Emerging Trends in Risk Management: From the Corporate Consumer's Perspective: An Interview with John J. Hampton, Executive Director of the Risk Management and Insurance Society (RIMS)

By Barrese, James | Review of Business, Fall 2003 | Go to article overview
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Emerging Trends in Risk Management: From the Corporate Consumer's Perspective: An Interview with John J. Hampton, Executive Director of the Risk Management and Insurance Society (RIMS)


Barrese, James, Review of Business


The Risk Management and Insurance Society (RIMS) is headquartered in New York and is a proactive voice on behalf of risk managers, dedicated to supporting their function. It represents nearly 4,800 industrial, service, non-profit, charitable and government entities, and serves risk management professionals around the world.

Q. These days, when corporate risk managers talk, it is fashionable to speak of "Enterprise Risk Management." What challenges do you see in creating a system that will allow for managing risk in an enterprise-wide manner?

A. There are many obstacles to creating an ERM system. Most are internal to the organization rather than the result of external forces or factors. I have four examples. First, measurement of results. Companies know how to pursue their operating and profit goals. They have few tools for quantifying or otherwise measuring intangible risks. Second, weak planning processes. Budgeting pursues revenues, cost controls, and financial reporting for shareholders, creditors, and regulators. Planning processes are not aligned with risk management. Third, there is lack of acceptance. Many managers simply do not see the need to make changes or the role of ERM. Time spent coordinating risks with other units or integrating risk management practices do not bring visible results or financial benefits to operating departments. The fourth and last example is culture. Most corporate structures and behaviors are not suitable to ERM processes. Managers do not want to reveal weaknesses in their operations or gaps in their risk management activities.

Q. During the last 18 to 24 months, amid a hard insurance market and regulatory actions in response to corporate scandals, several of the CEOs in the insurance industry changed. Few of the new CEOs have come from the property/casualty/liability industry. Will this "leadership turnover" in the insurance industry benefit or harm the corporate risk manager?

A. new leadership in the insurance industry comes from organizations where the return on invested capital should match the level of risk assumed by the investor. As the insurance industry has traditionally under-priced its products, we can expect this to change in companies who bring in outside CEOs. The trend may have two effects. The first is higher prices. Insurance will be priced to provide adequate reserves and profits. The second is more valuable alternative risk products that give insurers a higher return on capital while providing more valuable risk protection.

Q. Amid premium hikes, depressed investment earnings and shrinking capital, the insurance industry is assuring us of disciplined underwriting that is sure to return stability in the insurance market. Yet with the exception of ACE Limited and a few others, reported loss ratios are well above benchmark. How do you see the continuing ability of the insurance industry to provide products and services for the corporate risk manager?

A. I see a trend in the wrong direction. Some underwriters are looking for new tools to narrow coverage. If they can identify the buyers who represent the most risk, they can exclude them from the risk pool. Insurance works better the other way. Cover everyone broadly, price the coverage to match the risk pool, and pay for losses among the organizations that pay the premiums. If insurers exclude trophy properties from terrorism insurance coverage, they will decline to sell coverage to those who need it. Agricultural cooperatives in Nebraska will not buy terrorism insurance. How are the needs of risk managers being met with that kind of scenario?

Q. While the Gramm-Leach-Bliley Act provides a framework for financial services integration, the functional regulation of insurance business, unlike the regulation of other financial services, remains in the hands of state regulators.

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