within the firm because sometimes risk is not obvious. Risk won’t necessarily jump up and say, “Here I am!”
Many opportunities exist for insurance agents to provide risk management services to clients. Using available identification techniques will help clients become a part of the process. This serves three purposes: First, it helps the client truly understand what risk is all about and how it affects their business; second, it helps set the framework for an insurance program to address insurable perils; finally, it helps establish the agent as a true value-added advisor to the business owner. Analyzing frequency and severity of potential losses lets the agent assist clients during the process of selecting loss control and financing options.
Other skills are required as well. Good communication skills are important in everything that we do. For every problem, a solution must be communicated. One way I’ve seen this manifest itself is when I accompany agents and business owners on inspections with a loss control engineer.
The engineer will use words in one frame of reference; the owner may have a different frame of reference, and the insurance agent yet another. It sometimes becomes my job to be an interpreter. I have to use my communication skills to explain to that owner why it may be in their best interest to accept the loss control recommendations.
Finally, you need to know how to surround yourself with smart people. And then do it. Over time, I’ve built networks of good lawyers, accountants, engineers, actuaries, salespeople, and service professionals. I learned while building an agency that the key was having good people around me who were smarter than I am.
Current and emerging risks
Perhaps the most important skill or role is that of an instructor. I have to teach my clients about risk management and how it will benefit their company. The more a client knows about what’s going on concerning the risks they face, the easier it is to gain their support for any required changes. Remember, successful clients succeed in business because they know how to do what they do. But that doesn’t mean the background or underlying activities, including risk management, are things they understand or care much about.
Talk to them about identifying perils, exposures, and hazards. Discuss risk analysis in terms of frequency: How often might an event occur? And severity: How bad can it be when it does happen? Help them understand how to approach problems from an analytical perspective.
To be a good risk manager, you may think you have to understand it all; in many cases, it’s a matter of simply surrounding yourself with others who complement what you do. Team-building and other organizational skills become paramount, and the concept of enterprise risk management becomes clearer.
Uncertainties are out there and emerging risks are burgeoning everywhere. New exposures, perils, and hazards show themselves every day. Agents and risk managers cannot sit by and just do the same things they’ve always done. Look at new risks. Cyber risks and terrorist risks are significant. Of course, standard and mundane things, like fires, thefts, and vehicle collisions, are still out there, too.
Again, think outside the box. Look at all the potential disasters that might occur in our country and throughout the world—attacks on the power grid, attacks on waterway structures, and personal attacks in places like theaters, restaurants, and entertainment venues.
We’re living in a very risky time, which means we’re in a time of uncertainty, because that’s what risk is: uncertainty.
R.W. “Tommy” Thomas, CIC, CRM, ARM, is currently a risk management consultant and faculty member for the CRM program. He also worked as a risk manager, as well as an insurance agency owner, during his career.