Drake Risk & Opportunity Forum Connects Professionals

By Kevin Croft

Expanding Horizons, April 2023

October 21, 2022, was a beautiful fall day full of sunshine that brought more than 200 risk practitioners to the Cowles Library Reading Room on the campus of Drake University in Des Moines, Iowa. The day was filled with lively conversations, networking and discovery.

The idea of hosting a conference centered on risk practitioners blossomed during a conversation with Brent Mardis, who was then the chief risk officer at Sammons Financial. Brent remarked that there was no place for insurance chief risk officers (CROs), regardless of company size or line of business, to gather, share experiences and learn best practices. A short time later, I joined the faculty at Drake University and was appointed director of the Kelley Center for Insurance Innovation. Drake’s Zimpleman College of Business houses a Center of Actuarial Excellence and fully supported creating such an event.

The Drake Risk & Opportunity Forum was created to:

• Provide a space for chief risk officers, chief investment officers (CIOs), chief financial officers (CFOs), regulators, rating agencies, service providers and other stakeholders to discuss current and emerging issues, challenges/opportunities, best practices, regulation trends and employee development needs
• Provide an opportunity for students to engage with risk management professionals to both network and consider career options
• Provide service to industries that measure, evaluate and manage risk
• Promote the exchange of thought leadership emanating from the forum’s discussions
• Establish Drake University as a hub for risk management innovations by bringing together industry professionals from all over the world
• Generate classroom teaching examples that are top of mind for risk management practitioners

The 2022 Drake Risk & Opportunity Forum was a hybrid conference with both in-person and remote attendees. Overall, the forum attracted more than 200 attendees from 17 states, two countries, 48 employers and five universities. Executive leaders—including CFOs, CIOs, CROs, deputy general counsel, controllers and many levels of actuaries—attended. In-person attendance included 50 professionals from six states and 29 unique employers and 34 Drake students. Remote attendance included 118 professionals from 14 states, Canada, 30 unique employers and four universities.

Hosted by the Kelley Center for Insurance Innovation in the Zimpleman College of Business at Drake University, the forum consisted of an introductory welcome by Dean Alejandro Hernandez, six sessions, and a networking lunch. During his opening comments, Dean Hernandez noted the importance of risk management by observing, “It's clear that the risk landscape is changing fast. I mean, all you have to do is look at your newsfeed: geopolitical instability, the war in Europe and volatile markets. To me, it seems as if risks are emerging more quickly.” He then encouraged attendees “to revel in the possible. I think it's a luxury because often we don't as we tackle day-to-day challenges and don't really have the chance to reflect on the potential that we have in the many roles we play.”

The first session was an insurance company CRO roundtable moderated by Alessa Quane, chief insurance officer at Oscar Health. Alessa was joined by Lorie Graham, chief risk officer at American Ag; Ken McCullum, chief risk officer at Principal; and Pooja Rahman, chief risk officer at Protective Life. While three distinctly different lines of business were represented, these leaders have shared risk management perspectives. Emerging risks such as global, political, cyber, financial liquidity, demographics and megatrends are a focus. These risks are external to the organization, which means they cannot be fully managed or mitigated. An organization can prepare through people, process, modeling, agility and resiliency when the unexpected occurs. Rahman utilizes a framework to prioritize focus items that consider liquidity as air, capital as water and strategy as food. A weakness in any one area will lead to stress in the others. An estimate of the impact an emerging risk has on liquidity, capital and strategy identifies whether the firm can absorb it adequately. McCullum cautioned, “Don’t fall in love with your models. Models are useful, but they all are wrong.”

Panelists also highlighted several additional risks, including second-order risks beyond traditional flood, fire and hurricane. Talent acquisition and retention are important parts of building a firm’s risk-aware culture. Themes of teamwork, the ability of people and culture to identify blind spots, ensuring the firm’s values are in alignment with employees’ needs for equity and inclusion, and prioritizing employee mental health were emphasized as keys to success.

The second session included two CROs of firms not in the insurance industry. The roundtable was moderated by Brent Mardis, chief strategy officer (CSO) at Sammons Financial. He was joined by Charley Campbell, chief legal and risk officer at Krause Group, and Maria Matamoros, vice president of risk management at Orascom Construction. The Krause Group manages a diverse set of businesses that include convenience retail, logistics, Italian wineries and hospitality, real estate, agriculture and soccer clubs. Orascom is a leading global engineering and construction contractor. As the top risk managers in their companies, these leaders focus on a risk control framework that seeks to identify, measure and prioritize risks. In addition to the traditional measures of frequency and severity, they incorporate velocity (how quickly a problem can arise) to arrive at a risk score. They partner with management to develop a heat map of what impacts the enterprise, serving as advisors to the leadership teams.

Building a safety culture is extremely important in these industries. Construction sites are dangerous places with many workers’ compensation issues, such as falls, electrification and mental health. Orascom implemented 10 minutes of stretching each morning both to improve worker flexibility and to illustrate how it cares about workers. Whether it involves construction, using cutting tools in a warehouse or managing a fleet of trucks, heavy industries represent risks with low frequency yet potentially high severity. Campbell summed it up by sharing, “We own a petroleum transport company. It's a trucking company. They're carrying 8,000-gallon bombs down the road, so if you think about that just for a minute—in that business, safety is one of the values they talk about every day.”

A much-anticipated highlight of the day was a keynote address by Gary Zhu, senior vice president and director of insurance portfolio management at Alliance Bernstein. His address covered his viewpoints on the economy and interest rates, demographic impacts on insurance purchasing behavior and investment portfolio risk management. Interest rates have increased as inflation has risen, and inflation is expected to be sticky, as evidenced by increases in the price of a McDonald’s Big Mac. Prices may not decline even if input costs drop. Positively for insurers, corporate bond yields on new investments have risen to 6 percent. Negatively for insurers’ existing portfolios, they have a large number of unrealized losses. Has the recent rise in rates ended the low-rate environment? Possibly. Governments around the world have purchased large amounts of public debt over the past few years. They will likely stop buying, but what if they start selling? Significant selling would pressure interest rates to rise above current levels.

The large demographic group of Gen Z and millenials are natural savers, perhaps as a result of the Great Financial Crisis. With greater wealth, these generations may provide a tailwind for insurers that sell annuities or other policies with investment components. Long-term care insurance is a valuable policy that is difficult for younger consumers to purchase since loss ratios have been poor. As a result, insurers have been either raising premiums or reducing benefits. Young savers likely believe they are better off investing the money on their own and retaining the health risk due to an uncertain path for the premium costs.

Lastly, Zhu emphasized a mix of common sense and stress testing to design insurance investment portfolios. Common sense relates to investing for 10 or more years in stable or improving economies, which do not include Africa, Eastern Europe or China due to political friction and a lack of transparency. Portfolio stress analysis incorporates historical scenarios as well as true stress outcomes. Stress should include tail scenarios to identify the cause of outcomes that are dramatically worse than others.

The lunch break created opportunities for executives to connect with each other and students alike. The students were pleased to see how open the executives were about sharing their experiences and perspectives.

The fourth session included three experts in insurance capital models. The roundtable was moderated by Chris Freese, chief risk officer of US insurance solutions at Principal. He was joined by Dean Crabtree, executive director at JP Morgan; Brian Spadaccino, director, Capital Advisory Group at Aon; and Mike Yanacheak, chief actuary at the Iowa Insurance Division. The panelists shared what is important for building and using capital models, along with what green shoots they see on the horizon. The risk-based capital (RBC) approach used in the United States was designed to identify weakly capitalized companies. It is not an effective tool for ranking two or more companies and should not be used by management to effectively run the company. Instead, an insurer should use an internal model to paint the picture of how it views its organization and its risks. Models represent a point in time; the parameters used lag behind the real world and are always evolving. New risk measures should be added to reflect recent experience. As external stakeholder models evolve, an insurer should anticipate changes, hold discussions with the rating agencies and regulators, and make changes before rule changes are final.

Many green shoots of progress were identified. For property and casualty (P&C) companies, climate change inputs are being used, and future risk will be enhanced by building back better after recent Florida storm losses. Higher interest rates are supporting life companies, as are more creative uses/sources of capital. The increased use of reinsurance highlights the strength of reinsurers.

The day’s final panel included three experts in using environmental, societal and governance (ESG) criteria to build insurance investment portfolios. The roundtable was moderated by Nick Gerhart, chief innovation officer at Homesteaders Life. He was joined by Michel Boulos, senior investment director, equities at Putnam; Sasha Kamper, managing director at Apollo Global Management; and Mansi Patel, managing director at Met Life. Each firm utilizes a bottom-up approach to rate and rank investments by proprietary ESG measures. Met Life even acquired an investment manager specializing in ESG to accelerate its efforts. Putnam’s key measures focus on people (access to health care), the planet (carbon impact) and the public (broadband access). Boulos emphasized that an ESG strategy need not sacrifice yield. Kamper views ESG as a nexus of doing good for society and a good risk/return tradeoff. When evaluating third-party ESG ratings, it is important to understand the materiality of each factor used. For instance, some rankings place a high value on the amount of reporting a firm provides and improvements in the reporting. Oil producer Exxon Mobil ranks highly because it reports a significant amount of information.

Investors would like to see insurance regulators accelerate ESG adoption to support sustainability goals. Rating agencies can help calibrate risk across investments and should not view ESG as a revenue source. Many areas of investment opportunity—such as social/affordable housing, energy/LED lighting/water efficiency improvements, mass transit and electric vehicle charging infrastructure—were identified.

The day’s final session was a fireside chat with Nick Gerhart, chief innovation officer at Homesteaders Life, and Andy Beal, chief operating officer at the National Association of Insurance Commissioners (NAIC). Andy began by describing the NAIC as a regulatory support organization with no regulatory powers. The NAIC does provide many essential functions for the regulator community, such as organizing meetings to discuss regulatory policy issues, collecting data and performing data analysis. The average tenure of an insurance commissioner is 22 months. Due to significant turnover, the NAIC provides a fairly extensive onboarding process for new commissioners that helps them understand what the NAIC does and does not do, educates them on insurance regulation, informs them on current issues and provides guidance on committee involvement.

Beal also shared that the NAIC identifies four or five top issues of focus for each year. The first current issue is the solvency of long-term care insurers. The second involves the impact of climate change leading to wildfires, floods and severe weather events. There is a big focus on insurer solvency, coverage gaps for insureds and working with the public to limit risk to future climate events. The third issue is how race and insurance intersect. A current initiative is aimed at creating more career opportunities for people from underserved communities in the regulatory space. Last is technology. Insurance regulators have a very positive view of innovation in insurance. Innovation benefits include more tailored products for consumers, an improved customer experience and more operational efficiencies for both insurers and agents.

A gathering of this size requires the energy and support of a team to make it happen. I would like to thank the administration, faculty and staff at Drake University for their help and guidance. Sponsors included Alliance Bernstein (food and beverage sponsor) and Sammons Financial (dinner for speakers and event sponsors). Many students from the Chi Chapter of Gamma Iota Sigma assisted speakers, took photographs and monitored the online production throughout the day. The forum was led by a steering group that decided on the topics, identified and recruited high-quality speakers and guided the overall program. Steering Group members for 2022 were:

• Chris Freese, chief risk officer of US insurance solutions at Principal
• Nick Gerhart, chief innovation officer at Homesteaders Life and former Iowa Insurance Commissioner
• Roy Ju, enterprise risk management at Prudential
• Brent Mardis, chief strategy officer at Sammons Financial
• Alessa Quane, chief insurance officer at Oscar Health
• Dusan Stojanovic, former chief risk officer and chief operating officer at the Federal Home Loan Bank of Des Moines
• Dale Uthoff, senior vice president of variable annuities for Delaware Life Insurance Company
• Steve Walsh, vice president, enterprise risk officer, EMC Insurance Companies

The day was a ray of sunshine connecting professionals, students and academics to new thoughts and perspectives. It was especially gratifying to realize that six of the 17 presenters were degree holders from Drake University. The full agenda, speaker biographies, and session recordings are available at https://risk-opportunity.wp.drake.edu/. Check out the website, or follow the forum on LinkedIn for information about future meetings.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.

Kevin Croft, ASA, CFA, is EMC Associate Professor of Practice and director of the Kelley Center for Insurance Innovation at Drake University. He can be reached at kevin.croft@drake.edu.