Ken Feinberg on the “Two Types of Risk”

Ken Feinberg, the "claims czar," says there are two types of risk that challenge leadership.

Ken Feinberg just might have the most difficult job out there. He has worked as mediator/administrator in the wake of tragedies and natural disasters such as 9/11, the shootings at Virginia Tech, Hurricane Katrina and the Holocaust slave labor litigation. He is currently serving as the administrator for the $20 billion BP oil spill claims fund.

It is Feinberg’s job to sit with victim’s families and to sift through claims from each disaster in order to figure out how much their personal and financial loss is worth. It is a job few envy.

But through his years of experience with mediation and dispute resolution, he has learned that there are two types of risk that challenge leadership:

  1. Risk as defined by the assignment that you’ve undertaken
  2. External risk — or in other words, the external pressures on you or the stress level factored into how you perform

“You have to define risk with each situation [you’re presented],” he said. “When I pay a fisherman, I find a payment that ends their concern, but what is the likely risk that the Gulf is safe? Have I factored into that reward a good understanding of future risk to fishing in the Gulf? Inherent is the notion of a substantive definition of risk.”

In relating that knowledge to his recent tasks as administrator of the 9/11 victim’s compensation fund and the BP oil spill claims fund, he noted:

“When administering the 9/11 fund, it turned out that my evaluation of risk was poorly done — I underestimated the support of the victim’s families and the public in general. I evaluated correctly with the BP case — I’m a human pinata.”

More so than knowing and incorporating the two types of risk that challenge leadership, those in charge should also incorporate certain characteristics. The following are those Feinberg truly believes in and which he has incorporated during his challenging assignments:

  • Convey a sense of certainty
  • Be transparent — “The more sunlight I let into the room, the easier it is,” he said.
  • Consistency — no bias or favoritism
  • Flexibility — keep an open mind
  • Use sound judgement — “Give the people impacted by your decisions a say.”
  • Delegate to good people — “Staff is the key.”

Feinberg’s job is not easy, but it has taught him a lifetime worth of lessons regarding leadership, risk and fairness.

Check back over the next several days for more posts relating to the amazing speakers I was fortunate enough to hear at the Wharton Leadership Conference, including Jane Golden, executive director of the City of Philadelphia Mural Arts Program; James Quigley, author of As One; and senior partner at Deloitte; and Colonel Jack Jacobs, NBC analyst and recipient of the Medal of Honor.

Top Ten Disasters of the Past Decade

Zurich has unveiled its list of the “Top Ten Megadisasters” of the past decade. The usual suspects pretty much (listed chronologically — not by their “overall business impact,” which is the basis for the list).

1. 9/11 – 2001
2. SARS – 2003
3. 2003 U.S. / Canada power outage – 2003
4. 2004 Indian Ocean earthquake and tsunami – 2004
5. Hurricanes Katrina, Rita and Wilma – 2005
6. Financial crisis – 2008
7. China earthquake – 2008
8. H1N1 pandemic – 2009
9. Iceland volcano – 2010
10. Floods in Europe and Pakistan – 2010

I have to admit, I would have probably completely forgotten the 2003 blackout if I was playing Family Feud and had to come up with all 10 — and I even wrote a cover story for Risk Management magazine about it.

Obviously, catastrophes that weren’t included like the Haiti earthquake, Cyclone Nargis and Bam earthquake were horrific tragedies, but the insurance penetration in those areas is so minimal that the ghastly human tolls did not have a large affect on the industry.

Let’s all dearly hope that the next decade is tamer.

katrina ninth ward

Ninth Ward. New Orleans. Post-Katrina.

Risk Management Links of the Day … Featuring Security Dogs on Vacation

security dog philadelphia airport

  • Three bomb-sniffing dogs at the Philly International airport failed their recertification tests and have been relieved of duty. While laying off security dogs may sound like overkill, even in the new climate of airline security sensitivity, one expert notes that “these dogs are not ornamental. They are there for a purpose. If the purpose is not being satisfied, that’s a serious issue.” There is a “built-in redundancy” at the airport so other screening methods can be used in the meantime until new dogs can be brought in. As for the dogs who failed … Do they just get to go on vacation and relax playing billiards like the pup above? Nope. It’s back to school for them: “TSA spokesman Greg Soule said the agency could not comment on the status of its dogs. He said, however, that the rigorous nature of yearly certification tests means that some of the nation’s 700 TSA-led dog teams deployed in air, marine and mass transportation systems may not pass and must go through a remedial program.”
  • A scary-to-think-about report was released today from the Sector Risk Research Programme stating that risks that are poorly understood and thus not addressed properly by the commercial insurance sector could “prompt a new phase of the financial crisis.” More specifically, the report states: “Parallels can be drawn between large property and casualty insurance institutions today lacking the ability to fully understand changing risk exposures and more publicised past failures of financial institutions to understand risks assumed. While loss impacts naturally lag economic changes by several years, turmoil in commercial insurance is expected as a latter phase of the financial crisis.” Jeez. Let’s hope not. (via Risk & Insurance)
  • The 4th quarter of 2009 set a record for cat bond issuance volume. “More companies have put their toes back in the water after a slow start in 2009,” said Robert Stone, director with the RMS dedicated ILS team, RiskMarkets.
  • This is a little dated at this point, but I read it over my holiday break and was just reminded how much I enjoyed Vanity Fair‘s extensive look at Goldman Sachs. The article breaks down the disconnect between “the way Goldman Sachs sees itself (they’re the smartest) and the way everyone else sees Goldman (they’re the smartest, greediest, and most dangerous).” It seems like the further we get away from September 15, 2008, the more interesting the stories become about what actually happened between Wall Street and Washington during the market meltdown, and Bethany Mclean of Vanity Fair peels back a few more revealing layers of the onion here. They also devised this sweet chart illustrating that “Goldman’s influence is ubiquitous in the highest echelons of global political power.” That sure is a ton of former Goldman employees in a ton of the world’s most influential financial positions.
  • Speaking of political power over the financial system … David Leonhardt is asking “If the Fed Missed This Bubble, Will It See a New One?” in the New York Times. “The fact that Mr. Bernanke and other regulators still have not explained why they failed to recognize the last bubble is the weakest link in the Fed’s push for more power. It raises the question: Why should Congress, or anyone else, have faith that future Fed officials will recognize the next bubble?” Fair question, it would seem.

Find an interesting link? Email me any stories, videos or images you come across. Or just follow me on Twitter @RiskMgmt to pass along the news.