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Unquantifiable Exposures

Top Five Uninsurable Risks

The complexities and nuances of these risks make it impossible for risk managers to find total coverage.
By: | September 2, 2014 • 11 min read
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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.

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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.

09012014_01_CS_sidebarWhile some coverage is available, these five threats are considered mostly uninsurable: reputational risk, regulatory risk, trade secret risk, political risk and pandemic risk.

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.

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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.”

Reputational Risk

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.”

Regulatory Risk

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.”

Tom Srail, senior vice president, Willis

Tom Srail, senior vice president, Willis

“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.

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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.”

Rudy Telscher, partner, Harness Dickey & Pierce

Rudy Telscher, partner, Harness Dickey & Pierce

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.

Political Risk

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.

An Emergencies Ministry member walks at a site of Malaysian airliner flight MH17, which was brought down over eastern Ukraine, killing all 295 people aboard.

An Emergencies Ministry member walks at a site of Malaysian airliner flight MH17, which was brought down over eastern Ukraine, killing all 295 people aboard.

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.

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“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.

Pandemic Risk

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.”

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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.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at afreedman@lrp.com.
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Risk Insider: Nir Kossovsky

“If By Compensation…”

By: | July 9, 2014 • 2 min read
Nir Kossovsky is the Chief Executive Officer of Steel City Re. He has been developing solutions for measuring, managing, monetizing, and transferring risks to intangible assets since 1997. He is also a published author, and can be reached at nkossovsky@steelcityre.com.

In 1952, Noah Sweat, Jr. a lawmaker from the then-dry state of Mississippi found himself explaining his position on whiskey to an audience of pro- and anti-prohibitionists. His speech, known today as “if by whiskey,” cheered both sides.

“If when you say whiskey you mean the devil’s brew, the poison scourge, the bloody monster, that defiles innocence… I am against it.”

“But, if when you say whiskey you mean the oil of conversation, the philosophic wine, the ale that is consumed when good fellows get together … I am for it.”

General Motors CEO Mary Barra faced a similar challenge developing the company’s compensation strategy for victims of its faulty ignition switches.

Customers expected GM to fully compensate victims, and capital providers expected GM to protect assets from litigation and compensation funds:  One of GM’s major stakeholders was bound to be disappointed.

Barra’s move was to leverage the reputation of Kenneth Feinberg to help restore GM’s reputation with both sides.  Kenneth Feinberg’s reputation makes the “if by whiskey” approach to GM’s compensation strategy possible.

Feinberg has been pivotal in resolving many of our nation’s most challenging and widely known compensation matters.

GM customers and victims are warmed by Feinberg’s experience directing the September 11th Victim Compensation Fund. Working pro bono, he spent three years meeting with families and calculating claim awards. Feinberg also handled compensation issues for the Virginia Tech shooting and the Boston Marathon bombing.

Barra’s move was to leverage the reputation of Kenneth Feinberg to help restore GM’s reputation with both sides.

GM’s stakeholders breathe easier knowing that Feinberg, as administrator of BP’s $20 billion fund to compensate victims of the Deepwater Horizon disaster, carefully manned the funding spigot.

Almost one year after the spill began, he had paid only 168,000 claimants out of more than 490,000 people who had filed. Feinberg explained then that 80 percent didn’t have proper documentation; the terms of the GM compensation plan similarly have strict documentation requirements.

Nor is he anti-corporatist. His firm accepted $850,000 a month from BP to administer the compensation fund, which led a New Orleans federal judge to order Feinberg to quit claiming independence from BP.

The “if by compensation” strategy is working, according to analysis published by Consensiv, the reputation controls company, based on reputation value metrics we use at Steel City Re.

The bump on the graph starts June 15th, the week Google Trends shows a steady uptake in searches for Kenneth Feinberg that accompanied an uptick in GM’s reputation metrics.

GM’s reputation premium, a measure of additional value arising from favorable stakeholder expectations, rose to the 46th percentile within its peer group, while the consensus trend, a measure of stakeholder surprise, showed an increase to 1.2 percent.

Reputation is about setting, meeting or beating expectations. Reputation restoration is about acknowledging fault, repairing the damage, and raising future standards.

Barra has been candid in exposing the faults.

Her challenge in repairing the damage was assuring customers and victims without frightening creditors and investors. By hiring Feinberg, Barra appears to have pleased both key stakeholder groups, boosting GM’s reputation.

Read all of Nir Kossovsky’s Risk Insider contributions.

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Sponsored Content by Helios

Medication Monitoring Achieves Better Outcomes

Having the right patient medication monitoring tools is increasingly beneficial.
By: | September 2, 2014 • 5 min read
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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.

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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.

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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.

This article was produced by Helios and not the Risk & Insurance® editorial team.


Helios, the new name for the powerful combination of Progressive Medical and PMSI, is bringing the focus of workers’ compensation and auto-no fault pharmacy benefit management, ancillary services, and settlement solutions back to where it belongs—the injured party.
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