2018 Most Dangerous Emerging Risks

Climate Change as a Business Interruption Multiplier

Crumbling roads and bridges isolate companies and trigger business interruption losses.
By: | April 9, 2018 • 9 min read

A string of winter storms dropped more than 60 inches of rain on California’s Central Coast this year, washing out roads, triggering massive mudslides and threatening the integrity of already-fragile bridges. The Pfeiffer Canyon Bridge is one such structure. As the ground beneath gave way, the bridge slid downhill several feet and developed a sizable crack, making it too unsafe for travel.


The Pfeiffer Canyon Bridge is also the only link between popular vacation destination Big Sur and the rest of the world to its north. To its south, a landslide left Highway 1 — the only road in from that direction — covered with boulders and hills of dirt. Four hundred and thirty-five people were left trapped in between.

Businesses scurried to arrange other ways to bring in needed supplies while dealing with a shortage of workers who were blocked out by the rubble. Hotels would obviously not be greeting any new guests for some time — that stretch of Highway 1 is set to be closed for 18 months.

Failing infrastructure increasingly poses business interruption risk. Collapsed bridges and mudslide-barred highways may be extreme examples, but more commonplace events like burst pipes and sinkholes can shut down streets and leave the businesses populating them stranded, disconnected from suppliers, distributors, employees and customers.

The American Society of Civil Engineers (ASCE) has evaluated the state of the nation’s infrastructure since 1988, when the congressionally-commissioned National Council on Public Works Improvement put out its first “report card.”

Even then, the marks weren’t good.

“After two years of study, the National Council on Public Works Improvement has found convincing evidence that the quality of America’s infrastructure is barely adequate to fulfill current requirements, and insufficient to meet the demands of future economic growth and development,” the 1988 report said.

Since then, the ASCE has given U.S. infrastructure a “D” grade in every subsequent report card.

Adrian Pellen, North American infrastructure leader, Marsh

In 2016, “9.1 percent of the nation’s bridges were structurally deficient,” according to the latest report card. The ASCE estimates that rehabilitation and improvements to highways and bridges alone will require $836 billion — a number that doesn’t include repairs to railways, airports, dams, levees, ports, or energy, water or waste systems.

“The elephant in the room is the funding,” said Adrian Pellen, North American infrastructure leader, Marsh’s construction practice. “Governments have deferred maintenance on infrastructure forever, and we’re at this critical juncture where we need the investment, and the funding mechanisms just aren’t there.”

The gas tax — the primary revenue source for government-sponsored infrastructure projects — is not adjusted for inflation and has not risen in more than 25 years. And with more electric and fuel-efficient vehicles replacing gas-guzzlers, the tax is yielding less than ever.

“Getting a gas tax increase right now would be very difficult. And there is a political divide over how to fund large projects that is causing further delay,” Pellen said.

Democrats call for more federal investment, while Republicans want to pass the bulk of responsibility to the private sector. Public-private partnerships (P3) have been successful on some large projects.

“P3s push design, construction, financing and the operation and maintenance of infrastructure down to the private sector,” Pellen said. “These can be a very efficient way to deliver infrastructure on time and on budget, but they aren’t the magic bullet for all of our infrastructure needs. There are still politicians on both sides of the aisle who aren’t fond of them.”

Amid the political and financial delays, climate change and increasingly severe weather patterns are adding more and more pressure to aging structures not equipped to handle it. This exposure will get worse before it gets better and is going to create business interruption losses in the millions for some, knocking other businesses out altogether.

Insurance Options

Businesses like those in Big Sur, cut off by failures of critical infrastructure, have few insurance options to help them recover their losses. Traditional business interruption (BI) coverages stipulate the covered property must incur some physical loss or damage. Contingent BI policies are only triggered if the insured’s suppliers incur such damage.


So what happens when there’s no physical loss to a property or any of its supply partners?

“The market struggles with non-damage business interruption,” said Rich Clark, managing director, Gallagher’s hospitality practice.

“Standard ISO-based policy wording would not provide coverage for this type of scenario regardless of the cause of the loss to critical infrastructure,” said Brendan Osean, principal, EPIC Insurance Brokers & Consultants. “But if they have broader manuscript policy wording, there may be some coverage.”

Ultimately there are three potential solutions — ingress/egress, civil authority and parametric policies — but each comes with its own limitations.

Ingress/egress and civil authority coverages may offer indemnity for non-damage business interruption losses, but only if the cause of the loss is specifically covered.

For example, a hotel may experience a loss of business if a flood washes out the road to their property. But if they aren’t located in a flood zone, and flood is not a named peril under their ingress/egress policy, then there would be no coverage.

“Governments have deferred maintenance on infrastructure forever, and we’re at this critical juncture where we need the investment, and the funding mechanisms just aren’t there.” — Adrian Pellen, North American infrastructure leader, construction, Marsh

Same goes if the cause of loss to a piece of critical infrastructure is simple deterioration. Gradual wear-and-tear is not considered a covered cause of loss, so if a bridge or tunnel collapses simply due to its age, any affected business could not recover from an ingress/egress policy.

Insured perils could include earthquake, windstorm, heavy snow, rainfall, hurricane or flood, depending on the location.

“Even if an ingress/egress policy is triggered by an insured peril, these policies typically only offer coverage for 30 to 90 days of interruption. If you’re dealing with a total bridge or tunnel collapse, it’s likely to be longer than that,” Clark said.

Similar exclusions apply to civil authority policies. These cover instances where a government authority shuts down a roadway or transportation system due to an imminent safety threat. Again, that safety threat must be an insured peril and must actually come to fruition in order for the coverage to respond.

Both types of coverage may also impose mileage limitations. The loss to infrastructure would have to occur within a designated radius from the insured location.

“We most commonly see 5- or 10-mile limits, sometimes up to 25 miles,” Clark said, “but there is no standard.”


Greg Schiffer, global head, engineering, Swiss Re, said neither ingress/egress nor civil authority coverages were designed to address exposure related to loss of critical infrastructure.

“These policies are usually sub-limited, and they have waiting periods and time limits. They were not designed for this type of loss, and any recovery from them would be indirect or unintended,” he said. “They might respond to a loss caused by a natural peril, but when it comes to infrastructure, lack of maintenance is a bigger issue, and lack of maintenance is not a covered cause of loss.”

Parametrics, a relative marketplace newcomer, offers a third option.

Parametric Possibilities

“Parametric coverage triggers are not indemnity-based, so they aren’t based on an individual client’s actual loss. If you hit the coverage triggers, you get the payout,” EPIC’s Osean said.

Jamie Crystal, EVP, Crystal & Company

Most parametric coverages are built around weather events. Typical triggers would include a certain wind speed sustained or inches of rainfall over a designated period of time, an earthquake of a certain magnitude, or extreme temperature changes.

“Depending on your risk tolerance, you could manuscript wording to apply these triggers to a radius around your property that includes a critical piece of infrastructure,” Pellen said.

If severe weather meeting the policy parameters causes a road or bridge to become impassable — as in the case of Big Sur — the insured property still receives the payout, even if it sustained no physical damage itself.

“You can define the payout in line with what your anticipated business interruption losses would be,” Pellen said.

Some airports, he said, are already using parametric solutions this way. With finite budgets for maintenance, snow removal and salting, airports have used payouts from parametric coverages to supplement those funds and help with cleanup after a storm — even if the airport sustained no significant physical damage.

As with ingress/egress and civil authority policies, however, gradual deterioration would not trigger any coverage. There’s also the possibility that a storm will cause damage to critical infrastructure — and a subsequent business interruption loss — without hitting the triggers set by the policy.

Parametric products may also be too pricey for some. Osean said they come with frictional expenses and “may not be economical for mid-size organizations.”  But Jamie Crystal, EVP, Crystal & Company, disagreed.

“As opposed to buying a year’s worth of BI insurance, you may only need this cover for a few weeks. If you’re buying a million dollars’ worth of insurance at a 4 percent rate, that’s still only $40,000. And you might not need more than $1 million,” he said. “To me, it’s a very viable and cost-effective way to protect a company from loss to critical infrastructure.”

Risk Mitigation Strategies

Plenty of examples from the CAT-heavy year of 2017 show this risk is real. One only has to look to California, the Florida Keys or any number of small coastal islands to see how infrastructure failure cuts off the livelihood of an entire town.

But these aren’t Black Swan events — it is possible to plan for them. And as increasingly unforgiving weather weakens already-vulnerable infrastructure, there’s no time like the present.

Risk managers should consider their dependency on critical infrastructure as part of a risk analysis. Having only one way in or out, for example, should spark some concern. How reliable or exposed is that route? A probable maximum loss study should consider all peril-related losses, including losses related to neighboring assets. Simulations can estimate the likelihood and extent of a loss.

“It requires the recognition on the part of the organization that this could happen, and putting thought into how it will respond if it does happen,” said Jill Dalton, managing director, Aon Global Risk Consulting. “Do tabletop exercises. Try to quantify the financial impact. Once you figure that out, you can prioritize how to respond.”

“If your business is dependent on a bridge or a major road, what are you going to do if that bridge goes down? Each organization has to figure that out on its own.” — Jill Dalton, managing director, Aon Global Risk Consulting

Though no organization can prevent a bridge collapse or mudslide, they can develop a plan of action to maintain operations as best as possible.

“Whether it’s your employees, or guests getting to a hotel, or goods getting to and from a manufacturer or distributor, it’s all about having a business continuity plan,” Dalton said.


“If your business is dependent on a bridge or a major road, what are you going to do if that bridge goes down? Can any other location pick up the extra work? Are there third parties you can rely on? Do you have other supply chain options? Each organization has to figure that out on its own.”

Beyond continuity plans, the best course of action is to obtain the broadest coverage available. According to Clark at Gallagher, coverage for an infrastructure-related business interruption loss will often come down to what you can negotiate out of your property policies.

“Analyze your coverages and see what’s excluded and how you might be able to get more of the exposure covered. Manuscript forms or endorsements can give you more options,” Osean said.

“You can determine your exposure and what your appetite for that is. There may not be off-the-shelf solutions, but brokers certainly are capable of bringing some solutions to the table if they have the foresight to ask the right questions,” Crystal said. &

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

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The Profession

For This Pharmaceutical Risk Director, Managing Risk Means Being Part of the Mission to Save Lives

Meet Eric Dobkin, director, insurance and risk management, for Merck & Co. Inc.
By: | September 28, 2018 • 5 min read

R&I: What was your first job?
My first job out of undergrad was as an actuarial trainee at Chubb.I was a math major in school, and I think the options for a math major coming out are either a teacher or an actuary, right? Anyway, I was really happy when the opportunity at Chubb presented itself. Fantastic company. I learned a lot there.

R&I: How did you come to work in risk management?
After I went back to get my MBA, I decided I wanted to work in corporate finance. When I was interviewing, one of the opportunities was with Merck. I really liked their mission, and things worked out. Given my background, they thought a good starting job would be in Merck’s risk management group. I started there, rotated through other areas within Merck finance but ultimately came back to the Insurance & Risk Management group. I guess I’m just one of those people who enjoy this type of work.


R&I: What is risk management doing right?
I think the community is doing a good job of promoting education, sharing ideas and advancing knowledge. Opportunities like this help make us all better business partners. We can take these ideas and translate them into actionable solutions to help our companies.

R&I: What could the risk management community be doing a better job of?
I think we have made good advancements in articulating the value proposition of investing in risk management, but much more can be done. Sometimes there is such a focus on delivering immediate value, such as cost savings, that risk management does not get appropriate attention (until something happens). We need to develop better tools that can reinforce that risk management is value-creating and good for operational efficiency, customers and shareholders.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?
I’d actually say there hasn’t been as much change as I would have hoped. I think the industry speaks about innovation more often than it does it. To be fair, at Merck we do have key partners that are innovators, but some in the industry are less enthusiastic to consider new approaches. I think there is a real need to find new and relevant solutions for large, complex risks.

R&I: What emerging commercial risk most concerns you?
Cyber risk. While it’s not emerging anymore, it’s evolving, dynamic and deserves the attention it gets. Merck was an early adopter of risk transfer solutions for cyber risk, and we continue to see insurance as an important component of the overall cyber risk management framework. From my perspective, this risk, more than any other, demands continuous forward-thinking to ensure we evolve solutions.

R&I: What’s the biggest challenge you’ve faced in your career?
Sticking with the cyber theme, I’d say navigating through a cyber incident is right up there. In June 2017, Merck experienced a network cyber attack that led to a disruption of its worldwide operations, including manufacturing, research and sales. It was a very challenging environment. And managing the insurance claim that resulted has been extremely complex. But at the same time, I have learned a tremendous amount in terms of how to think about the risk, enterprise resiliency and how to manage through a cyber incident.

R&I: What advice might you give to students or other aspiring risk managers?
Have strong intellectual curiosity. Always be willing to listen and learn. Ask “why?” We deal with a lot of ambiguity in our business, and the more you seek to understand, the better you will be able to apply those learnings toward developing solutions that meet the evolving risk landscape and needs of the business.


R&I: What role does technology play in your company’s approach to risk management?
We’re continuing to look for ways to apply technology. For example, being able to extract and leverage data that resides in our systems to evaluate risk, drive efficiencies and make things like property-value reporting easier. We’re also looking to utilize data visualization tools to help gain insights into our risks.

R&I: What are your goals for the next five to 10 years of your career?
I think, at this time, I would like to continue to learn and grow in the type of work I do and broaden my scope of responsibilities. There are many opportunities to deliver value. I want to continue to focus on becoming a stronger business partner and help enable growth.

R&I: What is your favorite book or movie?
I’d say right now Star Wars is top on my list. It has been magical re-watching and re-living the series I watched as a kid through the eyes of my children.

R&I: What is the riskiest activity you ever engaged in? When I was about 15, I went to a New York Rangers versus Philadelphia Flyers game at the Philadelphia Spectrum. I wore my Rangers jersey. I would not do that again.

Eric Dobkin, director, insurance & risk management, Merck & Co. Inc

R&I: What is it about this work you find most fulfilling or rewarding?
I am passionate about Merck’s mission of saving and improving lives. “Inventing for Life” is Merck’s tagline. It’s funny, but most people don’t associate “inventing” with medicine. But Merck has been inventing medicines and vaccines for many of the world’s most challenging diseases for a long time. It’s amazing to think the products we make can help people fight terrible diseases like cancer. Whatever little bit I can do to help advance that mission is very fulfilling and rewarding.

R&I: What do your friends and family think you do?
Ha! My kids think I make medicine. I guess they think that because I work for Merck. I suppose if even in a small way I can contribute to Merck’s mission of saving and improving lives, I am good with that. &

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]