Risk Management

The Upside of Risk

Organizations win when they integrate risk management into strategic decision-making.
By: | May 24, 2016 • 13 min read

In 2012, the LEGO Group considered increasing its investment in the fast-growing Chinese market.

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A year later, it began weighing whether to build a sales and distribution presence in China. The company had existing sales hubs in Connecticut, London and Singapore. That required the Danish toy company to consider the potential opportunities of such a move as well as the potential risks.

“There is a tendency for people to look on the negative side of risk, but the objective from my point of view is mainly the positive,” said Rico Ferrarese, who was with LEGO Group’s strategic risk management department until recently moving into an operational role.

Hans Læssøe, senior director of strategic risk management at LEGO, created the department in 2007. It focuses on company strategy. It doesn’t handle insurance, safety, claims or other traditional risk management responsibilities.

“Insurance has value but it doesn’t help you develop your business,” he said.

Hans Læssøe, senior director of strategic risk management, LEGO

Hans Læssøe, senior director of strategic risk management, LEGO

“How do we help management make better decisions — decisions that are better informed about the uncertainties? … To me, that’s much more proactive,” he said.

“I think a lot of risk managers right now are hampered by the fact that they are coming from an auditing or insurance business,” Læssøe said. “They want to make sure everything is covered. They have not been trained or asked to look at opportunities. They have not been asked to support decision quality.”

Focusing on the positive side of risk is unnatural for many risk managers. There’s a reason many executive and operational leaders dub such departments, the “department of no.”

By the same token, it also is uncommon for the C-suite or operational leaders to rely on their risk managers when they are contemplating strategic moves. They often fail to recognize the tools that risk managers can bring to the table to help assess potential opportunities and challenges.

Generally, it is only when a strategy moves forward that the organization informs the risk manager as a prelude to securing insurance protection.

“All too often, risk managers get called in after the decision has been made,” said Elizabeth Carmichael, director of compliance and risk management for Five Colleges Inc., which includes Amherst, Hampshire, Mount Holyoke, Smith College and University of Massachusetts-Amherst.

Risk managers who successfully integrate themselves in C-level discussions often must take the initiative themselves. They ask questions and develop relationships throughout the organization. They make sure they understand the entire business and its operations.

They ask key leaders what would help them do their jobs better, and then follow through with ways to help.

Strategic Uncertainties

When LEGO considered going into China, it used a scenario process known as “Prepare for Uncertainty.”

“There are a lot of things we don’t know about China and especially China five years from now when we would be up and running,” Læssøe said.

“We have a set of uncertainties.”

Among them: What is the retail distribution structure like? Is it like the United States, with a few very large toy distributors, or like Germany, with “a gazillion and one small stores?” Or is it a combination of the two?

What are the consumers like? Will they want the same products as the American market, or will LEGO need to create different colors, heroes and concepts geared to the Chinese culture?

“How do we help management make better decisions — decisions that are better informed about the uncertainties?” — Hans Læssøe, senior director of strategic risk management, LEGO

Læssøe facilitated a structured discussion with the leadership team responsible for deciding whether to enter the Chinese market. Using Post-it notes, each team member team individually listed their “two most important uncertainties” about the potential move.

It was done that way to prevent group-think.

“We don’t even consider whether things are a risk at this time,” Læssøe said.

For three hours, the team talked through the ideas as they placed the notes two-by-two across on the table.

The leadership team then used the “Park Adapt Prepare Act” (PAPA) model.

“We prioritized them, not based on impact. The impact is inherently high. We look at the likelihood, low or high. Do we believe it will happen or not, the speed it might happen and our agility to respond,” Læssøe said.

If an issue was not likely to happen or offered sufficient time for the company to respond if it did, the uncertainty was “parked” on the side. Eventually, the only issues left on the table were those with a high likelihood and a short amount of time to respond.

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All of the items had the potential to be both risks and opportunities, he said. “Now, we look at the issues we need to address.

“We want to make sure our strategy is resilient in a world that probably will change in a different way than we expect,” he said.

“What will give you a competitive advantage in the future world is maneuverability or agility.

“Competitiveness to me is like a penicillin for the flu. It can get you nauseous and uncomfortable but it makes sure you are on your toes and don’t get really, really sick,” he said.

LEGO started building its factory in China a couple of years ago.

“It’s just about finished,” Læssøe said.

On the Cutting Edge

LEGO’s strategic risk management process is “probably the leading edge of best practice,” said Andrew Bent, manager, enterprise risk management, Alberta Energy Regulator, in Calgary, Canada.

Bent, who is chair of the RIMS strategic risk management development council, said that more risk managers are recognizing that they must create as well as protect value for their organizations.

“Risk managers shouldn’t be the ones saying, ‘No, no, no. It’s too risky.’ They should be working — and many now are working — to provide the organization with the information needed to make good decisions,” Bent said.

“Risk managers are now asking, ‘How do we actually create value for the organization? How do we support the business strategy?’ ”

It’s about ensuring decision-makers have solid information about both the upside and downside of a potential strategy, he said. When that happens, the leadership takes accountability for the decision and is able to explain to their shareholders or board the reasons behind decisions and what controls were put in place.

“Over the last few years, we have seen much more emphasis on the C-suite and boards to be actively engaged with risk management, to really understand what is going on,” Bent said.

“Risk managers shouldn’t be the ones saying, ‘No, no, no. It’s too risky.’ ” — Andrew Bent, manager, enterprise risk management, Alberta Energy Regulator

“The implication for the risk manager is that we must be prepared to answer their questions. Most risk managers I talk to see this as the opportunity they have been looking for and waiting for.

“The organizational culture has to be ready to receive and ask for information about risk, and risk managers must be better prepared to not only give the information they are asked for, but also the information the organization needs to hear,” Bent said.

Adding value to the organization takes many forms. It is as individual and specific as each organization’s operations.

When Bent was working in risk management at a law enforcement agency, the city he worked for had the highest murder rate in Canada.

“In addressing this serious community problem, we needed to think beyond the very obvious downside. We had to ask, ‘What is the value that risk managers can add to our organization?’ ”

The downside, or traditional approach, he said, would have been a push to ban knives and increase police patrols.

Andrew Bent, manager, enterprise risk management, Alberta Energy Regulator

Andrew Bent, manager, enterprise risk management, Alberta Energy Regulator

Instead, the agency focused on the potential opportunities. It began to coordinate activities with social service organizations, such as homeless shelters; employment, training and housing agencies; mental health and addiction centers; and others; to bring more organized support to residents, he said.

“They were doing great things without a lot of coordination,” Bent said.

“Is this our job as a police agency to coordinate? Perhaps not in a traditional model. But we manage the downside of the risk, so we thought it was more useful to manage to upside first so we don’t get to that point.

“It was about bringing together all of those pieces and putting the right people at the table to have those conversations and make sure they are risk informed and understand the good, the bad and the ugly,” Bent said.

In another situation Bent is aware of, a construction company facing a range of safety issues decided to focus on the upside economic advantages of creating a strong safety culture to prevent further injuries.<

Leaders who had higher rates of injuries on their sites were also the ones who tended to have more re-work on their jobs, and the sites used more materials. By addressing the safety culture, those sites became more profitable.

Supervisors and foremen were trained, performance indicators were created, unions were consulted, and if workers refused to transition to the new safety climate, “they were no longer welcome on the company’s worksites,” he said. “It was costing money and hurting people.”

“By addressing the safety culture, the company was able to control downside risk and also improve profitability.”

A New Way of Thinking

It’s challenging for many risk managers to think about the positive side of risk, said Joanna Makomaski, president of Baldwin Global Risk Solutions Inc., and a columnist for Risk & Insurance®.

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The Institute of Risk Management in London recently honored Makomaski as Risk Management Professional of the Year for her work on the Toronto 2015 Organizing Committee of the Pan/Parapan American Games.

Too many risk managers equate risk management with the company’s insurance portfolio, Makomaski said.

“When you rely only on insurance, in essence, you are waiting for something negative to happen and you can only mitigate the consequences.

“I am an advocate of identifying what your opportunity risks are, but you also have to look at the possible collateral damage of that risk,” she said.

For example, utility companies have a great opportunity for increased revenue during long, cold winters. At the same time, however, those companies may find that more people can’t pay their bigger bills. That can result in default risk on bill payment and a social responsibility risk.

“When you rely only on insurance, in essence, you are waiting for something negative to happen and you can only mitigate the consequences.” — Joanna Makomaski, president of Baldwin Global Risk Solutions Inc.

“That’s the challenge: Should the utility cut off their heat in the middle of a frigid winter? All of a sudden, even though this really good thing is happening, there are other risks to consider.”

In exploring opportunities, risk managers must consider their organization’s risk appetite, its tolerance for periodic excess risk, and the possibility that the failure to take a risk can have a negative impact. An example would be the way the manufacturers of the BlackBerry phone overlooked the risk posed to it by the iPhone.

“Given that risk is integral to the pursuit of value, strategic-minded enterprises do not strive to eliminate risk or even to minimize it,” according to “Risk Management in Practice” by Deloitte.

“Rather, these enterprises seek to manage risk exposures across all parts of their organizations so that, at any given time, they incur just enough of the right kinds of risk — no more, no less — to effectively pursue strategic goals. This is the ‘sweet spot,’ or optimal risk-taking zone.”

When risk managers understand a company’s potential exposures and the company’s risk tolerance, they can be in a position to tell the organization it can take on even more risk than they think, said Læssøe of LEGO.

Makomaski said she sometimes uses a “global heat map” to illustrate possible risks and returns of potential business strategies.

A heat map plots the likelihood and impact (ranging from very low to very high) of a strategy, including such potential risks, for example, as supply chain disruption, economic downturn, customer preference, new or increased competition, etc.

It’s important to note that such risk assessments are only as good as the data.

“Assessments are vulnerable to the garbage in, garbage out rule,” Makomaski said.

Marti Dickman, vice president, risk management, Advanced Disposal

Marti Dickman, vice president, risk management, Advanced Disposal

Marti Dickman, vice president, risk management, Advanced Disposal, said her risk management department is designed to “be the instrument that enables senior management to contemplate all of the risk factors and make good sound decisions about how to manage risk on the front end, recognizing we will still have a downside of risk.”

One way her department looks to add value is when the sales and marketing department negotiates with customers.

“They engage us right away and we offer suggestions for [contract] language, coverages that perhaps the customer has missed that we can provide,” she said.

“We can offer recommendations on how a component of the contract could be changed to create a value add and allow us to win the business. It gives us a competitive edge,” Dickman said.

“I work with my team so that my folks are not seen as the ‘no people.’ We want to be the ‘go-to people.’ The direction my team is charged with is to explain the challenges we see and the opportunities to make something even better.

“Instead of looking to avoid risk, we help them understand the risk on the front end so decision-makers can use that to make informed decisions. Ultimately, it will depend on the risk appetite of your company,” she said.

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Carmichael, of Five Colleges, said most of her risk management colleagues “are pretty skilled at understanding the upside of risk.”

“We get requests for all kinds of interesting projects within higher education,” she said.

“Our students and faculty are very creative and the administration is often looking to do things that are innovative.

“When asked to do a risk assessment, it may be wise to ask the administrator, ‘Are you looking to say yes or no,’ because that way you have a better sense of what direction they are working toward.

“If they are looking to say no, the task is fairly easy because you can probably come up with many things that can help the school say no,” Carmichael said.

“But don’t leave off the upside of the activity, as other administrators are likely to want to weigh in at some point.”

In one instance, an honors student with a circus project wanted to bring a trapeze event to campus. Participants would have the chance to learn how to swing on and transfer from one trapeze to another.

“The upside of the risk was great. It would be an on-campus activity that would engage a large number of people in the community, both staff and faculty. It would bring the campus together and give people an experience they might not otherwise have in a relatively low-risk environment.

“The obvious downside [to the event] was that someone could have been hurt or there could have been some other snafu, for lack of a better term, with the project,” she said.

“As the risk manager, in collaboration with other administrators, we were able to ensure that our facilities staff and public safety officers were on board.

“We also worked through a very well-reasoned and balanced contract with the trapeze company and used waivers to help spread the risk to the participants. We had an extremely successful event.”

Supporting the Business Plan

“When you invest in something,” said Ferrarese of LEGO, “it must have a positive outcome. You may not be able to put a financial outcome on it, but there is a positive reason we are doing it.”

“The key challenge,” said Dickman of Advanced Disposal, “is to overcome the traditional view that many people have of risk management.”

While that may be slowly changing among senior leadership, the onus is on risk managers to “reach out and take that initiative if the culture sees risk management in that more traditional role. Push forward,” Dickman said.

“Don’t be discouraged. Make inroads so people see you as a resource and benefit so they will want to bring you in at the beginning.”

At the same time, some risk managers need to change their own mindset.

“Instead of being risk averse, we need to understand there is a benefit to taking on more risk — when we do so in a controlled way,” she said.

Carmichael suggested risk managers “look for ways to engage in conversations about getting to ‘yes’ rather than starting at ‘no’ … and getting carried grudgingly along.”

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They also need to educate senior leadership. “The more aware your senior officers are about risk and risk management, the more likely risk management will be called in before a decision is made,” she said.

Makomaski said one way to gain traction and engagement is to “dance to the rhythm of the business.”

“I like to attach myself to an agenda or internal system that is working and risk adjust that,” she said.

“Make yourself an enabler to the strategy. My job is to enable the risk to happen within the bounding risk position of the organization.” &

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]