Category Archives: Business Risk

Oil and Gas Risk Report

National oil companies (NOCs) are facing a riskier business environment, yet there is a gap between the importance of the risks they face and how well they are managed. A new survey from Marsh found the overall level of risk facing the industry remains high, with the NOC Risk Index score rising to 4.51 out of a possible 6 in 2008. By contrast, the Risk Management Effectiveness Index score was just 3.8. The top five risks in 2008 ranked by participants are: availability of oil and gas resources; recruitment and retention of a qualified workforce; energy price volatility; environmental impact of operations; and political/regulatory risk issues. Availability of oil and gas resources as a risk issue was rated 5.3 out of a possible 6. It was also the top-ranked risk in 2007 but with a rating of 4.9.

Business Oversights on Natural Disasters

A new survey of financial executives representing the largest corporations in North America reveals that almost all companies are exposed to natural disasters, yet many of those firms are ill-prepared for such catastrophes. FM Global said the gap between levels of natural catastrophe exposure and levels of preparedness is concerning.   The 2008 Natural Disaster Business Risk Study found that while 96 percent of financial executives said their companies have operations exposed to hurricanes, floods and earthquakes, less than 20 percent indicated that their firms were very concerned about such disasters negatively affecting their bottom line. For example, while 80 percent of companies have North America operations located in hurricane-exposed regions, nearly 50 percent reported they are not well-prepared for a hurricane. Nearly 80 percent are not overly concerned that a hurricane/typhoon or tropical cyclone could negatively impact their company’s bottom line. FM Global said the findings suggest companies should also consider the impact a disaster could have on maintaining competitiveness, market share and corporate reputation. Check out I.I.I. facts and stats on U.S. catastrophes.

Captive Commentary

Medical malpractice continues to be the dominant line of business for U.S. captives. The performance of this line therefore can have a significant impact on the overall captive insurance market. A new report by ratings agency A.M. Best notes that medical malpractice net premiums written fell 26 percent in 2007, leading to a 15 percent drop in net premiums written for a composite of 177 captive insurance companies. However, captives overall benefited from favorable underwriting trends. Solid underwriting results in medical malpractice helped the captive composite’s loss ratio to improve substantially in 2007 to 61.9, for example. Looking ahead, A.M. Best predicts that in spite of the soft market, the outlook for the captive industry is stable. Captive formations continue even as the commercial market softens and new domiciles have entered the market. A key advantage for captive insurers is also their ability to compete not just on price, but on customized services for their insureds. Check out I.I.I. updates on captives and  other risk  financing options and on medical malpractice.  


Occupational Fraud Costs

U.S. businesses lose an estimated seven percent of their annual revenues to fraud, according to a survey of Certified Fraud Examiners who investigated cases between January 2006 and February 2008. That translates to approximately $994 billion in fraud losses when applied to the projected 2008 United States Gross National Product. Fraud schemes tend to be very costly. For example, the median loss caused by the occupational frauds in the study was $175,000 and more than one-quarter of frauds involved losses of at least $1 million. The study also found that frauds were most often committed by the accounting department or upper management and that most fraudsters were first-time offenders. Small businesses are especially vulnerable to occupational fraud. Check out the I.I.I. small business owners’ guide to insurance.

Global D&O Protection Gap

Worldwide U.S. directors and officers (D&O) policies do not provide the global protection that many insureds may believe they have. That’s the upshot of  the latest annual D&O  liability survey by Towers Perrin. It found that only 3 percent of survey participants with international operations have  purchased separate local D&O liability insurance policies for individual countries. This is despite the fact that many countries do not permit non-admitted D&O insurance policies to cover local directors and officers. Towers Perrin warns that many companies are not yet aware of this emerging issue. Given the  increased claim activity outside the United States, this issue is unlikely to go away. By the way, some 43 percent of survey participants indicated that their firms are global. Something to think about.

Environmental Risk and Responsibility

Despite the increasing attention and resources being dedicated to managing environmental risk, many companies are still at the early stage of this process. The finding comes in a new Economist Intelligence Unit (EIU) survey co-sponsored by ACE, KPMG, SAP and Towers Perrin. It reveals that environmental risk management is frequently managed in an ad hoc fashion, and that there is no clear consensus about who should be responsible for environmental risk. Lack of certainty about the impact of environmental liabilities and the future scope of legislation are the main obstacles to effective environmental risk management. According to the survey, the top three risks cited by respondents for which they face potential environmental liabilities – extreme weather events, the potential impact of climate change over the longer-term and water scarcity – are inherently unpredictable in both timing and scale. “Faced with such a high degree of uncertainty, and the huge challenge of quantifying these threats, it is perhaps unsurprising that environmental risk management remains at a relatively early stage of development,† it notes. What do you think?  

ID Theft Legal Action

You may well have read the fascinating tale  of the CEO of identity theft protection company LifeLock, himself a victim of ID theft, who is now facing legal action from customers claiming that the company’s services did not work as advertised. According to a May 22 Associated Press article, LifeLock CEO Todd Davis had dared criminals for two years to steal his identity, even giving out his social security number in advertisements for the company. Apparently this led to at least 87 instances in which people tried to steal his identity, and one worked. Now attorneys are suing on behalf of LifeLock customers in Maryland, New Jersey and West Virginia, claiming that because Davis’ records were compromised, the company doesn’t provide the comprehensive protection promised in its ads. We note that ID theft remains the number one consumer complaint received by the Federal Trade Commission (FTC), accounting for 32 percent of all fraud complaints in 2007. Some 258,427 identity theft complaints were reported to the FTC in 2007, up 5 percent on the previous year. ID theft may be covered by insurance. Check out further I.I.I. info on this topic.

Data Security

A glance at the list of data breaches maintained by the Privacy Rights Clearinghouse includes a variety of security breaches at health-related facilities where personal information such as medical records or prescription drug information was compromised. With this in mind, it’s interesting to read that Google has begun offering online personal health records to the public. According to the May 20 online article by Steve Lohr at the New York Times, Google joins a growing list of companies offering personal health records on the Web. Apparently participants in a pilot project were not put off by any concerns about security. Yet from a business standpoint, companies face growing liability when a breach in data security occurs. Luckily, insurance can help corporations prepare and recover in such an event. Check out further I.I.I. info on this topic.  


Managing Emerging Risks

A new report from Lloyd’s and the Economist Intelligence Unit titled Directors in the Dock: Is Business Facing a Liability Crisis? reveals that boards could make better use of the time they spend on liability and litigation issues by switching their focus to emerging risks. Many executives interviewed for the report admit that there has not yet been board-level discussion on a range of emerging threats, even though they recognize the need to tackle the issue. For example, nearly four in 10 said that they should discuss work-related stress, but have not yet raised this issue formally, while 29 percent believe technology security should be discussed. Indeed, technology risks – such as data and system security and nanotechnology – are among the top three emerging risks that executives are most concerned about. Environmental liabilities and the liabilities arising from poor corporate governance are also top board concerns. Check out further I.I.I. info on the U.S. liability system.  

China Quake

Yesterday’s magnitude 7.8 earthquake that struck a mountainous region north-west of Chengdu, capital of Sichuan Province, China, leaving thousands dead could lead to a large number of insurance claims from the area, according to catastrophe modeler Risk Management Solutions (RMS). In  its commentary, RMS notes that most of the damage reports so far are from Chengdu, the 10th largest city by GDP in the country, with some 4.5 million people. A mitigating factor is that the rapid growth of the city in the last 30 years means that the majority of buildings were constructed after 1978, when buildings were required to be made more resistant to earthquakes, so many of the commercial buildings will have been constructed to withstand some level of ground-shaking. RMS also notes that the event is a reminder for businesses considering moving into China that business continuity insurance should be a risk management priority. Take a look at  the Business Insurance  May 12 online article  by Jeff Casale  for more on this story. Check out I.I.I. facts & stats on global catastrophes.