Consultants: forget it.
I read the response to my "Chasing Our Tails" article (Risk & Insurance[R], March 2006, p.37) by Erie Schmidbauer, in the July 2006 edition of Risk & Insurance[R]. I think our differences--and they are significant--boil down to matters of making advice practical, and verifiable, based on the genuine goals of company management in managing risk. I intentionally steer clear of utility considerations, because while the concept may have some deeper psychological relevance to the whole retention decision thing, it is an incredibly difficult thing to measure (as any honest economist will tell you).
Reasoning using an abstract concept like this can get circular, fast. I raise my deductible because it increases my utility. How do I know? I can only infer it from my decision to increase my retention. Does utility "explain" the decision, or vice versa? The typical approach of consultants that use the "utility" approach is trying to get at the clients "appetite for risk."
Advising on a risk management strategy based on "appetite for risk" is like advising someone on a diet plan based on their "appetite for food." To all likeminded consultants: If you can operationalize the utility approach, please do so. Otherwise, forget about it. My point about the expected value comparisons is that they are easily operationlized, and often used (rightly or wrongly), even by knowledgeable consultants.
Mark Jablonowski, CPCU, ARM
Conning Research & Consulting
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|Title Annotation:||LETTERS TO THE EDITOR|
|Publication:||Risk & Insurance|
|Article Type:||Letter to the editor|
|Date:||Sep 15, 2006|
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