The Paradox of Drones
A paradox is emerging in the area of drone or unmanned aerial systems (UAS) coverage.
On the one hand, capacity for UAS–related risks is fairly abundant, according to a report from Marsh. Yet at the same time, underwriting expertise and historical data are in short supply.
As the insurance industry waits for enough data to more comfortably underwrite the risk, carriers are working off of forms developed for traditional aviation risks. The lack of precise language to address the risks of drones is limiting coverage, and by extension the expansion of the commercial use of drones.
According to a recent report from Marsh, entitled “Dawning of the Drones: The Evolving Risk of Unmanned Aerial Systems,” insurance is currently available to cover drone-related property and liability risks such as:
- Physical Loss to the UAS itself (airframe, propulsion units, operating system, and flight controls).
- The payload—such as camera equipment and sensors, and the ground station/control unit, as well as spare parts, and coverage for transit.
On the liability side, coverage is available for bodily injury and property damage as well as product liability for re-sellers and manufacturers.
The report includes a checklist of risk factors influencing UAS underwriting decisions.
For instance, in determining whether or not to take on UAS liability risks, underwriters are looking at:
- Whether operators are certified by a governing body.
- The hours flown since the craft was manufactured.
- Engine type and redundancy as well as aircraft range.
In deciding about UAS property risks, all of the above concerns are taken into consideration as well as additional factors such as endurance, launch and recovery, navigation, operating environment (urban or non-urban) as well as maintenance, storage, countries and safety of the load while in transit.
Considering that much of the coverage that exists today evolved from the aviation market—and considering the shortage of UAS-related claims history, according to Marsh, some carriers are hesitant to underwrite the UAS sector, despite a general glut of capacity.
“It is difficult with the FAA just starting to open the commercial air space, to know what all of the risks are,” an executive with Marsh said.
“There just hasn’t been the claims history or litigation to tell where problems may lie.”
Exceptions to the rule do exist, however: One coverage that’s available which has some uniqueness to drones is insurance to cover the risks to the ground control equipment — whether hand-held or via a full cockpit layout (often contained in a van).
“Such coverage varies depending upon the size and type of control station and functionality,” according to the Marsh report.
Still, risk specialists wanting a UAS insurance program addressing only what is needed for unmanned aircraft may want to consider markets who’ve been hard at work crafting specialized coverage for drones.
Another factor limiting the expansion of commercial drone use is a lack of regulation from the FAA. As an opinion piece in the Houston Chronicle recently pointed out, Congress asked the FAA to issue regulations by September of 2015.
The FAA recently announced it could miss that deadline by as much as two years.
Greenberg on Cuba
On a visit to Moscow in 1964, Hank Greenberg noticed a picture of a Havana office building on the desk of an official with the Soviet insurance company Ingosstrakh.
“That looks like the building where my company housed its insurance operations,” Greenberg — who was in Moscow seeking a travel risk reinsurance deal — told the official.
The C.V. Starr Companies had an office in Havana – pictured above – between 1943 and 1958.
“That may be,” the Soviet official replied. “Now it is the building where Ingosstrakh houses the Soviet Union’s Cuban operations,” he added.
“Please take care of that building,” Greenberg told the official. “We will get it back … soon.”
More than 50 years after Greenberg made that bold statement, as recounted in his 2013 book “The AIG Story,” the day that Starr Companies takes possession of its former property in Havana is not yet here.
“Change must come about, but how fast? I can’t answer that.” – Hank Greenberg, CEO and Chairman of the Starr Companies.
With the recent easing of travel restrictions to Cuba by the U.S. government, however, Starr Companies’ executives are checking on the condition and ownership of the building just the same.
Untangling the history of that Havana building is just one of the opportunities that are on the minds of business people in the United States since travel restrictions to Cuba were eased in January.
Greenberg expresses the hope that his company can one day re-open an insurance operation in Havana. At the same time, Greenberg said that there is much work yet to be done, on the part of both the public and the private sector, before anything like that can happen.
“Both governments have got to agree on the speed by which normalization would come into being,” Greenberg said.
Since the restrictions were eased, Greenberg reports that the Starr Companies’ travel services subsidiary Assist-Card International Holdings, which it acquired in 2011, is already seeing an uptick in inquiries from businesspeople interested in its travel protection services in Cuba.
“From what we can discern, there is a great deal of interest and a pent-up need to travel,” Greenberg said.
The hotel and restaurant business, agriculture and travel-related industries like cruise shipping and aviation are just a few of the industries that will see opportunities in nearby Cuba as relationships between that country and the United States open up.
There will also be an intense interest, Greenberg said, for people of Cuban descent who are United States citizens eager to visit their origin country.
However, more evolution in government relations must occur before many of those dreams can become a reality.
“Change must come about, but how fast? I can’t answer that,” Greenberg said.
One thing Greenberg is certain of. Free trade is the quickest route to building lasting bonds between the United States and Cuba.
“I think that where trade increases between countries generally you see change in attitudes and building better trust between countries. You learn from each other, it’s a faster way to normalize relations than anything I can think of,” Greenberg said.
Greenberg stressed that Assist-Card International isn’t the only U.S.-based insurance company or subsidiary in the travel risk business.
The Starr chairman indicated though that he expects his company to be a strong competitor.
“The challenges of doing business in Cuba are substantial,” Greenberg said.
“But Starr is well-positioned and prepared to leverage our relationships and global network to support our clients’ entry into this market.”
Pathogens, Allergens and Globalization – Oh My!
In 2014, a particular brand of cumin was used by dozens of food manufacturers to produce everything from spice mixes, hummus and bread crumbs to seasoned beef, poultry and pork products.
Yet, unbeknownst to these manufacturers, a potentially deadly contaminant was lurking…
What followed was the largest allergy-related recall since the U.S. Food Allergen Labeling and Consumer Protection Act became law in 2006. Retailers pulled 600,000 pounds of meat off the market, as well as hundreds of other products. As of May 2015, reports of peanut contaminated cumin were still being posted by FDA.
Food manufacturing executives have long known that a product contamination event is a looming risk to their business. While pathogens remain a threat, the dramatic increase in food allergen recalls coupled with distant, global supply chains creates an even more unpredictable and perilous exposure.
Recently peanut, an allergen in cumin, has joined the increasing list of unlikely contaminants, taking its place among a growing list that includes melamine, mineral oil, Sudan red and others.
“I have seen bacterial contaminations that are more damaging to a company’s finances than if a fire burnt down the entire plant.”
— Nicky Alexandru, global head of Crisis Management at AIG
“An event such as the cumin contamination has a domino effect in the supply chain,” said Nicky Alexandru, global head of Crisis Management at AIG, which was the first company to provide contaminated product coverage almost 30 years ago. “With an ingredient like the cumin being used in hundreds of products, the third party damages add up quickly and may bankrupt the supplier. This leaves manufacturers with no ability to recoup their losses.”
“The result is that a single contaminated ingredient may cause damage on a global scale,” added Robert Nevin, vice president at Lexington Insurance Company, an AIG company.
Quality and food safety professionals are able to drive product safety in their own manufacturing operations utilizing processes like kill steps and foreign material detection. But such measures are ineffective against an unexpected contaminant. “Food and beverage manufacturers are constantly challenged to anticipate and foresee unlikely sources of potential contamination leading to product recall,” said Alexandru. “They understandably have more control over their own manufacturing environment but can’t always predict a distant supply chain failure.”
And while companies of various sizes are impacted by a contamination, small to medium size manufacturers are at particular risk. With less of a capital cushion, many of these companies could be forced out of business.
Historically, manufacturing executives were hindered in their risk mitigation efforts by a perceived inability to quantify the exposure. After all, one can’t manage what one can’t measure. But AIG has developed a new approach to calculate the monetary exposure for the individual analysis of the three major elements of a product contamination event: product recall and replacement, restoring a safe manufacturing environment and loss of market. With this more precise cost calculation in hand, risk managers and brokers can pursue more successful risk mitigation and management strategies.
Product Recall and Replacement
Whether the contamination is a microorganism or an allergen, the immediate steps are always the same. The affected products are identified, recalled and destroyed. New product has to be manufactured and shipped to fill the void created by the recall.
The recall and replacement element can be estimated using company data or models, such as NOVI. Most companies can estimate the maximum amount of product available in the stream of commerce at any point in time. NOVI, a free online tool provided by AIG, estimates the recall exposures associated with a contamination event.
Restore a Safe Manufacturing Environment
Once the recall is underway, concurrent resources are focused on removing the contamination from the manufacturing process, and restarting production.
“Unfortunately, this phase often results in shell-shocked managers,” said Nevin. “Most contingency planning focuses on the costs associated with the recall but fail to adequately plan for cleanup and downtime.”
“The losses associated with this phase can be similar to a fire or other property loss that causes the operation to shut down. The consequential financial loss is the same whether the plant is shut down due to a fire or a pathogen contamination.” added Alexandru. “And then you have to factor in the clean-up costs.”
Locating the source of pathogen contamination can make disinfecting a plant after a contamination event more difficult. A single microorganism living in a pipe or in a crevice can create an ongoing contamination.
“I have seen microbial contaminations that are more damaging to a company’s finances than if a fire burnt down the entire plant,” observed Alexandru.
Handling an allergen contamination can be more straightforward because it may be restricted to a single batch. That is, unless there is ingredient used across multiple batches and products that contains an unknown allergen, like peanut residual in cumin.
Supply chain investigation and testing associated with identifying a cross-contaminated ingredient is complicated, costly and time consuming. Again, the supplier can be rendered bankrupt leaving them unable to provide financial reimbursement to client manufacturers.
“Until companies recognize the true magnitude of the financial risk and account for each of three components of a contamination, they can’t effectively protect their balance sheet. Businesses can end up buying too little or no coverage at all, and before they know it, their business is gone.”
— Robert Nevin, vice president at Lexington Insurance, an AIG company
Loss of Market
While the manufacturer is focused on recall and cleanup, the world of commerce continues without them. Customers shift to new suppliers or brands, often resulting in permanent damage to the manufacturer’s market share.
For manufacturers providing private label products to large retailers or grocers, the loss of a single client can be catastrophic.
“Often the customer will deem continuing the relationship as too risky and will switch to another supplier, or redistribute the business to existing suppliers” said Alexandru. “The manufacturer simply cannot find a replacement client; after all, there are a limited number of national retailers.”
On the consumer front, buyers may decide to switch brands based on the negative publicity or simply shift allegiance to another product. Given the competitiveness of the food business, it’s very difficult and costly to get consumers to come back.
“It’s a sad fact that by the time a manufacturer completes a recall, cleans up the plant and gets the product back on the shelf, some people may be hesitant to buy it.” said Nevin.
A complicating factor not always planned for by small and mid-sized companies, is publicity.
The recent incident surrounding a serious ice cream contamination forced both regulatory agencies and the manufacturer to be aggressive in remedial actions. The details of this incident and other contamination events were swiftly and highly publicized. This can be as damaging as the contamination itself and may exacerbate any or all of the three elements discussed above.
Estimating the Financial Risk May Save Your Company
“In our experience, most companies retain product contamination losses within their own balance sheet.” Nevin said. “But in reality, they rarely do a thorough evaluation of the financial risk and sometimes the company simply cannot absorb the financial consequences of a contamination. Potential for loss is much greater when factoring in all three components of a contamination event.”
This brief video provides a concise overview of the three elements of the product contamination event and the NOVI tool and benefits:
“Until companies recognize the true magnitude of the financial risk and account for each of three components of a contamination, they can’t effectively protect their balance sheet,” he said. “Businesses can end up buying too little or no coverage at all, and before they know it, their business is gone.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.