Overcoming Enterprise Disruptions New Risk Tools Help Companies with the Uninsurable March 2011 Lockton Companies The commercial and operational realities of today s global business Emily Freeman Executive Director 011 44 20 7933 2224 emily.freeman@uk.lockton.com environment are creating a whole new class of risks that do not fit neatly into the traditional categories of insurable risk for organizations. We call these contingent enterprise disruptions, and they can cause significant financial loss to your organization, as well as inflicting costly damage to your corporate reputation. Ian Harrison Partner 011 44 20 7933 2297 Ian.Harrison@uk.lockton.com Supply chain and infrastructure disruption can arise from many sources without warning. Companies trading into and out of countries in North Africa, the Middle East, and Japan are acutely aware of such risks right now. In reality, a wide array of risks fall into the gap between physical damage losses and those arising from legal liabilities. Many underwriters have been uncomfortable stepping outside established categories of insurable risks. Until now, protecting your organization against such risks has meant taking out multiple discrete specialist insurance policies, where available, or relying entirely on your own risk prevention and mitigation measures. That situation now appears to be changing, with certain London underwriters becoming more open to entertaining such risks. L O C K T O N C O M P A N I E S
What if? A good way to approach these issues is to pose a series of what if questions likely to strike a chord within your organization and against which no fully effective means of prevention or mitigation currently exists. FOR EXAMPLE, WHAT IF: You or a supplier were unable to supply a component or final product due to the withdrawal of a regulatory approval or license? The supplier of a component or a supplier responsible for assembling your product became insolvent? A critical delivery pathway were blocked or suspended, causing critical delays or preventing delivering and what if this happened during a peak time of year? A vendor or supplier s operations were disrupted by political instability or terrorism? A component or finished product did not meet required specifications and had to be withdrawn? A component or finished product were the subject of a forced recall (whether due to regulatory, voluntary or counterfeit issues)? Your computer network was suspended due to an administrative/operational mistake or a computer attack (such as malicious code, denial of service, or extortion attempt)? An adverse legal or government action successfully challenged your intellectual property rights in a product, service or solution forcing a potential withdrawal, loss of investment value, increased costs of licensing, workarounds, etc.? An adverse media report concerning your business, its executives, products or activities (whether factually accurate or otherwise) caused short-term reputational damage, impacting earnings and imposing crisis management costs? A NEW APPROACH TO PACKAGING CONTINGENT RISKS Lockton has extensive experience in the relevant fields of risk transfer and has developed a range of innovative solutions for our clients. We have now developed a customized solution specifically geared to the types of contingent risks outlined herein. This encompasses specialist analysis and risk management capabilities, as well as access to substantial risk transfer capacity. Lockton has brought together the talents of its leaders in areas, such as product recall and contamination, technology and marine risks to create an innovative new risk transfer solution and risk management service under the Enterprise Disruption Contingency Insurance banner. A vendor responsible for key IT or business functions (e.g., call center, IT hosting, application development, processing or call center functions) were unable to perform due to a force majeure problem meaning that they were not responsible for compensating you for costs involved in bringing the function back in house or finding another vendor? Political and credit risks Marine/blockage risks IT network disruption or suspension Regulatory risks Inability to manufacture or distribute (including contamination/ product recall) Loss of intellectual property rights Loss of reputation (and resultant crisis management costs) Elements of physical loss affecting goods in transit 2
March 2011 Lockton Companies ENTERPRISE DISRUPTION CONTINGENCY INSURANCE Lockton s Enterprise Disruption Contingency Insurance offers an innovative umbrella solution for such grey area risks, enabling organizations to adopt a joined-up, cost-effective risk transfer solution for the key contingent business risks they face. Underwriters have traditionally focused on mainstream property and casualty risks, which can leave many of the exposures facing today s enterprise uncovered. This creates a requirement for a new type of insurance product to capture such risks. Cover for some of these exposures has previously been available under the heading off-premises service interruption or contingent business interruption but only for damage to property, such as buildings, hardware or inventory resulting from a physical peril, such as fire, flood or windstorm. Although catastrophic physical perils are certainly key elements of risk and risk transfer, risk managers in today s global business environment are increasingly aware of their exposure to non-physical perils that can result in severe business interruption and considerable additional expense. Hence the need for the new approach encapsulated in Enterprise Disruption Contingency Insurance. Supported by key London syndicates, we are offering an initial capacity of $75 million. We tailor a base Enterprise Disruption Contingency Insurance wording to meet the individual needs of each client. Having identified the array of physical or nonphysical perils that need to be addressed in order to solve a particular risk issue, we then take these as the basis for a customized policy solution which we then present to underwriters. This approach allows a true collaboration between client, broker and underwriter. WHAT CAN BE COVERED The purpose of this new kind of umbrella insurance solution is to protect enterprise earnings and revenue streams and to guard against unanticipated additional costs associated with risk events that lie beyond the scope of traditional property perils. Typically, these would stem from events that affect supply chains, core business infrastructure functionality, or your organization s ability to distribute or sell its products or services, such as: Political and credit risks. Marine/blockage risks. IT network disruption or suspension. Regulatory risks. Inability to manufacture or distribute (including contamination/product recall). Loss of intellectual property rights. Loss of reputation (and resultant crisis management costs). Elements of physical loss affecting goods in transit. Although specific coverage against some of the above risks is currently available in the marketplace, Lockton has innovated a solution that allows you to combine a range of perils within a single policy customized to answer a specific set of risk issues. Lockton s aim in creating our new Enterprise Disruption Contingency Insurance is not to offer an all-inclusive solution for every conceivable supply chain or infrastructure risk. Instead, we work with risk managers to focus on key areas of vulnerability and areas where redundancy and/or business contingency planning alone do not provide sufficient safeguard. We offer practical hands-on assistance, focusing on specific business issues requiring an effective risk transfer solution. 3
Risk identification and transfer process We first establish a dialogue through which you can advise us of specific risk issues facing your business, defining key threats and the means through which these can be mitigated. Having confirmed the factual basis and the scope of the issues identified, we make an initial presentation to underwriters. In practice, your initial factual submission to us need consist simply of completing a brief template document which can be sent by e-mail. Recognizing that this information may be sensitive, we will sign a nondisclosure agreement, and ensure that underwriters do likewise. Our initial goal is to secure an undertaking from key underwriters of their receptiveness to further discussions. Providing their response is positive, we will outline to you the specific information underwriters need to move to the next step, following which underwriters may be able to provide a ballpark indication of limits, premium and retention i.e., a waiting period, possibly combined with some form of monetary retention or co-insurance arrangement. This process would ideally involve an underwriting conference call with the risk manager and key people within your organization who can speak knowledgeably about the risks you wish to address. For example, if these relate to business process or IT outsourcing, key people in corporate legal, procurement and IT might be involved. The underwriter would also request specific financial information concerning revenues, loss of net income, and extra expenses to support the case for insurance. A pre-audit is unlikely to be required to reconfirm the relevant financials. Underwriters have dedicated accounting relationships, including forensic accountants, that can assist in post-loss claims settlement or potentially agree with your choice of accountancy relationship. RISK MANAGEMENT SERVICES Alongside the Enterprise Disruption Contingency risk solution, Lockton has developed a proprietary risk consulting service to assist clients in managing vendor/ supplier risk more effectively. Services available include a workshop and tools made available to a cross-functional team that would include risk management, procurement, IT, compliance and legal teams. The goal of the workshop is to discuss key elements in managing the risks created by vendor relationships, specifically: Creating a vendor inventory and correlating this with key risks such as performance, security, privacy, intellectual property and content. Creating metrics for identifying high-risk vendors. Developing tools and approaches for vendor due diligence, either at the outset of the relationship or at contract renewal. Suggesting contractual terms and conditions that have been successfully deployed based on specific risk concerns. Developing appropriate insurance requirements for the vendors and their subcontractors. 4
March 2011 Lockton Companies OVERVIEW OF ENTERPRISE DISRUPTION CONTINGENCY INSURANCE TEAMS AT LOCKTON This product will be jointly managed by Lockton Companies LLP s London-based Global Casualty and Technology/Global Privacy Teams. Ian Harrison, partner, Global Casualty Responsible for developing the Product Recall/ Contamination and Guarantee insurance areas for Lockton clients and prospects throughout the world. Over 20 years of worldwide experience in assisting clients in this specialist area as both an underwriter and broker. Ian holds an MBA from Cass Business School in London and a degree in Law and International Relations from Canterbury, Kent. Specialist Experience Extensive experience in developing insurance and risk management solutions for many clients in Consumer Product Industries. Specializing in food, beverage manufacturers and retailers including many of the FT 100 and Fortune 500. Frequent speaker at seminars in this area in the EU and USA. E-mail: ian.harrison@uk.lockton.com. Direct Line: +44 (0)20 7933 2297 Alison AlsegÅrd, Vice President, Global Risks Product Guarantee and Recall. She joined the Product Recall team within the Global Casualty Division at Lockton in May 2006 and has extensive experience in wording development for major clients and deals with the placement of risks in the London market. Alison works alongside Ian Harrison and Tony Hardy. Alison has a BA(Hons) degree in Business Administration from Kingston University. E-mail: alison.alsegard@uk.lockton.com. Direct Line: +44 (0)20 7933 2424. Emily Freeman, Executive Director, Technology and Global Privacy Practice Emily has developed many cyberspace and technology insurance products. Emily has been responsible for large insurance programs for technology, telecom and media professional liability, as well as insurance for a broad range of security and privacy liability risks. She is a frequent speaker and writer for professional publications on her areas of expertise. She has been the lead consultant on risk identification and risk management projects for clients. Emily has extensive underwriting and brokerage experience in the United States and was previously Vice President at National Union/AIG and was involved with underwriting and product management of technology and cyber risks. She also led the e-business practice at Marsh from 1998-2002. Prior to 1998, she was a marketing manager at Sedgwick and a member of the executive committee of the Sedgwick Technology Group. She holds IIA degrees in Risk Management and Underwriting. E-mail: emily.freeman@uk.lockton.com. Direct Line: +44 (0)20 7933 2224. Alison has worked in the insurance industry for more than 15 years and specializes in Product Contamination, 5
Ben Beeson, partner, Technology and Global Privacy Practice Ben has spent sixteen years in the insurance market and joined Lockton on October 2, 2007 from Marsh Ltd. He spent five years working in Marsh London s FINPRO division and also running the Technology Errors and Omissions team in the San Francisco office. Before arriving at Marsh, Ben was involved in launching a new Lloyd s broker, Safeonline Ltd, set up to address new exposures associated with the Internet. Ben s expertise centers on liability risks to the Technology Industry and also extends to Security and Privacy exposures across multiple industry segments. Ben also has extensive experience developing products for the small and medium enterprise sector in particular affinity associations. E-mail: ben.beeson@uk.lockton.com. Direct Line: +44 (0)20 7933 2857. About Lockton More than 3,800 professionals at Lockton provide more than 15,000 clients around the world with insurance, benefits, surety and risk management services, offering an uncommon level of client service. From its founding in 1966 in Kansas City, Missouri, USA, Lockton has grown to become the largest privately held insurance broker in the world and the ninth largest overall. Business Insurance recognized Lockton as a Best Place to Work in Insurance. For more information, visit www.lockton.com. 6
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