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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Supply Chain Risks

Driving Blindfolded

Many small and mid-size businesses underestimate their exposure to supply chain disruption.
By: | April 4, 2016 • 5 min read
R4-16p64-65_7SME.indd

Last November, a global study of 3,000 small and mid-size enterprises (SMEs) found that only one in seven SMEs think their business would be significantly affected if they lost their main supplier.

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Overall, 39 percent of SMEs consider themselves at risk from the loss of their main supplier, yet 55 percent believe it would not influence their day-to-day business.

Meanwhile, the “2015 Supply Chain Resilience Study” by Zurich and the Business Continuity Institute (BCI) found that while 74 percent of companies experienced at least one supply chain disruption in the last year, only half of those disruptions were known to originate from Tier 1 (immediate) suppliers, and 72 percent of respondents admitted they did not have full visibility into their supply chain.

“Supply chain risk is a blind spot for a lot of organizations.” — Karl Bryant, senior vice president at Marsh Risk Consulting

“This makes us believe that SMEs probably underestimate their supply chains risk exposure, and we urge them to reassess this,” said Nick Wildgoose, Zurich’s global supply chain product leader. He added that visibility and resilience along supply chains are major sources of competitive advantage.

BCI warned that organizations could be “driving blindfolded into a disaster.”

Companies at most risk are those reliant on “sole source” suppliers — one-of-a-kind manufacturers whose components are either of unique quality or are unavailable elsewhere in the market.

In today’s lean manufacturing era, fewer companies keep spare inventory, so if a critical component ceases to be available it can quickly prevent a company from producing its core product or service, leading to lost revenue, diminished service, dissatisfied customers and, in extreme cases, business closure.

Lurking Risks

Supply chain risk lurks in many forms. According to the BCI, IT and telecoms outages, adverse weather, and for the first time, cyber attacks/data breaches are

Karl Bryant, senior vice president, Marsh Risk Consulting

Karl Bryant, senior vice president, Marsh Risk Consulting

the top three causes of supply chain disruption. Another emerging risk is “business ethics,” which placed in the top 10 for first time.

“Supply chain risk is a blind spot for a lot of organizations,” said Karl Bryant, senior vice president at Marsh Risk Consulting.

Complacency that suppliers have everything under control can be a problem, said

Ken Katz, property risk control director at Travelers.

“When a risk exists outside your own four walls and you are focusing on your core business there is reduced visibility to the potential destruction it can cause,” Katz said.

To make matters worse for SMEs, smaller companies are likely to feel the effects of a supply shortage first as suppliers will invariably prioritize their biggest accounts if outflow is reduced.

R4-16p64-65_7SME.inddAn obvious risk mitigation strategy is to have a stockpile of spare inventory, but such an approach is not popular in these austere times.

“I’d love to see companies with six months’ supply, or matching supply against their expected downtime and their assets, but that’s a losing battle — no one wants inventory these days,” said Bryant.

Former RIMS President Rick Roberts, director of risk management and employee benefits at Ensign-Bickford Industries (EBI), said supply chain disruption is a “huge issue. People who’ve never had a problem often sit back and don’t pay much attention, but up-front work is critical because when a problem hits it can be major.”

Roberts, whose company is both a customer and supplier, said some of EBI’s customers require his company to keep a number of months’ worth of supply as inventory as part of their agreement. However, few SMEs have the leverage to wield this kind of influence.

Risk Assessment

To fully understand their supply chain exposures, Bryant suggested SMEs conduct a “value segmentation” exercise, identifying mission-critical areas of their

Ken Katz, property risk control director, Travelers

Ken Katz, property risk control director, Travelers

business, such as those that generate the highest margins or growth.

Then, Katz said, they should conduct a “business impact analysis,” simulating the repercussions of vital components being undeliverable.

It is also essential for SMEs to get to know their suppliers’ finances and quality of work as best they can, he said.

Bryant said that companies should compile a matrix of their supply chain in as much detail as possible, including suppliers of suppliers, and if possible, the exposure of suppliers’ plants and operations (as opposed to regional offices) to natural catastrophe such as flood or earthquake.

SMEs should ask all their suppliers what business continuity plans and insurance they have in place, and get clarity on exactly how they will be treated should the supplier run into problems.

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However, warned Bryant: “It can take a lot of man hours to send out questionnaires, follow up on them and pull the information together in a meaningful way, and many smaller companies don’t have the resources to invest in that kind of process.”

Nevertheless, this is information that empowers risk managers to make informed continuity plans. This could include, for example, finding alternative single source suppliers or new methods of production in case a sole source supplier fails to deliver, or even potentially acquire that supplier to ensure it stays in business.

There must also be a communications strategy for dealing with clients and negotiating delays. “You need a good explanation that is more sophisticated than ‘we can’t help you, I’m sorry’,” said Bryant.

Rick Roberts, director of risk management and employee benefits, Ensign-Bickford Industries

Rick Roberts, director of risk management and employee benefits, Ensign-Bickford Industries

Continuity planning, he said, requires a coordinated approach between risk and operational departments to ensure that gathered data is optimally leveraged. According to the BCI, only 54 percent of SMEs currently have a business continuity plan, compared to 74 percent of large organizations.

It also found that nearly six in 10 SMEs don’t insure losses from supply chain disruption, even though contingent business interruption (CBI) insurance would compensate for lost revenues during a supply problem.

This usually applies only to an insured’s first tier of suppliers, and can only be acquired if the SME has business interruption coverage.

Roberts would like to see more insurers extend coverage to second tier suppliers. “It can be expensive, and you can’t always see the benefits of being proactive — but when you get hit with a loss you’ll wish you had been prepared.” &

Antony Ireland is a London-based financial journalist. He 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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