The gaming industry provides an interesting example of an industry impacted by conflicting societal views, regulatory changes, technological growth and industry trends. According to the American Gaming Association, from 1992 through 2002, gross gambling revenue in the United States increased from $30.4 billion to $68.7 billion. In addition to fueling this increase in revenue, a number of key developments during the period have presented the industry with significant risk management challenges. All businesses face the risks that changing conditions present, but in the gaming industry, these factors clearly affect risk management strategies and lead to an increased focus in enterprise risk management. Expansion outside of Nevada, the proliferation of Native American casinos, the advent of online gaming and the threat of terrorism all make up a risk management landscape for gaming that has lead to the increasing use of enterprise risk management throughout the industry.
Leaving Las Vegas
Like many industries, the challenges related to growth opportunities create an array of risks. The expansion of casinos and other gaming establishments accelerated tremendously in the 1990s, and by the year 2000, casinos were present in 32 states. After 2000, however, the introduction of major new entertainment properties into new states began to slow. As a result, the industry has seen consolidations and mergers of mega-resorts, establishment of “racinos” (greyhound racetracks with slot machines), alignment with mega-mall sites, and expansion onto the Internet. Moreover, these developments have come at a time when Americans currently spend more money in casinos than on golf, the cinema, compact discs or cable television.
For years, state legislators have seen gaming as a source of revenue, job creation and overall economic growth and many have thus sought to create friendly environments for the industry. This has even led some Mississippi universities, for example, to propose new academic programs in gaming management. And today, some form of legalized gambling exists in all but two states—Utah and Hawaii.
Despite these positive indications, societal issues and increasingly organized opposition to gambling—especially from local environmental, political and consumer groups—continue to present challenges and obstacles to gaming expansion through new gaming resorts and properties. Despite increasing public acceptance, the overall perception that gaming has a negative societal impact continues to present an obstacle to corporate casino expansion outside of Nevada. Moreover, new economic studies show contradictory and inconclusive results regarding the extent to which additional economic value is actually added to the economy.
Additionally, recent research indicates an increase in gambling addiction and disorders in youth and senior citizens. The 2003 Global Gaming Exposition published a summary of conference sessions on gambling disorders, reporting that states are falling short in detecting youth-related problems, where the rate of disorder is significantly higher than among adults. Other social scientists equate gambling addiction with tobacco addiction and suggest the gaming industry may face similar large-scale lawsuits from states. On the environmental front, problems such as noise, traffic and damage to landscapes caused by new facility construction is well documented in studies conducted in Kentucky, Missouri and other states.
The gaming industry also faces regulatory and legislative changes. In December 2003, for example, federal legislation eased government access to the financial records of gaming customers. This new law is expected to have a significant impact on high rollers, many of whom desire strict privacy and as a result, may opt to play in international gaming markets rather than U.S. casinos. Organized citizens’ groups in California have backed legislation limiting or restricting new gaming endeavors and others have filed lawsuits asserting that Native American tribes should not be able to expand beyond their tribal lands. In some states, gaming initiatives have received stiff resistance from the government, which competes for the same entertainment dollar. South Carolina legislators, for example, have aligned against Native American bingo halls and video poker while maintaining a state-run lottery. Likewise, Kansas’ constitution requires non-Native American casinos to be owned and operated solely by the state.
To overcome the risk of lawsuits and negative public image, the industry is exercising loss control through educational efforts and addiction treatment. Industry initiatives have been geared toward positive public relations campaigns on the benefits of gaming and on loss control funding. Significant funds are dedicated to treatment clinics, including tribal medicine techniques and special programs for youth and senior citizens. Recently, American Gaming Association members adopted a code of conduct designed to minimize problem gambling, block underage gambling and curb excessive drinking. The standard is an attempt to demonstrate that the industry is taking an active role in reducing its most visible problems.
Native American Casinos
Nationally, there are 201 tribal governments engaged in gaming through 321 operations in 29 states. Their annual revenue totals $12.7 billion, or about 10% of the entire gaming industry. The total number of jobs in tribal gaming operations is approximately 300,000, with 25% of all employees being Native American. This revenue is strictly allocated to fund tribal government operations, provide for the general welfare of the tribe, promote tribal economic development, donate to charitable organizations or to help fund operations of local/state government agencies.
To reduce some of the risk in its business models, the Native American gaming industry has diversified its revenue stream by branching out into other businesses. What began as small, stand-alone casinos has grown to include golf resorts, hotel complexes, convention centers and even indoor water parks, allowing tribal governments to generate an increasing percentage of their revenue away from gaming itself.
Like the traditional gaming industry, politics is also one of the most visible risks to Native American gaming. Any proposal to build a casino is a very sensitive issue, as the public often cites a number of concerns attached to gaming, which usually include a widespread increase in drinking problems, personal bankruptcies, compulsive gambling, crime, money laundering and traffic problems. Such concerns were raised during a recent vote in Madison, Wisconsin on a casino proposal, and the public eventually voted against the proposal by a margin of two to one.
The Native American gaming industry combats this negativity by emphasizing its extensive donations to schools and tax relief provided to local residents—a popular issue, given the current state of local tax revenue and federal support cutbacks. The industry has an extensive lobbying effort and a number of supporters stemming from their large donations to local charities. The additional revenue pumped into the local economy, along with casino job creation, also plays well in the press (although critics point out that jobs created by casinos are often low-paying).
Despite the recent loss in Wisconsin, political risk is generally well-managed by local tribal governments. Their public relations efforts—on a par with many large corporations—take a holistic approach, citing all of the benefits from their operations, both gaming and nongaming. The tribal governments are leading the funding for model programs for problem gamblers and other counseling groups in many of their communities and are continually emphasizing that the rate of problem gambling is far less than that of alcohol, drugs or depression.
Las Vegas casinos are now facing fresh competition from the online gaming industry, which makes nearly $5 billion a year and has the competitive advantage of being available from any location where one can log onto a computer. While online gaming offers enticing growth opportunities, rapidly changing regulations and challenges in implementing new operations present a number of risk exposures as well.
Technically, online gaming is illegal in the United States. The Federal Wire Act of 1961 prohibits gambling over telecommunication devices including the internet, and internet payment services such as Paypal, as well as traditional credit card companies and other prominent financial organizations, do not authorize payment for gambling services.
Despite this, the online gaming arena is still seen as a growth opportunity. Online casinos developed in gambling-friendly countries currently derive approximately 60% of their revenue from gamblers in the United States. Entering this tempting industry while avoiding the domestic legal ramifications presents an interesting challenge for U.S. casinos. MGM Grand, one of the initial U.S. casinos to enter the online field, discontinued their operation in June 2003 after reporting losses of $5 million, due primarily to the technology cost and related expense of confirming the identities of legal gamblers.
Industry leader Harrah’s Entertainment, Inc. plans to begin online gaming in the United Kingdom in 2004. In an effort to avoid negative feedback over providing easy access to gambling for minors and compulsive gamblers, Harrah’s has developed an innovative subscription model, consisting of monthly fees ranging from $16 to $64, designed to reduce the potential for underage gamblers and illegal U.S. participants. Gamblers also experience less risk since the model provides unlimited play for the monthly fee without further monetary contributions. Harrah’s subscription model is one example of an innovative risk reduction approach to online gaming.
It is virtually impossible to find an industry that has not been impacted by terrorism in some way. For a gaming community fed by tourism and travel, this means that the pseudo-fantasy existence of opulent casinos has now been overshadowed by the reality of personal safety and security concerns. As a result, the industry has been tasked with balancing the fun and excitement that is artfully packaged for guests’ enjoyment with the need to present a leveled response to the terrorist threat at the resort.
While the entire business community shares this concern, there are some unique consequences that impact the gaming community. The risks associated with terrorism in the gaming industry can be categorized as both direct and indirect. Direct exposures are the actual losses associated with a terrorist incident that may occur at a property. The quantifiable impacts are loss of life (outside insurers, workers’ compensation), property (fire and casualty) and business interruption. The indirect losses would be felt by businesses and organizations that rely on the gaming industry. In many states, gambling has become a major local government revenue generator. As a result, gaming industry losses of the magnitude that might be expected in a terrorist attack could produce a ripple effect.
Clearly, the most effective tool in dealing with multi-headed risk would be enterprise risk management. A blend of insurance protection, employee training and education, and increased government cooperation and information sharing all work towards addressing the overall issue. One strong example of this has been a summertime symposium held in Las Vegas on the terrorism threat.
The Homeland Education Resource Organization (HERO) recently hosted its own conference entitled “Gambling with Security: Hospitality and Gaming Face High Stakes.” This conference brought gaming professionals face-to-face with their counterparts in the anti-terrorism and Homeland Security areas in both the private and public sectors. The goal of the conference was to give participants the tools and strategies necessary to deal with this global concern. Emphasizing the focus on enterprise risk management was the direct involvement of RIMS as a sponsor, coordinator and participant in 2003.
The Loss Exposure Paradigm
Gaming resorts today are self-contained living and entertainment environments operating 24 hours a day, seven days a week. Including staff, most large resorts contain more people at any given time than most towns. And the nature of the business and the habits of its customers requires a large presence of cash, credit cards and other valuables on site. To address this intimidating scope and intensity of risk, many gaming organizations are turning to the use of enterprise risk management to identify and assess the collective risks that affect their firm’s value. A number of different tools and methods exist to identify and manage risks. One in particular, the loss exposure paradigm, can be thought of as an operational road map of assets and risk exposure.
To develop the paradigm, a resort begins by identifying each of its separate business operations, such as the casino, the hotel, conference area and amenities, including retail and recreation areas. An assessment of each business unit’s operations establishes the unit’s major assets and type of customer. Once the assets are developed, the casino identifies the risks associated with each asset. There are two basic types of threats to each business unit’s assets and customers: internal threats and external threats. Internal threats include employee crimes such as embezzlement and theft, while external threats include all crimes perpetrated by outsiders, ranging from cheating at the gaming tables to terrorism.
The final step in the process develops the risk management applications that are available to mitigate or eliminate the risks that were identified, matches specific risk management applications with the identified threats and implements those applications. One example of this is the recent decision by some casinos to implant RFID tags in their playing chips to hinder cheating. Another is employing game theory to help determine a single vision for the firm’s future and using that vision to guide its risk management decisions.
With a king’s ransom at stake and a host of risks to face, the gaming industry is a prime example of enterprise risk management in action. Gaming organizations are becoming increasingly supportive of enterprise risk management in general, and many firms are enjoying top-level executive support of such programs. As the gaming industry’s enormous exposures are likely to increase over time, it also seems likely that more and more companies will embrace ERM as their best bet for a viable future.
Diana R. Cook is the director of risk management for the University of Iowa. Alan E. Meyer is the vice president of marketing for American Family Insurance Company. Ruthanne Murray is the risk management officer for the Las Vegas Valley Water District. David A. Skup, CPA, is the senior vice president and chief operating officer for the Aon Underwriting Managers’ Service Center. Nicholas P. Thilges is a claim supervisor for MetLife Auto & Home Insurance Company.
This article was written in conjunction with the authors’ studies in the Risk Management and Insurance Masters Program at Florida State University.