The title of my class at Emory University this autumn is "The Ethics of Risk." Basically, it is a philosophical look at risk management, as it focuses on a variety of risks to society, including legalism and the morale hazards, absolutism, the environment, and other ethical issues from somewhat of an enterprise risk management approach. We'll examine not only at the pure risks of loss, but also at the areas of risk where society may win as well as lose.
I plan to start the first session of the class with a question I've used in lectures many times: "Why did the chicken cross the busy road?" I'm counting on the typical wisecrack answers to explain why the creature ended up as road kill, even from my very adult students.
The truth is that the ill-fated chicken crossed the road for much the same reason that most loss occurs: because it failed to recognize the risk(s). From that point, our class will analyze the concepts of risk as the chance of loss, or gain, and explore factors such as hazards, perils, exposures, and ways to deal with them in an ethical manner.
In traditional risk management, as briefly mentioned in my July column, risk managers must balance risk finance with risk control. That's where the idea of management applies. Too much control can stifle progress, but not enough can create too much loss. Too much finance would tie up funds needlessly, but not enough would lead to bankruptcy. Even though redundant safety measures may be necessary at NASA, the average company may consider them a waste of money.
Industry-Specific Risks
Some of us may be merrily plowing along, handling our claims and collecting our paychecks without a peek at the looming risks. However, there are a few risks facing our industry that we should consider before crossing that busy Election Day highway. One is the potential for serious inroads on the state regulation of insurance by the federal government. It is a political issue, but it is an important one that will likely affect everyone from the ordinary insured "Joe" to the agent or broker selling the coverage, to those of us that handle claims. It is an old political battle dating back to the 18th century.
According to the research by James F. Simon in What Kind of Nation (Simon & Schuster, 2003), a major constitutional crisis was brewing in the final decade of the 1700s between the Federalists, under President John Adams, the Democratic Republicans, under Vice President Thomas Jefferson, and the High Federalists under Alexander Hamilton. Into this mix stepped Jefferson's cousin, John Marshall, appointed to the Supreme Court as Chief Justice at the last moment by Adams so that Jefferson would not have that opportunity. (Jefferson's self-appointed running mate, Aaron Burr, supported by those High Federalists to thwart Jefferson, ultimately shot Hamilton during a duel, but that's another story.) The fuss was over whether authority on all domestic matters should reside with the federal government or with the individual states.
In Jefferson's view, the states — with governors and legislators elected by the voting citizens, which were usually land-owning white males — represented what the Constitution meant when it said, "We, the people…." The contrary Federalist view was that power should rest with the central government in Philadelphia. (Washington D.C. was not yet quite a city at the time.)
As in all political pickles, there were side issues as well. Adams had sent Marshall and two others to post-revolution France to see if a peace and trade treaty could be reached. This would've at least paralleled that having been reached by John Jay in the treaty of 1794 with Great Britain that left American shipping somewhat vulnerable to the British Admiralty. But allegedly three French politicians offended Marshall and one of his fellow travelers, who returned home to recommend that the U.S. not only avoid dealings with France, but declare war on them. Alexander Hamilton and his New York/New England "High Federalists" took up the cause, while Jefferson felt that peace with France was a far better deal than what Jay had managed to concoct with the English Crown.
If left alone, Virginia would have entered its own treaty with France. Even then, more than 60 years before the Civil War, there was talk of secession. Considering that the seeds of the War of 1812 with the British lay in Jay's treaty, and that the Louisiana Purchase from France by Jefferson proved the best deal the U.S. finagled until William Seward bought Alaska from the Russians, Jefferson was certainly on target.
So this notion of state or federal decision-making is far from new. In the August 4, 2008 issue of National Underwriter, Arthur D. Postal reported a "wide divide within the insurance industry between those who want to retain state regulation and others who prefer an optional federal charter…." Postal cited four different insurance organizations and what each had to say about the proposals being floated in the Senate Banking Committee. Thank goodness that all of the senators went home for August, meaning that it's unlikely that much more will happen before next year.
As in Jefferson's day, some view the federal role as paramount, whereas others see the benefits of the current state regulation. All seem to agree that it needs some beefing up, at least in the consumer protection area. I'm thinking that this may include how claims are handled. Maybe this is an issue we need to think about before we wander onto that busy highway, eh?
Being of Two Minds
Watching the presidential campaigns and debates every four years should — but unfortunately rarely does — point out the key differences between the two political parties. Having belonged to both, I like to dig deep and see what is really behind each position. Do we want a strong federal government that does everything for us? Or is it the role of the states to ensure that we are doing things for ourselves in our own way? Would we rather pay those high taxes to the feds, or to our state? One need only look to charts showing the disparity in education, welfare, health, transportation, and just about any other area of social life between the states — the so-called "rich ones" and the "poor ones," those clustered primarily in the Southern regions of the nation — to see that a good argument for federalization can be made. But when I see how easily Washington can gum up the works and prove the old Peter Principle, I thank goodness that there is still a state-by-state system in which new ideas can be planted and tested.
The state systems of insurance regulation run the gamut of weird to excellent. Most do a pretty good job, whether with or in spite of the National Association of Insurance Commissioners, which seems to favor keeping the federal camel's nose out of the state insurance regulator's tent.
Again, I ponder that chicken, and why it tried cross the busy road. It wandered on, without considering the risks. Well, it is election time again. What risks will we consider as we approach whatever type of gismo records our vote this year? People lament that the current economy is "road kill." Well, there's that chicken again.
Ken Brownlee, CPCU, is a former adjuster and risk manager based in Atlanta, Ga. He now authors and edits claim-adjusting textbooks.
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