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Multinational Risk

Stop Tariffs from Decimating Your Supply Chain with These 3 Insurance Products

Risk managers should assess how global protectionism will impact their supply chain.
By: | June 1, 2018 • 7 min read

Writer, historian and philosopher Voltaire once quipped, “Uncertainty is an uncomfortable position. But certainty is an absurd one.”

Though Voltaire lived and wrote during the Enlightenment period, he very well could have been reflecting on today’s international political risk climate. Uncertainty, it seems, can be added to the very small list of life’s “sure things” — right next to death and taxes.

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For multinational businesses, today’s uncertainty is, in part, a result of the growing trend toward trade protectionism both in the United States and abroad. Trade protection is the drive to limit imports or promote exports by creating barriers to trade (such as tariffs) with foreign nations. The Trump administration and nationalist government actors abroad have increased the focus on trade protection.

“We live in interesting times,” said Richard Abizaid, XL Catlin’s head of the Americas for political risk, credit and bond.

“Contrast this era to the post-World War II era where the liberal world order was the dominant political and economic system with the United States at its head. It created an atmosphere of predictability and allowed businesses to operate globally based on the assumption that the rules of the game were known to all,” he said.

Today, economic protectionism is creating a climate of increased instability, which is a shift from the years of predictability, said Abizaid.

The Trump administration’s unraveling of the Trans-Pacific Partnership, its efforts to renegotiate the North American Free Trade Agreement and the push to renegotiate the free trade agreement between the U.S. and South Korea are a few examples of how trade protectionism is playing out on the world stage.

Experts predict this is only the first act.

Richard Abizaid, head of the Americas for political risk, credit and bond, XL Catlin

President Donald Trump campaigned for the presidency on this issue, among other things, and appears to be committed to following through on this promise. But whether the current course is a long-term shift toward nationalism or simply a Trump strategy used to create a better negotiating climate for the U.S. remains to be seen.

Either way, with a president characterized as impulsive, sometimes hostile and often lacking prudence, even a well-planned strategy could go awry, thus adding to the uncertainty and risk.

“The President seems to be throwing some of this out there to get the attention of other nations, so he can start renegotiating some of the deals he sees as unfavorable to the U.S.,” said a brokerage executive who specializes in global political risk.

“He has made some exceptions, such as those for Canada and South Korea, so maybe he’ll make an exception for some of the other countries or industries as well. Trade wars are a concern on business leaders’ minds, and no one wants to see this escalate and get out of control,” he added.

At Risk & Insurance® print time, the Trump administration, on May 1, delayed for 30 days the imposition of tariffs on steel and aluminum for Mexico, Canada and the European Union. The move was met with both anger from allies who want more than a short-term fix and a collective sigh of relief from those who feared tariffs would spark retaliation.

But relief is temporary, because this issue is far from resolved. Financial and other business consequences could yet be costly to industry and consumers alike.

Supply Chain Tariff Risks

“There are different scenarios that could take place that would be detrimental to business,” said the executive. Among them are tariffs (paid on a class of imports or exports).

“Tariffs add cost to the supply chain. This could impact costs by raising the prices of goods associated with the supply chain,” he added.

Evan Freely, global practice leader credit specialties, Marsh

“Businesses would need to reassess their costs. If their margins are still good they probably won’t do anything. But if they have higher costs — so high that the project is no longer valuable, then they will need to act. This is a tough one to bring to the insurance market,” the executive said.

Evan Freely, global practice leader credit specialties, Marsh, noted when tariffs increase companies’ costs and subsequently affect market price for their products, consumers shoulder the burden.
“This is when the pain is passed on to the consumer,” Freely said.

“U.S. companies hit by retaliatory tariffs could see a loss of jobs and a loss of market share. Certain agricultural companies, for example, also are at risk.”

Trade Barrier Risk

In addition to tariffs, an escalation of other international trade barriers has multinational businesses concerned. For example, if the situation between the U.S. and China results in either government limiting or prohibiting selling to or importing from the other country, businesses could be without needed manufacturing materials thus negatively affecting the supply chain.

There is concern that China, in particular, could react to policies of the U.S. government by using “back-door methods” to make business more difficult for U.S. companies.

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“Companies with investments in China could be targeted for retaliation by the Chinese government,” said Abizaid.

“And for us, the potential credit degradation of companies impacted by potential and unknown retaliatory Chinese tariffs is a source of concern.”

Worldwide political and economic influence is also at stake.

“The plot thickens when you think of China’s growth,” said Abizaid.

“China’s exports to Asia have doubled, while U.S. exports have declined by half over the last 10 years. This gives China significant influence not only in the Asia region but worldwide. China has been very determined and active in increasing its international influence and trying to establish itself as a global leader. The Chinese government reach extends well beyond just Asia and trade.”

Risk Management Strategies

Despite this uncertainty, there are things risk managers can do to mitigate risk caused by protectionism.

Among these strategies is diversifying your supply chain. If a company’s supplier is located in a region that is vulnerable to unrest, tariffs, trade barriers or acts of war, it could result in the supplier being unable to deliver its product or make the product cost-prohibitive.

So instead of ordering all supplies from one factory, savvy risk managers are recommending a diversification of suppliers — simply put, ordering from several strategically located suppliers.

“It’s all about being agile,” Freely said. “The more progressive companies are agile and seek multiple suppliers in more regions or countries.”

Even with diversification of suppliers, risks still ensue. Companies, which have vetted suppliers, still can’t fully know the risks that exist to their suppliers’ suppliers.

Additionally, the political climate worldwide is such that a region stable today could very quickly become a region of unrest, thereby rendering suppliers unable to deliver.

Three Political Risk Insurance Products

“A big part of our job is educating risk managers on the potential impact on their business of an unpredictable geopolitical environment and how political risk insurance products can provide some balance sheet protection,” said Abizaid.

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“Risk managers know a lot; they have a great depth of knowledge. They will come to us having identified where their company is exposed to political risks and say here is the situation, and we work with them and their brokers to structure a political risk insurance program to help meet their needs.”

Those recommendations, among other things, include political risk insurance products. Some are standard, while others can be manuscripted to deal with very specific situations. They include:

  1. Trade disruption insurance: This product can help protect a company’s income in the event their supply chain is disrupted due to political risks such as war, embargos and government actions that restrict exports.
  2. Contract frustration insurance: If a multinational business has a contract with a government buyer and is concerned that it may not get paid due to credit concerns of the buyer or the political risks posed by doing business in an emerging market country, contract frustration can be used to protect a company’s account receivables.
  3. Expropriation: This product covers government interference with a company’s investment. Key here is its ability to cover more subtle actions such as political retaliation from a foreign government that denies the ability of the company to continue to operate.

For example, this could include the cancellation of licenses which are critical to continue running its business or the implementation of excessive taxes or tariffs that no longer make the business economically viable.

Geopolitical Results Of Protectionism

Even with strategic planning, diversification and insurance coverage, the consequences of trade protectionism for the U.S. and multinational U.S. business might not be worth any gains made.

“If the U.S. pulls out of some of our agreements, it will almost guarantee China’s growing influence at our expense,” said Abizaid.

“The U.S. used to consider trade as an extension of our geopolitical influence. The U.S. government was a guarantor of democracy around the world,” he added.

Given this, and the damage to relationships with our long-term allies, such as Britain, perhaps it is time for the U.S. government to consider less the “price” of things and focus more on their “value.” &

Mercedes Ott is managing 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.

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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.

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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.”

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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.

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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]