Author Archives: Emily Holbrook

About Emily Holbrook

Emily Holbrook is a former editor of the Risk Management Monitor and Risk Management magazine. You can read more of her writing at EmilyHolbrook.com.
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Risk Management in Africa

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Ergonomic tools and training are needed in developing countries just as much as they're needed throughout the offices in which we work.

Companies throughout developed countries often implement ergonomics as a risk management tool. Offices hire firms to show their employees how to sit at their desk, type on their keyboard and read their monitors in a way which should not result in injury or strain, which could effect the employees productivity, or worse, result in a workers comp claim (for example: carpal tunnel syndrome).

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 This training is helpful to the employees and employers alike.

But what if your office is a sweltering farmland in the southern lands of Africa and your job requires 12 hours a day of picking tobacco? Where do ergonomics play into this occupation?

That’s a question Aon is answering. With their initiative, The Work Right Foundation, the insurance giant is aiming to provide basic, ergonomic tools to manufacturing and agricultural workers in Africa, who are in desperate need of tools to work safely and without inflicting wear and tear to the human body.

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We spoke with Vicki Missar, associate director of Aon’s Ergonomics Consulting, via email about Aon’s initiative in Zimbabwe.

“The Work Right Foundation has a mission to help spread ergonomics into industrially developing countries by getting companies to donate new or used ergonomic items (or money) to the foundation,” she said. “I started the foundation this year. From a historical standpoint I was inspired by Professor Pat Scott, HoD.

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, Rhodes University, South Africa, a professor of ergonomics in Africa who dedicated her career to this cause. I saw her speak at the International Ergonomics Conference in Maastricht, The Netherlands two years ago and am now in a position to help.”

Aon hopes to raise 2,000 ergonomically effective items for distribution to Zimbabwe’s workers by the end of June, and the desire to do something has grown.

“This just started but the swell of enthusiasm to reach out and help others has been amazing,” said Missar. “We have pulled together ergonomic professionals from several countries in addition to the amazing efforts and support of Aon.”

The initiative is not stopping with Zimbabwe. The foundation hopes to target one industrial developing country each year. For more information or to donate, click here.

Santa Barbara Fire: A Costly Disaster

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Though the wildfire in Santa Barbara county has been mostly contained, damage estimates continue to rise. Authorities say 77 homes have been destroyed — nearly double what was originally estimated — in the affluent Southern California area of Jesusita.

The median home value for the Jesusita area is just over USD 500k, but it does contain a number of multi-million dollar mansions—several of which reportedly have been destroyed.

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Buildings in the area are constructed of stucco walls and chimney finishes, have shed (flat) roofs covered with low-pitched clay tile and terra cotta or cast-concrete ornaments. The homes generally have little cleared area separating them from the surrounding vegetation, which consists of an equal mix of chaparral, brush, and conifers. In many cases, even homes that do have partial setbacks will be affected by encroaching flames, depending on the direction of the fire and accompanying winds.

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The blaze is 65% contained and all but 375 residents from 145 homes had been allowed to move back in. Insured losses from this fire are expected to be large, but residents of California are no strangers to insurance claims resulting from wildfires. As the Insurance Information Institute reports:

Nine of the ten largest wildfires, in terms of insured property losses, occurred prior to 2007, according to ISO data. A 1991 wildfire in Oakland, California tops the list with $ $2,687 in insured losses in 2008 dollars. In October 2007 a series of wildfires broke out across Southern California, damaging thousands of homes and causing widespread evacuations.

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The largest of these fires, the October 21 Witch fire, resulted in 4 billion in insured losses and was the second most damaging wildfire since 1970, in 2008 dollars.

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First Quarter Troubles For AIG . . . What Else Is New?

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In a conference call yesterday afternoon, AIG CEO Edward Liddy announced the company’s first quarter 2009 results. And the news was as expected — or worse.

American International Group, Inc. (AIG) today reported a net loss for the first quarter of 2009 of $4.35 billion or $1.98 per diluted share, compared to a net loss of $7.81 billion or $3.09 per diluted share in the first quarter of 2008. First quarter 2009 adjusted net loss, excluding net realized capital gains (losses) and FAS 133 gains (losses), net of tax, was $1.60 billion, compared to an adjusted net loss of $3.56 billion in the first quarter of 2008.

The full audio webcast of the call can be accessed here.

Variable Annuities in Trouble

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In response to the S&P’s Supercomposite Life & Health Insurance Index falling 60% in the past year on costs to back variable annuities, we decided to ask some questions. For this, we turned to Doug Dannemiller, senior analyst at Aite Group, LLC, who focuses on wealth management and retail investment.

How does risk vary by annuity type offered by insurers?

The risk that the insurers are taking is the risk of downside market movement. What they’re doing under the three general classes of benefits in a variable annuity is either paying out that risk in a one-time payment in a GMAB [Guaranteed Minimum Accumulation Benefit]. So, if you’re in seven years and the market’s down 10%, they said you wouldn’t lose any principle – you’re now free to move about the country with your money and the GMAB is 10% of the money. They pay it up and off you go.

The other two options of risk are the GMIB [Guranteed Minimum Income Benefit], which is at that same “after seven years, you’re 10% down.” Well you now have the option to annuitize with that insurance carrier, which will turn your principal into an income stream for life at a conversion factor that is at a spot rate, as opposed to a rate that was set seven years ago. That conversion equation happens, then the insurance company obviously takes the entire amount of principal but pays out on the amount that would’ve been 10% higher.

So, depending on how they account for all that, there’s a book of profit involved in the annuitization equation as well as the sort of marking up to the 10% gain. So that’s a slightly different transaction for the insurance company.

The third general class of guaranty doesn’t involve annuitization, nor does it involve “you take the money and you’re free to move about the country.” It is one where you keep it in accumulation phase and you can withdraw up to 7% for a certain period of time without risk of running out of money. It neither involves the booking of profit, nor does it involve having to gross it up all at once and, in this final scenario, the assets are still invested in the market, so you’re essentially extending the time period that you’re guaranteeing from a minimum of seven years on to something like 12 or 14 years.

So those three scenarios, just on the product differentiation are significantly different.

What is the severity of the risk in regards to these annuities?

The severity of the risk is that if it was sold in the last seven years, they’re most likely “in the money” in terms of that option, that guaranty. So, the insurance carriers are on the hook to make up the difference between market value and guaranteed value. The risk is that they have to make those payments.

How will insurers in general be impacted by this?

New sales are the lifeblood of any product line and it used to be that advisors were looking at the richness of the guarantees offered on these annuities to make these selections. They’re still doing that, but they’re also putting equal weight behind the question: what is the long-term viability of the insurance carrier that is backing these guarantees. The advisors say, “OK, this is the gurantee, but are they going to be able to meet this seven years down the road?” So, insurers are being viewed more as a long-term investment, as opposed to just being a product provider. The credit quality of the insurer is now more of a commodity; I think it’s a differentiator now.

How can insurers hedge against such risk?

They can use futures and options. Sophisticated programs were put into place at a few of the insurers to do so. And I think the basic issue is that they were charging somewhere between 50 and 100 basis points for these guarantees. My estimate is that it would be much more than that to completely hedge the risk.

Warren Buffet has said that life insurers “took on an ungodly amount of risk.” Do you agree with this statement?

I would put it differently. I don’t think they were appropriately compensated for the risk that they did take. I say it that way because I think that the product is actually at the right price, both good for the consumer and the insurance carriers.

What do you see in the future in regards to life insurance and variable annuities?

I think annuities, especially with guarantees, are important products for utilization in a well thought-out financial plan for retirement. Having a downside guarantee with five or six years to go until you plan to retire and needing that money to grow a little bit, I think is a good idea.