Category Archives: Emerging Risk

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FAA Announces Drone Testing Partnerships Beyond Current Regulations

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Drone regulations FAA

Yesterday, the Federal Aviation Administration announced three partnerships with companies to expand the operation of unmanned aerial vehicles (UAVs) in an initiative the agency is calling the Pathfinder program.

U.S.-based drone maker PrecisionHawk will be exploring the possibilities of flights over agriculture while testing tracking and a system for drones and planes to remain aware of each other in flight to avoid collisions. CNN will be testing the use of drones for newsgathering in urban areas where drones will remain in the line of sight of operators. BNSF Railroad, owned by Warren Buffet’s Berkshire Hathaway, received permission to test drone operations outside of the operator’s visual line of sight. The company will “explore command-and-control challenges of using UAS to inspect rail system infrastructure,” the FAA reported.

“Government has some of the best and brightest minds in aviation, but we can’t operate in a vacuum,” said U.S. Transportation Secretary Anthony Foxx. “This is a big job, and we’ll get to our goal of safe, widespread UAS integration more quickly by leveraging the resources and expertise of the industry.”

To that end, Pathfinder will allow these corporate entities to research operations that push the boundaries of the recent draft rules released regarding small unmanned aircraft, namely by operating both within and without the visual line of sight requirements currently mandated by the FAA.

“Even as we pursue our current rulemaking effort for small unmanned aircraft, we must continue to actively look for future ways to expand non-recreational UAS uses,” said FAA Administrator Michael Huerta, who announced the initiative at a conference held Wednesday by the Association for Unmanned Vehicle Systems International. “This new initiative involving three leading U.S. companies will help us anticipate and address the needs of the evolving UAS industry.”

This effort is also the first step in realizing some companies’ grander aspirations for drone use, such as the package delivery applications being pursued by Amazon. That being said, the information gathered by these companies will merely provide data to inform future FAA regulations, which are still pending and may only approve broader operations in a few years. Other companies looking into similar applications that are beyond the scope of current draft regulations would still need to apply for and receive a Section 333 exemption from the FAA. While about 300 of these requests have been granted, the agency has received repeated criticism for an exceptionally slow and sometimes mystifying review process.

“The impact of the Pathfinder Program could be profound for several reasons — perhaps most importantly, it shows the FAA is serious about moving quickly to safely and practically integrate commercial drone use in the U.S.,” said Anthony Mormino, senior legal counsel at Swiss Re. “Allowing drone flights beyond the sight of a drone operator is considered the key to unlocking the true potential of commercial drone use.  This collaboration could impact the future rules promulgated by the FAA regarding the line of sight requirement for commercial drones.”

Such developments could also significantly impact insurers. As discussed in “Drones Take Flight,” the April cover story of Risk Management magazine, one of the most promising near-future applications for UAVs could be in the insurance industry in the wake of natural catastrophes or other major claim events. “Reducing or eliminating the visual line of sight limitation on commercial drone use will allow insurance companies to employ UAVs to their fullest extent in insurance underwriting and claims management,” Mormino said. “Consider that the FAA has already granted a number of insurance companies permission to test and use UAVs for insurance inspection purposes. These companies include AIG, State Farm, Erie Insurance Group, and USAA.

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They plan to use UAVs, for example, to more quickly process insurance claims after natural disasters by allowing them to inspect damage —especially in remote locations—in real time.

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Insurers also plan to use UAVs to obtain imagery and data for use in underwriting, such as roof inspections. Until the FAA mitigates the visual line of sight limitation, however, the foregoing insurance uses for UAVs will remain drastically limited. Success for the FAA’s new Pathfinder program would open the door to potentially even larger scale use of UAVs by insurance companies.”

The implications for insurers also extend to the products and pricing offered. “First, the current dearth of UAS loss data makes it difficult for insurance companies to properly price insurance policies covering drone use,” said Carol Kreiling, senior claim manager at Swiss Re. “It is therefore no surprise that only a handful of insurers actually issue stand alone drone insurance coverage, such as Zurich Insurance in Canada, and Tokio Marine in the Lloyd’s of London market. An increase in commercial use of drones in the US could provide a steady flow of data that would allow more insurers to price and issue coverage for use of UAS. On the other hand, if the Pathfinder program’s goals are fulfilled—to find ways to safely use UAVs outside a pilot’s visual line of sight—increased remote use of drones could raise risk profiles for insurance coverage.

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At the conference, Huerta also announced a new smartphone app called B4UFLY, designed to help model aircraft and UAS users know if it is safe and legal to fly in their current or planned location by pairing geolocations with the relevant restrictions and requirements.

For more about drones, UAV regulations, and the potential impact these machines may have on the insurance industry, check out “Drones Take Flight,” the April cover story of Risk Management magazine.

Risks and Questions Surround 3D Printing Technology

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NEW ORLEANS—One of the most promising new technologies to hit the wider market in recent years, 3D printing is poised to revolutionize manufacturing as we know it. Otherwise known as additive manufacturing, 3D printing allows users to print almost anything they can dream up, including toys, machine parts, clothing, food, and prosthetic (as well as actual) body parts. There even companies that can print a lifesize, 3D model of your unborn fetus using ultrasound scans.

Of course, as with any new technology, there are many risks to consider and just as many unanswered questions about how to address those risks. At an educational session this morning at the RIMS 2015 Annual Conference & Exhibition, Cynthia Slubowski, head o f manufacturing at Zurich, Lisa Cirando, and attorney with Jones Day and Toni Herwaldt, risk manager at Kraft Foods, provided a risk checklist, outlining at the wide range of risks and questions facing those in the 3D printing space and those whose industries will be impacted by this new technology:

Product risk. Since 3D printing changes the traditional manufacturing model, industries will need to determine who owns a 3D printed product and in the event of an accident how will liability be apportioned?

Technology risk. Who owns the software and designs used to create products, particularly when users can make endless customizations?

Operations risk. How will 3D printing impact power supplies (the printers generate a lot of heat during operation), and how will the possible toxicity of ingredients and their byproducts be addressed. In addition, what are the business interruption and transportation risks?

Cybersecurity risk. How do you protect you designs and formulas? How do you prevent counterfeiting?

Environmental risk. How do you address exhaust, housing and disposal issues?

Contract risk. What kind of risk transfer or licensing agreements do you want to have in place?

Insurance risk. Do you have the appropriate coverage and where will it be coming from?

Strategic risk. How do you handle reputation and intellectual property issues? What happens to your product development lifecycle management?

Supply chain risk. Does your supply chain risk increase or decrease?

Market risk. What differentiates your product? What happens to your geographical risk?

10 Insurance Tips for Risk Managers

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NEW ORLEANS—Most companies will at one time or another face coverage issues and lawsuits. In order to identify and avoid insurance-related issues and disputes before they arise, risk managers should take advantage of proven strategies for resolving difficult claims, advised Darin McMullen, attorney with Anderson Kill, P.C. at the RIMS 2015 Annual Conference & Exhibition here.

1. The purpose of insurance is to insure.

Don’t underestimate potential future problems and think of loss prevention and risk transfer rather than loss financing, he noted. Companies need to assess the types of risks they will face and make sure their program is tailored to meet these needs. Also important, he said, is making sure policies are designed to cover the losses the company will face on a day to day basis. For example, certain types of risks are seen in manufacturing and other risks are particular to an IT vendor. Risk managers need to examine any pitfalls or shortages that may exist in their current policies and seek legal opinions well in advance of renewal. They need to look at how exclusions might be interpreted as well, McMullen said.

Joshua Gold, also an attorney with Anderson Kill, added that risk managers’ jobs are more difficult than ever, with fragmentation in insurance programs existing, since many polices are purchased for a program. These may include directors and officers, product liability and cyber insurance. “There are products out there that try to assimilate them and make sure gaps in coverage are treated,” Gold said, adding that while the fine print in policies can be overwhelming, it can be key for proper coverage, especially when dealing with multiple lines, excess layers and towers of insurance.

2. Don’t limit insurance expertise to the risk management department.

All too often, “there are still going to be thorny claims and there still are going to be disputed claims, which are unavoidable,” McMullen said. He said that building expertise elsewhere within the company is critical to taking advantage of any and all available coverage. “We get the need for everybody to work together, but now, more than ever, this is important,” he said. Coverage should not just be delegated to risk or legal and collaboration is needed. For example, IT departments need to be included when planning for cyber coverage.

3. Lawyers and risk managers can be natural allies.

While there may be friction between departments in a company, legal generally recognizes the beneficial role risk managers play, McMullen said. He added that risk managers need to put any insurance-related communications in writing and assist in the analysis of policies and claims.

4. Insurance is an essential component of corporate resources and asset conservation plans.

Risk managers should purchase coverage with the intent of safeguarding the company’s own property and employees. They also need to recognize which mechanisms actually transfer risk and which do not.

5. Think insurance after a loss occurs.

This means looking to insurance coverage following all lawsuits, claim letters, product-related issues and financial losses. Risk professionals also need to analyze other sources of insurance that could possibly cover a claim.

6. Give notice of a claim or loss as soon as possible.

When faced with a claim or loss, McMullen advised risk managers not to hesitate to notify their broker, insurers and everyone in their tower of insurance as soon as possible.

7. When you make a claim, don’t accept “no” for an answer.

There is no downside to challenging an insurer’s denial of coverage. “You owe it to your company, you owe it to your organization to explore this and push back,” McMullen said, adding that determination and persistence often mean the difference between coverage and no coverage.

8. Find out where your company’s policies are.

Locate, collect and catalogue past insurance policies. Also acquire and keep policies of all entities related to your company.

9. Don’t panic if your insurer becomes insolvent.

If this is the case, McMullen advised risk professionals to file a proof of claim as a creditor and file a claim against the state guaranty fund in one or more possible jurisdictions. He recommended that they request the next layer of insurance companies to “drop down,” and also to consider litigation options.

10. Make sure your insurance team is conflict-free.

This means the team should be untainted–risk managers need to know where loyalty lies and if an attorney is representing both sides, McMullen said. “You want a conflict-free insurance team to take on the insurance company and to fight for the coverage that you are paying for,” he concluded.

 

Survey Finds Alliance with Organizations and Risk Reporting Structures

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NEW ORLEANS—Seventy-nine percent of companies are aligned with their risk management reporting structure, however, only 27% of risk professionals believe that emerging risks will be a company priority in the coming year, according to the 12th annual “Excellence in Risk Management Survey” released here by Marsh and RIMS.

In the last five or six years, “We have seen significant narrowing of the gap, where there is better alignment of what risk managers and risk executives are providing their organization and what their C-suite and management is looking for and needing in this riskier world that we all live in,” said Brian Elowe, a managing director at Marsh and co-author of the report. Findings are based on more than 300 responses to an online survey and a series of focus groups with leading risk executives.

Elowe explained that the study focused on organizational alignment, risk management effectiveness, data analytics and technology and cyberrisk.

In their study of organizational dynamics, he said, “We looked at priority setting, organizational structure and performance measurement standards to understand effective execution of a risk management strategy.”

The first insight was in respect to structures risk management reports to inside an organization. “We also asked whether the people responding to the survey felt risk management was reporting to the correct area inside the organization. We found that 79% of the respondents said they felt risk management was reporting into the appropriate area inside their organization,” Elowe said.

Looking deeper, he said the survey found that 50% of executives report into the finance area. The other half reports into a wide number of areas inside the company–12% report to general counsel, 8% to other C-suite members, 5% to internal audit, 5% to operations, 2% to human resources and 11% to “other” functions.

“We found that while they are all in the risk management function, those that report to areas outside of finance tend to be involved in areas deemed to be more strategic in nature. So they are more likely to be involved with things like ERM strategies, IT, privacy and security.”

Elowe said, “We think that finance executives might be well-served to help facilitate greater connections inside their companies to help broaden the perspective that risk executives reporting into finance might be able to have inside their own companies.”

In addition, only 27% of risk professionals reporting to the CFO or treasurer said they expected an increase in spending for training risk management staff. This is compared to 46% in increases expected by those reporting to other areas.

The top-five programs reporting to risk management were insurance management (92%), claims management (88%), enterprise risk management (67%), captive operations (65%) and emergency response (63%).

Looking at functions that report into risk management, he said that while the traditional functions of insurance and claims were well aligned, there is a significant alignment with IT. This is compared to several years ago when IT “operated in and of itself in an organization. That is an outcome of the growing cyberrrisk and the need for organizations to have a multi-disciplinary approach to how cyber is affecting their organization.”

Discussion groups agreed that the “here and now” is most important to their companies and that more needs to be done to develop understanding of emerging risks. “Risk managers are concerned they are not looking far enough ahead,” Elowe said, adding that company focus is largely directed to regulations and compliance. Carol Fox, director of the strategic and enterprise risk practice at RIMS and co-author of the report observed that organizations focused on operations are generally not as involved in strategy. She said management understands risks, but fell off in actually planning for emerging risks.

Findings include:

  • Risk management departments that do not report into finance are generally better aligned with other strategic functions within their organizations — most notably in the areas of enterprise risk management, compliance, information technology (IT) risk management, privacy, and security.
  • Despite the importance placed on emerging risks by many board members, senior leaders, and risk executives, only 27% of survey respondents said that identifying emerging risks would be a priority in the coming year.
  • Over the next two years, 42% of organizations expect to increase the level of investment in risk analytics, according to our survey, with 57% saying it would remain flat.
  • Nearly 60% of respondents said their organization has no formal communications plan in anticipation of a cyber event.
  • Risk professionals who report into the CFO or treasurer are much less likely to expect an increase in spending for training risk management staff in the coming year compared to those reporting elsewhere.