For Your Consideration

It is being reported that what is being billed as “Wall Street Reform” is likely to be passed in Senate and will be sent to the President’s desk for signature. Tucked in this 1600 page bill is Title V, relating to the federal regulation of insurance, constituting pages 384-421.

Today I share a review of Title V, Subtitle A, “Office of National Insurance” with very little in the way of personal commentary, except to say that I am ashamed of how little coverage of the substance of this law has received in the press/media, including no real critical analysis in the insurance and risk management journals. This review is not by any means comprehensive, but a general guide to the law’s provisions. If time permits, I will review the other subtitle/sections of Title V.

Initially, this law creates the “Office of National Insurance”, which, as part of the Department of Treasury, shall have the authority to “monitor all aspects of insurance… that could contribute to as systemic crisis in the insurance industry or the United States financial system”. This is essentially a “blank check”, as many aspects of the insurance industry could conceivably “contribute” to a systemic crises, as evidenced by what occurred at AIG.

The ONI will be tasked with coordinating “Federal efforts and develop Federal policy on…international insurance matters”, determining “whether State insurance measures are preempted by International Insurance Agreements”, and consulting “with the States… regarding insurance matters of national importance”.

ONI’s scope of authority extends “to all lines of insurance” except health and crop insurance and specifically authorizes reception and collection of “data and information on and from the insurance industry and insurers”, but does not specify what specific data shall be collected. For those interested in the notion of privacy, this is a huge unknown.

It grants the federal government the right to preempt state insurance measures if it determines (in its sole capacity) if the measure “results in less favorable treatment of a non-United States insurer domiciled in a foreign jurisdiction that is subject to an international insurance agreement… and… is inconsistent with an International Insurance Agreement on Prudential Measures”.

According to attorneys Francine L. Semaya and William K. Broudy from the law firm Nelson Levine de Luca & Horst, the main purpose of this provision is to “give the federal government, acting through agreements with other nations, the sole authority to regulate international insurance matters.”

But what is an “International Insurance Agreement on Prudential Measures” exactly? According to law’s text, this is “a written bilateral or multilateral agreement entered into between the United States and a foreign government, authority or regulatory entity regarding prudential measures applicable to the business of insurance or reinsurance”. This begs the question: what constitutes “prudential measures”? That is currently unknown and undefined. It further strictly forbids a state from enforcing “a State insurance measure to the extent that such measure has been preempted…”

But this is only the proverbial tip of the iceberg as the law specifically requires a study on “how to modernize and improve the system of insurance regulation” shall be submitted to Congress for review within 18 months of enactment. This report must specifically address “the degree of national uniformity of state insurance regulation”, the “regulation of insurance companies and affiliates on a consolidated basis”, the “international coordination of insurance regulation” and shall examine the feasibility of regulating “certain lines of insurance at the Federal level” and the “potential consequences of subjecting insurance companies to a Federal resolution authority”.

Despite apparent insurance industry approval, what should be abundantly clear is that the door to federal and international oversight of the domestic insurance industry has been opened. Insurers and state regulators should be so advised and not surprised when their autonomy is eventually usurped.

Some time back, I was hopeful  that we could see an inadvertent renaissance in self-employment, as firms were reluctant to bring on full-time employees in the the current business environment we now call the “new normal“. Well, as hopeful as that post was, it may not come to pass if certain members of Congress have their way.

In January, Financial Advisor Magazine warned that “Rep. Jim McDermott (D-Wash) introduced legislation that would eliminate Section 530 of the Revenue Act of 1978, the so-called safe harbor provision that lets employers classify workers as independent contractors rather than employees as long as they meet specific criteria” and that Sen. John Kerry (D-Mass) introduced his version that “aims to kill Section 530, or at least make it more difficult and costly for businesses to incorrectly classify employees as independent contractors.”

More recently, Daniel J. Aguilar of Morrison & Foerster commented that the President’s proposed 2011 fiscal year federal budget includes a $25 million “Misclassification Initiative” for the U.S. Department of Labor, intended to target employers who (intentionally or unintentionally) misclassify workers. To accomplish this, the DOL plans to hire more than 350 new employees, including 177 investigators and other enforcement staff.

Mr. Aguilar also advises that the IRS is launching its National Research Project (“NRP”), which requires the audit of approximately 6,000 employers over the next three years. It’s goal is to “examine and compile trending information” in five categories (worker classification, fringe benefits, payroll taxes, expense reimbursements, and other related payroll issues) and “will require comprehensive audits” in an effort to close an estimated $15 billion employment tax gap.

Folks, this issue is a prime example of where regulatory, employment and legal risks intersect and one that is of prime importance to small business.

Due to the uncertainty this new proposal (amongst many other new government proposals) adds to the equation, businesses will continue to “hunker down“, depressing employment and economic activity in the process, as they attempt to ride out the storm. And while there will always be pockets of the economy where the sky is clear, structural debt stresses in the U.S. and global economies not only remain, but intensify.

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In the end, however, I don’t think the heavy-handed approach will ultimately prevail, despite the best effort.

For every law that is created or “reform” enacted, there are hundreds of millions of people (some with very smart and talented attorneys) that will utilize their God-given talents to “game” the new system. And the more bone-headed and misguided the law, the more genius the response tends to be.

And it’s only a matter of time before we witness the miracle that is American ingenuity again.

While stock market participants are recovering from the bona fide temporary financial collapse yesterday, it is reasonable to turn our gaze to the unemployment rate figures released today. While increasing to 9.9% (due primarily to more people looking for jobs as their 99 week unemployment benefits run out), the press is reporting that employers added 290,000 new jobs.

Hmmm… What?

When these numbers are broken down, this narrative is subject to a certain refinement. For starters, 66,000 of the 290,000 are census workers- jobs that are not likely to last once census activities finish. Further, 188,000 were added solely by virtue of the “birth-death model”, a statistical model first utilized by the Bureau of Labor Statistics in June, 2003.

Accordingly, a case could be made that the economy really added 36,000 new non-farm jobs, not 290,000. And because we all know that statistical models cannot be manipulated, all is well. 

So today’s unemployment news, coupled with the market legerdemain yesterday naturally leads me to a cognitive dissonance- that “uncomfortable feeling caused by holding two contradictory ideas simultaneously”.

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Hat tip to Zerohedge, by far the best advanced financial site available to mere mortals.

 
For those that have been following the Rod Blagojevich trial (or not), U.S. District Judge James B. Zagel recently denied a defense request from Team Blago to order President Obama to give testimony in the case. Normally this is a good ruling for a sitting president, but Blago is, by all press accounts, a loose cannon and this decision will not likely be the last word on the matter.

Essentially, Team Blago argued that the President had direct conversations with Blago and that these conversations are directly relevant and pertinent to the Blago defense. The Court wasn’t buying it and ruled in favor of the government, which as these things go, is not inconsistent with past efforts to compel testimony of a sitting president.

But this leaves the President in a curious position. If only Blago testifies as to these alleged conversations, they go unchallenged into the record. And I’m not sure that that’s necessarily a “good thing” for either the President or for the concept of Justice.

So a chess piece is moved. While the Court’s most recent ruling that the President is not ordered to testify at this time (which is by all accounts a loss for Team Blago), there may come a time when it becomes virtually necessary to do so, so that Blago’s version of events may be refuted. Hence, in the end a seemingly Big Win for Team Blago, as the President gets to be examined under oath. But I would maintain that getting the President to testify is not likely to be Team Blago’s ultimate aim, it is merely a means to an end. Team Blago is likely betting that the President might prefer that the Justice Department drop the case rather than to subject himself to what would very likely be a grueling deposition.

This is all part of the normal course of high-stakes litigation, folks, whether the warring parties are corporate or government. Litigation is a thinking-man’s game. Chess pieces are placed on the board, moved as needed and sacrificed at the appropriate time. But there are many ways to get to the “desired result” in litigation and the best strategists see the game on multiple levels, plan for almost every contingency, and have a process to move forward despite any preliminary legal ruling.

So, with that said, don’t be surprised to hear that the President has agreed to testify via video deposition to refute Blago’s one-sided (and potentially damaging to the President) version of events. Of course, the President’s answers cannot be perceived as evasive or unsubstantial, otherwise Team Blago will press any weakness in the President’s recollection and Blago’s “very clear” recollection of events will still prevail, potentially damaging the prosecution’s case.

I cannot conceive any other outcome, unless of course the matter is dropped by the government prior to this eventuality, which is of course, Team Blago’s ultimate aim and would provide the Biggest Win Possible for Blago.

…to the show that never ends. As many of you have noted, I took a serious hiatus from posting. During my time away, I did a lot of writing, but was thoroughly unhappy with the results.  I’ve missed you, though and so, I am compelled to return to share a few more nuggets of joy while I still can.

Instead of taking this opportunity to discuss the ever-apparent “employer’s revolt” where “less bad” is not better or that cheap money is sowing the seeds of the next economic crisis or discussing the increasing (yes, increasing) global meltdown risk (irrespective of the results of the upcoming so-called “Wall Street reform” vote),

or even the new health care responsibilities “entrusted” to the I.R.S.,I really just wanted to share with you a quote from Abraham Lincoln from his address at Sanitary Fair, Baltimore, Maryland on April 18, 1864:

“We can not fail to note that the world moves… We all declare for liberty; but in using the same word we do not all mean the same thing. With some the word liberty may mean for each man to do as he pleases with himself, and the product of his labor; while with others, the same word may mean for some men to do as they please with other men, and the product of other men’s labor. Here are two, not only different, but incompatible things, called by the same name - liberty. And it follows that each of the things is, by the respective parties, called by two different and incompatible names - liberty and tyranny.”

It is sad state of affairs that many feel the only winning move is not to play and that “going Galt” (where one refuses to lend one’s genius to the world) is logically perceived as the most rational course of action. And while Publilius Syrus’ (a first century B.C. Syrian slave) maxim “Bonis nocet quisquis malis pepercit- Whoever spares the bad, injures the good” is currently out of vogue, its return will very likely be at once stunning, vicious and unexpected.

We can only be kept in cages we cannot see.

Once the bad are no longer spared, and a rational risk/reward equilibrium restored, Publilius Syrus will smile and we will all come to know (or remember) who John Galt really is.

Folks, get ready to hear more about the McCarran-Ferguson Act in the coming days and weeks as it is now in the crosshairs of our elected representatives in Congress and may quite simply become a casualty of the health care “reform” push. I’m going to try to briefly separate fact from fiction and address some of the “spin” I’m reading in the current misguided push to repeal this federal law.

What you absolutely need to know about McCarran-Ferguson is that it allows each of the states to regulate the insurers that write business within their state. So, instead of one regulator in Washington looking at the industry, there are 50 regulators! McCarran-Ferguson also grants insurers a VERY LIMITED exemption to federal anti-trust laws. The law’s Wikipedia entry is here and if you’re particularly adventurous, here is the text of the law itself.

Now, the general effect of McCarran-Ferguson on insurers is that it allows the sharing of statistical loss data and loss experience (usually called “prospective loss costs”) over the entirety of the industries they serve. So, for example, a health insurer writing business in Washington, DC can review an amalgam of all losses of all health insurers within that jurisdiction.

McCarran-Ferguson does not allow insurers to get together in smoke-filled star chambers and price-fix the cost of coverage for the ultimate consumer. That, friends, is completely untrue, utter nonsense and political spin. Federal laws such as the Sherman Act (and other such anti-trust laws) were enacted to prevent this type of illegal activity and McCarran-Ferguson does not supercede these laws. So, to reiterate, collusion to fix prices and so called “tying” arrangements are illegal and McCarran-Ferguson does not allow them to occur, no matter what you read on the internet.

It does allow (in concert with certain legal decisions in the 1980s) insurers to share actual loss data in the aggregate.

Why this is important is because the accuracy of an insurer’s prediction of losses increases as the size of the data sample increases. In essence, the sharing of loss data increases “credibility” (both statistically-speaking and in the real world). In fact, it’s this mathematical concept, commonly referred to as the “Law of Large Numbers“, that allows insurance to be viable.

So, to the extent that losses are forecast more accurately, the premiums charged better reflect the actual exposure to loss. In plain language, fairer and more accurate pricing of coverage is possible because the insurer has a larger, more credible sample of loss data to draw upon, rather than trying to price coverage based upon its own (very limited) loss data/experience.

Further, in political parlance, one can see how McCarran Ferguson actually promotes “choice and competition” as it allows insurers which do not have experience in certain lines of coverage to offer products with more relative certainty of the losses they are likely to see. Without the relative certainty large loss data samples afford an insurer, it may simply decide not to enter new markets, thus depriving consumers of a potentially competitive choice.

Also, the sharing of loss data promotes stability of insurers, reinsurers and society as a whole as it offers greater relative certainty that pricing is adequate for the exposures to loss assumed. The singular benefit to the consumer and society is that these stakeholders can be reasonably assured that the insurer will be “there” when losses occur and are required to be paid.

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Repeal of McCarran-Ferguson will undoubtedly have many unintended negative consequences. It is not difficult to envision that restricting an insurer to its own loss data will likely cause a contraction in not only the availability but also the scope of coverage provided by insurers. Many carriers may simply cease offering certain types of insurance or cease offering insurance to certain classes of business as they cannot assess their risk adequately.

If the above occurs, it will likely increase the cost of insurance, not only becase insurers will less credible loss data to base their pricing decisions upon (and have a greater cost of uncertainty) but also because there will be aggregate less competition amongst insurers, both of which ultimately results in fewer choices for consumers.

It is said that truth is the first casualty in war. In this war of words, at least understand what the truth is.

Late September UPDATE: Apparently quite a few Americans believe as I do. According to a recent Rasmussen poll, 78% support the idea of allowing all Americans the option of purchasing the same health plan that Congress enjoys. So with support for the current incarnation of the health care “reform” at 41% approval, the question you must ask yourself is why Congress keeps pushing a plan on a populace that clearly doesn’t support the effort. I maintain that the answer lies in the concept of a “scheme of control” and fundamental loss of individual liberty. 

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Few days go by that I’m not drawn into a conversation relating to the health care debate. And today, I got an email from a friend and attorney asking my thoughts on the subject. Politically, he and I are generally diametrically opposed, but he is a great guy with a sharp and inquisitive mind. We laugh a lot when we’re together. I consider it my honor to spar with him.

His position: [It] “seems to me the big issue that has been alluded to but not really spoken expressly is shifting the health economy from a finance and profit based model to a care based model.  The reliance on insurance companies and their place in the financial sector is what has to be addressed, as well as the fact that the consumer is not choosing the provider.”

I share with you now, my complete response:

For the sake of brevity, I think the President could go a long way to “ensure choice and competition”, by the adoption of a one-page bill: one that would give the general public access to the 300 or so insurance options that the federal government employees currently enjoy. The positives should be immediately recognizable: complete portability, affordability, lack of a employer-mandated solution, no waiting period for pre-existing conditions, etc. Some great progressive ends, wouldn’t you agree?

If paying for the insurance is still an issue for some, a solution like the Earned Income Tax Credit might be appropriate- in which the federal government, either by direct payment to the provider or via the 1040 form, can help subsidize the expense. Don’t misunderstand me, I am concerned about the constitutionality of these programs, but I’m also a realist.

I am also aware of the “creeping incrementalism” social programs generally exhibit, and think there are reasonable concerns over the increasing cost of the social compact of 3 generations ago, one which has not kept up with medical advancements. In short, my opinion rests on the following posit: there can be no social programs if we’re bankrupt.

Further, I have grave issues with what amounts to “generational theft”, as I see it as immoral and unethical. It does not matter how much our government requires, it is never enough. I agree with the progressives in one specific way: a revolution is occurring and cultural battle-lines drawn. I’m not suggesting that the revolution will be one of violence, but it certainly is being televised!

Hope I haven’t offended, I’m merely relaying the truth as I see it. You deserve nothing less. I would appreciate your candid thoughts. It’s only through rigorous examination of our positions can we be certain of their value.

Should national health care be a reality soon, we will see the most important (R)evolution in a generation rapidly unfold before our very eyes: the EXTINCTION of the corporate employee and the EMERGENCE of the independent contractor. I’m sure this is not what the President and Congress have in mind of course, but while a free-market exists for human capital, it is this end that strikes me as most plausible.

Which ever version of health care scenarios wins out in the end is not at all relevant. In the end, they all rely upon workers to be classified as “employees” in order for this thing to “work”. Whether the new national health care “premium” comes in the form of new taxes, surcharges, fees or penalties, no business will stand blithely by and be gutted by legislation. Accordingly, an interesting question comes to light: what happens when the business employs a relatively few number of “employees” and contracts their work out to independent contractors?

Everyone (including the IRS) has a slightly different definition of what makes a person an independent contractor versus an employee. They all converge around the same issue, that one being the issue of control. Who controls the work product? Who controls where the work will be performed? Who control when the work will be performed? Who provides the tools in order to process the work?  Does the “independent contractor” have their own telephone number? Their own insurance? Do they invoice regularly or are they paid weekly? Is there an “arms-length” business transaction between the parties?

I think you get the point.

Ultimately, if the business assumes too much control over the worker, the worker shall be determined to be an employee…. Which is exactly why those companies that can structure their business processes to take advantage of true independent contractors in many aspects of their operation shall have a competitive advantage in the coming years. Now this may sound all horrible for the prior “employee”, now newly-minted “independent contractor” but it really isn’t: not when you stop and consider that EVERY business is in essence an independent contractor to its own customers. And surprisingly but naturally, it is this “Employee Extinction (R)evolution” © which may save our economy in the coming years, as people become their own “brands” and compete against each other in the economy for work.

Think of what this kind of (R)evolution could do to all levels of local, state and federal government! And what it could quite easily do to unions…

The progressive fascination with tinkering with 17% of our national economy will have its consequences. Some can be foreseen and some cannot. Here’s one possible consequence which future generations may hail as our President’s greatest unintended accomplishment.

There are mornings I wake in a “Groundhog Day” grip. The clock blithely reads 4:45am, the parking lot spot: 2278; familiar faces greet me as I pass them on the side streets of the city. I count how many times I’ve seen each and marvel as the numbers reach 5, 10… 15.

I wonder if they find my regular presence in their world at all unusual. In a place of over 8 million souls, it’s remarkable to view the same ones so consistently. It draws me to a question: are these moments a lucid dream of my sole creation or do I reprise a recurring role in theirs? Is the notion of free choice a sadistic joke or something real? With each morning eerily similar to its predecessor, I do not pose these questions lightly. I fear the answer.

As acts of defiance, I walk different paths to change the view. I steal moments to read new periodicals, smell new smells: Halal mixed with urine and steamed subway ventings. To break monotony’s hold, I change travel timings: an earlier train in and a later train out. I am iced coolly and a kid for today.

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We choose the cage of our own desires and perhaps I am opening my eyes. Perhaps others are doing this in their own way as well. Perhaps I stand changed. Perhaps an end is in sight and the latest challenge will present. Perhaps everything will work out in the richness of time. And perhaps, just perhaps, as I breathe deep, slow my pulse to mentally mark the moment, this late evening in the city is warm and calm just for me.

Since “in the long run we’re all dead”, I’ve been wondering lately if I’ve been letting my “bad-attitude” get the best of me. You see, it’s getting increasingly difficult to see the proverbial light at the end of the tunnel. Forget the economic stats, there is a sense of unease and general “un-wellness” in people that’s positively unsettling.

My work has had me in Manhattan daily for months and the arduous commute is a ritual that almost must be shared to be endured. To that end, I’ve made some “single-serving” friends, nice people that I talk to regularly during the commute to help pass the time, but whose relationships are limited in time and space. A woman I’ll call “Aural” is worried about President Obama’s seeming naivety and the possibility of what she calls, “another 9/11″. We swap stories on where we were and how we felt on that fateful day. It’s hard to tell her not to worry.

“Mike” sees the twisted humor of it all but worries about what kind of future awaits his kids. I can relate. It is hard to have confidence in our leaders when the person third in line to the presidency alleges that the CIA (and impugns the entire intelligence community in the process) has misled her and Congress about “enhanced interrogation techniques”.

and

I see this as a binary expression: either the Speaker has made a false accusation and should be removed from office or it’s the truth and we should bring those responsible to justice. I can’t get anyone to take odds on either one happening. As of yesterday, Madam Speaker stands by her accusation.

“Earl the Hip” is trying to make it to the end of his middle management career working for a large quasi-public entity. His tired and vacuous eyes are periodically punctuated by staccato rumblings about ineptitude people at work and the relentless uselessness of time spent there. He figures if he can eak out a few more years without getting “right-sized”, he’ll bail with his pension. I see in him the present and future of many. He counsels me on “being in cash” but I counter that I’ll “see his cash and raise him” via inflation. I explain that he may feel safe being in cash, but he’s likely to lose on a real, (post-inflation) basis.

I find it palpably ironic that the person to whom the “long-run” quote is attributed, British economist John Maynard Keynes, is most well-known for his work on the theories of interventionist government policies. The central theme of his work is that “modern capitalist economy does not automatically work at top efficiency, but can be raised to that level by the intervention and influence of the government.” (From Wikipedia). So essentially, anything a free-market economy can do can be outdone by government. Certainly from a spending point of view that is true.

I find it both humorous and sad that it’s the foreign press that’s beginning to see through the “news-speak” passed as journalism which we are spoon-fed from an adoring media. The main idea in this article from the U.K.’s Guardian, is that political risks usually relegated to third-world countries, are now present in the United States. This was once unthinkable as the most stable nation of laws, but the capricious and arbitrary nature of the intervention of the federal government in private enterprise cannot help but be a chilling pall over the stimulation of investment in America. Who wants to play a game when the rules not only can, but are now expected to, change as the political winds blow?

There will come a day when the interventionist party will be over, the guests will be left to recover from the proceedings and the property owners will be left to salvage what remains. The landscape will have been irreparably changed.

For many years, I have wrestled with the idea of working for a Masters degree. Many things kept me from this pursuit: work needs, lack of time, family needs, you name it. There also was that nagging “value-proposition” problem…. I couldn’t find a Master’s program that qualified me for more than a $75,000/year middle management position. As an owner of my own business, the idea of spending the time, energy and money to obtain a Masters for a position I was over-qualified for seemed rather silly. 

Fast forward a quarter of a century….

In my risk management studies, I met an individual (hat-tip to George) who turned me on to the possibility of using the graduate credits earned from my ARM and ARM-P coursework towards a Masters degree. I began investigating this possibility and found the Salve Regina University willing to accept at least 12 graduate credits towards the 36 needed for the conferment of a Master of Science in Management with a Risk Management concentration. I will be petitioning the Dean of Graduate Studies to accept 6 additional graduate credits once I complete my Associate in Commercial Underwriting (”AU”) designation, scheduled (if all goes well) for June 1.

Almost all of the work is online and much of it self-study: right up my alley! To that end, I decided to apply. My first assignment: “Provide a detailed statement which describes academic and professional experiences which will make a contribution to your pursuit of a graduate education at Salve Regina University. Include in this statement any unique aspects of your experience relevant to your intended course of study.”

My graduate admissions statement follows:

I find it humorous that as I sit here wrestling with an appropriate application statement, I am transported back 25 years or so wrestling with my USC and NYU application statements as if it were yesterday. In that sense, my experience is circular, with everything old being new again! I am smiling because it’s “interesting” to try to sift through a quarter century of life trying to figure out what experience should be highlighted in such a statement. And by “interesting”, I mean “pointless”!

Every thing I’ve done and every person I’ve met and every experience experienced has led me to this point in time, the “here and now”. Every person helped, every person counseled, every life touched is a part of what constitutes me as me. For me to attempt to judge which experience was more important than another strikes me as folly. So let’s recap…!

NYU days were hectic. I worked full time in the family’s trucking business my junior and senior years and took night courses and summer sessions to keep up. I did not do this by choice but the family business was struggling and I needed to pull my weight. I paid for my own education and therefore understand its value. Soon after my Bachelor’s conferment, the family business failed. Shortly after that, I was married to my bride, moved and started a new job all in the span of 30 days. It was during this time that I consciously learned and accepted that the only constant in this world is change.

And many things did indeed change: I “fell into” the insurance sales business by accident and with my first home and daughter on the way, I had to figure things out very quickly. One thing I figured out quickly is that insurance sales producers could be broken down into two groups, one being so-called “social” producers, relying upon who they knew and not what they knew to make a living, or “technical” producers, those relying upon what they knew rather than who they knew. Since I didn’t have an effete, “social” background, you can pretty much guess which group I was relegated to!

I have yet to meet the person that grew up wanting to be in the insurance industry. A policeman, a fireman, an astronaut, yes, but not one insurance actuary, underwriter or risk manager. I think that this is the reason why there is such a lack of empathy, compassion and passion associated with the insurance industry. Its members think in terms of insurable risk,insurance contracts and how much the commission is going to be on the policy they just sold. After 20 years of practicing, I can tell you that the best insurance practitioners listen to people and find creative solutions to the problems faced.

At his trial for heresy, Socrates is acknowledged to have spoken “The unexamined life is not worth living”. In times of quiet, I close my eyes and allow myself to relax. In these moments of introspection, I listen and allow myself to hear what my heart is telling me. And what I’ve heard are the most important things, things that have shaped the tapestry of my life.  Among these “important things” is that I need to be a life-long learner not just to expand knowledge for its own sake or for personal hubris, but to deploy this knowledge to better the lives of others. Willingness to assist others is not enough, as it must be matched with commensurate ability.

Which is why, after 17 years from the conferment of my first professional insurance designation, I decided to listen to what
my heart was telling me and have dedicated two or so years to a remake, a refresh, a re-do. I chose the study of risk management in all its forms because it was the most natural progression from insurance. With it, I took my first steps into a much larger world. What I soon learned is that for all these years I had been applying risk management techniques and risk control mitigation in solving problems, I just never knew the language and could not articulate the ideas and solutions as well as I can now. I became aware, that despite its vast nature, just how small the world of insurance was.

Since January 2008, I have formally studied risk management at the AICPCU/IIA and National Alliance for Insurance Education and Research and have attained many acknowledged advanced technical designations. Conferment of a Masters degree in Risk Management will break down many walls to understanding, and give those whom I meet and help added comfort in my ability to adequately address the pressing problems they face.

I do not know what the future holds, but when the time comes to stand before my Maker, I do not want Him to think I’ve wasted my life, after all He’s given me.

The current credit crisis, how it affects the global marketplace and why it’s important to our entire economic system. Made so simple that a fourth grader can understand it.

This is a massive post for which I apologize in advance. Hope you have some time.

To my eyes it seems that society’s perception of risk is getting closer and closer to the actual risks we face. I have been a staunch proponent of markets ’self-correcting” and I have not minimized or sugar-coated the “pain” likely to be felt during this process. But my cautious optimism has in large part been based upon the political and regulatory processes of our country not radically changing.

But it’s right that we should expect change. The political wonks will tell you that it’s what the majority of voters “voted for” in November. While many can lament that more people didn’t ask for details of the proposed change, the reality of the situation is palpable.

Today, U.S. citizenry is faced with a dizzying array of emerging, high severity risks:

•     Surveillance Risks
•     Access to Information
•     Taxation Risks
•     Inflation Risks
•     Social Engineering Risks
•     Financial Risks
•     Regulatory/Political Risks
•     Class-Warfare Risks
•     Job and Home-Loss Risks
•     Loss of Liberty Risks

Probably not since our country’s founding have such a confluence of ideas and issues been thrust to the forefront for society to work out. Some thoughts on each risk follows:

• Privacy and Surveillance: Advances in technology has made it possible for government to surveil hundreds of thousands, even millions of people at relatively low cost. Whether the surveillance takes the form of monitoring computer searches or through security cameras the result is the same. I am appalled by the disingenuous nature of “marketing” these programs, using the guise of “protecting the public” by “helping fight crime” or “making the streets safer”. Privacy is a linchpin of liberty and the more we relent to intrusive surveillance, the more liberty is lost.

• Access to Information: In 1989, the modern internet was born when “Tim Berners-Lee invented a network-based implementation of the hypertext concept” (which we now call the world wide web). It is hard to imagine modern life without the internet. But our growing dependence upon “easy” access to information is a risk in and of itself as information may be withheld or corrupted to serve the needs of those who control not only the information itself but its flow and availability. The growing rate of loss of print media is also an alarming trend as we can envision a time when information is only disseminated through the internet.

• Taxation: The recently passed “Stimulus Package” at its heart is morally corrupt, as it makes future generations financially responsible for our folly today. Higher rates of taxation and new taxes not yet devised are a virtual certainty. Monies surrendered to a government means that it cannot spent in the “regular” economy. Taxation however, has a potentially dark underbelly as well. It can be used as a tool in social engineering, where taxed activities can be monitored. A recent idea of taxing people on the basis of the number of miles they drive rather than on how much gasoline they burn is only one step away from monitoring the who, what, where and when of such usage. See Privacy Risks.

• Inflation: A cousin to Taxation Risks. A natural consequence of “inflating” money supply in an economy is inflation, which is the loss of purchasing power over time. We intuitively understand this concept as the cost of goods and services tend to increase over time. However. as a result of current monetary policies, we can expect much higher rates of inflation in the near term future. The good news is that a little inflation is better than deflation, which is commonly defined as a “persistent” decline in the costs of goods and services.

• Social Engineering: For those unfamiliar with the term, social engineering can be thought of as those “efforts to influence popular attitudes and social behavior on a large scale”. Social Engineering is glaringly apparent in a bill currently circulating in the Illinois General Assembly, (HB0687). The bill, if passed, would amend the current Illinois Firearm Owners Identification Card Act to require firearm owners to provide proof of liability insurance in the amount of at least $1,000,000 specifically covering any damages resulting from negligent or willful acts involving the use of such firearm while it is owned by such person. As of today, lawmakers sense that they will not be able to suspend the Second Amendment to our Bill of Rights, so we can look at this proposed litigation as an attempt to circumvent it. Issue #1: the proposed law will require an insurance policy that covers “negligent and willful acts” of firearm usage. Good luck finding that today. Issue #2: if such a policy is not obtained, the owner’s firearms are subject to seizure. If something cannot be banned, there are those that seek to control it.

• Financial: A picture is worth a thousand words. As of this writing, the Dow Jones Industrial Average is shown directly above, which as of this writing is down more than 16% YTD. The basic problems? Lack of trust, lack of transparency, and lack of ethics. Increasingly, we do not trust our elected officials to get it right. Changing rules of the game “while the ball is in play” is particularly troublesome and does not assuage the people that make up the markets.  The Fed’s refusal to disclose the recipients of over $2 TRILLION dollars that not one American citizen or his designated representative voted on is completely unacceptable. In an information vacuum, trust suffers. In the “lack of ethics” department, think Madoff, Tom Daschle, Tim Geithner or Rod Blagojevic, all involved in some violation of trust. Simply speaking, without trust (which flows naturally from open and ethical frameworks), financial markets will continue to exhibit weakness and society will bear the brunt of its full force.

• Regulatory/Political: More and more, this is aligned to Financial Risks as New York and London cede financial power to Washington DC. So long as we delude ourselves into thinking that Washington has the answers to all our problems, the higher the frequency and severity of risks CAUSED by the political process. I promised a friend I would not mention that the “cult of personality” of some of our leaders today poses its own set of risks.

• Class-Warfare: a cousin to Taxation risks and an increasingly closer cousin to Political Risks. Societal unrest is an increasing possibility as battle lines of class-warfare are being drawn. There does seem to a bubbling sense of unease between recipients of governmental programs and those tasked with “paying the freight”. I sincerely hope this doesn’t rip us apart.

• Job and Home Loss: Simply speaking, the rock upon which our modern society stands (or falls). Job losses can cause an “infinite vicious regress” of home losses, which results in tax-base erosion, which results in lower tax amounts to government, which further strains government resources, which has to increase tax rates, which may result in further home losses and so on. (I’ve always wanted to use the term “infinite vicious regress” and now I have!)

• Loss of Liberty: By far, the risk that concerns me the most. Without blatant political commentary, I ask that you remember and consider this one risk as time goes by and events unfold. It is likely that this will take the continued form of “incrementalism“, where small liberties are asked (or demanded) as a “reasonable” trade-off for perceived safety. This is a close cousin to Privacy/Surveillance Risks, but be aware that the more power we relinquish to our government, a commensurate loss of liberty results.

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While our future is uncertain, being aware and thinking carefully of the emerging risks we face will put you ahead of the curve. As always, I look forward to your comments!

Given our recent proclivity to nationalize financial “pain”, it seems that it’s only a matter of time before those very well-heeled hedge funds (and their very well-heeled investors) taken in the $50B Bernard Madoff ponzi scheme will formally request a bailout of their own. I suspect it will happen very shortly after January 20, 2009 and just might be one of the first national policy “tests” of our new President, Treasury Secretary and SEC Chairperson.

From this recent Newsday article, “There’s no doubt that hearings will be held on this, and some government aid is a very logical request,” said Robert Schachter, an attorney with New York-based Zwerling, Schachter & Zwerling, which is representing several Madoff victims. “If we’re bailing out Wall Street and the auto industry, maybe these individuals should be bailed out too.”

When the time comes, will you blame them for making this, using Mr. Schacter’s own words, “very logical request”? Especially in light of the SEC’s own press release on the issue which reads in part…

“The Commission has learned that credible and specific allegations regarding Mr. Madoff’s financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action. I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them.”

Well if that isn’t a prima facie admission of negligence, I don’t know what would qualify….

In fact, read for yourself the SEC “Case Closing Recommendation” which plainly states that the SEC staff “found no evidence of fraud” as of November 21, 2007.

….This has not gone unnoticed by the legal community as Phyllis Molchatsky has filed an “administrative claim” against the SEC for damages due to its alleged failure to protect investors.

Luckily for the SEC, like most government agencies, it operates under the doctrine of sovereign immunity, which means that for all intents and purposes, “the king and queen can do no wrong” and cannot be sued under most circumstances.

But such claims against the SEC will provide “cover” for the politicos who’ll support the notion of a Madoff claimant bailout. And thankfully for them, they don’t have to look very far for the potential sponsor of such a bill: Senator Frank Lautenberg of New Jersey, who entrusted his family’s charitable foundation to Madoff. According to the Senator’s attorney, Michael Griffinger, the extent of the foundation’s losses is not known as yet, but “that the bulk of its investments had been handled by Madoff.”

………

Still, I am struck by some of the most basic and glaring risk management deficiencies as the facts of this matter emerge…

In the risk analysis phase of the risk management process (once risks have been identified), assessments of potential impact on the firm are reviewed. If done comprehensively, both quantitative AND qualitative analyses are performed. Quantitative analysis deals with so-called “hard numbers” and includes a review of things like projections of loss, cost/benefit analyses and net present value calculations.

Well-trained financial “quants” on Wall Street get paid “the big bucks” to do these type of analyses, and their reports are usually quite impressive on paper.  The problem is that too many financial and business decisions are made on the basis of these “impressive” reports/projections alone.

Without a concurrent review of the qualitative risks undertaken, the risk analysis is INCOMPLETE and can lead to unforeseen and financially disastrous results as evidenced by the recent collapse of so many financial services firms.

Qualitative risks are by definition, difficult to define as they are not “hard number-oriented” and rely to a great extent on the experience, judgment and intuition of the members of the risk management team.

I think the primary reason I see almost no discussion of qualitative risk analysis undertaken is because IT IS HARD TO DO. It is also time-consuming. It requires a thorough understanding of the business, its processes, and its place in the physical, organizational and socioeconomic environments the business operates in. It requires people who are TRAINED IN RISK MANAGEMENT TECHNIQUES, not just financial wizards who can make a report read however management wants it to read. Finally, it requires corporate management support, which is notoriously difficult to get (and keep).

………

Despite the political grandstanding that is likely to happen when this matter is undertaken by Congress, we cannot legislate greed out of existence and scams like this will come to light in the future.

In Errol F. Moody Jr.’s discussion of “Investment Malfeasance and Breach of Fiduciary Duty” (which is an excellent read and is VERY highly recommended reading), he makes the case that for all intents and purposes, matters such as Madoff all come down to the same issue: “a failure to gauge risk”.

Clearly, the risks posed by Madoff were either not identified or analyzed properly by investors and a price for failing to properly manage risk shall be exacted.

It’s 2013. Governments around the world continue to struggle to keep social and financial order, but with clever and well-intentioned legislation, things are getting better all the time.

The nationalization of certain companies at one time had their non-nationalized competitors at a distinct disadvantage.  Because these nationalized organizations (the “NO’s”) had an unlimited source of funds at their disposal, they didn’t have to worry about the pesky problems of raising capital much less the “cost of capital”, like their non-nationalized competitors had to.

So long as the NO’s continued to do what Congress mandated them to do, things were good for the NO’s. Social and financial engineering through a myriad of regulations has continued unabated.

The credit markets never recovered and disappeared entirely. No bank was willing to lend their capital to a non-nationalized company and the NO’s didn’t need them. When reviewing business plans, it asked a fundamental question: How can this entity compete against an unlimited-funded NO?

The previous “lender of last resort”, the Federal Reserve, is now the *only* authorized and needed lender. This really doesn’t have an impact since private ownership of business was outlawed in one of the better provisions of the Business Users Satisfaction Tax of 2010 (affectionately known in the beltway as the “BUST”).

Other provisions of the BUST forbade future home foreclosures (allowing people to stay in “their” homes even though they didn’t pay for them) and granted ownership of all currently-encumbered homes to the Fed. The BUST also eliminated the word “bailout” from our language and substituted it with “loan”. The penalties for using the “B-word” in print or verbally are severe.

To take advantage of Congress’ vast business experience, the President created a cabinet-level position “Office of the People’s Business” to ensure the NO’s compliance with Congressional mandates. Funding for this new office was easily obtained from the former Small Business Administration, which was disbanded due to lack of interest. Unions have also been legislated out of existence with the recognition that we all work for the Homeland now.

So much so that the budget for “Department of Homeland Entitlements” now eclipses that of the Department of Defense, as created by the “Fairness Tax of 2011″. The good news is that we all now have access to “affordable healthcare”, due to the nationalization of all health care providers. This was absolutely brilliant, as it completely bypassed the need for nationalizing the health insurance industry altogether.

The good news does not stop there, though! The Medicare, Medicaid and Social Security programs (which now take full effect at age 61!) are now well-funded due to the mandatory “age 60″ individual liquidation provisions.

The ownership stake of AIG taken in 2008 was fortuitous as it now “insures” all General United States Auto Worker Motors Company’s automotive products, which we are now mandated to buy. However, it appears its time as an insurer is limited. Legislation recently passed will amend tort laws in 2014 so that private collection of civil losses will be eliminated. All monies will now be automatically transferred to Department of Homeland Entitlements for compassionate redistribution.

The trial lawyers fought a good fight, but the fix was in. They now turn their attention to “The Happiness Act“, a really swell piece of legislation making its way through Congress which would eliminate five of the “least used” rights contained in the Bill of Rights, which is by any measure now “just a piece of paper”, a complete anachronism in our modern times.

But the Happiness Acts’ goodness doesn’t stop there. This bi-partisan proposal would also “update” the Constitution to mandate economic equality and correct the unalienable rights of “Life, liberty and the pursuit of happiness” enumerated in the Declaration of Independence to the much more compassionate “Loving government, wonderful life and guarantee of happiness”.

I mean really… How can anyone be against happiness?

Oh, and if you don’t know the meaning of the word “irony”, go look it up (and have a nice day)!