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Cyber Threat: Aviation

Unmanned Risk

Drone hacking could pose a terrorist threat, and it's already proven that drones can be hacked.
By: | April 7, 2014 • 7 min read
Alaska Plane Crash

Sending unpiloted vehicles into manned airspace may sound like a joyride to Amazon CEO Jeff Bezos, who’s speculated that when fully developed, commercial drones may be able to deliver an Amazon order to one’s door in 30 minutes.

But let’s face it: Some possible outcomes of the predicted exponential growth of Unmanned Aircraft Systems (UAS) are not all that pleasant to entertain.

Because it’s managed remotely by computer, a UAS could be hacked and its mission bent to destructive purposes. Or it could simply go awry due to operator error.

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“What if a UAS shoots thousands of feet into the air and gets ingested into a commercial aircraft engine full of passengers?” asked Barton Duvall, assistant vice president with Starr Aviation’s West Coast office in Carpinteria, Calif.

Such a scenario “puts an entirely new outlook on the limit needs of UAS operators and the non-owned aviation liability limit needs of customers of UAS operators,” said John Geisen, an Aon aviation senior vice president in Minneapolis.

The loss involved is known as a foreign-object-damage loss or FOD, he said.

Video: Watch this Lakemaid Beer drone delivery.

“The airline’s hull underwriters would pay for the engine and other physical damage as well as any liability that ensues, but in this case you would also have a cause for subrogation to go after the UAS owning and operating parties as well as, I suppose, the customer of the UAS.”

Where adequate coverage limits for negligence actions are not secured, one can expect a search for “deep pockets,” said Geisen.

“Subrogation for FOD losses occurs today when a negligent party responsible for clean up or the owner of the object that is ingested can be clearly identified,” Geisen said.

“Today, it is often hard to identify who owned the foreign object that was left on the tarmac and damaged the engine at takeoff or landing or maybe you eat a bird that no one owns — the hull insurer pays the claim and has nowhere to turn to try and mitigate it — file closed.”

However, should another aircraft “eat or ingest a UAS,” it will be easier to determine who’s responsible, he said.

Starr Aviation’s Duvall said that the worst-case scenario could have the lives of hundreds of passengers at risk as well as damage to the aircraft — some valued at well over $100 million — besides potential grave bodily injury and serious property damage on the ground.

“The chain of liability could span from the operator of the UAS, to the prime manufacturer and subcomponent manufacturers to, depending how these systems end up integrated, the entities responsible for control and safety of the National Airspace System (NAS).

“The actuality of a catastrophic event such as this may be improbable, but it’s not entirely out of the scope of possibility,” said Duvall.

Besides the obvious navigational challenge of sending unpiloted commercial vehicles into the stratosphere, hijacking enabled by cyber terrorism is another real threat.

The Cyber Terror Threat

In 2012, University of Texas professor Todd Humphreys and a group of students intercepted a GPS-guided UAS, using a GPS device created by Humphreys and his students.

 Video: Humphreys explains how he hacked the drone.

If that can occur, then what is to prevent a terrorist hacker from directing a drone to pick up a bomb and fly it into a university football game or some similar target, asked Geisen.

In such a situation, “plaintiffs are going to look for the deep pockets,” said Roberta Anderson, a partner in the Pittsburgh office of law firm K&L Gates.

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Anderson, who represents policyholders in commercial insurance coverage disputes, said those tapped for indemnification in the terrorist plot described here would likely include “companies that manufactured or designed the software applications, or owned or controlled the networks that allowed a hacker to penetrate the [drone’s] system and gain control.”

“Managers and owners of the stadium would also be targeted for potential negligence and insufficient security, and you’d see cross claims and counterclaims as well, with the stadium pointing the finger at their own security vendors.

“There could be tens of thousands of wrongful death claims” as well as “loss of reputation, property damage and business interruption for the stadium, which will represent a deep-pocket certain to have liability insurance,” Anderson said.

Mitigation Efforts

And yet, there are clearly mitigating factors to help prevent things from going terribly wrong.

A lot of these aircraft are building in “triple redundancies,” with “some even having automatic return-to-base features if there are any control interruptions,” Aon’s Geisen said.

Still, there is little doubt, he said, that commercial drones currently represent “a big area of emerging risk and growth.”

The U.S. military’s use of drones “went from like 50,000 flight hours in 2006 to some 550,000 by the end of 2011,” said Geisen.

“So in just five years you had an 11-fold increase,” he said, suggesting that the growth trajectory on the commercial side could be similar. One reason for growth in drone use: Cost per flight hour “is suggested to be 75 percent less with a UAS than a manned aircraft,” he said.

The U.S. military’s use of drones “went from like 50,000 flight hours in 2006 to some 550,000 by the end of 2011.”

– John Geisen, senior vice president, Aon

One forecast of global UAS demand by the Teal Group showed worldwide annual spending on research, development, testing, and evaluation, and procurement in this area rising from $6.6 billion in 2013, to $11.4 billion in 2022.

And in March, Dallas-based global market research and consulting firm MarketsandMarkets reported that the small UAS market alone is set to reach $582.2 million by the end of 2019.

NTSB Ruling

Accelerating insurers’ and brokers’ efforts to assess and effectively bind risks in this space, meanwhile, was a National Transportation Safety Board administrative law judge’s March 6 ruling overturning the FAA’s first-ever fine against a drone operator.

NTSB Judge Patrick Geraghty ruled that when Raphael Pirker flew an unmanned Styrofoam drone over the University of Virginia in 2011, “there was no enforceable FAA rule or FAR [federal aviation regulations] applicable to model aircraft or for classifying model aircraft as an UAS.”

Pirker reportedly sold photos and video collected during the flight to the university to help it create a promotional video.

Reports about the ruling immediately went viral, leading the science and technology site Motherboard to boldly state that commercial drones had become “unequivocally legal” in American skies — at least temporarily.

Motherboard noted that UAS operations previously sanctioned by the FAA included beer deliveries, aerial photography, tornado watching, and equipment inspections.

Industry Standards

The FAA appealed the ruling, saying “the agency is concerned that this decision could impact the safe operation of the national airspace system and the safety of people and property on the ground.”

R4-14p38-40_04Drones_ER.inddCongress asked the FAA to come up with a plan for safe integration of UAS by Sept. 30, 2015, and industry members expect to have some standards to work with by then.

Industry experts are trying to be patient.

A Feb. 26 post on the FAA’s website, titled Busting Myths about the FAA and Unmanned Aircraft, clearly stated: “Anyone who wants to fly an aircraft — manned or unmanned — in U.S. airspace needs some level of FAA approval.”

Commercial UAS flights are only authorized on a case-by-case basis, the agency emphasized, adding that “to date, only two UAS models (the Scan Eagle and Aerovironment’s Puma) have been certified, and they can only fly in the Arctic.”

According to Duvall, the September 2015 UAS integration deadline “may be quite difficult to meet,” considering that the preliminary notice of proposed rulemaking and public solicitation on the issue has been pushed back to November 2014.

Elsewhere, “this industry is growing by leaps and bounds,” with Japan, Greece, Canada and parts of Africa now using the technology for everything from farming to mapping to anti-animal poaching efforts, Duvall said.

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On the other hand, Geisen said, the FAA is likely to propose some rules for commercially operating drones under 55 pounds before the end of this year.

Insurance carriers said they will not be asleep at the switch.

“Once the FAA have completed their work on integrating unmanned aircraft into U.S. airspace, I would assume that we will very quickly see their commercial use proliferate, particularly in relation to agricultural and utility operations,” said Chris Proudlove of aviation underwriter Global Aerospace Inc.

                                                                                                                     

Complete coverage on the inevitable cyber threat:

Risk managers are waking up to the reality that the cyber risk landscape has changed.

Cyber: The New CAT. It’s not a matter of if, but when. Cyber risk is a foundation-level exposure that must be viewed with the same gravity as a company’s property, liability or workers’ comp risks.

042014_02c_hospital_thumbnailCritical Condition. The proliferation of medical devices creates a host of scary risks for the beleaguered health care industry.

042014_03c_cars_thumbnailDisabled Autos. It’s alarmingly easy for a hacker to take control of a driverless vehicle, tampering with braking systems or scrambling the GPS.

dv738024An Electrifying Threat. There is a very real possibility hackers could devastate the nation’s power grids — for a potentially extended period of time.

Janet Aschkenasy is a freelance financial writer based in New York. She can be reached at riskletters@lrp.com.
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RIMS 2014

Latin America Not Too Risky for U.S. Business

Violence and unrest are rampant, but risk mitigation strategies can ensure success in the region.
By: | April 30, 2014 • 4 min read
RIMSBrazil

The risks of doing business in Latin America are worth taking, according to a presentation at the RIMS annual conference in Denver.

Rob Osha, global director of risk management for mineral exploration company Boart Longyear, and Carlos Caicedo, senior principal analyst at IHS Country Risk, acknowledged social unrest and drug-related violence as two of the top dangers throughout the region, but expressed confidence in the growth of opportunities for U.S. business.

Caicedo highlighted Mexico as one emerging region. There, drug cartels pose the greatest risk, but their power may be decreasing. “Over the past five months, top leaders of the cartels have been arrested or killed,” he said.

However, a reduction of violence directed by drug lords could be replaced by extortion.

“We are seeing more risk in Mexico on the extortion side,” Osha said. “Cartels are looking to diversify their revenue streams.”

Caicedo conceded that extortion has increased against domestic Mexican businesses. He also said that cartel retaliation could lead to greater frequency of arson against commercial establishments. Despite these threats, though, he said security in Mexico has stabilized and the economy shows promise, thanks to a growing middle class and lower poverty rates.

“The economy is expected to grow at the end of 2014 and pick up even more in 2015,” he said.

Brazil, on the other hand, received a less favorable review. The region, in the view of IHS, is “a costly country to do business in.” The economy there has been poor since 2011, with inflation on the rise and a widening fiscal deficit. Social unrest, including World Cup protests, has been increasing this year.

In addition, state interventionism has undermined investor confidence, with domestic businesses stalling due to government influence in pricing.

Caicedo also addressed the terrorism threat in Colombia, where FARC continues to pose a danger, particularly to the country’s oil and energy infrastructure. However, the revolutionary faction and the government appear to be “very close to reaching a peace agreement,” Caicedo said.

FARC’s manpower has dropped from 20,000 at its peak to 8,000, and has been pushed into isolated areas of the country. The progression of peace talks will be critical in securing Colombia’s status as an emerging market and attractive place to do business, he said.

Even terrorist activity, however, didn’t scare off Boart Longyear from opening an office in Medellin, Colombia, where it had no prior experience.

“My first impression was, ‘Are you kidding me?’ I wasn’t sure we could do business there,” Osha said. The company established a “High Risk Country Committee” to examine the political, physical and travel risks in the region.

They identified general crime, bribery, extortion, and dangerous travel as the top risks facing the launch of a new facility.

“We gave [the project] the green light,” Osha said, as long as certain precautions were taken.

As part of the process, Boart Longyear hired a third-party firm to conduct a security review of the proposed location. “Don’t rely on your corporate real estate guy to tell you your location is safe,” Osha said.

After the review found the facility to be seriously under-guarded, the company added security cameras, remote locks, key cards, and after-hours guards.

They tackled travel risk next, by examining every route their workers could potentially take between sites and color-coded them by level of danger, establishing some “no-go” areas that were entirely off-limits.

Osha pointed to security assessments by IHS Country Risk and iJET, a travel risk provider, as vital resources for determining the safety of a travel route.

The company also hired a contractor to drive over every travel route and pinpoint areas with poor infrastructure or hazardous conditions like steep grades. Boart Longyear also established travel policies for its crew, instructing them to travel only by daylight and always with a partner.

Finally, they implemented a strict Foreign Corrupt Practices Act training and compliance program to address bribery attempts. Thanks to these efforts, the Medellin office was opened two years ago and has had no safety issues to date, Osha said. Follow-up assessments and ongoing monitoring have contributed to that success.

“We have to monitor the environment to make sure it is still stable,” he said. “Things can change in an instant with an election, a riot … things can get out of control.”

Should that happen, Boart Longyear put together a crisis plan that identifies the nearest resources like hospitals and police stations, and includes an emergency hotline.

While Latin America still presents big safety challenges to U.S. companies looking to capitalize on its emerging markets, those intrepid companies willing to take on the expense and effort of extensive risk planning and mitigation can expand to the area in a secure way.

Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at ksiegel@lrp.com.
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Sponsored Content by AIG

Global Program Premium Allocation: Why It Matters More Than You Think

Addressing the key challenges of global premium allocation is critical for all parties.
By: | June 2, 2014 • 5 min read

SponsoredContent_AIG
Ten years after starting her medium-sized Greek yogurt manufacturing and distribution business in Chicago, Nancy is looking to open new facilities in Frankfurt, Germany and Seoul, South Korea. She has determined the company needs to have separate insurance policies for each location. Enter “premium allocation,” the process through which insurance premiums, fees and other charges are properly allocated among participants and geographies.

Experts say that the ideal premium allocation strategy is about balance. On one hand, it needs to appropriately reflect the risk being insured. On the other, it must satisfy the client’s objectives, as well as those of regulators, local subsidiaries, insurers and brokers., Ensuring that premium allocation is done appropriately and on a timely basis can make a multinational program run much smoother for everyone.

At first blush, premium allocation for a global insurance program is hardly buzzworthy. But as with our expanding hypothetical company, accurate, equitable premium allocation is a critical starting point. All parties have a vested interest in seeing that the allocation is done correctly and efficiently.

SponsoredContent_AIG“This rather prosaic topic affects everyone … brokers, clients and carriers. Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”

– Marty Scherzer, President of Global Risk Solutions, AIG

Basic goals of key players include:

  • Buyer – corporate office: Wants to ensure that the organization is adequately covered while engineering an optimal financial structure. The optimized structure is dependent on balancing local regulatory, tax and market conditions while providing for the appropriate premium to cover the risk.
  • Buyer – local offices: Needs to have justification that the internal allocations of the premium expense fairly represent the local office’s risk exposure.
  • Broker: The resources that are assigned to manage the program in a local country need to be appropriately compensated. Their compensation is often determined by the premium allocated to their country. A premium allocation that does not effectively correlate to the needs of the local office has the potential to under- or over-compensate these resources.
  • Insurer: Needs to satisfy regulators that oversee the insurer’s local insurance operations that the premiums are fair, reasonable and commensurate with the risks being covered.

According to Marty Scherzer, President of Global Risk Solutions at AIG, as globalization continues to drive U.S. companies of varying sizes to expand their markets beyond domestic borders, premium allocation “needs to be done appropriately and timely; delay or get it wrong and it could prove costly.”

“This rather prosaic topic affects everyone … brokers, clients and carriers,” Scherzer says. “Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”

SponsoredContent_AIGThere are four critical challenges that need to be balanced if an allocation is to satisfy all parties, he says:

Tax considerations

Across the globe, tax rates for insurance premiums vary widely. While a company will want to structure allocations to attain its financial objectives, the methodology employed needs to be reasonable and appropriate in the eyes of the carrier, broker, insured and regulator. Similarly, and in conjunction with tax and transfer pricing considerations, companies need to make sure that their premiums properly reflect the risk in each country. Even companies with the best intentions to allocate premiums appropriately are facing greater scrutiny. To properly address this issue, Scherzer recommends that companies maintain a well documented and justifiable rationale for their premium allocation in the event of a regulatory inquiry.

Prudent premiums

Insurance regulators worldwide seek to ensure that the carriers in their countries have both the capital and the ability to pay losses. Accordingly, they don’t want a premium being allocated to their country to be too low relative to the corresponding level of risk.

Data accuracy

Without accurate data, premium allocation can be difficult, at best. Choosing to allocate premium based on sales in a given country or in a given time period, for example, can work. But if you don’t have that data for every subsidiary in a given country, the allocation will not be accurate. The key to appropriately allocating premium is to gather the required data well in advance of the program’s inception and scrub it for accuracy.

Critical timing

When creating an optimal multinational insurance program, premium allocation needs to be done quickly, but accurately. Without careful attention and planning, the process can easily become derailed.

Scherzer compares it to getting a little bit off course at the beginning of a long journey. A small deviation at the outset will have a magnified effect later on, landing you even farther away from your intended destination.

Figuring it all out

AIG has created the award-winning Multinational Program Design Tool to help companies decide whether (and where) to place local policies. The tool uses information that covers more than 200 countries, and provides results after answers to a few basic questions.

SponsoredContent_AIG

This interactive tool — iPad and PC-ready — requires just 10-15 minutes to complete in one of four languages (English, Spanish, Chinese and Japanese). The tool evaluates user feedback on exposures, geographies, risk sensitivities, preferences and needs against AIG’s knowledge of local regulatory, business and market factors and trends to produce a detailed report that can be used in the next level of discussion with brokers and AIG on a global insurance strategy, including premium allocation.

“The hope is that decision-makers partner with their broker and carrier to get premium allocation done early, accurately and right the first time,” Scherzer says.

For more information about AIG and its award-winning application, visit aig.com/multinational.

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


AIG is a leading international insurance organization serving customers in more than 130 countries.
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