Category Archives: Emerging Risks

Cyber protection gap akin to nat cat

FedEx Corp has disclosed in a securities filing that its international delivery business, TNT Express BV, was significantly affected by the June 27 Petya cyberattack.

Apparently, the courier company did not have cyber insurance or any other insurance that would cover losses from Petya, according to this report by The Wall Street Journal, via the I.I.I. Daily.

A new emerging risk report from Lloyd’s and risk modeling firm Cyence notes that cyberattacks have the potential to trigger billions of dollars of insured losses, yet there is a massive underinsurance gap.

Take its first modeled scenario: a cloud service provider hack. The event produced a range of insured losses from $620 million for a large loss to $8.1 billion for an extreme loss (overall losses ranged from $4.6 billion to $53 billion).

This left an insurance protection gap of between $4 billion (large loss) and $45 billion (extreme loss), so between 87 percent and 83 percent of the overall losses respectively were uninsured.

In another modeled scenario, the mass vulnerability attack, the underinsurance gap is between $9 billion for a large loss and $26 billion for an extreme loss, meaning that just 7 percent of economic losses are covered by insurance.

From the report:

“In some ways, the cyber insurance market can be considered in the same light as underinsurance in the natural catastrophe space – risks are growing and insurance penetration figures are low.”

Man-made earthquakes in Oklahoma – a headache for insurers

I.I.I. research manager Maria Sassian and I.I.I. chief actuary James Lynch take a closer look at man-made earthquakes, based on a presentation by Kelly Hereid, Chubb Tempest Re at Reinsurance Association of America’s Cat Risk Management 2017 conference:

In Oklahoma, for each barrel of oil extracted by energy companies, seven to 10 barrels of wastewater are produced. Oil and gas companies use a technique called ‘dewatering,’ which allows a cheap separation of oil and water, making old geologic formations economic. The water, which sits underground for millions of years getting saltier and nastier with the passage of time, must be disposed of safely. Oil companies send it to disposal wells where it is injected deep into the earth. This disposal process has been linked to an increase in earthquakes because the injected wastewater counteracts the natural frictional forces on underground faults and, in effect, “pries them apart”, thereby facilitating earthquakes. Because of wastewater disposal earthquakes on natural faults are occurring faster than they would have happened otherwise.

The spate of earthquakes in Oklahoma (Figure 1) over the past few years has driven earthquake insurance take-up rates in that state from 2 percent to 15 percent (higher than in California).  According to NAIC data from S&P Global Market Intelligence and the I.I.I., direct premiums written from earthquake insurance in Oklahoma increased by over 300 percent from 2006 to 2015 (Figure 2). The Oklahoma market has been declared noncompetitive as only four companies combine to write a 55 percent market share. The action gave the state Insurance Department the right to approve rate changes in advance. Some insurers suggested a better solution would be to encourage competition rather than increase regulation.

Due to the volatile nature of the risk there is potential for insurance market surprises. Earthquake liability could harm energy prices and create an environmental risk problem for insurers. Some economists argue that housing prices could fall by nearly 10 percent following strong (MMI VI) shaking, which is not uncommon in magnitude 5+ earthquakes. Lawsuits over loss of value could get big fast.

The 2016 Pawnee earthquake was the largest in the Oklahoma historical record with a magnitude of 5.8.

One of the problems for insurers is that lots of wells are injecting so it’s tough to tell which company caused the earthquake. It’s also tough to tell if an earthquake has been induced since an induced earthquake looks the same on a seismograph as a natural earthquake. The USGS 2014 seismic hazard update is being incorporated into earthquake risk models now, but the update doesn’t contemplate induced earthquakes, which are now covered in USGS annual rate forecasts instead.

In recent years, the rate of injection has fallen due to regulation in the form of a mandated 40 percent decrease in wastewater disposal in key earthquake regions, falling oil prices and new geologic targets which produce less water. And it looks like reductions in injection volume are reducing activity. However, some experts believe the damage has already been done. Above-normal earthquake activity may continue for several decades, with fewer but potentially stronger earthquakes.

Oklahoma is a hotspot for earthquakes linked to wastewater disposal, but it’s not alone. Concerns in Texas led to the closing of a wastewater injection site near the Dallas-Fort Worth International Airport and there is evidence that some of the earthquakes that occurred in California decades ago may have been induced.

Check out the I.I.I. issues update Earthquakes: Risk and Insurance.

Need For Political Risk Coverage Accelerates

Amid ongoing political upheaval in Venezuela and a volatile geopolitical landscape elsewhere, the need for political risk insurance is rising to prominence for multinational companies.

AP reports that General Motors just became the latest corporation to have a factory or asset seized by the government of Venezuela.

GM said assets such as vehicles were taken from the plant causing the company irreparable damage.

To protect themselves against loss or damage to physical assets caused by political action and instability, businesses should consider purchasing political risk insurance.

This specialty type of insurance can protect against a variety of risks, including:

  • Expropriation
  • Political violence (including terrorism and war).
  • Currency inconvertibility.
  • Non-payment.
  • Contract frustration due to political events.

Due to the accelerating pace of geopolitical uncertainty, the market for political risk insurance is pushing toward $10 billion in 2018, up from $8.1 billion in 2015, according to a KPMG LLP report published last year.

Willis Towers Watson advises multinational companies to buy political risk coverage on operations worldwide — particularly for select regions —while it is still available, Business Insurance reports.

Political risk insurance is available from both private insurers and from government-backed insurers, including the Overseas Private Investment Corporation (OPIC), an agency of the U.S. government.

Aon’s Political Risk Map 2017 captures changing risks for businesses and countries across emerging and frontier markets.

Last year an equal number of countries showed a reduction in political risk as showed an increase, a trend which highlights the persistence of political risk across the globe, Aon said.

Sugar: The Next Tobacco?

Is sugar the next tobacco? Liability insurance experts say it could be.

Excessive, but not always obvious use of sugar (also salt) in food has the potential for systemic loss, a recent Lloyd’s report found.

The potential loss scenario unfolds if excessive levels of sugar are found to be harmful by scientific studies and if courts find food producers and/or the distribution chain liable for resulting damages.

“A societal shift may make the addition of significant amounts of sugar to our food unacceptable, with liability risks affecting food manufacturers (and possibly distributors and retailers).”

A sample footprint in the report (below), starting from sugar beet and cane farming to sugar and confectionary manufacturing and spreading to various other food manufacturers, wholesalers, retailers, and food and drink outlets shows the widespread distribution of sugar and the potential impact on many customers:

“Historical data suggests that the spread would also be amplified by the presence of large corporates with large insurance cover and funds.”

Businesses address their liability concerns through many types of risk management, of which insurance is an important component, according to the Insurance Information Institute.

A Swiss Re study indicated that the United States in 2013 had the largest commercial liability insurance market in the world both in premium volume ($84 billion) and as a percentage of Gross Domestic Product (0.50 percent).

WEF: Collaboration Imperative On Global Risks

The World Economic Forum (WEF) is calling for a redoubling of efforts to protect and strengthen systems of global collaboration in the face of increasingly disruptive risk trends.

In its just-released Global Risks Report 2017, the WEF warns that risk drivers such as income inequality, polarization of societies, and climate change need to be addressed collaboratively if solutions are to be found to the world’s most complex problems.

Nowhere is cooperation more urgent than in addressing climate and environmental risks, the WEF said. While important strides have been made in the past year, the pace of change is not fast enough and more needs to be done.

The WEF cited the Paris Agreement on climate change now ratified by 110 countries, and the landmark agreement to curb CO2 emissions from international aviation as important examples of global cooperation in 2016.

But political change in the United States and Europe is putting this progress at risk.

“This is a febrile time for the world. We face important risks, but also opportunities to take stock and to work together to find new solutions to our shared problems. More than ever, this is a time for all stakeholders to recognize the role they can play be exercising responsible and responsive leadership on global risks.”

The environment dominates the global risks landscape outlined in the WEF report, with extreme weather events emerging as the single most prominent global risk and climate change the number two underlying trend this year.

Society is also not keeping pace with technological change, the WEF noted. While new and emerging technologies can provide solutions they also exacerbate risks.

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Artificial intelligence and robotics were identified as having both the highest potential for negative consequences and also the greatest need for better governance in this year’s risk survey.

The private and public sectors need to work together and collaborate to address the challenges of the Fourth Industrial Revolution, the WEF said.

“It is critical that policy-makers and other stakeholders – across government, civil society, academia and the media – collaborate to create more agile and adaptive forms of local, national and global governance and risk management.”

How To Cover Electronic Aggression, or Cyberbullying

Recent events have reminded us that cyberbullying is not limited to children, with at least one survey indicating that 73 percent of adult internet users have seen someone harassed online, while 40 percent have personally experienced it.

For example, professional golfer Paige Spiranac last week spoke about the harassment she and her family experienced following her professional debut last year. The recent U.S. Presidential campaign has also highlighted the increasing prevalence of cyberbullying that targets adults.

Electronic aggression is the definition used by the Centers for Disease Control and Prevention (CDC) to describe any type of harassment or bullying that occurs through email, a chat room, instant messaging, a website (including blogs), or text messaging.

And the National Conference of State Legislatures (NCSL) defines cyberbullying as the willful and repeated use of cell phones, computers, and other electronic communication devices to harass and threaten others.

NCSL notes that cyberbullying differs from more traditional forms of bullying in that it can occur at any time, its messages and images can be spread and shared instantaneously to a wide audience, and perpetrators can remain anonymous, often making them difficult to trace.

Adult cyberbullying often takes the form of trolling where someone posts inflammatory messages in an online platform, such as on Facebook, or Twitter or in a chatroom or blog, with the sole intent to provoke a reaction from other users.

While there are many examples of cyberbullying against celebrities or public figures, any adult who uses the internet is increasingly at risk.

Social media platforms, including Instagram, Twitter and Facebook have responded by introducing new tools aimed at combating cyberbullying.

Just as technology is changing the way we interact with each other, so insurers have been moving to provide insurance coverage that can mitigate the financial loss and emotional harm suffered as a result of a cyberbullying incident.

For example, earlier this year Chubb made cyberbullying coverage available to its U.S. homeowners customers. The coverage provides up to $60,000 in compensation to clients and family members for expenses related to harassment and intimidation committed via personal computers, telephones or mobile devices. It can help mitigate the cost of wrongful termination, false arrest, wrongful discipline in an educational institution, or diagnosed debilitating shock, mental anguish or mental injury.

From the perspective of businesses, most traditional commercial general liability policies would not cover electronic aggression or cyberbullying claims. Specialist media liability policies developed by insurers may cover social media activities and industry experts say the number of insureds and insurance brokers looking at this type of coverage is increasing.

Specialized cyber policies developed by insurers may also be tailored to incorporate social media coverage. Check out the Insurance Information Institute white papers Cyber Risk: Threat and Opportunity and Social Media, Liability and Risks for more on this topic.

Cybersecurity and the Presidential Election

Insurance leaders say the upcoming U.S. presidential election could impact a range of issues, including healthcare and international trade.

Cybersecurity is another insurance-related issue that next week’s election is likely to impact. Forrester even predicts that the new U.S. president will face a major cybercrisis within 100 days.

A new Insurance Information Institute (I.I.I.) white paper notes that governments are facing an unprecedented level of cyber attacks and threats with the potential to undermine national security and critical infrastructure.

The I.I.I. paper, Cyberrisk: Threat and Opportunity, also highlights rising concerns over how hacked information may be used to influence a political outcome:

“Hacks of both Democratic National Committee and Republican National Committee emails during an election year have raised concerns that groups are attempting to influence the outcome of the 2016 U.S. presidential campaign.”

Just last Friday U.S. government officials accused Russia of trying to interfere in the 2016 elections, including by hacking the DNC computers and other U.S. political organizations.

And on Tuesday Microsoft said the Russian hackers believed responsible for hacking the DNC computers had exploited previously undisclosed flaws in its Windows operation system and Adobe’s Flash software.

The Wall Street Journal reports that apparent Russian attempts to disrupt the U.S. election highlight more mundane risks as well as a new weapon in information wars: the disclosure of hacked information to influence policy or public perception.

Meanwhile, cybersecurity experts have warned that the election systems in the U.S. are vulnerable at the local, state and manufacturer level.

The mounting concerns have prompted the Department of Homeland Security (DHS) to consider whether the U.S. voting systems should be classified as critical infrastructure.

Currently, there are 16 critical infrastructure sectors, such as the U.S. power grid and water supply, whose systems and networks are considered so vital to the U.S. that their incapacitation or destruction would have a debilitating effect on national security and public health or safety.

In fiscal year 2015, there were around 295 attacks on critical infrastructure control systems in the U.S., a 20 percent increase on the previous year, according to DHS figures cited in the I.I.I. paper.

Samsung Recall Underscores Emerging Tech Fire Risks

A formal recall by US safety regulators of the Samsung Galaxy Note 7 smartphone due to serious fire and burn hazards should put users on notice to power down and stop using their devices immediately and return them for a free replacement or refund.

Samsung has received 92 reports of batteries overheating in the United States, including 26 reports of burns and 55 reports of property damage, including fires in cars and a garage.

In its warning, the Consumer Product Safety Commission (CPSC) states:

“The lithium-ion battery in the Galaxy Note7 smartphones can overheat and catch fire, posing a serious burn hazard to consumers.”

The recall covers 1 million phones in the U.S., but some 2.5 million of the devices need to be recalled globally, Samsung said.

It follows a Federal Aviation Administration (FAA) brief last week urging passengers not to use Samsung Galaxy Note 7 devices on planes, nor to stow them in their checked luggage.

As the Wall Street Journal reported, identifying a specific brand or model as a potential hazard is a highly unusual move for the FAA, though agency officials previously issued warnings about the overall dangers of checking any kind of cellphones, other battery-powers electronic devices or spare batteries in the holds of planes.

Following the FAA announcement, Samsung accelerated its massive recall.

The cost of the recall to Samsung have been estimated at about $1 billion, but the costs in terms of the hit to market value, tarnished brand and reputation, and lost revenues, as well as opportunity cost could be much higher, as Forbes reports. (Note: Apple’s new iPhone 7 goes on sale today)

From the insurance perspective, the story does underscore broader concerns over increased fire risks from lithium-ion batteries.

As this National Fire Protection Association blog post explains:

“Rechargeable lithium batteries overheat more than any other type of batteries and tend to have manufacturing defects. They are also very poorly regulated. The low weight batteries house substantial energy and fit into smaller devices, but have been causing fire safety issues in smart phones, tablets, hover boards and other emerging tech devices that are popular with the buying public.”

The homeowners line of business saw the majority of fire losses in 2014, according to Insurance Information Institute facts and statistics on fire losses here.

The risks of lithium batteries are also on the radar of commercial insurers. FM Global has partnered with fire protection groups to research the fire hazards of lithium-ion batteries in warehouse storage and cargo containers, for example.

 

 

Growth Potential of Sharing Economy, and Insurance

If, like me, you’ve taken a ride to the airport with Uber, or looked into renting a holiday home via Airbnb, did you take a moment to think about your insurance coverage?

If the answer to that question is “no,” you’re not alone.

A recent public opinion survey from the Insurance Research Council (IRC) found that 56 percent of all adult Americans who said they have participated in the sharing economy indicated that they did not consider their insurance coverage at the time.

This is despite the fact that more than half of all respondents said that the sharing economy exposes the general population to increased risk.

Some 71 percent of respondents to the same survey reported little familiarity with the sharing economy, with 46 percent saying they were “not at all familiar” with the sharing economy, while 25 percent reported being “not too familiar.”

Survey respondents gave numerous reasons for not participating in the sharing economy. Unfamiliarity was cited most frequently (65 percent), while lack of need was cited by 60 percent and lack of interest by 54 percent.

However, a lack of insurance was the least cited reason for not participating.

Elizabeth Sprinkel, senior vice president of the IRC, noted:

“The substantial number of people with little experience or familiarity with the sharing economy suggests tremendous growth potential in the years ahead.”

And for insurers, too, we would add.

Check out a recent Insurance Information Institute (I.I.I.) presentation on the role of insurance in the sharing economy.

Other I.I.I. resources include information on car sharing and peer-to-peer car rental insurance as well as peer-to-peer home rental and homeowners insurance.

The IRC report, The Sharing Economy: Public Participation and Views, presents findings from an online survey conducted by GfK Public Affairs & Corporate Communications on behalf of the IRC.

A total of 1,105 online interviews were conducted for the study, using a sample drawn from GfK’s Knowledge Panel. Survey data were weighted to the U.S. population of adults aged 18 and above.

Emerging Risk: the Internet

We think of the Internet as a borderless entity, but that could all change, according to an annual emerging risk report from Swiss Re.

The publication is based on the SONAR process, an internal crowdsourcing tool that collects inputs and feedback from underwriters, client managers, risk experts and others to identify, assess and manage emerging risks.

Increased localization of internet networks within country borders is one of the key emerging risks that industry players should prepare for, the report suggests.

It notes that as cybercrime has grown rapidly, so the Internet has become less safe and governments are instituting more regulation, requiring companies to protect their online assets more effectively and to store data on servers physically located within their geographical borders.

Some countries are even using special software to filter out unwanted information, firewalls and isolated IT infrastructure detached from global networks, Swiss Re reports.

“A step further in this direction is the design and development of internet protocols which make certain communications impossible. In China, for instance, the government already controls all Internet content as well as the physical infrastructure.”

While no international consensus has emerged yet on how the internet should be governed, the report reveals that there is a chance that disconnected national and regional nets will become more common.

As Swiss Re says:

“Such developments would increase IT costs and regulation and would hurt insurance companies operating across borders.”

In particular, the report highlights that evolving regulation would increase operational risk and could trigger more liability claims in the directors and officers (D&O) and fidelity arena, as well as massively increasing costs for setting up and maintaining separate legal structures.

Another concern is that technology companies may face liability suits from customers if they are no longer able to access data stored on cross-border servers.