Insurance Executive

Greenberg Settles Case with New York AG After 12-Year Fight

Starr's CEO and Chairman decries the breadth of New York State's prosecutorial powers.
By: | February 14, 2017 • 3 min read

AIG’s former CEO and CFO settled a civil accounting fraud case last week that spanned 12 years, stretching back to the administration of former New York State Attorney General Eliot Spitzer.

In settling the case with current NYAG Eric Schneiderman, former AIG Chairman and CEO Hank Greenberg and Howard Smith, AIG’s former CFO, agreed to payments totaling $9.9 million; $9 million on the part of Mr. Greenberg and $900,000 on the part of Mr. Smith.

The case was mediated by noted attorney Kenneth Feinberg, who also mediated between British Petroleum and claimants in BP’s Gulf of Mexico oil spill and who will also be managing the claimants’ fund connected to the Volkswagen emissions scandal.

As part of the settlement, there was no admission of wrongdoing on the part of Greenberg, now the chairman and CEO of the Starr Companies, or Smith.

In a statement released Feb. 9, the New York Attorney General’s office said the $9.9 million represented bonus payments Greenberg and Smith received between 2001 and 2004. Despite the terms of the mediated settlement, the AG’s statement implied that the agreement amounted to an admission of fraud by Greenberg and Smith.

Both men strongly dispute that characterization of the settlement.

At a press conference in New York on February 13, Greenberg’s attorney David Boies, described the payments as nothing more than a “nuisance settlement” given the fact that the NYAG’s office had originally sought some $5 billion in damages.

“The New York Attorney General’s case had totally collapsed at trial,” said Boies.

In all, the civil actions initiated by Spitzer in 2005 amounted to nine separate charges.

One of the last two actions to reach settlement is related to a loss portfolio that AIG received as a reinsurer from Berkshire Hathaway subsidiary Cologne Re Dublin in the fourth quarter of 2000. Unbeknownst to Greenberg and other executives at AIG, a portion of the portfolio had already been reinsured elsewhere.

Thus, AIG’s acceptance of the portfolio resulted in an erroneous increase in its loss reserves, since the transaction involved little or no actual risk. An innocent accounting error that they were not aware of, not fraud, Greenberg, Smith and their attorneys argued.

“Nowhere in the agreed statement by Mr. Greenberg is there any reference to any accounting being fraudulent, let alone that Mr. Greenberg was aware of any fraud,” Boies said on Feb. 13.

“There was nothing in those transactions that we knew were wrong when they were done,” Smith added.

The second case, known as the Capco transaction, involved allegations that AIG attempted to confuse investors by equating underwriting losses with investment losses.

“The New York Attorney General’s case had totally collapsed at trial.” — David Boies, attorney for Hank Greenberg

Greenberg’s conflict with Spitzer is a long and painful one and can reasonably be said to have had a substantial impact on the nation’s and the world’s economy.

Under pressure from Spitzer, Greenberg was forced out as Chairman and CEO of AIG in 2005, having spent 40 years with the company.

At the time of Greenberg’s forced resignation, AIG had a presence in more than 130 countries and $180 billion in market capitalization. Three years after Greenberg’s removal, the company’s insurance of credit default swaps resulted in an almost catastrophic failure.  The rest is, literally, history.

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AIG required an $85 billion two-year government loan, which it has since paid back; but it had to sell off key assets to do so.

“AIG is currently a shadow of what it had been,” Greenberg said in a statement released on Feb. 13.

“It was an international asset and no longer is,” Greenberg said.

“It employed over 100,000 people and now it is about half of that.”

Greenberg is pursuing a defamation case against Spitzer for comments Spitzer made about him after leaving the AG’s office in 2006. Spitzer lasted a year as Governor of New York before allegations that he consorted with prostitutes drove him out of that office.

Greenberg also spoke out at the press conference in opposition to New York’s Martin Act, which gives state prosecutors broad powers to prosecute business leaders without having to prove fraudulent intent.

“That law should be changed, it should be knocked out,” Greenberg 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

2017 RIMS

Resilience in Face of Cyber

New cyber model platforms will help insurers better manage aggregation risk within their books of business.
By: | April 26, 2017 • 3 min read

As insurers become increasingly concerned about the aggregation of cyber risk exposures in their portfolios, new tools are being developed to help them better assess and manage those exposures.

One of those tools, a comprehensive cyber risk modeling application for the insurance and reinsurance markets, was announced on April 24 by AIR Worldwide.

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Last year at RIMS, AIR announced the release of the industry’s first open source deterministic cyber risk scenario, subsequently releasing a series of scenarios throughout the year, and offering the service to insurers on a consulting basis.

Its latest release, ARC– Analytics of Risk from Cyber — continues that work by offering the modeling platform for license to insurance clients for internal use rather than on a consulting basis. ARC is separate from AIR’s Touchstone platform, allowing for more flexibility in the rapidly changing cyber environment.

ARC allows insurers to get a better picture of their exposures across an entire book of business, with the help of a comprehensive industry exposure database that combines data from multiple public and commercial sources.

Scott Stransky, assistant vice president and principal scientist, AIR Worldwide

The recent attacks on Dyn and Amazon Web Services (AWS) provide perfect examples of how the ARC platform can be used to enhance the industry’s resilience, said Scott Stransky, assistant vice president and principal scientist for AIR Worldwide.

Stransky noted that insurers don’t necessarily have visibility into which of their insureds use Dyn, Amazon Web Services, Rackspace, or other common internet services providers.

In the Dyn and AWS events, there was little insured loss because the downtime fell largely just under policy waiting periods.

But,” said Stransky, “it got our clients thinking, well it happened for a few hours – could it happen for longer? And what does that do to us if it does? … This is really where our model can be very helpful.”

The purpose of having this model is to make the world more resilient … that’s really the goal.” Scott Stransky, assistant vice president and principal scientist, AIR Worldwide

AIR has run the Dyn incident through its model, with the parameters of a single day of downtime impacting the Fortune 1000. Then it did the same with the AWS event.

When we run Fortune 1000 for Dyn for one day, we get a half a billion dollars of loss,” said Stransky. “Taking it one step further – we’ve run the same exercise for AWS for one day, through the Fortune 1000 only, and the losses are about $3 billion.”

So once you expand it out to millions of businesses, the losses would be much higher,” he added.

The ARC platform allows insurers to assess cyber exposures including “silent cyber,” across the spectrum of business, be it D&O, E&O, general liability or property. There are 18 scenarios that can be modeled, with the capability to adjust variables broadly for a better handle on events of varying severity and scope.

Looking ahead, AIR is taking a closer look at what Stransky calls “silent silent cyber,” the complex indirect and difficult to assess or insure potential impacts of any given cyber event.

Stransky cites the 2014 hack of the National Weather Service website as an example. For several days after the hack, no satellite weather imagery was available to be fed into weather models.

Imagine there was a hurricane happening during the time there was no weather service imagery,” he said. “[So] the models wouldn’t have been as accurate; people wouldn’t have had as much advance warning; they wouldn’t have evacuated as quickly or boarded up their homes.”

It’s possible that the losses would be significantly higher in such a scenario, but there would be no way to quantify how much of it could be attributed to the cyber attack and how much was strictly the result of the hurricane itself.

It’s very, very indirect,” said Stransky, citing the recent hack of the Dallas tornado sirens as another example. Not only did the situation jam up the 911 system, potentially exacerbating any number of crisis events, but such a false alarm could lead to increased losses in the future.

The next time if there’s a real tornado, people make think, ‘Oh, its just some hack,’ ” he said. “So if there’s a real tornado, who knows what’s going to happen.”

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Modeling for “silent silent cyber” remains elusive. But platforms like ARC are a step in the right direction for ensuring the continued health and strength of the insurance industry in the face of the ever-changing specter of cyber exposure.

Because we have this model, insurers are now able to manage the risks better, to be more resilient against cyber attacks, to really understand their portfolios,” said Stransky. “So when it does happen, they’ll be able to respond, they’ll be able to pay out the claims properly, they’ll be prepared.

The purpose of having this model is to make the world more resilient … that’s really the goal.”

Additional stories from RIMS 2017:

Blockchain Pros and Cons

If barriers to implementation are brought down, blockchain offers potential for financial institutions.

Embrace the Internet of Things

Risk managers can use IoT for data analytics and other risk mitigation needs, but connected devices also offer a multitude of exposures.

Feeling Unprepared to Deal With Risks

Damage to brand and reputation ranked as the top risk concern of risk managers throughout the world.

Reviewing Medical Marijuana Claims

Liberty Mutual appears to be the first carrier to create a workflow process for evaluating medical marijuana expense reimbursement requests.

Cyber Threat Will Get More Difficult

Companies should focus on response, resiliency and recovery when it comes to cyber risks.

RIMS Conference Held in Birthplace of Insurance in US

Carriers continue their vital role of helping insureds mitigate risks and promote safety.

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]