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Is Civility Killing Risk Management? (Part 2)

The first part of this series declared that HR managers now control the basic tenor of how safety management is executed in most organizations. As veteran safety professional Mark Kennedy says, “There is now no difference between safety and human resource management. I consider them one.”

As a result, safety has adopted a kinder, gentler disposition as it emphasizes employee relationships and teamwork. A worker’s safety performance is now judged in large part by a new compulsory social norm — civility.

Safety has become a social change movement that should worry insurers.

Experts say safety has suffered as a result of its increased focus on relational sensitivity. Workers with naturally grumpier temperaments — a majority of workers performing safety-sensitive jobs — feel unfairly targeted for change, or worse.

Is this concern justified, or are these workers simply part of a long-time dispositional safety problem that is only now being rectified through HR-led safety departments?

Following a dangerous path

A look at how this change is being felt by one company’s workers provides insight.

For the past three years, one large company has invested heavily in an employee safety awareness campaign designed by an HR consultant. The campaign includes training classes in which employees are equipped with relational skills to improve the company’s safety climate. Topics are standard training fare — teamwork, leadership, communication, supervising — aided by insight gained from a behavior assessment tool.

Initial results indicated that the company reaped an improvement in both safety attitude and incident rates. Thereafter, rates plateaued. Employees now quietly question the campaign’s viability.

Upon review of the campaign by independent sources, it was noted that training instructors were telling participants that they must avoid using what could be perceived as critical or confrontational behavior toward others, even if used to keep them from imminent injury.

A typical reaction came from one worker, who looked on incredulously when he was told that he could not raise his voice to stop a coworker from potentially injuring himself. Yelling to prevent injury would be as harmful as allowing the coworker to risk injury. Civility must prevail.

In another training class, students expressed shock at the audacity of someone who bluntly told a coworker to “get your hand back inside the elevator door” as it closed. (The coworker was holding the door open for a late-arriving colleague, a violation of safety policy.) Shame, shame, the class repeated in Gomer Pyle-like unison. Shame on the worker for acting rudely.

If these instances were isolated cases, there would be no cause for concern. But other companies mirror a similar trend.

Reaching beyond good intentions

Such a foray into forced sensitivity was never intended.

Two decades ago, pressure from safety regulators and large insurance brokers caused many companies to improve the safety-critical “people skills” of their labor force. Of greatest concern were interpersonal communication skills most often cited as being involved in incidents.

The consensus among company managers was that specialized employee development personnel with HR-like perspective were needed to better facilitate the training effort. Existing safety instructors wouldn’t do.

Some companies turned over the keys entirely to their HR departments.

Symbolic of this was a 1994 meeting in the boardroom of a large maritime company whose vessel personnel lacked the necessary interpersonal skills to safely manage crewmen and conduct operations. Determining a path to improvement was the sole item on the agenda.

The meeting was held under the watchful eye of the company’s risk management consultant. Present were the company’s executive vice president, its HR manager, a client-representative, a regulatory authority and a training contractor. No company safety representative was invited.

The company approved an extensive safety-training program for vessel officers that day. Its focus was simple: Improve communication skills. More than 1,200 of the company’s vessel officers eventually participated. Other companies used the same blueprint to train 2,300 of their officers.

Maritime executive Larry Rigdon says that the training contributed significantly to “a positive change in employee attitude toward themselves, the company and the industry.”

With the widespread success of training initiatives like this, safety discovered its softer side, and HR was given a change agent that it could use for broader purposes than risk control.

Large insurance brokers quickly fell into formation, strongly suggesting — sometimes demanding — that their customers recast their safety programs in the civility-first mold. But brokers did not envision the long-term effects of their endorsement.

Looking back, the risk manager present at the maritime company’s 1994 meeting (who wishes to be anonymous) states that early training efforts were focused on developing leaders who would “manage the loss-reduction process.” Relational skill-development was undertaken for a specific purpose, so that employees could better convey “where they are going and whether or not they have reached their objectives . . .to reinforce tactics and targets.”

The soft side of safety was created to enable workers to achieve concrete objectives, not to teach haters to be likers, or convert negative-mood individuals into positive ones or to intimidate those who do not fit a preferred mold.

Correcting course

Only insurers have the muscle to reverse the tide of the paralyzing civility movement within safety. Like two decades ago, they must exert influence with customers who need direction.

Here are a few things that insurers can do to right the balance of the listing safety ship:

— Sit down with the customer and ask the following three questions:

Which department establishes the behavioral standards of how employees should personally relate to each other in fulfillment of the company’s safety mission?

Which department is responsible for training employees in those standards?

Which department holds workers accountable, and how?

Search for duality or overlap (between HR and HSE) that may be confusing to those responsible with accomplishing the safety mission — that’s everyone.

— Poll the customer’s safety representatives confidentially. Ask their opinion about the direction of the company’s safety management program.

Give credence to the opinions of long-time safety professionals who have witnessed the evolution discussed here.

— Review the vision, mission and goals of the customer’s safety program independently and determine how they are accomplished within the customer’s real work climate.

Search for tangible evidence that the core elements of loss prevention are being achieved as a first priority.

Insurers should present their findings, along with recommendations, to the customer.

The long-standing safety goal of zero incidents turned into zero tolerance years ago. Under HR’s influence upon safety, the policy frighteningly approaches intolerance. Now is the time to reverse the trend.

Then again, as a reformed hater, perhaps I am just being too sensitive.

Is Civility Killing Risk Management? (Part 1)

In case you missed it, saving lives and preventing injuries on the job is now the duty of the human resources department. So is the choice of employee management tactics used to achieve safety. Civility is in; grumpiness is out.

Insurers should be concerned, because the shift in responsibility and tactics has grounded the safety ship they worked hard to launch two decades ago.

Safety, the social movement

The takeover by HR was foretold by Samuel Greengard in his bold 1999 Workforce magazine cover story on zero tolerance. “Saving lives. . . requires careful thought and action—usually spearheaded by HR,” he wrote. Not the safety department. HR.

A cursory glance at the organizational charts of mid- to large-size companies confirms the shift. Safety professionals have been dispossessed. Their authority to determine the overall tenor of safety management programs has largely been handed to those who think that relational development between employees is safety’s missing link.

The new core belief guiding safety is simple: Unless safety is accomplished civilly—with first priority given to employee management policy—and produces harmony between workers, it is not done properly.

As a result, it is no longer sufficient for workers to solely focus on accomplishing traditional safety objectives; they must also dedicate precious energy to ensuring tolerable relationships with each other. As Greengard says, “preventing harassment and avoiding discrimination” share the same priority as “saving lives.”

Bottom line? The way workers treat each other in conducting the safety mission has become as important as the mission itself.

Safety has become a social change movement.

Alarm from safety professionals

The change in focus has its detractors. Under the guise of zero-tolerance policies toward what Greengard calls “unacceptable and detrimental behavior,” some wonder if the real purpose of safety is being overlooked. Others express a deep concern that safety has merely become a powerful vehicle through which HR can effect social change.

Safety professionals have long been wary of the potentially detrimental influence on risk management that such an emphasis can bring. They are quick to point out that risk control and incident prevention often involve critical, confrontational and sometimes blunt dialogue on the job site—behavior frowned upon by HR.

Safety professionals’ greatest fear is that there may be a purge of workers whose temperament is vital to risk management but whose behavior is deemed to be uncivil, therefore non-compliant. This includes a large percentage of workers currently employed in safety-sensitive jobs.

One report published in Insurance Thought Leadership indicates that three-quarters of skilled and semi-skilled frontline workers exhibit primary personality traits that may be described as crusty or unfriendly. The traits include: task-focused, emotionally withdrawn, hostile and unsympathetic. Airline pilots, surgeons and most professionals whose job includes continuous risk-based decision-making bear the same characteristics.

Opening the door for intolerance

In research circles closely followed by HR managers, the rhetoric against those inclined to this prickly temperament has increased dramatically.

In one study, researchers classify less personable workers as “negative mood” employees who harm the “positive affective states” of “positive mood” individuals. Experts say gruff and grumpy workers easily negate any good generated by people-oriented positive-thinkers.

That’s tame compared with the harsh term used in a prestigious 2014 university research report on worker dispositional attitude. In this study, the word used to describe workers whose temperament is typically found in high-risk jobs is “hater,” as in the opposite of “liker.”

Haters tend to initially dislike many things and to focus on tasks rather than people. Considered standoffish, they are not as popular as social-butterfly, anything-goes likers. (Social media is not meant for haters. If so, “dislike” would be their favorite button.)

In the wrong hands and for the wrong purposes, “hater” is a derogatory categorization that could be used to isolate, shame or potentially terminate those whose only fault is that they occupy the wrong side of the behavioral spectrum preferred by leaders in the social safety movement.

Part 2 of this series explores what insurers can do to stop the slide down this slippery slope.

The Traps Hiding in Catastrophe Models

Catastrophe models from third-party vendors have established themselves as essential tools in the armory of risk managers and other practitioners wanting to understand insurance risk relating to natural catastrophes. This is a welcome trend. Catastrophe models are perhaps the best way of understanding the risks posed by natural perils—they use a huge amount of information to link extreme or systemic external  events to an economic loss and, in turn, to an insured (or reinsured) loss. But no model is perfect, and a certain kind of overreliance on the output from catastrophe models can have egregious effects.

This article provides a brief overview of the kinds of traps and pitfalls associated with catastrophe modeling. We expect that this list is already familiar to most catastrophe modelers. It is by no means intended to be exhaustive. The pitfalls could be categorized in many different ways, but this list might trigger internal lines of inquiry that lead to improved risk processes. In the brave new world of enterprise risk management, and ever-increasing scrutiny from stakeholders, that can only be a good thing.

1. Understand what the model is modeling…and what it is not modeling!

This is probably not a surprising “No. 1” issue. In recent years, the number and variety of loss-generating natural catastrophes around the world has reminded companies and their risk committees that catastrophe models do not, and probably never will, capture the entire universe of natural perils; far from it. This is no criticism of modeling companies, simply a statement of fact that needs to remain at the front of every risk-taker’s mind.

The usual suspects—such as U.S. wind, European wind and Japanese earthquake—are “bread and butter” peril/territory combinations. However, other combinations are either modeled to a far more limited extent, or not at all. European flood models, for example, remain limited in territorial scope (although certain imminent releases from third-party vendors may well rectify this). Tsunami risk, too, may not be modeled even though it tends to go hand-in-hand with earthquake risk (as evidenced by the devastating 2011 Tohoku earthquake and tsunami in Japan).

Underwriters often refer to natural peril “hot” and “cold” spots, where a hot spot means a type of natural catastrophe that is particularly severe in terms of insurance loss and is (relatively) frequent. This focus of modeling companies on the hot spots is right and proper but means that cold spots are potentially somewhat overlooked. Indeed, the worldwide experience in 2011 and 2012 (including, among other events, a Thailand flood, an Australian flood and a New Zealand earthquake) reminded companies that so-called cold spots are very capable of aggregating up to some significant levels of insured loss. The severity of the recurrent earthquakes in Christchurch, and associated insurance losses, demonstrates the uncertainty and subjectivity associated with the cold spot/ hot spot distinction.

There are all sorts of alternative ways of managing the natural focus of catastrophe models on hot spots (exclusions, named perils within policy wordings, maximum total exposure, etc.) but so-called cold spots do need to remain on insurance companies’ risk radars, and insurers also need to remain aware of the possibility, and possible impact, of other, non-modeled risks.

2. Remember that the model is only a fuzzy version of the truth.

It is human nature to take the path of least resistance; that is, to rely on model output and assume that the model is getting you pretty close to the right answer. After all, we have the best people and modelers in the business! But even were that to be true, there can be a kind of vicious circle in which model output is treated with most suspicion by the modeler, with rather less concern by the next layer of management and so on, until summarized output reaches the board and is deemed absolute truth.

We are all very aware that data is never complete, and there can be surprising variations of data completeness across territories. For example, there may not be a defined post or zip code system for identifying locations, or original insured values may not be captured within the data. The building codes assigned to a particular risk may also be quite subjective, and there can be a number of “heroic” assumptions made during the modeling process in classifying and preparing the modeling data set. At the very least, these assumptions should be articulated and challenged. There can also be a “key person” risk, where data preparation has traditionally resided with one critical data processor, or a small team.  If knowledge is not shared, then there is clear vulnerability to that person or team leaving. But there is also a risk of undue and unquestioning reliance being placed upon that individual or team, reliance that might be due more to their unique position than to any proven expertise.

What kind of model has been run? A detailed, risk-by-risk model or an aggregate model? Certain people in the decision-making chain may not even understand that this could be an issue and simply consider that “a model is a model.”

It is worth highlighting how this fuzzy version of the truth has emerged both retrospectively and prospectively. Retrospectively, actual loss levels have on occasion far exceeded modeled loss levels: the breaching of the levies protecting New Orleans, for example, during Hurricane Katrina in 2005. Prospectively, new releases or revisions of catastrophe models have caused modeled results to move, sometimes materially, even when there is no change to the actual underlying insurance portfolio.

3. Employ additional risk monitoring tools beyond the catastrophe model(s). 

Catastrophe models are a great tool, but it is dangerous to rely on them as the only source of risk management information, even when an insurer has access to more than one proprietary modelling package.

Other risk management tools and techniques available include:

  • Monitoring total sum insured (TSI) by peril and territory
  • Stress and scenario testing
  • Simple internal validation models
  • Experience analysis

Stress and scenario testing, in particular, can be very instructive because a scenario yields intuitive and understandable insight into how a given portfolio might respond to a specific event (or small group of events). It enjoys, therefore, a natural complementarity with the hundreds of thousands of events underlying a catastrophe model. Furthermore, it is possible to construct scenarios to investigate areas where the catastrophe model may be especially weak, such as consideration of cross-class clash risk.

Experience analysis might, at first glance, appear to be an inferior tool for assessing catastrophe loss. Indeed, at the most extreme end of the scale, it will normally provide only limited insight. But catastrophe models are themselves built and given parameters from historical data and historical events. This means that a quick assessment of how a portfolio has performed against the usual suspects, such as, for U.S. exposures, hurricanes Ivan (2004), Katrina (2005), Rita (2005), Wilma (2005), Ike (2008) and Sandy (2012), can provide some very interesting independent views on the shape of the modeled distribution. In this regard, it is essential to tap into the underwriting expertise and qualitative insight that the property underwriters can bring to risk assessment.

4. Communicate the modeling uncertainty.

In light of the inherent uncertainties that exist around modeled risk, it is always worth discussing how to load explicitly for model and parameter risk when reporting return-period exposures, and their movements, to senior management. Pointing out the need for model risk buffers, and highlighting that they are material, can trigger helpful discussions in the relevant decision-making forums. Indeed, finding the most effective way of communicating the weaknesses of catastrophe modeling, without losing the headline messages in the detail and complexity of the modeling steps, and without senior management dismissing the models as too flawed to be of any use, is sometimes as important for the business as the original modeling process.

The decisions that emerge from these internal debates should ultimately protect the risk carrier from surprise or outsize losses. When they happen, such surprises have a tendency to cause rapid loss of credibility from outside analysts, rating agencies or capital providers.

Overcoming Newton's Laws

Like many companies in many industries, and practically every human being I know, the insurance world can be change-resistant. We fight natural laws even as we recognize the very need to adapt and grow. When it comes to adopting technology — a topic I hope to explore in future contributions here — change is particularly difficult.

So how do you get your organization to change, to adjust, to transform? How can you promote and ensure a change in direction or propel a faster change? A few key lessons found in Newton's Laws can shed light on some good answers.

In 1687 Sir Isaac Newton published his work, Philosophiæ Naturalis Principia Mathematica, what we commonly call Newton's laws of motion. I am sure you remember Newton's laws of motion? Here's a layman's version (with apologies to Sir Isaac):

  1. First law: A body (mass m) in motion stays in motion unless it is acted upon by an external force (F). Picture a big boulder rolling down a shallow slope, just enough slope to keep the boulder rolling but not enough for the boulder to gain speed.
  2. Second law: A body will accelerate if pushed in the same direction as it is moving, i.e., F = ma (we'll need the formula later; I know, you were told there would be no math). Same boulder, now rolling slowly so you catch up to it and push it from behind, causing it to go faster.
  3. Third law: The forces of action and reaction between two bodies are equal and opposite. This means that whenever a first body exerts a force F on a second body, the second body exerts a force -F on the first body. F and -F are equal in magnitude and opposite in direction. Our boulder example again, only this time it runs into another boulder, which causes the first boulder to slow or stop and the one it hit to steer off in the opposite direction of the hit.

So that's what you already knew. What I bet you didn't know is that Sir Isaac Newton spent a lot of time at Edward Lloyd's coffee shop in London (Lloyd's of London). Sir Isaac was a professor, after all, and was nothing if not observant. For years he listened in on the conversations of insurance professionals as they talked about their businesses while sipping his nonfat vanilla lattes. He soon postulated the three laws of business:

  1. First law: A business (mass m) will remain on its course, good or bad, profitable or unprofitable, forever if no new forces act upon it.
  2. Second law: The larger or older a business is (big mass m), the more force (change agent F) it will take to accelerate its course.
  3. Third law: If a force (F) is exerted on a business (mass m) to try to change its course, expect some pushback (-F).

Sound familiar? Think about your own organization. Now do these “laws” ring a bell?

It is important to note that I love the insurance business and have been studying the industry from the inside for 34 years. That said, I do think Newton's laws of business have a stranglehold on our industry. While there are exceptions, many companies are in a “state of uniform motion,” and too many companies struggle to change course. Still others try but are forced to give up when change is not well received by those affected.

So what can an organization do to overcome Newton's laws or, in reality, use the laws to their advantage? Let's tackle them one at a time.

First Law in Action
Insurance is cyclical: soft and hard markets, profitable and unprofitable cycles. The common response is, “That's just the way it is, and we can't do anything about it.” To change speed or course requires a strong desire and some planning. It also requires an understanding of your mass m (your “boulder”, i.e., your company).

As Davenport and Harris state in Competing on Analytics: The New Science of Winning, you must know what you are really good at; that is, you must know your distinctive capability. So how do you get a deeper understanding of who you are as a company? How do you discover what you are really good at? You do the analysis — identify your team's talents and limitations; understand what your profitable and unprofitable clients “look like”; determine how and where you make money (or not); pin down your processes; know what additional corporate assets you have to work with; and so on.

Use all the technology tools available, including data analytics, descriptive and predictive modeling, and sometimes, outside help. You really need to understand the composition of your “boulder” and the nature of the landscape it is rolling down, including the other boulders (competition) that you may run into.

Second Law in Action
“We have always done it this way.” It pains me to even write that statement. In a young organization, you don't hear this statement that often, if at all; everything is new. There are no “habits.” Brand new companies are more like a handful of pebbles thrown down the hill than they are boulders. The smaller the mass m (the company), the less force required to change its course; Newton's second law of business.

And generally the larger and/or older the company, the greater the mass m = greater force required to change course. So if you hear, “We have 2,000 claims people scattered across the country; changing will be impossible,” ask yourself, will it really? Sure, change will be hard, maybe really hard. Therefore, F just needs to be larger, making the achievement that much more rewarding.

Here is where talented leadership is very important. Gain a following first (a big part of being a leader), paint a clear picture of where and how fast you want your boulder to roll, and people will get behind and push. Once the momentum picks up, you may encounter many competing forces; therefore, put some governance in place so the most important projects get everyone's attention. And have strong project management to keep the force applied in the right direction. Strive for quick, small successes so people “see” progress. People in IT will help you; they are trained in the discipline of managing projects and portfolios of projects.

Third Law in Action
You have taken a good assessment of your company, you have good leadership in place, and you have charted a new course and speed. You initiated projects with governance in place to assure they are the “right” projects. Everything is rolling along, but Newton's laws are still present. Now the troops start pushing back.

People tend to know the third law best. Proactive collaboration with your teams goes a long way to overcoming human pushback. When people participate in the process and know what they are doing, -F is minimized. Business intelligence and analytics can help here, too — even something as simple as who is using what technology and how often. Metrics on adoption are great.

Eight Steps For Leveraging Newton's Laws Toward Positive Change
Changing course isn't easy. The larger or older an organization is, the harder the course change. Quality change management is worth its weight in gold (even at today's price), and these eight steps can help.

Step 1 — Understand your “boulder.” Get outside help if you aren't really good at introspection. Analyze past history. If you buy into Newton's laws, your history will repeat itself unless acted upon by an “external, unbalanced force.” Today's technology provides unprecedented capabilities to study historical data in ways that were not possible (or at least were really hard to accomplish) just a few short years ago. There are so many ways to gather data and analyze the buyers of your products. Make sure you know your current business and your market.

Step 2 — Recognize that Newton's first law of business exists and that change requires hard work and good, strong leadership. It fact, leadership is the most important aspect needed for changing course. Effective leadership at the top is a must, but it's also a required factor of others who lead people in your company.

Step 3 — Determine your new direction. Use what you learned in Step 1 to establish the speed you want your boulder to go and in what direction. Once you know in which direction to head, you must figure out how to shove your boulder with the right amount of force. Typically, you must shove it hard to get it to change course, pick up speed, or both.

Step 4 — Recognize that talented leadership can exert a significant force. Talented leadership involves cultivating a following of believers, so that the third law is minimized and your team will eagerly follow the new course. It means painting a clear picture of where you want your boulder to roll. Your team must know the “destination” so they can help move your team, department, and company toward it.

Step 5 — Get governance in place. When an organization has bought into change, really bought into it, then there can be many competing forces. Governance must be strong so the “right” forces affect the direction of the company. Governance helps by identifying which way to “push” and ensuring the right amount of force. Remember the first real law: the force has to be unbalanced. If competing projects cancel each other out, the boulder will keep rolling in the same ol' direction, at the same constant (probably slow) speed.

Step 6 — Establish strong project management. A new course is set; the proper force is applied, and is applied in the right direction. Now the change must be monitored. Leadership should be kept informed. Course corrections may be required. It's all part of good project management. At my firm, we are huge Agile Methodology zealots (that's redundant). Breaking the work into manageable chunks and keeping people informed are great ways to accomplish what needs doing. It also helps to address the third law. People like to “see” progress and feel a sense of accomplishment.

Step 7 — Don't forget your people. People are subject to Newton's Laws too. Make sure you have human change management in place. Proactive collaboration with your teams goes a long way to overcoming human pushback. Train early and train often. When people participate in the process, know what they're doing, and understand what's expected, then -F is minimized.

Step 8 — Assess and amend. It is so easy to get off course, since there are many forces F and -F exerting influence on your company, both internally and externally. As you work to change or accelerate course, Newton's Laws will always be in play. Making adjustments as you go is critical to success.

Change is inevitable, whether you're changing your boulder's course or letting your competitors' boulders get in the way. But change can also be fun.

Over the course of 34 years, I have been called many things; one of the good ones is a change agent. I hope this article will help you change your organization in many positive ways. When you think about change, remember Newton's Laws and let them guide your actions. Embrace change. You can make it happen.