Will Hurricane Maria Prove to be the Event that Perpetuates Puerto Rico's Problems For a Generation.9/26/2018 If you're an accountant, CFP, or Texas insurance agent, please sign-up for our 1-hour captive insurance continuing education course on Friday, October 12 at noon.
If you have a captive located in Puerto Rico and would like to move to a more structurally sound jurisdiction, please contact us at 832.330.4101 In several blog posts, I've documented Puerto Rico's fundamentally unsound economy (see here, here, and here). To recap, they are in a depression; there is a fundamental problem with the labor market such that it hasn't reached full employment in decades; there is a net capital outflow from the economy. If this were not a U.S. territory, the financial press would probably be using phrases like "currency crisis" and "balance of payment" crisis. It's been one year since Hurricane Maria hit the island. It's starting to look as though this event will negatively impact the island in the medium and long term.
Both stories demonstrate that Maria's impact is far, wide, and extremely negative. Only time will tell, but it could be "the" event that prevents the economy from being anything but a perpetual cycle of poverty and dysfunction.
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Product Recall is a Prime Example of a Risk That Should be Managed Through a Risk Financing Facility9/22/2018 If you're an accountant, CFP, or Texas insurance agent, please sign-up for our 1-hour captive insurance continuing education course on Friday, October 12 at noon.
Remember when you were a kid traveling by car with your family and the issue of "clean bathrooms" was of prime importance when looking for a place to stop? Buc-ee's solved that problem. If you are ever driving between Texas cities (which Texans do regularly), Buc-ee's has become the stopping place because of their attention to cleanliness. Buc-ee's is also a great store. They use the Costco HR strategy -- pay your people well, thoroughly develop their talent, and they will actually work more efficiently. Trust me -- it pays off in spades. I feel the personal need to begin this blog post with a thorough defense of the chain because Buc-ee's recently had to recall a product, which is never a good development. However, it's part-and-parcel of running a retail store. Let's look at the the potential costs associated with this event:
This is a complicated risk. Not only should a company develop a customized plan for dealing with it (because it's not a matter of if but when it will happen) but it should also develop a specialized plan to deal with it. And that's where a customized risk financing facility comes into play. It allows the company to have a good idea up front how to pay for this eventuality. Higher Losses and More Events Mean It's Time to Consider Establishing a Risk Financing Facility9/22/2018 If you're an accountant, CFP, or Texas insurance agent, please sign-up for our 1-hour captive insurance continuing education course on Friday, October 12 at noon.
When should a company consider establishing a risk financing facility (RFF)? Being a good lawyer, I would say, "It depends." But 1.) an increase in the number of individual events, along with 2.) a rise in the total claim amount per event, are two factors that would support a decision to establish and maintain an RFF. The reason is simple: higher probability of a claim along with a higher claims amount per event means taking control of risk will help to lower the total bill from an event. And that is exactly what occurs when a company established an RFF. A recent study from MunichRe indicates the number of events and total amounts per event are rising: Both overall and insured losses from natural disasters in 2017 were significantly higher than the corresponding averages for the last ten years, which, after adjustment for inflation, amount to US$ 170bn and US$ 49bn respectively. The hurricane season in the North Atlantic proved particularly costly, accounting for US$ 215bn in overall losses, of which US$ 92bn is expected to be insured. There were also two earthquakes in Mexico with a combined loss of over US$ 8bn, and widespread flooding in China which caused losses of more than US$ 6bn. Severe wildfires were raging in the USA until the end of the year. Losses from the October fires alone exceeded US$ 10bn, with the bulk of this amount – more than US$ 8bn – insured. By the end of the year therefore, losses from wildfires are likely to be substantially higher. On Wednesday, September 26, we're giving a webinar on converting from a pool-based captive to a stand-alone pure captive. The webinar is at 10AM. You can sign up here.
According to Merriam-Webster, the word enterprise means, "a project or undertaking that is especially difficult, complicated, or risky." This implies that the phrase ERM -- Enterprise Risk Management -- is about managing the risk for an entire operation or endeavor. But to be effective, all decision makers in the organization have to buy into the plan. How do we do that?
I wish I could say that I came up with these four points on my own. It comes from this profile in Risk and Insurance, which contains this key nugget of wisdom: Mostly, he listened: “I needed to understand their challenges. That’s huge to getting buy-in,” he said. In a change-resistant organization, buy-in from the top was essential to implementing his plans. Under the previous risk manager, the insurance program was isolated. The process of meeting key people within in the organization helped to integrate risk management with other departments, helping to create a unified whole. Read the whole article; it will be well worth your time. On Wednesday, September 26, we're giving a webinar on converting from a pool-based captive to a stand-alone pure captive. The webinar is at 10AM. You can sign up here.
Several weeks ago, I noted that the changing nature of hurricanes and tropical storms is altering risk management along the Eastern seaboard. A story in today's NY Times sheds further light on the ever-changing nature of risk management [emphasis added]: Mr. Sears and many others here are well aware that hurricanes have long been a fact of life in North and South Carolina, with nearly 500 miles of coastline between them. But the last four years have been particularly punishing. An unnamed weather system that drew moisture from a hurricane in the Atlantic paralyzed much of South Carolina in 2015. Hurricane Matthew arrived the next year, drenching the Carolinas and leaving dozens dead. And now, Florence, which has dropped more than 8 trillion gallons of rain on North Carolina alone. ..... “When you have two 500-year floods within two years of each other, it’s pretty clear it’s not a 500-year flood,” the governor said at a news conference this week. “So as we approach recovery, both short-term and long-term, we will have to look at flooded property, work on mitigation and buyouts, and being smart about how we recover and make sure that we’re involving local, state and federal officials.” A risk manager must continually alter and change his program as the types of risks change. Programs have to be continually analyzed, re-evaluated, and probably repriced On Wednesday, September 26, we're giving a webinar on converting from a pool-based captive to a stand-alone pure captive. The webinar is at 10AM. You can sign up here. A captive insurance company is part of a larger plan, often referred to as "Enterprise Risk Management." While it's easy for management to dismiss this as an unnecessary and resource wasting endeavor, it's vitally important. For example, suppose your client is a manufacturer in the path of Hurricane Florence. As of now, they would have shut down operations, prepared their facilities for the hurricane, and locked everything up. But that's not all. They'd have to wait for the storm to hit and then pass, inspect the facilities for damage, and then work as fast as possible to start everything back-up. As with all things in life, the best time to prepare for this is before it happens. And that's where business continuity planning comes into play. These are the steps in the process (this from my old and dog-eared ARM 54 book, First Edition):  The captive is part of the process. Captive funds help to restore the insured to being whole both physically and financially. But the captive should be integrated into a larger business continuity plan as well.
On Wednesday, September 26, we're giving a webinar on converting from a pool-based captive to a stand-alone pure captive. The webinar is at 10AM. You can sign up here.
First, I'd like to offer my best wishes for those on the East Coast. Last year we lived through Hurricane Harvey, which was one of the most harrowing experiences I've been through. And, unlike Florence, we didn't have high winds. So, as we say in Texas, hunker down. That being said, the coming of Florence highlights an often untold captive insurance benefit: claims management. Right now, insurance companies are positioning their claims people around the Hurricane area. When the storm clears, they will flood into the area (no pun intended), working non-stop with the home office to process claims. But the sheer volume will slow things down. If you own your own insurance company, you're in control of the claims process, which gives you a huge advantage. There are two options. The first is for the captive to hire an outside third party to manage claims. But, in a situation like a natural disaster, this can be a hindrance because your third-party claims company is also processing claims for any number of people. The second option is for the captive to train a company employee to handle claims. Here, we strongly encourage an employee to become an Associate in Claims from the Institutes. This employee can then handle the claim and submit the paperwork, at which time the company can cut the check. At a time when you least want to deal with an entrenched bureaucracy, a captive offers you the opportunity to "do it yourself." And that can make a huge difference in your operations and business continuity plan. If you have a captive located in Puerto Rico and would like to move to a more structurally sound jurisdiction, please contact us at 832.330.4101 A jurisdiction is more than a code. It's an economy, government, and infrastructure system. Advisers have to consider all of these things when recommending a jurisdiction. I've documented that Puerto Rico's economy is structurally unsound and that the smart money is leaving the island. The problems go deeper. The following excerpts from a Washington Post article highlight just how poor the situation on the ground still is: Nearly a year after Maria hit Puerto Rico, people say they are still struggling with basic necessities. Fully 83 percent reported either major damage to their homes, losing power for more than three months, employment setbacks or worsening health problems, among other effects of the storm. The power is spotty, and many are leery of drinking the water. Roads are damaged, dangerous and difficult to navigate — like “the surface of the moon,” according to one resident — and in some places, the roadways remain impassible. ..... More than 7 in 10 residents give negative marks to the Puerto Rican government’s efforts, while two-thirds criticize the response of Puerto Rico Gov. Ricardo Rosselló. Smaller majorities are critical of the response from both the federal government and municipal authorities. ..... • Two-thirds say the storm caused major or minor damage to their homes, and most of them say the structures have not been restored to their original condition. • Ninety-three percent say their areas need more resources to repair roads and highways. • Fifty percent say people in their households could not get enough water to drink, and 53 percent say they are still worried about the quality of water in their homes. • More than 4 in 10 Puerto Ricans say their power was not restored until January or later — four months after the storm — and while nearly all residents now have access to working grid power, outages are common. More than 3 in 4 say they lost power for at least one hour in the previous month. On September 13, we'll be discussing how to use a captive for the newly emergent Cannabis industry. You can sign up at this link.  I live in Houston, Texas, and have lived through three hurricanes. First was hurricane Rita, which barely hit my part of the city. Ike was the polar opposite; we didn't have power for three weeks. But during Harvey we thankfully didn't lose power and had cable throughout (which allowed me to binge watch Mad Men).
As of this writing, Tropical Storm Florence is moving towards the U.S.' east coast, which serves as a reminder of the captive insurance/property nexus. How can a captive help with hurricane related coverage? The standard way is to have the captive underwrite a large deductible for the third-party carrier, essentially turning the commercial policy into an excess layer of risk. This should lower the cost of third party insurance somewhat. Most importantly, it puts the insured in charge of the claims process, expediting the disbursement of funds and allowing the insured to start repairs faster. The insured can also write a "DIC" or "difference in conditions" policy to supplement his property coverage. Finally, the captive could also provide an excess policy for his commercial coverage. So, if you own real estate, consider a captive for some of your property risk. Please call us at 832.330.4101 to learn more. On September 13, we'll be discussing how to use a captive for the newly emergent Cannabis industry. You can sign up at this link. A recent article in the Washington Post puts a very clear spotlight on the idea and concept of reputational risk. It starts with the following billboard:  Personally, I think it's a great ad. Of course, it plays to my somewhat offbeat sense of humor and love of irony. Nevertheless, it makes a pretty universal statement: if you're going to do this, do it properly. The campaign was well received at first. Then social media got involved: Initial reactions to the billboard, he said, were overwhelmingly positive. But the mood quickly changed after one disgruntled driver pulled over on the Charlton, Mass., road, snapped a photo and posted it to Facebook, accusing the ad of “being racist.” At this point, the jeweler is in a no win situation. He's smack-dab in the middle of an internet flame war and a deeply political controversy -- exactly where no sane business owner wants to be. This is a great example of reputational risk, which may seem ephemeral but is quite real. Let's start with a definition: "reputation" is "a place in public esteem or regard." It's an elusive idea but very important. It occurs when the public -- or, more specifically, your potential customers -- trust you and believe you're working in their best interest. It takes forever to develop and can be lost in an instant. We can best understand it from a negative perspective -- fact patterns that show how events can damage our reputation. The Tylenol crisis of 1982 is probably my generations best example. Someone started putting poison in Tylenol, leading to several deaths. Then we have the "Corona beer contains urine" PR disaster from 1987 where Rival beer distributors had allegedly whispered that Mexican workers used beer containers destined to be exported to the U.S. as urinals. Supposedly, this was the way the irate workers took vengeance on their northern neighbors and fiercest rivals. Or something to that effect. A more recent example is the Deepwater Horizon oil spill from 2010, which put BP in a terrible PR bind that they're still trying to mitigate. Here are a few key paragraphs on reputational risk from my old ARM 54 text that explain it from an insurance perspective:  Returning to our jeweler, he now has to repair his reputation. He'll probably need to hire a PR firm to develop and implement a campaign that helps to reverse the unintentional damage done by this controversy. This is the same course of action taken by Tylenol, Corona, and BP in the above referenced situations.
So, can you underwrite this risk? You bet! It can be a standalone policy. But it's usually part of a larger policy like cyber or legal liability. Please call us at 832.330.4101 to learn more. |
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