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

Emerging Risks

Stadium Safety

Soft targets, such as sports stadiums, must increase measures to protect lives and their business.
By: | January 10, 2018 • 8 min read

Acts of violence and terror can break out in even the unlikeliest of places.

Look at the 2013 Boston Marathon, where two bombs went off, killing three and injuring dozens of others in a terrorist attack. Or consider the Orlando Pulse nightclub, where 49 people were killed and 58 wounded. Most recently in Las Vegas, a gunman killed 58 and injured hundreds of others.

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The world is not inherently evil, but these evil acts still find a way into places like churches, schools, concerts and stadiums.

“We didn’t see these kinds of attacks 20 years ago,” said Glenn Chavious, managing director, global sports & recreation practice leader, Industria Risk & Insurance Services.

As a society, we have advanced through technology, he said. Technology’s platform has enabled the message of terror to spread further faster.

“But it’s not just with technology. Our cultures, our personal grievances, have brought people out of their comfort zones.”

Chavious said that people still had these grievances 20 years ago but were less likely to act out. Tech has linked people around the globe to other like-minded individuals, allowing for others to join in on messages of terror.

“The progression of terrorist acts over the last 10 years has very much been central to the emergence of ‘lone wolf’ actors. As was the case in both Manchester and Las Vegas, the ‘lone wolf’ dynamic presents an altogether unique set of challenges for law enforcement and event service professionals,” said John

Glenn Chavious, managing director, global sports & recreation practice leader, Industria Risk & Insurance Services

Tomlinson, senior vice president, head of entertainment, Lockton.

As more violent outbreaks take place in public spaces, risk managers learn from and better understand what attackers want. Each new event enables risk managers to see what works and what can be improved upon to better protect people and places.

But the fact remains that the nature and pattern of attacks are changing.

“Many of these actions are devised in complete obscurity and on impulse, and are carried out by individuals with little to no prior visibility, in terms of behavioral patterns or threat recognition, thus making it virtually impossible to maintain any elements of anticipation by security officials,” said Tomlinson.

With vehicles driving into crowds, active shooters and the random nature of attacks, it’s hard to gauge what might come next, said Warren Harper, global sports & events practice leader, Marsh.

Public spaces like sporting arenas are particularly vulnerable because they are considered ‘soft targets.’ They are areas where people gather in large numbers for recreation. They are welcoming to their patrons and visitors, much like a hospital, and the crowds that attend come in droves.

NFL football stadiums, for example, can hold anywhere from 25,000 to 93,000 people at maximum capacity — and that number doesn’t include workers, players or other behind-the-scenes personnel.

“Attacks are a big risk management issue,” said Chavious. “Insurance is the last resort we want to rely upon. We’d rather be preventing it to avoid such events.”

Preparing for Danger

The second half of 2017 proved a trying few months for the insurance industry, facing hurricanes, earthquakes, wildfires and — unfortunately — multiple mass shootings.

The industry was estimated to take a more than $1 billion hit from the Las Vegas massacre in October 2017. A few years back, the Boston Marathon bombings cost businesses around $333 million each day the city was shut down following the attack. Officials were on a manhunt for the suspects in question, and Boston was on lockdown.

“Many of these actions are devised in complete obscurity and on impulse, and are carried out by individuals with little to no prior visibility.” — John Tomlinson, senior vice president, head of entertainment, Lockton

“Fortunately, we have not had a complete stadium go down,” said Harper. But a mass casualty event at a stadium can lead to the death or injury of athletes, spectators and guests; psychological trauma; potential workers’ comp claims from injured employees; lawsuits; significant reputational damage; property damage and prolonged business interruption losses.

The physical damage, said Harper, might be something risk managers can gauge beforehand, but loss of life is immeasurable.

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The best practice then, said Chavious, is awareness and education.

“A lot of preparedness comes from education. [Stadiums] need a risk management plan.”

First and foremost, Chavious said, stadiums need to perform a security risk assessment. Find out where vulnerable spots are, decide where education can be improved upon and develop other safety measures over time.

Areas outside the stadium are soft targets, said Harper. The parking lot, the ticketing and access areas and even the metro transit areas where guests mingle before and after a game are targeted more often than inside.

Last year, for example, a stadium in Manchester was the target of a bomb, which detonated outside the venue as concert-goers left. In 2015, the Stade de France in Paris was the target of suicide bombers and active shooters, who struck the outside of the stadium while a soccer match was held inside.

Security, therefore, needs to be ready to react both inside and outside the vicinity. Reviewing past events and seeing what works has helped risk mangers improve safety strategies.

“A lot of places are getting into table-top exercises” to make sure their people are really trained, added Harper.

In these exercises, employees from various departments come together to brainstorm and work through a hypothetical terrorist situation.

A facilitator will propose the scenario — an active shooter has been spotted right before the game begins, someone has called in a bomb threat, a driver has fled on foot after driving into a crowd — and the stadium’s staff is asked how they should respond.

“People tend to act on assumptions, which may be wrong, but this is a great setting for them to brainstorm and learn,” said Harper.

Technology and Safety

In addition to education, stadiums are ahead of the game, implementing high-tech security cameras and closed-circuit TV monitoring, requiring game-day audiences to use clear/see-through bags when entering the arena, upping employee training on safety protocols and utilizing vapor wake dogs.

Drones are also adding a protective layer.

John Tomlinson, senior vice president, head of entertainment, Lockton

“Drones are helpful in surveying an area and can alert security to any potential threat,” said Chavious.

“Many stadiums have an area between a city’s metro and the stadium itself. If there’s a disturbance there, and you don’t have a camera in that area, you could use the drone instead of moving physical assets.”

Chavious added that “the overhead view will pick up potential crowd concentration, see if there are too many people in one crowd, or drones can fly overhead and be used to assess situations like a vehicle that’s in a place it shouldn’t be.”

But like with all new technology, drones too have their downsides. There’s the expense of owning, maintaining and operating the drone. Weather conditions can affect how and when a drone is used, so it isn’t a reliable source. And what if that drone gets hacked?

“The evolution of venue security protocols most certainly includes the increased usage of unmanned aerial systems (UAS), including drones, as the scope and territorial vastness provided by UAS, from a monitoring perspective, is much more expansive than ground-based apparatus,” said Tomlinson.

“That said,” he continued, “there have been many documented instances in which the intrusion of unauthorized drones at live events have posed major security concerns and have actually heightened the risk of injury to participants and attendees.”

Still, many experts, including Tomlinson, see drones playing a significant role in safety at stadiums moving forward.

“I believe the utilization of drones will continue to be on the forefront of risk mitigation innovation in the live event space, albeit with some very tight operating controls,” he said.

The SAFETY Act

In response to the terrorist attacks on Sept. 11, 2001, U.S. Homeland Security enacted the Support Anti-Terrorism by Fostering Effective

Warren Harper, global sports & events practice leader, Marsh

Technologies Act (SAFETY Act).

The primary purpose of the SAFETY Act was to encourage potential manufacturers or sellers of anti-terrorism technologies to continue to develop and commercialize these technologies (like video monitoring or drones).

There was a worry that the threat of liability in such an event would deter and prevent sellers from pursing these technologies, which are aimed at saving lives. Instead, the SAFETY Act provides incentive by adding a system of risk and litigation management.

“[The SAFETY Act] is geared toward claims arising out of acts of terrorism,” said Harper.

Bottom line: It’s added financial protection. Businesses both large and small can apply for the SAFETY designation — in fact, many NFL teams push for the designation. So far, four have reached SAFETY certification: Lambeau Field, MetLife Stadium, University of Phoenix Stadium and Gillette Stadium.

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To become certified, reviewers with the SAFETY Act assess stadiums for their compliance with the most up-to-date terrorism products. They look at their built-in emergency response plans, cyber security measures, hiring and training of employees, among other criteria.

The process can take over a year, but once certified, stadiums benefit because liability for an event is lessened. One thing to remember, however, is that the added SAFETY Act protection only holds weight when a catastrophic event is classified as an act of terrorism.

“Generally speaking, I think the SAFETY Act has been instrumental in paving the way for an accelerated development of anti-terrorism products and services,” said Tomlinson.

“The benefit of gaining elements of impunity from third-party liability related matters has served as a catalyst for developers to continue to push the envelope, so to speak, in terms of ideas and innovation.”

So while attackers are changing their methods and trying to stay ahead of safety protocols at stadiums, the SAFETY Act, as well as risk managers and stadium owners, keep stadiums investing in newer, more secure safety measures. &

Autumn Heisler is a staff writer at Risk & Insurance. She can be reached at [email protected]