6 Marine Services Risks
Top Five Uninsurable Risks
Whether it’s a Sriracha hot sauce maker being threatened with closure by city council or General Motors fighting for its reputation after recalling more cars than it made in the past three years, companies face a world of complex risks.
And some of those risks cannot be transferred via insurance products.
How well are companies protected, for example, when new regulations get passed — such as the EPA’s proposed restrictions on coal burning plants that may drive some in the energy industry out of business, or the current political drumbeat against tax inversion practices?
What insurance covers a company whose rogue employee sells trade secrets to an outside company? How about when a pandemic shuts down operations?
Risk managers identify their organizational exposures as best they can and then work to manage or eliminate those risks. Sometimes, commercial insurance can be used to remove the bulk of that risk, but we’ve isolated five risks which many experts believe are uninsurable in many respects: For the time being anyway.
“For the most part, the insurance industry rises to the occasion and creates products for emerging risks that evolve over time,” said Carol Laufer, executive vice president, ACE Excess Casualty.
“For insureds, the purchase of products such as employment practices and cyber insurance eventually evolves from a discretionary spend to standard insurance coverage,” she said.
For sure there are other challenging risks — such as weak economic conditions or skilled talent shortages — that also are uninsurable, but we have selected those for which risk managers are able to play an effective role in mitigating the risk.
Part of the problem in transferring such risks is the complexity involved in the exposures. Look at tax inversion — where a U.S. company merges with a foreign company to change their tax jurisdiction and lower their tax burden.
Is that a political risk? A regulatory risk? A reputational risk? It could be any one of them, or all three of them.
“I think it’s almost uncountable the ways that a loss could occur where that loss could be tied back to reputational risk or regulatory risk,” said David White, a national actuarial leader at KPMG.
At the same time, calling a risk uninsurable has nuances to it. Coverage for criminal fines and penalties, for example, are truly uninsurable. The law forbids such coverage, said Patrick Donnelly, chief broking officer, Aon Risk Solutions.
But for other types of risks, there may be various products offered by brokers and underwriters to address some, but not all of the specific exposures faced by a company, he said. Such coverage, however, may be rare or expensive, or corporations may find risk transfer to be an ineffective way of hedging the risk.
“I’m very careful about branding something as truly uninsurable,” Donnelly said.
“It’s not black and white.”
General Motors might be the quintessential example of a company undergoing a reputational hit. It recalled nearly 30 million cars, and faces numerous lawsuits and investigations related to a delayed recall of 2.6 million cars — some manufactured more than a decade ago — with a faulty ignition switch that has been linked to 13 deaths and more than 50 accidents.
Video: As this report from the New York Times indicates, automakers have a long history of trying to maintain their reputations in the face of major recalls.
But every day brings another contender for the throne. One day, it’s American Apparel’s founder being suspended, and possibly eventually fired, for alleged sexual misconduct. Another day, it’s a viral video of a Comcast customer service representative who refuses to let a customer cancel his account.
Or it could be yet another cyber theft of customer information or a celebrity spokesman tweeting out an offensive comment.
While there are insurance products that provide coverage for crisis management/public relations costs and product recall expenses, only a limited market exists for loss of income or net profit for reputational harm, said Emily Freeman, global technology and privacy practice specialist at Lockton.
“You need to be able to wrap your arms around the risk and the value of risk before you can insure it,” said Tom Srail, senior vice president, Willis. “What a company name is worth has long been a risk to the industry.”
Freeman said Lockton has been involved in creating customized solutions for large clients that address specific threats of reputational harm. The client and underwriter negotiate the period of indemnity and loss adjustment, she said.
“The perils are not on an ‘all risk’ basis, but rather categories listed that are relevant to the client, such as disgrace of key persons or breach of sensitive data,” Freeman said.
“In my mind,” said KPMG’s White, “you can’t find policies that cover all types of reputational risk from whatever event that occurred.”
When you think of regulatory risk, many risk managers keep an eye on the rules of the Health Information Portability and Accountability Act (HIPAA), the Dodd-Frank Act or a regulatory agency such as the Food & Drug Administration.
But the threat of regulation is immense and often unpredictable. In just one year, 2012, there were 17,763 changes to laws, rules and regulations affecting the banking and financial sectors alone, according to The Network, a training and compliance company.
“From a risk management or risk mitigation perspective, you can’t really predict regulations. You can prepare for them, but you can’t predict them or price them.” — David White, national actuarial leader, KPMG
Plus, risks can emanate from all sectors of government. One recent example is Huy Fong Foods, the manufacturer of Sriracha hot sauce, which was temporarily shut down by a judge following a lawsuit by the city council of Irwindale, Calif., after four families (one of which was related to a city councilman) complained about odors.
Eventually, the city dropped its lawsuit and its declaration that the factory was a “public nuisance,” but it took months for the situation to resolve itself.
“From a risk management or risk mitigation perspective, you can’t really predict regulations. You can prepare for them, but you can’t predict them or price them,” White said. “Regulatory risk is handled through risk mitigation, not risk transfer.”
“Even in the United States,” Srail said, “a government or state can put an industry or a company, if they want to, out of business or severely restrict their ability to operate.”
Certainly, the energy industry has been facing that threat since 2008 when President Obama noted that coal-powered plants can still be built, but at a steep regulatory cost.
“It’s just that it will bankrupt them because they are going to be charged a huge sum for all that greenhouse gas that’s being emitted,” Obama said.
While a final rule has not yet been issued by the Environmental Protection Agency, the president has recently called on it to enact new emissions regulations. The U.S. Chamber of Commerce estimated the regulations will cost the economy about $50 billion annually.
“There are some creative products underwriters have tried over the years … but there is definitely nothing off the shelf or run of the mill,” Srail said of regulatory risk.
“There’s nothing easy to do.”
Trade Secret Risk
“I find trade secrets to be one of the most dangerous areas,” said attorney Rudy Telscher, a partner at Harness Dickey & Pierce, who recently won a patent infringement case at the U.S. Supreme Court.
“There are no boundaries. It’s such a nebulous area.”
It can include anything from a disgruntled employee taking customer lists or R&D information to his next job, a foreign government stealing trade secrets or a hacker burrowing into a computer system to steal a company’s version of its special sauce.
Globalization and the expanded use of supply chain partners increase the potential exposure. Plus, even when a company is able to pursue trade secret litigation, courts consider whether reasonable precautions had been taken to secure the proprietary information.
“The violation,” said Bob Fletcher, president, Intellectual Property Insurance Services Corp., which offers insurance to litigate intellectual property cases, “is not the use [of a trade secret]. The violation is, ‘How did you get the information?’ ”
In any event, said Aon’s Donnelly, “an organization would have a very difficult time obtaining an insurance policy that adequately protects them against the theft or wrongful disclosure of their trade secrets and the potential damage that could do to the company if that trade secret got out.”
More common than industrial espionage, however, are the run-of-the-mill business discussions that revolve around synergies and potential partnerships between enterprises. Often, the nondisclosure agreements (NDAs) covering such discussions are not specific enough to protect the parties, Telscher said.
It is the party receiving the information that is most at risk, he said. If the discussions dissolve, that party may find itself accused of acting upon trade secrets because the NDA did not specify the information that was to be disclosed and held confidential.
“The more information you receive, the greater the risk there will be a lawsuit if you don’t end up doing a deal and you move forward on your own,” Telscher said.
In this era of globalization, companies establish operations all over the world, and the world is not a stable place.
Upheaval — or the increasing threat of it — is prevalent on just about every continent of the globe. Certainly, the possibilities in the Middle East, Eastern Europe, Asia and Latin America are concerning to risk managers.
While political violence and trade credit coverage is available in the majority of cases, companies continue to face uninsurable exposures.
“It’s definitely tricky,” said Mark Garbowski, a shareholder at Anderson Kill.
“Based on the policies I have seen, there will always be some aspects of it that will be fully outside the scope of what can be covered.”
And only “a minority” of companies actually buy the cover, said John Hegeman, AIG senior vice president, specialty lines-political risk.
“I think the principal reason is most risk managers view it as a self-insured business risk,” he said.
“Pretty much anything an insured thinks is really essential to their operations can be covered, but you have to identify it and understand what it is.”
Often, said Richard Maxwell, chief underwriting officer and global head of political risk and trade credit insurance for XL Group, corporations wait too long in the face of deteriorating conditions and insurers will not accept the risk.
“Buy the cover before the barn is on fire,” he said.
Generally, policies cover a host of risks, including government expropriation of an asset, destruction of an asset due to war or political violence, credit default of trade receivables, and when foreign governments block transfer and convertibility of currency.
Some countries, such as Iran, Iraq, Afghanistan and the like, are not insurable, said Jochen Duemler, CEO and head of Euler Hermes Americas Region, which offers risk coverage in nearly 200 countries.
Argentina is a recurring problem, and as for Venezuela, it’s not uninsurable, he said, “but we would say we pretty much have no exposure there and are very, very reluctant” to offer coverage.
Overall, policies exclude losses that occur when currency is devalued, losses that occur as a result of a nuclear incident and non-payment of premium, or any losses to suppliers or partners as a result of political violence, except for trade receivables.
Policies also require insureds to make certain warranties and representations that are included in the insurance contract.
Policy disputes can arise when property is expropriated or licenses are cancelled due to what a foreign government says are reasonable or legally justified regulatory actions, according to an article on political risk coverage by Robert C. Leventhal, an attorney with Foley and Lardner.
Another area of dispute emerges when assets are jeopardized by “creeping expropriations,” such as a series of actions by the government as opposed to a single act, he said.
Many risk managers aren’t too worried about the Ebola pandemic in West Africa that has already killed more than 900 people. And they probably aren’t all that worried — if they even know — about the four cases of pneumonic plague in Colorado that are life-threatening.
But who among them can forget the H1N1 pandemic influenza virus known as the swine flu, that in 2009 killed more than 250,000 people worldwide, including more than 3,600 in North America.
At one point, the U.S. Centers for Disease Control and Prevention estimated that as many as two in five workers might become infected or have to stay home to care for an ill family member.
Video: Researchers at the Massachusetts Institute of Technology studied the role airports play in spreading disease and pandemics, according to this report by Voice of America.
A pandemic flu is something all risk managers should worry about. And there’s no coverage for it.
“A pandemic is a very difficult exposure to insure in any meaningful way. You can do some work around it, but it’s a very, very difficult risk to insure and no one really insures it,” said John McLaughlin, managing director of the higher education practice at Arthur J. Gallagher & Co.
For schools or universities, his specialty, there may be some loss of tuition coverage available, but “it’s not very cost effective.”
For business, supply-chain insurance may offer some protection, but that coverage still has a limited take-up.
Companies may also be able to craft special wording for property or D&O policies, he said.
“You never say never. There’s always some solution that you can work up,” he said.
But, McLaughlin said, a healthier perspective for a risk manager is to analyze how the risk would impact the organization and to devise solutions that are not insurance-related.
The Promise of Technology
The field of workers’ compensation claims management seems ideally suited as a proving place for the power of technology.
Predictive analytics in the hands of pharmacy and medical management experts can give claims managers the data they need to intervene in troublesome claims. Wearables and other mobile technologies have the potential to give healthcare providers “real-time” reports on the medical condition of injured workers.
Never before have the goals of quick turnaround and transparency in managing claims appeared so tantalizingly achievable.
In the effort to learn more about technology’s potential, in September, Risk & Insurance® partnered with Duluth, Ga.-based Healthcare Solutions to convene an information technology executive roundtable in Philadelphia.
The goal of the roundtable was to explore technology’s promise and to gauge how advancements are serving the industry’s ultimate purpose, getting injured workers safely back to work.
Big Data, Transparency and the Economies of Scale
Integration is a word often heard in connection with workers’ compensation claims management. On one hand, it refers to industry consolidation, as investors and larger service providers seek to combine a host of services through mergers and acquisitions.
In another way, integration applies to workers’ compensation data management. As companies merge, technology is allowing previously siloed stores of data to be combined. Access to these new supersets of data, which technology professionals like to call “Big Data,” present a host of opportunities for payers and service providers.
Through accessible exchange systems that give both providers and payers better access to the internal processes of vendors, a service provider can show the payer the status of the claim across a much broader spectrum of services.
“One of the things I see with all of this data starting to exchange is the ability to use analytics to predict outcomes, and to implement workflows to intervene.”
–Matthew Landon, Vice President of Analytics, Bunch CareSolutions.
“Any time that we can integrate with a payer across multiple products such as pharmacy, specialty and PPO services, what it does is gives us a better picture of the claim and that helps us to drive better outcomes,” said roundtable participant Chuck Cavaness, chief information officer for Healthcare Solutions.
Integration across multiple product lines also produces economies of scale for the payer, he said.
Big Data, according to the roundtable participants, also provides claims managers an unparalleled perspective on the cases they manage.
“One of the things that excites us as more data is exchanged is the ability to use analytics to predict outcomes, and to implement workflows to intervene,” said roundtable participant Matthew Landon, vice president of analytics with Lakeland, Fla.-based Bunch CareSolutions, A Xerox Company.
Philadelphia roundtable participant Mike Cwynar, vice president of Irvine, Calif.-based Mitchell International, agrees with Landon.
“We are utilizing technology to consolidate all of the data, to automate as many tasks as we can, and to provide exception-based processing to flag unusual activity where claims professionals can add value,” Cwynar said.
Technology is also enabling the claims management industry to have more productive interactions with medical providers, long considered one of the Holy Grails of better case management.
Philadelphia roundtable participant Jerry Poole, president and CEO of Malvern, Pa-based claims management company Acrometis, said more uniform and accessible information exchange systems are giving medical providers access to see how bills are moving through the claims manager’s process.
“The technology is enabling providers to call in or to visit a portal to figure out what’s happening in the process,” Poole said.
Another area where technology is moving the industry forward, according to the Philadelphia technology roundtable participants, is mobile technology, which is being used to support adjustors and case managers and is also contributing to quicker return to work and lower costs for payers.
The ability to take a digital tablet to a meeting with an injured worker or a health care provider is allowing case managers to enter data and give feedback on a patient’s condition in real time.
“Our field-based case managers have mobile connectivity to our claims systems that they use while they’re out of the office attending doctor’s appointments, and can enter the data right there into the system, so they’re not having to wait until they are back at the office to enter critical clinical documentation,” said Landon.
Injured workers that use social media, e-mail and the texting function on their mobile phones are staying in better touch with those that are charged with insuring that they are in compliance with their treatment plans.
Wearable devices that provide in-the-moment information about an injured workers’ condition have the potential to recreate what is known in aviation as the “black box,” a device that will record and store the precise physical state of an employee when they were injured. Such a device could also monitor their recovery process.
But as with many technologies, worker and patient privacy also needs to be observed.
“At the end of the day, we need to make sure that we approach technology enhancement that demonstrates value to the client, while ensuring patient advocacy,” Landon said.
As payers and claims managers set out to harness the power of computing in assessing an injured worker’s condition and response to treatment, the cycle of investment in companies that serve the workers’ compensation space is currently playing a significant role.
The trend of private equity investing in companies that can establish one-stop shopping for such services as medical case management, bill review, pharmacy benefit management and fraud forensics has huge potential.
“Any time that we can integrate with a payer across multiple products such as pharmacy, specialty and PPO services, what it does is gives us a better picture of the claim and that helps us to drive better outcomes.”
— Chuck Cavaness, Chief Information Officer, Healthcare Solutions.
The challenge now facing the industry, one the information technology roundtable participants are confident it can meet, is integrating those systems. But doing so won’t happen overnight.
“There’s a lot of specialization in the industry today,” said Jerry Poole of Acrometis.
Years ago there was a PT network. Now there’s a surgical implant guy, there’s specialized negotiations, there’s special investigations, said Poole.
The various data needs to be integrated into an overall data set to be used by the carriers to help lower the cost of risk.
Securing Sensitive Information
Long before hackers turned the cyber defenses of major national retailers inside out, claims management professionals have focused increased attention on the protection of data shared across multiple partners.
Information security safeguards are changing and apply to what technology pros refer to “data at rest,” data that is stored on a particular company’s servers, and “data in flight,” data that is transferred from one user to another.
Mitchell’s Cwynar said carriers want certification that every company their data is being sent to needs to have that information and that both data at rest and data in flight is encrypted.
The roundtable participants agreed that the industry is in a conundrum. Carriers want more help in predictive analytics but are less willing to share the data needed to make those predictions.
And as crucial as avoiding cyber exposures and the corresponding reputational damage is for large, multinational corporations, it is even more acute for smaller companies in the workers’ compensation industry.
Healthcare Solutions’ Cavaness said the millions in loss notification and credit monitoring costs that impact a Target or a Home Depot in the case of a large data theft would devastate many a workers’ compensation service vendor.
“They’d be done in a minute,” Cavaness said.
The barriers to entry in this space are higher now than ever before, continued Cavaness, and companies wishing to do business with large carriers have the burden of proving that its security standards are uncompromising.
Workers’ compensation risk management in the United States is by its very nature, complex and demanding. But keep in mind that those charged with managing that risk get better results year after year.
Technology has a proven capability to iron out the system’s inherent complications and take its more mundane tasks off of the shoulders of case adjustors.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Healthcare Solutions. The editorial staff of Risk & Insurance had no role in its preparation.