Risk Insider: Joe Tocco

Risk and Reward in Latin America

By: | January 25, 2016 • 2 min read
Currently Chief Executive of the Americas for XL Catlin’s insurance operation, Joe Tocco has enjoyed three decades in the insurance industry at various organizations. He is also a veteran of the U.S. Navy, where he served as a nuclear field service engineer. He can be reached at joseph.tocco@xlcatlin.com.

All businesses and investors seek growth opportunities. One of the most intriguing is Latin America, a region that recorded gross domestic product growth in the past five years second only to the emerging economies of Asia.

What we have to remember, however, is that with growth comes risk. High-growth regions such as Latin America have risks that reflect – and sometimes outpace — economic activity.

The engineer in me knows that the best way to solve a problem is to get close to it and fully understand it. This approach works well in managing risk, wherever you may find it.

So let’s look a little closer at Latin America.

Latin America’s risks should not dissuade businesses from seeking rewards in the region. As it does everywhere else in the world, risk goes hand in hand with opportunity.

With a population exceeding 600 million people and a GDP of more than $6 trillion, Latin America offers enormous potential for businesses across many industries. From construction to infrastructure to oil and gas projects, the region continues to attract billions of dollars in foreign investment.

The United Nations’ Economic Commission for Latin America and the Caribbean (ECLAC) notes that foreign direct investment in the region fell overall in 2014, however.

Foreign investment in the region in 2014 was $158.8 billion, down from a record of almost $190 billion in 2013. Investment in Brazil dropped slightly but increased sharply in Chile and Paraguay.

According to the ECLAC, while outside investment is slowing somewhat, Latin America is seeing the emergence of more trans-national companies, known as “multi-Latinas.” These are multi-national companies that trade mainly within Latin America, though some are expanding globally.

That’s an intriguing development. But as companies grow, add trading partners, bring new products and services to the marketplace, and enter Latin America, they need to consider more coordinated approaches to their property and casualty risk management.

What are some of the key risks that business face in Latin America?

Environmental risk is a concern, especially for heavy industries such as mining, energy and construction.

Professional and management liability in Latin America is an emerging but fast-growing risk in the region, too, as services have overtaken manufacturing and natural resources as the largest sector for foreign investment.

Political risk and trade credit are other risks in the region.

And let’s not forget the frequency and severity of natural catastrophes. The strongest hurricane ever in the Western Hemisphere, Patricia, struck Mexico in October this year packing maximum sustained winds of 200 mph.

Just one month earlier, Chile suffered an 8.3-magnitude earthquake that triggered a tsunami alert. Long known as one of the most seismically active locations on the planet, Chile has experienced three of the world’s most powerful quakes in the past five years, as well as the strongest quake in recorded history, a magnitude 9.5 in 1960.

Latin America’s risks should not dissuade businesses from seeking rewards in the region. As it does everywhere else in the world, risk goes hand in hand with opportunity.

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Risk Insider: Nir Kossovsky

VW’s Reputation Crisis Likely to End Badly

By: | December 14, 2015 • 2 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 nkossovsky@steelcityre.com.

One of the many lessons to emerge from studies of reputation is the importance of governance in protecting enterprise value.

A gut appreciation of this role is one of the reasons corporate boards have named reputation risk to be their top concern. Hard numbers may compel them to move beyond mere concern to material action.

Stakeholders expect behaviors from corporations just as they expect them from persons. And in the eyes of stakeholders, corporations can be held to behavioral standards.

That’s why the disclosure that Volkswagen executives intentionally deceived regulators will probably have long-term, substantial consequences.

While courts of law may not send corporations to jail for criminal offenses, courts of public opinion — read, stakeholders — may jail them figuratively for a variety of offenses that impact reputation: ethics, innovation, quality, safety, sustainability and security.

The common thread for all six of these offenses is gross disappointment, the progenitor of reputation damage.

If corporations are persons, then their directors and officers are their brains. Over the past few years, two other major automobile manufacturers, in addition to Volkswagen, experienced adverse events that looked like reputational crises, and for which their executives received public opprobrium.

Toyota had a safety issue with its accelerator pedal; General Motors had a problem with its ignition key design.

If corporations are persons, then their directors and officers are their brains.

Volkswagen now has an issue with its engine emissions. Of the three, ethics and questions of governance, willful ignorance, or even overt misbehavior have been most strongly associated with GM and VW.

Using an economic loss model, we looked at the short- and long-term economic costs to Toyota, GM, and VW. Given the size and global nature of the three giant manufacturers, we measured their period gains and losses relative to the performance of a basket of equity indices: Nikkei 225, DAX, and S&P500.

On average, Toyota underperformed by 8 percent within the first two weeks of its serial notices of brake issues in 2010; underperformed by only 6 percent one month out, underperformed still 6 percent one year out, but had accelerated and caught up with the world markets by around 13-14 months. Bottom line: no persistent reputation damage.

GM’s trajectory was slower to launch with only a 2 percent underperformance at one month. But as equity investors studied the broad implications, by one year from the first public disclosures GM had underperformed over the trailing 12 months by 22 percent and by 13-14 months out, underperformed by 36 percent.

Bottom line: the suggestion that a long-term cover-up was sanctioned by some level of management led to material enterprise-level reputation damage.

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The VW story is still evolving, and the suggestion is that some level of management is culpable. At an average of one month out from serial public disclosures, VW is underperforming the basket of equity markets by 11 percent, suggesting its long-term course will be more like GM than Toyota. (See figure.)

This costly lesson affirms the general principle that stakeholders will forgive point failures like an errant supplier for Toyota, or even a London Whale for JPMorgan Chase.

They will be less forgiving if the shortcoming appears to be evidence of a systemic failure engineered by directors and officers.

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Sponsored: State of Vermont

7 Questions to Answer before Choosing a Captive Insurance Domicile

Ask the right questions and choose a domicile for your immediate and long-term needs.
By: | February 5, 2016 • 7 min read
Vermont_SponsoredContent

Risk managers: Do your due diligence!

It seems as if every state in America, as well as many offshore locations, believes that they can pass captive legislation and declare, “We are open for business!”

In fact, nearly 40 states and dozens of offshore locations have enabling captive insurance legislation to do just that.

With so many choices how do you decide who is experienced enough to support the myriad of fiscal and regulatory requirements needed to ensure the long term success of your captive insurance company?

“There are certainly a lot of choices,” said Mike Meehan, a consultant with Milliman, an actuarial firm based out of Boston, Massachusetts, “but not all domiciles are created equal.”

Among the crowd, there are several long-standing domiciles that offer the legislative, regulatory and infrastructure support that makes captive ownership not only a successful risk management tool but also an efficient entity to manage and operate.

Selecting a domicile depends on many factors, but answering these seven questions will help focus your selection process on the domiciles that best fit your needs.

 

1. Is the domicile stable, proven and committed to the industry for the long term?

ThinkstockPhotos-139679578_700The more economic impact that the captive industry has on the domicile, the more likely it is that captives will receive ongoing regulatory and legislative support. The insurance industry moves very quickly and a domicile needs to be constantly adapting to stay up to date. How long has the domicile been operating and have they been consistent in their activity over the long term?

The number of active captive licenses, amount of gross premium written in a domicile and the tax revenue and fees collected can indicate how important the industry is to the jurisdiction’s bottom line. The strength of the infrastructure and the number of jobs created by the captive industry are also very relevant to a domicile’s commitment.

“It needs to be a win – win situation between the captives and the jurisdiction because if not, the domicile is often not committed for the long term,” said Dan Kusalia, Partner with Crowe Hortwath LLP focused on insurance company tax.

Vermont, for example, has been licensing captives since 1981 and had 589 active captives at the end of 2015, making it the largest domestic domicile and third largest in the world. Its captive insurance companies wrote over $25 billion in gross written premiums. The Vermont State Legislature actively supports an industry that creates significant tax revenue, jobs and tourist activity.

 

2. Are the domicile’s captives made up of your peer group?

The demographics of a domicile’s captive companies also indicate how well-suited the location may be for a business in a particular industry sector. Making sure that the jurisdiction has experience in the type and form of captive you are looking to establish is critical.

“Be among your peer group. Look around and ask, ‘Who else is like me?’” said Meehan. “Does the jurisdiction have experience licensing and regulating the lines of coverage for other businesses in your industry sector?”

 

3. Are the regulators experienced and consistent?

Vermont_SponsoredContentIt takes captive-specific expertise and broad experience to be an effective regulator.

A domicile with a stable and long-term, top-tier regulator is able to create a regulatory environment that is consistent and predictable. Simply put, quality regulation and longevity matter a lot.

“If domicile regulators are inexperienced, turnaround time will be slower with more hurdles. More experience means it is much easier operating your business, especially as your captive grows over time,” said Kusalia.

For example, over the past 35 years, only three leaders have helmed Vermont’s captive regulatory team. Current Deputy Commissioner David Provost is one of the longest tenured chief regulators and is a 25-year veteran in the captive insurance industry. That experienced and consistent leadership enables the domicile to not only attract quality companies, but also to provide expert guidance on the formation process and keep the daily operations running smoothly.

 

4. Are there world-class support services available to help manage your captive?

Vermont_SponsoredContentThe quality of advisors and managers available to assist you will have a large impact on the success of your captive as well as the ease of managing the ongoing operations.

“Most companies don’t have the expertise to operate an insurance company when you form a captive, so you need to help build them a team,” Jeffrey Kenneson, a Senior Vice President with R&Q Quest Management Services Limited.

Vermont boasts arguably the most stable and experienced captive infrastructure in the world. Many of the leading captive management companies have their headquarters for their Global, North America and U.S. operations based in Vermont. Experienced options for captive managers, accountants, auditors, actuaries, bankers, lawyers, and investment professionals are abundant in Vermont.

 

5. Can the domicile both efficiently license and provide on-going support to your captive as it grows to cover new lines of coverage and risks?

Vermont_SponsoredContentLicensing a new captive is just the beginning. Find out how long it takes for the application to get approved and how long it takes for an approval of a plan change of your captive’s operations.

A company’s risks will inevitably change over time. The captive will need to make plan changes which can include adding new lines of business. The speed with which your domicile’s regulatory branch reviews and approves these plan changes can make a critical difference in your captive’s growth and success.

The size of a captive division’s staff plays a big role in its speed and efficiency. Complex feasibility studies and actuarial analyses required for an application can take a lot of expertise and resources. A larger regulatory team will handle those examinations more efficiently. A 35-person staff like Vermont’s, for example, typically licenses a completed application within 30 days and reviews plan changes in a matter of days.

 

6. What are the real costs to establishing and managing your captive?

Vermont_SponsoredContentIt is important to factor in travel costs, the local costs of service providers, operating fees, and examination fees. Some states that do not impose a premium tax make up for it in high exam fees, which captives must be prepared for. Though Vermont does charge a premium tax, its examination fees are considered some of the least expensive options in the marketplace.

It is also important to consider the ease and professionalism of doing business with a domicile in the ongoing operations of your captive insurance company.

“The cost of doing business in a domicile goes far beyond simply the fixed cost required. If you can’t efficiently operate due to slow turn-around time or added obstacles, chances are you have made the wrong choice,” said Kenneson.

 

7. What is the domicile’s reputation?

Vermont_SponsoredContentMake sure to ask around and see what industry experts with experience in multiple domiciles have to say about the jurisdiction. Make sure the domicile isn’t known for only licensing certain types of captives that don’t fit your profile. Will it matter to your board of directors if your local newspaper decides to print a story announcing your new insurance subsidiary licensed in some far away location?

Are companies leaving the jurisdiction in high numbers and if so, why? Is the domicile actively licensing redomestications — when an existing captive moves from one domicile to another? This type of movement can often be a positive indicator to trends in a domicile. If companies of a particular size or sector are consistently moving to one state, it may indicate that the domicile has expertise particularly suited to that sector.

Redomestications made up 11 of the 33 new captives in Vermont in 2015. This trend is a positive one as it speaks to the strength of Vermont. It reinforces why Vermont is known throughout the world as the ‘Gold Standard’ of domiciles.

Asking the right questions and choosing a domicile that meets your needs both today and for the long term is vital to your overall success. As a risk manager you do not want surprises or headaches because you did not ask the right questions. Do the due diligence today so that you can ensure your peace of mind by choosing the right domicile to meet your needs.

For more information about the State of Vermont’s Captive Insurance, visit their website: VermontCaptive.com.

 

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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 the State of Vermont. The editorial staff of Risk & Insurance had no role in its preparation.




The State of Vermont, known as the “Gold Standard” of captive domiciles, is the leading onshore captive insurance domicile, with over 1,000 licensed captive insurance companies, including 48 of the Fortune 100 and 18 of the companies that make up the Dow 30.
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