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The term "risk management" is a relatively recent evolution of the term "insurance
management," and originated in the mid-1970s. The reason for this evolution is
that the concept of risk management encompasses a much broader scope of
activities and responsibilities than does insurance management. Risk management
is now a widely accepted description of a discipline within most large companies as
well as a growing number of smaller ones. The myriad risks faced by most
businesses today necessitate a department solely devoted to managing these risks.
Basic risks such as fire, windstorm, flood, employee injuries, and automobile
accidents, as well as more complex exposures such as product liability,
environmental impairment, and employment practices, are the province of the risk
management department in a typical corporation.
These risks stem from various aspects of doing business and they generally fit into
the following categories, according to Kevin Dowd in Beyond Value at Risk:
Generally, risk managers are insurance brokers who advise clients on insurance and
risk, independent consultants on risk who work for a fee, or salaried employees—
frequently treasurers and chief financial officers (CFOs)—who manage risk for their
companies. Because risk management has become an increasing part of insurance
brokers' responsibilities, many work for fees instead of for commissions.
Risk managers also may opt to use risk financing, which refers to paying for losses
by retention or transfer. Retention of risk—sometimes referred to as self-insurance
—is the last resort for managing risk. If there is no other way to manage a
particular risk, a company bears the losses resulting from its risks, or retains its
losses. For example, the deductible of an insurance policy is a retained loss. In
addition, companies may establish special funds to cover any losses.
Transferring risk is when the risk is shared by a party other than the company
ultimately responsible for the risk, such as a contractor or a consultant who may
contribute to a company's risk, or by an insurance provider. Companies can transfer
their losses through insurance by obtaining insurance policies that cover various
kinds of risk that are insurable; insurance constitutes the leading method of risk
management. Insurance typically covers property risks such as fire, natural
disasters, and vandalism, liability risks such as employer's liability and workers'
compensation, and transportation risks covering air, land, and sea travel as well as
transported property and transportation liability.
In the implementation step, combinations of the above tools may be used. Indeed,
the basic risk management techniques—retention, reduction or avoidance, and
transfer—are complementary and risk managers often must use a variety of
methods to adequately manage a company's risks. The final step, called
monitoring, is necessary to determine if the solution employed actually obtained the
desired result or if that solution requires modification.
The Risk and Insurance Management Society (RIMS), the primary trade group for
risk managers, predicts that the key areas for risk management in the 21st century
will be operations management, environmental risks, and ethics. RIMS also believes
more small- and medium-size companies will focus on risk management and will
hire risk managers or assign risk management tasks to treasurers or CFOs.
Furthermore, Risk Management indicated that there were five times as many
natural disasters in the 1990s as the 1960s and that insurers paid 15 times what
they paid in the 1960s. For instance, there were a record 600 catastrophes
worldwide in 1996, which caused 12,000 deaths and $9 billion in losses from
insurance. Some experts attribute the increase in natural disasters to global
warming, which they believe will lead to more and fiercer crop damage, droughts,
floods, and windstorms in the future.
The trend towards mergers in the 1990s also affected risk management. More and
more companies called on risk managers to assess the risks involved in these
mergers and to join their merger and acquisition teams. Buyers and sellers both
use risk managers to identify and control risks. Risk managers on the buying side,
for instance, review a selling company's expenditures, insurance policies, loss
experience, and other aspects that could result in losses. After that, they develop a
plan for preventing or controlling the risks they identify.
A final trend in risk management has been the advent of nontraditional insurance
policies, providing risk managers with a new tool for preventing and controlling
risks. These insurance policies cover financial risks such as corporate profits and
currency fluctuation. Consequently, such policies ensure a level of profit even if a
company experiences unexpected losses from circumstances beyond its control,
such as natural disasters or economic problems in other parts of the world. In
addition, they guarantee profits for companies operating in international markets,
preventing losses if a currency appreciates or depreciates.
[Louis J. Drapeau,
FURTHER READING:
Dowd, Kevin. Beyond Value at Risk: The New Science of Risk Management. New
York: John Wiley & Sons, Inc., 1998.
Feldman, Paul. "Risk Managers' 'Global' Concerns." Risk Management, June 1998,
64.
Head, George L., and Stephen Horn 11. Essentials of Risk Management. Vols. 1-11.
Insurance Institute of America, 1991.
"New RIMS President Delillo Sees RM Future in Operations, Not Finance." National
Underwriter Property and Casualty—Risk and Benefits Management, 27 April 1998,
3.
Kroll, Karen M. "Covering Non-traditional Risks." Industry Week, I February 1999,
63.
Mills, Evan. "The Coming Storm: Global Warming and Risk Management." Risk
Management, May 1998, 20.
Risk and Insurance Management Society, Inc. "Risk and Insurance Management
Society, Inc. (RIMS) Website." Risk and Insurance Management Society, Inc., 1999.
Available fromwww.rims.org.