What’s Risk Got to do With It’

I recently watched the movie, “Traffic,” with my teenaged daughter. Directed by Steven Soderbergh, it is a powerful film about how the drug trade reaches into all of our lives, even those that are seemingly the most insulated.

We both agreed that the movie should be required viewing for all high school students, despite its “R” rating. For if nothing else, one thing the movie does well is drive home the message that there is absolutely nothing glamorous about the world of illegal drugs, other media images and peer pressure to the contrary.

Another issue the movie explores is the concept of risk. It examines how far an individual or company, in this case a drug cartel, will go to further their goals in light of certain risks. In one scene, a smuggler who’s agreed to testify against his drug lord boss in return for prosecutorial immunity discusses how the cartel weighs the risks of a variety of smuggling methods by calculating how much of the product will get lost and how much will get through. Knowing it’s a matter of course that losses will occur, the cartel makes business decisions based on estimates of which method will result in the least amount of loss.

However, drug cartels are not the only corporate entities that examine risk on a regular basis before pursuing a particular business model. Without in any way equating the actions of a company like Enron to those of a drug cartel, one wonders what the directors, officers, board members, risk evaluators, etc., at the energy trading giant were thinking when they made the business decisions that led to the collapse of the company.

As allegations of insider trading, cover-ups, fraud, destruction of documents and influence peddling mount, it is easy to ask, in retrospect, “what were they thinking?” But a mere six months ago, it seems no one was looking at the risks Enron was taking by straddling the fence and being a party to the trades it facilitated, or by hiding its losses in numerous “off-the-books” partnerships.

Now that the company has fallen like a house of cards, what does its apparent lack of solid risk management mean to the insurance industry? According to Charles Boyle, Insurance Journal’s international editor, the industry is involved on three fronts: insurers and asset managers that held debt or equity positions in Enron are now holding mostly worthless investments; companies that wrote surety bonds for the fallen company are examining whether those policies were in fact financial guarantees or insurance policies; and the impact of civil proceedings that could trigger claims against corporate indemnity and directors and officers coverage remains a big unknown.

Boyle noted that Chubb Corporation and CNA Financial have already been hit with huge losses—an estimated $220 million for Chubb and around $50 million for CNA Financial. However, a number of other insurers are at risk for payment of claims stemming from a $1 billion lawsuit filed against Enron by J.P. Morgan.

For now, as investigations into Enron’s actions proceed in the U.S. Congress, the SEC, the Labor Department and the Justice Department, we’ll have to watch the story unfold to see how far a company that was on top of the world will fall from, among other things, a lack of attention to the risks of its own business decisions.