NU Online News Service, Oct. 8, 3:32 p.m. EDT
Corporations and individuals often underestimate their exposure to risk and are unprepared for disaster when it strikes, say experts who study risk.
In a webinar today sponsored by global insurer FM Global, Howard Kunreuther, professor of Decision Sciences at The Wharton School and Ruud Bosman, vice chairman for FM Global discussed the failure of many to adequately prepare for catastrophes.
Mr. Kunreuther said that there is a psychology of denial at play where many believe that a catastrophe event will not happen to them and that it is very difficult to change that perception.
He said to break this perception a risk manager needs to get people in their organization to "understand that the event is more likely than they perceive."
Achieving this is done by framing the conversation in a way that people understand the probability of an event is much higher than they think, he said.
"It is very, very hard to get people to pay attention, risk managers and individuals, to these low probability, high consequence that is often below their threshold level of concern," said Mr. Kunreuther. "There's a notion that it's not going to happen to me until after the disaster occurs and even after it happens, people will say I'm not going to worry too long about it. It's just another crisis on my agenda."
Dealing with this "myopia and denial" requires people to make more of an investment in risk transfer, he said. The best way to achieve this goal is with multi-year contracts, he said, thereby ensuring "stability in the long run."
He noted that too often people focus on the short term, and after a few years fail to understand the value of risk transfer, and often drop coverage.
"It is tough to get across that the best return is no return at all" on an insurance policy," he said.
Mr. Bosman noted that when it comes to risk mitigation spending, corporations spend on what they perceive to be their biggest exposure and prioritize spending from that point. The challenge, he said, is to get senior management to understand that it needs to believe in the probability that they need to prepare for all risks.
"There needs to be an acknowledgement that these natural catastrophes are real and there is not much upside in debating probability, and using probability not to take any action," said Mr. Bosman. "We can empower ourselves to take some action. There doesn't have to be complete destruction and damage. There is a lot of preventive action that can be taken."
FM Global has published a white paper on this subject and a replay of the webinar is available through the RIMS website.
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