A new decade brings new risks
Risk managers need to be aware of new perils as well as fresh challenges to known exposures.
Most of the emerging risks facing property & casualty insurance customers today ultimately center on business interruption. Whether it’s climate change and extreme weather, transportation supply chain issues, or cyber attacks and resulting system failures, business interruption — potentially with far-reaching and catastrophic financial effects — is often the result.
Climate change heats up
Climate change news is grim. The latest assessments of the “emissions gap” between the amount of planet heating gases countries agreed to cut and where the current projections are headed shows that global temperatures are on pace to rise as much as 3.2 degrees Celsius by the end of the century — more than double what scientists projected to be a “safe” range.
Yet the results of Deloitte’s recent “Insurance Regulator State of Climate Risks Survey” reveal the insurance industry appears unprepared for the risks of climate change. One-third of the 27 respondents, from the National Association of Insurance Commissioners, said they did not know how well insurers are prepared to deal with the potential aspects of climate-related risks on financial stability. Similarly, one-third of the regulators surveyed didn’t know whether current insurer risk models are sufficient to capture and test climate-related risks.
“It’s a myth that the insurance industry doesn’t care about climate change,” stresses Rob Newbold, executive vice president at AIR Worldwide. “The effects of climate change can take decades, and insurance policies are typically one-year contracts.” Newbold has found that the majority of reinsurers want to understand the effects of climate change on a 5-to-10-year time horizon — or longer. He points out that many reinsurance companies are taking a holistic approach to climate change, addressing the physical, transition and liability risks. Particularly in non-industrialized parts of the world, the insurance industry is taking such actions as providing micro-insurance to low-income entities at high risk from climate change, issuing catastrophe bonds for climate change-related perils, and working with governments to enable their knowledge and expertise to manage risk to the fullest extent possible, he says.
Newbold advises decision-makers to use scenario testing to evaluate potential financial effects. “Catastrophe models are a great tool for conducting such test,” he says.
The insurance industry must adapt, as it always does, when significant impacts like the financial risks presented by climate come along, says Bill Gatewood, corporate senior vice president of Personal Insurance at Burns & Wilcox. “There are many good lessons we can take from the last few years.”
The way the insurance industry approaches managing the financial risks and identifying solutions will need to be multifaceted, he stresses. Initiatives will need to involve changing the rating structure and the review process for comprehensive coverages that are offered. Carriers will also need to strengthen their loss-prevention activities to provide homeowners with more tools to make their homes more defensible against wildfires.
According to Patrick Barco, manager of Ocean Marine at Burns & Wilcox, extreme weather conditions compounded with large losses in recent years have led many insurers to review their underwriting philosophy and apply adequate premium for the risks in the transportation industry, particularly in shipping. “We are seeing that most losses in the shipping industry are due to on-board vessel fires, voyage casualties and weather-related losses with containers that are lost overboard,” he explains. He notes that inland shipments handled by road or railroad could also be affected by extreme weather-related losses and are tied to such exposures as tornadoes, windstorms, fires and derailment.
Extreme weather risks also are growing in the construction industry. People in risk-prone areas are weighing the options of rebuilding or moving elsewhere. With high demands on materials and labor, some people are waiting to get contractors and home builders lined up to begin their rebuild projects, Gatewood says.
Transportation troubles
Whether by land or by sea, the primary risks for the transportation and shipping industry revolve around business interruption and supply chain issues, which can be caused by everything from extreme climate events to catastrophic system failures.
On land, business interruption can be caused by accident claims taking place hundreds of miles away from the home terminal, says Steve Shepard, underwriting manager of Transportation at Burns & Wilcox. The insured must get any undamaged cargo to its destination in a timely manner, which necessitates finding a replacement vehicle to pick up and continue to transport the load quickly to mitigate further interruption. He notes that without the correct policy, the insured might not be afforded temporary or substitute coverage for the liability or cargo. “Ultimately, they could lose a contract because they can’t fulfill the shipment,” Shepard cautions.
Theft is also a risk for transportation; however, technology to mitigate pilfering has come a long way in helping prevent incidents, he says. “We’ve written several accounts where the client implemented GPS tracking on the units, as well as external and internal tracking devices to help track shipments should they be stolen. Additionally, using team drivers and not leaving the shipments unattended helps mitigate theft concerns.”
One risk-reducing trend in the transportation industry is the declining costs of safety-enhancing technology. “The costs of lane departure, GPS, and forward and rear-facing camera systems have dropped, and we anticipate this will continue to be the case,” says Shepard. As a result, most insureds will see savings on their insurance premiums when they invest in and implement reputable technology.
Part of a safety-conscious culture is ensuring that drivers are trained and qualified to handle the risks that “come with the territory” — literally. “There are situations where drivers with varying experience levels have to drive through multiple types of weather events in the same day, or drivers who are used to local routes are newly responsible for hauling a load through the mountains,” Shepard points out. If the drivers are inadequately trained, accidents could result.
For severe accidents resulting in loss of life, juries are awarding “nuclear verdicts” that can put a smaller transportation company out of business, warns Craig Dancer, Transportation Industry practice leader at Marsh USA Inc. As an example, in August 2019 a jury in Georgia returned a $280 million verdict against Schnitzer Southeast, a trucking company whose driver crossed the center line and killed a five-person family traveling in an SUV.
All at sea
The shipping industry is prone to a unique set of losses. “Marine insurance is designed to cover transit risk on both import and export products, to ensure the goods are covered for any physical loss or damage during the transit period. It is important to consider all the parties that are involved within the supply chain process and their exposures,” Barco says. “Insurance companies are actively involved in scrutinizing the risk and charging the appropriate premium. As a result, rates are increasing based on the hard market conditions.”
Globalization is making supply chain management more complex than ever. A failure of critical infrastructure on one side of the world can cause catastrophic supply-chain losses on the other, notes Newbold. “The 2011 Tohoku earthquake and Thailand floods, and the 2015 Tianjin port explosion in China — which massively disrupted global supply chains — highlight the complex interdependencies that exist in today’s supply chains and the far-reaching consequences of their failures,” Newbold says.
According to the World Bank, the Thai floods alone had a global economic impact of more than $45 billion.
Another “seismic” change affecting supply chains in the transportation industry are the transition from a B2B to B2C business cycle, he notes. “It’s the ‘Amazon effect,’ and it’s affecting logistics,” he says.
Amazon made a “big splash” when it introduced drones as a delivery vehicle, Dancer says. “The application of drones is going to be huge, in terms of that ‘last mile’ from the distribution center to the consumer’s house. The efficiency will be another seismic change in the B2C supply chain.” This, of course, will bring about such risks as privacy issues due to drone cameras coming into close proximity with private homes, distractions to drivers, and crashes in heavily populated areas.
“The good news is that drones are regulated by the Federal Aviation Administration, with its own set of safety regulations, so risk issues will be delineated in terms of the regulatory licensing process,” Dancer says. “A commercial liability policy can cover businesses using drones for deliveries.”
Whatever segments of the transportation industry they serve, it’s crucial that underwriters be able to differentiate the risks, Dancer says. “The most important thing is to sit down and spend time with underwriters, helping them understand their clients’ needs and how to differentiate within the transportation market space.”
Looming cyber threats
The list of cyber risks is growing and includes ransomware and malware attacks, identity and data theft, and digital currency scams. Data theft from malicious or unintentional security breaches have been some of the most publicized forms of cyber incidents to date. “Worldwide types of data at risk include credit-card numbers, names, emails, passwords, health or financial records, and intellectual property.
Hackers use a variety of techniques to steal data, including social engineering, phishing and deploying malicious internal agents,” he explains.
Breaches can result in direct losses when intellectual property is stolen, data is destroyed, operations are interrupted, or systems suffer physical damage. Indirect losses can include third-party liability from the compromise of proprietary data and reputational losses. One attractive target for cyber criminals is a credit-card payment processor or acquirer. A successful attack could yield millions of credit-card numbers. For an insurer, the financial consequences could be catastrophic, Newbold says.
Cyber-related business interruption losses result when a company experiences a disruption to its operations as a direct result of a cyber event. Contingent business interruption (CBI) losses result when a company suffers downtime because its vendor or supply chain is affected by a cyber event.
Scenarios that could result in business interruption and CBI losses include attacks on a payment processor, domain name system provider, email server, content delivery network, or ad network. An attack on the power grid (run by a utility company that drives electricity through a common network of power lines) could lead to business interruption losses across a large geographic area. Although no blackout in the U.S. or the UK has yet been publicly attributed to a cyberattack, it has happened in Ukraine, demonstrating that the types of malware and viruses capable of causing a blackout already exist, Newbold warns.
“The cyber-threat landscape and the exposures companies face due to malicious activity such as ransomware are rapidly evolving,” says Michelle Chia, head of Professional Liability and Cyber for Zurich North America. “Underwriters need to collaborate with clients to understand their challenges in order to develop coverages and risk-mitigation services that will protect them from emerging threats.”
It’s important to have a standalone cyber policy because the underwriters who write them are aware of the trends, keep pace with emerging threats, understand how threats differ by industry, and collaborate with risk engineers to make sure they can provide needed protection, Chia explains.
In evaluating cyber risks, it’s important to be aware of the entire ecosystem of the business and how it affects the larger economy, Chia adds. “When a cyber event causes a business interruption, upstream and downstream are all impacted. Understand the various parties and how they interact.”
“Over the last year or so we’ve been seeing an increasing trend toward ransomware attacks,” observes Bob Parisi, leader of US Cyber Products at Marsh. “It takes many forms, but the simplest is ‘We have your data, and we’ve encrypted it so you can’t access it.’”
When a cyber event such as a ransomware attack does occur, Chia recommends contacting the appropriate experts immediately. “Not only do we engage with law enforcement, we engage with professional negotiators and professionals that can convert real currency into cryptocurrency such as bitcoin, which is most often the form of ransom malicious actors demand.”
Parisi advises carriers and underwriters to keep an open mind and be aware that the information they need to evaluate cyber risks might not come from traditional sources. “You might get a better sense of the risk companies face by talking to cloud vendors” and other tech service providers, he says.
From a cyber-risk perspective, cryptocurrency is a challenge in several ways, warns Jacob Ingerslev, head of Global Cyber, The Hartford. “One impact cryptocurrency is having on cyber risk is the way it’s fueling ransomware attacks. Beyond that, there is the evolving threat of cryptojacking and the ongoing cybersecurity problems with the currency itself.”
It’s difficult to determine the extent of cryptojacking in terms of annual costs to companies whose networks have been hijacked for crypto-mining purposes, but it is an issue that is growing in parallel with the adoption of cryptocurrency overall, Ingerslev notes. “The more measurable cyber risk aspect of cryptocurrency is the theft of funds from wallets and exchanges,” he says, referring to a report by Ciphertrace that states theft of crypto funds reached a total of $1 billion in 2018.
Cannabis risks are flowering
The changing legal status of marijuana in the U.S. is prompting insurers to begin offering coverages, despite having extremely limited loss data to inform them. “While marijuana remains illegal at the federal level, action is being taken on the state level to change laws on its consumption,” Newbold says.
More than half of U.S. states and the District of Columbia have legalized the use of medical marijuana. Many also allow recreational marijuana use.
“The growth of this industry has led to the development of a nascent insurance industry to support it,” Newbold says. “However, these carriers often find themselves faced with tough choices to make on appropriate premiums to charge and coverage limits to offer because the risks associated with businesses related to this industry are still being defined.”
The rapid growth in market size of the marijuana industry and activity has engendered concern due to the limitations of available scientific evidence regarding potential benefits and harmful effects, Newbold says.
Thinking ahead
Staying on top of the vast array of emerging risks is daunting but essential for insurance professionals who wish to provide optimum service and remain competitive. Dancer advises insurance professionals to update their mindsets on what “business interruption” means in today’s world. Newbold recommends that insurers use liability accumulation models to help quantify the potential impacts of events on a supply chain.
Parisi stresses that while you look to the future, don’t neglect past lessons. “There is a lot to be learned from how the insurance industry has previously addressed risk,” he says.
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