Sustainability + Risk Management = Resiliency

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I recently read a Forbes article of risk management and sustainability I thought made much sense.

It was an interview with Dr. Leo S. Mackay, senior vice president at Lockheed Martin, and he was describing a reorg at Lockheed that puts enterprise risk and sustainability under common reporting, since ERM and sustainability are both principally focused on the identification and prioritization of risk.

Considering risk and sustainability together is part and parcel of the same thing because sustainability in strategic terms is about building in resilience and efficiency into the business.  “Rather than have separate silos where discussions or disaggregated thinking around what are the existing and emerging risks, that now is a coordinated effort,” Dr. Mackay says “Those things are tantamount to risk mitigation and the control of risk.”

To me what Lockheed is building in their business is resiliency – perhaps an over-used word these days, but as good a descriptor as any. With organizations facing increased risks from cyber security to climate change, captives can lead the way to help create that resiliency, especially as many captives already work across silos if they cover diverse risks such as property and employee benefits. So as captive practitioners you can get the process started – by coming to VCIA’s Annual Conference to get some good education with sessions such as Expanding Your Captive Business Plan and Optimizing Your Captive’s Risk Profile and Reinventing Your Captive for Maximum Results.

Check it out: http://conta.cc/2vDCNrG

And a quick follow-up to last week’s blog: I reported about my concerns with the proposal to add a border adjustment tax (BAT) to any tax reform that Congress might attempt this summer, as it might cause additional costs to the captive insurance industry utilizing offshore reinsurers. Jim McIntyre just reported to me that the White House and congressional GOP leaders said that they are no longer looking at a border-adjustment tax as they work to get tax-reform legislation enacted this year. Good news as it eliminates one uncertainty in Washington!

I look forward to hearing from you.

Rich Smith
VCIA President

Border Patrol

taxes__illustrationWith Republican control of the Executive and Congressional branches of government enactment of tax reform in 2017 is highly possible.  Various proposals are being considered during the 2017 Congressional session and insurers have a lot at stake as Congress considers comprehensive tax reform.   Such legislation aims to lower individual and corporate tax rates, eliminate or limit most tax deductions, credits and exclusions, and dramatically restructure how the US taxes earnings of U.S. companies that sell goods and services outside the US.

Probably the biggest issue right now is a border adjustment tax proposed by Speaker Ryan. Taxes would apply based on the destination of where goods and services are consumed, rather than where they are produced or where the business has its headquarters.   This tax would make it virtually impossible for US insurers to buy global reinsurance, which they commonly use to spread risk and keep insurance rates affordable. It is still uncertain whether financial services transactions will be taxable if this proceeds, but the impact to reinsurance costs are estimated to be in the billions. In most other countries that have a similar value-added tax, or VAT, financial services transactions because the actual “destination” of such cash flows is difficult to discern.

Under current tax law, US insurers can write off the costs of international reinsurance just like any other cost of doing business, helping them to keep policies affordable. They cede about 20 percent of direct written premiums to reinsurers annually.  If insurers are not able to buy reinsurance to spread their risk, all the risk would be concentrated in the US rather than spread globally. This would make the insurance market less competitive, and result in higher premiums. The Brattle Group estimated that the impact of the tax is anywhere from $8B to $34B – a large range due to the fact that there is limited information on the proposal as of yet.

A border-adjustment tax is one of the ideas that has been floated in Washington as part of a major tax reform effort expected this year. To date, specific legislative proposals have not yet been put forward by Congress or the White House.  VCIA is working with the same coalition that opposes the Neal Bill on this issue to request a similar exemption.

Whatever road Washington takes on tax reform, it must act carefully and avoid the unintended consequences of a proposal like a border-adjustment tax.

I look forward to hearing from you.

Rich Smith
VCIA President

You’re Getting Warmer

Brache, James 2017 photo

Jamie Brache, 2017 VCIA Conference General Session Industry Keynote 

Some of you might have heard recently that a giant iceberg about the size of the State of Delaware (or twice the size of Luxembourg to our more Eurocentric friends) has broken off an ice shelf on the Antarctic Peninsula and is now adrift in the Weddell Sea.

At 5,800 sq km the new iceberg, expected to be dubbed A68, is half as big as the record-holding iceberg B-15 which split off from the Ross Ice Shelf in the year 2000, but it is nonetheless believed to be among the 10 largest icebergs ever recorded.  According to experts, this event will not itself result in sea level rises.  As one cool scientist described it “it’s like your ice cube in your gin and tonic – it is already floating and if it melts it doesn’t change the volume of water in the glass by very much at all.”

That being said, it is a reminder that climate change is upon us, whether you believe it is a natural occurrence, anthropocentric, or a little bit of both.  While climate change is accepted to have played a role in the wholesale disintegration of the Antarctic ice shelves, there is no evidence that the calving of this giant iceberg is linked to such processes.  However, climate change could have made the situation more likely, according to scientists.

The insurance industry is starting to play a role (indeed, must play a role) in mitigation strategies and resiliency when it comes to climate change. At the VCIA Annual Conference this August, Jamie Brache, Deputy Managing Director of Credit & Political Risk at Zurich North America, will provide his thoughts on the impact of climate change on the broader insurance marketplace and, drawing on his background, discuss some of the potential implications of climate change on risk management and the global political risk environment.  I hope I will see you there!

I look forward to hearing from you.

Rich Smith
VCIA President

 

Early Conference Rates Expire Today!

Today is the day! VCIA’s early rate specials for the World’s Greatest Captive Conference close today! Hopefully, all of you have already registered for our annual conference taking place August 8 – 10 in Burlington, Vermont.

Luhn,Matthew 2017

I am very excited about our closing keynote speaker, Matthew Luhn from Pixar Animation Studios (whose parent is The Walt Disney Company, one of VCIA’s best known members). For over 20 years, Matthew has created stories and characters for Pixar, including the highly popular films Toy Story, Monsters Inc., Monsters University, Finding Nemo, UP, Cars, Ratatouille and more. Along with being a driving creative force for Pixar, Matthew trains CEOs, Directors and others in how to craft stories for their organizations as well.

So register today – and maybe we can convince Matthew to weave captive insurance into his next film. I think Monsters Risk Management has a good ring to it!

I look forward to hearing from you.

Rich Smith
VCIA President

Cyber Stars

SOV-stars

We all know that Vermont’s captive regulators epitomize the Gold Standard the state embodies when it comes to captive insurance domiciles. Dave Provost, Sandy Bigglestone and the captive team at Vermont’s Department of Financial Regulation (DFR) are considered objectively as the best in the business. One reason for their star status is their desire to keep learning and moving ahead with the industry as it evolves. Being highly knowledgeable experts requires active learning.

This week, VCIA coordinated a ½ day educational session with the captive team from DFR (along with many of their colleagues from traditional insurance, banking and securities) on the subject of cybersecurity. VCIA board chair Heather McClure and Lynn Sessions from the law firm of Baker Hostetler lead the session on cyber liability, threats that create cyber exposure, regulatory scrutiny giving rise to claims and best practices when responding to these events. The goal of the session was to instill a depth and breadth of cyber knowledge in the Vermont staff that will be another benefit for Vermont captives.

Heather’s day job is executive director of operations at OU Physicians, and she is a licensed attorney in Oklahoma and Texas with an LL.M. in Health Care Law. She is also the Chief Operating Officer of OU Physicians’ captive professional liability insurer, Academic Physicians Insurance Company, which covers approximately 750 faculty physicians, 700 resident physicians and 700 medical students at the University of Oklahoma College of Medicine.

Lynn is a leading privacy and data protection attorney with Baker Hostetler with over 22 years of involvement in the healthcare industry. She has handled nearly 400 data breaches and over 100 regulatory investigations.  She was awarded a Burton Distinguished Writing Award at the Library of Congress for her article, “Anatomy of a Healthcare Data Breach.”

These two highly experienced professionals provided the DFR team with actual cyber liability claims and data breach responses, and provided a forum to ask questions of a leading privacy and data protection attorney and an insured who has experienced cyber incidents first hand.  The audience asked great questions and dug deep into what cyber policies should include and how best to regulate them for the good of the captive. Seeing this it is not hard to understand why Vermont remains the Gold Standard!

I look forward to hearing from you.

Rich Smith
VCIA President

Cyber Bully Pulpit

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According to a report from a recent Captive.com article, a full 50 percent of US firms do not have cyber insurance, despite the fact that 61 percent of US firms expect the volume of cyber breaches to increase in the next year. Further, more than a quarter of US firms say they are not planning to purchase cyber insurance. These findings come from a new survey from analytics firm FICO, which also reveals that even among those that have insurance only 16 percent said they have cyber insurance that covers all risks. This puts the United States well behind the United Kingdom and Canada in cyber protection, among other countries.

This corresponds to a report released at the 2017 Risk & Insurance Management Society’s (RIMS) Conference earlier this year. According to the 2017 Cyber Risk Transfer Comparison Global Report, written by the Ponemon Institute, most organizations spend four times more on insurance protecting their physical plants, properties, and equipment than they do their information-based assets. The report indicates that most organizations spend much more on fire insurance premiums than on cyber insurance, despite stating in their publicly disclosed documents that a majority of the organization’s value is attributed to intangible assets.

This is where captives make sense: the majority of survey respondents said that cyber insurance was inadequate to meet the needs of their organization, too expensive and has too many exclusions. That’s practically the mantra for captive formations!  Over time, the traditional insurance market will likely meet the need of many insureds with cyber policies, but it’s a little scary how unprotected we currently are – the time is nigh!

Come to the VCIA Conference this year and learn more about Cyber for captive with Cyber Security and Captives: How to Stay One Step Ahead (part 1 & 2). Click here for more information. This is just one of dozens of great captive topics being covered at VCIA August 8–10.  Hope to see you there!

I look forward to hearing from you.

Rich Smith
VCIA President

Steve and Carol

new-positionsTwo important people to us at VCIA have recently announced new positions in the captive insurance community.

As many of you saw from the Captive Review report last week, XL Catlin has appointed Steve Bauman as head of global programs and captive practice in North America. Steve is a longtime VCIA board member, formerly with Zurich North America, and has been a high-profile figure in America’s captive industry, having worked at Zurich as head of captive services in the US from 2007 to 2017.  Hiring Steve is a sure sign that XL Catlin is very interested in growing its captive programs in North America after making significant investment in its captive expertise over the past two years mostly in its European operation.

Secondly, Kroll Bond Rating Agency (KBRA) announced today the appointment of Carol Pierce to the role of director in KBRA’s insurance group with a focus on captives, reinsurers, and alternative capital providers. Carol joins KBRA’s analytic team after thirteen years with Munich Reinsurance America, where she was responsible for market, competitor, and client analysis, initially for the specialty-markets division and more recently for the reinsurance division. Prior to Munich Re, Pierce worked at A.M. Best, where she managed the team responsible for expanding ratings among captive insurers. Carol is a former member of our board of directors and was a past recipient of the VCIA Captive Crusader Award.

We are excited to have Steve and Carol continuing to bring their experience and support to the captive industry in their new positions!

I look forward to hearing from you.

Rich Smith
VCIA President