Article Review on Risk and Insurance - Essay Example

Student’s Name Professor’s Name Course Code Date Article Review on Risk and Insurance 1. Provide a summary for the article. The article explores intellectual liabilities from the perspective of insurance looking at whether they are applicable in management of human capital risks. The study context is within the Small and Medium-Sized Enterprises (SMEs). The argument raised in the article is that while intangible assets create considerable value for the company, there are other elements within that create intangible liabilities. The authors begin by recognizing that research on intangible assets has mainly focused on their value creating capabilities rather than possible risks or liabilities, a gap to which the article seeks responds to (Mäenpää & Voutilainen 53). The article notes that in areas where the liabilities are mentioned, the importance is underestimated. The authors argues that intellectual liabilities stem from the recognition that while intangible assets such as intellectual property rights, contracts, trademarks, and logos have legal protection, some intangible assets such as people’s knowledge and skills do not have such protection (Mäenpää & Voutilainen 53). Therefore, companies face continually the risk of loosing assets related to human capital especially as the individual owns these assets not the company. Within the context of SMEs, risk of losing knowledge through employee turnover is of considerable consequence as this affects company’s financial and intangible outcomes. The impact of intangible liabilities on small companies prompts the need to address ways to manage the risks properly through research and management. The article introduces insurances into the context of risk management, by examining how insurances can be used for management of human capital risks by arguing that the effect of human capital risks decreases as the size of the company decreases. The article progresses in four parts, the first is a literature review that outlines intellectual liabilities and offers an outlook of possible human capital related risks, and their effect on SMEs. The second part is a qualitative case study on the applicability of insurances for human capital risk management in which the authors determine the insurability of each human capital risk, and present a feasibility analysis on suitable insurances for each insurable risk. The third part is the results showing the most useful insurances, and lastly the conclusion on implications of the study in academia and management, limitations, and agenda for further research. In the literature review section, the authors provide a definition of intellectual capital risks. These are a number of various non-physical sources of value that include human capital and structural capital (Mäenpää & Voutilainen 54). The first refers to individual knowledge, capabilities, skills, creativity, and innovativeness, and the second refers to the customer capital and organizational capital. The created knowledge is an interplay of people and human resource management practices in recruitment, education and development, and remuneration. Organizations may not easily replicate the value added by employees if lost, hence the importance of identification and evaluation of risks related to human capital or liabilities. Such risks refer to causes of deterioration that arise from the human resources within the organization, the employees, their tacit knowledge, skills, experience, and attitude. The study uses a case study design, chosen because of the relative newness of the topic. The authors recognize that insurance of intellectual liabilities is a relatively new area of study, hence the case study. The selected case is on an insurance company with operations in Finland and neighboring countries, which the authors selected because they had access to the company for observations, and because of the company’s insurance base. The authors utilized empirical data obtained through interviews and examination of written documents including company sales material, detailed product descriptions, and insurance specific documentation. The study process followed from insurance visibility determination process, completed by identifying insurable versus uninsurable risks, and determining relevant types of insurances based on each risk. The results identified insurable risks, as those risks that an insurance company was willing to insure, and uninsurable as those risks that were very difficult or impossible to find insurance cover for (Mäenpää & Voutilainen 59). The first group included management of employee turnover, loss of competence, limitation of competence, inexperienced top management, offenses against the company committed by employees, and attitudes toward expatriate assignments. The second group comprise of inadequate employee training, discrimination among employees, problems with directing competence, unsuccessful recruitments, internal competition and not-invented here syndrome. Mäenpää and Voutilainen identify pension, accident, health, life, liability, and crime insurances emerge as potential solutions to risks associated with human capital, thus presenting both preemptive management tools and incentives for desired behavior and are applicable to both SMEs and larger companies (62). The most prominent among these is pension insurance, which has multiple purposes across the spectrum of identified human capital risks, and with the capability to increase commitment to the company. These findings have managerial implications as they can be used to assess human capital risks and establish insurance responses. The study was able to effectively achieve its set purpose with some limitations including the choice of firm and country thus being subjected to the single case experiences, use of observation in data collection, which may introduce biases. 2. Write the main learning points from reading this article. The article provides identifiable lessons in the possible use of insurances in risk management of human capital risks. The authors provide a progressive argument that offer insight into how human capital is both an asset and a liability for companies, especially in SMEs, which may not have the same advantages as found in larger companies. For example, their managers are usually owners and thus any arising risks may not be easily corrected. The principle argument presented in the study is the importance of protection of knowledge asset, which comes from human capital management (Mäenpää & Voutilainen 63). Notably, employees represent the knowledge asset based on their innovation, capabilities, skills, and competence, which they develop as they continue working in a company. The knowledge accrued may be implicit, and thus ensuring human capital risk management is crucial to retention of the knowledge. SMEs have a greater need to manage the risk as loss of key employees may translate to loss of company competitive advantage; hence, the importance of understanding intellectual liabilities and their management. The identified human capital related risks include high employee turnover, inadequate training and/or development of employees, discrimination among employees, and inexperienced top management. Other potentials risks are offences committed by employees toward the company, unsuccessful recruitments, incompetence, and challenges in directing competence. Employee turnover and loss of competence emerge as the two critical human capital risks (Mäenpää & Voutilainen 56). The severity of the two risks may depend on the size of the company, and may increase as the company size decreases such as in SMEs. An SME for the purpose of the article is a company employing less than 10 persons for a micro company, less than 50 persons for a small company, and less than 250 persons for a medium enterprise. Among the intellectual liabilities seen in SMEs relates to the direct and indirect costs associated with employee turnover and the negative effective on productivity felt due to turnover and loss of competence. Insurance management practices represent strategies that companies can use to protect themselves from human capital liabilities. Different ways arise through which companies can protect themselves including developing relationship knowledge map through which they can identify key organization members and their relationships. Another way is performance measurement as a tool for evaluation of employee turnover. Insurances provide companies with a practical tool for human capital risks management, as a way to protect the financial well-being of a company in the case of unexpected losses. Insurance offers protection from property and casualty losses and liability suits, provided through life insurance and property-casualty insurance. The study thus examines the use of insurances as a way to provide management of human capital risks. The applicable insurance options are specific to each type of risk, although the authors consider employee turnover alongside loss of competence due to the closeness of the two risks. Applicable insurance include identification of additional pension insurance, in which companies present employees with terms and conditions that they will meet to receive the pension. The scheme increases employee commitment to the company minimizing on voluntary turnover as such an outcome would cause the employee to lose their pension or part of it. Pension insurance is in addition to compensation systems, as poor remuneration and payment is a reason for voluntary turnover. Regarding involuntary turnover, the authors note that companies can lose competence through employee dismissal, retirement, disease, accidents, and untimely death (Mäenpää & Voutilainen 60). The last four are insurable through pension insurance, accident insurance, health insurance, and life insurance, but the first as conscious decision by the company is not considered in the study. Another possibility is that companies may choose to delay retirement thus retaining competence, which the author consider critical for small companies. Alternatively, companies can offer the person pension insurance having noticed that the person is less active in developing capabilities thus creating opportunities for early retirement, and then use the pension insurance as a way of attracting new and competent employees. SMEs can also use pension insurance and liability insurance to manage top management incompetence, although this is a risky attribute because it calls into question to capability of the manager to run the company (Mäenpää & Voutilainen 61). Nonetheless, in small companies, the manager is usually the owner and thus taking liability insurance is in the best interest of the owner and the company. Pension insurance also provides a possible insurance against negative attitudes toward expatriate assignments. Companies can use voluntary pension insurance paid by the company to ensure that employees are compensated for time abroad and do not miss benefits they may accrue if they stayed in the home office. The company may also provide additional health insurance including first class medical help in cases of accidents or sickness among the employees or their families. In insuring negative effects of offenses committed by employees, companies have the option of crime insurance, which can offer protection against financial risks. 3. Critical Analysis The article reflects current literature on the need for human capital risk management with the SMEs, although as noted the by the authors the area remains under researched especially in relation to use of insurances. The identified literature showed that for SMEs human capital present core competencies that promote companies competitive advantage because it helps SMEs differentiate from competitors (F-Jardon & Gonzalez-Loureiro 255). The advantage comes from people being the providers of knowledge, skills, and abilities that the organization may not otherwise be able to obtain, such as in tasks that require creativity. An aspect noted in literature is that rareness and inimitability found in organizations comes from human capital, and these develop as human resources skills and knowledge develop (F-Jardon & Gonzalez-Loureiro 256). This development can be costly for organizations in terms of the relationship built with the employee and the investment made, which agrees with Mäenpää and Voutilainen analysis of the direct and indirect cost of employee turnover (56). Therefore, management of human capital risk is essential. Previous literature shows the need for risk management to undermine both short and long-term constraints associated with loss of human capital and the equitable knowledge, which in SMEs depends on owner’s assessment of threats and opportunities (Smit & Watkins 6327). However, while previous literature recognizes the importance of risk management for SMEs as noted through Smit and Watkins, and F-Jardon and Gonzalez-Loureiro, use of insurances as a probable strategy is highly lacking, which makes the research by Mäenpää and Voutilainen useful in the area. An article that mentions the use of insurances in human capital risk management uses this particular study for reference (Santis & Giuliani 215). Therefore, this article provides a useful background for future research on use of insurances, which can be done in other countries, or using multiple cases as identified by the authors, who note use of one case as a limitation. 4. Practical Implications in the UAE The article provides a compelling case on how companies can benefit from insurances, a lesson applicable in the United Arab Emirates (UAE). The UAE is transforming from an oil based economy to one defined by an innovative and knowledge based economy, and human capital is a fundamental asset to the occurring change especially in terms of a well-educated and highly skilled workforce that can meet the needs of an innovative economy (Byat & Sultan 101). The various sectors have thus created a platform for people from various parts of the globe to find work. The complexity of the UAE workforce provides a useful area for the application of the lessons obtained from the article, including the understanding of intellectual liability as facilitated by bringing together people from various regions, the inclusion of women into the workforce, and the expansion of the economic sectors. As Mäenpää and Voutilainen note human capital is essential for the progress of companies (53). Within the UAE, human capital form the foundation of growth, and the government has been supporting this through a well-developed education system, diverse global talent, innovation culture, entrepreneurship mentorship, and development of telecommunication infrastructure and services (Byat & Sultan 102). These development may however be undermined by intellectual liabilities, which create both direct and indirect costs associated with voluntary or involuntary employee turnover, and loss of competence (Mäenpää & Voutilainen 56). For instance, direct costs associated with employee turnover are the added cost of recruitment including employee search, selection, training, and investing in a new relationship. Indirect cost reflects the loss of return on investment the company experiences, lost person-related business, and relationships. It further contributes to reduced innovation, delayed services, and sluggish implementation of new programs. Company productivity may also decline in proportion to lost skills. Within the UAE, nationals have mainly been working within the public service sector, but are now moving on toward the private sector and developing new skills sets (Byat & Sultan 103). The new movement of employees creates a potential challenge related to increased employee turnover in both public and private sectors as work opportunities continue to open in various sectors and industries. Adding to the challenge is the increase in expatriate employees especially within areas that require specialized skills, as well as in unskilled labor. The implication is that companies will find they will train employees who will later leave either to their home countries or to other companies thus loss of competence. Loss of competence in turn has unique challenges among them the risk of losing experienced person. This translates to loss of undocumented knowledge found among the key employees, and thus their turnover will mean the company loses parts of its competitive advantage. Employees develop implicit information that comprised how different parts of the organization fit together. Unless the company is able to codify this information, then if the key employee leaves, then he or she leaves with the knowledge and its applicability. Another risk is that people use the SMEs as a learning stop, in which after they acquire the skills needed in the industry they move on to larger companies (Mäenpää & Voutilainen 57). Therefore, voluntary and involuntary turnover presents a critical risk in loss of the innovative and creative employee pool essential for the continued development of the UAE economy. As exemplified through the cases study companies have viable insurance options within three groups of human capital risks. The first group is employee turnover and loss of competence, the second group is limitation of competence and inexperienced top management, and the third group is offenses committed toward the company by employees and attitudes toward expatriate assignments (Mäenpää & Voutilainen 60). SMEs can respond to these risks using pension and accident insurances; health, life, pension and liability insurances; and pension, crime and health insurances respectively. A research on the Middle East workforce, with UAE being the highest contributable showed that companies are increasingly noting the importance of identifying, quantifying, and planning for key competencies in current and future talent acquisition, development, retention, and recognition (Deloitte 14). Among these activities is showing how organizations can optimize the new mix of workers and ensuring efficiency. In their findings, Mäenpää and Voutilainen provide insight into how companies can combine both insurance and non-insurance attribute to obtain and retain their workforce; other risk management activities in addition to the insurances include non-financial incentives, employee empowering, and involvement in decision-making (60). Adoption of these suggestions provides insight into ways that organizations in the UAE can facilitate continuing growth with the appropriate workforce. 5. Other Comments In their study, Mäenpää and Voutilainen identify the use of insurances as preemptive risk management and development of desired behavior, which reflects the need for reviewing company threats and opportunities and establishing practices that help safeguard the company (62). Behavior development in turn shows the possibility of conditioning employees to pursue certain paths of actions, which promote the competitiveness of the company and facilitate performance. F-Jardon & Gonzalez-Loureiro note that the benefit of human capital on the company performance emerges from how well the organization can link the competence, skills, and behavior of employees to organizational vision and goals (255). Use of insurances can facilitate the connection by ensuring that employees learn to connect with company goals, and their behavior shows commitment to company processes. The article further shows the critical nature of being able to understand the combination of insurances and non-insurances that will have the most benefit on company outcomes. For instance while the study identifies pension insurance as the recurring insurance outcome representing multiple uses and responses, it requires management to connect this insurance with desired outcome. The article shows that effective use of pension insurance can enable companies to promote employee commitment reducing on voluntary turnover, increasing attraction and retention of new and competent talent, and promotion of acceptance of overseas assignments (Mäenpää & Voutilainen 60). Emerging from the article is that companies can adopt these insurances alongside non-insurance related approaches to reduce intellectual liabilities, such as through capacity building, giving employees opportunities to participate in various activities, cross-functional training, job rotation, and apprenticeship thus promoting knowledge sharing (Mäenpää & Voutilainen 63). Employees may also receive liberty to apply ideas and contribute to various activities. The implication is having a mix of insurance and non-insurance activities as well as tangible and intangible strategies. The reason for the suggestion comes from recognizing that use of insurances only among SMEs may undermine the holistic benefits organizations can have from combining approaches. 6. Conclusion The authors effectively use the case study approach to meet the purpose of their study, which was to analyze the usefulness of insurances in the management of human capital risks in SMEs. The article further shows good use of literature especially in responding to the first part of the study, which is to understand intellectual liabilities and provide a picture of human capital related risks that can then be applied into SMEs. The results come from both the application of the literature and the empirical data collected from an insurance company. The data shows that SMEs face challenges associated with human capital risks specifically employee turnover resulting to loss of competence, limitations in competence, inexperienced top management, offences committed by employees toward the company, and attitudes toward expatriate assignments. Companies can respond to these risks through various insurances, including pension, health, life, accident, crime, and liability insurances. A remarkable aspect noted in the article is the recommendation for using a combined strategy when dealing with human capital risks that includes insurances and non-insurances, although this does not mean that the article loses its focus. The authors remain focused on their goal of examining the use of insurances, but recognize the limitations associated with the approach hence the suggestion for combining it with other viable options. Within the UAE, the study findings are applicable especially as the workforce continues to change due to the growing economic development and the region continues to experience transition from the public to the private sector, and an influx of expatriates as well as increased entrance of women into the workforce. 7. Reference Byat, Ahmed and Osman Sultan. “The United Arab Emirates: Fostering a Unique Innovation Ecosystem for a Knowledge-Based Economy.” In Latif Al-Hakim (ed), Handbook of Research on Driving Competitive Advantage through Sustainable, Lean, and Disruptive Innovation. Hershey, PA: IGI Global, 2016. Print. Deloitte. 2016 Middle East Human Capital Trends: The New Organization: Different by Design. Deloitte University Press, 2016. Web. 18 December, 2016. F-Jardon, Carlos M. and Miguel Gonzalez-Loureiro. “Human Capital as Source for Sustained Competitive Advantages in SMEs: A Core Competencies Approach.” Economia Seria Management, 16.3 (2012): 255-276. Mäenpää, Irinja and Raimo Voutilainen. “Insurances for Human Capital Risk Management in SMEs. Vine, 42.1 (2012): 52-66. Doi 10.1108/03055721211207761 Santis, Federica and Marco Giuliani. “A Look on the Other Side: Investigating Intellectual Liabilities.” Journal of Intellectual Capital, 14.2 (2013): 212-226. Doi 10.1108/14591961311323850 Smit, Yolande and J. A. Watkins. “A Literature Review of Small and Medium Enterprises (SME) Risk Management Practices in South Africa.” African Journal of Business Management, 6.21 (2012): 6324-6330. Doi 10.5897/AJBM11.2709 Read More