Natural Catastrophes Dominate 2018 Marine Risk Landscape
By Captain Andrew Kinsey
Business interruption (BI) and cyber incidents interlink as the major threat for companies globally in 2018, according to the insight of 1,911 risk experts from 80 countries in the Allianz Risk Barometer 2018. However, for marine and shipping companies, natural catastrophes (34 percent), including storm, floods and earthquakes, takes the top spot – up from number four in 2017. BI tied with cyber incidents (31 percent), for the second spot followed by theft/fraud/corruption (27 percent) and fire/explosion (25 percent) to round out the top five business risks in the maritime sector for 2018. These incidents illustrate the complex nature of insurance risks as most are closely intertwined in complex loss cases.
Major Risks in Focus: Natural Catastrophes
Industry sources have estimated $330 billion in overall losses from natural catastrophes in 2017 with approximately $135 billion in insured losses. At least $90 billion resulted from the three category 4+ hurricanes – Harvey, Irma, and Maria (HIM) – that wreaked havoc in September, making it the most active hurricane month on record. Given the wide-ranging impact of HIM – from flood damage by Harvey in Houston to BI from record power outages in Puerto Rico caused by Maria – it may be some time before the final loss total is known.
The increasing frequency and severity of severe storms highlights the often fragile nature of our just in time supply lines. Hurricane Irma significantly impacted gasoline markets in Florida, first by prompting increased demand and then by disrupting the supply chain needed to deliver the fuel. The evacuation of people in anticipation of Hurricane Irma led to higher demand for transportation fuels and logistical challenges in supplying fuel to Florida that began before the hurricane made landfall on September 10, 2017.
Because Florida is largely dependent on marine movements of gasoline from the U.S. Gulf Coast, any threat of or actual disruption to supply sources and shipping routes, such as Hurricane Harvey, can affect gasoline markets. Between August 21 and August 28, 2017, when Hurricane Harvey made landfall in Texas, retail gasoline prices in Florida and Miami increased $0.10 per gallon (gal) and $0.05/gal, respectively, based on EIA’s weekly survey of gasoline prices.
These recent events are a reminder of how significant the impact of natural catastrophes can be; both socially and economically. As industries become leaner and more connected globally, it is becoming clearer that natural catastrophes can trigger or contribute to many other risks, such as business interruption or loss of market share. The impact of natural catastrophes goes far beyond physical damage to structures in the affected areas. They disrupt the normal dynamics of societal and industrial operations in the immediate regions affected and beyond, impacting a large variety of industries that might not seem affected at first glance.
Risk Barometer respondents fear the 2017 natural catastrophe year could be a harbinger of things to come with many believing the intensity of natural catastrophes will increase in future due to the impact of a changing climate. Research shows there has been a 46 percent increase in weather disasters since 2000 and that 797 events were recorded in 2016 alone, resulting in $129 billion of losses.
Changing global weather patterns is further demonstrated by the increase in Arabian Peninsula tropical cyclones. During the 1980s, only two storms were reported, but by the 2010s there have already been nine cyclones on record.
Climate change/increasing weather volatility is a new entrant in the top 10 global risks in 2018 and many scientists agree that changes in the climate and weather patterns have the potential to affect extreme events around the world in three primary ways: more intense windstorms, incidences of heavy rainfall leading to flooding events, and more severe drought episodes.
New Tools for Rapidly-Changing Risk Concentration
In order to keep up with rapidly-changing risk concentration, insurers are using a variety of new catastrophe management tools and insurance solutions to monitor storms and assess natural catastrophe damages from events such as those in 2017. These tools include drones – used outdoors to assess roof wind damages and inaccessible locations, but also indoors to assess water damage in large facilities – and satellite technology and 3D imagery, to locate risks more quickly and more precisely.
Business Interruption: An Increasing Number of Disruptive Scenarios
For businesses in the marine and shipping markets, BI tied with cyber as the second major cause of concern in 2018. BI can be triggered by traditional property damages resulting from natural catastrophe losses or a break in the supply-chain due to property damages at the premises of a supplier or customer, often known as contingent business interruption (CBI).
BI losses for businesses can often be much higher than the cost of any physical damage. The average large BI property insurance claim is now in excess of $2 million. This is more than a third higher than the average direct property damage loss. ($2.4m and $1.75m respectively).
But as many businesses transition from being rich in physical assets to deriving more value from intangibles and services, increasingly, BI is being triggered by non-traditional risk exposures that don’t cause physical damage but result in lost income – so-called non damage business interruption (NDBI).
BI impact is easy to underestimate and risks can be extremely complex. In many cases, it is difficult to know what the actual exposure is, how to calculate the loss, or even where the actual disruption in the supply chain occurred. Companies often underestimate the complexity of getting back to business and can have bottlenecks in their emergency plans, particularly with regards to alternative suppliers.
Nevertheless risks can be mitigated. Businesses should continuously fine tune their emergency plans to reflect the new BI environment, plan for a variety of scenarios and have strategic alignment through all departments on predictive detection of risks.
Cyber Risks Evolving
Five years ago, cyber incidents ranked 15th overall in the Allianz Risk Barometer; this year it is number 2 globally, number 1 in the United States and tied for second among marine and shipping executives. Cyber also ranks as the most underestimated risk and the major long-term peril across all regions and industries.
Recent events such as the WannaCry and Petya ransomware attacks brought significant financial losses to a large number of businesses. Others, such as the Mirai botnet, the largest-ever distributed denial of service (DDoS) attack on major internet platforms and services in Europe and North America, at the end of 2016, demonstrate the interconnectedness of risks and shared reliance on common internet infrastructure and service providers.
On an individual level, recently identified security flaws in computer chips in nearly every modern device reveal the cyber vulnerability of modern societies. The potential for so-called “cyber hurricane” events to occur, where hackers disrupt larger numbers of companies by targeting common infrastructure dependencies, will continue to grow in 2018.
The concerns addressed by the Risk Barometer respondents are also being expressed by other concerns, not just business interests. This is especially true on the Cyber Risk front. On January 5, 2018, the U.S. Government Departments of Commerce and Homeland Security released a draft report focusing on “Enhancing the Resilience of the Internet and Communications Ecosystem Against Botnets and Other Automated, Distributed Threats.”
At Allianz, tracking developments to help chart a safe course remains a key focus. Training, education and planning also continue to be important elements in maintaining a proactive operational profile that allow our business partners to address the complex risks they face.
Capt. Andrew Kinsey is a Senior Marine Risk Consultant with Allianz Global Corporate & Specialty. He spent 23 years in the U.S. Merchant Marine and U.S. Naval Reserve, sailing in all licensed ranks, including Master. After coming ashore in 2006, Andrew worked as an independent Marine Surveyor. He is a 1984 graduate of the United States Merchant Marine Academy.