Black Swans for Thanksgiving

I, for one, am glad its Thanksgiving next week. First, I love the feast! Family and friends (well, er, no friends this year) gather for dinner and conversation – no gifts, no chocolates, no decorations. Just like me: boring but predictable. Second, like everybody I could use a break from the craziness that is 2020, and Thanksgiving does allow one the opportunity to take a reality “time out” at least for a day.

But as my mind drifted to turkey, another bird edged its way into my brain. The proverbial black swan that is at the top of mind for many of us in the insurance community. An article yesterday in the London Times by Alex Wright highlights how many in our world are working to create insurance solutions for things that historically have been labeled uninsurable, like the pandemic.

As Alex outlined in his article, traditionally, companies have mitigated against risk by taking out an insurance policy. Underwriters would spend hours poring over reams of historical data to determine the likelihood of the risk occurring before giving a quote.  But black swans don’t fit this mode well, as by definition they defy historical data – at least in the linear manner we usually think of.

The burgeoning world of artificial intelligence (AI) and machine-learning is looking to change that. The key benefit of AI in insurance is that it can quickly process large data sets and identify significant trends that mere mortals are unable to do.

Dr. Marcus Schmalbach created the VUCA (volatility, uncertainty, complexity and ambiguity) World Risk Index, a parametric index that uses machine-learning to gather data from a range of trusted and verifiable sources, many of which aren’t considered in traditional underwriting. That data is then rigorously analyzed alongside information the technology has gathered from previous experiences to look for patterns and links between events and determine the likelihood of a major event occurring. Among the areas his group has successfully modelled is business interruption loss in the event of a pandemic based on the data they crunched.

Climate change, natural disasters, political and trade conflicts, all could be better priced in the insurance world with new AI applications. AI can also reduce paperwork and the time taken to receive a quote or claim. Using parametrics, AI can also establish if an event has happened, thereby triggering payouts and avoiding any disputes.  Captives are well poised to take advantage of such innovation.

While nobody can predict the future with 100% accuracy, AI will allow insurers to detect anomalies that will help anticipate future events, like pandemics, and maybe better prepare us for the black swans. Perhaps roast black swan instead of turkey….

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President

Friday the 13th – It’s Your Lucky Day

All of us in the captive industry, and throughout the broader risk management industry, are very rational thinkers who rely on science to determine the course of action we take in life, right?  A recent report published on November 10, 2020 in Captive International reminded me of how human behavior, with all its biases and superstitions, is a very difficult element in any kind of modelling.

The report, titled Viruses, Contagion and Tail-risk: Modeling Cyber Risk In The Age Of Pandemics, aims to better understand what modelers looking at pandemics and cyber risk can learn from each other.  The report highlights the lack of data from both types of viruses in trying to determine useful models for risk management. However, what caught my eye was this statement: “Although pandemics originate from pathogens, it is the individual and societal reactions to them that are hardest to model…”

I have always been fascinated by behavior economics as it tries to tackle our human foibles in a way that can be interpreted by economists to better understand how our world works. Even very intelligent, seemingly rational individuals are swayed by their internal biases. Science and economics are getting much better at “adjusting” for these very human traits and captive insurance will no doubt benefit as the industry sharpens risk modelling in everything from workers comp to liability. But just in case, hold on to that lucky talisman for now.

On another note, I want to wish Kevin Heffernan of Artex bon voyage as he announced he will be retiring in March 2021. Kevin has been with Artex for many years in a number of leadership roles and for the past 14 months has led captive operations across the US as executive vice president. Kevin was the first finance chair for VCIA at the start of my tenure over ten years ago and he did an excellent job of guiding the committee as well as providing me solid  advice on a wide range of topics Thank you, Kevin, and good luck!

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President

It’s an Election…. Now What Happens?

In case you may have missed it, we had a national election this week where the United States picked who will be our President for the next four years… well, almost. As of this filing, the winner has not been declared and there is talk of court cases and recounts. Such is the way of our world these days.

I have been asked several times (OK, once) how I think the captive industry might be impacted under a Biden administration if he were to win. The short answer, from my perspective, is probably not much. Certainly, there are macro issues that may change if Biden were to tack toward a more open border economy than Trump as seems likely. And he is probably going to tighten some of the regulations that Trump loosened in his four years. Perhaps those policies offset each other, but all the same, I don’t think it will have a huge impact on our industry. And I don’t see much of a change in the IRS’s attitude against 831(b)s!

The hardening of the traditional (re)insurance marketplace that ostensibly started last year looks like it will keep steaming ahead into the upcoming year. That will most likely have a greater impact on our industry than policy shifts under a new administration. Certainly, policies impacting the economy, world affairs, and the continuing pandemic will have an effect, but captives are very good about adapting to new risks and economic environments.

One policy change that might provide a little boost to captive formations is if Biden raises the corporate income tax that was lowered under Trump. The lowering of the corporate income tax decreased the federal tax benefit to captive owners, as the accelerated deduction for losses incurred but not recorded will be worth less at a 21 percent tax rate than at the previous rate.  I will be curious to see if a raise to the corporate income tax (if it happens) will have a perceptible effect in our current market.

So, my advice to you all is to strike “impact to captives” off the list of things you are worried about regardless of who ultimately wins. However, if you want to hear more about what may be coming our way in terms of policies, laws and regulations that will impact the captive industry, join VCIA’s annual members-only Captive State of the Union with Dave Provost, myself and other luminaries as we discuss the outlook as part of VCIA’s Annual General Meeting on November 18th. Click here for full information and how to register.

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President

Boo!

As if there aren’t already enough things to be frightened of, the World Economic Forum recently released an international jobs report that highlighted the top concerns for global business compared with previous years. Unemployment and spread of infectious disease were the top two risks cited by business executives globally, with fiscal crisis — last year’s top concern — falling to third place.  Not really surprising.

The Regional Risks for Doing Business 2020 survey results are based on 12,012 responses from business leaders in 127 countries. They were given a list of 30 global risks and asked to select the five global risks that they believe to be of most concern for doing business in their country within the next decade.

Cyberattacks have dropped down the list of top concerns for global businesses compared with previous years but remains the biggest risk for U.S. businesses.  While the top risks for global businesses are mostly related to economics, climate-related risks are causing greater concern this year, with natural catastrophes, extreme weather events and failure of climate change adaptation all rising up the list, the WEF said in a statement accompanying the report.

Captives will continue to be integral to their owners in optimizing recovery and building greater preparedness into their business models in order to be more resilient in the face of future disruptions. For more information of the survey, go to this link:

https://www.weforum.org/agenda/2020/10/risks-for-doing-business-survey-unemployment-coronavirus/

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President

And the Winner is…

It’s award season in the captive community (aw, heck, it’s always award season…) and not unusually several recent awardees have deep connections with Vermont.

Captive publication, Captive International, named the winners of its inaugural U.S. Captive Awards this past week and many of the winners were from Vermont or had lasting connections to VCIA. I won’t list all the winners, but here is a smattering from Vermont. First and foremost, Vermont was named Domicile of the Year. Some of the Vermonters who won include Beecher Carlson’s Pete Kranz, named as Captive Management Professional of the Year; Stephanie Mapes of Paul Frank + Collins, who is incoming VCIA board chair, received the Individual Legal honor; and former VCIA board chair Tina Truax McCuin of TD Wealth received the Individual Banker of the Year – are you sensing a pattern here?

Captive Review also staged their annual U.S. Captive Awards this past week and Vermont was the winner again of Domicile of the Year for the 7th year in a row!  Pete Kranz won Captive Service Professional of the Year in these awards as well, and former VCIA board chair Heather McClure of Academic Physicians Insurance Company (Oklahoma University Medicine Hospitals and Physicians) was named Captive Risk Manager of the Year. Again, I am sensing a pattern…

Many of the great firms and people who received awards from these two esteemed captive publications have strong connections to VCIA and all have played a role in its growth. We are happy to have these professionals among us. Congratulations to all!

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President

Welcome Brittany!

I want to say a HUGE welcome from the Vermont captive insurance community to Brittany Nevins. As many of you have heard, Brittany recently joined Vermont’s Department of Economic Development as the new Captive Insurance Economic Development Director. She will be taking over from the estimable Ian Davis, now over at Peoples United (but still in our captive community!).

Brittany will be responsible for the marketing and business development of Vermont’s captive insurance industry, working closely with the Department of Financial Regulation and VCIA to continue to strengthen the state’s reputation as the premier onshore captive insurance domicile.  We have already had several calls and zoom meetings with hew and she is going to be great!

Located in Texas for the last 2 plus years, Brittany served as a community and economic development specialist for Travis County, Texas, managing its property tax rebate program for businesses that sought to develop in the Austin region. Prior to that, she was a policy specialist for the Texas Health and Human Services Commission, where she provided support for a variety of agency regulatory programs.

On top of all that, having lived in Latin America for a little while, Brittany is also fluent in Spanish. And as VCIA and the State of Vermont continue to explore connecting the Vermont captive industry to the Latin American risk management marketplace, it will come in handy. Although, she did warn me translating our nomenclature, such as non-domiciliary reciprocal risk retention regulations, will not just flow off her tongue! And it coincides nicely with next week’s Online Captive Trade Mission with Mexico which VCIA and the State are hosting on September 30th.  By the way, this event is free for VCIA Members – details here.

So, please take a minute to say “hi” to Brittany and welcome her into our wonderful community, like you did for me ten years ago. Her email is brittany.nevins@vermont.gov.

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President

Vermont = Competence

I was looking at a LinkedIn message from Tim McQuiston, the editor of the Vermont Business Magazine, the other day and it reminded me of how important the competence of both leaders and agencies in the State of Vermont is to its citizens.

Tim reminded us that Vermont has used a combination of strict health protocols and impressive compliance by students to keep COVID case counts down, despite 40,000 college students back in the state and tens of thousands of tests conducted.

Vermont COVID numbers are low per capita and have been from the beginning. Not that there haven’t been challenges here and there, but Vermont’s Governor, Health Commissioner, and overall team (along with the Vermont General Assembly) have remained cool, calm, and collected. And part of the leadership in the Governor’s team is Mike Pieciak, Commissioner of the Department of Financial Regulation (DFR) – which, as most of you know, includes captive insurance. The Governor relies on Mike and his team to assist with the modelling of the COVID numbers and analysis using actuarial science. The work and reports being generated by Mike’s team are being used to inform the Governor, Health Commissioner, and all Vermont citizens. With this useful pandemic knowledge and insight, we are all better equipped to make good decisions.

Vermont has a history of being practical. Even us flatlanders who came to Vermont from other places seem to adopt that attitude – maybe it’s the weather. That practicality permeates the state and provides a sense of quiet competence regarding our leadership.  And nobody does competence better than DFR – let us all take a moment to acknowledge the great work the DFR staff continues to do, no matter the circumstance.

Thanks, as always, for your continued support in these trying times. I look forward to hearing from you!

Rich Smith
VCIA President

Thank You!

Just a quick post to say a huge THANK YOU to all who participated in VCIA Virtual 2020!

It was quite an experience for us to transform our usual captive insurance conference into an online 100% virtual event. And although it was sad not to have been able to see everyone in Vermont this year, it was heartening to get so many nice comments from many of the participants.

I am proud of our staff and members for pulling this off in the short mount of time we hade to learn the ropes and make the conversion. To all our expert panelists who so gamely made themselves available to the attendees – thank you!

And a huge thanks to all our exhibitors and sponsors without which we would not be able to present all the great content that will now be available until the end of July next year. Special thanks to our Platinum Sponsors:

  • A.M. Best
  • Kroll Bond Rating Agency
  • Madison Scottsdale
  • Old Republic Companies
  • Performa
  • Sedgewick
  • and the State of Vermont

I look forward to seeing everyone in Vermont next year!

Rich Smith
VCIA President

It’s Not Too Late to See Cool Stuff

VCIA Virtual 2020 starts Tuesday, August 11th, and it’s not too late to check it out and register!

One of our sessions, Digital Transformation and Opportunities: What the Captive Market Will Look Like in 2025, will feature a case study describing the progress and results of a Vermont-based working group who had been addressing issues like high administrative costs, lack of capacity of insurable and emerging risks, and inefficient value chain structure.

The panelists will discuss how they have engaged with stakeholders to drive digital transformation and business innovation, economic growth, and enhance captives in Vermont and beyond. The panel includes two of our favorite people from the captive owner’s perspective: Courtney Claflin, Executive Director, and Karen Hsi, Program Manager of Captive Insurance Programs for the University of California.

On top of that, panelists Marcus Schmalbach, chief executive at RYSKEX, recently was named as the winner of the Lloyd’s Lab Fusion event, designed to test early-stage start-up ideas aimed at dealing with COVID-19 and other systemic risks.

The Lloyd’s Lab Fusion event ran from July 21-23 and was supported by innovators from more than 10 Lloyd’s of London managing agents, with ideas assessed by a panel of judges from the Lloyd’s Corporation and Market.  RYSKEX program focused on developing cover for widespread, long-lasting power outages in the US power grid. RYSKEX proposed to bring together insurers, customers, and capital markets to develop parametric coverage for this systemic risk.

Lloyd’s said it was singled out for its “highly ambitious plan which supports Lloyd’s commitment to progressing solutions for global industry and government partnerships to fast-track society’s recovery from COVID-19 and provide greater resilience to future systemic risks.”

And last, but not least, the panel will be rounded out by John Donald, who ran his own risk consultancy advising on geopolitical and cyber risk before joining Axis Capital as a Cyber Adviser in February 2019. John is the author of three books. His first book “Catataxis: When more of the same is different” was published in October 2011 by Quartet Books. His second book “Bolt from the Blue: Navigating the new world of corporate crises” was published by Elliott and Thompson in 2013. The third “35 Views of Cyber Risk” was published by AXIS Capital in 2019.

Now that’s a panel not to be missed! Check out this behind the scenes look at the conference by viewing this brief video: https://youtu.be/X6UOlgcGWxQ

Register today for VCIA Virtual!

See you next week!

Rich Smith
VCIA President

Captive U

Law Quadrangle, University of Michigan

One of the great things about being 100% virtual for our conference in August is that students can more easily attend when they don’t need to get flights and hotels and spend time traveling to Vermont this summer.

Every year we invite students from risk management programs around the country, but the travel costs and logistics are an impediment. This year, with the help of many of our friends in the captive industry, we threw open the proverbial doors and have a great mix of students and their professors who will join us this August for the best captive insurance education available!   Not only are there great  sessions for folks new to the intricacies of the captive industry, but with sessions like Evaluating Your Online Presence and Digital Transformation & Opportunities, as well as a Young Professionals forum and The Impact of Emotional Intelligence on Risk Management we think there is a lot to appeal to students and younger professionals alike – OK, and to some of us “older” professionals as well.

Joining us are students and professors from institutions including Roosevelt University in Chicago, Temple University, Georgia State, Appalachian University, Texas A & M, University of Georgia, University of Houston, and St. Mary’s University in Houston. We are incredibly pleased to see these names on our attendee list!

Please let me know if you know of any interested students in any risk management programs; we would love for them to join us!   I look forward to seeing you all virtually in just 2.5 short weeks at VCIA Virtual! View all the details and register for the event here.