Modest Impact Anticipated
Last month’s Federal Reserve interest rate increase may impact property/casualty insurers positively, but it’s too soon to tell.
“I expect that the impact of a single quarter-point hike will be very modest on the insurance industry, whether property/casualty or life,” said Robert Hartwig, president of the Insurance Information Institute in New York.
More important, he said, will be whether the Fed continues its rate-raising activity during 2016.
“The central bank will likely increase [its overnight benchmark rate] three or four times in 2016, so short-term yields are likely to move up from where they’ve been at for the past seven years (nearly zero) to between 1 percent and 1-and-one-quarter percent in 2016,” said Hartwig.
If that happens, he said, yields on traditional fixed income assets held by insurers should rise gradually through the course of 2016.
There are few more significant challenges to P&C insurers than declining investment yields, according to Fitch Ratings, which downplayed the significance of the central bank’s moves.
“Investment yields in insurers’ investments fell again in 2015 and will likely fall further in 2016 unless long-term rates meaningfully rise,” Fitch stated.
Hartwig, however, sees the Federal Reserve’s decision to raise its benchmark interest rate by a quarter of one percent, to between 0.25 percent and 0.5 percent, as a good omen.
“So long as the economy stays on track, insurers should benefit from higher interest rates as well as increased business exposures on things such as vehicles and homes,” he said.
He predicted that rates and exposures will increase in 2016. Other upsides to the financial turnaround for insurers will hopefully include stronger construction activity as well as increased payrolls, which will help propel workers’ compensation premiums written as the economy continues to expand at a modest pace, Hartwig said.
The hike offers “insurers no real relief from the pain of this long-term low interest rate environment” and will have “no immediate impact” on insurance companies. — Ken Johnson, vice president, A.M. Best.
A.M. Best was more circumspect about the impact of the rate change.
The Fed’s move primarily affects “the shorter end of the interest rate term structure, which doesn’t impact insurers with predominantly longer-term bond holdings,” said Ken Johnson, a vice president at A.M. Best.
“This initial move also doesn’t ease the pain for older spread-based products with higher guaranteed crediting rates,” he said.
It offers “insurers no real relief from the pain of this long-term low interest rate environment,” he said, and will have “no immediate impact” on insurance companies.
Nonetheless, Fitch maintains a stable outlook for the U.S. P&C sector in part due to strong capitalization from lighter-than-average catastrophe events.
“However, the industry’s revenue production is dogged by premium rate competition in most segments and limited revenue growth in a still-recovering economy. These factors, combined with weak investment yields, mean that P&C profits will be under pressure in 2016, it said.
Insider Fraud on the Rise
Insider fraud is on the rise, but the good news is that the problem can be addressed with concrete steps by risk specialists.
The latest “2015/2016 Annual Global Fraud” survey commissioned by Kroll and carried out by the Economist Intelligence Unit, polled 768 senior executives worldwide across a broad range of industries from January through March of 2015.
Not only did three-quarters of respondents say their companies experienced fraud in the last year, but 81 percent of those companies said the scheme in question was perpetrated by an insider. That’s up from 72 percent in the previous year’s survey.
“Of those companies that experienced fraud where the perpetrator was known, four in five suffered at the hands of at least one insider.” — Kroll 2015/2016 Annual Global Fraud
Also, sixty-nine percent of those surveyed worldwide said the fraud they suffered resulted in a financial loss, up from 64 percent in the previous survey.
“The greater long-term threat to a company [today] is internal, specifically from corrupt employees who have access to private data, such as trade secrets, customer lists, proprietary software and the like, and the authority to spend money through the purchase of goods and services,” said Daniel Karson, Kroll’s chairman.
The survey clearly states that the biggest fraud threat to companies is the result of insider fraud.
“Of those companies that experienced fraud where the perpetrator was known, four in five suffered at the hands of at least once insider,” the survey revealed.
More than 36 percent of victims experienced fraud at the hands of their own senior or middle management; 45 percent by a junior employee; and 23 percent by the conduct of an agent or intermediary, the report stated.
So, what can risk managers do to mitigate the exposures Karson described?
Kroll’s report found that the most effective methods of preventing fraud were whistleblowers (representing 41 percent of uncovered frauds), external audits (31 percent), and internal audits (25 percent).
Karson said risk specialists should audit the cost they’re charged for goods and services so they know they’re paying market price and not being overcharged.
“That goes to [potential risk] of simply overpaying for goods and services as well as kickbacks paid to employees buying goods and services,” he said.
Beyond this, Karson recommended several other steps risk specialists should take on behalf of their organizations.
An employee code of conduct that’s enforced and reinforced through continued training is critical, he said. Also critical is a code of conduct developed for and agreed to by vendors.
“Can a company detect a kickback or bribe if it is paying 5 percent to 10 percent more for office supplies, or selling its goods to a foreign government? In most cases, it can’t without solid evidence. Its best defense is to deploy integrity tools that will have the same impact as a firewall.
“This is comprised of a comprehensive employee code of conduct, a vendor code of conduct, pre-employment background investigations, vendor screening, ethics training, whistleblower policies, a hotline, and the periodic audit of both purchase prices and tests to confirm that its vendors are bona fide companies,” Karson said.
“Together these are the tools that will reduce a business’s risk of internal fraud.
“Fraud thrives in an environment where rules are not in place, or where there is a perception that rules won’t be enforced, that audits are perfunctory, and that misconduct won’t be punished,” Karson said.
Gregory Bangs, chief underwriting officer of global crime at XL Catlin, agreed, pointing out that the U.S. and U.K. have been relatively successful in combatting the upswing toward insider crime.
“Unfortunately, employee fraud and third-party crime are on the increase around the world, so although we can point to the U.S. and the U.K. as the countries that have had the most success in limiting this increase, no country has been able to halt or reverse this trend,” he said.
“The most effective measure that companies can employ to aid in the fight against fraud is the implementation of an employee and third-party ‘hotline’ for reporting suspected employee theft,” said Bangs.
“Its efficacy is due to the anonymous nature of the reports, as individuals are far more willing to report suspicious activity if there are no potential negative repercussions for doing so.
“Another useful tool is the adoption of a ‘master vendor file’ that lists pre-approved vendors that employees are authorized to transact business with, which can help to limit the largest area of employee crime — vendor fraud,” Bangs said.
(Bangs writes about fighting vendor fraud here.)
“In one form or another, the specter of fraud arises in virtually every business relationship,” Karson added. “What our report drives home is that fraud is often an `inside job’ and that companies must address both internal and external relationships if they are to most effectively protect their money, property and private data.”
While Bangs agreed with the Kroll survey’s finding that approximately 80 percent of fraud against companies is committed by employees, he said risk specialists must also be on guard against the rising tide of computer crime involving third-party hackers.
R&I: What was your first job?
I worked for The Women’s Royal Naval Service — part of Britain’s Royal Navy. I was a so-called wren and worked in communications: I did coding, decoding, air traffic control, ship-to-shore communications, that sort of thing.
R&I: How did you come to work in risk management?
When I was still living in England I worked for a P&I club — a third party liability insurer. I was a maritime adjuster. This was back in the late ’70s and early ’80s. Soon thereafter I came to America.
R&I: What precipitated the move?
Koch Industries asked me to come to America and work for them. [They] had been one of the companies whose claims I handled in London. The company needed my maritime law expertise so they asked me to come and work in their risk management department. I was there for over two years. I got back into risk management in 2000, when I was hired by the Chesapeake, Va., public works department.
R&I: What is the risk management community doing right?
We’re realizing there’s a lot more to risk management than just looking at the bottom line and finding a way to incorporate into our plans the less obvious factors that lead to increased risk.
What the risk management community is doing more of, I think, is looking beyond the bottom line at things like: What are the other parts of the company or the entities doing that we can incorporate into improving safety, reducing our exposure to injuries and the costs of injuries, and asking more questions from the other parts of our organizations. One sign of that is we’ve begun talking a lot about predictive analysis, which incorporates a lot of factors that never used to be incorporated.
“We have a ‘geographic isolation’ tendency as American businesses. We tend to think that we are safe from a lot of things.”
R&I: What could the risk management community be doing a better job of?
That’s the other side of the coin. For those still working under the old system we used to operate by, we do need to bring more people into the wheelhouse. This is why I try to go out to other parts of the organization so I can see them in action. That helps me to identify areas we need to look at. It also helps people in the other parts of the organization to communicate with me their needs and how we can work together.
R&I: What emerging commercial risk most concerns you?
For public entities, law enforcement liability is one of the big issues these days. In the past year, there has been so much in the news about police and lawsuits against law enforcement. I know that is something that is concerning many public entities right now and this is going to be a big one for us as a local government.
R&I: What insurance carrier do you have the highest opinion of?
CCG is basically self-insured. However, our excess coverage on workers’ comp is carried by Safety National of St. Louis, and I really like Safety National.
R&I: How much business do you do direct versus going through a broker?
Most of our business is through a broker. We place our workers’ comp excess coverage through broker APEX Insurance, and we are doing property and casualty insurance through a different broker.
R&I: How do you grade the insurance industry’s response to the threat of cyber attacks?
This is a big issue for us as well. For the industry as a whole, I think it’s been a little off the mark. We have a “geographic isolation” tendency as American businesses. We tend to think that we are safe from a lot of things. For instance, look at how the U.S. credit card industry has only recently begun to catch up to what Europe is doing in terms of the upgraded security of the card.
R&I: Are you optimistic about the U.S. economy or pessimistic and why?
In the short term, I think we are basically treading water but long-term, I am optimistic. Americans work hard and want to succeed so I think that in the long term, we will.
R&I: Who is your mentor and why?
There have been a lot of people who come to mind but probably the key person would be my boss when I was a temporary researcher working for the Secretariat at the Council of Europe in Strasbourg. He told me I could do or be anything at a time when there were no women or almost no women in my field.
R&I: What did you do there?
I was a temporary researcher working for the Secretariat. I actually prepared the documentation for the first ever European Parliamentary hearing on maritime pollution. I even got to meet Jacques Cousteau.
R&I: What have you accomplished that you are proudest of?
I think probably it was when I worked for a nonprofit organization that helped people uphold their constitutional rights. It was for people who couldn’t afford expensive lawyers.
R&I: What’s the best restaurant you’ve ever eaten at?
The Chop House in London.
R&I: What is your favorite drink?
R&I: What is the most unusual or interesting place you have ever visited?
It’s a hard question since I have been around the world since I was 15. Probably New Zealand, because there is a bit of every country in the world in New Zealand in terms of its landscape and weather.
R&I: What is the riskiest activity you ever engaged in?
Probably going down into a coal mine, which happened to be in New Zealand. It was an educational expedition. I was only about 15 at the time and in the summers we went on wonderful field trips with my school and I got to pan for gold and all sorts of wonderful things.
R&I: If the world has a modern hero, who is it and why?
Our military. They risk their lives to save ours and to keep us free.
R&I: What about this work do you find the most fulfilling or rewarding?
I get to help our employees recover their health and get fit while at the same time saving the taxpayers money.
R&I: What do your friends and family think you do?
They think I try to make things safer for our employees, that I talk to a lot of unhappy people, and that I’m always trying to save money!