Risk Insider: Joe Tocco

Expanded Canal Creates Greater Opportunities … and Risks

By: | July 6, 2016 • 2 min read
Currently Chief Executive of the Americas for XL Catlin’s insurance operation, Joe Tocco has enjoyed three decades in the insurance industry at various organizations. He is also a veteran of the U.S. Navy, where he served as a nuclear field service engineer. He can be reached at [email protected]

An international consortium of companies built a new third lane and set of locks at the Panama Canal that doubles its capacity.

Like other massive infrastructure projects, the expansion effort faced an assortment of challenges. Nonetheless, on June 26, the Chinese container ship Costco Shipping Panama became the first vessel to pass through the new third lane; its name was changed to respect the honor of being the first “New Panamax”-sized ship to transit the canal.

Building Bridges

Doubling the capacity of the Panama Canal should increase trade flows between Asia and the Americas, as well as between Latin America and North America.

For example, about 10 percent of the Asia-to-U.S. container traffic could shift from the West Coast to the East Coast by 2020. A larger Panama Canal also offers an attractive alternative for shipping bulk commodities from the U.S. heartland to Asia via the Mississippi River.

For starters, bigger ships mean more accumulation risk. It’s estimated that the additional cargo moving through the canal each day will be worth about $1.25 billion. And that figure doesn’t include the vessels queuing at both ends of the canal.

And as natural gas production has surged in the U.S., producers are looking to develop new markets in Asia; an expanded Panama Canal could help facilitate that.

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For Latin America, the canal’s greater capacity could lead to increased deliveries of agricultural and other products to Asia. Similarly, we could soon see more shipments of perishable products like meat and fish, fresh produce and cut flowers from Latin America to North America.

A More Complex Risk Landscape

Doubling the canal’s capacity will also alter the risk landscape in Panama and elsewhere.

For starters, bigger ships mean more accumulation risk. It’s estimated that the additional cargo moving through the canal each day will be worth about $1.25 billion. And that figure doesn’t include the vessels queuing at both ends of the canal.

Operational risks at the canal are also potentially greater. In the original locks, electric locomotives on the lock walls pull the vessel along. In the new third lane, tugs positioned fore and aft will escort ships through the locks.

While canal pilots and tugboat captains have undergone extensive training, concerns have been expressed about the possibility of a tug losing control of the tow, resulting in damage to the lock as well as the ship. The maneuverability of the tugs selected for this task has also been questioned.

Given the Panama Canal’s prominent role in today’s supply chains, the impacts of an incident that takes the third lane offline would ripple quickly through the global economy, especially if the shutdown is protracted. Latin American companies shipping perishable products to North America, for example, could be especially affected by such an event.

Ports that have expanded, or are being expanded, to handle New Panamax (and larger) vessels also face greater accumulation and operational risks. And for ports on the East Coast of the U.S., the risks are amplified by the ongoing threat posed by hurricanes.

While it is too soon to determine how this expansion effort will reverberate throughout the Americas and across the globe, the canal should nonetheless continue to play a significant part in the ongoing march to a smaller world and a larger global economy.

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Cyber Risks

Ports Need to Rethink Criminal Activity

Port computer systems are vulnerable to criminal organizations looking to steal, smuggle or commit espionage.
By: | June 6, 2016 • 5 min read
industrial port with containers

As the marine industry grows more automated, ports and related industries are increasingly vulnerable to cyber disruptions.

In the past, criminals would steal a container on the dock and drive away before anyone noticed. Today’s criminals are global. They don’t have to be in the same country to learn when a container arrives, when it clears inspection, what’s inside it, where it’s stored and when it’s moving out.

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Computer networks changed how ports are run. Ports now use fewer workers on the ground because computers can operate vehicles remotely and GPS-based systems track and move containers semi-autonomously.

The systems may have changed, but criminals continue to try to steal containers, smuggle drugs or engage in espionage.

Ports are the economic engine that drives the economy, said Jayson Ahern, principal at The Chertoff Group and former deputy commissioner of U.S. Customs and Border Protection.

He said they need to be better protected.

“Port operators need to be looking at security in real time and rethink the risks – not just meet the minimum requirement of their governing agencies – and that’s where port operators often fall short,” said Ahern.

“Criminal activity is going to continue. Every time we plug one gap and vulnerability, they go back and adapt and diversify their approach.”

Billions in Losses

About 95 percent of world trade is transported via ship each year, according to the U.S. Department of Homeland Security.

“When we saw the impact of closing ports right after 9/11,” Ahern said, “I saw firsthand what happens when you shut down trade at our borders.”

Following the 2001 attacks, container shipping lost $1 billion each day for months after the United States closed all ports and airports, Ahern said.

More recently, a months-long labor dispute at 29 West Coast ports resulted in work slowdowns and caused billions in losses, according to Vice News. U.S. agriculture lost about $2.5 billion, while manufacturers reported an aggregate of nearly $400 million in losses for each month of the dispute.

A cyber attack could cause the same type of economic damage.

In 2013, computer problems – caused by error, not sabotage – resulted in weeks of problems at the Maher Terminal serving the port of New York and New Jersey, including closing the terminal for up to six hours at a time, according to the “Consequences to Seaport Operations from Malicious Cyber Activity” a report by DHS.

DHS also reported that an organized crime group used hackers to control the movement and location of containers at the Port of Antwerp in Belgium between 2011 and 2013; and crime syndicates penetrated the cargo systems used by Australian Customs and Border Protection in 2012.

Matthew McCabe, senior vice president, FINPRO practice, Marsh

Matthew McCabe, senior vice president, FINPRO practice, Marsh

Not only are ports vital to the economy, they are a national security issue, said Matthew McCabe, senior vice president for network security and data privacy group with the FINPRO practice at Marsh.

“We need to see more cyber security assessments,” Ahern said. “We’re not seeing it happening sufficiently enough around the world. People need to always be asking: ‘What type of monitoring and disruptions of attacks are we seeing?’ ”

A comprehensive plan needs to encompass three areas: physical security, insider threats and cyber risks, Ahern said.

Putting Plans in Place

When Martin McCluney, managing director, U.S. hull and liability practice leader at Marsh, talks to marine clients about cyber risk, he says they weigh whether to retain, manage or transfer risk into the market.

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“We are in conversations with several operators now,” said McCluney.

“We are assisting them in their internal process to evaluate the cost/benefit of any additional insurance that may be necessary.”

Just the mere act of applying for cyber risk insurance normally sets the wheels in motion for businesses to begin a risk assessment of cyber controls, McCabe said.

There is value in going through the planning process and identifying who you would turn to in a time of crisis.

The insurance market is keen to not just provide pure risk transfer but to also provide loss prevention and post-loss advice, McCluney said.

“We ask, ‘How do you recover? What systems do they have in place to prevent and deter attacks?’ And, if systems have been compromised, what is the contingency plan once an attack has impacted them?”

Insureds should review in detail the way their existing marine and property casualty policies would respond to a cyber attack. The task can be complicated because port operators work with many third parties that ship and receive the goods on either side, so operators need to establish minimum codes of compliance with all additional parties.

Marine market policies that cover stevedoring (loading and unloading of vessels in terminal operation) do not consistently include a cyber risk solution.

The client is very likely exposed to risks that are outside the coverage, McCluney said.

For example, if handling equipment shuts down due to a computer problem but hasn’t suffered physical damage, the economic losses may not be covered under a property policy.

To prevent losses in a case like this, operators should consider a cyber program that would be in excess to a property program, or a difference-in-conditions policy that would fill gaps in the coverage, McCluney said.

The core benefit to cyber insurance is you are able to transfer some of the financial damage and coordinate your response plan, so there’s a mechanism ready at a time of crisis, McCabe said.

The growth of cyber insurance over the last three years bears that out. The number of U.S.-based Marsh clients purchasing stand-alone cyber insurance increased 27 percent last year compared with 2014. That followed a 32 percent increase in 2014 over 2013.

Cyber insurance growth is expected to continue apace as port operators understand the potential cyber risks they face, and conduct risk assessments in conjunction with the Maritime Transportation Security Act. The act was written after 9/11 to shore up port protections by requiring vessels and cargo-handling facilities to conduct vulnerability assessments and develop security plans.

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The U.S. Coast Guard made additional cyber strategy recommendations in a June 2015 report.

In that report, the USCG recommended organizations view cyber security as an ongoing process, and regularly re-evaluate mitigation measures and ensure personnel understand and follow good cyber practices.

Organizations should strive to incorporate cyber security into an existing culture of safety, security, and risk management, it said, and identify a senior person responsible for cyber risk management.

Juliann Walsh is a staff writer at Risk & Insurance. She can be reached at [email protected]
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Sponsored: Liberty Mutual Insurance

Buyers Beware: General Liability Outlook May be Shifting

Buyers should focus on building a robust GI program and risk management infrastructure to lessen the impact of emerging GI trends.
By: | July 5, 2016 • 6 min read

The soothing drumbeat of “excess capital” and “soft market” to describe the general liability (GL) market is a familiar sound for brokers and buyers. Emerging GL trends, however, suggest the calm may not last.

Increasing severity of GL claims may hit some sectors like a light rain at first, if they have not already, but they could quickly feel like a pelting thunderstorm in others. A number of factors could contribute to the potential jump in GL prices for certain industry segments or exposures, possibly creating “micro” or niche hard markets in the short-term, and maybe even turning the broader market over the longer-term.

“There are trends we’re seeing that will play out slowly. Industries that carry more general liability exposure will and have been hit first and hardest, but it won’t apply across the board initially,” said David Perez, Senior Vice President and Chief Underwriting Officer, for Liberty Mutual Insurance’s National Insurance Specialty operation. “There is ample capital in the market today, which allows a poor performing account to move its policy frequently from carrier to carrier. Poorer performing classes, however, will likely face increased pricing for GL policies and a reduction in capacity.”

The good news for buyers is that they can take action today to lessen the impact these trends and the evolving market may have on their GL programs.

David Perez on the state of the GL market.

Medical and Litigation Trends Drive Severity

One factor increasing claim severity is the rising cost of health care, driven both by greater demand and by medical inflation that is growing faster than the Consumer Price index.

The impact of rising medical costs on commercial auto is well-known. Businesses with heavy transportation exposures are finding it more difficult to obtain coverage, or are paying more for it.

That same trend will impact general liability, just on a slower and more fragmented basis.

LM_SponsoredContent“In light of these trends, brokers and buyers should seek to understand how effectively their current or potential insurers defend GL claims, particular in using evidence-based medicine to assess and value the medical portion of a claim, and how they can provide necessary care to claimants while still helping clients control their total cost of risk.”

— David Perez, Senior Vice President & Chief Underwriting Officer, National Insurance Specialty, Liberty Mutual Insurance

“It takes longer for medical inflation to register through the tort system in general liability than it does in auto liability (AL) because auto claims are generally resolved more quickly,” Perez said. “But the same factors affecting severity in AL also exist in GL and as a result, it’s foreseeable that we will not only see similar severity trends in GL, but they may in fact be worse than we’ve seen in commercial auto.”

Industries with greater exposure to severity in general liability claims should be the first wave of companies to notice the impact of medical inflation.

“Medical inflation will drive up costs across the board, but sectors like construction and product manufacturing have a higher relative exposure for personal injury lawsuits.”

The impact of medical inflation on the GL market.

Beyond medical inflation, two litigation trends are increasing GL damages. First, plaintiffs’ lawyers are seeking to migrate the use of life care plans—traditionally employed only for truly catastrophic injuries—to more routine claims.  Perez recalled one claimant with a broken thumb and torn ligaments who sought as much as $1 million in care for the injury for the rest of his life.

Second, the number of allegations of traumatic brain injuries (TBI) in GL claims is growing.  It can be difficult to predict TBI outcomes initially and poor outcomes can be expensive and long tailed.

“In light of these trends, brokers and buyers should seek to understand how effectively their current or potential insurers defend GL claims, particular in using evidence-based medicine to assess and value the medical portion of a claim, and how they can provide necessary care to claimants while still helping clients control their total cost of risk,” notes Perez.

Changing Legal Landscape

Medical inflation and litigation trends are not the only issues impacting general liability.

Unanticipated changes in court interpretations of policy language can throw unexpected pressure on GL pricing and capacity.

Courts sometimes issue rulings interpreting policy language in a manner that expands coverage well beyond the underwriter’s original intent. Such opinions may sometimes have a retroactive effect, resulting in an immediate impact on not only open, but also closed cases in some circumstances.

Shifts in the Marketplace

In addition to facing price increases, GL brokers and buyers will be challenged by slightly shrinking capacity due to consolidation and repositioning among carriers in the marketplace. “Some major carriers have scaled back their GL writing, resulting in a migration of experienced senior management. As these executives leave, they take their GL expertise and relationships with them, resulting in fewer market leaders and less innovation,” Perez said.

“Additionally, there are new carriers coming into the business that may not have the historical GL loss data to proactively identify trends or the financial strength and experience to effectively service their GL customers and brokers. Both trends make it important for brokers and buyers to work with an insurer that is committed to the GL market and has the understanding and resources to help better manage risks impacting customers.”

Last year saw a high level of mergers and acquisitions in the insurance industry. Buyers should take advantage of that disruption to re-evaluate their needs and whether their insurers are meeting them.  Or better yet, anticipating them.

What’s a Buyer to Do?

Buyers—and their brokers— should look to partner with insurers that can spot emerging trends and offer creative solutions to address them proactively.

What should buyers and brokers do, given the trends facing the GL market?

“Brokers and buyers should value insurers that have not only durability and a long history in the general liability business, but also a strong risk management infrastructure,” Perez said. “Your insurer should be able to help you mitigate your specific risks, and complement that with coverage that works for you.”

Beyond robust GL claims and legal management, Liberty Mutual also provides access to one of the insurance industry’s largest risk control departments to help improve safety and mitigate both claim frequency and severity.

In addition, notes Perez, “Even if a company has a less than optimal loss history in general liability, there can be options to provide adequate coverage for that company. The key is to partner with an insurer that has the best-in-class expertise, creativity, and flexibility to make it happen.”

By working closely with their insurers to understand trends and their potential impacts, brokers and buyers can better prepare for the possible GL storm on the horizon.

To learn more about Liberty Mutual’s general liability offering, visit https://business.libertymutualgroup.com/business-insurance/coverages/general-liability-insurance-policy.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.

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Liberty Mutual Insurance offers a wide range of insurance products and services, including general liability, property, commercial automobile, excess casualty, workers compensation and group benefits.
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