Climate Change

Rising Threats in the Public Sector

The short- and long-term challenges of climate change are motivating low-lying municipalities to explore options and form strategic partnerships.
By: | May 24, 2016 • 6 min read

In Orange, Texas, a March public meeting to review storm surge suppression options for the Gulf Coast Community Protection and Recovery District had to be rescheduled to April 14 because of — wait for it — widespread flooding.

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Irony aside, nearly 140 miles of the Sabine River flooded for four days, closing down almost all major roads that crossed this watery Texas-Louisiana border.

The flood and delayed meeting are a clear example about the very real impact climate change is having on low-lying areas all around the U.S. coasts. The Texas Governor’s Commission for Disaster Recovery and Renewal program estimates that it may cost as much as $11 billion to protect that area of the Gulf Coast.

“Nobody is sticking their head in the ground as far as I can see.” — William F. Becker, national public sector practice leader, Aon Risk Solutions

That’s a good investment, however, since Hurricane Ike in 2008 wrought $29 billion in property damage, making it the most expensive storm in the state’s history and the third costliest in the country, according to the Texas Engineering Extension Service report.

Texas officials are not alone in facing such challenges.

Coastal communities such as New York City, Norfolk, Va., Miami-Dade County, and Seattle lie at or below sea level, making them vulnerable to storm surges and flooding, especially in the face of the rising sea levels and increased storm activity predicted for the coming decades.

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The key question for the public sector is how to affordably protect both residential and business properties as well as public infrastructure such as roads, bridges, utilities, water treatment plants, and other assets.

For many communities, the answer is to do more accurate risk modeling; do short- and long-term planning; build traditional “gray” defenses such as dams, levees, walls, and sea gates as well as natural “green” defenses to reduce storm surge impact; and work with insurers and reinsurers to rebound from losses made inevitable by climate change.

“Nobody is sticking their head in the ground as far as I can see,” said William F. Becker, Aon Risk Solutions’ national public sector practice leader. Instead, communities are balancing what can be done over the next few decades with current engineering and technology, while keeping an eye out for what may be possible with new technology by the year 2100.

Starting Small

However, budgetary pressures make many large-scale projects unaffordable, so public entities are maintaining the current infrastructure as best they can for now, said Becker, whose company also helps to administer the National Flood Insurance Program (NFIP).

062016_03_Risk_Report_sidebarSome cities have begun implementing protective strategies with a lower price tag, such as prohibiting land clearing near flood-prone areas, planning for public green spaces to absorb water, elevating streets over time, providing dunes on the coast, and heightening sea walls, among other solutions.

Tackling the problem with small, affordable strategies will give public sector organizations more time “until new and highly technical strategies can save these critical vital communities going forward,” Becker said.

Others are looking to partnerships to broaden their access to solutions.

One example is Miami-Dade County, which launched an innovative program in partnership with The Nature Conservancy (TNC), catastrophe modeler Risk Management Solutions (RMS), engineering company CH2M, and the American Red Cross/Red Crescent’s Global Disaster Preparedness Center.

The collaborators will work on various aspects of two demonstration projects that will measure the effects of green defenses such as salt marshes and mangrove forests in protecting the region from the severe storms that arise in the Atlantic’s Hurricane Alley.

Robert Muir-Wood, chief research officer, RMS

Robert Muir-Wood, chief research officer, RMS

This is the latest research project that RMS undertook to help model the protective impact of biological defenses. Working with communities on both coasts — including Norfolk, Va., and the Seattle region’s Puget Sound — “RMS has begun showing how we can quantify the reduction in risk using our storm surge modeling capability for coastal risks,” said the modeler’s Chief Research Officer Robert Muir-Wood.

“Our [modeling looks at] the full sweep of potential hurricanes and the storm surges they generate, and takes it all the way through to the damage and the quantified loss to property, which may be inland of the coastal areas,” Muir-Wood explained.

“We can actually quantify the benefits of one form of coastal defense [marshes]. That opens up a much bigger conversation to not only other classes of biological defenses but also to think through how can you combine a mixture of biological and gray defenses to provide really good protection.”

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This kind of assessment is critical for communities to understand the complete impact of storms on local government budgets, noted Kathy Baughman McLeod, managing director of TNC’s coastal risk and investment.

“We have found that local governments and governments in general don’t know what their risk is,” said McLeod. “And then, when they make [storm-related] repairs, they pay for it out of all different buckets [such as public works, parks and recreation, etc.].

“When we ask, ‘What are you spending each year?’ they don’t know. They have the awareness but the [quantitative analysis] is not there.”

Impact on Rates

TNC’s project will help develop trusted metrics about both green and gray defenses that can eventually be adopted to set more accurate NFIP prices and quantify total risk. In addition, on April 1, the Federal Emergency Management Agency (FEMA) implemented more rigorous guidelines for accurately assessing flood risk to help set more appropriate insurance rates.

While property owners and local governments in some communities will pay higher rates that are more commensurate with the actual risk, communities that adopt better defense strategies will see their rates decrease.

While climate change may have the greatest impact on coastal communities, the interior of the U.S. will face changing weather patterns as well.

For example, New Orleans got good news from FEMA in April, nearly 11 years after Hurricane Katrina devastated the city. With about $14.6 billion in improvements made by the U.S. Army Corps of Engineers, the below-sea-level area now has a new defensive ring of protective levees, floodwalls, and floodgates.

Work is continuing on renovations to the city’s drainage system as well. For many residents and businesses, the new maps mean lower insurance rates.

Muir-Wood said expect to see more municipalities and other public organizations create the position of chief resilience officer, just as Miami-Dade County, Norfolk, San Francisco, New Orleans and other cities have done with the support of the Rockefeller Foundation as part of its 100 Resilient Cities project.

This new office will coordinate work across departments and jurisdictions as well as with outside organizations to plan for and respond to weather-related events as well as other threats, such as fire, tornadoes or civil unrest.

Another trend, he said, is that catastrophe modeling tools previously used solely for insurance risk assessment will become more commonplace for big cities, letting them conduct a cost-benefit analysis for various alternative actions to reduce that risk.

Joe Caulfield, chief underwriting officer, government risk, OneBeacon

Joe Caufield, chief underwriting officer, government risk, OneBeacon

Finally, understanding weather-related exposures is still going to be critical for public sector entities, said Joe Caufield, chief underwriting officer for OneBeacon’s government risk operation.

“Some information is presented in a highly dramatic fashion,” he said. “The feedback we hear is that risk managers and city managers are overwhelmed by [threats] and don’t see them as actionable …  but we don’t encounter too many climate change deniers.”

Instead, public sector organizations are studying their exposure for critical assets such as wastewater management facilities and 911 communications centers. They’re making plans for protection and upgrading, especially if the facilities are right on the edge of FEMA flood map outlines that may not have been updated in 40 years.

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One thing to remember about climate change, Caufield noted, is that while it may have the greatest impact on coastal communities, they are not the only areas that will have to contend with climate threats.

The interior of the U.S. will face changing weather patterns as well, especially with greater temperature variations between severe cold and increased heat. That equals a more severe spring tornado season. &

Maura Ciccarelli is a long-time freelance writer. She 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]