Risk Insider: Martin Frappolli

Grab Some Risk While You Can

By: | August 31, 2015 • 3 min read
Martin J. Frappolli, CPCU, FIDM, AIC, is Senior Director of Knowledge Resources at The Institutes, and editor of the organization's new “Managing Cyber Risk” textbook. He can be reached at [email protected]

Because many of us in the risk management business make thoughtful and prudent decisions in life, you may be among those people who choose a vehicle for pragmatic purposes.  You may consider size, safety, and fuel economy.

If you’re like me, you might choose that pragmatic car even though it doesn’t quicken your pulse in the way that a red convertible performance coupe might do.  “Someday” you might buy that performance or luxury car.

Well, here is your excuse to act sooner. We’re keenly aware of how each new vehicle has more “smart” features than previous models, taking us closer to the future reality of autonomous cars.

We’re rushing toward a model of streaming transportation – driverless vehicles that arrive when you need them, take you where you need to go, then head off to another purpose for another passenger.

There’s plenty of upside to this – reduced need for parking, removal of the costs of ownership and insurance, reduced congestion, great strides in safety. I take some comfort that by the time I am no longer physically able to drive, I won’t need to.  If I can use a smart phone or whatever devices succeed the smart phone, I can get a ride.

From a risk management perspective, the move to streaming, on-demand autonomous transportation is a clear winner.

From a risk management perspective, the move to streaming, on-demand autonomous transportation is a clear winner. Cars will be safer when the possibility of human error is removed. Car insurance exists, after all, primarily as a means to compensate victims of human error.

Beyond the savings for vehicle repair, the reduction in bodily injury events will be cause to celebrate. Further, much of the capital and resources now devoted to automobile insurance may be freed up for other productive uses.

The flip side, though, is that we’ll pass up on the joy of motoring, the very notion of motor sport. Just as we’ve surrendered the beauty of album art when we moved from vinyl LP to CD to MP3 to streaming music, so too we’ll leave behind the rush of a fast muscle car and the twisty mountain road handled by the finely tuned suspension of a sports car.

You need to manage your own personal appetite for risk. While you may increase your risk of a traffic ticket or even an accident if you aggressively exploit the power of a sports car, you also mitigate the risk because these high-end vehicles typically are built with better braking systems and advanced safety features.

Were you eying that red convertible in the showroom when you bought that SUV?  The time for you to own and drive a car for pleasure is going away. Our future selves will marvel at the old days when multi-ton machines traveled at 70 miles an hour piloted by humans and subject to fatal error.

The question remains about how soon – but the change is coming. Here’s your rationalization to buy that performance car before your only role is that of passenger.

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Public Sector

Upgrading America’s Infrastructure

Climate change is speeding the deterioration of an already aged system. The fix will cost trillions.
By: | June 1, 2015 • 8 min read
** FILE ** Construction crews work to repair a 36 inch water main break that crumbled pavement and sent thousands of gallons of rushing water onto a major city street turning it into what looked like a small lake, in this file photo of Tuesday, Jan. 22, 2008, on the north side of Chicago. It was not clear what caused the 80-year-old cast-iron main to break, but engineers say we are in a crucial era for the nation's infrastructure, especially in older cities where some pipes and tunnels were built more than a century ago, and are now nearing the end of their life expectancies. (AP Photo/M. Spencer Green, File)

D+. That’s the grade assigned to the overall quality of America’s infrastructure by the American Society of Civil Engineers (ASCE). Just one notch above failure.

ASCE’s economic report on surface transportation, released in July 2011, reported that deteriorating infrastructure will cost the American economy more than 876,000 jobs and suppress the growth of GDP by $897 billion by the year 2020.


Bad infrastructure has a cascading effect on the economy. Lack of capacity and poor road conditions lead to backups and bottlenecks.

That means products sitting in trucks aren’t reaching their destinations in a timely and efficient manner. Commuters are wasting time and fuel sitting in traffic. The cost in wasted fuel and lost productivity is staggering.

“The Federal Highway Administration calculates that highway bottlenecks cause more than 243 million hours of trucking delays each year, costing $7.8 billion.

When shipping takes longer, businesses have to reorient their supply chains and rely on more distribution centers, adding more costs,” said Mark Brockinton, managing director, transportation and logistics practice at Aon.

“In 2011, traffic congestion caused American commuters to purchase an extra $2.9 billion in fuel, costing more than $120 billion in added fuel costs and wasted time.”

The effects of climate change and increasingly severe weather only further constrain traffic flow and worsen road conditions.

“If you look at the severe winter we had in the Northeast, that created a lot of wear and tear on our roads and bridges,” said Andy Herrmann, past president of the ASCE.

“They had to put a lot of de-icing material down to combat that, but that salt mixes with water and accelerates the corrosion of steel and gets into the concrete and starts corroding the reinforcing bars. And when steel corrodes, it expands seven to eight times its volume. So when you look at a bridge deck or a roadway surface and you see a pothole, that’s those reinforcing bars expanding and pushing against the concrete.”

Steve Bojan, vice president of fleet risk services for HUB International, added, “When you talk about climate change and harsh weather, you look at the Northeast and it wreaks havoc. [This past winter] was horrible. All bets were off on everything. Roads, whole cities, interstates were shut down. So you end up backing everything up for days, and at some point, some goods and services are just not produced. It’s in the billions of dollars a day in activity that can’t be done.”

“People are starting to understand that when they rebuild their infrastructure, they have to do it to a new standard.” — Erik Johanson, manager of strategic planning and analysis, SEPTA

Federal and state governments are taking steps to improve infrastructure, especially after Superstorm Sandy demonstrated that the effects of climate change can literally bring major cities to a standstill and incur huge costs.

In 2011, the Federal Transit Administration selected seven transit agencies across the country as part of a pilot program to conduct risk and vulnerability assessments of their systems and create plans for climate change adaptation.

After Sandy, it doled out capital funding to help turn some of those plans into reality.

In Philadelphia, the Southeastern Pennsylvania Transportation Authority (SEPTA) received $87 million to fund seven projects it developed during the pilot program phase.

The authority’s regional rail system in particular has been taking a beating.


Erik Johanson, manager of strategic planning and analysis, SEPTA

“We did a pre-screening process to determine the most vulnerable points in our system, and the Manayunk/Norristown line, which parallels the Schuylkill River pretty close to the level of the river, has flooded 13 times since 2003, out of a total of 21 recorded flood events in history,” said Erik Johanson, manager of strategic planning and analysis.

“So more than 50 percent of recorded flood events that have occurred on that line have happened since 2003.”

While plans focus on flood mitigation and shoreline stabilization, improving the system’s resiliency will also involve building a backup control center and power systems, and insulating bare copper wires that can easily trip and cause signal failure.

In general, extreme temperature changes and powerful storms make any transit system vulnerable to failure.

“For heat, the big things are track buckling and sagging wires, which have major impacts,” Johanson said.


“Once it reaches 90 degrees, we have to slow the trains down, so it has service impacts.”

Snow, ice and strong winds can also lead to downed power lines, damage to signal systems and other equipment, and labor workforce issues associated with snow removal.

“People are starting to understand that when they rebuild their infrastructure, they have to do it to a new standard,” he said.

Building in Resiliency

That new standard may include building with new materials and technologies.
According to the ASCE’s Herrmann, “The University of Michigan came out with a concrete that can take some tension. Concrete is a compressive material, but if it can take tension, it can prevent it from forming the little cracks that allow salty water to get into it and start the corrosion cycle.”

Monitoring devices can also be built into bridges to track ground movement.

“When it comes to settlements of soil or ground movements, those things can change just due to small gradual movements, but can also be drastic. It has impact on the stability of a structure,” said Guido Benz, head of engineering and construction at Swiss Re Corporate Solutions.

“Structural elements today have more up-to-date monitoring tools that can be built in during construction, which was not the case in the ‘50s. — Guido Benz, head of engineering and construction, Swiss Re Corporate Solutions

“Structural elements today have more up-to-date monitoring tools that can be built in during construction, which was not the case in the ‘50s.”

When bad weather strikes, lower salt and salt-free mixtures can also be used on roadways to melt ice. There are also new high-performance forms of concrete and steel, which are less permeable, more resistant to corrosion, and higher strength.

“But those things come with a cost,” Herrmann said. “State departments of transportation have hard decisions to make — what to do with limited dollars. Do they do maintenance, repairs or replacements with new structures? Maintenance can get put off, and it just gets more expensive the longer you put it off.”

By Bojan’s estimates, “It’s probably at least 20 years to uncork this. These projects are all very long term and take a lot of planning.”

Critical infrastructure may also be delayed due to lack of will.

“Infrastructure is not sexy, for lack of a better word,” Bojan said.

“People are much more likely to want a park on the lakefront. They’ll spend $150 million for that, but to spend $100 million for a viaduct, for example, they react negatively.”

Finding Funding

Lack of funds is another primary reason that necessary upkeep and upgrades to transportation infrastructure have not been made.

Guido Benz, head of engineering and construction, Swiss Re Corporate Solutions

Guido Benz, head of engineering and construction, Swiss Re Corporate Solutions

“Investments needed are in the billions of dollars. They’re massive numbers. The big question is: Where will the funds come from?” Benz said. The ASCE estimates it will take a $3.6 trillion investment by 2020 to bring the many components of America’s infrastructure up to an acceptable standard, and that total could increase if higher-strength, weather-resilient tools and materials are considered.

The federal government may invest in rebuilding efforts after a disaster, but these long-term projects need a steady stream of capital for maintenance.

Public-private partnerships (PPPs) are one way to attract investors to costly infrastructure projects.

“Models that bring in private investors but also involve project parties in long-term operational contracts generate revenue to maintain the structure. Achieving proper maintenance and keeping infrastructure upgraded is the critical element,” Benz said.

“In times of financial difficulty, maintenance gets cut short, so the quality will decay over time. So the benefit of the PPP approach is that the upkeep as well as the operations of the infrastructure is outsourced, and that presents a business opportunity for the private parties. From the investor’s point-of-view, it’s attractive because they can make a profit off of tolls, for example, and sell the property back when their contract is over.”

Other experts say a fuel tax increase is necessary to move projects forward at a steady pace. As vehicles have grown more fuel-efficient, the fuel tax percentage has remained static, meaning that more miles are being driven while fewer funds are collected. The revenue can’t keep up with the demand for repairs, upgrades and maintenance.


“The fuel tax needs to be raised an additional 40 cents to a total of 65 cents. The federal diesel tax hasn’t changed since 1993,” said Aon’s Brockinton.

“The American Trucking Association actually is pushing for higher taxes now,” HUB’s Bojan said.

“Freight is good, profits are up, and they’re saying, ‘We need to improve our lanes and infrastructure so we can improve our throughput, otherwise we’re just getting clobbered by constraints.’ ”

Planning for the Storm

The Environmental Protection Agency predicts that unless greenhouse gas emissions decrease substantially, temperatures will continue to climb, the world’s oceans will become more acidic and the frequency of severe storms and precipitation levels will increase.

Failure to address the risks to infrastructure will not only worsen congestion, but threaten to totally shut down transit if roads, bridges and rails become too dangerous to use. Safety also becomes a major issue.

Mark Brockinton, managing director, transportation and logistics practice, Aon

Mark Brockinton, managing director, transportation and logistics practice, Aon

“Certain insurance companies have products insuring against a loss a company might have within the transportation infrastructure, such as a port delay, local embargo, or a natural disaster,” Brockinton said.

“The products would include business interruption, contingent business interruption, trade disruption, political risk, logistics insurance.

Certain companies will insure risks without an actual loss of product under certain circumstances, which would include a delay or non-delivery of product due to a strike or natural catastrophe.

“A well-performing transportation network keeps jobs in America. It allows businesses to expand, and it allows businesses to manage their inventories and transport goods more cheaply and efficiently.”

Benz of Swiss Re said companies should view infrastructure failure as an “operational risk,” and mitigate it by building redundancies into their supply and delivery chains. As harsh weather presents an ever-growing challenge, it becomes more and more important for risk managers to “always have a Plan B ready to go.”

Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at [email protected]
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Sponsored: Liberty International Underwriters

A Wake up Call for Any Company That Touches Food

With costly outbreaks on the rise, don't let product recalls and contamination spoil your business.
By: | October 1, 2015 • 5 min read

It’s not easy to be in the food industry these days.

First, there is tougher regulation. On August 30, 2015, the Food Safety Modernization Act (FSMA) required companies to file planning paperwork for Preventive Controls for Human Food. The final FSMA rules take effect on August 30, 2016.

Next, increases in food recalls, some deadly, are on the rise. In early September, 9,000 cases of frozen corn were pulled from shelves after a listeria scare. A few days later, a salmonella outbreak in cucumbers imported from Mexico resulted in one death, while sickening hundreds of consumers nationwide.

Courts are getting tougher, too, as owners/executives in particularly egregious cases involving consumer deaths have been prosecuted criminally, with one receiving a recommendation for a life sentence.

Finally, advances in science – including whole-genome sequencing technology, which maps DNA of microbes to more easily pinpoint precisely where contamination occurs – can expose every player in the supply chain to potential losses and lawsuits.

“Few companies have the balance sheet or brand loyalty to survive a serious recall. Outbreaks, new regulations, prosecutions and science have made purchasing product recall and contamination insurance literally an act of survival for companies of all ages and sizes,” said Jane McCarthy, Senior Vice President of Global Crisis Management at Liberty International Underwriters (LIU), who has over 30 years of industry experience.

Working with growers, processors, manufacturers, importers, shippers, packagers, distributors, wholesalers or retailers, LIU’s policy provides indemnity to pay for losses a company might incur from a recall, including logistic expenses, lost income and access to crisis management and public relations consultants.

Legislation tightens on food-related companies

LIU_SponsoredContentPassed in 2011, the FSMA gives the Food and Drug Administration a far more proactive weapon in the war on tainted food, as the focus shifts to prevention combined with the FDA’s newfound authority to close businesses that aren’t complying with FSMA rules and regulations.

In addition to the August 30, 2015 deadline for filing paperwork for preventive controls, as part of the law, all companies need to be registered if they do anything with food in the United States, or a company is a foreign entity bringing food into the U.S.

“It’s the law and every regulation and benchmark has to be met,” McCarthy said. “The FDA will shut someone down if they don’t think a company is handling a food product properly. With these new rules and regulations, the whole industry has to change.”

With LIU’s product contamination policy, companies have 24/7 access to pre-loss consultancy through red24, one of the world’s leading security consultants and global crisis management consultancies. For example, they’ll work with clients to best prepare them to meet the FDA’s 48-hour response deadline should a food contamination or product recall incident occur.

Costly outbreaks on the rise

LIU_SponsoredContentAccording to a Wall Street Journal article, food recalls from 2012 to 2014 increased more than five times compared to the total number of recalls from the prior eight years combined. The Journal also reported that foodborne illness is often never formally reported, so about 48 million Americans, or one in six, get sick each year from food. The CDC estimates 128,000 hospitalizations and 3,000 deaths from tainted food.

Food contaminations happen in two main categories: allergens (peanuts, etc.) and pathogens (bacteria). There were four listeria outbreaks in 2014 alone, compared with one in each year from 2011 to 2013. Listeria is a particularly tricky and virulent pathogen that continues to survive and blossom, even in refrigerated environments. Listeria does not impact the appearance, taste or smell of food it invades, so a company in the food industry can only confirm contamination through testing or, unfortunately, once a customer becomes ill.

“Listeria is one of the worst nightmares. Not only is it deadly, but once it gets into a plant, it’s very difficult to eradicate,” said industry veteran Meg Sutton, LIU’s Senior Claim Officer. “It sneaks into drains and crevices that you thought were clean. Attempts to clean those drains and crevices, if done improperly, can result in aerosolizing the listeria and spreading it throughout the facility. In some cases, companies are forced to shut down the plant for extended periods of time, resulting in significant business interruption and loss of revenue.”

Courts get tough on deadly cases

LIU_SponsoredContentWith the increase and severity of food contamination recalls rising, the courts are getting tougher too. The food industry was rocked last month by a recommended life sentence for the ex-CEO of a peanut manufacturing company following a multiple-felony conviction for knowingly selling tainted peanut butter that ended up killing nine people.

“The judge ended up sentencing him to 28 years in federal prison, still the harshest penalty ever in a case of food contamination. While our policy won’t cover your defense if you’ve committed a crime, the penalty is another wake up call for the food industry that executives at the highest levels will be held accountable,” McCarthy said.

Science boosts detection, transparency

LIU_SponsoredContentAdvances in DNA mapping are on the rise. “Before this technology, people would say, ‘It wasn’t us! Prove it!’ and that was pretty much impossible,” McCarthy said. “Those days are gone now.”

By using today’s scientific methods to trace back to the source (grocery store, restaurant, wholesaler, etc.), experts can determine the production facility or farm that originated the food or food additive. They can swab the facility for DNA matches and pinpoint the contamination.

Considering those four prime drivers, it’s not surprising that interest in food product recall and contamination coverage from companies of all sizes is gaining momentum.

“We don’t want them to just buy our insurance,” McCarthy said. “We want them to be better for it with us as their partner by making sure they have the right coverage in place and improving their business from a health, safety and compliance standpoint.”

Liberty International Underwriters is the marketing name for the broker-distributed specialty lines business operations of Liberty Mutual Insurance. Certain coverage may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. This literature is a summary only and does not include all terms, conditions, or exclusions of the coverage described. Please refer to the actual policy issued for complete details of coverage and exclusions.

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

LIU is part of the Global Specialty Division of Liberty Mutual Insurance.
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