Our Conversations section features in-depth interviews with leading figures in risk management. Mark Siwik, founder of SandRun Risk, conducts this conversation with Felix Kloman, a longtime student, thought leader, and writer in the field.
Felix is a graduate of Princeton University, 1955 with an AB in History. He is a fellow of the Institute of Risk Management (London), a past director of the Nonprofit Risk Management Center, a past and founding director of the Public Entity Risk Institute, and a charter member of the Society of Risk Analysis. In 1994, he received the most prestigious award that the Risk & Insurance Management Society (RIMS) bestows on an individual: The Harry and Dorothy Goodell Award for outstanding achievement in the field of risk management.
Please share a little bit about your life and journey in the field of risk management.
After two years’ service in the U. S Navy in the Far East, I began work in an insurance brokerage in Philadelphia in 1957 and, almost immediately, read Russell Gallagher’s article on risk management in the Harvard Business Review. Gallagher and other leaders of the day started pushing me toward the idea that simply buying insurance was only one step in preparing for an unknown future, and an expensive one at that!
Gallagher’s ideas so intrigued me that after 13 years of insurance brokerage in Philadelphia and New York, I helped create a small consultancy in Connecticut, Risk Planning Group, focusing on the development of this new idea – that risk management is a much broader and more challenging field than the expertise required to design and sell commercial insurance. In 1984, we merged our small firm, now some 24 people, into Tillinghast (today Willis Towers Perrin) - an international management consulting firm, with which I remained until retirement in 1994.
I started writing about the myriad aspects of risk management in 1974 in Risk Management Reports (its publisher, editor and frequent writer), continuing as its sole writer to 2007, some 33 years. Then, in 2005 I tried to summarize my thinking in a book of essays, Mumpsimus Revisited, followed by another in 2008, The Fantods of Risk. Even today, I remain a student of this idea, sharing insights, criticisms and applause with an informal international group of other “students,” a “risk management group.” Our intent is to look at the evolution of risk management over the past 400 years and explore possible new goals, new standards, new understandings and new tools.
Looking back on your career, what professional values are most important to you and how did these values influence your work?
As a lifelong student of risk management, I have simultaneously been an advocate of the field and a skeptic. My three guiding values are doubt (question everything), curiosity (is there another or better answer?), and constant inquiry. These values led, naturally, to a wide and catholic reading. Who knows where you might stumble on a refreshing new idea?
These guiding values are necessary for learning to change our mind from time to time. For many years, I defined risk management as a discipline for living with the possibility that future events may cause harm. In the early 1990’s, when teaching at the University of St. Gallen, in Switzerland, a graduate student questioned my definition, arguing that outcomes could be more as well as less favorable than expected. The discussion led to an epiphany: I realized that my early insurance training led to an undue focus on possible negative outcomes.
I suppose this bias toward thinking about negative outcomes is that our field pays great attention to negative end results or losses. In fact, the insurance industry has developed over some two-hundred years to deal with these after-the-loss situations. Insurance is a half-way technology because it is an after-the-fact effort to correct our inability to prevent loss.
My student reminded me that it is equally important to explore decisive technologies that can anticipate and influence events for the better. Such technologies focus on continuous improvement, elimination of waste, and conservation of resources. My student also reminded me that we are all teachers in risk management and that we should “teach important things” as reflected in the following passage:
. . . life is best lived ‘with one eye cocked toward Comedy and the other eye skewed toward Tragedy,’ and that ‘out of this feat of balanced observation emerges Humour, not as foolish amusement or an escape from reality, but as a breadth of perception.’ (1)
Our discussion seems consistent with the ideas of the Thomas Friedman, the Pulitzer Prize columnist of the New York Times. Friedman argues that we live at a time when lifelong employment requires lifelong learning. A key to lifelong learning is being radically inclusive in our learning – learning from and with as many relevant people, processes, disciplines, organizations and technologies possible. Do you think Friedman is right and, if so, what are the implications for students of risk management?
Tom Friedman’s term of radical inclusiveness (from Thank You for Being Late, Farrar, Straus & Giroux, 2016) is especially applicable to what we now call “risk management.” The idea of dealing more intelligently with uncertainty, while a natural part of the inquiry of the human brain since Homo sapiens has existed, developed primarily as an offshoot of insurance in the early 1960s. Its focus was the possibility of adverse events, primarily financial, treated naturally only by buying insurance. Internal auditors and accountants later adopted the idea, favoring the importance of the work of auditors. For both segments, the key focus was the response of corporate stockholders. But both groups failed the test of “radical inclusivity.” Few, if any, considered the broader arena of “stakeholders” or even the entire world! That has changed, at least somewhat. The current thinking seems to have moved away from the idea of “risk management” toward consideration of a variety of ways in which we, as individuals, groups, and organizations, can learn to prepare more intelligently for the ever-present possibility of surprise. The results of surprise can vary widely from positive to neutral to negative, in both quantitative and qualitative terms. The idea now seems to be to build both flexibility and resilience.
Is “risk management” both an outmoded and confusing term? Can we “manage” risk? I suspect the best we can do is try to manage ourselves and our organizations, always imperfectly. Does the term “risk” unnecessarily focus us on only negative outcomes? Shouldn’t we also anticipate favorable results? By seeing only the negative, do we miss opportunities? And to whom should we be responsible? Is a focus only on shareholders far too narrow? These questions lead to the idea that the processes for dealing with uncertainty must be a part of every discipline in the organizational structure. No more “silos,” even though these are entirely natural. I prefer the term “castles” and castle in inhabited by people hiding in a defensive structure. “Silos” are merely storage facilities, without human habitation. Radical inclusivity is one way to tear down castles that stifle collaborative and life-long learning.
What do these ideas about life-long learning and radical inclusivity mean for mantras like the one that the role of risk management is to reduce the cost of risk?
The cost-of-risk concept is a good example of the need for life-long-learning. Way back in 1962, Douglas Barlow, a thoughtful Canadian, suggested that insurance buyers out to start a register called “total cost of risk.” This register included self-funded losses, insurance premiums, loss control costs, and related administrative costs, totaled and then compared to revenues, assets and equity. It was an attempt to move away from simply adding up insurance premiums. Many insurance buyers tried it and many of us happily cooperated with organizations such as the Risk & Insurance Management Society (of which Doug was a one-time President) in producing lengthy analyses of numerous American and Canadian companies who willingly shared their cost-of-risk data with us.
Looking back, the idea was inherently flawed because it was not “radically inclusive.” It dealt (really) only with the costs over which the insurance buyer had some control. It paid no attention whatsoever to other financial, political, reputational losses. And, above all, it never recognized that rapid and intelligent responses that cost money could not only erase some losses, but also bring in a stream of new income and profits. And that many situations were actually opportunities.
Measuring total cost of risk also misses the point that risk management should contribute to building and maintaining the confidence of stakeholders in the organization. Trust, the most important asset of any organization, is difficult to measure. It can change momentarily and be radically different from one group of stakeholders to the next. Yet this is and must be the focus of an organization. Trust and confidence come first. Capital assets, earning power, and management credit lines are all secondary.
What three or four books on risk management would you recommend that a business leader be familiar with and why?
To understand, if imperfectly, how we human beings can deal more intelligently with life’s inevitable surprises, we must first begin with our behavior. So, topping my list is Daniel Kahneman’s Thinking, Fast and Slow (2011). But don’t stop with it: follow the latest in behavioral science and economics. Michael Lewis’s The Undoing Project (2016) explains how Amos Tversky and Daniel Kahneman came to their discoveries in psychology, all of which affect how we respond to uncertainty. For the past of “risk management,” read Peter Bernstein’s immortal Against the Gods: The Remarkable Story of Risk (1996) and Nassim Taleb’s The Black Swan (2007). Then to see at first hand all the confusion and unnecessary complexity that have infected the field of risk management, try John Fraser and Betty Simkins’ Enterprise Risk Management (2010). But these are simply the views of a single observer. Look far afield!
Please share a little bit about your life and journey in the field of risk management.
After two years’ service in the U. S Navy in the Far East, I began work in an insurance brokerage in Philadelphia in 1957 and, almost immediately, read Russell Gallagher’s article on risk management in the Harvard Business Review. Gallagher and other leaders of the day started pushing me toward the idea that simply buying insurance was only one step in preparing for an unknown future, and an expensive one at that!
Gallagher’s ideas so intrigued me that after 13 years of insurance brokerage in Philadelphia and New York, I helped create a small consultancy in Connecticut, Risk Planning Group, focusing on the development of this new idea – that risk management is a much broader and more challenging field than the expertise required to design and sell commercial insurance. In 1984, we merged our small firm, now some 24 people, into Tillinghast (today Willis Towers Perrin) - an international management consulting firm, with which I remained until retirement in 1994.
I started writing about the myriad aspects of risk management in 1974 in Risk Management Reports (its publisher, editor and frequent writer), continuing as its sole writer to 2007, some 33 years. Then, in 2005 I tried to summarize my thinking in a book of essays, Mumpsimus Revisited, followed by another in 2008, The Fantods of Risk. Even today, I remain a student of this idea, sharing insights, criticisms and applause with an informal international group of other “students,” a “risk management group.” Our intent is to look at the evolution of risk management over the past 400 years and explore possible new goals, new standards, new understandings and new tools.
Looking back on your career, what professional values are most important to you and how did these values influence your work?
As a lifelong student of risk management, I have simultaneously been an advocate of the field and a skeptic. My three guiding values are doubt (question everything), curiosity (is there another or better answer?), and constant inquiry. These values led, naturally, to a wide and catholic reading. Who knows where you might stumble on a refreshing new idea?
These guiding values are necessary for learning to change our mind from time to time. For many years, I defined risk management as a discipline for living with the possibility that future events may cause harm. In the early 1990’s, when teaching at the University of St. Gallen, in Switzerland, a graduate student questioned my definition, arguing that outcomes could be more as well as less favorable than expected. The discussion led to an epiphany: I realized that my early insurance training led to an undue focus on possible negative outcomes.
I suppose this bias toward thinking about negative outcomes is that our field pays great attention to negative end results or losses. In fact, the insurance industry has developed over some two-hundred years to deal with these after-the-loss situations. Insurance is a half-way technology because it is an after-the-fact effort to correct our inability to prevent loss.
My student reminded me that it is equally important to explore decisive technologies that can anticipate and influence events for the better. Such technologies focus on continuous improvement, elimination of waste, and conservation of resources. My student also reminded me that we are all teachers in risk management and that we should “teach important things” as reflected in the following passage:
. . . life is best lived ‘with one eye cocked toward Comedy and the other eye skewed toward Tragedy,’ and that ‘out of this feat of balanced observation emerges Humour, not as foolish amusement or an escape from reality, but as a breadth of perception.’ (1)
Our discussion seems consistent with the ideas of the Thomas Friedman, the Pulitzer Prize columnist of the New York Times. Friedman argues that we live at a time when lifelong employment requires lifelong learning. A key to lifelong learning is being radically inclusive in our learning – learning from and with as many relevant people, processes, disciplines, organizations and technologies possible. Do you think Friedman is right and, if so, what are the implications for students of risk management?
Tom Friedman’s term of radical inclusiveness (from Thank You for Being Late, Farrar, Straus & Giroux, 2016) is especially applicable to what we now call “risk management.” The idea of dealing more intelligently with uncertainty, while a natural part of the inquiry of the human brain since Homo sapiens has existed, developed primarily as an offshoot of insurance in the early 1960s. Its focus was the possibility of adverse events, primarily financial, treated naturally only by buying insurance. Internal auditors and accountants later adopted the idea, favoring the importance of the work of auditors. For both segments, the key focus was the response of corporate stockholders. But both groups failed the test of “radical inclusivity.” Few, if any, considered the broader arena of “stakeholders” or even the entire world! That has changed, at least somewhat. The current thinking seems to have moved away from the idea of “risk management” toward consideration of a variety of ways in which we, as individuals, groups, and organizations, can learn to prepare more intelligently for the ever-present possibility of surprise. The results of surprise can vary widely from positive to neutral to negative, in both quantitative and qualitative terms. The idea now seems to be to build both flexibility and resilience.
Is “risk management” both an outmoded and confusing term? Can we “manage” risk? I suspect the best we can do is try to manage ourselves and our organizations, always imperfectly. Does the term “risk” unnecessarily focus us on only negative outcomes? Shouldn’t we also anticipate favorable results? By seeing only the negative, do we miss opportunities? And to whom should we be responsible? Is a focus only on shareholders far too narrow? These questions lead to the idea that the processes for dealing with uncertainty must be a part of every discipline in the organizational structure. No more “silos,” even though these are entirely natural. I prefer the term “castles” and castle in inhabited by people hiding in a defensive structure. “Silos” are merely storage facilities, without human habitation. Radical inclusivity is one way to tear down castles that stifle collaborative and life-long learning.
What do these ideas about life-long learning and radical inclusivity mean for mantras like the one that the role of risk management is to reduce the cost of risk?
The cost-of-risk concept is a good example of the need for life-long-learning. Way back in 1962, Douglas Barlow, a thoughtful Canadian, suggested that insurance buyers out to start a register called “total cost of risk.” This register included self-funded losses, insurance premiums, loss control costs, and related administrative costs, totaled and then compared to revenues, assets and equity. It was an attempt to move away from simply adding up insurance premiums. Many insurance buyers tried it and many of us happily cooperated with organizations such as the Risk & Insurance Management Society (of which Doug was a one-time President) in producing lengthy analyses of numerous American and Canadian companies who willingly shared their cost-of-risk data with us.
Looking back, the idea was inherently flawed because it was not “radically inclusive.” It dealt (really) only with the costs over which the insurance buyer had some control. It paid no attention whatsoever to other financial, political, reputational losses. And, above all, it never recognized that rapid and intelligent responses that cost money could not only erase some losses, but also bring in a stream of new income and profits. And that many situations were actually opportunities.
Measuring total cost of risk also misses the point that risk management should contribute to building and maintaining the confidence of stakeholders in the organization. Trust, the most important asset of any organization, is difficult to measure. It can change momentarily and be radically different from one group of stakeholders to the next. Yet this is and must be the focus of an organization. Trust and confidence come first. Capital assets, earning power, and management credit lines are all secondary.
What three or four books on risk management would you recommend that a business leader be familiar with and why?
To understand, if imperfectly, how we human beings can deal more intelligently with life’s inevitable surprises, we must first begin with our behavior. So, topping my list is Daniel Kahneman’s Thinking, Fast and Slow (2011). But don’t stop with it: follow the latest in behavioral science and economics. Michael Lewis’s The Undoing Project (2016) explains how Amos Tversky and Daniel Kahneman came to their discoveries in psychology, all of which affect how we respond to uncertainty. For the past of “risk management,” read Peter Bernstein’s immortal Against the Gods: The Remarkable Story of Risk (1996) and Nassim Taleb’s The Black Swan (2007). Then to see at first hand all the confusion and unnecessary complexity that have infected the field of risk management, try John Fraser and Betty Simkins’ Enterprise Risk Management (2010). But these are simply the views of a single observer. Look far afield!
1. Judith Skelton Grant, quoting Robertson Davies, Robertson Davies: Man of Myth, Viking, New York 1994.
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