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Essentials of Risk Management.

This book is designed to increase knowledge and develop skills that can improve job performance in risk management. Although not explicitly stated, it appears to have been produced primarily for students preparing for the Insurance Institute of America's Associate in Risk Management designation (ARM54).

The authors introduce their text effectively with a "Letter to the Student." This is followed by a useful first chapter that provides a detailed overview of the entire risk management process and maps out the plan of the text. The principal focus is upon risk management operations in individual organizations and embraces both private and public entities and profit-seeking and non-profit bodies. The role of risk management within the broad economy and for given communities is recognized, but apart from a limited discussion of personnel loss exposures for families, the text is set exclusively in the domain of corporate risk management.

The elements that make up the risk management process are introduced at an early stage by means of a hypothetical case study. This case scenario is used extensively to good effect throughout the text by providing pertinent examples. Elements in the risk management process are introduced as "steps," which implies a rigid, linear progression. Some other writers in recent times have preferred to treat the risk management process as a more holistic, complex, ad open system.

The overview chapter introduces seven techniques of risk identification, and six of these (standardized surveys and questionnaires, financial statements, other records and documents, flowcharts, personal inspections, consultations) are described in detail with suitable applications in the third chapter. The seventh technique (data on past losses) is covered in later chapters dealing with quantitative techniques and computerized systems. No reference is made to the adoption of other techniques of risk identification which are currently practiced--for example, hazard and operability studies and fault tree analysis. None of the techniques covered in this chapter would, for instance, be appropriate for risk identification when a planned facility was still in the design phase, although for cost effective risk control that is the most important stage for identifying potential risks.

Subsequent chapters offer a detailed exploration of the recognized areas of loss exposures. Property and net income losses are explored in the context of interests and values, perils and financial consequences. There is a detailed examination of liability exposures, with particular attention to workers' compensation and environmental pollution. Personnel losses are analyzed from the perspective of the impact on organizations and families.

There then follows a thorough (though possibly rather tedious) account of the various risk control and risk financing techniques. With regard to the latter, no mention is made of recently introduced alternative risk financing techniques, but that is presumably because they will be covered in the companion text for ARm56--"Essentials of Risk Financing."

Later chapters address the quantitative techniques that can be used in risk management decision making. Basic procedures for forecasting and routine cash flow analysis are introduced and explained in a thorough and progressive manner. The effort to adequately explain such techniques for the benefit of students does, however, create a problem. The use of forecasting and cash flow analysis for selecting the most appropriate risk management technique creates a false simplicity, in that these procedures relate solely to the criterion of cost effectiveness and thereby ignore the complexity of real-world business risk situations. And while many pages are taken up with detailed accounts of the techniques, the disadvantages and weaknesses of the methods advocated are dismissed in three short paragraphs.

The book concludes with a substantial and informative section on risk management information systems, with the emphasis appropriately on modern computerized systems.

On the basis that the text is intended for a specific ARM program, the material covered will necessarily be prescribed by that curriculum. But assuming that the book is also intended for a wider readership, there are several notable omissions to comment on.

First, the material launches straight into the risk management process. It would be helpful for general readers to have some introductory treatment of the nature of risk and the role of uncertainty in the business environment. The lack of attention to the qualitative aspects of risk contrasts with the extensive treatment over several chapters of the quantitative aspects.

The increasingly important area of environmental risk is covered appropriately in the chapter on liability exposures, but is conspicuously absent elsewhere. For example, this aspect is not referred to in the typical organizational structure of a large risk management department, in which other functions such as safety, industrial hygiene, and security are specifically mentioned. Another significant omission is contingency planning, which is mentioned only fleetingly in the context of computer disaster recovery.

A major area of concern is the treatment of information technology. As previously mentioned, computerized systems of risk management are covered extensively and effectively in the final chapter of the text. The problem is that the whole broad area of computers as they relate to risk management have in the main been self-contained in that one chapter instead of being suitably integrated into the other areas of the risk management process. Apart from a few brief entries, computers, their applications, and the risks related to them, are ignored in all but that final chapter. Many examples of that blatant omission are apparent: The chapter on loss forecasting suggests that in making adjustments for price level changes, the risk manager should "round the result to the nearest $100 to simplify later calculations," thus implying that the appropriate use of computer systems for this procedure had been overlooked; and a later statement in this chapter suggests that a risk manager should "turn to a trained statistician" because computing a curvilinear trend line is complex--although, again, one could expect a present-day risk manager to use an appropriate software package for this purpose.

Other features that disappointed this reviewer are the inconvenience of two volumes, each with its index (which often necessitated referring to both to locate a subject); with a combined length of approximately 600 pages it seems feasible for a single volume to be produced; a number of typographical errors and omissions (surprising in the light of the extensive process of review referred to in the preface); and the rather dated references (the vast majority of references appearing in the chapter notes are dated 1985 or earlier.).

Notwithstanding these reservations, this text embraces a wide body of material that adequately covers what its title promises. The many topics covered are presented in a logical order and in an appropriate style for students, and the chapter summaries provide helpful synopses. Bearing in mind the limitations apparently imposed to address the specific ARM program, this book can be expected to achieve its design intentions of increasing knowledge and developing skills that can improve job performance in risk management.
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Author:Reid, John W.
Publication:Journal of Risk and Insurance
Article Type:Book Review
Date:Mar 1, 1993
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