2222222222

2016 Power Broker

Power Brokers of Negotiation

In a record year for M&As, the 2016 Power Brokers excelled at marrying risk management cultures and firming up carrier relationships.
By: | February 22, 2016 • 7 min read

Spurred on by low interest rates and an appetite for scale, business leaders in 2015 sought to create market heft through mergers and acquisitions.

Advertisement




Winners of the 2016 Risk & Insurance® Power Broker® award were right there with them; marrying risk management cultures, ironing out coverage gaps and redundancies, and getting the insurance carriers to behave on price.

Alex Michon, a Sacramento, Calif.-based senior vice president with Aon, is a 2016 Power Broker® in the health care category. In a health care system merger that came out of the gate as a fire drill and then dragged on for months, Michon was reminded of a key M&A consideration: the human cost in acquisitions is often underestimated.

That’s something commercial insurance brokers need to keep in mind if they are going to build productive relationships and achieve the goals of both the buyer and the seller. Many times the risk manager for the acquired company is losing his or her job. Yet they still have to perform at the top of their game to bring off the deal.

“I think the human cost is usually under-represented in terms of the stress that these people are going through,” Michon said.

In these cases the broker can be a friend to the risk manager, who might not be first in the thoughts of finance executives or other company leadership. The risk manager might be driving in to work every day, knowing that a merger is underway and be unable to tell colleagues about it; even though hundreds of jobs may soon be on the chopping block.

“We are one of the few people who can openly talk to them,” Michon said.

In most cases, Michon said, the risk manager will perform admirably, giving the brokers and carriers all the information they need to be able to write the risk of the combined companies.

But Michon has seen cases where risk managers became so concerned with their futures that they put most of their energy into job hunting.

That tension can also impact dialogues with brokers who are working on a target company account, according to Arthur J. Gallagher’s Amy Sinclair, a 2016 Power Broker® in the pharmaceutical category and a veteran of many merger deals.

Advertisement




“Employees of the target company are concerned about redundancy at the acquisition partner,” Sinclair said.

“There is a good chance they may no longer have a job once the transaction closes,” she said.

Smaller brokerages that don’t have a lot of experience with M&As may dig in their heels a little bit.

“Generally speaking, brokers for the target and acquisition partner work well together,” Sinclair said.

“Regardless of what side of the transaction you are on, you still want to provide the best service to your client. It is not in anyone’s best interest to withhold information or to be uncooperative,” she said.

Carrier Relationships

The broker’s burden of relationship maintenance in the case of an acquisition also extends to those that underwrite the risks — the carriers. There is a lot of work to be done to convince the carrier that the risk they know won’t change when one company acquires another.

Herman Brito Jr., assistant vice president, Marsh

Herman Brito Jr., assistant vice president, Marsh

Marsh’s Herman Brito Jr.,  a 2016 Power Broker® in the marine category who places cargo and inland marine policies, played a part in two blockbuster deals in 2015; the acquisition by General Electric of the French electric railcar maker Alstom and the marriage of global food giants Kraft and Heinz.

Marsh was new to the Heinz account when the Kraft merger loomed. Pre-merger, Brito convinced Heinz to ditch its captive for global cargo exposures and transfer the risk to AIG. Even though Marsh wound up with both accounts, the rules of broker-client confidentiality meant that Brito couldn’t call his colleagues in Chicago — where Kraft is based — and check up on Kraft’s loss history.

Brito is a big fan of AIG’s multinational placements, calling them “best in class.” His challenge was to make sure that Kraft benefitted from the same aggressive terms he was getting for Heinz post-merger. As the cargo broker, Brito knew that the carriers had bigger concerns about things such as combined property exposures than what he was placing.

Advertisement




“Not only am I asking you to make it clear and concise for Heinz/Kraft, let’s make it easy on ourselves by implementing a mergers and acquisitions clause and a multi-year rate agreement,” Brito told the underwriters.

“It took a tremendous effort to change the structure that was in place in August 2014, and to obtain the coverages implemented in May 2015, but when claims occurred they started to see the benefits in certain coverages and why we pursued those,” Brito said.

“I think the human cost is usually under-represented in terms of the stress that these people are going through.” — Alex Michon, senior vice president, Aon

The General Electric/Alstom merger was another kettle of fish.

“GE’s acquisition of  Alstom was the hardest acquisition I have ever done,” Brito said.

The reason?

General Electric has a highly centralized risk management department, four risk managers handling the entire global program. Alstom had up to 30 risk managers, many of them with local authority.

Another difference was that General Electric has a huge retention and Alstom had more of a “trading dollars” philosophy, spending so much on premium against so much in expected losses.

Advertisement




Brito needed to convince the carrier that when GE bought Alstom, the cargo risk management programs would become one. Initially, the insurer wasn’t buying it. But eventually Brito convinced the underwriters that once the companies were married, Alstom’s standards would come up to GE’s.

Part of Brito’s job was to make sure he was available at any hour of the day to answer questions from Alstom risk managers around the globe and help them buy into the GE program.

“If you demonstrate that you are willing to have conference calls at a time that is most convenient in India, people are more willing to do what you are asking them to do,” Brito said.

The GE/Alstom deal closed in November of 2015. Brito was still spending a lot of time on it when we spoke to him in January.

Odd Couples

Marrying risk management cultures in a merger is a must; having the tools and the drive to convince carriers to take on the combined risk is crucial; and so is conducting enough due diligence to manage risk and provide adequate employee benefits when two very different company cultures get together.

Consider the challenges faced by Eric Wittenmyer, a 2016 Power Broker® in the health care category.

Eric Wittenmyer, senior vice president, Aon

Eric Wittenmyer, senior vice president, Aon

Wittenmyer, a senior vice president with Aon based in Chicago, was tasked with ironing out employee benefits for a large hospital system merger involving thousands of employees. One of the organizations classified hundreds of their employees as executives, eligible for a special category of benefits. The other organization counted slightly more than a dozen executives in a similar category.

“What we did was a tremendous amount of benchmarking, and an awful lot of cost modeling,” Wittenmyer said. That science determined that the hospital with the smaller group of employees classified as executives was closer to the norm.

Then came the art. That was figuring out how different employees perceived the value of certain ancillary benefits, such as life insurance and disability benefits.

Once that was determined, the in-house benefits team, with Wittenmyer’s guidance, offered one-time cash payments to employees who felt they were having a guaranteed benefit taken away, while still offering them access to an employer supported program; just not one in which the employer paid for the whole nut.

Advertisement




“So once we had done all of the plan design work, we had to manage significant transitional coordination issues,” Wittenmyer said.

Because coverage of certain benefits for the merged entities was taking effect on a staggered schedule, with some benefits being in place Jan. 1, for example, and others March 1, Wittenmyer had to earn the trust of underwriters who were being asked to stay on certain programs for a few months — some of them involving high potential life insurance pay-outs — without the corresponding premium income.

In the end, Wittenmyer was able to convince the carriers to work with him, with no price increases, because of the attractive size of the merged accounts.

“I think everything was as transparent as it could be and the vendors understood that,” Wittenmyer said.

See the complete list of 2016 Power Broker® winners.

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

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

Advertisement




In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

Advertisement




Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

Advertisement




How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

Advertisement




One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]