this hour has 22 minutes conference presents. this hour has 22 minutes 1- madoff fraud 2- payments...

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

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News Anchors

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Madoff Fraud

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Madoff trial

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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?

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Simplified explanation of the Madoff Scandal

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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

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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

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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

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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

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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

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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

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How Could it happen? Who can I blame?

• Where was the failure?

• Were there abundant warning signs?

• Process of due diligence

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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)

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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.

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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.

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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

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Top 10 Messages left on Bernie Madoff’s vmail

Questions

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Expectations on Payments in Recessionary Times

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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

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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.

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Trump Question

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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.

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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

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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.

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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

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Steps to take to get cash

• Review insurance policy

• Maintain documents

– Claims are fact intensive

– Complete record is vital for claim

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Steps to take to get cash

• Don’t try to do everything in-house

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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

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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

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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

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Commercial Break

Questions?

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Bankruptcy/Reorganization

RIMS Conference 2009

September 15, 2009

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How not to declare Bankruptcy…

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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

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State of the Economy

• September 18, 2008

• Falling interest rates

• Steep increase in filings

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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

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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

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Commercial Break

Questions

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Fiduciary Claims:The Pension Crisis

RIMS Conference 2009

September 15, 2009

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Agenda – Fiduciary Claims

• Pensions at a glance

• Issues

• What this means to risk management

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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

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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)

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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

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Pension Issues: Underfunded pension crisis

• Financial crisis is sapping the assets of defined benefit pension plans

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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

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Pension Issue: Notable underfunded pensions

$1 Billion

$20 Billion

$20 Billion $3 Billion

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Pension issue – What happens in Bankruptcy?

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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

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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

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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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