Rethinking Risk

Rethinking Risk

On a planet inhabited by more than 7 billion people, injury and loss arising from environmental factors and human behavior are inevitable. Surveys conducted by some of the world’s leading insurance industry organizations offer lists of the risks with the greatest impact, ranging from business interruption, market developments and damage to reputation, to cyber incidents, third-party liability and natural catastrophes. What is becoming clear is that these top risks increasingly are interconnected and have significant ramifications when viewed through the lens of risk management and insurance. This report explores these interconnections in greater depth, along with some of the legal consequences they can engender.

Complexities and connections Risk is dynamic. Global risks are increasingly complex, and change is accelerating. For example, what happens in one location can have severe, near-immediate implications on the other side of the globe. Advances in transportation and communication have in essence made the world smaller. It is easier today to conduct business across the globe than in the past, a development that has fueled both opportunity and exposure. Even seemingly isolated domestic events, depending on their nature, can have widespread impact. When loss occurs, recovery efforts – whether through insurance claims or litigation against a responsible party - can become quite complicated. Enforcing contract terms and conditions with suppliers and business partners can be daunting, especially when they cross international borders. The expectation of quick resolution of disputes is often adjusted downward once parties see clearly the challenge of pursuing or defending international litigation. Consider, for example, the following incidents and their outcomes: March 11, 2011: A magnitude 9.0 earthquake strikes Japan, triggering a massive tsunami. This catastrophe, one of the strongest quakes ever recorded, claimed more than 15,000 lives and caused economic losses of at least $300 billion. In addition to causing a meltdown at the Fukushima Daiichi

Many of the world’s most pressing risks, according to various polls of business leaders, are beyond the power of organizations to control. It is difficult, if not impossible, to predict – much less avoid – natural perils such as earthquakes, floods and wildfires. The effects of such perils are carefully analyzed and inform sophisticated catastrophe models, but the insurance industry and scientists still struggle to determine exactly where and when such events will occur. Likewise, human activity is inherently challenging to forecast. Fortunately, some elements of the risks cited as the most worrisome can be mitigated through insurance and risk management. Strategy-minded organizations therefore should take steps to control what risks they can. A fundamental method of controlling risk and mitigating loss from human or natural causes is provided by the global insurance industry. Through an array of products and services, the industry offers individuals and organizations tools to analyze, reduce and transfer risk. Underpinning these products are legal contracts designed to respond to policyholders’ needs while creating parameters for the insurer’s business commitments. Claims are paid in accordance with the terms and conditions agreed in the insurance policy. Insurers and policyholders, however, must adapt to changes in the business environment and to evolving risks.

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nuclear power plant, the event prompted the closure of nuclear plants across Japan, removing a major source of the nation’s energy. The tsunami also was responsible for supply chain disruption in Europe and North America, for industries including automotive and electronics. Whether large or small in scale, property business interruption and contingent business interruption are common exposures for businesses. The opportunity for a single event to disrupt operations and prevent goods from being sold is a function of the interconnectedness of businesses today. Even relatively small businesses can have multinational exposures to property losses, notes Robert Fisher, a partner in Clyde & Co’s Atlanta office. As an example, a regional U.S. manufacturer and distributor faced a class-action lawsuit involving materials produced in China. The company was named as an additional insured in a policy obtained by its Chinese supplier. Clyde & Co was retained to advise the insurer in China as well as provide coverage opinions under U.S. and Chinese law. In another case, Clyde & Co assisted a client in subrogating a contingent business interruption claim in the United States that arose from a fire at a supplier plant in the United Kingdom, preventing the insured’s high-value products from being sold and fulfilling U.S. purchase orders. The ability of a law firm to provide expertise and seamless service around the world enables better client outcomes on all types of claims, Fisher says. August 12, 2015: Human error in storing volatile chemicals causes a series of enormous explosions at a warehouse complex in Tianjin, China. The blasts killed at least 173, injured hundreds, displaced thousands of people and caused extensive damage to cargo awaiting shipment. Destroyed in the explosions were more than 10,000 automobiles and more than 7,500 shipping containers. The Tianjin event is estimated to result in the largest man-made insurance loss in Asia and one of the largest in history, at $2.5 billion to $3.5 billion, according to Swiss Re. One of the outcomes of the Tianjin event was increased awareness of risk accumulation and the need to understand proximity to other perils.

August 31, 2016: Global supply chains are disrupted when financially struggling Korean shipping giant Hanjin Shipping files for bankruptcy protection. Hanjin, one of the world’s largest container ship operators, fell victim to the worldwide economic slowdown after the 2008 financial crisis as well as sharply lower shipping rates. Hanjin felt the impact of lower rates on routes between Asia and Northern Europe and Asia and North America, which represented a large percentage of its revenue. Meanwhile, in September 2016, an estimated $14 billion of cargo was stranded aboard Hanjin vessels which were prevented from entering ports due to the risk or threat of arrest by Hanjin creditors, and the port operators’ fears that the shipping company would be unable to pay docking fees. The delays in shipping are expected to have downstream effects on the revenue and profits of many retailers as they scrambled to arrange alternative logistics. About 95% of the world’s manufactured goods are transported in containers, making disruptions such as the Hanjin bankruptcy a major risk for manufacturers, distributors and merchants. February 18, 2008: The U.S. Department of Agriculture announces one of the largest-ever recalls of ground beef, totaling 143 million pounds, by a California meat company. Widely distributed among restaurants, grocers and even federally subsidized school lunch programs, the recall created logistical challenges for customers of the meat company, and the USDA acknowledged that much of the product subject to the recall had already been consumed. The recall was prompted after a clandestinely filmed video of employees abusing ill cows raised questions about food safety. The incident brought further scrutiny to food producers, raised awareness of product liability risks and ushered in more stringent regulations. In 2007, there were 21 recalls of beef suspected of contamination with the pathogen E. coli. Although the USDA classified the health hazards from the 2008 recall as remote, the California meat company ultimately went into bankruptcy. Product liability risks extend well beyond the food and beverage industries. Manufacturers in virtually all industries face exposure to product liability claims. For example, 14 automobile manufacturers have been forced

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to replace tens of millions of defective airbags made by supplier Takata. The National Highway Traffic Safety Administration has called it the largest and most complex safety recall in U.S. history. Product liability litigation is usually complex and expensive for all parties. A particular burden on defendants is pre-trial discovery in meeting plaintiffs’ requests for documentation. February 2015: One of the largest-ever >Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8

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