Risk vs. reward

March 30, 2007

I had a good conversation about the current state of enterprise risk management yesterday with Prakash Shimpi, enterprise risk management practice leader at Towers Perrin. Mr. Shimpi is well versed on ERM, having written a book on the topic and having previously led Swiss Re’s Swiss Re Financial Services Corp.

He was in Chicago for an annual ERM symposium that this year drew about 500 attendees, and Mr. Shimpi believes the integrated approach to risk management is finally taking hold on a broad basis.

Among the reasons executives at insurance industry companies and other sorts of businesses are seeing value in ERM, he suggested, is that the lessons of Enron, WorldCom and others have moved the perception of ERM from an exercise that was solely the province of analytical wonks to a more accurate view that it’s an approach based on an understanding that every business activity has at its heart a risk/reward component.

“When you undertake any business activity, like it or not, you’ve got risk in that,” Mr. Shimpi said. “So risk management is inherent in any business decision.”

“The value of risk management is in allowing shareholders to earn a levered return,” the Towers Perrin practice leader said. “What enterprise risk managers have done in the end game is better economics for the business.”

Clearly, the benefits of  risk vs. reward thinking aren’t limited to the golf course.


But can you insure against heartbreak?

March 27, 2007

Well, as I’ve noted before, for better or worse I’m a Chicago Cubs fan. We live just about a five minute walk from Wrigley Field and have had a weekend/night game season ticket package for years.

And of course I have all the requisite heartbreaks to attest to my allegiance: 1969 and the Mets, 1984 and the Padres, 2003 and the Marlins. Oh yes, and the Hall of Fame Veterans Committee’s regular snubbing of Ron Santo.

Well, in addition to routine heartbreak–or maybe part of it–one other thing being a Cubs fan has come to mean in recent years is watching pitchers Kerry Wood and Mark Prior make more trips to the disabled list than the pitching mound. And yesterday, from their spring training site in Arizona, the Cubs announced that Wood will start the season on the DL, with Prior possibly to follow. Aargh.

This year, though, it looks like the Cubs tried to insure themselves against such a possibility (inevitability?) by stockpiling as many arms as possible on their roster, in hopes of avoiding last season’s Carlos Zambrano and four rookies scenario. So maybe the absence of Wood and Prior from the opening day roster won’t have a major impact. Or maybe I’m just talking like a Cubs fan. We’ll see.

Please remain seated until. . .

March 20, 2007

Well, the Airbus A380 tour hit Chicago today, and as a committed aviation and space nerd I’m kind of disappointed I wasn’t able to get out to O’Hare to see that big sucker come in.

As much as I’d like to see one of the superjumbos though, I’m not so sure I’m eager to travel in one. Just how much time will boarding and deplaining 555 passengers add to a trip, I wonder. And imagine the thrill of being cooped up with 555 of your closest friends on the tarmac for several hours during a snowstorm, then having to wait another 45 minutes or so to get out when they finally cancel the flight and taxi back to the gate.

Airbus contends that boarding the double-decker will take no longer than boarding existing aircraft, and that given the large number of passengers it will accommodate (potentially more than 800 in some configurations), the A380 would be more efficient than other aircraft.

Okay, imagine, then, the wait as baggage handlers have to go into the hold to identify and remove the luggage of someone who lost their passport between check-in and boarding (an experience I had a couple of years ago in Hong Kong–not the passport losing, but the waiting).

Business Insurance has also written in the past about some of the aviation insurance market issues around assembling capacity for these monsters. It will be interesting to see how that works out. And, given the economics of the U.S. commercial aviation business, it’s not clear whether any U.S. airlines are going to be standing in line to purchase A380s.

Still, despite all the questions, it seems like a pretty impressive bird.

Flexing some financial muscle

March 16, 2007

Well before the Enron collapse and other corporate scandals prompted Congress to set down corporate governance requirements in the form of the Sarbanes-Oxley Act, a number of the largest institutional investors were using the muscle the scale of their stock holdings provided in an effort to influence corporate behavior.

The California Public Employees’ Retirement System has long been at the forefront of those efforts, and hasn’t tired of the fight yet, yesterday releasing its latest list of companies the nation’s largest public pension fund is citing for what it sees as lackluster financial performance.

Among those finding a spot on CalPERS 2007 Focus List is Marsh & McLennan Cos. Inc., whose stock has “underperformed relative to the S&P 500 and its industry peer index” over the past one, three and five year periods, the $230 billion pension fund said.

CalPERS other beefs with Marsh appear to include what it considers excessive executive severance packages–the fund is pushing a shareholder proposal this year that would require that Marsh seek shareholder ratification of any severance agreement providing benefits with a total present value greater than 2.99 times the officer’s combined base salary and target bonus.

Other companies in CalPERS focus this year include Sara Lee, Eli Lilly & Co., Tribune Co., International Paper Co., Tenet Healthcare Corp., EMC Corp., Dollar Tree Stores Inc., Corinthian Colleges Inc., Kellwood Co. and Sanmina-SCI Corp.

Inclusion on CalPERS annual list might not be all bad, though. The pension fund cites a Wilshire Associates study that suggests the “CalPERS Effect” shows the stock of focus list companies outperforms the S&P 500 Index by 3.1% per year over the five years following their time in CalPERS spotlight.

Seeking a skilled workforce

March 15, 2007

I attended an interesting program this morning, a Finance & Insurance Workforce Summit presented by the Workforce Boards of Metropolitan Chicago.

Essentially, the program was an examination of some of the key issues and challenges facing insurance and financial services companies as they look to attract, develop and retain the talent needed to be competitive in the years ahead. I’ll be writing about the session more fully in April’s Industry Focus, and who knows, I may follow up a bit further here on the blog in the next few days.

Among the many serious workforce issues facing employers in this industry segment, I guess the journalist in me was struck by one in particular–the fact that many new hires are unable to write.

“What you have is managers writing e-mails because their employees can’t write,” said one panelist, Leana Flowers, executive vp and director of retail and human resource strategies at Chicago’s ShoreBank. And the issue is one that those managers often find difficult to address, Ms. Flowers said. “It’s sensitive and it’s cultural,” she said.

In an effort to address the problem, ShoreBank has partnered with the City Colleges of Chicago to provide remedial grammar training to employees requiring it.

And, while the computer competence and technical comfort level of Gen Yers entering the workplace is seen as a plus, another panelist, Andy Liakopoulos, senior manager in the Human Capital Group at Deloitte Consulting, noted that many of those under 25s have writing issues as a result of growing up used to the informality of e-mail correspondence and text messaging.


The apocalypse starts at 12:20 Thursday (11:20 Central)

March 14, 2007

Or maybe not. At least there doesn’t seem to be quite as much panic preceding the tipoff of today’s NCAA men’s basketball tournament games–or specifically the live online coverage of the contests–as there was last year.

Last year, as you may recall, CBS Sports’ announcement that it would provide NCAA tournament coverage online for free prompted numerous gloomy predictions of the negative impact such an act was sure to produce in terms of lost productivity. On top of that was the anticipated impact on companies’ IT systems as millions of crazed hoops junkies used company computers to get their fix.

Well, not having been barred by Congress from engaging in activities posing such an obvious threat to the well-being of U.S. business, CBS is at it again this year, having doubled its bandwidth to accommodate the anticipated increased demand.

CBS Sports says last year’s free online coverage produced 19 million video streams and five million site visits. This year, in addition to a video player 50% larger than last year’s, CBS again will include a “boss button,” allowing basketball fans to switch the image on their monitor to a benign looking spreadsheet with a single keystroke should the boss happen by.

Why would anyone be concerned about a threat to productivity?

Back to the futures

March 12, 2007

Interesting to see that a new hurricane futures and options contracts began trading today at the Chicago Mercantile Exchange. While previous efforts to create some sort of exchange-traded catastrophe risk product have fallen short, obviously folks at the Merc are optimistic that the time is now right for such a product to take hold.

Notably, the state of risk modelling has advanced considerably from where it was in the mid-90s when the Chicago Board of Trade tried to make a go of a catastrophe options contract. And there’s a greater comfort level today with using capital markets tools to address catastrophe risk.

Of course 2005’s hurricane losses have also played a considerable part in encouraging the exploration of new methods to address cat exposures, and bringing new players into the market.

The Chicago Merc’s contracts cover five defined U.S. regions: the Gulf Coast, Florida, the Southern Atlantic Coast, the Northern Atlantic and the Eastern U.S. The contracts are based on Carvill Group’s Carvill Hurricane Index, which uses data from the National Hurricane Center of the National Weather Service to calculate the potential for storm damage based on maximum wind velocity and storm radius.

In addition to insurers, the CME expects such entities as energy companies, pension funds, state governments and utility companies to look to the new contracts to hedge hurricane exposures.