Cyber Risk

Keep the Dialogue Open

As cyber threats become more sophisticated, risk managers must understand and assess evolving exposures.
By: | August 3, 2016 • 7 min read

A shut-down, or even a partial disruption, is the stuff of nightmares for risk managers and C-suites. Business interruption (BI) and contingent business interruption (CBI) policies can help organizations weather those kind of crises, but the coverage is complex, and has only become more so since cyber exposures came to the fore.

Advertisement




In order to help minimize BI and CBI losses, risk managers must establish and maintain an open dialogue with C-suite executives on a continuous basis.

Open communication will give companies the agility to respond quickly if a business is shut down or production is halted by a cyber attack, determine the best way to assess income loss, and also to protect the company’s reputation.

Prior to a loss, that open dialogue will also help everyone reach a consensus about coverage needs and whether sufficient limits are in place.

Traditional property and BI policies will typically insure against a physical loss or damage to property, however many exclude cyber attacks, even if the cyber attack causes property damage.

As cyber threats become more sophisticated, risk managers and their companies need to better understand and assess these evolving exposures, and to devise an appropriate mitigation strategy and emergency response plan.

Understanding and Measuring the Claim

Al Gier, director of global risk management and insurance at General Motors, said that BI and CBI are often the most complex form of property losses when trying to quantify the actual loss.

“They require a significant marshaling of the risk management, supply chain, finance, marketing, purchasing and distribution functions, in order to support the claim,” he said. “Added to that is the work that people are already doing behind the scenes to bring their company back on line.”

He added that one way of assessing loss is by using pre-loss production schedules, sales and growth projections, and budgets.

Rick Roberts, president and director of risk management and employee benefits, Ensign-Bickford Industries

Rick Roberts, president and director of risk management and employee benefits, Ensign-Bickford Industries

Rick Roberts, president and director of risk management and employee benefits for Ensign-Bickford Industries and immediate past president of RIMS, said there is often a sizeable difference between a company’s loss estimate and the actual loss.

“There are two approaches to BI claims — the first is a top-down approach and the second is bottom-up,” he said.

“I prefer the bottom-up approach that measures lost income plus any continuing expenses as it’s easier to understand.”

Dan Holden, manager of corporate risk and insurance for Daimler Trucks North America, said that risk managers need to explain to the C-suite how BI or CBI coverage would be triggered, what it would cover and for how long.

That allows management to focus on potential events in order to mitigate against any revenue interruption, he said.

Robert Reeves, partner at EY’s Fraud Investigation and Dispute Services (FIDS) practice, said that should a loss occur, risk managers need to help senior management understand the claim, as well as the claims process and the potential range of the claim.

“[BI and CBI] require a significant marshaling of the risk management, supply chain, finance, marketing, purchasing and distribution functions, in order to support the claim.” — Al Gier, director of global risk management and insurance, General Motors

He added that when assessing a loss, it’s also important to take into account both sales and production.

“Sales is really focused on demand and production is focused on capacity,” he said. “So no matter what industry you are in, you have to look at both factors.”

Selecting the Right Policy

Advertisement




Dave Finnis, executive vice president and national property practice leader at Willis Towers Watson, said that most property insurance policies won’t provide coverage as standard in the event of a cyber attack unless there was evidence of physical damage.

“I am seeing a lot more instances where these kinds of occurrences are becoming a reality,” he said. “In the last year, a German power plant had a cyber attack and suffered physical damage when the hackers accessed one of their furnaces, but fortunately they were covered under their property policy.”

Reeves said that it is important to read the policy’s wording first as most cyber insurance will provide coverage for a BI claim, but won’t necessarily cover a CBI claim.

Josh Gold, a cyber insurance attorney at Anderson Kill’s New York office, said that BI or CBI coverage should provide for loss of business income at a minimum, covering both lost profits and continuing expenses.

He added that it was important to build in coverage for extra expenses, such as the cost of using other facilities while your operations are down, bringing consultants in, or moving your system to a new cloud platform.

Doug Backes, FM Global’s claims manager, said that it is also important to match the coverage to the loss.

“From our perspective, we have always approached data as property and it needs to be covered as such,” he said. “Whether data is damaged in a fire or as a result of a cyber attack, there needs to be cover for that.”

Impact on Reputation

Reeves said that an often-overlooked impact of a BI or CBI claim is on a company’s reputation with its customers, employees and shareholders.

“Once the physical loss has gone away, then you have got to make sure that you manage your reputation,” he said. “So you need to let your customers know what is happening, how long you are going to be down and what your mitigation strategy is.”

Al Gier, director of global risk management and insurance, General Motors

Al Gier, director of global risk management and insurance, General Motors

Citing the example of Target’s major data breach, which has cost the company $300 million to date, Gold said that the impact of a cyber attack often runs much deeper than the initial loss, and it can damage reputation in terms of customer privacy and payment details.

“From a loss mitigation 101 standpoint, you wouldn’t want to exacerbate the problem by being less than candid about what is going on,” he said.

“Of course, a lot of risk mitigation can be done before a breach occurs, to ensure that you have the appropriate plan and insurance policy in place.”

Gier said that the impact of a BI or CBI loss on a business’ reputation depended largely on the cause of the loss, as well as the company’s response time.

“Companies can do a lot to minimize the risk of BI or CBI losses on their reputation by maintaining ultimate sources of supply, keeping extra inventory and having a thorough understanding of the financial impact of BI in protecting the most valuable parts of the business,” he said.

Working in Partnership

Reeves said that risk managers need to explain to senior managers how their BI and CBI policies work and to identify key areas that need to be written into the coverage based on previous claims experience.

“The C-suite needs to make sure that those resources are available and the risk manager needs to make sure that everyone has realistic expectations about the time frame for the claims process.” — Jill Dalton, managing director, Aon Global Risk Consulting

He added that it was also important to help them understand the interdependencies between the different parts of their business in the supply chain.

Jill Dalton, managing director, Aon Global Risk Consulting

Jill Dalton, managing director, Aon Global Risk Consulting

“We had a client with a very small site in the south that got hit by a tornado,” he said.

Initially they thought it wouldn’t have much of a financial impact, but they soon realized that it was the only plant that produced a small component used in all of their products.

“They dodged a real bullet, because fortunately they were able to get alternative sourcing, otherwise they would have been facing a $1 billion loss,” Reeves said.

Jill Dalton, managing director of Aon Global Risk Consulting, said that C-suites and risk managers need to work in unison.

“The C-suite needs to make sure that those resources are available and the risk manager needs to make sure that everyone has realistic expectations about the time frame for the claims process,” she said.

Carlos Moran, director of claims at Aon Global Risk Consulting, added that businesses need to develop a contingency plan in order to maintain critical operations in the event of a loss.

Advertisement




“Risk managers have a very difficult job,” FM Global’s Backes said. “Sometimes it’s very difficult for them at times to get the attention and buy-in from the C-suite.

“But when they can do that successfully, they can build out greater resiliency and redundancy into the company’s practices and procedures.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him 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.

Advertisement




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.

Advertisement




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?

Advertisement




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.

Advertisement




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.

Advertisement




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]