Risk Education In-Depth Series (Part 1): Reprogramming an Enterprise
Ask the department chairman at the nation's largest risk management and insurance academic program, and he's quite clear and emphatic.
"Our program today is fundamentally different today from what it was 4 to 5 years ago, and the same is true of where we place students today and the research that we're doing here," says Richard Phillips, chairman of the Risk Management and Insurance Department of the Robinson School of Business at Georgia State University. "It is an exciting place to be right now."
Turn to the College of Management at North Carolina State, and you'll hear a similar perspective.
"Risks for most enterprises are increasing in volume and complexity," says accounting professor Mark S. Beasley, "and the mission of our new enterprise risk management initiative is to develop new programs of research, teaching and outreach that help address these new challenges."
In fact, this view of major change and transformation in risk management and insurance education is not confined to those within the academy.
"Schools are recognizing that they need to change their conventional risk and insurance management curriculums and to strengthen their current programs in order to better prepare the next generation of risk professionals," says veteran executive recruiter Richard Meyers. "I am in my 35th year working on the recruiting side, and the future of the risk management industry is hotter than it's ever been."
In addition to the previously mentioned schools, Meyers also points to other institutions--Temple University, University of Florida, Mississippi State University, University of Georgia and The Wharton School at the University of Pennsylvania--that have strengthened their current programs or have created new risk and insurance management curricula.
"It used to be that you could count on one hand the numbers of schools offering a risk management and insurance program. Today, you need seven or eight hands," says Meyers. "There are now 25 to 35 universities that are offering risk management and insurance degrees, and that number is growing--for a good reason. The market is recognizing that it needs more talent, that there is a shortage of talent."
To be sure, the particular changes and expansions that are under way in academic risk management and insurance programs and curricula vary from school to school.
For example, Georgia State has launched an ambitious and far-reaching new initiative, which has included significant hiring of new faculty and the launch of degree programs in several new subject areas.
At North Carolina State, the school's high-profile changes have specifically focused on the design and implementation of new courses and programs that relate to enterprise risk management.
And at numerous other schools across the country, you can find examples of under-the-radar changes in the subject matter that is covered in long-standing courses and that are weaving new topics into their existing content.
However, despite the variety of approaches that different schools are taking, there is general agreement that an array of powerful factors are combining to create the need for those changes. Commonly cited factors include:
More corporate interest in enterprise risk management, due to the regulatory requirements (e.g., Sarbanes-Oxley) and by board-level and C-level concerns.
The convergence between "the business of financing companies with the business of insuring them," as epitomized by the impact of the Gramm-Leach-Bliley Act of 1999.
Significant advances in "financial engineering" and related capabilities that have dramatically increased the ability to model complex economic systems and that have increased the efficiency with which firms can manage and trade risk.
Separately and together, these and related developments are placing new demands on risk and insurance professions.
For example, advances in financial engineering "let you calculate things more accurately with greater confidence than you could in the past," says Georgia State's Phillips.
"This creates new opportunities to trade risks, and the improvements in the ability to trade and manage risk frees up a lot of capital, which makes it much less expensive to participate in risk in some of these markets."
To illustrate the wide-ranging impact of these new ideas and tools, Phillips cites a recent presentation by the director of supply-chain risk at Hewlett-Packard Co.
"He began with a chart of the typical lifecycle of a computer, with price on the y-axis and time on the x-axis," says Phillips.
"HP sells new computers at prices that are high at the beginning when they roll out a new product, then competitors enter with their offerings and the prices drop--and if HP has a supply-chain interruption in their business that lasts for any significant period of time, they can kiss an entire product line goodbye."
The HP executive then laid out the sources of risk in the supply chain and how they think about those risks.
"When he got to the solutions page," says Phillips, "there was no business-interruption insurance, no contingent capital, no credit line at banks--the traditional solutions. Instead, he talked about how they were using financial engineering techniques to write bilaterally traded contracts with both upstream and downstream suppliers to pass risks through the supply chain and to align incentives within the supply chain to make sure that HP would minimize its exposure to problems.
"In this nonfinancial context, HP was using mathematical techniques that came out of actuarial science and out of capital markets, and they had disintermediated financial-service providers from this source of financial risk for this company."
This example illustrates the "risk-management revolution that is taking place," Phillips says. "My bet is that over the next decade, the skills and the technical sophistication needed by risk managers in banks, insurers and nonfinancial firms will rise dramatically--and that is what our program is designed to address."
B.G. YOVOVICH is a business journalist and author based in Evanston, Ill.
April 15, 2008
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