About Caroline McDonald

Caroline McDonald is the senior editor of the Risk Management Monitor and Risk Management magazine.

Increasing Risk Complexity Outpaces ERM Oversight

More organizations are recognizing the value of a structured focus on emerging risks. The number of organizations with a complete enterprise risk management (ERM) program in place has steadily risen from 9% in 2009 to 28% in 2016, according to the N.C. State Poole College of Management’s survey “The State of Risk Oversight: An Overview of Enterprise Risk Management Practices.”

Yet this progress may lag behind the increasingly complicated risks that need addressing. Of respondents, 20% noted an “extensive” increase in the volume and complexity of risks the past five years, with an additional 38% saying the volume and complexity of risks have increased “mostly.” This is similar to participant responses in the most recent prior years. In fact, only 2% said the volume and complexity of risks have not changed at all.

Even with improvements in the number of programs implemented, the study—which is based on responses of 432 executives from a variety of industries—found there is room for improvement. Overall, 26% of respondents have no formal enterprise-wide approach to risk oversight and currently have no plans to consider this form of risk oversight.

Organizations that do have programs continue to struggle to integrate their risk oversight efforts with strategic planning processes. “Significant opportunities remain for organizations to continue to strengthen their approaches to identifying and assessing key risks facing the entity especially as it relates to coordinating these efforts with strategic planning activities,” the researchers found.

According to the study:

Many argue that the volume and complexity of risks faced by organizations today continue to evolve at a rapid pace, creating huge challenges for management and boards in their oversight of the most important risks. Recent events such as Brexit, the U.S. presidential election, immigration challenges, the constant threat of terrorism, and cyber threats, among numerous other issues, represent examples of challenges management and boards face in navigating an organization’s risk landscape.

Key findings include:

Software May Help Oil Companies Determine a Location’s Earthquake Potential

New software for monitoring the probability of earthquakes in a targeted location could help energy companies determine where they can operate safely.

The free tool, developed by Stanford University’s School of Earth, Energy & Environmental Sciences, helps operators estimate how much pressure nearby faults can handle before rupturing, by combining three important pieces of information:

  • Location and geometry of the fault
  • Natural stresses in the ground
  • Pressure changes likely to be brought on by injections

“Faults are everywhere in the Earth’s crust, so you can’t avoid them. Fortunately, the majority of them are not active and pose no hazard to the public. The trick is to identify which faults are likely to be problematic, and that’s what our tool does,” said Mark Zoback, professor of geophysics at Stanford, who developed the approach with graduate student Rail Walsh.

Fossil fuel exploration companies have been linked to the increased number of earthquakes in some areas—Oklahoma in particular—that have been determined to be the result of fracking. According to the Dallas Morning News:

Only around 10% of wastewater wells in the central and eastern United States have been linked with earthquakes. But that small share, scientists believe, helped kick-start the most dramatic earthquake surge in modern history.

From 2000 — before the start of America’s recent energy boom — to 2015, Oklahoma saw its earthquake rate jump from two per year to 4,000 per year. In 2016, its overall number fell to 2,500, but its quakes grew stronger.

Five other states, including Texas, Arkansas and Kansas, have seen unprecedented increases in ground shaking tied to the wells, although North Texas had no earthquakes strong enough to be felt last year.

The insurance industry has also been monitoring the rise in temblors. A Swiss Re report concluded, “It’s highly likely that this dramatic rise in earthquake occurrence is largely a consequence of human actions.”

According to the report:

Along with the increase in seismicity, Oklahoma has seen a growth in its oil and natural gas operations since 2008, specifically hydraulic fracturing (often referred to as “hydrofracking” or “fracking”) and the disposal of wastewater via deep well injection. Both hydrofracking and deep well injection involve pumping high-pressure fluids into the ground. A consensus of scientific opinion now links these practices to observed increases in seismic activity. Earthquakes where the cause can be linked to human actions are termed ‘induced earthquakes,’ and present an emerging risk of which the insurance industry is taking note.

Most Organizations Deny Prevalence of Fraud

At a loss of more than $6 billion annually, experts have found fraud occurs in most organizations, but 80% of respondents to a recent survey by ACL believe their organization has “medium to no” exposure.

The 2017 Fraud Survey of more than 500 professionals in the United States and Canada found that “alternative facts” extend to the mentality among many businesses.

“As the phenomena of ‘fake news’ and ‘alternative facts’ permeate the U.S. landscape, it is interesting to see how disconnected many executives are from the true prevalence of fraud and corruption in their organizations,” said Dan Zitting, chief product officer at ACL, a risk management software provider. He added that companies increasingly discover they have had “numerous instances of potential fraud” that need to be investigated.

Almost two-thirds of respondents (63%) also said that most instances of fraud committed in their organizations are not detected, and more than 75% said that at least some of the fraud that is detected goes unreported.

Respondents noted that a company’s fraud experts can feel pressure from senior leaders, direct managers and even peers to suppress or alter their fraud findings. While the existence of internal pressure is no surprise to most, the survey confirmed that pressure from all sides makes fraud harder to overcome.

“As long as companies refuse to admit that fraud exists, the fraud will continue,” Zitting said. “As unscrupulous employees and vendors realize the company’s ignorance, the problem has great potential to grow.”

According to ACL:
2017 Fraud Survey Results

Falling Trees Can Cause Property Damage, Injury or Death

During and after large storms, especially those with high winds, there are always reports of fallen trees and tree limbs, which can cause injury or death to those who are in the wrong place at the wrong time. In the past few months in California alone, a woman was killed by a falling tree in the San Francisco Bay area on Jan. 9; another woman was struck and killed by a falling tree while walking on a golf course in the Bay area on Jan. 8; and the mother of a bride was killed when a tree fell on a wedding party in Southern California on Dec. 19. In New York City’s Bryant Park, a woman was killed and five people were injured when a massive tree snapped in half on Sept. 4, 2015.

Falling trees are also a major cause of property damage. If winds are strong enough, even healthy trees can be uprooted or broken, according to the Tree Care Industry Association (TCIA).

It might not take a storm or high winds to cause a cracked or rotted tree to fail under its own weight, however. Cracks are hazardous because they compromise the structure of the tree and can eventually split the stem in two. Cracks are particularly dangerous when combined with internal decay, according to the TCIA, thus the presence of multiple cracks and decay indicates a potentially hazardous tree.

Property owners should be concerned about trees falling, especially if cracks are evident. “While trees are genetically designed to withstand storms, all trees can fail – and defective trees fail sooner than healthy trees,” Tchukki Andersen, staff arborist at TCIA, said in a statement. “To a professional arborist, certain defects are indicators that a tree has an increased potential to fail.”

Cracks in tree trunks can be one of the major indicators of an unstable tree. Most cracks are caused by improper closure of wounds or by the splitting of weak branch unions. Cracks can be found in branches, stems or roots, and vary in type and severity:

  • Horizontal and vertical cracks run across the grain of the wood and develop just before the tree fails, making them very difficult to detect. Vertical cracks run with the wood grain along the length of the tree and may appear as shear or ribbed cracks.
  • Shear cracks can run completely through the stem and separate it into two halves. As the tree bends and sways in the wind, one half of the stem slides over the other, elongating the crack. Eventually the enlarging crack causes the two halves of the stem to shear apart.
  • Ribbed cracks are created as the tree attempts to seal over a wound. Margins of the crack meet and mesh but are reopened due to tree movement or extremely cold temperatures.
  • Thicker annual rings are created in order to stabilize the developing crack at the location of the wound. This forms the ribbed appearance over a period of many years.

To prevent damage, TCIA recommends having trees examined by a qualified arborist to determine the potential for failure. An expert will measure the shell thickness in a few locations around a tree’s circumference, determine the width of the crack opening and check for any other defects.