The decade of the 1990s saw dramatic changes take place in the role of the risk manager and the importance of a risk management program to a company. Today, the risk manager no longer is looked at as only the “insurance manager,” nor are risk management programs just about insurance coverage and automatic sprinklers. Even the generally accepted definition of “highly protected risk” has evolved.
New terms such as “holistic,” “enterprise,” and “global” have entered the corporate risk management lexicon. Risk managers now find themselves protecting shareholder value and managing vast databases of risk information.
Industry consolidations, vast economic growth, availability of capital, emergence of new players in risk transfer, incredible changes in manufacturing processes and the emergence of a huge global market have all influenced the risk manager position and the practice of corporate risk management. However, the core objective remains the same -protect the bottom line.
As companies have grown and spread into new markets risk managers have become faced with many more risks. Not only are they faced with common perils from fire, flood, hurricanes or ice storms that can easily catch them off guard, many are now dealing with new types of exposures. Advances in technology and communications are responsible for unprecedented change and new opportunities, as well as unprecedented risk and new exposures.
There is tremendous competitive pressure in this increasingly global economy to reduce expenses and grow profit margins. Risk profiles of companies are constantly changing. Manufacturing capacity is being consolidated; just-in-time inventory has become commonplace, as are relying on single source suppliers, outsourcing, downsizing and automation. But at what additional risk?
Today's business cannot afford interruptions. The total impact of a business interruption may involve many indirect consequences, from missed growth opportunities and loss of market share to one-off costs of management time, litigation and potential harm to corporate reputation. These less tangible risks are uninsurable in the traditional sense. Though rarely quantified, some business executives estimate these “hidden costs” of an interruption to be between seven and 20 times the cost of the initial loss. The bottom line is that business risk is skyrocketing and not everybody is focusing on reducing this cost of risk, but rather on risk assumption or risk transfer.
Opportunity of the new millennium
Reduction of risk is an opportunity to actively manage risk in support of business strategies. As a result, a company can gain greater reliability and certainty of supply, giving it greater confidence in anticipated cash flows. For decades FM Global has counselled that it is better to prevent a loss than to insure against it. The goal now is to manage risk as a competitive advantage. Ultimately, that commitment is a worthy and wise use of corporate resources that will reflect itself in enhanced shareholder value.
How is that going to happen? Niche companies, working in tandem with clients and the brokerage community, will allow companies to customize their risk management program to their industry, the local economy, even to the social and political environment. Working in co-operation with others, insurance companies will combine their special expertise - such as FM Global's expertise in risk management engineering services - to provide companies with a combination of insurance and risk management services that will enable them to be more competitive in their markets.
In today's highly charged competitive environment, the role of risk management is rapidly changing. As companies become increasingly more knowledgeable about risks, they are being faced with an increasing choice of treatments. And, as they increase their knowledge of risk and the way those risks are managed, they are beginning to seek a linkage to improving the way their business operates.
To get that linkage, management requires practices where investments in risk management can be used to create positive returns for their business. This results in a move away from risk management being purely an investment in avoidance through insurance. Firms are now working towards installing a risk management philosophy that is logical and integrated; one that is effective and efficient, and works for the business.
Sound business investment
Organizations are investing large amounts of time and money on managing the risks in their business. It is estimated that the insurance risk management functions alone cost six billion dollars in the United States. Companies are beginning to look at these numbers and starting to ask some questions. Are they getting a good return on their investment? Should they be spending more or less than they are now? Are the various risk management investments working together as a portfolio? How much should be retained? What should be passed on to the insurance companies? How much should that cost them?
Risk managers are now being asked to consider the impact of risks throughout the entire enterprise, on every part of the organization. How a company identifies, quantifies, and manages its risk exposure is becoming an important factor in creating shareholder value. The role of a chief risk officer - the person who takes the big bold view of all risk in a company - is emerging as a leading practice to ensure that risk management functions really can provide some sort of business wide capability.
This is where I see the insurance industry becoming a partner with their customers. What were once extensive risk management operations, located at every facility, may today consist of just a small staff working across global operations. Accordingly, risk managers now require insurance companies to provide them with the tools, the presence and the capacity to assist them worldwide, to give them the ability to help manage their risks in this ever-changing economic environment.
Tomorrow's risk management tools
Essentially, today a company can get the support it requires for its centralized risk management needs, as well as the support it needs for its many geographically spread, decentralized locations. This greatly improves the ability to design risk reduction into any company's risk management program, no matter how many countries it operates in or how many locations it has.
The results can be staggering. As a result of Hurricane Andrew in 1992, FM Global put teams of engineers in the field to research and develop guidelines on what could be done to keep customers' roofs intact during a hurricane. The results of that research became clear when Hurricane Georges hit Puerto Rico in September 1998. Customers that followed our engineering guidelines suffered losses that were only 20% to 25% of there suffered by all industry that didn't follow our advice.
Strategic risk reduction
These insurance industry tools, the collective knowledge and expertise, and developing technology - when bundled properly into an effective risk management program - give risk managers the opportunity to reduce risk for their company in many beneficial ways. Having these inputs will allow them to develop a strategic risk capability to ensure that the identification of risk is taking place within the right context for their industry.
In turn, they will be able to reduce risk to business processes and operations, and reduce risk from intangibles, such as business interruption and lost market share. As a result, capital can then be used more efficiently to generate a return that is more in line with the risks that their company is exposed to.
In the end it means that capital can be freed up to invest in the business, to expand into emerging new markets or new products, to hire and retain valuable employees or to pass back to shareholders.
Risk reduction is an investment in securing the future of your business.