Risk Management reports

August, 1996
Volume 23, No. 8

Summer brings me back to Maine, its long, lazy days and the never-ending rituals of boat maintenance. One of these is varnishing, the careful application of six or more coats of luminous protection for the bright work on a sailing sloop and the rubrail and sculls for an 18' rowing boat. Each surface is carefully sanded, first with 80 grit and then 120. Then I wait for some dry, warm weather, not too windy, and begin applying thin coats of the best marine varnish (that's varnish that is identical to regular varnish but costs 50% more because it is called "marine"). Each coat should dry at least 24 hours, before it is lightly sanded with even finer paper and a follow-up coat applied. The entire, almost religious, ritual requires anywhere from 7 days (if the weather cooperates) to three weeks, after which I bask in the glow of the newly finished wood.

I first wrote about the varnishing process and its application to risk management in September 1994. The compliments of a neighbor on my efforts this year remind me that the lesson needs reiteration.

The critical ingredient is, of course, patience. Varnishing cannot be rushed, nor can the creation of effective risk financing. Too many rush precipitously from one risk financing plan to another, from enforced high deductibles in hard conditions to low when the market is soft, from one provider to another on the strength of annual or three year bids. Too little time means inadequate bonding, just like too few coats of varnish. It's easily marred and we're disappointed with the result. We then start over, trying something new. Often we rush into new offers without the necessary preliminaries (preparation of the "surface") and fail to consider the patience that results in an enduring relationship (between wood and varnish, between organization and risk financing partner).

I've argued that risk financing is "sharing," not "transfer." Shouldn't these relationships, like varnish on bright work, be more carefully and patiently built up over a period of six or seven years? The results will be much more satisfactory. It's a lesson that summer in Maine teaches.

If a man must be obsessed by something, I suppose a boat is as good as anything, perhaps a bit better than most. A small sailing craft is not only beautiful, it is seductive and full of strange promise and the hint of trouble.

E. B. White, "The Sea and the Wind that Blows,"
Oxford Book of the Sea, Oxford University Press, Oxford, 1993

European Risk Management Education
On trips to England in March and France in May, I had the opportunity to talk with two leading European educators of risk management. In both cases, their curricula encompass a broader, more strategic, more holistic approach to the discipline.

Dr. Steven Diacon and Professor Paul Fenn jointly direct the Insurance Centre of the School of Management and Finance at the University of Nottingham and teach two risk management modules, "Risk Management Decisions" and "Risk Management Processes." These courses are not restricted to finance or insurance majors but are offered to a wide range of students across the university, as the Centre has links with the School of Social Studies and the Departments of Economics and Law. "Risk management" is defined by Dr. Diacon as "those policies and procedures, both financial and non-financial, that a company can utilize to influence the risking, i.e. variability) of its performance."

The "Decisions" module looks at the role of risk management, individual risk and risk aversion, human information processing on risk, managerial decision-making under risk (incentives and contracts), physical and financial risk, externalities and liability, and risk in corporate decision-taking.

The "Processes" module looks at corporate risk management, organization of the firm, business ethics and corporate responsibility, identification and measurement, reduction, health & safety, optimal risk retention, corporate insurance coverage, financing retained risk and, finally, captive insurance companies. Among the key texts for these courses are Neil Doherty's Corporate Risk Management: A Financial Exposition (McGraw-Hill, 1985), The Handbook of Risk Management, by Bob Carter and Neil Crockford (Kluwer Publishing), and Business Risk Management, B. Ritchie and D. Marshall (Chapman & Hall, 1993). In addition to these courses, the Centre is currently undertaking research programs on the financial performance of insurance companies, liability insurance in the health sector, health care and insurance in the UK, workplace risk and disability insurance, and personal financial services.

Dr. Diacon and a Research Associate, Simon Ashby, prepared a paper earlier this year with the intriguing title of "The Strategic Value of Silence: The Costs and Benefits of Communications in Risk and Crisis Management." It raises questions as to the desirability of publicly of corporations or industries disclosing information about risk management and risk financing programs both before and after a crisis event. I've always been a believer in full disclosure rather than silence but the authors point out that competitive pressures may dictate otherwise.

Across the Channel a more ambitious program is underway. Consider a one year risk management master's degree program that includes course work in Paris, Rotterdam and Manchester, case studies in France, Portugal, England and possibly Greece, all followed by a three month practical work session in a