The risk of non-risk management: why layoffs might not save money.
Almost two decades ago while working as the corporate risk and claim manager for a large international corporation, I was waiting for a meeting with my boss, the corporate CFO. I picked up a magazine called Risk Management. But it was not the Risk Management Magazine with which I was familiar--the one published by the Risk & Insurance Management Society (RIMS). It was instead a magazine for financial executives dealing with issues such as derivatives, debentures, foreign exchange, bonds, investments, and similar financial factors. Long ago this column alluded to "the other side of claims" in reference to loss control. But this was the "other side of risk management" the management of speculative risk as opposed to the pure risks of loss with which his tiny department dealt. I supposed it was a part of enterprise risk management (ERM), the new jargon being tossed about in various insurance publications. ERM was taking hold, and corporations began by no longer having a "risk manager:' Instead, they employed Chief Risk Officers (CRO), who sat on the throne of a large corporate internal empire to oversee everything from company investments to the selection of its insurance broker.
The risk management subject is rightfully the bailiwick of my co-columnist, Kevin Quinley, who has often spoken of this new process called ERM. It crops up often in our companion publication, National Underwriter, with sundry writers taking the insurance industry to task for not embracing ERM passionately. However, when the headlines in the April, 2009 issue of National Underwriter appeared, I began to wonder if my aversion to speculative financial risk might not have had some merit. Across the nation, corporations were terminating their risk managers. Sam Friedman, NU's editor, had written an article titled "Out-of-Work Risk Managers Must Face Up to the 'Reality of Necessity,'" and a companion article, "Risk Managers in Survival Mode."
Corporate belt tightening in the financial crisis of 2008-2009 was leading to the layoff of risk managers all over the nation. Friedman quoted Bill Perry, president of Logic Associates, a New York firm, who advises those caught in the baling machine of corporate straw to "consider going back to school for [their] MBA in finance or for a designation, like an ARM or CPCU. That will help [them] land a new job more quickly when the economy does recover:' Sure, maybe they can get a student loan for the MBA?
This is precisely what the economy needs: another MBA trying to figure out how to make The Donald another billion or two. Sixty years ago, nobody had heard of an MBA. Now there are zillions of 'em, and look at the mess they have made of many businesses. It all comes back to the question this column posed last month: Is insurance and pure risk really a "financial" business? This month's question is: Should corporate risk managers be more concerned with their speculative risks or their pure risks of loss? If all of those financial CROs, CFOs, and CEOs with their MBAs and DBAs got us into the financial mess we're in, relying on "market economics" to overcome stupidity, then why were the ERM guys not blowing whistles and waving red flags? They were not exactly banging on the door of the executive suites, warning the risk-takers of that rule King Solomon supposedly wrote in Proverbs, "Take a man's garment when he pledges his word for a stranger...." In other words, if you don't know the risk, then you are going to lose your shirt. A lot of shirts are being lost out there because nobody knew or was managing risk--either pure or speculative.
Risk Management And Insurance
My first encounter with risk management happened when I was still a street adjuster down in Miami. A group of us got together roughly every month to help a local college decide what risk and insurance classes should encompass. At that time, RIMS was still known as the Society of Insurance Managers, basically an association of corporate insurance buyers who worked with the plethora of insurance brokers to find the best coverages for their individual risks, even if it was only for excess insurance over pure self insurance. Risk managers were responsible for analysis of the pure risks their employers--both corporate and governmental--faced daily, from employee injuries to auto and general liabilities, with all the suretyship, marine, aviation, life-and-health, and other pure risk aspects that went with it. When executives planned some new venture, the risk manager would help decide if the risks of the venture were manageable. If the risks were not manageable, then the risk manager would pose suggestions as to what could be done to make them feasible.
Pickles and Jams
Some of those in our group had large staffs, consisting of safety engineers, insurance policy reviewers, premium auditors, statisticians, inspectors, and claim adjusters. Others were all of those wrapped up in a single individual. After Miami and a trip to the home office, I became one of those lone ducks, with a staff of a shared secretary in the pre-'type-it-yourself' PC days. Every pure risk from slip and falls to company car accidents was examined for prevention. Every insurance policy purchased was reviewed, word-by-word, for either missing coverage for an exposure or the need for special endorsements. Every new employee's health and bondability was examined. Every contract, including hundreds of property leases, was reviewed. At the time, there was no corporate counsel; the risk manager did what legal work was needed, settling claims or assigning law suits for defense, managing the litigation, and reporting any excess exposures to the correct insurers, as well as summarizing it all for senior management. It was never clear to me whether the job should have fallen under food services instead of finance, as my primary risk task was dealing with pickles and jams.
The financial team dealt with the speculative risks, which was wise. They had the time to read financial reports and the Wall Street Journal. Meanwhile, the risk manager was reading the fine print of contracts or leases or the latest CGL forms to make sure each potential risk was protected. Being an international firm meant that the risk manager had to deal with the laws of every state, every federal jurisdiction, and every nation in which business was conducted. Who had time for debentures and derivatives?
A New Era
Well, that was then. This is now. Friedman suggests that the reason risk managers -I suppose including all those high-ranking CROs--are vulnerable is because of layoffs, including both staff and "the actual risk manager" bankruptcies (shouldn't that highly paid CRO with his DBA have prevented those?), outsourcing non-core functions to outside vendors--including insurance brokerages, and to mergers and acquisitions. Imagine the mess a merger or acquisition can create if no one is examining what risks and losses are being assumed or purchased along with a corporate entity. Imagine it now; see it a couple of years from now.
Friedman also poses the question, "What Are Risk Managers Worth?" Again, he cites Logic Associates' Bill Perry.
"Generally speaking, some risk managers are seeing their salaries frozen and their bonuses reduced or cut out altogether, especially if the bonus depends not just on personal performance but on the employer turning a profit, which far fewer are managing to do in this economy," Perry said.
Best's Review periodically also tracks jobs by sector. It doesn't cite a "risk manager" category, but it is probably included in the "other segments" list. In July, 2008, it showed 48,760 in such jobs. By March, 2009, however, it had risen to 52,700, around 10 percent. The shift in adjusting jobs likewise had increased, from 51,800 in July to 53,300 in March, all according to the U.S. Bureau of Labor Statistics. 3-he March figures were up by 2.5 percent for adjusters over the previous year, although average adjuster earnings in March were down 2.5 percent as well. Essentially there were more jobs, but less pay. This trend will not likely continue as those jobs are frittered away.
Can corporations and governmental entities rely on their insurance brokers for sound risk management? Undoubtedly, the big brokerage firms will say "certainly" Putting the broker in charge of risk management, however, is like asking the egg merchant who also sells fried chicken to guard the henhouse. Unless the broker moves into the cubicle the risk manager once occupied and personally witnesses the daily flow of pickles and jams arriving by mail, phone, email, fax, courier, sheriff, and any other type of communication, then that broker cannot envision all of the potential risks that must be addressed in a large company. An insurance policy--whether arranged on a fee-for-service basis or on the basis of a commission for the broker--is not the answer to every pure risk of loss. The whole financial mess began when pure risk insurers (meaning a small London office of AIGFP) decided to undertake speculative risks called credit default swaps as if they were a pure risk. They pledged for the stranger, and rendered up AIG's garments. As noted last month, financial guarantee insurance is a no-no for insurers.
Today some risk managers examining global warming are shouting "the sky will fall." Problem is, nobody in the nation's executive suites is listening. That sky will probably fall. Global warming loss is a speculative risk. No insurance company worth purchasing a policy from is going to insure anybody against the many risks and costs of global warming. When that sky falls, any insurance company foolish enough to have insured against it will also fall. So what should corporations do? Lay off risk managers, or dump new tasks on their shoulders? Should they simply farm everything out to the broker? Have you noticed how low the sky is lately?
Pure vs. Speculative Risk
Pure risk is calculable, whereas speculative risk is not. The cost of having a baby can be statistically and fairly accurately predicted. Some cost less, some millions more; however, on average, that "law of large numbers" means having a baby costs $X. Babies are a pure risk. They come with known and occasionally rare exposures. Hence, insurers can sell insurance to cover the costs of obstetrics. The same does not hold true of a speculative risk, such as marriage. General y, marriage is a non-insurable risk. When roughly half of marriages fail, there is no way to calculate that cost of risk. The real estate bubble was a speculative risk. Enterprise risk managers should have been out there screaming that the sky would fall. Only they didn't, and fall it did.
Ken Brownlee, CPCU, is a former adjuster and risk manager based in Atlanta, Ga. He now authors and edits claim-adjusting textbooks.