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Companies must encourage whistleblowers says Economist Tim Harford

Tim Harford at Airmic Conference 2015
Tim Harford at Airmic Conference 2015

Tim Harford at the Airmic Conference 2015

One of the UK’s leading economic commentators opened this year’s Airmic conference with a challenge against received wisdom and a call for companies to make whistleblowing easier.

During his opening address at the Airmic Conference 2015, Tim Harford, the award-winning FT columnist, economist, author and Radio 4 presenter suggested that whistle-blowers may just be the missing piece in the puzzle.

Citing the problems of fraud faced by healthcare insurers in the US, Harford noted that whistleblowing had been incentivised with those revealing problems to their employers profiting by as much as 5% of the total defrauded. “This translates into a considerable incentive. I can’t recall if my figure is the mean or the median, but when you hear the number you won’t care,” he told the audience. “The average incentive payment for whistleblowers in the US healthcare insurance market is $50m.”

 

Although he described incentives as a slightly ‘crude’ means of encouraging whistleblowing, this topic, alongside a declaration that “leverage was a fundamental source of risk”, were probably the key takeaway points from a compelling presentation.

As listeners to his BBC Radio 4 programme More or Less will have become used to hearing, Harford took considerable effort to make the audience think about the ironies of safety systems that actually increase risk, and the problems all industries have in forecasting.

He advised that instead of investing in safety systems that can help organisations to cope with disasters, it may be better to reduce or remove the hazard itself. On the topic of risk forecasting Harford discussed Physchology professor Philip Tetlock’s latest research which attempts to prove that people are capable of predicting risks, as long as an open minded culture of debate is encouraged.

The presentation was littered with academic references. For example Harford cited the Piper Alpha catastrophe suggesting that businesses can learn a great deal from industrial accidents and how they spiral out of control. Quoting Princeton professor Charles Perrow’s book ‘Normal Accidents’ he illustrated the concepts of complex organisational systems; and ‘tight coupling’.

His interpretation was that complex organisational systems are common within businesses that have a number of needs for their operation to be deemed successful. “The needs subsequently represent the things that could go wrong,” said Harford.

Tightly coupled systems, on the other hand, don’t have to be complex but are typically interlinked. Harford used the insurance scandal of the LMX spiral in which a succession of insurers reinsured one another until the risk arrived back at the balance sheet of ‘insurer A’, pulling the entire market to its knees.

As to regards to safety systems that risk managers are often keen to introduce,  Harford reminded the audience at Airmic that safety measures do not always make people safer and often create more ways of how things could go wrong. He highlighted the Peltzman effect which reflects that safety measures can make people more careless and advised the audience to seek out a book called ‘No good deed goes unpunished’, “It has lots of amusing anecdotes of fires caused by fire alarms and so on”, added Harford.

 

 

 

About Ralph Savage (138 Articles)
Insurance and legal journalist Ralph Savage has written extensively for the financial and professional services sectors, most notably as News Editor of Post Magazine. He ghost writes regularly on behalf of FTSE 250 CEOs, leading counsel and senior professionals including solicitors, insurers, accountants and brokers.

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