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By DAVE LENCKUS, who has covered the insurance industry for more than two decades

They are the Clydesdales that pulled the insurance manager buggy out of the rut in front of the insurance market, allowing others down the road to jump aboard the rechristened risk management bandwagon.

Others rejected the basic design of insurance products or changed the status quo of insurance regulation.

Since 1950, the year the Risk and Insurance Management Society Inc. (RIMS) was founded as the National Insurance Buyers Association, those deep thinkers and risk management pioneers who first implemented their novel ideas have shaped this discipline and highlighted its critical role in organizational management, according to those following in their footsteps, even as the NIBA morphed into the American Society of Insurance Managers five years later, and then finally to RIMS in 1975.

For many risk managers, the most influential individual in their field was Douglas Barlow, widely recognized as the first risk manager--the title that agricultural equipment manufacturer Massey-Ferguson Ltd. gave him in 1963.

Barlow was a Canadian Rhodes Scholar who earned several law degrees and a master's degree in astrophysics. He turned to risk management in his early 50s after his second bout with tuberculosis forced him to abandon the longer hours his law career demanded.

Barlow joined Toronto-based Massey-Ferguson, now part of Duluth, Ga.-based AGCO Corp., as its insurance manager in 1959 and restructured his position immediately. He began asserting that all management is risk management. He is credited with creating a first-of-its-kind global insurance and risk management program for the multinational company. And, in 1965, he convinced Massey-Ferguson management to form one of the first captive insurers.

Above all, Barlow is remembered for championing the concept that the cost of risk is more than an organization's insurance premium and includes costs such as unreimbursed losses and loss-prevention expenses.

That concept was a huge boon to the fledgling risk management discipline, said RIMS President Terry Fleming and Cincinnati-based risk management consultant Carol Fox, who chairs the RIMS Standards and Practices Committee.

"He made management (in all organizations) think of risk," said Fox, who also earned the RIMS 2009 Harry and Dorothy Goodell Award. Barlow received the award, RIMS' most prestigious honor, in 1982.

As the concept gained acceptance in C-suites, companies began retaining more risk and holding operating units accountable for their losses, said Fleming, who doubles as director of the risk management division for Montgomery County, Md., in Rockville.

Barlow is the only risk manager in the Insurance Hall of Fame. Its inductees are selected by the nonprofit International Insurance Society.

Barlow contemporary George Betterley, widely regarded as the dean of risk management consulting, also was tremendously influential, said RIMS board member Wayne Salen.

Betterley opened his practice 60 years ago, the same year ASIM was founded, and aggressively promoted the philosophy that risk management extends beyond insurance procurement, noted Salen, director of risk management at Labor Finders International Inc. of Palm Beach Gardens, Fla.

Betterley, the 1988 Goodell recipient, also was an early advocate of adding risk management to university curricula.

MAINTAINING TRACTION

Among current forces in risk management is Jorge Luzzi, the Sao Paulo, Brazil-based worldwide director of risk management for Pirelli & C. S.p.A. of Milan, Italy, Fox said.

"Jorge really started driving the risk management practice outside of North America" during the 1980s through his work with various risk management associations around the world, she said. During his 40-year career, Luzzi has worked for companies in Europe, South America and Bermuda.

Luzzi, the 2002 Goodell Award recipient, currently is the president of the International Federation of Risk & Insurance Management Associations (IFRIMA), a board member of the Federation of European Risk Management Associations (FERMA) and a member of Italy's risk management association, ANRA.

H. Felix Kloman, a prolific chronicler of risk management who has continued his efforts to advance the discipline long after retiring from his nearly quarter-century-long consulting career, made many observers' short-list of influential contributors to the field.

During his career, Kloman lectured on risk management on four continents and produced Risk Management Reports for 33 years, until 2007. He has written more than 200 articles on risk management.

A 1994 Goodell Award recipient who turns 77 in April, Kloman retired from consulting in 1993 but still pens chapters for books on risk management. He also is working on his own book on how individuals respond to uncertainty. And he regularly participates in an informal 13-member risk management forum consisting of risk managers, consultants and brokers from around the world.

He has been "a passionate advocate for risk management," observed Joan Schmit, senior associate dean and a professor of actuarial science, risk management and insurance at the University of Wisconsin in Madison.

Kloman is renowned for his sometimes acerbic views on risk management and about where the discipline should be heading, but observers are pretty forgiving.

Despite Kloman's criticisms of RIMS, Fleming applauded him as "a real thought-leader on risk management."

"He's taken some pretty hard positions" on risk management, concurred RIMS board member Richard J. Roberts, "but he's been right."

Roberts, the corporate risk manager for Simsbury, Conn.-based Ensign-Bickford Industries Inc., also praised former RIMS president Roger Andrews for his continuing work to advance the risk management discipline.

Andrews, the director of risk management for E.D. Bullard Co. of Provo, Utah, and the 2006 Goodell Award recipient, orchestrated RIMS' governance restructuring. Before the new structure took full effect in 2007, unfiltered input from the dozens of RIMS chapters had become unwieldy for RIMS presidents and the executive council, Roberts explained. The organization "struggled to get things done."

With RIMS more nimble under its 16-member board and its "active committees working on timely issues," corporate C-suites and various organizations increasingly are approaching RIMS for input on numerous issues, Roberts said.

ALTERNATIVE RISK

One of the most significant developments in risk management over the past 60 years has been the development of alternative risk financing and the resulting greater control organizations have in managing their cost of risk.

Alternative risk financing would not be what it is today without Frederic Reiss, said Al Beer, an insurance and actuarial science professor at St. John's University in New York City.

"The father of captives," as Beer called him, developed the captive concept, picked Bermuda as his laboratory and established the first captive manager there in the early 1960s.

"When rates were low, no one thought of alternative markets, but Fred did," Beer said.

While offshore captive domiciles offered prospective captive insurance owners tax advantages, risk managers who wanted to remain onshore did not have attractive options a generation ago.

Colorado and Tennessee had captive insurance laws, but their stringent capital requirements and other tough regulatory provisions treated captive owners like commercial insurers of third-party risk.

That changed in 1981, when George Chaffee, then Vermont's insurance commissioner, spearheaded the enactment of the first U.S. captive insurance law recognizing captive owners as self-insured entities.

Twenty-nine years later, nearly 1,600 captives--more than one-third of them in Vermont?have been licensed in nearly 30 U.S. domiciles, most of which have largely copied Vermont's captive law.

Chaffee's effort was an extremely important contribution to risk management, said Beer and RIMS' Fleming.

"That took a little courage to stand up and allow companies to form captives in the United States," Beer said. "In a sense, that was a public service."

If Chaffee and Vermont had not led the way in creating a reasonable captive law, the likelihood that another state eventually would have is debatable, Beer said. He noted, for example, that unlike tiny Vermont, other states might not have considered the captive industry's tax revenues large enough to pursue.

Chaffee, who has retired and turns 72 in May, reflects on that time as the "high point" of his career, but he also credits others for their critical guidance.

Among them was H. Lincoln Miller Jr., chairman of captive manager USA Risk Group Inc. in Montpelier, Vt. Thirty years ago, Miller--an out-of-state insurance agent vacationing in Vermont--dropped by Chaffee's office to meet him and swung their discussion around to the benefits of captive insurance, Chaffee said.

Early in his research on captives, Chafee met several RIMS representatives, the first time he ever had conferred with risk managers. He said they "impressed" him enough to "take a stab at it."

Another individual who contributed greatly to the development of an alternative risk financing concept was corporate executive William G. Karnes, said brokerage executive J. Patrick Gallagher Jr.

In the early 1960s, Karnes, president of Chicago-based food producer Beatrice Foods Co., began questioning the company's risk-financing strategy. He complained that Beatrice was "trading dollars" with insurers and that too much of Beatrice's premiums went to cover insurers' overhead costs, said Gallagher, who is chairman, president and chief executive officer of Arthur J. Gallagher & Co.

Karnes wanted Beatrice, a Fortune company dismantled in a 1980s buyout, to purchase only enough coverage to protect the company's balance sheet from catastrophic losses.

To that end, Arthur J. Gallagher overhauled Beatrice's insurance program and arranged large-deductible coverage. To service Beatrice's retained losses, the brokerage created third-party administrator Gallagher Bassett Services Inc.

In a precursor to how other organizations would respond when they began retaining expected losses, Karnes "got after loss control heavy, and (losses) came down substantially," Gallagher said.

RISK MANAGEMENT THEORY

For educators, the risk management discipline has been most heavily influenced by predecessors and peers who have advanced various theories on risk and the economics of risk and insurance.

H. Wayne Snider, a professor at the University of Pennsylvania during the 1950s and later at Temple University, actually conceived the cost-of-risk concept that Barlow adopted, according to academicians and risk managers.

Snider, who also coined the term "risk manager," was "incredibly influential," asserted Schmit of the University of Wisconsin.

Schmit also lauded professors Richard Heins of the University of Wisconsin and C. Arthur Williams of the University of Minnesota for their textbook "Risk Management and Insurance." Beginning in the mid-1960s, the textbook provided college insurance professors, whose coursework had focused on personal-lines coverage, their first material on corporate risk management, Schmit noted.

A decade later, Emmett Vaughan of the University of Iowa wrote an influential textbook on personal and business risk management, said Martin Grace, a risk management professor at Georgia State University in Atlanta.

Vaughan, who also attended insurance and risk management industry meetings to speak about risk, stressed how developing a risk management plan in addition to negotiating appropriate insurance policies added value to a company by reducing the cost of risk, Grace said.

Vaughan's daughter, Therese M. Vaughan, chief executive officer of the National Association of Insurance Commissioners, noted that her father "saw risk management in everything he looked at."

She also recalled how her father, who died in 1997, influenced others to enter the insurance and risk management fields.

Stephen G. Rasmussen, chief executive officer of Nationwide Mutual Insurance Co. of Columbus, Ohio, said the professor factored so prominently in his decision to pursue an insurance career that he named a company building in Des Moines, Iowa, after Vaughan.

Another trailblazing educator whose work had tremendous impact on insurance and reinsurance was economist Karl H. Borch, a professor at the Norwegian School of Economics and Business Administration for nearly a quarter-century beginning in the early 1960s, Grace said.

Borch was a leader in identifying the economics of uncertainty, which he applied to the economics of insurance. His work illustrated underlying problems with then-accepted concepts of risk-sharing and reinsurance contracts. Most notably, Grace said, Borch linked reinsurance to the capital asset pricing model, a finance tool for determining the appropriate rate of return on an asset given, among other things, its market risk.

Schmit and Nicos Scordis, a risk and insurance professor of St. John's University, also were effusive about Neil Doherty, an insurance and risk management professor and chair of the Insurance and Risk Management Department at the Wharton School at the University of Pennsylvania.

Doherty has written several papers and books--most notably "Corporate Risk Management: A Financial Exposition and Integrated Risk Management"--which examine how financial strategies can be utilized to manage insurable risk, Schmit and Scordis said.

Salen also lauded an academic whose theories on workplace safety seem intuitive today but were eyebrow-raising back in the 1970s. At that time, safety focused on maintaining machines and ensuring that equipment guards were in place, Salen noted. But Dan Petersen, who taught at several universities, said that workplace accidents really resulted from management and management systems failures.

"Petersen recognized the interface of man and machine, how people recognize safety and integrate that into their normal lives, and the responsibility of employers to manage that," Salen said. "He brought safety from an odd-sounding thing into the mainstream of business management thinking."

Risk managers during the discipline's first few decades had expertise in various areas but no formal risk management education--because no course of study outside of personal-lines insurance was available. That changed in 1972, when the American Institute for Chartered Property Casualty Underwriters in Philadelphia introduced the Associate in Risk Management.

To many observers, including RIMS' Fleming, Salen and Roberts and the University of Wisconsin's Schmit, the ARM degree has been critical in the professional development of risk management. According to the AICPU, more than 29,000 individuals have earned the degree.

But the program, which serves as the theoretical foundation of the institute's new ARM-E degree in enterprise risk management, would not be what it is without one individual, George Head, observers agreed. For more than 40 years, Head--the 1987 Goodell Award recipient--was a risk management educator who developed and maintained coursework for the AICPCU's professional designations in risk management and safety. Head, now retired, also authored a book, "Risk Management--Why and How."

They weren't educators, but Granville E. "Ron" Judd and Anita Benedetti?both Goodell Award recipients?were instrumental in advancing risk management education, Fox said.

Judd's impact as executive director at RIMS for 24 years was felt shortly after he joined the organization in 1967, and it remains his legacy. Judd immediately focused the organization on education. It no longer would hold largely social conventions. Besides an exhibition of products and services, the organization's annual gathering would become a conference designed to advance the risk management profession with a week of educational sessions on topics ranging from fundamental practices to the latest theories, such as enterprise risk management.

Importantly for risk managers, in these educational sessions theories were "taken down to an applied level so practitioners can be more effective," Fox said.

Fox also praised Benedetti, who promoted risk management education as a deputy director of RIMS and president of its Spencer Educational Foundation Inc. Benedetti, who died in 1996 at age 47, drew students to risk management by promoting the financial support that was available to them, Fox said.

Many others have influenced risk management since the mid-20th century and some are still at it. Kloman even pointed to important contributions made by many individuals in the early 1900s.

But whether they were risk managers, consultants, educators or industry executives, whether they ran with another's idea or explored an untrammeled path, all were ultimately helping pull the risk management discipline more astutely down a road paved with uncertainty, a road which senior management wants more assistance negotiating.

May 1, 2010

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