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Risk management: a retrospective view.

H. Wayne Snider, Ph.D., is professor of risk management and insurance at Temple University in Philadelphia.

In 1955, what is now the Risk and Insurance Management Society changed its name from the National Association of Insurance Buyers (NAIB) to the American Society of Insurance Management (ASIM). That November I told the Midwest Insurance Buyers Association that the attempt to gain recognition and status by name change was futile, but instead that an expansion of function was necessary. The ideal was to establish a fully integrated department not only responsible for insurance but also for loss prevention, industrial safety and employee benefits. Such a department should be headed not by an insurance manager but a "risk manager."

A reporter from the National Underwriter was in the audience and reported on the speech in the Nov. 24 issue. Although I had spoken from notes, there were several requests for copies of my paper. Consequently, the following week I wrote a paper and distributed it to those who had requested it. They in turn distributed it to others, and the essence of the paper appeared in the Weekly Underwriter. National Insurance Buyer, Best's Insurance News, Insurance Law journal and Management Review. These articles, I believe, brought the concept of risk management to the attention of insurance buyers and other professionals.

The articles generated interest and support from insurance buyers and managers for the concept because it extended their area of responsibility and provided them with an escape from what was then essentially a dead-end lower or middle-management position. The concept, however, did not appear to significantly impact others until almost a year later when the Harvard Business Review published an article, "Risk Management: New Phase of Cost Control," by Russell B. Gallagher. This article was directed at senior management and aimed "to outline the most important principles of a workable program of `risk management'-for so it must be conceived, even to the extent of putting it under one executive, who in a large company might be a full-time `risk manager.'"

The risk management concept received additional recognition and support through the American Management Association. Until the mid-1960s AMA's semiannual insurance conferences were the only national meetings directed toward insurance buyers, since ASIM held its annual meeting in conjunction with the fall AMA conference. Speakers at these conferences regularly stressed risk management and its development, a factor in further stimulating interest in and awareness of the concept during this early period. AMA's publication in 1962 of the first book devoted to risk management, "The Growing Job of Risk Management," reinforced this development.

Although the concept generated enthusiasm among many practitioners, others opposed it. Some practitioners failed to recognize the substantive changes required by the concept and thought of it only as a change in title. Others resisted the concept because they recognized that it would require them to make changes in orientations, practices and skills, which they were unwilling or unable to do.

The first recognition of the risk management concept in the curricula of a collegiate business school came in the 1960-61 academic year in a course at Upsala College, entitled Corporate Risk Management, taught by Dr. Kailin Tuan. Because the school was small and relatively unknown, however, the impact of this development was limited.

Any doubt regarding the substantive value of risk management was finally eliminated with the publication of two collegiate textbooks in the early 1960s. The first, "Risk Management in the Business Enterprise," was written by two professors at the University of Illinois, Robert Mehr and Bob Hedges, and published in 1963. The second, "Risk Management," published in 1964, was adapted from a lecture series presented at the Wharton School and edited by me.

In the early 1960s the rapid escalation of employee benefit costs, particularly medical expense contracts, affected the evolution of risk management in many firms. Prior to this, employee benefits had been considered a relatively minor part of the insurance management function. Group insurance coverages had been relatively simple and financially insignificant when compared with the insurance for fire, liability and workers' compensation risks. The emerging economic significance and increasing complexity of employee benefit coverages, along with the demands for greater knowledge and skills to implement the risk management concept, however, created a double burden on insurance managers. Many responded by shifting the responsibility for employee group insurance to the personnel/industrial relations department. Although nearly all insurance managers retained responsibility for workers' compensation, most who retained control of all insured benefits had adequate staff to permit specialization in benefits.

The Transition Phase (1965-75)

To my knowledge, the first major company to recognize and implement the concept of risk management was the Canadian firm MasseyFerguson. Douglas Barlow had been appointed insurance manager of Massey-Ferguson in 1959. On Jan. 1, 1966, Mr. Barlow obtained formal recognition of the concept from the company's president and was appointed risk manager. Simultaneously, Massey-Ferguson adopted a policy statement on risk management. Since Massey-Ferguson operated internationally, the managers and local insurance brokers overseas had to become familiar with the concept. This was a significant factor in introducing risk management worldwide.

Once the concept of risk management was accepted (at least in theory), the next step was implementation. A lack of qualified risk managers, however, made its adoption difficult. To overcome this problem, people had to be educated and trained in the new approach. A program of study was then developed and sponsored by the Insurance Institute of America and ASIM. The program, which leads to the Associate in Risk Management (ARM) designation, began in the fall of 1966, and the first group completed it in May 1967 when 282 persons earned their designations. Surprisingly, 70 percent of those earning their ARM designation in the first three graduating groups were brokers or insurance company employees, and only 13 percent were insurance/risk managers. In three recent graduating groups, 66 percent were affiliated with brokerage or insuring organizations, and 20 percent were insurance/risk managers. Since 1968, the supply of people at least minimally qualified to act as risk managers has steadily grown, not only through the ARM program but also through academic programs in a few collegiate business schools and by other specialty programs such as the Healthcare Risk Management Certificate Program sponsored by the Chicago Medical School and M.M.I. Cos.

The other major implementation difficulty was the general unresponsiveness of senior management. There were several reasons for this, many of which continue to exist today. First, senior management remained largely unfamiliar with the concept. Although they were becoming familiar with the term risk management, an understanding of the concept and its implication for organizations and operations was rare. As a consequence, many of those who were given the new title of risk manager continued to function solely as insurance buyers or insurance managers.

Second, others resisted the movement because they believed that the concentration of authority and responsibility implicit in the risk management concept threatened their positions. For example, the general counsel of a major corporation tried to prevent the establishment of a risk management department and the appointment of a risk manager until it was agreed the legal department would handle workers' compensation and liability claims.

General management consultants also created some resistance. I well remember an informal meeting in New York City in the spring of 1971 in which a small group of influential insurance/risk managers discussed how to implement the concept. They agreed that educating those in the major consulting firms about risk management was crucial because the consultants, unfamiliar with the concept, often passively discouraged the change from insurance management to risk management. Some clients attempting to implement the concept were actively discouraged by consultants. Although a program to influence or educate consultants was never implemented, the negative influence of consultants slowly abated.

Finally, there were people who resisted simply because they believed that any significant change created uncertainty, which was undesirable. They believed that as long as no crisis existed, no change should be made.

Crises Emerge

However, crises began to emerge in the late 1960s and early 1970s, primarily because of the inability or the unwillingness of the insurance industry to respond to the demand for more insurance. At first it was a lack of capacity for property insurance coverages largely due to inflationary pressures created by government policies related to the Vietnam War and the expanded social programs of the Great Society. In part, it was brought about by the increase in the absolute value of certain properties such as jumbo jets, supertankers and integrated petrochemical plants. As a result, certain insureds were forced to retain a significant amount of risk, in some cases through large deductibles or the establishment of captive insurance companies. In either event, senior management was forced to recognize that risk retention supplemented by loss prevention is an alternative to insurance buying.

Shortly thereafter, similar problems in capacity arose in the liability area, particularly regarding medical care. While monetary inflation led to an increase in loss, the more important factor was a change in the criteria for tort liability. Non-profit hospitals lost their exemption from liability claims, surgeons were held to new standards of informed consent and traditional defenses of contributory negligence were eroded. Indeed, in all liability areas, there was movement (which still continues) toward absolute liability. In this environment, many commercial insurers withdrew from the market. As a result, a few insureds responded by avoiding the risks through withdrawing their products or services from the marketplace. Others retained, the risks, often through captive insurers. Organizations were forced to move beyond insurance buying to other methods of risk treatment and, thus, to implement the risk management concept.

This movement toward risk management was reinforced by the insurance industry, particularly by insurance brokers. As it became more difficult to place insurance, the brokers' commission income declined. They responded by developing new sources of income, primarily from the sale of risk management services. According to data in the Captive Insurance Company Directory, many of the large captive management companies were formed between 1968 and 1973 as subsidiaries of brokerage firms.

Another positive influence during the early 1970s was the emergence of consulting firms, knowledgeable and specializing in risk management. In some cases, these firms had existed as specialists in insurance, or occasionally in loss prevention, but they then began to stress risk management principles and practices. In other cases, they were new firms fully committed to the risk management approach. As these firms grew and prospered, they played an important, though informal, role in educating senior management and spreading the risk management concept.

Acceptance of Risk Management

Insurers' acceptance of risk management is indicated by the initiation of programs or courses on risk management for their middle-management employees. For example, CNA held a two-day seminar in 1969 at which joe Parrott, a former president of ASIM, and I spoke about the principles of risk management. The Insurance Company of North America and Liberty Mutual sponsored semester-long ARM courses on company premises for their employees from 1972 to 1974. Insurers had finally recognized risk management as a significant part of their customers' operations.

The adoption of risk management was also aided during this period by various ASIM activities. In 1969 the name of the society's magazine was changed from The National Insurance Buyer to Risk Management. As long as the association was named the American Society of Insurance Management and published a magazine called The National Insurance Buyer, senior management and an interested public could not be expected to abandon the belief that risk management was simply insurance buying and management under a new name. Changing the society's name to the Risk and Insurance Management Society in 1975 completed this transition.

Other society activities during this period had an immeasurable but significant impact on the acceptance of risk management. One was the increasingly significant role it played in legislative matters, both state and national. Its testimony before legislative committees served to make governmental administrators and elected public officials aware of risk management.

The society's promotional activities were even more important. References to risk management in articles and studies published by Fortune and U.S. News & World Report and others helped establish risk management as an accepted approach for treating risk.

The Globalization Phase (1975 to Present)

Although many organizations and people have contributed to the spread of risk management worldwide, in my opinion, the most important promoter of the concept has been RIMS and its predecessor, ASIM. By 1973 representatives from foreign countries were beginning to attend the society's annual conference. In 1974 the society promoted such attendance by jointly sponsoring with Temple University a seminar in risk management for foreigners. The 12 people attending the seminar came from Sweden, Great Britain, France, South Africa and Mexico. Interestingly, only one was a risk manager; the others were involved in insurance company management, insurance brokerage and consulting.

Also, by 1974 RIMS began to establish ties with emerging risk management organizations in Europe, encourage program development in several European countries and launch a program to assist such developing organizations in Australia, Japan and South Africa. In 1986 RIMS sponsored the first Asia/Pacific risk management conference in Singapore, which provided the impetus for establishing national risk and insurance management societies in Singapore and the Philippines.

Although scattered interest in risk management was evident in Europe by the late 1960s, I believe the most important factor influencing risk management in Europe was the establishment of the Geneva Association in 1973 to support and encourage research "in the economics of risk, uncertainty, insurance and related institutions." The association's foundation was based on the facts that as the economic emphasis was changing from industrial production to service, insurance was emerging as "a key economic factor fully integrated into the overall strategy of economic development," and the management of risk was a fundamental element of economic management.

In August 1976 the Geneva Association published "The Management of Risk and Insurance," one of its first publications. It included the first survey of risk management practices in Western Europe. The survey of large industrial companies revealed that 56 percent of the managers were responsible for insurance only, and that only 13 percent were called risk managers. In addition, the study noted that less than half were making "wide use of deductibles."

Since that time, the association has published numerous papers on risk and risk management, many of which have been conceptual rather than descriptive in nature. This, in turn, may have encouraged creativity rather than conformity in the development of risk management in Europe.

In Japan the role of academics in promoting risk management has been particularly important. Several Japanese professors came to various universities in the United States during the 1970s and early 1980s to study the theory and practice of risk management. When they returned to Japan they first translated some of the English writings into Japanese. More recently, they have written their own articles and books on the subject in Japanese. It appears that they have adapted the risk management concept to the distinctive Japanese business environment and are slowly influencing future generations of senior management in Japan.

In other Asian countries academics have taken the lead in promoting risk management with varying degrees of success. Surprisingly, American academicians, with only a few exceptions, have not played a part in international development. Although the role of academics in the United States was important in the initial development of risk management, a study published by the Geneva Association shows that their interest in the subject, as reflected in publications, peaked in 1967 and has since declined.

Finally, multinational corporations have played a continuing role in the development of risk management globally by applying the concept to their subsidiaries and joint ventures located throughout the world.

The Next Decade

The future remains uncertain, but one major factor that will shape the development of risk management is readily apparent: the recognition of risk and its management in the formal business educational process.

The study of risk management has been declining in the collegiate business schools throughout this country for the last 20 years. In contrast, there has been an increased academic interest in Europe and Japan. If effective support is not given to the collegiate business schools here, one can expect that little substantive change in the practice of risk management will occur in this decade. It will remain an important but secondary aspect of the finance function of management confined in its development and service. Significant change could occur only if two situations take place: significant advances are made in foreign countries, and U.S. corporations are forced by competition to copy them and adapt to them.

To avoid this scenario, several steps must be taken. First, RIMS, together with insurance industry associations, must promote a curriculum to the American Association of Collegiate Schools of Business, the accrediting agency of business schools. The American Marketing Association, American Accounting Association and American Finance Association actively support and influence their disciplines in this area; risk management and insurance associations do not. The input into such a program could provide a great return in the long run to the risk management profession.

Second, a continuing and serious effort should be made to gain adoption of courses in the management of risk in the curricula of the major graduate schools of business. Currently, too much time and effort are devoted by practicing risk managers to educating those emerging from these institutions. Further, an attempt must be made to integrate risk management into general management theory and practice.

Third, academics in this country must be encouraged to devote attention to this subject. The number of professors engaged in research in risk management is decreasing. This trend must be reversed.

As previously indicated, RIMS has spent a considerable amount of time during the last 15 years on gaining recognition of risk management globally. In my opinion, the basic effort of RIMS this decade must be educational.

Finally, there currently is an effort to establish international educational standards for risk management. Such standards must address an acceptable definition of risk management that accommodates distinct national philosophies, institutions and languages. If such an effort succeeds, there will be some upgrading of the occupation internationally and improved communication among risk managers everywhere. It carries the risk, however, of institutionalizing the current level of performance and knowledge, with a resulting stagnation in development. Whether or not that occurs might well be the basis of a paper 10 years from now.
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Snider, H. Wayne
Publication:Risk Management
Date:Apr 1, 1991
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