IDENTIFICATION AND QUANTIFICATION

IDENTIFICATION AND QUANTIFICATION
Given that risks are endemic in our uncertain world, adopting appropriate strategies to deal with risk exposures and their consequences
is an everyday task. Consider the case of the pedestrian contemplating
crossing a busy street. The first step is to identify the risk (speeding automobiles with distracted drivers chatting on cell phones?) and to quantify its magnitude (scrapes? bruises? broken bones? fataliRisk
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ties?). This mundane task is the critical point of departure for one crafting
a risk management strategy—remember the old aphorism that “forewarned is forearmed,” which is probably the best piece of cheap advice that a risk manager can give.1
In the business setting, many kinds of risk are identifiable, even to the most uninitiated. Dangerous machinery or exposed electrical wiring
in a factory setting, or slippery floors in an office or retail establishment
(squashed grapes on the floor are a grocer’s nightmare) are obvious examples. Other types of risk exposures may be less apparent and discernible only to those with experience in a particular area of risk analysis. Much as standing under a tree during a thunderstorm may seem reasonable to those unfamiliar with lightning, risk exposures may not be apparent to an untrained eye.
In the case of the Ford Rouge power plant, for example, there were certainly engineering advantages associated with the consolidation of production of the electricity, steam, and high-pressure air required by the entire Rouge complex. But the risks of this approach also turned out to be substantial, as the events of February 1999 attest.
Perhaps the most insidious risks facing businesses these days, however, come from evolving legal rules, as we have observed in the case of environmental liability and asbestos exposure. The Comprehensive
Environmental Response, Compensation and Liability Act, the 1980 Superfund hazardous substance clean-up legislation, introduced strict liability that may involve several entities jointly for cleaning up hazardous waste sites. As a consequence of this new legal reality, a business could have been in full compliance with all applicable laws at the time of the waste disposal, or simply be the current owner of an existing site, yet still be strictly liable for the costs of clean-up. Even partial contributors to the site are fully liable for the entire cost of clean-up, due to joint and several liability,2 leading to the predictable prospecting for “deep pockets” by enterprising tort attorneys. These liabilities also may be inherited, which makes mergers and acquisitions problematic these days.
Asbestos exposure also provides an instructive example. Fifty years ago, most people had little understanding of the health risks associated
with airborne asbestos fibers in the workplace, and exposure standards reflected this. Over time, however, it became increasingly clear that asbestosis (a close cousin of the black lung disease suffered
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by coal miners) and mesothelioma (an untreatable cancer of the lung or stomach lining that is both swift and invariably fatal) were associated with workplace exposures. The result has been an explosion of litigation
(estimated potential: 1.3 to 3.1 million claims) with expected asbestos liabilities of $200 billion, of which $78 billion will be borne by the affected companies and the rest by their insurers (Parloff 2002).
Litigation has already destroyed the primary producers of asbes-tos—Johns-Manville, Unarco, and Raybestos Manhattan all declared bankruptcy long ago—and has moved on to bankrupt companies that merely purchased asbestos products, including Babcock & Wilcox, Owens Corning, GAF, and W.R. Grace. Currently in the crosshair of asbestos litigation are Georgia-Pacific (involving gypsum products), 3M (for allegedly failing to warn that the dust masks wouldn’t work if improperly used), and Ford (for exposures related to the asbestos used in brakes). Federal-Mogul Corp., an automotive supplier, recently sought Chapter 11 bankruptcy protection because of an asbestos liability
inherited from its 1998 acquisition of T&N PLC of Manchester, England, a company that had used asbestos in a separate building supplies
business. At the time of the acquisition, Federal-Mogul set aside $2.1 billion in cash to cover the anticipated claims, a sum that in retrospect
seems to have been nowhere near enough.
Daniel S. Sobczynki, the former Director of Corporate Insurance for Ford, put it best: “The highest potential risks are those that are unidentified
and unmanaged. It is critical to evaluate your risks and to learn from the lessons of others,” he says. “The problem of learning from personal experience is that it gives you the lesson after the test has been administered” (Financial Times 1999).