MORE SCIENCE, MORE RISK

“What is clear is the nature of risk is continually evolving. Significant risks we face today weren't on the radar a decade ago,” Galanski says, beginning with risks associated with product recalls and outsourcing activities emerging in the “extraordinarily dynamic” life-sciences industry.

“While the Food and Drug Administration (FDA) reported 27 new medical devices approved for public use in 2010, on the flip-side, the FDA also recalled 46 medical devices,” he reports.

“Contract research organizations (CROs) help biopharmaceuticals firms reduce fixed costs by outsourcing—a big priority considering many patented drugs will end shortly and also because of the general economic environment,” he adds. “The rising demand for CROs creates potential exposures that we didn't see before,” he says, citing a report estimating that roughly 40 percent of drug development would be outsourced by 2012 and that the world market for CRO outsourcing was projected to exceed $26 billion by 2012.

“In response to that, Navigators is now offering coverage that is tailored specifically for CROs—a coverage that wasn't necessarily needed ten years ago, but that is critical in today's world,” Galanski reports, referring to a combined products-completed operations and errors & omissions liability insurance product called “Life Sciences Research Related Liability Coverage,” launched last June by Navigators Management Co., an underwriting agency subsidiary.

SOLUTIONS TO SUPPLY

Vitale, the former CEO, Global Corporate, Zurich Financial Services, and former CEO Willis North America, says that over the course of his 30-plus years in the industry, he's seen workplace management, automobile safety and construction design improve to make these aspects of the world less risky.

“I do believe that we in business and in life do learn some lessons, and do make the world a safer place…The whole idea behind risk management—the definition—is to identify risk and then figure out how to mitigate it or transfer it.”

However, “if you look at real risk in a more holistic way, you have to conclude that it is a much more severe world, and not only is severity worse in risk, but the correlation between risks is greater.”

Deepwater Horizon, the Japanese earthquake, the volcanic eruption in Iceland last year—“these headline events clearly point to a more risky world,” Vitale says, adding that supply-chain interruption intensifies their impacts.

“We saw that with the Icelandic volcano, when goods and parts from Europe could not be flown to the United States. Assembly-line plants ground to a halt,” he reports. More recently, he notes disruptions in Japanese manufacturing following the March earthquake, which personally impacted Vitale and other buyers of Apple's iPad, who could not order accessories because of six-week delivery delays.

“That, of course, had a greater effect on business than people's personal lives,” Vitale says. “It's been very real and very relevant, and that's part of the reason why the need for insurance solutions and creativity has never been greater.”

“Unfortunately, you need one of these events to actually get customers and risk managers to think more about these things,” he says. “In some cases, [disruptions] were totally unexpected, and now [they] have a greater appreciation.”

Vitale believes such events and a global shift to leaner, just-in-time manufacturing systems “actually create a whole new value proposition for the insurance industry,” stressing that a lack of understanding of supply-chain-interruption risk persists among businesses today “What the insurance industry can do is not only help companies understand it, but also help them mitigate it, and then also transfer the risks to the balance sheet of a third party.”

“It's a great opportunity for creative and solution-oriented insurers to help bring those value propositions directly to the brokers and the customers they represent,” he says. Supply-chain and business-interruption insurance providers today look not just at the interruption for the individual customer, but also at what happens to key suppliers, the key purchasers of their products, he says. They look at seemingly uncorrelated risks associated with financial institutions around these customers as well as power-supply interruptions and other issues—filling in gaps that might have existed in business-interruption policies before, Vitale adds.

“This global shift to just-in-time production is wonderful when you're trying to run a corporation at a very lean balance sheet. But it has a cost. It has a supply-chain-interruption cost,” he says.

“We need to quantify that for companies, make sure they understand that risk that they're taking, and if they want to keep that risk so be it…But just-in-time production is not going to go away. You're not going to see warehouses filled up just to deal with a catastrophic event.”

WORLDWIDE EXPOSURES

Galanski notes that globalization also creates new and emerging risks.

“How can a U.S. importer be assured of the safety of foreign-manufactured products from jurisdictions that lack enforced safety standards,” he asks, referring to the Chinese-drywall headaches for U.S. builders and suppliers.

Globalization has even impacted the U.S. directors and officers insurance industry with a large increase in securities class action claims in 2011 being brought in the United States against Chinese companies, he notes.

Within U.S. borders, Galanski sees new environmental-liability risks emerging also—specifically risks associated with a new, environmentally conscious regulatory world. “Just last year, there was a new U.S. EPA regulation mandating lead-safe construction practices,” he says, pointing to an insurance coverage need for contractors that did not exist 10 years earlier—and one for which Navigators has specifically tailored a new coverage to protect against litigation that arises from a “pollution incident.”

At Navigators, where the 2010 Annual Report carriers the title “Embracing Risk,' marine insurance remains the largest coverage line—a situation that prompts Galanski to comment on emerging challenges for oil drillers.

“The world's insatiable demand for oil has led to new risks in offshore oil exploration and production,” he says. “Deep-water drilling requires new technologies to drill for oil at previously untapped depths of the ocean. This presents technical engineering challenges [and] ultimately, we will learn about the efficacy of these techniques through [insurance] losses.”

“The financial consequences are significant,” Galanski says. “Deep-water production platforms are valued in the hundreds of millions of dollars compared to the tens of millions for the old shallow-water units.”

“Our demand for oil impacts the shipping industry,” he adds. “Oil has risen from under $10 a barrel in the early 1990s to over $130 a barrel a little earlier this year. So, now, when oil is shipped around the world, the oil inside the tanker is often worth multiples of the value of the ship carrying it.”

Finally, Galanski notes that “cyber-technology risks are evolving on a daily basis. Hacking, theft of property data and related government-imposed consumer-protection requirements have dramatically increased business exposure to claims for failure to protect data,” he says.

THEY'RE OUT THERE

Bottom line: “Sure, there are many advancements that may make us feel safer, but emerging risks may be barely visible and, to some extent, not fully understood,” says Galanski

Vitale says he “subscribe[s] to a theory that for every risk that actually gets safer, a new one is added.

“You don't have to go far [to find] concerns over nanotechnology and some of the hazards that this may be presenting to health around the world” being addressed in newspaper articles. “Or cell-phone radiation.”

“The point is we can easily identify some things that clearly present a safer world, but it wouldn't be hard to find a few things that actually replace those every day with new risks and new concerns that ultimately will affect both individual and corporate balance sheets,” Vitale says.