Risk Scenario

Washed Up

Climate change and rapid development create flood conditions that undo a semiconductor manufacturer.
By: | October 1, 2016 • 9 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

Bright Shiny Objects

As the plane touches down, Meredith Fiers feels the butterflies in her belly. The risk manager for semiconductor manufacturer Bluepoint is now on the ground for her first big overseas assignment.

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Her task? Visit the site of a proposed Bluepoint plant outside of Chandigarh, India, the provincial capital of Haryana. Officials in Haryana are offering generous tax breaks, a prime location and help accessing an educated, modestly compensated local workforce.

But there are still some issues to work out. Fiers needs to help determine how exposed the plant is to flood and other hazards.

Her first meeting with government engineers in Chandigarh leaves her feeling that she has her work cut out for her.

“These flood maps leave a lot to be desired,” she says to herself as she reviews a set of plans and elevations with local officials.

Something pings in her gut.

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“I need to get out in the country and meet with some locals,” she thinks.

The next morning Fiers and an interpreter hop into a taxi and headed to the local village that is closest to where the Bluepoint plant will be built.

Fiers keeps her eyes peeled as the taxi driver navigates a bumpy provincial town road into the village. Out of the corner of her eye, she notices a group of older men gathered under the canopy of a Jujube tree.

“Stop! Here!” she says and the interpreter, in rapidly delivered Hindi, delivers the message to the driver.

“Ask them! Ask them,” she says excitedly.

“Ask them what?” says the interpreter, beginning to show signs of trepidation in the face of the forward manner of his American client.

“Ask them about flood,” Fiers says. “What’s the worst flood they remember?”

At the center of the group of villagers is an old man. Part of his white beard is stained by nicotine to a goldfinch yellow.

He nurses a glass of tea and the smoldering hand-rolled cigarette in his fingers seems like a natural extension of his anatomy. His dark eyes sparkled brilliantly though and he smiles as the interpreter approaches him.

The interpreter pops the question.

“Old man,” he says with a bit of cheek. “What is the worst flood you remember?”

The old man strokes his white-yellow beard and his smile fades as the memory hits him. Suddenly excited, he turns, jumps up and points with a trembling hand at a nearby temple wall.

Fiers turns and looks with him. She sees it immediately, a faint division in the shading of the stones. The stones to a certain point darker from the ground up, then lighter above. A highwater mark.

The man speaks excitedly to the interpreter in Hindi. But once he begins speaking, other members of the group started to engage and argue with one another. One pointing further up the hill; another pointing downhill. The argument soon becomes quite heated.

The interpreter turns to Fiers, surprised at the detail he just picked up. He just ignores the growing chaos behind him.

“1945,” he says. “That was the high point right there. In 1945.”

The village elder argument dies down and the old man sits down and takers a sip of tea; subdued again.

***

That night Fiers leaves an excited voicemail with Bluepoint’s CFO.

“Our proposed site is 1.5 meters higher in elevation than the worst flooding Haryana has ever seen,” she says.

“Let’s do this.”

Monsoon Season in Haryana

By August of 2018, the Bluepoint semiconductor plant near Chandigarh is everything company executives thought it would be. The local workforce and management team are delivering like a dream.

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Part of Bluepoint’s confidence in the Chandigarh operation is that it is armed with a contract from Todah. Todah, one of the largest auto manufacturers in the world, is grabbing large chunks of market share with its hybrid vehicles.

This very month, Bluepoint wins yet another enormous contract, this time with a U.S.-based car maker.

Bluepoint’s leaders though, are keeping a close eye on a German competitor, Tek-Kraft. Tek-Kraft also used government incentives to build a semiconductor plant nearby. Bluepoint seems to be in a budding talent war with Tek-Kraft.

But as monsoon season builds to a peak, Bluepoint finds it has something else to worry about. The rain is coming down like no one in Haryana has ever seen.

“It’s Superstorm Sandy all over again,” says an engineering consultant that works with Bluepoint, on a call with Fiers and other executives as flood waters begin to overwhelm the lower elevations.

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“What do you mean?” says Fiers, with some irritation in her voice. She doesn’t initially get the connection.

“I mean that a couple of underlying factors are producing flooding like this area has never seen before,” he says patiently.

“One, climate change is increasing the intensity of storms and other climactic actors like monsoons. This area has probably never seen such moisture.”

“And the second?” Fiers says. Panic is causing her to lose her composure.

“The second is that there is no way local flood maps could take into account the rapid increase in development which has sealed off the soil with concrete, asphalt and business parks,” the consultant says.

“There’s nowhere for all this water to go.”

The image of the old man pointing to the temple wall flashes in front of Fiers’ eyes. How high up that wall will this flood go? The answer is … high enough.

Bluepoint’s Chandigarh location is devastated by three days of flooding. The old man Meredith Fiers interviewed never thought he’d see the day when that 1945 flood is eclipsed. Well that day is here.

Nothing to do for it but get on the phone with her broker and her carriers. Fiers takes a deep breath and starts dialing.

Goodbye Local Workforce

“You’re in good shape from a coverage standpoint,” her broker tells Fiers when they connect and go over the policies two days after the plant is so severely damaged.

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“You’ve got robust property coverage. You’ve got business interruption coverage as part of your property policy. No issues there given how long we think it will take the plant to get back up to speed, which I think is about nine months,” he says.

“True,” Fiers says.

“Of course we have some work to do to make sure we don’t get hurt at renewals,” he added. “But with your loss run, you should be okay,” he added.

But Fiers isn’t convinced that all is well. She’s right.

Six months later, with the re-opening of the Bluepoint Chandigarh plant a mere three months away, the company is buffeted by a different kind of flood; a wave of bad news.

The first blow is that Bluepoint loses Todah as a customer. The superstar hybrid maker picked up a new supplier while Bluepoint was down. Guess who? Yes, it’s Tek-Kraft.

Then Bluepoint loses the contract with the U.S. hybrid maker. Semiconductor makers with locations in China and Thailand were only too happy to pick up that business.

Still, Bluepoint executives push on to open the Chandigarh plant. Their sales people are begging other customers to stay with them until they can open again.

Their pleas may be in vain. Bluepoint puts out the word that it is hiring again at the Chandigarh plant. Unfortunately very few answer the call.

Local officials indicate that much of Bluepoint’s work force is now working for the Tek-Kraft plant.

“We’re none too happy with how your company has managed things here,” a Haryana economic development official tells a Bluepoint manager.

“So now it’s our fault?” the manager says.

Politics being politics, somebody’s got to take the blame for squandered tax breaks that in the end, failed to create long-lasting jobs. In these parts, Bluepoint is now the bad guy.

***

Bluepoint is rocked by the events in Haryana.

One day, just to escape the tension of what has become a daily work nightmare, Meredith Fiers takes a walk on the outskirts of the local village.

Coming up to the Jujube tree, she sees the village elder, the one that pointed to portentiously to the temple wall’s high water mark.

With his ever-present cigarette he looks sadly to the damaged temple, where there is a new high water mark. Fiers’ gaze follows his.

“If I only knew,” she says to herself.

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Risk & Insurance® partnered with FM Global to produce this scenario. Below are FM Global’s recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance®.

Do not underestimate the impact you can have on reducing the potential damage and disruption to your business if flooding occurs. It all starts with a clear understanding of the risk, flood maps, onsite engineering expertise, local knowledge and a flood emergency response plan.

At important facilities, an onsite engineer is crucial to evaluating factors such as changes in terrain and infrastructure, impediments to water flow and other factors. Ideally, the facility should lie outside of a flood zone. Flood maps and onsite engineers are your best defense to mitigating flood exposure.

Regional and global mapping capabilities represent a unique blend of scientific knowledge, local expertise and technology to ensure you have the most comprehensive, up-to-date information to help you make informed risk improvement decisions.

But, if your facility is flood exposed, an engineer can look at opportunities to provide fixed or temporary flood protection, such as flood barriers or elevating critical assets.

A flood emergency response plan (FERP) can help you:

  1. Gain a thorough understanding of how a potential flood event could affect your facility;
  2. Make your emergency response team aware of their roles during such an event; and
  3. Ensure you have adequate resources on hand.

Consider taking the following steps:

  • Make sure you understand the potential flood events to which your site is exposed. It is critical to know how much time you will have to put your plan in place. Important aspects include warning time, how fast the water will rise and how long it will last. This is where an onsite engineer can help you.
  • Ensure you have a reliable method of flood warning.
  • Establish the potential impact to your business (what operations will be affected, what level of damage will be involved – an engineer can provide assistance in assessing)

Taking action against flood can lead to disruption. After all, there always is the chance that predictions are wrong and the flood may not occur. By truly understanding the potential flood event, as well as the nature of the warning and timing, you will be able to determine a “point of no return,” after which your plan will not have time to work. This may be the most critical part of the plan, so it’s essential that your entire team is aware of the implications, supports the plan and agrees to who has the authority to put the plan into place—regardless of the immediate business implications.




Dan Reynolds is editor-in-chief of Risk & Insurance. He 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]