risk management in the new economy per j. agrell center of operations research and econometrics...
TRANSCRIPT
Risk Management in the New Economy
Per J. AgrellCenter of Operations Research and Econometrics (CORE)
Catholic University of Louvain
© Per Agrell, SUMICSID 2
Outline
The New Economy– Business environment– RM environment– Insurance environment
Business strategiesThe if.. competitive advantage
© Per Agrell, SUMICSID 3
Presentation
1991 civ. ing. Linköping Institute of Tech, Sweden1991 M.Sc (OR) Univ of Massachusetts, USA1995 tekn. dr. Linköping Institute of Tech, Sweden 2000 docent Linköping Institute of Tech, Sweden
1991- Linköping Institute of Tech, Dept of production economics assistant professor of production economics
1995/96 IIASA, Vienna research scholar
1996/97 University of Georgia, Dept of managementvisiting professor
1997/98 University of Copenhagen, Operations researchvisiting associate professor
1998- Royal Agricultural University, Dept of economics, associate professor of managerial economics
2000- Catholic University of Louvain, COREvisiting professor
© Per Agrell, SUMICSID 4
The New Economy
Lower transaction costs– Lower cost to enhance services– Lower cost to reach the market
Constant production costs– Fewer advantages to commodity providers
Information driven– Changes in the Value Chain
© Per Agrell, SUMICSID 5
Theory of intermediation
PROVIDERPROVIDER CLIENTCLIENTGEOGRAPHICAL,
CULTURAL, ECONOMICAL;
LEGAL BARRIERS
INTERMEDIARYINTERMEDIARY
HIGH TRANSACTION COSTS
© Per Agrell, SUMICSID 6
Disintermediation
PROVIDERPROVIDER CLIENTCLIENT
INFORMATION TECHNOLOGYEDUCATIONKNOWLEDGE
INTERMEDIARYINTERMEDIARY
LOW TRANSACTION COSTS
© Per Agrell, SUMICSID 7
Intermediaries?
Disintermediation– Demise of the Middleman
Reintermediation– Birth of marketplaces
“Disinterremediation” Saffo (1997)
– Death of non-value added services
© Per Agrell, SUMICSID 8
Example 1: Automotive
Old Economy:– Car (product)– Maintenance (service)
Now– Car + Maintenance (product + service)
New Economy – Transportation (multiple products,
services)
© Per Agrell, SUMICSID 9
Example 2: Home Appliances
Old Economy:– Refrigerator (product)– Electricity, maintenance (service)
Now– Fridge + maintenance (product +
service)
New Economy – Food Management Services (product, multi-service)
© Per Agrell, SUMICSID 10
Example 3: Electricity market
Old Economy:– Energy + distribution (monopoly product)
Now– Energy (competitive product)– Distribution (monopoly service)
New Economy – Heat, Light and Comfort (competitive
service)
© Per Agrell, SUMICSID 11
Common traits?
Slow movers become commodity providers– tough market, low loyalty
Fast movers become service partners– through focus on core needs of client
© Per Agrell, SUMICSID 12
Two Generic Strategies
Low-cost leadership– Domination due to technology, skill or
source
Differentiation– Domination due to unique and lasting
partnership with clients
Porter (1980)
© Per Agrell, SUMICSID 13
Your turn...
Postal servicesCommercial TVHigher education
BankingInsurance...
© Per Agrell, SUMICSID 14
Critical Questions
Who are our clients?What is on his agenda?
What is happening to the RM profession?What is the state of the insurance
market?
How can we move forward?
© Per Agrell, SUMICSID 15
Managerial focus
OPERATIONSMANAGEMENT
RISKMANAGEMENT
STRATEGICMANAGEMENT
-Mission-Objectives
-Risk-Uncertainty
-Goods-Services
© Per Agrell, SUMICSID 16
The Executive’s Risk Agenda
Occupational hazards (stress)Loss of reputation/brand valueCopyright infringementE-commerce exposure
– Technological risks– Dispersion of knowledge– Impediments to growth
© Per Agrell, SUMICSID 17
Enterprise Risk Management
Focus at value-adding processes– Financial operations– Technological processes– Operating practices
© Per Agrell, SUMICSID 18
RM development
Risk ManagementRM
Uncertainty ManagementUM
Strategic Importance
Complexity
© Per Agrell, SUMICSID 19
Professional trends
Higher entry levelBroader scopeCertificationStandardization
© Per Agrell, SUMICSID 20
Risk manager revival
Industry interest– One of 21 Top Jobs in USNews
Educational – RM replaces actuarial sciences programs
Reimbursement– Growth of salaries and benefits
© Per Agrell, SUMICSID 21
Risk manager’s credo
Consistency– Organizational objectives
Proactivity– Taking the initiative
Comprehensiveness– Addressing the true risks
© Per Agrell, SUMICSID 22
Proactive management
REACTIVE MANAGEMENT“never happens again”
PROACTIVE MANAGEMENT“it must never happen”
BUSINESSBUSINESSCLAIMS,
ANALYSES,TRENDS
PLANNING,INFORMATION,
READINESS
© Per Agrell, SUMICSID 23
Risk manager’s evolution
Insurance Purchaser
Risk Controller
Risk Manager
Uncertainty Manager
Complexity
Manageriallevel
© Per Agrell, SUMICSID 24
Summary: Business changes
Global, demanding, changingInformation intensive: new exposuresManagement of Risk acknowledged
However:– Short span of attention– Very specific requirements for services – No loyalty in trading commodities
© Per Agrell, SUMICSID 25
RM actions
Systematized RMIncreased ART (alt risk transfer)
– 1. Flexibility– 2. Non-traditional risks– 3. Price
Competitive purchasing
© Per Agrell, SUMICSID 26
Insurance market
How will the insurance industry meet the challenge?
– Product provider?– Service provider?
What is the current basis for change?
© Per Agrell, SUMICSID 27
Client satisfaction
© Per Agrell, SUMICSID 28
Insurance market
Disintermediation– Only the value-added survives
Commodization– Standardized, competitive products
Innovation in finance– 49% of PC insurers diversify in finance
© Per Agrell, SUMICSID 29
Insurer’s survival strategies
Commodization may be met with– Low-cost leadership
Volume
– Differentiation: BundlingBlended programs
– Differentiation: ServiceFinancial servicesConsulting services
© Per Agrell, SUMICSID 30
Volume strategy
Expected, but– IT has reduced processing costs– Decreasing marginal revenue
What did you make on your last contract?
– New risks -- new expertise– No lasting advantages
© Per Agrell, SUMICSID 31
Product revamping
Short-term response to competition, but– Blended contracts have lower margins– Simplification accelerates commodization– Needs close financial ties– No comparative advantage
© Per Agrell, SUMICSID 32
Service provider
Financial products– Synergies with life, pension, etc.– Strong competition from banks
RM Consulting– Cultural change– Competition from consultants– Needs a comparative advantage
© Per Agrell, SUMICSID 33
RM Consultancy market
Growing outsourcing budgetsComplex task -- Higher marginsScattered market -- Low trust
© Per Agrell, SUMICSID 34
Future actors
Insurance companiesBrokersManagement consultants
– Who will take the most profitable market?
© Per Agrell, SUMICSID 35
Management Consulting
Ernst & Young Enterprise RMArthur Anderson Integrated RMArthur D LittleCoopers & Lybrand Generally Accepted
RPTowers Perrin Enterprise RMKPMG Boston Consulting Group
© Per Agrell, SUMICSID 36
Ex: RM at Ernst & Young
Enterprise RM– Strategic RM support– Maximize return/RM-investment– RM Performance benchmarks
Key angle: Pre-merger RM assessment
© Per Agrell, SUMICSID 37
Industry response
Insurance Purchasing
Risk Controller
Risk Manager
Uncertainty Manager
Complexity
Manageriallevel
Agent
Safety specialist
Broker/Consultant
RM Partner
© Per Agrell, SUMICSID 38
RM partnership (1)
RM Partner offers the client– Professionalism– International network access– Superior risk assessment through data
analysis– Superior risk transfer access– Single account manager at insurer
© Per Agrell, SUMICSID 39
RM partnership (2)
RM Partner gains– Higher value-added to client– Higher billing marginal– Lower dependency on insurance products
© Per Agrell, SUMICSID 40
if… Comparative Advantage
Insurance theory revisitedJumping over the fenceSung (1999)
© Per Agrell, SUMICSID 41
Principal-Agent Theory
AGENTAGENTTASKPRINCIPALPRINCIPAL
VERKSAMHETVERKSAMHET
RESULT RESULTACTION
© Per Agrell, SUMICSID 42
Two Problems
The insurance contract puts the client as agent– Moral hazard– Adverse selection– Contractual excesses
The quality of insurance is not assessable– Impediment to partnership
© Per Agrell, SUMICSID 43
Jumping over the fence!
What does the client really want?– Peace of mind
How can we give him that?– By sharing his agenda – By working with him, even after the contract
© Per Agrell, SUMICSID 44
The Winner Insurers
Sung (1999):The insurance contract is the optimal incentive contract for a consultant-investigator and the client.
Competitive advantage !
© Per Agrell, SUMICSID 45
Barriers to development
Cultural differencesEducational diversityIndustrial structure and inertiaConflicts of interest and loyalty
© Per Agrell, SUMICSID 46
Cultural change
YESTERDAY TOMORROW
Salesman, distrust Partner, trustReactive ProactiveNarrow specialist Holistic analystUnknown quality Certified qualityCostdriver Profit drivenProduct focus Client focus
© Per Agrell, SUMICSID 47
Change enabler
if… Educational Program– RM Academy
Academic entry to contemporary RM discipline
– The ARM diplomaCertificate of excellence in industrial RM
© Per Agrell, SUMICSID 48
Summary
Market drives for changeLooking for prosperity, insurance turns
– Knowledge industry– Information intensive– Delighter!
Jump the fence!