2018 Most Dangerous Emerging Risks

Climate Change as a Business Interruption Multiplier

Crumbling roads and bridges isolate companies and trigger business interruption losses.
By: | April 9, 2018 • 9 min read

A string of winter storms dropped more than 60 inches of rain on California’s Central Coast this year, washing out roads, triggering massive mudslides and threatening the integrity of already-fragile bridges. The Pfeiffer Canyon Bridge is one such structure. As the ground beneath gave way, the bridge slid downhill several feet and developed a sizable crack, making it too unsafe for travel.


The Pfeiffer Canyon Bridge is also the only link between popular vacation destination Big Sur and the rest of the world to its north. To its south, a landslide left Highway 1 — the only road in from that direction — covered with boulders and hills of dirt. Four hundred and thirty-five people were left trapped in between.

Businesses scurried to arrange other ways to bring in needed supplies while dealing with a shortage of workers who were blocked out by the rubble. Hotels would obviously not be greeting any new guests for some time — that stretch of Highway 1 is set to be closed for 18 months.

Failing infrastructure increasingly poses business interruption risk. Collapsed bridges and mudslide-barred highways may be extreme examples, but more commonplace events like burst pipes and sinkholes can shut down streets and leave the businesses populating them stranded, disconnected from suppliers, distributors, employees and customers.

The American Society of Civil Engineers (ASCE) has evaluated the state of the nation’s infrastructure since 1988, when the congressionally-commissioned National Council on Public Works Improvement put out its first “report card.”

Even then, the marks weren’t good.

“After two years of study, the National Council on Public Works Improvement has found convincing evidence that the quality of America’s infrastructure is barely adequate to fulfill current requirements, and insufficient to meet the demands of future economic growth and development,” the 1988 report said.

Since then, the ASCE has given U.S. infrastructure a “D” grade in every subsequent report card.

Adrian Pellen, North American infrastructure leader, Marsh

In 2016, “9.1 percent of the nation’s bridges were structurally deficient,” according to the latest report card. The ASCE estimates that rehabilitation and improvements to highways and bridges alone will require $836 billion — a number that doesn’t include repairs to railways, airports, dams, levees, ports, or energy, water or waste systems.

“The elephant in the room is the funding,” said Adrian Pellen, North American infrastructure leader, Marsh’s construction practice. “Governments have deferred maintenance on infrastructure forever, and we’re at this critical juncture where we need the investment, and the funding mechanisms just aren’t there.”

The gas tax — the primary revenue source for government-sponsored infrastructure projects — is not adjusted for inflation and has not risen in more than 25 years. And with more electric and fuel-efficient vehicles replacing gas-guzzlers, the tax is yielding less than ever.

“Getting a gas tax increase right now would be very difficult. And there is a political divide over how to fund large projects that is causing further delay,” Pellen said.

Democrats call for more federal investment, while Republicans want to pass the bulk of responsibility to the private sector. Public-private partnerships (P3) have been successful on some large projects.

“P3s push design, construction, financing and the operation and maintenance of infrastructure down to the private sector,” Pellen said. “These can be a very efficient way to deliver infrastructure on time and on budget, but they aren’t the magic bullet for all of our infrastructure needs. There are still politicians on both sides of the aisle who aren’t fond of them.”

Amid the political and financial delays, climate change and increasingly severe weather patterns are adding more and more pressure to aging structures not equipped to handle it. This exposure will get worse before it gets better and is going to create business interruption losses in the millions for some, knocking other businesses out altogether.

Insurance Options

Businesses like those in Big Sur, cut off by failures of critical infrastructure, have few insurance options to help them recover their losses. Traditional business interruption (BI) coverages stipulate the covered property must incur some physical loss or damage. Contingent BI policies are only triggered if the insured’s suppliers incur such damage.


So what happens when there’s no physical loss to a property or any of its supply partners?

“The market struggles with non-damage business interruption,” said Rich Clark, managing director, Gallagher’s hospitality practice.

“Standard ISO-based policy wording would not provide coverage for this type of scenario regardless of the cause of the loss to critical infrastructure,” said Brendan Osean, principal, EPIC Insurance Brokers & Consultants. “But if they have broader manuscript policy wording, there may be some coverage.”

Ultimately there are three potential solutions — ingress/egress, civil authority and parametric policies — but each comes with its own limitations.

Ingress/egress and civil authority coverages may offer indemnity for non-damage business interruption losses, but only if the cause of the loss is specifically covered.

For example, a hotel may experience a loss of business if a flood washes out the road to their property. But if they aren’t located in a flood zone, and flood is not a named peril under their ingress/egress policy, then there would be no coverage.

“Governments have deferred maintenance on infrastructure forever, and we’re at this critical juncture where we need the investment, and the funding mechanisms just aren’t there.” — Adrian Pellen, North American infrastructure leader, construction, Marsh

Same goes if the cause of loss to a piece of critical infrastructure is simple deterioration. Gradual wear-and-tear is not considered a covered cause of loss, so if a bridge or tunnel collapses simply due to its age, any affected business could not recover from an ingress/egress policy.

Insured perils could include earthquake, windstorm, heavy snow, rainfall, hurricane or flood, depending on the location.

“Even if an ingress/egress policy is triggered by an insured peril, these policies typically only offer coverage for 30 to 90 days of interruption. If you’re dealing with a total bridge or tunnel collapse, it’s likely to be longer than that,” Clark said.

Similar exclusions apply to civil authority policies. These cover instances where a government authority shuts down a roadway or transportation system due to an imminent safety threat. Again, that safety threat must be an insured peril and must actually come to fruition in order for the coverage to respond.

Both types of coverage may also impose mileage limitations. The loss to infrastructure would have to occur within a designated radius from the insured location.

“We most commonly see 5- or 10-mile limits, sometimes up to 25 miles,” Clark said, “but there is no standard.”


Greg Schiffer, global head, engineering, Swiss Re, said neither ingress/egress nor civil authority coverages were designed to address exposure related to loss of critical infrastructure.

“These policies are usually sub-limited, and they have waiting periods and time limits. They were not designed for this type of loss, and any recovery from them would be indirect or unintended,” he said. “They might respond to a loss caused by a natural peril, but when it comes to infrastructure, lack of maintenance is a bigger issue, and lack of maintenance is not a covered cause of loss.”

Parametrics, a relative marketplace newcomer, offers a third option.

Parametric Possibilities

“Parametric coverage triggers are not indemnity-based, so they aren’t based on an individual client’s actual loss. If you hit the coverage triggers, you get the payout,” EPIC’s Osean said.

Jamie Crystal, EVP, Crystal & Company

Most parametric coverages are built around weather events. Typical triggers would include a certain wind speed sustained or inches of rainfall over a designated period of time, an earthquake of a certain magnitude, or extreme temperature changes.

“Depending on your risk tolerance, you could manuscript wording to apply these triggers to a radius around your property that includes a critical piece of infrastructure,” Pellen said.

If severe weather meeting the policy parameters causes a road or bridge to become impassable — as in the case of Big Sur — the insured property still receives the payout, even if it sustained no physical damage itself.

“You can define the payout in line with what your anticipated business interruption losses would be,” Pellen said.

Some airports, he said, are already using parametric solutions this way. With finite budgets for maintenance, snow removal and salting, airports have used payouts from parametric coverages to supplement those funds and help with cleanup after a storm — even if the airport sustained no significant physical damage.

As with ingress/egress and civil authority policies, however, gradual deterioration would not trigger any coverage. There’s also the possibility that a storm will cause damage to critical infrastructure — and a subsequent business interruption loss — without hitting the triggers set by the policy.

Parametric products may also be too pricey for some. Osean said they come with frictional expenses and “may not be economical for mid-size organizations.”  But Jamie Crystal, EVP, Crystal & Company, disagreed.

“As opposed to buying a year’s worth of BI insurance, you may only need this cover for a few weeks. If you’re buying a million dollars’ worth of insurance at a 4 percent rate, that’s still only $40,000. And you might not need more than $1 million,” he said. “To me, it’s a very viable and cost-effective way to protect a company from loss to critical infrastructure.”

Risk Mitigation Strategies

Plenty of examples from the CAT-heavy year of 2017 show this risk is real. One only has to look to California, the Florida Keys or any number of small coastal islands to see how infrastructure failure cuts off the livelihood of an entire town.

But these aren’t Black Swan events — it is possible to plan for them. And as increasingly unforgiving weather weakens already-vulnerable infrastructure, there’s no time like the present.

Risk managers should consider their dependency on critical infrastructure as part of a risk analysis. Having only one way in or out, for example, should spark some concern. How reliable or exposed is that route? A probable maximum loss study should consider all peril-related losses, including losses related to neighboring assets. Simulations can estimate the likelihood and extent of a loss.

“It requires the recognition on the part of the organization that this could happen, and putting thought into how it will respond if it does happen,” said Jill Dalton, managing director, Aon Global Risk Consulting. “Do tabletop exercises. Try to quantify the financial impact. Once you figure that out, you can prioritize how to respond.”

“If your business is dependent on a bridge or a major road, what are you going to do if that bridge goes down? Each organization has to figure that out on its own.” — Jill Dalton, managing director, Aon Global Risk Consulting

Though no organization can prevent a bridge collapse or mudslide, they can develop a plan of action to maintain operations as best as possible.

“Whether it’s your employees, or guests getting to a hotel, or goods getting to and from a manufacturer or distributor, it’s all about having a business continuity plan,” Dalton said.


“If your business is dependent on a bridge or a major road, what are you going to do if that bridge goes down? Can any other location pick up the extra work? Are there third parties you can rely on? Do you have other supply chain options? Each organization has to figure that out on its own.”

Beyond continuity plans, the best course of action is to obtain the broadest coverage available. According to Clark at Gallagher, coverage for an infrastructure-related business interruption loss will often come down to what you can negotiate out of your property policies.

“Analyze your coverages and see what’s excluded and how you might be able to get more of the exposure covered. Manuscript forms or endorsements can give you more options,” Osean said.

“You can determine your exposure and what your appetite for that is. There may not be off-the-shelf solutions, but brokers certainly are capable of bringing some solutions to the table if they have the foresight to ask the right questions,” Crystal said. &

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.


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.


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?


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.


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.


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]