Lunch with William R. Berkley

I was fortunate enough to attend the W. R. Berkley Corporation’s annual luncheon yesterday at the Red Eye Grill here in Midtown Manhattan. Bill Berkley, chairman and CEO of W.R. Berkley Corp., is known for not only his intelligence and success within the insurance industry, but also for his blunt remarks and honest opinions — listening to him speak is exciting and interesting.

As one would imagine, talk of the Deepwater Horizon incident and the insurance implications surrounding it emerged. Berkley, one of the many insurers of Transocean, said his company lost $5 million from the offshore accident, but that number is far from what Llyod’s, Excel and ACE lost. Berkley, however, was not upset at the relatively small chunk of change his company lost. Rather, he was excited that his firm, for the first time, was able to raise prices 40 to 50% for offshore insurance — calling the Gulf of Mexico disaster both very unfortunate and an opportunity for insurers.

I asked Mr. Berkley if he perceived the Deepwater Horizon incident as an enormous lack of risk management. He reponded:

“I don’t think it’s an enormous lack of risk management in the offshore drilling industry, no. I think it was more a lack of understanding of all the alternative things that could go wrong.”

The very definition of risk management is to identify and assess any and all risks of an operation and then work to minimize, monitor and control the probability and/or impact of unfortunate events. Maybe I’m crazy, but the Deepwater Horizon catastrophe seems like an enormous lack of risk management to me.

The topic of discussion soon turned to the topic of financial regulation, to which Berkley agrees is needed. But he also wonders what other aren’t asking:

“If all these giant financial institutions are taking on such great risks, how come they have such crummy returns? No one is asking that.”

Indeed, I have not heard anyone asking that question.

Then questions about the P/C market prices arose. He was asked why he saw prices starting to firm up and he answered:

“You can only hide from reality for a certain length of time. You’re going to see some people go broke because they’ve mispriced their business. They won’t survive through the good times, maybe not even through the first quarter of 2011. People are accumulating adverse reserve deficits and that will affect them soon.”

And when asked how he would grade the government’s involvement with AIG, Berkley confidently responded, “D,” citing that “part of the problem with government is that process becomes more important than outcome.

True words indeed from a well-respected figure in the insurance industry. Even if I do disagree with him about the failure of risk management in regards to the Deepwater Horizon situation, he is a wise man that has proven his knowledge of the industry with the success of his own company.

The Risks of Oil-Producing Countries

Understanding the unique risks of oil-producing countries is not easy. From political to economic to security risks, there are many and they are far-reaching.

I was lucky enough to participate in a webinar yesterday on this very topic. Leading the presentation was Fareed Mohamedi, partner and head of markets and country strategies for PFC Energy and Raad Alkadiri, partner and head of PFC Energy.

The webinar was thought-provoking and insightful, offering a glimpse into the oil production of such countries as Iraq, Iran, Russia and Brazil.

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Iraq, according to the U.S. Energy Information Administration, holds more than 112 billion barrels of oil — the world’s second largest proven reserve — and also contains 110 trillion cubic feet of natural gas, and is a focal point for regional and international security issues. Mohamedi and Alkidiri see this oil-rich country as a ongoing risk.

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The presenters also focused on OPEC constraints on oil production and the eventual quota applied to Iraq, stating that “OPEC may be able to live with maximum Iraqi production of 6 mmb/d by 2017 assuming relatively benign supply/demand fundamentals, but the risks are all on the downside.”

But let’s not leave out Iraq’s neighbor and fellow oil-rich country, Iran. According to PFC Energy, the country’s oil production forecast looks something like this:

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But this excessive production doesn’t come without some consequences. Iran faces severe natural decline rates from its reservoirs, forcing Iran to rely heavily on proven undeveloped reserves (PUDs). However, the country’s unstable investment climate is a downside risk for PUD development. And as the webinar stated, “Iran’s production struggles will continue, or even worsen in the future due to geological constraints, lack of domestic technical capacity and the impact of sanctions on investment.”

U.S. dependency on foreign oil may decrease as the Obama administration opens up even more water for exploratory drilling. But, as we have seen recently with the Deepwater Horizon, that too comes with extreme risks.

To view an archived version of the webinar click the following link:
Password: pfcglobalrisk

Zappos Turns a Negative Into a Positive

Usually the pages of Risk Management and the Risk Management Monitor are full of stories about companies that have done wrong and cost themselves small fortunes in the process. But every so often we come across a story of a company that goes above and beyond the call and reminds us that when it comes to a company’s reputation, doing the right thing is sometimes more important than not doing the wrong thing.

A case in point is online shoe retailer As reported on the Consumerist, last weekend a programming error caused all of Zappos’ products to be priced at $49.95. The error was eventually discovered but not before the company lost more than $1.6 million. But rather than cancel the orders affected by the error, the company chose to absorb the loss because as Zappos CEO Tony Hsieh explained on a company blog, “it was the right thing to do for our customers.”

“To those of you asking if anybody was fired, the answer is no, nobody was fired – this was a learning experience for all of us. Even though our terms and conditions state that we do not need to fulfill orders that are placed due to pricing mistakes, and even though this mistake cost us over $1.6 million, we felt that the right thing to do for our customers was to eat the loss and fulfill all the orders that had been placed before we discovered the problem.”

Of course, a cynical person might point out that drawing attention to the error and the subsequent loss is a pretty effective form of self-serving marketing – a kind of look-how-generous-we-are-so-come-shop-with-us sort of thing. And to a certain extent, it probably is. But in the end, it is the customers who benefit and I for one will certainly check out Zappos the next time I’m looking to buy shoes. Perhaps that $1.6 million loss will turn out to be a pretty good investment into Zappos’ reputational goodwill.


Up Next for Congress: The Food Safety Bill

Now that the financial reform bill, one of the most important bills in history, has passed through Congress, many lawmakers are now focusing on something just as important: the Food Safety Modernization Act.

The bill, S.510, aims to “amend the federal food, drug and cosmetic act with respect to the safety of the food supply.” In other words, it will expand the power of the FDA, enabling regulators to be more vigilant in preventing food contamination. One key supporter of S.510 is Congressman John Dingell (D-MI), who held a briefing May 19 to call for the swift passage of the bill, citing recent E. coli outbreaks linked to romaine lettuce. Also on board for the passage of the bill is Congresswoman Rosa DeLauro (D-CT), who issued a public statement last week.

“The American people continue to be at risk from dangerous outbreaks while critical food safety reform legislation, which includes provisions that would be helpful in addressing a widespread outbreak through preventive controls and interventions, remains stalled in the Senate, Congresswoman DeLauro said Friday. “I urge the Senate to act quickly before more people become victims of contaminated food and our faulty food safety system–the longer the food safety bill is delayed, the more vulnerable our food safety system remains.”

And delayed it has been. The bill was first introduced in March 2009 and the last reported action regarding the reform was in December 2009 when it was put on the legislative calendar. Since then there have been numerous food recalls and food contamination illnesses reported. The most recent widespread recall focused on raw alfalfa sprouts produced by Caldwell Fresh Foods of Maywood, California. The sprouts have allegedly sickened at least 22 people in 10 states.

Contaminated food kills at least 5,000 people in the United States every year, puts more than 300,000 in the hospital and costs the nation around $152 billion. To not pass the Food Safety Modernization Act would be like giving the green light careless food manufacturers — in essence, giving them a license to kill.

alfalfa sprouts