Newsletter Sign-up

It is common today to find various factions of the risk management community arguing about changes to the profession. Enterprise risk management seems to top the list, along with federal versus state regulation, and the future role of insurance as a risk management tool.

There are solid arguments on all sides of these issues, but the most crucial thing to understand is whether the issues themselves are just minor blips in the trend of risk management, or if they represent shifts in the path that risk management is taking.

I recently came across the historical events in the Risk Management Report written by Felix Kloman in December 1999. They provided perspective on the history of risk management.

For example, in 1992, British Petroleum was at the center of a great debate. Using a study by two university professors, it made the unprecedented decision to eliminate insurance on the first $10 million of its exposures. This was radical. I am sure there were plenty of pundits who saw this as ill-conceived. Today, BP's decision is the norm, not the exception, for large multinational companies.

Yet in the context of risk management history, BP's was not such a radical move. The first captive, Tanker Insurance Company Ltd., was formed in 1920. In 1962, Douglas Barlow developed the idea of "cost-at-risk," which compared the total cost of insurance to the total cost of self-funding. If one looks at the forces at play in the years leading up to 1992, including the Risk Retention Act of 1982, which allowed the creation of "risk retention groups," then the BP decision seems like an inevitability in the evolution of the discipline.

Likewise, the role of the risk manager has evolved. In 1956, the Harvard Business Review published "Risk Management: A New Phase of Cost Control," quoting Dr. Wayne Schneider of the University of Pennsylvania as saying "the professional insurance manager should be a risk manager." In 1975, the American Society of Insurance Management changed its name to the Risk and Insurance Management Society, reflecting a broader focus from insurance to risk.

In 1976, Fortune magazine published an article titled "The Risk Management Revolution," which discussed "the coordination of formerly unconnected risk management functions within an organization with oversight by the board of directors." In 1993, James Lam became the first-ever chief risk officer at GE Capital. Two years later, the Australian/New Zealand ERM standard was published.

There are a few key takeaways from these events. First is that risk management is a young profession. It was only in 1956 that the idea of a true risk manager was being discussed.

Second, one must understand the lifecycle of changes to the profession. Just because an idea is introduced does not mean that it will be accepted right away. New and radical ideas, if they are to be adopted, often don't become the standard for about 20 to 30 years.

Finally, one should see the trend in risk management. The role of the risk manager has slowly but consistently broadened over the years. ERM, like other new concepts before it, took about 20 years to be seriously considered. CRO's are far more common now than in 1993 when Lam first took the title. It should not be a surprise the profession is still growing and changing, given its youth. For those looking to further the profession, step back for a moment and see the trend. Then it is pretty clear to see where we are going.

BEAUMONT VANCE, the risk management columnist for Risk & Insurance®, lives in Colorado and manages risk for Sun Microsystems Inc.

December 1, 2006

Copyright 2006© LRP Publications