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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Supply Chain Risks

Securing the Small Business Supply Chain

Small and mid-sized companies underestimate a disruption's potential impact.
By: | December 28, 2015 • 3 min read
supply chain

By its nature, supply chain risk is complex. But it also appears to be misunderstood by small and mid-sized businesses.

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More than half (55 percent) of U.S. SMEs [small to medium-sized enterprises] surveyed do not believe the loss of a main supplier would have a serious impact on their business, according to Zurich’s Third Annual Global SME Survey, which polled SME C-suite executives and managers.

A second study, the 7th Annual Supply Chain Resilience Report – produced by Zurich Insurance in collaboration with the Business Continuity Institute (BCI) – found that 74 percent of organizations suffered at least one supply chain disruption in the past year, and 14 percent suffered losses of well over $1 million.

Linda Conrad, director of strategic business risk, Zurich North America

Linda Conrad, director of strategic business risk, Zurich North America

The top three causes of supply chain disruption were unplanned IT and telecommunications outages (64 percent), cyber attack and data breach (54 percent), and adverse weather (50 percent).

Supply chain resilience has serious implications for businesses of all sizes, said Linda Conrad, director of strategic business risk for Zurich North America.

“Many companies seem to be so focused on managing the bottom line that they don’t look out for these operational risks within their supply chain, which is close to driving blindfolded,” Conrad said.

The data conveys that many small enterprises do not fully understand the level of exposure facing their supply chains — and that overlooking these risks can be extremely costly.

“Due to the increasing complexity of global trade and how goods must travel, it’s not a case of it, but when a supply chain disruption is going to happen,” Conrad said.

She noted that a previous study found that about 40 percent of companies that suffer significant supply chain disruptions fail.

“Dollar values are going up and people are not thinking through in advance how much will cost them.”

And for SMEs, their limited or lack of cash flow cushions and a loss of market share resulting from a disruption can serve as a rough one-two punch.

Good practices can mitigate the worst effects of supply chain disruptions. — Patrick Alcantara, senior research associate, Business Continuity Institute

“SMEs often do not have the tools, support and methodology to quantify what a supplier disruption will do to their business,” she said. “Most SMEs have an ‘all hands on deck’ scenario in trying to be profitable, but no resources to measure potential loss. Yet, the supply chain is their economic lifeblood.”

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Conrad added that Zurich’s database of supply chain disruptions across the globe reflect that many of those losses are not caused by insured occurrences, such as a fire.

For example, a work slowdown at a seaport can wreak havoc with a supply chain but is not specifically covered via insurance.

“Eventually when the goods show up, SMEs are already behind in filling orders,” she said, adding that that the fastest-growing supply chain risk today is often a cyber issue, even more than goods or supplies in transit.

The surveys also found that nearly one in 10 organizations cannot name their key suppliers and seven in 10 do not have visibility over their full supply chain.

Other findings of the report include:

  • Among the top 10 disruptions new to the list this year are a product quality incident (No. 8), a business ethics incident (No. 9) and lack of credit (No. 10).
  • The top five consequences of disruption are loss of productivity (58 percent), customer complaints (40 percent), increased cost of working (39 percent), loss of revenue (38 percent) and impaired service outcomes (36 percent).
  • One-third (33 percent) of respondents report “high” top management commitment to supply chain resilience, increasing from 29 percent last year.
  • More than two-thirds of respondents (68 percent) report having business continuity arrangements in place to deal with supply chain disruptions.

Patrick Alcantara, senior research associate at the BCI and a report author, said that good practices can mitigate the worst effects of supply chain disruptions.

“With findings consistently showing top management commitment as a key enabler of supply chain resilience, we encourage business leaders to take a closer look at their supply chains and champion good practice across their organizations,” he said.

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“Through our work with customers in this area, we’ve found that increasing visibility along supply chains and resilience are major sources of competitive advantage,” added Nick Wildgoose, global supply chain product leader at Zurich Insurance Group.

“Senior management leadership is the key to overcoming silo thinking about supply chains within an organization, regardless of size,” he said.

Tom Starner is a freelance business writer and editor. He can be reached at riskletters@lrp.com.
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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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