3 Strategies to Protect Your Organization from Political Risk

From the Middle East to Eurasia to Eastern Europe, events and potential events that translate into political risk fill the news.

Political risk is instability that damages or threatens to damage an existing or potential asset, or significantly disrupt a business operation. Examples include sustained political and labor unrest, terrorism and violent conflict. This risk is increasingly regional in nature, as the Arab Spring and sudden spread of Islamic State control demonstrate.

According to the new Clements Worldwide Risk Index, political unrest is the number one concern among top global managers at multinational corporations and global aid and development organizations.

Risk managers in these organizations responded in the Worldwide Risk Index survey that political risk and instability—including cyber attacks—are real and growing. Twenty-eight percent of top managers surveyed stated political unrest was their top concern, while 25% cited kidnapping, and nearly 10% cited terrorism.

When it comes to terrorism, the Worldwide Risk Index results align with the data. The U.S. State Department’s Annual Country Report on Terrorism released recently indicates that the number of terrorist attacks worldwide in 2014 increased 35%, while total fatalities from terrorism activities grew by 81%, compared to 2013.

But as violence and unrest have increased, readiness for it trails far behind. Twenty-one percent of respondents admitted being “not prepared at all” for a terrorist attack, while 11% considered themselves “very prepared;” 17% said they were “very prepared” for the ramifications of a disease outbreak, while 10% they were “not prepared at all” for that threat; and 21% said they were “not prepared at all” for a cyberattack.

Perhaps most troubling, these concerns and lack of preparedness are impacting business decisions. Twenty-one percent of Worldwide Risk Index respondents had delayed plans to expand into new countries due to rising international risks.

So what can executives do to bring their organizations’ preparedness in line with growing risks around the world?

First, they can invest more in risk management overall. This means emergency planning, training, security and other techniques to manage and reduce risk. An important element is also testing the plan, which typically highlights gaps. Forty-four percent of Worldwide Risk Index respondents increased spending on this activity. While not a majority, it is still a significant percentage of organizations investing more in basic risk management.

Next, corporate executives should consider retaining the services of the growing number of political risk, insurance and security consultancies that provide political intelligence. While the quality of these firms vary and they are not a substitute for direct experience, these companies provide useful insights into potential risks one might encounter, especially when starting operations in a new location. Risk managers can also personally monitor catalysts to political unrest, such as elections, which are often linked to demonstrations and disturbances in developing countries, particularly with the rise of social media. Elections and other catalysts have caused disruptions in surprising places around the globe, such as Thailand. Corporate executives, including risk managers, need to understand that no country is absolutely “safe” anymore.

Finally, organizations need to consider increasing their spending on international insurance. Fifty-seven percent of the respondents to the Worldwide Risk Index report doing just that. There are more options than ever before for political violence and risk, kidnap and ransom (K&R), evacuation and related policies. Organizations can work with individual carriers, or with brokers who can help tailor policies to specific risk profiles. The best organizations link their brokers or insurance carriers to their overall risk management strategy and ensure their plans include which broker to contact in case of which emergency, as it may differ for a medical versus a property event.

The global economy is more integrated than ever, with more markets opening every year. Yet global supply lines and other business operations and investments are more dependent on particular political factors than at any time in modern history. Political unrest, instability and even conflict are “normal” realities that drive business decisions in evermore areas of the world. This risk can be managed. To do it, executives need to get serious about bringing their risk management strategies into line with the new “facts on the ground.”

What Proposed Changes to U.K. Counter-Terror Laws Mean for Your K&R Policy

With insurers facing increased scrutiny over indemnity payments from the U.K. government, there could be consequences for companies who regularly put their employees into harm’s way.

When she announced plans for new laws in the Counter Terrorism and Security Bill, Home Secretary Theresa May cited UN estimates that ransom payments have raised up to £28 million ($42 million) for militant group ISIS in the past 12 months.

Observers often ask if the existence of kidnap and ransom (K&R) insurance itself encourages kidnapping for ransom. But for corporate risk managers, the debate is immaterial. They must protect employees and ensure that jobs in danger zones remain attractive to new recruits.

May’s bill amendments, which will be inserted into the Terrorism Act 2000 if passed, do present a potential challenge to the established order and highlight the pivotal role of response consultants (AKA hostage negotiators).

How does K&R actually work?

K&R insurance typically covers against losses related to kidnap incidents, particularly ransoms, lost earnings and the costs for an outsourced expert agency whose job is to handle the case and advise the policyholder on the negotiations. However, the indemnification is only paid out to the policyholders retrospectively, after the hostage situation is over. With such an approach, insurers on the one hand prevent ransom payments spiraling out of control and, on the other hand, remain in the grey area of section 17 of the Terrorism Act 2000.

The new amendments

Under May’s new section 17A, it is now clear that the insurer commits an offense if “it knows or has reasonable cause to suspect” that payments will be handed over in response to a demand made for the benefit of a proscribed organization.

The question for their response consultants will therefore be how much notice they can give their assureds as to whom they are dealing with. Historically, negotiations for release could be made without resorting to identifying the culprit, but now the insurer will have to make sure that they are not engaging with a terrorist on Whitehall’s blacklist.

As of Nov. 28, 2014, there were 74 international terrorist organizations listed under the Terrorism Act 2000. However, a large number of organizations associated with kidnappings are not on the list, which, with a few exceptions, focuses on organizations from Northern Ireland and those operating in the MENASA Region (Middle East, North Africa and South Asia). Of course, kidnappings have increased in the Middle East in recent years, but most kidnappings worldwide are still taking place in Central and South America and Central and Southern Africa. Although the new law only targets proscribed organizations from the MENASA region, insurers have to remain attentive since the home secretary may add organizations to the list at any time.

One thing which hopefully will remain protected are the fees and costs that hostage negotiators charge; this is a critical part of the industry’s service to a market believed to include at least 80% of the Fortune 500 as its clientele.

K&R still valid

From a company’s perspective, K&R is certainly still a valid class of business. There should not be any effect on pricing as the underlying risk has not changed.

However, if your policy is led by insurers domiciled in the U.K., those insurers may be less likely to indemnify kidnappings where the culprits may be loosely associated with a proscribed group. Equivalent insurers in other territories may be less restrained, so some insureds may elect to have their business placed outside the U.K., particularly if they have workers who are frequently operating in the MENASA region.

It is important to understand that corporations are also not allowed to fund payments. From a risk management perspective, where companies do wish to ensure they are able to lawfully pay ransom demands to release their employees, they need to consider in which jurisdictions they should be located so as to lawfully pay ransoms. On a practical level, they need to review with their response companies what protocols they use to identify or qualify the identity of kidnappers who allege, possibly incorrectly, that they are affiliated to terror groups.

The proposed offence aimed at insurers provides:

17A Insurance against payments made in response to terrorist demands

(1) The insurer under an insurance contract commits an offence if –

(A) the insurer makes a payment under the contract or purportedly under it,

(B) the payment is made in respect of any money or other property that has been or is to be, handed over in response to a demand made wholly or partly for the purposes of terrorism, and

(C) the insurer or the person authorising the payment on the insurer’s behalf knows or has reasonably cause to suspect that the money or other property has been, or is to be, handed over in response to such a demand.

This article was originally posted at Airmic.com

Marine Losses Continue Downward Trend

The marine industry continued to see a steady decline in the number of large ships losses globally since 2002, with 94 ships lost in 2013, down 20% from 117 reported in 2012, according to a study by Allianz.

The “Safety and Shipping Review 2014” by Allianz Global Corporate & Specialty found that of ships lost, the largest number, 32, were cargo vessels; 14 were fishing vessels; and 12 were bulk shipments. Only six passenger ships were lost, the survey found. The most common cause of losses in 2013, and over  the last 12 years, was foundering (sinking or submerging). The demise of 69 ships accounted for nearly three-quarters of all losses—with bad weather a significant driver.

Worldwide there were 1,673 losses from Jan. 1, 2002-Dec. 31, 2013, with an average of 139 per year. The top geographic area for losses has been South China, Indo China, Indonesia and Philippines. The area including British Isles, North Sea, English Channel and Bay of Biscay is still ranked fourth, despite improvement. With 45 losses overall, the U.S. eastern seaboard improved in 2013, dropping out of the top 10 regions.

According to the study, January is the worst month for all casualties in the Northern Hemisphere. There were 23% more losses in January compared with the quietest month, June. In the Southern Hemisphere July sees 41% more losses than April.

The majority of losses are caused by machinery damage, the reason for most losses in marine insurance. Statistics from the International Union of Marine Insurance (IUMI) report that 40% of hull claims are machinery damage and account for 20% of costs.

The review found that while piracy is still a threat, it has also subsided. Piracy at sea reached its lowest levels in six years, with 264 attacks recorded worldwide in 2013, a 40% drop since Somali piracy peaked in 2011. Fifteen incidents were reported off Somalia in 2013, including Gulf of Aden and Red Sea incidents, down from 75 in 2012, and 237 in 2011 (including attacks attributed to Somali pirates in Gulf of Aden, Red Sea and Oman).

According to the study: “The very real threat of piracy for ships operating in the Gulf of Aden reached the general public last year as the Hollywood Oscar-nominated blockbuster Captain Phillips was released. Tom Hanks played the lead as the master of the pirated Mærsk Alabama, broadcasting the piracy problem to a much wider audience and raising awareness of its consequences. The steps that the international maritime community has taken to reduce the threat of piracy in the Gulf of Aden have been extremely successful with the number of ships seized and hostages taken in 2013 significantly down on 2012.”

Lower losses overall were attributed to a number of factors including increased regulation, which has helped the maritime industry improve its safety record. Because the quality of operations varies in different regions, however, there is a big need for universal regulations on ship safety to reduce the risk of casualties and loss of life, the survey concluded.

 

Are Drone Cargo Ships the Next Step in Supply Chain Automation?

Rolls Royce Drone Ships

Ahoy, robots!

The $375 billion shipping industry, which carries 90% of world trade, is next in line for drones to take over—at least, that’s what Rolls-Royce Holdings is betting on. The London-based engine manufacturer’s Blue Ocean development team has already set up a virtual-reality prototype in its Norwegian office that simulates 360-degree views from a vessel’s bridge. The company hopes these advanced camera systems will eventually allow captains in control centers on land to direct crewless ships. The E.U. is funding a $4.8 million study on the technology, and researchers are preparing a prototype for simulated sea trials next year.

“A growing number of vessels are already equipped with cameras that can see at night and through fog and snow—better than the human eye, and more ships are fitted with systems to transmit large volumes of data,” said one Rolls-Royce spokesperson. “Given that the technology is in place, is now the time to move some operations ashore? Is it better to have a crew of 20 sailing in a gale in the North Sea, or say five people in a control room on shore?”

Crew costs of $3,299 a day account for about 44% of total operating expenses for a large container ship, industry accountant and consultant Moore Stephens LLP told Bloomberg News. By loading more cargo and replacing the bridge and other systems that support the crew, such as electricity, air conditioning, water and sewage, ships can cut costs and boost revenue, claims Oskar Levander, Rolls-Royce’s vice president of innovation in marine engineering and technology. The ships would be 5% lighter before loading cargo and would burn 12% to 15% less fuel, he reported.

Unmanned ships would require captains to operate them remotely and people to repair and unload them in port, but the lack of crew at sea could change the landscape of piracy. Without people to take hostage, the risks would greatly reduce—as would the need for for kidnap and ransom insurance premiums. The material being transported, however, could be even more vulnerable without a human line of defense. Further, the remote operating system opens the door to digital hijacking from hackers or cybercriminals.

Currently, human error—most notably tied to fatigue—causes most maritime accidents, according to Allianz. But, as the 600,000-member International Transport Workers’ Federation is quick to point out, humans are also the first line of defense in a field plagued by unpredictable conditions. “The human element is one of the first lines of defense in the event of machinery failure and the kind of unexpected and sudden changes of conditions in which the world’s seas specialize,” Dave Heindel, chairman of the ITF’s seafarers’ section, told Bloomberg Businessweek.

Drone cargo ships would represent the latest part of a rapidly automating supply chain. As Wired pointed out, as customers’ desire for ever-more-instant gratification mounts and companies like Amazon find ways to drastically cut shipping costs with technology, consumer pressure may make this too tempting a development to pass up.