2016 Most Dangerous Emerging Risks

Crumbling Infrastructure: Day Of Reckoning

Our health and economy are increasingly exposed to a long-documented but ignored risk. 
By: | April 4, 2016 • 5 min read

For decades, government watchdog groups and engineering associations warned that the nation’s infrastructure was grossly underfunded and on the brink of collapse, but those warnings, for the most part, went unheeded by authorities.

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Now a day of reckoning is upon us. The dereliction of North American infrastructure is a catastrophe in slow motion.

For four months, natural gas spewed from a leaking well in southern California — the largest recorded natural gas leak in history. The amount of methane released was the equivalent of running half a million cars for a year. Residents of the area were sickened and more than 10,000 of them needed to be relocated.

For more than a year, the residents of Flint, Mich., suffered lead exposure when the city changed its water source. Water from the Flint River interacted with aging water pipes, resulting in thousands of children being exposed to heavy metals for extended periods. The city is in a federal state of emergency.

Michael Sillat, president and CEO, WKFC, managing general underwriter, Ryan Specialty group

Michael Sillat, president and CEO, WKFC, managing general underwriter, Ryan Specialty group

Dozens more health and environmental debacles are certain to take place.

“U.S. infrastructure is in a dire state of disrepair,” said Michael Sillat, president and CEO of WKFC, a managing general underwriter in the Ryan Specialty group handling excess and surplus lines.

“The roads, bridges, schools, airports and power grids of the U.S. will take something like $3.5 trillion to bring them up to an acceptable, safe and manageable standard.”

Despite events like the huge Northeast blackout in 2003 that affected seven states and the Province of Ontario, and the collapse of the Interstate 35 Bridge in Minneapolis, he noted that “funding for public infrastructure is deficient.”

Operational Risk Challenges

The continuing problem in Flint underscores the challenge of operational risk and risk management. Municipalities all over the country are facing water main ruptures and sewage overflows daily. The costs of repairs and cleanup have to be calculated against any perceived savings in operational or maintenance expenses.

“The onus is on the insureds, especially on government entities for shoring up the infrastructure in the country.” —Michael Sillat, president and CEO, WKFC, managing general underwriter in the Ryan Specialty group

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“We write governmental entities that are water and wastewater authorities and municipalities that treat and provide their own water and collect or treat their own sewage,” said Kathy Adamson, lead underwriter for government entities at CivicRisk, a division of WKFC.

“Prior loss history and infrastructure condition/maintenance is a major factor in determining our attachment and premium.”

Addressing infrastructure shortcomings lies at the feet of owners.

“The onus is on the insureds,” said Sillat, “especially on government entities for shoring up the infrastructure in the country.”

Grace Hartman, director at Aon Infrastructure Solutions, noted that the “contraction in [public] spending … does not mean that existing bridges don’t need maintenance and that new ones don’t need to be built.”

Grace Hartman, director, Aon Infrastructure Solutions

Grace Hartman, director, Aon Infrastructure Solutions

“The question is how to get that done if public entities are not going to pay up-front. There are alternative project delivery methods, notably public-private partnerships (P3s).”

Use of P3s in the U.S. varies with state law. “So called ‘mini-mega’ projects, in the $750 million to $1 billion range have been identified as the correct economy of scale and cost of capital for P3s so far,” Hartman added.

For all the signs of progress, it is unlikely that full infrastructure restoration can be accomplished before another major failure.

Risk professionals in the public and private sectors are asking about worst-case scenarios — bridge collapses that cut off major highway arteries; dam failures that flood vast areas and prevent manufacturing and trade. There are not yet a lot of answers to those big questions.

“We see some agencies in the U.S. that do not even know what their assets are,” said Terry Bills, global transportation industry manager for Environmental Systems Research Institute (Esri). “If I were an insurer, I would have concerns about asset management and would be very engaged in the process.”

In starting to assess the effects of a major infrastructure failure or natural disaster, Adrian Pellen, also a director at Aon Infrastructure Solutions, said the costs “have to look beyond frequency and severity of losses to include litigation costs and issues. Property insurance is not intended to pick up things that are already in disarray, but liability can still play a big role.”

The Insurance Response

Aging infrastructure puts a spectrum of industries and even the economy as a whole at risk, said Lou Gritzo, vice president and manager of research at FM Global.

Lou Gritzo, vice president of research, FM Global

Lou Gritzo, vice president of research, FM Global

“The key issue is protecting industry from water, a risk that continues to change with rising sea level. Now, there are exposures that were previously unrealized. That directly affects coastal development and urbanization.”

There have been efforts by the industry to adapt business-interruption policies to accommodate indirect disaster and infrastructure risks. Results have been mixed. Underwriting is complex, and uptake among owners has been spotty.

Where there are clear and present dangers, such as indicated on new flood maps, homes and businesses are being moved, but refineries and chemical plants can’t be.

“The most important protections in any case are those that are fit for purpose,” said Gritzo. “Anything that can be moved or elevated should be.”

Risk managers must make a plan based on current exposures, and then address the greatest vulnerabilities, he said.

Bills of Esri said that public agencies are focusing on traffic levels as they decide what to repair and what to abandon.

R4-16p30-32_1BInfrastruc.indd“What to keep and what to let go is a very different political issue now,” said Bills. “Infrastructure used to be nonpartisan. But the gridlock at the federal level has forced states to be creative in their own directions.

“One option is P3s, which are growing fast in some places,” he said.

According to the U.S. Army Corps of Engineers, there were about 3,000-plus P3 projects in the works as of September 2015, with a value of about $268 billion.

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Part of the problem, said George Spakouris, director of infrastructure advisory at KPMG,  is that “governments have not been building things in a long time. The booms were in the ’50s and ’60s. That expertise is not within cities and states anymore. Even utilities don’t seem to know how to plan and build anymore.”

That brings the problem full circle, Spakouris noted. “There are many old assets out there where failure could cause great damage,” well beyond the immediate loss of the structure. &

BlackBar

2016’s Most Dangerous Emerging Risks

brokenbridgeThe Fractured Future Infrastructure in disrepair, power grids at risk, rampant misinformation and genetic tinkering — is our world coming apart at the seams?

01c_cover_story_leadCyber Grid Attack: A Cascading Impact The aggregated impact of a cyber attack on the U.S. power grid causes huge economic losses and upheaval.

01d_cover_story_vaccineFragmented Voice of Authority: Experts Can Speak but Who’s Listening? Myopic decision-making fostered by self-selected information sources results in societal and economic harm.

01e_cover_story_dnaGene Editing: The Devil’s in the DNA Biotechnology breakthroughs can provide great benefits to society, but the risks can’t be ignored.

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Liability

Fresh Worries for Boards of Directors

New cyber security regulations increase exposure for directors and officers at financial institutions.
By: | June 1, 2017 • 6 min read

Boards of directors could face a fresh wave of directors and officers (D&O) claims following the introduction of tough new cybersecurity rules for financial institutions by The New York State Department of Financial Services (DFS).

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Prompted by recent high profile cyber attacks on JPMorgan Chase, Sony, Target, and others, the state regulations are the first of their kind and went into effect on March 1.

The new rules require banks, insurers and other financial institutions to establish an enterprise-wide cybersecurity program and adopt a written policy that must be reviewed by the board and approved by a senior officer annually.

The regulation also requires the more than 3,000 financial services firms operating in the state to appoint a chief information security officer to oversee the program, to report possible breaches within 72 hours, and to ensure that third-party vendors meet the new standards.

Companies will have until September 1 to comply with most of the new requirements, and beginning February 15, 2018, they will have to submit an annual certification of compliance.

The responsibility for cybersecurity will now fall squarely on the board and senior management actively overseeing the entity’s overall program. Some experts fear that the D&O insurance market is far from prepared to absorb this risk.

“The new rules could raise compliance risks for financial institutions and, in turn, premiums and loss potential for D&O insurance underwriters,” warned Fitch Ratings in a statement. “If management and directors of financial institutions that experience future cyber incidents are subsequently found to be noncompliant with the New York regulations, then they will be more exposed to litigation that would be covered under professional liability policies.”

D&O Challenge

Judy Selby, managing director in BDO Consulting’s technology advisory services practice, said that while many directors and officers rely on a CISO to deal with cybersecurity, under the new rules the buck stops with the board.

“The common refrain I hear from directors and officers is ‘we have a great IT guy or CIO,’ and while it’s important to have them in place, as the board, they are ultimately responsible for cybersecurity oversight,” she said.

William Kelly, senior vice president, underwriting, Argo Pro

William Kelly, senior vice president, underwriting at Argo Pro, said that unknown cyber threats, untested policy language and developing case laws would all make it more difficult for the D&O market to respond accurately to any such new claims.

“Insurers will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure,” he said.

Going forward, said Larry Hamilton, partner at Mayer Brown, D&O underwriters also need to scrutinize a company’s compliance with the regulations.

“To the extent that this risk was not adequately taken into account in the first place in the underwriting of in-force D&O policies, there could be unanticipated additional exposure for the D&O insurers,” he said.

Michelle Lopilato, Hub International’s director of cyber and technology solutions, added that some carriers may offer more coverage, while others may pull back.

“How the markets react will evolve as we see how involved the department becomes in investigating and fining financial institutions for noncompliance and its result on the balance sheet and dividends,” she said.

Christopher Keegan, senior managing director at Beecher Carlson, said that by setting a benchmark, the new rules would make it easier for claimants to make a case that the company had been negligent.

“If stock prices drop, then this makes it easier for class action lawyers to make their cases in D&O situations,” he said. “As a result, D&O carriers may see an uptick in cases against their insureds and an easier path for plaintiffs to show that the company did not meet its duty of care.”

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One area that regulators and plaintiffs might seize upon is the certification compliance requirement, according to Rob Yellen, executive vice president, D&O and fiduciary liability product leader, FINEX at Willis Towers Watson.

“A mere inaccuracy in a certification could result in criminal enforcement, in which case it would then become a boardroom issue,” he said.

A big grey area, however, said Shiraz Saeed, national practice leader for cyber risk at Starr Companies, is determining if a violation is a cyber or management liability issue in the first place.

“The complication arises when a company only has D&O coverage, but it doesn’t have a cyber policy and then they have to try and push all the claims down the D&O route, irrespective of their nature,” he said.

“Insurers, on their part, will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure.” — William Kelly, senior vice president, underwriting, Argo Pro

Jim McCue, managing director at Aon’s financial services group, said many small and mid-size businesses may struggle to comply with the new rules in time.

“It’s going to be a steep learning curve and a lot of work in terms of preparedness and the implementation of a highly detailed cyber security program, risk assessment and response plan, all by September 2017,” he said.

The new regulation also has the potential to impact third parties including accounting, law, IT and even maintenance and repair firms who have access to a company’s information systems and personal data, said Keegan.

“That can include everyone from IT vendors to the people who maintain the building’s air conditioning,” he said.

New Models

Others have followed New York’s lead, with similar regulations being considered across federal, state and non-governmental regulators.

The National Association of Insurance Commissioners’ Cyber-security Taskforce has proposed an insurance data security model law that establishes exclusive standards for data security and investigation, and notification of a breach of data security for insurance providers.

Once enacted, each state would be free to adopt the new law, however, “our main concern is if regulators in different states start to adopt different standards from each other,” said Alex Hageli, director, personal lines policy at the Property Casualty Insurers Association of America.

“It would only serve to make compliance harder, increase the cost of burden on companies, and at the end of the day it doesn’t really help anybody.”

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Richard Morris, partner at law firm Herrick, Feinstein LLP, said companies need to review their current cybersecurity program with their chief technology officer or IT provider.

“Companies should assess whether their current technology budget is adequate and consider what investments will be required in 2017 to keep up with regulatory and market expectations,” he said. “They should also review and assess the adequacy of insurance policies with respect to coverages, deductibles and other limitations.”

Adam Hamm, former NAIC chair and MD of Protiviti’s risk and compliance practice, added: “With New York’s new cyber regulation, this is a sea change from where we were a couple of years ago and it’s soon going to become the new norm for regulating cyber security.” &

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]