Risk Management Reports

March, 1997
Volume 24, No. 3

The Five Hole
Every organization has unique vulnerabilities and is constantly altering its defenses to meet these rapidly changing risks, a bit like an ice hockey goalie, moving from side to side, moving out to cut down the angle for a shooter, leaping to block high shots and then flopping on the ice to protect his or her (yes, there's been a female goalie in the National Hockey League) net. Stick, pads, gloves and even the facemask are tools of the trade. Yet vulnerabilities remain. In hockey the extreme corners of the net carry the designations "one" through "four." They are the most exposed points for scoring. But the most vulnerable point, in the estimation of many coaches, is the Five Hole, the triangular gap between the goalie's legs and the ice. Arms and the stick move faster than legs and, since the goalie generally takes a spread leg stance for greater balance and quick motion, the Five Hole can give a split-second opening for a scoring shot.

The analogy to risk management is obvious. Competition, Murphy or "The Gods" seek and find that vulnerable point. Risk managers acknowledge that no measure of risk control will completely eliminate the Five Hole: vulnerability is a constant. The key is to reduce that vulnerability to its minimum and then to have a counter-attack capability that can offset the loss and win the encounter. That's the goal of risk management: prepare prudently for the occasional harmful event and yet take strategic advantage of the larger game for eventual victory.

He shoots! He scores!

Jesus Saves! (but Phil Esposito scores on the rebound)

Graffiti seen on the wall in a bar in Athens, Georgia

Responding to Murphy
Misfortune happens. How we respond creates the difference between success and failure. I recently experienced both good and bad outcomes. First, my ten hour flight from San Francisco to London was diverted from Heathrow to Manchester because of heavy fog. The United captain updated the exhausted passengers on the delay and diversion, but dropped the ball when we landed. We remained on the plane for an extra half-hour until customs agents and coaches could be found. No United service representatives were available for guidance (understandable, since Manchester is not a United "station," ), yet the captain never noted the easy availability of train service to London (a short walk from the terminal), a quicker and more comfortable trip than risking life and limb on a three-hour ride on the M4 in the fog. No offer was made to pay for train travel. No mention was made of a possible later flight to London. The result: a resentment against United after an otherwise pleasant and uneventful flight.

Contrast this with the reaction of the operators of the Eurostar train from London to Paris. We were stopped for forty-five minutes at the English end of the Chunnel. The conductor provided updates on the situation every ten minutes. Then, just before arrival at the Gare du Nord, Eurostar announced that every passenger would be given a chit for a free one way trip between the two cities as compensation for the short delay. It wasn't necessary or even expected. The offer left every passenger with a warm feeling for Eurostar. I'll ride Eurostar again before I'll fly United!

That's contingency planning at its best: not only acknowledging the problem and keeping everyone informed, but going beyond the expected. It shows that capitalism can have a human face.

Another example: look at the recent Texaco fiasco involving employee allegations of racial discrimination and the publication of an incriminating tape recording of a meeting of Texaco officials. Texaco's response was immediate: full apology, abject contrition, and quick action to redress the situation. Even though later analysis of the tape revealed that some of the material was taken out of context, I think Texaco's response was correct. The degree of public exposure and the nature of the problem required nothing less.

There are those who disagree. One argument, by Gerald C. Meyers and Susan Meyers, appeared in The New York Times on January 12, 1997. The authors believe that, in certain circumstances, both silence and denial/counterattack are reasonable options. I agree it's a difficult call in the heat of the moment. CEOs amply earn their pay by having to make quick decisions, but I tend to lean toward using the public apology as the primary way to deflect irate public opinion.

The Meyers' four suggestions are worth following:

(1) Express complete contrition if the company is clearly and totally to blame. Forswear the past and vow to move forward as reformed leaders running a reformed company.

(2) Express indignant and outrage denial if - and only if - the facts will clear the company's name and such facts can be produced.

(3) Acknowledge an uncertain situation if one really exists and commit an honest and thorough investigation and follow-up.

(4) Maintain absolute silence only to stop certain destruction of the organization, or if public health and safety requires.

The fact that the world has become fuller than ever of complexity of every kind may suggest at first that it is harder to find a way out of our dilemmas, but in reality the more complexities, the more crevices there are through which we can crawl.

Theodore Zeldin, An Intimate History of Humanity
HarperCollins, New York, 1994

Disaster Site
There's an interesting new worldwide web site on disaster planning (http://www.disasterplan.com) of value to risk managers. Not only can messages be left and received, but the site also has a "Yellow Pages" list of assistance organizations, earthquake hazard maps for the California and the US, worldwide weather, a focus on whatever the current critical weather situation may be, geological hazards and a connection to the International Decade of Natural Disaster Reduction (IDNDR), the United Nations initiative on this subject. This is another example of how a risk manager may use the Internet to create a vigorous contingency plan, keep abreast of developing problems, alert associates, communicate with operating groups, corral external assistance when required and actually manage a crisis situation, all from a keyboard.
No crisis is local.

Professor Marion Pinsdorf, Fordham University
in telephone conversation, February 6, 1997

Desecration of the House
Occasionally I will watch on television, with muted sound, a rendition of Canadian folk opera, listening to more civilized background music. On a February evening it was Beethoven (hence the title) and the New York Rangers visually committing mayhem on a lesser National Hockey League opponent. Even the muting of sound advertisements didn't do the job: I was bothered by losing sight of the puck along the boards, buried by advertisements. Every inch of vacant space, once white, was covered by pleas to purchase beer, stocks, automobiles, hamburgers and even insurance. Despite the coverage of the commercial breaks by Ludwig, commercialism continued to detract from the game.

We're engulfed by commercialism. Is it possible that Beethoven's "Calm Seas and a Prosperous Voyage" was commercially sponsored? I can imagine a German marine insurance company commissioning that work. Everywhere we look, the forces of the market thrust their wares on us. The Seattle, Washington high schools now sell advertising space on their buses, team uniforms, walls, and schoolbooks just to gain extra dollars. The operators of the infamous Channel One "give" VCRs and television monitors to classrooms in return for blasting children with plugs for products, embedded within the "news." Nonprofit organizations endorse credit cards, telephone companies, auto makers and insurance schemes in return for more income. Golf tournaments, once identified by their locations, are now "classics" connected to commercial sponsors.

At risk management conferences, we're given tote bags endorsing insurance brokers and asked to attend breakfasts, lunches and dinners where plugs precede food.

When, as resident curmudgeon, I've complained, I'm told that I should be a realist. The only way to survive, I'm advised, is to accept commercial sponsorship. The ends justify the means! Taxpayers won't pay for education or for the debts of their governments. Association members resist dues that would eliminate commercial endorsements. Conference attendees actually seem to like the volume of twaddle that washes over them, reducing their registration fees. Entire channels of television are now devoted to infomercials, 24 hour selling of over-priced and under-performing products.

I acknowledge the role that public presentation of commercial products and services plays in a market economy, but does it have to be so all-pervasive? It's a sign of the times: a willingness to let someone else pay, even though it begins to distort what we enjoy. Can electronic wizards develop some chip that will erase advertising from hockey boards and skip quietly and blankly over the "commercial intervals?" Will a consumer backlash shift support to public television channels that themselves seem to be slipping into the commercial morass?. Will registrants at conferences pay a fair price for a session devoid of commercialism? Wishful thinking.

In the meantime, I'll continue to rail against this monster, and listen to the masters while watching Canadian folk opera.

Consider how people have allowed themselves to be turned into human billboards. They have the taste (and the money) to buy the best brands of clothes and all the trimmings, and they want the world to know. . . . The names of shrewd designers now travel their bodies in packs, across chest, over back, up pantleg, along pocket, around the side of socks and the waistband of underwear. We wear more tags than kids sent off to camp.

James Morris, "Democracy Beguiled"
Wilson Quarterly Autumn, 1996

Here's a novel risk - the possibility that some form of mass hysteria breaks out as we near the year 2000. The Economist suggested in its January 4, 1997 issue that "even the most resolutely secular of sensibilities will probably find itself being sucked into the collective cloud of hope or foreboding, the wavering of faith in human institutions and the tendency to sudden panic that humanity has always been prone to display when it has felt a new era coming on." Forget that the millennium is a "mathematical accident," caused when a monk in the 6th century decided to number years consecutively from the birth of Christ. Forget that the millennium correctly begins on December 31, 2000, not 1999. None of that will matter as "disorientation, loss of faith in institutions, a rising sense of unfocused excitement, and visions of an apocalyptic or utopian future" begin to occur - what The Economist calls PMT, or "pre-millennial tension." Some workers with ask their risk managers if it is compensable. Perhaps the current "irrational exuberance" (Alan Greenspan) of the stock market is initial evidence of PMT.

I hope that we can mark the date (or dates) more modestly, giving gratitude for what good has been accomplished, acknowledging the ills that continue, and exhibiting a sense of realistic self-confidence in the future.

The best way of treating the inevitable tide of PMT would be to eliminate several years entirely, just as hotels dispense with the thirteenth floor. Let's move directly from 1998 to 2002!

An adequate education should leave you on perpetual alert, accustomed to raising the possibility, like a flare at a disaster site, that what you are being told is nonsense, even though it's hardbound and best-selling, and what you are being sold is junk, no matter its label's cachet. Thus guarded and prepared, you will move through the society with a reserve that, at the least, intends no offense.

James Morris, "Democracy Beguiled"
Wilson Quarterly, Autumn 1996

Good Reading
As winter wanes, my reading pile shrinks like melting snow. Some notable publications:

Rethinking Risk Financing Lukas Muhlemann has come and gone as chief executive of Swiss Reinsurance Company, leaving a changed institution, one both more radical and financially secure. He energized a new approach to the development of financial products for clients, insurance companies and corporations, in collaboration with Credit Suisse. He re-stated the vision of the organization, to reduce volatility through diversification, using the tools of risk assessment, risk management and risk transfer. An expression of this new thinking was published last December by three senior staff members of the company, Georg Fallegger, Carolyn Helbling and Donna Hill. These three are evidence of the value of a multi-disciplinary approach to risk management: Swiss former underwriter, English former petrochemical consultant and American former finance specialist for an investment bank. Their collaboration in Rethinking Risk Financing produced a clear, readable and important document on the growing convergence of traditional insurance/reinsurance and capital markets into new risk financing tools. Risk financing, in their view, responds to all forms of risk and incorporates the key principle of self-responsibility. This booklet belongs not only on every risk manager's bookshelf but also on the desks of CFOs and CEOs. I admit some bias, since I provided limited editorial assistance to its production. It is a significant contribution to this rapidly changing field. Copies are available on a complimentary basis from Swiss Reinsurance Company, Mythenquai 50/60, CH-8022, Zurich, Switzerland

Riskfinancier How do you keep up with the changes in the risk financing marketplace? Risk managers should consider subscribing to this new "monthly commentary on the convergence of the financial and insurance markets." Riskfinancier is published by Emap Finance, the publisher of International Risk Management. The first issue of (February, 1997), under publisher Mike Hanley and editor Christopher Stoakes, featured current combined risk financing deals, a review of the traditional contracts of bottomry and what we can learn from them, the global redistribution of catastrophe risk, and tax aspects of insurance derivatives. Compelling stuff, but a pricey, at US$ 755 per year for a twelve page monthly! It may be worth it, however. Write or call Mike Hanley, publisher, at Emap Finance, 33-39 Bowling Green Lane, London EC1R ODA. Tel: +44-171-505-8171

Risk in Perspective To counterbalance the high price of Riskfinancier, here's a free monthly. It focuses on public health issues but often has important insights for practicing corporate risk managers. The January 1997 Perspective is devoted to an article by Dennis J. Paustenbach, a visiting professor at the Harvard Center for Risk Analysis (the publisher) and CEO of McLaren/Hart-Chemrisk Environmental, a US consulting firm. He analyzes the current OSHA (Occupational Health and Safety Agency) attempt to update "permissible exposure limits" (PELs) on a variety of industrial chemicals. It is an enlightening illustration of the difficulty of developing and enacting rational regulations in a complex society. He details the clash of scientific rationality with entrenched industrial and political positions, all of which leads to continued inaction and the inevitability of worker exposure and higher costs. It's an excellent summary of the key problems that face us. Write or call Dr. John Graham, Director, Harvard Center for Risk Analysis, Harvard School of Public Health, 718 Huntington Avenue, Boston, MA 02115. Tel: 617-432-4497

The Tanker Insurance Company: 1920-1995 Corporate histories are seldom compelling or entertaining, but this one has significance for risk managers.

It's the story of one of the oldest captive insurance companies, formed in August, 1920, by the Anglo-Persian Oil Company, the predecessor of today's British Petroleum. Limited self-insurance was adopted in 1919 to offset high marine hull and cargo insurance rates, and the captive was created a year later, taking a 20% participation on a fleet of five ships. Seventy-five years, an economic depression, local property confiscations, a world war, and several serious Mideast disruptions later, Tanker Insurance Company has assets of US$ 750 million and continues to play a role in risk financing for its parent. It consistently produced "profits" in every year for BP, since all captives are, in reality, cost centers. The last chapter describes the "new directions" for BP in the 1990s, engineered by Judith Hanratty, now Corporate Secretary of BP. She guided the company to a program of no commercial insurance above US$ 10 million (see RMR "Topsy Turvy," July 1994) and a changed role for its captive insurer. For a copy (for which a small fee will be charged) contact John Mitchell, BP Insurance, Britannic House, 1 Finsbury Circus, London EC2M 7BA. Tel: +44-171-496-4000

Nonprofit Risk Management Center This Washington-based organization, which I have the privilege to serve as a director, helps nonprofits in North America through consultation, conferences, and publications. Its monographs on nonprofit risk issues are uniformly readable and practical. From managing volunteers, and defining the responsibilities of the board, to dealing with insurance organizations or crisis management, the Center finds a way to publish a meaningful and inexpensive guide. One of the best is Crisis Management for Nonprofit Organizations, written by staff members John Patterson and Pam Rypkema in 1996. It's clear, simple and practical. Its "ten steps for survival" could apply as easily to profit-making organizations. The ten: create a "team," draft a plan, train and practice, consider a "command post," protect and direct people, protect resources, communicate with constituencies, restore operations post-event, assure funding, debrief following a crisis and update the plan. This booklet also has a first-rate bibliography. Available at $12.00 a copy

A second multi-purpose monograph is Kidding Around? Be Serious!, a guide to dealing with and creating safe service opportunities for young people. Its authors, Anna Seidman and John Patterson, argue that children and adolescents need different and more tailored management than adults, especially when enrolled in nonprofit service activities. This booklet discusses their characteristics, legal principles governing interaction with young people, a general risk management approach, and service scenarios. Again this should be valuable to risk managers in profit-making organizations that interact with youngsters. Available at $15.00

The fact that risk management is multi-disciplinary is illustrated by another recent publication of the Center, Healthy Nonprofits: Conserv