2222222222

Specialty Insurance

Rewarding Resilience

A new bond framework can provide dividends for completing infrastructure projects that boost resilience.
By: | May 2, 2017 • 5 min read

Healthy cities, like healthy people, are less risky to insure. So if insurers offer people tools and incentives to meet their health goals, why not do the same for cities and regions?

That’s a simple but clear way of explaining the purpose of resilience bonds, a unique variation of catastrophe bonds being developed through the Re:Bound initiative, the brainchild of Re:Focus Partners, a design and finance firm focused on developing and brokering public-private partnerships for sustainable infrastructure around the world.

Shalini Vajjhala, founder and CEO, Re:Focus Partners

Resilience advocacy is still a relatively nascent trend. In fact, the formal role of chief resilience officer didn’t even exist before 2014. But resilience projects like seawalls and other coastal protections are now finding their way onto the agendas of cities and regions with catastrophe exposures.

In the process of designing some of those projects, the team at Re:Focus Partners noticed a marked disconnect. Founder and CEO Shalini Vajjhala said: “We were creating insurance benefits that weren’t really capturable at the retail level. If you rebuild 63 miles of seawall along Miami Beach you should be reducing risk — that’s the point of the whole project. But it occurred to us that no one was really thinking about this problem this way.”

Vajjhala and her team launched Re:Bound to establish a direct method for tying infrastructure investment to risk transfer vehicles, using catastrophe bonds as a jump-off point.

“Our goal with the program was to test and validate whether we could rework a CAT bond into a new structure so that we could capture the benefits of resilient infrastructure projects in an insurance linked finance mechanism,” Vajjhala said.

Re:Focus teamed up with RMS, Swiss Re, The Rockefeller Foundation and Goldman Sachs to study, develop and validate the framework for the bonds.

Alex Kaplan, senior vice president at Swiss Re, took part in the initiative. “The challenges our cities and communities face globally are changing,” said Kaplan. “This means the solutions our industry can provide must also evolve.”

Advertisement




Resilience bonds, like CAT bonds, serve an insurance purpose, providing a payout if a catastrophic event occurs and meets the bond’s predetermined triggering criteria, whether that be a certain threshold of losses, a specific storm surge height or a certain wind speed, for example. That financial assurance enables entities or communities to reduce their dependence on federal relief and disaster aid.

But unlike CAT bonds, resilience bonds also benefit their holders when disaster doesn’t strike. Reduced premiums based on lowered risk are tied to the completion of the resilience project during the bond term, creating “resilience rebates” that can applied in a variety of ways depending upon the needs and goals of the entity.

“If you rebuild 63 miles of seawall along Miami Beach you should be reducing risk — that’s the point of the whole project. But it occurred to us that no one was really thinking about this problem this way.” —Shalini Vajjhala, founder and CEO, Re:Focus Partners

At the completion of a resilience project, the bond holder has achieved reduced physical disaster risk while maintaining the financial protection of the bond and earning a return on its premiums, which would continue through subsequent bond issuances — creating a long-term resource for funding continued resilience efforts.

“Resilience bonds could not only support a faster recovery,” said Kaplan, “but would also help to improve national and city preparedness in a very substantial way, and fast-track resilience from idea to reality.”

Modeling for Impact

The framework for resilience bonds, like CAT bonds, relies on sophisticated models, which are broadly understood and deliver a high level of confidence for investors. The difference for resilience bonds is the use of project-based measurements to frame the risk.

Alex Kaplan, senior vice president, Swiss Re

For a flood barrier project, for instance, the same CAT events are modeled both with and without the barrier in place, illustrating how the project will reduce the cost of the risk.

“The key to the resilience bond concept is the ability to … determine in a robust, probabilistic manner, the reduction in risk that results from actions taken to improve resilience,” said Ben Brookes, VP, capital markets, RMS.

Brookes noted that modeling for resilience brought a new dimension to exposure data.

Resilience, he said, “might mean reducing loss of life in the wake of disaster. It might mean protecting complex interconnected lifelines such as health care services, transportation, energy and water supplies. It might mean improving the ability to recover quickly. It might mean reducing the economic impact in terms of city revenues or private business.

“Or it might mean all of these things and more.

“The interplays between these elements can also be critical,” Brookes said.

Shared Exposures

The catastrophe exposures being addressed by any given public sector resilience project typically impact numerous public and private stakeholders in a region, such as utilities, hospitals, universities and mass transportation systems as well as private corporations.

Advertisement




As such, resilience bonds present partnership opportunities to share the cost of infrastructure improvements as well as the benefits of resilience rebates, while improving the risk profile for all.

Shared risk in the Embarcadero Historic District in San Francisco is a notable example.

“There is $75 billion in assets behind the seawall and all of the major utility lines actually run physically through the concrete wall,” said Vajjhala.

“The wall is not seismically sound anymore.”

A retrofit would generate insurance benefits for the Port, which is the seawall’s managing entity, as well as all of the private properties that could be impacted if that seawall fails, she said.

“Almost every major port city has some variation on that problem.”

The Re:Bound project is exploring infrastructure interventions that work across different perils, including wildfires.

“It’s all about what’s modellable, what creates a meaningful risk reduction, and then how do you translate those risk reductions into a resilience bond structure so that they can be redirected to support the project,” said Vajjhala.

Jamie Rhodes, program co-lead, Re:Bound

She and Re:Bound program co-lead Jamie Rhodes are working with potential sponsors and co-sponsors from around the country to explain the new bond framework and help them determine whether a resilience bond might be an effective complement to a resilience project under consideration.

Vajjhala and Rhodes expect that the first issuance of this type of resilience bond will happen within the next year and a half. They’re excited to be able to bring the concept to reality.

“A large part of what makes our little firm tick is solving problems that are at the intersection of public and private interest — those things that have a lot of people’s attention but there’s no single individual or organization that has the get-up-and-go to tackle on its own,” said Vajjhala.

“We take a great deal of satisfaction in being able to solve these kinds of problems and incubate lines of business that create public value.” &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

Advertisement




In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

Advertisement




Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

Advertisement




How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

Advertisement




One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]lrp.com.