Wednesday, March 29, 2017

Transportation Risks in Latin America: the Importance of Infrastructure

Cargo capacity and operation techniques have changed dramatically over time. Containers and “intermodalism” now allow cargo to be carried with minimum interruption by ships, trucks and/or trains. To boost efficiency, there has been a race to build larger means of conveyance capable of transporting more containers, thus making better use of transoceanic voyages or long road trips. In fact, container ships have evolved from 1,000-2,500 Twenty Foot Equivalent Units (TEUs) in the 1970s and 1980s to over 18,000 TEUs today.

Though the conveyance in which goods are transported will always be important, it becomes apparent that without proper infrastructure, the risk of loss may be higher than acceptable. Ports need facilities to accommodate large ships, including dredging, pilotage, and improved mooring, refueling and servicing capabilities. The additional cargo these vessels are capable of transporting require adequate discharge machinery, personnel and temporary storage facilities, and better land transportation to other destinations. Special cargo, such as refrigerated food for human consumption transported in reefer containers, needs an uninterrupted source of electric power to protect the cold chain.

No underwriting evaluation is complete without considering the available infrastructure on the transportation route, bearing in mind that unpredictable circumstances can force a ship to make an unplanned stop along the way (the three stools of cargo underwriting are “conveyance/voyage/commodity”). The Latin American region, comprised of over 20 countries in two continents, is vast, and infrastructure situations may differ immensely.

When infrastructure and logistics are inadequate, disaster can rapidly ensue. The grounding of the APL Panama in 2005 while trying to enter the Port of Ensenada in Baja California, Mexico, is a good example. The 874-foot ship was not assisted by tugboats and the port pilot was not on board the vessel as she attempted to enter port. Given the size of today’s ships, pilotage availability and sound, duly enforced service procedures for port maneuvers are increasingly important.

Other infrastructure and logistics problems include cold chain deficiencies caused by insufficiency or lack of power hook-ups for reefer containers while merchandise is waiting to pass customs or while stored in warehouses. Frequent power grid failures are also a very common problem in some countries.

The design and maintenance of roadways for ground transport, availability and reliability of communications and police efficiency against the risk of robbery should also be evaluated as prime infrastructure offerings, among other factors.  

Clearly, investments in infrastructure in Latin America as a whole are not at desirable levels today, which negatively affects insurable risks. The challenge is local circumstances combined with social and political objectives as well as the economy of that particular country. As a result, risk  can and will vary significantly depending on the route chosen, the countries and specific ports visited, and distribution centers or warehouses involved. Underwriters are advised to gather as much information as possible relating to available infrastructure in an effort to achieve acceptable results.

Posted by Daniel Baron* and Jorge Pecci

*Not licensed to practice law in Florida.  

Jorge Pecci is President and CEO of SafeWaters Underwriting Managers
SafeWaters Underwriting Managers is a series of RSG Underwriting Managers, LLC. RSG Underwriting Managers, LLC is a Delaware series limited liability company and a subsidiary of Ryan Specialty Group, LLC, specializing in underwriting management and other services for insurance products distributed through agents and brokers. In California: RSG Insurance Services, LLC License # 0E50879 ©2017 Ryan Specialty Group, LLC

Thursday, March 23, 2017

The “El Niño” Effect In Peru, Can Anything Be Done?

After a period of severe drought, per recent news reports the “El Niño” effect is bringing heavy rainfall on Peru´s Northern coast causing overflowing of rivers, mudslides and flooding. This is the worst such disaster since 1997 and 1998, when a similar “El Niño” event in Peru affected over 100,000 people, killing several hundred and causing property losses of over USD 7.5 billion. This time, over 800 cities have been declared in state of emergency, the death toll is nearing 100, and property damage is also on the rise.

The National Oceanic & Atmospheric Administration (NOAA) website explains that “El Niño” and “La Niña” are opposite phases of what is known as the El Niño-Southern Oscillation (ENSO) cycle. The ENSO cycle is a term that describes the fluctuations in temperature between the ocean and atmosphere in the east-central Equatorial Pacific. As part of the “El Niño” effect warm waters appear on the ocean surface near or during December thus causing rainfall to increase.

Although public awareness of this climatic phenomenon may be recent, the “El Niño” effect is hardly new. It is said that fishermen off the coast of South America had identified it as early as the 1600s. The NOAA has been able to establish past ENSO events as far back as 1897 based on a Multivariate ENSO Index.

As part of his emergency response, Peruvian President Pedro Kuczynski has prioritized re-opening the Panamericana Norte roadway in the Viru área, for which a provisional bridge needs to be constructed. This would allow a connection with the capital city of Lima. The Peruvian President also underlines the importance of repairing the Chavimochic canal to secure potable water for the population.

A few days ago the Peruvian banking, insurance and pension authority “Superintendente de Banca, Seguros y AFP” (SBS) issued Rogatory 10250-2017 requesting that Banks re-schedule financial obligations pertaining to clients in emergency zones who have trouble honoring their debts. In reply, the members of Association of Banks (“Asociación de Bancos” or ASBANC) committed to re-scheduling financial obligations of affected clients in certain areas of  Lima, the Province of Callao, Piura, Lambayeque, La Libertad, Tumbes and Ancash. Clearly, this is not enough.

Fortunately, Peruvian authorities are also seeking to find better, long-term strategies for coping with climate-related disasters. In 2011, under the auspices of the German Society for International Cooperation (GIZ gMBh), the Peruvian insurance regulatory authority and the Peruvian Ministries of Economy and Finance, Environment, and Agriculture organized a workshop to discuss “Insurance Solutions for Adaptation to Climate Change for the Public, Productive and Financial Sectors.”

As part of the discussions, Index-based insurance was proposed as a way of curbing the negative economic effects of extreme “El Nino” conditions in Peru such as has been used for insuring cattle in Mongolia, flood and drought in Vietnam, or earthquakes in Indonesia.

Unlike traditional insurance, which pays out only when damage has occurred, this type of protection uses an index specified in the policy -such as the amount of rainfall– as a payment trigger. Payment would be made irrespective of the actual damage, with which costly damage measurements can be avoided. The result is affordable coverage in reach of the poorer sections of the population. This is not a comprehensive solution to all, and there are even legal issues to address, but it is an interesting starting point.

The 2016 World Economic Forum Global Risks Report situates “extreme weather events” in second place amongst other relevant world risks in terms of likelihood of occurring, and with high impact. Such as has been the case for hundreds of years, the people of Peru as well as those of other Latin American nations will probably continue to be affected by climate disasters. Initiatives such as that of the Peruvian authorities should be applauded for helping to create the necessary discussions that will surely lead to finding better ways of coping with the problem.

Posted by Daniel Baron*

*Not licensed to practice law in Florida.

Wednesday, March 15, 2017

Increase in Energy Industry Losses in Latin America

Para ver esta página en Español, por favor haga clic aquí.

Recent studies in the insurance industry have shown that the fall in oil prices has historically led to an increase in claims in refineries and petrochemical plants.
The 2016 Marsh report, in relation to the 100 claims in the hydrocarbon industry of highest cost (“The 100 Largest Losses, 1974-2015”), contains a graph that identifies such claims. Generally, it can be concluded that the risk increases when attempting to produce savings and the following occurs: 
  • The amount of personnel is reduced, as is investment in safety training programs;
  • Projects for expansion and rehabilitation of plants with long operational life are reduced or paralyzed;
  • The number of interested professionals in the industry is reduced, which can create a generational gap causing knowledge transfer programs to suffer; and
  • Risks of disturbances exist related to budget tensions due to the low prices of petroleum, especially in countries such as Libya, Iraq, Nigeria, Brazil and Venezuela (according to the Oil & Gas Journal).  
We have seen recent fires at plants in the United States (Pasadena Refinery, LyondellBasel Plant, Shell Refinery Motiva), in Mexico (PEMEX Veracruz) and in other countries in Latin America. It may be too early to conclude that these are directly related to the low price level of the barrel of oil, a phenomenon that has affected the industry since mid-2015, but the odds are high.
Underwriters need to be prepared to assist insureds in the energy industry in the most efficient manner, since large claims can greatly affect the stability of these clients, also impacting financial products and associated schemes such as property, pensions and many others. As Marsh concludes in the abovementioned report, "The next challenge is for the commercial insurance market to respond to the changing demand of energy companies and to offer lower retentions, higher limits and/or greater coverage, in a way that recognizes the continuing cost pressures that the energy industry must face
Latin American countries such as Ecuador and Peru have continued their investments in projects and expansions of different plants. But at the same time there are difficulties in countries like Venezuela and Mexico due to government control of state-owned oil companies. At least in the case of Mexico there is an opening to a sound amount of foreign investment. 
There is no greater risk than a country that is on the brink of bankruptcy and does not want to accept foreign aid or investment, especially when its plants and deposits are of high international interest, and when the economic conditions as discussed above stimulate a trend towards large claims. 
The key to managing energy losses in Latin America is to first know the industry thoroughly, as there are not necessarily as many experts available or capable companies as in more developed countries. Likewise, the culture of each country must be known in order to understand how the insured should be treated, especially in understanding what internal pressures they may have and how to achieve the greatest collaboration of all parties. This categorically includes the availability of documents when assessing the root cause or extent of damages and repairs relevant to a major incident -which tends to generate a significant delay in the handling of the incident and a potential increase in loss of profit claims. 
Finally, the local legal environment can play a crucial part in many key aspects, such as the interpretation of policy wording and its applicability in the jurisdiction, or maybe bring certain requirements related to the adjustment process, or special rules relating to how any disputes between the parties be handled. Insurers should be aware that energy claims are very likely to attract the involvement of local authorities, thus putting extra pressure on the insured relating to an array of legal and practical issues including pollution, failure to meet established domestic production quotas, and inquiries relating to safe working conditions, for example.   
Good communication and correct management of expectations continue to be indispensable tools to adequately handle this type of claims in Latin America.
Posted by Daniel Baron* and Daniel A. Correa, CEng
*Not licensed to practice law in Florida.
Daniel Correa is a Senior Forensic Engineer at Envista Forensics, formerly known as PT&C|LWG Forensic Consulting

Wednesday, March 1, 2017

Fighting Insurance Fraud in Latin America

Though they are a minority, fraudulent claims can amount to very significant sums of money, causing insurers to re-think their business practices and take action to mitigate the negative impact resulting from fraud. 

Insurance fraud is as old as commercial insurance itself. But awareness of its implications for the insurance industry in Latin America may be as recent as the late 1990’s.

It was at that time that insurers across the region started to form special departments to deal with the problem and modify their claim handling practices to include new tools. Anti-fraud checklists were developed, claim systems were modified to perform cross-checks and flag suspicious cases, investigators and specialized counsel were hired, and employees were given specific training. But most importantly, insurers began developing means by which they were able to share valuable information leading to detecting and fighting fraud.

All across the Latin American region, associations formed by insurers or independent organizations intending to fight fraud began to make their way into the market. In Argentina, an antifraud coalition of 50 top insurers representing 70% of the market was formed through the initiative of an organization called CESVI (“Centro de Experimentación y Seguridad Vial” – Center of Experimentation and Road Safety). CESVI has provided a platform for interaction among local insurers, with tools to facilitate constant exchange of information on insurance policies in force, losses and third party claims.

Similarly, organizations such as Prose-Chile in Chile, INIF in Colombia, AUDEA in Uruguay and AMIS in Mexico have spearheaded anti-fraud initiatives relating to sharing or pooling information. Some of these organizations sponsor annual events to further discuss and improve fraud detection.

In view of the fact that the cost of fraudulent claims is ultimately paid by the general public via higher insurance premiums, authorities are intervening to require action to fight fraud. Just as in the United States anti-fraud plans are mandatory for insurers in 22 states, in 2014 the Argentine insurance regulatory authority ordered insurers to present “Rules on Policy, Procedures and Internal Controls to Fight Fraud” for approval.

The 10-page resolution dictated by the local Insurance Superintendent constitutes a first step towards making the fight against fraud mandatory in Argentina. This might set a trend for other Latin American countries to follow in the future.

Fraud is a challenge for insurers and reinsurers in the region, just as is the case in the rest of the world. Although arguably Latin America may have gotten off to a slow start, there is growing awareness and much is being done by both the industry and authorities to fight the war against fraud to the benefit of insurers, reinsurers and the general public.   

Posted by Daniel Baron* and Marcelo Volpe

*Not licensed to practice law in Florida.

Marcelo Volpe is head of the Special Investigations Unit at La Meridional Cia. Argentina de Seguros S.A. and has responsibilities relating to fighting fraud in the Latin American region.