Author Archives: Caroline McDonald

About Caroline McDonald

Caroline McDonald is a writer and former senior editor of the Risk Management Monitor and Risk Management magazine.
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Prepare Now for Spring Thaw Flooding

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After a harsh, cold winter, the clear, sunny skies and rising temperatures of spring are much appreciated. Businesses, however, also need to be ready for the possibility of flooding that may result from heavy rains combined with melting ice and snow.

The National Oceanic and Atmospheric Administration (NOAA) notes that flooding causes more damage in the United States than any other weather-related event. On average, flooding causes $8 billion in damages and 89 fatalities annually. Warming weather also often brings ice jams along rivers, streams and creeks, which can cause further flooding.

“In addition to the threat of floods that occur when severe weather hits, snow and ice have been piling up in many areas of the U.S. this winter,” Bill Boyd, senior vice president with CNA Risk Control, said in a statement. “When temperatures rapidly increase, so does the rate at which snow and ice melt…” which can create serious problems for those heavily affected this winter. “As spring temperatures begin to rise, it’s imperative for businesses to create emergency plans for flooding, which could cause costly property damage or disrupt operations,” he said.

According to NOAA:

Snowmelt and the breakup of river ice often occur at about the same time. Ice jams often form as a result of the sudden push exerted on the ice by a surge of runoff into the river associated with snowmelt. Ice jams can act as dams on the river that result in flooding behind the dam until the ice melts or the jam weakens to the point that the ice releases and moves downstream. A serious ice jam will threaten areas upstream and downstream of its location. Six inch thick ice can destroy large trees and knock houses off their foundations. Once an ice jam gives way, a location may experience a flash flood as all the water and debris that was trapped, rushes downstream.

CNA offers these tips for businesses to minimize loss during the thawing season:

• Create a flood preparation plan.

• Keep water out with barriers, sandbags and other devices.

• Relocate materials from lower levels. In some cases, this may simply mean placing stored items on      one or two pallets, or moving items from lower shelves or racks to upper levels.

• Review shutdown procedures for affected processes, especially hazardous processes.

• Check to make sure drainage, including roof drains, are open and flowing freely.

Thaw Edition tools, checklists and bulletins, can be found at www.cna.com/actnow.

Enterprise Risk Management Needed in Battle Against Corruption

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Even though the U.S. government has broadened its pursuit against corruption, only about 9% of organizations see Foreign Corrupt Practices Act monitoring as a top concern, according to “Bribery and Corruption: The Essential Guide to Managing the Risks” by ACL.

Many companies have policies against corruption, but it still exists. Although remaining competitive can be difficult in some parts of the world that see payments, gifts and consulting fees as part of doing business, companies need to identify these risks and manage them across the organization. There is much is at stake, as penalties are rising and more companies globally are being fined, the study found.

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According to ACL, if a formalized ERM process exists within an organization, then the anti-bribery and anti-corruption (ABAC) risk assessment process should ideally be carried out within that ERM framework. In some organizations, however, the overall risk management process is fragmented, meaning that the risks of bribery and corruption are considered in relative isolation. Whichever approach is taken within an organization, the process of defining the risks should involve individuals with sufficient knowledge of the regulations and ways the business actually works.

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“We encourage companies to maintain robust compliance programs, to voluntarily disclose and eradicate misconduct when it is detected, and to cooperate in the government’s investigation. But we will not wait for companies to act responsibly,” said Leslie Caldwell, assistant attorney general in the criminal division at the Department of Justice. “With cooperation or without it, the department will identify criminal activity at corporations and investigate the conduct ourselves, using all of our resources, employing every law enforcement tool, and considering all possible actions, including charges against both corporations and individuals.”

The study’s findings also include:

Haulers of Crude Finding Coverage Scarce

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HOUSTON—The recent spike in oil and natural gas production has led trucking companies to grow so quickly that they sometimes scramble to find qualified drivers. This has meant tightening coverage with a limited number of carriers and a market in “disarray,” Anthony Dorn, a broker with Sloan Mason Insurance Services, said today at the IRMI Energy Risk and Insurance Conference.

“Carriers have taken a bath on construction risks,” he said. “Only nine carriers will write crude hauling.”

There is a huge need for risk management in trucking right now, he added. “A lot of these are fly-by-night companies. They are running with drivers that have no experience, they are getting violations from the DOT left and right for not having licenses and adequate brakes on their trucks and they are running on dirt roads that aren’t made for 100,000 pound units,” Dorn said. “It’s a very risky place for underwriters. If we don’t do something as agents and as risk managers there will be fewer carriers.”

The recent downturn in the oil and gas market has also been a game-changer for some companies. Dorn predicts a “cleaning of the crop” of truckers. Inexperienced companies with new drivers will “fall by the wayside. What we are going to be left with are companies that are well-run with proper safety procedures in their fleet.”

Once that happens, he believes more carriers will enter the market. “But as of now, in general the whole market is in disarray,” he said.

He noted that agencies such as the Department of Transportation have vehicle reports available online, which insurers now frequently access when considering whether to take on a trucking company as a risk. He suggested that companies looking for coverage also check these reports and work closely with their risk managers and safety directors to correct any problems, such as drivers without adequate experience.

“There is a huge opportunity out there right now for risk managers to approach these companies and tell them, ‘If you don’t have a risk manager to help with your losses, you are not going to be able to find insurance.’ Right off the bat, I’d say 50% [of trucking companies] are declined as soon as they walk in the door,” Dorn said. As a result, he has seen companies declined by every insurer and forced to form a new LLC or even shut down.

Loren Henry, also a broker with Sloan Mason, said that another thing they are seeing as oil prices drop is companies formed to haul salt water for hydraulic fracturing looking to other opportunities. “They start hauling agricultural products and paper products, whatever there is that is not oil and gas related,” he said. “That is typically not going to be covered under their auto policy.

” He advised fleet owners to be aware of this and communicate any changes to their broker to find out specifically what is covered.

“We have had some losses recently, where a company made a shift from what they were hauling because they had lost some saltwater accounts. They were hauling cattle and they had a loss and it wasn’t covered because it is not in the policy language,” Henry explained.

“I don’t know where all these water-haulers are going to go,” Dorn added. “You’re going to see massive fleets go on sale and you’ll get huge discounts on trucks. You are going to see some transitions.”

Dorn added that one of his clients is now hauling salt water with half of his trucks and cattle with the rest. He advised his client to form another LLC for the cattle-hauling if he expects to get insurance coverage, as insurers would cover one or the other, but not both.

Asked whether companies are hiring risk managers and if they are also listening to their advice, he said, “Yes, especially after they get their premium. When they go from $5,000 a unit to $12,000 a unit their ears perk up pretty quick. They are willing to do almost anything to get that pricing down. It’s sad because companies are actually being put out of business because their premiums are too high.”

He expects the next year to see a lot of changes. “A lot of companies will go by the wayside,” he said. “A lot of smaller companies will be gone—they will sell their trucks or be bought out by bigger fleets.”

Shale Shakes Up Energy Sector

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shale oil industry

HOUSTON—In the words of the well-known rock group REM, “It’s the end of the world as we know it,” at least for the energy sector in the last decade, said Ross Payne, managing director of Wells Fargo Securities and keynote speaker at the IRMI Energy Risk and Insurance Conference here. Since 2009, production in the United States is up 72%, he said. “That’s a phenomenal increase, driven by shale production.”

The huge boon in shale production was the result of technology. “Just sticking one straw into shale was not going to be economic, butwhen you were able to take that drill bit and turn it horizontal, and go out one to two miles horizontally and pop a hole into the ground every hundred yards along that one or two miles, you got enough flow to make that economically an option,” he said. “That’s why, when we broke the technology on that, it did change the world as we know it.

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”

Looking at energy from 30,000 feet, he explained that, since the early ’90s, the energy sector has enjoyed “one way pricing,” which was brought about by constricted supplies. The only new technology before developments to extract shale came along was in the deep water offshore arena, “a brand new territory for drilling in the 1980s and ’90s.”

Adding to that was dramatic global growth and demand, primarily from the BRIC countries–Brazil, Russia, India and China–and geopolitical issues such as the Arab Spring and the Iraq war, Payne said.

With high prices, however, “you get substitutions and you get disrupters. Clearly shale has become a disrupter.” What kind of impact has shale had on the industry? “Just since 2011 to 2013, the Energy Information Administration (EIA) doubled their crude basin estimates to 95. There are now 41 countries out there with significant shale assets.

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Shale reserves increased 980% in that two year time frame. Currently in the United States, 42% of production is through shale, with crude production around 50%,” he said.

As technology continues to evolve, Payne said, “we are continuing to do a better job of pulling this gas and crude out at a lower price. We are going to get more prolific and drive down costs even further.” Meanwhile, other countries, including China and Russia, are doing the same.

“Shale is the future, it’s the future on a global basis as well,” he said. The country with the largest shale reserves, he noted, is Russia, with the United States in second place. “We’re obviously the largest producer of shale crude, and China is number three.

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On the natural gas side, China is number one and the U.S. is number four.”

But how long will crude prices stay low? “We think it’s going to be awhile,” Payne said. “Because of shale, prices will be capped. As prices start to come up, we will see a situation where rigs come back on line very quickly. We think that, as we get into the $65 to $70 per barrel range, a lot of rigs will come back on line,” he said. “At peak, we were at 1,610 crude rigs in the U.S., and if you have 1,610 rigs working in the fields primarily on shale, you will get 1 million barrels of growth year-over-year.” He also does not see prices going much above $80 because of the ability to turn these rigs so quickly, primarily in the U.S.

A poll among energy experts in the audience as to where prices will be by the end of 2015 reached a consensus of $55 to $60 per barrel. Asked whether he believes the Nixon-era ban on exporting oil will be lifted, Payne pointed out that a number of CEOs have been pushing for U.S. exports of crude. “I’m surprised that Obama let LNG [liquefied natural gas] exports materialize as quickly as he did,” he said, adding that the president has allowed for other similar exports as well. However, he warned, “Once we start to export, there could be a knee-jerk reaction from OPEC. We are going to be viewed as a competitor rather than a customer, and they may want to squelch that competitor a bit longer than people’s expectations. So I think there is a danger to doing that, but it could very well move forward.”