How California Lawmakers Got Wildfire Risk Management Right

California’s new wildfire liability bill emphasizes mitigation planning, and will allow compliant utilities to pass some costs on to customers.
By: | October 15, 2018 • 5 min read

With the support of major national and state property and casualty insurers, the California legislature passed a sweeping reform of utility company liability triggers at the end of August.

Governor Jerry Brown is expected to sign Senate Bill 901 even though he originally supported a different measure. By most accounts, SB-901 is a rare example of thorough inquiry and balanced legislation.

A Trend in Defining Liability

Because of, or perhaps despite, strong contending forces, the state Public Utility Commission (PUC) sought clarity on its authority to apportion liability when utilities are held responsible for losses, especially from wildfire. Utilities were seeking relief from inverse condemnation, the mandate that holds them strictly liable for damages.

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Utilities, including Pacific Gas & Electric (PG&E), are facing massive claims and possible criminal investigations from the 2017 wildfires, raising the specter of bankruptcy. Property owners and consumer groups, on the other hand, did not want for-profit power companies to be allowed to transfer their liabilities onto rate payers.

There are similar issues in the U.S. of publicly-traded companies seeking to manage their risks by shifting them away from shareholders and onto customers. In North Carolina, for example, utilities demand that rate payers submit to a credit check before starting new service or else post a heavy deposit. Credit-card issuers and many online vendors require customers to waive legal rights and submit to arbitration in disputes.

With major hurricanes again battering the southeastern U.S., the balance between public and private liability for resilience is at the fore. Six years after Hurricane Sandy, disputes are still raging in coastal communities of New Jersey, where owners of waterfront property are resisting state and local efforts to build dunes and other natural barriers.

Managing Growing Natural Hazards

Management of natural hazards was at the core of SB-901. While the legislation was crafted to address complex legal and financial issues, important provisions overhaul how woodlands are managed in an era of climate change.

In a letter to the state senate wildfire conference committee, six insurance associations supported SB-901: American Insurance Association (AIA), National Association of Mutual Insurance Companies, Pacific Association of Domestic Insurance Companies, Personal Insurance Federation of California and Property & Casualty Insurers Association (PCIA). They collectively represent more than 95 percent of the residential and commercial market in California.

“… vegetation management is critical to prevention. We have got to get the dead wood out.” — Katie Pettibone, VP, western region, AIA

“The fires throughout the state illustrate the importance of focusing on how to manage and reduce fuel in what appear to be longer and hotter fire seasons,” the letter stated. “We reiterate our members’ strong support for meaningful measures, like those in SB-901, to address this need.”

If SB-901 becomes law, “we hope forest management will improve,” said Mark Sektnan, vice president of state government relations at PCIA.

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“The big thing was PG&E trying to change its legal liability. Now … we can move forward with the subrogation cases already filed.”

The size and severity of last year’s fires brought the issues to a head: “For years, the most costly event was the Oakland fire of 1991, with losses of $2.9 billion,” Sektnan said.

“In just the last 18 months, we have broken the record for largest fire in geographic area three or four times. And the losses from the North Bay and Thomas fires together are about $12 billion, including the associated mudslides. The scope of those surprised everyone.”

The Thomas Fire of December 2017 burned more than 280,000 acres and is the largest since the California Department of Forestry and Fire Protection, known as Cal Fire, began compiling its list in 1932.

Two months earlier, the 14 blazes known as the North Bay Fires were the deadliest. They burned more than 213,000 acres and 5,700 structures, and killed 41 people, according to Cal Fire.

Katie Pettibone, vice president of the western region for AIA, emphasized the significance of natural hazards.

“The conference committee established that vegetation management is critical to prevention. We have got to get the dead wood out.”

In December 2017, the U.S. Forest Service announced an additional 27 million trees, mostly conifers, died throughout California since November 2016, bringing the total number of trees that have died due to drought and bark beetles to a historic 129 million on 8.9 million acres.

Katie Pettibone, vice president, western region, AIA

“Ultimately all the components of the bill will reduce risk for wildfires in California,” said Pettibone.

“The questions still remaining are about the PUC. It was clear in the conference committee hearings that the PUC does not have the manpower it needs. Utilities basically self-certify that they are complying with regulations. It also emerged that PG&E is woefully under-insured.

“There is a commission that will study the costs, and there may be a fund for catastrophic fires that are not the result of negligence. The issue is still what these companies are doing to manage their risks.

“In California the courts have determined long ago that privately-owned utilities are quasi-government entities. They have a monopoly and guaranteed rate of return.”

They also have some recourse to eminent domain and, thus, strict liability.

Pettibone added that under its new president, Michael Picker, the PUC questioned its ability to apportion liability for losses if a utility were even 1 percent responsible.

SB-901’s Potential

By most accounts, SB-901 addressed that, as well as the other major issues. In reporting on August 31 that the bill had passed, the San Francisco Chronicle wrote, “Although SB-901 should ease fears that PG&E’s potential $17 billion liability from the fires could push the company into bankruptcy, it does not give the utility everything it sought.”

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SB-901 would allow the state’s investor-owned utilities to issue cost-recovery bonds, to be repaid by charges on customers’ bills, if the PUC determines the utility employed reasonable fire safety practices.

Estimates indicate power customers would pay an extra $5 per year for every $1 billion in bonds issued.

“We supported SB-901 for many reasons,” said Sektnan. “Those included forest management, mutual aid, prepositioning of equipment and hardening of the grid.”

He also noted that while utilities were only responsible for one out of 10 wildfires historically, the state fire authority had referred 11 of the 16 utility-caused fires in 2017 to district attorneys for investigation of possible violations of state law. &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He 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]