Businesses, of course, face risk every day, whether from supply chain disruption, calamity, or as we’ve seen from a series of hurricanes of the last years, Mother Nature. But most of these risks have a foreseeable ending – after all, at some point the hurricane passes.
But among the many business risks during this Covid age are the unknown risks – how long will the pandemic endure? Which geographies will be hit hardest? What might recovery look like?
And while the insurance business can account for many of the regular risks, Covid brings a new, challenging dimension.
So how are the insurance companies thinking about Covid-19? Perhaps more significantly, how can businesses measure, plan, and account for the risks they face? How should they think about the problem?
Joe Coughlin is the one you want to ask. Joe is CEO & Founder of Corporate Risk Solutions. With decades of experience in the consulting, advisory, underwriting and brokerage segments of the insurance industry, he has seen virtually every kind of risk – and understands what makes the current pandemic unique. Over that time he has originated thousands of engagements and provided services for many of the largest and most intricate transactions within the private equity and distressed debt markets.
Transcript: Joe Coughlin — The Science & Art of Managing Business Risk Today
Chris Riback: So, a professional in the insurance business, I’m sorry for how slow things must be for you. How in the world do you pass your time, Joe?
Joe Coughlin: In many different ways. Every time the phone rings, there’s a different challenge. But we’re in the problem solving business, so I can think of no better place to be.
Chris Riback: Well, there are plenty of problems. I can’t imagine that things have ever been much busier, but you’ll tell me about that. Give me the overview. What is corporate risk solutions? Where do you fit in the insurance and business risk ecosystem?
Joe Coughlin: We are an independent risk advisor that serves in the alternative capital space primarily. And by alternative capital space, I mean by normally people that have raised third-party capital, either through private equity funds, through distress debt funds, hedge funds, venture capital firms, but they’ve raised this third-party money from endowments and pension plans and wealthy individuals, etc., and they’re deploying that capital and they’re looking for superior rates of return. So we’ve focused in that marketplace the most because it tends be repeat business.
If you’re doing a good job for a particular sponsor, they’re going to call you back on the next deal and the deal after that and the one after that. So you can have a very long area or a level of continuity with these clients.
Chris Riback: Now, do you work then directly with the sponsors? Do you work with portfolio companies to the extent that the sponsors with whom you’re working are investing in specific companies? How does that work for you?
Joe Coughlin: In a perfect world where we start our relationship almost universally is at the sponsor side. So we’re actually dealing with the fund, we’re helping the fund assess their own risk. And that’s normally in the form of general partnership liability. It’s protecting the actual fund for all the things that they’re doing while they’re looking for deal flow or while they’re assessing businesses to buy. And so when we start with that, the general partners quickly see that we really do understand the space and we understand what they’re about.
Chris Riback: I’m not trying to be smart here, but why do they need you? Why can’t they do that themselves?
Joe Coughlin: Well, I can honestly say this. In 34 years of being exclusively on the private equity side of the house, meaning the sponsored business side, we have never met a risk manager that has been able to have a grasp of what’s going on in the marketplace. If you’re a risk manager and you happen to be in a private equity fund, you have between nine and 15 assets that you’re possibly looking over at any given time. That might bring you into contact with multiple brokers, but for the most part, a private equity fund like that is probably dealing with one or two, maybe three different brokers, and then those nine different portfolio companies as they come up for renewal at various times of the year, that’s nine or 15 different times that they’re out in the marketplace.
And depending on what kind of assets they own, if… Maybe they’re in consumer products, maybe they’re in real estate, maybe they’re into some kind of energy, silos or something like that. But it’s a finite view of what’s going on in the market. What we are doing is by dealing with the breadth of clients that we have, which is some 100 plus funds that are in every industry vertical, we’re dealing with brokers all around the world, in all of these different industry groups. And whether you say they’re six primary or they’re 14 subset of business silos, we’re in with every one of them. And then we’re dealing simultaneously with every relative underwriter, which brings you into the hundreds of underwriters that are around the globe.
Chris Riback: So you’re really understanding both sides of the equation. You have to understand both sides of the equation.
Joe Coughlin: The thing that we believe in very firmly is that the client needs to be as close to the capacity as possible. When I say the capacity, I mean that that is the actual underwriter, that is the insurance company that has entered into this agreement. What we’re doing is we’re acting as this navigator, we’re acting as this Sherpa guide by saying that, “This is what the marketplace looks like. Here are the carriers, here are the underwriters, here are the insurance companies that like your business, they are interested in your business.”
“Not only that, they excel at writing this business. They’re committed to writing it. They’re not just going to come in this year and then next year that they’re going to hammer you with rate increase. They really like this business.” So what we’re trying to do is to build partnerships that will be sustaining.
Chris Riback: Now, if you are the Sherpa, talk to me about the Mount Everest that I am assuming the business risk management world is today. Have you ever seen anything in the business risk management field like what we’re seeing now?
Joe Coughlin: No, that’s it. It’s an emphatic no. So I’ve been in the business for 40 years. And I grew up in an insurance family and knew a lot of people that were in the insurance industry. And the last three hard markets that we had prior to this one, which I’ll get to in a second, were… it was 1975 to 1978, 1984 to 1987, and 2001 to 2004.
Chris Riback: Tough times.
Joe Coughlin: Yes. If you go back into the last hard market cycle of 2001 to 2004, that’s when you were really starting to come off of Wilma and… Well, actually when you get into 2005 and 2006, you had Wilma, Katrina, and Rita and all of those things.
Chris Riback: All of the hurricanes.
Joe Coughlin: All of those. Now, the property pricing bumped up for a little while, but then it went right back down for a really a 14-year period of time. And that then finally got hit again in 2017 with the worst catastrophic claims in recorded history. And that was about $135 billion was recorded in the third quarter of 2017. But it still took another two years, so it was really in September of ’19 that we started to see the pricing really firm, and that was because a lot of the reinsurance treaties started to expire.
Chris Riback: And just refresh my memory. What occurred in that quarter in 2017?
Joe Coughlin: It was a combination of a whole host of things, but it was really Sandy, Harvey, Irma, Matthew, Maria, those just on the hurricanes alone. I think that really it just got to the point that… and there was other factors. I don’t even want to say extenuating circumstances. I would say that they are just circumstances that directly correlate to the industry, because the reality is, while this may be a gigantic industry when you take all the players that are involved in it, the reality is that when insurance dollar comes into an insurance company, it sits there. Then depending on what happens with the claims during the course of the year, the insurance company has to post reserves. The other thing is that insurance companies are the largest buyers of fixed income instruments. They are big government bond buyers. They have to put their dollars into very prudent investments. And those prudent investments don’t have very good rates of return as you can imagine. And as you well know right now, we’re in the lowest interest rate environment ever.
Then you’re looking at a stock market that fluctuates around, it goes from highs to lows in a matter of weeks if not months. Well, and then you take things that have happened litigation wise over the last few years. You’ve got these social justice claims that are taking place. You’ve got the changes that took place in regulatory side. You had the GDPR, which is Europe’s anchor to regulation on privacy.
Then that’s followed by what California did, which is leading our country, which is the CCPA, the California Consumer Protection Act. And those are privacy things that directly affect employers and then the employers are insuring these potential fines or transgressions. So you had this culmination that all came down the pike at the same time. And after this sustained 14-year soft cycle, the insurance companies said, “That’s it.” And once the retrocessive market, which backs up the reinsurance market, which backs up the insurance carrier market, dried up, then all of a sudden, the capacity, the price to rent the balance sheet of an insurance company went through the roof.
So right now, we are absolutely positively – and I’m not shy about saying this, because people say, “You all know that market,” – but this is the worst market in 40 plus years without a doubt.
Chris Riback: And now, what does COVID do?
Joe Coughlin: Yes, COVID is the icing on the cake. Here’s my answer on COVID. It’s hard to say, right? There is speculation that COVID, on the one side, it’s estimated that it could cost the industry $56 billion. On the other side-
Chris Riback: Just COVID alone?
Joe Coughlin: Just COVID alone. On the other side, it says that COVID could cost the industry some $556 billion.
Chris Riback: Explain that to me, because that’s a massive range obviously.
Joe Coughlin: So yes. If anyone said to you that somebody is a treasurer or a CFO has something for me and they came back with that, I don’t think they would last too long.
Chris Riback: Yes. You’re really good, Joe. That is a lot of years in the industry to be able to narrow it down to just 500 billion range.
Joe Coughlin: I know.
Chris Riback: There’s a why behind that. Tell me the why.
Joe Coughlin: Well, the why is there’s really two components of COVID, right? One is that there is this healthcare side, which clearly, that is really the easiest part to see, because there’s all these models that are out there. By the way, if every single day that you open up the newspaper or you hear on the news, there is a new announcement on what’s going on with COVID. Do the antibodies survive for longer than 36 days? Well, it used to be the antibodies would last for years if not forever. Right?
So getting the true facts out to a public on a new disease is very hard. But what we do know is that for those patients that do contract the disease, if they don’t go into an intensive care unit, then the average cost that they’re seeing as of right now exceed about $11,000 per patient. If you go into the ICU, it could be as high as $35,000, and that doesn’t include any short-term disability that may be provided in there. So by capitizing the number of people – if we had 10% of the population that contracted the disease, then that has its own math. If it went up to 20%, then it has another math.
And if it goes up to what people have said is the worst case scenario, which would 60%, when it was thought that… What is herd immunity? Well, at first, herd immunity was 70%, then it went to 60. We’re now hearing, as of last night, we-
Chris Riback: Yes. I saw it.
Joe Coughlin: It was like herd immunity might be as low as 20 to 40%, right? So it depends on really what’s happening. But the reality is that the healthcare side is easier to see right now than the property and casualty side. And when I say property and casualty, I mean really everything else other than healthcare.
Chris Riback: So explain that to me. I understand why healthcare… X number of people are going to get sick, there’s going to be an average of Y amount of cost per person. I get that math. Why so much unknown on all the rest of it? What might be all the rest of the potential claims and why is it a gray area?
Joe Coughlin: Right. And there is where you can’t say the icing on the cake, right? Where you can say it could be the cake itself. While we’re talking about all these things that… ESG is environmental, social, and governance types of things, and as we just got done talking about the social justice type of things, no one really knows because we’re seeing a lot of things that were never intended to happen are happening now and that rules are being changed and-
Chris Riback: Meaning abilities for businesses to stay open, not stay open, who can be where, what types of transactions can take place. Do you mean those types of different rules changes?
Joe Coughlin: I think people are really trying to grasp and grapple with the fact of what is fairness. When you have hundreds of thousands, or make that millions of people, that are either out of work or are wondering about their future status with work, or they’ve been working at restaurants, or they’ve been working at stores… I mean, let’s face it. If 80% of the economy is driven by small business, then those small businesses have been affected. And the speculation is that it’s a loss of some 225 billion to $450 billion a month.
Chris Riback: A month?
Joe Coughlin: A month. Right. That is no longer going into the general economy. Right? And so, if you have enough people that are saying, “Somebody’s got to pay for this,” right? Because you thought you were buying insurance, right? Now, insurance thought it was pretty clear, the insurance companies. They looked and they said, “Well, after SARS came about in 2006,” they said, “Wait a minute, there is no way that we can offer insurance for a pandemic and communicable diseases. It’s anathema to being in business.” And I really do thank Evan Greenberg who runs Chubb… And he’s been a long-time friend, way back when he was at AIG. But Evan just brought it right back to light when he said that, “The thing about property and casualty is, it’s defined by time and geography.”
And by that, I mean that if you take a major storm, if you take a hurricane and it comes up from the Caribbean and it comes and it hits Florida, let’s just say it’s category five storm, and it goes all the way up to Maine, it’s defined by time. And it might take a week.
Chris Riback: At some point, it ends.
Joe Coughlin: It ends. Right? And it’s defined by geography, right? Because it eventually moves on and leaves, and it dies. I don’t care if it’s a typhoon, I don’t care if it’s an earthquake, it’s a wildfire, but there is a degree of time and there’s a degree of geography. But in a pandemic, as we are seeing right now, there is no time limit, left onto itself, and there’s no geographic limit, for an insurance company to say that, “We are going to underwrite these losses for business interruption.” They say, “No, we can’t do it.” So in some cases, the policies actually provided some coverage because they wanted to make it simple enough to say, “We’d rather offer you very, very little, but offer you a coverage but show that it ends here,” rather than say, “There is no coverage,” and argue about it.
Chris Riback: Has that question been litigated? Have businesses gone and said, “Well, you are my insurance company, bad thing happened, I thought I was insured, what do I have you for?” And the insurance company says, “You had me for A through Z, but not this thing that has no time and geographical boundaries.” Is there a litigation status on that or that’s-
Joe Coughlin: Yes. There’s a lot of litigation status. There hasn’t been that much in terms of where it’s been adjudicated, but what we do know is there’s some 450 ongoing or at least filed lawsuits as of this point in time.
Chris Riback: Wow.
Joe Coughlin: There are a whole host of class action lawsuits that are saying that this is a business interruption and an indemnifiable business interruption. Texas, as of right now, there was a Liberty Mutual case where they have stood by the carrier in their ruling. But just last week, Missouri allowed some hair salons and some restaurants to proceed with their suit alleging that the physical damage actually applies to their countertops. Now, normally in business interruption, there clearly has to be direct physical damage that took place. So remember when COVID first came out, everyone was saying, “I couldn’t get to my place of employment. I couldn’t get there. It was closed.”
This is one of these things that it was like, “Well, it’s pandemic. It’s a communicable disease and there is no coverage for that.” So what’s being argued now is, will… By the way, Louisiana, Massachusetts, New York, Ohio, and Pennsylvania are now looking into doing the same thing and saying that this is what’s going on here.
I, firstly, would have to think that my money would be on the insurance companies because it is contractual law. And unless somebody is going to backstop all of these insurance companies… because there’s only so much money that can go around, right? And as big as the industry is, and whether it’s $20 trillion in assets, those $20 trillion is already tied up in reserves and it’s already tied up in low interest rate returns that, one year, the industry would be bankrupt. It’s a very, very, severe-
Chris Riback: Yes, what a challenge. I’m sure you are shy of making any type of prediction on anything, except but for the idea that this very well could end up in the Supreme court at some point.
Joe Coughlin: Yes. I definitely think it goes to the Supreme Court. And what you’re seeing right now is already they’re modifying these policies and these coverages. There were those that went out and bought coverage for this, and Wimbledon is probably the best example of it. But Wimbledon, for the last 14 or 16 years, has been buying… Well, since SARS, so 14 years. They’ve been buying pandemic coverage in the event that Wimbledon was going to be canceled.
Chris Riback: And not cheap. It’s not cheap insurance.
Joe Coughlin: No, it’s not. I think it was like a million, five pounds a year. I think that the number is in US dollars. They put in some 31+ million dollars over the years to buy this. Right now, they’re looking… from what I’ve read, is that they’re looking to collect $142 million on this. And you’d say, “Absolutely.” And you should. But there’s tens and tens of thousands of people that never bought that. But now, what you’re going to see is that policies are going to clearly now. I mean, they’re going to get far, far more restrictive in what they will do and what they’ll put out there. And so, what happens at the end of all of this? It’s just question marks everywhere.
I mean, that’s where risk really comes down to. People have to think and I think that every business has really got to the point that you have to say, “What is the worst case scenario and what do we do if there’s some kind of systemic change that takes place?” That’s all.
Chris Riback: What are businesses calling you about now and what are you telling them?
Joe Coughlin: Right now, there has been… for April, May and June in particular, we had a lot of more people calling specifically regarding COVID. I’m not going to say that’s not going to stop, but it started to… I think they were getting a lot of conflicting information, and I’m not looking to get into any battles with any law firms or anything, but they were… I think maybe for some places there were providing hope where there maybe shouldn’t have been as much hope. So people were exploring options as to what the realities were. But right now, our main business is trying to help our clients stave off the effects of what was the hard market before COVID.
And that hard market is still with us. There is a scarcity, a dearth of capacity that’s out there. These carriers have a finite balance sheet and they are very selectively they are renting that balance sheet out to a client base that they feel that they can, again, partner with for a few years and that they feel as though they can collect a justified amount of money for a risk that they’re taking on and that both parties feel good in the process. And-
Chris Riback: So is there a situation? Are businesses in certain cases having trouble getting insured, because there’s just not a market to insure something?
Joe Coughlin: Oh, yes. Very much so. And-
Chris Riback: And what’s that doing to their business? How can a business go forward without insurance backing it up?
Joe Coughlin: It’s extremely difficult. And depending on what business that you’re in and what types of margins… I think everybody, by and large, I always think that you want to be in a business that you’re getting 30 plus percent in a margin, right? Reality is, some make a lot more than that and some don’t make close to that. But whatever your profit margin is that keeps somebody in business, you’re looking for a return. You normally just don’t go into a business just to tread water. But if you now have to start passing on those increased prices if you are in the restaurant business or you’re in the transportation business… And transportation business is a commodity business. It’s separated by a half a penny depending on the miles driven.
And now you have to start to increase your pricing because your insurance costs more across the board. And look, you’re going to self-insure, you’re going to do whatever you possibly can, but at a point in time, there’s certain things that you do have to provide for, and cyber liability, things that could really knock you out. You’ve got to have these business plans for. But if you start to pass that onto the consumer, everyone’s sitting there and say, “Well, geez! And it makes the flow of that client go someplace else. So there’s real ramifications of this. So what we’re trying to do is do what we’ve always done, and that is to act as a fiduciary for the client and to be able to say, “Okay, what do you got? What concerns you? Where do you stand right now? What have you been told?”
And now, what we’ll do is either one, if you’re dealing with a company that is really well prepared and really well-represented both by their insurance companies and by their brokers, we might just be simply giving a good housekeeping seal of approval saying, “There is nothing more to do here or you can tweak this around the margins.” But, more often than not, we’re finding that there’s a bunch of rocks that haven’t been overturned or looked under and we’re providing options that haven’t been seen before. The client just can’t know that. They’re just not ever going to know that. And the only way they can do it is they’ve got to put their program in competition with another broker, and that sometimes becomes a real pain. I’m trying to choose-
Chris Riback: Yes. I understand you. That can never be fun. But you’re describing a process that feels like it could be potentially as integral to business success as any operational efficiency.
Joe Coughlin: Absolutely. Yes. I’d say like, “Look, it’s not just us, I know that there’s other firms that are out there, but you need to know it.” It’s something that clients, you don’t need to do it every year necessarily, especially if you’re working with an advisor. You want to be able to go say, “All we’re really doing, is it best practices?” Right? Best practices, you need to know what your competition is doing, you need to know what the market is doing. And it’s a big, big market. I mean, there’s hundreds of insurance companies that are out there, and that at any given point in time, somebody is going to be saddled with legacy claims that it’s trying to run off that book of business until it can get back on its feet in a particular way product line. And that means that new capacity. And by the way, that’s the thing we really haven’t touched on.
The reason that this market started to drive up to the way it is today is the fact that the capacity drive dried up and that we were not getting the private equity firms and the hedge funds that were coming in, that were feeding these green shoot, new companies, new insurance companies, that had come up in the ’80s and the ’90s and even in the early 2000s. So we’re starting to see a couple that are out there, and with that new capacity, once they realize that interest rates start to firm up a little bit and once people start to think about there’s some stability in the stock market and once interest rates start to rise a little bit more, and once there’s a little bit better feel on the litigation side of the house where people could start to feel a little bit more comfortable that this is the way courts will rule and there’s not as much of a… like a-
Chris Riback: Uncertainty. Yes.
Joe Coughlin: Yes. Then we will see it. I know that sounds like it’s like, “Oh, that’s too feel goodie,” but reality is, it does, and it will. It will come back. I have no doubt about that because I personally, if I was sitting there with hundreds of millions and billions of dollars, would I right now be putting money into some very seasoned professionals, some underwriting teams that come out of some of the best insurance companies in the world and saying, “I want to underwrite this line. I want to underwrite this. This product line, I’m going to be a little of this, a little of that.” And I put those teams out and I say, “Here’s my balance sheet. Now let’s go to work.” Yes, I would. I definitely would. And you would be able to pick up some fantastic business which right now can’t move. It can’t move because there is no market.
Chris Riback: Joe, to close things, we’ve talked about some incredibly important topics; the capacity challenge, COVID, the hard markets, the pending or the existing litigation and the pending outcomes, the uncertainty, but I feel I really should end this with what has to be the pertinent question, which is, why did you put Eagle Scout in your bio, on your website?
Joe Coughlin: Yes, I put it for a reason that… I put it because is scout oath, scout law, but trustworthy, loyal, helpful, friendly, courteous, kind, obedient, cheerful, thrifty, brave, clean, and reverent. The word fiduciary is when you engage a third party to act on your behalf, as in this case, the subject matter expert on insurance and on risk. Then we have to, we have to act as the fiduciary.
And as an Eagle Scout, I felt as though that that should and I believe it does. It sends a message that you are something more, that you strove to be something more in that regard. And it doesn’t mean that you’re not going to tick off people from time to time, and it doesn’t mean you’re not going to push them, but it does mean that there’s a level of fairness, but there’s a level of trust and honesty that has to be involved here. So that’s the part that we just like to think that it differentiates the way that we’re going to act and the way that we’re going to communicate with our clients and the people that we’re working with, whether that be broker, underwriters, or wholesalers, or excess surplus lines underwriters, whatever that’s out there. It doesn’t have to be this hard if everybody was really doing the right thing,
Chris Riback: Doing the right thing. I can only imagine how good your former scout master would feel hearing you reel off the list of Eagle Scout oaths or words to live by, whatever it was that you just gave, like 27 words in about five seconds, but-
Joe Coughlin: It’s just 12. But yes, exactly.
Chris Riback: But the fact that you still have it imprinted in your mind and it sounds like in how you seek to carry yourself and your business every day. Joe, thank you. Thank you for taking the time and for enlightening us on what’s happening in this business insurance risk world which seems like it could not get crazier, but I bet no one would insure me against that bet, so let’s just say, “If we think it can’t get crazier, it probably will.”
Joe Coughlin: Well, thanks, Chris. It really has been a pleasure.