Risk Insider: Nir Kossovsky

D&O’s Weakened DNA

By: | July 1, 2015 • 3 min read
Nir Kossovsky is the Chief Executive Officer of Steel City Re. He has been developing solutions for measuring, managing, monetizing, and transferring risks to intangible assets since 1997. He is also a published author, and can be reached at [email protected]

“Want to Attract Board Members? Manage Company Risk Better,” declared the headline of Tony Chapelle’s article in the Financial Times’ Agenda news service for corporate directors published June 15, 2015.

The feature (Paywall) helpfully warned board candidates “to perform due diligence before accepting a seat or risk loss of personal capital and reputation.”

“Directors want to work for honest, risk-aware companies, said Stephen Ferris, professor and senior associate dean at the University of Missouri — as quoted in Chapelle’s article —  “to reduce the likelihood of getting enmeshed in ligation over fraud, defective products or other situations that threaten their ability to properly discharge their duties. They’ll also be less exposed to losing their personal capital or their reputations, which could limit their opportunities for serving on other boards.”

The challenge for companies seeking the best board members is that governance, risk management, and compliance disclosures do not have great signaling gravitas or impact, nor are they as robust and convincing as talking money.

This is sound advice, of course, but we’ve seen this movie before.

In the late 1980s, corporations were finding it difficult to attract and retain qualified directors. At that time, at the height of complex transactions, directors were exposed to claims that they failed to exercise due care, and consequently, to potential personal liability both that was disproportionately large and rather unpredictable.

FORTUNE described the perceived risk in that era as being “so great that only madmen and lepers were expected to join corporate boards.”

That’s when directors who wanted to work for “honest, risk-aware companies,” sought out companies that had qualified for, and could afford, Directors & Officers liability insurance.

As Risk Insider Peter Taffae explained last year, “The intent then, and arguably today among experts, is to protect senior management and the insured’s board against litigation arising from their capacity as a director and/or officer, from third parties.”

The cover protected the personal capital of the director with one policy, which eventually became Side A of a common policy, and “bet” on the risk management culture of the company with a separate policy that evolved into Side B.

D&O coverage was available at rational prices to the better risks — its presence was a signal that the company had a strong risk management culture.

Only it was more than a signal. It was a warranty-like badge of honor where a third-party backed, with real money, the company’s claim of a strong risk management culture.

Money talks. But that was then.

Chapelle’s article and the experts quoted therein suggest that D&O insurance today merely whispers relative to the noise of 21st century threats — especially from social media, regulatory scrutiny, and investor activism — to directors’ “personal capital or their reputations.”

Today’s risk-aware director-prospect is advised to look beyond liability coverage to the underlying risk management practices, to study the 10-K Item 1A risk disclosures, and to validate that the company is providing appropriate risk mitigation strategies for all recognized threats.

The challenge for companies seeking the best board members is that governance, risk management, and compliance disclosures do not have great signaling gravitas or impact, nor are they as robust and convincing as talking money.

With D&O’s mojo gone, perhaps companies that have implemented world-class enterprise risk management programs could let prospective directors appreciate and value them with clear and credible signals like board performance bonds?

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Column: Roger's Soapbox

Know Your Limitations

By: | May 6, 2015 • 3 min read
Roger Crombie is a United Kingdom-based columnist for Risk & Insurance®. He can be reached at [email protected]

The insurance of directors and officers has been of the keenest interest to me since the mid-1990s. When I say “keenest interest,” don’t get me wrong: D&O is as dull as printing money can be. But I have followed the discipline since ACE arrived in Bermuda more than 20 years ago. They wrote it and I wrote about it.

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I know Side A when I see it. I’ve saved time by assuming that Side B covers what Side A does not.

Yes, I’ve met people who insist there is a Side C, at weird insurance conventions in places you’ve never heard of, but I prefer to think of D&O like a single from the 1960s (a song stamped on heavy plastic and played on … never mind). Side A was the hit single; Side B the filler. There were double A-sides, but I stray further from the subject with every passing word.

I mention D&O because I have lately become a director of the company that manages the managers of the apartment block I live in. The protection D&O coverage offers is now literally of the keenest interest. I’ll tell you straight: writing about D&O is less stressful than having D&O written for you.

I know Side A when I see it. I’ve saved time by assuming that Side B covers what Side A does not.

As the finest director never to draw a salary, I have suddenly become aware of the true value of D&O insurance to the insured.

Potential claims loom on every horizon. A director oversaw something imperfectly done? He failed to oversee or foresee something imperfectly done? Something happened while he was on vacation in Mexico? The poor so-and-so is liable every time.

We have a leaseholder who sends incomprehensible writs against us that he has drafted himself, claiming money he hasn’t lost and distress he hasn’t suffered.

Another leaseholder wants it to be Florida in the corridor while the ice piles up outside. One especially nutty fellow is on his fifth Jaguar of the year. Curiously, he doesn’t drive.

As a director, I’m liable for all their woes, errors, crimes and misdemeanors.

A press release issued last month reported that directors are often unaware of the terms and conditions applicable to their coverage. They have little clue, it seems, about basic stuff, such as term and limits.

Poor fools, I thought. Then it struck me: I also have no clue what the terms and limits of my D&O policy might be.

Clint Eastwood, that great director (and, as ‘Dirty’ Harry Callahan, officer), once said: “A man’s got to know his limitations.” Coverage-wise, I don’t know mine. I know the premium has been paid and the policy is in force, but beyond that I can’t tell my Side A from my Hepatitis B.

How many insureds, I wonder, cruise along, thinking that our bottoms are covered, without ever bothering to read the small print, or even the large? We insureds aren’t too bright, apparently.

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But here’s the thing, which you probably know if you work in insurance: We insureds don’t want to know the details. It’s not that we’re big-picture people. We’re more like Batman with his cowl on backwards.

For sake of argument, let’s say I’m protected by a three-year policy with a limit of $1 million for covered behavior. Knowing that, I would have to worry about what happens that might take place in four years’ time or cost more than a million bucks. The writs guy could have finished law school by then (and be putting on the writs).

To be honest — and I speak for insureds everywhere — not knowing is a much smoother experience for all of us.

Ignorance really is bliss.

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Sponsored: Starr Companies

A Global Perspective

Political risk is on the rise in an increasingly unsteady world.
By: | August 3, 2015 • 5 min read
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As any traveler knows, the world is full of uncertainty and dangerous places, where the challenges of simply trying to run a profitable business far from home are complicated by even greater risks, such as political violence, civil unrest, credit risk, corruption, expropriation of private assets by the government, and more.

Anyone doubting this need only take a look at current events. Some 70 percent of the world’s nations currently have serious corruption problems throughout their governmental and civil service framework. Nearly 40 percent of all nations are experiencing some form of significant civil unrest. Signs of economic distress are everywhere, from falling oil prices to Eurozone debt crises to economic slowdown in China.

Despite such geopolitical risks, the world still needs its businesses to continue running amid dangers that range from warfare and terrorism to punishing economic conditions caused by international sanctions, to simple graft and hostility toward foreigners.

For global and multinational companies, keeping an eye on their political risk profile is as important as handling worker safety, environmental impact, products liability, or any other insurable risk. Thankfully, political risk exposures are insurable as well, and Starr Companies is there to provide its clients with robust political risk insurance coverage, a suite of unique support services that truly is second to none, and the ability to educate clients on how to manage their political risk.

Political risk hazards generally fall into one of the following categories:

Breach of Contract and Non-Honoring of Financial Obligations

Starr_BrandedContentThese related hazards involve the failure of a local actor to uphold their contractual or financial obligations to a foreign investor, and the inability or unwillingness of local authorities to intercede on the foreign investor’s behalf. This is perhaps the most common form of political risk hazard, as it is a major problem in any environment where there is substantial economic instability and/or corruption.

Confiscation of Property

Also known as “expropriation,” “ownership risk” and “nationalization,” this is when a government seizes property or assets without compensating the owners for them. An overt example of expropriation would be a revolutionary government seizing an office building or a factory belonging to a foreign-owned corporation. An example of creeping expropriation would be a series of successive events by a government to gradually deprive an investor of their property rights.

Regulatory Changes

This is when the local laws change in such a way as to constrict foreign investors’ economic activity in some way. It could range from creeping expropriation to changing taxation or labor laws that might simply make it far less profitable or far less efficient for a foreign entity to operate in a local jurisdiction.

Inconvertability of Currency

Also known as “transfer risk,” this is when a government takes action to prevent the conversion of local currency to another form of currency, making it difficult or impossible for foreign investors to transfer their profits elsewhere. This tends to happen in countries undergoing some kind of political crisis, like when Zaire—now the Democratic Republic of Congo—declared a new national currency in 1980.

Political Violence

Starr_BrandedContentProperty or income losses stemming from violence committed for political purposes, including, but not limited to declared and undeclared warfare, hostile actions taken by foreign or international forces, civil war, revolution, insurrection and civil strife (politically motivated terrorism or sabotage).

Kidnap and Ransom

Political violence might also manifest itself as a kidnap, ransom and extortion hazard, but that is typically covered by a separate, specialized policy.

To protect against these risks, insurers can provide comprehensive and custom-tailored political risk solutions, which at a client’s request can be broadened to cover investment contract repudiation, currency inconvertibility and political violence. Such policies typically last for periods of 5 to 10 years. Protected assets for this coverage include fixed assets (e.g., a factory, farm, warehouse or office), mobile assets (e.g., harvested natural resources, raw or manufactured inventory or mobile equipment), leased assets (e.g., aircraft, watercraft or construction vehicles) and investment interests in assets abroad (e.g., money dedicated to funding a foreign project, held in a host country bank and subject to expropriation).

Kidnap & ransom coverage protects company personnel and family by providing financial reimbursement for such an event. Depending on the insurer, some K&R programs also provide independent expert consultancy before and after a potential act of kidnapping, ransom or extortion.

Starr_BrandedContentGreat insurance coverage isn’t enough to adequately protect against political risk, however. Businesses need extra support to stay on top of their exposures, and to know what the latest geopolitical developments are.

 

Starr Companies, for example, does this through Global Risk Intelligence, a specialized team of political risk experts with long-standing backgrounds in national intelligence and international affairs. GRI delivers to Starr clients a unique risk advisory service that spans the gamut of commercial property & casualty exposures. GRI also produces two assets that are extremely helpful. The first is the Executive Intelligence Brief, a world-class monthly analysis of ongoing geopolitical developments (especially in emerging markets) available exclusively to a carefully selected readership of top executives. The second is the Global Risk Matrix, a quarterly ranking of the overall political security risk of every country on the planet.

The world’s geopolitical landscape is changing at a remarkable pace, with new risks and uncertainties arising in even the unlikeliest of places. And yet, as business becomes ever more globalized, insurers can provide their clients with tailored coverage to absorb the losses that stem from political turmoil. By finding the right insurer, with the financial strength to cover their risks as well as the analytical acumen to help turn risk into opportunity, businesses can create partners in prosperity anywhere in the world.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Starr Companies. The editorial staff of Risk & Insurance had no role in its preparation.




Starr Companies is a global commercial insurance and financial services organization that provides innovative risk management solutions.
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