In some sense, risk management has always existed. In fact, some trace the entire concept of insurance — spreading the risk — to Chinese farmers who would “risk it all” to send produce down the Yangtze River on a barge. There was a five- to 20-percent chance that the barge would either wreck on the rapids or that robbers would steal the produce. It was an all-or-nothing proposition. Maybe a wife suggested to her farmer husband, “Why don't you and 19 other farmers get together, distribute your goods among 20 different barges, and keep a record of it? Even though the rapids and the robbers might get away with perhaps a fifth of it, at least four-fifths would remain when you get to market.”

What a novel idea: Lose a little in order to keep a lot. We should keep in mind, though, that insurance is still an aleatory contract, sort of like gambling. We pay a bundle for a casualty insurance policy that expires in one year. If nothing happens, then we've essentially paid for nothing. If something does happen, then we may recoup much more than what we actually paid in premium.

Risk Management Throwbacks

The ancients managed risk in various ways, one of which was constructing walls around their communities. It's historical trivia that the walls of Jerusalem in the era of Ezra were being built at the same time as the Great Wall of China, largely for the same reason — to keep enemies out and authority in. We still build walls for that reason. Suretyship and underwriting are ancient skills — insurance is not a new game; it has been around for thousands of years.

The concept of professional risk management was first mentioned in an article published in the Harvard Business Review in the 1940s. Until then, risk and insurance issues were handled either by a corporation's legal department or by its purchasing department. The first risk-oriented organization was the Insurance Buyers of New York, which was founded in 1932. It was not until the late 1960s or perhaps the early 1970s that the American Society of Insurance Management became the Risk & Insurance Management Society and adopted new risk management concepts.

There was little available in the academic setting for those desiring to be managers of risk and not just buyers of insurance. Fortunately, the American Institute acquired skilled risk academics like Dr. George Head to create risk management programs such as the risk segment of CPCU and the Associate in Risk Management (ARM) professional designation.

Risk management in the 1970s and 1980s was seen as a combination of risk financing processes and loss control processes. Academically, it was based on statistical probabilities, much like actuarial science. The Institute also offered a designation in Loss Control Management, which combined common sense with safety engineering and looked at the causes of loss in practical terms. Apparently, there was not sufficient interest in this designation. I wonder if today's CRO, who could be a senior-level executive with a strong financial background reporting directly to the CEO or company president, would know a “hazard” if he tripped over one. But that's the point. There should not be anything there for anyone to trip over. Besides, tripping over objects simply creates work for adjusters.

Adjusting or Claims or Losses?

Before the Insurance Institute of America (IIA) began awarding the Associate in Claims designation to those who completed the six adjusting sessions, the “graduates” received a diploma in Insurance Loss and Claim Adjusting. For years, I looked at it hanging on the wall and tried to discern the difference. A loss and a claim were basically the same thing, right? Well, there's a bit of history here, too. Property adjusters referred to their work as “loss adjusting,” while casualty adjusters adjusted claims. If only the difference was that simple. A “loss” is a whole system of events. It begins with hazards that build until a peril occurs; it then continues until somebody puts a stop to it. Left alone, loss only gets worse. Consequently, adjusters tried to arrive as soon as possible to prevent further loss and damage from occurring.

Meanwhile, a “claim,” you know, that thing that casualty adjusters think of as their file, is basically only a demand for something — usually money, under a contract or at law. It is limited. While a loss results from hazards and the peril event, a claim is limited to whatever the contract or policy provides, or whatever the law permits. Risk managers, therefore, must think “loss,” and not just “claim.” Otherwise, thinking in terms of a “claim” only will mean that all of that peripheral damage and loss will get out of control.

Two other readers recently took me to task for touching too much on politics and suggested that the Iconoclast stick to insurance after reading “Mismanagement At The Top.” The April 2008 article contained questions such as “Will we — both as a nation and as insurance consumers and employees — have leaders with foresight, with the strength to take unpopular positions and stand their ground? Or will we be sidelined by a bunch of red-herring issues … that have nothing to do with the realities of either the world we need to maintain or risk-spreading financial mechanisms?”

Well, it's not the first time that this columnist has struck a nerve by talking about politics. Frankly, it probably won't be the last. Maybe I should have heeded the advice of my Mom and my wife, who both warned me to avoid debates about religion and politics, as they cannot be won. My mother's words still echo, “Convince a man against his will, and he's of the same opinion still.” Growing up, I was known my family as the “yeah, but” kid. During one of those proverbial parental lectures, I'd try to interject but never seemed to get any further with the explanation.

No longer being six years old, I shall rephrase the defense: “Yes, but … there is a reason why politics — if not religion, and maybe that, too — has a lot of bearing on claims and insurance.” If the industry's image, internal and external, is in need of smashing, then isn't that what iconoclasts are supposed to do? It would be ludicrous to suggest that the insurance industry's image, future, and reality are not political. What is insurance if not a means of dealing with risk? Furthermore, what is risk if not political in nature?

If the reference to “red herrings” was offensive, then look no further than ABC's awful debate last April in which the moderators attempted to humiliate Senator Obama because he didn't wear a flag pin. Is this symbolic of our nation's mentality, by which we elect politicians on the basis of whether or not they wave a flag, belong to a certain church, or have a spouse who “fooled around”? The real campaigns are about to begin, and yet we're fixated on whether someone's former pastor said naughty words.

If politics seem unimportant to you, then consider this: The men and women you either directly elect to the judiciary, or the executives and legislators you elect that will appoint and approve the judiciary, will decide the cases that you — the claim adjuster — allow to go into litigation. Despite hoping for good legal decisions that will enhance your position as an adjuster, you might get “bad law” that makes your position even more difficult.

Readers, I encourage you to keep poking at me, and send the editor those e-mails complaining that I've stomped on your toes and should be beaten with a stick that has emblazoned on it, “stick to insurance.”

Ken Brownlee, CPCU, is a former adjuster and risk manager based in Atlanta, Ga. He now authors and edits claim-adjusting textbooks.