Like everyone else, I shop at Target, Home Depot and TJ Maxx and as a consequence of their security breaches and for my future protection, I have had to exchange my credit card several times.
Although I am very careful about sharing personal data and keep a shredder very busy, clearly the companies with whom I do business have vulnerabilities that they and I were unaware of.
Such vulnerabilities impact our industry as well.
In July, the Consero group conducted a survey of Fortune 1000 companies that indicated that 65 percent of their executives do not believe their vendors are sufficiently focused on minimizing risk.
We are in an industry where vendors abound and we rely heavily on them to provide services to our clients, our employees, our medical and ancillary providers, and to each other.
What are the risks if our vendors do not meet the highest standards and have vulnerabilities that affect the various stakeholders in our business?
Data security – We must be certain that all the data we collect and share (much of which is highly personal and confidential) is secure. How can we be sure that all of our vendors have the “right” level of controls to keep all of your and your client’s data secure?
Financial impact – Financial transactions are at the core of our businesses. In today’s highly technology-based business practices, many of these transactions are performed electronically. How do you know if your and your vendor’s systems are protected against unauthorized access?
Compliance/regulatory impact – Is your vendor’s system processing complete, accurate, timely, regulatory compliant and authorized?
Controls – Exactly what controls do your vendors have in place to prevent the security breaches that have become all too frequent?
Remember the SAS 70? Since 1992, SAS 70 has provided the auditing standard guidance for internal controls, including IT-related controls, of service organizations.
However, two key authorities, the American Institute of Certified Public Accountants (AICPA) and the International Auditing and Assurance Standards Board (IAASB) identified the limits of the SAS 70 and acknowledged the need for greater controls.
Certainly, our recent experience of all types of security breaches would indicate that we do need to do more. Thus in 2011, new standards specifically for service organizations were developed with the SSAE 16 Trust Services Principles and Criteria.
Sparrow, Johnson and Ursillo, a full service accounting and technology firm serving a wide variety of clients all over the country including members of the banking community, describes the SSAE 16 standards this way:
“These attestation standards address engagements undertaken by a service auditor for reporting on controls at service organizations that provide services to user entities (customers). User entities in reality take on many of the risks of their outsource partners. These attestation standards provide the framework for CPAs to report on the internal controls over financial reporting as well as compliance and operations of the service organizations in order to determine and demonstrate the effectiveness of internal controls.”
With these new standards, entities can describe and document more precisely how services are being delivered and how controls are utilized within finance, operations and compliance. This new certification can be utilized to identify risks, evaluate the effectiveness of internal controls and provide assurances that we all need as it relates to our vendor partners.
Focus on Vendors
I would suggest that you make this a high priority in your organization. We are, after all, in the business of risk management and we need to ensure that our vendors/partners are as focused as we are on minimizing risks.
Ask yourself these questions:
• How do you know that your vendors are doing what it takes to protect your systems and data?
• Have you talked to your vendor partners about their internal controls as they relate to their business with you?
• Is your vendor management department knowledgeable about the Trust Service Principles?
• Are you — or should you be — requiring your vendors to be SSAE 16 compliant?
All of us need to be more vigilant and better protected against security breaches. Are you and your company as protected as you need to be?
Building Resilience From Top to Bottom
Access to accurate and timely information is essential to crafting a world-class supply chain risk management program, where tightly integrated networks are dependent on a myriad of factors for their smooth operation. And while a supplier’s ability to withstand natural hazards and fire is vital, it is equally important to understand the economic climate in each supplier’s country of origin.
Many supply chains are far-flung enterprises often involving dozens of countries and sometimes hundreds of organizations, each producing different components that come together in a finished product.
If a second-tier supplier is responsible for a significant proportion of a particular manufactured item and is exposed to a country’s looming political upheaval, the risk cannot be ignored. Likewise, when a company’s supply chain is scattered across the world, it may confront other perils including currency fluctuations, inconvertibility and credit availability — to name a few. Vital capital investment and resource allocation decisions may need to be made, including shifting production to a supplier somewhere else in the world.
And while many companies understand the risk factors that can cause disruptions at their top tier suppliers, they may be less cognizant of economic factors within a country that can affect suppliers’ suppliers. As the first tier outsources production to organizations in China, Thailand, India, Hungary, Malaysia, the Philippines, Vietnam and other developing economies, they may unknowingly create risk for themselves and their own customers, unaware of brewing economic threats.
It’s not surprising that many supply chains unravel in the aftermath of economic and political upheaval — somehow a third-tier supplier’s vulnerability was overlooked, causing production to decrease if not come to a halt. Bottom line: True supply chain resilience depends on the risk quality of each supplier in the network, each of them potentially exposed to a hornet’s nest of risk inherent to the countries where they are based.
Unfortunately, many organizations fail to scrutinize through an economic lens how resilient countries are to supply chain disruption. Without the ability to make more informed decisions, these organizations are flying somewhat blindly, their supply chains a network of weak links.
As the first tier outsources production to organizations in China, Thailand, India, Hungary, Malaysia, the Philippines, Vietnam and other developing economies, they may unknowingly create risk for themselves and their own customers, unaware of brewing economic threats.
Smart supply chain risk management considers more than just the possibility of threats like floods and earthquakes or a factory fire. Taking the pulse of risk such as vulnerability to government instability, a whipsawing economy, unexpected regulatory impediments, energy supplies, or the availability of credit requires the monitoring and mapping of such conditions in each supplier’s country of origin. This is not a one and done affair, as the world of business is fast-paced and in constant flux.
How can organizations ferret out key economic information and apply it to their supply chains? The answers lie in microeconomic and macroeconomic data sets which, when properly leveraged, can be considered from the top to the bottom tiers of a supply chain. The result when thoughtfully applied? Resilience. A supply chain strengthened by statistical insights and informed risk management decisions is a dynamic one that is able to adapt and take advantage of a changing world.
Passion for the Prize
In his 1990 book, The Prize: The Epic Quest for Oil, Money and Power, Pulitzer Prize winning author Daniel Yergin documented the passion that drove oil exploration from the first oil well sunk in Titusville, Penn. by Col. Edwin Drake in 1859, to the multinational crusades that enriched Saudi Arabia 100 years later.
Even with the recent decline in crude oil prices, the quest for oil and its sister substance, natural gas, is as fevered now as it was in 1859.
While lower product prices are causing some upstream oil and gas companies to cut back on exploration and production, they create opportunities for others. In fact, for many midstream oil and gas companies, lower prices create an opportunity to buy low, store product, and then sell high when the crude and gas markets rebound.
The current record supply of domestic crude oil and gas largely results from horizontal drilling and hydraulic fracturing methods, which make it practical to extract product in formerly played-out or untapped formations, from the Panhandle to the Bakken.
But these technologies — and the current market they helped create — require underwriters that are as passionate, committed and knowledgeable about energy risk as the oil and gas explorers they insure.
Liability fears and incessant press coverage — from the Denton fracking ban to the Heckmann verdict — may cause some underwriters to regard fracking and horizontal drilling with a suppressed appetite. Other carriers, keen to generate premium revenue despite their limited industry knowledge, may try to buy their way into this high-stakes game with soft pricing.
For Matt Waters, the chief underwriting officer of Liberty Mutual Commercial Insurance Specialty – Energy, this is the time to employ a deep underwriting expertise to embrace the current energy market and extraction methods responsibly and profitably.
“In the oil and gas business right now, you have to have risk solutions for the new market, fracking and horizontal drilling, and it can’t be avoidance,” Waters said.
Matt Waters, chief underwriting officer of Liberty Mutual Commercial Insurance Specialty – Energy, reviews some risk management best practices for fracking and horizontal drilling.
Waters’ group underwrites upstream energy risks — those involved in all phases of onshore exploration and production of crude oil and natural gas from wells sunk into the earth — and midstream energy risks, those that involve the distribution or transportation of oil and gas to processing plants, refineries and consumers.
Risk in Motion
Seven to eight years ago, the technologies to horizontally drill and use fluids to fracture shale formations were barely in play. Now they are well established and have changed the domestic energy market, and consequently risk management for energy companies.
One of those changes is in the area of commercial auto and related coverages.
Fracking and horizontal drilling have dramatically altered oil and gas production, significantly increasing the number of vehicle trips to production and exploration sites. The new technologies require vehicles move water for drilling fluids and fracking, remove these fluids once they are used, bring hundreds of tons of chemicals and proppants, and transport all the specialty equipment required for these extraction methods.
The increase in vehicle use comes at a time when professional drivers, especially those with energy skills, are in short supply. The unfortunate result is more accidents.
“In the oil and gas business right now, you have to have risk solutions for the new market, fracking and horizontal drilling, and it can’t be avoidance.”
— Matt Waters, chief underwriting officer, Liberty Mutual Commercial Insurance Specialty – Energy
For example, in Pennsylvania, home to the gas-rich Marcellus Shale formation, overall traffic fatalities across the state are down 19 percent, according to a recent analysis by the Associated Press. But in those Pennsylvania counties where natural gas and oil is being sought, the frequency of traffic fatalities is up 4 percent.
Increasing traffic volume and accidents is also driving frequency trends in workers compensation and general liability.
In the assessment and transfer of upstream and midstream energy risks, however, there simply isn’t enough claims history in the Marcellus formation in Pennsylvania or the Bakken formation in North Dakota for underwriters to rely on data to price environmental, general and third-party liability risks.
That’s where Liberty Mutual’s commitment, experience and ability to innovate come in. Liberty Mutual was the first carrier to put together a hydraulic fracking risk assessment that gives companies using this extraction method a blueprint to help protect against litigation down the road.
Liberty Mutual insures both lease operators and the contractors essential to extracting hydrocarbons. As in many underwriting areas, the name of the game is clarity around what the risk is, and who owns it.
When considering fracking contractors, Waters and his team work to make sure that any “down hole” risks, be that potential seismic activity, or the migration of methane into water tables, is born by the lease holder.
For the lease holders, Waters and his team of specialty underwriters recommend their clients hold both “sudden and accidental” pollution coverage — to protect against quick and clear accidental spills — and a stand-alone pollution policy, which covers more gradual exposure that unfolds over a much longer period of time, such as methane leaking into drinking water supplies.
Those are two different distinct coverages, both of which a lease holder needs.
Matt Waters discusses the need for stand-alone environmental coverage.
The Energy Cycle
Domestic oil and gas production has expanded so drastically in the past five years that the United States could now become a significant energy exporter. Billions of dollars are being invested to build pipelines, liquid natural gas processing plants and export terminals along our coasts.
While managing risk for energy companies requires deep expertise, developing insurance programs for pipeline and other energy-related construction projects demands even more experience. Such programs must manage and mitigate both construction and operation risks.
Matt Waters discusses future growth for midstream oil and gas companies.
In the short-term, domestic gas and oil production is being curtailed some as fuel prices have recently plummeted due to oversupply. In the long-term, those domestic prices are likely to go back up again, particularly if legislation allows the fuel harvested in the United States to be exported to energy deficient Europe.
Waters and his underwriting team are in this energy game for the long haul — with some customers being with the operation for more than 25 years — and have industry-leading tools to play in it.
Beyond Liberty Mutual’s hydraulic fracturing risk assessment sheet, Waters’ area created a commercial driver scorecard to help its midstream and upstream clients select and manage drivers, which are in such great demand in the industry. The safety and skill of those drivers play a big part in preventing commercial auto claims, Waters said.
Liberty Mutual’s commitment to the energy market is also seen in Waters sending every member of his underwriting team to the petroleum engineering program at the University of Texas and hiring underwriters that are passionate about this industry.
Matt Waters explains how his area can add value to oil and gas companies and their insurance brokers and agents.
For Waters, politics and the trends of the moment have little place in his long-term thinking.
“We’re committed to this business and to deeply understanding how to best manage its risks, and we have been for a long time,” Waters said.
And that holds true for the latest extraction technologies.
“We’ve had success writing fracking contractors and horizontal drillers, helping them better manage the total cost of risk,” Waters said.
To learn more about how Liberty Mutual Insurance can meet your upstream and midstream energy coverage needs, contact your broker, or Matt Waters at email@example.com.
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.