Cyber Risk Coverage

Slaying the Dragon

Risk managers struggle and succeed in placing cyber coverage.
By: | March 1, 2016 • 12 min read

The cyber dragon is devouring billions of dollars in uninsured losses and risk managers are feeling the heat.

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A daily drumbeat of data breaches is scorching even the most technologically savvy organizations. Boards of directors and the C-suites, rightly fearful for their bottom lines, are in turn putting pressure on risk managers.

Many risk managers are seeking to transfer this overbearing and frightening risk by purchasing cyber insurance, but that’s easier said than done. Even as risk managers seek solutions, they face a slew of applications with intricate, hard-to-answer questions on their IT security and exposures, as well as a dizzying array of coverages, terms and conditions.

“The spate of data breaches is obviously creating fear in those who feel the need to buy it,” said Eamonn Cunningham, chief risk officer, Scentre Group, which has about 2,500 employees. “Whether you should actually buy it or not is another question, but the fear is driving behavior.

“The unfortunate confluence of facts is we are dealing with something that is relatively new, is constantly evolving and is coupled with a series of well-publicized incidents that, in my mind, could drive an element of extreme, irrational behavior [to purchase a policy without sufficient analysis],” he said.

Analyzing the Threat

Target, Sony, Anthem, Home Depot, the IRS and the U.S. Office of Personnel Management suffered some of the more recent attention-grabbing data breaches. But with nearly 300 million records leaked and more than $1 billion stolen just in 2015, according to Tech Insider, every organization is at risk.

The greatest external risks are from cyber criminals, according to the “2016 Vormetric Data Threat Report,” followed by hacktivists (hackers with political goals), nation-states, cyber terrorists and competitors.

For most organizations, though, it is employees who pose the greatest danger.

“Employees and negligence will continue to be the leading cause of security incidents in the next year,” according to the “2015 Data Breach Industry Forecast” by Experian.

“Between human error and malicious insiders, time has shown us the majority of data breaches originate inside company walls,” it said.

Analyzing specific exposures is one of the challenges facing risk managers.

Scott Clark, risk and benefits officer, Miami-Dade County School District

Scott Clark, risk and benefits officer, Miami-Dade County School District

Scott Clark, risk and benefits officer at Miami-Dade County School District, with 45,000 employees and 355,000 students, said it took about a year of working with the CFO, chief IT officer, internal risk management employees, and an external risk management consultancy to determine the district’s cyber exposures; that was before deciding to go to market.

“We all felt there were a number of moving parts that in the event of a major hack could be exposed,” he said.

One major exposure specific to school districts is student Social Security numbers, which are “practically dormant” until students seek out jobs or credit. It often isn’t until then they find out the information was stolen, Clark said.

“It’s a huge exposure that hasn’t gotten a lot of press outside of public school systems,” Clark said.

“We all felt there were a number of moving parts that in the event of a major hack could be exposed.” — Scott Clark, risk and benefits officer, Miami-Dade County School District

In early February, the University of Central Florida revealed that hackers stole the Social Security numbers of 63,000 current and former students and employees.

To forestall problems, the Miami-Dade County School District reviewed which employees had access to Social Security numbers, said Mike Fox, district director for risk management. “If it was not vital to their job function, we took the access away,” he said.

Working with carriers can help risk managers see these and other risks in a new light.

Clark said that going through the underwriting process “is a great exercise” for risk managers.

“It really forces you to examine from a cyber standpoint your organization at a deeper dive level than you ordinarily would,” he said.

Mike Fox, district director for risk management, Miami-Dade County School District

Mike Fox, district director for risk management, Miami-Dade County School District

“It really makes you focus on your operations and maybe some aspects of your operations that you didn’t consider,” Clark said.

“But you can’t do it in a vacuum. You have to reach out to those in the trenches from a data standpoint so you get a full understanding of what exposures are out there.”

One exposure Miami-Dade is working on is third-party access to its systems. The district now requires all vendors to have a policy to address cyber liability and is considering a requirement that all vendors in the future provide proof of actual cyber liability insurance coverage.

But, Fox noted, even with strong firewalls, “the simplest thing will trip you up, a lost thumb drive, a stolen laptop.”

Applying Is Complicated

James Banfield, director of risk management at Texas-based Baylor College of Medicine, with 10,000 employees, said applying for cyber coverage is “a little bit daunting.” The college purchased its first cyber policy in the summer of 2015. Previously it was self-insured.

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“We hadn’t been with a carrier for this risk before, therefore, we weren’t easily able to translate what we do into what [underwriters] wanted, proof of how we monitor things, what tests we do to our systems to determine whether they are vulnerable,” Banfield said.

“One of them wanted our first-born-child-type of information [on the application],” Banfield said.

His broker was able to get the carriers to accept a common application, with the medical college adding specific information upon request.

“It requires diligence and a little bit of tenacity internally to try to get this information that is being requested that may not exist or may not exist in the form the application is requesting,” he said.

In addition to the complexity of applications, carriers deal with the notification expenses in the event of a data breach differently, Banfield said.

One wanted to limit coverage to 2 million individuals. Another wanted a dollar sublimit, while yet another offered full policy limits.

Some offered network extortion coverage, some didn’t, he said. Most did not offer reputational harm coverage. Most sublimited fines and penalties.

Overall, Banfield said the terms and conditions were broad and favorable. He said it was worth buying the coverage and he felt that if there is a loss, his chances of having a claim covered were good.

Reading the Fine Print

There is a huge learning curve in selecting an insurance solution, said Lynda Bennett, chair, insurance recovery practice, Lowenstein Sandler.

Lynda Bennett, chair, insurance recovery practice, Lowenstein Sandler

Lynda Bennett, chair, insurance recovery practice, Lowenstein Sandler

“One of the greatest challenges I face is when a client comes to me who has three different proposals from three different carriers and asks, ‘Which is better?’

“One isn’t necessarily better because they are all offering different terms and conditions,” she said. “There is not one that is the gold standard that gives you the best in each and every category that you intend to cover.

“These policies are so complicated. You have to get into the definitions and all of the definitions are embedded in other definitions. It’s mind-numbing and very, very complicated to review,” Bennett said.

Robert Chesler and Janine Stanisz of the Anderson Kill law firm noted that a single cyber policy may contain 60 definitions and 30 exclusions.

David Katz, a partner at law firm Nelson Mullins Riley & Scarborough, said he “spends a lot of time with in-house lawyers on whether they have the right type of coverage.”

One key area is coverage of first-party or third-party claims. For example, does the policy cover only damage to the insured or does it also cover damage a breach causes to third parties, or damage to the insured caused by an incident at another entity, such as a vendor?

Prior agreement on settlement of claims is also important, he said. What settlement formula is applied with respect to payment of damages if there is disagreement between the insured and carrier over a potential settlement?

A delay in notice to either the broker or the carrier of a potential claim also creates certain risks for the insured, Katz said. Sometimes, in the immediate aftermath of a suspected data breach, some companies are so focused on stopping the bleeding that they may not provide the necessary notifications. Others may report information that is later found to be incorrect.

Failure to follow the policy’s set notification procedures and communicate correct information could harm a company’s ability to successfully pursue a claim or defend its reputation, Katz said.

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Many risk managers said they appreciate post-breach services in the form of policy additions, such as notification call centers, credit monitoring, public relations, forensic and legal services.

“You can get all of those services on your own but it helps when you have an insurance company that has assembled a team,” said Baylor College’s Banfield.

As for forensic services provided by cyber coverage, Katz said, it’s important to know whether the scope of services applies only to an investigation to meet notification mandates or whether it will also include an investigation into causes of the breach and ways to remediate the problem.

Including the “earliest possible retroactive date” in a policy is also important because a breach may go undetected for a period of time, according to King & Spalding LLP.

Making the risk manager’s job even tougher is that in a generally soft market, cyber insurance is getting pricier.

Taking the Risk to Market

“There’s truly one hard market out there and it’s cyber,” said Carolyn Snow, director of risk management at Humana, a Kentucky-based health insurance company with 52,000 employees.

Carolyn Snow, director of risk management, Humana

Carolyn Snow, director of risk management, Humana

“We just went through a renewal and it was really, really brutal.

“We have a very aggressive security staff and security systems. You can never say you won’t have a loss — you would be foolish to say that — but we do everything we can that’s reasonable to mitigate losses.”

But in health care, there is so much protected information at risk that it gives underwriters pause, she said.
“The one thing underwriters are looking at really hard this year is the number of records [of protected information] you have. That’s a big, big problem for health care companies.

“The [application] information required this year was much more extensive than in prior years,” she said.

“Even after talking with our security people, we got a lot more questions, much more than we had in the past.”

In the end, some carriers declined to quote, including some from the prior program. Humana also took a higher attachment point for its coverage.

What Snow found “very, very unusual” is that the pricing on the higher layers of the tower is nearly as expensive as the primary layer.

“What underwriters think of as the working layer is much higher than it used to be,” she said. “It’s a really hard market.”

Brokers and underwriters, however, said that — except for health care and retail organizations — capacity is ample and they consider the price to be reasonable.

Standard & Poor’s said there are about 50 carriers offering cyber risk coverage, with increasing demand for the solution, newer entrants to the market, and a risk that is evolving.

Lloyd’s of London estimates that there is about $400 billion in annual global losses from hacking, with “only a moderate proportion” being insured.

S&P said the “typical line size for policies for small companies is around $25,000, to a maximum $5 million to $25 million for larger companies. For large companies, policies can be stacked in the form of a tower to provide the theoretical maximum capacity of around $400 million.”

“One of the greatest challenges I face is when a client comes to me who has three different proposals from three different carriers and asks, ‘Which is better?’ — Lynda Bennett, chair, insurance recovery practice, Lowenstein Sandler

Banfield said he found ample capacity. The medical college got six good quotes for its first cyber policy this past summer, he said, noting that pricing hadn’t gone up markedly since the college first looked at cyber coverage about 10 years ago.

Clark at Miami-Dade, said the district’s recent renewal was flat for the second year of its policy offering a $10 million limit per claim and aggregate annual limit, with a $250,000 self-insured retention per claim.

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Scentre Group’s Cunningham said his company is “actively considering” a cyber policy purchase, but he stressed the need to take a measured approach.

Work with carriers that have a mature approach to cyber, he advised, as opposed to newcomers to the field who may only be in the market until they have losses.

He said a lot of capacity is coming on stream. Given that, he said, risk managers have to pick those markets that they believe have a considered understanding of the risks in their organizations.

The underwriters also need to have the capacity to properly underwrite the risk and ultimately provide a product that very closely correlates with what should be the underlying intent between insured and insurer.

Litigation Defines Coverage

Litigation of cyber claims ultimately creates standard definitions for policy wording, but there hasn’t been all that much litigation thus far.

“Most of the losses to date we have seen have fallen within the pre-claim aspects of coverage, the loss prevention or forensics to figure out what happened,” said Bob Parisi, managing director, Marsh FINPRO.

“This is fairly young coverage and there is still a fair amount of uncertainty in the marketplace,” he said.

“As you get a more critical mass of people buying the coverage, you will have more instances of claims that will fall outside of coverage,” he said. At that point litigation will increase, he said.

To date, most of the litigation involving cyber claims were filed pursuant to commercial policies such as general liability, crime, D&O or E&O, as opposed to a standalone cyber policy.

In one case, Travelers Indemnity Co. is seeking a court ruling that it does not need to defend or indemnify P.F. Chang’s China Bistro Inc. under a general liability policy.

The restaurant chain’s data breach did not trigger the policy, Travelers argued, because there was no bodily injury, property damage, advertising injury or personal injury connected to the incident, as the policies defined them.

That case is still pending.

In another case, employees of Apache Corp., an oil and gas company, were fooled by emails and phone calls purportedly from a vendor notifying them of new bank account information for payment of invoices.

Company employees released $2.4 million to the thieves before the fraud was discovered. Great American Insurance Co., which issued Apache a crime policy, disputed the claim but Apache won its case in court.

“When you think about most policies like fire or property,” said Humana’s Snow, “those policies have been litigated word by word. Cyber hasn’t been litigated that much. The more litigation you have, the more certainty you will have [about coverage].

“What underwriters think of as the working layer is much higher than it used to be. It’s a really hard market.” — Carolyn Snow, director of risk management, Humana

“I think the problem for the buyer and for the carrier is maybe you intended to cover one thing and not something else. The way it is written may cover more than intended. I think vagueness around some of the wording is an issue. Happily it’s not something we have experienced,” Snow said.

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Cunningham said it’s too early to tell if carriers are fundamentally making good on the implicit promises they provide when the insurance contract is written.

“I think there is a lack of history of publicized settlements,” he said.

“If both carriers and insureds don’t approach this in a very diligent manner so as to ensure the underwriter contract correlates with the commercial intent of the insured in going into the marketplace … that mismatch could very well end up in litigation,” he said.

Anne Freedman is managing editor of Risk & Insurance. 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]