Most of us, not just the risk management junkies in our midst, understand the mental calculus necessary to evaluate how much risk will yield a given amount of reward. Take going to war, for instance. It doesn't require a genius to figure out that there's a chance you might never come back.
Or how about the risk of building a $100 million factory near an earthquake fault? Could that investment crumble in a heap when the earth rumbles to the tune of a magnitude-6.7 quake? Sure it could. What of launching a new product without any market research? Of offering the hapless Yugo for your rental fleet? Of opening a jewelry store in downtown Camden, N.J.? Or even of investing in an Internet company with a Web site but no product or service to sell?
These are risks for which we can more or less grasp the upside and the downside of acting in one way or another.
But what of risks that no one ever sees, no one ever hears, no one ever touches, no one ever conceives of? What of risks that lurk not in the unknown, but the "unknown unknowns," to use a phrase uttered by former Defense Secretary Donald Rumsfeld.
What of risks where the variables are so numerous, or where placing a value is so fraught with complexity and uncertainty, that coming up with a risk-reward formula is impossible?
What of the relatively small losses that happen every year, $1 million here, $2 million there, that add up over time from exposures that we all take for granted. The cumulative damage of these risks often ends up costing more than the Big One.
And what if that small million-dollar property loss could have been prevented by using 30 two-cent nails, instead of 15. How foolish would you look?
Knowing that most of our media colleagues, in preparation for the Risk and Insurance Management Society Inc.'s annual meeting in New Orleans, April 29 to May 3, would be looking back on the past two years at how the Crescent City has changed since the lashing it took at the hands of Hurricane Katrina, we decided to take a different approach.
We decided to write about risks that managers would be most likely to overlook. The risks listed in the pages that follow are not necessarily the rarest risks, those with an infinitesimal chance of occurring, but risks that have a high relative chance of being ignored.
In some cases, like a hurricane slamming into the Northeast where population and property densities are the greatest, working out the cost of insured losses, whether they reach $80 billion, $100 billion or even $150 billion, isn't rocket science, particularly given the right software, reams of historical data and actuaries skilled in the art of loss control.
But in other cases, the risk is much harder to evaluate. Take cases of workplace retaliation, for example. An employer can win a legal dispute against a disgruntled employee in a gender-discrimination lawsuit, for example, yet a jury might still find the company liable for retaliating against the employee for filing the original discrimination complaint.
Then there are exposures that risk managers deal with daily. Take wind exposures, for example. Not a day goes by that wind doesn't affect some part of the country. Sometimes it's from a vicious concentration of force, like that which occurs in a tornado. Other times it's more diffuse, like that which occurs during a blizzard. Most likely, it's the 50- to 80-mph gust that comes with thunder and lightning.
Often it's these storms, which literally take place every week somewhere in the United States, that inflict the most cumulative damage. But because they are a routine occurrence, they don't always warrant the same amount of preparation on the part of the risk management community.
In the words of one expert, some of the most overlooked risks are those that are "so endemic that the sore thumb doesn't stick out."
Ultimately, it's about making choices. Risk managers know the severity of an exposure may be higher in one area than in another. But because the frequency of the occurrence is much lower, the company is better off redirecting resources in the name of efficiency.
With the attention of our readers focused on New Orleans and the brutal assault--one that some saw coming--it suffered at the hands of Mother Nature two years ago, we believe it's time for risk executives to pause and re-evaluate to just what it is they are exposed.
May 1, 2007
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