Risk Management Reports

February, 1997
Volume 24, Number 2

Hazard in Oz
A friend asked me for my impressions of my thirteen day November trip to Australia and New Zealand. Of the 312 hours away from home, only 14, or 5%, involved wandering around Sydney, Gold Coast and Auckland, the three cities where I stayed. The remaining time found me in the interiors of airports, airplanes, cabs, hotel rooms, offices, restaurants and conference rooms. Despite these limitations, I can still say that Aussies and Kiwis remain among the most outgoing of people, full of good humor and eager to share their opinions with you.

The primary purpose of this trip was a presentation at the annual ARIMA (Association of Risk and Insurance Managers of Australasia). The good news: some exceptional speeches, well above the average for risk management conferences. Jim Whiting, of Australia's National Safety Council, suggested that risk makers and risk takers have equal responsibilities to be risk managers. The key question, he argued, is determining "how safe is safe enough?". By definition all risk is speculative and there is no such thing as "zero risk." All safety is relative to our understanding, our will and our financial capabilities. Seeking absolutism in safety is irrational: risk is a continuum and we must decide where we as a society wish to place ourselves. The role of the risk manager is to assure that all stakeholders understand risk better and accept ownership of both risks and responses.

Robert Hailstone, from Australia's Criminal Justice Commission, challenged registrants to recognize the true costs of workplace crime costs: expected to run to A$ 10 billion in 1996. Fraud, he reported, accounts for two-thirds of all crime, yet the public appears to tolerate increasingly unethical and fraudulent behavior. Losses are caused by three types of individuals: "meat eaters," who use their power to generate personal gain, "grass eaters," opportunists who, if presented with a chance for illicit gain, take advantage of it, and "the birds," who see improper activity and do and say nothing. Greed, the pressures of personal financial loss, and revenge are the three major drivers for criminal acts, supported, according to Hailstone, by an enormous and growing social tolerance. He cited the examples of Michael Milkin in the US and Christopher Skase in Australia. Situations that fifty years ago would have been immediately challenged are today tacitly acceptable, evidence of the decline of ethics. Hailstone's challenge to risk managers: begin a re-establishment of rigorous ethical behavior.

This will mean broader operational management audits, internal and external, instruction in personal accountability (using case studies as examples), full publicity on all misconduct, and finally, appropriate police involvement.

Robert Hailstone's remarks were ironic in light of two disturbing aspects of the conference. First, it was held in a gambling casino. The venue selection was ill-advised. It leaves an inappropriate impression with those who know little about risk management. This judgment applies equally to the biennial AEAI conferences in Monte Carlo and the one RIMS conference held in Las Vegas. As Girolamo Cardano, a sixteenth century Italian physician and one of the first to study probability and odds, wrote, "The greatest advantage from gambling comes from not playing at all!"

The second black mark on the conference was its blatant commercialism. Every handout carried some form of commercial endorsement. The dinners were all sponsored by service providers, whose representatives extolled their wares before we could eat. Granted that these events are expensive to run, but why not ask attendees pay for them? Again, what is the impression to outsiders? This criticism is hardly confined to ARIMA: I attended the US RIMS, the Canadian RIMS and the AIRMIC conferences last year and the same situation exists. Is this becoming an ethical problem: accepting constructive gratuities from vendors? Is it time for these events to be paid for by their registrants?

A final negative comment: of the 46 listed speakers at the conference, only 10 were risk managers (29 were service providers and seven represented government or associations). It is discouraging that risk managers themselves seem to have so little to say at their own conferences!

Nonetheless, the 1996 ARIMA conference was one of the better sessions that I have attended. Most of the presentations offered real value and challenge. They looked beyond the traditional insurance view to broader regulatory, quality, communications, contingency planning and ethical problems. They echoed the words of the Australian economist Robert Dixon (in a 1986 paper), "Uncertainty is present in the decision-making process, not so much because there is a future as that there is, and will be, a past . . . . We are prisoners of the future because we (are) ensnared by our past."

He had the distinct advantage of being American and therefore never hesitant about expressing an opinion. Australians, in comparison, lack confidence, and it is this, not steel mills or oil wells, that is the difference between the two nations.

Peter Carey, Illywhacker, Faber & Faber, London 1985

La Vache Qui Risqué
The announcement in the House of Commons last March that ten new cases of Creutzfeldt-Jakob disease (CJD) had been discovered in Great Britain and that they might be related to B.S.E. (bovine spongiform encephalopathy), or "mad cow" disease, set off an uproar that has yet to subside. I first commented on this situation in the May 1996 RMR ("Holy Cow!). It continues to be a perfect example of the mismatch between instant global communications and our imperfect knowledge. The first reaction was to swear off British beef, and the European Union still maintains this ban. Yet, as an incisive article by John Lanchester in The New Yorker (Dec. 2, 1996) argues, the presumed sources of the contagion, the rendered parts of a slaughtered cow (brain, spinal cord, etc.), reformulated as feed for cattle, also go into many other products such as gelatin, used in candies, mayonnaise, lipstick, and ice cream, collagen, used in sausage casing and glue, tallow and fat, used in soap, detergent, linoleum, insecticide and margarine, and keratin, used in shampoo. In a modern interdependent economy, nothing is wasted and therefore the potential for infection may be that much greater.

The key is whether or not a long-known animal disease ( also known as scrapie in sheep) can cross to the human species.

The Lanchester paper suggests three scenarios. One, there may be no connection between B.S.E. and the new variant of CJD, despite a growing consensus on such a linkage. Two, the species barrier may not exist at all, and, within a five year incubation period, we may uncover hundreds of thousands of people with fatal brain disease, a "disaster of Old Testament proportions" as Lanchester calls it. Or three, the connection may exist but the species barrier may limit the disease to only a few. This is the likely scenario according to the most recent research.

For the practicing risk manager, the unknowns greatly outweigh the knowns. If you run a cafeteria in England, should you serve beef? But aren't the risks here (so far) relatively minuscule when compared to the accidents arising from the use of company automobiles by employees? As with all risks, we have to make decisions based not only on the most recent expert assessments of frequency and severity potentials, but also on the public's rapidly-changing perceptions, often easily twisted by the revelations of the press.

Discontinuities. irregularities, and volatilities seem to be proliferating rather than diminishing.

Peter L. Bernstein, Against the Gods, John Wiley & Sons, Inc., New York 1996

Wish List
After the hype and enthusiasm of New Year's resolutions subside, I fall back to my periodic "wish list," changes that I would like to see take place but which I acknowledge are unlikely. The curmudgeon still presses onwards, however!

1. Initials: Let's dispense with the army of initials that many used to follow their names (professional designations; advanced degrees, awards, etc.) They're okay in a resume but not elsewhere. I have a suspicion that there may be an inverse relationship between professional competence and the frequency of visible initials.

2. Regulation: It is time for federal regulation of the US insurance industry and, in addition, for substantially more international cooperation in both regulation and solvency rating. What the Basle Committee has done for banking is necessary for insurance.

3. Commissions: Why shouldn't all commercial insurance be offered to customers net of commission, permitting intermediaries to add fees, if and when authorized by the customer? The plethora of restrictive state regulations on fees in the US is an example of coercive protectionism at its worst.

4. Fellows: It's time for a global program offering a "fellow" in strategic risk management, based on a combination of examinations and experience.

5. Reserves: Why shouldn't corporations have the right to establish actuarially-sound catastrophe reserves on a tax deferred basis? This right should be granted corporations and insurers alike. The budget deficit problem in North America makes this highly unlikely within the next five to seven years, but I can still wish for it!

6. What's in a Name? In the 1970s, the American Society of Insurance Management (ASIM) changed its name to the Risk and Insurance Management Society (RIMS). It's time for another name change: to the Risk Management Society. The acronym need not change (RiMS). The Public Risk Management Association has already led the way, dropping "insurance" from its name several years ago.

7. Factory Mutuals: Originally a loose consortium of many mutuals, the Factory Mutual Group is now made up of three insurers, Allendale, Arkwright and Protection. It's time for them to merge into a single organization offering property insurance and superior loss prevention engineering.

8. Business Insurance: I participated in the inception of BI, as an anonymous book reviewer and sounding board to Rance Crain. Isn't it time that BI changes its editorial focus toward risk management and relinquish its role as a weekly listing of various service providers? More editorial material and less directories!

Ah well, these are just wishes!

Selfish individualism: we might linger with the phrase. It could even serve as the starting point for a political critique of contemporary popular culture. To what extent do our arts and entertainments encourage mindless self-absorption and a blithe disregard for almost everything else, including other people, common decency, and the well-being of the nation? To what extent do the various offerings of the arts-and-entertainment complex contribute to our collective coarsening and the death of fellow feeling?

Jay Tolson, "Hail to the Critic," Wilson Quarterly, Autumn 1996

Dealing with the Press
"Lutheran Treasurer Accused of Stealing From Church" NY Times 9/20/96

"Adelphi Chairwoman's Dual Role Queried" NY Times 9/24/96

"Man Accused in Charity Scheme Faces 82 Counts" NY Times 9/28/96

One week produced these headlines and, in many papers, we could find similar leads in a single day. They raise the question of how best to deal with the media, that elusive melange of reporters and writers. Daily, periodical and trade press, radio and television, and even the Internet seek stories and offer commentary. As George Stephanopoulos suggested, in David Remnick's "Curious George," The New Yorker, October 21 and 28, 1996, " . . . journalism, like history, like biography, is not what it pretends to be. It's still a matter of creating a story. And nobody ever admits it. Part of creating a story involves personal relationships, and what the press will never admit to is that they want it both ways. If there are bad stories, it's because you didn't treat us right. But they would never admit to the fact that treating them right will affect their stories."

For the risk manager, dealing with the press will be a matter of personal relationships. It is a critical ingredient in organizational survival. It begins not with a crisis, but well before it. It begins with a candid and realistic assessment of the power of the media and how it can benefit or harm the reputation of an organization and the confidence of its stakeholders. Pragmatism requires a certain degree of cynicism. John le Carre, writing in The Tailor of Panama (Hodder & Stoughton, London 1996): " . . . since nothing is more predictable than the media's parroting of its own fictions and the terror of each competitor that it will be scooped by the others, whether or not the story is true, because quite frankly, dears, in the news game these days, we don't have the staff, time, interest, energy, literacy or minimal sense of responsibility to check our facts by any means except calling up what has been written by other hacks on the same subject and repeating it as gospel." Overstated? Perhaps, but we can all cite examples to support his case!

Media relations should be one of the key ongoing responsibilities of a prudent risk management program, incorporating contacts with a variety of representatives within the organization. Over the years, first as an employee of an insurance brokerage firm with an almost paranoid fear of the press, then as the head of a small consulting firm, dependent on fair and frequent press mention, and finally as a partner in a large consultancy, I developed five "rules" for dealing with the media.

One Never lie! Dishonesty inevitably corrodes not only your relationship with the press but your own organization as well. A good friend in England put it well: "integrity is the most efficient approach to expediency." Any organization can survive bad news if it is ready to acknowledge it and make the necessary corrections.

Two Respond to media inquiries immediately. Don't put off the reporter's telephone call. If he or she is staring at a deadline, your failure to respond can often be worse than a misquote. Consider the conditions under which they work: think like a reporter.

Three Give short, easy quotable answers. Again, think like the reporter. A length speech will inevitable create misquotes. Be short and pithy. If you know the subject matter before returning a call, think of three simple items you would like to say on behalf of your organization. Write out three punchy quotes and deliver them.

Four Volunteer information occasionally. Following a telephone interview offer to send a summary of your comments, press releases (if pertinent), or supportive articles. Call a press source from time to time and offer current items that she or he may not have heard and that might make a good story.

Five Maintain contact with key media representatives. When visiting the home city of an editor, pay a call or share a meal (go dutch!). Discover their interests and help them to do a better job. A personal working relationship will never guarantee a more favorable slant on a story, but at least it may give you a chance to respond before an adverse story is written.

All of this presumes no crisis situation. When catastrophe hits, additional precepts may help. Train internal staff, especially the CEO, to deal with inquisitive and obtrusive media. Don't refer inquiries to outside public relations counsel. Can your insiders handle floodlights and a barrage of questions with poise? Make sure that these spokespeople are available for comment 24 hours a day during the crisis period. Have "fact sheets" available for distribution. Initiate further media contact when appropriate. Consider a "war room" for major crises: a shipping company and its risk manager did just this for a recent stranding that attracted global attention. And finally, be ready with apologies when warranted. Compassion does more to preserve and enhance a reputation than stonewalling, no matter how much lawyers and insurance people counsel otherwise.

Melanie Herman, the Executive Director of Washington's Nonprofit Risk Management Center, summarized how to deal with the media in "Crisis Communications," in the September 1996 issue of Community Risk Management & Insurance. Recognize that the media is here to stay and that the reporter's job is to gather information and write a story (see Stephanopoulos comments above). Credibility is essential and understand that an interview can be controlled. Treat media contacts as opportunities. Recognize that drama and dramatic effects make news, and, finally, that the media shape the public's view of reality.

As with all risk, dealing with the press can produce either benefit or harm. It all depends on how you approach the problem.

American journalism countenances a staggering amount of lying about authorship. Indeed, claims of phony authorship are routine. How many published opinion pieces, let alone autobiographical tomes, by politicians and celebrities are really written by them? How many have even read the stuff they allegedly wrote? Indeed, the whole lot of speech writing, so honored in the world of Washington journalism, is a ventriloquist's exercise in dissimulation and legalized plagiarism.

Charles Krauthammer, "In Defense of Joe Klein," The Weekly Standard, August 5, 1996

Competitive Bidding
A recent article on techniques for the competitive bidding of insurance in The Risk Management Letter (Vol. 17, Issue 7, 1996) caused me to take a fresh look at this most traditional of techniques for checking the pricing of an insurance program.

The author wrote: " . . . every good broker should periodically undertake (competitive bids) even when not asked" (my italics). I couldn't disagree more! A broker serves a client. Under no circumstances should any broker initiate contact with competitive insurers without the knowledge and express consent of the client. To do otherwise is to misrepresent the client to a potential insurer. The client-insured must have an opportunity to decide when and if such an approach is to be made and especially with whom.

The author suggests that a bid process allow at least 60 days for the underwriter to prepare a quotation. This presupposes that the entire process probably starts 180 days prior to the new inception date of coverage. Starting this early means that the process should be undertaken only infrequently, perhaps once every five to seven years rather than the suggested "three to five years."

Finally, no mention is made in this otherwise sound list of bidding steps of the desirability, even the necessity, of meeting face-to-face with the underwriters of the insurance companies selected to present bids. Granted that today's "system" makes this difficult, I find it disturbing that a risk manager or financial officer would not want to meet personally someone whose organization could be providing millions of dollars of promised future protection. It is inconceivable that a treasurer would select a bank without a personal meeting. What is different with an insurance company? The selection of insurance companies to participate in the bidding process should be the primary responsibility of the insured and its risk manager and/or financial officers. It should be based on a careful assessment of financial condition, a review of claims payment practices, and consideration of the past volatility of offered coverages and prices to other organizations, as well as on current costs. No market should be approached without the express approval of the client. Care should also be taken to include in the process all qualified insuring organizations, from stock and mutual companies, to direct writers, group captives, reinsurers and other financial institutions.

Competitive bidding is indeed a useful tool, but it should be used judiciously and less, rather than more, frequently. It should, above all, be rigorously controlled by the organization that will be the insured.

In this day of "whatever." Americans are becoming slaves to the new tyranny of nonchalance. "Whatever." The word draws you in like a plumped pillow and folds around your brain; the progress of its syllables is a movement toward surrender and effacement, toward a universal shrug. It's all capitulation. No one wants to make a judgment, to impose a standard, to act from authority and call conduct unacceptable. But until something like that begins to happen, until standards of intelligence and behavior are defined and defended once again, we had better be prepared to live with deterioration.

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