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10 survival skills for managing corporate risks in the future.

10 Survival Skills for Managing Corporate Risks in the Future

In the past, the risk manager's primary function was to minimize the cost of insurance for his or her company. The risk management process was fairly straightforward; he or she had a risk and bought an insurance policy. If you had to sum it up in one word, it was reactive.

Today, the outlook is different. Risk management involves actively managing the cost of risk. The risk manager must now tradeoff or balance between retaining risk and buying insurance. In the future, this dynamic field will continue to evolve and the need for the risk manager to change with it and to drive the risk, rather than allow it to drive him or her, will become even more important.

The evolution of the risk management process has affected corporations of all sizes as well as their risk managers. Analyzing companies earning between $200 million and $500 million from 1982 to 1986, Logic Associates, a firm specializing in recruiting risk managers, found that, on average, these companies now have a staff of three handling their risk management operations. This number was divided equally between professionals and support staff. The use of captives by these companies increased from approximately 10 percent in 1982 to about 18 percent in 1986. Information systems have rapidly become commonplace in the field. In effect, the number in use more than doubled from 1982 to 1983 and then leveled off in later years. By 1986 there was another tremendous surge probably due to the advent of personal computers and increasing familiarity with using the systems.

During that time, the amount of risk retention doubled, up to 40 percent from less than 20 percent. (For our purposes, a large retention is considered to be more than the first $500,000 for risk.) Part of the reason for sudden surges between 1983 and 1986 was the volatile U.S. market, and part was the trend toward larger retentions.

Undoubtedly, professional skills will be needed to survive in this new environment; and this need is reflected in the increasing number of risk managers attaining such professional designations as the Associate in Risk Management (ARM) and the Charter Property Casualty Underwriter (CPCU) between 1982 and 1985. People are taking pride in being certified in the industry. If numbers show a decrease during this time, it may be due to risk managers who have run operations for a number of years moving on to other career opportunities. Yet after some time, their replacements will likely have professional degrees as well.

Risk managers of larger corporations face even greater challenges. For example, the utilization of captives increases as companies earnings rise to the $3 billion level and beyond, according to Logic Associates. The larger companies also have large self-insured retentions. Clearly, these two alternative funding mechanisms reflect a major trend toward retention. The form of retention will undoubtedly need to be addressed by the risk manager of the future. Considering the widespread use of information systems, the situation becomes even more complex: 50 percent of the companies report using information systems, either a mainframe or personal computer system. No matter the system, solid computer skills will be a necessity for the risk manager of a progressive company.

The trend toward self assumption of some of the risk has been making the risk manager's job even more demanding. It presents a number of questions. How big is the company? Can you afford self assumption? Can you manage it? This trend is another component the risk manager of the future must address.

To handle these trends, both the risk manager of a mega company or growing company need certain skills. I believe that there are 10 skills that are essential for the risk manager of the future.

Risk Assessment

One of the most essential skills for the risk manager of the future is the ability to assess risk. No matter where a company operates, it is important to have an understanding of its legal exposures. What if your company decides to export to another country or make an acquisition? An understanding of the legal environment is a critical component to assessing risk.

For instance, a risk manager at a company with operations around the world should constantly keep abreast of new exposures. He or she does not want to first become aware of them when there is a claim, but rather wants to know about potential losses beforehand. Thus it is essential to be aware of the potential problems that may develop and how to set up a network within your organization or through a service firm.

Knowledge

There are very few companies today that are in a single business. Being knowledgeable about many different areas is a required skill for the risk manager of the future.

It is crucial to know how to speak the language of your colleagues. Use their terminology and understand their needs.

The risk manager is representing the risk to the brokers, the insurance markets, and most importantly, his/her own company. He or she must have an understanding of the technological base and the factors going into it. This is a lot more complex than it used to be.

Financial Expertise

It is essential to understand a company's financial status. How it is constructed? What are the key elements? Does it have a large self-insured retention, and how is that reflected and accounted?

All these factors can affect the risk management decision, as can tax issues. One needs to look at the tax options, their impact and how they fit into the company's overall packaging strategy. Part of the problem is understanding the dynamics of financial statements and how might the risk management function contribute to the overall direction management wants them to take.

From an analytical perspective, there are a number of practices to be undertaken. For example, present value analysis, often called discounted cash flow, can be used to analyze various alternatives. Yet break-even analysis can be an easier and more effective way to deal with the saturation level.

When dealing in analytical work, it is important to keep in mind sensitivity to changes in assumptions. One aspect is criticalness. How will it vary? And finally, do the numbers have statistical significance? For example, comparing two programs, one we pay $1,000 and the other will be loss-related. In the first case, there is $600 of loss, but it will be paid out over time. Yet those losses may vary. Let's increase loss by 25 percent, which is an additional $750.

In terms of discounting the losses, look at the present value rate versus the cost. In the first pro/con program the money was paid upfront, so there is no time value on it. Whereas the second, there is a time value to money. This is really break-even analysis. Above 7 percent after-tax expected, the second is lower in cost than the first. This is one way to use this analysis. If the rate of return is above 7 percent, then this is the break-even point.

Yet how much would that break-even point change if the losses were changed by 25 percent? In this case, there is a 13 percent present value rate. This is a sampling of sensitivity analysis. These are ways to combine some very simple techniques and to help look at situations. In short, to make the numbers come alive for management.

Computer Skills

Computers are universal today and risk managers need to have a solid understanding of them. A risk manager needs to know how to extract data, and more importantly, how to utilize that data and filter it into information.

Industry Understanding

One also needs an appreciation of history to better understand the risk manager's position. It is useful to know how the insurance market has changed along with its volatility, how changes vary with geography and what are the current terms and conditions. What type of insurance is available and what is not? What is the impact that vanishing coverages will have on your company? For example, what is the impact of professional indemnity or directors and officers liability? Also, one should understand current options and cost factors. What is the sensitivity to the variance in price? An understanding of the industry is another essential skill. There is no better way to learn than to share your experiences with others in your industry group.

Consulting and Motivating

The next important role of the risk manager is that of consultant. To improve the loss situation, aside from using financial measures, a risk manager needs to explain to management why it is important for him or her to change how he or she is working and how the work can make an impact on the company.

The ability to motivate people within the firm and explain the logic behind the words and actions is important. This is the risk manager's role as an advocate or consultant. If one lacks the authority to make things happen alone, the ability to persuade others is key.

Problem Resolution

Another skill for the risk manager of the future involves problem resolution. The manager may come in and say, "What do I do?" If the company has a large claim, the manager may need help in analyzing it. It is up to the risk manager to explore the company's options.

Interpersonal Skills

Interpersonal skills can also be critical. There are three levels to recognize. One level is to communicate goals and ideas to the people who will actually implement plans.

Dealing with peers is the next level. The skill to deal with people at different management levels and to get their support for various programs is vital to being an advocate for the future and making the company a progressive one.

The risk manager must also apply interpersonal skills in working with superiors. Without support from upstairs, a lot of things cannot get done. So the ability to establish relationships with people on an interpersonal basis can be critical for the risk manager of the future.

In addition, as a risk manager, you are going to be called on to present and sell your ideas, and to explain why things need to change and how to be proactive in your company and environment. Another communications issue to be addressed is language, that is, the language of industry. When talking to the petroleum industry, for example, a certain type of language is commonplace. It will most likely be necessary to explain risk management terms such as "per occurrence" and "aggregate" and all those retention ideas to someone who only thinks in terms of bricks or gallons.

Managing Management

Techniques for dealing with management are important, too. Too many times people present an idea to the wrong level of the company or miss the point totally. Getting the right point across to the right people will be critical. Because of the visibility of a risk management position, and its access to high levels within the company, the message impacts on more levels of the company. Keep in mind that different audiences have different perspectives. For instance, the operating manager is concerned with the company's growth and keeping costs under control.

On the other hand, a vice president of finance will have a different perspective. He or she is concerned about whether the safety program recommended two years ago will have a positive impact, and may have little concern about the average cost per claim. The bottom line for the finance vice president will be knowing that program is effective in saving the company money.

The chief executive officer wants to see that losses are flat or decreasing. He will probably want to know how the risk manager can help improve earnings per share over time, a different perspective of the same information.

Planning

The last of the 10 skills in planning. A business plan for the risk management operation is key. The plan should outline steps for the next planning period, and most importantly, highlight the plan of action.

Thus, part of your development as a risk manager depends on the type of risk management role. Understanding the insurance market, interpersonal skills, planning your company's risk program, assessing risk, finance and presenting ideas all play a part in the risk management position for the future. Every risk manager needs to look objectively at his or her strengths and weaknesses and must seek out areas for improvement.

Future roles must also be defined. Thought should be given to the progressive plans for a company as it changes and develops. Is the company in search of acquisitions? Will there be a divestment of operations? Perhaps there will be an expansion into new product areas or geographic markets.

The next step is to get some more information and survey options. What are the educational programs available to a risk manager? Which special projects could enhance skills and professional development? What are the programs that are available through industry groups and through various vendors? Then once the information has been gathered, it should be incorporated into a plan.

There are three final key points for success for risk manager of the future. First, follow a logical plan, one that has been planned sequentially. Second, be committed. If one is not committed to a plan, it will never function. And finally, utilize resources. There are tremendous resources in the industry and within each company. If one does not utilize them, one will be starting unnecessarily from scratch.

Will you be able to serve your company as risk manager in the future? You certainly can. However, you must be committed to facing a future filled with challenges.

Luther T. Griffith is chief executive officer of Alexander & Alexander Services' Risk Management Services Group. This article is an edited version of his presentation before the Australian Risk and Insurance Management Association's annual meeting last year.
COPYRIGHT 1989 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Author:Griffith, Luther T.
Publication:Risk Management
Date:Jan 1, 1989
Words:2318
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