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This Hour has 22 Minutes
CONFERENCE
PRESENTS
This Hour has 22 Minutes
1- Madoff Fraud
2- Payments in Recessionary Times
3- Bankruptcy and Risk Mgmt
4- Fiduciary Claims
4 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
News Anchors
5 Presentation Name ©2004 Deloitte & Touche LLP and affiliated entities.
Madoff Fraud
6 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Madoff trial
7 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Episode Contents – Madoff Fraud
• Background - Hedge funds
• What happened? - Madoff Story & Hedge fund frauds
• How could it happen? Who can I blame?
• What is the Recourse?
• What is the Impact of Madoff Fraud on Insurance?
• What are the Lessons to be Learned?
8 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Simplified explanation of the Madoff Scandal
9 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
The Madoff Story - Background
• Bernard Madoff founded Bernard L. Madoff Investment Securities LLC in 1960
• Was one of the top market maker businesses on Wall Street
• His firm developed innovative computer information technology to disseminate stock quotes – later this technology became the NASDAQ
• Madoff was a former Chairman of the NASDAQ
10 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
The Madoff Story – The Fall Out
– $65B Loss or $20B?– 8,800 claimants– $1.2B recovered to date– $120M in compensation paid by SIPC– Hundreds of litigation cases
11 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Anatomy of a hedge fund fraud
– A simple example:
MASTER FUND
Domestic Feeder Offshore Feeder
Domestic Investors
Offshore Investors
You and me
Trading activities
Intermediaries – invest in the master fund
12 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Anatomy of a hedge fund fraud: The players
Party Role
Investment ManagerDevelops the investment strategy; responsible for hiring service providers
AdministratorTo provide financial reporting; communication with shareholders/partners
Custodian Hold the assets
Auditor Verify the financial results
13 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
The Madoff Story – The Ponzi Scheme
• According to former CFO, Frank Dipascali, for at least 20 years, the results of the Madoff Fund were entirely fictional
• Clients were sorted into categories, each with its own pattern of fictional but plausible trading
• They created account statements and trading slips for trades that never took place
• Finally, on December 11, 2008, amidst the economic crisis, Madoff could not fund $7B of redemptions out of his fund
• He was sentenced to 150 years in prison on June 29, 2009. With good behaviour, he is set to be released in 2139
14 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
15 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Other famous hedge fund frauds
• The Madoff Fraud is not unique. There have been other famous hedge fund frauds/failures including:
– Manhattan Capital (2001) $400 Million
– Stanford Financial Group (2009) $8,000 Million
– Westgate Capital Management (2009) $900 Million
– WG Trading Co (2009) $554 Million
16 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
How Could it happen? Who can I blame?
• Where was the failure?
• Were there abundant warning signs?
• Process of due diligence
17 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Investor recourse
• Investors have limited recourse. Some options include:
– Litigation against Feeder fund for negligence, mismanagement and fiduciary duty
– Litigation against Regulators
– Claims under the Securities Investor Protection Corp. (“SIPC”)
– Claims limited to $500,000
– Canada has a similar program called the Canadian Investor Protection Fund (“CIPF”) with limits of $1,000,000 investor
– Make a claim under homeowner insurance
– Limited coverage for securities losses due to theft
– AIG is being sued by two homeowners alleging the insurer is refusing to honour the fraud-protection provision in their homeowners insurance
– Likely limited coverage (<$100,000)
18 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Impact of Madoff fraud on Insurance
• Still too early to gauge exactly how much insurance coverage will come into play
• Many of the Feeder funds are being sued by investors
– D&O and E&O coverage
– Legal defense cost coverage (eg. Tremont Group)
– Crime insurance and fidelity bonds
• Impact of Madoff fraud will be felt for years to come in the form of increased prices and restricted coverage.
19 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Lessons learned - How do we prevent the next Madoff?
• It is unclear whether more regulation could have prevented this fraud
– SEC investigated Madoff, but did not uncover
• Introduce reforms to demand that custodians, brokers, administrators all be independent
• Use the IRS model
– Advisors and custodians would be required to report assets
– Asset data would be cross referenced, and any disparities would be investigated.
20 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Lessons learned – What should investors do?
• Review all insurance policies
– D&O and E&O policies
– Ensure coverage is sufficient
• Exercise greater due diligence
– Inquire/demand that your investment manager is exercising due care
– Some large investor’s are buying “Madoff Insurance” – hiring private investigators to research the social aspects of their money managers
– Deloitte Financial Advisory
21 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Top 10 Messages left on Bernie Madoff’s vmail
Questions
23 Presentation Name ©2004 Deloitte & Touche LLP and affiliated entities.
Expectations on Payments in Recessionary Times
24 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Episode Contents
• State of the Industry
– Trump Question
• What is “reasonable” payment timing?
• Unreasonable payment timing
• Cut-through clauses
• How can we get interim payments?
• Steps to take to get cash
25 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
State of the Industry
• Insurance industry hit hard.
– AIG Bailout
– Lehman bankruptcy, Merrill Lynch takeover & bailout
– Increased M&A activity
• Insurers note an increase in competitive pressures.
• Canadian life insurers facing falling stocks.
• Insurance companies need to make money to exist.
26 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Trump Question
27 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
What is “reasonable” payment timing
• What do you know of your Insurance company regarding payments on claims?
• Has this changed in light of the economic downturn?
• Industry benchmark on large commercial claims
• Lloyd’s audits their syndicates on timing of payments.
28 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Unreasonable payment timing
• Duty of insurance company to conduct an insurance claim investigation.
• Unreasonable delays may be due to:
– Documentation
– Order of Payment
– Coverage
– Communication
29 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Cut-through clauses – A Growing Trend?
• If Insurer goes belly up, the Reinsurer is still on the hook and payment is made directly to the Insured, not to the Insurer.
• Provides security from an Insured’s perspective.
• Avoids the risks associated with insurance.
• Allows the Insured to have more control over the real Insurer in cases where the administration and claims handling is provided by the Reinsurer.
• Most frequently sought when an Insurer receives a downgrade in its ratings.
30 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
How can we get interim payments?
• Credit crunch pain
• Lack of interim financing
• Most Insurers will accept interim claims
• Reasonable percentage (50% or 75%) of what is likely to be the overall compensation figure.
• Must justify and document proof
• Benefits are: cash flow, establish communication, address issues sooner, avoids surprises, minimizes the outstanding amount
31 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Steps to take to get cash
• Review insurance policy
• Maintain documents
– Claims are fact intensive
– Complete record is vital for claim
32 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Steps to take to get cash
• Don’t try to do everything in-house
33 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Steps to take to get cash
• Develop an insurance loss team comprised (as appropriate) of the following skills:
• Retain experts
• Presentation is everything
Engineers and AccountantsRisk ManagerInsurance Broker
34 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Steps to take to get cash
• Communicate with the adjuster
– Get buy in on major decisions to minimize “Monday-morning quarterbacking”
• Try to avoid surprises
• However, do what you need to keep your business operating
35 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Steps to take to get cash
• Communicate with appropriate internal management
– Explain the claim process and timing
– Manage claim settlement expectations
– Business interruption is not “black and white”
– Be cautious if booking receivables for business interruption
36 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Commercial Break
Questions?
38 Presentation Name ©2004 Deloitte & Touche LLP and affiliated entities.
Bankruptcy/Reorganization
RIMS Conference 2009
September 15, 2009
39 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
How not to declare Bankruptcy…
40 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Agenda – Bankruptcy/Reorganization
• State of the Economy – Auto, Real Estate, Retail
• Risks in a bankrupt company – still covered?
• Issues – BI Values
– Contingent BI – key customers/suppliers
41 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
State of the Economy
• September 18, 2008
• Falling interest rates
• Steep increase in filings
42 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Risks in a Bankrupt Company – still covered?
• Cancellation - Insurers cannot cancel a policy
• Most policies have change of control policies
• If Insurer goes bankrupt, then Insured must go elsewhere
• But could get bumped up with Clawback payments
• Claims – OSFI possibility but limited. Very few clear answers
43 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Issues – BI values
• Declared values may not be the same
• Contracts not the same
• May not be a true BI loss
• Contingent BI – no coverage for yourself if others have gone down. Best practice is good ERM & supply chain management
44 Presentation Name ©2004 Deloitte & Touche LLP and affiliated entities.
45 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Commercial Break
Questions
47 Presentation Name ©2004 Deloitte & Touche LLP and affiliated entities.
Fiduciary Claims:The Pension Crisis
RIMS Conference 2009
September 15, 2009
48 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Agenda – Fiduciary Claims
• Pensions at a glance
• Issues
• What this means to risk management
49 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Pensions at a glance…
• Pension funds consist of assets and liabilities
• Defined Benefit vs. Defined Contribution
• An underfunded plan is defined as a plan whose liabilities exceed the assets
– Only a defined benefit plan can have an unfunded liability
– Many assumptions are required to quantify the plan liabilities including: discount rate, actuarial assumptions, etc.
• In the US, the Employment Retirement Income and Security Act (“ERISA”) governs pensions nationally
• In Canada, each province has its own pension standards legislation
50 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Pensions at a glance….
• A plan can be underfunded temporarily, but must adopt a schedule to address the shortfall within a defined period (eg. ERISA defines a period of 7 years)
51 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Pensions at a glance: Timeline
1974 ERISA Enacted
1963 Studebanker Pension failure
Pension Chronology
1960's 1970's 1980's 1990's 2000's
2006 FAS 158 Accounting rules for Defined Benefit Pensions
2006 Pension Protectection Act,
2008/2009 Pension crisis – More to Come
52 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Pension Issues: Underfunded pension crisis
• Financial crisis is sapping the assets of defined benefit pension plans
53 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Pension Issue: Underfunded pension crisis
• According to the 2008 Milliman Pension Funding Study, the top 100 pension funds are 80% funded at the end of 2008, compared to 106% in the prior year
• Almost half of top unions have underfunded pension plans
54 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Pension Issue: Notable underfunded pensions
$1 Billion
$20 Billion
$20 Billion $3 Billion
55 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Pension issue – What happens in Bankruptcy?
56 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Pension Issues: Litigation
• Until recently, large fiduciary liability claims were rare
• Pension litigation is on the rise, and projected to be the most heavily litigated issue in the U.S.
– According to pensionlitigationdata.com, 100% of ERISA litigation in the U.S. involves fiduciary breach allegation
57 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
Pension Issues: Litigation
• Areas of dispute
– Fees litigation
– Stock drop cases
– Conversion claims
– Surplus entitlement
• Even Defined Contribution plans are not immune to lawsuits
– Claims related to the selection and monitoring of investment advisors
– Negligent or inappropriate investment decisions
58 Business Insurance Claims Consulting (“BICC”) © Deloitte & Touche LLP and affiliated entities.
What this means to risk management
• Fiduciaries may be held personally liable for breach of responsibilities in the handling of pension plans
• Some D&O policies exclude fiduciary liability exposure as well as those exposures pertaining to employee benefits
– In some cases, fiduciaries may need to purchase fiduciary liability insurance
Questions
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