In the face of ever-increasing weather volatility, insurance companies are becoming more adaptive to handle capital challenges and ensuring their solvency. While different divisions within insurance companies would ideally exist within a vacuum, severe price shocks often necessitate that resources flow between them.
In her working paper “How Do Hurricanes Aﬀect Life Insurance Premiums? The Eﬀects of Financial Constraints on Pricing,” Shan Ge, a researcher and PhD candidate at The Ohio State University’s Fisher College of Business and research fellow at The Risk Institute, examines this trend.
According to Ge’s model, a hurricane might result in a severe shock due to a large number of claims to the Property & Casualty (P&C) division while the Life division escapes relatively unscathed. Pricing adjustments can then be made in one division to help transfer needed resources to another division.
“The insurance industry oﬀers a unique setting to study how shocks to ﬁnancial constraints aﬀect ﬁrms’ pricing behavior,” said Ge. “Many insurance companies are organized into groups of commonly owned aﬃliated companies. Some groups contain both life and P&C insurance subsidiaries, which are subject to unrelated shocks. For example, a hurricane can have a large impact on a P&C business but not directly on a life insurance business.”
In the wake of such an event, the Life division of the company will want to stimulate the amount of incoming capital and could lower the premiums of policies whose initial costs would be covered by the purchase price. Conversely, policies resulting in an initial outflow of capital would see their policies increase.
This increase in capital is important for a couple reasons: First, when assets are deemed too low to meet liabilities (say, when P&C claims spike due to a hurricane), regulators can seize control. Transfer of capital from one division to another can help to prevent this. Also, customers prefer to utilize better-capitalized insurers. This free flow of capital is vital to insurers when faced with heavy losses in one division vs. another.
While hurricanes bring a host of literal emergencies, flexibility of resources in their aftermath can help to mitigate some of the potentially devastating effects. Similarly, insurance companies facing financial shortfalls from such disasters can benefit by applying timely pricing strategy to allocate their resources where they’re needed most.
Shan Ge is a research fellow at The Risk Institute. The Risk Institute at The Ohio State University’s Fisher College of Business exists to bridge the gap between academia and corporate America. By combining the latest research with the real-world expertise of America’s most forward-thinking companies, the Risk Institute isn’t just reporting risk management’s current trends — it’s creating tomorrow’s best practices.
Ethics is more relevant than ever before; In public and private entities, ethical decision making seems to have taken a back seat to short-term profitability be it monetary gain or popular opinion. Companies like Volkswagen, Wells Fargo and Equifax are seeing share prices in freefall while simultaneously dealing with a public relations nightmare.
The Risk Institute hosted its first continuing professional development session of the academic year on October 11, 2017, on the Foreign Corrupt Practices Act (FCPA) and ethical decision making. Speakers included David Freel, a professor at The Ohio State University; Eric Lebson, a vice president at the Crumpton Group; Vlad Kapustin from New York Life; and Bill Foale, an investigator from EY.
Globally, corruption accounts for more than 5 percent of the global GDP — more than $2.6 trillion. Most of that corruption occurs in developed countries with approval from senior management. Which leads us to think that the tone at the top and organizational culture need work.
Organizational culture is the shared beliefs or expectations that influence thinking and behavior; it’s the glue that holds the company together. According to Prof. Freel local companies Nationwide, Cardinal Health are best-practice examples of excellent, ethical organizational culture.
And ethics is important to consumers too. The data currently says that consumers are more likely to do business with companies they perceive to be of a high moral fiber.
Since a company’s ethics is a priority to consumers, it could be assumed that strides have been made across industries to clearly define ethical behavior for its employees, provide training, improve whistleblower policies, etc.
Unfortunately, that’s not the case.
Over the last 30 years, there’s virtually been no change in anti-corruption policies. According to Eric Lebson, “It’s difficult to get a company that has never experienced a FCPA incident to take action.”
An FCPA investigation can be crippling. On average, an FCPA investigation lasts 3.7 years, 92.42% of defendants who settle with SEC, and 76.44% of defendants who settle with DOJ.
Bill Foale encouraged executives to empower their audience to make compliance second nature. Many anti-corruption policies are dense and jargony and therefore difficult for even a native English speaker to comprehend. Foale suggests asking the following questions about your anti-corruption policies:
Is the material understandable?
Is it written in a way that the information is relatable to the audience responsibilities? As in, not just a list of “do nots” and includes examples of practical tips
Language? Keep in mind that many of your employees may be native English speakers.
Is there a resource available for questions/assistance?
Many ethical challenges like transparency, privacy, self-interest, and data protection lie ahead. But with proper prior preparation, any organization can avoid ethical conflicts.
For more on this topic and many others, visit fisher.osu.edu/risk. Risk Series V continues on November 14 with a conversation on Mergers & Acquisition Risk. M&A is a high stakes game and getting it right matters. Join The Risk Institute and our experts from academia and industry for a lively discussion about the delicate balance of risk and reward in M&A. To register, visit go.osu.edu/marisk.
Researchers find that unrest can have international ripple effect on business
A recent study conducted by Professor Isil Erel, Academic Director of the Risk Institute at The Ohio State University’s Fisher College of Business, in conjunction with Jan Bena from the University of British Columbia and Serdar Dinc from Rutgers University, has found that global, non-financial companies that have subsidiaries in crisis countries experience negative financial effects that extend beyond that country’s borders.
In their findings, which were presented by Professor Erel last month at Carnegie Mellon University and Emory University, it was determined that investment in a corporations’ subsidiaries in non-crisis countries tended to be 18% lower for corporations who had other subsidiaries in countries experiencing turmoil. Employment growth rate was also shown to be net zero or negative for such companies compared to 1.4% growth for their non-affected counterparts.
Isil Erel is the Academic Director and research fellow at the Risk Institute. The Risk Institute at The Ohio State University’s Fisher College of Business exists to bridge the gap between academia and corporate America. By combining the latest research with the real-world expertise of America’s most forward-thinking companies, the Risk Institute isn’t just reporting risk management’s current trends — it’s creating tomorrow’s best practices.
Are Bitcoin and blockchain the same thing? No, they aren’t. However, they are closely related. When Bitcoin was released as open source code, blockchain was wrapped up together with it in the same solution. And since Bitcoin was the first application of blockchain, people often inadvertently used “Bitcoin” to mean blockchain. That’s how the misunderstanding started. Blockchain technology has since been extrapolated for use in other industries, but there is still some lingering confusion.
Bitcoin is a type of unregulated digital currency that was first created by Satoshi Nakamoto in 2008. Also known as a “cryptocurrency,” it was launched with the intention to bypass government currency controls and simplify online transactions by getting rid of third-party payment processing intermediaries. Of course, accomplishing this required more than just the money itself. There had to be a secure way to make transactions with the cryptocurrency.
Bitcoin transactions are stored and transferred using a distributed ledger on a peer-to-peer network that is open, public and anonymous. Blockchain is the underpinning technology that maintains the Bitcoin transaction ledger. Check out this infographic and watch the video below for an overview:
How does the Bitcoin blockchain work?
The Bitcoin blockchain in its simplest form is a database or ledger comprised of Bitcoin transaction records. However, because this database is distributed across a peer-to-peer network and is without a central authority, network participants must agree on the validity of transactions before they can be recorded. This agreement, which is known as “consensus,” is achieved through a process called “mining.”
After someone uses Bitcoins, miners engage in complex, resource-intense computational equations to verify the legitimacy of the transaction. Through mining, a “proof of work” that meets certain requirements is created. The proof of work is a piece of data that is costly and time-consuming to produce but can easily be verified by others. To be considered a valid transaction on the blockchain, an individual record must have a proof of work to show that consensus was achieved. By this design, transaction records cannot be tampered with or changed after they have been added to the blockchain.
How is blockchain for business different?
The blockchain that supports Bitcoin was developed specifically for the cryptocurrency. That’s one of the reasons it took a while for people to realize the technology could be adapted for use in other areas. The technology also had to be modified quite a bit to meet the rigorous standards that businesses require. There are three main characteristics that separate the Bitcoin blockchain from a blockchain designed for business.
Assets over cryptocurrency
There is an ongoing discussion about whether there is value in a token-free shared ledger, which is essentially a blockchain without cryptocurrency. I won’t weigh in on this debate, but I will say this: blockchain can be used for a much broader range of assets than just cryptocurrency. Tangible assets such as cars, real estate and food products, as well as intangible assets such as bonds, private equity and securities are all fair game. In one business use case, Everledger is using blockchain to track the provenance of luxury goods to minimize fraud, document tampering and double financing. Now, over one million diamonds are secured on blockchain.
Identity over anonymity
Bitcoin thrives due to anonymity. Anyone can look at the Bitcoin ledger and see every transaction that happened, but the account information is a meaningless sequence of numbers. On the other hand, businesses have KYC (know your customer) and AML (anti-money laundering) compliance requirements that require them to know exactly who they are dealing with. Participants in business networks require the polar opposite of anonymity: privacy. For example, in an asset custody system like the one being developed by Postal Savings Bank of China, multiple parties, including financial institutions, clients, asset custodians, asset managers, investment advisors and auditors are involved. They need to know who they are dealing with but one client or advisor doesn’t necessarily need to be able to see all transactions that have ever occurred (especially when those transactions relate to different clients).
Selective endorsement over proof of work
Consensus in a blockchain for business is not achieved through mining but through a process called “selective endorsement.” It is about being able to control exactly who verifies transactions, much in the same way that business happens today. If I transfer money to a third party, then my bank, the recipient’s bank and possibly a payments provider would verify the transaction. This is different from Bitcoin, where the whole network has to work to verify transactions.
Why will blockchain transform the global economy?
Similar to how the internet changed the world by providing greater access to information, blockchain is poised to change how people do business by offering trust. By design, anything recorded on a blockchain cannot be altered, and there are records of where each asset has been. So, while participants in a business network might not be able to trust each other, they can trust the blockchain. The benefits of blockchain for business are numerous, including reduced time (for finding information, settling disputes and verifying transactions), decreased costs (for overhead and intermediaries) and alleviated risk (of collusion, tampering and fraud).
Nearly three-quarters of a century into its existence, Safelite Group has reason to act like a market leader – it is one.
The ubiquitous Columbus-based glass repair and replacement services company has a presence in all 50 states, with the capability to serve about 97 percent of U.S. drivers. Even 70 years after its founding, it’s in growth and acquisition mode.
That doesn’t mean, however, that Safelite isn’t keeping an eye out for disruptors waiting in the wings to turn the business on its ear.
“We’re looking over our shoulder,” said Bruce Millard, the company’s vice president of digital and customer innovation. “We’re asking, ‘Who has the velocity to potentially cause us problems?’”
Millard was one of four speakers at the second of two summer sessions focused on top business challenges and co-hosted by The Risk Institute along with three other centers housed at Fisher College of Business: The Center for Innovation and Entrepreneurship, the National Center for the Middle Market and The Center for Operational Excellence. After surveying the state of the “talent war” in July, the centers brought together industry executives and academic experts to offer a mix of exciting developments, sobering realities and paths forward in the rapidly shifting world of data analytics and digital disruption.
In his kickoff keynote, Jeremy Aston of tech communication giant Cisco Corp. shared how much — and how little — has changed in how companies are viewing and preparing for the threat of digital disruption. Cisco’s Global Center for Digital Business Transformation in a 2015 survey of nearly 1,000 executives found 15 percent said digital disruption was already occurring in their respective industries. At the same time, a scant one in 250 of those surveyed said digital trends would have a transformative impact on their industry. Fast-forward to a new survey round this year and the shift is staggering: Half of those surveyed said disruption was ongoing, while nearly one in three foresaw a transformative effect.
“Today, we’re under pressure to transform and perform,” said Aston, senior director of the Go to Market and Offer Monetization Office at Cisco.
One statistic that changed little in the two-year span hints at a gap Cisco’s research has found between companies’ awareness and action. In 2015, a quarter of those surveyed said they were “actively responding” to digital disruption. That number rose to just 31 percent this year.
“That is a dangerous game to play,” Aston said.
While the media/entertainment trades and Cisco’s own technology products and services niche are easily most vulnerable to disruption, few – if any – parts of the economy are immune to companies born in today’s digital-first world. Speaker Mark Kvamme, a former Ohio economic development official and partner at venture capital investment firm Drive Capital, shared a dynamic portrait of companies in Drive’s investment portfolio that could have a transformative impact. One of them, Columbus-based startup CrossChx, has launched an artificial intelligence-enabled tool for the healthcare industry that synthesizes and automates high-volume, repetitive tasks — prior authorizations, appointment reminders — outside the scope of patient care. On the analytics front, Columbus-based FactGem — run by Megan Kvamme — is helping companies translate hordes of data from far-flung sources into actionable intelligence.
All these innovations, Kvamme said, point to an unavoidable truth: “The amount of change we’re going to see in the next five to 10 years is going to spin everybody’s heads.”
A world of opportunity, however, also means a world of risk. Professor Dennis Hirsch, who runs the Program on Data and Governance at Ohio State’s Moritz College of Law, closed out the session with a look at the tricky terrain of data analytics in technology, which already has destroyed some players (student data repository InBloom) and led to serious brand damage for others (Uber).
“Big data is a crystal ball,” Hirsch said, “and that means it can be used for good — and for bad.”
As companies move forward, Hirsch said, it’ll be incumbent upon them to establish processes and guiding values that protect customers and treat them fairly. Technology and its innovative uses for data, in fact, are outrunning the law itself.
“The law hasn’t caught up, and to some extent it never will,” Hirsch said. “We need to be asking, ‘What does it mean to be responsible beyond just compliance?’”
A key tool companies can use as they make decisions on these issues, and the broader world of digital transformation, is a decidedly non-technological notion at heart: process. From a legal and ethical perspective, that means establishing them on the front end to mitigate the risks of leveraging big data. From a business agility standpoint, Aston of Cisco said in opening the day, that means having a perspective that extends beyond the flashy innovation itself.
“We have to make thoughtful decisions,” Aston said, “and we can’t just be focused on technological outcomes. What’s the business outcome you need to drive?”
It’s a car crash, not an accident. That’s the message coming from behavioral researchers partnered with The Risk Institute Distracted Driving Initiative at The Ohio State University Fisher College of Business, who recommend that people need to stop using the word “accident” when comes to distracted driving crashes, as well as several other behavioral recommendations.
“One of the keys to curbing distracted driving fatalities and crashes is to change behavior and attitudes towards driving while distracted,” said Stacey Emert, partner at InAlign Partners and lead of the initiative’s behavior team. “One of the most effective methods is called social norming. This is essentially the collective thought about a behavior. Over the last 50 years, we’ve successfully flipped the collective thought on smoking, drunk driving, and child safety seats. We need to flip the collective mindset on distracted driving. We do this in part by changing the language we use: distracted driving accidents become crashes. You wouldn’t call a plane crash a plane accident.”
The Distracted Driving Initiative at The Risk Institute at is a nationwide endeavor comprised of dozens of companies, government entities, and researchers seeking to combine key partnerships, critical research, and leading-edge technology to predict and curb distracted driving behaviors.
“Unfortunately, people make choices that harm their ability to drive, like driving drunk, and so many traffic deaths could’ve been prevented if people stayed off the roads when drunk,” says Brittany Shoots-Reinhard, a psychology researcher at The Ohio State University. “In the 1980s, people were resistant to laws against drinking and driving, but now, we don’t drive drunk or let our friends drive drunk, either.”
The number of fatal traffic accidents rose 7.2 percent nationally in 2015 according to the National Highway Traffic and Safety Administration. It is the greatest year-over-year increase since 1966. Distracted driving was a factor in about 10 percent of auto deaths; the exact percentage is difficult to determine due to privacy rules and other factors.
“We can change the norms about distracted driving, too. These crashes are entirely preventable; at Ohio State, we’re working together to figure out how to help people not drive distracted”,” said Shoots-Reinhard.
The Risk Institute at The Ohio State University Fisher College of Business brings together practitioners and researchers to engage in risk-centered conversations and to exchange ideas and strategies on integrated risk management. Through the collaboration of faculty, students and risk management professionals, The Risk Institute addresses risk at a broad cross section of industries and is dedicated to developing leading-edge approaches to risk management.
The Distracted Driving Initiative at the Risk Institute began in February 2017. Industry partners involved with the project are Honda Inc., Aon Benfield, Nationwide, NiSource, Ford, Motorists Insurance, DHL, State Auto, Freer Logic, TrueNorth, and others. Representing the legal and governmental branches are the Ohio Attorney General’s Office and the Ohio Department of Public Safety. Ohio-based Root Insurance, Smart Drive, Greenroad, and eDriving Fleet make up the technology voices in the conversation. A dozen researchers and thought leaders from OSU representing behavioral science, engineering, automotive research, risk and others make up the research arm of the initiative.
My name is Luis Garcia-Fuentes, alumnus of The Ohio State University Fisher College of Business. I now work for PwC in New York helping banks navigate financial reporting requirements. During my time at Ohio State, one of the organizations that furthered my education the most was The Risk Institute. The Risk Institute compliments Fisher’s academic programs by providing insights into the art and science of risk management, a theme that any business student must be familiar with in order to succeed in this ever-changing world. The Institute achieved this by providing networking sessions with risk professionals from multiple industries and by providing first-hand experiences through business simulations. I was able to participate in two of these simulations. The first was co-hosted by DHL professionals, and for the second I was a team member of the prestigious RIMS national case competition, which allowed me to better understand the risk environment of the Fintech sector.
My experience at the RIMS case competition was unique, as I worked within a group of five talented business and actuary science students to understand the risk environment of PayPal. Unlike any other case competition, where a problem is presented to be solved, the RIMS case competition asked a broader question; what PayPal risks are and what the best way to mitigate them is. This forced our team to spend weeks of research getting to know PayPal’s business environment, leveraging our findings with the guidance of our project mentor Philip Renaud, Executive Director of The Risk Institute. Our experience during that semester long project closely mirrored the profession of a risk consultant. We even had the opportunity to spend an hour in a conference call with one of PayPal’s C-suite executives.
To say that the Risk Institute creates value to the university by co-organizing case competitions and hosting networking events is an understatement. The Risk Institute serves as a host for ideas across different business disciplines, where all students can learn how to think about risk and how to act during a business crisis. Furthermore, The Risk Institute not only focuses on enhancing the education of Ohio State students, but they also host executive courses for professionals and share their industry expertise with the community of Columbus. The Risk Institute, through the active engagement of all its members, has made of my education at Ohio State a distinctive experience.
The Risk Institute is excited to announce SCRAM™, a supply chain resilience assessment and management tool, developed by researchers at The Ohio State in collaboration with the U.S. Air force, Dow Chemical, L Brands and a number of other companies.
Businesses Need Resilience
In an age of global turbulence, resilience is a key competency for corporations. How can a company improve the resilience of its supply chain processes, so that it can recover rapidly from unexpected disruptions, assure business continuity and adapt effectively to changing external conditions?
SCRAM™ is a facilitated process, supported by a computer-based toolkit, that provides a diagnostic assessment of an organization’s preparedness and fitness for coping with turbulent change. The process identifies resilience gaps and then suggests enhancements that will strengthen the company’s capacity to survive, adapt, and flourish—even when surprises occur.
What Can SCRAM™ Do For You?
SCRAM™ offers businesses a unique, comprehensive approach to understand the pattern of their potential vulnerabilities and to design a portfolio of supply chain capabilities that will offset those vulnerabilities.
For more information about SCRAM™, please contact us at The Risk Institute.
We often associate risk with something that has a negative connotation, while missing out on the fact that risk is faced with any unexpected outcome, whether good or bad. Before starting my master’s degree, I worked in a bank where for us, the word “risk” meant that there was a fair chance of events going awry.
When I started the SMF program at The Ohio State Fisher College of Business, The Risk Institute’s Monday evening sessions caught my eye and I soon realized that risk meant so much more. There were different aspects of risk such as financial, political, operational and cyber, to name a few. Risk management teams would work to ensure that the risks faced by an organization were mitigated/reduced.
The Risk Institute hosted educational sessions with an array of speakers to give insight into the diverse risks that their companies anticipated, faced and tackled. All these sessions were immensely informative and interesting. What I had anticipated being a subject with a negative connotation, turned out to be a whole new world of meanings. In addition to the guest speakers, Phil and Denita at The Risk Institute guided us in the scope of risk in this day and age, which led me to take on coursework for enterprise risk management.
As a part of the Enterprise Risk Management course, I worked on one of the risk projects for Abbott Nutrition at their Columbus Plant. The project seemed fairly simple on paper, however, as our team began working we soon realized its complexities. The scope of the project was a bit broad and we were still in the process of getting acquainted with the risks that Abbott Nutrition’s plant faced vis-à-vis other technical risks that we had studied in classrooms. We decided it would be best to seek out The Risk Institute’s advice on how to go about our project. Phil was more than happy to help us formulate a plan of action and to advise us on how such projects were done by The Risk Institute. Throughout the short term of our project, Phil, Denita and our sponsors at Abbott Nutrition were involved and continually provided feedback. This helped us in delivering a product that was ultimately appreciated by Abbott Nutrition.
In addition to the curriculum, the members of The Risk Institute have also helped me with my job search. They suggested prospective employers, networking events and connected me with professionals who have considerable expertise in the field of risk management.
To sum up my experience, it was wonderful working with the members of the Risk Institute and I plan to give back to The Risk Institute in whatever way possible in the future. I graduated in spring of 2017 from Fisher College of Business after completing my SMF degree. I am currently on the lookout for roles and opportunities.
Does offshore production pose an added quality risk relative to domestic production? And if so, what factors influence quality risk? The study, “Quality risk in offshore manufacturing: Evidence from the pharmaceutical industry” by John V. Gray and Michal J. Leiblein at the Fisher College of Business at Ohio State, co-authored with Aleda V. Roth at Clemson University’s College of Business and Behavioral Sciences, attempts to answer these questions by examining a series of invariant quality-risk measurement controls.
Companies are hopeful that offshore plants will become lower-cost “clones” of U.S. operations. While many believe this to be a significant cost-cutting strategy, the study proves that quality risk suffers in offshore manufacturing. The research defines quality risk as the propensity of a manufacturing establishment to fail to comply with good manufacturing practices. It is a proxy for the likelihood that a product shipped from a given establishment will not perform as intended due to manufacturing-related issues.
The researchers focused on U.S. pharmaceutical companies with offshore production in Puerto Rico, where 16 of the top 20 drugs in the United States were produced at the time of the study. To assess quality risk, the authors used inspection data from the Food and Drug Administration, providing a consistent, unbiased, third-party measure of quality risk in the highly regulated industry. To assess quality risk, they examined 30 matched pairs of U.S. and Puerto Rican pharmaceutical manufacturing facilities. The pairs had the same parent companies and produced similar products.
The researchers measured and controlled factors influencing quality risk in offshore manufacturing, finding: greater potential for expropriation of assets and intellectual property; political, social, and currency instability; issues related to insufficient worker experience and infrastructure; more pronounced cultural issues, language, and communications incompatibilities.
When these factors were measured in depth, they revealed the following:
The higher the educational level of the local population from which the plant’s employees are hired, the lower a plant’s quality risk
The greater the agglomeration of related plants in the geographic area of the plant, the lower the quality risk of an individual plant in that area
The greater the geographic distance between the plant and company headquarters, the higher the quality risk of the plant
The greater the cultural distance between the firm’s home country and the offshore plant, the greater the increase of quality risk at the offshore plant
In conclusion, the study warns, “Many top-level executives may be easily blindsided by the numerous perceived upsides of offshoring, and may too easily dismiss the downside operational risks beyond the obvious.”