1. january 2015 // issue 05
tread
carefull
y
The rapid evolution of the telecoms
market brings sophisticated
challenges that require fresh
thinking in order to optimise risks
14
24 30
Feelingthestress
Financial services firms must
tackle rising stress levels
before they become endemic
among their workforce
Walkingafineline
Large-scale projects leave
energy companies vulnerable
to oil price changes, business
interruption and regulation
Buildingforthefuture
Businesses and public bodies
should improve their buildings’
resilience to the growing risk of
natural catastrophes
08
Solutions for a risky world
Directors'
officers'
business risks and
policy concerns
5Top
2. resiliEnce // issue 05 // january 2015
Welcome
Weallknowthatbusinessdoesnotstandstill,
butsometimeswedonotappreciatejusthow
quicklyitchanges.Thisisastrueofbusinessrisk
asitisofbusinessopportunity.
Increasing connectivity, economic
and political volatility, environmental
pressuresandagrowingfocusonworkplace
wellnessareimpactingcompanies’riskprofiles
and redefining how to manage and mitigate
enterprise risk.
Consider the example of Facebook: many parts of the
UKmediahaverecentlysuggesteditdidnotdoenoughto
helppreventaterroristattack,andquestionsarenowbeing
raisedaboutitsdutytohelpprotectnationalsecurity.More
generalquestionsarebeingaskedabouttelecoms,media
and technology (TMT) companies’ role as responsible
corporatecitizens–questionsthatwouldhavebarelybeen
considered just a few years ago. This trend is unlikely to
abate: as TMT companies’ services and products touch
people and societies in more ways, they will leave a trail
offreshpotentialliabilities.
Economic and political volatility affects all industries
but few to the same degree as the oil and gas sector,
whose large-scale, long-term projects can be rendered
unprofitable by events over which they have no control,
often occurring thousands of miles away. For example,
eventsintheMiddleEastandUkrainecontinuetochange
the global energy sector’s supply and demand dynamics
while production decisions by the large oil producers
directlyimpactpricelevelsandtheeconomicviabilityof
shaleenergyexplorationinitiatives.
The aviation sector, meanwhile, is wrestling
with growing environmental risks. Technological
developments are helping airlines to manage pressure
from governments, environmental bodies and (yes –
you’ve guessed it!) the media, to become greener. Yet
technologythatsavestimeandmoneyandmakesthings
safercanalsocreateitsownchallenges–forexample,the
growing industrial use of drones could breach privacy
lawsandbesubjecttoabuse.
Manage the cause, not the symptom
Amid all these external changes, we must not lose sight
oftheeffectsthatafast-pacedandintenseworkplacehas
onemployeewellness.Somefinancialservicescompanies
need to do more to help manage their workers’ stress
levels before they lead to long-term health problems.
It’sbeensuggestedthatsomearemoreactivelytryingto
recruitgraduateswithhumanitiesdegrees,tointroduce
alternative ways of thinking and counterbalance the
possiblecognitivebiasesbroughtaboutbyanabundance
of science graduates. Such fundamental realignments
are crucial if financial services and other sectors are to
successfullymanagetheirworkforceandretaintalented
staff, rather than merely address the symptoms of
employeestress.
Clearly it is possible for companies to be responsible
corporatecitizens,retainahappyworkforceandsucceed
in new arenas. The challenges, however, are perhaps
greater than ever. Along with a proactive, anticipatory
engagementwithbroadersocial,politicalandeconomic
trends, strategic, collaborative relationships with those
whocanprovidesubstantiveexpertisearevital.Onlythen
canwebegintoreallyunderstandandmanageourrisks.
Stefan Spohr, Head of global industries, Willis
4. The aviation industry needs to accommodate
growth in demand, cope with volatile fuel
prices and meet increasingly stringent
expectations for environmental
performance. Technological
change is helping airlines
to rise to the challenge.
By Philip Smaje
ad astra*
per ardua
* Through adversity
to the stars
Philip Smaje
CEO of Willis Aerospace
resiliEnce // issue 05 // january 2015
5. �35% value of world trade shipments
carried by air transport
A divided market
When tragic airline losses occurred in
2014, the airline insurance market was
braced for heavy turbulence and an end
to a long soft market. Rates have gone
up, in some cases steeply, but not as
dramatically as expected.
Why? The sector still enjoys a
remarkable safety record and continues
to present solid profit opportunities to
insurers, so the competitive forces that
have kept rates down are still in place.
�3.1billion
passengers carried by
airlines in 2013
F
lying has always been a risky business,
although in the 21st century it’s not
necessarily the act of flying itself that
carriestheriskbutwhat’sgoingonoutside
theplane.In2015thesectorwillneedtosquare
uptoon-goingrisksofterrorism,publichealth
threatsandcomplexgeopoliticalrisk,aswellas
anintenselycut-throatbusinessenvironment,
volatilefuelcostsandpressuretocutgreenhouse
gasemissions.
The downing of Malaysia Airlines Flight 17
highlighted how vulnerable airliners can be in
timesofconflict,whilethetransferofEbolavia
air travel from West Africa to Europe and the
UnitedStatesraisesthepotentialforincreased
passengerchecksandrestrictions.
Meanwhile, industry competition is fierce,
capitalinvestmentcostsarehugeandcashflowis
strained.Financestendtobecyclical,withgood
yearsandbadyears.Butevengoodyearscanbe
thin,withWarrenBuffettfamouslycommenting
that he believed the sector’s net profit was less
thanzero.Yetthehistoryofflightisoneoftaking
risksandfindingsolutionsandifanysectorkeeps
going per ardua ad astra (through adversity to
thestars),it’saviation.
Flying high
People want to fly more and more. Passenger
numbers are projected to reach 7.3 billion by
2034,projectstheInternationalAirTransport
Association(IATA),representinga4.1%average
annual growth in demand for air connectivity,
more than doubling the 3.3 billion passengers
expected to travel in 2014. The challenge is to
meetthisdemandwhilemanagingtheassociated
risk.
Remarkable technological change seems
to be on the horizon. Some of this is through
the constant re-tweaking and improvement
that engineers do so well. For example, planes
continuetobecomemorefuelefficient:Boeing’s
new787burns40%lessfuel-per-passengerthan
its1970sequivalent.
Otherdevelopmentsaremoreexpansive.For
example, the Swiss long-range solar-powered
Source: The Air Transport Action Group
�8.7million
people employed directly in the aviation industry
Carriers have been affected, however.
Those directly hit by the losses are now under
immediate pressure to raise rates, while
carriers not hit by the losses face a longer-
term pressure to stop the decline in rates. Both
types of carrier seek rate increases – those
directly hit by the losses are actively seeking
them, while those that weren’t are anticipating
them. It’s unclear whether these divided
interests create a competitive field that buyers
will be able to use to their advantage.
Premium/claims($million)
2010 2011 2012 2013 2014*
2,500
2,000
1,500
1,000
500
0
Premium Claims Loss ratio
110
100
90
80
70
60
50
40
Lossratio(%)
Hull and liability premium and claims
*As of September 2014Source: willis
05
04
7. pressure group Greenpeace claims the total is
higher when you factor in other greenhouse
gases. In either case, saving fuel is obviously a
win-winforall.
New tracking technology is another area
that offers a double benefit: greater safety and
potentially greater efficiencies. All new Airbus
and Boeing aircraft are fitted with automatic
dependentsurveillancebroadcast(ADSB),which
broadcastsviaGPStogroundstations,allowing
aircrafttobetrackedmorepreciselythanradar
–within25feeteverysecond.
Inthefuturethiswillmeanthataircraftcanbe
foundmorequicklyintheeventofanincident,
andwillalsoallowthestreamingofinformation
onenginefunction,fuelconsumptionandother
technicalmatters,allowingairlinestopre-empt
problems and ensure maximum efficiency
minutebyminute.
Given the downward slide in aviation
insurancepricesdespiteaseriesofmajorlosses
lastyear,andtheinsurancesector’swillingness
to take on more of the risks associated with
technological innovation, aviation is looking
increasinglywell-placedtomeetthechallenges
ahead.However,it’simportanttorememberthat
thingstaketimetochange.Everynewtechnology
has to go through extensive testing, regulators
havetoconstructappropriateframeworksand
the journey from experimental prototype to
runwayrealityislongandexpensive.
Meanwhile, risks – political, commercial,
fiscal,evenenvironmental–runfarfaster.The
perils heading up the news – Isis and Ebola –
wereallbutinvisibleayearagoandthepriceof
oilhasshownconsiderablevolatility.
Aviationhasalwaysbeenariskybusinesswhere
successhasdependedonstrengthofcharacteras
muchasmoneyandengineeringknow-how.The
planes of tomorrow might look very different
to the canvas and wood creations of yesterday,
but perhaps in essence some things remain
thesame.
Game of drones
Greater industrial use of drones could lead to a shortage of skilled operators,
raise privacy concerns and have liability repercussions.
more
information
Philip Smaje
smajep@willis.com
+44 (0)20 3124 7815
Flying in near silence, drones have crept
up on the public’s consciousness and now
look like becoming a key part of future
business life. Online retail giant Amazon
claims to be developing prototypes
as delivery bots and many other
possible uses are emerging in
sectors ranging from sports
broadcasting, to
law enforcement,
engineering
and filmmaking.
But while the
technology could cut
costs and improve
safety, it also brings
new risks that need to
be managed. For example,
although pilotless, drones
still require operators and getting
the right staff for such a key job may
be tricky. The ideal skill set for a drone
operator is an unusual combination of
air navigation and camera skills, yet
these two skill sets do not usually come
together, and drone providers typically
must hire someone trained in one and
then teach them the other. The party
responsible for the safe and successful
operation of a drone is ultimately
responsible for the proper training of
the operators, which may prove more
complicated than most training regimes.
The insurable risks for drones are
primarily standard aviation risks. Drone
owners will want to insure the aircraft
itself in case of accidents and also cover
any ensuing liability. In this interim phase,
where approved drone use is legal on a
non-commercial basis – when companies
must own the aircraft themselves and
seek approval for a specific use
– aviation cover will be an
immediate consideration.
Companies hiring
the services of drone
providers will need
to look at their
contracts to assess
the liabilities they
may face. In most
cases, this will be a
third-party liability
situation, meaning
the provider would be
responsible, but contracts must
be reviewed carefully.
Greater drone use could see privacy
concerns being raised by the public
that is already nervous about access to
personal data. Any companies using the
new technologies will need to address
this risk. Commercial drones will likely
be hired for narrow purposes, such as
inspecting wind turbines for cracks or
roadways for storm damage, but they will
see anything in their view and send back
that information to the party collecting
the visual data. Even unintentional
surveillance could have serious liability
repercussions that will need to be
addressed.
50%
targeted reduction in net
aviation carbon emissions
by 2050, compared to 2005
willis wire
Emerging threats to
airports, aircraft and
staff ow.ly/FadFb
blog.willis.com
07
06
8. resiliEnce // issue 05 // january 2015
Bank workers have more intensive training, complete
additional compliance reviews and fill out more paperwork,
even though their workload has risen due to redundancies.
Stress needs to be tackled before it becomes endemic.
By Jagdev Kenth
Stress,strain
andbrain
drain
S
tress in financial services has been a
focus for the UK’s Health and Safety
Executive (HSE) for more than a
decade. The industry suffers an
estimated 1,860 cases of stress per 100,000
employees–theworstintheprivatesector.
It is the subject of renewed attention
following a spate of suicides in the first
quarterof2014,alongwithseveralhigh-profile
resignations and absences caused by stress.
More widely, 60% of bankers have trouble
sleeping, found a survey of 4,900 bank staff
bybusinesspsychologyspecialistsRobertson
Cooper for the Bank Workers Charity
publishedin2014,whichvalidateditsearlier
studythatfound42%hadtroublerelaxingand
Much of this is driven by regulatory reform.
Increased capital requirements, for example,
haveledmanytorestrictlendingtoconsumers
and small and medium-sized enterprises
(SMEs), with the Bank of England’s Trends in
LendingreportshowingloanstoUKbusinesses
declining in each of the last four years. Earlier
last year the UK Treasury Select Committee
established a review into SME lending; the
result is a permanent reduction in the size and
profitabilityofsomeareasofbanking.Likewise,
banks have been pushed to divest proprietary
trading or other divisions involved in what
regulators have determined as ‘high-risk’
activities.
More generally, increased regulatory and
reporting requirements, as well as more
aggressive enforcement, have significantly
magnified the regulatory pressure. In the US,
compliance with the Dodd–Frank Wall Street
Reform and Consumer Protection Act costs
the eight largest banks alone up to $34 billion
annually, estimates ratings agency Standard
Poor’s. Meanwhile, Britain’s largest bank,
HSBC,warnedinAugustthatregulationswere
undermining business after reporting a 12%
decline in profits. “The demands now being
placed on the human capital of the firm and
on our operational and systems capabilities
jagdev Kenth
director of risk and regulatory
strategy at Willis Financial
Institutions Group
53%worriedaboutthefuture.
Insufficient time to do the job, lack of
involvement in decisions affecting them and –
particularly–alackofcontrolintheirjobwere
keywork-relatedconcerns.
Banking on change
Several changes since the financial crisis have
exacerbated the problem. Most obviously,
wide-scale redundancies have contributed to
worries. For example, the number of banking
jobs in London dropped from 354,000 in 2007
to250,000in2012,accordingtotheCentrefor
Economics and Business Research, and job
losses continued last year with redundancies
atseveralmajorbanks.
9. are unprecedented,” said HSBC’s chairman
DouglasFlint.
Itisnotsimplyaboutthenumberofregulatory
changes, however. Regulators such as the
UK’s Financial Conduct Authority (FCA) are
determinedtochangethecultureinanindustry
that, according to the FCA chief executive
Martin Wheatley, “lost its moral compass” in
the run-up to the financial crisis. It must now
berecalibrated,heinsists.
Wheatley has stated that changing cultures
couldtakeyears,whileBritishMPMarkGarnier,
amemberoftheParliamentaryCommissionon
Banking Standards (PCBS), has described it as
“agenerationalchange”.
A costly problem
The result is unprecedented pressure on
bankingstaff.Seniorexecutivesareincreasingly
focused on managing regulatory relationships
and complying with regulatory changes,
ratherthanclient-facingactivities.Asurveyby
financial systems provider Sungard last year
foundregulatorychangesecondonlytomarket
volatilityinalistoffinanceexecutives’concerns.
HalfofthosesurveyedsaidtheirCEOwas‘highly
stressed’asaresultofregulatorychange–higher
than the figure for chief compliance officers
(39%). Reputational damage (52%), losing
Regulatory pressures
have added to bankers’
stress levels
60%
bankers that have
trouble sleeping
53%
bankers that worry
about the future
09
08
10. resiliEnce // issue 05 // january 2015
40
35
30
25
Sep 2011 Jan 2012 Jul 2012
2 3 5
6
Shareprice(p)
1
1
2
3
4
5
6
Financial services suffer
from stress more than most…
4
1,860
Financial service
activities, except
insurance and
pension funding
1,620
Financial and
insurance
activities
2,210
Hospital activities
1,220
All industries
Construction 680
Professional, scientific and
technical activities 970 710Arts, entertainment
and recreation
clients (39%) and regulatory fines (28%) were
amongthekeyconcerns.
Infact,thepotentialconsequencesarewide-
rangingandnotalwaysimmediatelyapparent.
Some are obvious, of course: the departure of
SirHectorSants,whoresignedasBarclays’head
of compliance in November 2013 after being
diagnosedwithexhaustionandstress.Another
exampleistheenforcedbreakofLloydsBanking
GroupchiefexecutiveAntónioHorta-Osórioat
theendof2011,forthesamereason,whichsaw
almost £1 billion wiped off the bank’s market
value.
Similarly,theriskof‘braindrain’hascometo
theforefollowingthethreatsofnon-executive
directorsonHSBC’sUKboardtoresign,atleast
partlyduetothe‘SeniorManagersRegime’,soon
to be implemented by the FCA and Prudential
RegulationAuthority.Thenewruleseffectively
reverse the burden of proof; in the event of a
failing,aseniormanagerwillneedtoshowthat
the steps they took were ones that they could
reasonably be expected to take to avoid the
contraventionoccurring(orcontinuing).
Legal challenges for failing to address stress
have also had some attention. Firms risk
enforcement action by the HSE for failures
under the Management of Health Safety at
Work Regulations 1999, as well as civil claims
forwork-relatedstress.Thelattermustshowa
recognised psychiatric injury and that the risk
was reasonably foreseeable, making it a high
hurdle for claimants. However, there are also
opportunitiestoclaimundertheProtectionfrom
HarassmentAct1997,and,whilethenumberof
employer liability claims for stress in financial
services is relatively few, the cost of cases can
be great. For example, after bullying at her
investment bank employer, Helen Green was
famouslyawarded£800,000in2006,including
£640,000 for loss of future earnings. She was a
companysecretaryassistantratherthanatrader,
andonasalaryof£45,000.
Nevertheless,mostcoststobanksfromstress
are more mundane, but are ongoing across the
organisation. Absence is a key concern. Stress
is responsible for 10.4 million days lost across
all UK industries, according to the HSE, with
Average rate per 100,000 employees
Estimated prevalence and rates of self-reported stress,
depression or anxiety caused or made worse by current
or most recent job, 2009/10–2011/12
How Lloyds Banking Group’s market value plummeted when its chief executive, António
Horta-Osório, went on sick leave for extreme fatigue and stress due to overwork
...WHICH can have a profound
impact on the company...
Nathan Bostock, RBS’s
head of risk, plans to join
Lloyds’ wholesale division
António Horta-Osório goes
sick with stress
Bostock decides to stay at
RBS, contributing
to Lloyds' share-price drop
£1 billion wiped off
Lloyds' value
Horta-Osório returns
to work
Share price not fully
recovered
11. £800,000
AMount awarded to bullied
bank worker by ex-employer
30
13
19
24
16
19
37
52
43
50
41
42
Highly stressed Moderately stressed Limited/not stressed/don’t know
50
29
33
34
29
39
...and
regulation
is making
it worse
an average 24 days lost for each case. In the
financialservicesindustryspecifically,insurer
Legal and General’s income protection claims
statistics show that 42% of all claims in 2012
wereformentalhealthillnesses.
According to the Bank Workers Charity
survey, the cost of each day’s sickness is
£164per employeeintermsofaverage
salarybillalone.Addedtothis,thecost
ofreplacingabsentstaffissignificant.
TheCharteredInstituteofPersonnel
andDevelopmenthasestimatedthata
fifthofstaffturnoverinanorganisation
canberelatedtostressatwork.
The biggest cost to business, however, is
harder to calculate. In total, when charity The
SainsburyCentreforMentalHealthestimated
the costs of mental ill health at work across
industries in 2007, staff turnover accounted
for£2.4billion,addingtothe£8.4billioncostof
absence. Reduced productivity, however – the
costofpeopleunderperformingduetostress–
wasestimatedat£15.1billion.
Too little, too late
Banksfacemanydifficultiesinidentifyingand
addressingstress.First,itrequiresanintegrated
approach that brings together information
across the organisation, including
sickness absence records, claims
details under group health and
incomeprotectionpolicies–as
wellasemployerliabilitycovers
– and data from the employee
assistance programmes (EAPs)
frequently offered by employers,
Feelings of stress as a result of regulatory change (%)
CEO
Board
CFO
CRO
General counsel
CCO
Sources: health and safety
executive; fit for leadership;
sungard
1 1
10
12. “Even after leaving the industry,
bankers continue to work extremely
long hours and even impose these on
new organisations they join.”
which usually take the form of free telephone
counsellingservices.
Muchoftheinformationfromthesesources
must, inevitably, remain confidential and will
be anonymised. However, it can be valuable
in detecting whether a problem exists. Data
fromhealthclaims,forexample,canbeusedto
identify the country, office and often even the
departmentfromwhichclaimsforstress-related
illnesses arise, giving firms an indication as to
wheretheissuemaylie.
Thecentralweaknessofsuchdata,however,
is that they can only identify the problem
after it has arisen and they fail to pick up the
ongoingcostsofpoorproductivity.CaryCooper,
professor of organisational psychology and
health at Lancaster University and director of
Robertson Cooper, noted this in his research
fortheBankWorkersCharity.
“Manyorganisationsnowoffersupportthrough
servicessuchasEAPsbutsuchsupporttendstobe
providedwhenworkersarealreadyexperiencing
quite severe stress or mental health problems,
with a very limited range of support options,”
Cooper wrote. “Fewer organisations seem to
consistentlyimplementpreventativeapproaches.”
Thisputstheorganisationssurveyedatodds
withHSEguidance,whichadvocatesidentifying
and tackling the root causes of stress. It also
presents a significant challenge for banks and
other businesses to address it, given that
management information that can identify
falling productivity and rising stress before it
escalates is both harder to come by and more
difficulttointerpret.
Culture and coherence
A two-pronged approach is needed. The key-
man risk of the business leaders must be
addressed,giventhepotentialconsequencesfor
thecompanyofsudden,high-profiledepartures
or,morecommonly,poorperformanceamong
seniormanagersasaresultofstress.However,
broader change is also required to tackle the
widerproblemandday-to-dayattritionallosses
fromabsence,staffturnoverandproductivity
thatoccurthroughoutorganisations.
Thismaymeanfocusingonlifestyleissues,
with advice on nutrition and encouragement
to exercise (which is equally applicable to
leadership roles). It should also include
management training, as line managers have
acrucialroleinspottingandaddressingearly
signsofstress.
Morethanthat,therehastobeawillingness
to both talk about stress and to confront long
workinghours.Apaperin2014byex-Goldman
Sachsbanker andUniversityofPennsylvania
academic Alexandra Michel showed that,
even after leaving the industry, bankers are
so conditioned that they continue to work
extremely long hours, and even impose these
on new organisations they join. Blackberry
bans, ensuring annual leave and the curfews
some City banks are reported to be imposing
on client entertaining are a start. More
fundamentally, a cultural change is required
in which ‘presenteeism’ is recognised as a
potential problem, rather than expected and
rewarded.
There is also, however, a challenge for
regulators,whosecurrentapproachthreatens
to undermine their aims. The regulatory
burden falls not only on companies but the
people who work in them. Relentless change
is being combined with more aggressive
enforcement. Bankers who caused the crash
‘gotawaywithit’,asBankofEnglandGovernor
Mark Carney recently put it, and there is a
determinationthatitwillnothappenagain.
Inseekingtoensurebanksareaccountable,
however, regulators should also seek to be
proportionate. Failure to do so risks driving
talentedpeopleoutoftheindustry,whocould
otherwiseplayavaluableroleintransforming
organisations.Italsorisks,throughrelentless
pressure and overwork, forcing errors that
would otherwise not occur, potentially even
causingtheveryproblemsitiskeentoprevent.
Both banks and the regulator are right to
wantculturalchangeintheindustryfortheir
different reasons. Hopefully the two do not
proveincompatible.
resiliEnce // issue 05 // january 2015
13. Willis works with several partners to
take a holistic approach to managing
the risks of stress. Among them is
Fit for Leadership, which runs both
compressed week-long workshops
and annual programmes for boards
and other senior managers, to
promote the understanding and
management of stress.
The company’s chief executive,
Ker Tyler, worked in financial
services for 36 years before
suffering a nervous breakdown.
Stress and burnout are common
issues throughout organisations
and addressing them through good
line management is crucial, he says.
However, the board has a particular
role to play in changing attitudes
and developing a willingness to
talk about and address the issue
effectively.
“It has to start at the top level,
because if the leadership team
doesn’t buy into it, it isn’t going to
happen. They have to demonstrate
to the rest of the business that they
believe it is important,” Tyler says.
A key part of Fit for Leadership’s
programme is lifestyle, exercise
and nutritional advice, and it
draws heavily on the support
and knowledge offered to top
professional athletes. This includes
wearing discreet heart rate
monitors. Worn over a few days to
measure stress levels, the results
can be charted against diary entries
to enable business leaders to
understand what activities lead to
peaks in stress and, crucially, how
they can most effectively recover.
Tyler points to mental health
charity Mind’s statistic that one in
four people suffer from some mental
health issue in any year, making
it inevitable that board members
will be affected at some point. “The
question is, ‘what are you doing
about it?’” he says.
Let’s Get Healthy looks at similar
issues, with about 40% of its
work being with financial services
business. Again, its managing
director, Maria Bourke, is a banking
veteran, with a CV that includes
time as chief operating officer
for Europe at Citigroup. As well as
nutritional and health advice, Let’s
Get Healthy helps to train managers
to identify and deal with stress in
their workforce, and also provides
workshops and online education to
staff to recognise and address the
symptoms.
The latter is particularly
important due to the difficulty
that remains in discussing the
subject openly. “It can be quite
uncomfortable to talk about it if you
are at work,” says Bourke. “We tend
to find a spike in visits to the portals
in the evening, with a lot of people
looking at them from home.”
Tackling stress head-on
Lifestyle, exercise and nutritional advice can help employees
to better manage stress, but senior management support for
workplace schemes is key.
“It can be quite uncomfortable
to talk about stress at work –
a lot of people look at our
portals from home.”
more
information
Jagdev Kenth
jagdev.kenth@willis.com
+44 (0)20 3124 8560
willis wire
Building business
athletes to tackle stress
ow.ly/Fae53
blog.willis.com
13
12
14. resiliEnce // issue 05 // january 2015
The rapid evolution of the
telecoms market brings
sophisticated challenges
that require fresh thinking
in order to optimise risks
effectively.
By Sara Benolken
T
helandscapeofthetelecomsindustry
continuestoevolveduetoincreased
customerdemandforspeedof
connectivityandcontent,ever-changing
regulatorypressure,industrycompetitionand
theexpansionofthemobilenetworkingsystem.
Theseconditionsprovideagreatopportunity
forgrowthinthesector,butalsopresenta
newsetofchallengesandrisksthatneedtobe
considered.
Devices, content and services are becoming
more interconnected as customers become
increasinglyreliantoncommunicationsnetworks
to run personal devices for work, shopping,
banking and entertainment. Services typically
involvemultipleproviders,andthelinesbetween
telecoms,mediaandtechnology(TMT)companies,
aswellasretailersandfinancialinstitutions,have
becomeblurred.
Astelecomscompaniesracetomeetincreased
customer(andshareholder)demands,theability
to consistently deliver superior level customer
serviceismoreimportantthanever;yetincreasing
complexity, fearless competition, relentless
criminal hacking and intrusion activity, and the
speedofchangemakesthisdifficult.
Aseeminglybenignhumanerror,forexample,
could see a relatively straightforward software
upgrade result in a cascading network failure
– such as the event that caused a three-day
outage for Blackberry users in 2011. Telecoms
companies also face pressure to update
infrastructure ever more quickly, investing in
greater broadband capacity that new devices
depend on while creating more effective
defencestocounterthecyberthreat.Yetproduct
and service revenues have been falling while
providersarecontinuingtoofferunsustainable
discountsandcuttingcosts.
Inaddition,maintainingandupgradingolder
infrastructures is becoming a big challenge as
newtechnologiesanddemandsarebeingmade
of existing infrastructure. Consumers want
access to new services wherever they travel,
includinginsomeoftheworld’smostpolitically
fragileregionswiththefastest-growingtelecoms
markets.
Managing a broader portfolio
With advances in technology, telecoms
companies are increasingly moving away from
offeringasimpleconduitbywhichotherssupply
Sara Benolken
Global leader of Willis’s
Technology, Media and
Telecommunications Industry
managing
risks in
a fast-
changing
telecoms
market
15. data and services, otherwise known as a
‘dumb-pipe’,towardsa‘smartpipe’business
model,whichincludesvalue-addedproductsand
servicestogeneraterevenue.
A smart pipe business model brings
opportunitiesbutitalsoenhancesperformance-
related risks, as well as making security more
challenging.Furthermore,astelecomscompanies
begin offering content, financial services,
property management and control services,
and lifestyle/health and fitness applications,
theyareincreasinglyexposedtomedialiability,
intellectualproperty,miscellaneousprofessional
liabilityandgeneralthird-partyliabilityrisks.
For example, mobile payment services,
using a mobile phone or similar device, are an
increasingly popular way of paying for goods
and services. There were around 365.6 billion
globalnon-cashtransactionsin2013,andmobile
payment transactions are expected to grow by
60.8%annuallyin2015,accordingtoCapgemini’s
2014WorldPaymentsReport.
A range of apps and services now enable
consumers to use mobile devices to transfer
money,completefinancialtransactionsinperson
or online, make contactless payments or even
use their mobile device like a virtual wallet. Yet
mobile payment services come with enhanced
risks–includingsecurity,fraud,regulatoryand
reputational risks – as well as traditional risks
likefailuretodeliverservice.
Though cyber-crime and fraud are big risks
for telecoms companies, the added dimension
of monetary transactions could raise these two
exposures to new levels. Whether it’s financial
crime, funding terrorists or laundering money
for organised crime, mobile payments will be
an attractive target, while perpetrators will be
difficulttotrace.
Payments using a mobile device involve
multiple parties and multiple points of
vulnerability. A small business with weak
security could open others up to potential fines
and reputational damage should money or
databestolen.
As utility providers, telecoms companies
usuallyenjoysomeimmunityfromliabilityfor
damageorlossesincurredbyusersofanetwork
(becausetheyarejudgedtoberesponsibleonly
forprovidingthenetwork,notforhowitisused).
However, such immunity may be harder to
maintainastelecomscompaniesofferagreater
rangeofservices,producemorecontent,become
more aggressive advertisers and operate more
like a technology or media company than a
traditionalregulatedutility.
Telecomscompaniesareunderpressurefrom
corporate customers to accept high levels of
liability under major contracts – sometimes
going as far as accepting unlimited liability,
which can be especially problematic because
it may not be possible to quantify potential
claims. Risk management departments have
animportantroleinquantifyingandmitigating
theincreasedliabilitiesofmajorcontracts,but
theoptionsforrisktransferarecurrentlylimited
–theonlyrealsolutionistofocusoncontinuous
servicedelivery,especiallywheretheliabilities
arelargest.
Protests and political threats
The telecoms industry is growing fastest in
emergingmarkets,whichnowaccountforalmost
80%oftheworld’smobilephonesubscriptions,
according to statistics from the International
Telecommunication Union (a United Nations
agency).
However, many of the world’s growth
markets are exposed to varying degrees of
conflict – including violent anti-government
protests,territorialdisputes,sectarianorethnic
divides, terrorism, insurgency and even full-
15
14
16. resiliEnce // issue 05 // january 2015
blownmilitaryconflict–puttingtelecoms
infrastructureandemployeesatrisk.
Telecoms commentators previously
believed that telecoms networks were
usually seen as neutral, offering critical
servicestoallsidesinaconflict.Thisseems
to be changing, however, according to
recentanalysisbyAlert:24,aunitofWillis.
Communicationsnetworksareoftena
featureorenablerofconflict–insurgents
use them to communicate, for example,
andprotestersusethemtoorganise–but
telecoms infrastructure is increasingly
seenasalegitimatetargetbyprotagonists.
Telecoms towers have been regularly
targeted in Afghanistan, Iraq and Syria,
andassetshavealsocomeunderattackin
lessobviousconflictzones.In2012,Boko
Haram, the militant Islamist movement
in Nigeria, destroyed or damaged 530
base stations, killing staff and causing an
estimated $132.5 million in damage. In
India,aspateofMaoistattacksontelecoms
towersforcedmobileserviceprovidersto
stop operating in remote areas, plunging
most parts of Bihar state into a ‘zero-
network’.
Mass protests can also result in
damage to telecoms assets if providers
are associated with the government – for
example,duringtheArabSpringprotests
in Egypt, extremist protesters targeted
towers.Thewayacompanycommunicates
and presents itself can affect how it is
perceived during conflict or unrest, so it
paystothinkcarefullyaboutengagingwith
localcommunities.
Evenstateswilltargetnetworks.Some
may be switched off during a coup or
to control protests, while towers were
targeted by the US-led coalition in Syria
becausetheywerebelievedtobenefitthe
IslamicState.
While the threat to telecoms assets
in the developing world is clear, there
is also an important social obligation
to invest. Inexpensive, reliable mobile
communication systems are the key to
micro and macro social, political and
economicdevelopment.Theindustryand
governmentsneedtobalancetheprevalent
seriousrisks,withthesignificantbenefits
ofconnectingcommunities.
Telecoms companies must invest for
the long term, so it is important to scan
thehorizonandconsiderlikelyscenarios.
For example, cyber-attacks are now an
established risk in conflicts and are
increasinglylikelytofeatureinthefuture,
although the threat has to be weighed up
againstimprovingsecurityandmitigation
measures.
Awaiting innovation
Even the most successful companies get
thingswrong.AccordingtoWillisresearch
intotheperformanceoftheFortune500and
FTSE100,morethan95%ofthecompanies
Despite a $349 price tag, the queues for the new
Apple Watch are expected to be lengthy when
the devices finally go on sale in early 2015. Apple
claims its latest gadget will enable consumers to
switch on the lights at home, monitor their health,
shop and keep in touch with friends.
Big things are expected of smart watches: fewer
than one million smart watches will have been sold
by the end of 2014, but this is expected to leap to
13.6 million sales in 2015, according to telecoms
research firm Analysys Mason. There could be 92.6
million smart watch devices in developed markets
by 2020, it predicts.
But smart watches, smart glasses and smart
bands are just the start. Faster processors, better
batteries, cognitive computing and improving
sensor technology are expected to make devices
smaller, more powerful and interactive, with
implications that go beyond wearable devices.
Internet-enabled devices are increasingly
expected to find a place in our homes, cars
and workplaces. Over one trillion devices will
eventually be connected via the internet,
according to McKinsey Company.
This explosion in mobile and networked devices
will create several new risks and challenges for
telecoms companies. Chief among these is likely to
be the challenge of network providers to keep up
with demand.
As smart devices and ‘wearables’ become
more sophisticated and mainstream, consumers
are likely to own more connected devices and
find more and more uses for them. Data usage
Smart devices:
keeping up
with demand
Mobile devices are changing quickly
and creating new risks and challenges
for telecoms, media and technology
companies.
Growth in Mobile phone subscriptions
Year
Subscriptions(million)
2005 2010 2014
7,000
5,000
3,000
1,000
0
Source: ITU World Telecommunication/ICT
Indicators database
Developed world
Developing world
Total
17. will consequently increase, as
will demand for higher-speed
connectivity.
Global internet traffic will increase
threefold over the next five years, while
the number of devices connected to IP
networks will be nearly twice as high as the
global population by 2018, according to Cisco.
Traffic from wireless and mobile devices will
exceed that of wired devices by 2018 – with Wi-Fi
and mobile devices accounting for 61% of internet
traffic, compared with 44% in 2013, Cisco projects.
To utility and beyond
More devices and greater data traffic means that
privacy and data security is likely to become an
even bigger issue than it is today. As telecoms
companies expand into new services and products,
they will have access to huge amounts of data, in
more diverse forms. For example, smart glasses
and watches can be used to continually record and
broadcast sound and images, while most smart
devices can track people’s movements, shopping
habits, even health and medical data.
As telecoms service providers handle, process
and store such data, their liability exposures
will potentially increase. Telecoms companies
will probably continue to defend their position
as utility companies, arguing that they are not
responsible for how consumers use devices like
smart glasses.
However, the convergence of TMT companies
will potentially accelerate as mobile devices, like
wearables, evolve. Smart devices rely on apps,
cloud storage and even content – areas that
telecoms companies are now increasingly involved
with. This trend could see telecoms companies’
role as purely utility companies questioned by
regulators and plaintiff attorneys looking to launch
class action lawsuits.
Press to download
As telecoms companies expand their offerings
they could find it more challenging to meet the
many different needs of
various customers.
For example, apps are the main way
that data is collected from devices and then
used as a resource. Consumers typically agree
to give away their data in return for the use of
a free app on their phone. Mobile apps will have
been downloaded more than 268 billion times by
2017, according to research firm Gartner. Mobile
users will provide personalised data streams
to more than 100 apps and services every day,
expects the research firm.
But as companies look to monetise users
and data, they will also have to carefully gauge
how consumers are willing to have their data
used. For example, some shopping centres offer
visitors free Wi-Fi in return for access to their
data, which can then be used by retailers to
advertise or send offers as you move around the
store or shopping centre.
Even giving services away for free can cause
problems when done without users’ permission.
Rock group U2 and Apple forcibly downloaded
the band’s latest album to 500 million iTunes
users, leading some to complain that the
unwanted gift was using up valuable space.
Apple’s experience reminds us of the need
to respect consumers’ different needs, and
to understand that some may not appreciate
change, even when it is for free.
Broader exposures
As the scope of what can be done with wearable
and other mobile devices broadens, operators
will open themselves up to potentially new
regulatory risks. For example, by offering mobile
payments, companies would need to consider
local banking laws.
In the case of the Apple Watch, the device
could become a powerful health tracking tool, yet
healthcare is one of the most tightly regulated
industries in most countries. This raises
questions around whether smart watches would
be subject to regulation in the US as a medical
device.
New biometric applications, such as the
iPhone fingerprint scanner or the Apple Watch’s
ability to take biometric readings like heartbeats,
also raise potential concerns for identity and
security breaches. For example, biometric
technology is also being used in Apple Pay,
Apple’s mobile payment system, which would see
personal biometric data being connected to the
outside world.
willis wire
Threats to telecoms
operators in conflict
landscapes
ow.ly/Faemz
blog.willis.com
17
16
18. resiliEnce // issue 05 // january 2015
Under pressure
Despite the challenges, telecoms companies can deal with increasing demands for
unlimited liability contracts. By Akiba Stern, partner in law firm Loeb Loeb
While outsourcing customers
increasingly push for contracts that
include no limitations on the liability
of their suppliers, they rarely get
everything they want in telecoms
deals. In competitive procurements,
however, telecoms companies will
selectively meet competition when
the business is particularly important
to them. This increases their risk –
but the risk can be manageable if
done right.
Customers are usually looking
for higher or unlimited liability in
critical areas, such as breach of
confidential information, especially
as it relates to personal information,
and regulatory non-compliance,
especially when non-compliance can
result in fines by regulators.
Uncapped indemnification
provisions, limits of liability and
damages are not the whole story,
however. Those are compensatory
solutions. In order to proactively
manage risk so that the issue of
compensation never comes up, ie,
in order to identify and manage
risk, companies should look to
other standard contractual tools
such as key performance indicators,
service level agreements, control
of subcontracting and governance
to help mitigate the risk of default,
other harm and damages.
In the face of pressure to accept
more liability, telecoms companies
need to work within their processes
and risk mitigation standards, using
risk committees to monitor risk on a
deal-by-deal basis.
Obviously, insurance solutions
can help, provided that a telecoms
company’s sales culture and service
delivery processes are well managed
and controlled operationally and are
designed to avoid risk to and liability
from customers.
studiedsufferedasignificantreversaloffortune
event,causingadeclineinsharepriceinexcessof
20%,inthepast20years.Onaverage,aleading
companywouldsufferareversaloffortunesonce
every seven years. This is within the average
tenureofmostCEOs.
For TMT firms, the average reversal of
fortune was once a decade; however, some of
the companies suffering the biggest decline
in share price were one-time leaders in their
markets.
Forexample,SkyDeutschlandsawitsshare
price plummet almost 70% in 2008 after it
overstated the number of paid subscribers,
whilein2006DanishtelecomscompanyTDC
sawitssharepricehalveafterafailedbidforthe
companybyagroupofprivateequityinvestors.
Interestingly, there is no discernible trend
in the cause of these reversals in fortune –
they fell equally into strategic, operational,
financial and external events. This suggests
that telecoms companies, like other leading
corporates, are likely to experience a major
shock at some point, but it is impossible to
predictwhenandhow.
fullcommentary),manytelecomscompaniesare
unabletocoverasmanyofthetoprisks–suchas
non-damagebusinessinterruptionandcyber–
astheywouldlike.Thetelecomsindustry’sneed
for greater insurance innovation is clear – and
as its interconnectedness grows, this need will
onlyincrease.
Withthisinmind,telecomscompaniesshould
lookfortheirinsurerstocoverabroaderscope
of risk with simpler triggers, in particular for
corporate catastrophe exposures and the new
risks associated with strategic change. As
Rhiannon Jones, head of risk at British Sky
BroadcastingGroup,notes(seeboxoppositefor
How TMT companies’ stock price has been
affected by ‘reversals of fortune’
Year
2004 2010 2013
5
15
25
35
45
55
Telecoms
Media
Technology
Averagerelativestockunderperformanceagainst
benchmarkIndex(%)
Source: willis
19. Developments in technology and convergence
within the sector are driving significant changes to
the risk profile of TMT companies. While the high-
level themes contained within the risk registers of
most TMT organisations, for example competition,
regulation and supply chain, have not changed
fundamentally over recent years, the nature of
the underlying risks have become more complex,
interrelated and fast changing.
The competitive landscape is continually
evolving, whether as a result of new entrants
utilising new technologies (benefiting from lower
cost business models) or traditional brands
broadening the scope of their activities, for
example, telcos becoming content providers and
vice versa.
With regards to supply chain risk, the ‘horse
meat crisis’ highlighted the potential complexities
within traditional supply chains for physical
products. For TMT companies the challenge is even
more pronounced, with supply chains that are
characterised by intangible, virtual and network-
based products and services.
As a result of such developments the value
proposition of traditional risk management and
insurance for TMT companies is being challenged.
Risk management evolution
The traditional risk management tools remain
but their application is necessarily evolving. Risk
analysis, for example, is becoming less about the
isolation of numerous and seemingly independent
risks by single points of ‘expected value’ and
moving towards broader based scenario and
correlation analysis.
This approach also provides a deeper risk
narrative that is more capable of satisfying multiple
stakeholder groups. Boards and regulators, for
example, have become increasingly interested in
understanding the ‘tail-end’ or ‘black swan’ risks
following recent crises in international financial
markets and the eurozone, whereas management
within the business seek insight into risks that
are manageable, rather than theoretical, and
most immediately threaten the achievement of
objectives.
Given the dynamic nature of the environment
in which TMT companies operate, the risk
management ambition is often about underpinning
strategic decision-making. The rationale for this
approach is clear but for most organisations this is
currently more theory than practice.
Insurance industry response
From an insurance perspective, the
challenge lies in developing products that
reflect the changing nature of the TMT
companies' risk profiles rather than fitting in
with traditional underwriting lines.
As buyers we need to better recognise
our role in shaping insurance offerings.
Have we, for example, been able to clearly
articulate the specific risks and coverage
requirements in areas such as cyber and
non-damage BI? Greater transparency and
collaboration between insurer, broker and
the TMT community is needed in order to
deliver the required transformation.
Rhiannon Jones is the chair of
the TMT special interest group at
Airmic, the UK insurance and risk
management association.
“More devices and greater data
traffic means that privacy and
data security is likely to become
an even bigger issue.”
Managing risks
in an interrelated
world
Risks for technology, media and telecoms
companies are becoming increasingly
complex and interrelated, requiring more
innovative and bespoke risk and insurance
solutions. By Rhiannon Jones, head of risk
at British Sky Broadcasting Group
more
information
Sara Benolken
sara.benolken@willis.com
+1 512 651 1670
19
18
20. 4027214224
207178
14
14 14 21 13 17
33
27
10
25 19
33
23
10
3
4
19
RISK MANAGER
NED
0 10 20 30 40 50 60
resiliEnce // issue 05 // january 2015
Directors and high-ranking officers in
public and privately-held corporations
around the globe work under an
unprecedented level of scrutiny.
LAW LAW LAW YER
Feeling the
scrutiny
likenever
before
Regulatory and other
investigations and
inquiries
Regulatory and other
investigations and
inquiries
Regulatory and other
investigations and
inquiries
Criminal and
regulatory fines
and penalties
Criminal and
regulatory fines
and penalties
Anti-corruption
legislation (including
Bribery Act)
Anti-corruption
legislation (including
Bribery Act)
Anti-corruption
legislation (including
Bribery Act)
Criminal and
regulatory fines
and penalties
Employment practices
claims (harassment, age
and sex discrimination)
Securities/shareholder
claims
Risk of being sued
abroad
Risk of being sued
abroad
Risk of being sued
abroad
Multiplicity of
sanctions regimes and
affected countries
1.
2.
3.
4.
5.
2012 2013 2014
Top five risks to businesses and directors
A
survey conducted by Allen Overy and Willis in
September 2014, titled Directors’ liability – DO:
Blurring the lines, explored shareholder pressure,
perceptions of public interest, heightened regulatory
vigilanceandahostileenforcementandlitigationenvironment:
some of the forces that corporate leaders have to manage on a
dailybasis.
“Directors can now be held personally liable in the UK for
offencesthatincludebribery,corruptionandfraud;competition
andantitrustmatters;environmentallaw;healthandsafety;tax;
international sanctions; money laundering; financial reporting
requirements; the Dodd–Frank Act and other long-arm US
legislation,”saysFrancisKean,executivedirectoratWillis.
Yet, there is still a lack of awareness of this among many
directorsandotherseniorofficers.
63%are unaware of the proposed expansion of the
directors’ disqualification regime. The proposals,
setoutinapaperpublishedbytheUKDepartmentforBusiness,
Innovation and Skills titled Transparency Trust: Enhancing
the Transparency of UK Company Ownership and Increasing
TrustinUKBusiness,willintroduce“broaderandmoregeneric”
provisionsinrelationtothemattersdeterminingtheunfitness
ofadirector.Theproposalswilloutlineseveralfactorsthatcould
Source: Allen Overy and Willis, Directors’ liability – DO: Blurring the lines
betweenindividualdirectorsandthecompany
Conflictsofinterest
Environmental
claims
Insolv
ency
andcorp
orate
colla
pse
practicesclaims
(harassment,ageand
sexdiscrimination)
Employment
Classactions
21. 12 21 14 20 33
40 42 52 43
27
5
13
7
11
7
2129
172033
19257217
3338523438
47
4562215767
59
62
54
6947 41 48
46
45
COMPLIANCE
IN-HOUSE LAWYER
DIRECTOR
60
50
40
30
20
10
0
be used to justify disqualification, covering misfeasance,
breaches of duty, legislation and sector regulations. For
example,itwouldbepossibletotakeadirector’soverseas
misconduct into account in disqualification proceedings
intheUK,meaningthatrisksfacingdirectorsoverseasare
transportedbackintotheUK.
Fearing investigation and regulation
More than twice as many executive directors as non-
executivedirectors(NEDs)rateanti-corruptionlegislation,
includingtheBriberyAct,asofconcern.“Thismaybedue
to NEDs assuming (perhaps dangerously) that they are
less likely to be called to account than management for
the company’s systems and controls to prevent bribery
in the event of a corruption investigation or proceeding,”
saysBarton.
47%worryabouttheriskofbeingsuedabroad.
26%worryabouttherisksassociatedwithforeign
directorships.
19%worryabouttheriskofextraditionofcompany
directors,mirroringtheextraterritorialthreat.
“Ten years ago extraterritorial claims were brought
against the directors of Parmalat, but, with today’s more
sophisticatedgloballitigationtechniques,bothregulators
and claimants are more alive to the potential. Antitrust
regulators,forexample,areconsiderablymorejoinedupin
theirapproachtowrongdoingacrossborders,”saysAndrew
Barton,counselatAllenOvery.
Thinking green
13.5%worryaboutthethreatofenvironmental
claims – an issue that should perhaps
be moving up the agenda. Greenpeace claims the risk
of climate-related lawsuits is rising, and has launched a
campaignthattakestheformof‘DearCEO’letters,which
inviteanswersfrombusinessleaderstospecificquestions
relating to their exposure and coverage for these types of
claims. “The premise appears to be that, as the threat of
litigation increases, so too does the threat that company
executives will be made personally liable and that their
insurers will be vulnerable to large pay-outs,” says Kean.
Some directors and officers (DO) policies exclude cover
forclean-upandpollutioncosts,andthoseexclusionscan
also extend to the provision of defence costs in relation
Howcorporate
leadersranktheir
businessrisks
Download
All data used in this article
was originally featured in
Allen Overy and Willis's
report Directors’ liability –
DO: Blurring the lines
ow.ly/FeFkd
Criminaland
regulatoryfinesand
penalties
Regulato
ryandother
investig
ationsand
inq
uiries
legislation(including
theBriberyAct)
Anti-corruptionsanctionsregimes
andofaffected
countries
Multiplicityof
Im
pacto
freform
sto
perm
itc
ontingency
feesi
ntheUK
Riskofbeingsued
abroad
Directors’
disqualification
proceedings
Proposedreforms
tointroduce
compensatoryawards
Extraditionofcompanydirectors
2 1
20
22. 7 21 17 17 5
5538484554
5246283847
26 25 45 18 40 7 21 24 18 20
14
25
17
16 14
43
50
41
32
54
IN HOUSE LAWYERRISK MANAGER
IN-HOUSE LAWYER
NED
0 10 20 30 40 50 60
60
50
40
30
20
10
0
resiliEnce // issue 05 // january 2015
to allegations of pollution – suggesting that
Greenpeace has highlighted a risk more
directorsandriskmanagersshouldbealiveto.
22%worryabouttherisksassociated
withinsolvencyandcorporate
collapse.Thisistheriskwherethereismost
divergence between directors and NEDs,
with more than a third of NEDs considering
insolvency a significant risk to them. “This
may be because NEDs may feel more
removed from the day-to-day workings of
thecompaniesonwhoseboardstheysit,and
thus more concerned about their failing,”
saysBarton.
Worried about a lack of cover
“Over the years there has been a marked
tendency in DO insurance policies to try
to spell out each new embellishment to the
product.Thishasresultedinaninsuredperils
approachtothecover,whichhasbred
length and complexity. It is not unusual for
DOpoliciestobe40pageslong,withasmany
definedterms,whereaserrorsandomissions
insurance,aclosecousin,istypicallyhalfthe
length,”saysKean.
A call to restrict insurers’ ability to refuse
a claim based on non-disclosure has grown
louderin2014.“Directorsandseniorofficers
worry they might not have been asked the
rightquestionswhenthepolicywastakenout,
orthattheymaynothavethoughtsomething
wasrelevantthatitlaterturnsoutshouldhave
beendisclosed,”saysBarton.
50%see this as a major worry, yet
we are aware of only very few
instances of rescission for non-disclosure
involving DO policies. “Well-drafted
wordingshouldinanyeventprotectinnocent
directors from the consequences of non-
disclosure or deliberate misrepresentation
byothers,”saysBarton.
Costly investigation
Every year directors and senior officers
Whether the policy will
always respond if there is
an investigation involving
directors
Whether DO policy
and/or company
indemnification will
be able to respond to
claims in all jurisdictions
How claims against
directors and officers
will be controlled and
settled
Restricting insurers’
ability to refuse a
claim based on
non-disclosure
Clear and easy to
follow policy terms
Whether there is cover
for cost of advice at
the early stages of an
investigation prior to
the main hearing
Whether there is cover
for cost of advice at
the early stages of an
investigation prior to
the main hearing
Restricting insurers’
ability to refuse a
claim based on
non-disclosure
Coordination of the DO
policy with company’s
indemnification
obligations
Whether DO policy
and/or company
indemnification will
be able to respond to
claims in all jurisdictions
Coordination of the DO
policy with company’s
indemnification
obligations
Whether DO policy
and/or company
indemnification will
be able to respond to
claims in all jurisdictions
How claims against
directors and officers
will be controlled and
settled
1.
2.
3.
4.
5.
2012 2013 2014
Clear and easy to
follow policy terms
Clear and easy to
follow policy terms
Top five Do Policy issues
Howcorporate
leadersrank
theirDO
policyconcerns
Source: Allen Overy and Willis, Directors’ liability – DO: Blurring the lines
Clearandeasytofollowpolicyterms
abilitytorefusea
claimbasedonnon-
disclosure
Restrictinginsurers'
theearlysta
gesofan
investigatio
n,priorto
them
ain
hearing
forcostofa
dviceat
andhencerapid
theeventofaconflict
depletionof
ofinterestbetween
Whathappensto
aggregatelimit
directorandcompany
thecoverwhenIretire?
Thesharing
Whatcoverappliesin
Price
W
hetherthe
reiscover
23. 27
9
10
21
19
40
36
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2734312923
4729102110
3817312333
6
29
312920
21
21
21
27
27
14 34
14
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14
COMPLIANCE
DIRECTOR
worry about coverage for the cost of
advice incurred at the early stages of an
investigation, prior to any main hearing.
This would include regulatory visits
and notification obligations where,
from an insurer’s point of view, it
canoftenbedifficulttodistinguish
between routine investigations
and those where the personal
liabilityofdirectorsisarealistic
possibility.Costsrackedupfor
legal advice for individuals
at the start of investigations
can be substantial. “With
regulatoryandenforcement
soheavilyfocusedonsenior
management, this is a
growing area of expense,
particularly as matters
become more complex and
increasingly international,”
saysKean.
“Yet insurers do not like
covering the pre-claim stage
of an investigation because
theyworryaboutthepotential
forthemtohavetosignablank
cheque for legal fees up to the
policy limit,” adds Kean. “It can
also prove tricky to distinguish
between the costs of defending the
entity (which would not typically be
covered by DO insurance) and the
costs of defending the individual before
formal proceedings have been issued,” says
Kean. This is a classic blurring of the lines
between entity and individuals in a coverage
context – individuals can potentially find
themselvescaughtinagapbetweenthetwo.
Cover at an early stage of an investigation is a
key issue for the compliance officers and for the
NEDs.Thereisastrongandinterestingcorrelation
between these findings and those relating to
conflicts of interest in which the compliance
functions and the NEDs also signal the greatest
concern.Thissuggeststhat,forboththeseclasses
of corporate leader, there is a clear focus on the
potentialneedforseparatelegalrepresentation.
42%ofexecutivedirectorsratecoverat
anearlystageofaninvestigation
as a priority. This is less than the proportion
of NEDs and also well below the proportion
of executive directors who rank regulatory
investigationsandanti-corruptionlegislationas
areasofkeyconcern–suggestingitmaynothave
theattentionfromexecutivesthatitdeserves.
Preparation is key
Companiesshouldtrytomakeacleardecision
regarding who should and should not benefit
from DO insurance and/or indemnification
andthatthisismadeclear(andkeptuptodate)
inrelevantdocuments.
“This means paying attention not just to
directorsbutalsotoofficersinDOpoliciesand
indemnities – it is often clear which statutory
directors benefit from cover, but the term
‘officers’ can be applied and interpreted much
morebroadly,”saysBarton.Companiesshould
thereforehaveaprocessofrecordingchangesin
directorships,jobtitlesandroles,andtoensure
individuals are given full information on their
coverwhentheyassumenewpositionsormove
throughtheorganisation.
Individual directors and officers and their
employers should place great value on getting
DO policies and indemnifications correct at
theoutset,andkeepingthemuptodatethrough
thecourseofanindividual’scareer.“Thingsthat
are overlooked in the good times can cause big
problemsshouldproblemsarise,notonlyforthe
individualleftexposed,butalsoforthecompany,
whichwillneverbenefitfromamessysituation
with its own employees during regulatory
investigationorlitigation,”saysBarton.Upfront
preparationminimisestheserisks.
willis wire
Dangerous intersection
between indemnities
and insurance
ow.ly/FaexJ
blog.willis.com
more
information
Francis Kean
keanf@willis.com
+44 (0)20 3124 7078
tothecoverifthe
companybecomes
insolvent
willbe
m
aintained
fol
lowinga
chang
eofcontrol
H
o
w
cover
forclaimsbrought
bythecompany
againstthedirectorsThereiscoveragewithyourcompany's
indemnification
obligations
oftheDOpolicy
W
illDO
policy
and/orcompany
indem
nification
beabletorespond
Abroaddefinitionof
whoisinsured
Howclaimsagainst
thedirectorsand
officerswillbe
controlledandsettled
Understandinghowdisputesbetweenyourcompanyandyourinsurerswillbe
Whathappens
Thecoordinationdealtwith
toclaim
sinall
jurisdictions
23
22
24. resiliEnce // issue 05 // january 2015
Walkinga
fineline
Joe Seeger
Energy Practice Leader, Canada,
Willis
The large-scale and long-term nature of oil and gas
companies’ projects leaves them vulnerable to oil price
fluctuations, business interruption and ever more
stringent regulation.
By Joe Seeger
U
ncertainty around energy prices is
undoubtedly the biggest risk facing
companies in the oil and gas sector –
makingitdifficulttocalculatewhether
investments are economical over a project’s
lifecycle.
Oil prices have fluctuated significantly in
recent times, dipping to below $60 a barrel at
thetimeofgoingtopress,againstabackdropof
saturatedsupply.Accordingtomediareportsthe
mostpowerfulnationsinOpechavemadeitclear
they are willing to push prices as low as $40 a
barrelintheirbidtotakeonRussiaandUSshale.
Eighty dollars a barrel is still, historically, a
relativelyhighpriceforinfrastructuretocontinue
tobedeveloped.Moreover,theoilpriceinthelong
term(fiveyearsandmore)isgenerallyforecastto
remainover$100abarrel.Atthispriceorabove,
mostexplorationanddevelopmentcanproduce
a solid profit margin, including the more deep
marginintermsoflonger-termpricesandprofit.
Companies unfazed by lower oil prices,
however, are often troubled by a lack of
infrastructure. Permits for infrastructure
development – such as the proposed Keystone
XL pipeline to deliver oil from Canada across
America to the US Gulf Coast – have a major
bearingoncompetitiveness.Withdownstream
projects tending to have high-asset values –
running into many billions of dollars – delays
or refusals for critical infrastructure, such as
distribution pipelines, can substantially affect
overallcosts,ascananyotherformofbusiness
interruption.
Most oil facilities take three to five years to
build, plus another two years for the design
and testing before handover. This investment
of time and money requires certainty that, at
theendofthesevenyears,therewillbeastrong
andsteadysupplyofrevenue.YetUSregulatory
water frontier regions such as Brazil, although
projectsintheArcticaretheexceptionduetothe
significantlyhigherexplorationcostsinvolved.
Some developments do become less
economic, however, if oil is priced below $100
abarrel.Forexample,greenfieldoilsandssites
areparticularlychallengedbythefallingprices
we have seen recently, owing to a period of low
capital spending, which could lead to some
projects being cancelled should the price of oil
remainlow.
However, this is not true across the board.
For some of the more established companies
focusedonCanadianoilsands,forexample,the
price tipping point is around $35–40 a barrel.
So while many companies are deterred by the
hefty investment costs required ($10 billion
plusforsomemines)intheCanadianoilsands
market – along with political uncertainties in
the royalty regime – others still see a healthy
25. Offshore
Middle East
Offshore
shelf
Heavy oil
Offshore
Russia
break-even price for regional oil production
100
90
80
70
60
50
40
30
20
10
0
0 10 20 30 40 50 60 70 80 90 100
Total liquids production (million barrels per day)
AverageBrent-equivalentbreak-evenprice,($/barrel)
$47
$27
$41
$50 $51
$65
$52
Deepwater
Onshore
RoW
North
American
shale
Ultra
deepwater
$56
Oil sands
Arctic
$70
$75
Source: morgan stanley, rystad energy
Break-even price
25
24
26. resiliEnce // issue 05 // january 2015
Changing forecasts
prompt price drops
Changes in forecasts for oil demand and supply and global
economic growth can have a big effect on oil prices.
“The security of isolated facilities in
poorly or ‘ungoverned spaces’
remains a serious challenge.”
authorities have delayed decisions regarding
the Keystone pipeline, while domestic politics
(environmental and aboriginal) are affecting
otherplannedpipelinedevelopmentsacrossthe
globe.Governmentdecisionsoverwhetherornot
topermitenergyexploitationandinfrastructure
development–suchasoffshoreexplorationand
productionintheArcticandSouthChinaSeaor
pipelines and transmission lines across North
America and Europe – can have a potentially
majorimpactonpriceintheoilandgassector.
Geopolitical risks
Petrochemical companies generally face
fewer environmental challenges than oil
refineries, which frees them up to focus more
on product innovation and growing market
Shell, have pulled out of West Africa due to a
growingsenseofgeopoliticalriskinthisregion,
whileotherswithlargerriskappetiteshaveopted
to stay for the long term. East Africa, however,
is becoming more attractive, with a notable
influx of independents, because there is less
geopolitical risk and companies are finding oil
andgasintheregion.
share, particularly in emerging markets.
However,thisbringsthemintocontactwith
many geopolitical and security risks, which
also drive up operating costs and threaten
projectfeasibility.Oftentheseflashpointsare
uncomfortably close to key areas of energy
productionandtransportation.
Some major energy companies, such as
Brent crude (recognised as the
global benchmark for oil) fell to
under $88 a barrel in early October
2014, its lowest level since 2010,
after the International Energy
Agency (IEA) cut its estimates for
oil demand for 2014–2015. Oil prices
have since fallen further after
several organisations, including the
World Bank and the IMF, reduced
their forecasts for global GDP
growth for 2014–2015.
In its monthly oil market report,
the IEA reduced its forecast of
global oil demand for 2014 by 0.2
million barrels a day (mb/d), to 92.4
mb/d, due to lower expectations
of economic growth and the weak
recent trend. Annual demand
growth for 2014 is now projected
at 0.7 mb/d, rising tentatively to 1.1
mb/d in 2015 as the macroeconomic
backdrop improves, said the IEA.
OPEC crude oil output surged
to a 13-month high in September,
led by Libya’s continued recovery
and higher Iraqi flows, said the IEA.
Production rose 415,000 barrels a
day (415 kb/d) from August to 30.66
mb/d. A weaker demand outlook
cut the “call on OPEC crude and
stock change” by 200 kb/d for 2015
to 29.3 mb/d. The “call” declines
seasonally by 1.5 mb/d from the
fourth quarter of 2014 to the first
quarter of 2015, the IEA added.
The higher output from OPEC as
well as from non-OPEC producers
lifted global supply by almost 910
kb/d in September 2014, to 93.8
mb/d. Compared with a year earlier,
total supply stood 2.8 mb/d higher,
as OPEC supply swung back to
growth and amplified robust non-
OPEC supply gains of 2.1 mb/d. Non-
OPEC supply growth is expected to
average 1.3 mb/d in 2015.
Hitting new highs
Global refinery crude demand hit
new highs in August 2014, near 79
mb/d, with OECD runs leading the
uptick. The onset of seasonal plant
maintenance sees runs fall through
October, taking global crude runs
to 77.5 mb/d in the fourth quarter
of 2014 from 78.1 mb/d in the third,
with year-on-year growth rising
over the same period to 1.4 mb/d
from 0.9 mb/d.
OECD commercial total oil
inventories in September built by
37.7 mb over August, to 2,698 mb,
narrowing the five-year-average
deficit to 38.1 mb, from 67.1 mb
one month earlier. Preliminary
data indicate that inventories rose
counter-seasonally by 14.0 mb over
September 2014, led by a steep 11.7
mb build in middle distillates.
OPEC is unlikely to put a brake
on supplies, warns the IEA, leaving
the potential for further overall
price falls towards the end of 2014
and start of 2015. “Recent price
drops appear both supply- and
demand-driven,” it said. Upon the
publication of the IEA bulletin, Brent
crude dropped to $87.59, while US
crude dropped to $84.73.
27. $59a barrel
Cost of brent crude
in December 2014
$88a barrel
Cost of brent crude
in october 2014
Source: International Energy Agency
Elsewhere, some of the larger American
companies have cashed in on their assets in
moregeopoliticallysensitiveareasandputtheir
money into US shale gas production instead.
While this also carries political risks, the US is
consideredaneasierregioninwhichtooperate,
withgasbeingproducedatareasonablerate.
Last year’s attack on Algeria’s In Amenas
gas field reminded us that the security of
isolated facilities in poorly or ‘ungoverned
spaces’ remains a serious challenge, and also
of the vulnerability of the industry’s core (and
increasinglyscarce)asset:well-qualifiedhuman
capital.
Shortages of human capital run through the
whole range of skills the sector needs – from
fitters and welders through to engineers and
other technicians. This global shortage often
extends project times and increases costs,
thereby undermining oil and gas companies’
effortstocontaincosts.
The potential shortage of highly skilled
engineers can place a strain on the energy
facilities’extremelycomplexdesigns,increasing
theriskofmistakesbeingmadeandappropriate
risk mitigation procedures and safety best
practicesnotbeingapplied.
When setting up a facility in a particular
region, energy companies typically recruit
workers from the surrounding community.
Though this can enrich the local community,
it creates a risk of employees working on a set
projectandthenleavingagain,resultingintheir
expertisenotbeingdevelopedandutilisedacross
other projects. Consequently, workforces can
becomeverytransient,especiallyonaverylarge
project – which could have as many as 40,000
workers–producingthechallengeofcontinuing
toensurethequalityofthatparticularworkforce.
Serious downtime
Oil and gas companies generally have a keen
understandingofwhatcangowrongwiththeir
supplies. They tend to have numerous service
level agreements in place so, if a supply of
crude oil or gas is momentarily stopped, they
can procure that resource from an alternative
market.
Similarly, the criticality of equipment is
routinely analysed and defined, in terms of
how it affects production, safety and the wider
50%
45%
40%
35%
30%
25%
OPEC’s share of global oil supply
Millionbarrels/day
1975 1995 2015 2035
OPEC crude oil supply
32
31
30
29
28
mb/d
2014
Millionbarrels/day
2012 2013
27
26
28. environment.Oilandgascompaniesarealsowell
versedindefiningtheavailabilityandreliability
of maintenance programmes. So supply chain
risksshouldnotbeaparticularproblem,inthe
immediatesense.
But oil and gas companies are not always so
up-to-speedinpreparingforalossthatrequires
significant downtime (one to three years).
Inoperativeness for more than a week is often
seenasadisaster,yetdamagetoafacility’scritical
componentscouldcauseaplanttobeshutdown
for two or three years. For example, it could
take12monthstoreplaceatransformerand18
monthstoreplaceacompressor.
The chance of such problems arising is very
remote,yettheirimpactcanbehuge,soitisvital
tohavethoroughandrobustbusinesscontinuity
(BC) plans in place – and not to confuse them
with disaster management, as waiting for a
problem to occur often means waiting until
it’s too late. It’s sometimes suggested that an
importantstepinBCplanningisforoilandgas
companies to map out all of their tier one, tier
twoandtierthreesuppliers.However,oftenthis
isunfeasible,withcompaniesnormallyachieving
apartialpicture.Instead,thefocusshouldbeless
on tier two and tier three suppliers and more
on tier one suppliers, and identifying possible
alternatives to those key suppliers, should one
ofthembeputoutofaction.
Moving pieces
The movement of investments and products
changesquickly,accordingtoperceivedshiftsin
risklevelsindifferentcountriesandchangesin
local regulations. For the first time, a tanker of
Canadianoilsandscrudewasrecentlyshipped
to Europe, which, after years of opposition,
no longer deems oil sands as ‘dirty’, so more
shipmentsfromCanadatoEuropeareplanned.
As oil sand operators wait for pipelines to be
approved to ship crude to their traditional US
market, Europe is now open for business and,
while Europe carries a different set of risks,
companiescanstillgettheirproducttomarket.
Aside from shale gas, the US also has
significant amounts of oil – an unexpected by-
product. This unexpected bounty has created
additional interest in the US and induced an
embryonicshiftintheglobaloilandgassector.
Overthelastfiveyearsalotofmoneyhasbeen
invested in the Middle East, Asia and Australia
toconstructrefineries;atrendthatwillcontinue
for the next few years. These plants often take
sevenyearstofullyassemble–includingthepre-
constructiondesigntime–andareconstructed
ontheexpectationofprovidinga20-yearreturn.
Theseinvestments,however,werepredicatedon
a global market without large reserves of shale
gas and oil in the US, so some oil and energy
companiesnowfacetheprospectofhavingmade
investmentsinregionsthatarelesscriticalthan
hadbeenenvisaged.
ItispredictedthattheUSwillbeself-sufficient
inoilandgasby2018/20,andexportingby2030.
With the changing geopolitical situation in
Russiaandsomeneighbouringcountries,some
European countries will seek to reduce their
dependencyonRussianenergyandtocapture,in
theshorttermatleast,theUSshalegasmarket.
Going green
Energy companies are being forced to consider
their environmental management plans even
morecarefully,asstrongerenvironmentalliability
legalframeworksareimplemented,includingin
emergingLatinAmericanmarketssuchasBrazil,
“The global
shortage of human
capital often
extends project
times and increases
costs, undermining
oil and gas
companies’ efforts
to contain costs.”
Colombia,Mexico,PanamaandPeru.
Maintaining an effective and transparent
social licence to operate is a priority because
energy companies increasingly see their
fortunes tied to thorough, transparent and
effective engagement with the communities
in which they operate. Environmental and
socialissues,inparticular,havetakenamuch
higher profile across the board – as seen in
the difficulty of getting permits for energy
infrastructureprojectstobedevelopedinthe
firstplace.
Environmental obligations, particularly
regarding potential pollution threats,
have been strengthened for onshore and
offshore activities, and for all stages of an
operation – from initial development and
construction through to operation and then
final decommissioning – including in the
US. These obligations can include recovery
of fish stocks and wildlife habitats and soon,
in Canada, dealing with tailings ponds in the
oilsands.
The constant regulatory requirements oil
refineriesfacetoregulatetheimpuritiesinfuel
products, and other emissions, places a huge
strain on the profitability of their business.
For example, if the specifications on gasoline
are changed to reduce sulphur content –
which has happened several times over the
last10–15years–arefinerymayhavetoinvest
hundredsofmillionsofdollarstomeetthenew
specifications.Yettheseregulatorypressures
are unlikely to abate and could well increase
aspublicandmediainterestinenvironmental
issuesincreasesintheyearsahead.
Analyse this
Emerging analytics can improve forecasting
and risk assessments, helping energy
companiestomakemoreinformeddecisions
abouthowtheymanagerisk.
For example, the US government wanted
to find a way to predict the probability of an
offshore oil spill. To help them, Willis built
a model that employed detailed oil spill
frequency and severity data to understand
the likelihood of these events as well as their
potential impact. The model gathers real
historic spill data (over the past 20 years)
resiliEnce // issue 05 // january 2015
29. more
information
Joe Seeger
joe.seeger@willis.com
+1 403 705 0373
willis wire
Why the energy
insurance market
is not truly soft
ow.ly/FaeFu
blog.willis.com
Greenfieldoilsandssitesareparticularly
challengedbythefallingoilpricesseen
recently.Over$7billionhasjustbeen
spenttoreplacesomeinfrastructureinthe
Syncrudeproject.“We’reenteringaperiod
oflowcapitalspending,whichmeans
werequirealoweroilpricetoremain
competitivelyviable,atleastinthenear
tomediumterm,”saysPhilipBirkby,
treasureratCOS.
“If you’re looking at making new
Greenfield investments, you will incur
those capital costs so you obviously
need a much higher oil price to be
viable. If the low oil prices we have seen
recently are sustained we will see more
project economics challenged, with some
projects being cancelled or postponed.”
A lack of infrastructure is another
concern. More transmission capacity is
needed to get products to market but
the need for new pipelines goes beyond
the oil sands sector. While US regulatory
authorities are delaying decisions
regarding pipelines, such as the
Keystone XL pipeline, domestic politics
are affecting other planned pipeline
developments within Canada. “Without
some increase in pipeline capacity, we
are going to be challenged to get our
crude to market. Rail is an option, but
pipes are safer,” says Birkby.
With the myriad risks energy
companies face, cost containment across
the board, alongside a dynamic risk
management plan, is paramount. “As
an oil sands and mining company, our
margins are tighter than conventional
producers – we’re more leveraged with
thinner margins and so more sensitive to
cost increases,” says Birkby.
Energy companies are starting
to collaborate on research and
development, hoping to find more
economical and efficient ways to
operate, but containing costs, driven
by inflation, is proving difficult, says
Birkby. “Higher human capital costs
and the changing regulatory landscape,
particularly with regard to environmental
matters, has increased the scope of our
operations and driven costs up over the
last several years.”
Extra-fine margins
Oil price uncertainty, lack of infrastructure and cost
containment are key challenges for Canadian Oil Sands
(COS), the largest shareholder in Syncrude – a large oil
sands mining project.
and runs that data through the model tens
of thousands of times to generate a robust
set of frequency and severity outputs. The
model revealed that there is an average 5%
probability of a 1,000,000 barrel spill in the
Gulf of Mexico during the next five years, and
thatthisprobabilityincreasesdependingonthe
depthandcomplexityoftheproject.
Whileit’simpossibletopredictexactlywhen
a scenario like this could occur, applying this
kind of science and rigour to risk assessment
givesunderwriterstheconfidencetopricerisks
appropriately,whichprovidesclientswithmore
risktransferoptions.
However,insurersstillstruggletomeetsome
of the needs of oil and gas companies, such as
coverageforcatastrophiccyberincidents.
IntheUS,40%ofallcyber-attacksoncritical
infrastructureassetsin2012occurredagainst
the energy sector, according to ABI Research.
And the UK government estimates that UK
oil and gas companies are already losing £400
millionayearduetocyber-attacks,notesareport
byKMPG.
There are several types of cyber insurance
available – including first-party network loss,
privacy and security liability, media liability,
privacy regulation defence, as well as cyber
extortion–butthesearenotdesignedtoprotect
companies against immense physical damage
andreputationalharmcausedbyacyber-attack.
To address the risk of catastrophic cyber
events, and similar emerging risks, more
capacity and innovation needs to enter the
market. Attaining a full and open relationship
with insurers can be a problem for oil and gas
companies,however,asmuchoftheinformation
thathastobedrawnontounderwritetheirrisks
isverysensitiveandnoteasilyshareable.
AndeffectiveBCplans,involvinginsurerand
broker input, require companies to disclose
information even before a claim, opening
energy companies up to a level of (potentially
embarrassing) scrutiny they might struggle to
accept.Acknowledgingthissensitivity,andthe
obstacles it can present, is a key first step that
energy companies, brokers and insurers must
takeinordertoworkmorecloselytogetherand
tackleenergycompanies’growingriskprofile.
29
28
30. for
william creedon
Head of Willis Group’s Global
Construction industry
Building
resiliEnce // issue 05 // january 2015
Climate change, urbanisation
and economic development
mean that the cost of natural
catastrophes is now higher than
ever before. Businesses and
public authorities need to take
decisive steps to improve their
resilience to future disasters.
By William Creedon
A
string of recent catastrophes have
exposed the vulnerability of some of
the world’s leading cities. Growing
urbanisation, along with inconsistent
buildingstandardsandalackofurbanplanning,
have increased the danger. To withstand the
more frequent – and more intense – natural
disasters that are forecast, we need to build
smarter,betterandsafer.
An unprecedented boom in construction is
settooccurinthecomingyears.Thevolumeof
constructionoutputwillgrowbymorethan70%
to$15trillionworldwideby2025,accordingto
researchbyGlobalConstructionPerspectives.
Thereasonsforthisbuildingboomarerapid
populationgrowthandeconomicdevelopment.
The global population, which stands at over 7
billionpeopletoday,isexpectedtorisebynearly
40%to9.6billionin2050,accordingtoestimates
bytheUnitedNationsPopulationFund,aUnited
Nationsagency.
Alongwithariseintheoverallpopulation,the
numberofpeopleflockingtocitieshasjumped.
Overhalfofthepeopleintheworldalreadylive
inthemand,eachyear,65millionmorepeople
move to live in urban areas – more than five
times the population of Greater London –
according to Global Trends 2030: Alternative
Worlds, produced by National Intelligence
Council’s report. The world’s 50 largest cities
alonehaveacombinedpopulationthatisbigger
thanthatoftheUnitedStates,accordingtothe
WorldBank.
Thedevelopingeconomieswillseemostofthis
newbuildingactivity.Theyalreadyaccountfor
52%ofallnewconstructionactivity,andthiswill
riseto63%by2025.MuchofthiswillbeinChina
andIndia,where270millionnewhomeswillbe
needed,accordingtoGlobalConstruction2025,
31. producedbyGlobalConstructionPerspectives
andOxfordEconomics.
Along with these new homes come offices,
factories, transport, power, water networks,
schools,hospitalsandothervitalinfrastructure.
However,manyofthefastest-growingcitiesare
thosemostvulnerabletocatastrophes.
Megacities at increasing risk
UN-Habitat states that 80% of the world’s
largest cities are at risk of severe damage from
earthquakes, while 60% are in danger from
stormsurgesandtsunamis.Thereisincreasing
scientific evidence that impacts of climate
change could causesealevelstoriseandcould
bring more frequent and more severe natural
disasters, such as hurricanes, typhoons and
extremerainstorms.
The past ten years have seen an increase in
the number of devastating natural disasters.
Major earthquakes have occurred in Japan,
Chile, China and New Zealand; devastating
floodshavehitThailand,AustraliaandtheUK;
violentstormsandtornadoeshavehittheUSA.
Since2000,naturaldisastershavecostaround
$2.5 trillion, says the UN. Its secretary-general
Ban Ki-moon offered this stark assessment:
“Economic losses from disasters are out of
control.” The annual average economic losses
from earthquakes and cyclonic winds alone is
around $180 billion this century, estimates a
new global risk model produced by the United
Nations International Strategy for Disaster
Reduction.
The Great East earthquake in Japan in
March 2011 provided graphic proof of how
biggernaturalcatastrophescanhaveterrifying
economicandsocialconsequences.Thetremor
triggered a tsunami with waves 130 feet high,
killing more than 18,000 people and washing
awaybusinessesandinfrastructure,causingan
economic loss of $210 billion. If the resulting
Fukushima nuclear shutdown is taken into
account, estimates of the total damage rise to
as much as $360 billion. Without power and
transportation,industrythroughoutthecountry
groundtoahalt,breakinginternationalsupply
chainsandhittingtheglobaleconomy.
Plan for the future, not the past
Climate change, urbanisation and economic
developmentmeanthatmorepeoplenowlivein
areasatriskofnaturaldisasterthaneverbefore.
Consequently, where and how new building
takesplacebecomevitallyimportanttoacity’s
resiliencetodisaster.
Organisations,bothpublicandprivate,need
to take more account of the forecast increase
inthefrequencyandseverityofsevereweather
events in their planning strategy and building
standards,aswellastheircontingencyplans.
For example, many organisations’ disaster
plans could not cope with Superstorm Sandy,
because the 14-feet water surge it created was
morethantwicethehighestlevelthanhadever
beenpreviouslyseen–thebenchmarktowhich
theirresiliencestrategieshadbeendesigned.
Asmostnewbuildingswillhavealifespanof
atleasthalfacentury,theirdesignmustbeable
tocopewithwhatthefutureholds,ratherthan
for what has already happened. The new San
Francisco–Oakland Bay Bridge, which opened
inSeptember2013toreplaceonethathadbeen
damaged by the 1989 earthquake, was built to
exactingstandardstowithstandfuturetremors.
Itistheworld’slargestself-anchoredsuspension
bridge and the most seismically advanced civil
structureeverbuilt.
the f ture
18,000
130ft
tsunami
wave
80%
world’s largest cities at
risk of severe damage
from earthquakes
u
31
30
32. resiliEnce // issue 05 // january 2015
Climatesciencehasmadegreatstridesinthe
past 30 years, enabling us to understand the
vulnerabilitytoextremeweatherofmanyparts
of the world, rich and poor. Predictive climate
modellingisstillinitsinfancy,butitcanalready
offersomeindicationsofhowfrequentlynatural
catastrophes may occur and how severe their
impactcouldbe.
Butthisknowledgeisnotalwaysreflectedin
decisions being made on where and how new
buildingsareconstructed.
In some cases, countries may understand
their vulnerability but lack the resources to be
abletoplantheircitiestowithstandtheeffects
ofdisasters.
Constructionfirmscanplayaroleinhelping
local communities to recover from a natural
disaster and offer advice on how to build back
better. The Disaster Resource Partnership,
a consortium of global engineering and
construction firms, has helped to provide
disaster-resilient reconstruction in the
aftermath of catastrophes, through flood and
seismicriskassessmentsandadviceonthebest
materials and design techniques to use to help
buildingsbetterwithstandfuturedisasters.
Forexample,Arupengineerscreatedasimple
guide and training scheme for how to rebuild
and repair properties damaged in the 2011
Gujarat earthquake, which was widely used
by local builders, government officials and
relief charities. It has since been used in other
countriesrecoveringfromearthquake.
But what about old buildings?
The catalyst for change is sometimes disaster
itself. The desire and collective will is to ‘build
backbetter’topreventarepeatofthenightmare.
Building codes are tightened to ensure new
buildingsareconstructedtohigherspecifications
sotheycanwithstandfutureevents.Butthatstill
leavestheproblemoftheexistingbuildingstock
inthosevulnerableareas.
TimReinhold,seniorvice-presidentandchief
engineerattheInsuranceInstituteforBuilding
and Home Safety, calls it the ‘98% problem’.
These have been put up to varying standards
Incentivising resilience
Some argue that businesses need to
adopt a longer risk horizon. For too long,
marketshaveplacedgreatervalueonshort-
term returns than on sustainability and
resilience, says the UN’s secretary-general
Ban Ki-moon. “At long last, we are coming
to understand that reducing exposure to
disasterriskisnotacostbutanopportunity
tomakethatinvestmentmoreattractivein
thelongterm.”
Businessescouldbeincentivisedtothink
harder about their disaster risk exposure if
they saw a benefit to doing so; for example,
byenjoyingalowercostofcapital.Ifpublic
companieswererequiredtostatehowmuch
a severe natural disaster (which would
normallyoccuronceevery100years)would
cost them, then capital providers could be
abletoseetherelativeimpactitwouldhave
on their balance sheets. If it were clear to
investors that a hotel chain, for example,
had a lower exposure to natural disasters
than its rivals, because of the locations
and building standards of its hotels, then it
couldberewardedwithahigherstockprice,
resiliEnce // issue 05 // january 2015
rising impact of natural catastrophes
Estimated damage ($ billion) caused by reported natural disasters
Number of people reported affected (million)
350
250
150
50
250
150
50
1975 1980 1985 1990 1995 2000 2005 2010
3
3
1
2
Number of disasters reported
500
300
100
1
HurricaneKatrina
KobeEarthquake
WenchuanEarthquake
HonshuTsunami
4
Number of people reported killed
120,000
80,000
40,000
0
4
2
Source: EM-DAT – THE INTERNATIONAL DISASTER DATABASE
anddifferinglevelsofenforcement,whichoften
fall far below the modern design levels set to
meetexpectedfuturedisasters.Thechallenge
is to encourage property owners to invest in
retrofittingtheirbuildingstobringthemupto
alevelwithnewbuildings(seebox:‘Promoting
disasterresilienceintheUnitedStates’).
Somecitiesaregrowingsoquicklythattheir
planners and building codes cannot keep up.
Once the shape of a city has been established,
however haphazardly, it can be difficult to
overturn. Local planners and legislators are
facedwiththedifficultchoiceofeithermoving
inhabitants to safer and better housing, or
formalising the existing developments, even
if they are in areas that are in danger from
disasters.
These tough choices are not confined to
developing economies. The earthquakes in
JapanandNewZealand,aswellasSuperstorm
Sandy, have prompted intense debate in
these countries about whether the worst-hit
areas should be rebuilt, including expensive
mitigationschemestoamelioratetheeffectsof
futuredisasters,oriftheyshouldbeabandoned
asbeingtoovulnerable.
