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Five decades of RM: as Risk Management Magazine celebrates its fiftieth birthday, join us as we page over half a century of observation and analysis. (Looking Back).


The risk manager undoubtedly starts out to accomplish his fundamental purpose, i.e., to protect his corporation against serious loss in the most economical manner possible. Unfortunately, he may become so devoted to dollar savings that he temporarily ignores the more vital problem of the catastrophic loss.

The first fundamental then, is to arrange proper protection against the catastrophic loss before attempting to effect savings in the area of normal losses.

The second fundamental is the distinction between physical damage losses (fire, extended cover, burglary, etc.) and third party losses (workmen's compensation and public liability)....

A third fundamental to be considered is the correctness of the insurance rate structure used in the comparison of costs between insurance and self-assumption of risk. I know that none of us here would determine the cost of workmen's compensation and public liability insurance on the basis of unmodified "manual" rates, anymore than we would compare insurance premiums to losses 'paid without including other costs involved such as loss adjustment expenses, safety engineering, premiums for self insurer's bonds, payments as a self-insurer into second injury funds and loss of income on low yield securities posted as guarantees to act as a self insurer.

"Risk Administration ... Some Fundamental Issues" C. Henry Austin, November 1959


While enjoying the relaxation of daily commuting, or while incurring the displeasure of his family by being off in day-dream land, [the catastrophe underwriter] sometimes looks back and works the whole day over again, as Underwriting Manager of Utopia Insurance Company ...

Nine o'clock. The mail has been placed on his desk.

First item--production and experience report for the first six months. Premiums written--up 12 percent over last year! Losses--same as last year--NONE! Loss ratio 0.0 percent! No improvement there, but it's not bad.

Next item--applications for Catastrophe Liability Insurance quotations. He must think positively now; i.e., positive that he is completely removed from loss.

The first application now comes under scrutiny. He reads and he thinks:

I hope this applicant has been in business long enough so that he is well experienced and a recognized leader in his field. Let's see: 30 years! Fine! No inexperienced newcomer.

I hope he doesn't have a string of subsidiaries that will complicate everything. Well, good!--no subs, and no foreign operations. A nice, well-established, single entity, domestic account!

I hope he's not involved with a lot of contractual obligations, hold harmless and sublet work. What does he say to these questions? "No contracts, other than those which come within the scope of standard coverage in the primary insurance policy," and "No independent contractors engaged." No problem here and I'm convinced he will not develop these exposures.

I hope he manufactures a product I recognize. Then, I will at least have an idea of its loss potential. Say! That's a fine product; I buy it myself and I can't imagine a serious loss as a result of any one using it. Good sales volume too!

I hope there are no leased real properties or leased property of others in his care, custody or control. If there are, I'll have to--Hold it! The answer to this question is "none--all owned premises; no leased property of others." Makes it easy!

I hope he doesn't have a large fleet spread out all over the country--long haul, tractor-trailers, double rigs, all that. No, he doesn't--well, it's a fair sized fleet, but from its description no severity exposure to be worried about.

How about employers liability? Is he self-insured for workmen's compensation? He carries statutory workmen's compensation insurance in all states where operations are conducted and has no exposure under admiralty jurisdiction or the Jones Act; none under the Federal Employer's Liability Act and none under the Federal Longshoremens and Harborworkers Act. Fine!

I hope he doesn't carry on an extensive advertising campaign. Radio, TV, magazines, etc. This could be a real hot exposure. What does he do?--occasional Trade magazine ads; minimal expenditure. I guess I can live with this.

"Some Secret Thoughts of a Catastrophe Liability Underwriter" Martin J. Cullen, September 1965


"It is not at all clear to me that the American people are particularly alarmed about the fact that we sacrifice as many people on the highways each year as we lost in Vietnam over 12 years. For this reason, I wonder how much the consumer will be willing to pay for a "safe" car which will undoubtedly be more expensive to operate and less "fun to drive."

"Cracking the Nut Behind the Wheel" Stephen G. Graves, March 1974


Employers are now required to inform their employees of the potential hazards of the products they work with and to train and protect these employees from any potential hazards. Compensation settlements have become more and more generous, and refusal to work when faced with a suspected danger is a right all employees have.

Accidents are not 100 percent preventable. Even the best control systems are vulnerable to failure. Plans therefore have to be' made that will allow a firm to act quickly and responsibly to minimize the effects of an accident. These plans must be translated into money, physical resources, and trained human beings to respond adequately to any emergency. A pollution loss program designed to track changes in all areas of environmental legislation and to integrate them into up-to-date compliance programs and employee awareness programs can ultimately be more effective and less costly than a control system. Such programs can only improve productivity by increasing safety ...

The design for a complete loss prevention program should include aspects of four distinct components. They are: environmental law, medical considerations, risk analysis and response services.

Achieving the right mix of these components will depend on the chemicals involved, their degree of toxicity, the number of persons subject to potential exposure, and the nature of the surrounding sites.

"Creating a Pollution Loss Prevention Program" Jean-Guy Stafford, April 1986


Because the U.S. government took a major role in the Persian Gulf war, there is likely to be increasing terrorism against U.S. targets....

One reason behind the rise in worldwide terrorist activities over the years is the fact that the news media feeds on terrorism, and terrorists know it. Experience has shown that television is a powerful tool, and terrorists acts are usually geared to take full advantage of the worldwide television "appeal." Indeed, images of Cable News Network reporter Peter Arnett covering the war from the Iraqi viewpoint must have been a compelling lesson for any terrorist commander seeking an audience for his cause.

As a result of the television coverage of the Persian Gulf War, terrorism is likely to spread even further. It could be argued that the massive destruction of the Iraqi army--the scenes of absolute carnage at the Mutla Gap and the overall rout of the world's fourth largest military power has resulted in the humiliation of not only the Iraqi persona but the Arab persona as well. There is also likely to be a Muslim backlash, and it is unlikely that short-term solutions to the problem of Muslim fundamentalism can be found....

Like it or not, the United States and its citizens, by becoming actively involved in the Middle East ... have placed themselves on a political tightrope. Maintaining balance becomes increasingly difficult as issues and societies become more polarized. Unfortunately, the United States has positioned itself as a political buffer. As a result, the most likely terrorist target is any corporation with an American name or one that is branded in an American way. Well-known U.S. industrial plants, regardless of where they are located, may be singled out for terrorism. Terrorists may also target employees of those firms, as well as their products.

U.S. risk managers must not only understand these risks but also the problems related to insuring against them. When purchasing insurance coverage for terrorist acts, a major problem is the absence of a universally accepted definition of terrorism. Most people agree that typical terrorist incidents include hijacking, kidnap/hostage-taking, bombing, assassination and assorted threats. Yet the boundaries between terrorism, revolutionary violence and self-defense are difficult to define, except by subjective criteria; after all, one man's terrorist is another man's freedom fighter.

"Postwar Terrorism Triggers Insurance Dilemma" Peter Dobbs, June 1991
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Title Annotation:catastrophic loss is key issue for risk managers
Publication:Risk Management
Geographic Code:1USA
Date:Feb 1, 2003
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