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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).

1950s

Risk management is a relatively new term and has been defined as a new area of cost control. In my opinion, risk management has a much broader application. While risk or the chance of loss in the broad sense, is inherent in all actions and decisions by management in a competitive economy, risk management is concerned primarily with pure risk as the term is used in the insurance industry and embraces the recognition of operations, sales and manufacturing hazards, the estimation of chance and amount of loss, and a reasoned selection of the most desirable methods of dealing with such loss potentials.

I am aware of the fact that all of us are weary of being reminded in this present recession (or by whatever name this particular economic breathing spell may be described) that every effort should be made to reduce costs so that we can lay down our product or perform our service for the ultimate consumer at the lowest possible price.

It has been suggested by some that since the cost of raw materials is policed effectively by the Purchasing Department, and because the cost of labor represents a constantly changing truce between automation and the unions, the remaining area of costs and general overhead represents the most logical target for cost reduction efforts.

Risk management, however, has application and can be effective in all of these fields. Protection of raw material inventories, the determination of the need for contingent interruption insurance, and protection of goods in transit are only a few of the problems in the area of raw material costs.

"The Integrated Insurance Department" C. Henry Austin September 1958

1960s

It has only been in recent years that insurance has begun to take its place in business along with such established professions as architecture, law, accounting and engineering. For many years, insurance was considered by industry and the public as a "necessary evil" and company officials generally regarded insurance as one of those problems not worthy of high-level consideration and planning. In most organizations, the insurance function was assigned to personnel who had no specialized knowledge of insurance and who were usually over-burdened with other work. Insurance companies were intent on selling a product for a mass market rather than coverage tailored to an insured's needs. Agency and brokerage representatives were often selected on the basis of their sales and social abilities.

In more recent years, top management has begun to recognize the need for a more objective method of administering their insurance programs. This change in thinking has developed from the necessity of conforming to present-day business methods.

It is in this latter period that the insurance professional has come into his own, with the duties of risk management emerging as a vital corporate function. While the function of the insurance manager remains much the same, in that the company's assets and income must be protected from losses due to accidents or hazards, his responsibilities are far greater than those which traditionally led only to the purchase of insurance at reasonable costs. Today the corporate insurance manager must view the company's overall picture. He must look at the total objective, the plans and programs of his firm in the light of its corporate character and coals, and analyze all the hazards to which it is exposed. He must evaluate and classify all risks faced by his firm and proceed to measure as many as possible in terms of predictable relationships. After these risks have been analyzed in relation to the overall operation of the company, the insurance manager must decide on the best method of handling such exposures.

"Professionalism in Insurance Management" Bruce H. Suter January 1962

1970s

During the next fifteen years, how would you like to live in a world practically devoid of the sports of hunting and fishing and products such as personally owned automobiles, motor boats and airplanes? It is entirely possible for some of the above to become completely extinct, even as the carrier pigeon never again will frequent our skies.

Our environment is slowly being stifled with ecological pollution; our product manufacturers are burdened with horrendous court decisions that ultimately produce catastrophic insurance costs. We, the public, and we, the manufacturers, must be shocked into a positive approach to reduce this drastic trend.

It appears that our problem is in the development of a workable concept to alleviate economic loss or injury to the public, caused by the direct result of contact with a product. Reimbursement must be made available to all persons who might be wronged, at a level commensurate with their loss but not to exceed a predetermined maximum amount. Simultaneously, the manufacturer who has shown due diligence in design, manufacture and marketing of his product must be allowed reasonable consideration and protection from staggering court awards and punitive damages.

"A Concept for No-Fault Product Liability" Robert B. Willshire May 1972

1980s

Although relatively few cost-benefit analyses are conducted for risk management information systems (RMIS), it is becoming increasingly important to perform this task because of escalating operation costs and tight risk management budgets. Such a cost-benefit process can be used to either highlight possible inefficiencies in the proposed application of the RMIS or to determine the system's cost-effectiveness.

The costs of implementing and using a RMIS have increased, and will continue to do so with inflation the biggest single contributing factor. While hardware costs have declined, both software development and system maintenance charges have risen. However, another reason for increased costs is that analyses by the risk manager are becoming more sophisticated and, therefore, consuming significant amounts of costly computing time. Concurrently, the many users of risk management information systems are accessing their data more frequently and broadly, which costs more than producing standardized reports.

While these specific costs have been increasing, the recession has caused most companies to emphasize overall cost reduction. One result for this has been a reduction in risk management budgets. There may still be discretionary funds in the budget, but these are far less plentiful than in prior years. Consequently, it is becoming critical to prove the worth of every investment. This cost justification function has been accomplished for captive insurance companies by the "feasibility" analysis which is really nothing more than a cost-benefit analysis of the tangible and intangible factors associated with forming a captive insurer. Similarly, it is important to assess the feasibility of a risk management information system using an analytical, yet somehow communicable, approach.

"Justifying a Risk Management Information System's Cost" James D. Blinn and Mitchell J. Cole July 1982

1990s

Today, the climate for ethical conduct is increasingly volatile. The entire financial services industry has come under intense scrutiny on account of a confluence of forces. In the United States, the public's heightened concern about ethics in the securities, banking and insurance industries is threatening the essential asset of the financial services industry--America's confidence in our financial stability and security. Nationally, as well as globally, financial services are under siege.

Beyond the public scrutiny of financial services, ethical dilemmas are also arising across a broad spectrum of industries. Physicians have come under attack for having financial interests in the labs that conduct their tests, and at least one major accounting firm has collapsed under the weight of lawsuits over gross professional negligence. Business and personal ethics are being further complicated by difficult economic conditions. Recessionary pressures are forcing many industries to cut expenses and downsize to compete. The threat of layoffs and other workplace pressures tend to relegate the issue of ethics to the periphery.

As once-discrete professions fight for survival, distinguishing features among service businesses are blurring. The persistent soft market continues to test the insurance industry. Brokers and underwriters compete for a larger portion of market share, while buyers work to contain costs through lower premiums, higher retained risk and alternative markets.

In such an inhospitable economic climate, some believe sensitivity to ethical considerations is a luxury they can't afford. This is a tragically myopic view. Qualitative considerations, such as professionalism and integrity, are now more than ever critical to the bottom line performance.

"Ethics and Risk Management" Robert H. Moore March 1992
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Publication:Risk Management
Geographic Code:1USA
Date:Jul 1, 2003
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