Dark Angel: The insurance industry as political tool for politicians

By Russ Banham

Leader’s Edge

First there was pressure from New York Gov. Andrew Cuomo and Maria Vullo, New York’s financial services superintendent, on the industry to dump the National Rifle Association as a client—even fining brokerage Lockton Affinity and insurer Chubb for selling and underwriting an NRA insurance policy.

Now, insurers are being asked to take sides on the climate change debate. It began with an epiphany, the realization that all fossil fuel companies shared a common feature—they bought property and casualty insurance. What if their insurers could be pressured to no longer underwrite the companies’ risk exposures or invest in their securities? The answer was obvious—the companies would flounder.

It was a brilliant concept, one that its originator—The Sunshine Project—has since set in motion. In July, the San Francisco Board of Supervisors became the first municipal body in the United States to call upon insurers to stop insuring and investing in the coal, oil and tar sands industries. The board also urged the city and county of San Francisco to screen insurers’ underwriting of and investments in these industries and to formally cut ties with those carriers that did not comply with its wishes.

“Cities have nothing to gain from collaborating with insurance companies that prioritize dirty energy companies over communities,” said Aaron Peskin, a San Francisco supervisor, in announcing the decision.

The decision was a major early victory for The Sunrise Project, the Australia-based organization that devised the idea of using the insurance industry as a battering ram to clear the world of harmful emissions produced by oil, coal and other fossil fuel businesses. “Pretty much any business in the world, if they don’t have insurance, they can’t operate,” says Ross Hammond, Sunrise Project’s senior campaign advisor in the United States.

For people fretting that humanity is at the brink of extinction from global warming, the modus operandi of The Sunshine Project is a stroke of pure genius, and it has arrived just in time. For insurance leaders, even those who support a transition away from fossil fuels, there is concern that using the industry as a blunt instrument to achieve political aims sets a potentially dangerous precedent. “It is not the role of insurance to steer politics,” says Jochen Körner, the executive managing director of specialist insurance brokerage Ecclesia Group, headquartered in Germany.

Nevertheless, Körner concedes he is conflicted on the subject. “On the one hand, I endorse the aims of the San Francisco resolution because we brokers and insurers can be enablers [of The Sunshine Project’s goals] by shutting down the support system for fossil fuel companies,” he says. “This can be a quicker way to ban coal and tar sands than through politics.”

On the other hand, Körner adds, “If insurers are the means to a political end, where does it stop? Who decides what is right and what is wrong?”

Körner is not alone. “The burning of fossil fuels is a concerning issue, but requiring property and liability insurers to abandon a multibillion-dollar business like the energy industry and to limit the diversification of their investment portfolios is bad public policy,” says Robert Hartwig, a professor of finance and co-director of the Risk and Uncertainty Management Center at the University of South Carolina.

In Hartwig’s view, if the Sunshine Project’s approach were taken to its extreme, the insurance industry could be compelled not to insure or invest in other industries deemed socially unacceptable. “There are people opposed to logging companies, pharmaceutical companies, tobacco companies, businesses that make pesticides and herbicides, airlines that produce high emissions, and cars that do the same,” Hartwig says. “Do we ban insurers from insuring or investing in these companies, too?”

Governing Issues

It’s possible, of course. According to the Environmental Protection Agency, the U.S. transportation sector produces more greenhouse gas emissions than the burning of fossil fuels for utilities. If insurers can be politically compelled to forsake the energy industry, automakers and airlines may be next.

Hammond has a different opinion. “Scaling a social movement that results in a healthier planet is a very good thing,” he said. “Insurance companies are investing in and insuring the very industries which are making climate change worse. If insurance companies want to protect us from catastrophic risk, they must break ties with the fossil fuel industry.”

In other words, insurers and reinsurers that continue to underwrite and invest in fossil fuel companies are directly contributing to a future in which they will experience more severe property catastrophe losses. Dump them, and losses will eventually moderate.

That might be a pretty enticing argument if the decision were left up to individual insurers. For years, organizations like the American Sustainable Business Council have advocated that companies voluntarily divest from fossil fuels and invest instead in low-carbon alternatives. The Business Council’s DirectInvest campaign asks companies to sign a pledge to this effect and lists the names of the top 200 oil, gas and coal companies.

But that decision belongs to the companies themselves. In San Francisco, government is calling the shots.

The Sunrise Project sees nothing wrong with this scenario. “Insurance companies are supposed to protect us from catastrophic risks,” the organization states. “Yet when it comes to the largest threat to humanity—climate change—many insurers are fueling a dangerous future through their investments in and underwriting of fossil fuels.”

In their corner is California’s insurance commissioner, Dave Jones, who wants insurers to voluntarily divest from thermal coal investments. Jones’s position is that these investments will experience a precipitous decline in value as the world shifts to renewable sources of energy. Jones has directed that the state insurance department maintain a searchable database of insurers that have invested in oil, gas and coal companies. This is all part of his Climate Risk Carbon Initiative, which was designed to provide the public with information on potential financial risks caused by climate change that California insurance companies face as a result of their exposure to investments in fossil fuel.

Not surprisingly, the initiative was met with virulent opposition in coal- and oil-producing states such as Oklahoma and Kentucky. In June 2017, nearly a dozen state attorneys general threatened to sue Jones for violating the Commerce Clause of the U.S. Constitution, arguing that by targeting energy companies, employment in their states will suffer. (One in four Oklahomans works in the energy industry.) “This initiative is misguided as a matter of policy, questionable as a matter of law, and inconsistent with the principle of comity among the United States,” the group maintains, promising legal action unless Jones relents.

Jones subsequently replied in a statement that he was “undeterred.” In May 2018, as the litigation threats from the 12 state attorneys general hovered above the department, Jones launched the nation’s first-ever stress test of climate-change risks on insurer investments in fossil fuels. Initial findings indicate that insurers in the state have more than $500 billion in fossil fuel related securities issued by power and energy companies, including $10.5 billion invested in thermal coal enterprises.

The California Insurance Department did not reply to requests for an interview with Jones. Leader’s Edge also reached out to the National Association of Insurance Commissioners, the organization representing state insurance departments, for its perspective on the subject. Spokesperson Erin Yang replied, “Unfortunately, it is not an insurance regulatory issue that the NAIC has taken up.”

Hartwig calls this position untenable. “Regulators are required to ensure the financial solvency of insurance companies,” he said. “The industry is one of the largest institutional investors on the planet. By limiting their ability to invest in the energy industry, this reduces the diversification of their investment portfolios. A less diverse portfolio is a risker one. … Ultimately, this will lead to higher insurance rates for people and businesses.”

Although Jones has called for insurers to voluntarily divest from coal and other fossil fuel companies—he’s issued no such mandate—industry groups like the Property Casualty Insurers Association of America (PCI) likened Jones’s position to calls for a boycott. “Politicians have every right to express their desires and set their own policy,” says David Kodama, a PCI assistant vice president. “It’s our role to inform them about the potential ramifications of their decisions.”

Like other insurance industry participants and watchers, Kodama believes the ramifications of San Francisco’s efforts could be precarious. “Our concern is that the Board of Supervisors’ decision will become a template to push a social agenda against companies in businesses that groups of people dislike,” he explained. “It could be used as the model to fight against companies that make certain chemicals, tobacco and e-cigarettes. I could see it used against marijuana businesses, abortion clinics, casinos and adult entertainment enterprises. All of these businesses buy insurance.”

He also disapproves of limiting insurer investments. “The inference is that insurers should invest in green companies providing sustainable and renewable energy instead of oil and coal companies,” Kodama says.

“But what if these investments are less secure and more speculative in nature? That would jeopardize the stability of insurers’ investment returns, to the detriment of their policyholders.”

Hartwig agrees. “Some environmental advocates believe the future will involve the massive storage of energy in industrial batteries, but the environmental consequences of these activities are becoming clearer,” he says. “Could this result in insurer prohibitions from investing in companies that make electric cars? What about other zero carbon energy technologies like hydroelectric dams that impact fish and wildlife or wind turbines that kill birds? Once you go off in this direction, there is no end in sight.”

His point is obvious: under such a scenario, insurers would be required to restrict their investments solely to politically correct companies. Körner provides another unsettling scenario. “If insurers and reinsurers don’t assume coal mining and coal plant risks, the government may need to provide insurance,” he says. “However, no government is equipped to underwrite coal-related risks. If losses exceed premiums, taxpayers will be on the hook. … The government is never a good risk-taker.”

One need look no further than the federal government’s National Flood Insurance Program for an example of how not to underwrite U.S. flooding risks; the program has been in the red since Hurricane Katrina struck the Gulf Coast in 2005.

Taking the Pledge

Despite these concerns over government overreach, many of the world’s largest European insurers and reinsurers are doing what The Sunshine Project, Commissioner Jones and the San Francisco Board of Supervisors have urged. Swiss Re, Zurich, Allianz, Aviva and Axa have decided to no longer underwrite and to divest from coal companies, according to a recent report by an organization called Unfriend Coal. In August 2018, Munich Re joined them. Altogether, the insurers have divested about $23 billion from coal companies.

“Climate change generates enormous economic and social risks,” says Oliver Bäte, CEO of Allianz. “It is already harming millions of people today. As a leading insurer and investor, we want to promote the transition to a climate-friendly economy.”

And the insurer doesn’t see the move as detrimental to its bottom line. “We are convinced that our approach will further improve the risk/return profile of our portfolio in the long term and that we will strengthen our position as a forward-looking investor,” says Günther Thallinger, a member of the board of management of Allianz who is responsible for investments and environmental, social and governance criteria. “As a long-term investor, we want to shape the change to a climate-friendly economy together with our clients. We will thus also strategically develop our investment opportunities in new technologies.

“It is important to limit global warming as quickly as possible. This will only succeed if business and politics pull in the same direction.”

It is not clear if these commitments by the foreign insurers and reinsurers also apply to their business in the United States, Hammond says. However, last summer Swiss Re announced it would no longer provide reinsurance to insurers with more than 30% thermal coal exposure.

No U.S. insurer has made such commitments. “The big gaping hole is the United States,” Hammond says. “Even though the coal industry is pretty much in a terminal decline, there are still plenty of coal-fired plants in the U.S. and plenty of proposals in the Powder River Basin and in Appalachia for more coal mining. Our goal is to get U.S. insurers to do what European insurers have done and are doing.”

Hammond is confident The Sunrise Project will prevail. In July, the group sent a letter to 22 insurers asking them to voluntarily stop underwriting and investing in fossil fuel companies. Among the companies receiving the letter are such large insurers as AIG, Liberty Mutual, Berkshire Hathaway, Chubb, Nationwide and The Travelers Companies. “We need a U.S. company to get out in front of this,” Hammond says. “Axa apparently got a lot of pressure from the French government to do something on climate change, given the Paris Accord. We’d love to see a big company like AIG take the lead on this here.

“This is an extraordinary opportunity for the industry to make a huge difference—a chance to make a mark when nothing positive is going to happen at the federal level,” he says.

At present, Hammond is doing outreach in other U.S. municipalities to consider initiatives similar to the one issued in San Francisco. He also recently visited Silicon Valley to discuss The Sunrise Project’s goals with large technology companies.

“We’re hoping that companies like Google and Facebook that already have done quite a bit on climate change will start a dialogue with their insurers—if they want to keep their business, they’ll need to distance themselves from the fossil fuel industry,” Hammond says. “Changing insurance companies is not a big deal.”

He’s also targeted the cities of New York and Los Angeles as likely to follow San Francisco’s lead in breaking ties with insurers of coal, oil and tar sands companies. “Both cities that have already taken actions on climate change,” he explains. “We want them to put their insurers on notice that these are their expectations going forward.”

Crossing the Line

Certainly, the overarching ambition of The Sunrise Project is clear. It wants coal, tar sands and other fossil fuel companies to fold up their tents for good, by whatever means necessary. Without insurance and insurer investments, the organization figures the companies cannot survive, and it’s probably right.

Some would agree this is a good thing. The question is whether the property and casualty insurance industry should be the means to such an end.

It’s a Solomon-like determination. As Körner says, “I have nothing against requiring insurers to demonstrate how they are individually reducing their carbon footprint, but to require them all to stop writing the risks of an industry that is doing nothing illegal crosses a line.”

Once a line is crossed, there is no going back.

Russ Banham is a Pulitzer Prize-nominated financial journalist and author who writes frequently for Leader’s Edge. russ@russbanham.com

Lessons on Auditing from Carillion’s Collapse

By Russ Banham

CFO magazine

If past is prologue, U.K. accounting regulators may want to take a hard look at the great American business tragedy known as Enron.

In 2002, the scandalous collapse of the energy company caused the demise of one of the Big Five audit firms, Arthur Andersen, resulting in the Sarbanes-Oxley Act’s stern reforms. The now Big Four are in the crosshairs of U.K. regulators, following the spectacularly speedy collapse in January 2018 of Carillion, one of Britain’s largest construction firms. It was the largest insolvency in U.K. history, jeopardizing some 20,000 jobs and countless pensions. The company went into liquidation with liabilities of $9 billion and only a few million dollars in the bank.

All four auditing giants were connected to Carillion in some capacity, with KPMG its external auditor. A House of Commons report says KPMG failed to challenge management on “highly questionable assumptions” about construction contract revenue and accumulated goodwill from acquisitions. As with Enron, this roiling hurricane has whipped up urgent calls in the U.K. for auditing reform. Some want Parliament to separate the audit work of the Big Four from their prized consulting services; others suggest shattering them into multiple firms. While the first has been done in the United States, some here are still calling for the second.

The United States is ahead of the United Kingdom with respect to regulating auditing, but no one would say America has perfected the approach. An effective framework of accountability for auditors doesn’t presently exist. So, could a downfall of Shakespearean proportions like Carillion’s happen here? And is there a solution to making sure it doesn’t?

Applying Judgment

When considering the accountability of auditors in a sizable corporate meltdown like Carillion’s, or MF Global’s, or even that of Lehman Brothers, accounting experts underline the imposing task audit firms face. In every engagement, they issue an opinion on the fairness and accuracy of a company’s financial statements based on a statistical sampling of its financial data.

The key word here is “sampling.” No auditor of a large public company could possibly dig through every single transaction to guarantee its financial integrity. Consequently, there is always the risk of issuing an opinion that may be ambiguous or flat-out wrong. That is why it is called an “opinion,” a “judgment not necessarily based on fact or knowledge.” And why an “audit” is just another word for a “survey” or “check.”

“A lot of what audit firms do is a legitimate judgment call,” says Erik Gordon, a professor in the University of Michigan’s Ross School of Business. “Here in the United States, judgments are based on [generally accepted accounting principles], but they’re still judgments.”

The problems occur when the client pushes back, disputing the auditor’s judgment. The auditor may decode comments such as “I’m not sure you really understand our business” or “I don’t think you appreciate what is special about our industry” as “implying that the company will curtail the high-priced consulting services provided by the firm,” says Gordon. “That’s when the auditor’s objectivity can become strained.”

The U.S. Stage

Audit firms in the United Kingdom can still provide consulting services to the same client (unlike in the United States), resulting in a blatant conflict of interest. That and other circumstances of the Carillion case are an old tune in the U.S., which confronted similar issues post-Enron until Congress passed the Sarbanes-Oxley Act of 2002 (SOX). SOX prohibits firms from providing non-audit services to audit clients like internal audit outsourcing and large-scale, large-fee information systems design and implementation. The law also requires publicly held companies to disclose the fees paid to auditors.

Three of the Big Four firms pulled out of consulting after SOX came into effect, eventually returning to the business by committing not to provide audit and consulting services to the same company. For the most part, this accommodation has eased worries over another Enron. But does that make the Carillion calamity a case of “it can’t happen here?”

The list of mistakes that the U.K. parliament accuses Carillion’s auditor, KPMG, of making sound pretty similar to errors that U.S. auditors have made since SOX, especially during and after the 2008 financial crisis: questionable assumptions about revenue recognition and the goodwill value on corporate balance sheets, for example, and a lack of professional skepticism toward aggressive accounting judgments:

  • In 2014, the Public Company Accounting Oversight Board (PCAOB) banned a PricewaterhouseCoopers partner for overlooking improper revenue recognition by a medical device firm. The practices missed included unusual pricing and payment terms, quarter-end sales spikes, and a scheme by which the company funded a distributor’s purchases.
  • A U.S. district court recently found PwC guilty of giving Colonial BancGroup a clean audit for years before it emerged that huge chunks of Colonial’s loans to a mortgage originator were secured against assets that did not exist.
  • The PCAOB charged Deloitte with violating PCAOB rules and auditing standards in audits of software firm Jack Henry. The PCAOB said none of the engagement personnel had the knowledge to properly evaluate and audit the firm’s accounting for software license revenue.

In addition, criticisms of the U.K.’s accounting watchdog, the Financial Reporting Council, are similar to those leveled at the PCAOB: that the regulating entity is too close to the firms it oversees.

Two of the current five members of the PCAOB, for example, spent significant time at Big Four firms, and an April 2018 academic study found that an increasing number of PCAOB employees leave the regulator for senior-level positions at large audit firms.

Robust Regulation?

The Big Four declined to be interviewed for this story, referring the subject to the Center for Audit Quality (CAQ), which represents the interests of public company auditors. CAQ issued a statement to CFO maintaining that “robust independent regulation and oversight” is firmly in place in the United States “to safeguard auditor independence.”

“Auditing has become much more rigorous in the past 15 years,” says Owen Ryan, one-time CEO and managing partner of Deloitte’s advisory business and a member of its global executive committee. Financial restatements and large bankruptcies without forewarning by auditors have fallen significantly, he says. “Lawmakers and regulators like the [PCAOB] deserve credit for putting pressure on audit firms to be independent and to continually improve practices.”

Like all sweeping business regulations that are passed, SOX was initially greeted by companies as unnecessarily burdensome. But it has changed corporate behaviors for the better, restoring needed investor confidence in the accuracy and completeness of financial statements, says Robert Hartwig, a professor of finance at the University of South Carolina’s Darla Moore School of Business.

The statement bears repeating, as the White House and Congress are questioning the effectiveness of many capital markets regulations. A current bill in the House of Representatives, for example, would allow small broker-dealers to hire audit firms that are not registered with the PCAOB.

“The U.S. took a hard step in adding another layer of regulation. But the result has been greater financial transparency and corporate governance,” says Hartwig.

And the PCAOB is still refining its approach. As of June 30, 2019, auditors have to include in their reports a discussion of critical audit matters (CAMs) that have been communicated to the audit committee. CAMs are matters related to disclosures that are material to the financial statements and involve “especially challenging, subjective, or complex auditor judgment.”

Another factor involving the difference in oversight here and in the U.K. is a wide disparity in funding, points out Patrick Villanova, a former lead audit senior manager at PwC. The PCAOB’s $250 million annual budget is pretty much double the funding of the FRC and regulators in the Netherlands, Ireland, France, Germany, and South Africa — combined.

Breaking Up

In the United Kingdom, Parliament has remedies in mind in the wake of the Carillion collapse, some of which have also been contemplated in the United States. The two principal ones are (1) fragmenting the Big Four into smaller firms, and (2) detaching their audit arms from their consulting services arms, which generally offer strategy, legal, and merger-and-acquisition advice.

The first solution would encourage competition in the audit market, say U.K. lawmakers, limiting the potential for audit firms and clients to nurture long-term, cozy relationships. The Big Four check the books of nearly all (98%) of the U.K.’s 350 leading public companies. “The veiled threat [by regulators] is that if you don’t do it, we’ll do it,” says Gordon.

More competition would break the Big Four’s stranglehold. Other suggestions being proposed in the U.K. would cap these firms’ market share of public company auditing or limit the number of audit clients any one firm can have.

But is an oligopoly of four top-tier firms a bad thing, either in the U.S. or the U.K., given that there are tiers of other audit firms right below it? “More competitors usually leads to more competition,” says Gordon. “But I know people at all four firms, and in a sort of semi-genteel way they really do compete for business. Would a ‘Big Six’ be more competitive, giving a CFO more places to shop? Maybe, but I’m not sure it would result in higher audit quality.”

Jian Zhou, a professor of accounting at the University of Hawaii’s Shidler College of Business, would rather see a market solution. He notes that the second tier’s market share is growing in the United States. “We may soon have a Big Six, without the need to break up the Big Four to spur competition,” Zhou says. “Audit committee members need to have more of an open mind toward appointing second-tier audit firms like BDO, Grant Thornton, and Crowe Horwath.”

Villanova, now vice president and corporate controller at BlackLine, is doubtful about the prospect of breaking up the Big Four. “The second-tier firms readily admit they currently don’t have the national office resources, technical expertise, or the global networks of the Big Four,” he says.

He is not alone in that position.

“The Big Four are the ‘A-team’ for a reason — they’ve hired the cream of the crop,” says Tom Wheelwright, a former tax specialist in Ernst & Young’s national office and CEO of WealthAbility, a provider of tax and accounting educational tools. “No one goes to a second-tier firm if they have the opportunity to work for the Big Four … [because] their resources aren’t nearly as good. You’ll get better audit prices, but not better audits.”

Core Conflicts

The provision of both audit and consulting services by a Big Four firm is the other chief complaint of U.K. lawmakers. Their arguments are driven by an enhanced potential for conflicts of interest, since audit firms are both an advocate and a public protector of a company on behalf of shareholders and investors. And the job of advocate, in the form of advisory work, pays more.

The Big Four counter that added services like tax and legal consulting are useful from an expertise standpoint, allowing for higher-quality audits. They also say the added revenue stream of consulting services income helps subsidize clients’ audits. “If you remove the ability to offer these services, audit prices would be considerably more expensive, as much as double,” Wheelwright claims.

Nonetheless, these factors do little to offset the possibility of a serious conflict of interest. “If there are no disputes on the audit side with the client, no issues over asset impairments or how revenue and expenses should be booked, then no problem — the conflict of interest is hypothetical,” says Gordon. “But if the auditor is questioning these things while the firm also provides profitable services to the client” then the auditor may turn a blind eye.

The conflict of interest argument has also arisen in the United States, where many wonder if it makes sense anymore for the issuer being audited to be the one paying the auditor. After all, why do auditors continue to make big, costly mistakes that result in lawsuits? Could it be the pressure to keep the audit client happy?

Big Four alumni say the overwhelming majority of auditors are not being negligent. As Villanova explains, an auditor is often trying to figure out some “newfangled, ingenious thing that some banker came up with” while the “clock ticks toward the quarterly earnings report.” The company makes a best estimate based on the available information, and the auditor scrutinizes the company’s key assumptions to the best of his or her ability.

A potential solution to the problem of long-term auditor-client relationships, says Villanova, is having another firm come in and check the assumptions.

There is no law or accounting rule requiring the use of peer reviews, in the U.K. or the U.S. Not only would a “referee” weaken the conflict-of-interest charge — auditor would know its work would be evaluated by a competitor — it would spread the wealth among a greater number of firms, addressing the oligopoly assertion.

“It could result in a new practice, whereby a group of firms specializes in scrutinizing the financial data that another firm has already scrutinized,” Villanova said. That already happens when a company goes through a major acquisition or divestiture — one Big Four firm gets hired to give the company a valuation report and another audits the assumptions and models used in the valuation.

What Now?

The Big Four would hardly relish having other audit firms peering over their shoulders at their workpapers. In addition, issuers and investors might not put up with longer lead times between the closing of books and the auditor giving its imprimatur to the financial statements.

One thing auditors can do to head off any new rules is to ensure new auditors are trained to appropriately challenge the client on accounting and disclosure matters. Audit committees on boards of directors can also play a part. They must keep auditor independence intact and identify for auditors the transactions and accounting issues from which misstatements are likely to arise.

Still, audits will miss things, given that auditors need to form an opinion drawn from only a small wedge of the client’s financial data. “The public sees an audit as assurance that everything is perfect in a company, which is not what an audit is,” said Wheelwright. “It’s a testing process to see if what a company is doing is reasonable.”

Lawmakers in the U.K. might be off base — “looking for precise answers to improve a science that is inherently gray,” as Villanova puts it. But that doesn’t mean the quality of audits can’t be improved. For certain, if the Big Four firms don’t join the discussion about how to make incidents like Carillion less likely, they may not be happy with what regulators impose as a solution.

Russ Banham is a Los Angeles-based financial journalist and author.

Can We Bear the Cost: The Planet Is Warming. How Can We Prepare?

By Russ Banham

Leader’s Edge

It’s one thing to read about raging wildfires in California and quite another to experience the possibility of such a catastrophe. In early August, our secondary home in Idyllwild, a small town nestled in the San Jacinto mountains, was imperiled by the Cranston fire, just one of the many wildfires burning throughout the state.

The blaze was started by an arsonist, and all 3,000 residents of Idyllwild were evacuated.

For five nail-biting days, we waited, fearing mostly for our neighbors’ primary homes and their pets left stranded when the roads to the town were closed. A friend in the California Highway Patrol snapped a picture of a giant plume of smoke from our front fence line. It was a half-mile away. Winds blew westerly, not a good sign.

And then our prayers were answered. The ground and aerial firefighters who arrived by the hundreds to battle the blaze finally got it under control. Although the fire consumed more than 13,000 acres, the town and all but a half-dozen homes were spared. Other municipalities throughout California have not been so fortunate. The largest wildfire in state history burned for more than a month and encompassed more than 400,000 acres.

The costs of such natural disasters are borne by all of us—in our taxes and our insurance premiums. That cost was made clear in 2017. A study by the Swiss Re Institute found the economic damage caused by natural disasters last year totaled $337 billion, the second highest on record—of which $144 billion was insured, the highest on record. Three hurricanes that year—Harvey, Irma and Maria—ranked among the five worst hurricanes in history, in terms of financial costs. Insured losses from all wildfires in the world totaled $14 billion in 2017, the highest ever in a single year. In the United States alone, more than 9.8 million acres burned in 2017, costing $18 billion—triple the annual wildfire season record. Among these wildfires was the Thomas fire, California’s worst fire in history at the time in terms of acreage burned.

For businesses, natural disasters represent a serious risk management issue. Many surveys of large and midsize companies rank natural catastrophes among their top three risks. For small companies, such disasters are an even greater threat.

In the years ahead, diverse structures in regions vulnerable to natural disasters are bound to experience substantial property damage and destruction. Large companies will endure significant supply-chain disruptions, delays in business operations and reduced revenues. Many smaller businesses will fail.

What is being done to prepare for this dystopian possibility? The paradoxical answer is: quite a bit but not enough.

For example, in ZIP codes designated by the Federal Emergency Management Agency as susceptible to natural catastrophes, 40% of small companies experienced natural-disaster related losses that curtailed business operations.

Only 17% of them had business interruption insurance, according to a 2017 study by the Federal Reserve.

Leaving aside potential causes, more than 97% of climate scientists in peer-reviewed studies in notable scientific journals concur that the planet is warming. And more than 80% of climate scientists in studies conducted by groups supported by the oil and gas industry affirm that climate change is happening.

“The evidence is unequivocal that the planet is warming, with literally thousands of studies using all sorts of evidence to draw what are pretty rock-solid conclusions,” says Richard Black, director of the Energy and Climate Intelligence Unit, a U.K.-based nonprofit that publishes on energy and climate change issues.

What does this mean for natural disasters? It depends. Among the scientific community, some potential effects are generally agreed upon, while others have less consensus.

Hurricane Flooding

As the planet warms, ocean levels rise for two reasons: thermal expansion (water expands as it warms) and the flowing of melting land-based ice like glaciers into seas. “We can measure sea levels year by year and have seen gradual increases that may accelerate in the future,” said Robert Muir-Wood, chief research officer at catastrophe risk modeling firm RMS.

When hurricanes form, they create an additional abnormal rise in sea level—called a storm surge. The greater the rise in sea levels, the higher the risk of extreme flooding along coastal areas, given the expanded volume of water.

“There’s no doubt that hurricanes will inflict heavier damage due to rising sea levels caused by climate change,” says Michael Oppenheimer, a climate scientist and professor of geosciences at Princeton University. “That’s a no-brainer. The flooding will be greater and will extend more inland from coastlines.” That said, 90% of Harvey’s insured property losses derived from inland flooding and not hurricane wind intensity.

Climate change also is a factor in higher precipitation events, such as the 60 inches of rain that engulfed the greater Houston area during Hurricane Harvey. “As temperatures rise to warm oceans, water evaporates [faster] and produces more moisture content,” Oppenheimer explains. “On that, we climate scientists can agree.”

Muir-Wood shares this opinion. “There’s pretty good evidence to suggest we will have more intense rainfall resulting in extreme flooding events like we saw with Harvey,” he says.

Another factor in hurricane flooding is duration of the storm. Hurricane Harvey lasted 16 days—from August 17 through September 2. According to the journal Nature, climate change affects what scientists call “translation speed”—the speed at which a hurricane travels forward. This speed is slowing, indicating that storms may linger longer in a particular geographic area, increasing the risk of flooding.

“There’s a theory that shows a warming planet stalls atmospheric circulation patterns like trade winds and the jet stream, stalling storms in one place for longer periods,” Oppenheimer says. “But there is no scientific consensus yet that this is explicitly caused by climate change.”

The changing climate might also explain why scientists expect more Category 4 (130 mph to 156 mph winds) and Category 5 (157 mph or higher) hurricanes. That’s because hotter oceans provide more energy, fueling wind intensity.

“We may even need to create a new Category 6 to take into account more intense winds,” Oppenheimer says. “But most scientists are not willing yet to say that the observed change in wind intensity is due explicitly to climate change. Again, we’re not at a point yet to nail this down.”

If there is a silver lining in these dark clouds it is this: more frequent hurricanes generally are not anticipated, with some climate experts predicting a potential decrease in the overall number of future hurricanes, based on models involving warming temperatures. According to the National Oceanic and Atmospheric Administration’s Geophysical Fluid Dynamics Laboratory, three or four small hurricanes might merge into a single large hurricane, although the organization acknowledges uncertainty on this subject.

Droughts and Wildfires

Last year was the second-worst year on record for wildfires in the past 60 years, with 10 million acres burned, exceeded only by 2015, when about 10.1 million acres went up in flames. This year is well on track to break the record. (See sidebar: A Terrible Tally.)

Prior to the 1970s, wildfires in the United States received little attention from the government and the public, as they were generally smaller and sporadic and occurred in mountain regions with scant habitation. Then all hell broke loose. According to the Union of Concerned Scientists, between 1986 and 2003, wildfires burned more than six times the land area, occurred nearly four times as often and lasted almost five times as long as wildfires reported between 1970 and 1986.

More recent statistics indicate that wildfire seasons were 84 days longer on average from 2003 to 2012 than they were from 1973 to 1982. Large wildfires also are taking more time to contain, burning an average of more than 50 days between 2003 and 2012, compared to six days between 1973 and 1982.

Is climate change the cause of all this misery? “It’s a complicated peril, with a lot of actors in play,” Muir-Wood says. “You must take into account the previous history of drought and extreme heat waves.”

He’s referring to the fact that our world has seen weather like this before. Ancient Egypt was lost to one of history’s most withering droughts, and the United States’ most protracted drought occurred during the Dust Bowl years from the 1930s to the 1950s.

However, we do know that the increase in air temperatures due to climate change does cause drier conditions, such as decreased soil moisture and increased evaporation of water from lakes, rivers and other bodies of water—all of which can exacerbate drought conditions.

“Another factor is natural weather occurrences like El Niño events that cause year-by-year variability in drought potential,” Oppenheimer says. “What we do know is that future conditions will be progressively more favorable to these kinds of fires in many areas. The reasons are complicated, but the science is getting close to nailing it down.”

The Human Factor

While climate change can be blamed in part for the recent scourge of natural disasters, human folly contributes to much of the economic impact. First, too many people (myself included) continue to live in coastal areas and mountain towns, regardless of the known dangers. Second, those of us living in these regions downplay the risks and do little to reduce their impact.

“Despite all we have learned about the impact of hurricanes, wildfires and other natural disasters and how to protect ourselves and our businesses from their impact, we’ve actually done very little to reduce the material losses from these events,” says Howard Kunreuther, a professor of decision sciences and public policy and co-director of the Center for Risk Management and Decision Processes at the University of Pennsylvania’s Wharton School.

In his book (written with Robert Meyer) The Ostrich Paradox, Kunreuther contrasts human behavior negatively with the behavior of an ostrich presumed to bury its head in the sand when danger approaches. “The reality is that ostriches stick only their beaks in the sand, but their eyes see everything around them,” Kunreuther says. “People have their entire heads in the sand. The uncertainty associated with future sea level rise and the nature of hurricanes often leads us to hope for the best rather than fear the worst.”

He attributes this reaction to myopia, amnesia, optimism and inertia, which combine to make us always expect the best, even when bad things are blatantly obvious. “People have a tendency to think when they move to coastal areas in a hurricane-prone region that the worst won’t happen to them, despite all evidence to the contrary,” Kunreuther says.

Muir-Wood expressed a similar sentiment. “In most cases, the risks of a hurricane or wildfire are greater than how people perceive them,” he says.

Given all we know, scientifically and economically, about natural catastrophes, the related costs continue to rise, in large part because of our collective tendency to downplay their significance. “Following a wildfire or a hurricane that interferes with people’s lives, little if anything is done to prepare for the possibility of it occurring again,” Kunreuther says. “The thinking is that we will be spared next time around. We have very short memories when bad stuff happens.”

By doing little if anything to reduce the potential impact of a natural disaster, when the next one arrives the aggregate damage losses are higher than they otherwise could have been. A study by insurer FM Global affirms this connection. The multinational property insurer/property loss prevention specialist company evaluated its losses from Hurricanes Irma and Maria, comparing the data of clients that had taken loss prevention actions based on its recommendations with those that hadn’t taken these actions.

“We were surprised to learn that the companies that took these actions experienced losses five times lower than those that didn’t,” says Katherine Klosowski, FM Global’s vice president of special projects. “We had expected a difference but not that magnitude.”

This is good news, indicating that losses can be contained. Such losses run a gamut wider than just property damage to homes and buildings. “There are arrows that go from climate change to things like food security, geopolitical stability and economic growth, all of which create risk management implications for companies,” Kunreuther says.

In fact, according to one study, as much as 95% of fresh produce is perceived to be at risk because of climate change. Livestock health is also at risk, as warming temperatures cause heat stress and increased demands for water that may not be as readily accessible.

“More needs to be done to assess these risk interdependencies,” Kunreuther says. “And insurers are in a prime position to undertake these assessments.”

Fortunately, there are many smart ideas circulating on how homeowners and businesses can reduce their risks of property damage, including water runoff systems like dikes to contain flooding, spraying homes with fire retardant prior to a wildfire and hurricane-resistant doors and windows. For more information, check out FEMA’s online hurricane preparedness and wildlife planning toolkits.

Government Action

When people fail to take actions to limit their exposure to property damage, governments generally don’t intervene on their behalf. “We’ve seen a perpetuation of poor public policy decisions, in which people and businesses are allowed to locate anywhere they want in structures that are inappropriate given the climate risks,” says Will Dove, CEO and chairman of new reinsurer Extraordinary Re. “This guarantees that catastrophe claims frequency and severity will only get worse.”

“We need the political will of the federal government to say that it will no longer encourage risky zoning and land-use rulemaking on the part of local governments, since it is local government that authorizes permits for construction activities in climate-vulnerable areas. Local building codes must reflect the actual risks, which are well understood.”

Princeton’s Oppenheimer also took local municipalities to task for not upgrading their building codes. “They need to get them up to modern standards that reflect reality and then enforce them stringently,” he says. “And the federal government flood insurance program must follow through with rates that are sound but also sensitive to the investments that people make to protect their property.”

If this were the case, more homeowners might buy flood insurance. Only two in 10 homeowners had either private or federally provided flood insurance to absorb losses from Hurricane Harvey, according to an estimate by the Consumer Federation of America. “People without insurance expect the government to bail them out, which is often the case,” Dove says. “In effect, the government bailout takes away the financial responsibility from the individuals affected. When this occurs, the taxpayer ends up footing part of the bill.”

Part of the problem is the National Flood Insurance Program, which is deeply in debt and nearly insolvent, in part due to repetitive claims for property damage by the same homeowners. “NFIP is in need of reforms,” Dove says.

“FEMA flood maps are outdated and don’t reflect current reality. There are no incentives to rebuild structures to accommodate the actual risks, resulting in repetitive loss properties. Coverage limits are stripped down in many cases, with no business interruption insurance for small businesses out of commission for longer than a month.”

Congress is now studying common-sense reforms to NFIP, like improved flood mapping and the identification of properties filing repetitive damage claims. But even with such enhancements, unless flood insurance is mandatory in vulnerable regions, not everyone will buy the insurance. Kunreuther proposed the idea of offering all homeowners and businesses financial incentives, like lower premiums and affordable loans, for structural improvements they undertake to reduce storm-related damage risks.

“A reason why people don’t invest in mitigation measures is because they perceive the cost as too high relative to the benefit,” he explains. “But if the government offers them long-term loans at affordable rates, there’s a better chance they’ll see value in making needed improvements. And if their insurance carrier simultaneously reduces its premiums for taking out the loan, the incentive for the business or the individual is even greater.”

Private Market

It’s not just a government problem, though, and there is a lot the private insurance market and other businesses can do to help encourage mitigation. And the private insurance market is growing for flood. Several reinsurers like Swiss Re are partnering with primary carriers to offer the coverage. Altogether, carriers wrote more than $623 million in business in 2017, a 51.2% increase in premiums over the previous year. Nevertheless, this is a pittance compared to the NFIP’s $3.5 billion in 2017 premiums.

As far as encouraging mitigation goes, Oppenheimer has some ideas. “Frankly, the U.S. insurance industry could do a lot more to fulfill its social responsibility by making sure people properly manage the risks to their properties,” he says. “A rate structure that gives people credit for building and maintaining resilient homes and premium rebates when someone does something good to make the property more resistant to damage are big steps in the right direction.”

Lenders also can do their part. “Banks can require businesses and homeowners in vulnerable areas to buy flood insurance as a condition of loans and mortgages,” Dove, of Extraordinary Re, says. “Many lenders already do this if the region is in a one-in-100-year flood zone. But the flood maps that define many areas are very dated and have not been updated to reflect current climate conditions. Certainly, no one expected that Hurricane Harvey could produce 60 inches of rain in a matter of days. Some regions that were not perceived as a one-in-100-year flood zones in the past may very well fall into this category now.”

Insurance brokers also can help tip the scales. “Too many policyholders are confused about what is and isn’t covered when a natural disaster strikes and are surprised when something they thought was covered wasn’t,” says atmospheric scientist Marla Schwartz, from reinsurer Swiss Re.

An example is mudslide damage and destruction. A few months after the Thomas fire was finally contained, heavy rainfall in the affected region resulted in massive and deadly mudslides that destroyed multiple homes. Although property insurance policyholders did not have mudslide insurance, which is unavailable in California, the state’s insurance commissioner instructed insurers to honor claims for mudslide damage, commenting that the fire was the “proximate cause.”

The decision was contentious, but Schwartz says, “It’s a good sign that regulators are up to date on links between fires and mudslides. But it would be better for insurers to recognize this link in their policies and reflect the risks accordingly in their premiums.”

Taking the Lead

Some believe the global property and casualty insurance industry can play a more influential role in understanding, managing and insuring future natural disasters. “There is no single set of people other than the actuaries at insurers and reinsurers who are better at understanding these risks and calculating their frequency and severity,” Black, of the Energy and Climate Intelligence Unit, says. “Companies like Swiss Re and Munich Re are just brilliant at this for obvious reasons—they’re bearing a good part of the cost. They and others should have louder voices in informing the public and policymakers of what is really going on and what needs to be done as a result.”

An unambiguous “voice” may well be needed. Every time the United States suffers a shocking disaster like Hurricane Katrina, Superstorm Sandy or the California wildfires, the inevitable hue and cry that follows eventually subsides—until the next big disaster arrives.

“The challenge in the future will not be lack of risk-bearing capital to absorb catastrophic losses,” Muir-Wood says, “but whether insurers are allowed to charge for the underlying cost of risk based on their technical arguments.” If they can’t charge for the actual cost of risk, he says, insurers might need to pull back coverage or pull out of markets entirely.

“Certainly, the world is not helped by a U.S. administration that doesn’t accept climate change as a reality, making the chances of support for infrastructure and building adaptions at the federal level currently nonexistent,” Black says.

“But insurers and reinsurers accept reality. They can be expected to tell it like it is.”

Oppenheimer contends time is of the essence. “Human beings have done a pretty good job saving more lives from natural disasters,” he says. “Fewer people die worldwide from hurricanes and wildfires than in the past. But on the property and business interruption side of things, the record stinks.”

Banham is a Pulitzer Prize-nominated financial journalist and author. russ@russbanham.com.

This Deep Learning Technology Is Redefining Ad Integrity

By Russ Banham


In the pre-social media era, marketers had a good idea about how many times consumers saw their corporate logo and other brand images. Then, around 2010, after social media sites took off, millions of people could see a company’s logo, unbeknownst to the organization. That was both good and bad news.

While exposing people to a company’s logo could, in theory, make them more familiar with the brand, products, and services, there was also the possibility the image could be put into a negative context and go viral. Until recently, marketers had no way to monitor the use of their advertising images by third parties.

Today, deep learning makes this possible. Computer vision, a subset of deep learning technology, gives marketers insights into how many people have viewed a logo or other brand images, in addition to their context.

“The use of computer vision for marketing purposes is becoming an increasingly common application of deep learning technology,” said Clement Chung, director of machine learning at Wave Financial, a provider of integrated software and tools for small businesses. “Companies can see just how they are being represented in online images, both positively and negatively.”

Ad Impact, Across Mediums

Deep learning is a subset of machine learning, itself a subset of artificial intelligence, in which computers are instructed to learn by example. For instance, in self-driving cars, the car’s computer is instructed to stop at a red light. Once the car is programmed to do so, the machine will know to stop at all red lights.

Computer vision technology, then, uses object recognition software to tabulate how many times an ad or logo has been viewed in social or traditional media, and the context in which the image appeared.

“The technique involves two parts—the development of an algorithm to train the computer to find the image, and then the use of object recognition to determine the context of the image,” said Chung.

This has to two positive effects for marketers. To begin, it helps them identify how many times an ad was viewed outside of its original distribution campaign. If we were to consider a Dodgers Stadium beer ad, for example, computer vision technology could provide a way to calculate how many times the billboard at the game was seen both on social media and traditional media. If the game is televised, chances are local and even national news stations may also carry images of the event in which the billboard ad is visible.

Detecting viewership can help marketing teams decide where to put ad dollars. “What if the ratings on the televised event have dropped significantly, meaning fewer people are seeing it at home?” Brian Kim, senior vice president of product at GumGum, a leading computer vision company,said. “This might convince the marketer to put its spend elsewhere.”

Using computer vision, companies can calculate if more people saw the image on social media or other media than the TV ratings indicate. “That’s a far better determinant of the advertisement’s value,” Kim noted.

Chung agreed, stating that a marketer may also discover things like a billboard placed behind the catcher was seen by more people than one situated in left field. “The goal in all cases is to get a bigger bang for your advertising dollar,” he said.

An Opportunity Algorithm

The technology also identifies missed opportunities and flags necessary damage control. If the context is positive, the company has the opportunity to push the advertised image toward becoming viral.

However, there is also the risk that an image of the brand or its logo could become a “meme of the worst kind, used for satirical purposes,” said Chung. “In such cases, the product’s brand value can quickly erode, especially if the marketer is unaware of the negative associations and is too late to do anything about it.”

Computer vision offers a way to be notified in real time about insulting brand imagery. “An algorithm can be created to spot the use of certain offensive words that accompany the image on social media,” Chung pointed out. One obvious example, he noted: “This product sucks!”

With the emerging technology, marketers have the ability to counter the offense. “There have been memes created by overworked millennials and teenagers fed up with too much homework where they’ve snapped a picture of themselves ‘drinking’ a household cleaning product—the ‘my fake suicide’ kind of thing,” said Kim. “With computer vision tools, brand managers have instant access to what is now a negative trend to quickly adjust the conversation in a more positive direction.”

Of course, computer vision can also help spot and seize marketing opportunities. For instance, GumGum has created a way for marketers to run an advertisement at opportune—often fleeting—moments in social media.

“We’ve developed a contextual relevance algorithm using object recognition software that can pinpoint, for example, when happy images involving humans and cats appear on social media,” said Kim. “Say this image appeared on CNN. We now have the opportunity to stick a banner ad for a national pet store chain into the image in real time. We would receive income from the pet store chain to display the advertisement and arrange for CNN to be paid a portion of the earnings.”

The technology is also able to train the algorithm to find a context in which a brand should appear in certain images, but doesn’t. With the beer company example, this might include adding logos to images of people photographed at parties, restaurants, or taverns where they know the beer is served.

“Computer vision can find images that fit the marketer’s desired demographic, and if the brand is not evident in these images, the information is nonetheless insightful for marketing purposes,” Chung said. “The company now has better intelligence on where to put its marketing spend.”

Russ Banham is a Pulitzer-nominated journalist and author who writes frequently about marketing technologies.

Meet Rose, the One-of-a-Kind Chatbot of the Future

By Russ Banham

Perspectives magazine

Her name is Rose, and she is exactly the kind of person one would expect to handle customer queries at The Cosmopolitan of Las Vegas, a hotel known for its decadent tag line, “Just the right amount of wrong.” Listening to Rose speak, she conjures images that seem to align with The Cosmopolitan’s, well, suggestive ads.

But Rose is not a person—she’s a chatbot that made her debut last year as the hotel’s virtual concierge. And today, her persona matches the attitude of many looking to escape for a weekend in Vegas.

“If you called to ask Rose something and she couldn’t answer, she will say, `Sorry, I just spilled wine on my top and need to change into something more comfortable. Let me get you to a live agent,’” said Clara de Soto, cofounder of Reply.ai, the company that created Rose’s conversational strategy in partnership with The Cosmopolitan’s digital marketing agency R/GA.

Rose is new in the world of AI chatbots, yet she’s not only a smart algorithm. She’s also a personality. As more companies create voice-enabled bots to handle customer queries, they’re realizing the value in having virtual points of contact serve as a marketing extension of their brand.

“The reality is that you’re not just building a bot,” de Soto said, “you’re building a relationship.”

Rapport Is Money

For the Cosmopolitan, this relationship also has bottom-line benefits. Guests who engage with Rose spend 30 percent more at the hotel than those who don’t. And when these guests leave, they’re 33 percent happier, too, according to the hotel’s surveys.

Of course, it isn’t always easy to capture the right personality in a chatbot. “We equate it more to a long-distance run than a sprint,” said de Soto. “The reality is it takes time to do this right. In Rose’s case, the conversational strategy planning took us a solid two years.”

Most voice-enabled chatbots continue to be menu-based, whereby a caller asks a question and is provided with three or four possible answers to pick from. More sophisticated bots like Rose leverage machine learning and, in this case, natural language processing (NLP) to understand and interpret a question before providing an answer.

Certain questions, like booking a reservation at a restaurant or buying tickets for a game or a show, are easier than others. At present, Rose has been able to successfully answer a question 80 percent of the time without turning the person over to a live human being, de Soto said.

When compared to Facebook’s Messenger chatbot that reportedly fulfilled just 30 percent of user requests in 2017, that feels like pretty high functionality. Yet, de Soto continues her work to continually increase Rose’s batting percentage. “There are so many ways of asking a question and Rose is learning all the time,” she added.

Even questions that are salacious in nature, Rose can answer. “We made sure her response was not inappropriate, yet still reflected the brand,” de Soto said.

No Two Bots Should Be Alike

According to Juniper Research, an AI-focused research firm, by replacing human beings with pre-programmed bots, companies in the retail, banking, and healthcare sectors can trim 2.5 billion hours off of the time needed for humans to respond to customer inquiries in the next five years. What’s more, the firm estimates these companies will save an estimated $11 billion in the same timeframe.

Such a dramatic savings in time and overhead is reason enough for companies across industries to invest in chatbots. Another seems to be their reliability. Unlike people, they’re never sick, tired, angry, or rude—and, they don’t make the same mistake twice, thanks to machine learning.

“Machines do things the same way all the time until they learn something new,” said Kevin Kelly, founder and co-president of New York-based digital advertising agency Bigbuzz Marketing Group.

Potential downsides, of course, include difficulties in answering tough questions, causing customer frustration, and a lack of human connection. According to a 2018 survey by consultancy PwC, 64 percent of U.S. consumers felt that brands have lost the human touch in their automated customer experiences.

However, the same study indicates that more human-like interactions could tip the scale. “Automated solutions should learn from human interactions so those experiences can improve,” the study reported.

That’s exactly the kind of work that Reply.ai is doing. “No two bots should be alike,” said de Soto. “Each must be unique because each company is unique.”

While Rose serves as an extension of the Cosmopolitan’s brand strategy, she’s not alone. De Soto aids in the development of other chatbots who do the same (albeit without the sass), working for several insurers, for instance, that need bots who show empathy. For example, upon filing a collision claim, the chatbot will state, “Oh, I’m so sorry to hear that,” before moving on to asking the next question.

Liberal Arts Majors Rejoice

One problem with previous generations of chatbots was that the IT engineers who built the underlying technology also crafted the bot’s responses. De Soto, who has a theater background as a performer, instead enlists a combination of playwrights, copy editors, sociologists, and user experience (UX) designers to humanize the dialogue elements.

In writing the scripts, these creatives collaborate with other creative people at marketing firms to ensure message and tone consistency. “There’s a new title running around called a `conversation designer,’” said Kelly. “Their job is to design chatbot responses to customer queries that sound like real people—assuming people were always smart, helpful, interesting, and fun.”

Bigbuzz is currently working with Reply.ai to develop a full-service chatbot for a large provider of smart home devices. “[De Soto’s] team is presently working on the bot’s tone of voice to give it the right personality,” he said.

And personality may be just what is needed to keep callers on the line. Kelly predicted that in five years, chatbots will become so savvy and ubiquitous, human beings will rarely provide customer service.

“A subset of AI is machine learning, which will continuously guide chatbots to learn from each customer interaction, training them to solve problems in more accurate, faster, and useful ways,” he said. “In ten years, people will be telling their children about the old days when real, live people used to answer their silly questions on their mobile phones.”

Russ Banham is a Los Angeles-based technology writer.

Critical audit matters coming into focus

By Russ Banham

Journal of Accountancy

As auditors prepare for a new auditing standard requiring the disclosure of critical audit matters (CAMs) in their reports, they are traveling in uncharted territory and contemplating new information that they will be providing to investors.

The new auditing standard AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, adopted by the PCAOB in 2017, is predicated on enhancing the relevance and usefulness of the auditor’s report. The first phase of implementation affects PCAOB audits of companies with fiscal years ending on or after Dec. 15, 2017, and includes disclosing auditor tenure and other changes to the form and content of the auditor’s report.

The second phase of implementation requires CAMs to be disclosed in the auditor’s report beginning with fiscal years ending on or after June 30, 2019, for audits of large accelerated filers, and for all other applicable companies for fiscal years ending on or after Dec. 15, 2020. The phased implementation date gives audit firms time to develop processes around determining which items they will disclose as CAMs, which are matters that:

  • Have been communicated to the audit committee;
  • Are related to accounts or disclosures that are material to the financial statements; and
  • Involved especially challenging, subjective, or complex auditor judgment.

At present, audit firms are developing processes to ensure all their engagement partners have a consistent method to identify CAMs.

“As with all changes in our audit methodology, we will distribute implementation guidance and tools for engagement teams to implement the new standard,” said Dave Sullivan, CPA, national managing partner for quality and professional practice at Deloitte & Touche LLP. “We also plan to design and implement controls to monitor the adoption of the CAM disclosures and assure that engagement teams have considered all the requirements of the new standard while applying it to their unique client situation.”


The standard is intended to provide investors with more comprehensive information for investment decisions and is an opportunity for auditors to provide more information of value during the audit. AS 3101 requires auditors to identify a CAM, describe the principal considerations that led to its selection as such, describe how the CAM was addressed in the audit, and refer to the relevant financial statement accounts or disclosures in making these determinations. While CAMs may be matters that were traditionally discussed with audit committees, they were not discussed in an auditor’s report.

Sullivan provided an example of a CAM that might not have been disclosed in past auditor reports. “Let’s say a company with a lot of goodwill on its books is struggling,” he said. “It’s going through the process of predicting future earnings to determine whether or not the goodwill will be impaired. The projections may involve revenue and expense calculations 10 years into the future. This would fit the definition of a critical audit matter, as it is material to the financial statement and could be subjective, complex, and involve auditor judgment.”

The new standard creates several challenges for auditors, audit committees, and preparers of financial statements. First, the PCAOB did not provide an all-inclusive list of what might constitute a CAM. Rather, it is the auditor’s responsibility to make this determination.

“The new framework is broad enough that on one level you might think that ‘goodwill impairment’ is a difficult judgment that would always be a CAM, yet this is not the case,” Sullivan said. “A company could be so profitable that this is not a difficult, complex, or subjective judgment. But if the company the next year has a truly bad year, then goodwill impairment could be a CAM.”

Other possible CAMs include a company’s valuations of hard-to-value securities and investments in nonliquid assets, assuming in both cases that they are material to the balance sheet, Sullivan said. “While the firm anticipates some effort in reporting the CAMs the first year of compliance, we’re very supportive of the new audit model and the goal of giving investors additional information to assist their valuations,” he added. “By separating out such issues for specific attention by investors, they’re better aware that this was a significant estimate by management and one of the most challenging areas in the audit for the auditor.”

A second challenge is how many CAMs an auditor must detail in the report. “Auditors will first look to the definition of a CAM in the auditing standard,” said Cindy Fornelli, executive director of the Center for Audit Quality (CAQ), which is affiliated with the AICPA. “A CAM is any matter arising from the audit of the financial statements that is communicated or required to be communicated to the audit committee, that relates to accounts or disclosures material to the financial statements, and that involved especially challenging, subjective, or complex auditor judgment. There is no set number for CAMs for the auditor to communicate.”

Boilerplate language is another area that will represent a challenge for auditors related to this standard. SEC Chairman Jay Clayton issued a warning of sorts when the new standard was issued. He said he would be disappointed if CAMs result in boilerplate communications that snuff out the potential for the new standard to deliver meaningful information toinvestors.

Fornelli shared that auditors may identify the same CAM from one year to the next. “Investors are looking for comparability. So as long as a CAM provides meaningful and accurate information about the audit, it may be OK to use similar language year after year,” she said.

Fornelli also said that investors must appreciate that the new PCAOB standard does not provide the same heightened degree of transparency called for in the United Kingdom’s auditor reporting standard issued in 2013 by the Financial Reporting Council (FRC). The FRC standard requires auditors to describe the most significant risks of material misstatement, disclose the levels of overall and performance materiality, and explain the scope of the audit.

“They’re different standards with different levels of transparency,” Fornelli said. “The other caveat I have for investors is that they should not expect the CAMs to be a proxy for the conversations they must still have with management, the audit committee, and the auditors. This is not the purpose of the standard. Nevertheless, investors will get insights into what the auditor has found to be challenging or complex, which is a big step forward.”


Given these various challenges, the good news is that the phased effective dates give auditors, audit committees, and preparers time to get ready. While other mandatory features of the new auditing standard, such as disclosure of an auditor’s tenure, were phased in on Dec. 15, 2017, the communication of critical audit matters for large accelerated filers is not required until audits of fiscal years ending on or after June 30, 2019, and for all other companies for audits of fiscal years ending on or after Dec. 15, 2020. “That’s a pretty good lead time,” Sullivan said.

In the meantime, Sullivan said engagement teams are endeavoring to consider all the matters that may be CAMs, to determine which ones will be disclosed as such in the auditor’s report. The firm’s internal implementation guidance and model workpapers are guiding engagement teams through the process of considering relevant items and documenting their conclusions as to whether or not each matter is, in fact, a CAM. “We’ll monitor the application of this guidance and tools as we prepare to implement this portion of the new standard,” he added.

The firm also expects to engage in frequent dialogues with the audit committee about what might constitute a CAM disclosure. “We will then take a dry run, going through the process of identifying the matters that could be CAMs and how they might look in a report,” Sullivan said. “Once that is done, we would bring everyone together to look at the draft and react to the disclosures.”

Sullivan recommended launching this audit planning process early in the fiscal year to discern the challenging, complex, and subjective areas of the audit and discuss them with the relevant parties. “As the year progresses, if circumstances change or something big happens like an acquisition, certain CAMs may drop off the list, but others will remain so there are no surprises two days before the filing,” he said.

Lastly, Sullivan advised that auditors exercise restraint in not trying to do too much, too soon. “You need to present important information, not duplicative information,” he said. “If there is a very good description of the [entity’s] critical estimates in the footnotes, in which the matter’s complexities and subjective judgment is detailed, I don’t think auditors need to repeat the same words [that are] in the body of the 10-K. They’re already voluminous and can be repetitive.”

About the author

Russ Banham is a Pulitzer-nominated business journalist and author who writes frequently about finance and accounting issues.

Prejudice and Pride on the Road to the C-Suite: The Story of XL Catlin’s CDO

By Russ Banham

Carrier Management

Math has been the one constant in Henna Karna’s life.

The chief data officer of XL Catlin today heads up the data and digital transformation team at the global property/casualty insurer and reinsurer. She is widely considered to be one of the foremost data scientists in the insurance industry, beginning her career initially as an actuary and then becoming a predictive modeler and cryptographer for several government agencies.

Karna subsequently worked in both the business and technology sides of high technology and financial services companies, and spent a brief period in academia. She returned to the public sector to lead disruptive digital innovations at Verisk Analytics and AIG, serving the latter as global head of data and technology for the actuarial organization. She’s taking her work to the next level at XL Catlin, which has embarked on a robust initiative to make data a competitive differentiator and the nucleus of all business decisions.

“Our vision is to create an embedded digital ecosystem that intelligently converts data into business insights on a platform that can be used democratically by the company, our customers and our partners,” said Karna, who has a master’s in business administration from MIT and both a master’s and a Ph.D. in applied mathematics from the University of Massachusetts. “In this journey, I am fortunate to have such a great team and the buy-in from across the technology and business sides of the organization. It is not our vision, our approach or our technology that will make this successful but rather our teamwork and partnership.”

The sheer volume of data today in digital format is a goldmine for all industries, assuming there are ways to rapidly unearth this intelligence. “The challenge is the time and effort required to access and analyze data,” said Karna. “Finding what you need at a point in time is elusive. Our mission is to transform the company to create this value in real time.”


XL Catlin is well on its way toward achieving this vision. (Disclaimer: The reporter for this article has also written content for XL Catlin.)

Different datasets now reside in an array of searchable micro-databases with transparent indicators, effectively transforming data into “reusable assets,” said Karna. “We are becoming hyper-flexible in how we leverage data, convert it into information, and then transform it into insights and intelligence.”

In these regards, XL Catlin is at the vanguard of the P/C insurance industry, which some see as being in the midst of an existential crisis. Under attack by InsurTech startups predicated on more efficient ways to underwrite, process and distribute insurance, carriers can no longer abide legacy operations and technology. It’s either transform or die; otherwise, customers will turn to competitors that sell innovative insurance coverages tailored specifically to their needs at lower premiums.

Karna is well positioned to lead such a transformative event. “Henna stretches the thinking of every team she is in,” said her former boss at AIG, William Kolbert, the insurer’s chief information officer/global consumer. “She knows what it takes to go from good to great.”

Prejudice and Pride

Karna is no stranger to difficult challenges. She came to the United States as a child from Purnia, India, the fifth largest of 38 cities within Bihar state, a rural area in the country’s eastern region. Purnia’s small farms produce multiple crops like rice, potatoes and wheat. It is one of India’s least literate cities, yet Karna’s father, Arun, persevered to become the first in his family to graduate college. He later received a master’s in mechanical engineering.

“My dad is the oldest of seven siblings from a village that struggled with water and electricity,” said Karna. “Everything he earned went to our village—the classic ‘oldest son’ responsibility.”

Her mother, Pushpa, a homeopathic doctor, came from a family that had been part of Ghandi’s movement in the second Indian Revolution. Post-independence, the family achieved a more comfortable existence. Pushpa’s father received his master’s in mechanical engineering from Oxford University in England and a Ph.D. in India. Arun sought to do the same and moved the family to Narragansett, R.I., to attend the University of Rhode Island.

Karna was five years old, the second oldest of four siblings. Her life was turned upside-down. “Money was very tight,” she recalled. “My father was given a very nominal stipend from the university to support the six of us. Kitchari rice and lentils became our most consistent meal at home. My mother walked four miles to buy groceries and back. She sewed all our clothes from scratch fabrics. My siblings and I had to walk or bike several miles each day to and from school, where we relied on meal tickets for lunch. It took several decades before my family could afford to buy a home.”

Tough as these conditions were, they were nothing compared to the virulent racism her family experienced. Narragansett then and today is almost completely white, with the most recent U.S. Census tallying a 95.8 percent population of Caucasians.

“We were the only Indian family anywhere,” said Karna. “I was the subject of intense bullying at school. Girls used to lock me in closets and purposefully trip me in the cafeteria carrying the tiny bit of food I had. One time, some kids stole my gym clothes and burned them in the trash while I was showering. Name-calling and emotional abuse were part of every day. I remember teachers telling the class generalized statements of how people were so poor and illiterate in India that they lived in trees and ate snakes, which is a complete fabrication. The ignorance was profound.”

Life was even worse at home. Karna’s family was involved in a near-fatal car accident. Her parents were hospitalized, and her brother, who suffered a skull fracture, was in and out of the hospital for months. “We went pretty quickly from barely surviving to an even more devastating situation,” she confided. “Survival became the only goal.”

There were some rare instances of goodness. Neighbors and other people pitched in to help until Arun was back at work. “My favorite memory is of the woman in school who served us lunch,” Karna said. “She spoke no English but could tell from my face that life was not easy. Because we did not eat beef, she purposefully saved sauce for me before adding the meat. It was a small gesture but meant so much to me at the time. I still remember her face.”

Saving Graces

Through their ordeals, the family found refuge in academics. Today, Karna’s sister is a physician and her two brothers work at Goldman Sachs and as a serial entrepreneur, respectively.

“I was slightly different than my siblings—more on the creative side,” she said. “I liked the arts, which is why I liked mathematics. Most people don’t see math as creative, but I do. I found writing mathematical proofs and arguing hypotheses to be a form of creativity. In a real world that had become insensible, math became my sanctuary.”

In middle school, Karna read epic fantasy books involving different worlds than the one in which she lived (David Eddings was her favorite author). She started reading Marvel comic books and was particularly attracted to The X-Men, relating to their singularities—the mutations that had made them superheroes. She nurtured her first real friendships with a girl named Maya and a boy named Benjamin, whose families were of European descent and welcoming.

“I think I would have quit school and forgotten how to appreciate people had Maya and Benjamin not been there,” she said, laughing. “Maya and I were both nonconformists. And Benjamin was the class valedictorian, a jock, and yet didn’t wear it with arrogance. Till this day, we stay in touch.”

Karna also found inspiration in the lives led by two historical figures—Abraham Lincoln and Rani Lakshmibai, a young woman who led the first revolt against British rule in India in 1857. Lakshmibai was 29 years old and queen of the princely state of Jhansiin in Northern India, having married the local Maharaja.

“The British compared her to Joan of Arc,” Karna noted. “She refused to accept the constraints put upon her and other women at the time. She was fearless in wanting to stop the practice of slavery and the ingrained racism against certain groups of Indian people that the British had encouraged. She inspired me to find the good in all things and to never accept the status quo, always looking at everything with a fresh perspective—something I try to bring to work every day.”

Karna was similarly impressed by Lincoln’s courage in speaking up for what he knew in his heart was right for America, despite the political consequences. “As a victim of racism, it was an awakening to realize that there were people who had the strength to stand up for what they knew was right,” she said. “Every era needs such people.”

Stepping Out

Karna gradually came out of her shell in high school. She became more vocal in class and no longer tried to conform to others’ expectation of what it meant to be American. As she developed confidence in her abilities, she discovered a newfound love for being Indian.

“We were advised to blend in to not get harassed,” she recalled. “The reality was that was going to happen anyway, so I decided to embrace my difference, braiding my hair and wearing Indian clothes to school. But I was still a classic teenage girl. I wore my salwar (a pair of light, loose, pleated trousers tapering to a tight fit around the ankles) with sneakers, which was pretty cool, I thought. Not that anyone else agreed!”

Mathematics remained her passion. Unlike English literature or history classes that focused on the western world, math was not subjective. “Because I didn’t really understand ‘American culture’ or get the jokes, my grades outside of math were not the best,” she acknowledged. “With math, there was always a right answer and I could find my way to it.”

She excelled in the subject. While in high school, she also indulged her creative interests, applying them to woodworking. She eventually got an after-school job carving walking canes. “I worked for this woman who gave me $30 for every cane I carved and then sold them for $450 each,” she said, laughing at the sheer capitalism.

The elaborate canes included a handle with a rope-like design with knots that Karna carved. She was interested in knot theory—the mathematical study of closed curves in three dimensions and their possible deformations without one part cutting through another. “I’d carve each rope handle based on a mathematical proof,” she said, referring to an argument for a mathematical theorem drawn from previously established theorems. “Then, I put together this little booklet that explained the theorem in terms of nature. Ultimately, I carved 30 different cane handles.”

Taking Charge

Karna brings the same diligence and precision to her role leading XL Catlin’s data and digital transformation. The company’s CEO Mike McGavick said the strategic imperative is crucial to the insurer’s differentiation in the evolving insurance industry. “Everything we do is focused on the customer—providing better insurance solutions and giving them even greater peace of mind—and to do that we need to be more efficient in how we underwrite, distribute our products and innovate. Data transformation is the gateway.”

Karna, who is tasked with building this gateway, explained its value: “By being able to access intelligent data instantly across the enterprise, our people, customers and partners like brokers will have the information they need to improve every link in the insurance value chain,” she said.

She provided an apt analogy of why this transformation is needed in the insurance sector. “Back when people took photographs and sent out the roll of film to be printed, they received back a dozen images,” she said. “It wasn’t difficult to find that photo of grandpa doing something silly. Today, you laboriously scroll through hundreds and hundreds of digital images to find the picture you’re looking for. It takes so long you get frustrated and move onto something else. Well, looking for data is like looking for that one photo.”

XL Catlin is making the hunt vastly simpler and easier. “We started by analyzing our ‘current state’ business capabilities—underwriting, actuarial work, how we go to market, product distribution, claims and so on—measuring dozens of metrics like the length of time it took in each case to extract information,” said Karna.

Her team then brainstormed how to speed up these processes while increasing the rigor and quality of data at the same time. Recently, the architecture needed to move different datasets in real time to the containerized micro-databases that have been built. Insurance processes like underwriting and claims can now draw from the containers.

Asked for an example, she pointed to the data amassed in a micro-database on different policy endorsements. Previously, there was no way to analyze each endorsement type, as there was no central repository. Karna calls this a “classic data problem.”

“It used to be that if someone wanted to understand the trends around a particular policy endorsement to measure them against other endorsements, they would have to manually ferret out the answers in a ‘business as usual’ way,” she explained. “Now, the insights are there for the taking. Time instead is directed toward information analysis that shapes an insightful story.”

Is it hard work?

“It’s an effort,” Karna conceded. “But we see it more as a mission with a journey, one that we’ve been on for the past year-and-one-half. We’ve taken the time to do this right—up-skilling colleagues’ capabilities, changing the entire technical stack [the software that provides the infrastructure for a computer] and modifying our KPIs [key performance indicators]. I can say that we have officially created assets out of our data. We now have measurable value across four pillars: operational, foundational, strategic and disruptive.”

Finding Her Way

As the transformation initiative moves forward, Karna’s embrace of mathematics as a form of creativity differentiates XL Catlin’s approach. The company’s digital innovation is one of the key factors in the decision by French insurer AXA to acquire the company. “My career has been varied, broad and fairly nonlinear, but the reality is that math has always been my forte,” she said. “Mathematics is analytical, and the heart of analytics is data. Most companies now realize that data is how they must drive their businesses forward in future.”

Karna has her hands on the wheel at XL Catlin. “Henna is superbly positioned from her career experiences and interests to lead our company forward in becoming the industry’s premier data-driven commercial insurer,” said CEO McGavick. “She brings a business lens to solving problems yet also has tremendous analytical experience.”

McGavick shared something he had written to Karna following her interview for the chief data officer position in 2016. “Happily, in most cases, I meet some really impressive people in senior interviews…Even against such high expectations, I did not expect to be as impressed as I was by our session and your clear passion for your work and the people you seek to lead.”

XL Catlin’s Chief Information Officer/Reinsurance Dave Walker is confident that the company’s data and digital transformation initiative is on the right track. “This is the first time in decades that I really see a very high possibility of us succeeding in a data strategy,” said Walker. “We’ve made attempts before and thought we were on the right path, but it didn’t have this level of thoroughness in the vision and didn’t create this level of energy in the company. With Henna at the helm, I’m confident we’re going to get there.”

Karna is a happy person today, a wife and mother balancing work-life demands like other women with demanding but meaningful jobs. She no longer feels the need to wear a salwar to boldly state her uniqueness. In today’s multicultural workforce, she blends easily into the quilt, just one “American” among many with a unique background story. “On occasion, I’ll wear a nose ring or a saree to remind me of my cultural heritage,” she confessed. “But the truth is, I just really like the style.”

Russ Banham is a Pulitzer-nominated financial journalist and author.

Technologies for Aging Baby Boomers

By Russ Banham

Despite the popular misconception that everyone ends up in a nursing home, more than half of 95 year-olds still live at home. Among them is my 93 year-old dad.

Jack served in World War II and the Korean War and came home with a Bronze Star and a Purple Heart. When you experience combat as a teenager and survive, it makes the rest of life’s challenges a bump in the road. He’s battled colon cancer and melanoma and won, and came out of a quadruple bypass smiling. A former marathoner who ran the NYC Marathon in four hours at 60, he goes for a two-mile walk each day, jogging in the last couple blocks. He fills his morning making art collages and then cuts vegetables to get dinner ready for my working sister and her husband, whose home he shares. He fully expects to become a centenarian.

There are likely to be more Jacks as my generation of Baby Boomers enter our golden years. With longevity rates pointing upwards—more than one in three women and one in five men who are 65 will reach age 90, according to the Brooking Institution—the volume of older Boomers likely to be taking care of themselves at home is substantial. This social phenomenon, called “aging in place,” will likely lead the Baby Boomer generation to depend on technologies that ease the daily challenges of living long and well in their own homes.

Virtual Caregivers

One can thank modern healthcare advancements for our longer expected lifespans. “We are all benefiting from new medicines, bio-technology, gene therapies, and 3D bio-printing of body parts,” said Nancy Shenker, who writes the popular Bots & Bodies column in Inc. magazine and is the founder and publisher of Embrace The Machine, an AI marketing agency. “There’s a lot of work being done to keep us Boomers alive and thriving longer than previous generations.”

Yet despite scientific advancements, no one is predicting peak health and fitness for those in their last decades. Even the fittest Boomers today are likely to experience fading hearing, eyesight, and mobility—which is where technology comes into play.

A variety of solutions using sensors, smartphone apps, GPS systems, and voice activation have been developed to help older people age in place—enjoying independent lives in their homes. Lively, for instance, is a smartwatch that can remind older people when it is time to take a particular medication. ElliQ is a social robot that uses AI technology to encourage a more active and engaged lifestyle; marketed by Intuition Robots, the robot may suggest that the user go for a walk, knowing that the weather outside is perfect that very minute for a promenade.

Voice technologies allow people to communicate with their smart speakers, like Amazon Echo, and connect to smart devices to help perform household tasks.

“There is great value for someone whose motor skills are compromised to say `open the trashcan’ when they need to dump a large bag of refuse into it,” said Shenker. “They can ask the smart coffee machine to make coffee or the smart refrigerator which foods are in short supply, and then request that those items be ordered over the internet for delivery.”

Saving Lives, Maintaining Dignity

Technology can be a literal lifesaver, yet even with new innovations come complications. While personal emergency response systems—worn on the wrist or around the neck—allow seniors to press a button in the event of an emergency, only 14 percent of older people continuously wear the devices continuously. What’s more, approximately 83 percent of seniors fail to activate the alert button after being on the floor for more than five minutes.

Newer technologies are setting out to address these shortcomings. TruSense, for example, is a smart health monitoring and tracking device that combines GPS with a range of monitoring sensors in the home. The technology detects periods of human inactivity that may indicate a possible health crisis.

“If someone gets up at a certain time of the day and then moves through a series of rooms over a period of time—and does not do this one morning— a designated family member is contacted immediately,” said Rob Deubell, senior vice president of TruSense.

The internet-enabled sensors measure motion, temperature, water leaks, the presence of visitors, and voice sounds. This data flows to a computer that uses algorithms to discern when normal human behaviors, habits, and patterns are out of alignment.

The algorithm is developed to trigger an alarm when two or more events occur simultaneously, limiting the possibility of false alerts. If Grandma, for example, is sleeping at her grandchild’s place, there will be no movement. But if there is no movement and some other anomaly is detected, such as a much higher or lower room temperature, then this may be clearer evidence of a potential fall or other life threatening issue.

The tool also provides a way for a Boomer-designated family member to receive information about their loved one without monitoring behavior 24/7. “We’ve integrated the solution with digital assistants like Alexa on the Echo smart speaker,” said Deubell. “You can ask, `How is Mom doing today?’ and get an updated response drawn from our app.”

While surveillance cameras can achieve similar aims, Deubell said that nobody likes the Big Brother-ish feeling they’re being watched in their own home. “We wanted a solution that was non-invasive to maintain the dignity of seniors,” he explained.

Fully In Charge

With new technologies on the rise, aging in place might just relieve some of the financial and emotional constraints placed on families, society, and healthcare institutions to care for aging Boomers.

It might also improve the lives of those that make their way to triple digits. “I fully plan to live past 100,” said Shenker, who is today a spry 60. “And I also plan to be fully in charge of how I live my life.”

Russ Banham is a Pulitzer-nominated financial journalist and author.

How a melanoma scare – and a great dermatologist – made me more serious about skincare

By Russ Banham

At my annual checkup, the doctor noticed an oddly shaped mole of a worrisome size on my back. “Have your wife take a peek at it now and then to make sure it doesn’t change,” he instructed me. He was pretty certain that it was just, well, a mole.

By “change,” he meant grow in size or height, develop asymmetrical borders, alter color, or otherwise evolve into something that it currently was not. I’d have monitored it myself were it not smack dab in the middle of my back. My life was in my wife’s hands, or so I told her. Was I worried? A little. My father and aunt had skin cancer.

I also hail from the Baby Boom generation of kids whose moms implored us to “Go outside and get some color on your face.” Being too pale was considered the sign of a recluse, someone with poor athletic skills who read Archie comics indoors all the time. As teenagers growing up in Queens, New York, summers with my pals were enjoyed at Jones Beach, ogling the waves (yeah, right) for hours at a time. In the dog days of August, my attire was a pair of cutoff jeans and sunglasses, no shirt or shoes. The sun had most of my body to burn to a crisp. I was a sitting duck for solar radiation, tallying up more sunburns than I can count.

After one month of watching the peculiar mole, my wife gave up. “I can’t tell if it’s changing,” Jenny sighed. “This is too much to ask.”

Who could blame her? She wasn’t a doctor. So I contacted the real thing, a dermatologist a friend recommended.

Will Kirby, DO, is a local celebrity in Los Angeles, where I live. Will won the Big Brother competition in 2001, taking home enough money to finish his medical training. In his younger years, he had a basal cell carcinoma (a type of skin cancer) removed from his leg, which set his life’s course. Will took one look at the mole on my back and said “Not good.” He snipped it off and had a biopsy performed of the tissue. The diagnosis: A dysplastic nevus, a precursor to melanoma, a skin cancer. A nevus is a mole; dysplastic is atypical.

Within days I was on my stomach as Dr. Kirby removed more tissue from the site of the mole, then sutured a two-inch long line. Three months later, he took a peek and liked what he saw. “Not to worry,” he said.

Since then, Dr. Kirby and I have become friends. This is often the case with a skin cancer patient and his dermatologist. Every three months for the next two years, I was in his office. Dr. Kirby surveyed the landscape of my body, circling suspicious moles with a pen. In the eight years of my visits to date, I’ve had three more dysplastic nevi (plural of nevus) removed and multiple other moles snipped away before they could get worse. “That’s what we do here — snip, snip, snip away cancer,” Dr. Kirby said when I called for an interview. “The key is to be vigilant. The sooner we snip, the better the outcome.”

So far, so good: None of the three types of skin cancer I’ve attracted have entered the thornier territory of Stage 2. I even had a topical procedure done on my face, the site of several snips to reduce the risk of future cancers. The medication contained a substance called ingenol that kills abnormal cells that lead to skin cancer. My face looked like a deflated football for a week, until the dead skin sloughed off. I’m promised at least five years of a cancer-free face, at which point I will undergo the same procedure.

This is now my future. Certainly, I’m to blame for the sun exposure of my youth. While I apply sunscreen with SPF 50 every morning, and wear a hat on hikes and the rare weekend at a Malibu beach, the blistering sunburns of my youth will forever take their toll. I will always develop odd-looking moles. Dr. Kirby will give them the once-over and snip when he must. He’s my younger big brother now, looking out for me for life.

When found and treated early, the estimated 5-year survival rate for melanoma is 99%. But new therapies offer hope for even advanced cases. In 2015, former President Jimmy Carter, then 91, beat metastatic melanoma that had spread to his liver and brain. Ask your primary care physician for a skin cancer screening at your next physical. 

The Future of Initial Coin Offerings

By Russ Banham


Until recently, Initial Coin Offerings, or ICOs, were perceived as a great way for startups to raise capital, in large part because of the unregulated nature. Experts pegged the amount of capital raised through ICOs from $4 billion to $6 billion in 2017, and nearly $3 billion to date this year.

Now this spigot is slowing due to growing legal and regulatory scrutiny around ICOs. The U.S. Securities and Exchange Commission (SEC) maintains that the sale of tokens that gives investors ownership in startups falls within its jurisdiction. But several other regulators, including the Federal Trade Commission (FTC), the Commodities Futures Trading Commission (CFTC), and the Comptroller of the Currency (OCC), have weighed in that they, too, should regulate ICOs and the sale of tokens.

This alphabet soup of oversight is making investors pause before plunking down on cryptocurrency. The caution is to be expected, said Joel Telpner, a partner at New York-based law firm Sullivan & Worcester, where he heads up its blockchain practice.

“ICOs, cryptocurrencies, and the blockchain technology that underpins them are such radically different concepts that they’re completely beyond current regulatory regimes,” Telpner explained. “Regulators are struggling to understand what these are, whether they should be regulated, and how that might happen.”

When a Rose is Not a Rose

As investors hesitate, ICOs are taking a breather. Funds raised in May are nearly one-third the amount raised this past December, according to ICO research firm Autonomous Next, which blamed the sluggish conditions in large part on “continued regulatory uncertainty.”

At its simplest, and ICO entails investors seeking a share in the startup venture to purchase virtual tokens, assuming enough capital is raised to launch the company. While the primary use case for ICOs is nothing new—“just another capital raising concept,” Telpner called it—the atypical nature of ICOs has caught the attention of myriad regulators, baffled if the tokens are a form of currency, a security, a utility or something else.

If deemed a security, then the SEC wants to regulate ICOs. “Some players have marketed the tokens at a discount to investors that get in early, giving them the opportunity to sell the tokens at the time of the ICO to make a quick return,” said Telpner. “To the SEC, that sounds a lot like a security.”

However, the blockchain platform that serves as the foundation of the ICO has the appearance of a utility, since the tokens also provide a way to access the blockchain’s products and services. Complicating the picture is that tokens also can be used to verify the data on a blockchain platform. Businesses or consumers wanting to access this data pay for that opportunity with tokens.

“In these situations, tokens are used as commodities or to buy or sell goods, making them different than a security,” Telpner said. “You’re now dealing with a form of commerce in which the tokens are equivalent to a real currency. You don’t take a share of Starbucks’ stock and buy a cup of coffee.”

These various scenarios emphasize why various regulators are giving closer scrutiny to ICOs, blockchain platforms, and cryptocurrencies. In May, for example, the FTC issued a temporary restraining order against four cryptocurrency investment ventures.

Under the Microscope

Although it may be too soon to predict the future regulatory landscape, companies dealing in blockchain and AI solutions are nonetheless optimistic that the current pause in ICOs is temporary. Still, Telpner said he would not be surprised if ICOs are regulated by several government entities at different stages.

“There is some talk now that a token would be regulated as a security the first year after the ICO, and then morph into a utility token afterwards,” he said. “Another idea floating around is to create different types of token categories—some securities, some commodities, and some utilities. Depending on the circumstances, different regulators would be involved.”

As the ICO market matures, at least some regulation is likely. “These are such radical technologies in their earliest stages of development; regulators are just trying to get a bead on what this all is and how it may change going forward,” said Telpner. “That’s a good thing, as it allows for more thoughtful treatment.”

The ongoing work of the Congressional Blockchain Caucus is to study blockchain technology for use by the government and industry, and to examine the actions of states like Arizona, that is writing its own legal definitions. “In Arizona, the legislation would allow an ICO to raise a certain amount of funds without risking violation of securities laws,” Ron Wince, founder and CEO of Myndshft, a healthcare AI and blockchain solution, said.

This regulatory action, most believe, is a good start. “The more clarity, the better for all concerned,” Wince stressed. “If regulators try to regulate this new animal using old regulations, we’ll just end up with a patchwork quilt. We need regulations, but we also need them to be as innovative as the technologies they regulate. Shortcuts are not to anyone’s advantage.”

Russ Banham is a Pulitzer-nominated business journalist and author who writes frequently about the intersection of technology and business.