July, 1996

Risk Management Reports

July, 1996
Volume 23, No. 7

You Are What You Read
Several months ago, Seth Shapiro, a consultant with Aon Risk Services in Seattle, inquired by e-mail about those books that had most contributed to the development of my thinking over the past thirty years. What makes an aging author both cantankerous and opinionated, a curmudgeon in pussy-cat's clothing? Where do I find some of my most outrageous quotations? It's simple. We are creatures of our reading. Stimulated by his request, I went back to my library to refresh my memory on sources and authors. My list is eclectic, if anything, and I hardly presume to recommend it to others. It is, however, an indication of how my thinking has been affected over the years. First, I have been a steady reader of fiction and essays, starting with my two years in the U. S. Navy, when I consumed by actual count over 250 volumes to offset the boredom of steaming back and forth across the Pacific at 12 knots. My favorites include John Barth, Julian Barnes, Jorge Luis Borges, Anthony Burgess, A. S. Byatt, Peter Carey, Bruce Chatwin, Joseph Conrad, Loren Eisley, John Fowles, Robertson Davies, William Golding, Graham Greene, William Kennedy, John LeCarre (David Cornwell), Gabriel Garcia Marquez, Peter Matthiessen, Cormac McCarthy, John McPhee, Howard Frank Mosher, Walker Percy, Jonathan Raban, Paul Theroux, Lewis Thomas, Anthony Trollope, John Updike and Evelyn Waugh. Don't look for any consistency here: it is hard to find! Also, it's politically insensitive in that there is but one woman on the list. That's changing. I've read most of what these writers have written. My family (three schoolteachers among them) constantly suggest new authors. My wife, an inexhaustible reader of murder mysteries, has periodically tried to interest me in that genre, with little luck. I'll stick novels and essays. Second, there are other books to which I still refer and which materially affected my thoughts about the discipline of risk management. Foremost is one that concerns writing as a technical means of expression: Strunk and White's Elements of Style. I can't imagine anyone interested in risk management being without this extraordinary book. Communication, be it electronic or otherwise, depends on clarity of thought and expression. Strunk and White's book is essential. Several of the books involve insurance or risk management: Fred Church's Avoiding Surprises, Vernon Grose's Managing Risk: Systematic Loss Prevention for Executives, Orio Giarini and Walter Stahel's The Limits to Certainty, Peter Huber's Liability, John Long's Ethics, Morality and Insurance, and The Invisible Bankers, the amusing expose of the insurance industry by Andrew Tobias. Unfortunately too much of risk management and insurance writing is tedious academese or technical jargon. Some books involve the process of risk assessment: Paul Schwartz's The Art of the Long View, Innumeracy, by John Allen Paulos, a professor at Temple University, and Melvin Konner's Why the Reckless Survive. There are other texts on risk assessment but these three have been the most influential for someone who is essentially innumerate. Most of the other books that influenced me fall in the rough categories of historical and futuristic: assessments of the past and projections for the future. The latter include Peter Drucker's Age of Discontinuity, Daniel Bell's The Coming of the Post-Industrial Society, Alvin Toffler's The Third Wave, Jonathan Weiner's The Next One Hundred Years, The Year 2000, by Herman Kahn and Anthony J. Weiner, and John Kenneth Galbraith's Economics and the Public Purpose, The Affluent Society and The New Industrial State. The latter, published in 1967, was the impetus for my opting to	become an independent management consultant. I wrote a review of it for Rance Crain and his newly-formed Business Insurance, only to have my superiors at the insurance brokerage firm where I worked withdraw permission for me to publish it. Galbraith, in their opinion, was "too controversial." I published the review under a pseudonym, started an active writing career and two years later formed my own risk management consulting firm. The more historical books include Paul Kennedy's The Rise and Fall of Great Powers and Preparing for the 21st Century, Paul Johnson's Modern Times and The Birth of the Modern, Edward O. Wilson's On Human Nature, C. Northcote Parkinson's The Law, Loren Eisley's The Invisible Pyramid, and the incomparable essays of Lewis Thomas, including The Lives of a Cell and The Medusa and the Snail. The last book on my list is one I read early in my career. Ralph Nader's Unsafe at Any Speed (1965) precipitated the entire consumer movement that has so affected American society and our litigation patterns for the past 30 years. I wrote a book review of it for The Journal of Risk and Insurance and one of my 1965 comments jumps out. Nader argued that America in the mid-'60s suffered from the unwillingness of manufacturers to deal responsibly with the deaths and increasing air pollution caused by the automobile. I suggested that "this sickness is a result of corporate and individual myopia, accentuated by the desire to sell more and more to the American public". Have matters really changed very much in the intervening 30 years? One final comment: in the July 1995 RMR I listed some periodicals that risk managers might read. I want to add four publications to my selection: The Geneva Papers on Risk & Insurance: a wide-ranging and intellectually challenging quarterly published by The Geneva Association, 18 chemin de Rieu, 1208 Geneva, Switzerland. Fax: +41-22-347-22078 SFR 170 per year. International Risk Management: a presumptuous, prickly and provocative monthly magazine, focused primarily on risk management developments in Europe and published by Emap Finance, 33-39 Bowling Green Lane, London EC1R 0DA. Telephone: +44-171-505-8185. 100 pounds a year. More information can also be obtained by going to the Internet site for the Global Risk Management Network, http://www.emap.com.grmn. The Sciences: a bimonthly of science and philosophy for the layman, accentuated by superlative art and graphics, published by the New York Academy of Sciences, Two East Sixty-third Street, New York, NY 10021. Tel: 212-838-0230 or 1-800-843-6927. $21.00 a year. The Wilson Quarterly: an eclectic gathering of ideas, in essays, articles, book reviews and poetry, in a quarterly published by the Woodrow Wilson International Center for Scholars, 901 D Street S.W., Washington, DC 20024. Telephone: 1-800-829-5108. $24.00 a year. For about US$ 300 you can have both technical and general intellectual stimulation with these four publications! When asked by an interviewer about the wellspring of his writing and ideas, Patrick O'Brian replied, " . . . they rise from a fairly copious stirabout of reading." ("The Art of Fiction," Paris Review, #135, Summer 1995). I suggest that a good "stirabout" of reading makes a good risk manager. I hope that my own history and suggestions will provide some stimulus in this direction.

You Are What You Read

Several months ago, Seth Shapiro, a consultant with Aon Risk Services in Seattle, inquired by e-mail about those books that had most contributed to the development of my thinking over the past thirty years. What makes an aging author both cantankerous and opinionated, a curmudgeon in pussy-cat's clothing? Where do I find some of my most outrageous quotations? It's simple. We are creatures of our reading. Stimulated by his request, I went back to my library to refresh my memory on sources and authors. My list is eclectic, if anything, and I hardly presume to recommend it to others. It is, however, an indication of how my thinking has been affected over the years.

First, I have been a steady reader of fiction and essays, starting with my two years in the U. S. Navy, when I consumed by actual count over 250 volumes to offset the boredom of steaming back and forth across the Pacific at 12 knots. My favorites include John Barth, Julian Barnes, Jorge Luis Borges, Anthony Burgess, A. S. Byatt, Peter Carey, Bruce Chatwin, Joseph Conrad, Loren Eisley, John Fowles, Robertson Davies, William Golding, Graham Greene, William Kennedy, John LeCarre (David Cornwell), Gabriel Garcia Marquez, Peter Matthiessen, Cormac McCarthy, John McPhee, Howard Frank Mosher, Walker Percy, Jonathan Raban, Paul Theroux, Lewis Thomas, Anthony Trollope, John Updike and Evelyn Waugh. Don't look for any consistency here: it is hard to find! Also, it's politically insensitive in that there is but one woman on the list. That's changing. I've read most of what these writers have written. My family (three schoolteachers among them) constantly suggest new authors. My wife, an inexhaustible reader of murder mysteries, has periodically tried to interest me in that genre, with little luck. I'll stick novels and essays.

Second, there are other books to which I still refer and which materially affected my thoughts about the discipline of risk management. Foremost is one that concerns writing as a technical means of expression: Strunk and White's Elements of Style. I can't imagine anyone interested in risk management being without this extraordinary book. Communication, be it electronic or otherwise, depends on clarity of thought and expression. Strunk and White's book is essential.

Several of the books involve insurance or risk management: Fred Church's Avoiding Surprises, Vernon Grose's Managing Risk: Systematic Loss Prevention for Executives, Orio Giarini and Walter Stahel's The Limits to Certainty, Peter Huber's Liability, John Long's Ethics, Morality and Insurance, and The Invisible Bankers, the amusing expose of the insurance industry by Andrew Tobias. Unfortunately too much of risk management and insurance writing is tedious academese or technical jargon. Some books involve the process of risk assessment: Paul Schwartz's The Art of the Long View, Innumeracy, by John Allen Paulos, a professor at Temple University, and Melvin Konner's Why the Reckless Survive. There are other texts on risk assessment but these three have been the most influential for someone who is essentially innumerate.

Most of the other books that influenced me fall in the rough categories of historical and futuristic: assessments of the past and projections for the future. The latter include Peter Drucker's Age of Discontinuity, Daniel Bell's The Coming of the Post-Industrial Society, Alvin Toffler's The Third Wave, Jonathan Weiner's The Next One Hundred Years, The Year 2000, by Herman Kahn and Anthony J. Weiner, and John Kenneth Galbraith's Economics and the Public Purpose, The Affluent Society and The New Industrial State. The latter, published in 1967, was the impetus for my opting to

become an independent management consultant. I wrote a review of it for Rance Crain and his newly-formed Business Insurance, only to have my superiors at the insurance brokerage firm where I worked withdraw permission for me to publish it. Galbraith, in their opinion, was "too controversial." I published the review under a pseudonym, started an active writing career and two years later formed my own risk management consulting firm.

The more historical books include Paul Kennedy's The Rise and Fall of Great Powers and Preparing for the 21st Century, Paul Johnson's Modern Times and The Birth of the Modern, Edward O. Wilson's On Human Nature, C. Northcote Parkinson's The Law, Loren Eisley's The Invisible Pyramid, and the incomparable essays of Lewis Thomas, including The Lives of a Cell and The Medusa and the Snail.

The last book on my list is one I read early in my career. Ralph Nader's Unsafe at Any Speed (1965) precipitated the entire consumer movement that has so affected American society and our litigation patterns for the past 30 years. I wrote a book review of it for The Journal of Risk and Insurance and one of my 1965 comments jumps out. Nader argued that America in the mid-'60s suffered from the unwillingness of manufacturers to deal responsibly with the deaths and increasing air pollution caused by the automobile. I suggested that "this sickness is a result of corporate and individual myopia, accentuated by the desire to sell more and more to the American public". Have matters really changed very much in the intervening 30 years?

One final comment: in the July 1995 RMR I listed some periodicals that risk managers might read. I want to add four publications to my selection:

The Geneva Papers on Risk & Insurance: a wide-ranging and intellectually challenging quarterly published by The Geneva Association, 18 chemin de Rieu, 1208 Geneva, Switzerland. Fax: +41-22-347-22078 SFR 170 per year.
International Risk Management: a presumptuous, prickly and provocative monthly magazine, focused primarily on risk management developments in Europe and published by Emap Finance, 33-39 Bowling Green Lane, London EC1R 0DA. Telephone: +44-171-505-8185. 100 pounds a year. More information can also be obtained by going to the Internet site for the Global Risk Management Network, http://www.emap.com.grmn.
The Sciences: a bimonthly of science and philosophy for the layman, accentuated by superlative art and graphics, published by the New York Academy of Sciences, Two East Sixty-third Street, New York, NY 10021. Tel: 212-838-0230 or 1-800-843-6927. $21.00 a year.
The Wilson Quarterly: an eclectic gathering of ideas, in essays, articles, book reviews and poetry, in a quarterly published by the Woodrow Wilson International Center for Scholars, 901 D Street S.W., Washington, DC 20024. Telephone: 1-800-829-5108. $24.00 a year.

For about US$ 300 you can have both technical and general intellectual stimulation with these four publications!

When asked by an interviewer about the wellspring of his writing and ideas, Patrick O'Brian replied, " . . . they rise from a fairly copious stirabout of reading." ("The Art of Fiction," Paris Review, #135, Summer 1995). I suggest that a good "stirabout" of reading makes a good risk manager. I hope that my own history and suggestions will provide some stimulus in this direction.

Bear in mind that in today's world, we have come to believe that we are required to know everything on every topic and always offer an opinion. When I was Mayor, I once speculated that 70 percent of what almost anyone tells you is buffalo chips, not because people lie, but because they think they must offer an opinion even when they don't have the facts or knowledge to form one.

Ed Koch, former Mayor of New York City, in graduation address to Roger Williams University, May, 1996, as quoted in The New York Times, May 27, 1996

Political Risks
In the post-bi-polar world (USA vs. USSR), the glue that once held communities and nations together has lost its adhesion. Political fragmentation is one of the growing global risks faced by most organizations. Political decentralization raises concerns about the rules and regulations under which commerce will take place and the personnel with whom we will deal. It's ironic that, as a vocal and less restricted global press and new electronic technology bring us closer together, many of us seem to be opting for newer and smaller self-governing political units. Examples: only last fall the province of Quebec voted narrowly to remain within Canada. It hardly settled the matter, only stimulating the Quebecois to press for another independence vote shortly. The Anglos (The English-speaking minority centered in Montreal) and Cree Indians now suggest that they might opt out of Quebec and remain in Canada if the vote goes against their wishes. A small group of iconoclasts has declared an independent "state of Texas," even bringing a suit to the International Court of Justice in the Hague to press its case.	In Italy the Northern League, under its charismatic leader, Umberto Bossi, threatens to sever the head of the Italian peninsula to form a new state of Padania. Padania would have about 44% of the population but more than 60% of its GDP. Could it happen? Given the present climate, anything is possible. Political risk involves not only political fragmentation but also economic disintegration. One example is Thailand, where rapid economic development, using a free-market model, has created a system that has outgrown the service infrastructure that government traditionally provides. Reports come from Bangkok of inadequate waste-water treatment, polluted canals, and one of the world's highest H.I.V. infection rates among its prostitute population. Bangkok is also bedeviled by monster traffic jams. More people per capita own Mercedes in Bangkok than anywhere in the world, reports the New York Times (March 20, 1996), but few owners can navigate the crowded streets. Political risks force a re-assessment of investments by organizational risk managers.

Political Risks

In the post-bi-polar world (USA vs. USSR), the glue that once held communities and nations together has lost its adhesion. Political fragmentation is one of the growing global risks faced by most organizations. Political decentralization raises concerns about the rules and regulations under which commerce will take place and the personnel with whom we will deal. It's ironic that, as a vocal and less restricted global press and new electronic technology bring us closer together, many of us seem to be opting for newer and smaller self-governing political units.

Examples: only last fall the province of Quebec voted narrowly to remain within Canada. It hardly settled the matter, only stimulating the Quebecois to press for another independence vote shortly. The Anglos (The English-speaking minority centered in Montreal) and Cree Indians now suggest that they might opt out of Quebec and remain in Canada if the vote goes against their wishes.

A small group of iconoclasts has declared an independent "state of Texas," even bringing a suit to the International Court of Justice in the Hague to press its case.

In Italy the Northern League, under its charismatic leader, Umberto Bossi, threatens to sever the head of the Italian peninsula to form a new state of Padania. Padania would have about 44% of the population but more than 60% of its GDP. Could it happen? Given the present climate, anything is possible.

Political risk involves not only political fragmentation but also economic disintegration. One example is Thailand, where rapid economic development, using a free-market model, has created a system that has outgrown the service infrastructure that government traditionally provides. Reports come from Bangkok of inadequate waste-water treatment, polluted canals, and one of the world's highest H.I.V. infection rates among its prostitute population. Bangkok is also bedeviled by monster traffic jams. More people per capita own Mercedes in Bangkok than anywhere in the world, reports the New York Times (March 20, 1996), but few owners can navigate the crowded streets.

Political risks force a re-assessment of investments by organizational risk managers.

Canada was boring beyond belief, but there was a brief flurry of excitement when Quebec voted on whether to secede and it came out just about even. After that, Canada immediately resumed being as boring as ever.

Russell Baker, The New York Times, November 21, 1995,

May in Paris
Aside from atypical raw weather in Paris in mid-May, my participation as chairman and a speaker at the ICBI (International Centre for Business Information) Insurance & Risk Management '96 Conference was intellectually and gastronomically satisfying. It was particularly stimulating in that the preponderance of discussion related to the future of the risk management process within a organization, leaving only modest comment about the insurance market. Refreshing! The salient conclusions: Risk management is more a process and a useful discipline than a position or a discrete function. The ultimate risk manager is the managing director and every employee carries some responsibility for the discipline. It does not need to report to a single czar. Alain Bridoux, the CFO of Sonoco Europe, uses Risk Management Committeesin each of his national operating units to identify risks and build risk awareness. Don't let one risk or set of risks dominate discussion: look at all of them. Dr. Paul Dorey, Group Operational Risk Director at Barclays Bank, has integrated risk assessment at the Bank to include Credit, Market and Operational risks, even while the primary focus at the bank remains on credit. Similarly, I cautioned the group to avoid the trap of "micromanaging minutiae," over-focusing on relatively minor risks. This is often the tendency of those whose responsibilities include insurance. In the total organizational framework, most "insurable" risks are inconsequential. Emphasize risk accountability at the business unit level. Excessive management at the corporate staff level builds risk aversion and denial, instead of risk awareness. Local units must take responsibility for their own risks, and their losses, without undue insulation. Teamwork of corporate staff and operating managers is essential to success in risk management. The risk manager becomes a "strategist" and "coach" rather than "manager." Harry Daugird, of ABB Germany, stressed that operating unit managers should be considered "customers." Good information is the core of successful risk management. It requires a two-way flow: from the	operating units to responsible staff, and then back in massaged form to aid better decision-making. Appropriate information on risk should also flow to senior management, the Board, shareholders, employees, customers, suppliers, financial partners and regulators. These latter audiences are often overlooked and under-served. Arthur Burgess, the Treasurer of British Gas, argued for the convergence of the languages of treasury and insurance: often different words are used when they have essentially the same meaning, leading to confusion (for example, a surety bond and a letter of credit are basically the same animal). Graham Trapnell, the Head of Passive Risk Management at Standard Chartered Bank (see RMR, June 1996), described the new French-engineered risk management information system that he has installed in London. Effisoft (also known as GestRisk) addresses all risks. He suggested that, armed with better information about risk, banks such as his would be accepting retentions of up to $100 million within the next three years. Trapnell also coined the epigram of the conference: "Manage what we know, not what we think we know." The structure of risk management should reflect local conditions and forms of governance. In the US and UK, many risk managers will report to the Board of Directors. In those European countries where corporations have dual boards, this is inappropriate. Finally, analyze continuously the financial capacity, financial strength (or weakness), the underwriting expertise and the cost of security of the insurance and reinsurance markets. Wolfram Rohde-Liebenau, Executive Director for Risk Management at Siemens, argued that "silent cartels are present in most insurance markets" and need to be recognized. He noted that Siemens has created a "fortuitous event" reserve of DM 20 billion (about US$ 13 billion) that significantly reduces its reliance on commercial insurance for risk financing. I was therefore surprised to learn that Siemens carries only a DM 20 million (US$ 13 million) retention although its departure from the German tariff property insurance market in 1993 probably will lead to higher retentions. ABB's Harry Daugird summed it up best when he said that "world class risk management standards are becoming normal." The free exchange of new ideas and practices, in conferences and through new technology such as the Internet, make it possible for risk management programs to be completely overhauled in far less time and with far less trauma than ever before.

May in Paris

Aside from atypical raw weather in Paris in mid-May, my participation as chairman and a speaker at the ICBI (International Centre for Business Information) Insurance & Risk Management '96 Conference was intellectually and gastronomically satisfying. It was particularly stimulating in that the preponderance of discussion related to the future of the risk management process within a organization, leaving only modest comment about the insurance market. Refreshing! The salient conclusions:

Risk management is more a process and a useful discipline than a position or a discrete function. The ultimate risk manager is the managing director and every employee carries some responsibility for the discipline. It does not need to report to a single czar. Alain Bridoux, the CFO of Sonoco Europe, uses Risk Management Committeesin each of his national operating units to identify risks and build risk awareness.
Don't let one risk or set of risks dominate discussion: look at all of them. Dr. Paul Dorey, Group Operational Risk Director at Barclays Bank, has integrated risk assessment at the Bank to include Credit, Market and Operational risks, even while the primary focus at the bank remains on credit. Similarly, I cautioned the group to avoid the trap of "micromanaging minutiae," over-focusing on relatively minor risks. This is often the tendency of those whose responsibilities include insurance. In the total organizational framework, most "insurable" risks are inconsequential.
Emphasize risk accountability at the business unit level. Excessive management at the corporate staff level builds risk aversion and denial, instead of risk awareness. Local units must take responsibility for their own risks, and their losses, without undue insulation.
Teamwork of corporate staff and operating managers is essential to success in risk management. The risk manager becomes a "strategist" and "coach" rather than "manager." Harry Daugird, of ABB Germany, stressed that operating unit managers should be considered "customers."
Good information is the core of successful risk management. It requires a two-way flow: from the

operating units to responsible staff, and then back in massaged form to aid better decision-making. Appropriate information on risk should also flow to senior management, the Board, shareholders, employees, customers, suppliers, financial partners and regulators. These latter audiences are often overlooked and under-served. Arthur Burgess, the Treasurer of British Gas, argued for the convergence of the languages of treasury and insurance: often different words are used when they have essentially the same meaning, leading to confusion (for example, a surety bond and a letter of credit are basically the same animal). Graham Trapnell, the Head of Passive Risk Management at Standard Chartered Bank (see RMR, June 1996), described the new French-engineered risk management information system that he has installed in London. Effisoft (also known as GestRisk) addresses all risks. He suggested that, armed with better information about risk, banks such as his would be accepting retentions of up to $100 million within the next three years. Trapnell also coined the epigram of the conference: "Manage what we know, not what we think we know."

The structure of risk management should reflect local conditions and forms of governance. In the US and UK, many risk managers will report to the Board of Directors. In those European countries where corporations have dual boards, this is inappropriate.

Finally, analyze continuously the financial capacity, financial strength (or weakness), the underwriting expertise and the cost of security of the insurance and reinsurance markets. Wolfram Rohde-Liebenau, Executive Director for Risk Management at Siemens, argued that "silent cartels are present in most insurance markets" and need to be recognized. He noted that Siemens has created a "fortuitous event" reserve of DM 20 billion (about US$ 13 billion) that significantly reduces its reliance on commercial insurance for risk financing. I was therefore surprised to learn that Siemens carries only a DM 20 million (US$ 13 million) retention although its departure from the German tariff property insurance market in 1993 probably will lead to higher retentions.

ABB's Harry Daugird summed it up best when he said that "world class risk management standards are becoming normal." The free exchange of new ideas and practices, in conferences and through new technology such as the Internet, make it possible for risk management programs to be completely overhauled in far less time and with far less trauma than ever before.

Risk is what life is all about! We press the envelope, try things that have never been done before for the sake of learning. Sometimes we have success. Sometimes we fail. We need to understand those failures and accept them as a natural part of learning, of growing and taking risks.

Kathryn C. Thornton, astronaut, addressing the University of Virginia graduation, as quoted in The New York Times, May 27, 1996

The Actuary and Risk Assessment
What can an actuary tell us? How reliable are actuarial projections? What role can the actuary play in risk assessment? I recently ran across a lucid and enlightening one page essay on the actuary's "art" in the pages of Tillinghast-Towers Perrin's quarterly magazine. John Tierney argues that, while actuaries traditionally attempt to estimate expected values, today they are being asked to evaluate variability. Variability is risk! He suggests that actuarial estimates, contrary to some belief, do not change the "underlying riskiness of the enterprise" and that a "statutory opinion" (for an insurance company) does not reflect the organization's "momentum" or future direction. Despite Tierney's first point, I believe that the "perception" of risk is altered by a thorough and believable actuarial analysis. It leads recipients to feel	falsely comfortable, merely on the evidence of an extensive set of numbers, signed by a reliable firm. This is what Tierney is warning against. He also properly emphasizes the necessity for the actuary to be completely independent in his or her evaluation, to test and analyze assumptions rigorously, and to model the financial consequences of the results. The actuary must reduce the possibility of the client adopting a "false sense of security" from the actuary's work: in this area a range of possible outcomes is always superior to a point estimate. For a copy of this succinct essay, contact the firm at 335 Madison Avenue, New York, NY 10017-4605: John Tierney, "The Role of the Actuary, 1996.

The Actuary and Risk Assessment

What can an actuary tell us? How reliable are actuarial projections? What role can the actuary play in risk assessment? I recently ran across a lucid and enlightening one page essay on the actuary's "art" in the pages of Tillinghast-Towers Perrin's quarterly magazine. John Tierney argues that, while actuaries traditionally attempt to estimate expected values, today they are being asked to evaluate variability. Variability is risk! He suggests that actuarial estimates, contrary to some belief, do not change the "underlying riskiness of the enterprise" and that a "statutory opinion" (for an insurance company) does not reflect the organization's "momentum" or future direction.

Despite Tierney's first point, I believe that the "perception" of risk is altered by a thorough and believable actuarial analysis. It leads recipients to feel

falsely comfortable, merely on the evidence of an extensive set of numbers, signed by a reliable firm. This is what Tierney is warning against.

He also properly emphasizes the necessity for the actuary to be completely independent in his or her evaluation, to test and analyze assumptions rigorously, and to model the financial consequences of the results. The actuary must reduce the possibility of the client adopting a "false sense of security" from the actuary's work: in this area a range of possible outcomes is always superior to a point estimate.

For a copy of this succinct essay, contact the firm at 335 Madison Avenue, New York, NY 10017-4605: John Tierney, "The Role of the Actuary, 1996.

Philosophers who have only one idea and propound it in barbarous neologisms in thirty successive volumes have a guaranteed future in the universities . . . .

Louis de Bernieres, Corelli's Mandolin, Vintage International, New York 1995

The Basle Committee
After the Herstatt Bank affair in Germany, bank regulators in many developed countries formed in 1974 the Basle Committee on Banking Supervision. The goal: a global framework for reviewing banking issues to avoid the systemic problems that appeared to be building. Its original concordat was adopted in 1975 with subsequent revisions in 1983 and 1992. Its minimum requirement: all international banks should be supervised on a consolidated basis (their entire worldwide business) by a capable authority in the home office country. The Basle Committee works. It is a forum for problems despite the fact that political issues continue to play a role. The Basle Committee has a securities industry counterpart, the International Organization of Securities Commissions (IOSCO). What do we have for insurance, a third piece of international financing? Regulators still protect their fiefdoms, particularly in the United States, where an outmoded system of state regulation looks increasingly archaic. Isn't it time to create a "Basle Committee" for global insurance, to extend to insurance offered through jurisdictions such as Bermuda, Guernsey, Luxembourg and Cayman Islands?	The deterioration of Lloyd's, the CIGNA "good insurer/bad insurer" fabrication, the current and forthcoming international insurers mergers (Zurich-Home; CNA-Continental; Royal-Sun Alliance and others forecast), and the extraordinary development of the alternative risk financing market, all call for a new global group to provide some leadership for both solvency, common accounting and consumer information. Shareholders and policyholders deserve some common standards. How about a new "Geneva Committee?" Some of the machinery is already in place with the Geneva Association, a 20+ year old group of European and North American insurance and reinsurance CEOs, headed by Dr. Orio Giarini. A new "Geneva Committee" could include representatives from government regulators and major corporate policyholders. This triumvirate - insurers, regulators, and policyholders - could begin to exercise the moral suasion that could lead to global standards for capital and surplus, risk-based capital formulae, quality controls, and guidance on major multi-national insurer mergers. Why not follow the lead of the banks?

The Basle Committee

After the Herstatt Bank affair in Germany, bank regulators in many developed countries formed in 1974 the Basle Committee on Banking Supervision. The goal: a global framework for reviewing banking issues to avoid the systemic problems that appeared to be building. Its original concordat was adopted in 1975 with subsequent revisions in 1983 and 1992. Its minimum requirement: all international banks should be supervised on a consolidated basis (their entire worldwide business) by a capable authority in the home office country. The Basle Committee works. It is a forum for problems despite the fact that political issues continue to play a role.

The Basle Committee has a securities industry counterpart, the International Organization of Securities Commissions (IOSCO).

What do we have for insurance, a third piece of international financing? Regulators still protect their fiefdoms, particularly in the United States, where an outmoded system of state regulation looks increasingly archaic. Isn't it time to create a "Basle Committee" for global insurance, to extend to insurance offered through jurisdictions such as Bermuda, Guernsey, Luxembourg and Cayman Islands?

The deterioration of Lloyd's, the CIGNA "good insurer/bad insurer" fabrication, the current and forthcoming international insurers mergers (Zurich-Home; CNA-Continental; Royal-Sun Alliance and others forecast), and the extraordinary development of the alternative risk financing market, all call for a new global group to provide some leadership for both solvency, common accounting and consumer information. Shareholders and policyholders deserve some common standards.

How about a new "Geneva Committee?" Some of the machinery is already in place with the Geneva Association, a 20+ year old group of European and North American insurance and reinsurance CEOs, headed by Dr. Orio Giarini. A new "Geneva Committee" could include representatives from government regulators and major corporate policyholders. This triumvirate - insurers, regulators, and policyholders - could begin to exercise the moral suasion that could lead to global standards for capital and surplus, risk-based capital formulae, quality controls, and guidance on major multi-national insurer mergers.

Why not follow the lead of the banks?

Henry Underhill was a man who felt he had been called upon to rule, and he was not put off by the fact that no one else seemed to have noticed. Instead he patiently collected, one by one, those small positions of authority left vacant by other's indolence.

Peter Carey, The Illywhacker, Faber & Faber, London, 1985