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Risk Management in the New Economy Per J. Agrell Center of Operations Research and Econometrics (CORE) Catholic University of Louvain
© Per Agrell, SUMICSID2 Outline The New Economy –Business environment –RM environment –Insurance environment Business strategies The if.. competitive advantage
© Per Agrell, SUMICSID3 Presentation 1991 civ. ing. Linköping Institute of Tech, Sweden 1991 M.Sc (OR)Univ of Massachusetts, USA 1995 tekn. dr.Linköping Institute of Tech, Sweden 2000docentLinköping Institute of Tech, Sweden 1991-Linköping Institute of Tech, Dept of production economics assistant professor of production economics 1995/96IIASA, Vienna research scholar 1996/97University of Georgia, Dept of management visiting professor 1997/98University of Copenhagen, Operations research visiting associate professor 1998-Royal Agricultural University, Dept of economics, associate professor of managerial economics 2000-Catholic University of Louvain, CORE visiting professor
© Per Agrell, SUMICSID4 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, SUMICSID5 Theory of intermediation PROVIDER CLIENT GEOGRAPHICAL, CULTURAL, ECONOMICAL; LEGAL BARRIERS INTERMEDIARY HIGH TRANSACTION COSTS
© Per Agrell, SUMICSID6 Disintermediation PROVIDER CLIENT INFORMATION TECHNOLOGY EDUCATION KNOWLEDGE INTERMEDIARY LOW TRANSACTION COSTS
© Per Agrell, SUMICSID7 Intermediaries? Disintermediation –Demise of the Middleman Reintermediation –Birth of marketplaces Disinterremediation Saffo (1997) –Death of non-value added services
© Per Agrell, SUMICSID8 Example 1: Automotive Old Economy: –Car(product) –Maintenance(service) Now –Car + Maintenance(product + service) New Economy –Transportation(multiple products, services)
© Per Agrell, SUMICSID9 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, SUMICSID10 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, SUMICSID11 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, SUMICSID12 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, SUMICSID13 Your turn... Postal services Commercial TV Higher education Banking Insurance...
© Per Agrell, SUMICSID14 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, SUMICSID15 Managerial focus OPERATIONS MANAGEMENT RISK MANAGEMENT STRATEGIC MANAGEMENT -Mission -Objectives -Risk -Uncertainty -Goods -Services
© Per Agrell, SUMICSID16 The Executives Risk Agenda Occupational hazards (stress) Loss of reputation/brand value Copyright infringement E-commerce exposure –Technological risks –Dispersion of knowledge –Impediments to growth
© Per Agrell, SUMICSID17 Enterprise Risk Management Focus at value-adding processes –Financial operations –Technological processes –Operating practices
© Per Agrell, SUMICSID18 RM development Risk Management RM Uncertainty Management UM Strategic Importance Complexity
© Per Agrell, SUMICSID19 Professional trends Higher entry level Broader scope Certification Standardization
© Per Agrell, SUMICSID20 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, SUMICSID21 Risk managers credo Consistency –Organizational objectives Proactivity –Taking the initiative Comprehensiveness –Addressing the true risks
© Per Agrell, SUMICSID22 Proactive management REACTIVE MANAGEMENT never happens again PROACTIVE MANAGEMENT it must never happen BUSINESS CLAIMS, ANALYSES, TRENDS PLANNING, INFORMATION, READINESS
© Per Agrell, SUMICSID23 Risk managers evolution Insurance Purchaser Risk Controller Risk Manager Uncertainty Manager Complexity Managerial level
© Per Agrell, SUMICSID24 Summary: Business changes Global, demanding, changing Information intensive: new exposures Management of Risk acknowledged However: –Short span of attention –Very specific requirements for services –No loyalty in trading commodities
© Per Agrell, SUMICSID25 RM actions Systematized RM Increased ART (alt risk transfer) –1. Flexibility –2. Non-traditional risks –3. Price Competitive purchasing
© Per Agrell, SUMICSID26 Insurance market How will the insurance industry meet the challenge? –Product provider? –Service provider? What is the current basis for change?
© Per Agrell, SUMICSID27 Client satisfaction
© Per Agrell, SUMICSID28 Insurance market Disintermediation –Only the value-added survives Commodization –Standardized, competitive products Innovation in finance –49% of PC insurers diversify in finance
© Per Agrell, SUMICSID29 Insurers survival strategies Commodization may be met with –Low-cost leadership Volume –Differentiation: Bundling Blended programs –Differentiation: Service Financial services Consulting services
© Per Agrell, SUMICSID30 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, SUMICSID31 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, SUMICSID32 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, SUMICSID33 RM Consultancy market Growing outsourcing budgets Complex task -- Higher margins Scattered market -- Low trust
© Per Agrell, SUMICSID34 Future actors Insurance companies Brokers Management consultants –Who will take the most profitable market?
© Per Agrell, SUMICSID35 Management Consulting Ernst & YoungEnterprise RM Arthur Anderson Integrated RM Arthur D Little Coopers & LybrandGenerally Accepted RP Towers PerrinEnterprise RM KPMG Boston Consulting Group
© Per Agrell, SUMICSID36 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, SUMICSID37 Industry response Insurance Purchasing Risk Controller Risk Manager Uncertainty Manager Complexity Managerial level Agent Safety specialist Broker/Consultant RM Partner
© Per Agrell, SUMICSID38 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, SUMICSID39 RM partnership (2) RM Partner gains –Higher value-added to client –Higher billing marginal –Lower dependency on insurance products
© Per Agrell, SUMICSID40 if… Comparative Advantage Insurance theory revisited Jumping over the fence Sung (1999)
© Per Agrell, SUMICSID41 Principal-Agent Theory AGENT TASK PRINCIPAL VERKSAMHET RESULT ACTION
© Per Agrell, SUMICSID42 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, SUMICSID43 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, SUMICSID44 The Winner Insurers Sung (1999): The insurance contract is the optimal incentive contract for a consultant- investigator and the client. Competitive advantage !
© Per Agrell, SUMICSID45 Barriers to development Cultural differences Educational diversity Industrial structure and inertia Conflicts of interest and loyalty
© Per Agrell, SUMICSID46 Cultural change
© Per Agrell, SUMICSID47 Change enabler if… Educational Program –RM Academy Academic entry to contemporary RM discipline –The ARM diploma Certificate of excellence in industrial RM
© Per Agrell, SUMICSID48 Summary Market drives for change Looking for prosperity, insurance turns –Knowledge industry –Information intensive –Delighter! Jump the fence!
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