Risk Scenario

Blind Faith

An auto manufacturer thinks their tech supplier escaped typhoon damage. Closer inspection reveals quite the opposite.
By: | September 15, 2014 • 9 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

Part One: Cocky Sons of Guns

With a steady, fluid motion, Ray Fines stretched his six-foot-two-inch frame to its limit and smacked the tennis ball toward his opponent Robert Gailey on Gailey’s ad-court side.

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Fines served with a lot of top-spin, so the shorter Gailey had to hop a little on his return, but he reached out and backhanded the ball masterfully down Fine’s forehand side for a winner.

Someone whistled appreciatively from the grassy court-side banks of the hard-surface courts at San Diego’s Corona del Playa Country Club: Neither Fines nor Gailey looked over.

For one, they were both well-paid executives with the highly successful niche luxury automobile manufacturer Charing Motors, based in San Diego. The company’s 2014 revenue was $850 million.

It was fair to say success had gotten to their heads a little bit and they tended to be socially unapproachable.

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They were also two of the club’s top players and were used to people watching them play.

“Game and set,” Gailey said as Fines trotted over to pick up the ball.

“One more?” Fines asked, looking over to Gailey and hoping for a chance at revenge.

“Nah, we need to get set up for the barbeque tonight,” Gailey said. “I’d better get back to the house or I’m going to be the one getting grilled.”

After showering, Gailey and Fines stopped in the clubhouse for some sparkling water and freshly squeezed orange juice, fortified with raw vegan supplements. They were quietly hydrating when Gailey, flipping through the news feeds on his mobile phone, stopped.

“Hmmm,” he murmured.

“What?” said Fines, Charing Motors’ risk manager.

“Looks like there’s a sizable tropical storm heading for mainland China. Could turn into a typhoon,” said Gailey, the company’s procurement director.

“We don’t have any suppliers there,” Fines said.

“No, we don’t,” Gailey agreed.

“But some poor son of a gun does. Looks like it’s headed right at the Pearl River Delta. Lots and lots of tech suppliers there,” he said.

“First we miss Tohoku, now we luck out on this. We must be doing something right,” Fines said.

Charing Motors, back in its infancy, had escaped the supply chain damage that many auto manufacturers suffered when an earthquake and tsunami devastated Japan and its economy in 2011.

“Evidently so,” Gailey said, looking up from his mobile phone and flashing a suntanned, winning smile at Fines.

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Part Two: A Stunning Revelation

Three weeks later, Gailey and Fines were in a conference room, hunched over a speaker phone.

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“Good morning,” Gailey said as the other caller beeped on.

“Good afternoon,” said the caller in Taipei, acknowledging the 15-hour time difference between Taipei and San Diego.

After some brief and awkward preliminaries, Gailey got to the point.

“We’re concerned about these delivery delays we’re seeing, Dr. Wu,” Gailey said. “We’re looking at a three-week backlog as things stand, and I’m not confident the delays won’t get even longer,” Gailey said.


There is a long pause.

“Are you with me, Dr. Wu?” Gailey said.

“Yes. I’m with you,” said Dr. Wu.

Dr. Wu, who earned his Ph.D. at Carnegie Mellon University in Pittsburgh, is the chief executive officer of Paramount Technologies, which assembles the collision avoidance and cruise control components for Charing Motors.

“We … it’s hard to explain but we are conducting an investigation into our suppliers. We have some suppliers in the Pearl River Delta in China and we are uncertain as to their status,” Dr. Wu said.

Fines punched the mute button.

“Pearl River? I didn’t think we had any exposure there,” Fines said.

Gailey unmuted the phone.

“Pearl River, you say? That area was heavily damaged by Typhoon Lei, was it not?”

“Yes sir, substantial damage. We have multiple suppliers there we fear have been heavily damaged,” Dr. Wu said.

“Well how long until you? …” Fines began but was cut off by Dr. Wu’s response.

“We cannot offer a timeline on when our investigation will be finished,” Dr. Wu said.

Robert Gailey and Ray Fines just look at each other. In the space of one conversation, their confidence level in the short- to mid-term success of their company plummeted.

Part Three: The Flood in Bao ‘an

Wearing rubber boots, Vince Yee sloshed across his factory floor at the semi-conductor manufacturer Yee Industries in Bao ‘an, causing a pair of two-foot-long grass carp that typhoon flood waters stranded in his shop to swim for cover.

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Yee grimaced at the sight of the river fish in his once-pristine manufacturing facility. He climbed up on a flight of concrete steps. Gaining that perch gave him enough elevation to sit down and light a cigarette.

Yee exhaled cigarette smoke and looked out over the water-covered factory floor. Here and there, employees moved about in vain attempts to hoist expensive machinery up on blocks in an effort to lessen the water damage.

It’s Yee that supplies the semi-conductors to Dr. Wu’s Paramount Technologies, without which Wu will not be able to assemble the collision-avoidance technology for Charing Motors’ luxury sedans.

Yee takes another long drag on his cigarette and his cell phone vibrates as he sees a water snake working its way under a water-soaked piece of equipment that cost him $750,000.

“Hello?” Yee says in a dour tone of voice.

“Yes, this is Vince Yee. Yes, Dr. Wu.”

Yee looks out over the factory floor as Dr. Wu talks. From his expression, Yee would rather throw his phone in the flood water then listen to what Dr. Wu is asking him.

“No. No. I have no flood insurance,” Yee said.

“You can’t even get flood insurance down here. I’m 30 centimeters above sea level, Dr. Wu. You know that.”

Yee grimaces in frustration and anger as Dr. Wu asks him another question.

“Your guess is as good as mine, Dr. Wu. It will be a bloody miracle if I ever get back into business at this rate. But I’ll let you know. Good bye.”

Yee turns off the cell, runs his free hand over his face and hair in frustration and then flips his cigarette butt into the flood waters.

Part Four: Searching in Vain

Lee Ackles, Charing Motors CFO, leans back in his office chair and looks away from Robert Gailey and Ray Fines toward the San Diego Harbor.

“I’m just trying to get my head around this and I don’t think I can,” Ackles says to Gailey and Fines, when he brings his gaze back from the water.

“From what you’re telling me, our collision-avoidance system supplier really doesn’t know at this point where it can get the semi-conductors it needs to finish our product,” Ackles said.

“That’s correct,” Gailey said bravely.

“We’ve determined that a lot of their suppliers are single-source. Many of them were in the Pearl River Delta which was so heavily damaged by the typhoon in May.”

“Five months ago,” Ackles said, looking at Gailey and Fines like they had no brains.

“Correct.” It was Fines that managed to speak this time.

“And what have you found out in the past five months?” Ackles asked.

“There’s a lot of variation in product specs, even the names of the products in some of these Asian countries,” Gailey said.

“The semiconductors we’re looking for are really hard to find in Taiwan, Thailand or even mainland China right now,” Gailey said.

“We hope to have this thing nailed down in another month but as it stands, we can’t complete production on the CM-5 or the CM-7 until we do,” Gailey said.

“The CM-5 and the CM-7,” Ackles said. At this point he clicked his mouse and looked at some data on his screen.

“We’re looking at a real punch in the gut unless we can get it done much sooner guys,” Ackles said.

“Paramount Technologies, that’s the company in Taipei?” Ackles asked. He clicked and looked at his computer screen again.

“Wow, $4 million in billings to us last year. Get on a plane, go see Dr. Wu and company and get us a quicker answer. Both of you. Go tomorrow.”

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Part Five: A Visit to the Delta

Robert Gailey and Ray Fines are passengers in a 1969 Piper Cherokee 6/260 that is winging its way along the Pearl River toward the Bao ‘an location of Yee Industries. The Piper is equipped with twin pontoons and makes a perfect river landing.

Jackie Chen, the Piper Cherokee pilot, turns and smiles toothily at Gailey and Fines from behind yellow-tinted sunglasses after his plane drifts up to the dock outside of Yee Industries and is secured by a Yee Industries employee.

“Just like I said, gentleman, smooth as silk,” Chen said, mimicking the smooth descent and landing of the plane with his hand.

Gailey and Fines both try forced smiles but just clamber out instead.

Walking up the path to the Yee Industries factory, Fines scanned the property and saw little sign of activity.

“Doesn’t look like they are even close to operational,” Fines said.

“Who knows,” Gailey said as they reached the factory door.

Entering the factory through an open side door, Gailey and Fines encounter a factory floor that is now dry, but shows no indication of being able to achieve full production anytime soon.

In one corner, six employees are sitting around a table hand-fashioning some semiconductor parts.

“Can I help you gentlemen?” said Vince Yee, as he approached the Americans.

“We’re looking for Vince Yee,” Gailey said.

“I’m Vince Yee,” said the factory owner.

“I’m Robert Gailey and this is Ray Fines. We’re with Charing Motors out of San Diego in the U.S.”

Yee stared at Gailey and Fines blankly.

“You’ve heard of Charing Motors?” Fines said.

“No. Never heard of it,” Yee said.

Gailey and Fines pause as this latest piece of information resonates.

“We make cars,” Gailey said.

“You want to buy this factory? You could make cars here in China,” Yee said.

“That’s not what we had in mind,” Fines said.

The conversation with Yee yielded one piece of productive information. After looking at the specs of the semiconductors Charing Motors needs to assemble its collision-avoidance system, Yee gave Fines and Gailey the name of a Pearl River manufacturer still at full production.

This manufacturer, though, is upstream in Panyu.

“Can you take us to Panyu?’” Gailey asked Jackie Chen as he and Fines get back to the Piper Cherokee.

“Can I take you to Panyu? I was born in Panyu,” Jackie Chen said with a chuckle.

“Just get in and fasten your seatbelts.”

As the Piper Cherokee takes off, Ray Fines and Robert Gailey avoid eye contact, neither of them knowing how soon they’ll be able to get the part they need to keep crucial manufacturing processes going.

It will be a full year until Charing Motors can resume full production. The privately held company recorded a 40-percent revenue drop for fiscal year 2015.

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Risk & Insurance® partnered with FM Global to produce this scenario. Below are FM Global’s recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance®.

1. Demand more from first and second-tier suppliers: It’s not enough to trust that your first and second-tier suppliers have an adequate knowledge of their suppliers’ property-CAT exposures and resilience. Insureds, working through their brokers and carriers, should create contractual certainty with their suppliers that their supply chain will be resilient in the event of a natural catastrophe or some other supply chain interruption.

2. Identify at-risk locations: Locations such as the Pearl River Delta of China is a prime spot for property losses, business interruption and supply chain problems due to the extremely high concentration of technology, automotive and telecommunications parts suppliers in natural hazard-exposed locations. As vulnerable as it is, however, the Pearl River Delta is just one example of a super-exposed location that could result in substantial business interruption should a windstorm, earthquake, flood or some other event transpire.

3. Involve the claims executives: In mapping out business interruption, property and supply chain risk and risk transfer options, make sure to involve the claims executives from your carrier in the discussion. Involving only the broker and the carrier at renewal time could result in an incomplete understanding of your company’s claims recovery chances in the event there is a loss.

4. Pinpoint single-source suppliers: One of the most vulnerable parts of your supply chain is that occupied by single-source suppliers. The use of single-source suppliers in some cases might be unavoidable, but identifying those parts of your supply chain that are single source and addressing them with specific risk management strategies is a good idea.

5. Everyone gets hit: Never assume that just because you haven’t suffered a substantial property, business interruption or supply chain loss that you won’t. An increasing complexity of global supply chains and economic forces that dictate business establishment in natural hazard-exposed areas almost guarantees, that sooner or later, your company will face a peril of one kind or another.




Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Insurance Executive

A Leader for Turbulent Times

Lloyd’s CEO Inga Beale is tasked with guiding the venerable insurance market through Brexit and the demands of the fiercely competitive global specialty business.
By: | July 6, 2017 • 12 min read

Underwriters at Lloyd’s are accustomed to taking on complex, even daunting, risks. The company’s leader looks at the world today and sees plenty of opportunity, but also much to be concerned about.

“Political instability is something that troubles me more than anything else because I think there is now more uncertainty across the world than there has ever been,” said Inga Beale, CEO of Lloyd’s of London.

“It feels that all of the norms that I grew up with are being challenged — openness, globalization, acceptance, inclusion — on a global scale.”

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Appropriately, we’re sitting around a table in Beale’s modern glass-fronted office at the top of the Lloyd’s Building — itself a vision from the future — to talk about Brexit and Lloyd’s newly announced Brussels subsidiary.

Add to the mix Donald Trump and the threat of nuclear attack from North Korea, the bombing of Syria and a spate of terrorist attacks across Europe, and it’s clear we are living in the most dangerous period certainly since the Cold War, or possibly ever, believes Beale.

That belief received even more chilling reinforcement when terrorists detonated a bomb at an Ariana Grande performance in Manchester, England on May 22.  Twenty two people, some of them children, were killed and more than 50 wounded in that attack.

Three years ago, it was Beale herself making world headlines with her appointment as the first female CEO in Lloyd’s 329-year history. But now Brexit and other seismic disruptions to world order have taken center stage.

Lloyd’s announced at the end of March that it would establish a new European subsidiary in Brussels in time for January 1, 2019 renewals so it can continue writing risks for all 27 European Union (EU) and three European Economic Area states after the UK exits the EU.

Currently, it uses its passporting rights to serve EU customers from London, but the expected loss of those rights after Brexit necessitated the establishment of a new subsidiary.

For now though, it’s business as usual, said Beale, with the UK remaining a full EU member for at least two more years. She added, with a reassuring smile, that there will be no immediate impact on existing policies, renewals or new policies written during that time.

“We were campaigning very much to remain in the EU before the referendum because we knew what the likely impact [of leaving the EU] would be on Lloyd’s,” said Beale, whose impressive resume includes stints with GE Insurance Solutions, Zurich and Canopius.

“We rely very much on our licensing network, and being part of the EU means that from London we can write insurance and reinsurance for all of the EU countries with our passporting authority.

“But with the UK exiting the EU, it now means that we lose those licensing powers to offer insurance with immediate effect. To counteract this, we have determined to set up a subsidiary within the EU, meaning that about five percent of our global revenues will have to go through this subsidiary because it is insurance business offered to our EU-based clients.”

Beale and her team also negotiated that most of Lloyd’s underwriting business will remain in London, as will the majority of the transactions and decision-making powers. Meanwhile, the manpower needed to run the new Brussels operation will be in the “tens rather than hundreds,” she is quick to point out.

“It’s not a huge raft of people having to move over,” she said.

“Lloyd’s will continue to do 95 percent of its business as it has always done — it’s only the other five percent that will have to go through a separate legal entity, and we’re not anticipating any further changes to our business model as a result.”

Beale, whose dual role is both supervisor and advocate for the market’s 100-something member underwriting syndicates, says that the franchise board chose Brussels over other locations including Luxembourg, Dublin and Malta because of its “robust and quality” regulatory regime.

“At the time, I didn’t even know that reinsurance existed, but once I discovered it I absolutely loved it.” — Inga Beale, CEO, Lloyd’s of London

It also provides access to a multilingual talent pool, is near to London, and, most importantly she stresses, is located in a member state with a “very high certainty of staying in the EU.”

“We want people who reflect our customers,” she said.

“The London insurance market is littered with people from all over the world because London is such a global insurance hub, so we need experts here who speak the language and understand the different cultures.”

North American Footprint

Despite its large European market, it’s the other side of the pond where Lloyd’s really thrives. Approximately 46 percent of its business comes from the U.S., mainly California earthquake and East Coast hurricane risks, she said.

Lloyd’s also remains the No.1 excess and surplus lines insurer in the U.S. and the largest non-U.S. domiciled insurer, she added.

“We have done really well in terms of growing our E&S market share over there,” she said.

“That’s our sweet spot; those non-standard risks that are hard to place.”

By contrast, Beale said that reinsurance has become a much more competitive market with new entrants offering alternative types of reinsurance putting a squeeze on prices. As a consequence, Lloyd’s has focused more on insurance, she said.

“We have also done well in Canada and with our delegated authority through our Managing General Underwriters and Managing General Agents,” she said.

“It’s this very local and specialist distribution channel that has been our success story across North America.”

In January, Beale was made a Dame Commander of the Order of the British Empire — the female equivalent of being knighted — and is also the Association of Professional Insurance Women’s Insurance Woman of the Year for 2017.

“What concerns us most is not individual risks such as earthquakes and hurricanes, but rather assessing the aggregation of our exposures to financial and liability-type risks with no geographical boundaries.” — Inga Beale, CEO, Lloyd’s of London

As the person directing Lloyd’s, she is also acutely aware of the shift in power towards emerging economies, with McKinsey recently reporting that 67 percent of commercial insurance growth will come from those markets by 2020.

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In response, Lloyd’s has focused its efforts on Asia and Latin America, transferring more than half of its managing agents to its Shanghai and Beijing platforms; and it was recently granted final approval to open a reinsurance office in Mumbai, she said.

“That’s where the future’s going to be,” she said.

“We know that a lot of the business is no longer coming to London in the traditional way, hence we have set up a Singapore platform and platforms in China, and opened up an office in Dubai as well as in India to be closer to our clients and brokers there.”

Lloyd’s profits last year were flat at $2.7 billion, while GWP was up $3.9 billion.

The market made a profit despite taking a $2.7 billion hit for major claims — the fifth highest such total since the turn of the century — primarily due to Hurricane Matthew and the Fort McMurray Wildfire in Canada.

Although natural disasters are Lloyd’s bread and butter, its real strength is in insuring complex risks, from cargo ships and satellites to political and terrorism risks.

Lloyd’s Role in Cyber

It’s the aggregation of those harder-to-quantify risks such as cyber security that concerns Beale most. Expected to grow to $7.5 billion in global premiums business by 2020, cyber is a big focus for Lloyd’s. It has a 25 percent market share and aggregate limits of approximately $650 million per risk, she said.

“What concerns us most is not individual risks such as earthquakes and hurricanes, but rather assessing the aggregation of our exposures to financial and liability-type risks with no geographical boundaries,” she said.

“We saw that with the financial crisis and the collapse of Fanny and Freddie, and its impact on Greece, but now it’s cyber.

“We have interviewed numerous risk managers and they are telling us that they are only insured against less than 10 percent of the risks that their businesses face on a daily basis. Our challenge is to make sure that we are continuing to adapt as fast as their businesses do and that we are delivering the relevant products that they need.”

Another area where Lloyd’s has seen an uptick is political and terrorism risk, said Beale.

The U.S. standoff with North Korea, Brexit and a swath of ISIS terrorist attacks across Europe have only exacerbated the problem, heightening fears among those countries’ citizens and tearing whole communities apart.

“We would love to get to a stage where a client can track something being quoted or a claim being paid, just like you do with a package being delivered [to your home].” — Inga Beale, CEO, Lloyd’s of London

Just witness the anguish of the victims and families in the Manchester concert bombing.

“We have seen a dramatic increase in demand for these types of products because of the political instability everywhere at the moment, particularly for companies that are trading cross border with countries where governments can suddenly intervene at a moment’s notice,” she said.

“Similarly, businesses are looking to protect themselves against the ever-growing threat of terrorism, which is where Lloyd’s can step in to give them the confidence to keep on trading.”

Reforming Lloyd’s

Within Lloyd’s itself, Beale has been at the forefront of trying to modernize the aging institution. Despite its modern metallic and glass exterior, inside Lloyd’s there’s still very much what some might term a stuffy “old boys’ club” culture.

Men are required to wear a tie and women weren’t allowed into the underwriting room until 1972. Brokers still walk around with leather slipcases crammed full of paper.

The Lloyd’s headquarters on Lime Street.

Beale’s predecessor, Richard Ward, tried to modernize Lloyd’s but left plenty for Beale to address in that respect.

Beale committed $700 million over the next five years to upgrade Lloyd’s aging computer and IT systems, with the end goal of achieving one-touch data capture to speed up the premiums and claims process.

“It’s about following that data all the way through the process from the client to the intermediary and the underwriter, and the processing of the premiums and claims,” she said.

“We would love to get to a stage where a client can track something being quoted or a claim being paid, just like you do with a package being delivered [to your home].”

Another area Beale is keen to shake up is diversity within Lloyd’s itself. Currently the market is two-thirds male, while only 11 percent of the whole London insurance market are non-UK nationals — a damning statistic that Beale is all too aware of.

“The Lloyd’s market doesn’t reflect the demographics of the whole of London and we are very conscious that we’re not tapping into all of the available talent that’s out there,” she said.

“We need to cut out the old ideas, try to challenge the unconscious bias and create an environment that is welcoming for people who are a bit different.”

Beale has also been pushing the [email protected] initiative, currently in its third year, and in September Lloyd’s will host the third annual Dive In festival to promote diversity and inclusion in the insurance industry.

In addition, 95 percent of the Lloyd’s market has already signed up to its Diversity & Inclusion charter to improve diversity, she said.

“To attract the best talent we need to modernize and look at how we can change our working practices and hiring decisions for the better,” she said.

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“There’s a vast amount of work that we are actively doing to encourage people to be more open and seek more diverse talent.”

On a personal level, Beale readily admits that she was late to the leadership game, and it was only her mentor, Annette Sadolin at GE, who convinced her to take her first promotion.

That lack of confidence is something that, as a leader, Beale has witnessed in her own team and she is keen to help overcome.

“Annette became very much a mentor for me throughout my career, so whenever I have had to make key decisions I would always ask her view,” she said.

“The key lesson that I have learnt from her is that things move so quickly and you need to take opportunities when they come along that give you exposure to something new, even if they don’t seem like a natural career path at the time.

“For me, being a leader is all about inclusion and being passionate about the people you work with because you need to inspire and motivate them. But there is also nothing more rewarding than watching people progress their careers.”

A Truly Global Journey

Beale, who initially harbored ambitions of being an architect, admits that she “fell into reinsurance,” starting as a trainee international treaty reinsurance underwriter at Prudential Assurance Company in London in 1982. But once she had a taste there was no turning back.

“At the time, I didn’t even know that reinsurance existed, but once I discovered it I absolutely loved it,” she said.

“I fell in love with the global nature of the risks that came to London; one day you could be looking at a piece of business from Chile, the next from Australia.”

But, back then, working in a male-dominated industry where she was the only woman among 35 men, Beale struggled to fit in. So she quit and went travelling for 10 months.

It was during her time as a receptionist at the BBC in Sydney, Australia that Beale worked under her first female boss, a formidable woman, she said.

Inspired by her boss’s strong work ethic, Beale decided to return to the insurance business.

She soon landed a job with GE Insurance Solutions in Kansas City, where she held various underwriting management roles, before being appointed president of GE Frankona and head of continental Europe, Middle East and Africa for GE Insurance Solutions in Germany.

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After 14 years at GE, Beale moved to Switzerland with Converium as group CEO in 2006.

Two years later, she joined Zurich Insurance Group as a member of the group management board in Zurich before being appointed global chief underwriting officer, prior to her appointment as group CEO at Canopius in 2012.

The breadth and depth of her experience makes Beale a natural fit for the demands of the Lloyd’s top job.

There’s no doubt she’ll be drawing upon every ounce of that expertise and experience to keep Lloyd’s at the cutting edge of this harrowing new world we live in.

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]