ARKWRIGHT: INVEST IN RISK MANAGEMENT: EXEC

MILAN, Italy-When it comes to deciding between investing in risk management or putting risk management savings back into the company's bottom line, there's really no decision to be made at all:

Risk managers must invest in their departments by building up risk management and buying insurance products that add value, urges an insurance company executive.

The issue of whether to invest in risk management during soft market periods or to "save" that money and "boost the bottom line" is a recurring debate, noted C. Scott Ellwanger, vp and central operations manager in North Olmsted, Ohio, for Arkwright Mutual Insurance Co. These questions are as cyclical as the insurance market but tend to be "dismissed too quickly, without proper analysis," he said.

Mr. Ellwanger spoke at the 1997 Arkwright Global Symposium on Risk Management in Milan, Italy, last month.

Nearly 100 risk managers, risk engineers, consultants, insurance brokers and Arkwright representatives from across Europe and the United States-as well as Israel and South Africa-gathered to discuss the relative merits of risk management and insurance solutions.

By asking an either/or question-risk management vs. buying insurance-the whole issue of risk management as an ongoing corporate discipline is called into question, Mr. Ellwanger said.

"It suggests that risk management is something to be practiced at specific times, depending on market conditions or perhaps a company's individual needs," said Mr. Ellwanger.

"Making risk management an option positions it as a tool, one of several or perhaps many tools. It is not a tool. It's more of a toolbox. It is a philosophical orientation that, if one adopts it, governs all of your actions and decisions about what tools and approaches you will use in dealing with risk," he said.

Identifying risk management as a "philosophical orientation" lends it validity as an overall strategy for the organization, not one to be used and discarded on a whim, said Mr. Ellwanger.

At the same time, it is not clear why organizations would choose to buy less expensive insurance products while scrimping on risk management, he said. Mr. Ellwanger offered three possible reasons for this situation.

First, in some organizations, risk management may have lost its true meaning because it has become a part of the background, a sort of corporate wallpaper. Alternatively, "it may be a case of temptation," he said. "Being able to contribute to your company's profitability is very appealing, much more so than having to argue, defend or fight for needed loss-prevention dollars." The third possibility is that organizations may be too short-sighted, "which means they haven't really gotten the risk management message," said Mr. Ellwanger.

By taking these "savings" to the bottom line, risk managers are setting themselves up for future failure, asserted Mr. Ellwanger. "You've just raised the bar for what will be expected of you down the road," he said. "Will you be able to deliver?. . .If you can't, it might not be your fault. . .but will senior management know or care?" he asked.

What's more, bottom-line savings also can threaten existing programs. "After all, when the savings go away, and prices perhaps rise, you may well be asked to tighten your departmental belt and cut a program or two," he explained. While all this is happening, management attention is being diverted from the true meaning of risk management within the organization, and by taking this route, risk managers are doing themselves no favors for their future relationships with insurers.

"At some point in the future, when prices aren't quite so advantageous, you're going to be in price negotiations and find yourself with very few bargaining chips," warned Mr. Ellwanger. "The best insurance programs obviously will go to the best risks, and, given that capacity is tight and making insurers more wary, insurers will be less and less inclined to accept poor risks."

Investing in risk management programs means protecting an organization's people, facilities and future, he said, and is growing in importance as the nature of risk changes. "Investing in risk management is no different from investing in your company and its future in general," he said. "The companies that reinvest their profits, whether to ensure a steady influx of new products or to ensure the company's ability to produce those products, are the companies that are most successful," he added.

In the meantime, insurers are experiencing greater and greater competition, particularly in the face of online capabilities, and have become more efficient. Added to this, the continuing influx of new capital has helped keep the insurance market soft.

Risks are "growing" and are "frightening." Prices are being driven down by market forces, but values are being driven up, creating new exposures and increasing current ones, said Mr. Ellwanger.

Quality of risk will play a greater and greater role in pricing in the future, he said. "Insurers can only lower operating expenses so far, and they must pay losses on what they insure," he said. "It is not improbable that eventually potential exposures will become more important than premium cost as risk becomes more complex."