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.
If any proclamation were needed to confirm that the day of the mega cargo ship has arrived, just look to the notoriously penurious Port Authority of New York and New Jersey spending $1.3 billion to raise the deck of the Bayonne Bridge.
The roadway will be raised 64 feet, to 215 feet above mean sea level with a target completion by the end of next year to allow the new monster container ships access to the sprawling port facilities in New Jersey.
Megaships are not new, but construction and use are definitely trending up — as is a rise in incidents.
With the coming of the megaships, “the newer tonnage Panamax [300 meters] ships are being moved on to runs that were traditionally considered feeder runs. This means larger vessels in smaller ports. The result is less room for error,” said Capt. Andrew Kinsey, senior marine risk consultant with Allianz Risk Consultants.
“We [already] see a rise in incidents with these size vessels,” he said, noting that “the mega container ships are more likely to encounter incidents during arrival and departure in near coastal or port areas due to the fact that there are fewer ports that accommodate these ships.”
“As a result, the most devastating scenario will involve two of these vessels in a collision situation during arrival or departure. The channel gets very crowded when you have one or two of these maneuvering.”
Visionary naval engineer Isambard Kingdom Brunel built the 700-foot-long S.S. Great Eastern in London in 1858.
In recent decades, ultra-large crude carriers, or supertankers, have ranged up to 1,500-feet long and 250,000 deadweight tons (DWT). Mostly single-skinned, the majority has been scrapped or retired as floating storage platforms in favor of safer double-hulled tankers.
The latest mega container ships, the Triple-E class, will rival supertankers at 1,300-feet long. Costing $200 million each to build, the Triple-E class will have 18,400 TEUs (the common measure of box container capacity) — the capacity of 18,000 20-foot equivalent units. Standard shipping containers today are 40-feet long.
“The container ships of 18,000 TEUs and greater will have a trickle-down effect that is already being felt,” Kinsey said.
From the perspective of the underwriter insuring the hull and machinery, he said, “the stresses that these vessels are subject to are exponentially increasing as the size increases.”
“If we look at the failure of the MOL Comfort [built in 2007, 316 meters in length, 8,100 TEU capacity, which broke in half off Yemen in June 2013], we see a relatively new vessel built by a quality yard suffering a catastrophic failure; directly attributable to the lack of adequate container weights being provided to the vessel so that the ship can accurately calculate its trim and stability profile for the voyage.
“Couple this with the increase in fuel costs and the pressures to reduce the amount of ballast being carried and you have vessels that are running very high bending and shear force numbers. And actually, these numbers are based on faulty data because the actual container weight is not known,” he said. “Over time, this leads to premature failure of the hull structure.”
Published accounts indicate the MOL Comfort hull and machinery were insured for $66 million. The total loss cost underwriters between $300 million and $400 million in claims.
The “firmly entrenched [trend of] super-slow steaming” is another factor compounding megaship stresses, Kinsey said.
“The container ships today on the transpacific route are steaming at the same speeds as the clipper ships did. This is a cost savings measure that is here to stay with the new Triple-E class vessels having engines designed for these slower steaming speeds.
“This leads to greater exposures to controlled atmosphere cargo containers and an increase in losses, because these larger ships also need to use feeder ports. So we are looking at increased steaming time, more exposure of the reefer box to mishandling during transhipment and a subsequent increase in [cargo] losses.”
No Special Conditions
For underwriters, “hull and machinery coverage for ships is pretty much standard, tailor-made to the insured’s trade and operations,” said Sven Gerhard, global head of marine hull and liabilities at Allianz.
“There are no special policies or special conditions for megaships. Terms and conditions for a client might reflect the size of ships, for example, by higher deductibles and the insured’s self-retentions for larger vessels.
“There are no fees charged,” he said. “Premiums are driven by multiple factors, including type and size of tonnage, but also deductibles, fleet size, the quality of the insured’s risk management and the past loss experience have an influence on rates.
“This is why it’s very difficult to determine whether a rate change is determined solely by vessel size. It’s, for sure, a fact and probably not a surprise that due to values at stake, such vessels usually pay higher effective premiums than smaller vessels of the same type.”
That is corroborated by brokers.
“For bigger vessels, the premiums are generally higher,” said Robert Waterson, senior vice president of marine at Lockton in London.
That is not so much a deliberate decision by underwriters; rather, it is simply a function of arithmetic, he said.
“There are two aspects to the risk transfer equation for a vessel. One is the risk of total loss, which is easy. The value of the vessel determines the premium.
“The other aspect is the risk of partial loss from any cause. That is highly variable, but the accepted calculation is based on the tonnage. So you can see, larger vessels will pay a higher premium,” he said.
Waterson also confirmed that Lockton “is certainly working with owners who are ordering larger and larger vessels, especially ‘Cape-size’ bulkers.” Too large for any canal, they have to travel around the Cape of Good Hope or Cape Horn.
“There are bigger earnings for bigger vessels,” he said.
That is especially true of cruise ships. “We have worked with ships worth $1.4 billion,” said Waterson.
“The biggest problem with those is not overall capacity in the market, but rounding up enough subscribing underwriters. Each one takes $5 million to $10 million. It is a big challenge for the broker to line up the slip for $1.4 billion.”
While sinkings garner most of the attention, partial losses are more common. But even in those situations, the megaships present new challenges, said Martin McCluney, manager of hull and liability and U.S. marine practice leader for Marsh in New York.
Now instead of 2,000 to 3,000 containers to be salvaged, it could be 7,000 to 8,000 — all with different owners, he said.
To put that into perspective, the M.V. Rena, which grounded off New Zealand in 2011 and disintegrated in dramatic slow motion over two weeks, carried just 1,300 containers.
“The Rena was a modest sized ship,” said McCluney. “And the New Zealand government was adamant that as much cargo and fuel be removed, and then the wreck salvaged. In decades past, such a wreck would just have been left to the sea.
“The claim ran to several hundred million dollars. With the megaships, you are looking at about five times the Rena’s capacity. What would that take in time and equipment to salvage?”
Still, McCluney said, the most important factors to underwriters are not the size of the vessel, but the financial stability of the owner, the maintenance of the vessel and the training of the crew.
“You could have a brand-new ship, and if it is run shabbily, size won’t matter,” he said.
McCluney noted that the commercial drivers behind megaships are no different from sprawling malls, factories, or subdivisions. The only difference is that malls don’t sink.
“Insurance for ships is not really driven by size,” he said. “Still, the P&I clubs have awakened to the reality that removal-of-wreck costs do increase substantially with a much larger vessel.”
In such cases, environmental regulations could drive coverage costs higher, but as the rules differ around the world, and as the megaships are still new, there is no sense in the market how that will play out.
Some suggest that if the ships operate several years without major incidents, underwriters may calculate that catastrophic risks are low for the megaships as a class. If there are some losses, and operators balk at higher premiums, then bonds or some other alternate method may be devised for megaships.
“So far the bigger ships don’t rate as more exposed,” said Waterson at Lockton.
“We have not seen anything about them that indicates they are inherently riskier. But we are all still just feeling our way. There has been nothing to come along yet to indicate anything to worry about. If there are a few losses, and it becomes clear that they were something related to the size, that would change the rating system.”
Training and support for the crew are essential, said Bruce Paulsen, litigation partner with Seward & Kissel in New York.
“Most of the first-class operators train and treat their crews well. But it is still a hard and lonely existence for the dozen or two people on these ships. There are also substandard operators in the world, but they don’t come to the U.S. You could not bring a rust bucket without certification and insurance into Port Elizabeth [N.J.]. The Coast Guard would not let you in,” he said.
But while casualties tend to be fewer, they are bigger — such as Comfort, Rena, Costa Concordia, the Deepwater Horizon oil rig, and the recent Korean ferry disaster, Paulsen said.
“With the megaships, there is only a marginal increase in risk. They are more difficult to navigate, and they present more windage. They require taller and wider cranes, and not every port can handle them,” he said. “If there is a grounding or a collision, there is more cargo and fuel to try to salvage.
“But from a risk-management perspective, the shipping industry has done a very good job.”
Medication Monitoring Achieves Better Outcomes
There are approximately three million workplace injuries in any given year. Many, if not the majority, involve the use of prescription medications and a significant portion of these medications is for pain. In fact, prescription medications are so prevalent in workers’ compensation that they account for 70% of total medical spend, with roughly one third being Schedule II opioids (Helios; NCCI; WCRI; et al.). According to the U.S. Drug Enforcement Administration (DEA), between the years of 1997 and 2007, the daily milligram per person use of prescription opioids in the United States rose 402%, increasing from an average of 74 mg to 369 mg. The Centers for Disease Control and Prevention (CDC) reports that, in 2012, health care providers wrote 259 million prescriptions—enough for every American adult to have a bottle of pills—and 46 people die every day from an overdose of prescription painkillers in the US. Suffice to say, the appropriate use of opioid analgesics continues to be a serious issue in the United States.
Stakeholders throughout the workers’ compensation industry are seeking solutions to bend the curve away from misuse and abuse and these concerning statistics. Change is happening: The American College of Occupational and Environmental Medicine (ACOEM) and the Work Loss Data Institute have published updated guidelines to promote more clinically appropriate use of opioids in the treatment of occupational injuries. State legislatures are implementing and enhancing prescription drug monitoring programs (PDMPs). The Food and Drug Association (FDA) is rescheduling medications. Pharmaceutical manufacturers are creating abuse-deterrent formulations. Meanwhile payers, generally in concert with their pharmacy benefit manager (PBM), are expending considerable effort to build global medication management programs that emphasize proactive utilization management to ensure injured workers are receiving the right medication at the right time.
A variety of factors can still influence the outcome of a workers’ compensation claim. Some are long-recognized for their affect on a claim; for example, body part, nature of injury, state of jurisdiction, and regulatory policy. In contrast, prescribing practices and physician demographics are perhaps a bit unexpected given the more contemporary data analysis showing their influence on outcomes. Such is the case for medication monitoring. Medication monitoring tools promote patient safety, confirm adherence, and identify potential high-risk, high-cost claims. Three of the more common medication monitoring tools include:
- Urine Drug Testing (UDT) is an analysis of the injured worker’s urine that detects the presence or absence of a specified drug. Although it is not a diagnosis, UDT results are generally a reliable indicator of what is present (and what is not) in the injured body worker’s system. The knowledge gained through the testing helps to minimize risks for undesired consequences including misuse, abuse, and diversion of opioids. With this information in hand, adjustments to the medication therapy regimen or other intervention activities can occur. UDT can also be an agent of positive change, as monitoring often leads to behavior modification, whether in direct response to an unexpected testing result or from the sentinel effect of knowing that medication use is being monitored.
- Medication Agreements or “Pain Contracts” signed by the injured worker and their prescribing doctor serve as a detailed and well-documented informed consent describing the risks and benefits associated with the use of prescription pain medications. Medication agreements help the prescribing doctor set expectations regarding the patient’s adherence to the prescribed medication therapy regimen. They serve as a means to facilitate care and provide for a way to document mutual understanding by clearly delineating the roles, responsibilities, and expectations of each party. Research also suggests that medication agreements promote safety and education as injured workers learn more about their therapy regimen, its risks, and benefits.
- Pill Counts quantify adherence by comparing the number of doses remaining in a pill bottle with the number of doses that should remain based on prescription instructions. Most often, physicians request pill counts at random intervals or the physician may ask the injured worker to bring their medication to all appointments. As a monitoring tool, pill counts can be useful in confirming proper use, or conversely, diversion activities.
On a stand-alone basis, these tools rank high on individual merit. When used together as part of a consolidated medication management approach, their impact escalates quite favorably. The collective use of UDT, Medication Agreements, and pill counts enhance decision-making, eliminating gaps in understanding. Their use raises awareness of potential high-risk, high-cost situations. Moreover, when used in concert with a collaborative effort on the part of the payer, PBM, physician, and injured worker, they can improve communication and align objectives to mitigate misuse or abuse situations throughout the life of a claim.
Medication monitoring can achieve better outcomes
The vast majority of injured workers use medications as directed. Unfortunately, situations of misuse and abuse are far too common. Studies show a growing trend of discrepancies between the medication prescription and actual medication-regimen adherence when it comes to claimants on opioid therapy (Health Trends: Prescription Drug Monitoring Report, 2012). In response, payers, working alongside with their PBM and other stakeholders, are deploying medication monitoring tools with greater frequency to verify the injured worker is appropriately using their medications, particularly opioid analgesics. The good news is these efforts are working. Forty-five percent of patients with previously demonstrated aberrant drug-related behaviors were able to adhere to their medication regimens after management with drug testing or in combination with signed treatment agreements and multispecialty care (Laffer Associates and Millennium Research Institute, October 2011).
In our own studies, we have similarly found that clinical interventions performed in conjunction with medication monitoring tools such as UDT reduces utilization of high-risk medications in injured workers on chronic opioid therapy. Results showed there was a decrease in all measures of utilization, driven primarily by opioids (32% decrease) and benzodiazepines (51% decrease), as well as a 26% reduction in total utilization of all medications, regardless of drug class. This is proof positive that medication monitoring can be useful in achieving better outcomes.