Risk Scenario

Blind Faith

An auto manufacturer thinks their tech supplier escaped typhoon damage. Closer inspection reveals quite the opposite.
By: | September 15, 2014 • 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.

Part One: Cocky Sons of Guns

With a steady, fluid motion, Ray Fines stretched his six-foot-two-inch frame to its limit and smacked the tennis ball toward his opponent Robert Gailey on Gailey’s ad-court side.

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Fines served with a lot of top-spin, so the shorter Gailey had to hop a little on his return, but he reached out and backhanded the ball masterfully down Fine’s forehand side for a winner.

Someone whistled appreciatively from the grassy court-side banks of the hard-surface courts at San Diego’s Corona del Playa Country Club: Neither Fines nor Gailey looked over.

For one, they were both well-paid executives with the highly successful niche luxury automobile manufacturer Charing Motors, based in San Diego. The company’s 2014 revenue was $850 million.

It was fair to say success had gotten to their heads a little bit and they tended to be socially unapproachable.

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They were also two of the club’s top players and were used to people watching them play.

“Game and set,” Gailey said as Fines trotted over to pick up the ball.

“One more?” Fines asked, looking over to Gailey and hoping for a chance at revenge.

“Nah, we need to get set up for the barbeque tonight,” Gailey said. “I’d better get back to the house or I’m going to be the one getting grilled.”

After showering, Gailey and Fines stopped in the clubhouse for some sparkling water and freshly squeezed orange juice, fortified with raw vegan supplements. They were quietly hydrating when Gailey, flipping through the news feeds on his mobile phone, stopped.

“Hmmm,” he murmured.

“What?” said Fines, Charing Motors’ risk manager.

“Looks like there’s a sizable tropical storm heading for mainland China. Could turn into a typhoon,” said Gailey, the company’s procurement director.

“We don’t have any suppliers there,” Fines said.

“No, we don’t,” Gailey agreed.

“But some poor son of a gun does. Looks like it’s headed right at the Pearl River Delta. Lots and lots of tech suppliers there,” he said.

“First we miss Tohoku, now we luck out on this. We must be doing something right,” Fines said.

Charing Motors, back in its infancy, had escaped the supply chain damage that many auto manufacturers suffered when an earthquake and tsunami devastated Japan and its economy in 2011.

“Evidently so,” Gailey said, looking up from his mobile phone and flashing a suntanned, winning smile at Fines.

Part Two: A Stunning Revelation

Three weeks later, Gailey and Fines were in a conference room, hunched over a speaker phone.

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“Good morning,” Gailey said as the other caller beeped on.

“Good afternoon,” said the caller in Taipei, acknowledging the 15-hour time difference between Taipei and San Diego.

After some brief and awkward preliminaries, Gailey got to the point.

“We’re concerned about these delivery delays we’re seeing, Dr. Wu,” Gailey said. “We’re looking at a three-week backlog as things stand, and I’m not confident the delays won’t get even longer,” Gailey said.


There is a long pause.

“Are you with me, Dr. Wu?” Gailey said.

“Yes. I’m with you,” said Dr. Wu.

Dr. Wu, who earned his Ph.D. at Carnegie Mellon University in Pittsburgh, is the chief executive officer of Paramount Technologies, which assembles the collision avoidance and cruise control components for Charing Motors.

“We … it’s hard to explain but we are conducting an investigation into our suppliers. We have some suppliers in the Pearl River Delta in China and we are uncertain as to their status,” Dr. Wu said.

Fines punched the mute button.

“Pearl River? I didn’t think we had any exposure there,” Fines said.

Gailey unmuted the phone.

“Pearl River, you say? That area was heavily damaged by Typhoon Lei, was it not?”

“Yes sir, substantial damage. We have multiple suppliers there we fear have been heavily damaged,” Dr. Wu said.

“Well how long until you? …” Fines began but was cut off by Dr. Wu’s response.

“We cannot offer a timeline on when our investigation will be finished,” Dr. Wu said.

Robert Gailey and Ray Fines just look at each other. In the space of one conversation, their confidence level in the short- to mid-term success of their company plummeted.

Part Three: The Flood in Bao ‘an

Wearing rubber boots, Vince Yee sloshed across his factory floor at the semi-conductor manufacturer Yee Industries in Bao ‘an, causing a pair of two-foot-long grass carp that typhoon flood waters stranded in his shop to swim for cover.

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Yee grimaced at the sight of the river fish in his once-pristine manufacturing facility. He climbed up on a flight of concrete steps. Gaining that perch gave him enough elevation to sit down and light a cigarette.

Yee exhaled cigarette smoke and looked out over the water-covered factory floor. Here and there, employees moved about in vain attempts to hoist expensive machinery up on blocks in an effort to lessen the water damage.

It’s Yee that supplies the semi-conductors to Dr. Wu’s Paramount Technologies, without which Wu will not be able to assemble the collision-avoidance technology for Charing Motors’ luxury sedans.

Yee takes another long drag on his cigarette and his cell phone vibrates as he sees a water snake working its way under a water-soaked piece of equipment that cost him $750,000.

“Hello?” Yee says in a dour tone of voice.

“Yes, this is Vince Yee. Yes, Dr. Wu.”

Yee looks out over the factory floor as Dr. Wu talks. From his expression, Yee would rather throw his phone in the flood water then listen to what Dr. Wu is asking him.

“No. No. I have no flood insurance,” Yee said.

“You can’t even get flood insurance down here. I’m 30 centimeters above sea level, Dr. Wu. You know that.”

Yee grimaces in frustration and anger as Dr. Wu asks him another question.

“Your guess is as good as mine, Dr. Wu. It will be a bloody miracle if I ever get back into business at this rate. But I’ll let you know. Good bye.”

Yee turns off the cell, runs his free hand over his face and hair in frustration and then flips his cigarette butt into the flood waters.

Part Four: Searching in Vain

Lee Ackles, Charing Motors CFO, leans back in his office chair and looks away from Robert Gailey and Ray Fines toward the San Diego Harbor.

“I’m just trying to get my head around this and I don’t think I can,” Ackles says to Gailey and Fines, when he brings his gaze back from the water.

“From what you’re telling me, our collision-avoidance system supplier really doesn’t know at this point where it can get the semi-conductors it needs to finish our product,” Ackles said.

“That’s correct,” Gailey said bravely.

“We’ve determined that a lot of their suppliers are single-source. Many of them were in the Pearl River Delta which was so heavily damaged by the typhoon in May.”

“Five months ago,” Ackles said, looking at Gailey and Fines like they had no brains.

“Correct.” It was Fines that managed to speak this time.

“And what have you found out in the past five months?” Ackles asked.

“There’s a lot of variation in product specs, even the names of the products in some of these Asian countries,” Gailey said.

“The semiconductors we’re looking for are really hard to find in Taiwan, Thailand or even mainland China right now,” Gailey said.

“We hope to have this thing nailed down in another month but as it stands, we can’t complete production on the CM-5 or the CM-7 until we do,” Gailey said.

“The CM-5 and the CM-7,” Ackles said. At this point he clicked his mouse and looked at some data on his screen.

“We’re looking at a real punch in the gut unless we can get it done much sooner guys,” Ackles said.

“Paramount Technologies, that’s the company in Taipei?” Ackles asked. He clicked and looked at his computer screen again.

“Wow, $4 million in billings to us last year. Get on a plane, go see Dr. Wu and company and get us a quicker answer. Both of you. Go tomorrow.”

Part Five: A Visit to the Delta

Robert Gailey and Ray Fines are passengers in a 1969 Piper Cherokee 6/260 that is winging its way along the Pearl River toward the Bao ‘an location of Yee Industries. The Piper is equipped with twin pontoons and makes a perfect river landing.

Jackie Chen, the Piper Cherokee pilot, turns and smiles toothily at Gailey and Fines from behind yellow-tinted sunglasses after his plane drifts up to the dock outside of Yee Industries and is secured by a Yee Industries employee.

“Just like I said, gentleman, smooth as silk,” Chen said, mimicking the smooth descent and landing of the plane with his hand.

Gailey and Fines both try forced smiles but just clamber out instead.

Walking up the path to the Yee Industries factory, Fines scanned the property and saw little sign of activity.

“Doesn’t look like they are even close to operational,” Fines said.

“Who knows,” Gailey said as they reached the factory door.

Entering the factory through an open side door, Gailey and Fines encounter a factory floor that is now dry, but shows no indication of being able to achieve full production anytime soon.

In one corner, six employees are sitting around a table hand-fashioning some semiconductor parts.

“Can I help you gentlemen?” said Vince Yee, as he approached the Americans.

“We’re looking for Vince Yee,” Gailey said.

“I’m Vince Yee,” said the factory owner.

“I’m Robert Gailey and this is Ray Fines. We’re with Charing Motors out of San Diego in the U.S.”

Yee stared at Gailey and Fines blankly.

“You’ve heard of Charing Motors?” Fines said.

“No. Never heard of it,” Yee said.

Gailey and Fines pause as this latest piece of information resonates.

“We make cars,” Gailey said.

“You want to buy this factory? You could make cars here in China,” Yee said.

“That’s not what we had in mind,” Fines said.

The conversation with Yee yielded one piece of productive information. After looking at the specs of the semiconductors Charing Motors needs to assemble its collision-avoidance system, Yee gave Fines and Gailey the name of a Pearl River manufacturer still at full production.

This manufacturer, though, is upstream in Panyu.

“Can you take us to Panyu?’” Gailey asked Jackie Chen as he and Fines get back to the Piper Cherokee.

“Can I take you to Panyu? I was born in Panyu,” Jackie Chen said with a chuckle.

“Just get in and fasten your seatbelts.”

As the Piper Cherokee takes off, Ray Fines and Robert Gailey avoid eye contact, neither of them knowing how soon they’ll be able to get the part they need to keep crucial manufacturing processes going.

It will be a full year until Charing Motors can resume full production. The privately held company recorded a 40-percent revenue drop for fiscal year 2015.

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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®.

1. Demand more from first and second-tier suppliers: It’s not enough to trust that your first and second-tier suppliers have an adequate knowledge of their suppliers’ property-CAT exposures and resilience. Insureds, working through their brokers and carriers, should create contractual certainty with their suppliers that their supply chain will be resilient in the event of a natural catastrophe or some other supply chain interruption.

2. Identify at-risk locations: Locations such as the Pearl River Delta of China is a prime spot for property losses, business interruption and supply chain problems due to the extremely high concentration of technology, automotive and telecommunications parts suppliers in natural hazard-exposed locations. As vulnerable as it is, however, the Pearl River Delta is just one example of a super-exposed location that could result in substantial business interruption should a windstorm, earthquake, flood or some other event transpire.

3. Involve the claims executives: In mapping out business interruption, property and supply chain risk and risk transfer options, make sure to involve the claims executives from your carrier in the discussion. Involving only the broker and the carrier at renewal time could result in an incomplete understanding of your company’s claims recovery chances in the event there is a loss.

4. Pinpoint single-source suppliers: One of the most vulnerable parts of your supply chain is that occupied by single-source suppliers. The use of single-source suppliers in some cases might be unavoidable, but identifying those parts of your supply chain that are single source and addressing them with specific risk management strategies is a good idea.

5. Everyone gets hit: Never assume that just because you haven’t suffered a substantial property, business interruption or supply chain loss that you won’t. An increasing complexity of global supply chains and economic forces that dictate business establishment in natural hazard-exposed areas almost guarantees, that sooner or later, your company will face a peril of one kind or another.




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]