Corporate Board Member magazine

resh from the announcement that Columbia Banking Systems is acquiring Pacific Premier Bancorp in a $2 billion stock transaction, board member Chris Mitchell is feeling pretty good. Mitchell, formerly a director at Pacific Premier, will join the board at Columbia, a post-merger regional banking behemoth with $70 billion in assets. “This was an industry, regional middle-market banking, that was starved for deals the last four years,” he says. “We’re now at the front end of a very large M&A movement.”

While acknowledging that banking is one of just a few sectors experiencing an M&A resurgence, Mitchell says others are poised for dealmaking triumphs. “There are definitely layers of uncertainty out there, but it seems like enough people are interested in M&A conversations to offset them,” he says.

If his prognostications come true—overcoming high hurdles in the way—dealmaking may finally pick up. The volume of M&A transactions began a steep descent in 2022 and has flatlined ever since. Dealmaker reservations are attributable to inflation, elevated interest rates, geopolitical factors, regulatory scrutiny and, since January, the impact on supply chains of ever-evolving tariffs.

After President Trump launched a global trade war on April 2, dubbed “Liberation Day,” deal volume hit a 20-year low. The tariff tensions eased in June and the number of M&A deals revived in July, but nowhere near the anticipated volume. “A lot of market participants expected 2025 to be a return to the gangbuster days we saw in 2021, but that has not been the case,” says Adam Reilly, national managing partner of Deloitte’s U.S. mergers, acquisitions and restructuring services practice. The first six months of 2025 were “not a bad market; it’s an okay one,” he says.

In late July, a spate of deals led to the highest-volume week for U.S. company M&As since 2021, according to LSEG, suggesting momentum may pick up in the second half of 2025. “I’m frankly surprised how resilient it has been,” says Reilly. “We could very well see a significant pullup the rest of the year into 2026. There are lots of tailwinds for growth-seeking companies with money to spend.”

Encouraging conditions include a more favorable antitrust regulatory climate for strategic deals, generally strong corporate profit margins and cash flows, keen interest in acquiring entities with superior technology assets like AI, and activists pressuring companies and financial sponsors to spin off businesses and assets. “It feels like we’re moving from uncertainty to cautious optimism,” Reilly says.

BY THE NUMBERS

Despite relatively flat M&A activity in the first half of 2025, sectors like technology, healthcare, energy and industrials fared better than others, EY-Parthenon’s July 2025 U.S. M&A Activity Insights report revealed. Transaction values increased, primarily for larger transactions. Notable deals through June included Google’s acquisition of Wiz, for $32 billion, Diamondback Energy’s $26 billion acquisition of Endeavor Energy Partners, Constellation Energy’s $16 billion acquisition of Calpine, Sycamore Partners’ $10 billion acquisition of Walgreens Boots Alliance and Skydance’s $8 billion merger with Paramount. In July, Union Pacific announced plans to acquire Norfolk Southern to create a $250 billion enterprise.

While Big Four M&A consulting firms and many board members predict M&A momentum will pick up through the remainder of the year, they also acknowledge that dealbreakers could whip up at a moment’s notice and disrupt their expectations. “Our M&A survey suggests that this will be a strong year, but the uncertainties out there keep pushing the timeframe out,” says Dean Bell, lead director on KPMG’s board and head of markets for deal advisory and strategy. “Three-quarters of the respondents expected to do a deal in Q3, but that now looks like it will be Q4.”

A similar opinion was voiced by Kevin Desai, U.S. deals platform leader at PwC. “We polled 670 executives on what’s making M&A difficult for them, and the No. 1 response was U.S. economic policy, followed by AI and data regulations. The third was U.S. trade policy,” he says. “Many deals paused [after Liberation Day], revived in June but may be delayed again.”

Desai is referring to President Trump’s penchant to issue high tariff warnings and deadlines, change his mind and then change it back again. In February, for example, Trump issued a 10 percent tariff rate on imports from China. He subsequently increased it to 20 percent and then kicked it up to a stratospheric 145 percent in April, before reducing the effective tariff rate to 30 percent in May. “Sectors reliant on international supply chains are reticent to take on the M&A risk of tariffs,” says Reilly. “While sellers tend to have a positive view this will all go away sooner than later, buyers have a negative view, resulting in deal valuation gaps that are hard to bridge.”

Trump’s antitrust regulatory oversight is also not what many market participants expected upon his election. Although the regulatory environment for bank M&A activity appears to be more accommodating, other sectors have yet to see a moderating influence. According to a June report from the large international law firm Wilmer Hale, “Meet the New Boss, Not So Different from the Old Boss,” the new leaders of the Department of Justice Antitrust Division and the Federal Trade Commission “are acting and talking in ways that differ in most respects only modestly from antitrust leadership in the Biden era.”

Desai concurs. “There was a bit of M&A market participant overexaggeration of what would happen [in Trump 2.0],” he says. “Regulators are still scrutinizing deals, putting the onus on management and the board to be thoughtful about diligence. It’s not free and clear. Headwinds continue to exist.”

These include high borrowing costs, due to rising national debt and interest rates. “Right now, it is unbelievably expensive to finance a deal, forcing companies to be more creative,” says Kimberly Valentine-Poska, board member at Empire Valuation Consultants, where she chairs the cybersecurity and risk governance committee.

Geopolitical challenges are another question mark. Tensions are evident in the trade war between the U.S. and China, ongoing conflicts in the Middle East and Europe, shifting global trade alliances and recent elections that suggest growing nationalism. “Elections are uncertain by design as we don’t know who will win, but couple that with how a country is being governed and it produces uncertainty,” says Javier Saade, board member at publicly traded Henessy Capital Group and private companies Golden Pear Funding and Swedish Health Services.

Another headwind is global shifts in energy production. The energy needed to power the exponential growth in AI is shifting global M&A perspectives, Saade says. “Will the U.S. have enough power, and, if not, which countries are likely to have it?” he explains. “It may not be a top boardroom consideration right now, but it will be soon enough.”

HOPE IS IN THE AIR

As always with M&A, even the cloudiest projections show glimmers of sunshine. At the end of July, the stock market was at record highs, consumer and business spending had picked up and the U.S. economy was improving, expected to tick up a notch in the second quarter of 2025, following the 0.5 percent annual decrease in first quarter GDP. These factors suggest more deals are quietly in the works.

Things can only improve, an analysis by Citibank of M&A data since 2001 alludes. Since the first half of 2001, M&A volume as a percentage of the North American Equity Market Cap averaged 1.8 percent, versus 90 basis points in the first half of 2025—half the volume. “To me, the metric implies an increase in volume as deals return to the historical precedent,” says Devin Murphy, board member at publicly traded companies Phillips Edison & Company, Macerich and CoreCivic.

Murphy posited that heightened activity by shareholder and investor activists will pressure boards to scrutinize assets, driving management toward corporate separations and other deals that unlock value. Desai shares this opinion. “Activists are starting to push companies to think about their portfolios of businesses, questioning whether the organization is the right owner of these assets,” he says. “If not, then it’s probably time to carve them out and sell.”

Deals also are in motion as companies widely seek to implement AI solutions across the value chain. “As the U.S. moves even more to a service-based economy, businesses looking for opportunities to innovate and grow are eyeing AI as the means. The question for management and boards is, ‘Do we build or buy AI capabilities?’” says Saade.

Many are opting to buy, Deloitte’s M&A analyses suggest. “The vast majority of value creation in the next five years will be driven by investments in technology, a big part of it AI,” says Reilly. “Lots of companies are… looking to do deals to acquire AI products and talent. It’s a very expensive trend because these are highly valued companies.”

Mitchell agrees. “Size and scale matter in M&A,” he says. “That’s always been true, but even more now given required investments in technology broadly and AI more specifically.”

Acquiring a company primarily for its AI capabilities and talent is not for the fainthearted. Arriving at a precise valuation is a complex undertaking since AI-heavy companies are valued for intellectual property like algorithms that are inherently difficult to gauge. The risk of AI talent leaving post-transaction for higher compensation elsewhere is equally daunting. As The Wall Street Journal reported in late July, Meta CEO Mark Zuckerberg is offering compensation packages in the hundreds of millions of dollars to superior AI talent.

While boards are carefully navigating how best to assist management in sifting through the technological complexities, pulling the pin is not easy. “Historically, companies bought other companies for shareholder financial accretion, but here they’re looking to buy a business purely for its AI capabilities,” says Valentine-Poska. “Board focus on governance is intensifying.”

TEMPERED OPTIMISM

While the interviewees see opportunities ahead for an uptick in M&A dealmaking, they’re also hedging their bets. Valentine-Poska is “cautiously optimistic,” pointing to a narrowing M&A bid-ask spread in certain sectors. “Valuations are getting closer, but there’s still a differential due to high interest rates and the difficulties that presents to finance a transaction,” she adds.

“Sellers have come back to earth, realizing buyers don’t think their assets are worth what they thought they were worth. That makes me excited about bullishness the rest of the year,” agrees Bell. Nevertheless, he acknowledges that the cost of capital remains an obstacle. “As private equity looks to finance deals getting more expensive, they want to be sure they’re not being speculative. That could cause them to wait until rates come down to do a deal.”

The passage of President Trump’s Big Beautiful Bill gives Desai a modicum of hope for an M&A revival. However, he remains concerned about an aggressive regulatory stance. “At a minimum, the legislation allows for steadier corporate tax rates and the deductibility of expensive carry-forward interest—fuel for the M&A fire,” he says. “The challenge is antitrust regulation. The SEC’s new commissioners have yet to issue public statements or [provide] literature on the ‘new normal.’ For now, I’m not seeing a slowdown in antitrust challenges. It’s still a very active SEC.”

Reilly is also relatively upbeat, with a few reservations. The government’s business-friendly tax policy, continuing hopes for a Federal Reserve rate cut and the potential for deregulatory actions should combine to boost dealmaker confidence through the second half of the year into 2026, he says. “I’m still a bit wary due to all the uncertainties, but I definitely see interesting opportunities arising.”

What is absolutely certain is that M&A opportunities and risks are front-and-center discussions at many boards, making directors’ service more complicated and demanding. “We’re playing chess with blindfolds on, as no one knows what the future holds and how things will play out,” says Saade. “In this period of extreme disruption and uncertainty, strategic planning is practically useless. We’re in a fast moving, whitewater river.”

He is not alone in this glum perspective. “The risk framework when doing M&A has changed so quickly, and in the next five years the changes will be exponential,” says Valentine-Poska. “Risk averse companies and boards that don’t like change could be up the proverbial creek without a paddle, too consumed with uncertainty to make a decision.”

She and other board members counsel scenario planning. “Right now, the M&A pause button is getting hit more than the play button because of uncertainty,” says Lisa Greer Quateman, board member at Scherzer International and Lyles Diversified. “Boards need to ensure management is exploring multiple possible outcomes when plotting a deal.”

Equally crucial, says Mitchell, is for dealmakers to cultivate relationships with prospective buyers and sellers. “So many transactions are years in the making; they’re not a sudden discovery,” he explains. “Get to know your competition, as you may buy them someday, or they may buy you. Look for cultural synergies, customer extensions—whatever ticks the boxes in the M&A equation. Find common ground and start a conversation.”

The post Time To Make A Deal? appeared first on https://www.russbanham.com.

Chief Executive magazine

Patrick Renna has held the CFO position seven times, nearly all in the food service industry. Perhaps that’s not particularly surprising for someone who bused tables and washed dishes as a teenager at his family’s restaurant. What is interesting is Renna’s promotion from finance chief to chief executive—twice. 

Although most new chief executive officers come from outside the organization, for a CFO , the top of the corporate ladder is increasingly within reach. Sixteen percent of CFOs transitioned to become CEO among the top 630 listed companies in Europe in 2024, compared with 15 percent in 2023, according to search firm Spencer Stuart. In the U.S., 13 percent of new S&P 1500 CEOs came from the CFO role in 2024, compared with 5 percent in 2023. 

As the strategic, financial and operational knowledge and expertise between the two jobs increasingly narrows, finance chiefs are in a commanding position internally to succeed their CEO. “Nowadays, the CFO and CEO work so closely together to ensure strategy and planning match up with financial capabilities that boards feel very comfortable with the CFO stepping in,” Renna, currently CFO of Proof of the Pudding, told CFO Leadership. 

That comfort is evident in the number of well-known companies with CEOs who were formerly CFO, including Hershey CEO Kirk Tanner, Oracle CEO Safra Catz, Siemens CEO Sunil Mathur and Hertz CEO Stephen M. Scheer. 

Job Requirements 

What skills and experiences put those CFOs on track to assume the chief executive role when given a chance? Not necessarily the default skills required to be a finance chief, according to experts. 

CEO-worthy candidates have a strategic mindset first and foremost. Operational experience is a plus, and problem-solving traits and deep-rooted self-assurance are essential, according to research by Deloitte. Softer skills, such as the ability to listen and communicate well, in addition to an innate curiosity and modesty, are also critical. 

Benjamin Finzi, CEO practice leader at Deloitte, adds one other attribute to the list—the mental make-up to lead an organization through extraordinary uncertainty.  

“The responsibility of the CEO has always been to deliver on the current vision, but this must now be effected in a world where the future is increasingly less defined,” Finzi says.

The Strategic Mindset 

The road to becoming CEO is different for every CFO. Unexpected opportunities often arise. 

Renna, whose early career included an accounting manager at Bertucci’s, a Boston-based fast-casual Italian restaurant chain, “liked the accounting side of things and never thought about becoming a CFO,” let alone a CEO. 

Instead, the role chose him. In 2009, after the CFO of burrito chain Boloco left abruptly, the Boston-based company hired Renna as interim finance chief. Five years later, Renna was named CFO and, for a time, added the COO title, through which he gained valuable operational experience. 

“I was getting out to the restaurants to meet people inside the four walls to understand what was happening at the ground level, becoming a visible leader versus sitting at a desk,” says Renna. “I also began to work side-by-side with the CEO in developing the strategy for the future.” When Boloco’s founder and chief executive, John Pepper, stepped down in 2014, Renna became CEO.  

His second CEO stint at Wahlburgers came four years later. Renna was CFO of the burger restaurant chain owned by actor Mark Wahlberg and his brothers, but stepped into an interim CEO role when the company launched a search for an outside leader. “As CFO, I felt the business needed an outside CEO and agreed to the interim spot until we found one,” he says.   

Renna’s advice to CFOs aspiring to become CEOs is to develop a strategic mindset and to cultivate an analytical way of thinking about future goals. “Try to think big and longer term, beyond today and tomorrow, to what the business will look like in three to five years. Be curious,” he says. 

Time spent in the trenches listening to employees is vital for understanding and helping shape the operational aspects of the business, he adds. “You get to appreciate the work everyone does for the business, encouraging them to be their own leaders while coaching them with feedback,” he says. 

His stints as CEO also taught Renna that decision-making fortitude is a crucial proficiency to develop. “It’s lonely at the top. You’re the one everyone is looking at, something I didn’t realize until I got there,” he says. “I worried about the impact of my decisions. A board member helped me realize that leaders must be decisive. Whether your decision is right or wrong, you have to own it.” 

Empowering Everyone 

Steve Horowitz’s journey to the top of CareCentrix, a 1,700-employee provider of in-home care services, began as a controller in the healthcare sector. He joined CareCentrix as its finance chief in 2012, rising to become CEO in 2022.  

Like Renna, Horowitz had no expectations of becoming a chief executive. 

“It was not something on my radar,” Horowitz says. “I’m pretty introverted in general, and seeing the way good CEOs I’ve worked with over the years spent so much time managing the board, employees, sales prospects and investors, I didn’t know if I wanted to do all that.”  

After transitioning from CFO to CEO, Horowitz adopted a leadership model focused on empowering everyone in the organization to excel in their roles and fostering more effective cross-functional collaboration. Each week, he has a series of one-on-one conversations with people across the company’s value chain. He asks if any roadblocks are impeding their work and what he can do to remove them. “All it takes sometimes is to get people to speak openly and frankly,” he says. 

Horowitz has also learned to be more conscious of his comments in group meetings and to limit them to a bare minimum. “I realized that as soon as I weigh in with my opinion on something at hand, it changes how everyone else in the room thinks,” he says. “I intentionally let them go first and offer an opinion based on what I’ve heard. At the outset of a meeting, I don’t speak much at all.” 

That approach is something Horowitz learned during his time as finance chief. “I made this pivot where I began thinking more broadly and strategically and decided not to be the typical CFO who always said `No,’ shooting down others’ opinions,” he explains.  

The impact was instant, according to Horowitz. “When I did say something, they listened. People opened up. I was the same person, but I felt powerful. Once I realized this and became CEO, I thought, “How can I harness it to help take the organization where it needs to go?” 

To map the organization’s path, Horowitz needed the board’s support. His predecessor gave him valuable advice on how to handle his first board meeting as CEO. “He said to do it my way, not the way he did it, to be authentically me,” Horowitz says. “`You don’t have to be Jack Welch. You have to be Steve Horowitz,’ he said. It resonated with me.” 

Every company needs a CEO whose leadership attributes seem purpose-built for the times, Horowitz says. “Tesla would be so different without Elon Musk’s personality, energy and ability to make people believe in his vision, but a lot of companies aren’t like that. Charisma alone doesn’t guarantee success,” he says. “Sometimes you need more substance than flash, though there are times when flash is better.”   

Succession Issues 

Even CFOs ready to take on the responsibility of being CEO can run into obstacles. A promotion to CEO can be delayed or missed due to the lack of a clear successor in finance. The pipeline feeding finance chiefs to the top leadership role is slowing due to gaps in the skills development of finance staff, say search firms. 

“Not enough controllers and vice presidents of finance are prepared to step into the shoes of the CFO,” says George Pentaris, market vice president of Ledgent, a division at Roth Staffing Companies. “As finance chiefs are promoted or retire, the talent behind them to backfill the role is falling behind.” 

He attributed the slowdown to a growing gap between the evolving skills of a modern CFO and the traditional focus of a controller or vice president of finance. The latter roles typically involve cash flow management, accounting, financial analysis, compliance and cost controls, responsibilities that are important but fall short of the strategic skills needed by a CFO. 

“Developing the next wave of CFOs to become CEOs requires continuous professional development of controllers and VPs of finance, providing opportunities that encourage leadership, strategic thinking, communications and risk management,” Pentaris says.   

But the dearth of CFO-ready controllers and vice presidents of finance has paved the way for alternative paths to the CFO role, says Steve Gallucci, Deloitte’s CFO practice leader. “It used to be an accountant and now it’s someone with either a finance, technology or investment banking background or a collective career experience, where CFO upskilling is a product of the opportunities they’ve been given.” 

The Critical Ingredients

What do boards of directors and search firms consider the most essential skill needed to be a chief executive? 

“The ability to inspire and motivate people, based on the human elements and not data in a spreadsheet, is what many companies look for in a CFO to become their CEO,” says Ledgent’s Pentaris. “A finance chief taking that next step needs to shift from relying exclusively on market data to listening to the insights and critical perspectives of their staff and others in the organization.”   

Deloitte’s Finzi believes that the critical ingredient is curiosity. “It’s not what a CFO has studied or learned that companies need today to lead the business; it’s the beginner’s mindset they bring to learning,” he explains. “The situation a new CEO will encounter in a world where knowledge is accumulated so fast [and] is so uncertain—someone leading purely on what they know will not have a lot of answers.” 

Instead, the right leader, he says, “is the one who comes into the role with questions that stimulate critical thinking.” 

Aspiring CEOs also need integrity, optimism and confidence, Finzi says. “Those qualities may sound like they’re soft, but they’re attributes of steel,” he says. “Integrity is what gives a CEO the right to be optimistic and confident in the face of continuous uncertainty, to do something good enough that’s better than doing nothing, which can be the fate of other CEOs overwhelmed by ambiguity and indecision.” 

Is the modern finance chief ready to be this leader? “If a CFO is already curious, has an open mindset and knows how to listen, the answer is yes. My advice is to do the same, more. It’s just a bigger job,” Finzi says. 

That may sound like an oversimplification. But the functional divide between chief executive and finance chief has narrowed. “Titles have never enamored me,” Renna says. “Whether you’re the CEO or the CFO, you take the blame if the company isn’t performing well or your decisions aren’t working out the way you hoped. It’s called the `executive leadership team’ for a reason.” 

The post Are You Ready To Be A CEO? appeared first on https://www.russbanham.com.

Carrier Management magazine

It’s not every day that the chairman and CEO of one of the world’s largest insurance companies issues open warfare against an entire industry. While no one was surprised that Chubb’s Evan Greenberg attacked litigation funding firms for driving up the costs of lawsuits and insurance premiums, his purported threats of negative consequences for partnering organizations that do business with the firms was an extraordinary moment.

In response to Greenberg’s alleged comments, Christopher Bogart, CEO and co-founder of Burford Capital, one of the world’s largest litigation funding firms, told the Financial Times that it was “inappropriate” for a large insurer like Chubb to take its “market power … and try to use it to deny access … to a perfectly legal” market, characterizing such actions as potentially “anti-competitive.” Burford Capital declined an opportunity to be interviewed to assess the accuracy of the news story.

The war of words continued. In late July, an Op-Ed penned by Greenberg and John Doyle, CEO of insurance broker Marsh McLennan, in The Wall Street Journal took aim at litigation funding for encouraging “drawn-out lawsuits to extract big investment returns for themselves.”

Perhaps alluding to Greenberg’s ultimatum, the insurance industry leaders wrote:

“Chubb is looking carefully at our relationships to make sure that the people and companies with whom we do business aren’t helping to fuel the problem. Likewise, Marsh has refused for several years to work on litigation insurance with these litigation funders.” Marsh declined a request to interview Doyle on the subject.

Suffice it to say the battle royale between the two industries has entered a new stage of combat. Carrier Management reached out to several insurance brokers about the alleged warning by Greenberg to stop doing business with litigation funding firms. None were willing to discuss the matter on the record, although an anonymous source from the broking industry had plenty to say.

Other industry participants and observers freely offered their opinions, as did Dai Wai Chin Feman, managing director and corporate counsel at Parabellum Capital, another large commercial litigation funding firm. Feman was especially critical of Greenberg’s alleged threat, commenting, “It seems to me like he’s inciting an illegal group boycott.”

Nevertheless, the accusations and counteraccusations highlight the stark divide between support for the litigation funding industry’s role in enabling people and businesses to pursue litigation against well-funded opponents, and condemnation over its potential to generate outsized settlements and jury verdicts leading to higher insurance premiums.

In what follows, both sides of the hot button issue are presented, beginning with Greenberg’s alleged warning to Chubb’s partnering organizations.

Sticks and Stones

While Greenberg’s alleged remarks may have been extemporaneous, they were likely planned in advance with assistance from Chubb’s PR personnel and legal counsel. “From what I know of Evan, he very much thought through what he was going to say and knew the consequences of his words. He’s very strategic,” said an anonymous source who preferred that we not name their industry. “Although I don’t think he showed the best judgment, he gets a lot right.”

Asked if Greenberg’s alleged comments could be legally construed as anti-competitive, Robert Hartwig, Clinical Associate Professor of Risk Management, Insurance and Finance at the University of South Carolina, was skeptical. “I don’t believe they have the degree of force associated with restraint of trade or a sort of demand that has antitrust implications,” said Hartwig. “I think the industry’s sentiments toward third-party litigation funding are fairly well known. Greenberg and even Doyle has every right to refuse to do business with any organization they feel is detrimental to their business models.”

Asked the same question, the anonymous source from the insurance brokerage industry commented on the absurdity in asking an insurance company’s lawyers, asset managers and fellow industry participants to end their affiliation with an industry most do business with.

“What an utterly ridiculous threat to ask law firms, for instance, to pledge to stop doing business with litigation funding firms; there isn’t a single law firm in the U.S. that does plaintiff-side litigation that has not had some form of litigation funding,” the source said. “Beyond that, there are numerous insurance companies and brokers investing in litigation funding, with an arm or desk or individual in some way investing in legal assets. They [stop doing business with the litigation funders] and they’re on an island unto themselves.”

Feman from Parabellum Capital, a commercial litigation funder of antitrust cases and intellectual property matters, described Greenberg’s alleged comments as “a PR stunt—hopefully,” he said. “Chubb obviously has close relationships with a lot of law firms; are they just going to abandon these relationships? I don’t imagine their partnering organizations are going to violate the rules of professional conduct because [he] is threatening to cut off business with them.”

While Feman said the alleged warning indicates the serious intent of Chubb and possibly other insurers to annihilate the litigation funding industry, were that to happen, insurance companies would squander the PR value of litigation funding as the cause of their problems. “If we went away tomorrow, insurers would need to find some other scapegoat for high-dollar jury verdicts and rising insurance premiums,” he said.

Tom Baker, Henry R. Silverman Professor of Law at the University of Pennsylvania’s Carey School of Law, amplified Feman’s point. “The insurance industry should be careful what it asks for,” he said. “Commercial litigation funders like Parabellum don’t usually fund class actions or personal injury cases. A commercial plaintiff has access to litigation funders to help the company even the playing field against extremely well-funded defendants. Putting them out of business won’t reduce insured losses.”

Insurable Interest

Insurance critics have long contended that litigation funding leads to the filing of speculative and dramatically high-dollar legal outcomes than otherwise would have been the case. They point to a funder’s influence in litigation decisions, swaying plaintiffs towards high jury awards instead of more moderate settlements. By funding sophisticated law firms that charge significant contingency fees, critics argue that the aggregate costs trickle down to increase both personal injury and commercial insurance premiums.

“The cost [of lawsuits] for a litigation funding firm … is to pay the lawyers that brought the class action, rather than the injured parties,” said Andrew Robinson, chairperson and CEO of Skyward Specialty Insurance Group, citing contingency fees that reach 40 percent and 50 percent in some cases. “Not much [money] is left after the lawyers, litigation funding firms and the doctors often expressly brought in to increase the perceived value of the loss take their cuts.”

Hartwig offered a similar perspective. “What litigation funding firms do is insert themselves between the insurer and the policyholder to profit from the loss of the policyholder,” he said. “It’s a perversion of the foundational principle of insurable interest, which is legally required everywhere in the country.” The principle of insurable interest means that any person or entity taking out an insurance policy must have a genuine stake in the well-being of the policyholder.

“The concept ensures that the function of insurance is to protect against unforeseen events and not speculative possibilities akin to gambling,” said Hartwig. “The profit motive for litigation funding firms strikes many people, including judges and juries, as a perversion of the traditional relationships that exist in insurance.”

Apprised of these viewpoints in an email, Feman wrote back that the litigation funding market “exists out of necessity and demand. Litigation is incredibly expensive, and defendants are rarely willing to settle on fair terms before extensive litigation. Companies and law firms use our capital because it makes financial sense. If we didn’t exist, many meritorious claims would never be brought or [the plaintiffs] would settle for unreasonably low amounts.”

Regarding assertions that litigation funding firms push clients toward jury verdicts, he responded, “Unlike many plaintiffs who inhibit settlement, we are rational, non-emotional decision-makers who prefer the certainty of settlement over trial, which is inherently binary and subject to years of appeals, remands and illiquidity.”

Jonathan Stroud, general counsel at Unified Patents, an organization formed to protect against frivolous patent litigation, takes a position in between these extremes. “It’s become this ‘us versus them’ narrative,’ but the truth is that insurers are much better at defending the risks of defendants than they are at insuring the risks of plaintiffs,” he said. “While the insurance industry has solid experience structuring products to insure offensive risks in lines like automobile insurance, carriers have fallen short in insuring the aggressor side in commercial risks like patent litigation, creating an opening for litigation funding.”

The anonymous insurance broking source offered a similar opinion. “Insurance is [a form of] litigation funding for the defense side in commercial lawsuits. Large, well-insured corporate defendants have the bigger war chest and the ability to draw out litigation by making it very costly for smaller corporate plaintiffs,” the source said. “Commercial litigation funding firms tip the scales back in favor of equality by financing the plaintiff side. The insurance industry wants that advantage back.”

Stroud agreed to a point. “Insurers are worried that plaintiffs have deeper pockets, but that’s more in the realm of ambulance chasers, venue-shopping and spooking the defense into settling non-meritorious cases than commercial litigation funding,” he said.

Different Strokes

The differences between commercial litigation funding and consumer litigation funding are often brought up by large commercial litigation firms like Burford Capital and Parabellum Capital that maintain they do not finance plaintiffs in slip-and-fall lawsuits and automobile accidents. As Feman put the difference, “Comparing consumer litigation funding to commercial litigation funding is like saying Chubb and United Healthcare are in the same business. They are both technically insurance, but very different kinds, with very different policy considerations,” he said.

“Insurers like to claim that litigation financing firms fund unmeritorious and frivolous litigation, which is nonsense,” the anonymous broking source said. “These are some of the smartest legal and financial minds in the country. Ninety to 95 percent of the stuff that comes across their desks gets rejected. I’m talking commercial litigation funding, which is fundamentally different than the funders of personal injury class actions promoted on highway billboards. With them, the industry may have a legitimate beef.”

Ian Gutterman, a longtime analyst of the insurance industry on behalf of investors, said that insurers would be better off if they focused their attention on personal injury attorneys financed by litigation funding firms specializing in such lawsuits, and not on commercial litigation funders like Burford and Parabellum. “If I were Evan Greenberg, I would target the attorneys whose faces you see on billboards across Chicago, Florida, Los Angeles, you name it. People would respond to that; the general public doesn’t know what Burford is. I’d go after the ambulance chasers,” he said.

The anonymous broking source echoed the comment. “If the insurers were smart, they would take aim at just the consumer litigation funding and leave the ‘big dogs’ in commercial litigation financing alone. There hasn’t been much subtlety or nuance in … making [commercial] litigation funding the boogeyman for everything people complain about the insurance industry. The target is too broad and that isn’t helping.”

Gutterman said he has no problem personally with commercial litigation funding. “It’s just financing, which is no different than insurance carriers buying reinsurance or issuing a catastrophe bond,” he explained. “These are not nefarious or bad guys. Do they drive up settlements or verdicts and then insurance costs? Yes. Underwriters then need to say, ‘We have this new cost and need to account for it in pricing the risk.’ They’ve got 15 years of experience making it easy to price. Had they done it years ago and been more aggressive then, taking the risk on their reserves, they’d have less to complain about now.”

Death and Taxes

No one expects the industry’s complaints to diminish, particularly after suffering a major legislative defeat seeking to tax the profits earned by litigation funders at the highest individual rate (37 percent), plus an additional 3.8 percent instead of the lower capital gains rate they presently pay in many cases. The bill, Tackling Predatory Litigation Funding Act (S. 1821/H.R. 3512), failed to be included in the final version of President Trump’s “Big Beautiful Bill.” Possibly worse for the industry is the loss of their anti-litigation funding champion, Sen. Thom Tillis (R-NC), who spearheaded the bill and announced after its failure that he would not run for re-election in 2026.

Hartwig attributed the death of the tax bill to the plaintiff trial bar—”the best organized, best funded and best politically connected special interest group in America, bar none,” he said. “Trial lawyers are riding high on the current wave of populism, meaning uphill battles at the federal and state level in terms of obtaining meaningful tort reforms.”

Among those proposed reforms is mandatory and full disclosure of litigation financing agreements, which are generally kept secret. “In most cases, knowing whether there is third-party litigation funding in any given case is impossible,” the U.S. Chamber of Commerce, a longtime critic of litigation funding, stated. “As a result, nobody knows what control or influence the funders have over the underlying litigation or attorneys.”

“Disclosure is a good place to start,” said Jerry Theodorou, director of the Finance, Insurance and Trade Policy Program at the nonprofit public policy think tank R Street Institute. “What makes the insurance industry concerned is that litigation funding is a ‘black box.’ The industry does not know if there is funding in the first place and is also in the dark on the nature of the relationship between the plaintiff attorneys and the funders.”

These blind spots give an unfair advantage to litigation firms. Theodorou said that insurance policies are discoverable, their coverages, terms, conditions and limits available for perusal in litigation—but not litigation funding agreements in patent infringement and antitrust cases. “It’s these kinds of vexatious lawsuits that cause insurance companies to settle instead of facing a court. Is that too much to ask? I don’t think so.”

Hartwig doesn’t think so either, commenting that the goal of disclosure is transparency. “Litigation funding firms want to hide their role in cases because they know the existence of the financing fundamentally influences not only the incentive to bring cases but also the settlement negotiations,” he said. “If a third party seeks to profit from the misfortune of a claimant, there’s no question that a judge and a jury should consider this fact.”

But Feman said that disclosure is merely a “trojan horse” for defendants and their insurers to extract information prejudicing the plaintiff’s case, pointing to budgets, emails discussing case risks and underwriting damage analyses.

And so it goes, accusations and counteraccusations, the war of words attaining a new level of opprobrium. Imagine the next stage if, in fact, many banks, law firms, asset managers and insurance brokers actually do stop doing business with litigation funding firms. Still, it’s doubtful if even that would kill off the industry’s “boogeyman.” As the anonymous source put it, “As long as there is money to be made for litigation funding firms, whether it’s consumer or commercial, smart financial minds are going to try to make that money.”

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Carrier Management magazine

Having already paid out billions of dollars in claims related to the Eaton fire, more than 100 insurers have filed lawsuits against Southern California Edison to recoup these costs, alleging the utility’s electrical equipment is the ignition source. Other insurers have made a choice not to sue and have instead sold their subrogation rights.

Home insurer Hippo is among them. Rick McCathron, Hippo’s CEO and President, said the sale of its subrogation rights in March to an unnamed party was financially beneficial, reducing the insurer’s $42 million in estimated pre-tax losses from the Eaton and Palisades fires by approximately $15 million on a gross basis and $11 million on a net basis. The decision to sell rather than sue, he said, was based on “significant economic damage calculations,” including the time value of money and the utility’s bankruptcy risk, among other factors.

The proceeds from the sale of Hippo’s subrogation claims “compare favorably” with what the insurer would have received by pursuing these claims on its own through the legal system, he said. Cash in hand offers financial certitude, whereas long, drawn out court battles are wearisome and costly, the clock ticking on attorney billable hours. Still, if Hippo’s lawyers decided to go for the jugular in court and Southern California Edison was found at fault for the Eaton fire, the insurer may have collected more cash, money offsetting a greater cost of claims to potentially decrease premiums for policyholders.

That’s the lesson from the Camp fire litigation against Pacific Gas & Electric (PG&E), whose electrical transmission lines ignited the 2018 wildfire and forced the utility into Chapter 11 bankruptcy. At least a dozen insurers, including CSAA Insurance Group, Nationwide, Farmers Insurance, AMCO and 21st Century sold their subrogation rights to Baupost Group, a hedge fund, according to documents addressing PG&E’s bankruptcy. Some insurers sold for pennies on the dollar. CSAA, for instance, reportedly sold $1 billion in subrogation claims to Baupost for 35 cents or less. “The insurers that held onto their subrogation claims did much better than those that didn’t,” said Dave Jones, California’s Insurance Commissioner from 2011 to 2018.

While Jones acknowledges that the bankruptcy court could have extinguished the claims from policyholders whose homes were damaged or lost by the Camp fire, the insurers that held onto their subrogation rights and the investors that bought them from other carriers recovered 87 percent of the total insurance payments made to policyholders. Baupost’s total $6.8 billion investment in subrogation claims against PG&E for a series of wildfires in 2017 and 2018 generated a whopping $3 billion profit, Bloomberg reported. Carrier decisions to sell their rights to sue resulted in a missed opportunity. “Hindsight is always 20/20, but the insurers that held onto the subrogation rights did much better than those that sold them,” Jones said.

Nevertheless, the former state regulator said that Hippo’s sale of its subrogation rights in the Eaton fire may be a smart move. “Hippo is not a major insurer. Given how small they are, with a much smaller number of claims from the Eaton fire than other insurers, it may make a lot of sense for them to sell quickly, due to the cost of litigation versus the potential return,” he said. “Other insurers are still working through their claims and may not know for some time their final cost of claims, or even near final.”

A Number’s Game

The economic calculus for determining whether to retain or sell subrogation rights begins with a strong likelihood of an at-fault party. Although the cause of the Eaton fire remains under investigation, video and witness reports of sparking near Southern California Edison’s transmission lines suggest the utility may be responsible for igniting the blaze. “It’s very clear to us that the probable cause of the Eaton fire was Southern California Edison’s faulty electric utility equipment, whereas liability for the Palisades fire is not as clear,” said McCathron. Hippo did not sell its subrogation rights for claims received from the Palisades fire.

After reaching the decision to sell its subrogation claims from the Eaton fire, a series of calculations ensued to arrive at a proper sales price. “We start with a number we think we would get if we sued the utility outright,” said McCathron. “Hypothetically, let’s say that’s 90 cents on the dollar, meaning if our gross event is $50 million, we’d collect about $45 million. From that figure, we subtract our expected attorney fees, which are generally high since these cases can drag out forever. Let’s say that’s $10 million, bringing us down to $35 million. We then estimate how long it would take to collect this time value of money, say five years at a 20 percent discount rate per year. That brings us down another $10 million to $25 million.”

The last calculation is Hippo’s reinsurance costs, which is difficult since the reinsurance contract may include two catastrophic events residing in different parts of a reinsurance tower, among other complications. He estimated this cost for the Eaton fire at $5 million. “That $20 million number represents the floor in our negotiations,” he said. “Investors then come to us through brokers and give us their numbers. If they’re above our floor, we are apt to take the offer. If it’s below our floor, we negotiate to get it closer.”

Rates and Risks

Certainly, an insurer determined to sell its subrogation rights—a practice rooted in common law since Roman times and formally established by the Magna Carta in 1215—treats the decision with utmost seriousness. Nevertheless, interviews with several insurance industry experts and onlookers unearthed significant concerns about what appears to be a growing trend.

Chief among them is how the income from the sale of an insurer’s subrogation rights is treated in requests to regulators for a rate increase. In the 16 states where insurance rates are regulated (other states and territories file and implement rates as they see fit without a regulatory review), insurers are required to file information about the revenues they receive from exercising subrogation claims or from the sale of these rights.

“The way it works is when an insurer gets a subrogation payment, it is reported to the Department of Insurance as part of the next rate filing and gets included in the analysis of how well the carrier is doing financially for the purpose of deciding how much additional rate it will receive,” said Jones. “That revenue would be considered in setting the rate going forward, effectively offsetting some portion of the loss the insurer uses to justify an increased rate going forward.”

However, economist Robert Hartwig, Associate Professor of Finance at the University of South Carolina, said regulators should “seriously question and potentially deny a rate increase to an insurer that simply sells it off to a hedge fund as a matter of course. While the existence of a market for insurers to sell their subrogation rights is beneficial to the carrier and ratepayers alike, [sales] should only occur if recovery from a negligent party is doubtful, uncertain, costly or of indeterminate length.”

Hartwig, who also leads the university’s Risk and Uncertainty Management Center, provided the example of an insurance company that theoretically could recover 85 percent from an at fault party in five years but decides to recover 35 percent from a hedge fund shortly after the loss event.

“It is in the insurer’s interest to maximize the return they receive on their subrogation rights, making it inappropriate in my view to not wait the full five years to recover the 85 percent,” he said. “From a ratemaking standpoint, the insurer should build into their rate an expectation that there will be subrogation and include in that the historic proportion of their recoveries. If they instead opt to sell their subrogation rights on a regular basis, the historic proportion of those sales should be built into the rate, a percentage figure typically much lower.”

Lower recoveries on a historic basis from the sale of subrogation rights would weaken insurer requests for a rate increase, whereas higher recoveries on a historic basis from the retention of these rights would strengthen this possibility, he explained.

A related concern is the price that an insurer arrives at to sell their subrogation rights. Jones said that regulators should review insurers’ pricing rationale, but the former insurance commissioner doubts many regulators conduct the examinations. “The usual practice is to view these as arm’s length transactions between two sophisticated parties,” he said. “Insurers are motivated to get the best possible deal, so there is little or no oversight.”

Hartwig offered a similar perspective. “Insurers engage in calculations every day when it comes to making decisions about whether to settle a case or take it to trial [making it] unlikely that a regulator would need or want to engage in a review of the process used,” he explained. “Regulators do, of course, have the right to review every component of a rate filing, and that would include how the insurer accounts for the value of its subrogation rights.”

If more carriers continue to pursue subrogation sales after a devastating wildfire, two different claims treatment strategies may ensue, with both positive and negative consequences for policyholders, said Douglas Heller, Director of Insurance at the Consumer Federation of America.

“A carrier that sells its subrogation rights may be compelled to pay claims more quickly, a good thing, but there are also potential policyholder downsides,” he said. “The cash in hand insurers receive could encourage them to become reliant on financing more of their claims. The quick money may compel them to tighten the belt on the other claims they don’t subrogate or sell off, taking more time to pay these claims to the detriment of policyholders.”

Litigation Finance

Some but not all interviewees likened the sale of subrogation rights by carriers to the insurance industry’s longstanding criticism of Third Party Ligation Funding (TPLF) firms providing financial support to a plaintiff. Carriers reproach TPLF for driving up the cost of legal verdicts and settlements, forcing them to increase insurance rates. The sale of subrogation rights to a hedge fund, whose attorneys are highly skilled at securing large judgments in litigation to reap a profit for investors, may correspondingly drive up the cost of verdicts and settlements.

“What’s surprising and fascinating is that the insurance industry has demoted TPLF for causing what it calls `social inflation’ and yet it turns around and does the same thing, selling its subrogation rights to a hedge fund that will extract maximum financial gain from a defendant company,” said Tyler Leverty, Associate Professor of Risk and Insurance at the University of Wisconsin School of Business.

Jerry Theodorou, director of the finance, insurance and trade program at R Street Institute, a U.S.-based center-right think tank, said that insurers are “smart enough to know that TPLF doesn’t fuel frivolous lawsuits—they invest in meritorious claims likely to go to court and settle for large numbers. TPLF is all about the ‘Benjamins,’ the big money, whereas subrogation is about responsibility.”

The sale of subrogation rights to a hedge fund that will go the distance in a case is a legitimate way of forcing a responsible party to pay for the damages they caused, Theodorou said. “I imagine that some insurers give up their subrogation rights when the probability of recovering is pretty low. Hedge funds potentially have more aggressive legal tactics. Baupost, for instance, probably has a higher chance of getting a significant recovery [than an insurance company].”

Leverty agreed. “Hedge funds have deep pockets and a time horizon longer than an insurance company that’s looking at protracted litigation over many years. There’s also a capital efficiency argument where an insurer needs funds now to pay losses,” he said.

This “win-win” possibility was echoed by David Perla, Vice Chair at publicly traded Burford Capital, a global provider of legal finance solutions. Perla said the sale of an insurer’s subrogation rights to an investment firm like a hedge fund makes complete sense. “The fundamental difference between an insurance company and a hedge fund is that the insurance company is bound by capital adequacy regulations, possibly impelling it to settle earlier or cheaper than it would prefer. A hedge fund, which is not regulated in terms of capital adequacy, has more latitude in terms of timing and the amount of settlement,” Perla explained.

John Koch, Deputy General Counsel and a member of the Insurance Counseling and Recovery Group at law firm Flaster Greenberg, affirmed the reasons why insurance carriers sell their wildfire subrogation rights. “It’s a question of whether to invest all this time and money into litigation to potentially get a recovery years later, or to have cash in hand now to offset losses,” he said. “In making this decision, a huge actuarial analysis is undertaken to project the likely recovery and other factors. It’s all numbers.”

Nevertheless, Koch, who often writes about subrogation for legal publications, does not share the opinion that hedge funds have more aggressive legal tactics to secure a bigger windfall from defendants. “It’s not an accurate description,” he said. “Any insurance company worth its salt is perfectly capable of hiring the best of the best [law firms] for a whopping claim. I know some of the insurer subrogation firms and they’re very good. From a technical or legal standpoint, a hedge fund is in no better position to litigate for the recovery than the insurer.”

Subrogation Ups and Downs

Two other subjects were discussed with the interviewees: a recent court-imposed limitation of insurers’ subrogation rights, and a legislative resolution urging carriers to exercise their subrogation rights against fossil fuel companies for climate change-induced wildfires. Both topics stem from the 2023 Maui wildfires in Hawaii, caused by utility Hawaiian Electric equipment.

In February, Hawaii’s Supreme Court ruled that insurers cannot pursue their respective lawsuits against the utility and other responsible parties, requiring them to seek reimbursement from a $4 billion settlement fund. The decision restricting insurers’ subrogation rights in wildfire-related lawsuits establishes a significant legal precedent possibly compelling other states to impose similar constraints. While Hartwig supports the creation of a settlement fund ensuring the continuing viability of a utility and full compensation for insurers, he is concerned over a legal precedent impeding insurers’ right to subrogate.

“The right to subrogate is enshrined in law and no government has the ability to abrogate that right,” he said. “If an insurer is unable to subrogate, it may suffer a [ratings] downgrade and, in a worst case scenario, may become impaired at some point.”

Heller from the Consumer Federation of America is equally worried about the implications of the decision. “The subrogation rights of an insurance company are drafted in a contract guided by law. Carriers’ [legal] claims against a responsible party should not be limited in any way,” he said.

In a separate development, Hawaii’s legislature passed a resolution in May urging insurers to exercise their subrogation rights against the fossil fuel industry. The state’s Attorney General also filed a lawsuit the same month against several oil and gas companies and their trade association, alleging deceptive practices in not warning the public about their products’ climate risks.

“More states, including California, are calling on insurers to exercise their subrogation rights against oil and gas majors for their emissions contribution to climate-driven catastrophic events,” said Jones, Director of the Climate Risk Initiative at UC Berkeley’s Center for Law, Energy and the Environment. “Assuming they do, it could help offset the challenges we now see in insurance pricing and availability. No insurer has stepped up, however. There’s no excuse for not doing it.”

Would it benefit insurers to sell their subrogation rights to a hedge fund that takes the offensive against the fossil fuel industry? “I suspect that insurers have not explored in any way the third-party market for their subrogation rights against oil and gas companies,” Jones said. “That’s a reasonable question to ask of the insurers.”

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Leader’s Edge magazine

Once or twice a year in the early 2010s, CFO Mike Gilmartin of M. Davis & Sons braced himself for a visit of the 155-year-old organization’s insurance broker. “Back then, our health plan was fully insured, and the broker would come by and exclaim, `You did such a great job managing claims that the premium increase is only in the low double digits!’” Gilmartin says. “It was a cycle of helplessness. We were paying bills without knowing what they were for.” 

The annual cost of employee healthcare benefits for the industrial construction company climbed up the P&L statement to become one of the top five line items. In 2013, Gilmartin took control of the situation. He attended a workshop exploring the use of a member-owned captive insurance company as an alternative to a conventional healthcare plan. M. Davis & Sons became a member of the captive, Well Health Insurance Ltd., joining 25 existing employers. 

Over the past dozen years, the company’s annual benefit plan premium increases have averaged about 4 percent. “I was simply tired of getting those `lucky’ double-digit increases,” Gilmartin says.

Up, Up and Away 

The average cost of employer-sponsored healthcare coverage is on target to increase by 9 percent this year, surpassing $16,000 per employee, according to an October 2024 analysis by Aon. In comparison, healthcare coverage costs increased by 8.5 percent last year and were up 7 percent in 2023, indicating a steady upward trend. The causes of the persistent hikes run the gamut from aging Baby Boomers, higher rates of chronic disease and expensive medical technologies to wider use of costly medications like GLP-1 drugs.  

An eye-opening 85 percent of CFOs and CHROs participating in a January survey conducted by Chief Executive Group Research and Roundstone said their healthcare costs put significant pressure on the bottom line, adding a “non-negligible burden to the mounting expenditures they have spent the past five years trying to reduce,” the report states. 

One survey respondent, the CFO of a small life sciences company, echoed Gilmartin’s prior frustration: “The ongoing high-single, low-double digit increases create an untenable trend that is nearly impossible to address.” Another CFO respondent commented, “[We] experienced a 25 percent plus increase this year even with adjustments to the plan.”  

Many finance chiefs are in the same spot that Gilmartin was—they’re considering innovative ways to get out from under perpetually rising healthcare costs. However, they need to do so without adversely affecting a highly valued employee benefit that affects employee recruitment and retention. It is a small wonder that many finance chiefs grimace and pay existing plan premiums, hoping to make up the shortfall elsewhere.

Potential Savings 

There is another way. A quarter (28 percent) of the respondents to the Chief Executive Group/Roundstone survey indicated they had moved on from the traditional healthcare coverage benefit and invested in a self-funded healthcare plan with a stop-loss insurance policy that reimburses an employer for claims exceeding a specified threshold. Seven percent of respondents had invested in a self-funded plan that includes a captive solution with stop-loss coverage. But about half the respondents (47 percent) continued to be fully insured by a health insurance company. 

After all, a traditional benefits plan from a health insurance company seems like a great deal from a risk management perspective. “A company that buys a fully insured program is paying the health insurer to take away its [financial] risk. If the insurer messes up and underestimates [employees’ annual claim costs], that’s on them,” says Andrew Coccia, senior manager of Deloitte’s human capital practice. 

However, fully covered plans are not only constantly increasing in price year to year; they are also more expensive than self-funded alternatives. 

or example, to mitigate the possibility of underestimating employee claims, the insurer tacks on a so-called risk charge. “If the insurer estimates the annual cost of claims for a company is about $10 million, they’ll add a 5 percent risk charge for moving the risk to their balance sheet, plus an additional amount to eke out a profit,” Coccia says. In addition, insurers typically add to the customer’s bill the one-to-three percent tax they pay on policyholder premiums, 

An organization that self-insures liberates itself from the risk charge. However, the “profit charge” savings will probably be spent on purchasing stop-loss insurance to cover catastrophic losses.  

Regardless, the expense savings of self-insuring are significant, resulting in positive net cash flow that can be allocated elsewhere. “We estimate that self-insured plans provide premium savings of 5 [percent] to 8 percent over the long run,” Coccia says. 

Self-Funding Decisions 

In general, size counts when weighing a move away from traditional full-coverage insurance. Large companies that make the transition often invest in a self-funded plan with a stop-loss insurance policy, plus or minus a captive insurance company. “If you’re in the Fortune 100 and you’re not self-insured, something weird is going on,” Coccia says. 

After that, the decision to self-insure includes other factors. If an organization has roughly 500 employees in its health benefits program, Coccia explains, “the CFO has enough claims experience to be able to draw credible conclusions on future claims frequency to consider the benefits of self-insurance. The more employees, the more credible the conclusions and the more likely the employer is self-insured.” 

Midsized and smaller companies with only a couple of hundred employees, however, would not automatically benefit from being self-insured. “They’d need to have a firm grasp of claims activity,” Coccia says. 

Self-Insured Plus Stop-Loss 

Self-insurance is not a cure-all. While the organization saves money, it has a higher administrative burden and risks exposure to catastrophic claims. To offset those disadvantages, employers typically engage a third-party administrator to assume the administrative work and, in conjunction, purchase stop-loss insurance. 

That’s the strategy at CareCentrix, which purchases stop-loss insurance from Cigna. Cigna also manages the company’s self-insured healthcare plan. 

“It would be hard for a single employer our size to administer the healthcare program,” says Phillip Shiver, CFO of the 1,700-employee provider of in-home care services. “You need a provider with a nationwide network to handle the claims processing, employee privacy issues, healthcare inquiries and other administrative tasks.” 

CareCentrix has self-insured its employee healthcare plan since before Shiver joined the company in 2013. The self-insured plan and stop-loss insurance coverage have combined over the years to keep healthcare premiums flat. 

In 2024, there was a “small bump” in the premium, reflecting higher healthcare costs, says Shiver. To moderate the impact, the company increased the point at which the Cigna stop-loss insurance policy kicked in—to $300,000 per occurrence, up from $250,000 previously. Nonetheless, the self-insured plan remains “significantly less expensive than buying a fully insured plan,” he says. 

Like many employers that self-insure healthcare, CareCentrix invests in long-term strategies focused on reducing employee medical expenses, including wellness programs, preventive care and targeted interventions. “We offer cancer screening tests to catch potentially catastrophic conditions earlier, put together cooking seminars involving healthy eating and promote walking and other exercise events, where groups of employees participate in a variety of competitive races we call `Zombie Challenges,’” the CFO says.  

Not surprisingly, given CareCentrix’s mission to “make the home the center of patient care,” its healthcare plan is structured to quickly redirect care to an employee’s home whenever medically feasible. “That’s a lot less expensive than a hospital setting and is also better for employees’ health and wellbeing,” Shiver says. 

Self-Insured Plus Captive  

The group captive that M. Davis & Sons joined as the twenty-sixth employer tallies several hundred like-minded organizations across various industries and sectors. “All the partners are striving for a cost-effective plan that’s in the best interests of employees,” says Gilmartin. 

Gilmartin attributes the company’s average 4 percent increase in healthcare premiums over the past dozen years to the workshops, webinars and other gatherings where the captive’s members discuss their respective claims experiences and cost containment tactics. “We share our successes and failures,” he says.  

An example involves employee emergency room visits, a key driver of healthcare plan costs. According to recent studies, a visit to the emergency room in the U.S. can cost $4,000 or more, depending on the severity of the medical condition. At a meeting with fellow captive members, Gilmartin learned that an unusually high number of ER visits were for relatively benign conditions, such as an earache—a medical issue addressable online, over the phone or at an inexpensive urgent care facility.

To discourage such visits in the future, the captive, Well Health Insurance, bumped up the price of going to an ER for such conditions. 

Well Health was formed in 2011 by Captive Resources LLC, a consultant to member-owned group captives that encourages member companies to reimagine health insurance by taking control of it. This empowerment is evident in M. Davis & Sons’ decision to carve out coverage for expensive organ transplants from the captive’s medical stop-loss policy. A heart transplant, for example, typically costs more than $1 million, but only 3,700 are performed annually in the United States, according to Yale Medicine.  

By removing the transplant coverage, M. Davis & Sons received a monthly $6,000 premium discount on its stop-loss policy. The surgeries are fully insured under separate insurance, priced at approximately $3,000 per month.  

“We’ve had two kidney transplant cases with zero cost to the business or the individuals other than the annual premium for the carve-out coverage, demonstrating the carve-outs value as a targeted, cost-saving solution,” Gilmartin says.

A Choice For Small Companies 

Smaller employers, such as Carta Healthcare, a provider of AI-fueled clinical data management solutions with 50 employees, also leverage the economies of scale offered by networking with like-minded employers. They do so through a professional employer organization (PEO). “We pool our healthcare coverages and expenses with hundreds of other small businesses in our PEO, Insperity, saving us 30 percent on average on our insurance costs,” says Carta Healthcare CFO Lucas Tanner.  

PEOs function as the employer of record for multiple companies that employ between 25 and 250 employees, giving them greater clout to negotiate more favorable health insurance rates. “We analyzed what it would cost for comparable benefits from a fully funded health insurance plan and found that the savings from Insperity, our PEO, were significant, consistent with the other small companies I’ve served at as CFO,” Tanner says. 

Down the line, Deloitte’s Coccia says that small, growing companies like Carta Healthcare are probably headed down a path toward a captive and self-insurance model. Given Carta’s May 2025 infusion of $18.5 million in Series B1 funding, such growth is in the cards. 

“Like all forms of insurance, the greater the number of people insured, the greater the opportunity to spread the risk and seize economic value,” Coccia says. “That’s the law of large numbers.” 

The post How To Bid Farewell To Conventional Health Plans appeared first on https://www.russbanham.com.

Corporate Board Member magazine

Board members and the general counsel have long enjoyed a close working relationship. The company’s highest-ranking legal officer provides expert legal counsel to directors to navigate complex risks. When these risks evolve into a tangled web of convoluted information, the board leans more on the GC, straining their close relationship.

To flatten their learning curve on the strategic and operational risks caused by generative AI, cybersecurity and technology innovation, many boards have formed dedicated committees, task forces and ad hoc committees. As they conduct deep dives into these topics, directors are requesting voluminous business records and other documents from the GC. “Board members perceive greater responsibility and want to be conscientious, but in some cases the information they request could be a work in progress that the GC is uncomfortable disclosing to them—for their own sake,” says Lawrence Cunningham, board director at publicly traded companies Markel and Constellation Software, where he serves as vice chair.

Delving so deeply could push directors into dangerous legal territory. “If a dedicated committee says it wants a report on an investigation concerning the treatment of employees or a report on the company’s emission standards and performance or the consequences of its lobbying activities, some of that might be sensitive information that could hurt the company and the directors,” says Cunningham. “The reviews might indicate violations of law or policy that are continuing. If the company is sued, lawyers for the other side will try to pry information from a director that could look terrible in front of a jury, potentially jeopardizing the liability of both directors and officers.”

This concern, while not always central, is one of several that can make GCs hesitant to share certain information, he says. “From what I’m hearing, there may be growing tension in some cases between directors and the GC over the information board members need to provide effective risk oversight and what the GC is comfortable in sharing.”

Other board directors and legal experts perceive the same tension at play. The priorities of dedicated board committees to understand and assess the growing number of impenetrable risks are colliding with the GC’s focus on legal compliance and avoiding potential litigation. “The purpose of a board committee is to create a structure allowing directors to take a deeper dive into the topics assigned to that committee,” says veteran directors and officers liability attorney Dan Bailey, partner at Columbus, Ohio-based law firm Bailey Cavalieri. “More committees mean more work by both the directors and the GC to support the deep dives. The challenge for the GC is to provide enough information helping the board members do their job, without inundating them and getting them into the weeds.”

Once in the weeds, directors struggle to find their way out and request even more detailed data from the GC. Too much information can make it harder for board members to satisfy their concerns, causing frustration, confusion and a loss of focus on the core issue. This is the case with AI and cybersecurity, two of the most confounding areas for directors to oversee, according to Corporate Board Member’s “What Directors Think Survey,” conducted in partnership with Diligent Institute and BDO.

As directors peel one layer of the onion, another layer appears, followed by more. Inevitably, the information provided by the GC piles up into a rubble of baffling data. “I’ve seen instances where the GC is trying to keep the company books, records and other business data ‘neat and tidy’ and not jeopardize board members by providing documents that should be attorney-client privileged,” says Butch Hulse, general counsel and chief administrative officer at MiMedx, a publicly traded provider of healthcare products made from human placental tissue. “Boards that get too deep in the weeds can put themselves in harm’s way, focusing on the wrong risks [and] giving short shrift to the real threats.”

LEARNING CURVE

There’s no doubt that boards confront an evolving array of singularly complex risks testing the resilience of the organization’s risk management policies and their own oversight structure. A case in point is the whipsawing effects of President Trump’s lightning-fast actions on trade and federal DEI initiatives and efforts to influence monetary policy. Although candidate Trump’s campaign pledges clearly suggested these moves, few people anticipated such alacrity in their implementation.

In tandem with this locomotive are other rapidly changing topics for board attention—generative AI, cybersecurity, technology innovation and corporate DEI policies. “The demand signal from the board is higher because every board member needs to stay forward in their thinking and education to understand what is going on in our changing world,” says Suzanne Vautrinot, board member at CSX, Wells Fargo, Ecolab and Parsons.

Cunningham, whose day job is director of the Weinberg Center for Corporate Governance at the University of Delaware, agrees that boards have a responsibility to oversee the company’s risk management and systems. “The challenge is the scope of that responsibility has magnified as the risks have evolved in complexity and scale,” he says.

Longtime board member Gaurdie Banister characterizes the situation as a “state of perma-crisis.” Every year, he says, “there’s always something you have to be paying attention to that turns out to be a bigger deal than you thought. Directors need to be sufficiently aware of these challenges to apply the proper level of governance.” Banister serves the boards of three publicly traded companies, Russell Reynolds, Dow Chemical and Enbridge Inc. Prior board positions include Marathon Oil and Tyson Foods.

Asked what constitutes “sufficiently aware,” Banister explains, “You’re not there to run the company. Board members can’t be involved in all the details, in all the dimensions of risk. At a macro level, we can analyze how gen AI impacts the business or assess the risks inherent in the use of genAI internally, sticking our noses in but keeping our fingers out.”

His reference to NIFO, the acronym for “Noses In, Fingers Out,” is apt. The board of a publicly traded company has the right to request access to internal documents to fulfill their fiduciary duty of overseeing the company’s operations and make informed decisions. However, highly confidential information might be restricted depending on the specific circumstances and jurisdiction.

Banister says the board should have access to any information “reasonably needed” to effectively perform their oversight role. Asking the GC for sensitive, covert or clandestine data on cybersecurity, however, may be sticking too many fingers into the pie. “We’re supposed to have a 50,000-feet-elevated responsibility for material issues and shouldn’t be asking for everything,” he says.

Nicholas Donofrio, former board member at Bank of New York Mellon, Liberty Mutual, Delphi Automotive and AMD, agrees that board members must accept that they don’t run the enterprise. “We don’t need to know where every transistor is placed on a chip, where every wire is fastened to a tool or where every nickel and dollar is transferred, but we’re still fully enabled to render opinions about things that don’t make sense,” Donofrio says. “The problem is when people get mesmerized by the fireflies before the storm, when the real risk is the storm behind the fireflies.”

COMMITTEE CONCERNS

To focus on the actual storm, some boards form dedicated committees, subcommittees or ad hoc committees narrowly overseeing topics like risk management, compliance, sustainability, technology innovation and corporate social responsibility, to mention a few of these new committees (other boards embed these topics into the traditional three-committee structure). In making this decision, Vautrinot says, “The question is whether an acute risk is existential for the company and requires an immediate deep dive by a committee to understand its ramifications, or a chronic ‘forever risk’ that can be addressed once or twice a year without the need of a dedicated committee or subcommittee.”

Another purported reason to form a dedicated committee is if the board members lack expertise in understanding a particularly complicated and rapidly evolving operational risk. “If the risk is not in the experience stable for the board members, the solution is, ‘Let’s create a committee to invest in a level of confidence around these issues that are distorting the business,’” says Ed Magee, board member at publicly traded WD40 Company, a global manufacturer of household and industrial products.

Would it be more useful for the board to recruit an expert in generative AI or cybersecurity to help directors better understand and assess the risks? Not necessarily. “The way I see it, every director has to be a digital-cyber-AI director because that is the context for business,” says Magee. “We have to rise to the occasion for what is going on, diving into technological opportunities and risks and global economic shifts. Do I need to be an expert on all things cyber, no. But I do need to be able to ask good questions and understand the answers.”

Every board member, says Cunningham, should have a baseline ability to discern business matters, challenges and risks and render judgments about them, “probing managerial execution without micro-oversight.” Retaining an expert in cybersecurity on the board may be seen by other directors as providing special advantages and judgment to that person, he says. “If the director says, ‘I’m the person here who really knows this stuff and can tell you how it works,’ the rest of the board may defer too much to them,” he explains.

When a determination is reached by the board to form a dedicated committee, committee members quickly learn they need more detailed information to draw clearer conclusions on the risks under review. As D&O attorney Bailey explains, “A board committee, by definition, is a mandate for a deeper dive. The more committees there are, the more work for the directors and management to support them. As the number of committees rise, the responsibilities of the members may overlap, causing confusion and a greater risk of inefficiency.”

WHEN ENOUGH ISN’T ENOUGH

Too many board committees, each with their own information demands, can be overwhelming for the GC of a publicly traded company, says Hulse, the GC at MiMedx. “It’s the GC’s obligation to make sure both management and the board fulfill their respective risk management responsibilities, but when there is overlapping jurisdiction from one committee to the next—each with a range of information requests—it causes confusion over which committee has risk ownership,” he contends.

Matt Gorham, leader of PwC’s Cyber and Risk Innovation Institute, agrees the role of the GC has expanded beyond providing traditional legal advice. “The GC is much more engaged in the broader risk space—not just legal risks but handling broad portfolios of risk,” he says. In this expanded role, requests from dedicated board committees for detailed information on a particular risk can frustrate and wear thin the patience of GCs.

“It’s not uncommon for the GC to feel overwhelmed by the volume of [information] requests, while simultaneously trying to navigate what is management’s role and the board’s role,” Gorham says.

The interviewees offered a range of comments on how to ease the flow of information requests from the board, without undermining directors’ need for transparent and comprehensible information. “While board members need to keep their fingers out of running the company, that doesn’t mean the GC should withhold information they need to see,” says Bailey, advising that the GC “present the information to the directors in a format that is not too high or too low in terms of detail. I’ve always been an advocate for less is more.”

Gorham offered a similar opinion. “For the board and the GC to see eye-to-eye on risk, they just need to be looking at the same thing,” he says. Rather than provide directors with a pile of confusing documents, the GC needs to consolidate and edit the information for easier accessibility and comprehension. He provided the example of the SEC’s cyber risk disclosure rule requiring publicly traded companies to disclose a material cyber incident within four business days (the rule may be relaxed or eliminated by the Trump administration). The disclosure rule produced a multitude of requests from board members to the GC on what constitutes materiality.

“In evaluating materiality, imagine a triangle,” says Gorham. “You have the CISO in one corner, the CFO or controller in another corner, and the GC in the third corner. Since materiality requires a legal judgment, the GC needs to quarterback the shrinking of that triangle. That’s an expanded role for the GC, but it can help ensure a level of transparent information for the board to assess, as directors wrestle with understanding and assessing this issue.”

To help the board wrestle with the risks facing Telix Innovations, the radiopharmaceutical solutions provider hired its interim auditor to assess and rate both the risks and its tolerance levels. “We receive a quarterly report detailing where we are with some risks and what we’re doing about it, which informs our internal audit,” says Tiffany Olson, board member at the publicly traded company and two other public companies, Castle Biosciences and MiMedx. “It’s factually based with a good software metric system.”

In situations where directors need more detailed information for risk oversight, Olson says, “It’s up to the GC to tell us when it’s too detailed and not necessary. The challenge for boards is knowing when enough information is enough. The GC is so vitally important from an information disclosure standpoint, given the potential financial risk to members. Do we need to know all the nitty-gritty? Probably not.”

To keep board members out of dangerous legal territory, Cunningham advises that sensitive reports flow through the GC’s office first before distribution to the committee. The GC can then characterize the information as a communication between an attorney and a client, making it privileged in future proceedings with adverse parties, he explains. “If, for example, the treatment of an employee blows up into a scandal and the company is sued by the government or shareholders and the other side goes after the committee members, they won’t have access to the GC’s report to the board,” he says.

Undoubtedly, the board ought to be able to reasonably see everything related to strategy, operations and risks. “No manager can say this [piece of information] is proprietary to management,” Cunningham says, “but it is the GC’s role to design the information cycle to the board so that certain items are stamped as attorney-client privileged.”

Bailey concurs with this advice. “Management should not be withholding information from the board, but it is better for the GC to give the directors summaries, metrics and key performance indicators to monitor the red flags, rather than a full dump of all kinds of information.”

Simple and to the point should benefit all parties.

The post When Boards Ask For Too Much: How Risk Oversight Can Backfire appeared first on https://www.russbanham.com.

By Russ Banham

Posted on March 3, 2025

When the smoke and ash cleared after the 2018 Camp Fire in Paradise, California, 15,000 homes had been completely destroyed. Seven years later, only 3,550 have been rebuilt. Of the rest, nearly 20% of the town’s homeowners lacked adequate insurance coverage to rebuild. California’s FAIR Plan, a property insurance market of last resort, insured about 9% of the homes and businesses in Paradise. FAIR Plan premiums, however, cost $3,200 annually on average, more than double the state’s average of $1,480 for privately placed property insurance. Many people who could not afford private insurance or the FAIR Plan simply went without coverage.

Hundreds of miles separate Paradise from the diverse middle-class suburb of Altadena, California, where an estimated 9,413 structures were destroyed by the Eaton Fire in January. Some 958 homes in Altadena were covered by the FAIR Plan, up 28% from the prior year, according to FAIR Plan data. Figures are yet to be compiled on how many people were uninsured in Altadena, but given that approximately one in 10 (154,108) homes in Los Angeles are uninsured, according to LendingTree estimates, more than a few of them may be located in Altadena. Losses from the wildfires that Los Angeles endured in January weren’t limited to residences. The UCLA Anderson School of Management projects $297 million in wage losses for businesses and employees in impacted areas, which are home to thousands of businesses.

Coverage Increasingly Out of Reach

For economically disadvantaged homeowners near or below poverty levels in California and across the country— people who for the most part have lower incomes, higher debt, and low FICO credit scores—the alarmingly high cost of property insurance is increasingly beyond their ability to afford. According to a multiyear study by the Federal Reserve Board, Harvard Business School, and Columbia Business School published in December 2024, 65% of the U.S. population is underinsured.

“For the longest time, we have not been able to quantify exactly how underinsured people are and to what degree they purchased coverage to protect them against wildfires, hurricanes, tornadoes, and other natural disasters,” says study co-author Ishita Sen, an assistant professor of business administration at Harvard Business School. “Now we have an idea of the magnitude of the situation and the news is staggering.”

Sen says that most people within the 65% cohort reduce their coverage to ensure a low, fixed-amount premium. Losing a job, a medical emergency, or a mortgage loan default often compels a “Sophie’s Choice”—putting food on the table or buying sufficient homeowners insurance. “They convince themselves that their homes won’t be susceptible to a disaster or if one strikes, the damage will be minimal, and FEMA will make them whole,” says Sen. “The reality is otherwise.”

The Federal Emergency Management Agency provides up to $43,500 in grants to homeowners who lose their homes in a natural disaster, not nearly enough to rebuild a house that burned to the ground, Sen says. “Even average Americans lack enough savings for such events in life. Households, lenders, and taxpayers face far more uninsured risk than we all realize,” she says.

More than one in 13 homeowners in the United States have no property insurance at all, according to a 2024 study by the Consumer Federation of America (CFA), a nonprofit research, education, and consumer advocacy organization. That represents about 7.4% of all homeowners in over 6 million uninsured homes nationwide, despite the risk of more frequent and financially severe hurricanes, tornadoes, wildfires, and convective storms. Over 20% of households living in poverty do not have homeowners insurance, compared to just over 5% of households not in poverty, the CFA found in its analysis of 2021 American Housing Survey data.

Breaking it down further: Homeowners earning less than $50,000 per year are twice as likely to have no insurance compared to the broader population. Among lower-income homeowners, 15% lack coverage. Demographics plays a role, with Native American, Hispanic, and Black homeowners disproportionately at risk of “going bare”—forgoing any property insurance.

Nineteen percent of homes valued at no more than $150,000 were not insured, CFA said. That dropped to 5% or less for homes worth more than that amount.

“Being uninsured can foster deeper economic precarity for millions of homeowners across the country, especially those with lower incomes, and is an important contributor to racial inequality,” the report says. “Inequalities in who has homeowners insurance will likely widen the long-standing racial wealth gap.”

The study found that $1.6 trillion in U.S. home property value is uninsured. “When millions of families simply cannot find or afford insurance coverage for their home, we are all exposed,” Douglas Heller, CFA director of insurance, warned in a press release announcing the organization’s findings.

Louisiana serves as evidence of what happens to low-income victims of a natural catastrophe. A 2006 study in the journal Ecological Economics found negative correlation between people living in poverty in New Orleans when Hurricane Katrina struck the year before and homeowners who had flood insurance. “This suggests that city planning districts that had a high percentage of poverty also had a low percentage of flood insurance coverage,” the paper states.

Uninsured or underinsured victims of Hurricane Katrina faced ongoing challenges that their fully insured peers may have been able to avoid, findings show: “For example, the Road Home homeowners’ assistance program only began accepting applications in October 2006, more than a year after Hurricane Katrina struck, leaving underinsured homeowners in temporary housing for extended periods,” according to a 2014 research paper published in Social Science Quarterly.

Small Business Shutdowns

Small, low-margin businesses are not immune to this profound disruption. According to FEMA data, 43% of small businesses affected by a weather-related disaster fail to reopen and an additional 29% go out of business within two years of the event. FEMA does not define a “small business,” relying instead on Small Business Administration (SBA) size standards to determine if a business qualifies for disaster assistance. SBA standards are based on factors including the number of employees and average annual receipts. FEMA’s data does suggest that low-income applicants are more likely to be denied assistance and that those with insurance recover faster.

Running a small business is risky even without external threats. Roughly 20% are permanently shuttered within a year of opening for business and half close within five years, according to 2024 data from the U.S. Bureau of Labor Statistics. Average income for self-employed owners is $26,084 for an unincorporated business or $51,816 for an incorporated small business, according to data cited by USA Today. But even that top number could leave small business owners struggling based on the cost of living of many urban areas.

The effects of a natural disaster on businesses range from damage to property or materials from a direct hit to supply chain disruptions or reduced operating hours even if the impact is less immediate, the Federal Reserve Bank of Richmond noted in November 2024, after Hurricane Helene struck the southeastern United States.

The impacts can be particularly dire for small businesses, which likely lack the resources, capital, and larger number of locations that can insulate their larger counterparts from potentially ruinous harm from a natural catastrophe, Inc. magazine noted last fall.

“Potential knock-on effects from damage to small businesses could also create challenges that extend to the broader economy,” McKinsey stated in an October 2024 analysis following Hurricanes Helene and Milton. “Micro-, small, and medium-size enterprises (MSMEs)—defined as enterprises with fewer than 500 employees—collectively play a major role in powering the U.S. economic engine.”

While acknowledging it would be impossible to tally exactly how many small businesses sustained some form of damage from the two storms, McKinsey made clear there was significant potential for extensive harm.

The 34 counties in Florida impacted by Hurricane Milton encompass nearly 60% of the MSMEs in the state, the analysis says—that is 1.9 million businesses with roughly 4 million employees. The swath of impacted industries was similarly broad, encompassing healthcare, construction, real estate, manufacturing, and others.

Further up the East Coast, 39 counties in North Carolina affected by Hurricane Helene are home to 45% of the state’s MSMEs, McKinsey found— roughly 471,000 businesses with 1.1 million employees.

Most small businesses are insured for property damage, but are only partially covered, says Ben Collier, associate professor of risk management and insurance at Temple University. He cites flood insurance provided through the National Flood Insurance Program (NFIP). “NFIP covers property damage losses but not the impact of a business interruption resulting in significant revenue disruption while the business owner waits for the structure to be rebuilt,” Collier said.

Reopening the business in another location is an option to keep revenue flowing, assuming the distance isn’t too far for current customers to travel. Other options include applying for a disaster recovery loan from the Small Business Administration to fund repairs after a climate-related disaster. There’s a hitch, however. Collier explains: “While the loans help address the liquidity problem that businesses can’t solve, people need to show they have a good likelihood of repaying the debt. Since SBA loans are based on credit scores and monthly cash flow budget considerations, only half the number of people that apply receive the loans.”

That is not necessarily the only complication. The Small Business Administration did not have enough funds to quickly provide loans to some businesses damaged by Hurricane Helene, forced to wait for additional funding from Congress, according to local news coverage at the time. That left some businesses in limbo for weeks to months.

Bloated FAIR Plans

In the weeks since the Palisades and Eaton fires, the economic cost and insured losses caused by the disasters have been attributed to climate change, misaligned city budget priorities, delayed fire suppression, an increase in the built environment, wildfire-susceptible houses, poor land and water management, insurers that departed the California market, and the state insurance regulations that compelled their exit. There is some truth to all the assertions.

For nearly four decades, homeowners insurance in California was priced below the risk of wildfire due to Proposition 103, the state regulation formally known as the Rate Reduction and Reform Act. The rule limited how much insurers could increase rates without a public hearing, discouraging them from raising prices frequently. Although catastrophe models posited more frequent and severe wildfires ahead, insurers could not include this data in their underwriting and pricing. Nor could they include the rising cost of the reinsurance they bought to spread their risks.

Two years ago, two of the largest insurers in the state, State Farm and Allstate, stopped selling and renewing many homeowners insurance policies. Another large carrier, Farmers Insurance, temporarily non-renewed its homeowners policies. Altogether, seven of the top 12 insurance companies in California either pulled back from offering new policies or pulled out of the market entirely. The insurers attributed their decision to Proposition 103, criticizing it as an outdated regulation that failed to account for rapidly increasing wildfire risks.

The loss of this massive amount of risk-bearing capital in the state forced hundreds of thousands of homeowners into the higher-priced FAIR Plan. Of the 1,600 homeowners policies that State Farm non-renewed in July 2024, around 1,400 ended up in the FAIR Plan, according to the California Insurance Department.

The plan’s total financial exposure is $458 billion, tripling from September 2019 through September 2024. It is expected now to grow by at least another $4.7 billion, since 22% of the structures affected by the Palisades Fire and 12% of the structures affected by the Eaton Fire were insured in the plan, according to California Department of Forestry and Fire Protection (CAL FIRE) incident maps.

Although state-sponsored, the FAIR Plan is not state-subsidized. Rather, the plan’s losses are shared by property and casualty insurers operating in California. If the plan runs out of cash and reinsurance (at press time it had $200 million in cash and $2.5 billion in reinsurance), the state steps in and charges assessments to the insurers for the shortfall. Carriers can then pass on the cost of the assessments to California consumers by charging higher premiums, making coverage more expensive for homeowners, especially those who are economically distressed.

Meanwhile, homeowners insurance rates are expected to increase significantly following a landmark regulation signed by the state’s insurance commissioner, Ricardo Lara, on Dec. 30, 2024, eight days before the massive wildfires first erupted. The rule obviates key aspects of Proposition 103, allowing insurers to use wildfire catastrophe models in setting rates and to treat reinsurance like other carrier expenses. In return, insurers must increase the number of property insurance policies they write in wildfire-prone regions in California by 5% every two years until they reach the equivalent of 85% of their statewide market share.

While many homeowners and businesses in the high-priced FAIR Plan will now be able to buy more coverage at lower cost in the private insurance market, homeowners and businesses not in the FAIR Plan are likely to pay more. The nongovernmental Consumer Watchdog estimated that the total 9 million homeowners living in California will pay an average $1,100 in additional premium annually if the FAIR Plan assesses private insurers $10 billion for costs related to the recent wildfires that are not absorbed by reinsurance.

Economically deprived homeowners may buckle under the financial strain, reducing their coverage or eliminating it altogether, adding to the ranks of the 10.5% of uninsured homes in California. A similar situation is expected in the other 34 states that have FAIR Plans, as climate change increases the frequency and severity of local weather-related disasters, forcing insurers to stop offering coverage, resulting in more of these markets of last resort assuming an ever-growing number of high-risk properties.

Following California’s landmark regulation, a major question is whether insurance companies, despite their newfound ability to charge higher premiums, will reenter the state’s homeowners insurance market. Given recent insured losses, they may decide otherwise, says Daniel Kaniewski, former FEMA deputy administrator for resilience. “Since they got all the regulatory changes they asked for, the insurers should not use the L.A. fires to back out of their statements that they would write new insurance in California because their models told them that there could be a catastrophic wildfire,” adds Kaniewski, managing director, public sector, at broker Marsh McLennan. “But they might.”

Harvard Business School’s Sen commends the regulatory changes in California but criticizes the state Insurance Department for waiting too long.

“California lured people and businesses into risky areas of the state with premiums that were low enough to make them think the risks were not high,” she says. “We cannot have a world where we don’t let insurance companies price their products based on the risks. The recent regulatory changes should have occurred at least 15 years ago.”

What Can Be Done?

One way to forestall the worst for disadvantaged homeowners and small businesses would be reimagining the purpose and structure of property insurance to further spread disaster risks. Reinsurance broker Guy Carpenter recently announced a project exploring the use of parametric insurance to spread wildfire and hurricane risks in California and Florida, respectively. Assuming the project proves feasible, primary property insurance costs would fall for insurers in both states, trickling down to reduce the number of people in their FAIR Plans.

The concept calls for developing a community-based parametric reciprocal exchange, an insurance model in which a community of homeowners or small businesses share natural disaster risks. Payouts are triggered automatically when specific, predefined measurable events or conditions, such as wind speeds or rainfall levels, are met.

Catastrophe bonds, a type of insurance-linked security that can spread wildfire and hurricane risks beyond private insurance and reinsurance markets, are another way to achieve the twin goals of shrinking FAIR Plans and reducing insurance premiums for insureds including small businesses and disadvantaged homeowners. Approximately 12% of the cat-bond market is exposed to wildfire risks above cumulative loss thresholds absorbed by underlying primary insurers and reinsurers. While Fitch reported on Jan. 24 that the Los Angeles wildfires will cause some cat bonds to experience partial losses, the aggregate losses will not impede cat bond issuance, the ratings agency stated.

Lastly, some form of government-run disaster insurance program to absorb catastrophic risks is on the table. “The creation of a federal catastrophe reinsurance structure is absolutely essential to manage the risk transfer we need in a world so dramatically transformed by climate change,” says Heller. “We need to recognize we just can’t follow the same path toward deregulation that began when the federal government officially passed regulation of insurance to the states.”

He’s referring to the McCarran-Ferguson Act of 1945, which exempted insurance companies from federal antitrust laws, with a proviso that states regulate insurance to ensure carriers do not impose excessive, inadequate, or unfairly discriminatory rates. In the 80 years since the act was passed, Heller asserts that many state regulators have failed to constrain carriers in this regard. “Insurance works when there is a mix of low risk, moderate risk. and high risk, so we can spread it,” he says. “The only way we can have economic security and community resilience as a functioning society is to think about property insurance more like a utility than a private sector product. Not everything has to be solved by the insurance market.”

Heller worked closely with then-Representative (now Senator) Adam Schiff (D-Calif.) in developing legislation (the INSURE Act) intended to establish a $50 billion federal reinsurance program for property insurance. The program would cover hurricanes, floods, wildfires, and earthquakes; cap insurers’ liability for catastrophic events; and address the challenges homeowners face in insurance affordability and availability. “The bill is structured to achieve the twin goals of providing insurers with a clear backstop for the extreme catastrophe risks they now fear and providing Americans with meaningful access to insurance coverage that we all need,” Heller says.

Insurers and reinsurers oppose the legislation, asserting that a federal property reinsurance program would shift fast-rising catastrophe costs to taxpayers. Filed in January 2024, the bill never got a House committee hearing before the 118th Congress ended. At press time, the bill had not been refiled.

Former California insurance commissioner Dave Jones thinks a narrower approach to federal reinsurance targeting homeowners who are forced into FAIR Plans makes sense.

“Our experience with bigger federal insurance schemes is not good,” he says. “The NFIP and Federal Crop Insurance programs require substantial and regular taxpayer-funded bailouts, are regressive, and [since their] rates do not reflect the risk, they don’t incentivize risk reduction. Federal reinsurance for FAIR Plans would help reduce FAIR Plan costs and the amount of rate increases needed as things get worse in the 35 states that have them.” (See Sidebar: Q&A with Dave Jones)

In the aftermath of a disaster that provoked horror and grief for hundreds of millions of people watching it unfold in real time, the unbearable possibility that our homes, too, could be next certainly begs new ideas. As Sen puts it, “Average Americans don’t have enough savings for such events in life, eroding the fundamental idea of home ownership.”The number of small businesses shuttered by the wildfires in Los Angeles was unavailable at press time. As of September 2024, the FAIR Plan had 13,101 commercial policies in force—though how many of those covered small businesses also could not be immediately determined. That number was up 161% from 5,010 commercial policies in force in September 2024. But those figures pale in comparison to the count of FAIR Plan dwelling policies in force, which spiked 123% from 202,897 in September 2020 to 451,799 four years later.

The post Beyond Reach appeared first on https://www.russbanham.com.

Risk Management magazine

As the new Trump administration continues to enact its agenda, many insurance industry experts anticipate that shifting regulatory priorities could impact directors’ and officers’ liability and the D&O insurance market. However, since the second half of 2022, when record high premiums confronted directors and officers across all industry sectors, D&O liability insurance capacity, coverage and pricing have rebounded. These favorable market conditions are expected to persist.

Any time a new federal administration takes a sharp turn left or right, there are both positive and negative liability implications for directors and officers, said Dan Bailey, a D&O insurer defense attorney and partner at law firm Bailey and Cavalieri. “Volatility drives D&O claims activity,” he said. “Unpredictability creates uncertainty over the benefits and drawbacks.”

Nevertheless, he believes that any actions taken by the Trump administration will not immediately affect current D&O market conditions. “It takes some time for the market for D&O insurance to turn in terms of pricing, coverage terms and conditions,” Bailey said.

According to Priya Cherian Huskins, senior vice president and partner at commercial insurance brokerage Woodruff Sawyer, D&O rates are “always a question of capital supply and demand, married to carriers needing to pay for past and future losses.” Reflecting on the market in 2022, she said, “Unprecedented demand for the insurance outpaced available supply, causing D&O premiums to hit record highs.”

She attributed the increase in D&O market demand that began in 2021 to the formation of a record number of special purpose acquisition company (SPAC) and IPO formations that year. According to Woodruff Sawyer data, IPO filings in the United States averaged 234 per year between 2017 and 2019. In 2020, that figure more than doubled to 460 filings, and the following year saw a record 1,013 IPO filings.

“In the second half of 2021, 71% of public companies renewing the same year-over-year D&O program experienced a price increase,” Huskins said. “The hard market rates were almost five times the rates we saw in 2018, resulting in a flood of new capacity and carriers to provide D&O insurance.”

As the number of IPOs, SPACs and de-SPAC transactions decreased in the second half of 2022, available supply returned to the market and D&O rates subsequently fell. Almost 90% of public companies experienced a D&O price decrease in 2022, a soft market trend that continued into 2023 and 2024 with further premium decreases or the same pricing, according to Woodruff Sawyer data. “As quickly as the market hardened, rates came down even faster,” Huskins said.

These market conditions remain in effect. “We are still in a very competitive market, with plenty of capacity and much lower securities class action claims than we saw between 2018 and 2021,” said Jennifer Sharkey, national managing director in the executive and financial risks practice at insurance broker Gallagher.

A Shifting Landscape for D&O Liability

It is unclear whether D&O claims activity will increase or decrease in the coming years under the Trump administration. While several regulations and enforcement activities are likely to be rolled back, new regulations and enforcement activities may replace them. For example, the focus of the Securities and Exchange Commission (SEC) may shift under new chair nominee Paul Atkins, who is reportedly “market friendly” and skeptical of overregulation. “The SEC is expected to become less aggressive from an enforcement standpoint,” Bailey said. “We do not expect to see the level of regulatory oversight we saw—not that it will go away or the SEC will ignore wrongdoing.”

According to Scott Seaman, co-chair of the global insurance services practice group at law firm Hinshaw & Culbertson, there is a “strong possibility” that the SEC’s rules requiring the disclosure of climate-related information in public company financial filings “will be wiped off the record,” thereby removing directors’ and officers’ liability for inaccuracies or misrepresentations in their climate emissions disclosures.

Other potential changes involve the president’s appointment of more conservative federal judges. In President Trump’s first term, he appointed 234 federal judges, including 54 district court judges. Rulings by conservative judges in lower courts appointed during Trump’s first term largely benefited directors and officers, said Ryan Stubits, senior vice president and director of client services at insurance broker Lockton. He speculated this trend might continue over the next four years.

In addition, the three conservative Supreme Court justices President Trump appointed in his first term have further altered the posture of the nation’s highest court in ways that have mostly favored directors and officers. For example, last year, the Supreme Court invalidated an SEC regulation requiring Nasdaq-listed companies to disclose the diversity of their board members and the end of the Chevron Deference, a four-decade-old legal doctrine requiring federal courts to defer to federal agencies’ interpretations of ambiguous statutes. Going forward, federal judges will now determine the meaning of these laws. Another 2024 Supreme Court decision in Loper Bright Enterprises v. Raimondo diminished the power of administrative agencies, which previously could impose civil fines in federal court. These and other recent decisions will likely serve to limit directors’ and officers’ liability going forward.

Overall, as the federal government elevates economic concerns over environmental and social considerations, D&O liability insurance claim frequency and severity may be reduced. “There is little question that most corporate executives and board directors feel the new administration will have a more sensible regulatory approach and a more favorable environment for business in general,” said Mike White, who chairs the nominating and governance committee at Bank of America. “That being said, there are still lots of risks out there.”

New D&O Risks

Despite the favorable regulatory environment, several heightened liability concerns remain for directors and officers under the Trump administration. The president’s widespread tariffs on critical imports from other countries alters the D&O liability impact in different industry sectors. “Tariffs change the D&O emphasis, with oil and gas companies possibly benefitting and clean energy companies possibly not,” Bailey said.

White noted the geopolitical impact of higher tariffs imposed on goods from China and other countries, which could boomerang into a major trade war. “That could be very disruptive and bleed into D&O insurance rates a bit,” he said.

Although possible expenditure reductions at the SEC recommended by the Department of Government Efficiency (DOGE) may reduce D&O claim activity, potential expense cuts at the Federal Trade Commission may have the opposite effect. A more tolerant FTC that less often prohibits M&A transactions based on antitrust concerns could result in greater D&O claims activity. “Shareholders frequently challenge board conduct with respect to a merger transaction,” Bailey said. “More transactions usually mean more D&O claims.”

Some believe there may also be rising D&O liability linked to the president’s more permissive approach to cryptocurrencies. “For corporations outside the crypto industry, I do not foresee much of a D&O impact,” Bailey said. “But for directors and officers in the crypto industry, which appears to be growing fast and involves a ton of money, the inherent volatility we have seen in the past may return, increasing the prospect of D&O claim activity.”

Recent federal government actions involving cybersecurity are another looming D&O concern. The Department of Homeland Security’s recent dismissal of the federal Cyber Safety Review Board, whose purpose was to examine and assess cyber incidents and recommend cybersecurity improvements to the private and public sectors, exemplifies pared-back cybersecurity enforcement. Since directors and officers can be held liable for cybersecurity breaches if they fail to ensure adequate cybersecurity measures are in place, the more relaxed regulatory posture is concerning. “There is a lot of cyber risk out there,” said White. “No board member can sleep soundly thinking everything is fine.”

Huskins, however, is not convinced that regulatory enforcement activities by federal agencies will significantly contract under the Trump administration. “I think the corporate celebration that the new administration will be less interested in enforcement actions is premature,” she said. “As much as this is an administration likely to be more constructive from a business standpoint, there are still some fundamental rules when it comes to securities and other laws that will continue to be enforced. As we learned from the previous Trump administration, if the federal government is perceived not to be doing enough around enforcement, states and local governments will pick up the slack.”

Ultimately, the new administration’s policies will likely create both opportunities and challenges for directors and officers. “While I would say there are fewer risks, there are also different risks,” White said. “Knowing President Trump’s style [of running the government], we will be surprised along the way by some things that will be favorable to directors and officers and others that will not be.”

As for the insurance market, sharp pullbacks in D&O capacity are not expected, suggesting that coverage and pricing stability will continue through the upcoming D&O policy renewal season.

“We are still in a very competitive market, with plenty of capacity and much lower securities class-action claims than we saw between 2018 and 2021,” Sharkey said. “We expect to see more excess insurers enter the D&O market [although] the majority of risk managers are sticking with their incumbent insurers, assuming they are providing the market rate or offering further reductions.”

Russ Banham is a veteran business journalist and author based in Los Angeles.

The post Will the Trump Administration Impact the D&O Market? appeared first on https://www.russbanham.com.

Chief Executive magazine

n an era of rapid-fire geopolitical and economic transformation, we asked four leaders how they stay on top of market challenges and opportunities and rally their workforces to attack them. Here are their stories.

In June 2024, after an extensive review, CEO Julie Wood at QBE North America introduced the large commercial insurer’s revised strategy—to focus on core customers and segments where the company has meaningful market position, relevance and scale. “We were finding our way around our appetite and marketplace in the U.S.” Woods says. “Our new strategy shifts away from generalist, commodity-type business toward becoming a niche specialist.”

The decision to strategically reposition QBE North America as a provider of niche insurance products to select commercial customers was a bold move. QBE North America, with $7.3 billion in gross written premium in 2024, is part of Australia’s QBE Insurance Group Limited, a global insurance leader with operations in 26 countries. The parent company’s strong global brand helped it gain a foothold in North America in the late-1990s and early aughts. In 2024, QBE North America’s middle market business segment, which brought in some $500 million in gross written premium, struggled with profitability, impelling a strategic reassessment and the insurer’s decision to close down the segment. “We deliver a profit in North America, but you have to earn the right for investment capital and to gain the confidence of the parent company, the board and shareholders,” she says.

The generalist nature of serving different mid-sized companies required significant human capital and systems to assess diverse risks and handle the underwriting, pricing, reserving and claims management. By narrowing the focus on niche insurance markets and extending this lens to gradually introduce new property and casualty insurance products with selective distribution, the path ahead is clearer. “Fundamentally, we believe we can build better products in the areas we’ve chosen,” Wood says.

In this era of erratic change, finding a clear path—the aim of all CEOs—is akin to navigating a three-masted merchant ship in 1492 to locate a sea route from Spain to India. Although shifting geopolitical policies and economic headwinds and tailwinds disrupt explicit paths, a guiding North Star is still fundamental in crafting a roadmap, says Benjamin Finzi, founder and leader of Deloitte’s global CEO program over the past 10 years. “Successful CEOs, whether they admit it or not, have a theory of the future, what the world will look like in three to five years,” he says.

Once this vision of an endpoint is in mind, the journey ahead requires strategic readjustments in response to evolving geopolitical, macroeconomic, technological and competitive threats and opportunities. These challenges are legion today, forcing CEOs to assess a cacophony of constant disruptions. To hear through the noise, the best CEOs “have a certain ‘version of resilience,’ characterized by not worrying about the stuff they really don’t have to worry about,” says Finzi. “So many things hit them at once that they have an algorithm in the brain that computes, ‘I hear that, but I’m not going to worry about it.’”

That ability to recognize back-burner distractions frees up time to reflect on more pressing threats and make strategic readjustments to address them. These modifications should be influenced and shaped by the organization’s mission, purpose and values, the inherent components of its culture, says Finzi. “The CEO falls back on these components to find language that will inspire, motivate and guide the movement toward the endpoint,” he explains.

Chief Executive reached out to four CEOs about their methods of homing in on a theory of the future, identifying necessary tactical adjustments and rallying people around the organization’s new direction.

Strong Values Lead the Way

At QBE North America, CEO Woods’ theory of the future suggested a rare opportunity to leverage the insurer’s strong values and underwriting and claims expertise to better meet the demands of niche customers for its crop, accident & health, cyber and financial lines. “We hear time and again a desire for consistency in pricing and a better claims experience,” she says. “That’s our vision and what we’re building toward.”

Successfully serving its specialty property and casualty insurance coverage customers entails coupling relevant talent and expertise with investments in cutting edge technology tools like gen AI and machine learning and a culture that values work flexibility, open communications and collaboration. “People need to share business stories, be cognizant of KPIs under stress and be ready to adjust,” says Wood, who became CEO in September 2023 after nine years at top insurance broker Marsh. “Teams need to stay grounded in the marketplace to get feedback from brokers and customers on high-level macro trends in the industries served. We encourage creativity to speak up; that’s the value of transparency. No one should hoard information.”

Woods also views the opportunity to be part of the company’s journey toward refocusing around specialty insurance as a talent draw for QBE. “A new chapter is unfolding here with differentiated brands and the opportunity to do different things in different ways,” she says. “That’s a powerful value proposition for talent in the early stages of their career.”

Driving Toward Diversification

In crafting the strategy at Harbor Foods, a fourth-generation family-owned independent distributor serving more than 7,500 restaurants, hospitality venues, convenience stores and independent grocers, CEO Justin Erickson applies market and customer knowledge passed down from his father, grandfather and great-grandfather to current market challenges.

“I try to stay focused on differentiating and positioning Harbor in a different light than our competitors,” says Erickson. “Like many of the customers we serve, we’re purpose-driven and customer-centric. We look for ways to solve their problems and serve them better, a value proposition that has helped us consistently grow over the decades through Washington, Oregon, California, Alaska, Idaho and Nevada.”

Such assessments prompted Erickson to strategically reposition the company in the foodservice business, beyond its roots in serving convenience stores and neighborhood grocers. In 2019, Harbor bought a portion of a large foodservice distributor, Food Services of America (FSA), that included a 250,000-square-foot distribution facility in Kent, Washington, FSA’s executive leadership and many employees, and 1,700 of its independent restaurant customers. “It was important strategically to diversify the business by adding broadline foodservice distribution,” explains Erickson. “We now serve a much wider variety of customers.”

Shortly thereafter, he restructured the organization into two operating companies: Harbor Wholesale, in charge of retail distribution; and Harbor Foodservice, in charge of foodservice distribution. Harbor Foods Group was formed as the parent company of both operating companies, which have different methods of acquiring products from vendors, packaging, shipping and sales channels. Each operating company is led by its own president.

“We’re able to focus on each specialized niche and still pull them together for back office efficiencies,” he says. “This wasn’t a strategic decision; it was all about customer service and operating effectiveness. Our mission—‘supporting the local entrepreneurs that provide jobs in their communities, bring convenience to busy lives and invite us all to experience life around the table’—remains the same. That’s our North Star.”

Recent economic volatility hasn’t changed that, says Erickson, who notes that his company has endured more than a century’s worth of ups and downs. “At the end of the day, we distribute food to stores and restaurants,” he says. “People need to eat. The fundamentals haven’t changed.”

Nevertheless, he acknowledges the need to make certain adjustments. “Growth is tough right now, which is something I hear from most people in our business, especially businesses that sell things to consumers,” he says. “Prices have disproportionately impacted lower-income people who shop in convenience stores and quick-serve restaurants. Everyone is fighting for market share now, forcing us to be clear on our value proposition and not race to the bottom to be the lowest-priced provider.”

For the past decade and more, Harbor has expanded its geographic footprint via the acquisitions of other wholesale and foodservice companies. In 2022, Harbor paid $40 million to acquire MTC Distributing, a third-generation Modesto, California-based wholesaler with 300 employees, a 150,000 square foot distribution center and annual sales of approximately $330 million. The company presently tallies four large distribution centers, positioned geographically to serve its markets, and 1,100 employees.

Erickson is quick to note that stewarding Harbor’s growth trajectory includes disciplined decision-making that ensures each expansion aligns with its core mission and competencies. “When you push the top line and grow for the sake of growth, you get pulled into areas you’re not good at,” he says. “I once read that the most important thing in a strategy is figuring out when to say no. Fortunately, we have a great executive team and board of directors here that ensure we don’t stray from our mission of taking care of customers and our people-focused culture. That has been our strategic advantage in acquiring companies and will continue to be it.”

Speaking Truth to Power

CEO Steven Horowitz’s version of resilience—what he worries and doesn’t worry about—is shaped by the mission of CareCentrix, a provider of in-home care services to 14 million people, with approximate revenues of $1.5 billion. “What matters is our North Star, which is focused on delivering better quality of care to patients, making sure they get home quickly when they’re in a hospital or care facility and doing what we do as efficiently and inexpensively as possible,” he says.

In a climate characterized by market shifts and regulatory threats, achieving that mission requires more adaptive, iterative strategies that allow for flexibility and responsiveness to unforeseen challenges, he notes. “It’s critical to have some idea of direction, where you see the company in the next three to five years,” says Horowitz, who became CareCentrix’s CEO in 2022 after a decade as its CFO. “But it’s not the same thing as the rigid five-year strategic plans we had years ago.”

As an example, he points to the company’s execution of large-scale initiatives, particularly its ongoing technology transformation. “We’ve moved from a traditional project-based structure to an agile structure where we have a general goal in mind but do things in small chunks. One step informs the next step, adjusting as you go along,” he explains. “You still have the endpoint in mind, but how you get there can be very different than you thought.”

This more flexible approach to changing tactics is informed by a combination of KPIs and people speaking truth to power. “I’ve had salespeople tell me the market has changed, and we need to do something different now. That’s not easy to accept,” he says.

“The hardest thing for many CEOs is to change their mind when confronted with reality. But if you don’t [reconsider], you could be looking at an Enron-size debacle, where nobody questioned leadership even though they knew things were wrong. Everyone here is empowered to question anything, even if it comes from me,” he says. “I have no idea who will win the Super Bowl next year, but it’s probably not the Giants.”

More than a Numbers Game

CEO Bobby Chacko at Bonduelle Group Americas, a wholly owned subsidiary of the large French family-owned company Groupe Bonduelle, also finds value in on-the-ground insights. The manufacturer and distributor of high-protein bistro bowls, salad kits and branded Ready Pac fresh foods to supermarkets leverages Net Promoter Score (NPS) metrics to analyze customer satisfaction, but Chacko also does his own legwork, asking consumers what they’re buying and why. “As with any analytical solution, you need to first diagnose the problem,” he says.

“NPS makes sure we’re on track with our purpose, measuring whether the work we’re doing is having the desired effect,” says Chacko, who became CEO in March 2024, after CEO tenures at Ocean Spray Cranberries and Smuckers Natural Foods (TruRoots Company today). “But I also visit supermarkets and talk to shoppers to get a sense of how they’re coping and behaving. Not just lower-income shoppers but higher-income people, too. I’m curious about what they’re buying. Are they sacrificing healthy foods for less-healthy items that cost less? Like any analytical solution, you need to first diagnose the problem.”

Armed with consumer insights, Chacko looks for areas where tactical adjustments can change the value picture for consumers. “Are the products in the right place, have they been put through a different supply chain, do they have the right price, and are they being merchandised correctly?” he says.

For example, during one store visit, Chacko noticed that a Bonduelle product previously merchandised in the produce section had been moved to the deli section, where peer products were 20 to 30 percent less expensive. The product also had fewer consumer facings—not as many products viewable to consumers as before—indicating supply chain restocking issues.

Discussions with the retailer led to the product being restaged back into the produce section and a lower-priced product with more deli-style appeal staged in that section. The decisions produced more robust sales for the retailer, elevating the products from a supply chain fulfillment perspective.

“It’s all about balancing the price point, availability and store architecture to make it a win for us, the retailer and the consumer. Strategy is only as good as the execution,” says Chacko. “Details matter in real time. To find out what’s wrong, you have to see it with your own eyes.”

Russ Banham is a frequent contributor to Chief Executive.

The post CEOs On Leading Strategy Through Uncertainty appeared first on https://www.russbanham.com.

Carrier Management magazine

PART TWO OF A TWO-PART SERIES

Last weekend, my wife, Jenny, and I drove three miles from our home to see firsthand the widespread devastation caused by the Eaton Fire in Altadena.

I had been determined not to visit the scene of such grief and despair out of respect for others’ privacy. But after writing about our four-day mandatory evacuation and plans to invest in fortifying our house against the next wildfire, a fact-finding mission was in order. I needed to ascertain why some houses survived the annihilation.

It was a splendid day with mostly blue skies as Jenny drove her car slowly through the charred remains of the neighborhood. Most of the hazardous debris had been removed by the U.S. Army Corps of Engineers. What remained took on a solemn quality.

Carbonized bikes and cars littered many lots. Fireplace chimneys poked out of flattened rows of houses like tombstones. Springtime bouquets of wild yellow sunflowers called California Goldfield bordered blackened trees wrapped in strips of colored tape for removal. Former mansions were evident by their grand staircases, beckoning guests to nothingness.

“It’s like the ruins of an ancient city,” Jenny, an art teacher at an elementary school in the San Fernando Valley, whispered.

Now and then, a house sprouted serenely from the wreckage. Jenny stopped the car, and I studied them. All were built with noncombustible materials like brick, stone and stucco. I do not know if other houses, now gone, were made of similar materials, but the information was encouraging.

I was in my quiet reporter mode taking notes while Jenny talked about the memories the houses held—the kids’ drawings, photo albums, precious heirlooms and holiday parties. “I need to go home now,” she said.

Living in California

We live in the same wildland-urban interface in between the San Gabriel Mountains and the built environment in La Cañada Flintridge as the people of Altadena, in a 75-year-old house on a block of similar vintage structures. As I wrote in my previous article of this series, Jenny and I have decided to stay put in spite of the wildfire risks. We love the woodsy environs, hiking in local hills, proximity to all Los Angeles offers and our neighbors.

We took out a HELOC to make our house as fire resistant as possible, with the aim of receiving the IBHS Wildfire Prepared Home program designation. We’re also hopeful to exit the California FAIR Plan at some point. Capital has been earmarked for double-paned, tempered glass windows framed in noncombustible materials; fire-resistant aluminum fencing and front gate; fire-resistant steel barriers between our house and flanking structures; and Class A fire-rated intumescent paint as an alternative to expensive siding. I took care of relatively inexpensive improvements like clearing the vegetation surrounding our house and replacing the vents near the foundation, in the attic and under the eaves.

Over the past month, I conducted a series of interviews to better understand the causes of wildfires, what is being done to reduce their severity and frequency in a sprawling county of foothills and mountains, and our chances of finding homeowners insurance in the private insurance market. The interviewees included the head of Los Angeles County’s forest management program, a veteran fire investigator, California’s former insurance commissioner, my independent insurance agent and several neighbors. I wanted to know the following:

• Why did the wildlands get so wild, what is being done to tame them, and will fire suppression activities like prescribed burns and low-lying vegetation clearing expand?
• Since we know the ignition sources for many recent wildfires—sparking from power lines, fireworks, the burning of debris, fires set by homeless people, and arson—can the laws banning such activities be strengthened and vigorously enforced?
• What are the most effective ways for homeowners to fortify their properties against fire without breaking the bank?
• Will the insurance industry financially encourage homeowner wildfire mitigations that reduce the possibility of widespread destruction?

As I was doing the interview, California was in the process of releasing a series of updates to its Fire Hazard Severity Zone maps. The last batch, published by the California Department of Forestry and Fire Protection (Cal Fire) on March 24, added more than 440,000 acres to Los Angeles County’s fire hazard zones. Areas in the county with the highest fire hazard increased by 30 percent. Cal Fire is the state agency responsible for fire prevention, fire protection and resource management on over 31 million acres of California’s wildlands.

Related article: New Fire Maps Put Nearly 4M Californians in Hazardous Zones

Across California, 1.2 million acres are now categorized in the “very high” fire hazard zone, up from 860,000 acres a decade ago. Approximately 4.5 million acres are in a “high” or “moderate” hazard zone. Altogether, 3.7 million people live within the three zones statewide, an area twice the size of Delaware.

A Paradigm Shift

Several people I talked with believe that in the aftermath of the seven fires that raged simultaneously on Jan. 9 throughout Los Angeles County, residents have reached the breaking point and are demanding government actions that radically decrease wildfire ignition sources and the combustible fuel load of forests.

“Existential dread is a powerful force,” said my insurance agent, Azy Susman, owner of Susman Insurance Services Inc. “Most everyone in Los Angeles County knows someone directly affected by the recent wildfires. People living in urban areas a few miles from the foothills used to think they were protected. Now there’s obvious proof they’re not, due to the velocity and unpredictability of the Santa Ana winds carrying embers miles away.”

More than 100 of Azy’s clients lost their homes in the Eaton and Palisades fires. “The first time they called after the fires erupted, they were unbelievably calm. They were in shock, of course,” she said. “The second time, they talked about the typical insurance issues, the nitty gritty of what they had to fill out and when they would receive payment. The third time, they talked about the impact on their kids. That’s when the emotions spilled over.”

The overwhelming majority of Azy’s clients received a check from their insurance adjuster within days. “My clients and other agents’ clients were not battling with their insurance carriers, as the press reported. However, many homeowners in the FAIR Plan sadly have yet to receive their claim payments, a nightmare for them and agents trying to expedite the checks. In my office, it was all hands on deck.”

Her staff of 17 people worked at her office in Brentwood from 6 a.m. till 10 p.m. and through the weekend to do everything possible for policyholders during one of the worst weeks of their lives. “When clients told me they needed a place to live—no joke—I went on Zillow to help them search,” she said. “I’m a problem solver by nature.”

Captain Kevin Montoya, head of the Prescribed Fire Management Program at the Los Angeles County Fire Department (LACoFD), also senses change in the air. “There’s a paradigm shift underway since the big wildfires,” he told me. “Unlike the Paradise Fire, this disaster was close to home. People in LA County watched entire communities close to them burn to the ground. Events like these change perceptions of what can be done and what needs to be done.”

Captain Montoya is a 24-year veteran firefighter, paramedic, engineer and fire crew supervisor. When not out responding to an incident, he is responsible for supervising the fuel loads in the county’s forests, analyzing potential fire behaviors and managing prescribed fire activities. His office is fortuitously located at LACoFD’s Fire Camp 2 in La Cañada Flintridge, where we reside. When I referred to him as Captain Montoya, he humbly asked me to call him Kevin.

During our one-hour conversation, we discussed hiking in the Angeles Forest abutting La Cañada Flintridge and traded some of our favorite trails. He mentioned that a crew was set to thin the vegetation in the hills north of our home in the next week, a stroke of plain good luck. He also pointed out the monumental task before the forest management teams he leads.

“If you look at photographs of California in the late 19th century and compare them with photographs from today, there’s a dramatic difference. Back then, natural fires and small fires purposely started by Native Americans cleared out much of the understory and smaller trees, reducing the risk of fires climbing into the bigger trees,” he explained. “Due to the suppression of fires over the past 150 years, you literally ‘can’t see the forest for the trees.’ There’s so much material to burn, it climbs like a ladder into the tree canopy and takes off from there.”

To decrease this gargantuan fuel load, the budget of the Wildfire and Forest Resilience Action Plan has almost doubled in the past six years to $4 billion. The capital goes toward the work Kevin and his peers across California do—prescribed burns and the thinning out and removal of low-lying chapparal and other vegetation. Over the same period, the number of Cal Fire employees providing these services also nearly doubled from 5,829 to 10,741.

Despite the additional capital and personnel, Kevin is realistic about the chances of quickly overcoming 150 years of fire suppression. “The idea that we can turn around [the forests] in a meaningful way overnight is hindered by obstacles. Every time you touch the ground in a forest in California, you have to fill out and file an EIR [Environmental Impact Report]. If you’re starting from scratch, you’re looking at a thousand pages, depending on who owns the land—the state, federal government or a private landowner. Often, you need to hire an expensive environmental consultant just to fill out and file the EIL.”

A 200-acre forest management project costs $200,000, he said. “That’s a pretty heavy lift in a world where the climate keeps getting hotter and drier. But we’re definitely moving in the right direction, continuously reducing the fuel load and changing the behavior of wildfires.”

To get a better grasp on the success of these activities, I perused Cal Fire’s Fuels Treatment Effectiveness Dashboard, launched two months before the Eaton and Palisades fire. As its name indicates, viewers can click on a recent fire incident to view treatment details like fuel breaks, vegetation mastication and tree thinning to determine if the action produced a positive impact. In several random clicks, I was encouraged to see the prescribed treatments decreased the intensity and slowed the progress of the wildfires.

Not knowing much about EIRs, I discovered the regulations came into effect with the California Environmental Quality Act of 1970. The goal of the legislation was to inform the public about the environmental effects of proposed forestland projects. Given the enormous increase in large wildfires and burned acreage in the 55 years since the regulation was effected, perhaps the time has come to find a more pragmatic balance between environmental concerns and citizens’ safety and economic well-being. “It’s taken events like the Eaton fire to change the perception of what can be done and should be done within reason,” Kevin said.

Monitoring Ignition Sources

My interview with arson specialist Joe Toscano, a fire investigator for major global insurers and reinsurers the past 30 years, underscored the difficulties inherent in stopping human sources of wildfire ignition. “There’s not much that can be done to prevent an arsonist from committing an act of arson, but earlier detection would provide an opportunity for fire suppression professionals to respond in a timely manner,” Toscano said.

A step in the right direction is the use of satellites already equipped with sensors to monitor wildfire spread. “The sensors can detect thermal signatures attributable to incipient fires in areas like riverbeds, where homeless people start cooking fires or campfires for warmth,” he said, adding that drones equipped with similar sensors can provide the same surveillance.

The number of fires ignited by homeless people in Los Angeles has climbed steadily in recent years. Nearly 14,000 such fires were reported in 2023, nearly double the number in 2020, according to Los Angeles Fire Department data. Although fires in unpermitted areas are banned, advocates for unhoused people contend they should not be arrested for basic human needs but should instead be equipped with fire extinguishers and other fire suppression tools. “My first inclination is to keep such bans intact and strictly enforce them, considering the consequences,” Toscano said.

The exact cause of the Eaton and Palisades fires is still under investigation, although lightning has been ruled out. While a homeless encampment was found near the suspected ignition point in Altadena’s Eaton Canyon, other evidence points to a dormant transmission tower with a history of electricity arcing as sparking the fire. Southern California Edison (SCE), the utility serving much of the region, is investigating both possibilities and other potential causes. In 2024, 178 fires were sparked by SCE equipment, up from 105 in 2015, according to annual state reports filed by the utility.

A report by the California Office of Energy Infrastructure cited in a March 30 article in The Los Angeles Times indicated that SCE has “thousands of open work orders to fix equipment problems found in inspections.” The good news is the rising amount of SCE capital spent on insulated wires, tree trimming and equipment inspections. In 2024, the utility dedicated $1.9 billion to reducing the risk of a wildfire, up 29 percent from the prior year, the article stated.

Hope Springs Eternal

The interviewees gave me a modicum of hope that the wildfire intensity will moderate a bit in the years ahead, assuming public support for needed change does not wane. In a recent poll administered by The Los Angeles Times, 80 percent of voters in Los Angeles County said they back tougher building codes to make homes more fire-resistant, even if it increases costs. Residents also said they are willing to pay higher taxes to boost funding for fire protection agencies.

Jenny and I share these opinions and are optimistic our wildfire risk mitigations will protect our house. That’s a bold declaration, but we are not alone in making it. When my first article on the wildfires was published and featured on LinkedIn, several people I’d interviewed in the past as well as complete strangers reached out in support of our decision. Among them was Art Fliegelman, senior financial analyst, Office of Financial Research, at the U.S. Treasury Department.

“You are totally correct that mitigation is the only real viable solution. Without that, it is just rolling dice until the next event occurs,” Fliegelman emailed me. “Hopefully your changes will do the job. … Unlike a hurricane or flood, the risk of a fire depends a lot on what neighbors have or have not done. I have confidence LA will come back, but it depends upon people making the right choices and not repeating past mistakes. … It sounds like you are doing a lot of the right things.”

Fliegelman’s comment about the need to involve neighbors in protecting a community against wildfires struck home. We’ve had several such conversations. The families whose houses flank ours are participating in the cost of building fire-resistant steel barriers between our homes. My neighbor across the street, featured in the previous article as Catherine for her privacy, was extremely helpful in passing on the names of local contractors (Kevin Kochar at Mulholland Brand gave me a tutorial on the fire resistance differences in different grades of steel, aluminum and vinyl gates that greatly assisted our decision-making).

Catherine also weighed in on the recent decision that Pacific Palisades made to bury utility lines underground as the neighborhood rebuilds—a remedy every county in a high-risk hazard area should pursue, she said. “When they were installing the sewer system a decade ago in La Cañada Flintridge and had all the roads torn up, several residents got together and urged the City Council to put the electric [lines] underground at the same time,” Catherine informed me. “They should have been more forward-thinking, but they’re a group of five people running a city part-time.”

The last person I interviewed was Dave Jones, the former state insurance commissioner and the director of the Climate Risk Initiative at the UC Berkeley School of Law. I wanted to know if the investments Jenny and I were making would provide the means to exit the California FAIR Plan. While Jones extolled our efforts, he explained that the exorbitant cost of the recent wildfires to insurers financially backing the plan make it unlikely for the time being. Recent estimates indicate the FAIR Plan expects to incur over $4 billion in losses.

Another impediment is regulatory. “Policyholders in the FAIR Plan are not rated for the investments they’ve made in property, community and landscape scale mitigation,” Jones explained. “I and others have written to the insurance department to make this necessary change.”

Until that occurs—if it happens at all—we and the 450,000 other Californians compelled to buy homeowners insurance from the FAIR Plan are looking at premium increases of 40 to 50 percent this year, possibly even more. I asked my insurance agent if she thought that market stability was forthcoming.

“Do I think that State Farm will insure 85 percent of high fire hazard areas over the next few years as stipulated by the state’s new insurance regulation? No, not in their dire financial straits,” Azy said. “But carriers like Travelers, Safeco and Mercury appear to be interested. The premium will be higher, but at least it’s a way for people to leave the FAIR Plan, eventually. And if Mercury or Travelers agree to insure your and Jenny’s home, there’s a good chance you’ll get discounts for hardening your premises against wildfire damage.”

There’s an old saying attributed to Roman playwright Titus Maccius Plautus, “You have to spend money to make money.” It would be great to say goodbye to the FAIR Plan someday, but more important to us and our neighbors is what Jenny latched onto during our pilgrimage to Altadena: the preservation of our memory-filled homes.

The post Revisiting California’s Wildfires: A Personal Journey appeared first on https://www.russbanham.com.