40 years of risk management highlights start with the birth of the profession
By John J. Hampton
As Business Insurance celebrates 40 years of publication, it is a time to reflect on key developments and turning points in risk and risk management since 1967. Here are some highlights:
1960s-1970s.
Insurance buyers morph into risk managers. From the late 1800s, organizations recognized the importance of insurance. Still, it was not until the 1960s that we learned the lesson of the Hartford Steam Boiler Inspection & Insurance Co. The title "inspection" comes before "insurance" on purpose. A company could not buy boiler insurance if it did not pay for regular inspections because when boilers are inspected and maintained, they rarely explode. Organizations got serious about risk management starting in the 1960s after Massey-Ferguson appointed Douglas Barlow as the first professional risk manager. In 1975, the American Society of Insurance Management changed its name to the Risk & Insurance Management Society. Captives challenge traditional insurers. Since the founding of the first captive in Bermuda in the 1960s, organizations have gained a more sophisticated understanding of insurable risk. A captive allows the retention of high-frequency, low-severity exposures such as vehicle accidents and employee injuries. Efficiencies are achieved when an organization controls the processing of claims using its own captive rather than dealing with an unrelated insurer. Captives can be a critical risk management tool when traditional insurance markets do not offer the capacity or coverages organizations need. 1980s
Expansion of liability concepts. Legal liability arises in the normal course of business. By the 1980s, nothing was simple as the U.S. tort system exploded with new lawsuits. Contract law changes included implied warranties, express disclaimers and strict liability. Punitive damages became a tool to compensate for pain and suffering. Courts awarded judgments for psychic injuries and even hypothetical damages. Class action and medical malpractice lawsuits grew exponentially. Ignorance of long-term risk views. In 1986, Roger Smith was named CEO of the Year by CEO Magazine. Short-term achievements drove the honor. The magazine did not seem to notice General Motors' underfunded pension plan or the impact of expensive lifetime health care for a growing population of retirees. The consequences of such myopia by automakers would hit GM, Ford and Chrysler hard 20 years later. 1990s
Demise of the likelihood of nuclear disaster. In the early 1990s, the breakup of the Soviet Union left the specter of a renegade nuclear incident but greatly reduced the prospect of global destruction. This is a pleasant reduction of risk in the 40-year period. Hurricane Andrew challenges the actuaries. When Hurricane Andrew struck Florida in 1992, actuarial data was quite precise in forecasting damages. Past hurricanes allowed insurance rates to be set based on losing 10% to 20% of roofs. The problem was that much of the data was based on masonry walls and tile roofs. A 1980s development boom in Florida produced substandard construction. After Andrew, many subdivisions had lost every single roof. Insurers were reminded that actuarial data has to be examined carefully, assumptions must be tested and underwriting must be augmented by qualitative assessments. Andrew also ushered in the era of catastrophe modeling, a tool widely used today. CEO performance risk. As the 1980s ended, corporate boards wanted to ensure that CEOs were rewarded for improving the performance of common stock. Bonuses were tied to stock price. When the Dow went from 3,500 in the early 1990s to 11,000, the rising tide lifted all boats and CEO compensation. By the mid-1990s, mediocre performance was highly rewarded.
Internet risk. A broad spectrum of new words arose in the late 1990s and around 2000 to identify new exposures as a result of electronic communications. They included hackers, spam, viruses, phishing, pharming, illegal downloading, industrial espionage, spyware and cyber terrorism. 2001-Present
Commercial insurance and war risk. The terrorist attacks of 9/11 exposed the insurance industry to almost unimaginable catastrophic loss. Individuals and small groups could expose a nation to massive losses previously associated with wars. A dirty bomb in New York City, for example, could cause $800 billion or more in insured losses. Insurance reserves are only about half that amount. The world has become a riskier place for those whose job it is to protect others from massive loss. Outlaw environments. Global sourcing and distribution cause an expansion of operations into areas of the world where corruption permeates governments and the legal and banking systems. Counterfeit products, violations of patents and copyrights, and theft of intellectual property are rampant. Many companies do not have effective risk mitigation strategies or remedies to fight back. Environmental risks. Temperatures and oceans may be rising, natural resources may be declining, pandemics may be approaching and governments may be unable to mobilize resources until after a crisis occurs. As Hurricane Katrina showed in 2005, the response to an environmental disruption may be too little too late. It is hard to escape a conclusion that, with the exception of nuclear disaster, the world has become more risky. We will see what happens in the second 40 years of Business Insurance.
