Managing Risk as a Duality of Harm and Benefit: A Study of Organizational Risk Objects in the Global Insurance Industry

Abstract

This study examines how organizations construct and manage risk objects as a duality of harm-benefit within their normal operations. It moves beyond the existing focus on accidents, disasters and crisis. We study the risk-transfer processes of 35 insurers where they navigate the tension of retaining risk in their insurance portfolio to increase the benefit of making profit and transferring risk to reinsurance to reduce the harm of paying claims. We show that organizations' constructions of risk are underpinned by everyday risk management practices of centralizing, calculating and diversifying. Through variation in these practices, not all organizations seek balance and we in turn uncover the sensemaking processes of abstracting and localizing that enable organizations to prioritize harm or benefit. This contributes to the risk literature by illuminating the co-constitutive relationship between risk sensemaking processes and everyday risk management practices. Following the complex linkages involved in the construction of risk objects as sources of harmbenefit, our analysis also contributes to the literature on dualities. It shows that while immediate trade-offs between harm-benefit occur, prioritizing one element of the duality is ultimately a means for attaining the other. Thus, while initial imbalance is evident, prioritization can be an enabling approach to navigating duality. All authors contributed equally to this work. We would like to thank Editor Professor Pei Sun and the anonymous reviewers for their constructive feedback during the review process. We also thank Yuval Millo, Anette Mikes and other participants at the Cass Constructing Financial Risk Workshop, April 2015 and colleagues at EGOS 2015 and AOM 2016 for their helpful comments on earlier drafts of this paper. The authors acknowledge support from the following grants: Economic and Social Research Council

Empirical investigation of risk management practices

“…Despite multiple surveys on risk management and the emerging concepts, the definition of risk remains vague as it is still developing and changing over time. On the one hand, it is defined broadly as a shared perception of a possible source of harm or benefits in relation to what is expected (Arena et al, 2010;Maguire and Hardy, 2013;Bednarek et al, 2019); on the other hand, risk management is defined more narrowly as a set of tools and practices that help managers to ensure a predictive outcome with limited resources and also to control these achievements (Roethlisberger, 1941;Roethlisberger and Dickson, 2003;Hubbard, 2009;Kaplan, 2013, Tereso et al, 2019). Unfortunately, the quantitative or, as defined by Mikes and Kaplan (2013), the "numeric" approach to risk is firmly embedded in risk management tools.…”

“…A good example of quantitative risk assessment practices can be found in finance, where risk assessment procedures are often standardized and connected with quantitative models or "calculating practice" that can be unfolded through the use of analytical tools to make decisions and assess the relevant information (Bednarek et al 2019). Although these tools are visible, standardized, and auditable (Ring et al 2016), the insufficient quality of information and lack of historical data are the limitations of quantitative risk assessment.…”

“…The quantitative assessment also disregards more elements, such as values and interests, and turns into a kind of "compliance rationality" (Bednarek et al, 2019;Arena et al, 2010). Qualitative risk assessment practices can therefore be revealed through discussions of causality during risk workshops and analysis of past events.…”

“…While some scholars, for example Osman and Mahmoud (2018), still emphasize the documented risks and structured process to define likelihood and impact for each risk, others argue that organizations approach risk and assess riskiness or safety in different ways (Maguire and Hardy, 2013;Bednarek et al, 2019). When different actors use different views to assess risks and do not interact with each other, the risk assessment in an organization does not necessarily correspond to an actual situation.…”

“…The integrity of both types of controls is important and should be aligned to focus on the common objective. When organizations employ centralizing, calculating, and diversifying practices, they construct the risk object as abstract and distant (Bednarek et al, 2019), thus preparing for long-term risk response. Short-term risk response practices are related to decision-making in an organization.…”