Spanning the globe from Japan to New Zealand to Thailand to Iceland to the United States, a series of natural disasters in the past two years caused significant supply chain disruptions.  These disasters have shown that supply chain exposures are an ongoing risk for many businesses, and that this risk can cause serious financial and reputational consequences.  Along with earthquakes and adverse weather activity, other major causes of supply chain disruptions are unplanned outage of IT or telecommunication systems, transport network disruption, insolvency, civil unrest/conflict, and cyber attack. 

According to a survey of corporate risk managers and financial executives conducted by Dempsey Partners in February 2012, 61% said they had experienced a supply chain disruption in the last five years that led to a loss of earnings.  Companies are increasingly relying on their supply chains to produce their products and deliver to their customers.  With the rise of online communication and worldwide delivery, both large and small businesses are subject to supply chain risks.  The exposure does not end at a company’s direct supplier but extends to suppliers of their suppliers as well. 

In addition to not receiving the product for which the company has contracted, the disruption can come from discovering that a product is not to the anticipated standards, which have resulted in massive recalls in recent cases.

So how does your company address the supply chain exposure?  Is the exposure addressed in your commercial insurance policies or in an alternative risk transfer mechanism?  Have you experienced any supply chain disruption in the past 5 years?

Enterprise risk management is a hot topic.  The charge of Enterprise Risk Management is to identify and quantify an organization’s current and potential risks and opportunities, determine the company’s risk tolerance, and decide on risk-taking and risk-avoidance strategies.  Insurance professionals are especially attuned to the lessons of risk management.

There is one risk that persists in all enterprises: human error.  No matter how expert or how careful an individual is, there will come a point at which he makes a significant mistake. 

We frequently have people close to us who may notice our errors before serious damage is done – these people may be supervisors, peers, or people who report to us.  Unfortunately, when the person noticing the error is in a junior position, the dissenter’s voice may go unheard.

The book “Sway – The Irresistible Pull of Irrational Behavior,” by Ori and Rom Brafman, discusses the positive power of dissent, especially the dissent of subordinates, whether in a board room, a cockpit, or a surgical suite.

On March 27, 1977, two Boeing 747 passenger aircraft, KLM 4805 and Pam Am Flight 1736, collided on the runway of Los Rodeos Airport in the Canary Islands, killing 583 people.  According to “Sway”, subsequent investigation and review of the black box records show that a mistake by Captain Jacob van Zanten, the pilot of KLM 4805, resulted in the crash.  The runway was foggy and Captain van Zanten had only been granted one of the two types of clearance necessary for takeoff.  The first officer of the flight, Klaas Meurs, tried to point out that Van Zanten did not have the necessary second clearance, but was disregarded.  At the time, Van Zanten was the head of safety for KLM and had an impeccable record.

Several years subsequent to the Canary Islands disaster, NASA initiated a study on “Cockpit Resource Management” (or “Crew Resource Management”).  One finding of the study is that it is essential for subordinates to have effective tools to communicate possible mistakes to their supervisors, and it is essential for supervisors to tune in and listen.  Since then, several commercial airlines have implemented communication protocols to be used by the copilot or staff when they see a mistake in progress.  The crew is trained in how to make their statements most effective, and the pilots are trained to stop and listen.  Similar initiatives are being implemented in hospitals and other health care facilities, such that the concerns of a nurse or resident will be considered by the attending physicians and surgeons.

What do you think?  How would you grade your organization on “tuning in” to sources of concern?  Are they considered on the merit of the argument or on the basis of who is speaking?  If you work in the insurance or risk management field, how can your organization create an environment in which legitimate concerns are heard, no matter what the source?  The answers to these questions can make a difference in any industry, and certainly in the risk management industry.

We all know how dangerous it is to text while driving.  In fact, texting while walking can be dangerous as Cathy Cruz Marrero proved in January when she became a YouTube sensation by falling into a mall fountain while texting.  If Ms. Marrero’s phone had been company-issued could her employer take a bath as well?

In a recent Insurance Journal article, author Andrew G. Simpson examines the newly mobile workplace.  Here he suggests that work can happen virtually anywhere in the world at any time of the day or night, and that this is a relatively new phenomenon.  This article cites research that the choice to work outside of the physical office is largely self-imposed with little evidence that management requires a mobile environment.  It is easy to imagine employers named in a myriad of lawsuits where employees are involved in accidents or questionable behavior while attending to work-related activities and/or using equipment issued by their employer.  These cases are coming, and employers can begin to protect themselves in anticipation.

Michael Liebowitz, New York University’s director of risk management and insurance, suggests employers draft contracts with employees to define rules of usage associated with company issued electronic devices and defining risks and responsibilities. HR and employment lawyers need to be engaged in this process and ramifications must be firm. Maureen McCarthy, manager of Workers’ Compensation and Managed Care for Liberty Mutual makes the comparison between off-site after-hours mobile device liabilities to incidents occurring during after-work gatherings involving alcohol.

Cathy Cruz Marrero is among the first to stick her toe in the water, bringing a lawsuit against the mall for failing to install a railing around the fountain to protect texters and against the security guards who were heard laughing on the recording that went viral. 

What do you think? What should be defined as “work?” How can employers reduce their exposure to these new workers’ compensation risks? Let us know.

What would happen if an actuary evaluated the 2011 NFL Draft?  In particular, the Atlanta Falcons big move, where they traded five picks to move from #27 overall to #6 overall.  Is trading up at the cost of multiple picks, in general, advisable?

As part of my wider reading around the issues of risk-management, I read “The Black Swan: The Impact of the Highly Improbable” by Nassim Nicholas Taleb, which I highly recommend.  A “black swan” is an unlikely event with significant consequences.  Mr. Taleb advises seeking positive exposure to such black swans (the risk-management aspect is avoiding exposure to negative black swans).  Mr. Taleb also makes the point that people, particularly “experts” in their field (and particularly actuaries!), are especially prone to great overconfidence in their predictions.

It appears to me that the NFL draft is littered with examples that show how General Managers often get it very wrong when making picks, or, more accurately, that the knowledge available to General Managers at the time they make a selection in the draft is only a small amount of what will decide whether a player will be successful in the NFL.  Off the top of my head, I came up with the following examples:

• Ryan Leaf – Most predicted he’d be as good as Peyton Manning.
• Tom Brady – The black swan par excellence.  Who predicted he’d be a Hall-of-Famer (and one of the best QBs ever)?
• JaMarcus Russell – Picked #1 overall, released by Oakland Raiders after 3 years.
• Reggie Bush vs. Marques Colston – Marques, a 7^th round pick, was as least as good as Reggie, #2 overall and predicted by many to be the #1 pick, in their first year with the Saints.
• Vince Young – #3 overall pick, off Tennessee’s roster for 2011-12 season.
• Fill in the blank here from your favorite team ____________.

And the above does not take into account careers derailed by significant injury.  To date, there have only been a few players to win the Heisman Trophy and become an NFL Hall-of-Famer. So, history would suggest that General Managers don’t have lot to go on.

The Atlanta Falcons gave up five draft picks to move up from #27 overall to #6 overall. Black swan theory, and prior history, would suggest this was a mistake. Overconfidence on the part of Falcons’ management in their scouting ability has lead them to think that the #6 overall pick will come out better than any of the five other players they could have drafted.

I’ve kept the article to general terms, avoiding questions such as whether the Falcons’ biggest need was another wide receiver. Given the analysis above, in my opinion it’s rarely worth the risk to trade up the draft at the expense of multiple picks.

Do you agree?  Let me know.

Michael Solomon, FCAS, MAAA, is a consulting actuary at Merlinos & Associates.

Risk Management Solutions (RMS) recently released version 11.0 of its U.S. Hurricane Model.  According to the company, this version is a major upgrade and incorporates new datasets and scientific developments to advance the industry’s view of U.S. hurricane risk.  Associate Professor Robert Hart of Florida State University described the upgrade as utilizing “the most complete historical observation archive currently possible for quantifying hurricane risk.”  It is expected to result in significant increases in expected hurricane losses in inland areas of states from Texas to the Atlantic seaboard.

The model is currently under review by the Florida Commission on Hurricane Loss Projection Methodology (FCHLPM) to determine its compliance with their published standards, and ultimately to determine if the model can be used in rate filings in Florida.   Other coastal states’ regulators often make their decisions on the use of new models in their state based on what happens in Florida.  Louisiana has their own evaluation methodology, but most other states do not perform an independent, in-depth review of the models used in rate filings.

As the new model is being reviewed by insurance regulators, actuaries, and others, it is important to ask a few questions about the model:

• Will the FCHLPM accept the model?  If not, how does that affect how other state regulators will address use of the model?
• How long will it take for companies, brokers and reinsurers to get it installed and tested?
• How will reinsurers use the model? Will there be multiple versions such as long-term/ short-term?
• Will reinsurers and direct writers use the RMS model only in their ratemaking, or multiple models, or maybe not use RMS at all?
• What will the final impact be on inland policy premiums, given that the portion of the total premium attributable to hurricanes in these areas is relatively low?
• How will regulators and companies phase in the impacts of the new model into filed rates?
• How will regulators and companies communicate the reasons for rate increases? (model changes, doubling of non-cat losses in the past 3 years, impact of competition, etc.)

Looking ahead, if the model is accepted for use in Florida by the FCHLPM, it may be modified from the current released version.    These modifications should not affect reinsurance pricing because the Commission’s actions don’t affect the reinsurers directly.  However, for insurance companies, it might be late summer before model runs can be prepared for inclusion in rate filings, since it takes time to get the release out, installed and tested.  Current law only allows 60 days from the date a new version of a model is accepted to use the prior version in rate filings in Florida.    

On top of all this, there will be significant changes in the Florida statutes regarding property insurance by the end of the session in early May.  Assuming the Governor signs the legislation, there will be a period of time to figure out how the Office of Insurance Regulation is going to actually implement the changes.  This is always hard to predict, as their actuaries and management often come up with implementation requirements that are difficult for insurance companies to evaluate and implement.

What do you think?  Will the new model be accepted by the FCHLPM? Will the new RMS model have a significant impact on Florida insurance premiums?  What will nearby states do? Let us know your thoughts.

A recent collection of articles on the state of the captive insurance industry, published by National Underwriter at propertycasualty360.com, paints a picture of a healthy captive marketplace in the U.S.  The author discusses captive activities with several state regulators and reports an increase in captive formations in 2010, and optimism for continued growth in 2011.

This captive insurance report includes the results of a survey identifying the biggest concerns of captive owners.  Topping the list were policyholder retention and growth, expanded utilization, and collateral.

What are your biggest captive insurance concerns? What keeps you up at night? Let us know.

The NAIC accreditation program requires that Captive RRG examinations commencing on or after January 1, 2011, follow the risk-focused surveillance approach.  District of Columbia regulators met with the Captive Insurance Council of the District of Columbia (CIC-DC) on January 18, 2011, to discuss changes that are expected to impact Risk Retention Groups in their venue.  The DISB recommends the following preparations by the RRG for a risk-focused examination:

• Ensure good corporate governance and control structures.
• Document corporate governance and controls.
• Coordinate with auditors; help examiners leverage CPA workpapers.
• Help examiners to better understand the company, not just understanding prior filing and support documentation.
• Become familiar with the Handbook and Process.
• Help facilitate the exam.

What is your opinion regarding risk-focused exams in your venue?  Will there be any impact to your RRG due to the new NAIC accreditation standards?  Let us know.

National Underwriter editor-in-chief Sam Friedman’s recent editorial suggests that part of the blame for the recent oil spill in the Gulf of Mexico lies on the shoulders of risk managers at BP.  Mr. Friedman suggests that loss prevention measures were not implemented as they should have been, and that future drilling for oil in sensitive areas requires better risk management.

What role, and how much authority, should risk managers play in planning for and preventing such occurrences? Let us know.