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Risk Focus: Asia

Assessing Tianjin’s Damage

The insurance industry faces a long and arduous claims process for last year’s devastating Tianjin Port disaster.
By: | February 22, 2016 • 6 min read

The insurance fallout from last year’s Tianjin Port explosions, which caused nearly 200 deaths and insurance losses that could exceed $3.25 billion, appears as sprawling as the gargantuan Chinese port itself.

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Primary liability for the disaster currently sits with Rui Hai International Logistics Co. — the warehouse operator that allegedly stored 3,000 tons of hazardous goods, including 70 times the legal quantity of sodium cyanide in its warehouse, resulting in an explosion equivalent to a 2.9 magnitude earthquake.

However, the chances of affected companies across a multitude of sectors winning compensation from Rui Hai are very slim indeed. One source described the operator’s liability policy as “not worth the paper it’s written on.”

Craig Neame, partner, Holman Fenwick Willan

Craig Neame, partner, Holman Fenwick Willan

Not only would the policy be of insufficient value to recover the hundreds of millions of dollars of liabilities unfolding from the event, but the policy is very unlikely to be honored by the insurer if Rui Hai is proved to have flagrantly breached regulations on the storage of dangerous goods.

Rui Hai may not, however, be the only company on the hook.

“There will be a Chinese investigation, and if that concludes there was widespread knowledge and the willful turning of blind eyes, parties who didn’t inform customers their cargo was at risk or take the necessary steps to protect their cargo could potentially be liable,” said Craig Neame, a partner at Holman Fenwick Willan. Class action lawsuits could not be ruled out down the line.

But, said Lincoln Pan, CEO of Willis China, “We’re advising our clients that seeking liability-based damages is going to be tough as it will be very difficult to prove liability and successfully claim against the individuals who may have been at fault.”

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Meanwhile, Peregrine Storrs-Fox, risk management director of TT Club (the biggest insurer of containers and cargo at Tianjin) said that Chinese maritime courts are unlikely to accept proceedings until the Chinese government concludes its investigations. “If there is no recovery, due to a lack of recoverable assets or difficulty enforcing a foreign judgment in China, the loss will rest wherever it fell,” he said.

It is more realistic, then, that companies affected by the disaster will have to rely solely on their own insurance policies to recoup any losses — with property, cargo and business interruption policies taking the brunt of the claims. According to Pan, Willis Towers Watson has several clients that suffered losses exceeding $100 million as result of explosion. “These cases will require real advocacy and negotiation to get the fullest type of recovery back from insurers,” he said.

Key Policies Triggered

Damage to buildings in the vicinity of the blast will trigger property and business interruption policies worth up to $1.2 billion, according to Guy Carpenter. The majority are being handled by Chinese insurers, which are reportedly being encouraged by the Insurance Association of China to pay claims promptly and with minimal dispute. Damage to specialist equipment may also trigger covers provided by London and international underwriters, with Swiss Re ($250 million), Hannover Re ($104 million) and XL Group — now XL Catlin — ($100 million) among the highest pre-Christmas loss projections.

Peregrine Storrs-Fox, risk management director, TT Club

Peregrine Storrs-Fox, risk management director, TT Club

Zurich projects $275 million in property and marine losses, but told Risk & Insurance®: “The nature of many of the losses and the extended remediation period to complete repairs mean that uncertainty as to the final cost remains.”

A Lloyd’s market spokesperson said: “We are not clear what the quantum looks like, so it is too soon to tell what the impact on the Lloyd’s market will be. In the coming weeks, we hope to have greater clarity.”

Guy Carpenter estimates that container losses could reach $60 million, while lost or damaged cargo stored at the port could be worth more than $500 million. As many of the manufacturers and importers are international firms, much of these losses will be shouldered in the global insurance markets.

“When car insurers were doing their modelling, I don’t think they considered the risk of an adjacent warehouse storing chemicals in a huge breach of government-imposed regulations.” — Craig Neame, partner, Holman Fenwick Willan

However, Neame said cargo losses may be lower than projected. “There’s been very little reporting into the insurance market of substantial cargo losses, which suggests a lot of the containers were empty — the big loss is the cars,” he said.

According to Guy Carpenter, more than 22,700 cars were destroyed or damaged in the blasts, with a potential loss value of up to $1.5 billion, with many major car firms affected.

While these losses would trigger either cargo or property losses depending on who had ownership of the vehicles in the supply chain at the time, sources believe several manufacturers were inadequately insured.

Lincoln Pan, CEO, Willis China

Lincoln Pan, CEO, Willis China

It is rumored that because of limits on the number of vehicles that can be insured at one location, some manufacturers may not have declared all of their exposed vehicles, and may have to absorb the loss of their unprotected excess assets.

Pan added that certain local importers may also find themselves underinsured, having insured their assets using book value rather than market value.

“Some parties insured just for the manufacturing cost of the inventory, and are now seeking claims on the commercial value. Most insurers are rejecting or contesting these claims.

“Risk managers should analyze the value of their assets as they move through the supply chain, and insurance should be procured according to the maximum potential value of the asset rather than the financial value of an asset in any one point in the supply chain,” he added.

Throw in some large deductibles on the policies that are in place, and it appears that with so many companies having to absorb uninsured losses, the insurance industry may not come out of the event as scathed as it perhaps could have.

The biggest unknown is the impact on supply chain. The port system is now diminished and struggling to cope with the relentless demands of economic trade through China, with logistical disruptions and delays permeating throughout the regional economy.

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While this should trigger a host of business interruption (BI) and contingent business interruption (CBI) policies — particularly among international companies — Neame believes there will be substantial uninsured losses when it comes to business interruption as a result of logistical delays rather than physical loss, as this is unlikely to trigger most BI policies. “I suspect the majority of Chinese manufacturers don’t buy CBI,” he added, “though there’s no guarantee CBI would respond either.”

Nick Derreck, chairman of the International Union of Marine Insurers, said in the wake of the event that the accumulation of related risks from the disaster served as a “wake-up call to all cargo insurers,” and called for new technology to help underwriters handle this kind of aggregated risk. Meanwhile, Neame suggests the insurance industry may put tighter limitations on how much stock can be stored in certain locations without the policyholder obtaining assurances on site safety, particularly in developing markets.

Mark Thompson, CEO, Cunningham Lindsey International

Mark Thompson, CEO, Cunningham Lindsey International

“When car insurers were doing their modelling, I don’t think they considered the risk of an adjacent warehouse storing chemicals in a huge breach of government-imposed regulations — this has opened up their eyes to a new type of risk,” he said.

But loss adjuster Mark Thompson, CEO of Cunningham Lindsey International, noted that while some insurers are now coming to terms with “much bigger exposures than they thought,” he doesn’t believe this event will be as damaging to the insurance market’s coffers as recent catastrophes in Thailand or Japan.

While Storrs-Fox said the event is unlikely to lead to any material changes in insurance terms, he advises insurance buyers to ensure they have a “force majeur” clause in their cargo contracts, and also to maintain high levels of due diligence over the practices and procedures of counterparties, including ensuring subcontractors are adequately insured, and operating in compliance with regulations.

It is unlikely the unscrupulous activities at Tianjin are isolated. Both insurers and insureds must learn their lessons from the disaster quickly if they are to avoid similarly complex settlement challenges in the future.

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Antony Ireland is a London-based financial journalist. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

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In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

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Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

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How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

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One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]