2017 Most Dangerous Emerging Risks

Foreign Economic Nationalism

Economic nationalism is upsetting the risk management landscape by presenting challenges in once stable environments.
By: | April 7, 2017 • 8 min read

Economic nationalism not only has an impact domestically but presents significant risks for the global economy as well.

Political risk research firm The Eurasia Group cites “independent America” as a top risk for global stability and warns that 2017 will see a “geopolitical recession” that marks “the most volatile political environment in the postwar period, at least as important to global markets as the economic recession of 2008.”

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Add to that the way other nations are turning inward and sealing their own borders in response to stalled economies, a surge in refugees or a shift in the way terror attacks are carried out by individuals, often inspired by social media.

In Europe, Britain voted to withdraw from the European Union, a.k.a. “Brexit.” In South America, Venezuela closed its borders with Brazil and Colombia.

All of this inward focus has the potential to create what the Eurasia Group calls a “G-Zero world” — a world with no global leader.

With no clear political leader, there’s also no unifying voice on security, trade or social values. There’s no coordinated response on climate change, capital flows or the internet.

With no superpower setting the agenda and global uncertainty about rising economic nationalism, the world order could fall into disarray.

“The established norms of the past 50 years quickly eroded,” said Dan Riordan, president of political risk, credit and bond insurance at XL Catlin.

“It didn’t start last week. It started over a period of time but we’re definitely reaching a different dynamic and that’s creating a lot of uncertainty,” he said.

Governments adopting nationalistic economic policies may renege on foreigners’ contracts, leaving businesses to foot the bill or renegotiate deals.

Some countries, such as Venezuela, have already seized property from foreign-owned businesses, namely natural resources such as oil, in the name of “the people.”

Global institutions may lose clout or be victimized by political retaliation.

The ripples of economic nationalism are creating worldwide uncertainty. Along with that comes emerging economic and political risks that may defy traditional forecasts and that may happen at a rapid-fire pace never before faced by risk managers.

“So many of the tools the risk manager is using today are mostly useless because of the complexity we have right now,” said Dante A. Disparte, founder and CEO of Risk Cooperative.

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Disparte attributes the global rise in economic nationalism to several factors. There’s greater global income inequality; a growing dependency on individual commodities for government revenues; too many countries hitching their economic fortunes to China; and oil-producing countries that work outside proscribed multilateral agreements, he said.

“Broadly speaking, multinational corporations find it hard to cope with this kind of rise of economic nationalism,” Disparte said.

Multinational systems, such as the World Bank and World Trade Organization, have been sources of stability in the world. If individual nations shun these global systems to work directly with some countries while leaving others out, there may be a rise of tit-for-tat reprisals, Disparte said.

It could lead to increasing political incidents and international investors being harmed as a way of sending a signal to those policymakers, he said.

Dante A. Disparte, founder and CEO, Risk Cooperative

“Don’t be surprised if the consequences become much more severe,” he said.

Trade embargoes, the expropriation of assets, freezing accounts — these tools that the U.S. and Europe keep in their arsenals when trying to send a signal to another country — can be sent back in a return volley. Companies will be the ones that will pay the most direct price, as will consumers and society, Disparte said.

Political Violence

The paradigm shift from globalization to nationalism is creating a lot of uncertainty, as well as growing concern about currency risk and political violence that can lead to targeting assets in certain countries, Riordan said.

A country looking to send a message to the U.S. might be more likely to target an Exxon oil rig than disrupt sales of Proctor & Gamble shampoo products because of the impact it can have back in the home country.

“Companies trade with each other, countries do not.” Disparte said. “It’s McDonalds, BMW, Boeing; these are the companies that are trading with the world.”

The country is merely the platform where the trade is occurring. In an era of protectionism and trade barriers, and potential risk of expropriation and nationalization of assets, businesses face significant risk, Disparte said.

Those companies with an iconic brand attached to a certain country or nationality can be targeted for political reasons, Riordan said.

“I’m a firm believer myself that trade among countries usually leads to peace,” XL Catlin’s Riordan said.

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“Risk-prone industries really need to carefully weigh their posture and the posture of their home country. They become an extension of the United States or an extension of England, which under this new political era is going to effectively anger a lot more people on the planet.

“I recommend companies start thinking about the concept of corporate activism. Not all these risks can be insured or hedged through traditional means.

“They need to prove to the market and to their customers that they can be trustworthy counterparts. The market will be more lenient to these types of firms.”

One insurer, AIG, revised one of its products to address the growing potential global threats corporations face. Late last year, AIG raised its property terrorism insurance limits globally to $1 billion from $250 million in many larger cities, typically those classified as Tier 1 terrorism risks.

The larger capacity is available to clients on a stand-alone basis or as expanded limits within AIG’s large limits property insurance offering, which provides clients with all-risk coverage limits up to $2.5 billion per occurrence.

“Risk managers need to ask the question, ‘What are we going to do if this area that we are counting on is no longer politically stable for one reason or the other?’ ” said Louis Gritzo, vice president and manager of research at FM Global.

“The big thing is just uncertainty,” Gritzo said, “The level of uncertainty is higher than it’s ever been.”

Hypothesizing about what will happen or why will never get an exact answer. But be prepared, so if you have to pull operations out of one country or find an alternative supplier, you are not starting from ground zero, Gritzo said.

Risk managers may need to ask “what if” questions that probably a few years ago they were not asking, even about some developed countries that may not have been a risk in the recent past.

To begin with, companies need to take basic assessments of their international operations and partners, and political risk insurance products.

When Steven Minsky, CEO of LogicManager, was working on a risk assessment with a client operating in 15 different countries, he noticed the company focused mainly on the countries that contributed the most revenue.

Don’t focus on the risk facing any individual country, Minsky said. Instead, look at what the likely risks are across regions and then focus on how big an impact those aggregated risks can have on your business.

“Some small-dollar countries can cause huge scandals,” Minsky said.

Dan Riordan, president of political risk, credit and bond insurance, XL Catlin

“One giant mistake is to say, ‘I’ll write this country off because they aren’t main revenue drivers.’ That is going to bite the company big time because it’s an unmanaged risk.”

XL Catlin’s Riordan recommends clients assess their local partners overseas, whether it’s a supplier, exporter, importer, investor or joint venture partner.

Business must have a good local partner that is politically and commercially adept, he said.

Assess all joint venture arrangements, whether that’s trading, investing or supplier relationships and what laws protect those agreements. Know the provisions for dispute resolutions, such as arbitration in an international setting, rather than going to a local court where you may not be treated fairly.

Stay up to date on the changing political climate. There’s a lot of information available and much of it is free, said Riordan.

For example, most U.S. embassies around the globe have a Foreign Commercial Service and those tend to be good sources of information on local partners and local business practices.

The Commercial Service mission is to promote the export of goods and services of American companies and develop and protect U.S. business interests abroad.

Also connect with international bankers, accounting firms and insurers to obtain in-depth analysis and risk assessment on each country’s political and socioeconomic risks.

Creating Opportunity

Several risk experts agree that the emerging global uncertainty can also create a lot of opportunity for international corporations with a well-prepared risk management team.

During periods of intense uncertainty, when most of the market is paralyzed, it is an enormous once-in-a-lifetime opportunity to leap ahead, Disparte of Risk Cooperative said, “as counterintuitive as it might seem.”

“There’s an opportunity in this uncertainty,” he said. “I think there’s a big chance for organizations to spring forward.”

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Minsky of LogicManager sees a general overreaction to the political climate right now, and he cautions that emotion may blindside people to the real issues.

“You can look at this as a really hot issue right now, or take a step back and say that this is part of the landscape of the international arena,” he said. Enterprise risk management helps take that subjectivity and emotion out of the risk scenario.

“You can still be personally concerned about it, there’s nothing wrong with that. But when you are thinking about it from the company standpoint, there’s still positives in this,” he said.

“Risk management enables companies to react to change and uncertainty faster than competitors, which can push a business forward.

“This is an opportunity to gain new sales and market share,” Minsky said. “That is a massive competitive advantage.”

For risk managers, weathering the changes requires “going back to basics,” Riordan said.

“There will be challenges for companies that relied on international norms of trade and investment, and organizations built to protect them like the World Trade Organization and World Bank.”

He said companies should examine the changing environment from an ERM standpoint to examine how it changes their risk appetites.

Ultimately, he said, “if they regularly are assessing their risks, they can still be successful.”

“It’s a fascinating period,” Riordan said. “It’s not Armageddon, but it is changing.” &

________________________________________________________________

2017 Most Dangerous Emerging Risks

Artificial Intelligence Ties Liability in Knots

The same technologies that drive business forward are upending the nature of loss exposures and presenting new coverage challenges.

 

 

Cyber Business Interruption

Attacks on internet infrastructure begin, leaving unknown risks for insureds and insurers alike.

 

 

U.S. Economic Nationalism

Nationalistic policies aim to boost American wealth and prosperity, but they may do long-term economic damage.

 

 

Coastal Mortgage Value Collapse

As climate change drives rising seas, so arises the risk that buyers will become leery of taking on mortgages along our coasts.  Trillions in mortgage values are at stake unless the public and the private sector move quickly.

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

More from Risk & Insurance

More from Risk & Insurance

Risk Manager Focus

Better Together

Risk managers reveal what they value in their brokers.
By: | June 1, 2017 • 11 min read

Michael K. Sheehan, (left) Managing Director, Marsh and Grant Barkey, Director of Risk Management, Motivate International Inc.

Ask a broker what they can do for you and they will tell you. But let’s ask the risk manager.

What do risk managers really need in a broker? And what do the best brokers do to help risk managers succeed in their jobs?

Chet Porembski, system vice president and deputy general counsel, OhioHealth Corp.

Risk managers say it’s a broker who helps them look knowledgeable and prepared to their bosses. It’s someone who sweeps in like a superhero with an ingenious solution to a difficult problem.

Risk managers want to see brokers bring forth better products year after year. They want a broker who shows up at renewal time with new ideas, not just a rubber stamp.

Great brokers embed with the risk management team and learn everything they can about the company and its leaders. They help risk managers prepare and keep tabs throughout the year on changes at the organization with an eye towards planning the future.

“There’s the broker that sees themselves as just a hired ‘vendor,’ or I should say, somebody that basically just does the job at hand,” said Chet Porembski, system vice president and deputy general counsel at OhioHealth Corp.

“And then there’s the broker that views themselves very much as a business partner.  They truly bring added value to the relationship.”

These brokers look at the tough issues the risk manager is facing and bring in the resources to try to help their client in ways even the client might not have thought about yet. They also do advanced planning that makes the risk manager’s job easier when a problem arises.

“That’s the kind of broker I want.” Porembski said.

And that’s the kind of broker many risk managers need more than ever.

“The only way that the relationship is going to be successful is if you build a tremendous amount of trust.” — Frances Clark, director of risk management and insurance, Sentara Healthcare

That’s because risk managers are under increasing pressure these days. They carry more weight as corporations shrink their departments to cut costs.

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Climate change, cyber threats and geopolitical shifts are turning what were once unthinkable losses into risks that are almost commonplace. And this is all happening in an under-insured risk environment, according a study by PwC entitled Broking 2020: Leading from the Front in a New Era of Risk.

Thankfully there are good brokers out there, risk managers say, who can bring more value to a client today than ever before and help ease that fear.

Brokers — the traditional intermediary in the risk transfer chain — do in fact have a tangible and growing role in developing viable and innovative solutions for the risk manager, according to PwC’s study.

They are the “global risk facilitation leaders.”

“[Whatever] organizations are doing in the short term — be this dealing with market instability or just going about day to-day business — they need to be looking at how to keep pace with the sweeping social, technological, economic, environmental and political (STEEP) developments that are transforming the world,” PwC said in the report.

Advisors That Are Getting It Done

Cyber risks are just one growing challenge that all organizations grapple with.

Frances Clark, director of risk management and insurance at Sentara Healthcare, remembers when her broker first suggested that she hold a leadership tabletop cyber drill.

Clark said her broker kept saying, “I know this is going to be a painful experience, but you are going to come out so much better in the long run.”

Frances Clark, director of risk management and insurance, Sentara Healthcare

Her broker was right, and went so far as to help arrange a system-wide drill that included representatives from the legal, finance, security, communications, marketing and medical teams.

They reviewed the many ways a cyber attack can happen and then practiced a response.

“We benefitted greatly from that exercise,” Clark said.

When Doctors on Demand developed a telemedicine app to offer mental health services through mobile devices, the company ran up against insurance limitations across state lines. All states require that the physician giving the advice be licensed in the same state where the patient is located.

The concern was for patient encounters where the patient actually crossed state boundaries during the encounter, due to the utilization of a mobile phone. The patient may have started with a properly licensed physician in the original state, but then crossed into a neighboring state where the physician was not licensed.

Larry Hansard, a regional managing director at Arthur J. Gallagher & Co., and a 2017 Power Broker®, worked to secure medical professional liability coverage without the traditional licensure exclusions placed on medical professionals by insurance carriers.

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The initiative he helped develop actually changes how health care can be delivered to patients. It allows the emerging telemedicine sector to now offer services around the world.

Two-thirds of the risk managers in the PwC Broker 2020 survey labeled their brokers as “trusted advisors.” But the same survey found that some participants see their broker as more of a straightforward service provider rather than as a source for solutions.

The survey results indicate there is plenty of room for brokers to bring more value to clients.

OhioHealth’s brokers meet each year with OhioHealth’s risk management team to review insurance coverages.  And when the health system holds quarterly risk management retreats, the brokers attend. They bring with them education and insights on a broad range of topics, from property insurance markets to cyber solutions.

Porembski’s brokers also collaborate with the risk managers when there’s an upcoming presentation on risk issues to senior management. Sometimes the brokers help prepare the presentation, he said.

“We end up looking exceptionally good to our senior leaders and our board,” he said.

Involving the broker in interactions with leaders outside the traditional risk management team has benefits beyond selling products, he said. It extends the relationship circle.

Clark tries not to think of her brokers as outside vendors just providing a service. She wants them to be as committed and knowledgeable about the organization as she is.

“The only way that the relationship is going to be successful is if you build a tremendous amount of trust,” Clark said.

“You have to be completely open and honest about everything, no matter how bad it is, or how bad it may look to the market or underwriters.”

“Once you establish that trusting relationship, I think everything else falls into place,” she adds.

Sentara underwent significant growth recently, acquiring five hospitals in about six years. The expansion required a vast amount of integration on insurance programs and a merger of risk management departments and claims.

Clark said her brokers rolled up their sleeves and expertly navigated her through the consolidation.

“I can’t reiterate enough how most risk managers don’t know how to deal with an M&A unless you’ve gone through it.”

She said she wouldn’t have been able to manage the risk of the mergers without her broker’s counsel.

Grading the Broker

Mike Lubben, director of global risk management at Henry Crown & Co. in Chicago, sets standard expectations of his insurance brokers: know the exposures, understand how a risk manager has to sell ideas internally and understand the urgency of requests.

He lets his brokers know his expectations with regular report cards, complete with letter grades. And he isn’t shy about giving out Fs.

  • How did the broker service the EPLI coverage?
  • Did the broker provide expertise and coverage analysis?
  • Was there anything creative?
  • Did the broker recommend new endorsements based on the previous exposure?
  • Did the broker recommend any risk mitigation programs?
  • How well did he communicate and help with presentations?

“A good broker will think this is fantastic,” Lubben said.

This method starts the conversation. It helps Lubben establish long relationships with some stellar brokers.  But if the broker misses the mark, Lubben can have a talk with them about ways to do better in the future. Some brokers he has sent away.

Recently a broker failed on what Lubben calls “blocking and tackling,” the basics like returning phone calls within one day and responding promptly to emails.

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Lubben gave him an “F” on those subjects and told him why. The broker still didn’t improve his game and was eventually replaced.

For many people, insurance can seem very routine from renewal to renewal. But a really good broker will break from routine and come back with some kind of enhancement or improvement.

If the renewal is flat with no change in premium, then Clark says she’ll ask, “What are you going to do for me this year?”

The best brokers are always striving for better, she said.

“Without the brokering community, you would be hard pressed to do your job. I really appreciate what the brokers do, they bring a level of expertise that we can’t possibly have on all lines of coverage.” — Mike Lubben, director of global risk management at Henry Crown & Co.

Motivate International Inc., which operates more than half of the bike share fleets in North America, went through a recent renewal.

Their broker, Marsh, explored more than 10 options with different strategies and programs. In the end, after all of that, they decided the expiring coverage was the best fit.

“Those exercises are very valuable for risk managers,” said Grant Barkey, Motivate’s director of risk management.

“As an innovative company committed to delivering best-in-class services, we believe thorough exploration leads to informed decision-making.”

A good broker understands that a company’s day-to-day operations and a highly effective risk management program have implications for what type of policy should be procured, he said.

Brokers need to partner with risk managers to figure out what those options are, and what the markets are saying and then succinctly relay the information to management.
They also need to have the tact and curiosity to inquire about future plans and figure out what resources might be needed to better serve their client.

When PwC surveyed risk managers, most put their insurance carriers and industry groups ahead of their brokers as the primary source of cyber and supply chain risk solutions; yet these areas are still cited as risk managers’ top concerns.

“Becoming the go-to partners for developing and coordinating innovative and effective solutions in these priority risk areas is at the heart of the commercial opportunity for brokers.” PwC said in its report.

“Yet, our survey suggests that these are important areas where brokers are falling short of the market’s demands and therefore need to adapt.

For example, less than a third of respondents are very satisfied with brokers’ analytical and modelling services across a range of areas.”

When participants were asked how their brokers could be more efficient, respondents put risk analysis at the top of PwC’s survey list. Significantly, more than a third also cited ‘big data’ analysis.

Finding the Right Fit

Paul Kim, Co-CBO of U.S. Retail at Aon Risk Solutions, helps match brokers to risk managers. He keeps in mind that insurance companies tend to sell product, while the clients are looking to manage risks. The right broker assists in mapping risks to existing products and also customizing broad solutions, he said.

“The risk manager’s job has become more complex in the current environment, but there are so many tools available for those individuals to make better informed decisions that truly help protect the overall risk profile of their companies,” Kim said.

Paul Kim, Co-CBO of U.S. Retail, Aon Risk Solutions

That’s why finding the right broker should be first and foremost, he said. Look for an individual with strong industry knowledge, product expertise and market relationships. A strong broker is able to effectively communicate what the risk manager’s goals are to the marketplace to be able to execute and achieve those goals.

“Not every broker can do that,” Kim said.

“Not every broker is the right broker.”

PwC said those brokers who quickly master the art and science of identifying ambiguous threats and then mobilize a broad private/public stakeholder pool to economically manage those risks over time will pull ahead of their competition.

“We’re really generalist,” Lubben said.

“Without the brokering community, you would be hard pressed to do your job. I really appreciate what the brokers do, they bring a level of expertise that we can’t possibly have on all lines of coverage.”

When selecting a broker, the risk manager should also take into account the entire organization behind the broker. Ask about the additional support systems that are available to the broker’s clients.

The company should have a deep bench so when the primary broker is out of the office there’s someone else to rely on who is almost as knowledgeable. The broker organization should also be able to assist you with your budgeting and forecasting from a financial risk perspective.

In PwC’s survey of risk managers, nearly three-quarters want analytics from their broker to help inform their decisionmaking, with concerns over new and emerging risks being a strong driver for this demand.

Clark also thinks it is vitally important for a broker to offer a claims advocate, somebody on the outside, when you are dealing with a carrier on a complicated claim.

“Otherwise you are vulnerable to what the carrier says,” Clark said.

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To lead in this new era of risk, it’s also important that brokers forge close relationships with a broader set of stakeholders that includes governments, academia, specialist risk consultancies and even their industry peers, PwC said in the report.

It’s also going to be important to develop shared databases and research capabilities.

In turn, brokers need to assure this diverse stakeholder group that they are the right party to lead.

Clark, at Sentara Healthcare, said she knows what her risk exposures are today, but she’d like her brokers to anticipate her needs before she does.

“It’s kind of crazy, but amazingly some of them do it,” Clark said.

The broker will also use past experience and industry knowledge to anticipate where policy terms and conditions can be tweaked and improved upon.

“They will, say, advise us that we need to change this policy language, and then a year later you have a claim on that and you thank your lucky stars that they changed it,” Clark said.

“It is amazing to me every time it happens.”  &

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