Tag Archives: Business Risk

Charlotte Unrest and Business Insurance

Ongoing civil unrest and protests in Charlotte, North Carolina following the police shooting of Keith Scott are reported to have caused significant property damage to businesses in the central area of the city.

The Charlotte Observer reports that entertainment complex EpiCentre faced looting and sustained significant damage Wednesday night. Numerous businesses were damaged, including Sundries EpiCentre, CVS, Enso and Fleming’s Prime Steakhouse, it said.

The NASCAR Hall of Fame was among other sites hit by vandals, with adjacent restaurants and hotels also damaged after officials declared a state of emergency for the city.

As clean-up gets underway it’s important to note that most commercial insurance policies generally include coverage for losses caused by riots. civil commotions and fires.

The definition of rioting covers looting by people who steal merchandise or other property from a premises. Vandalism is also covered.

According to The Charlotte Observer, a possible curfew for Thursday night is being discussed by city officials.

The Insurance Information Institute (I.I.I.) notes that if a business has to suspend operations or limit hours due to rioting, business interruption coverage is only covered if there is direct physical damage to the premises, forcing a business to suspend operations.

A “civil authority provision” in a business policy provides coverage for lost income and extra expenses in the event the police or fire department bars access to a specific area as a result of the danger caused by a riot or civil commotion.

In April 2015, looting and arson in Baltimore, Maryland, following the funeral for Freddie Gray, a 25-year-old who died after suffering a severe spinal cord injury while in police custody, resulted in estimated property damage of about $24 million, according to the I.I.I..

Five of the costliest civil disorders in the U.S. occurred in the 1960s. Here’s they are:

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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.

 

 

Allergic Reaction: EpiPen Needed to Restore Reputation

As the mother of a young child with a life-threatening nut and sesame allergy, it’s hard to remain objective and impartial when it comes to a company increasing the price of EpiPen, the life-saving allergy injector, by more than 400 percent since 2007.

However, the latest example of a company facing a public backlash, political pressure and social media storm due to its business practices illustrates the importance of having the necessary resources in place to mitigate the effects of a reputational risk crisis if and when it occurs.

As we’ve noted before in an earlier blog post, reputational risk is among the most challenging categories of risk to manage. A survey from ACE Group found that 81 percent of companies view reputation as their most significant asset—and most of them admit that they struggle to protect it.

The survey suggests that organizations need a clear framework for managing reputational risk that reduces the potential for crises, taking a multi-disciplinary approach that involves the CEO, PR specialists and other business leaders.

Mylan, the company at the center of the EpiPen controversy, has moved quickly to respond to the angry mob and to stem the drop in its share price which has so far lost investors $3 billion.

Yesterday, Mylan’s CEO Heather Bresch went on CNBC to announce the company was increasing financial assistance to patients to offset out-of-pocket costs of the EpiPen.

However, as The New York Times reports, Mylan did not say it would lower the list price — which has risen to about $600 for a pack of two EpiPens, from about $100 when Mylan acquired the product in 2007.

By the way, actress Sarah Jessica Parker also announced she is ending her relationship with Mylan after the pricing debacle broke.

Wherever you stand in this debate, the reality is the pharmaceutical industry is for-profit, as noted by Ms Bresch, and in the absence of a competitor or a generic, EpiPen is the latest example of a company trying to maximize profit.

Reputational risk is not covered by a standard business insurance policy, but companies can purchase coverage via a stand-alone policy which typically would pay fees for professional crisis management and communications services; media spending and production costs; some legal fees; other crisis response and campaign costs including research, events, social media and directly associated costs.

Newer reputation insurance products have also been developed that would cover a company’s financial losses due to reputational and brand damages.

In the mean time, in a climate of increased public, regulatory and investor scrutiny, the Mylan case is a good example of why companies need to be more proactive than ever to respond to challenges before they do serious damage to their brand and reputation.

U.S. Exposure to Brexit Referendum

London, for decades the financial center of Europe, finds itself on the brink of a monumental vote. On Thursday, British voters will decide whether to leave the European Union in what’s known as the Brexit referendum.

While there is uncertainty over what a Brexit could mean for the UK economy and for London, there is also uncertainty over what it would mean for the United States and for U.S. companies.

The Los Angeles Times reports that while the U.S. economy is better insulated than most from the risk of market turmoil, the Brexit referendum has added to uncertainties in a presidential election year and to lingering concerns about China’s economic slowdown.

A lot of U.S. companies have something to lose if the UK decides to leave the EU, with the banking and insurance sectors among those most likely to be affected, according to this CNBC report.

Some U.S. companies have moved not just parts of their operations but whole headquarters from the U.S. to the UK, CNBC says.

For example, the world’s largest insurance broker Aon, relocated its corporate headquarters to London from Chicago in 2012, in a move designed to give the company greater access to emerging markets through London.

Aon told CNBC in a statement:

“If Britain votes to leave the European Union, the innovative center of excellence that has set London apart in the insurance space will be deeply challenged.

“Talent is a true differentiator for the city of London, and to create a barrier between the industry that addresses the world’s most complex risks and the global talent needed to do this will have real implications.”

If companies lose the ability to passport their services into Europe, they may decide to move their European hubs and staff out of London and the UK, which would lead to significantly higher operational costs.

The London insurance market has been very vocal on why remaining in the EU is the best outcome for insurers.

As Lloyd’s chief risk officer Sean McGovern said earlier this year, the London market is currently the largest global hub for commercial and specialty risk—controlling more than £60 billion ($88 billion) of gross written premium.

And the UK’s membership of the EU gives it access to the world’s largest insurance market with a world market share of nearly 33 percent and total insurance premiums of nearly Euros 1.4 trillion ($1.6 trillion).

In a recent paper, Lloyd’s, the International Underwriting Association and Fidelis warned that Brexit poses a significant threat to London insurance jobs and business.

Read more about the insurance sector impact of a Brexit in this analysis by London law firm Clifford Chance.

Aon’s full statement on the EU referendum is available here.

What Does A Cyberattack Really Cost?

The current market value put on the business impact of a cyberattack is grossly underestimated, according to a new report from Deloitte Advisory.

It finds that the direct costs commonly associated with data breaches, such as regulatory fines, breach notification and protection costs, and public relations costs account for less than 5 percent of the total business impact.

But the effects of a cyberattack can be even more far-reaching and last for years, resulting in a wide range of hidden or intangible costs related to loss of intellectual property, operational disruption, increase in insurance premiums, and devaluation of trade name.

In fact more than 95 percent of the financial impact of a cyberattack is likely to accrue in these areas and businesses can be caught especially unprepared for these intangible costs.

In a press release, Don Fancher, principal, Deloitte Advisory, and global leader for Deloitte forensic, says:

“Rarely brought into executive and board conversations around cyber risk are the costs and consequences of IP theft, cyber espionage, data destruction, or business disruption, which are much harder to quantify and can have a significant impact on an organization.

“Our intent is not to scare executives into thinking that all cyber incidents will be more costly than they think. It’s to give them a better understanding of their specific risks so they can make more educated decisions that are aligned with their business strategies.”

Find out more about cyber risks and insurance in this Insurance Information Institute paper.

Commercial Insurance Barometer Shows Competitive Market

Commercial property/casualty insurance rates in the United States continued to register a decline  in February, but showed little movement across  sectors, according to online insurance exchange MarketScout.

The composite rate remains at minus 4 percent.

Richard Kerr, CEO of MarketScout noted that traditionally February has always been a slow insurance month, so the lack of activity in rates is not surprising.

By coverage classification, commercial property saw the largest decrease at  5 percent, while business interruption, inland marine and commercial auto were all priced more competitively in February as compared to January. The rates for other coverages remained steady.

Large and jumbo accounts were also down more in February, with large ($250,001 to $1 million) down from minus 4 percent in January 2016, to minus 5 percent in February 2016. Jumbo accounts (over $1 million), declined from minus 3 percent to minus 4 percent in the same period. All other account sizes matched the same composite rate from the prior month.

By industry classification, manufacturing had a significant rate decrease from minus 2 percent in January to minus 5 percent in February. Habitational was down another 1 percent in February for a total of minus 6 percent. All other industry rates remained the same as in January, MarketScout said.

Here’s the visual on the average P/C rate changes for 2016 compared to a year ago:

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AverageP/CRateIncrease2015

 

Don’t Ask, Don’t Tell

We’re reading an item of interest from across the pond where the United Kingdom’s Institute of Directors (IoD) has issued a new report that gives insight into how companies tend to react if they are under a cyber attack.

The IoD study, supported by Barclays, revealed that most companies keep quiet, with under one third (28 percent) of cyber attacks reported to the police.

This is despite the fact that half (49 percent) of cyber attacks resulted in interruption of business operations, the IoD noted.

Hat tip to forbes.com which reports on the IoD findings in this blog post.

It’s worth noting that here in the United States, the Identity Theft Resource Center (ITRC) has long maintained that the record number of U.S. data breaches it tracks are by no means the whole story.

Many data breaches fly under the radar, the ITRC says, because businesses want to avoid the financial dislocation, liability and loss of goodwill that comes with disclosure and notification.

Back to the UK the survey of nearly 1,000 IoD members also showed a worrying gap between awareness of cyber risks and preparedness.

Even though nine in 10 of business leaders said cyber security was important, only 57 percent had a formal strategy in place to protect themselves, and just one fifth (20 percent) held insurance against an attack.

In the words of Professor Benham, author of the IoD report:

No shop=owner would think twice about phoning the police if they were broken into, yet for some reason, businesses don’t seem to think a cyber breach warrants the same response.

Our report shows that cyber must stop being treated as the domain of the IT department and should be a boardroom priority. Businesses need to develop a cyber security policy, educate their staff, review supplier contracts and think about cyber insurance.”

With 34,500 members, ranging from start-up entrepreneurs to CEOs of multinational companies, the IoD is the UK’s largest organization for business leaders.

More on cyber security in the Insurance Information Institute’s paper Cyber Risks: Threat and Opportunities.

Alerting You to Earthquakes… and Insurance

Earthquake resilience was  in the spotlight as the Obama administration gave its support for an earthquake-alert system on the West Coast at a White House summit Tuesday.

President Obama also signed an executive order establishing a federal earthquake risk management standard which will improve the capability of federal buildings to function after a quake.

The order requires federal agencies to ensure that federal buildings are constructed or altered using earthquake-resistant design provisions in the most current building codes.

A 2015 scientific assessment from the U.S. Geological Survey shows that more than 143 million Americans could experience potentially damaging earthquakes, nearly double the prior 2006 estimate.

The ShakeAlert early warning system being developed and tested in the West would warn  residents and businesses from at least a few seconds to a few minutes before the shaking starts.

This would be  enough time to slow and stop trains and taxiing planes, and to prevent cars from entering bridges and tunnels, for example.

A common misperception among Americans  is that earthquake coverage is provided in a homeowners or business insurance policy.

However, standard homeowners, renters and business insurance policies do not cover earthquake damage. Coverage is available either in the form of an endorsement or as a separate policy.

Residential earthquake insurance in California is sold through the California Earthquake Authority, a privately funded, publicly managed organization.

Some 85 percent of U.S. homeowners said they do not have coverage for earthquake damage in response to the Insurance Information Institute’s (I.I.I.) annual Pulse Survey.

The I.I.I. Pulse results showed significant variations in the number of consumers that have earthquake insurance across the U.S.

That number was greatest in the earthquake- prone West, where 18 percent of homeowners said they had purchased separate earthquake insurance coverage.

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Information on reducing earthquake damage to homes and businesses is available on the Insurance Institute for Business and Home Safety (IBHS)  website.

The  I.I.I. also offers facts and statistics on earthquakes and tsunamis here.

U.S. Elections Add to Growing Political Risks Businesses Face

The 2016 U.S. presidential election is one of the rising political risks facing businesses and investors in the year ahead, according to Marsh’s Political Risk Map 2016.

Terrorism and struggling emerging economies, such as China and Russia, are also among the growing political risks businesses face.

Marsh notes that the recent terrorist attacks in Paris and San Bernardino, California have intensified political rhetoric and brought foreign relations and defense policy topics to the forefront.

With polls showing national security to be a major concern for voters, foreign policy will remain a key theme on the campaign trail in 2016 – and will be top of mind for the next presidential administration.”

Marsh observes that in the last decade multinational organizations have undertaken unprecedented international expansion, leaving them exposed to global credit and political risks like never before.

And those risks–including terrorism and political violence, armed conflicts, increasingly powerful anti-establishment political movements, and persistently low commodity prices–continue to grow.

Against this backdrop, it’s critical for businesses to be prepared for the possibility that political violence, unrest, or other large- scale crises will quickly develop in virtually any part of the world – including those countries that were historically seen as safe or stable, Marsh says.

Companies can prepare for these risks by managing their credit risk, building resilient supply chains, protecting their people and by protecting their assets through insurance.

Marsh notes:

Credit and political risk insurance can protect against a variety of risks, including expropriation, political violence, currency inconvertibility, non-payment, and contract frustration.”

Marsh’s Political Risk Map 2016, with data and insight from BMI Research, presents country risk scores for more than 200 countries and territories, helping businesses and investors make smarter decisions about where and how to deploy financial resources–including risk capital–globally in 2016 and beyond.

Cyberattacks Top Risk To Doing Business in North America

Cyberattacks are now the greatest risk to doing business in North America, according to the just-released World Economic Forum’s (WEF) Global Risks Report 2016.

In North America, which includes the United States and Canada, cyberattacks and asset bubbles were considered among the top risks of doing business in the region.

The WEF noted that in the United States, the top risk is cyberattack, followed by data fraud or theft (the latter ranks 7th in Canada, which is why it scores 50 percent in the table below).

The risks related to the internet and cyber dependency are considered to be of highest concern for doing business in the wake of recent important attacks on companies, the WEF observed.

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On a global scale, cyberattack is perceived as the risk of highest concern in eight economies: Estonia, Germany, Japan, Malaysia, the Netherlands, Singapore, Switzerland, and the United States.

Public sector bodies in at least two of these countries have recently been disrupted by cyberattacks: the US Office of Personnel Management and the Japanese Pension service, the WEF noted.

Attempts to detect and address attacks are made harder by their constantly evolving nature, as perpetrators quickly find new ways of executing them. Businesses trying to match this speed in their development of prevention and response methods are sometimes constrained by a poor understanding of the risk, a lack of technical talent, and inadequate security capabilities.”

Defining clear roles and responsibilities for cyber risk within corporations is crucial, the WEF noted.

Who in the corporation is the actual owner of the risk? While there are many “C” level owners (CISO, CFO, CEO, CRO, Risk Management), each of these owners has differing but related interests and unfortunately often does not integrate risk or effectively collaborate on its management.”

Outdated laws and regulations also inhibit the ability of governments to capture criminals, but also to expedite the often lengthy procedure of implementing legal and regulatory frameworks to reflect evolving realities.

Check out the Insurance Information Institute’s latest report on cyber risks here.