3D Printing Offers New Risk Challenges
As commercial 3D printing advances from occasional to routine use, the product liability landscape will shift around it. Defective and counterfeit product exposures, among others, will arise for all participants along the manufacturing continuum, industry experts said.
In an adverse incident, said Rob Gaus, product risk leader, Marsh, liability will be apportioned among participants in the manufacturing and distribution stream: product manufacturer, printer manufacturer, software designer, feedstock supplier, distributor (especially if it modifies the product) and retailer (if the manufacturer is not well capitalized). No case law exists yet.
In 3D printing, a computer sends the software containing a product design to one or more printers, which builds the product, layer by layer, from many kinds of materials — plastics, metals, drugs, paints and even human tissue.
David Carlson, U.S. manufacturing and automotive practice leader, Marsh, said 3D-printed products are treated the same as any other new operation that poses new risks.
Underwriters and brokers must first assess the company’s risk management profile and risk appetite. When production, research and development teams look at technology, “they should loop in risk management. Risk management should be part of the continuum, or the company could get into sticky situations.”
The emerging risks include unregulated manufacturing, said Mark Schonfeld, a partner at Burns & Levinson LLP in Boston specializing in business and intellectual property law.
If 3D printing enables production of, say, just 100 hip implants or 100 hearing aids, such work will generally take place outside of a traditional mass-production factory, which is subject to government regulation and inspection.
“Insurance companies like FDA oversight of manufacturing because it makes products safer and helps identify responsibility when things go wrong,” Schonfeld said.
To protect themselves and their clients, Schonfeld advises insurers to keep abreast of technological developments, consult with a creative and knowledgeable attorney about how to address liability exposure, and adjust existing policies to be fair to consumers and prevent injury to the insurance company.
3D printing also raises the risk of counterfeit products, said Peter Dion, line of business director-product liability, Zurich Insurance. The digital “recipe” in the software design, and is vulnerable to capture, he said.
Although there is no encryption mechanism for the software, one solution might be to transfer the digital file in pieces only as they are needed by the printer to prevent capture of the entire design signature, Dion said.
Manufacturers have always struggled with counterfeit products, but 3D printing magnifies the risks because it can slash the time from product development to market-ready product to a matter of hours and requires no molds or prototypes. “Hackers can take the proprietary blueprint or software, send it to a third-world country, and have the product ready for market tomorrow,” said Carlson. “That’s a business disruption issue. Counterfeiters can put a company out of business.”
Drug manufacturers may subvert counterfeiters by adding tracer elements and watermarks to their formulations, which protects their reputations, profits and public health. “If the counterfeiters get the recipe wrong, they might not produce high-quality drugs for public consumption,” Carlson said.
Other manufacturers can also use watermarks and digital rights management (DRM) software to prevent file sharing. Still, Carlson said, counterfeiting is an old problem. “Bad guys have always exploited new technologies for their personal gain.”
The materials used by manufacturers present a greater potential loss exposure than the 3D printer itself, said Dion, noting that it is just another piece of equipment, like a pencil or a lathe.
For example, if a 3D printer is used to replicate a cupcake, the manufacturer should be as careful of contaminants in the mix as traditional bakers need to be. “When 3D printer manufacturers purchase materials from suppliers, they need to perform due diligence on their supplier’s products also.”
Burning Down the House
When politics as a whole gets stale, it’s refreshing when leaders with novel ideas come in and shake things up, rejuvenating the country’s imagination. Take it too far, though, and all that shaking can trigger a firestorm, threatening to turn the foundation to rubble.
The 2016 election cycle, at times more social media circus sideshow than electoral process, has the potential to substantially undermine business. Early on, it was easy to dismiss candidates’ “crazy” platforms and comments as hot air or just grabs for media attention. Over time, though, even the most radical of those ideas — whether from the left or the right — began to gain actual traction, leaving political and business leaders with knots in their stomachs.
For the past year, candidates have been beating the drum for dramatic changes to America’s approach to free trade, immigration, wages, taxes, education, foreign policy and globalization. The public, rather than rejecting or ignoring the rhetoric, has latched on. No matter how unworkable, impractical or seemingly ludicrous an idea a candidate has thrown out there, supporters are taking up the torch and running with it.
When the rhetoric is viewed through the sober lens of economic policy, many business leaders are worried that the proposals inflaming populist anger would unravel much of the economic foundation built since the end of WWII.
Concerns have deepened further since the UK’s “Brexit” surprise, a populist vote of no confidence against unchecked globalization and immigration — some of the same issues fueling the American populist movement against the establishment and political elites.
In the blink of an eye, British voters unraveled a structure in place for more than 40 years. Could it happen here? Without a doubt.
An Unquiet Nation
Much has been written about how candidates who would have been a blip on the radar in other election years managed to take center stage this time around. But there’s no real mystery to it.
The nation is angry. Rosy looking unemployment statistics hide the real picture of an increasing number of Americans underemployed, or getting by on contract work that provides no job stability or benefits.
For everyone else, wage stagnation is the not-so-new normal. The middle class is shrinking as the income equality gap widens by the week. Meanwhile, the Panama Papers are only the latest reminder that the world’s wealthiest have even more than they’re letting on.
“Anger among a great deal of the populace is not good news for anyone, business or otherwise,” GOP analyst Reed Galen said.
“You take a look at the angst and the anger here in the United States, and that’s being played out through the election process,” said Kevin Kelley, CEO of Ironshore. “[It stems] from this notion that there’s just not enough jobs, not enough opportunity and we need change.”
The U.S. turmoil is not happening in isolation, said Hank Greenberg, chairman and CEO of Starr Cos. “We are not in a world by ourselves. You have to look at the whole global economy, and things are not particularly brilliant in Europe. You have several central banks where you have negative interest rates, and you have negative interest rates in Japan. You have a global economy that is not particularly buoyant.”
In addition to anemic job creation in the U.S., “you have the market at 24-25 times earnings. We have huge debt, national debt — maybe as high as we have ever had, maybe even larger,” said Greenberg, who served on the President’s Advisory Committee for Trade Policy and Negotiations during the first Bush administration.
“And you have an election coming up which through the primaries was more divisive than anything I have ever seen,” he said.
“It’s a backdrop,” said Kelley, “for a whole series of potential things that we’re facing, and by ‘we’ I mean those of us who take risk and those of us who manage risk.”
“You need people with stable minds who understand the responsibility they have in maintaining a world order.” — Hank Greenberg, chairman and CEO, Starr Cos.
Voters have lost faith in institutions they thought they could trust, from the government to corporations to banks and the media. And they have lost faith in the ability of career politicians to fix what ails the country. So when anti-establishment candidates stepped up to the mic and said, in essence, “Let’s blow up the status quo!”, voters said, “Bring it on.”
Looking at the economic situation tangled up with a social environment rife with protest, terrorism and violence, business leaders are hoping that once the election hoopla is over, the new commander-in-chief will be a calming influence.
“So you have a world where you have to weave your way through, and I think it would be a time to be a little more conservative than you would be otherwise,” said Greenberg.
“You need people with stable minds who understand the responsibility they have in maintaining a world order. … Having stability is very important — one of the most important things that each country has to manage in their own way.”
For businesses, a degree of uncertainty in election years is par for the course, particularly when there is no incumbent. But the question has typically boiled down to which party gets the White House, Republicans or Democrats? From there, making an educated guess about what the next four years would hold was a fairly academic exercise. Right now though, there are too many unknowns to make assumptions, and it’s making business leaders noticeably uncomfortable.
“Uncertainty is worse than just about anything,” said Galen. “If you know something bad is definitely going to happen … you’re not going to like it, it’s going to be terrible, but at least you can plan for contingencies around it.” But a volatile candidate “offers you no real chance to do that. You just have to hope and pray that whatever he does or does not do is not the death knell for your industry or your business.”
According to a Duke University/“CFO Magazine” survey in June, nearly half of U.S. firms reported pulling back on employment or investment as political uncertainty clouded their overall business outlook. And eight out of 10 CFOs said the U.S. economy faces moderate to large political risk due to election uncertainty.
“Companies take a big pause in the face of severe risk, delaying or scaling down business spending plans until the risk dissipates,” John Graham, the director of the survey, wrote in the report. Executives surveyed anticipated capital spending growth of 1.1 percent over the next year, down from 5.8 percent growth anticipated this time last year.
“For those of us who run global businesses, if we end up with an erratic president and/or loose cannon, we may be less willing to invest in the U.S. until we see how things are going to play out,” said Mark Watson, CEO of Argo Group International.
The Stroke of a Pen
Doomsday predictions make for catchy headlines, but it’s safe to assume that on the morning after the 2017 inauguration, we won’t be waking up to some dystopian New World Order, no matter who gets sworn in.
The markets aren’t likely to collapse either. According to “Fortune” magazine, the evidence of the past 70 years shows that presidential elections barely affect the economy at all.
But don’t exhale just yet.
The U.S. Constitution may spread the power across the branches, but sources point out that the power of executive orders — and the potential for abuse of them — should give business leaders pause.
Consider that Lincoln’s Emancipation Proclamation was enacted via executive order, as was the establishment of the Works Progress Administration — the lynchpin of Roosevelt’s New Deal. Of particular relevance to some of the more extreme rhetoric to come out of current campaign sound bites, Roosevelt also used an executive order to send 120,000 people of Japanese descent to internment camps — the majority of them American citizens.
“Hopefully there’s enough separation of powers so that a zealous president, Republican or Democrat, can be held in check by a vigilant legislative branch.” —Mark Watson, CEO, Argo Group International
In more recent history, President Obama issued a 2014 executive order to raise the minimum wage for all federal contractors and subcontractors from $7.25 to $10.10. It’s possible that the next president could do the same to quickly push through the popular call for a $15 minimum wage, putting upward pressure on states to keep pace.
Several presidents have been accused of overstepping the authority of the executive branch. The U.S. Supreme Court recently affirmed an appeals court decision in United States v. Texas that challenged President Obama’s 2014 executive order that limits the deportation of certain illegal immigrants. Twenty-six states and the House of Representatives filed suit, arguing that the president effectively rewrote the immigration laws, and also imposed an unlawful financial burden on the states.
“Hopefully there’s enough separation of powers so that a zealous president, Republican or Democrat, can be held in check by a vigilant legislative branch,” said Watson.
Political appointees offer the presidency added opportunities for influence. The next president’s choice as a successor to Federal Reserve Chairwoman Janet Yellen is on the minds of many, said Jon Lieber, United States director at global political risk research and consulting firm Eurasia Group.
“Political independence of the Fed is one of the cornerstones of our modern macroeconomic policymaking today. … If [the next president] appoints someone that isn’t as protective of the independence of the Fed, that has a material impact on the dollar; that has a material impact on interest rates; it has a material impact on the stock market; and it will have ripple effects that extend throughout the entire economy.”
Experts also caution that if the way the election campaigns have been run is any indication, the next president may not stop at executive orders or any other standard approach to getting things done. The contenders have shown a notable lack of interest in doing what’s expected of them, said author Meg Murer Tortorello, former senior vice president with the Property Casualty Insurers Association of America.
“They are not looking to follow the establishment thinking that ‘This is the playbook; these are the rules to follow.’ ”
Deepening the uncertainty about how any of the candidates will act once elected, there is the fact that the high level of volatility in the presidential campaign could impact other elections in unexpected ways.
“People should be looking at what’s happening down the ticket. They need to think about the disruption down the line,” said Tortorello. “It is not a quiet country right now. As the voices continue to be loud and grow louder, I don’t think Congress is going to be able to get away with business as usual if they want to keep their seats. That will be a different pressure than we’ve seen in the past.”
“The polarization of the candidates that exists in this election cycle means that it is also possible for Congress to turn over in a variety of different ways,” added Dr. Eric Eisenstein, director of the business analytics program, department of statistics, at Temple University’s Fox School of Business.
“Those things also ruin your estimates about how stable things are or how likely things are to be implemented. I think it is particularly [unclear] right now what will happen with Congress. … I feel like I’m on solid ground in saying that this is a more up in the air, more uncertain jump ball than usual.”
Getting Into the Weeds
“Until after the election, or until the policies become clearer, there is a case — if it’s not too costly — to put off investments, especially fixed and irreversible investments, and maybe not do so much hiring [or firing] but to just kind of stay where you are and put off some decision-making to the future,” said Scott Ross Baker, assistant professor of finance at Northwestern University’s Kellogg School of Management.
But delay, in this case, may be an insufficient risk management plan.
“If people are sitting on the sidelines watching how the elections are going to play out this fall, thinking they’re going to have a year before the presidency and Congress can really get going, I think that is a big risk,” said Tortorello.
Company leaders cannot rely solely on checks and balances, said experts, or assume that political gridlock will be enough to prevent dramatic upheavals.
“If you are charged with that task of looking down the road … and asking what is the environment going to look like for us from a governmental or from a regulatory perspective, the idea that you’re somehow not worried at all about it seems foolhardy,” said Galen.
“Over the course of the last 60 or so years, the executive branch has taken on and been given enormous independent authority by the legislative branch.”
“It’s more important than ever to follow these kinds of political developments,” added Lieber. “Unfortunately, companies have to spend more time getting into the weeds of what’s happening with the federal government [and] what’s happening in the regulatory space as it affects their industry.
“Part of that’s just a matter of paying attention … and understanding where the pressure points are. It’s important in a way that I think it wasn’t 20 or 30 years ago for corporations.”
Now is the time to be thinking about how to manage the potential risks, experts said.
“Companies that are being more proactive and trying to mitigate some of those risks now, those are the ones that are going to be more successful within the next year, two years,” said Tortorello.
Executives can begin to assign probabilities to the things their company leaders are worried about, said Ironshore’s Kelley.
For example, he said, “What happens if economic growth comes in even lower than we think? What’s the probability of that? Because that would have impacts on risk and how you mitigate risk. What happens if Fed policy gets misinterpreted and interest rates move up more quickly than the market thinks? That would have an impact on business.”
The issues outlined on the candidates’ websites can function as a jumping-off point, said Tortorello. “Overlay that with a lens of what could happen with gridlock, which are going to be easier wins, which are going to help drive economic growth.
You can, in a sense, create a grid for your company to think about which could really impact you and which has a higher probability of moving more quickly or more slowly.”
“Having the organization reflect on the potential impacts, the magnitude of the potential impacts, and how they would react is a completely logical approach,” said Mike O’Connor, CEO of Aon Risk Solutions.
“The best way to be prepared is to be proactive,” he said, which means having a mind-set of resiliency and “looking out the windshield rather than the rear-view mirror in terms of understanding what might impact their businesses.”
An Opportunity to Step Up
Executives are hopeful that all of the current turmoil will eventually result in change for the better.
The economy obviously needs more growth, said Kelley, “and one good way to help stimulate that is through infrastructure spending. I think regardless of who the next president is, there’ll be a lot of focus on that and there’ll be a lot of benefit to the economy if that is done right.
“We could end up creating more jobs and ultimately improving productivity. If we improve our roads, our airports, the byproduct is not just jobs today, but improved productivity for tomorrow. I think that is not foolish optimism.”
Tortorello hopes business leaders will take that kind of thinking a step further and work to be a part of what drives that change by sharing their ideas with candidates, with the White House, and with congressional leaders.
“[Executives can] take a look at the laws that are hampering innovation, the laws that are hampering job growth and job creation — what are the laws that are holding their communities back from building and prospering?
“There’s an opportunity for the business sector to think about what would help their companies, what would help their market sector, what would help their community and their country, and put those ideas forward.”
Tortorello added that the exercise of developing those ideas can be of great benefit to companies as they think about the outcome of the elections and their organizations’ risks and goals.
“When you’re sitting down with your senior management team and talking about what’s holding us back or what would help us jump forward, it helps you think outside of the box. It helps you think more like a disruptor.”
That can help companies think through ways to be more agile once the elections happen, she said, while also helping them understand the role they can play in helping the overall economy, creating jobs and helping the country prosper.
“Executives need to be thinking through the disruption,” said Tortorello. “Regardless of who wins, there are opportunities for the business sector to step up and help — help calm some of the unrest of our nation as well as create innovative opportunities and mitigate their own risks.
“The business sector, I hope, won’t sit on the sidelines. We can be a part of the conversation to really help the country.” &
Cyber: The Overlooked Environmental Threat
“Cyber breach” conjures fears of lost or ransomed data, denial of service, leaked corporate secrets and phishing scams.
But in a world where so many physical operations are automated and controlled by digital technologies, the consequences of cyber attacks extend far beyond the digital realm to include property damage, bodily injury, and even environmental pollution.
Industrial companies that deal with hazardous materials — like power plants, refineries, factories, water treatment facilities or pipelines — are heavily dependent on automated technology to maximize their efficiency. Other sectors use technology to control HVAC systems, power and utilities, placing their properties at risk as well.
Cyber risks like theft of personally identifiable data have been highly publicized in recent years, but physical risks like pollution sparked by a cyber breach may not be as obvious.
“It’s significant to lose 100,000 customers’ Social Security numbers,” said William Bell, Senior Vice President, Environmental, Liberty International Underwriters, “but can you imagine if a waste treatment facility’s operations get hacked, gates open, and thousands of tons of raw sewage go flowing down a local river?”
In many industrial complexes, a network of sensors gathers and monitors data around machinery efficiency and the flow of the materials being processed. They send that information to computer terminals that interpret the data into commands for the hardware elements like motors, pumps and valves.
This automation technology can control, for example, the flow of pipelines, the level of water or waste held in a reservoir, or the gates that hold in and control the release of vast quantities of sewage and other process materials. Hackers who want to cause catastrophe could hijack that system and unleash damaging pollutants.
And it’s already happened.
In 2000, a hacker caused 800,000 liters of untreated sewage to flood the waterways of Maroochy Shire, Australia. In 2009, an IT contractor, disgruntled because he was not hired full-time, disabled leak detection alarm systems on three off-shore oil rigs near Long Beach, Calif.
Just last year, cyber attackers infiltrated the network of a German steel mill through a phishing scam, eventually hacking into the production control system and manipulating a blast furnace so it could not be shut down. The incident led to significant property damage.
According to a leading industrial security expert and executive director of the International Society of Automation, “Today’s operational technologies—such as sensors, SCADA systems, software and other controls that drive modern industrial processes—are vulnerable to cyber attack. The risk of serious damage or compromise to power and chemical plants, oil and gas facilities, chemical and water installations and other vital critical infrastructure assets is real.”
“The hacks could come from anywhere: a teenager looking for entertainment, a disgruntled worker, or more sophisticated criminals or terrorists,” Bell said. “There are certainly groups out there with political and ideological motivations to wreak that kind of havoc.”
“We are working to bring the cyber component of environmental risk to the forefront. Cyber security is not just an IT issue. Industry executives need to be aware of the real-world risks and danger associated with an industrial cyber attack as well as the critical differences between cyber security and operational technology security.”
— William Bell, Senior Vice President, Environmental, Liberty International Underwriters
The cleanup cost of an environmental disaster can climb into the hundreds of millions, and even if a cyber breach triggered the event, a cyber policy alone will not cover the physical and environmental damage it caused.
The risk is even more pointed now, as resource conservation becomes increasingly important. Weather related catastrophe modeling is changing as both flooding and drought become more severe and frequent in different regions of the U.S. Pollution of major waterways and watersheds could have severe consequences if it affects drinking water sources, agriculture and other industrial applications that depend on this resource.
Managing the Risk
Unfortunately, major industrial corporations sometimes address their environmental exposure with some hubris. They trust in their engineers to remove the risk by designing airtight systems, to make a disaster next to impossible. The prospect of buying environmental insurance, then, would be superfluous, an expression of doubt in their science-backed systems.
Despite the strongest risk management efforts, though, no disaster is 100 percent avoidable.
“We are working to bring the cyber component of environmental risk to the forefront,” Bell said. “Cyber security is not just an IT issue. Industry executives need to be aware of the real-world risks and danger associated with an industrial cyber attack as well as the critical differences between cyber security and operational technology security.”
The focus on network security and data protection has distracted industry leaders from strengthening operational technology security. Energy, manufacturing and other industrial sectors lack best practice standards when it comes to securing their automated processes.
After the Homeland Security Act of 2002, the Department of Homeland Security began comprehensive assessments of critical infrastructure’s cyber vulnerability, working with owners and operators to develop solutions. It also offers informational guides for private companies to do the same. The National Institute of Standards and Technology also continues work on its cyber security framework for critical infrastructure. Although this helps to establish some best practices, it does not completely mitigate the risk.
Many businesses don’t see themselves as a target, but they need to look beyond their own operations and property lines. They could be an attractive target due to their proximity to densely populated areas or resources such as waterways and highways, or nationally or historically significant areas. The goal of a cyber terrorist is not always to harm the target itself, but the collateral damage.
The Role of Insurance
“Environmental liability is still by and large viewed as a discretionary purchase,” Bell said, “but the threat of a cyber attack that can manipulate those systems and ultimately lead to a pollution incident is added incentive to buy environmental coverage.”
Liberty International Underwriters’ environmental coverage could respond to many pollution conditions set off by a cyber breach event.
“Property damage, bodily injury and cleanup of any pollution at or emanating from a covered property would likely be taken care of,” Bell said. “The risk is not so much the cyber exposure but the consequence of the attack. The resulting claims and degradation to the environment could be severe, especially if the insured was a target chosen because of their unique position to have a large effect on the local population and environment.”
LIU also offers dedicated Cyber Liability insurance solutions designed to manage and mitigate the cost of responding to a cyber attack and any resultant loss of data and associated liability. Coverage includes proactive data breach response services designed to help organizations comply with regulatory requirements and prevent data breaches.
LIU’s loss control managers are also on hand to conduct assessments of insureds’ properties and facilities to examine potential environmental impacts. They can educate brokers on the importance of enhancing cyber security to prevent an environmental accident in the first place.
“People are relying more and more on their systems, automaton is increasing, and the risk is growing,” Bell said. “We’re all focused on protecting data, but the consequences of a cyber breach can be much farther reaching than data alone.”
To learn more about Liberty International Underwriters’ environmental coverages and services, visit www.LIU-USA.com.
Liberty International Underwriters is the marketing name for the broker-distributed specialty lines business operations of Liberty Mutual Insurance. Certain coverage may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. This literature is a summary only and does not include all terms, conditions, or exclusions of the coverage described. Please refer to the actual policy issued for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.