http://www.aria.org/riskpos.htmRisk Management
(also see:
Risk management services
: Swiss site offering solutions, products and services for corporate risk management, risk
financing, investments and provision for the future.)
Risk management is the systematic process of managing an organization's risk exposures to achieve its objectives in a manner consistent with public interest, human safety, environmental factors, and the law. It consists of the planning, organizing, leading, coordinating, and controlling activities undertaken with the intent of providing an efficient pre-loss plan that minimizes the adverse impact of risk on the organization's resources, earnings, and cash flows.
Top management and boards of directors are well aware of the importance, indeed necessity, of effective risk management. They spend considerable amounts of time dealing with such concerns as directors and officers liability, product liability, workers compensation, pension plans, employee health care, and pollution concerns.
(1) Estimated 1990 property and liability insurance premiums for U.S. companies were $150 billion.
(2) Estimated 1990 expenditures for self-insurance, loss prevention, and other non-insurance techniques for property and liability exposures were $100 billion.
(3) $1 billion single event losses are becoming more commonplace: consider the 1989 explosion at the Phillips Petroleum Co. petrochemical complex and the 1988 Piper Alpha oil platform explosion in the North Sea.
(4) Estimated 1990 expenditures for employee health care benefits were $111 billion (only 11% of this is insured).
(5) Estimated expenditures for other employee benefits were $275 billion.
Failure to develop effective risk management strategies results in:
(1) Excessive time spent by managers and boards in dealing with unanticipated losses, thus detracting from other important concerns.
(2) Adverse effects on firms' credit ratings and costs of capital.
(3) Reduction in cash flows, growth, and profitability due to non-optimal pricing necessitated by concerns over risk.
(4) Deterioration of public image and loss of customers because of actions offending societal norms.
(5) Difficulty in finding qualified persons who will serve on boards of directors because of concerns about personal liability.
(6) Abandonment of certain strategically desirable projects because of inadequate ability to manage associated loss exposures, domestically and internationally.
Just as the finance and marketing functions are applications of management processes and techniques to specialized problems and in fact grew out of the general field of management, risk management also involves the application of general management processes and techniques to the specialized problems of risk control and risk finance. There is general agreement that the risk management function involves four interrelated processes:
(1) Systematic and continuous investigation of risk loss exposures,
(2) Evaluation of their nature, frequency, severity, and the potential impact on the organization,
(3) Planning and organizing of appropriate risk control and risk financing techniques to efficiently minimize loss impacts on the organization,
(4) Implementation of such techniques both internally at the department and top management levels, and externally with loss control organizations, insurers, and other risk finance specialists.
The risk manager is mostly a planner, promoter, and coordinator of the above processes. Responsibility for implementation resides at the departmental level. Accidents, injuries, fires, thefts, defective products, violations of employee rights, and environmental pollution occur at the worksite and can best be prevented or reduced at that level. Such prevention will not occur, however, without guidance by knowledgeable experts like risk managers and loss control specialists.
Education in risk management does not always require a separate course; rather, like international business, it is an integral part of finance, marketing, accounting, human resource and production management,and can be integrated into those courses or included in a policy course. Most professors currently teaching risk management belong to The American Risk and Insurance Association (ARIA). Founded in 1932, ARIA's membership is comprised of academics, individual insurance industry representatives, and institutional sponsors. ARIA emphasizes research relevant to the operational concerns and functions of insurance professionals, and provides resources, information and support on important insurance issues. Our goals also include the expansion and improvement of academic instruction to students of risk management and insurance, as well as the dissemination of cutting edge research in the academic field of risk management and insurance. Consequently, ARIA publishes The Journal of Risk and Insurance on a quarterly basis.
Currently, at least 70 universities offer undergraduate majors and about 20 offer graduate majors ln risk management and insurance. (Many other universities have courses in risk management and/or insurance). The programs evolved primarily from insurance programs similar to the evolution of marketing from sales, human resources from personnel, and finance from banking and micro- economics.
The Risk and Insurance Management Society (RIMS), a professional association of risk managers, has experienced rapid growth over the past three decades. Its annual U.S. meetings involve over 6000 attendees. In addition, RIMS has for several years sponsored professional meetings in Monte Carlo and in the Orient, testifying to the internationalism of risk management. University education is supplemented by the Associate in Risk Management (ARM) professional designation, which is a recognized professional program for practitioners. The insurance industry is also a strong supporter of risk management education, offering a variety of continuing education programs for interested professionals.
Given the scope and magnitude of the pure risk exposures currently, facing businesses and other organizations, students lacking knowledge in risk recognition and risk control techniques are unprepared to achieve basic organizational goals such as profit maximization, earnings stability, and/or growth. At best, these future managers may hastily implement sub-optimal risk management plans. More likely, risk management will only be implemented following a loss, which may prove to be too late to assure the survival of the organization. Haphazard management of potentially catastrophic risks can be disastrous in an environment in which management accountability is expected and demanded.
Risk management is crucial to effective financial, marketing, production, and human resource management and is integrated into the decisions in those areas in modern corporations. The marketing of a new product would not be considered apart from potential liability and distribution risks. Production planning must consider possible environmental pollution, worker injuries, business interruption and quality control. Business, legal, and societal pressures are all combining to require more sophisticated, integrated decision-making approaches in the future. Simply buying insurance has not solved risk management problems for decades.
The ability to manage risks effectively is increasingly crucial. Business schools must begin to provide at least the rudiments of risk management to their graduates. Increased accountability for prudent management of resources requires that future managers be able to integrate risk management techniques into their financial, marketing, human- resource, and production management decision- making.