“If By Compensation…”
In 1952, Noah Sweat, Jr. a lawmaker from the then-dry state of Mississippi found himself explaining his position on whiskey to an audience of pro- and anti-prohibitionists. His speech, known today as “if by whiskey,” cheered both sides.
“If when you say whiskey you mean the devil’s brew, the poison scourge, the bloody monster, that defiles innocence… I am against it.”
“But, if when you say whiskey you mean the oil of conversation, the philosophic wine, the ale that is consumed when good fellows get together … I am for it.”
General Motors CEO Mary Barra faced a similar challenge developing the company’s compensation strategy for victims of its faulty ignition switches.
Customers expected GM to fully compensate victims, and capital providers expected GM to protect assets from litigation and compensation funds: One of GM’s major stakeholders was bound to be disappointed.
Barra’s move was to leverage the reputation of Kenneth Feinberg to help restore GM’s reputation with both sides. Kenneth Feinberg’s reputation makes the “if by whiskey” approach to GM’s compensation strategy possible.
Feinberg has been pivotal in resolving many of our nation’s most challenging and widely known compensation matters.
GM customers and victims are warmed by Feinberg’s experience directing the September 11th Victim Compensation Fund. Working pro bono, he spent three years meeting with families and calculating claim awards. Feinberg also handled compensation issues for the Virginia Tech shooting and the Boston Marathon bombing.
Barra’s move was to leverage the reputation of Kenneth Feinberg to help restore GM’s reputation with both sides.
GM’s stakeholders breathe easier knowing that Feinberg, as administrator of BP’s $20 billion fund to compensate victims of the Deepwater Horizon disaster, carefully manned the funding spigot.
Almost one year after the spill began, he had paid only 168,000 claimants out of more than 490,000 people who had filed. Feinberg explained then that 80 percent didn’t have proper documentation; the terms of the GM compensation plan similarly have strict documentation requirements.
Nor is he anti-corporatist. His firm accepted $850,000 a month from BP to administer the compensation fund, which led a New Orleans federal judge to order Feinberg to quit claiming independence from BP.
The “if by compensation” strategy is working, according to analysis published by Consensiv, the reputation controls company, based on reputation value metrics we use at Steel City Re.
The bump on the graph starts June 15th, the week Google Trends shows a steady uptake in searches for Kenneth Feinberg that accompanied an uptick in GM’s reputation metrics.
GM’s reputation premium, a measure of additional value arising from favorable stakeholder expectations, rose to the 46th percentile within its peer group, while the consensus trend, a measure of stakeholder surprise, showed an increase to 1.2 percent.
Reputation is about setting, meeting or beating expectations. Reputation restoration is about acknowledging fault, repairing the damage, and raising future standards.
Barra has been candid in exposing the faults.
Her challenge in repairing the damage was assuring customers and victims without frightening creditors and investors. By hiring Feinberg, Barra appears to have pleased both key stakeholder groups, boosting GM’s reputation.
Read all of Nir Kossovsky’s Risk Insider contributions.
Configuring Disaster Planning
When Hurricane Sandy struck in October 2012, some folks living in Red Hook in Brooklyn, N.Y., benefited from a little-used technology called mesh to keep the lines of communication open. When the storm caused regular Internet and cell phone networks to go down, a mesh network remained up and running.
Mesh networks were also used by two Australians in the wake of the devastating earthquake that shook Haiti in 2010, when they launched the Serval Project as a way to keep the lines of emergency communications open when cellular and Wi-Fi networks are knocked out.
In that case, Android phones running a special app connected directly with each other to create a “peer-to-peer” network that allowed communication.
“A communications disaster can be completely avoided by having a mesh network ready as a backup that can be executed in a matter of minutes,” said Bob Schena, CEO and co-founder of Rajant Corp., a provider of mesh networking solutions in Malvern, Pa.
In layman’s terms, a mesh is a stand-alone communications network that relies on smart phones or other devices — often, basic routers — to “talk” directly to each other. These small networks may be linked to the Internet via satellite, but that’s not necessary to provide local communications during natural or man-made disasters.
Such a tool should have a role in a company’s disaster plan or claims operations, said Robert Morris, a risk control technology specialist at OneBeacon Technology Insurance, a member of OneBeacon Insurance Group. Morris said today’s mesh networks could include in a disaster recovery plan.
He said communities, first responders or companies could use the Internet to set up a satellite link with a single link on the ground and then configure a mesh Wi-Fi network that allows for local Internet access.
On a larger scale, Morris said, one can set up a long-distance point-to-point link using licensed bands to a remote bandwidth location. As this is usually designed for the signal to travel a long distance, the access points must be mounted at a decent height (15 feet to 20 feet). If the Internet backbone or access is down, then the mesh won’t provide Internet access, but still can be used to set up a Wi-Fi-based network allowing for local communication.
By establishing a mesh network with satellite connectivity as part of its disaster plan, Morris said, a company could enable its workers to access the Internet for information, email and social media.
“Mesh provides a local distribution layer and can support links of a few blocks up to a few miles,” he said, noting that mesh technology is mature and can leverage whatever bandwidth sources are available, and distribute them quickly and simply with minimal training.
“If you add the capability to a disaster plan, of course, it also is important to maintain and test the mesh network equipment, to ensure it can provide the necessary level of connectivity if needed,” he said.
Morris said the main challenges with mesh technology are finding power sources and available mounting locations. He noted that generators and batteries as well as solar and microwind solutions, can be used to provide power.
Schena, of Rajant Corp., said that, while his company has not worked within the insurance industry (it primarily serves mining, telecom, the military and other heavy industrial clients), it has set up many post-disaster mesh networks.
For example, after Hurricane Katrina, Rajant participated in the relief networks by sending several hundred thousand dollars in equipment and personnel to set up multiple networks. This enabled EMS, state highway patrols and fire departments to send and receive emails, and share vital information long before communications and power were restored to the area.
Founded in 2001, following the World Trade Center attacks, Rajant also responded when a tsunami hit Southeast Asia in 2004, quickly setting up a mesh network in a refugee center.
Schena said mesh networks could transition very easily to any company’s disaster planning strategy
“Risk management and insurance are verticals we have thought about but have not pursued yet,” he said. “But it’s very easy kit for most any company to put in place. They could probably plug it into an emergency lighting system, fire it up and get a network going.
“With what we know about our technology, there is no reason a company could not have a low-cost backup data system ready to go,” he said. “They could design it so when power went out, it could still be used within an office or building in any location.”
Global Program Premium Allocation: Why It Matters More Than You Think
Ten years after starting her medium-sized Greek yogurt manufacturing and distribution business in Chicago, Nancy is looking to open new facilities in Frankfurt, Germany and Seoul, South Korea. She has determined the company needs to have separate insurance policies for each location. Enter “premium allocation,” the process through which insurance premiums, fees and other charges are properly allocated among participants and geographies.
Experts say that the ideal premium allocation strategy is about balance. On one hand, it needs to appropriately reflect the risk being insured. On the other, it must satisfy the client’s objectives, as well as those of regulators, local subsidiaries, insurers and brokers., Ensuring that premium allocation is done appropriately and on a timely basis can make a multinational program run much smoother for everyone.
At first blush, premium allocation for a global insurance program is hardly buzzworthy. But as with our expanding hypothetical company, accurate, equitable premium allocation is a critical starting point. All parties have a vested interest in seeing that the allocation is done correctly and efficiently.
“This rather prosaic topic affects everyone … brokers, clients and carriers. Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
– Marty Scherzer, President of Global Risk Solutions, AIG
Basic goals of key players include:
- Buyer – corporate office: Wants to ensure that the organization is adequately covered while engineering an optimal financial structure. The optimized structure is dependent on balancing local regulatory, tax and market conditions while providing for the appropriate premium to cover the risk.
- Buyer – local offices: Needs to have justification that the internal allocations of the premium expense fairly represent the local office’s risk exposure.
- Broker: The resources that are assigned to manage the program in a local country need to be appropriately compensated. Their compensation is often determined by the premium allocated to their country. A premium allocation that does not effectively correlate to the needs of the local office has the potential to under- or over-compensate these resources.
- Insurer: Needs to satisfy regulators that oversee the insurer’s local insurance operations that the premiums are fair, reasonable and commensurate with the risks being covered.
According to Marty Scherzer, President of Global Risk Solutions at AIG, as globalization continues to drive U.S. companies of varying sizes to expand their markets beyond domestic borders, premium allocation “needs to be done appropriately and timely; delay or get it wrong and it could prove costly.”
“This rather prosaic topic affects everyone … brokers, clients and carriers,” Scherzer says. “Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
There are four critical challenges that need to be balanced if an allocation is to satisfy all parties, he says:
Across the globe, tax rates for insurance premiums vary widely. While a company will want to structure allocations to attain its financial objectives, the methodology employed needs to be reasonable and appropriate in the eyes of the carrier, broker, insured and regulator. Similarly, and in conjunction with tax and transfer pricing considerations, companies need to make sure that their premiums properly reflect the risk in each country. Even companies with the best intentions to allocate premiums appropriately are facing greater scrutiny. To properly address this issue, Scherzer recommends that companies maintain a well documented and justifiable rationale for their premium allocation in the event of a regulatory inquiry.
Insurance regulators worldwide seek to ensure that the carriers in their countries have both the capital and the ability to pay losses. Accordingly, they don’t want a premium being allocated to their country to be too low relative to the corresponding level of risk.
Without accurate data, premium allocation can be difficult, at best. Choosing to allocate premium based on sales in a given country or in a given time period, for example, can work. But if you don’t have that data for every subsidiary in a given country, the allocation will not be accurate. The key to appropriately allocating premium is to gather the required data well in advance of the program’s inception and scrub it for accuracy.
When creating an optimal multinational insurance program, premium allocation needs to be done quickly, but accurately. Without careful attention and planning, the process can easily become derailed.
Scherzer compares it to getting a little bit off course at the beginning of a long journey. A small deviation at the outset will have a magnified effect later on, landing you even farther away from your intended destination.
Figuring it all out
AIG has created the award-winning Multinational Program Design Tool to help companies decide whether (and where) to place local policies. The tool uses information that covers more than 200 countries, and provides results after answers to a few basic questions.
This interactive tool — iPad and PC-ready — requires just 10-15 minutes to complete in one of four languages (English, Spanish, Chinese and Japanese). The tool evaluates user feedback on exposures, geographies, risk sensitivities, preferences and needs against AIG’s knowledge of local regulatory, business and market factors and trends to produce a detailed report that can be used in the next level of discussion with brokers and AIG on a global insurance strategy, including premium allocation.
“The hope is that decision-makers partner with their broker and carrier to get premium allocation done early, accurately and right the first time,” Scherzer says.
For more information about AIG and its award-winning application, visit aig.com/multinational.