The former CEO of AIG, Maurice "Hank" Greenberg, stated that with every passing day, the restrictions on the bailout loan are pushing AIG closer to failure. In a letter to CEO Edward Liddy, he said, "Time is clearly running out." He told him that is was imperative that AIG began talks about renegotiating the loan. Additionally, Greenberg said that to government was effectively nationalizing the company. The government could receive up to an 80 percent stake in the company.
Greenberg also said that taxpayers, employees, and investors in the company could be hurt with losses that could be incurred under the current loan arrangement. He is concerned that with the current loan structure AIG is being forced to sell assets and that is very hard under the current economic conditions. He said that this indicates that there is “little hope” that the loan will be able to be repaid.
http://www.reuters.com/article/businessNews/idUSTRE49T9SR20081030?feedType=RSS&feedName=businessNews
Friday, October 31, 2008
Chinese Melamine Scandal Continues
Recently, it has been reported that melamine is probably being added to Chinese animal feed. Several reports have stated that the contamination could span many parts of the entire food chain.
Initially, the melamine fiasco began last month when thousands became sick from contaminated milk. Then the problem broadened when traces of melamine were found in Chinese eggs. Authorities hypothesize that the cause was probably from contaminated feed given to the hens.
This week, many Chinese newspapers said that the use of melamine in animal feed was not an isolated event, and that this practice is prevalent. It is reported that the industry has used melamine in feed in order to reduce cost while still producing the appropriate protein count to pass inspections.
http://news.bbc.co.uk/2/hi/asia-pacific/7701477.stm
Initially, the melamine fiasco began last month when thousands became sick from contaminated milk. Then the problem broadened when traces of melamine were found in Chinese eggs. Authorities hypothesize that the cause was probably from contaminated feed given to the hens.
This week, many Chinese newspapers said that the use of melamine in animal feed was not an isolated event, and that this practice is prevalent. It is reported that the industry has used melamine in feed in order to reduce cost while still producing the appropriate protein count to pass inspections.
http://news.bbc.co.uk/2/hi/asia-pacific/7701477.stm
Medical Groups Against Avandia
Top medical groups from the US and abroad have persisted that doctors stop prescribing the diabetes drug Avandia, a product of GlaxoSmithKline.Members of the American Diabetes Association and the European Association for the Study of Diabetes decided unanimously against the use of the drug.
On Thursday, October 30, the consumer group Public Citizen asked the U.S. Food and Drug Administration to ban the drug.The group says that the usage of the drug increases the risk of heart attact, as well as causing 14 cases of liver failure resulting in 12 deaths.
GlaxoSmithKline responded by stating that they do not believe that there is a connection between liver failure and Avandia, and claims that the drup is safe and effective. Regardless of their claims, sells of the drug have dropped very significantly since last year.
The FDA is currently debating over whether to ban the drug completely or let is stay but with more warnings.
The petition from Public Citizen poses a very serious reputational risk that can cause GlaxoSmithKline a great deal of money in the future. The company should began taking steps in order to deal with restoring their reputation.
http://online.wsj.com/article/SB122537774874284331.html?mod=googlenews_wsj
On Thursday, October 30, the consumer group Public Citizen asked the U.S. Food and Drug Administration to ban the drug.The group says that the usage of the drug increases the risk of heart attact, as well as causing 14 cases of liver failure resulting in 12 deaths.
GlaxoSmithKline responded by stating that they do not believe that there is a connection between liver failure and Avandia, and claims that the drup is safe and effective. Regardless of their claims, sells of the drug have dropped very significantly since last year.
The FDA is currently debating over whether to ban the drug completely or let is stay but with more warnings.
The petition from Public Citizen poses a very serious reputational risk that can cause GlaxoSmithKline a great deal of money in the future. The company should began taking steps in order to deal with restoring their reputation.
http://online.wsj.com/article/SB122537774874284331.html?mod=googlenews_wsj
Reinsurance Market is Hardening
In class a couple of weeks ago, we discussed the difference between a soft market and hard market in the insurance industry.
A study from Benfield indicates that pricing trends in the global reinsurance market are changing as the beginning of the year renewal season approachs due to the credit crisis and increasing losses from Hurrican Ike. They predict a hardening of the reinsurance market.
Beinfield’s report, Capital Consequences – Billion Dollar Question, shows that while Hurricane Ike was only a Category 2 hurricance, it has been more costly than was previously predicted and losses are still climbing. The losses from the 2008 hurricanes have been amplified by companys’ investment losses.
Angie Coad, a member of Benfield Research stated that, “Losses and loss of confidence are a potent mix for changing behaviour. The onset of global recession and associated increase in cost of claims could act as a catalyst for both insurers and reinsures alike.”
http://www.strategicrisk.co.uk/story.asp?storycode=375156
A study from Benfield indicates that pricing trends in the global reinsurance market are changing as the beginning of the year renewal season approachs due to the credit crisis and increasing losses from Hurrican Ike. They predict a hardening of the reinsurance market.
Beinfield’s report, Capital Consequences – Billion Dollar Question, shows that while Hurricane Ike was only a Category 2 hurricance, it has been more costly than was previously predicted and losses are still climbing. The losses from the 2008 hurricanes have been amplified by companys’ investment losses.
Angie Coad, a member of Benfield Research stated that, “Losses and loss of confidence are a potent mix for changing behaviour. The onset of global recession and associated increase in cost of claims could act as a catalyst for both insurers and reinsures alike.”
http://www.strategicrisk.co.uk/story.asp?storycode=375156
Increasing Fraud Due to Credit Crisis?
While in class a bulk of our discussions focus on financial related risk, as Dr. Klein stated, it is important to consider other risks as well, such as people risks.
This particilar aticle warned that the recession could lead to higher levels of claims against liability policies.
Suzanne Kearney, and insurance company director, described the credit crunch as ‘potentially a breeding ground for fraud.’
She stated that during the financial downturn in the 80’s motor fraud increased rapidly and she is seeing the same trends right now. Currently, motor fraud is at risk of increase and claims are on the increase in even the most well ordered companies.
She also stated that obvious signs of fraudulent injury can include a sudden unexplained rise in claims at one location, refusal to entertain non-financial compensation such as rehabilitation, and repeat claimants.
http://www.strategicrisk.co.uk/story.asp?sectioncode=23&storycode=374842&c=2
This particilar aticle warned that the recession could lead to higher levels of claims against liability policies.
Suzanne Kearney, and insurance company director, described the credit crunch as ‘potentially a breeding ground for fraud.’
She stated that during the financial downturn in the 80’s motor fraud increased rapidly and she is seeing the same trends right now. Currently, motor fraud is at risk of increase and claims are on the increase in even the most well ordered companies.
She also stated that obvious signs of fraudulent injury can include a sudden unexplained rise in claims at one location, refusal to entertain non-financial compensation such as rehabilitation, and repeat claimants.
http://www.strategicrisk.co.uk/story.asp?sectioncode=23&storycode=374842&c=2
Increased IT Risk – Internet Crime
The FBI has stated that internet criminals are becoming more knowlegeable and are committing more attacks.
Shawny Henry, the newly appointed head of the Cyper Division of the FBI, stated that the agency is dealing with thousands of cases right now dealing with cyber crimes and attacks. He stated that recently international law officials took down a large organized criminal unit that was buying and selling stolen financial information online.
He also said that this increase in crime poses a serious threat to national security, as over 20 other countries have become interested in infiltrating US networks over the year. Additionally, new hacker coopertives have been forming in an effort to combine their expertise and committ more organized crimes.
http://www.strategicrisk.co.uk/story.asp?sectioncode=23&storycode=374856&c=2
Shawny Henry, the newly appointed head of the Cyper Division of the FBI, stated that the agency is dealing with thousands of cases right now dealing with cyber crimes and attacks. He stated that recently international law officials took down a large organized criminal unit that was buying and selling stolen financial information online.
He also said that this increase in crime poses a serious threat to national security, as over 20 other countries have become interested in infiltrating US networks over the year. Additionally, new hacker coopertives have been forming in an effort to combine their expertise and committ more organized crimes.
http://www.strategicrisk.co.uk/story.asp?sectioncode=23&storycode=374856&c=2
Troubling Issues with Your 401(k)
Recently some employers, such as GM, have told their employees that they will suspend matching their contributions in their 401(k) until the economy gets better. This is tough for employees to deal with as they are already battling rising health care cost and job cuts.
Results from a recent survey by Watson Wyatt Worldwide show that 21% of employers surveyed stated that they have raised the employee contributions for health care and another 25% said that they planned on doing the same within the next year. Additionally, 19% laid off workers and 26% will do so in the next year.
Currently, employers have been trying to use stopping or reducing their 401(k0 contributions as a last alternative. Only a small percentage has done so, however, many say that they will resort to this if this period of economic turmoil persists.
On the bright side, analysts say that individuals should keep contributing to their 401(k), and that it will pay off in the long run.
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/25/AR2008102500045.html
Results from a recent survey by Watson Wyatt Worldwide show that 21% of employers surveyed stated that they have raised the employee contributions for health care and another 25% said that they planned on doing the same within the next year. Additionally, 19% laid off workers and 26% will do so in the next year.
Currently, employers have been trying to use stopping or reducing their 401(k0 contributions as a last alternative. Only a small percentage has done so, however, many say that they will resort to this if this period of economic turmoil persists.
On the bright side, analysts say that individuals should keep contributing to their 401(k), and that it will pay off in the long run.
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/25/AR2008102500045.html
Sunday, October 19, 2008
FSA Lessens Requirements for Life Insurers
The Financial Security Assurance has eased capital requirements on life insurers due to the crisis in the global economic markets according to Financial Times.
The regulator has recognized the fact that capital adequacy requirements should be reviewed as heavy attention is turned on Solvency II.
If insurers are having problems in meeting capital demands, the FSA plans to be flexible with them.
http://www.strategicrisk.co.uk
The regulator has recognized the fact that capital adequacy requirements should be reviewed as heavy attention is turned on Solvency II.
If insurers are having problems in meeting capital demands, the FSA plans to be flexible with them.
http://www.strategicrisk.co.uk
Insurers Should Prepare for Pandemics
Lloyd's has a warning stating that insurers must prepare for the threat of pandemics. The company’s emerging risk teams feel as if a pandemic poses a threat because they have a history of reoccurring every 30 to 50 years meaning one should occur in the near future. Trevor Maynard, emerging risks manager, stated that it is imperative for businesses to make sure that they are not the only one unprepared for a pandemic should one occur and then perform worse than competitors.
Lloyd’s report, predicts that a worldwide pandemic could devastate the global GDP by up to 10 per cent, thus creating heavy losses for insurers. Maynard emphasized the fact that companies should not prepare for one particular worst case scenario, instead they should safeguard against many different types of pandemics.
http://www.strategicrisk.co.uk/
Lloyd’s report, predicts that a worldwide pandemic could devastate the global GDP by up to 10 per cent, thus creating heavy losses for insurers. Maynard emphasized the fact that companies should not prepare for one particular worst case scenario, instead they should safeguard against many different types of pandemics.
http://www.strategicrisk.co.uk/
Saturday, October 18, 2008
Smokers Pay More
In class this week we discussed how insurance companies sometimes charge more for people who are obese, smoke, etc.
Recently, the South Carolina State Budget and Control Board approved a change that states that public employees that smoke will have to pay $25 more a month for health insurance. This will begin January 2010.
It is estimated that this new law will affect almost 100,000 state employees. Right now the higher rate would be charged per policy not per person; however, South Carolina’s Governor is leaning toward charging the fee for each smoker.
While some may disagree with this policy, I think that it is an excellent ideal. Why should people who opt for a healthier lifestyle pay for those who choose otherwise? Smoking related health problems are preventable, therefore, smokers should have to pay more. Besides, maybe laws such as this will have positive results such as making people stop smoking.
http://www.thestate.com/local/story/490653.html
Recently, the South Carolina State Budget and Control Board approved a change that states that public employees that smoke will have to pay $25 more a month for health insurance. This will begin January 2010.
It is estimated that this new law will affect almost 100,000 state employees. Right now the higher rate would be charged per policy not per person; however, South Carolina’s Governor is leaning toward charging the fee for each smoker.
While some may disagree with this policy, I think that it is an excellent ideal. Why should people who opt for a healthier lifestyle pay for those who choose otherwise? Smoking related health problems are preventable, therefore, smokers should have to pay more. Besides, maybe laws such as this will have positive results such as making people stop smoking.
http://www.thestate.com/local/story/490653.html
Increases in Supply Chain Risks
Marsh has conducted a study and their findings show that while firms are improving efficiency in their supply chains to cut costs during this economic crisis, their efforts are increasing their risk exposures.
This risk exposure arises because firms are likely to monitor their largest suppliers closely and try to increase efficiency within those transactions, thus ignoring their smaller suppliers that are more vulnerable during tough economic times. If a small company that is crucial part of a company’s supply chain experiences trouble this could stop the process of production and order fulfillment.
Marsh states that companies should evaluate their supply chains in order to find ways to lower the risk. The options Marsh suggests include:
· reviewing their business interruption strategies, supplier network and financial exposures
· taking advantage of new insurance solutions that address risks that have not previously been regarded as insurable.
http://www.insurancejournal.com/news/international/2008/10/17/94734.htm
This risk exposure arises because firms are likely to monitor their largest suppliers closely and try to increase efficiency within those transactions, thus ignoring their smaller suppliers that are more vulnerable during tough economic times. If a small company that is crucial part of a company’s supply chain experiences trouble this could stop the process of production and order fulfillment.
Marsh states that companies should evaluate their supply chains in order to find ways to lower the risk. The options Marsh suggests include:
· reviewing their business interruption strategies, supplier network and financial exposures
· taking advantage of new insurance solutions that address risks that have not previously been regarded as insurable.
http://www.insurancejournal.com/news/international/2008/10/17/94734.htm
Monday, October 13, 2008
Chinese Milk Crisis and Supply Chain Risks
Because China’s food sector is very intricate and globally involved, the recent melamine contamination crisis is proving to be a serious issue causing several supply chain difficulties.
The current contamination has led to Chinese milk products being banned by numerous countries, and companies are going to extreme measures to protect their reputation and disassociate their products with milk ingredients from China.
First there was lead paint, then Chinese pet foods began killing out pets, and next we were scared to brush our teeth because of contaminated toothpaste. Now we have to worry about poisonous milk products. This latest issue has led to even more degradation in China’s reputation for product safety. This is just another problem to indicate that cheaper isn’t always better.
http://businessassurance.com/the-impact-of-the-chinese-milk-crisis-on-global-supply-chains
The current contamination has led to Chinese milk products being banned by numerous countries, and companies are going to extreme measures to protect their reputation and disassociate their products with milk ingredients from China.
First there was lead paint, then Chinese pet foods began killing out pets, and next we were scared to brush our teeth because of contaminated toothpaste. Now we have to worry about poisonous milk products. This latest issue has led to even more degradation in China’s reputation for product safety. This is just another problem to indicate that cheaper isn’t always better.
http://businessassurance.com/the-impact-of-the-chinese-milk-crisis-on-global-supply-chains
Sustainability on the Backburner
Because of the recent credit crunch, well over 70% of company leaders are not considering sustainability as a priority. A study performed by Echo Research shows about two-thirds of companies see sustainability as a low or non-priority for business, and about half stated that businesses will not do much of anything concerning sustainability during the economic crisis.
While the current credit crisis should be at the forefront of businesses priorities, maintaining sustainability should never be omitted from a company’s “to-do” list. Focusing on sustainability and understanding how the company effects the environment and people in its surrounding helps with financial management and ultimately pushes economic success.
http://www.strategicrisk.co.uk/section.asp?navcode=19
While the current credit crisis should be at the forefront of businesses priorities, maintaining sustainability should never be omitted from a company’s “to-do” list. Focusing on sustainability and understanding how the company effects the environment and people in its surrounding helps with financial management and ultimately pushes economic success.
http://www.strategicrisk.co.uk/section.asp?navcode=19
Sunday, October 12, 2008
Progressive’s Big Brother Auto Insurance
In class on Thursday, we briefly discussed how insurance companies have been offering monitoring devices in order to monitor their customers driving habits.
Progressive Auto Insurance’s MyRate provides data to the insurance company that details the driver’s speed, number of miles driven, the time of day the driver drives, and how “aggressively” they drive. The insurance company presents MyRate as a way to promote safer driving and clean up the environment. They even received an award from Fast Company for their new and innovative ways to provide an incentive for individuals to choose alternative means of transportation and drive safer. When you visit the Progressive website you are inundated with quotes from Progressive Execs stating how much they care about the consumer and want to offer as many insurance options as possible while still protecting the environment.
I may be cynical, but I really don’t believe any of the goals of the MyRate insurance program. There is no way that I can believe that the MyRate general manager and his team sat down and said to each other, “How can we make the world a better and safer place?” The conversation probably was more like, “How can we reduce our costs by separating the low risk drivers from the high risk drivers without explicitly stating it.” Don’t get me wrong, I know some of the main goals of the insurance company are to minimize costs and risk; however, I dislike the fact that they present their product as a “we-care-so-much-about-our-customers” type of thing. The fact that people may become safer drivers or drive less is merely a positive side effect, not something that was intentionally planned.
http://auto.progressive.com/progressive-car-insurance/myrate-device.aspx
Progressive Auto Insurance’s MyRate provides data to the insurance company that details the driver’s speed, number of miles driven, the time of day the driver drives, and how “aggressively” they drive. The insurance company presents MyRate as a way to promote safer driving and clean up the environment. They even received an award from Fast Company for their new and innovative ways to provide an incentive for individuals to choose alternative means of transportation and drive safer. When you visit the Progressive website you are inundated with quotes from Progressive Execs stating how much they care about the consumer and want to offer as many insurance options as possible while still protecting the environment.
I may be cynical, but I really don’t believe any of the goals of the MyRate insurance program. There is no way that I can believe that the MyRate general manager and his team sat down and said to each other, “How can we make the world a better and safer place?” The conversation probably was more like, “How can we reduce our costs by separating the low risk drivers from the high risk drivers without explicitly stating it.” Don’t get me wrong, I know some of the main goals of the insurance company are to minimize costs and risk; however, I dislike the fact that they present their product as a “we-care-so-much-about-our-customers” type of thing. The fact that people may become safer drivers or drive less is merely a positive side effect, not something that was intentionally planned.
http://auto.progressive.com/progressive-car-insurance/myrate-device.aspx
Tuesday, October 7, 2008
AIG Had Early Warnings…
In March, a letter was sent to AIG warning against risks that may arise due to the company’s lack of transparency and inability to manage its financial products.
A Democratic representative, Rep. Henry Waxman, disclosed a letter from (OTS) and warnings by AIG's accountants at a current hearing. The letter warned about weak spots that AIG should focus on. In particular, the letter stated, “We are concerned that the corporate oversight of AIG Financial Products ... lacks critical elements of independence, transparency, and granularity…”
At this hearing, lawmakers also displayed anger when discussing the perks AIG executives are currently enjoying even though they have just been bailed out. For instance, execs racked up bills for $200,000 for hotel rooms and $23,000 for spa services.
When examining, AIG’s internal documents, is showed that AIG execs ignored problems even though there were clues that the company was in trouble.
Articles like this always tend to make me angry. Once again, the greedy big time executives win out and leave the taxpayers to pay their bills. When will this all end?
http://www.insurancejournal.com/news/national/2008/10/07/94411.htm
A Democratic representative, Rep. Henry Waxman, disclosed a letter from (OTS) and warnings by AIG's accountants at a current hearing. The letter warned about weak spots that AIG should focus on. In particular, the letter stated, “We are concerned that the corporate oversight of AIG Financial Products ... lacks critical elements of independence, transparency, and granularity…”
At this hearing, lawmakers also displayed anger when discussing the perks AIG executives are currently enjoying even though they have just been bailed out. For instance, execs racked up bills for $200,000 for hotel rooms and $23,000 for spa services.
When examining, AIG’s internal documents, is showed that AIG execs ignored problems even though there were clues that the company was in trouble.
Articles like this always tend to make me angry. Once again, the greedy big time executives win out and leave the taxpayers to pay their bills. When will this all end?
http://www.insurancejournal.com/news/national/2008/10/07/94411.htm
Monday, October 6, 2008
AIG Plans Customer Retention….
This article basically discussed how AIG CEO Edward M. Liddy felt about the future of AIG. He was quoted as saying AIG is” doing very well in the marketplace," regardless of what the opposition might say. He also stated that AIG is focusing on retaining its current customers and is "making good progress."
He mentioned that the company would not lower prices in order to keep customers and will uphold its pricing discipline. He went on to say that although there was a period of concern when the Fed first rescued the company, since then things have calmed down.
Liddy stated that the company also plans to sell off certain assets such as some life insurance and financial product units in order to pay back the federal government’s loan, but it would not be selling its U. S. commercial lines. He plans on making these sells to “brand name” companies.
Finally, Liddy went on to say, "This is a very strong company and we will emerge from this crisis."
My first thought after reading this article was, “How can AIG possibly retain its customers when the company’s name is in the news everyday associated with financial failure?” But then I thought about the huge government bailout and realized that it is completely possible. It made me upset, because it brought me back to the thought that the big financial giants get saved while the little taxpayers suffer the losses. While the bailout of AIG might have been the “right” decision, it just seems that throughout history there have been instances of greed and wild spending by these large firms and the taxpayers have had to pay the bill. Is this not just encouraging other companies to engage in unnecessary risks in the future?
He mentioned that the company would not lower prices in order to keep customers and will uphold its pricing discipline. He went on to say that although there was a period of concern when the Fed first rescued the company, since then things have calmed down.
Liddy stated that the company also plans to sell off certain assets such as some life insurance and financial product units in order to pay back the federal government’s loan, but it would not be selling its U. S. commercial lines. He plans on making these sells to “brand name” companies.
Finally, Liddy went on to say, "This is a very strong company and we will emerge from this crisis."
My first thought after reading this article was, “How can AIG possibly retain its customers when the company’s name is in the news everyday associated with financial failure?” But then I thought about the huge government bailout and realized that it is completely possible. It made me upset, because it brought me back to the thought that the big financial giants get saved while the little taxpayers suffer the losses. While the bailout of AIG might have been the “right” decision, it just seems that throughout history there have been instances of greed and wild spending by these large firms and the taxpayers have had to pay the bill. Is this not just encouraging other companies to engage in unnecessary risks in the future?
Sunday, October 5, 2008
World Economic Forum Warnings
The World Economic Forum (WEF) has warned that companies should not focus all of their attention of the current financial crisis without paying any attention to managing future risks. Basically, firms need to spend time assessing the current risks in order to protect them from the recent financial failures, while focusing on long-term risk as well to secure future growth.
The fact that there may still be failures in major financial institutions, continuous default in the consumer credit arena, etc. has increased the threat of future risks. Sheana Tambourgi, head of the Global Risk Network of the WEF, said: ‘'We understand how difficult it is for organizations to look at future risks to growth in the midst of such turmoil but our experience shows that long term planning for growth remains paramount and neglecting it could be equally damaging.’
http://www.strategicrisk.co.uk/story.asp?sectioncode=23&storycode=374311&c=2
The fact that there may still be failures in major financial institutions, continuous default in the consumer credit arena, etc. has increased the threat of future risks. Sheana Tambourgi, head of the Global Risk Network of the WEF, said: ‘'We understand how difficult it is for organizations to look at future risks to growth in the midst of such turmoil but our experience shows that long term planning for growth remains paramount and neglecting it could be equally damaging.’
http://www.strategicrisk.co.uk/story.asp?sectioncode=23&storycode=374311&c=2
Thursday, October 2, 2008
Execs Forced to Better Manage Pension Plan Risks
In class on Tuesday, we briefly discussed risks associated with companies with defined benefit pension plans. I found an article discussing how firm executives have been devoting more attention to containing these risks during this time of financial uncertainty.
Financial execs from North American companies with DB plans are shifting the focus away from making a return on their assets and putting more effort into eliminating risks associated with their pension plans. In fact, a survey from Towers Perrin shows that 76% of companies surveyed have made that shift. The extreme strain caused by failing financial markets coupled with new regulations put forth in the Pension Protection Act are forcing financial teams to manage pension plans more effectively.
The current financial state has companies worried about their pension plans impacting their cash flows, income statement, balance sheet, and their ability to comply with regulatory requirements. To manage these risks, companies are mainly focusing on improving their portfolio management techniques rather than changing their plan designs or involving third parties. 21% of the companies even reported that they are now managing their pension risks together with enterprise risk management techniques, and 46% said there was some coordination with broader risk management structures.
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