2016 Most Dangerous Emerging Risks

The Fractured Future

Is our world coming apart at the seams?
By: | April 4, 2016 • 5 min read

Clipped genetic codes and broken bridges; fragmented communication; electricity networks so vulnerable to interference it’s a wonder we still have the lights on.

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As we developed our list of Most Dangerous Emerging Risks for 2016, images of fissures and fractures surfaced again and again.

In this issue, we examine four emerging, dangerous risks. We define a Most Dangerous Emerging Risk as a risk with the potential to cause widespread losses, but for which insurance coverage may be in a nascent stage of development.

On one front, we look at our tendency to self-curate media sources to the degree that informed, official statements get overlooked. Look no further than the phenomenon of parents bypassing vaccinations for their children, fed by an erroneous correlation between inoculation and autism.

We all fear terror attacks. We all worry about cyber hacks. Combine the two and you get the possibility that a cyber attack on our grid could cascade into widespread business interruption and public
disarray for months on end.

On another front, we pronounce a day of reckoning due to a shortfall in both the political will and the resources to maintain our country’s infrastructure. The thousands of children exposed to lead in Flint’s drinking water and the 90,000 metric tons of methane released from a gas well in Porter Ranch, Calif., provide foreboding data points.

Another emerging concern is our new ability to cut and paste DNA strands, and the potential that gene-edited products could hit store shelves before the risk is adequately measured.

We all fear terror attacks. We all worry about cyber hacks.

Combine the two and you get a dangerous emerging risk, the possibility that a cyber attack on our grid could cascade into widespread business interruption and public disarray for months on end.

We spoke to a number of industry experts to create the 2016 Most Dangerous Emerging Risks list; carriers, brokers and vendors were consulted.

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The spirit of this exercise is to foster a dialogue in the risk management community about what insurance products might be useful and what risk mitigation strategies companies should be considering right now.

As the years unfold, we see companies and public entities reacting to emerging risks and taking steps to mitigate them. What follows is a list of some risks we’ve written about in the past and measures being taken to mitigate those risks. &

Mitigating Dangerous Emerging Risks

Since 2011, Risk & Insurance® identified and reported on the Most Dangerous Emerging Risks. Here is a look at how some of those risks are now being addressed.

2011: Social Media Threats

hackEmployee and customer posts to Facebook, Twitter and other social media harm corporate reputations. Companies invested in analytical and monitoring tools and created crisis management plans to respond to critical or brand-damaging posts. Some companies fought back using legal means. One car dealership in Massachusetts obtained a $700,000 attachment on the real estate holdings and bank accounts of individuals who posted defamatory statements about the company online.

2011: Rising Sea Levels

floodClimate change is resulting in rising sea levels and increased inland flood risk. Local governments are responding to climate change by analyzing specific threats and taking action. In Boston and New York, wastewater treatment plants will be constructed nearly two feet higher than the plants they are replacing. In the San Francisco Bay area, the region is considering a limit on development near the water and the construction of levees and sea walls to keep the sea from encroaching.

2012: Typhoons

typhoonThe semiconductor industry face supply chain risks because many of its crucial suppliers in the straits of Taiwan are vulnerable to Pacific storms. More companies established relationships with alternative suppliers not located in the same geographic areas or countries. Korea, China and Japan have all become manufacturing locations competing with Taiwan. In addition, some companies are considering reshoring operations to the United States.

2012: Agroterrorism

cowsWe wrote about the potential for terrorists to introduce disease into the U.S. cattle population, decimating ranchers and food suppliers. Food production plants have installed security padlocks and fencing, while milk producers and transporters have security on trucks that will let the company know if the product has been accessed. In 2013, the Food and Drug Administration upgraded its Food Defense Mitigation Strategies Database to provide food processors and distributors with a tool to protect food against intentional contamination. The tool provides a range of preventive measures companies can take to better protect their facilities, personnel and products.

2012: The Pharma-Water Syndrome

waterHormonal and developmental imbalances in juveniles are a sign that drinking water is adulterated with discarded medications. Some municipalities are testing fish and water samples to determine the amount of chemicals in the water. Many local governments created drug take-back programs that allow residents to drop off unused medications, and the Environmental Protection Agency issued guidelines to discourage hospitals and nursing homes from flushing unused drugs down drains or toilets.

2013/2015: Concussions

brainIn 2013, the potential liability resulting from concussions spread from the National Football League to all professional contact sports. In 2015, the exposure reaches athletes of all ages, from college down to community sports leagues. Ivy League coaches are eliminating tackling at practices to prevent concussions while some high school districts have eliminated football from their sports schedules.

Forty-nine states and the District of Columbia enacted strong youth sports concussion safety laws.

2014: Drone Hacking

dronesDevastation could occur if terrorists hacked drones and aimed them at airplanes or other targets. Police in the Netherlands joined forces with Guard From Above to use trained eagles to snatch rogue drones in mid-air. European aerospace conglomerate Airbus uses a combination of radars, infrared cameras and direction finders to identify possible rogue drones. A UK start-up called Open Works Engineering launched an anti-drone net bazooka that can capture a rogue drone in a net and deliver it intact via a combination of a compressed-gas-powered smart launcher and an intelligent programmable projectile.

BlackBar

2016’s Most Dangerous Emerging Risks

01b_cover_story_crackCrumbling Infrastructure: Day of Reckoning Our health and economy are increasingly exposed to a long-documented but ignored risk.

01c_cover_story_leadCyber Grid Attack: A Cascading Impact The aggregated impact of a cyber attack on the U.S. power grid causes huge economic losses and upheaval.

01d_cover_story_vaccineFragmented Voice of Authority: Experts Can Speak but Who’s Listening? Myopic decision-making fostered by self-selected information sources results in societal and economic harm.

01e_cover_story_dnaGene Editing: The Devil’s in the DNA Biotechnology breakthroughs can provide great benefits to society, but the risks can’t be ignored.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Liability

Fresh Worries for Boards of Directors

New cyber security regulations increase exposure for directors and officers at financial institutions.
By: | June 1, 2017 • 6 min read

Boards of directors could face a fresh wave of directors and officers (D&O) claims following the introduction of tough new cybersecurity rules for financial institutions by The New York State Department of Financial Services (DFS).

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Prompted by recent high profile cyber attacks on JPMorgan Chase, Sony, Target, and others, the state regulations are the first of their kind and went into effect on March 1.

The new rules require banks, insurers and other financial institutions to establish an enterprise-wide cybersecurity program and adopt a written policy that must be reviewed by the board and approved by a senior officer annually.

The regulation also requires the more than 3,000 financial services firms operating in the state to appoint a chief information security officer to oversee the program, to report possible breaches within 72 hours, and to ensure that third-party vendors meet the new standards.

Companies will have until September 1 to comply with most of the new requirements, and beginning February 15, 2018, they will have to submit an annual certification of compliance.

The responsibility for cybersecurity will now fall squarely on the board and senior management actively overseeing the entity’s overall program. Some experts fear that the D&O insurance market is far from prepared to absorb this risk.

“The new rules could raise compliance risks for financial institutions and, in turn, premiums and loss potential for D&O insurance underwriters,” warned Fitch Ratings in a statement. “If management and directors of financial institutions that experience future cyber incidents are subsequently found to be noncompliant with the New York regulations, then they will be more exposed to litigation that would be covered under professional liability policies.”

D&O Challenge

Judy Selby, managing director in BDO Consulting’s technology advisory services practice, said that while many directors and officers rely on a CISO to deal with cybersecurity, under the new rules the buck stops with the board.

“The common refrain I hear from directors and officers is ‘we have a great IT guy or CIO,’ and while it’s important to have them in place, as the board, they are ultimately responsible for cybersecurity oversight,” she said.

William Kelly, senior vice president, underwriting, Argo Pro

William Kelly, senior vice president, underwriting at Argo Pro, said that unknown cyber threats, untested policy language and developing case laws would all make it more difficult for the D&O market to respond accurately to any such new claims.

“Insurers will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure,” he said.

Going forward, said Larry Hamilton, partner at Mayer Brown, D&O underwriters also need to scrutinize a company’s compliance with the regulations.

“To the extent that this risk was not adequately taken into account in the first place in the underwriting of in-force D&O policies, there could be unanticipated additional exposure for the D&O insurers,” he said.

Michelle Lopilato, Hub International’s director of cyber and technology solutions, added that some carriers may offer more coverage, while others may pull back.

“How the markets react will evolve as we see how involved the department becomes in investigating and fining financial institutions for noncompliance and its result on the balance sheet and dividends,” she said.

Christopher Keegan, senior managing director at Beecher Carlson, said that by setting a benchmark, the new rules would make it easier for claimants to make a case that the company had been negligent.

“If stock prices drop, then this makes it easier for class action lawyers to make their cases in D&O situations,” he said. “As a result, D&O carriers may see an uptick in cases against their insureds and an easier path for plaintiffs to show that the company did not meet its duty of care.”

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One area that regulators and plaintiffs might seize upon is the certification compliance requirement, according to Rob Yellen, executive vice president, D&O and fiduciary liability product leader, FINEX at Willis Towers Watson.

“A mere inaccuracy in a certification could result in criminal enforcement, in which case it would then become a boardroom issue,” he said.

A big grey area, however, said Shiraz Saeed, national practice leader for cyber risk at Starr Companies, is determining if a violation is a cyber or management liability issue in the first place.

“The complication arises when a company only has D&O coverage, but it doesn’t have a cyber policy and then they have to try and push all the claims down the D&O route, irrespective of their nature,” he said.

“Insurers, on their part, will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure.” — William Kelly, senior vice president, underwriting, Argo Pro

Jim McCue, managing director at Aon’s financial services group, said many small and mid-size businesses may struggle to comply with the new rules in time.

“It’s going to be a steep learning curve and a lot of work in terms of preparedness and the implementation of a highly detailed cyber security program, risk assessment and response plan, all by September 2017,” he said.

The new regulation also has the potential to impact third parties including accounting, law, IT and even maintenance and repair firms who have access to a company’s information systems and personal data, said Keegan.

“That can include everyone from IT vendors to the people who maintain the building’s air conditioning,” he said.

New Models

Others have followed New York’s lead, with similar regulations being considered across federal, state and non-governmental regulators.

The National Association of Insurance Commissioners’ Cyber-security Taskforce has proposed an insurance data security model law that establishes exclusive standards for data security and investigation, and notification of a breach of data security for insurance providers.

Once enacted, each state would be free to adopt the new law, however, “our main concern is if regulators in different states start to adopt different standards from each other,” said Alex Hageli, director, personal lines policy at the Property Casualty Insurers Association of America.

“It would only serve to make compliance harder, increase the cost of burden on companies, and at the end of the day it doesn’t really help anybody.”

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Richard Morris, partner at law firm Herrick, Feinstein LLP, said companies need to review their current cybersecurity program with their chief technology officer or IT provider.

“Companies should assess whether their current technology budget is adequate and consider what investments will be required in 2017 to keep up with regulatory and market expectations,” he said. “They should also review and assess the adequacy of insurance policies with respect to coverages, deductibles and other limitations.”

Adam Hamm, former NAIC chair and MD of Protiviti’s risk and compliance practice, added: “With New York’s new cyber regulation, this is a sea change from where we were a couple of years ago and it’s soon going to become the new norm for regulating cyber security.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]