RIMS 2016 Impressions

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The semester may be winding down but there is no shortage of activity and obligations for students and faculty alike.  So it was particularly refreshing to spend a few mid-April days at the RIMS 2016 annual conference in San Diego with two Ferris State Risk Management and Insurance students, Melissa Klinger and James Freid.  The conference and the venue were both exhilarating experiences just before the end-of-the-semester final push.

Melissa and James experienced the incredible scope of the conference and the industry itself, from the moment we strolled into the opening breakfast session and keynote speakers, to the vast exhibit hall, and the dozens of educational sessions.  We had a very enlightening conversation with representatives from the captive insurance industry that was entirely an instance of serendipity as we sat down at a random lunch table one day.

I could go on and on about my impressions of the conference and the students’ conference experience, but I’d prefer to let them speak for themselves.  So here are thoughts from Melissa and James on their RIMS 2016 experience:

Melissa Klinger:  “This experience gave me a chance to get out of the classroom and my online classes to learn more about the risk management and insurance industry. There were over 300 different companies that attended this convention and had booths in the exhibit hall. Also, every day there were a number of different educational sessions. A few of the educational sessions that I was fortunate to be able to attend were: a construction industry session, ‘Risk Management in the Driver’s Seat: Navigating the World of Automated Vehicles,’ ‘We Didn’t Start the Fire: A Mock Property Claim,’ and a couple of other sessions. Each of theses sessions were different and gave a different view and look at the risk management industry. We were also able to go and see the three finalists of the Spencer-RIMS Risk Management Challenge present their case study on The LEGO Group. This gave James and I some things to think about and improve on for next year when our group wants to compete in this challenge again. This entire conference was a little overwhelming for a student going for the first time, but it was very beneficial and I definitely do not regret this amazing opportunity. I would have to say that my favorite parts of the conference other than the fact that it was in San Diego were the opening keynote speakers. I enjoyed Vinh Giang, the illusionist, the most because he used magic to explain how to overcome misdirection in life and in the business world. I cannot wait for RIMS 2017, especially since it will be closer to home in Philadelphia.”

James Freid:  “The RIMS 2016 conference in San Diego blew me away. The conference made me excited to graduate and begin my career. At the conference I met many professionals in the Risk Management field and was able to get my name out. I was exposed to a side of the industry I did not realize existed based on textbook learning. The most interesting part of this area of the industry was the captive insurer’s area. Captives make up a much larger portion of the insurance industry. There were about ten different states attempting to attract captives to come to their respective states. It was really interesting having the opportunity to meet professionals working with captives to learn where this section of the industry fits into the industry as a whole.

The second half of the conference was focused on different sessions on risk management topics. My favorite session was about calculating loss reserves and how companies can forecast the overall cost of loss. These sessions allowed for students, like myself, to gain a glimpse into day-to-day functions of a risk management professional.

The conference as a whole was a great experience. Being able to go to such a prestigious event for risk management was an experience I am very grateful for. I feel that I am a step ahead in my vision for my career because of my ability to experience this event.”

I couldn’t have summed it up any better myself.  Nice job Melissa and James.

San Diego here we come!

RIMS2016

The Risk and Insurance Management Society (RIMS) annual conference will be held in San Diego, California next week.  I will be attending along with two students from the Ferris State Risk Management and Insurance academic program.  As I type these words, I am watching snow flurries floating through the Michigan “spring” air.  The palm trees of San Diego are looking mighty inviting right about now.

RIMS is one of (and perhaps) the largest gatherings of risk and insurance professionals.  It provides never-ending opportunities for learning, networking, and collaboration.  I always relish the opportunity to take students to this industry event and watch their reaction as they gain a new appreciation for the scope and impact that this industry has on business and society.

There will be more to say once we arrive at RIMS 2016 and begin to take in the keynote addresses, educational sessions, and exhibit hall offerings.  I will endeavor to post a few blog post updates that will be disseminated through my other social media channels.  I also intend to ask the students to provide their perspective on the event that will be shared here as well.

Until then, I’m trying to ignore the snow outside my window and just imagine the Pacific Ocean breeze and warm sunshine.

Present, but absent

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Presenteeism, according to one recent research report, is ten times more costly to business than absenteeism.  Presenteeism is what happens when employees show up for work but put forth significantly less than a full effort.  This is not a new phenomenon.  I’ve witnessed it anecdotally in various work settings throughout my career. The cult-classic film “Office Space” provides an entertaining depiction of presenteeism.

In fact, to be totally honest, there have been days in my working life when I’ve been “present, but absent” on the job.  Not recently, but there have been those days.  As the Office Space character Peter Gibbons says, “It’s not that I’m lazy, it’s that I just don’t care.”  There were times in my professional past when the work wasn’t challenging, the bureaucracy and politics were oppressive, and the mission was unclear.  All of those conditions result from poor leadership in the enterprise.  When the work environment is such that the effort seems futile, presenteeism is the result.  The truly alarming fact is that no employee is immune, and presenteeism can become an insidious cancer within an organization.

There is more to the costs associated with presenteeism than just lost productivity.  Customer and supplier relationships can be damaged, co-workers can be “infected,” and employees can suffer long-term physical and mental harm.  It has long been known that distracted employees are more likely to be injured on the job, and long-term presenteeism can result in atrophy of a worker’s skills and abilities.  Presenteeism is more than just a productivity issue – it is also an employee wellness issue (for the benefits staff to consider) and a workers compensation issue (for the risk management staff to consider).

The natural inclination among managers with an industrial-era scientific management mindset (archaic in this knowledge-economy era, but still very much alive) is to “buckle down” to make sure that employees are working to their full potential at all times.  That’s a knee-jerk reaction that leads to micromanagement and paternalism.  Approaching presenteeism from that angle is anathema to employee engagement and knowledge worker productivity.  My own doctoral research examined this area quite closely.

The true answer to presenteeism is not to treat the symptoms but to cure the underlying disease.  Remove the conditions that cause employees to “check-out” and do just enough work to avoid getting fired.  That means providing challenging work, adequate authority, opportunities for personal development and mastery, and then get out of their way.  A great book that gets at the heart of motivation for modern-day knowledge workers is “Drive” by Daniel Pink, or check out his TED talk on the same material.

Employers, specifically leaders and managers, must come to grips with the magnitude of the presenteeism problem.  Perhaps more importantly, they need to recognize the difference between effective and counterproductive responses to the presenteeism problem.   Our economic health as well as the physical and mental health of our employees depends on it.

What, Me Worry?

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In my younger years, I enjoyed the irreverent humor of “Mad Magazine” with its fictitious mascot, Alfred E. Neuman.  I’m not saying that Warren Buffett resembles the goofy Mr. Neuman in any physical sense, but Neuman’s catch-phrase, “What, me worry?” comes to mind as Mr. Buffett has made some news with the recent release of his annual letter to Berkshire Hathaway shareholders.

Full disclosure:  I own a few shares of Berkshire Hathaway.  A very few shares.  Just enough to brag that Warren and I are business partners (sorta) but not enough for me to retire any time soon.  In fact, although Berkshire has been a high performing stock in my personal portfolio, my Berkshire holding is so small that if I sold it today, it wouldn’t even buy me a new car.   Just for fun, consider the following exercise in wishful thinking:  I purchased my small Berkshire stake back in 2002.  If my parents had invested the same amount (adjusted for inflation) in Berkshire stock in my name back in 1965 (when I was one year old), you would be reading the words of a guy sitting on a nearly $7 million stake in Warren’s enterprise today.  If only…

Needless to say, I have a great deal of admiration and respect for the Oracle of Omaha.  Still, I am a bit perplexed by his recent discussion of climate change in his annual shareholder letter.  In general, it seems clear that Mr. Buffett prefers to err on the side of caution by assuming that the threat of climate change is real.  The letter refers to major commitments that BH Energy has made “to the future development of renewables in support of the Paris Climate Change Conference.”  With respect to a proxy proposal that will come before shareholders this year, Mr. Buffett waffles a bit.  He does say that he believes it is “highly likely” that “climate change poses a major problem for the planet.”  But then Mr. Buffett proceeds to explain that he considers the unknown consequences of climate change to be so potentially catastrophic that even if the chances of the consequences coming to fruition is only 1% it merits a “highly likely” conclusion in order to invoke action before it’s too late.

In the wake of that murky reasoning, Buffett proceeds to downplay the proxy proposal (which would require the company to issue a report on the dangers that climate change poses to BH’s insurance business) by suggesting that there is no evidence of increased losses due to climate change, and that if increased losses should materialize it would actually be good for the insurance business.  The basis of Buffett’s argument is that any increased loss costs year-to-year, are matched with increased premiums year-to-year, because most insurance policies are written with one year terms.  He further justifies this reasoning by pointing out that if GEICO’s loss costs per policy had remained at their $30 per policy levels of 1951, the company would be only a $600 million firm rather than the $23 billion firm that it is today.  The implication is that rising loss costs will drive revenues up as well, thereby creating growth.  Buffett concludes this section of his letter warning that homeowners in low-lying areas may want to consider relocating to avoid the consequences of climate change, but “when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries.”

In fact, Mr. Buffett seems to be a climate change believer who fears cataclysmic, Biblical outcomes are possible, if not “highly likely” unless we act to quell climate change now.  But don’t worry… if there are more storms and more losses from climate change in the future, Berkshire Hathaway (and other major insurers) will somehow benefit from as opposed to being threatened by climate change.  Perhaps I am too simple-minded to properly understand these seemingly contradictory perspectives on climate change, after all, Mr. Buffett does have billions to his name, and I almost had $7 million, if only…

Oh well.  What, me worry?

 

 

Care for some Lemonade?

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There was celebration in several corners of the insurance industry (particularly in the agency system) this past week as news broke that Google was pulling the plug on its insurance-shopping comparison site, Google Compare.  Carriers are certainly open to all cost-effective distribution models for the insurance products that they sell, but there still exists an uneasiness with the online distribution model that emphasizes price as they key differentiation above all else.  Commoditization of the insurance product and service is a race to the bottom, as the industry knows all too well.  Independent agents, on the front lines of the industry, know this better than anyone.  Which is probably why there was rejoicing among the independent agents I was hanging out with earlier this week at the MAIA convention when a speaker mentioned the Google Compare news.

But the story is not over.  Online insurance distribution is not going away.  CoverHound (one of Google’s partners) said that this may just be a temporary hiatus for Google Compare, allowing Google to re-tool and re-brand the online comparison and distribution service.  CoverHound itself continues to offer insurance comparisons online.  There is also comparison and purchase opportunities from the likes of PolicyGenius.  In short, it may be welcome news to insurance agents that Google, with its billions in cash and technological deep bench, has exited the marketplace, but the game is not yet over.  In fact, it’s still early in the first quarter.

Consider the birth of Lemonade as a peer-to-peer insurance carrier who coincidentally (or perhaps purposefully?) also made news this week with the hire of high-profile behavioral scientist, Dan Ariely.  If you haven’t heard about Lemonade yet, think of it as the logical extension of the peer-to-peer networked economy that has given us Uber, Airbnb, and countless other industry earthquakes.  Just as Uber totally disrupted the taxi market, and Airbnb has dented (if not disrupted) the hotel industry, Lemonade could have the same effect on insurance.  Uber and Airbnb also upset the existing regulatory framework in their respective industries, and Lemonade might do the same to insurance although they seem to be moving more cautiously than their more brash peer-to-peer brethren.  Lemonade recently announced reinsurance partners that include several industry stalwarts.

Can peer-to-peer insurance work?  Let me put it this way:  I’m not going to bet against it.  Will it disrupt the insurance market?  Absolutely.  Is it the death knell of the independent insurance agent? No way.  The insurance product is far more complex than taxi rides and overnight stays.  I believe that there will always be a place for insurers and agents who provide real risk management services (personal and especially commercial), and win business by marketing more than just a commoditized price.  Keep that in mind every time you sip your cool lemonade drink during the summer months ahead.

Flint Water – A Catastrophic Failure of Government

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Since it seems that everyone else is piling on to the dialogue regarding the Flint (Michigan) water situation, I suppose it’s my turn.  It is not my intent to light a political brush fire here, but given the current election season and the emotional charge of this catastrophe, that may be easier said than done.  My guess is that I will tweak someone’s political sensibilities before I’m done here even if that is not my intent.  So here goes.

The lead-poisoned water in Flint is a result of failure in so many ways that it’s difficult to catalog all of the failures.  Moreover, I think the fact that the failure spans so many levels and departments of government is the heart of the problem.  Infrastructure is one of the most basic and primary of all duties of government.  As a society, we elect officials to be good stewards over our collective taxes and hire good people to administer the basic needs of society: roads, defense, courts, and other basic infrastructure.  Honestly, all the rest of the activities of government (e.g., social programs, public education, etc.) are “add-ons” that have become a distraction and resource drain on the fundamental duties of government.

The situation in Flint is disturbing, and that’s putting in mildly.  Even more disturbing to me is the race to the bottom on full display among the political class and ideologues.  Everyone is blaming someone else, covering their own backsides, seeking political advantage in what amounts to a sickening display of political gamesmanship.  All while Flint residents continue to rely on bottled water and filters when what they really need is world-class emergency infrastructure project to replace the water pipes – something that a properly incentivized private sector contracting firm could pull off if the political class would just shut up and recognize this.

The political left is hanging this all on Michigan Republicans.  The political right is blaming Michigan bureaucrats and the Obama-led Environmental Protection Agency.  The fact is, every level of government has failed Flint here.  Democratic and Republican politicians along with unaffiliated bureaucrats working in a flawed administrative state all bear responsibility.  Government fails because it’s incentives to manage such complex systems are all screwed up.  There is no accountability, and that’s by design.  It’s the EPA Animas River fiasco all over again.  Same screwed up results, different year.  Government fails.  Big government fails big.  Then the political class rushes in to assign blame, capture a political public relations advantage, and convince us that even bigger government is the only solution.

The late Harry Browne (Libertarian presidential candidate in 1996 and 2000) used to say, “Government is good at one thing: It knows how to break your legs, hand you a crutch, and say, ‘See, if it weren’t for the government, you wouldn’t be able to walk.'”  The Flint water catastrophe is a failure of government risk management, administrative management, oversight, and more.  I don’t believe that any one person set out to poison the people of Flint, but that’s not what Michael Moore would have you believe.  Then again, Michael Moore wants Governor Rick Snyder arrested so that he can sensationalize the entire disaster to help his leftist political causes which will only serve to give us larger and more incompetent government.

Why do we continue to trust and put our faith in behemoth government bureaucracies at the state and federal level when they have so often and so spectacularly failed?  Seems to me that this catastrophic failure of government at all levels and of all political stripes should be enough to convince us that maybe, just maybe, we should try downsizing the behemoths and trust ourselves at the local level just a bit more.  We’ve tried everything else and I don’t see how it can get any worse.

 

 

Space Shuttle Challenger

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Thirty years ago today, the space shuttle Challenger exploded just 73 seconds into its flight, taking the lives of all seven astronauts, including school teacher Christa McAuliffe.  As with most tragic events that affect an entire nation, I remember where I was when I learned of the disaster.  I was just returning home from a morning class during my undergraduate days at Michigan State University.  My roommate and I watched the network news bulletins in utter disbelief.

The investigation following the disaster concluded that the cause of the explosion was a failure in an O-ring component of the solid fuel rocket boosters which allowed hot gas to escape and ignite the shuttle’s external fuel tank.  The O-rings had a design flaw which had long before been deemed to be acceptable and several previous successful shuttle launches seemed to support that conclusion.  However, the O-ring design flaw presented greater risk at colder temperatures.  On the morning of January 28, 1986, the Florida temperature was a mere 36 degrees Fahrenheit.  In the days following the disaster, we learned that there were engineers who had cautioned that the O-rings may not properly seal at temperatures below 53 degrees Fahrenheit, but such cautions were either ignored or were not effectively communicated.

Much has been written regarding this disaster and its obvious risk management failings over the last 30 years.  There have been alternative theories, talk of conspiracies and cover-ups, and frankly some pretty wacky stuff.  I can’t help but wonder if this disaster might have been averted had their been more of an enterprise-wide risk management process in place.  Don’t get me wrong… NASA and all of the contractors involved in the space program for the last 50+ years have always taken the significant risks of space travel very seriously, and have had many processes and checklists in place to ensure that no step was missed and no procedure left undocumented.  The ingenuity and dedication to astronaut safety was on full display in the case of Apollo 13.  That NASA mission also endured a catastrophic explosion, but with a much happier ending.

The fact is, bad things will happen.  The entire profession of risk management and the insurance industry that serves us exist only because there is risk in everything that we do.  We need to be prepared to identify and control these risks, and finance the economic impact of the risks that slip past us.  Enterprise risk management is a relatively recent approach and evolution from the traditional risk management approach where risk and risk control existed within organizational silos.  ERM addresses risk more holistically and bridges across those organizational silos.  I am no expert on the Challenger disaster and the investigation, but it seems to me that there is a fair amount of evidence that the launch decision on that cold Florida morning 30 years ago was made without the benefit of sufficient risk information from across the NASA enterprise.  And if that is true, what a shame that enterprise risk management couldn’t have evolved a few decades earlier.