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Alex Wright

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda and news editor at the Insurance Times and Global Reinsurance. You can reach him at riskletters@lrp.com.

Mergers & Acquisitions

Data Transfer

The value of data in a merger cannot be underestimated.
By: | May 1, 2014 • 6 min read
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The transfer of data is key to any successful M&A, however many companies neglect to safeguard their data even at the most basic levels.

In many cases, firms simply overlook the value of data because they would rather focus on the hard assets involved in the deal such as property and equipment.

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But the consequences of ignoring the value of data as part of the transaction can be catastrophic, resulting in the loss of highly sensitive company information, the price of the deal being significantly affected or the deal falling through altogether.

M&As are big business in today’s fast-paced corporate world, with the total volume of global deals amounting to $2.33 trillion in 2013, according to Bloomberg, meaning that data handling is now more important than ever.

R5-14p30-31_02Data.inddDavid Molitano, vice president, content, technology and services liability division, at OneBeacon, said data is often the No. 1 reason for a company to be acquired in the first place.

“It is difficult to place an average cost on data itself because it will have a different value from company to company,” Molitano said. “The true dollar value amount really depends on what a company is willing to pay for that data and the accompanying intellectual property.”

He said that any data transferred as part of a deal needs to be first clearly defined, evaluated and controlled just like any other asset.

However, despite all the checks in place, any company holding large amounts of data would naturally be a target for a data breach, he said.

“Since the data directly correlates to money on the black market, there is the constant threat of a data breach,” Molitano said. “In an M&A situation, a company must also look more closely to internal issues such as a disgruntled or recently discharged employee who may take confidential company information with them when they leave the company.

“Since so much of today’s data is easily portable, removing data from a network and a place of employment is unfortunately very easy.”

Richard Clark, UK-based Xuber’s head of specialist commercial, whose company services the Lloyd’s of London market, said that data is just as valuable as the systems and repositories where it is stored.

“In an M&A deal, the retention of existing customers and a base from which to grow the business are obvious imperatives,” he said.

“Therefore, the history or dealings (claims, customer information, premium payment records etc.) and the analyses that can be run from the existing data are vital.”

Clark said the risks involved in transferring data in any M&A include the loss of vital intellectual property and other unforeseen costs resulting from software access contracts not being properly checked.

The consequences of not getting the data part of the deal right could be loss of business as well as the absence of a statistical basis from which to operate when evaluating future opportunities.

 Underestimating Value

“There isn’t an executive in the land that doesn’t know the true value of data,” said John Merchant, Head of Cyber Liability & Professional Liability Underwriting at Freedom Specialty Insurance Co.

“However, many times in an M&A deal, the value of that data is vastly underestimated and it isn’t nearly as well protected as it should be.”

John Merchant, Head of Cyber Liability & Professional Liability Underwriting for Freedom Specialty Insurance Co.

John Merchant, Head of Cyber Liability & Professional Liability Underwriting for Freedom Specialty Insurance Co.

Merchant places a higher value on data than on the hard assets involved in an M&A.

“During a deal, most people at the board of directors’ level look at the more traditional aspects such as the financials and pro-formas,” Merchant said. “I think that, however, is more of a generational issue and due to a general lack of understanding about company systems and data oversight.”

Security is the single biggest issue for companies transferring data, he said.

However, particularly in non-technology deals, the risk manager responsible for looking after the data is often brought in too late in the process, meaning that the data is never truly secure, he said.

From a buying perspective, he said, the buyer needs to assume all of the liabilities associated with the data.

“They have to look at exactly what the data is and what they are buying, who it belongs to and whether it is being handled properly,” Merchant said.

On the other side, he said, the seller is also responsible for the transfer of that data.

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One of the biggest unknown risks, according to Merchant, is the security of cloud computing and the use of third-party providers such as Google or Amazon to handle any data involved in a deal, because it is still a relatively new area.

“On the carrier side,” he said, “we haven’t necessarily seen a lot of claims activity or lawsuits in that area. However that is not to say it isn’t happening, so it’s something we need to keep a very close eye on.”

In the worst-case scenario, said Merchant, there could be a loss of data or the deal could fall through because of the way the data was handled.

“If companies don’t start to look at their data as a hard asset such as property, then they could be in real trouble if something goes wrong further down the line,” he said.

Ryan Gibney, an underwriter at XL who specializes in technology, cyber liability and data protection, said that his clients realize the value of data and have taken the appropriate steps to protect it at source.

“It is particularly important for companies in the public eye and public companies with shareholders that whenever they transfer data as part of any deal that a nondisclosure agreement is signed and that all of the network security controls of the other party are properly audited,” Gibney said.

“On top of that, they need to ensure they have cyber insurance to protect themselves and their clients in the event of any loss of data shared as part of the deal.”

One of the biggest issues to be resolved, said Gibney, is the control of access to data, where it is stored and who uses it once it has been transferred.

“Companies want to make sure that any data transferred is fully protected so that if an improper disclosure of that data occurs, you can advise any inquiring parties that the proper controls were in place to safeguard that data.”

Most of the errors occur, he said, because companies don’t have the right basic encryption protocols in place.

Tim Crowley, director, management and professional risk group at Crystal & Company, said it is important to get the company’s IT team involved as early as possible in the process in order to evaluate all of the other company’s privacy and security protocols, and to align the two companies.

“I think the critical thing for the risk managers, particularly on the buying side, is to continually look at their policies as they add different entities from potentially different industry classes, because not one policy is the same.”

—  Tim Crowley, director, management and professional risk group, at Crystal & Company

Crowley said the market for risk transfer policies has broadened considerably over the last few years in terms of the coverage provided for both first- and third-party liabilities.

“I think the critical thing for the risk managers, particularly on the buying side, is to continually look at their policies as they add different entities from potentially different industry classes, because not one policy is the same.”

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Kevin Maloy, senior managing director, M&A, special practices, at the same brokerage, added: “From a risk management perspective, we are seeing more companies from a good governance standpoint, adopting the concept of a privacy committee and establishing privacy procedures.

“There are a number of clearly defined and set guidelines that companies can follow in order to take the right enterprise risk management steps to protect their balance sheets from an unintentional breach.”

Alex Wright is a U.K.-based business journalist, who previous was deputy business editor at The Royal Gazette in Bermuda and news editor at the Insurance Times and Global Reinsurance. You can reach him at riskletters@lrp.com.
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Global Shipping

Full Speed Ahead

A dispute delaying Panama Canal construction was resolved, but further delays could be costly to shippers and exporters.
By: | March 25, 2014 • 3 min read
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Any further delays to widen the Panama Canal could have far-reaching cost implications for all parties involved in the construction project and the shipping companies and exporters who use the Canal, a marine risk expert warned.

The Panama Canal Authority (ACP) signed a deal this month to end a four-month dispute — and a two-week work stoppage — over $1.6 billion in cost overruns claimed by the Grupo Unido por el Canal consortium (GUPC) carrying out the work. The dispute had threatened to derail the whole project, which now is expected to cost nearly $7 billion.

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Under the terms of the agreement, the Authority and the Spanish-led construction consortium will each invest an extra $100 million in the project.

Zurich North America, which holds $400 million surety bond on the project, “worked diligently with the ACP and GUPC to reach an agreement on the matter and fortunately the two sides have had a successful negotiation,” said Michael Bond, head of surety, Zurich North America. “We congratulate both of them on effectively reaching a favorable outcome. Zurich was glad to have played a role in a solution that brought the project forward.”

When the Canal expansion is completed in December 2015, the new third lock will house 12 giant lock gates designed to allow larger cargo ships through, and double the shipping lane’s capacity.

But Douglas Sakamoto, class underwriter, marine, Liberty Specialty Markets, warned that any further interruptions could result in shipping delays, increased costs and lost shipping tolls.

“The forecast for work to be completed has changed from 2014 to 2015, which is still not a massive delay when compared to the dimension of the work and the expectation in terms of international trade turnaround,” Sakamoto said.

“However, a longer delay could impact several international trade industries since there are lots of related ongoing investments, such as work on several international ports to adapt them to the new vessels, and orders placed for the new-Panamax vessels.

“If the work can’t be completed for any reason and costs still continue increasing, there are a number of serious implications such as the termination of the agreement with the current consortium, and the bond policy may be required in order to provide the extra amount needed to complete the work.”

When done, the Panama Canal Authority is expected to double the $1 billion in revenue it currently receives from shipping tolls.

With more than 13,000 ships passing through the Canal every year, Sakamoto said, construction delays could mean restrictions in the amount of goods producers can export as well as increasing the time it takes to ship the goods.

He noted that producers of commodities, such as LNG, which are exported from the U.S. Gulf Coast to target markets like Asia and the west coast of Latin America could be affected.

In addition, grain producers in the Brazilian ports of Itaqui, Suape and Pecém would also lose out on shorter shipping times, he said.

Shipping companies that have invested heavily in new-Panamax vessels orders several years ago would similarly miss out on vital revenue, Sakamoto said.

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International port authorities that have poured vast amounts of money into developing their ports for larger vessels and cargo volumes would also be adversely affected, Sakamoto said.

Pressure to meet the new deadline for completion of 2015, he said, could also impact labor force costs and suppliers.

“The Panama Canal construction project has been highly debated,” said a spokesman for Allianz Global Corporate Specialty, “but it’s actually not unusual for a large construction project to run over/get delayed. In fact, that’s why with project cargo coverage, there is a particular element called ‘delay in start up’ protection to help mitigate that risk.”

Work on the Canal project is now 70 percent complete; however the delay has come at a considerable cost to Sacyr, the Spanish building company that is leading the consortium, which saw its share price drop 6.9 percent this month following a breakdown in initial talks.

Alex Wright is a U.K.-based business journalist, who previous was deputy business editor at The Royal Gazette in Bermuda and news editor at the Insurance Times and Global Reinsurance. You can reach him at riskletters@lrp.com.
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Medical Malpractice

Medical Malpractice Claims Still Rising

The impact of tort reform has lessened, and average claims severity is rising rapidly.
By: | March 3, 2014 • 3 min read
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Medical malpractice claims increased by nearly 8 percent in severity in 2012, driven by large claims costing $2 million or more, according to new research by insurer Beazley.

The findings, which form part of Aon Risk Solution’s 2013 Hospital and Physician Professional Liability Benchmark Analysis report, uncover an upward trend that started in 2006.

The average severity for closed claims with indemnity has climbed from just above $300,000 to almost $500,000 in the space of six years.

More worryingly, however, the research revealed that the gap in the average severity for closed claims with indemnity narrowed between all U.S. states and those states where tort reform has been passed — from $100,000 in 2009 to $50,000 last year.

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Steve Chang, head of Beazley’s health care claims team, told Risk & Insurance® that the report’s data supported his own findings over the last two years.

“We have similarly felt a very acute uptick in the most severe claims,” he said.<

"The most interesting part of the report was in the non-tort reform states. We have been feeling some pressure [in terms of claims] in some states that have historically been considered benign, and the report really confirmed our experiences."

Plaintiff’s attorneys “have become very savvy at circumventing the caps in place in tort reform states for non-economic damages in order to ensure their clients receive greater economic damage compensation.”

– Steve Chang, head of Beazley’s health care claims team

Chang said there has been a “spillover effect” with the migration of big verdicts awarded in favor of the plaintiff in traditionally high severity states to lower risk jurisdictions, adding that there was no longer a big geographical split as there had been before.

“We are getting a lot of these anomalies where a large verdict will push up the settlement values of subsequent cases and therefore courts are being forced to try cases they wouldn’t normally have considered five years ago, which is creating a vicious cycle,” he said.

Beazley, which maintains a claims database covering 38 percent of U.S. hospital beds, reported that plaintiffs’ attorneys were now pushing for inflated economic damages in the form of large life care plans in states where non-economic damages are capped.

“The knock-on effect is that plaintiffs’ lawyers in tort reform states have been reading about these verdicts in non-tort reform states and many are inclined to try and emulate these results,” said Chang.

“They have become very savvy at circumventing the caps in place in tort reform states for non-economic damages in order to ensure their clients receive greater economic damage compensation.”

An example of this significant shift in plaintiff attorneys’ strategy can be found in Maryland, which despite being a tort-reform state, experienced an increase in average closed claims severity from $423,000 in 2006 to $750,000 in 2012, according to the report.

These findings are backed up by Beazley’s own claims handling experience, said Chang.

The research found that plaintiffs have also switched their focus to high severity cases, driven by catastrophic injuries and the potential for large awards rather than pursuing high volumes of relatively low value cases.

Furthermore, Beazley’s research found that 43 percent of claims above $5 million related to obstetric procedures, with the rate of increase outpacing that of non-obstetric claims.

The Physician Insurers Association of America’s national database of medical professional liability claims reflects a steady increase in severity of claims for higher risk procedures such as obstetrics, and general and orthopedic surgery.

“We have known for some time that our losses are driven primarily by obstetrics claims, but what surprised me most was the significant increase in the value of closed claims between 2005 and 2012,” said Chang.

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Divya Parikh, director of research and risk management at the Physician Insurers Association of America’s (PIAA), concurred with the report’s findings.

She said the PIAA’s national database of medical professional liability claims likewise reflected a steady increase in severity of claims for higher risk procedures such as obstetrics, and general and orthopedic surgery.

“While there has been a leveling off in the frequency of claims overall, it seems intuitive that there would be more interest in claims with bigger payouts attached,” she said.

“Obstetrics and gynecological surgery tend to report the highest number of paid claims on our database and in general they also account for the highest average individual payouts in most cases.”

Chang added that U.S. health care reform could accentuate this trend of increased claims in the long-term as more people begin to gain access to better medical services and coverage.

Alex Wright is a U.K.-based business journalist, who previous was deputy business editor at The Royal Gazette in Bermuda and news editor at the Insurance Times and Global Reinsurance. You can reach him at riskletters@lrp.com.
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