Aquifers Approaching Point of No Return
A new pair of studies show many of the largest aquifers are being depleted at alarming rates. Out of 37 of the world’s largest aquifers, more than 21 are past sustainability tipping points, which means that the rate of withdrawal exceeds the rate of replenishment.
Of those at highest risk, 13 are on the verge of exceeding the point at which they may not come back.
In a June 17 PBS NewsHour broadcast, Professor James S. Famiglietti of the University of California, Irvine, the lead author of one of those reports, discusses the potential impact of the dwindling supply of freshwater resources.
Famiglietti’s comments support those of experts interviewed for Aquifer: Nothing in the Bank, part of R&I’s April 2015 Emerging Risks special coverage. In the April article, experts discussed the deep impact of the depletion of California’s Central Valley aquifer on agriculture, as well as the ripple effects for real estate, construction, energy production and more.
VIDEO: Reports confirm that California’s Central Valley has been losing about 5.5. trillion gallons of groundwater per year for the last four years.
Upgrading America’s Infrastructure
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.
“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.”
Lack of funds is another primary reason that necessary upkeep and upgrades to transportation infrastructure have not been made.
“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.
“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.”
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.