Feds Propose New Capital Requirement Rules

Late yesterday, the Federal Reserve proposed rules requiring the nation’s largest banks to hold more capital and to keep it more easily accessible. This is one effort on their part to prevent another financial crisis. Tough specific details are still forthcoming, the requirements are seen as less strict than those put forth for international banks — allowing American banks to breathe a sigh of relief.

In a 173-page proposal that tied to the Dodd-Frank regulatory law passed last year, the Fed also proposed the first formal limits on the amount of credit exposure that a bank holding company can have to any major borrower be it another bank or corporation.

The goal is to prevent one bank from being susceptible to failure because of a relationship with another large institution. The lack of a cash cushion in the 2008 financial crisis caused many firms to try to rapidly unwind transactions that had troubled institutions on the other side of them, worsening a partner’s troubles and accelerating the market’s crash.

One of the more important parts of the 173-page proposal is a provision that requires large banks to have a “stand-alone risk committee of the board” that works alongside the chief risk officer to handle company-wide risk management — a big step for in the right direction for the discipline.


Extreme Risks of Reality TV Shows — Are They Insurable?

Fear Factor, Wipe Out, Survivor and even The Biggest Loser are all shows that put contestants at risk. And in order to gain viewers’ attention (and ratings to keep advertisers happy), reality shows are constantly trying to one-up each other while in turn increasing their risk. So how do these shows get away with it? Who would insure such insane acts? How do producers make sure they’re covered in case of an injury or death? To answer these questions, I turned to Lorrie McNaught, reality TV expert with Aon/Albert G. Ruben.

What types of reality shows spur the most insurance claims?
LM: Many times it’s more of the “walk and talk” shows as opposed to those with stunts that spur the most claims. Audience members are often hurt while being moved in and out of the auditorium. With stunt-laden productions, producers and networks are extremely cautious, and often will hire outside loss control professionals to ensure safety protocol is at its best. Every precaution is taken to make sure the stunts are dangerous looking, but not TOO dangerous to perform. As walk-and-talk programming seems so simple, sometimes safety hazards are overlooked.

Are any stunts or activities uninsurable?
LM: The quick answer is no, with the exception of intentional acts; the right broker can find a quote for anything a producer wants to do. Usually it comes down to pricing, and how much they have in the budget for insurance. The right broker doesn’t hear the word “no” from insurers. They find a way to get coverage.

How are contestants insured? Or are they?
LM: There are many ways that producers look at mitigating their risks when it comes to contestant injuries. Many times, it will depend on requirements from the networks, and how much they are allocated for insurance. But most, if not all, production companies have participants/contestants sign liability releases, which hold them harmless in the event of injury to the participant while they are filming the show. Production companies have a general liability policy, which would protect them from bodily injury claims, in the event a contestant decided to file a suit. There are other ways that production companies can provide coverage, including accident medical policies and short-term disability. These might be an option for production companies who wish to offer some type of coverage for the participants if they are hurt, while helping to keep their GL policies claims free.

What keeps show producers and risk experts up at night?
LM: Concerns that they might not be able to film the production the way they want to. And, if insurance is the reason that things are held up, that is a huge problem. As an experienced broker, you get to the point where you can almost proactively imagine what the production companies may want to do on a certain show, and you can go to the marketplace and request quotes for various options to present to the producer. That way, they have some options up front, and can create a budget that will allow them to do the shoot they want to, since they’ve been able to plan for it.

What is the biggest mistake producers can make when choosing their insurance programs?
LM: Picking a broker who has little experience and is unable to get the producers the coverage and pricing they need to get their production made.

What should producers be aware of in their agreements with the networks?
LM: The networks all require indemnification from the producers. Sometimes the networks will require the producers to also use the networks’ own insurance program. At the point an uncovered or under-covered claim happens, it could leave a producer bare of coverage, but still forced to indemnify the network. A producer should always carry their own insurance as well, to protect themselves at all times.

Analyzing Weather Risk: A Quantitative Approach

(Randy Heffernan is the vice president of Palisade Corporation, a developer of risk and decision analysis software.)

Taken separately, most severe natural events are unlikely to occur. However, Mother Nature can take many forms, and her wrath is notoriously difficult to predict accurately, even with the best practices and software tools used by meteorologists. It is that unpredictability that makes such events so destructive.

But severe weather is only one part of the risk equation. All industries must manage weather risk on a day-to-day basis. Despite the severity of extreme events and the frequency of lesser events, risk analysis of weather is still rarely given the prominence it deserves. But it is crucial to determine what risks emerge when various types of weather conditions strike. Organizations should take a more strategic approach to this risk. Increasingly, companies are adopting more sophisticated techniques, using quantitative risk analysis, to specifically account for the inherent uncertainty and unpredictability that characterizes weather risk.

One example is the use of Monte Carlo simulations. Monte Carlo simulation is an analytical technique that evaluates and measures the risk associated with any given venture or project. It is a computerized mathematical process that defines uncertain variables in models and creates a range of possible outcomes and the probabilities that those outcomes may occur. Monte Carlo simulation can offer insight into the most risky and conservative outcomes for extreme risk situations.

Monte Carlo simulation in particular is being applied by a wide range of private companies and government agencies to formulate mitigation strategies. Just a few recent examples include:

  • Flood planning. Britain’s Environment Agency commissioned the Halcrow Group Ltd., a global infrastructure firm, to develop a flood risk management plan to protect the more than five million people in England and Wales who live in areas susceptible to flooding. The company employs Monte Carlo simulation to account for the wide variability in the costs of flood defense projects and the likelihood of flood events occurring in different regions. With this insight, the group can allocate limited Agency funds most efficiently and to maximum benefit.
  • Hurricane response. In 2005, when Hurricane Katrina struck New Orleans, the Louisiana state government implemented a program that used Monte Carlo simulation to account for uncertain call volume to the response centers.  This enabled the appropriate agencies to plan call staffing much more effectively, reuniting disconnected family members and freeing important resources to assist with other damage control efforts.
  • Volcano mitigation planning. It may seem far-fetched, but volcanic eruptions are a significant threat to large populations in many parts of the world. Recently, researchers in Guatemala and at the UK’s University of Bristol examined the threat posed by Guatemala’s enormous Volcan de Fuego, one of the most dangerous in Latin America. Using Monte Carlo simulation and decision trees, another technique that maps out decisions in a sequential and probabilistic way, the teams were able to better understand the effects of evacuation times, communication delays, lava flow rates and other variables. As a result, researchers identified which factors were most important so that resources could be invested in the most effective mitigation strategies.

Given the public’s heightened awareness of weather risks, today’s risk managers and decision-makers have a useful, but potentially limited, window of opportunity to illustrate the benefits of quantitative risk analysis techniques to their organizations. By identifying potential risks, these tools can help protect the organization against unexpected costs in the future. Consider the following strategies to implement quantitative weather risk analysis:

  • Supply evidence. Back up the commitment to a thorough quantitative risk management program with documentation on why it works. This validates the budget and buy-in requested at the start.
  • Communicate clearly. As with any organizational change, it is essential that everyone is clear on the processes. Create a common risk language that everyone can understand to avoid misunderstanding and ensure a consistent approach to risk and decision analysis.
  • Illustrate with numbers. Qualitative assessment is useful, but numbers are more powerful. For example, talking about the percentage chance of meeting a deadline or budget if certain weather conditions occur is much clearer than discussing how it “probably” will or won’t happen. This is critical for avoiding miscommunication regarding assumptions.
  • Create the right organizational structure. Individuals and groups need clearly defined roles, and must take responsibility for their own area of expertise.
  • Think laterally. No enterprise operates in isolation, so other external variables must be included in the decision-making model and process. For example, even a few inches of snow could have a major effect on revenues if raw materials need to be transported across long distances.
  • View the complete picture. Weather risk factors can be explored by involving all stakeholders. Investing time and money in consultation and research ensures that businesses have a clear idea of the complete environment in which they operate, and therefore minimize the chances of products and services failing should a weather emergency occur.
  • Report and review. Risks, and their management, must be reviewed regularly – and the program amended if necessary. Instigate a reporting process in which risks are clearly identified and prioritized.
  • Learn new tricks. Being risk-aware does not mean being risk-averse. Businesses should be careful to avoid “the way we have always done it” approach. Keep up-to-date and be bold. Take into account previous miscues and successes when determining how weather events impact the organization.

Monte Carlo simulation, decision trees and other techniques, therefore, put risk managers in an ideal position to focus on potential weather risks and help make weather risk analysis an integral part of corporate operations.

Risk-related Posts From Around the Web

The newest edition of the monthly Cavalcade of Risk is now online at the Chatswood Consulting blog. This issue features posts on risk management and insurance from around the web, including:

  • Tips on how to protect yourself from identity theft from the folks at Boomer & Echo
  • Gaming-centered financial risk management (with broader implications) from TMG
  • Why business owners should include themselves in workers comp coverage from AllBusiness.com
  • Laptop ergonomics from Workers Comp Insider

The entire roundup of posts can be viewed here. Stay tuned for the next Cavalcade of Risk.