Risk Managers Have a Safe Future The Buzz


Risk management has always been about making good decisions in an uncertain world. Now, the traditional world of risk management is facing its own uncertainty.

Experts agree risk management is changing dramatically. Those currently in the field are going to have to learn new skills. New entrants with the right skills will have an advantage.

Risk managers used to just buy insurance for companies. They dealt with pure risk. This means potential losses to things such as fire, flood or being sued for a faulty product. Liability and property insurance could protect a company.

Today, risk managers don't just deal with pure risk. They also deal with business risks such as currency fluctuations, trade embargoes and damage to reputation. They not only protect a company from losses, but also look at profit opportunities. This new type of risk management is called "enterprise" risk management.

"The job has really expanded in recent years," says Lloyd Hackett. He works with the Risk Management Society (RIMS).

"They're pretty darn involved in everything that's going on that could have a downside or a limited upside to it," Hackett says.

"The new concept of risk management is not only to consider pure risk, but also speculative risk," says George Rejda. He is a professor of insurance at the University of Nebraska. "That's the biggest change that's happening right now, that some of the big corporations are starting to look at."

No longer do risk managers just decide what insurance a company needs. Today, they need to understand how a wide range of things can impact a company. The definition of risk management is changing.

"The old definition of risk was fires and floods and liability suits that produce definable injuries and damages, and for which there is typically insurance products available," explains Dan Anderson. He's a professor of risk management and insurance at the University of Wisconsin.

"[Today] they're trying to measure all the risks that can have an adverse financial impact on the corporation."

More and more companies are doing business overseas. Many are building plants overseas. This is creating demand for risk managers who look at currency exchange fluctuations, interest rate movements and prices of needed materials.

Today's risk managers also need to look at how a company's reputation can be hurt. For example, what if the manager of your Indonesian plant starts using child labor? Or what if your company uses genetically modified vegetables in products?

Recently, a clothing company was accused of using child labor. The sponsor for that company was a well-known television personality.

"The reputation of her company was so much sullied when it came out that her company might be using child labor," says Rejda. "If a company's stock plummets downward as a result of this, here is a speculative risk that a risk manager in the past would ordinarily not be concerned about."

Major companies are leading this trend in risk management. Their global dealings are forcing risk managers to consider new risks.

"Consider companies like Coca-Cola and Gillette," says Rejda. "They operate all over the world. There's a lot of speculative risks out there which ordinarily a risk manager would not be concerned about, but today that's all changing."

"I think people are looking at wider definitions of what risk is," says Amy Geffen. She's director of professional development for RIMS in New York. RIMS has 4,800 companies as members, as well as 8,400 individuals.

"The management of risk has changed in that we're looking at larger issues, broader issues. It's not only operational risk -- it's political risk, it could be terrorism, it could be market risks, it could be credit risks."

This change means risk managers need to understand more than insurance. They need a strong business background with a focus on finance.

A few U.S. universities, such as the University of Georgia, offer degrees in risk management. Many universities and colleges offer strong business and finance programs.

Risk managers can be divided into two categories: financial and insurance. In the U.S., there are 80,000 and 20,000 people working in these areas, respectively, according to the Insurance Institute of America (IIA).

Insurance risk managers work for insurance underwriters and insurance brokers. They're part of risk management teams, and may start as actuaries, who study and compile statistics.

Financial risk managers work for corporations and consulting firms. They may go by the title of risk analyst. The very largest companies are starting to have CROs -- chief risk officers.

Financial managers have traditionally been concerned with business risks such as damage to reputation, currency fluctuations and political risks. They are starting to consider accidental losses in their business models.

On the other side, insurance specialists have traditionally been concerned with accidental losses. They are starting to bring business risks into their insurance models.

In other words, the two sides are starting to merge. However, who will be the risk managers of the future? Will it be financial managers who have integrated insurance principles? Or insurance managers who have integrated business principles?

Here's what George Head with the IIA says: "There is currently [a] sort of a battle between the insurance risk managers and the financial risk managers as to who's going to co-opt the term 'risk management.' The financial management people have a very good set of theories behind them -- they've got economics, finance and decision-making behind them to develop models to deal with uncertainty.

"In the long run -- 10, 15 years out -- the folks who are doing financial risk management, I think, will win the day. It's much easier to take the problem of accidental losses and build that into a management model than it is to take all of management [theory] and build it into an insurance and safety model."

Clearly, the job description of risk managers is changing. Many insurance specialists are likely going to go back to school to learn business and financial models. People new to the field can get in if they have a solid business education.

But will the overall number of risk managers increase? Experts are divided.

"There are definitely job opportunities out there for people who are trained in this area," says Rejda. "I think it's going to expand the number of jobs in the field right now as the [new risk management] concept spreads."

Anderson is not so sure. "The consolidations of companies has actually cut into opportunities because if two companies merge, and they both have a risk manager, somebody goes. I don't know that new jobs are being created, but for the people that still have jobs or are going into jobs, there are some new opportunities."

Geffen expects globalization to create new jobs. "Now, with the global economy, things are changing," she says. "Companies that never had risk managers before are hiring risk managers."

Head disagrees. "I do not see the significance of internationalization of business as being that big a factor in raising the overall demand for risk managers."

One thing the experts do agree on is this: aspiring risk managers should have a strong background in finance, accounting, economics and insurance. Risk managers of the future also need a less tangible quality. Anderson describes it this way: "They're just going to have to think more creatively and expansively."

Links

American Institute for Chartered Property Casualty Underwriters
Info about certificate courses for risk management professionals

Risk Management Information Systems
Lots of articles about the impact of technology on risk management

Risk Management Society
The official site for risk managers' professional society