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 “You only find out who is swimming naked when the tide goes out” – Warren Buffett

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 PartyRole Investment Manager Develops the investment strategy; responsible for hiring service providers Administrator To provide financial reporting; communication with shareholders/partners CustodianHold the assets AuditorVerify 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, 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 Does a severe downturn in the economy constitute an event of force majeure? –Can no longer get financing from banks –Trump is arguing this for the Trump Hotel in Chicago –Claim relating to “a once-in-a-century credit tsunami” –Requirements: –1) An event in the FM clause has occurred –2) FM event was beyond control and was unexpected –3) FM event prevented party from performing its contractual obligations –4) No reasonable steps to avoid or mitigate the event

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 Accountants Risk Manager Insurance 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 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 $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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