Risk Management: An International Journal
Risk Management and Insurance
by Scott E. Harrington and Gregory R. Niehaus London: Irwin/McGraw-Hill (1999) ISBN 0 256210 18 7 (674 pages, £75.00)
Reviewed by Mark Butterworth In recent times many changes have been seen in the field of organisational risk management, and in particular in corporate governance codes and legislation. It is therefore a key test of the value of a textbook on risk management practice that the concepts promoted are enduring and appropriate to modern business requirements. Harrington and Niehaus have compiled a book that sufficiently passes the test for it to become an important addition to any risk management student’s or practitioner’s bookshelf. The approach taken by the authors is to construct each chapter as a freestanding study . A list of key terms and helpful self-test questions are placed at the end of each chapter , and the book contains many case studies. This is very helpful for those who wish to use the book as an occasional reference, but also works well as a coherent learning resource across a wide range of insurance and risk management concepts.And here the first point of clarification should be made: risk management can mean many things to dif ferent people, and in the context of this book it should be regarded as ‘operational’or ‘event’risk management. The book is not intended to serve those engaged in investment risk management, or financial and credit risk assessment. However, to give those interested in risk -financing a broad view of the concept, the authors provide a chapter on hedging risk using financial instruments such as options, futures and industry-related derivatives. In a refreshing chapter on the objectives of risk management, linking clearly and sensibly with business value maximisation, the authors discuss in some detail the timeless question of what constitute the ‘cost of risk’. Whilst the suggested components of the costs of risk include losses, cost of controls and residual uncertainty, the proposition that maximising business value is equivalent to minimising the cost of risk might not be something all would agree with, especially in a business that is ready and willing to assume and manage risk. Mathematical risk quantification is given reasonable coverage, and needs to be understood to get the best out of the chapter on insurance pricing.The effects of the ‘underwriting cycle’are noted but without suf ficient emphasis—readers would not get a true picture of the extreme effects on pricing of very soft markets and very hard markets, as we are currently experiencing post-2001. Perhaps surprisingly for a book that does not hold back on detailed analysis of insurance concepts, there is very little discussion of reinsurance.All operational risk managers and their advisors are required to be very familiar with reinsurance structures, markets and trends in order to build appropriate risk-financing programmes, but would have to look elsewhere to build their knowledge. Potential readers should also be aware that chapters on employee benefits, workers compensation, retirement plans (pensions), social security and automobile insurance are all
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Risk Management: An International Journal
focused on the position in the United States. These parts of the book are a very good primer for anyone wishing to understand the situation in the US,but of little interest otherwise. Similarly, insurance regulation is strongly directed towards US regulatory structures. A chapter on risk management decision-making (perhaps better described as risk-financing decision-making) gives an orderly structure to how choices should be made in levels of insurance cover, the role and effects of self-insured retentions and balancing risk control costs with insurance premiums. When much of these decisions in practice tend to be based on subjective opinions it is worthy of the book that the more academic approach of objective analysis is described and justified. Indeed, the book serves as a very helpful academic reference for many insurance and risk management fundamentals. Mark Butterworth Prudential plc
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