Captives

5 Key Takeaways from the VCIA Conference

How to insure innovative industries was on this year's Vermont Captive insurance conference agenda.
By: | August 17, 2018 • 5 min read

The Vermont Captive Insurance Association wrapped up its annual conference in Burlington on August 9. If you couldn’t make it to beautiful Burlington for one of the better conferences this writer has ever attended, try to do so at some point. Vermont in August is something special and the conference content is always top-notch.

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For those who didn’t make it, here are five key takeaways from VCIA based in large part on a conversation between myself and Ian Davis, Director of Financial Services for the state of Vermont. David Provost, the captive insurance regulator for Vermont, and Rob Walling, a principal and actuary with Pinnacle Actuarial Resources Inc., also contributed some ideas to this piece.

Talent — “The first thing that came to my mind while reflecting on this year’s VCIA conference would be the conversation around a talent shortage and whether or not that discussion should transition to a conversation around talent cultivation,” Davis said. While it is true that the industry still needs to work diligently to continue to attract and retain talent, business leaders should also be focusing on the cultivation and skills development of those professionals that exist in the industry today, Davis said.

“One of the things that really struck me at the VCIA conference was the concerted effort made through their Young Professionals Forum and their Young Professionals Development track to devote sessions and the time of industry leaders to help in the cultivation of talent in this industry,” he added.

“I think that talent cultivation happens through three ways: through exposure, through opportunity and through mentorship,” he said.

Davis said he saw a lot of younger insurance professionals at the VCIA conference this year, more than last year.  He said attracting younger talent will continue to be important, but it’s also important to realize that the industry needs to bring that talent along at a much faster clip than previously. That means exposing younger talent to senior-level discussions and decision making processes so that they can get an idea of the tenor of those conversations and have the opportunity to learn from them.

David Provost
Deputy Commissioner, Captive Insurance
State of Vermont

“Where traditionally, you had professionals in the business with linear career paths and career trajectories, including advancement opportunities, today those opportunities are happening at an earlier and faster rate given the demographic realities facing the industry,” Davis said.

Innovation — “One of the beauties of captive insurance is that it is always at the forefront of innovation,” Davis said.

Rob Walling, a principal and consulting actuary with Pinnacle Actuarial Resources Inc., sat on an innovation panel at VCIA with Bob Gagliardi,the Vermont-based head of captive management and U.S. Fronting for AIG and Tim Herr, the secretary and risk management officer of the Recreation Risk Retention Group.  The three discussed challenges facing those that work in an innovative industry or who are looking for innovative risk transfer and mitigation approaches.

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“A lot of our discussion was about practical considerations that go into forming captives for innovative industries or providing innovative coverages,” Walling said.

For newer industries, say the growing cannabis industry or solar energy, there isn’t a lot of loss data to go on, which makes forming a captive to insure general liability or workers’ comp losses in those industries challenging. But Walling said data can be found from other, similar industries that can make the case for a captive in a newer one.

For example, tobacco shop or holistic medicine losses might be analagous to those experienced in a cannabis dispensary.  Academic studies on the performance of Chinese-manufactured solar panels, or data on the losses experienced by a roofing company could be applied predictively to a solar energy operation, Walling said.

“One of the questions from the audience that caught me a little off guard had to do with selecting service providers,” Walling said.

Walling said it makes good sense for those considering whether to form a captive  to talk to actuaries, attorneys and captive managers to get a better idea of whose professional abilities best align with your project.

“I thought in terms of getting useful information to the audience on selecting the right service providers that was useful,” Walling said.

The Simpsons — Yes, you read that correctly.  Joel Cohen, the Emmy-award winning writer and producer for the long-running cartoon show The Simpsons, was the keynote speaker at this year’s VCIA conference.

Rob Walling
Principal and Actuary,
Pinnacle Actuarial Resources Inc.

For Davis, the persistence displayed by Cohen and his team of writers who have to come up with joke after joke, pitching hundreds of them to come up with the few dozen who make it into the show is analagous to the persistence needed by those who are going to innovate with captives.

“His perspective was to be a contrarian, to not settle on the first joke but to continue to push yourself further,” Davis said. Davis said Cohen also took a circuitous route to his role as a television writer. Persistence and the unique set of skills Cohen brings to his work from his real life experience can be effectively echoed by professionals in the captive insurance world, Davis said.

Hot Topics with David Provost — Each year, one of the most well-attended sessions at VCIA is the Hot Topics session with David Provost, the deputy commissioner, captive insurance with the State of Vermont.  Provost said what topics are considered hot are picked by the audience. In this case, cannabis shot to the top of the list.

Ian Davis
Director of Financial Services
Vermont Department of Economic Development

Provost noted with a bit of irony that he doesn’t consider cannabis to be “a hot topic at all,” because regulators in Vermont are cool to the idea of forming captives for the cannabis industry. Like many carriers, Vermont captive regulators are taking a hands-off approach to cannabis until such time that the Federal government finally bows to the will of the 50 states and removes marijuana from its list of dangerous Schedule 1 narcotics.

Vermont allows residents to possess an ounce of marijuana. If they grow their own, they can have two mature marijuana plants and four immature plants per housing unit; but there are no commercial cannabis operations in the state.

“The states are eventually going to overwhelm the federal government. You’re going to have to lead from behind at some point,” Provost said.

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He said a far more relevant topic for regulators and captive owners in Vermont are the implications of the Base Erosion and Anti-Abuse Tax (or BEAT), part of the federal tax reform enacted on December 20, 2017.  BEAT penalizes companies, including captives, that cede risks to entities in other countries in reinsurance arrangements.

Provost said Vermont legislators, known for their quick action in support of the insurance business, passed a law in May allowing for reinsurance operations to be established in the state.

Provost said Vermont financial services regulators were approached by companies seeking an onshore option and moved quickly to make that happen.

“We haven’t seen any formations yet,” Provost said.

High Turnout — “I am always struck by the quality and scale of the VCIA conference ” said Davis. Davis pointed out that VCIA this year was attended by nearly 1,100 people from 45 states and 11 countries. “The percentage of captive owners who attend the VCIA conference is unparalleled in the industry, and is what really makes this event and its content stand out,” he said.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]