Risk Management


The decision by Texas-based Blue Bell Creameries to recall all of its products after two samples of its ice cream tested positive for listeria is a timely reminder of the importance of product recall insurance.

Product recalls can be costly and logistically complex. In Blue Bell Creameries’ case the expanded voluntary recall announced Monday night includes ice cream, frozen yogurt, sherbet and frozen snacks distributed in 23 states and international locations.

Blue Bell said it was pulling its products “because they have the potential to be contaminated with listeria.”

The company had issued an earlier more limited recall last month after the U.S. Centers for Disease Control and Prevention (CDC) linked ice cream contaminated with listeria to three deaths in Kansas.

As of April 21, 2015, the CDC says a total of 10 people with listeriosis related to this outbreak have been confirmed from four states.

A 2014 report by Aon notes that the number of product recalls in the United States and Canada for both food products and nonfood products continues to grow year over year.

Each year, hundreds of products are recalled in the U.S. Some historically significant recall events have included such well-known brands as Tylenol, Perrier, Firestone Tires, Pepsi and Coca-Cola.

The Insurance Information Institute (I.I.I.) reminds us that product recalls can be financially devastating and potentially put a company out of business. No organization is immune to the risk of a product recall—even those with the best safety records, operational controls and manufacturing oversight.

In a post in the Wall Street Journal’s Morning Risk Report, crisis management experts note that how well a company succeeds at regaining customer trust following a product recall will likely determine whether it recovers from the negative hit to its reputation and bottom line.

True. Insurance can also help defray the financial hit on a company.

Product recall insurance helps cover a wide range of costs including advertising and promotional expenses to launch a recall, as well as the costs related to product destruction and disposal, business interruption and repairing a damaged reputation, the I.I.I. says.

Another coverage worth considering is product contamination insurance, which protects a company’s bottom line in the event its product is accidentally or maliciously contaminated.

Towers Watson just released its annual survey on predictive modeling with some notable results.

The percentage of U.S. property/casualty executives reporting a positive impact on profitability has dramatically increased over the past six years, while the breadth and depth of predictive modeling applications has grown.

Some 87 percent of property/casualty executives report that predictive modeling had a favorable impact on profitability in 2014, an increase of eight percentage points over 2013. The increase continues a pattern of growth over several years, and is up significantly from 57 percent six years ago.

A positive impact on rate accuracy helps explain the boost in profits, Towers Watson said.

In fact, the percentage of carriers citing a positive impact on rate accuracy has increased every year since 2010, when 70 percent cited a positive impact. By 2014, 98 percent of insurers reported that predictive modeling has improved their rate accuracy.

More accurate rates also positively impact loss ratios, which have improved in parallel, according to p/c insurance executives. In 2014, 91 percent cited the favorable impact of predictive modeling on loss ratios, an increase of 14 percentage points over 2013.

The survey shows the use of predictive modeling in risk selection and rating/pricing has increased significantly for all lines of business over the last year, continuing a long-term trend.

For personal lines, auto saw the largest increase with 97 percent of participants saying they used predictive modeling in underwriting/risk selection or rating/pricing in 2014, up from 80 percent in 2013 – a 17 percentage-point increase.

Even more noteworthy is the increased use of predictive modeling in commercial lines.

For commercial property/commercial multiperil (CMP)/business-owner peril (BOP) as well as commercial auto the use of modeling increased 19 percentage points – to 51 percent and 41 percent respectively, year-to-year.

But it was specialty commercial lines that saw the largest increase, where 44 percent of p/c executives said they use predictive modeling in risk selection and rating/pricing in 2014, up from 13 percent in 2013 – a 31 percentage point increase.

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While the survey suggests that insurers are increasingly comfortable with predictive modeling and using it in a growing number of capacities, more progress is still possible, according to Towers Watson.

Treating data as an asset and more effectively using predictive modeling applications to improve claim and other functional results could make a significant difference in the profitability of insurance companies, it suggests.

More on the survey results in this Insurance Journal article.

Towers Watson gauged the views of 52 U.S. insurance executives in personal lines and commercial lines carriers for the survey.

 

 

If you’re reading about the rising number of measles cases in California, you may also be thinking about pandemic risk.

First, let’s look at the status of measles cases and outbreaks in the United States.

The CDC notes that from January 1 to January 28, 2015, 84 people from 14 states were reported to have measles. Most of these cases are part of a large, ongoing outbreak linked to Disneyland in California.

On Friday (January 30, 2015), the California Department of Public Health released figures showing there are now 91 confirmed cases in the state. Of those, 58 infections have been linked to visits to Disneyland or contact with a sick person who went there.

At least six other U.S. states – Utah, Washington, Colorado, Oregon, Nebraska and Arizona—as well as Mexico have also recorded measles cases connected to Disneyland, according to this AP report.

What about last year?

The U.S. experienced a record number of measles cases during 2014, with 644 cases from 27 states reported. Many of the cases in the U.S. in 2014 were associated with cases brought in from the Philippines, which experienced a large measles outbreak, according to the CDC.

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Measles, which can be prevented by vaccine, is one of the most contagious of all infectious diseases. The virus is transmitted by direct contact with infectious droplets or by airborne spread when an infected person breathes, coughs, or sneezes.

Approximately 9 out of 10 susceptible persons with close contact to a measles patient will develop measles, the CDC reports.

This is an important point. A study published by Risk Management Solutions (RMS) last year compared the low transmissibility of Ebola (Ebola can only be transmitted through direct contact with bodily fluids), with other infectious diseases such as measles.

RMS noted that each person infected with measles can generate on average more than 10 additional cases in an unvaccinated environment.

What about mortality risk?

Measles is one of the leading causes of death among young children, the World Health Organization (WHO) says. In 2013, there were 145,700 measles deaths globally—about 400 deaths every day or 16 deaths every hour.

One or two out of every 1,000 children who become infected with measles will die from respiratory and neurologic complications, according to the CDC.

One dose of the Measles, Mumps, Rubella (MMR) vaccine is approximately 93 percent effective at preventing measles, CDC notes, while two doses are 97 percent effective. Measles vaccination resulted in a 75 percent drop in measles deaths between 2000 and 2013 worldwide, WHO reports.

A CDC-issued health advisory here provides guidance to healthcare providers nationwide on the multi-state measles outbreak.

The potentially devastating impact of the rapid and massive spread of infectious diseases was a risk underscored by respondents to the recently released World Economic Forum (WEF) Global Risks 2015 report.

This reflects the need for a higher level of preparedness for major pandemics at both the country and international levels, the WEF noted.

The I.I.I. has facts and statistics on mortality risks here.

Most actuaries know about projections that go awry, so we have quite a bit of sympathy for the weather forecasters who missed the mark early this week, says I.I.I.’s Jim Lynch:

Weather forecasts have improved dramatically in the past generation, but this storm was odd. Usually a blizzard is huge. On a weather map, it looks like a big bear lurching toward a city.

This storm was relatively small but intense where it struck. On a map, it looked like a balloon, and the forecasters’ job was to figure out where the balloon would pop. They were 75 miles off. It turned out they over-relied on a model – the European model, which had served them well forecasting superstorm Sandy, according to this NorthJersey.com post mortem.

There are lessons for the insurance industry from the errant forecast and the (as it turns out) needless shutdown of New York City in the face of the blizzard that wasn’t:

  • • Models aren’t perfect. Actuaries, like weather forecasters, have multiple forecasting models. Like forecasters, actuaries have to know the pros and cons of each model and how much to rely on each one given the circumstances. Actuaries and forecasters both bake their own experience into their final predictions.
    Property catastrophe models are considerably cruder than the typical weather forecasting model. By crude I mean less accurate. Cat models project extreme events, where data are sparse and everything that happens has an oversize influence on everything else that is happening. Woe to the insurer that over-relies on cat models, something cat modelers themselves say regularly.
  • • It’s hard to pick up the flag once you have planted it. Forecasters suspected late Monday that New York City would be spared the brunt of the storm, but acknowledge now they were reluctant to make too big a change because it could hurt their credibility, particularly if the new forecast had proved too mild. This is a human failing both by the forecaster and its recipient, both of whom worry about crying wolf.
    The tendency also helps explain why it is hard to project market turns, whether they are from growth to recession or from rising insurance rates to falling.
  • • Policymakers have egg on their faces today, but they appear to have been following sound risk management principles. It’s not unusual to prepare for disasters that don’t happen, something to think about next time you unbuckle a seatbelt or unlock a door. The scale this week was much larger, but the principle was the same. Needlessly closing a subway is better than stranding hundreds on it, and the occasional forecaster’s error is certainly better than the crude prognostication that gave us the Galveston hurricane or the Schoolchildren’s Blizzard.

I.I.I. has Facts and Statistics about U.S. catastrophes in general and winter storms in particular.

Check out this timelapse video of the blizzard hitting Boston:

Measures and methods widely used in the financial services industry to value and quantify risk could be used by organizations to better quantify cyber risks, according to a new framework and report unveiled at the World Economic Forum annual meeting.

The framework, called “cyber value-at-risk” requires companies to understand key cyber risks and the dependencies between them. It will also help them establish how much of their value they could protect if they were victims of a data breach and for how long they can ensure their cyber protection.

The purpose of the cyber value-at-risk approach is to help organizations make better decisions about investments in cyber security, develop comprehensive risk management strategies and help stimulate the development of global risk transfer markets.

Among the key questions addressed by the cyber value-at-risk model concept are: how vulnerable are organizations to cyberthreats? how valuable are the key assets at stake? and, who might be targeting them?

The proposed framework is part of a new report, Partnering for Cyber Resilience: Towards the Quantification of Cyber Threats, that was created in collaboration with Deloitte and the input of 50 leading organizations around the world.

As the report states:

The financial services industry has used sophisticated quantitative modeling for the past three decades and has a great deal of experience in achieving accurate and reliable risk quantification estimates. To quantify cyber resilience, stakeholders should learn from and adopt such approaches in order to increase awareness and reliability of cyber threat measurements.”

One potential option, it suggests, is to link corporate enterprise risk management models to perspectives and methods for valuing and quantifying “probability of loss” common to capital adequacy assessment exercises in the financial services industry, such as Solvency II, Basel III, albeit customized to recognize cyber resilience as a distinct phenomenon.

The report points out that the goal is not to provide a single model for quantifying risk. Indeed for cyber resilience assurance to be effective, it says participants need to make a concerted effort to develop and validate a shared, standardized cyber threat quantification framework that incorporates diverse but overlapping approaches to modeling cyber risk:

A shared approach to modeling would increase confidence regarding organizational decisions to invest (for risk reduction), distribute, offload and/or retain cyber threat risks. Implicit is the notion that standardizing and quantifying such measures is a prerequisite for the desirable development and smooth operation of cyber risk transfer markets. Such developments require ERM frameworks to merge with insurance and financial valuation perspectives on cyber resilience metrics.”

 

Emerging risks that risk managers expect to have the greatest impact on business in the coming years could be on the cusp of a changing of the guard, according to an annual survey released by the Society of Actuaries.

It found that the risk of cyber attacks and rapidly changing regulations are of growing concern to risk managers around the world, and may be slowly replacing the risk of oil price shock and other economic risks which were of major concern just six years ago.

Some 47 percent of risk managers saw cyber security as a significant emerging risk in 2013, up seven points from 40 percent in 2012.

The SOA noted that this perceived risk predates recent cyber security events (read: the December 2013 Target breach) that have opened up new corporate data security vulnerabilities. The online survey of 223 risk managers was conducted in October 2013.

Regulatory framework/liability regimes was also perceived to be an emerging risk of impact by 23 percent of risk managers, an increase of 15 points from just eight percent in 2012.

The survey noted that as the regulatory framework takes shape post-financial crisis, risk managers are currently trying to implement voluminous and changing regulations on short time frames with: limited additions to staff; and regulators who often have limited understanding of risk tools.

Just 33 percent of risk managers said economic risks – such as oil price shock, devaluing of the U.S. dollar, and financial volatility – will have the greatest impact over the next few years, versus an all-time high of 47 percent in 2009.

In fact, the economic risk category is at an all-time low in 2013, the SOA said.

Hat tip to The Wall Street Journal’s CFO Report which reported on the survey here.

It’s Super Bowl weekend and whether you’re cheering for the Denver Broncos or the Seattle Seahawks, or have no idea who even made the final, the big game wouldn’t be able to happen without the support of the risk management and insurance community.

While it doesn’t look as if a blizzard will disrupt Sunday’s title game at MetLife Stadium in New Jersey, it’s no surprise that event-cancellation policies have been making the headlines.

Earlier this year New York-based broker DeWitt Stern announced that it had designed an event cancellation policy to protect businesses from lost revenue if for any reason the Super Bowl was cancelled or moved more than 60 miles.

In the event a terrorist attack or blizzard causes the game to be cancelled, the policy would respond and cover businesses for loss of estimated potential revenue. The policy is underwritten by Houston Casualty Company.

There are many other risks that insurers will cover, from the Bruno Mars and Red Hot Chili Peppers halftime show (remember the infamous wardrobe malfunction during Janet Jackson’s performance with Justin Timberlake in 2004?), to coverage for broadcasters in the event their transmissions are interrupted due to a technical problem (think back to last year’s championship game in New Orleans when a power outage halted play for 34 minutes).

For more on Super Bowl risks, check out this post at KYForward.com by Kevin Moore, director of Risk Management Services for Roeding Insurance.

And for the betting among you, check out the Super Bowl Prediction System of John Dewan to see which team you should be backing.

May the best team win!

A global pandemic is the most important extreme risk for the insurance industry to worry about in the long term, according to a survey of global insurance industry executives conducted by Towers Watson.

Rounding out the top three extreme risks of concern are a large-scale natural catastrophe and a food/water/energy crisis, the survey found.

Other top 10 extreme risks named in the Towers Watson survey include cyber-warfare, an economic depression, a banking crisis and a default by a major sovereign borrower.

Votes were compiled in a wiki survey which enabled participants to add their own ideas. Over 30,000 votes were cast.

Meanwhile, a new report by AonBenfield says pandemic risk remains the most important mortality exposure for the insurance industry and is placed above other forms of catastrophic event including natural catastrophes, nuclear explosions, and terrorism.

In Pandemic Perspective, AonBenfield points out that according to historical data, pandemics are large enough to destabilize the insurance market more than once every 200 years, with three global pandemics recorded in each of the last three centuries.

This suggests that the majority of people working in the insurance industry today are likely to face at least one pandemic during their careers. Insurers should be aware that now is the time to anticipate and educate themselves on pandemic risk, and begin to model it.”

Check out I.I.I. facts and statistics on mortality risk.

Despite recognizing natural catastrophes as a growing threat, many companies have insufficient mitigation plans in place, and considerably more effort will be required before the risks of natural catastrophes are adequately controlled, according to a global survey by Zurich Insurance Group.

The study, conducted in January 2013 by the Economist Intelligence Unit and sponsored by Zurich, polled 170 executives from medium-sized and large companies around the world.

The findings confirm a widespread perception among organizations that natural catastrophes are becoming both more frequent and more severe, and that commensurate importance is assigned to assessing and mitigating the associated risks.

Survey respondents were asked to rate the severity of potential disruptions to distinct areas of their business operations in the event of a natural catastrophe occurring within the next three years.

Combining the top two most severe ratings on a scale of five puts continuity of IT support as facing the most severe disruption (46 percent), followed by supply-chain logistics (44 percent) and business-critical functions (44 percent).

While most companies have taken some steps to mitigate associated threats to IT systems, the adoption of systematic, integrated approaches to risk management is surprisingly low, the survey found.

Fewer than half (45 percent) of the companies surveyed use some form of scenario analysis to assess the risks of natural catastrophes.

Moreover, while a large majority of respondents say they have addressed the challenges of mitigating IT risks from natural catastrophes, only 31 percent say that their risk-management strategy explicitly addresses the interconnectedness of different types of risk.

Zurich says the findings suggest that while businesses are aware of the challenges they face, most have not yet developed a holistic approach to confronting these risks.

Company executives consider inadequate budgets for business-continuity planning and/or disaster recovery as the biggest obstacle to adopting more effective risk management strategies. An inability to present compelling business cases for risk management initiatives is cited as another significant hurdle.

Canadian Underwriter has more on this story.

While it’s too early to answer many of the questions arising from twin explosions at yesterday’s Boston Marathon, what we do know is that three people are dead and more than 140 injured in the bombings.

Our thoughts and prayers are with the victims, all those injured and their families.

The Boston Globe reports that much of Back Bay is locked down to protect the crime scene and the investigation underway is being directed by the FBI.

Boston.com’s Big Picture has images of the scene at the finish line of the marathon.

Right now, it appears the White House is describing the incident as a potential terrorist attack.
A Politico.com article cites a White House official saying:

Any event with multiple explosive devices – as this appears to be – is clearly an act of terror, and will be approached as an act of terror. However, we don’t yet know who carried out this attack, and a thorough investigation will have to determine whether it was planned and carried out by a terrorist group, foreign or domestic.”

Insurance Information Institute (I.I.I.) president Dr Robert Hartwig narrowly missed the blasts after watching his son cross the finish line of the marathon more than an hour earlier.

In an interview with PC360, Dr Hartwig said it was too soon to know the insurance implications of the event, but it looked like damage to property was light. Dr. Hartwig added that injured public safety and marathon workers would certainly be covered by workers compensation.

An I.I.I. advisory suggests reporters with questions about the potential insurance implications of the Boston Marathon explosions contact Dr. Hartwig.

Check out the I.I.I. website for further updates.

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