Risk Managers Stature Grows,Even As Budgets Shrink

"Post 9/11, risk management got a boost at companies that were ahead of the curve," noted Chris Mandel, assistant vice president, enterprise risk management at USAA, based in San Antonio, Texas.

"Those companies recognized the risk management function as important, elevating it to higher levels and putting in people who are more capable," said Mr. Mandel, who is also the immediate past president of the New York-based Risk and Insurance Management Society.

Sheila Small, assistant treasurer of risk management and insurance for New York-based Verizon Communications–which went through the ordeal of restoring telephone service to lower Manhattan after the World Trade Center devastation–sees 9/11 as one factor in risk managements ascendancy.

"Risk management as a discipline has gotten a lot more face-time with senior management because of escalating insurance costs and corporate scandals," Ms. Small said. "Directors and officers realize that theyre not safe and cushy anymore."

"Risk management has become a lot more visible and is considered more important to executives," noted Jim Ferguson, director of risk management for Houston, Texas-based Halliburton Company.

One reason for the increased visibility, according to Mr. Ferguson, is the closer scrutiny of corporate governance necessary to comply with the Sarbanes-Oxley Act and Securities and Exchange Commission rules. "At Halliburton, we have a disclosure committee that meets quarterly and signs off on certifications," he said.

"Another reason for the greater visibility of risk managers is the chaotic insurance market," Mr. Ferguson added. "Companies want to control costs, but they have to spend more on their insurance and risk management programs, and have to really stretch the dollars that are available."

Norma Carabajal Essary, risk manager of the Dallas/Forth Worth International Airport, said that not only has risk managements status been elevated, but it also now reaches into many more areas–and in much greater depth. Fiduciary responsibilities, as well as technology issues such as viruses and computer fraud crimes, are now squarely within the province of the risk manager, she noted.

"There is a newfound knowledge of what risk management is [because of] the events of the past few years," Ms. Essary said. She cited Enron, WorldCom, terrorism and the economy in general as the sparks for this knowledge. "You can now go to a person in just about any occupation and they will probably know what risk management is."

On the other hand, as a "staff" [as opposed to "line"] function, risk management has not been immune to cost-cutting moves in a tough economy, USAAs Mr. Mandel pointed out. "For companies with severe economic problems, risk management functions are taking a hit, sometimes without real consideration of what happens when resources go below certain minimums."

When resources are cut, risk managers must put more pressure on their "broker-partners" to perform the functions that the risk management departments can no longer handle, Mr. Mandel indicated. He cited issuance of certificates of insurance and oversight of claims activity as examples of such functions. Most brokers, Mr. Mandel added, have willingly taken on these additional responsibilities.

Lance Ewing, vice president, risk management for Las Vegas, Nev.-based Park Place Entertainment Inc. and current president of RIMS, said that risk managers being asked to "do more with less" should turn to their outside service providers for assistance. Third party administrators, loss control firms and insurance carriers–in addition to brokers–can all help pick up the slack for risk management departments facing cutbacks, he noted.

Insurers can be especially useful in providing training, engineering and actuarial services, Mr. Ewing pointed out. "When the market was really hard, it was the broker and risk manager versus the insurance company. Now its more like a three-legged stool, with broker, risk manager and insurer working together."

According to Mr. Ewing, insurers recognize that the hard market could soon end, so they have become more accommodating in order to retain business.

Mr. Ewing stressed that the risk management function has not been singled out for cutbacks. "Globally, because of the fragile economy, companies are looking for efficiencies and effectiveness in sales, marketing and other functions, not just in risk management," he said.

"No question there is still pressure on risk management staffs; there are still some layoffs going on," noted Wayne Salen, director of risk management for HQM Inc., an operator of long-term care and assisted living facilities, headquartered in Palm Beach Gardens, Fla. Mr. Salen is also chair of the external affairs team at RIMS.

"Here in Palm Beach County, there have been cutbacks of some of my peers and more pressure to trim expenses," Mr. Salen said. "I know two risk managers who lost their jobs in the past couple of months."

Ms. Essary noted that D-FW Airport went through a reduction-in-force (RIF) within the past six months and her department, as well as many others, felt the pinch of staff reductions. "It used to be that RIFs were not so common in the public sector, but thats no longer the case," she added.

Bill Chapin, director of facilities and risk management for the Diocese of Rockville Centre, N.Y., echoed Ms. Essarys view that non-profit risk management departments have been facing reductions similar to those in the for-profit sector.

"We [non-profit and for-profit entities] are all in the same economy and insurance marketplace, with coverages being cut and premiums going up," Mr. Chapin pointed out. "Organizations either have to raise more money or reduce their budgets and cut back on services."

Mr. Chapin noted that his employer has so far been able to avoid layoffs in the risk management department, although the departments budget has been decreased.

Even with the reductions, there has been an increase in the visibility of risk management at the CEO and CFO levels, according to HQMs Mr. Salen. "For instance, Sarbanes-Oxley heightened concerns regarding directors and officers and corporate governance issues, and many risk managers are active in that arena."

Randy Thurman, director of risk management at Gaylord Entertainment Co. in Nashville, Tenn., operator of the Grand Ole Opry, agreed that Sarbanes-Oxley has made risk management more visible to top executives.

"This will be good for risk managers in the long run, but it is a lot of pressure in the short run, as in the down economy they have these increased responsibilities with less staff and a lower budget," said Mr. Thurman, who is also vice president of communications for RIMS.

Mr. Mandel of USAA sees the breaking down of "silos" as key to the elevation of the risk management profession. These silos have insulated risk managers from other parts of a companys business, he said.

"Risk managers cant sit in comfortable silos of traditional risk and insurance and expect to survive. They have to also look at business, financial and operational risks. They have to have broad enough skill-sets to meet top managements expectations," he said.

"Risk managers must become more comfortable in the area of finance," Mr. Thurman emphasized. "They have to know about financial products and the economic shifting of expenses."

Verizons Ms. Small noted that the role of the risk manager is getting more complex. "The required knowledge baseincluding knowledge of the capital marketsis growing," she said. "Risk managers need to rise to the occasion."

A major obstacle to building rapport with the executive team in the current economy is that risk managers must often convey information about sharply higher premiums, increased mandatory retentions or insurer insolvencies.

"If risk managers have a problem bringing bad news to top management, it is because they havent developed the right relationships," Mr. Mandel pointed out. "They must communicate to management what is going on in the marketplace."

"No one wants surprises," Verizons Ms. Small stressed. "Our job is to manage expectations. If you anticipate bad news, let senior managers know about it and what their options are."

Mr. Salen noted that risk managers at private companiessuch as HQM where he workstend to have a more "hands-on" relationship with the owners. "The company is the family and the family is the company," he pointed out. As a family company, Mr. Salen also gets involved in risk managing the owners personal holdings, such as their homes.

Communication with management can save risk managers from getting caught up in a "shoot the messenger" situation when theres bad news to deliver, Mr. Salen noted. "For example, if the company self-funds workers compensation, let management know from the outset that it is a long-term decision, and there could be some years when they will get burned."

Mr. Ewing said he keeps Park Place management fully informed about marketplace trends by regularly providing them with trade publication articles, e-mails and news from seminars. He also educates them about the capacity and rating of the many new insurers in the market.

"Dont blindside management with bad news. Thats a recipe for a short-lived career," Mr. Ewing warned.

Halliburtons Mr. Ferguson is at an advantage in dealing with the executive team, as he also wears the hat of assistant general counsel and is involved in many of the companys legalas well as risk managementissues. He agreed that keeping management aware of potential problems is the best way of avoiding uncomfortable surprises.

"For instance, a policy renewal may cut back on terms and conditions and cost more. Hammer home to management that it might occurkeep them involved, so when you tell them what happened, they are expecting it," Mr. Ferguson advised.

Ms. Essary conducts roundtable discussions with D-FW Airport management to keep them informed of insurance renewal negotiations and other risk management issues. "We lay out colorful graphs and charts that explain where the negotiations are going and the estimated premiums," she noted.

Gaylords Mr. Thurman uses a similar approach, making certain that management is aware in advance of where insurance renewals and the market in general are headed. Even for policies that dont renew until a little less than a year in the future, he has already started informing management of potential problems. "It is critical that you give management time to plan for an anticipated problem and adjust their expectations," Mr. Thurman noted.

As a result of keeping the lines of communication open, Mr. Ewing stated that he has developed a very positive relationship with Park Places CFO, chief general counsel and other top management. "They are extremely supportive and give me wide latitude in negotiating the best deals for the company. I feel appreciated personally and as a professional."

"Risk managers should not be content to float below the radar screen," Mr. Ewing noted. "If theyve done a good job, they should say so, such as in a stewardship report to management. That will help to raise the visibility of risk management within the organization."

"We cant be viewed as the department that always says no, Mr. Ewing said. "We have to be the department that figures out how to get to yes."

Mr. Thurman of Gaylord Entertainment urges risk managers to avoid blame for things they are not responsible for. One way they can do this, Mr. Thurman said, is by not taking credit for good news they had no hand in.

"If the D&O premium was cut 50 percent five years ago, risk managers shouldnt have taken credit for that because it was soft market conditions," Mr. Thurman explained. "Similarly, they should not be blamed if the premium goes up 50 percent in a hard market. But you cant avoid blame for the bad if you took credit for the good."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 10, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.