Agribusiness Risk

Risk Rises in Wine Country as Weather Becomes Increasingly Volatile

Climate change is having a radical impact on grape growing and winemaking.
By: | November 1, 2017 • 9 min read

The wildfires that raged through premium wine-growing regions in California’s Napa and Sonoma counties proved a pressing point: Climate change is taking aim at vineyards.

The wine industry is taking a hit as global temperatures continue to rise, according to an Allianz study that says many prominent vineyards in California, France, Spain, Portugal, Australia and South Africa will experience heat too hot and dry to produce quality wines by 2050.

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“Climate has always had a hand in how wine is made,” said Brett McKenzie, Allianz’s agribusiness Midwest zone leader. “It would be unwise not to adapt to climate.

“However, winemakers hit by climate might not think about the types of insurance needed. They might not be educated in risk management and insurance,” she said.

“When you look at vineyards and wineries, you have farming risks, manufacturing risks, retail risks and hospitality,” said Larry Chasin, president, Winery PAK Insurance Programs.

“Weather is a risk we all seem to be facing these days.”

Weather and the Vine

Wine is one of the world’s long-lasting crops — the oldest recorded vineyard was found in an Armenian cave dated circa 4100 BC. Winemaking, then, has survived the tests of time. So if wine is such a survivor, what makes today any different than the past?

“Climate change has a greater impact on fruit development and vintage effect, variations on yield and quality,” said Chasin. “Heat has led to early harvests, which effects the ripening of the fruit.”

“Think of a raisin: It’s a grape exposed to too much sun. It shrivels up and gets sweet. A grape on the vine exposed to too much sun will go through the same process,” said McKenzie, which may not be what a vintner set out to grow in the first place, affecting crop, yield and quality.

Additionally, Jose Gutierrez, senior risk management consultant, ICW Group Insurance Companies, added, “Because of the heat, the increase of pests and fungus may also contribute to both evolving short- and long-term risks for the product.”

Brett McKenzie, Midwest zone leader, agribusiness, Allianz

Climate change has been tracked and monitored by scientists for decades with the majority of experts agreeing temperatures are on the rise. And from changes in temperature come natural disasters.

Water deficits and droughts, hail, flooding, the frequency of extreme weather events all influence the way a grape is grown. With increasing volume, natural disasters plague the wine industry. In the last year alone, vineyards in prime winemaking countries faced sudden frosts, high-magnitude earthquakes, extreme droughts and more.

“Pollution and wildfire are two big exposures,” said Chasin. He pointed to the recent wildfires that engulfed California and other mid-western states.

Look at the language, he said. Reports called the fires unprecedented in terms of behavior, speed and velocity.

The focus is on life safety — and rightfully so — but Chasin added that, much like tornadoes, these fires could hit one property and not the one next door. They’re unpredictable and could cost vineyards millions.

Chasin and his team visited the area in mid-October, assessing damages and helping where they could.

“The fear was real,” he said. “I don’t know if anyone’s ever seen something like this before.”

RMS reconnaissance experts were able to visit the area in late October as well, updating the total economic loss estimates between $6 billion and $8 billion. This estimate included loss due to property damage, contents and business interruption caused by the fires to residential, commercial and industrial lines of business.

As of October 20th, the fires burned more than 245,000 acres in the premier grape growing regions of Mendocino, Sonoma and Napa counties. Forty-two people were reported killed and hundreds more missing, and more than 5,700 structures — homes and businesses — were damaged or destroyed.

RMS noted that ember risk, driven by extreme Diablo winds, contributed to the overall damages done to the exposed area. Vineyards, according to Wine Spectator, acted as breaks for the raging wildfires, however, which kept the losses low in many cases.

“Weather is a risk we all seem to be facing these days.” — Larry Chasin, president, Winery PAK Insurance Programs

Still, some vineyards were destroyed while others had partial damage. In the short-term, said Chasin, wineries have lost business during the busiest time of the year — harvest season. In the long-term, these vineyards will feel the repercussions of the fires when it comes time to sell vintages from 2017.

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“In two to three years from now, some will have no wine to sell,” he said.

Vintners, however, are unlikely to move away from such at-risk locations. Where a grape is grown affects yield just as much as proper sunshine and water. When looking at where to plant their vines, vintners look at the soil quality and how it affects the taste of a grape — or, as winemakers call it, the terroir of the region.

“One grape growing in Canada versus the same grape in California will taste different,” said McKenzie.

She provided the example of a Sauvignon Blanc produced in Bordeaux versus a Sauvignon Blanc from New Zealand. The Bordeaux, she said, will have a grassier taste while the New Zealand yield will have a lemon zest/citrus quality.

“It’s the same exact grape but can taste very differently.”

This happens due to the minerals found in soil. That’s why volcanic regions, coastal regions and areas found on fault lines attract winemakers to take root, posing the question: If a breezy shoreline is good for the vine, how will the wine industry compete with beach homes and other citizens inhabiting the coast?

Fighting Climate’s Wrath

But winemakers are tackling one risk at a time. To combat the adverse effects of weather, McKenzie said organizations that promote winemaking in each region are talking to each other about processes to mitigate losses in their regions, whether those losses stem from pollution, climate, labor and so on.

Larry Chasin, president, Winery PAK Insurance Programs

“Wineries are thinking about their portfolio mix,” she said. If a grape isn’t growing well due to climate and weather factors, vintners should think of the long-term effect that might have on their product. “Get creative in your strategy. Ask yourself ‘are my grapes the right mix long term?’ ”

Some winemakers are already thinking outside the box. It’s not uncommon for a winery to receive grapes from various vineyards, committing their efforts to blended wines instead. This, in some cases, keeps vineyards thriving — in other places it’s creating animosity.

More vineyards are embracing technology as well.

“We’re seeing more weather-based technology monitoring moisture and heat. More sophisticated climate measuring technology,” is making its way onto vineyards, said Chasin.

This technology assists during harvest and fermentation.

Outside the actual growing and cultivating process, hotter weather, said Gutierrez, could lead to higher incidences of heat illness among the labor force, affecting workers’ compensation claims. To combat heat, “Wineries are requesting that the grapes be harvested in cooler weather. So, when average daytime temperatures in the area are 100+ degrees, some vineyards are beginning to harvest at night.

“In some instances, during the hotter periods of say August and September, there are vineyards that begin harvesting at 11 pm and go until 7 to 8 am,” he said.

Other Risks

While implementing new techniques to combat weather-related risks is a smart thing to do, the practice opens vintners to additional exposures.

For instance, vineyards harvesting at night “need to develop a night-harvesting program that includes high visibility vests, ambient field lighting and personal employee lighting, and communication procedures,” said Gutierrez.

Nighttime harvesting not only shields workers from the heat, but it also pits them against nocturnal safety hazards — lowered visibility, nocturnal animals — which could impact workers’ compensation claims.

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Likewise, as more growers turn to technology to combat rising temperatures, they leave themselves open to potential equipment breakdown.

“Thus the risks associated with machinery increase,” Gutierrez added.

In terms of weather, cyber can also pose risk. Climate measuring technologies connected to the internet are susceptible to hacking. Once inside the equipment, there’s no telling what a hacker will do.

“We’re starting to learn that hackers can get anywhere anytime they want,” Chasin said.

In general, “cyber is a big one affecting vineyards,” said Chasin. Many wineries, he said, have wine clubs where members of the community subscribe to have packages of wine sent to their homes throughout the year. Wineries take and keep credit card information on file, a risk affecting both winemakers and their customers. If a vendor is hacked, they are liable for their consumers’ information on top of regular business operations.

The risks don’t stop once the grapes are picked and packaged either.

Vineyards are hot-spots for weddings, tourism and other such events. Public exposures like walking paths and parking lots open a vineyard to liability for public injury. Wineries are also responsible for the safe transportation of their product, even when using a third-party vendor to transfer bottles to a warehouse.

“A winery needs to have coverage for wine in transit and while at the storage location,” Chasin said.

“When you’re in wine territory, there are service providers dedicated to transporting wine to dedicated warehouses. Wineries need a written agreement specifying liability” if there is a loss during transport and storage.

Building a Risk Management Plan

There exists a slew of potential liabilities a vintner needs to consider when creating a risk management program, from increasing temperatures and natural events to walking paths and thievery.

McKenzie suggests winemakers looking to build up their risk management team find an insurance broker or agent who specializes in wineries and vineyards. In other words, “Get someone who understands the coverage for anything ancillary to your operations,” she said.

Brokers, insurers and risk managers educated in the wine industry are key components to a successful team, Chasin said. “Stick with specialty insurers. [Vintners] need to communicate with their broker as their business changes; it’s not a set-it-and-forget-it practice. They have to keep brokers up-to-date with changes.”

“Purchase proper limits,” he added. “Undercutting your limits doesn’t make a lot of sense.”

“Think of everything,” said Gutierrez. “Hope for the best and prepare for the worst. Last month’s tragic fires in northern California point to the importance of having an emergency action plan in place.

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“While there are a lot of unknowns at this point, it’s worth mentioning that the rebuilding of these operations will pose new hazards and risks as businesses start to dismantle and rebuild their facilities as a result of the fires,” he said, stressing the importance of the risk management team in this time of rebuilding.

And the good news: The wine industry is unlikely to disappear anytime soon — wine consumption reached 24,707,701 liters worldwide in 2015, according to the Wine Institute. Insurers are prepared to protect wineries in a world of changing climate.

And although grapes and structures were lost in the October fires in California, many of the gnarly, tough-stemmed vines will survive, experts predict.

Even in a bad year, McKenzie said, it’s not as bad as it can get — experienced winemakers know how to work with changing temperatures and the disasters that stem from those changes. &

Autumn Heisler is the digital producer and a staff writer at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]