Author Archives: Caroline McDonald

About Caroline McDonald

Caroline McDonald is a writer and former senior editor of the Risk Management Monitor and Risk Management magazine.
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Greenberg: Insurers Should Step Up to TRIA—With Caution

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Risks for businesses are constantly changing, but they should be seen as opportunities and not shied away from. This was the message from Maurice R. “Hank” Greenberg last week.

Greenberg, chairman and CEO of C.V. Starr and CEO of AIG until 2005 spoke at a KPMG insurance industry conference in Midtown Manhattan.

“We are living and have been, in a changing world. Whether it’s terrorism, regulation, technology, for some they lead to opportunity and for others, to nothing,” he told insurers.

Looking back in time, he noted, a number of insurance companies with “household recognition” no longer exist because they resisted change. How does a company insure against cyberattack, for example? “With great difficulty, yet it has to be conquered,” he said.

Greenberg pointed out, “We’ve dealt with environmental, but there is a lot more coming down the pike.

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Fracking is a new risk, every day you read something new—whether it’s causing minor earthquakes or polluting water and so on. But we have to deal with these things. You can’t hold progress back because there’s a new risk and you don’t want to take it on.”

He added, “We’re living in a world where terrorism is a growth business in many countries. We have to deal with that and that will be an increasing problem for the industry to deal with.”

The insurance industry has to step up to risks such as terrorism, he said. If not, “government takes over and industry disappears—so many times you partner with government if you have to. Take TRIA for example, it’s up for renewal in 2014, and the industry is resisting government pulling out of TRIA.”

Initially after Sept. 11, 2001, Greenberg said he had hoped “we would get something like TRIA in place, but we’ve learned a lot about terrorism since then. We’re more secure. Yes, there are exceptions, but we’re more alert as a nation than we had been.”

Those who believe in the private sector, he said, believe government “should only do things the private sector can’t do.” And so, renewing TRIA as-is may not be the right course of action, he said.

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“The industry could take more risks than when it was confronted with 9/11. There are some parts of TRIA that I think the government has to continue to be involved with.” For example, he explained, underwriters fear accumulation of risk. “So take a large building in New York, like a hotel.

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If there was a terrorist attack with thousands of people in the building, the loss would be monumental. Particularly if they are employees and you have workers compensation coverage—it could possibly break the strongest company.”

He advised insurers to use common sense in their belief that the private sector has the financial capability of providing insurance. “Otherwise all the solvency funds in the industry on the regulatory side would be depleted. So it must be balanced. You can take more risk where the industry can afford to assume it, but there are parts that you have to say are beyond our capability. That’s where government does and should step in.”

Risk Managers Gain Foothold as ERM Program Drivers

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Fewer boards of directors are seen as their company’s top ERM program drivers, dropping to 26% in 2013 from 34% in 2011, according to the 2013 RIMS Enterprise Risk Management Survey, released today. This year risk managers came in as the second driver at 17%. By comparison, the second highest category in the 2011 report, which did not include risk management as an option, was “other” at 19%. Commenting on the 2011 report, Carol Fox, RIMS director of strategic & enterprise risk practice confirmed that many respondents wrote in their comments, that “other” was a risk management department initiative. “While I can’t do a direct comparison to this year’s 17%, I’d say it may be a shift as risk professionals take more of a leadership role in instituting ERM programs,” she said.

In 2011, in fact, part of the survey’s response was that “risk managers needed to take more of a leadership role with ERM. And since board leadership showed a drop [in 2013], risk managers may have taken up the slack,” she said.

Fox observed that concerns about rating agency requirements resulting from the financial crisis of 2008—that were some of the drivers for ERM in 2011—were also lower. “In 2013 ‘regulatory drivers’ for implementing ERM was 14%, dropping from 18% in 2011—so it is a shift,” she said.

What this means, she explained, is that more organizations understand the value of ERM. “It’s no longer about compliance with regulations or pressure from the rating agencies. They’re seeing the value in ERM itself.”

The board is still the largest driver, however. “That hasn’t changed, ERM is still very much top of mind for the board. As you look at the types of risk that can affect the objectives of the organization, they are mostly strategic. They are still the primary driver, but they were a higher driver in years past,” she said, adding, “This doesn’t say the board is less interested. The primary driver is the leadership role the risk professional is bringing.”

The 2013 RIMS ERM Survey was produced with Advisen LTD as a follow up to previous surveys in 2009 and 2011. The survey is free for both RIMS members and non-members and can be downloaded in RIMS newly revamped Risk Knowledge library at www.rims.org/RiskKnowledge.

 

Time to Get Serious About Climate Change Risks

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While arguments from climate change deniers have subsided, there is still discussion about the cause of climate change—natural or man made? But these arguments are mere time-wasters. Right now it’s critical to put the focus on managing this risk.

Insurers have it right. For years they have been pointing to the urgent need to deal with the issues surrounding climate change. Insurers know this global risk needs to be dealt with now—and in the future—and they can’t afford to get it wrong.

Johnny Chan, Ph.D., director of the Guy Carpenter Asia-Pacific Climate Impact Center said it best: “The debate on climate change and global warming has been intensely polarized. A great deal of this ‘noise’ has clouded the very real and emerging issues that we as an industry and society need to address. In order to adapt to climate change and the changing risk landscape, it is necessary to cut through this noise and focus on objective decisions to mitigate both the financial and social risks associated with climate change.”

Guy Carpenter said in a study on the risks of global warming that the biggest threat is rising sea-levels. According to the report, the greatest concern is coastal flooding, projected to increase as sea levels rise at least one to two feet by the end of the century. In other words, storms such as Superstorm Sandy on the U.S. East Coast and Cyclone Nilam in Eastern India are expected with greater frequency and severity.

Post-Sandy, we’ve seen how far-reaching the effects of a mega-storm can be. In fact, 25 miles or so away from the New York/New Jersey shoreline, northward along the Hudson River where I live, homes, businesses and communities were devastated by the storm surge. A number of businesses have closed and damaged homes still stand boarded and empty.

Bloomberg Businessweek reported that as the Federal Emergency Management Agency moves forward with its plans to update flood maps nationally, 350 coastal counties—and 32,000 homes—will be impacted. Homeowners and business owners are reeling from the price of flood insurance, which will escalate even more in designated areas unless they raise structures. One couple in Old Greenwich, Conn., will pay $300,000 to raise their home 15.5 feet, according to the article. Residents of towns that elect not to adopt the maps will not be eligible for National Flood Insurance Program coverage.

Hard-hit New York and New Jersey are taking the threat of rising seas seriously with announcements that a number of coastal structures will need to be raised. New York City Mayor Michael Bloomberg in June declared a sweeping plan to help combat future flooding. The plan, which would include building flood walls, levees and bulkheads along 520 miles of coast, was projected to initially cost $20 billion.

Guy Carpenter’s report recommends that coastal areas re-examine their flood strategies including dykes and seawalls. Inland urban communities aren’t immune, as winds and heavy rains can cause flooding. These areas need to have storm water management infrastructure in place to accommodate larger volumes of rainwater and should upgrade codes and standards for infrastructure and land use that permits rainwater catchment basins.

While these preparations should be a priority for governments, they also compete with the need to replace aging infrastructures everywhere. Bridges, roads and water systems need repairs or replacement in every corner of the country. But many communities, crippled by debt and shrinking workforces, no doubt are focusing on needs as they arise. Hopefully the two can go hand-in-hand so that risk managers can build in flood control and other upgrades as they make the improvements so badly needed.

Companies Ignore Whistle-blower Protections

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Whistle-blowers are in the news more and more, but some organizations don’t seem to have caught up with the trend, or the fact that retaliation is illegal. They don’t seem to realize that negative reactions to a whistle-blower can make them look petty—and guilty.

Take two front page stories in our area newspaper on the same day this week. Both were about whistle-blowers who put their jobs on the line to come forward. One was fired, the other was suspended and later resigned.

In one case, The Journal News reported, a member of a New York town’s financial staff, the supervisor of fiscal services for more than 10 years, testified at a hearing that she notified several of her superiors that the town’s revenue projections were overestimated—on a financial statement needed for a bond application. She also reported improper money transfers—one made to the town supervisor. The woman was ignored, told to keep quiet, and eventually fired.

Not only did the town officials make no move to right the wrongs she reported to them, one official denied ever being told of potential corruption or fraud. Meanwhile, the town, which is also being investigated by the FBI, has filed perjury and other charges against this former employee.

The second newspaper article is about a former security expert at the Indian Point nuclear power plant in New York. Because he feared the plant was vulnerable to a terrorist attack, he voiced his concerns to supervisors. In June he was suspended.

He filed a 76-page lawsuit in the U.S. District Court alleging misconduct and retaliation against him. The Indian Point employee alleged that security was inadequate and that documents and internal reports were falsified.

Unfortunately these sound like other stories in the news over the past few years following the financial crisis. At Lehman Brothers, the company’s chief risk officer, Madelyn Antoncic warned Dick Fuld, the CEO, that their risk in mortgage-backed security bets was too great. Her warnings were ignored. Her reward was to be fired.

The knee-jerk reaction of many organizations seems to be; get rid of the employee, blame the employee and then go to court. It appears that the whistle-blower protections under the Dodd-Frank Act, such as prohibiting retaliation against whistle-blowers, is still a mystery to some organizations.

Fraud experts contend that the burden is on the organization to see that employees are comfortable in coming forward and that their concerns are addressed. They advise companies to have hotlines available for employees to provide whistle-blower tips—and to act on those tips.

Whether or not a company is guilty of fraud, firing an employee for coming forward can make the organization look guilty and cause a whole host of other problems, including risk to the company’s reputation. Public entities and corporations would do well to study Dodd-Frank and put a plan in place before an employee does come forward. Have organizations learned nothing from Watergate? The cover-up always leads to exposure of the crime.