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Hank Greenberg Shares Concerns for Insurance Industry at RIMS Canada Conference

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Hank Greenberg RIMS canada

QUEBEC CITY, CANADA—Currently on the mend from Legionnaires’ disease, Maurice “Hank” Greenberg appeared via live video stream to deliver the keynote address to the 2015 RIMS Canada Conference. The chairman and CEO of the Starr Companies and former chairman and CEO of AIG gave a frank and diverse address highlighting a number of concerns about potential impacts to the insurance industry due to the current climate.

“We’re living in a very troubled time on a global basis,” he said, emphasizing geopolitical instability. While such geopolitical uncertainty demonstrates the need for political insurance, other widespread conditions do not necessarily have such favorable implications for the industry.

“Clearly commercial insurance rates are under pressure,” he said. “The absence of catastrophes has masked that rates have gone down so much, and that has allowed some companies to survive.”

He also noted that investment income is suffering because of interest rates, and expressed concern that many companies are turning to long-tail reserves for income. What’s more, he said, accident year results for many companies are turning negative, and many are finding their reserves inadequate, particularly as expense ratios are frequently increasing rather than remaining steady.

Companies that aren’t very efficient will find it very hard to be competitive and show returns this year, he cautioned.

Further examining the industry, Greenberg criticized insurers for “not doing a very good job of training underwriters,” seeing a stark comparison to the rigorous, diverse experience previously customary in the London market, for example.

“It takes years of experience to train an underwriter—they are not just qualified because of a college degree,” he said. “It takes years of work and a lot of common sense to develop the wisdom to know what can be underwritten and at what price.”

When it comes to this talent concern, he noted, it is not a question of which companies are doing better, but a problem across the board. “I don’t think we have the discipline, as an industry, to do the job properly,” Greenberg said.

Greenberg also shared some of his political opinions, both international and domestic.

Of China, the US-ASEAN Business Council chairman emeritus and vice chairman of the Council on Foreign Relations said he does not share the widespread dubious feelings on China. “They’ve had some missteps. What country hasn’t?” he said.

He spent some of his time addressing the burgeoning 2016 U.S. election. Greenberg noted Donald Trump’s campaign as part of what he views as growing dissatisfaction – and perhaps inadequacy – of the current political system. “People are fed up with the political system as it currently exists.

Why else would somebody like Trump, who has no experience but is speaking about things people care about be doing so well?” he said.

He also told the crowd that Jeb Bush would personally be visiting him Wednesday. Greenberg does not yet endorse any particular candidate, however, and expressed some concern about the Republican party’s position amid acute socioeconomic changes and resulting political demands nationwide.

“You have to give people the opportunity to succeed—that’s the American Dream. That’s why people came here,” he said. “If we’re going to deny that opportunity, the Republican party will have to change its name.”

Translating Compliance

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At a time when several large companies are being investigated for bribery in China, organizations doing business there would do well to have strong policies and training programs in place, experts advise. They also caution that using a “cookie cutter” approach for compliance is not enough.

“There are several ongoing investigations right now for hiring of relatives of foreign officials,” Michael Volkov, chief executive officer of the Volkov Law Group, LLC said in a webinar, “Navigating the Waters of Anti-Corruption Compliance in China.”

He pointed out that Qualcomm, a wireless technology company, “is under investigation for hiring relatives of foreign officials and giving them jobs strategically. This is a serious investigation, and Qualcomm is a reputable company with a sophisticated compliance program.”

Volkov cautioned that that using a “cookie-cutter global program” in China is the wrong approach. When it comes to compliance, there will be some aspects that are “never in control, particularly when it comes to gift-giving, receipts and the control of money. There are companies that have avoided the direct problem, but there are not very many.”

Asked whether there is a checklist of areas of risk to focus on, Jimmy Lin, vice president of product management and corporate development at The Network noted the importance of understanding the intricacies “of where the operations are [in China], as well as where the money flow is.” While you can understand business processes in countries, it’s being able to trace who is getting paid for what, as well as why and when. While a company might understand the business dealings and workflow processes that go on, “You don’t really understand where the money is until you watch where every dollar is going through your organization,” Lin said.

Asked how to educate Chinese executives on acceptable business practices when they are accustomed to a gift-giving culture, Lin said, “Part of adapting their culture to your culture is having clear definitions of what is acceptable and what is not. Making assumptions or assuming something is understood are traps people fall into when they cross those cultural borders.” He added, “Go in assuming they don’t understand you at all and make sure the definitions are clear and defined.” Companies need to conduct continuous trainings, “because this isn’t a case where one time will do it. You are asking someone to change a behavior they have had for many years. Having them adjust that behavior will take time and patience from the organization and perseverance to keep reminding and training people.”

Volkov agreed that reeducation is the correct approach, and added, “There will be blowback.” Companies must realize that in China there is a different mindset towards work, labor laws and compliance. “The only concern there is the ability of the tax authorities to come in and shut down a business. Day to day bribery is not at the top of their list and that has to be changed.”

Volkov listed his top-three areas of concern for compliance.

• Auditing and money.

• Training—putting in new controls and explaining that new procedures are in place. “It’s a hard process. There will be resistance and blowback, but if you don’t do it, it will get out of control.”

• Documentation. “Create a documentation system that will protect you through the good faith efforts you are taking to make sure you are in compliance.” Also, he said, make sure any legal judgments about compliance are documented, including any advice given by outside counsel. “This gives you an extra layer of protection beyond your good faith effort,” Volkov said.

 

Counterintelligence Now Riskier Than Terrorism, Intelligence Officials Report

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National Security

During a Senate hearing yesterday, top U.S. intelligence officials released a new threat assessment report that outlines the top risks to national security. While cybersecurity remains the greatest threat for a second year, the report said dangers from foreign spies and from leakers have surpassed terrorism as threats.

This revision follows a year that illustrated just how vulnerable the United States is to counterintelligence—both foreign spying and the leaking of information. In May, the Defense Department explicitly accused the Chinese government of launching cyberattacks against the U.S. government computer systems and defense contractors “in a deliberate, government-developed strategy to steal intellectual property and gain strategic advantage.”

According to Rep. Mike Rogers (R-Mich.), chair of the House Intelligence Committee, the theft of proprietary information and technology by the Chinese constitutes “the largest transfer of wealth illegally in the world’s history” and has cost the U.S. an estimated $2 trillion. “We are in a cyber war today,” Rogers said in July. “Most Americans don’t know it. They go about their lives happily. But we are in a cyber war today.”

Director of National Intelligence James Clapper also pointed to leaks from National Security Agency contractor Edward Snowden to illustrate the danger posed by the exposure of classified information. Terrorists are “going to school” on the information revealed, he claimed, calling Snowden’s act the “most damaging theft of intelligence information in our history.”

According to Clapper’s report, the top five threats from 2013 and for 2014 are:

2013

  1. Cyber-attacks, cyber-espionage
  2. Terrorism and Transnational Organized Crime
  3. WMD Proliferation
  4. Counterintelligence
  5. Counterspace (attacks on satellites, communications)

2014

  1. Cyber-attacks, cyber-espionage
  2. Counterintelligence
  3. Terrorism
  4. WMD Proliferation
  5. Counterspace

Recent Anti-Pollution Activism Underscores Importance of Community Relations

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Since the beginning of May, anti-pollution activism has been directed against several industrial projects in Chengdu, Kunming and Shanghai, China. The level of opposition has prompted street demonstrations and varying levels of response by local authorities.

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While foreign companies have not been involved in the latest examples of environmental activism, past incidents have targeted foreign companies. The latest incidents underscore the importance of early and effective two-way communication with local communities before undertaking a new industrial project.

In May, residents opposing two major industrial projects in Chengdu and Kunming stepped up their anti-pollution activism by holding protests on May 4 and May 16. Authorities in the city were also concerned that protests could occur during the opening of the China-South Asia Expo, which took place in the city June 6-10.

On May 4, media reports indicated that hundreds of protesters converged at Nan Ping Plaza in Kunming’s city center to protest plans to construct a paraxylene (PX) plant at an industrial zone in Anning city, approximately 45 kilometers southwest of Kunming.

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Also on May 4, local authorities in Chengdu reportedly increased security in the city’s downtown Tianfu Plaza to prevent anti-pollution activists from holding protests over a major refinery and petrochemical facility local authorities have been planning to construct in nearby Pengzhou. According to the South China Morning Post, the increased police presence effectively deterred protesters from holding a rally.

Meanwhile, in Shanghai’s Songjiang district, local residents also held a demonstration outside the main district government office on May 1 in opposition to a previously planned battery factory at a local industrial park. The company behind the project has since cancelled its plans, ending local opposition.

Growing Environmental Activism

These latest anti-pollution protests highlight an ongoing trend of local communities exposing potential pollution issues to environmental authorities. The scale of pollution in China, especially in major industrial areas, is a huge challenge for China’s leadership.

State media reported this week that Ministry of Environmental Protection statistics from last year revealed that 58% of underground water at the ministry’s monitoring sites around the country had been categorized as polluted or extremely polluted. The statistics also revealed that 298 million rural residents do not have access to safe drinking water. Activism and calls for greater efforts to clean up decades of pollution caused by China’s rapid industrial growth have mounted in recent months, accompanied by China’s new leadership transition.

Environmental authorities have tried to respond, but the extent of the problem will likely require years to make substantial progress in cleaning up the environment. In May, environmental authorities reported that they punished 15 factories for air and water pollution violations in the first quarter of this year. Given the scale of the problem, this number appears relatively low.

The Role of Social Media and Street Protests

The increased awareness and activism, especially in urban and suburban areas, combined with the limits of enforcement, have given rise to local communities resorting to social media to expose concerns about pollution. In some cases, local opposition has escalated to street protests if local governments are perceived as slow to respond.

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In May, local media reported that environmental authorities would investigate suspected water pollution at the Dabai Bay Industrial Zone in Shanghai’s Pudong New District. The posting of pictures online that showed blue sewage water discharged into a local river reportedly prompted local authorities to take action.

Recent protests, including some that have turned violent, have prompted local governments to suspend or cancel certain projects. The latest protests, especially against a major battery factory planned for construction in Shanghai’s Songjiang Industrial Park, have highlighted concerns about the transparency of the environmental impact assessment (EIA) process and the input of local communities. According to media reports, local authorities have decided that the planned production site of the battery factory would not engage in chemical processes which can produce pollution. Instead, the project originally planned to focus on lithium cell production and battery assembly.

Although local protests have resulted in the suspension of some major projects, the importance of local GDP growth and the development of industry present challenges to local governments. The importance of the battery factory to the development of Songjiang’s auto industry prompted the local government to initially try to strike a balance between economic development and pollution concerns. According to a local resident, authorities placed notices within at least one residential community in the district to inform them of the government’s latest decision about the project. This could be an indication that the local government understood the need for greater communication with the public. It may have also been an attempt to counter a relatively well-organized online opposition campaign created by residents concerned about their health and the potential for declining property values.

Proactive Risk Mitigation

Although foreign companies typically operate at a high standard of environmental protection, the communications and community involvement aspects of an industrial project will likely become increasingly important. As residential communities and industrial areas expand and encroach on each other in suburban areas of major cities, local residents’ environmental concerns will continue to rise.

Foreign companies can encourage local governments and industrial parks to ensure the transparency of the EIA process is upheld on their project and that extensive two-way dialogue is conducted with local residents. Foreign companies should also emphasize clean technologies and other processes used to treat waste. Using similar projects in other parts of the world as examples of the high standard of their operations can also be an effective component of a campaign. Management should also be prepared for some residents to demand compensation during the community relations process.

Lastly, companies should develop contingency plans in the event that an accident occurs after a project has started operation. Plans to address this type of contingency should include increased security measures as part of a response due to the potential for strong local reactions, including protests directed against the project.