Walmart de Mexico – Regulatory Risk Management and the FCPA

Posted on May 7, 2012 by

On April 20, 2012 The NY Times published an extensive piece on alleged bribery practices which took place at Walmart de Mexico and then were allegedly covered up by senior executives in Bentonville Arkansas.  As the NY Times was finalizing the article to go to press Walmart officially notified the Department of Justice that it had opened up an investigation into possible violations of the Foreign Corrupt Practices Act (FCPA).

In the wake of the story’s release market cap fell nearly $9 billion and like a tsunami the wave is only likely to grow as the Department of Justice, and the Securities and Exchange Commission begin their investigations.

Final costs are likely to have a significantly impact on Walmart in terms of monetary damages possibly including: potential criminal defense, civil fines and penalties, disgorgement (return of profits), and significant internal expenses from continued and ongoing investigations.  These expenses all have the potential of driving down share value and triggering shareholder class action lawsuits causing the payment of self-insured retentions and possibly higher director and officer liability costs in the future.

Next installment – Part 2: what is the Foreign Corrupt Practices Act and how an event can trigger a cause of action against corporate directors and officers.

Full article can be accessed here via this link.

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Innovation – A Recipe for Broker and Insurance Industry Sucuess

Posted on February 27, 2012 by

Captives – Innovation and creativity:Solution Update February 2012

Innovation and creativity are not a lost art but have taken a back seat to the changes of the overall industry.  Captive insurance structures and the broad range of solutions that they afford to organizations regardless of ownership type or structure may well be that needed spark to restart the next full cycle of innovation.

Over the next few days I will be releasing my annual review of the captive insurance market.

Part I is entitled “By the Numbers” and is a review of the raw data of total captives by domicile as of December 31, 2010 and the early year end numbers as of December 31, 2011.  Part I also includes a review of:

  • Total growth by year 2001 through 2010
  • Growth of Protected Cell Captives over the last 10 years
  • Growth of Individual Cell Captives over the last 10 years
  • A review of captive growth by domicile and region
  • Specific information on U.S. domiciles

Additional sections of the review include:

  • Part II – Captives and Benefits – “The Big Yawn” Including a table of all 2011 deals
  • Part III – Tax Issues – “Seeking Clarity in the Fog” Tax Issues 2011 and Emerging Ones for 2012
  • Part IV – Accounting Issues – Including Insurance Contracts, Dodd-Frank, Surplus Lines and Direct Procurement Taxes
  • Part V – CAT Bonds and ILS Market – “The Next Wave” – Including a detailed discussion of deals, industries, countries, risks, and exposures

The following links will take you to that specific section which can be read online or saved individually:

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Regulatory Risk Management – Foreign Corrupt Practicies Act

Posted on November 7, 2011 by

Unbeknownst to me at the time my first course in risk management was a business ethics class in 1980 in which we spent nearly a third of the time going over in great detail the scandal involving Lockheed Aerospace and bribes made to various government officials around the globe in exchange for contracts.

In response to this event and others the U.S. Congress agreed to and passed the Foreign Corrupt Practices Act of 1977.

Thirty-four (34) years later risk management has come into its own as a formalized and fundamental business practice and with that the risk management professional is being called upon more often in their role as the individual responsible for the protection of corporate assets to provide their expertise with regards to governance and regulatory risks from the perspectives of both operational risk as well as traditional risk financing.

Among the regulatory exposures that are seeing a significant increase in claims being brought by the Department of Justice are those found in The Foreign Corrupt Practices Act (FCPA) of 1977.

The act has three major provisions: accounting standards of corporations, the requirements of Securities and Exchange Commission (SEC) registered issuers, and anti-bribery. The act was amended in 1988 and in 1998, but the three major areas of coverage remain.

A copy of the Act can be downloaded here: 

Download (PDF, 42.02KB)

The U.S. Justice Department is actively going after after U.S. businesses around the globe and recent prosecutions under the FCPA are setting records for jail terms and fines; in a recent case a U.S. telecom executive pleaded guilty and was sentenced to 15 years and fined nearly $1,000,000 for paying bribes to a Haitian phone company.

Further illustrating this trend the non-profit organization, Transparency International, has just recently published its annual report of business bribes by industry and country.  Companies in Russia and China scored the highest in terms of likelihood while the Dutch and Swiss scored the lowest. Construction and industries involving government contracts were deemed most likely to pay bribes.

Training is essential in order to be conversational on the topic when discussing, evaluating, and analyzing exposures with both internal and external stakeholders. A good place to begin a review of the FCPA in a risk management context is to read the handbook, Fighting Global Corruption: Business Risk Management, a guide to Information for Global Businesses & Organizations on Navigating the International Anticorruption Environment published by the U.S. Department of State in consultation and cooperation with the U.S. Departments of Commerce, Justice,  Treasury, U.S. Office of Government Ethics, and the U.S. Agency for International Development.

A copy of the handbook is provided here for your review:

Download (PDF, 515.24KB)


There are a significant number of resources provided by the Government and others that can be accessed to provide greater detail on the Foreign Corrupt Practices Act.  Links to several of these sites are provided here for your review:

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Risk Management – Modeling Loss Experience: Collaboration and Creativity

Posted on October 10, 2011 by

Source - National Weather Service

Case Study in Loss Events – The Richmond Virginia Natural CAT Loss Hat Trick

The axiom I learned “Garbage in Garbage Out” is as true today as it was my first day in a college computer class in 1980 while working with punch cards.   The solution is only as reliable and credible as the inputs including anticipated events, values, likelihood, and severity.

A key component of risk management is the evaluation of risks that might occur during the course of the year which might impact, either on their own or in conjunction with other risks, the organization causing a reduction in cash flow, the impairment or destruction of physical assets, a disruption to the supply chain, or damage to raw materials, stock, etc.

The input from multiple team members provides insights that might be overlooked by a smaller team.  It also provides needed creativity to see possibilities from multiple perspectives. Working collaboratively the team can evaluate the probability of events including both frequency and severity faced by the organization.   Even the improbable risk and or combination of risks, as unlikely as they may be, need to be evaluated as part of the exercise and either recognized or disregarded based on total value.

The Richmond Virginia “Hat Trick” is a perfect example of what can be missed when evaluating property claim scenarios and loss probabilities from natural events if there is a lack of collaboration and creativity in anticipating such events.

Over the course of sixteen (16) days central Virginia, during the period  August 23, 2011 and September 8, 2011, was hit by no less than three (3) separately occurring natural events causing significant amounts of property damage, some of which is likely to have a negative effect on insurer financials during the second half of 2011:

  • August 23, 2011 – a 5.8 magnitude earthquake rattles Richmond the epicenter in Mineral Virginia some 50 miles to the West; quake is felt north into Canada, west into Illinois, and south into Georgia.  It will be the largest earthquake in Virginia over the last 150 years.  Several 5.0 aftershocks will be felt.  There will be some significant localized damage.  The quake forces the Nuclear Regulatory Commission (NRC) to keep the North Anna Nuclear Power Plant offline as quake damage continues to be assessed and repaired. The National Cathedral in Washington DC remains closed and expects needed repairs to be approximately $25 million.  Also remaining closed is the Washington Monument which suffered cracks from the earthquake that allowed water intrusion from subsequent weather events.
  • August 27, 2011 – The remnants of Hurricane Irene move through Richmond knocking power out to nearly 2.5 million with winds in excess of 65 MPH damaging homes and businesses nearly 100 miles inland.  Power is finally restored to all after by September 7th.
  • September 6-8, 2011 – A combination of weather events including the remnants of Tropical Storm Lee dumps 10 inches of rain and more in other areas of the region creating flash floods, collapsing roads and bridges and opening sink holes damaging homes.  Damage and rainfall amounts become greater as the storm moves northward into Pennsylvania, and into Vermont.

When evaluating risk all events regardless of how remote need to be evaluated. While these three (3) events within sixteen (16) days were somewhat improbable they did happen and should serve as a lesson for the evaluation of future risks which might be significantly more costly.

The Insurance Information Institute has prepared an analysis of the negative impact that CAT claims have had on 2011 first half carrier results at the following link: http://www.propertycasualty360.com/2011/09/22/2011-cats-create-case-study-for-risk-management

A copy of a presentation made by Dr. Robert Hartwig, President, Insurance Information Institute entitled “Global Economic Turmoil, Catastrophic Loss and Insurance: Implications for Risk Management & Marine Insurance Markets:     

Download (PDF, 4.65MB)



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2010 Annual Medical Malpractice Marketplace Update

Posted on October 7, 2011 by

Well it’s finally here, the annual state of Florida medical malpractice marketplace update.  This report is an excellent bell weather with regards to the health of the coverage line in general and by state.  Bottom line is that medical malpractice in Florida never looked so good.

Bad news is that this may well serve as fuel for rate reduction advocates seeking subsidized or reduced rates well below those indicated by loss levels and state statutes.

After analyzing the financial performance of the 23 medical malpractice insurance writers that constitute 80% or more of the Florida medical malpractice market in 2010 it appears that not only is the market healthy but showing signs of flourishing.

The findings include:

  • The average countrywide return on surplus for Florida’s leading medical malpractice writers was 12.2% in 2010
  • This represents the 7th year of profitability
  • Profitability increased nearly 100% from the 2009 return on profitability which was 6.6%
  • 2,520 claims were reported as closed during 2010 (down from 3,087 in 2009); 1,252 claims were closed for females, 1,268 for males
  • Hospital inpatient facilities were the most commonly reported claims location.
  • Most claims were in the “severe to moderate” category
  • An estimated $766.6 million (4 percent above 2009) was paid over the lifetime of the claims closed in 2010; $594.4 million was paid in damages, the remainder in loss adjustment expenses
  • On average, physicians and surgeons rates decreased approximately 2.3 percent

The Florida study also contains an excellent source of current and historical data for many other states including: New York, California, Pennsylvania, Illinois, New Jersey, Ohio, Texas, Massachusetts and Georgia as stand-alone data as well as comparative to Florida

The study can be downloaded here

Download (PDF, 417.67KB)


or directly from the site at http://www.floir.com/siteDocuments/MedicalMalReport10012011.pdf

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Insurer Performance – Calm before the storm?

Posted on October 5, 2011 by

A.M. Best reported on Monday October 3, 2011 that the U.S. property and casualty industry’s underwriting and operating performance deteriorated significantly in the first half of 2011 which saw industry net income decrease 67% to $6.9 billion as industry statutory combined ratio increased 9 points to nearly 110%.

The one ray of sunshine in the report, if you can call it that, was that the industry’s investment performance improved modestly as insurers reported net investment gains of $28.7 billion, up from $27.6 billion during the first half of 2010.

Since then long term rates, a key investment for insurers, has decreased trough the end of August 2011 and into free fall in mid September when the Fed announced “Operation Twist” which has the Fed purchasing $400 billion of longer term Treasury securities between now and the end of June 2012 which will negatively impact the yield on these instruments which were in large measure responsible for the increase in carrier investment income.  Since July 1, average longer term yields have decreased from 4.5% to 3.7% (the average from July 1 to today); daily yields are now hoovering around 2.7%.

Bottom line is that the picture is likely to get much worse before year end so the question remains the same:  Are rates heading up or down as we go into the year end and new year renewals?

The entire summary of the A.M. Best article can be seen: http://www3.ambest.com/Frames/Frameserver.asp?site=press&Tab=1&altsrc=2&RefNum=65494655775346526655

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