|Issues for 1997|
Each year, as I sit down at the computer to consider critical risk management issues for
the forthcoming twelve months, I find recurring themes as well as an ominous disquiet that
I could miss something big. Randy Myers quoted Jeffrey Serkes, IBM's vice president and
treasurer on this point ("Future Perfect," Treasury & Risk Management, Nov.-Dec. 1996):
"Our biggest challenge is going to be something none of us have yet imagined. Some risk
will pop up that none of us saw coming."
Last year my issues were counterparty security, the rising tide of debt, use of derivatives, political fragmentation, changes in regulations, environmental liability, employers' liability, violence in the workplace, dependencies on data, and communicating risk assessments and risk responses to stakeholders. Fortunately we saw few surprises. Political incumbents won in Russia and the United States, while a challenger surprised in Israel. The global bull market did peak, but much later than many imagined.
Considering the Serkes admonition, these are my risk management issues for 1997, within the four major risk quadrants: regulatory/political; financial/market; legal liability; and operational.
We need a social change away from pure "retirement" of fishing, golf, and
leisure toward new forms of social and economic participation, consistent with physical
and mental capabilities, experience, and interests. John Gardner identified this
twenty years ago, suggesting that retirement should not be a cessation of activity, but
rather a "repotting" of one's efforts, setting down roots in new soil. This review of
geriatric politics will force us to analyze health ethics (when is it both uneconomic
and irresponsible to extend life?) and emphasizing savings rather than consumption.
There are some interesting challenges to risk managers here!
Legal Liability Risks
If "knowledge and uncertainty are the twin principles of modern organization," as suggested by Peter Drucker, then risk managers - those who help organizations address uncertainty more prudently - have a major part to play. Above all, risk managers need to help their organizations prepare for the Serkes risk that "none of us saw coming."
Deep inside I know that trying to figure things out leads to blindness, that the desire
to understand has a built-in brutality that erases what you are trying to comprehend.
Only experience is sensitive.
Peter Hoeg, Smilla's Sense of Snow, Delta Books,
New York 1995
|Lloyd's - The Future?|
Last year, the security of insurance institutions was a major issue. Lloyd's was one of
them, as it prepared for the difficult transition to the formation of Equitas and the
revival of a three hundred year old marketplace. Its "R & R" plan was adopted last
fall and now the question is its future. I voiced some continuing doubts about Lloyd's
in the October 1996 RMR and received a thoughtful response in December from one
of my readers, Peter Maitland, chair of Trafalgar Underwriting Agencies in London.
Excerpts from his personal (not corporate) comments are worth sharing:
Peter's candid assessment is reassuring but questions remain. Does the recent entry of fresh capital to Lloyd's make sense in the current soft market? Can expenses be reduced to the level necessary to compete with other risk financing alternatives, not just other conventional insurers? Is Lloyd's prepared to deal directly with major corporate buyers? Some of these questions will begin to find answers in 1997.
. . . corporate capital seems to be far less cautious with its money than the
unlimited Names . . . in this year's donkey derby. . . . They add capital at exactly
the wrong stage of the cycle and could pose a major threat to the CGF (Central
Guarantee Fund) in the future and, therefore, to the future of Lloyd's. Have lessons
learnt from the excesses of the 1980s really been so quickly and deeply buried in
our memories - almost to be forgotten?
"Has Lloyd's Gone Mad? The Return of the Donkey Derby,"
CBSL News - Market Review, Christie Brockbank Shipton Ltd., London, November 1996
|"Against the Gods"|
I've complained for over twenty years that we don't have a textbook on risk management
that is both readable and catholic in its view. Peter Bernstein has just written that
book: Against the Gods: The Remarkable Story of Risk (John Wiley & Sons,
New York 1996). It joyfully and often lyrically explores the development of the concept
of risk as both threat and opportunity. He matches the ideas that have enabled us to
measure probability with those who first advanced them, introducing us to familiar
and unfamiliar names from the Middle Ages onwards. We know Pascal, Pierre de Fermat,
Edward Lloyd, the Bernoullis (Daniel and Jacob), Bayes and Bentham, but we learn,
through Bernstein, of the contributions of Pisano (who introduced Arabic numerals),
Cardano (who measured probability with dice), John Graunt (who calculated statistical
tables), Abraham de Moivre (the "bell" curve and standard deviation), Francis Galton
(regression to the mean) and other fascinating characters on whose ideas today's risk
management rests. Add to them more familiar names from this century, such as Kenneth
Arrow, Frank Knight, John Maynard Keynes, John von Neumann, Oskar Morganstern, Harry
Markowitz, and the partners Kahneman and Tversky and Black and Scholes, and Against
the Gods comes alive with complex and challenging personalities as well as ideas.
Where once we attributed fortune or misfortune to the whims of gods, we now, through the efforts of those described in this book, "have transformed the perception of risk from chance of loss into opportunity for gain, from FATE and ORIGINAL DESIGN to sophisticated, probability-based forecasts of the future, and from helplessness to choice." Bernstein writes fluidly and coherently. Names and ideas that I vaguely recalled or misunderstood, as a history major, jump to life. I am beginning to understand!
Did you know, for example, that the word "risk" comes from the early Italian word
"riscare," meaning "to dare." There's a proactive sense to that translation, implying
the choice, not fate, that Bernstein intends. "Hazard" comes from the Arabic word for
dice, "al zahr."
"Risk management," Bernstein argues, "guides us over a vast range of decision-making, from allocating wealth to safeguarding public health, from waging war to planning a family, from paying insurance premiums to wearing a seatbelt, from planting corn to marketing cornflakes." His is the complete integrated view of the function, even though, in the last quarter of the book, he focuses on investment risks and the financial market, the areas of his specific expertise.
He maps the development of more and more rigorous quantitative approaches to probabilities and the more recent attempts to understand why "people yield to inconsistencies, myopia, and other forms of distortion throughout the process of decision-making." His story of risk and risk management is one of rationality and human nature, ata one point at odds with each other and at another cooperating, to provide a better understanding of uncertainty and how to deal with it. ". . . Any decision relating to risk involves two distinct yet inseparable elements: the objective facts and a subjective view about the desirability of what is to be gained, or lost, by the decision. Both objective measurement and subjective degrees of belief are essential; neither is sufficient by itself."
"The essence of risk management," Bernstein concludes, "lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us."
This book belongs on every risk manager's bookshelf, to be read and as reference.
Risk and time are opposite sides of the same coin, for if there were no tomorrow there
would be no risk. Time transforms risk, and the nature of risk is shaped by the time
horizon: the future is the playing field.
Peter Bernstein, Against the Gods, John Wiley & Sons, Inc.,
New York 1996