Environmental Risk

Severe Weather Imperils Fuel Pipelines

Severe weather incidents are increasing pipeline loss frequency, especially in places where environmental risk was not previously a problem.
By: | April 3, 2017 • 3 min read

April showers bring peril to pipelines.

The hurricane season does not start officially until June 1, but spring rains and snowmelt highlight the growing peril to the aging energy infrastructure in the U.S. from severe weather. In most cases the leaks are small and contained locally, but underwriters see the emerging risk as one of frequency as much as severity.

In late October, the Associated Press reported that a “freak storm” around Williamsport, Pa., “caused a Sunoco Logistics gasoline pipeline to rupture, spilling an estimated 54,600 gallons into a tributary of the Loyalsock Creek that flows into the Susquehanna River at Montoursville.

John O’Brien, energy practice leader, Ironshore

The storm dumped as much as seven inches of rain on Western and Central Pennsylvania, triggering mudslides, turning roads into rivers and sweeping away at least two homes.

“The energy industry has environmental risks because their assets are set in places that have exposed named perils,” said John O’Brien, energy practice leader at underwriters Ironshore.

“These perils are not new. What is new is the greater awareness of weather events. Pipeline losses in particular seem to have greater frequencies. At least they are being reported more frequently and the losses seem to be bigger.”


O’Brien noted that weather is not the only variable in the equation.

“Part of the perception is that there is more material in storage than ever. Both crude oil and refined products. The tanks and terminals are full. Storage capacity is at an all time high.” When weather comes in, it takes longer to drain tanks, and fewer options on where to put displaced material.

“Pipeline people understand the issues,” said O’Brien. “In the past they mostly focused on system integrity [from an operational and maintenance perspective]. Now issues like ground subsidence are being discussed more and more. There is definitely heightened awareness.”

Marcel Ricciardelli, senior vice president, environmental division, Allied World, corroborated that, “yes, the experts in weather tell us that, yes, we are in a cycle of more, and more severe weather incidents. And that has affected our industry and the industries we cover.”

“When much of the energy infrastructure now in place was installed, that was based on past weather incidents and experience to that time. As a result, today, we are not just seeing more and more severe incidents; we are seeing severity in new regions.”

Marcel Ricciardelli, Senior Vice President, Environmental Division, Allied World

That has led to some underwriters changing the way they run their business from underwriting to capacity deployment.

“The property and casualty guys can give you a thesis on this,” said Ricciardelli. “On the environmental side things are more nuanced. I can tell you some of the things we are starting to look more at are things like above-ground tanks that are below grade, such as in a parking structure.

“We are alert to concentrations of things like that in urban areas. That goes for smaller tanks to larger bulk storage. Overall there are clearly shifting considerations for our industry.”

“One of the best things about environmental coverage is that it includes recovery services.” — Marcel Ricciardelli, senior vice president, environmental division, Allied World

Traditionally property policies do not include much environmental coverage, Ricciardelli explained. “Environmental tends to come in at two spots: a time element within the casualty tower, and also within pollution. For those, the event is not really the issue. The trigger is simply a release.”

After a release from any cause, Ricciardelli added that “the most important thing is access for recovery. If the release was caused by a mudslide from heavy rains, is there flooding? Is the area stable enough to begin recovery? Or was the landslide from seismic activity?

“One of the best things about environmental coverage is that it includes recovery services. Most of the big pipelines have their own, but for smaller operators the access to equipment and expertise is important.”


Recovery assets and preparation brings Ricciardelli back to the challenge of worse weather in new places. “There are landfills that were sited in places that were considered safe and are now flood zones.”

There are also environmental hazards that are not weather-related. Earthquakes associated with underground injection of wastewater have been a serious concern.

“The attention has been on homes and buildings with cracks,” said Ricciardelli, “but this comes back on the energy industry. There are pipelines and storage terminals in places like Oklahoma that have documented increased seismicity, and those facilities are not built to withstand earthquakes.”

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

Risk Focus: Cyber

Expanding Cyber BI

Cyber business interruption insurance is a thriving market, but growth carries the threat of a mega-loss. 
By: | March 5, 2018 • 7 min read

Lingering hopes that large-scale cyber attack might be a once-in-a-lifetime event were dashed last year. The four-day WannaCry ransomware strike in May across 150 countries targeted more than 300,000 computers running Microsoft Windows. A month later, NotPetya hit multinationals ranging from Danish shipping firm Maersk to pharmaceutical giant Merck.


Maersk’s chairman, Jim Hagemann Snabe, revealed at this year’s Davos summit that NotPetya shut down most of the group’s network. While it was replacing 45,000 PCs and 4,000 servers, freight transactions had to be completed manually. The combined cost of business interruption and rebuilding the system was up to $300 million.

Merck’s CFO Robert Davis told investors that its NotPetya bill included $135 million in lost sales plus $175 million in additional costs. Fellow victims FedEx and French construction group Saint Gobain reported similar financial hits from lost business and clean-up costs.

The fast-expanding world of cryptocurrencies is also increasingly targeted. Echoes of the 2014 hack that triggered the collapse of Bitcoin exchange Mt. Gox emerged this January when Japanese cryptocurrency exchange Coincheck pledged to repay customers $500 million stolen by hackers in a cyber heist.

The size and scope of last summer’s attacks accelerated discussions on both sides of the Atlantic, between risk managers and brokers seeking more comprehensive cyber business interruption insurance products.

It also recently persuaded Pool Re, the UK’s terrorism reinsurance pool set up 25 years ago after bomb attacks in London’s financial quarter, to announce that from April its cover will extend to include material damage and direct BI resulting from acts of terrorism using a cyber trigger.

“The threat from a cyber attack is evident, and businesses have become increasingly concerned about the extensive repercussions these types of attacks could have on them,” said Pool Re’s chief, Julian Enoizi. “This was a clear gap in our coverage which left businesses potentially exposed.”

Shifting Focus

Development of cyber BI insurance to date reveals something of a transatlantic divide, said Hans Allnutt, head of cyber and data risk at international law firm DAC Beachcroft. The first U.S. mainstream cyber insurance products were a response to California’s data security and breach notification legislation in 2003.

Jimaan Sané, technology underwriter, Beazley

Of more recent vintage, Europe’s first cyber policies’ wordings initially reflected U.S. wordings, with the focus on data breaches. “So underwriters had to innovate and push hard on other areas of cyber cover, particularly BI and cyber crimes such as ransomware demands and distributed denial of service attacks,” said Allnut.

“Europe now has regulation coming up this May in the form of the General Data Protection Regulation across the EU, so the focus has essentially come full circle.”

Cyber insurance policies also provide a degree of cover for BI resulting from one of three main triggers, said Jimaan Sané, technology underwriter for specialist insurer Beazley. “First is the malicious-type trigger, where the system goes down or an outage results directly from a hack.

“Second is any incident involving negligence — the so-called ‘fat finger’ — where human or operational error causes a loss or there has been failure to upgrade or maintain the system. Third is any broader unplanned outage that hits either the company or anyone on which it relies, such as a service provider.”

The importance of cyber BI covering negligent acts in addition to phishing and social engineering attacks was underlined by last May’s IT meltdown suffered by airline BA.

This was triggered by a technician who switched off and then reconnected the power supply to BA’s data center, physically damaging servers and distribution panels.

Compensating delayed passengers cost the company around $80 million, although the bill fell short of the $461 million operational error loss suffered by Knight Capital in 2012, which pushed it close to bankruptcy and decimated its share price.

Mistaken Assumption

Awareness of potentially huge BI losses resulting from cyber attack was heightened by well-publicized hacks suffered by retailers such as Target and Home Depot in late 2013 and 2014, said Matt Kletzli, SVP and head of management liability at Victor O. Schinnerer & Company.


However, the incidents didn’t initially alarm smaller, less high-profile businesses, which assumed they wouldn’t be similarly targeted.

“But perpetrators employing bots and ransomware set out to expose any firms with weaknesses in their system,” he added.

“Suddenly, smaller firms found that even when they weren’t themselves targeted, many of those around them had fallen victim to attacks. Awareness started to lift, as the focus moved from large, headline-grabbing attacks to more everyday incidents.”

Publications such as the Director’s Handbook of Cyber-Risk Oversight, issued by the National Association of Corporate Directors and the Internet Security Alliance fixed the issue firmly on boardroom agendas.

“What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.” — Jimaan Sané, technology underwriter, Beazley

Reformed ex-hackers were recruited to offer board members their insights into the most vulnerable points across the company’s systems — in much the same way as forger-turned-security-expert Frank Abagnale Jr., subject of the Spielberg biopic “Catch Me If You Can.”

There also has been an increasing focus on systemic risk related to cyber attacks. Allnutt cites “Business Blackout,” a July 2015 study by Lloyd’s of London and the Cambridge University’s Centre for Risk Studies.

This detailed analysis of what could result from a major cyber attack on America’s power grid predicted a cost to the U.S. economy of hundreds of billions and claims to the insurance industry totalling upwards of $21.4 billion.

Lloyd’s described the scenario as both “technologically possible” and “improbable.” Three years on, however, it appears less fanciful.

In January, the head of the UK’s National Cyber Security Centre, Ciaran Martin, said the UK had been fortunate in so far averting a ‘category one’ attack. A C1 would shut down the financial services sector on which the country relies heavily and other vital infrastructure. It was a case of “when, not if” such an assault would be launched, he warned.

AI: Friend or Foe?

Despite daunting potential financial losses, pioneers of cyber BI insurance such as Beazley, Zurich, AIG and Chubb now see new competitors in the market. Capacity is growing steadily, said Allnutt.

“Not only is cyber insurance a new product, it also offers a new source of premium revenue so there is considerable appetite for taking it on,” he added. “However, whilst most insurers are comfortable with the liability aspects of cyber risk; not all insurers are covering loss of income.”

Matt Kletzli, SVP and head of management liability, Victor O. Schinnerer & Company

Kletzli added that available products include several well-written, broad cyber coverages that take into account all types of potential cyber attack and don’t attempt to limit cover by applying a narrow definition of BI loss.

“It’s a rapidly-evolving coverage — and needs to be — in order to keep up with changing circumstances,” he said.

The good news, according to a Fitch report, is that the cyber loss ratio has been reduced to 45 percent as more companies buy cover and the market continues to expand, bringing down the size of the average loss.

“The bad news is that at cyber events, talk is regularly turning to ‘what will be the Hurricane Katrina-type event’ for the cyber market?” said Kletzli.

“What’s worse is that with hurricane losses, underwriters know which regions are most at risk, whereas cyber is a global risk and insurers potentially face huge aggregation.”


Nor is the advent of robotics and artificial intelligence (AI) necessarily cause for optimism. As Allnutt noted, while AI can potentially be used to decode malware, by the same token sophisticated criminals can employ it to develop new malware and escalate the ‘computer versus computer’ battle.

“The trend towards greater automation of business means that we can expect more incidents involving loss of income,” said Sané. “What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.

“We’re likely to see a growing number of attacks where the aim is to cause disruption, rather than demand a ransom.

“The paradox of cyber BI is that the more sophisticated your organization and the more it embraces automation, the bigger the potential impact when an outage does occur. Those old-fashioned businesses still reliant on traditional processes generally aren’t affected as much and incur smaller losses.” &

Graham Buck is editor of gtnews.com. He can be reached at riskletters.com.