Category Archives: Environmental Risk

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Cyber, Regulation Seen as Top Emerging Risks, Report Finds

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SAN DIEGO—Forecasting risk is not expected to get easier in the next three years, with cyberattacks and regulation topping the list of emerging risks, according to a new report published jointly by Marsh and RIMS.

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The 13th annual Excellence in Risk Management report found that while risk professionals are increasingly relied upon to identify and assess emerging risks, there are still organizational and other barriers to identifying those risks. In fact, nearly half of survey respondents—48%—predicted that forecasting critical business risks will be more difficult three years from now, while just over one-quarter said it would be the same.

“Whether emerging risks are on your doorstep, around the corner, or on the far horizon, they have the potential to catch organizations unaware,” said Brian Elowe, Marsh’s U.S. client executive leader and co-author of the report. “It’s important for risk professionals to maintain awareness of global risk trends, and to make the connection to their organizations’ business strategy.”

Where do risk professionals turn when trying to understand the impacts of emerging risks on their organization? According to the report:
One of the goals of this year’s Excellence survey’s goal was to better understand how organizations view the emerging risks facing them, what tools they use and the barriers they face in assessing, modeling, and understanding the risks. According to the findings, a majority of respondents—61%—cited cyber-attacks as the likely source of their organization’s next critical risk. This was followed by regulation, cited by 58% of the respondents, and talent availability, cited by 40% of the respondents.

Based on survey responses and insights from numerous focus group discussions, it became clear that risk professionals generally agree on the importance of identifying emerging risks, and also that there is no clearly established framework for doing so. More can be done to better identify, assess, and manage the impact emerging risks may have on organizations.

For example, a majority—60%—of the risk management respondents said they use claims-based reviews as one of the primary means to assess emerging risks, compared to 38% who said they use predictive analytics.

“The widespread use of claims-based reviews means that a majority of organizations are relying on studying past incidents to predict how emerging risks will behave rather than using predictive analytic techniques like stochastic modeling and game theory to help inform their decision making,” Elowe said.

Survey respondents also cited several barriers to understanding the impact of emerging risks on their business strategy.

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Decisions with lack of cross-organization collaboration ranked first among risk professional respondents.

“Lack of collaboration across the organization is still an issue for many risk professionals. On the other hand, breaking down silos has become less of a concern for executives,” said Carol Fox, vice president of strategic initiatives for RIMS and co-author of the report. “Tackling emerging risks often requires creative yet pragmatic approaches. It has to encompass internal cross-functional conversations — formal and informal — around the intersection of risk and strategy, senior-leadership engagement, and tapping into external information sources. Risk professionals are encouraged to broaden the scope and collaboration around emerging risk issues within their organizations.”

According to the report:

As the risk environment becomes increasingly complex and more entwined with financial decisions, risk strategy is increasingly a boardroom issue. As we have seen in past Excellence surveys, senior leaders’ expectations of the risk management department have increased in everything from leading enterprise risk management to providing better risk quantification and analysis.

However, while more is being asked of risk professionals, investment is not necessarily keeping pace. For example, the percentage that say they expect to hire more staff dropped to 25% this year from 37% when we asked in 2015. “We’ve all experienced this elevation of risk management at our institutions, but…as we are battling for budget, it becomes pretty easy for risk management to get pushed over to the side,” said the assistant vice president of risk management at a major university.

The survey is based on more than 700 responses to an online survey and a series of focus groups with risk executives in January and February 2016.

Overcoming ‘Balkanization’ of Business Continuity Planning

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Fragmentation

To be sustainable, organizations must prepare for crises that occur or risks that crystalize. General responses to those threats include alternative office sites, IT back-ups and communication protocols. As reality demonstrates over and over, it is critically important to have a strong leader in a crisis situation, be it the captain of a ship in a storm, the commanding officer of a platoon under fire or the CEO of a company in turmoil. A cacophony of contradicting orders or disintegration in the line of command is the surest way to increase a disaster’s impact and the time needed to recover.

Instead of creating a strong BCP landscape with clear lines of command and control, however, we more often see “balkanization,” or fragmentation of responsibilities. Business continuity planning, environmental health and safety, operational risk and IT disaster recovery are different teams with overlapping roles and responsibilities for crisis management.

The newest buzzword is resilience, which is discussed in a growing number of articles and lectures and defined as the “ability to bounce back to a normal operating status after a state of crisis.” There are also a number of overlapping areas with the aforementioned functions—and that is just on an intra-company level. The OECD has issued Guidelines for Resilience System Analysis, urging member states to set up resilience management on a country level basis.

Recent private initiatives like the 100 Resilient Cities (100RC) by the Rockefeller Foundation brings resilience management to an urban level. So if a natural disaster hits a major city, thousands of firms, and the city itself, will invoke a patchwork of crisis plans. For a larger disaster, there might also be a national crisis plan. Are there clear lines of command, however? Is everybody aware of what to do? We doubt it.

Modern BCP management does not need more specialization and buzzwords, but coordination of the different functions and initiatives to provide a clear, consistent and timely response. One of the most pressing tasks is establishing a common risk language to ensure that all stakeholders involved in the process have the same understanding. For example: While the 100RC initiative is coining the term CRO for chief resilience officer, the acronym is also widely used as an abbreviation for chief risk officer. So while talking about roles and responsibilities of a CRO, everyone involved should have a clear understanding about which CRO is meant.

100RC also looks at urban resilience in terms of surviving and thriving, regardless of the challenges—be they acute shocks (such as severe weather or earthquakes) or chronic stress (long term unemployment and violent crime)—and it seeks a much wider remit than the traditional concept of resilience as “the ability to bounce back from an event.”

The response is to call for a more coordinated approach working across multiple stakeholders through the chief resilience officer who, according to Michael Berkowitz (President of 100RC) “needs to build connections across not just various departments of municipal government, but across an entire ecosystem of people and places.” This is welcomed, since it is both forward looking and holistic in its approach to solving some of the world’s major issues in the next 20 years. Given that most entities are no longer stand-alone enterprises, but part of an increasing global network of customers, suppliers, regulators and other stakeholders, disaster recovery cannot be handled effectively by an individual member of that network. Instead, the entire group needs to collaborate to create an effective disaster recovery program. A central CRO who coordinates the needs of the various parts of the network seems to be the best way.

While we see this forward looking risk management approach to resilience as a welcome development, it does further complicate interaction between resilience and BCP by muddying command and control and introducing the potential for more stakeholders into an already complex chain. What is required for this to work is very clear planning and, one could argue, the ability for external (such as municipal) CROs to assume command of enterprises under his or her jurisdiction.

As of now, in most jurisdictions it is the responsibility of the CEO and the board to determine and define risk capacity and risk appetite. This leaves little room for outsourcing BCP or resilience planning. The key question, then, is whether a change in mindset and approach is required to enable the development of network-wide recovery solutions, thus overcoming the balkanization of BCP.

Time for Post-Storm Claims Filing

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Record-breaking Storm Jonas, which struck a large portion of the East Coast last weekend, was yet another reminder to have property insurance policies up to date and be familiar with claims procedures. To get the claims process moving, risk professionals whose business suffered damage should contact their insurer and broker as soon as possible.

According to the Insurance Information Institute, business owners need to:

▪ Fill out claims forms as soon as possible—including a “proof of loss” form, which must be completed within 60 days.

▪ Make a list of damaged property; the more detailed the better. Take photos or video to back up the claim.

▪ Be prepared to show the adjuster the damaged property as well as financial records or other documents.

▪ Get at least two bids for repairs or replacements.

▪ Keep copies of all correspondence regarding the claim and note the name, title and phone number of everyone you speak with. For more details, see Filing a Business Insurance Claim.

 What Is, and Is Not, Covered 

Business property owners also need to understand what is and is not covered by insurance, and the various coverage options available to protect their business. Property damage is typically covered under a business owners policy (BOP) or through a commercial multi-peril (CMP) policy.

Most commercial property policies provide either:

▪ Replacement cost coverage – pays to rebuild or repair the property, based on current construction costs.

▪ Actual cash value coverage – pays to rebuild or replace the property minus depreciation

Depreciation is a decrease in value due to wear and tear or age so with actual cash value coverage a business that is destroyed may not be in a position to completely rebuild. Business owners can also opt for a combination of both types of coverage.

Business income insurance, also known as business interruption, is typically included in a BOP or CMP and provides coverage for:

▪ Revenue lost due to the closure.

▪ Fixed expenses, such as rent and utility costs.

▪ Expenses of operating from a temporary location.

To receive appropriate reimbursement from business interruption coverage, there must be direct physical damage to the property resulting from an insured event. Also, there is generally a 24- to 48-hour waiting period before business income coverage kicks in.

Determining a business interruption loss involves establishing what the business would have earned had there been no loss. Insurers will consider past tax returns, profit and loss statements, projected sales and non-continuing expenses.

If basic business interruption insurance and property insurance coverage was expanded to include utility interruption, you may be covered if either electrical or water service was discontinued as a result of the storm.

Businesses that rent or lease a building can purchase tenant coverage, which insures your on-premises property, including machinery, furniture and merchandise. The building owner’s policy will not cover contents, however.

At Risk for Flood Damage?

Location is the most important factor for weighing your risk for flood damage. Is your business located in or near a flood zone? (Flood map search tools can be found online.) In what part of the building is your businesses equipment and inventory located? Anything housed on a lower floor, for instance, will be at greater risk.

Standard commercial insurance policies exclude flooding from melting snow or tidal surge. Commercial flood coverage is available from the National Flood Insurance Program (NFIP) and from a few private insurers. The NFIP provides up to $500,000 in building coverage and $500,000 for contents. Excess flood insurance is also available for businesses.

For more information on coverage options and disaster preparedness, see the Business Insurance section of the III website.

Related Links

▪ Facts and Statistics: Catastrophes

▪ Articles: When Disaster Strikes: Preparation, Response and Recovery; Does My Business Need Flood Insurance?; Does My Business Need Earthquake Insurance?; Does My Business Need Terrorism Insurance?;

 

Crude Oil Safety Mandates Signed into Law

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A transportation law signed by President Obama earlier this month includes new mandates for freight trains transporting crude oil through the United States. The law requires that tank cars used for transporting crude oil be replaced by March 1, 2018, phasing out older DOT 111 tank cars for shipment of flammable liquids, including most Bakken crude oil, according to the U.S. Department of Transportation.

The new tank cars will have thicker steel shells, insulating materials, full-size metal shields at each end and improved outlet valves underneath the car.

DOT tank car

The DOT said that the Notice of Proposed Rulemaking (NPRM) also outlines a classification and testing program for mined gases and liquids and new operational requirements for high-hazard flammable trains (HHFT) that include braking controls and speed restrictions.

A rail disaster in Lac-Mégantic, Canada, on July 26, 2013, that killed 42 people brought a heightened focus on the dangers of transporting highly flammable Bakken crude oil by train.

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The Journal News reports that the new law requires freight railroads to provide real-time data on flammable liquids shipments to state emergency response commissions (SERCs) to be shared with local first responders. The law codifies what had been a regulatory emergency order requiring trains containing one million gallons of Bakken crude oil to notify SERCs or other appropriate state-delegated entities about the operation of these trains through their states.

For the first time, the rail safety section of the new transportation law also allows states and localities to obtain inspection reports on privately owned rail bridges filed with the Federal Railroad Administration by freight railroads.

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Localities will be eligible for 80% federal funding to finance safety improvements at dangerous railroad crossings.

According to the DOT, the rule:

  • Requires an enhanced tank car standard and an aggressive, risk-based retrofitting schedule for older tank cars carrying crude oil and ethanol.
  • Requires a new braking standard for certain trains that will offer a higher level of safety by potentially reducing the severity of an accident.
  • Designates new operational protocols for trains transporting large volumes of flammable liquids, such as routing requirements, speed restrictions, and information for local government agencies.
  • Provides new sampling and testing requirements to improve classification of energy products placed into transport.