Category Archives: Regulatory Risk

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Switzerland, Norway Rank Highest in Supply Chain Resilience

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Plummeting oil prices, natural catastrophes and political disruption in a borderless business environment are some of the threats to the resilience of countries that can impact supply chains, according to the 2016 FM Global Resilience Index, which aggregates data to help companies identify their key supply chain risks. The Index ranked the resilience of 130 countries to supply chain disruption based on drivers in three categories: economic, risk quality and supply chain factors.

This year’s top-rated country, Switzerland, traded places with Norway—a reflection of Norway’s drop in oil revenue at a time of falling crude oil prices. Rounding out the top 10 in the Index, in descending order, are Ireland, Germany, Luxembourg, the Netherlands, the central United States, Canada, Australia and Denmark.

The lowest-ranked country in 2016 is Venezuela (ranked 130) for the second year in a row. It is followed in ascending order by the Dominican Republic, Kyrgyz Republic, Nicaragua, Mauritania, Ukraine, Egypt, Algeria, Jamaica and Honduras.

For the second consecutive year, Ukraine (ranked 125, down from 107) was among the countries with the biggest drop, reflecting the high degree of tension the remains within the country as well as with Russia (ranked 75).

FM Global also noted:

Venezuela’s position at the bottom reflects its exposure to the natural hazards of wind and earthquake, perceptions of its lack of control of corruption and poor infrastructure and its ill-perceived local supplier quality.

France (ranked 19) and the United Kingdom (ranked 20) retained their positions from last year, while Germany (ranked 4) rose by two places.

The United States is segmented into three regions to reflect disparate natural hazards exposure:

• Region 1, encompassing much of the East Coast, is ranked 11 in the Index.

• Region 2, primarily the Western United States, is ranked 21.

• Region 3, which includes most of the central portion of the country, is ranked 7 in the Index.
FM Global-infographic

Captive Growth Increases Need for Insurance-Experienced Board

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The current climate for captive insurers is gravitating toward encouraging captives—including single-parent, association and agent-owned—to appoint experienced, independent directors to their boards. Regulators (National Association of Insurance Commissioners and Bermuda Monetary Authority) and rating organizations (A.M. Best and Standard & Poor’s) have all come out in favor of the appointment of independent directors. They believe that independent directors add value by providing independent, experienced guidance to captive owners that is separate and distinct from a captive’s other advisers, including as managers, lawyers and accountants.

Their appointment could also help a company avoid a lawsuit. Independent directors do not have conflicts of interest, can provide experience that is different from others on the board and usually have a broad captive insurance perspective.

Another point worth considering is that some captive managers may have other interests, such as brokerages, reinsurance brokerages, actuarial, claims, asset investments. Some may even provide leads for a possible fee for premium financing. Furthermore, captive owners can mistakenly believe they get all the advice they need from their current advisers.

Independents on the Horizon

In the coming months, expect to see captive owners reaching out to independent directors, both because of their value-added consulting expertise and because regulators and possibly rating agencies will require it. This practice already exists in some overseas jurisdictions, and with Solvency II, it could become more important as it may ultimately apply here in the U.S.

What is often overlooked is the value-added experience independents offer. Here is a partial list of services normally expected of experienced independent directors:

  • Help in selecting the reinsurance interme­diary. They provide an independent per­spective separate from the reinsurance broker or risk manager.
  • Advise on acquisition opportunities of the captive, if any, such as buying a third-party administrator, a licensed admitted insur­ance company, or an investment in a new start-up retail brokerage firm. These sophis­ticated ideas are an expansion of most cap­tives’ business plans and need to be consid­ered carefully given the risks they present. Keep in mind, however, that the captive landscape from the 1970s is littered with the carcasses of captives that ventured ill-advised into such businesses.
  • Help in evaluating a reinsurance program’s structure and economics.
  • Attend and advise on the rating process with outside rating agencies, such as A.M. Best.
  • Attend meetings with insurance regulators, especially if there is a regulatory concern.

Independent directors are also asked to vote on many issues, including:

  • Should the captive change fronting companies?
  • Should the captive make a large dividend payment to the parent corporation, or should it return capital to its owners?
  • Should the captive write direct procure­ment policies for the parent corporation?
  • What law firm should handle uncollectible reinsurance?
  • Should the captive litigate or arbitrate certain claims?
  • Should it change asset investment managers?
  • Should the captive expand into other lines of business, such as writing third-party reinsurance business?
  • Should it move from an offshore domicile to a domestic domicile?
  • How can the captive reduce the cost of its reinsurance program?
  • How does a captive evaluate its various service providers?
  • What are the consequences of executing reinsurance or fronting agreements?

Cyber, Regulation Seen as Top Emerging Risks, Report Finds

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SAN DIEGO—Forecasting risk is not expected to get easier in the next three years, with cyberattacks and regulation topping the list of emerging risks, according to a new report published jointly by Marsh and RIMS.

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The 13th annual Excellence in Risk Management report found that while risk professionals are increasingly relied upon to identify and assess emerging risks, there are still organizational and other barriers to identifying those risks. In fact, nearly half of survey respondents—48%—predicted that forecasting critical business risks will be more difficult three years from now, while just over one-quarter said it would be the same.

“Whether emerging risks are on your doorstep, around the corner, or on the far horizon, they have the potential to catch organizations unaware,” said Brian Elowe, Marsh’s U.S. client executive leader and co-author of the report. “It’s important for risk professionals to maintain awareness of global risk trends, and to make the connection to their organizations’ business strategy.”

Where do risk professionals turn when trying to understand the impacts of emerging risks on their organization? According to the report:
One of the goals of this year’s Excellence survey’s goal was to better understand how organizations view the emerging risks facing them, what tools they use and the barriers they face in assessing, modeling, and understanding the risks. According to the findings, a majority of respondents—61%—cited cyber-attacks as the likely source of their organization’s next critical risk. This was followed by regulation, cited by 58% of the respondents, and talent availability, cited by 40% of the respondents.

Based on survey responses and insights from numerous focus group discussions, it became clear that risk professionals generally agree on the importance of identifying emerging risks, and also that there is no clearly established framework for doing so. More can be done to better identify, assess, and manage the impact emerging risks may have on organizations.

For example, a majority—60%—of the risk management respondents said they use claims-based reviews as one of the primary means to assess emerging risks, compared to 38% who said they use predictive analytics.

“The widespread use of claims-based reviews means that a majority of organizations are relying on studying past incidents to predict how emerging risks will behave rather than using predictive analytic techniques like stochastic modeling and game theory to help inform their decision making,” Elowe said.

Survey respondents also cited several barriers to understanding the impact of emerging risks on their business strategy.

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Decisions with lack of cross-organization collaboration ranked first among risk professional respondents.

“Lack of collaboration across the organization is still an issue for many risk professionals. On the other hand, breaking down silos has become less of a concern for executives,” said Carol Fox, vice president of strategic initiatives for RIMS and co-author of the report. “Tackling emerging risks often requires creative yet pragmatic approaches. It has to encompass internal cross-functional conversations — formal and informal — around the intersection of risk and strategy, senior-leadership engagement, and tapping into external information sources. Risk professionals are encouraged to broaden the scope and collaboration around emerging risk issues within their organizations.”

According to the report:

As the risk environment becomes increasingly complex and more entwined with financial decisions, risk strategy is increasingly a boardroom issue. As we have seen in past Excellence surveys, senior leaders’ expectations of the risk management department have increased in everything from leading enterprise risk management to providing better risk quantification and analysis.

However, while more is being asked of risk professionals, investment is not necessarily keeping pace. For example, the percentage that say they expect to hire more staff dropped to 25% this year from 37% when we asked in 2015. “We’ve all experienced this elevation of risk management at our institutions, but…as we are battling for budget, it becomes pretty easy for risk management to get pushed over to the side,” said the assistant vice president of risk management at a major university.

The survey is based on more than 700 responses to an online survey and a series of focus groups with risk executives in January and February 2016.

Dip, Don’t Swipe: How the EMV Liability Shift Impacts Merchants

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More than 575 million chip-cards have been issued by financial institutions to consumers, and you’ve probably been walking around with one in your pocket since June of last year. Since October 2015, merchants may have requested you begin to ‘dip’ rather than ‘swipe’ your card. Why? Although the transition to chip-card technology may be confusing at first, it’s ultimately a benefit to privacy and security.

For merchants, however, the transition to accepting chip-card technology is essential to avoiding what the industry is calling the EMV ‘liability shift.’

What is EMV?

EMV is a global standard for secure credit card transactions utilizing microchip technology embedded in debit and credit cards. The name derives from EuroPay, MasterCard and Visa (EMB), the companies that originally developed the technology.

Although Europe adopted the practice long ago, the United States was late in transitioning to the EMV technology standard.

By the end of 2015, 70% of U.S. credit cards were issued as EMV cards, but only 59% of retail locations were expected to be EMV-compliant.

What is the EMV “liability shift”?

As of Oct. 1, 2015 (2017 for fuel-pump stations), many card brands have instituted a “liability shift” policy to incentivize both merchants and card issuers (banks and credit unions) to transition to EMV technology, which has shown to increase card security and reduce counterfeit fraud. The liability shift means that between merchant and card issuers, liability for counterfeit card-present transactions resides with the party using the least secure EMV-related technology.

In other words, prior to Oct. 1, 2015, the liability for fraudulent transactions largely fell upon the card issuer. Now, non-EMV compliant merchants could be liable for the costs associated with any chargebacks.

What does EMV mean for merchants?

Consumers were provided their new chip-cards by card issuers, but what are the next steps for merchants? Although 78,000 merchants have already installed EMV chip-activated technology, tens of thousands are still risking exorbitant costs due to fraudulent charges and the ‘liability shift.’

The average cost of an EMV-compliant point-of-sale terminal is around $500. Chip-reading mobile devices such as Square can be purchased for $29-$39. While the initial costs of EMV technology may appear large for some merchants, ultimately merchants will pay far less than the potential fines, penalties and assessments levied by major card brands against non-compliant merchants.

Under Visa’s Global Compromised Account Recovery process (GCAR), for example, Visa can levy an assessment against a non-PCI compliant merchant that suffers a breach, that includes fraud recovery (an amount to reimburse issuing banks for fraud perpetrated on cards subject to a data breach) and operating expense recovery amounts (such as an amount to reimburse issuing banks for the costs to reissue payment cards subject to a data breach). The contractual clauses governing this exposure are generally found in the Merchant Services Agreement (MSA). This portion of a merchant’s exposure is insurable, but not all cyber liability policies respond the same way. It is important to note any breach of contract exclusions or sub-limits pertaining to both PCI Fines/Penalties and PCI Assessments.

Mitigate the risk

The first step to mitigating the risk is to become EMV compliant. While each of the card brand’s EMV-compliance certification program may vary, in general, merchants must apply for and receive certification through its acquiring bank to become EMV-compliant, which entails three phases:

  • Hardware Certification: installing EMV-enabled terminals that are certified by EMVCo to process payments.
  • Software Certification: implementing payment application software.
  • End-to-end Certification: holistic testing and approval of point-of-sale configuration, where the card brands check and confirm the integrity of the payment chain as a whole.

The certification process and level of involvement will vary across merchants, depending largely upon the size and complexity of the merchant’s business; the timeframe to completion can take anywhere from a few weeks to several months.