henry ford once said that failure
“is only the opportunity to begin again,
only this time more wisely.”
■ ■ A well-developed ERM analysis that incorporates business
growth strategies can improve materially the sustainability
and profitability of a small business.
The use of top actuarial science students to do this analysis has created some unexpected positive outcomes as well:
■ ■ Strong analytical skills and risk-modeling capabilities make
actuarial students ideal candidates.
■ ■ They provide a cost-effective way to undertake an ERM
analysis for a small business.
■ ■ Students perform best when working in small groups with
minimal guidelines and oversight.
■ ■ Students are encouraged to generate their own ideas,
which can produce many nonstandardized and creative
solutions for each project.
■ ■ Students are encouraged to think about business growth
and risk-mitigation strategies, which appeals to the
Students benefit on many levels, in addition to providing an
invaluable service to small businesses. For actuarial science students who have studied complex techniques on how to model
insurance and financial risks, these ERM projects force them
to think outside of the box, work in a team environment, and
adapt each analysis to the special needs of the small-business.
Since the students work on the entire project from start to finish, communicate directly with the small-business owners, and
put together the final report and models, the experience they
gain is precisely the kind that companies are looking for when
they hire new graduates.
Micro Risk Management
The ERM for Small Businesses initiative at the University of
Connecticut is similar to microfinancing and microinsurance,
both of which are globally expanding concepts. In fact, the initiative can be considered a form of micro risk management.
While the annual budget from the center could sustain
funding for approximately a dozen projects in the Connecticut
region per year, this is only a tiny fraction of nationwide opportunities to provide ERM for small businesses. To undertake
these projects on a large scale, two important issues need to be
resolved: ongoing funding and a cost-effective delivery system.
Large corporations, private foundations, and government
agencies have a stake in ensuring that small businesses stay
viable and continue to grow. A thriving and sustainable small-business environment is good for the overall economy, and small
businesses make up a market for goods and services developed
by large corporations. Further, a reduction in the failure rate of
small businesses has a positive financial impact for banks and
other lending institutions that provide loans to small businesses.
If large corporations selected small businesses to support
(engaging a nonprofit institution like the Goldenson Center to
do the work with students, with professional oversight by a large
actuarial firm like Towers Watson), imagine the possibilities. To
the extent that these efforts reduce failure rates, banks could
offer preferred lending rates for small businesses that undergo
an ERM analysis and establish risk management action plans.
Moving forward Wisely
I believe we have just scratched the surface in demonstrating
how an effective ERM culture can be created in the small-business segment. This work will continue, but it will require
an ongoing partnership with large corporations, foundations,
government agencies, and academic institutions to fund and implement the initiative for it to make an impact on a larger scale.
The payoff would be huge; any reduction in the failure rate
for small businesses could have a positive cascading effect on
the entire economy. Similar to microfinancing and microinsurance, micro risk management has global implications. Since
academic institutions exist all over the world, the delivery of
micro risk management services to small businesses using college students can be replicated globally as well.
Henry Ford once said that failure “is only the opportunity to begin again, only this time more wisely.” I believe we
have laid the groundwork for how to instill an ERM culture
in small businesses that can help this troubled segment move
forward more wisely.
JAY VADIVELOO holds a doctorate in statistics from the
university of California, berkeley, and is a fellow of the Society
of Actuaries, a member of the Academy of Actuaries, and
a certified financial analyst. He is professor-in-residence
and director of the Janet and Mark l. Goldenson Center for
Actuarial research at the university of Connecticut and
a senior consulting actuary at towers Watson.
He can be reached at email@example.com or