Transportation

6 Critical and Emerging Risks in Transportation

Some of the threats facing planes, trains and automobiles are ongoing, while others are just emerging.
By: | July 12, 2018 • 6 min read

Advancing technology, cyber exposures and market fluctuation created by international trade disputes are some of the newer risks facing transportation. The worsening driver shortage, regulatory compliance and the sad state of America’s infrastructure also present persistent challenges. Here are the six most pertinent transportation risks today:

1. Cyber Attacks on Physical Assets

“The biggest threat facing today’s transportation executives is cyber vulnerability,” according to a Willis Towers Watson report, “Transportation Risk Index 2016: Navigating risk in the transportation sector.”

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Increased use of fleet telematics systems that track the location, status and condition of physical assets creates more access points for hackers. While breaching a private network does expose private customer data, the greatest threat to transportation companies is the potential for cyber criminals to cause physical damage to the vehicle itself or its precious cargo.

Cyber attackers could, for example, take over the digital dashboard of a truck carrying fresh produce that displays the trailer’s temperature to show an appropriate reading, even while shutting down the cooling mechanisms. The result: Thousands of dollars’ worth of spoiled food, which the driver may not discover until stopping to make his delivery.

The biggest threat facing today’s transportation executives is cyber vulnerability. — “Transportation Risk Index 2016: Navigating risk in the transportation sector,” Willis Towers Watson

The rail industry also heavily utilizes electronic sensors, network technology and automation. Positive train control, track signals, communications systems and power delivery all rely on these technologies.

High-volume and commodities rail carriers may be particularly susceptible to cyber attacks by political actors because of the greater potential for supply chain disruption.

2. Advancing Technology

Cyber transportation risks are likely to be elevated by the emergence of new technology, like semi- and fully-automated vehicles and greater use of sensors connected to the Internet of Things. Aside from cyber exposure, these technologies do hold potential to ameliorate the driver shortage and enhance safety, but companies that disregard or fail to stay up to speed with these changes could fall behind competitors and lose out on critical opportunities.

According to a Marsh report on cyber risks in transportation: “As operational technology evolves, critical infrastructure operators will need to ensure that new architecture should not be deployed until it can be controlled and protected. As companies develop and modernize, they will be at risk of cyber attack. Exercises such as upgrading existing legacy systems may result in sacrificing security.”

3. Continuing Driver Shortage

According to the American Trucking Associations, the industry projects a shortage of more than 100,000 drivers by 2022. The persistent shortage is driven by the retirement of older workers, difficulty filing vacant positions with new recruits, and increased delivery demand created by the rise of e-commerce.

Source: USA Today

The average age of the American trucker is 56 years old. Despite rising wages and signing bonuses for new drivers, trucking owners and operators have struggled to sell the trucking lifestyle — long, lonely, sedentary hours on the road — to younger people. And an older workforce usually comes with higher prevalence of health issues and higher utilization of employee benefits, which drives up those costs for employers as well.

The driver shortage also means more pressure on veteran drivers to put in extra runs and more hours on the road per day in order to make deliveries on time, leading to fatigue and an increased likelihood of an accident.

4. Deteriorating Infrastructure

America’s outdated — and in some places, dilapidated — infrastructure will continue to pose problems for ground transportation and increase congestion on the roads and rails. Even small travel delays add up to big costs for trucking and rail owners and operators.

According to the American Society of Civil Engineers’ 2017 Infrastructure Report Card, “across 470 urban areas, there was a total of 6.9 billion vehicle-hours of delay on roads due to congestion in 2014.” These delays cost the nation 3.1 billion gallons of wasted fuel and a total cost of $160 billion. The ASCE also projects that these delays will rise 20 percent to 8.3 billion hours by 2020.

Source: ASCE 2017 Infrastructure Report Card

In addition to fuel costs and fewer deliveries being made on time, vehicles are also more likely to incur damage from poorly maintained roads, requiring more frequent maintenance or costly repairs.

The problem is also not likely to abate any time soon. The ASCE’s infrastructure report states “the total investment gap is now expected to be $1.1 trillion through 2025, and an additional $3.2 trillion from 2026 through 2040.”

5. Greater Regulatory Oversight

Driver fatigue is one factor behind more stringent federal regulations dictating how many hours drivers can sit behind the wheel in one day.

As of April 1, 2018, trucks must be equipped with electronic devices to track how many hours each vehicle spends on the road in a day. The new “hours of service” rule prohibits truckers from driving more than 11 hours in a 14-hour period of time. They must also take at least 10 hours of mandatory rest after an 11-hour drive.

While the regulation has been shown to combat driver fatigue and reduce crash rate, it also increases the cost of training and may further delay deliveries — further exacerbating issues created by driver shortage and adding to the list of transportation risks.

The Food Safety Modernization Act, which large trucking companies had to comply with by April of 2017, also increases the regulatory compliance burden for motor carriers and comes with the risk of significant fees.

The Food Safety Modernization Act, which large trucking companies had to comply with by April of 2017, also increases the regulatory compliance burden for motor carriers and comes with the risk of significant fees.

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According to Fleet Owner Magazine, “The FDA finalized its new food safety rule in April 2016 to prevent food contamination during transportation. The rule requires those involved in transporting human and animal food — shippers, loaders, carriers and receivers – to follow best practices for sanitary transportation, such as properly refrigerating food, adequately cleaning vehicles between loads and properly protecting food during transportation.” The rule includes requirements around proper documentation of every action taken.

6. Demand Volatility

Profit margins in the transportation sector rely heavily on the price of fuel. Lower oil prices equal lower prices at the pump and more money in operators’ pockets. Unfortunately, oil prices are far from stable, and the trucking, rail and aviation industries have to contend with unpredictable swings that affect each sector disproportionately.

When fuel is cheap, more shippers turn to trucking to transport goods as trucking is generally faster than rail. Railways conversely may get more business when oil prices are higher and freight trains provide better value over gas-guzzling tractor-trailers.

In addition to oil price fluctuation, international political tension and trade wars stand to change volume of goods being shipped and disrupt global supply chains. A Fitch Ratings report said auto tariffs and tariffs on aluminum and steel could both affect the U.S. transportation industry.

“Were auto tariffs to significantly raise the cost of purchasing an automobile, they could act as a sort of tax on motorists that would increase the costs of auto transportation and in turn reduce demand,” Scott Monroe, a Fitch analyst, said in a statement. &

Katie Dwyer is an associate editor 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 and 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]