Kidnaps on the rise Ransom demands reflect a rapid spread of unrest RISK MANAGEMENT Page 4 Property & Security

FINANCIAL TIMES SPECIAL REPORT | Wednesday November 9 2011 www.ft.com/risk­management­property­security­2011 | twitter.com/ftreports The key is to ensure you have back­

To avoid being snared by the unexpected, companies must be ruthless in rooting out weak links, reports Paul J Davies

hen millions of Black- Berry users found them- selves without emails or messages last month it Wwas an annoyance. When the problem grew worse over several days and the explanation turned out to be the failure of one key switch in one UK server farm, inves- tors and users alike could be forgiven their incredulity. If there is one lesson that corporate boardrooms should take out of 2011, it is to look ever more closely across the business for such single points of failure. It could be an over-reliance on a single piece of technology, or a criti- cal component or raw material that a company sources from a single sup- plier. It could be having a key indus- trial site in an area prone to floods or earthquakes. All these have been highlighted by events this year as weaknesses that can have disastrous effects on a com- pany’s ability to conduct its business. The answer to such concerns is sim- Costs below the surface: property damage in events such as the Japan earthquake is relatively simple to assess. The cost in business interruption is more complex AFP ple to put into words – if not always simple to put into action. It is diver- been exposed this year are those in America told dealerships they could 50 per cent, the risks are still under- and 1965 and there have been five an interview published on the sity and back-up. complex worldwide supply chains. have sport utility vehicles in any priced.” since the end of 2004. There were none insurer’s website. The chance of hav- For technology companies such as The global insurance industry has colour so long as it was not black, There have already been clusters of in between or for 25 years before 1950. ing one or more magnitude 6.7 or Research In Motion, maker of the suffered record first-half claims this because of difficulties in sourcing a very large shocks on the so-called Mr Muir-Wood concludes that there larger earthquakes in the San Fran- BlackBerry, or others heavily depend- year from a wave of natural disasters, key paint ingredient from Japan. Ring of Fire around the Pacific Ocean could be greater risk of large tremors cisco region over that period is ent on computing or data sites, it is including earthquakes in New Zea- Last month, Mazda, Toyota and in recent years, including in Indone- in the north-west of the US, or north- greater than 63 per cent, he said. all about building resilience and land and Japan, and flooding in Aus- joined the list of companies sia, Japan, New Zealand, Chile and ern Chile. Such a quake would be similar to redundancy into systems so that big tralia and Thailand. suspending production at factories in Haiti. Allianz, the German insurer, went the one in 1906, whose recovery costs fluctuations in demand for resources, Property damage is a relatively Thailand because of the flooding. And Further, as Robert Muir-Wood of further this year. It said it sees a very led to a draining of gold out of New or problems with one area, can be simple element of these claims to Honda Motor had to halt work at its Risk Management Solutions, the high probability of a major earth- York and other financial centres. covered by quickly substituting one assess. Far more complex are those assembly plants in Malaysia because catastrophe modelling company, notes quake in California over the next 30 In a prefiguring of recent events part of a system for the one in trou- for business interruption, mainly of a lack of parts from Thailand. in a column for this report on page 3, years. “The likelihood that there will that does not bode well for already ble. because of breaks in companies’ sup- But as well as cars, electronic goods there is some evidence that the big- be a major earthquake along the San hard-hit markets, the San Francisco Stefano Tranquillo, vice-president ply chains. produced all around the world rely gest of all earthquakes cluster in time. Andreas Fault in California is very earthquake helped bring about a for northern at FM Global, the In the weeks following the Japan heavily on specific parts of Asia – There were seven quakes with a mag- high,” Markus Treml, a seismologist financial liquidity crisis to compare insurance and risk management com- earthquake, Ford Motor in North even very limited areas of Japan or nitude of 8.5 or higher between 1950 at Allianz’s reinsurance unit, said in with that seen in 2008. pany, says it is often about asking South Korea – for certain key compo- some very basic questions that iden- nents. This is a problem not only this tify the weak links. year, but for the future. “After that, it’s about making sure Inside this issue What is more, according to natural you have back-up systems in place Management hazard experts, as companies increas- and working,” he says. “With compa- The culture of a ingly look to invest in Asia and set up nies that are very computer- company is more industrial sites in or near the dependent we do regular checks to crucial in main growth markets of the world, ensure the back-up works.” preventing losses they are often driven towards build- One of FM Global’s clients, Com- Page 2 ing in some of the areas most exposed putacenter, which provides and man- to flooding or seismic activity, usually ages information technology infra- Data security because of a lack of choice. structure to other companies, reckons Any company is In the near term, the biggest con- it has managed to save more than at risk of attack by people seeking to cern about this is the chance of fur- £1m in insurance premiums over the steal the personal data of its ther tremors hitting the country. past five years by following the risk customers Page 2 Earthquake prediction is a notori- management group’s recommendation ously uncertain science, but seismolo- to invest less than half that amount Personal view Pascal, the gists are broadly agreed that one in updating its fire extinguishing 17th century philosopher, may have result of the Tohoku quake in March sprinkler systems. had the best view of risk Page 2 has been an increase in the stress In other areas, however, diversity Property levels on faults both to the north and and back-up are nowhere near so easy to the south of Tokyo. Companies cutting to achieve. costs could be Since March, reinsurance rates for A report from the UK’s Royal Acad- offering criminals earthquake cover in Japan have emy of Engineering last spring high- a bonanza of shot up by 50 per cent or more. How- lighted the dangerous over-reliance on opportunities ever, for some, even this is not the US-operated Global Positioning Page 3 enough to compensate for the height- System (GPS), the ageing satellite net- ened risks. work that has a key function in many Guest column Serge Chiaramonte, head of insur- aspects of ordinary life – from the Progress in predicting earthquakes ance-linked strategies distribution at dispensable consumer satnav in cars has wider implications Page 3 , the financial services to the indispensable dispatch systems company, says his business will not of emergency services. Key man insurance increase exposure to Japanese earth- There are other systems being built, Simple measures can cover the loss quake risk at the moment, because of such as the European Galileo net- of mission­critical staff Page 4 the high probability of further after- work, but this will not begin to oper- shocks. ate until probably 2014 and will not be Directors’ cover Company officers “This and the increase in stresses completed for a further five years. are increasingly being targeted by on the Kanto fragment near Tokyo But the biggest and most important regulators and others Page 4 means that, even though reinsurance collection of weak points that have premiums have gone up by about

Source of next attacks defies easy prediction

effective work by police and Terrorism other government agencies lowers the chance of attack Regime change has or violence. Examples of many secondary this approach include Saudi Arabia and Israel. effects, writes In other high-risk areas, Libya protest: security agencies have been kept busy EPA Anousha Sakoui however, counter-terrorism capability is weak. of transnational terrorism widespread political up- According to risk consul- from the al-Qaeda terrorist heaval, analysts say. There The this year tancy Aegis Advisory and organisation is generally is also a risk, however, that presented businesses and insurance broker Integro, expected to fall. tensions could escalate if markets around the the Arab Spring has Its approach of using there are long and uncer- world with a number of diverted the attention of extreme violence has been tain periods of transition, challenges. security agencies towards undermined by the success significantly raising the Not only were oil supplies managing civil unrest, of mass and largely peace- threat of attacks over the disrupted, causing shocks weakening their ability to ful protests in forcing medium term, they add. to markets and associated deal with terrorism and regime change. However, Jake Stratton, a director businesses, but civil unrest some other security issues. analysts also say that the of Control Risks, the con- in some countries caused Libya and Egypt are partic- transnational threat to sultancy, says an interest- disruptions for a number of ular examples of this. Israel is unlikely to subside. ing dynamic over the next international companies The specialists say that But intra-country security year will be the effect of the operating in the region. while terror and security threats have increased – Arab Spring on terrorism in Terrorism and security threats have remained con- along religious lines in north and west Africa. threat levels vary widely stant throughout the Egypt, sectarian divides in “Companies need to adopt throughout the Middle East region, their composition Bahrain, and tribal group- sensible and proportionate and north Africa. has been changing this ings in Yemen. measures to counter the In some of the countries year. This could be a short- where the risk is high, For example, the risk term effect triggered by Continued on Page 3 2 ★ WEDNESDAY NOVEMBER 9 2011 Risk Management: Property & Security The limits of insurance in preventing large losses

risks ought to be the most important Management focus of loss-prevention activities for large companies and their risk manag- Paul J Davies explains ers. However, it has been noted many why the culture of a times by academics and business com- mentators that there is a trade-off company is important between the risk of accidents and financial returns that tends to under- weight large and rare disasters. he $40bn-plus bill for BP’s Experts say it is, in fact, the culture Gulf of Mexico spill last year of an organisation around safety and could pale in comparison with a company’s ability to know the risks the costs of any similar event it is taking on that are crucial in loss Toff the coasts of Europe, if moves by prevention. Meanwhile, much of the Brussels to extend an environment most important – and economically directive succeed. valuable – work in risk mitigation can The European Commission revealed come from insights into smaller and at the end of October that it wants to more prosaic details of industrial extend the Environmental Liability processes. Directive (ELD) from covering land Stefano Tranquillo, operations man- and shore to all marine waters under ager for northern Europe at FM Glo- the jurisdiction of bal, a specialist risk management and members. The ELD formalises a “pol- insurance company, gives an example luter pays” regime, but with the of the damage caused by earthquakes. added complication of a requirement “People think about collapsing that those guilty of environmental buildings and cracks, but most dam- damage must not only clean up the age is usually caused by fires started mess, but also restore wildlife and its by gas pipe ruptures,” he says. “We’ve habitat to its prior state. been installing devices in our clients’ This could leave companies, espe- gas pipes that can sense a quake and cially those in oil and gas exploration automatically shut off the supply.” and production, with a very long-term Much of FM Global’s focus is on the involvement in nurturing a large area traditional, costly dangers of explo- of sea back to health – a project that sions, fire and flooding, and on both is, in effect, impossible to cost. preventing their occurrence and mini- The CEA, a European trade body for mising the damage they cause when insurers, complains that such a move they do occur. by the Commission would only hinder But the other area where clients are the already slow development of poli- most in need of advice at the moment cies to cover ELD-related claims, is supply chains – particularly follow- where there is little data available to ing the disruptions caused by this assess risks. year’s natural disasters, such as the Michaela Koller, director-general of earthquake in Japan and, more the CEA, says: “Even fewer data and recently, flooding in Thailand. Ripple effect: flooding in Thailand has highlighted the extensive effects of natural disasters on supply chains EPA insurance capacity are available for The key is to identify “pinch offshore oil and gas risks, where inci- points”, the parts of a supply chain dents are infrequent but can be signif- where an unsubstitutable component because supplies are sourced by a pur- important, as economies in the west limit their exposure,” Mr Harvie says. icant. Including these risks in the or commodity comes into the process ‘We look at key revenue chasing department that is not inte- have stagnated and companies come “Clearly if companies believe that ELD could slow down the develop- and a company has only one supplier. grated with other parts of the com- under pressure to cut costs. they have sufficiently strong risk ment of the market for cover.” “We look at key revenue drivers drivers and often find pany. The flipside of this, according to management practices and are hold- The CEA added that there were not and often find that there are one or there are one or two “We try to ensure that companies John Harvie of consultants Protiviti, ing sufficient cash reserves to miti- even enough data on the costs of pre- two suppliers that are key and there break down those silos to ensure that is that insurers should be increasingly gate risk, this is likely to weaken venting many kinds of environmental is no alternative, so we then work to suppliers that are key . . . more people are aware of the risks concerned about whether clients who their appetite for insurance products.” accident, let alone remedial clean-up protect those suppliers’ sites,” Mr and pinch points.” drift away will ever return. Commercial insurers need to costs, to price insurance products Tranquillo says. so we work to protect This kind of more immediate and “Insurance products are expensive respond to these threats, he says, by effectively. He adds, however, that companies those suppliers’ sites’ “ground-up” risk assessment and and are inevitably an imperfect hedge, improving the service they deliver Such extreme and difficult-to-price are often unaware of these risks, mitigation has become ever more as insurers, by necessity, have to and by cutting the associated costs. Breaches can Pascal may have had result in the correct approach need to be very sure that an entirely different Personal View they understand what risks matter, especially when the PAUL J DAVIES they face and that they are patterns of occurrence of huge costs capable of managing them some natural hazards It is fitting that Blaise well. appear to be undergoing Pascal, the 17th century Some of this is not big changes. end approach allows you to French mathematician and rocket science. With the It seems a cruel turn of Data security understand where the weak philosopher, is seen as a right expertise in fate that earthquakes, links are, and apply the father of risk assessment. engineering, running floods and storms all Andrea Felsted appropriate solutions.” His theological wager is facilities or computing – appear to be becoming looks at the risks of Jeremy Smith, practice perhaps the ultimate and of course the right more prevalent just when leader in Willis’s insurance policy. culture – companies ought the Great Moderation in information theft cyber-risk and data security The wager says it is to be able to minimise the economic conditions has team, says once the sensi- rational to believe in God, disruption and financial also come to an end. This year, Marks and Spen- tive data have been identi- because you lose nothing if cost of fires, floods, spills, Unfortunately, certainty cer had to contact its cus- fied, companies can look at He does not exist, but gain power outages and all over what governs this tomers, warning them their ways of protecting against all if He does. Without manner of other everyday rash of natural disasters is email addresses had been unauthorised disclosure. belief, conversely, you will dramas. as unfathomable as the stolen, after Epsilon, a US- That may involve IT or it either lose nothing or lose But when efficiency in fate of the – if not based email marketing sup- may be just more basic pre- everything. costs is all-important, it is more so. plier, was attacked by com- cautions. The insurance industry more tricky for companies Insurers’ big advantage puter hackers. One way to minimise the would love nothing more to ensure that they have is that they should have The incident laid bare risks of a data breach is to than for everyone to follow enough redundancy, or the plenty of and they risks to businesses ranging limit the number of people Human targets: any company is at risk of an attempt to steal customers’ data Bloomberg the logic of Pascal’s wager back-up facilities, available should put it behind a from retailers to banks who have access. and buy cover for every to substitute for the diverse (and hopefully when they hold customer “You need to establish also protect themselves have entered the marker, costs of protecting the uncertain event. activity of interrupted key unconnected) set of risks data. According to Paul barriers, to ensure that against the costs related to and they have become bet- company’s reputation after However, companies operations. that are extremely unlikely Bantick, a senior under- information is limited in a data breach through spe- ter at understanding cyber- the incident. hunting quick cost-savings Both mitigation and to be realised all at the writer in insurer Beazley’s terms of how it is communi- cialist insurance policies. risks. Mr Bantick says compa- may scrimp on insurance back-up strategies will same time. technology, media and busi- cated for its intended pur- Bob Parisi, who leads on Beazley’s Mr Bantick says nies are “buying this insur- costs by increasing excess This gives them a basis ness services team, retailers pose and what locations are cyber-risks in Marsh’s that the cover “is cheaper ance policy to bring in peo- levels, reducing coverage Is Blaise for pricing risks that does are among the most using it. financial and professional than traditional liability ple who are managing amounts, or even opting to Pascal’s not require those risks to exposed to this type of risk. “Really, it is just making practice, says estimates put lines of business”. [security breaches] every self-insure. theological be fully comprehended and “If you think about it,” he sure that you have a good the size of the market at He notes that retailers, day. They just want this Large companies that wager the allows them a greater says, “people are going grip on exactly who is han- between $400m and $800m banks and healthcare thing to go away”. face rare and extreme risks ultimate margin for randomness through their stores swip- dling the data and why,” he of annual gross written pre- organisations are among But companies face fresh but also generate vast insurance? than companies themselves ing their credit cards all says. mium. the biggest buyers of this risks as a result of new quantities of cash, such as could ever afford. day long.” Data should be encrypted While the market has tra- type of cover. “Retailers are technologies, from staff oil and gas or other The highly complex But it is not just retailers he says, while sending them ditionally been concen- the number-one buyer of increasingly using tablet resources groups, have require investment and so global supply and who are potential targets. to third parties should be trated on the US, it is this type of insurance,” he computers to storing data long done this – though are no short-term fix. distribution chains that Companies are storing ever limited whenever possible, says. in the “cloud”. the danger of this was Investment also needs a exist today mean that even greater amounts of cus- Mr Smith adds. But the increase in cover “A lot of companies are shown in the bill for BP’s thorough cost-benefit the smallest companies in tomer data, while coming If something does go ‘A criminal would has been accompanied by lured by the low cost of oil spill in the Gulf of analysis and this is where the quietest locations can under constant pressure to wrong, it is essential to map out the an upswing in claims. cloud providers,” says Mexico last year. the knowledge and skills of be exposed to some of the run faster, lighter IT sys- have contingency plans in Whereas the US has for Marsh’s Ms Avery. “[But] In recent years, an insurer are much less most extreme risks tems. Guarding against a place. information value some time generated signifi- you have to look at all of according to some easily replaced. somewhere in their data security breach is “You should have a data chain and look for cant claims, incidents are your information. Is it co- consultants, many A full assessment of the organisation. more important than ever. breach response plan,” he now occurring across the located? Where does it companies ended up benefits side requires a full The best thing for Insurers and brokers says “so that when there is the weakest link’ world. reside? Is the server in your holding larger amounts of understanding of the risks companies in an identify several steps to a data breach, the right peo- The US already has strict country?” cash than normal because – which means both what environment of such minimise this risk. ple know who’s meant to be data protection legislation, Ben Beeson, a partner at of both caution over the threats are and a uncertainty could be to According to Karen doing what.” developing in Asia and and more comprehensive Lockton, an insurance bro- investment and worries sophisticated analysis of mimic the stress testing Avery, practice leader for It is also good practice to Europe, he says. European rules have been ker, says companies are about credit. These the probabilities that they philosophies of their resiliency services at Marsh have a dedicated privacy Willis’s Mr Smith says the proposed, says Mr Smith. working through whether companies may be willing will materialise. financial cousins – that is Risk Consulting, it is officer, or information secu- cost of cover depends on the “Data breach is a truly to outsource data to cloud to see cash as their best – A high-quality set of data to work out what threats essential for a company to rity officer. amount of personal data a global phenomenon,” he providers, as they could and cheapest – insurance will reduce the uncertainty would break them and map out what information “Having a good plan in company is holding, the says. remain liable for the risk of policy. surrounding those work back defensively it has, and its economic place can seriously reduce nature of that information, Many claims are for the a data breach. But not buying insurance probabilities. from there. value, so it can make the the costs resulting from the and the quality of security – cost of dealing with a data “Businesses are grappling is very close to the second As regards threats that After all, there is a right decisions about pro- breach as, in these kinds of for example whether the security breach, for exam- with that conundrum. My leg of Pascal’s Wager – it derive directly from a complex cost involved with tecting it. situations, the longer things company complies with ISO ple containing the breach feeling is it will become may not cost you anything company’s own activity, it taking on Pascal’s “What a criminal would run without being dealt 27002, the data security and notifying customers. more prevalent. Businesses today, but if a bad thing may think it has a deeper apparently simple wager. do is map out the - with in the proper fashion, standard. Affected companies may will use the cloud,” he says. happens, you will experience and Once you choose to tion value chain and look the more costly it can get,” Mr Parisi says the cost offer customers credit But he adds: “There is definitely be out of pocket understanding than an believe, the question for the weakest link,” she he adds. has also become more monitoring, while there nervousness about how this – perhaps disastrously so. insurer would anyway. becomes how moral a life says. “Taking this end-to- Banks and retailers can affordable, as more insurers may be the public relations is being addressed.” Those taking this route But external threats are do you need to lead? FINANCIAL TIMES WEDNESDAY NOVEMBER 9 2011 ★ 3 Risk Management: Property & Security Progress in understanding frequency of earthquakes

shocks relative to small 725km section of the North efficiently destructive Gujarat earthquake in 2001, including three shocks bigger However, since Boxing Day Guest Column shocks). So, a subsequent Anatolian Fault plate boundary earthquake, with shallow and found shopkeepers than any of those around 2004, there have been five ROBERT MUIR­WOOD earthquake can be even larger unzipped from east to west. depth, large displacement haggling in the rubble, goods Christchurch. One can barely magnitude 8.5 earthquakes or than the original “mainshock”, Over the past 14 months, relative to size, and a fault in the street. imagine the social, economic bigger and two at or above in which case the aftershock such a “train of strain” has movement pointing directly at It is different if the shocks and political panic if there magnitude 9. If you get the In medieval , after a will have to be relabelled the been moving through South Christchurch’s Central keep coming. Should one were a repeat today. impression that great strong earthquake, residents “new mainshock” while the Island, New Zealand. It began Business District. rebuild or wait? Should a The impact of one quake on earthquakes have become more would camp outside for a week original mainshock gets with a magnitude 7.1 Damage was catastrophic; the family or business stay, in the its successors follows physical common, that is correct – to allow the “chatter” of relegated to a “foreshock”. earthquake under the village of total cost is in excess of $15bn, hope it is all over? Or get out? rules. Subsequent earthquakes although this is only for the aftershocks to settle down, Given you never know if the Darfield, 40km west of New After the September 2010 tend to be concentrated on largest earthquakes in Japan recognising an imminent but original event was the Zealand"s second city Robert earthquake in Christchurch, faults where stresses are raised and Chile. There is an reducing chance of another big mainshock or simply a Christchurch on September 4, Muir­Wood: insurers were busy settling by the original movement, underlying episodic global earthquake. foreshock, sense dictates that 2010. The new fault rupture ‘Sense dictates claims and builders fixing while there will also be regions physical process triggering The logic of this behaviour you camp outside your house pointed like a rifle straight at that you camp properties, when the much without earthquakes where these episodes, but the precise was confirmed in 1894, when for that week. the city and strong aftershocks outside your more destructive earthquake stresses are reduced. mechanism remains unknown. the first academic seismologist, Some earthquakes start a began a westerly migration, house for arrived five months later. However, something more However, if activity of these Japan’s Fusakichi Omori, chain reaction of mainshocks. leading to a swarm of that week’ There was another destructive mysterious has emerged about largest megathrust earthquakes showed that aftershock activity After a catastrophic experience earthquakes directly under the aftershock in June this year. the global connections of the remains elevated for the next after one day will be 10 times in the first world war, Turkey city on Boxing Day 2010. This exacerbated by widespread The activity will eventually largest of all “megathrust” few years, this has implications greater than after 10 days, and chose to remain neutral in the was followed by a magnitude “liquefaction”, where soil loses stop once the “train of strain” earthquakes. Between 1950 and for risk in areas such as the 100 times greater than after 100 second world war and instead 6.3 shock on February 22, strength and behaves like has moved east, but no one can 1965, there were seven Pacific Northwest US, or days. The aftershock “half-life” was assailed by earthquakes. beneath Lyttelton on the south- liquid. tell whether the outbreak is earthquakes worldwide greater northern Chile, where such turns out to be a few days. There were seven major east edge of Christchurch. Communities can recover finished, or more is to come. than magnitude 8.5, three of monster earthquakes have While aftershock activity (greater than Moment If Guido Fawkes was tasked quickly from a single Exactly 200 years ago, an which were bigger than occurred in the past. reduces exponentially, a “power magnitude 6.5) earthquakes, with creating maximum urban mainshock earthquake. outbreak of earthquakes magnitude 9. There were no law” distribution of aftershock killing approximately 44,000, in damage with a limited quantity visited the ruined city of Bhuj assailed the almost uninhabited such earthquakes in the 25 Robert Muir-Wood is chief sizes remains (that is, a regular the war years from September of seismic TNT, he would be within a week of the lower Mississippi Valley in the years before 1950, nor for research officer at Risk decrease in the number of large 1939 to October 1944, as a hard pressed to devise a more devastating magnitude 7.6 US Midwest for three months, almost 40 years after 1965. Management Solutions How to keep the criminals at bay

factories, companies are Property looking to trim operating costs. However, the decline Ed Hammond in investment can, offer a looks at ways to bonanza to criminals. Adam Ashmead-Bartlett, protect businesses a UK-based security con- sultant with Isis Risk, explains: “If you have never n a warm spring suffered a serious attack evening three against your business, then years ago, thieves your brain does not accept drove an eight it as a normal or realistic Otonne digger into the side of scenario and so you think Kieron Franklin’s luxury the risk is very low.” goods warehouse in the He adds: “The big prob- docklands of east London. lem in the recession is that, The machine tore easily even as criminality is through the corrugated increasing, spending on metal wall, giving the security comes down, as thieves access to the valua- companies look to save ble bounty inside. They left money and take out costs with more than £3m worth where they can.” of high-end cosmetics. With his team – largely “It was an eye-opener for made up of ex-special forces most expensive and sophis- also rarely adorned with Security equipment man- individuals, says that a yourself in the shoes of the On watch: us,” says Mr Franklin. “We soldiers – Mr Ashmead- ticated network of gadgets company logos. ufacturers are involved in a property has to be like an criminals. Who are they? many layers of were insured, but we have Bartlett advises large corpo- and a simple human failing One such site is the lucrative arms race to sty- onion, with layer upon What are they targeting? security protect had to change the whole rations around the world or carelessness can leave Interxion data centre on the mie criminals in their layer of security, each one Are they stealing to order, the information in approach to security.” about how to counter the the door wide open for outskirts of – the efforts against big corpora- more impenetrable than the or is it random? this data centre As well as installing anti- risk of theft, terrorism or criminals. largest data centre in tions. last. “Then you take what is in ram bollards, which can attacks against their staff. “We encourage staff to Europe. One such device, the “It doesn’t matter where their mind and build a withstand the impact of a look out for anything out of The complex is buried at Smoke Cloak, was origi- you are in the world, the series of psychological bar- truck travelling at more the ordinary and install the the back of an unremarka- nally designed to protect principle is the same.” Mr riers between them – and than 30mph, a swale – a ‘It was an simple notion that ‘absence ble industrial estate run- high-value storage facilities, Blackman says. “You put the thing they want.” shallow, dry moat – was eye­opener for us. of the normal means pres- ning along one of the main such as gold bullion vaults, also dug out to stop vehi- ence of the abnormal’,” Mr arterial roads coming into but has been adapted for cles approaching the build- We were insured Ashmead-Bartlett explains. Germany’s financial capital. use across a wide range of ing at speed. The walls of but had to change One issue for the kind of Inside the hangars, how- offices and factories. the warehouse were also businesses that have large ever, highly sensitive infor- Described by its manufac- rebuilt to be thicker and the whole approach physical premises but do mation about billions of turer as a leader in “fog contain a high-tensile wire not necessarily have a large ’ worth of financial solutions”, each unit costs a mesh that cannot be cut to security’ staff presence, such as data transactions passes through little over £2,000 to install with power tools. storage companies, is how the network every second. and emits clouds of white Today, however, as the As well as helping to keep security tight Security on the site is smoke when triggered. economic headwinds of the businesses and rich individ- around the clock. highly visible. The data cen- A strobe light is then set downturn force companies uals devise physical secu- In a bid to deter random tre is ringed by a 20ft high off, battering the criminals’ on to an exhausting tread- rity systems, Mr Ashmead- attacks, data centres are steel mesh fence, while sensory perceptions and mill of cost-cuts, security is Bartlett trains employees often built in areas where coils of razor wire sprawl leaving them choked, con- beginning to suffer. about what a threat could there are no other compa- across the rooftops. fused and disinclined to Whether they are invest- look like. nies with valuable stock in But, in spite of these obvi- carry on. ment banks, the purpose- “The weakest part of any storage. The hangar-like ous deterrents, the real bat- Simon Blackman, a secu- built office complexes that security system is always warehouses containing tle to stop criminals gaining rity consultant who works punctuate suburbs, or the human element,” he computer towers and miles access is being waged inside throughout the world advis- industrial warehouses and says. “You can have the of electrical cables are are buildings. ing businesses and wealthy

Contributors Paul J Davies Source of next attack defies prediction Insurance Correspondent Continued from Page 1 cal violence risks by certain also resulted in ever markets will see modest Andrea Felsted insurers – notably those at more complex supply-chain increases in rates. Overall Senior Retail threat from terrorists wher- Lloyd’s of London – as war structures and interrup- capacity is not likely to be Correspondent ever they operate.” he says. risks. tions to supplies caused by significantly affected, how- Ed Hammond “This will typically com- “As these types of risks political unrest [that] can ever, according to market Property Correspondent prise a combination of are written on a country- have a serious effect on consensus. accurate analysis and intel- wide basis, it effectively revenues.” “Some players may Anousha Sakoui ligence on local threats, means that insurers will be revisit their products and FT Correspondent and physical countermeas- less able to provide cover wordings,” says Mr Taylor. ures around their facili- for certain companies with “Insureds would be best Alistair Gray ties.” operations in affected advised to review their risk FT Correspondent Insurance markets are regions.” exposures carefully, and to Rohit Jaggi reacting to the shifts in the It is not just in the Middle check that they are ade- Commissioning Editor level and source of threats East that insurance compa- quately reflected in the around the world. nies have been tested by scope of the cover they Steven Bird Mark Ferguson is head of civil unrest. Eurozone mem- have in place.” Designer terrorism and political vio- bers such as Greece have Travelling on business, lence at Bowring Marsh, the seen violent protest in meanwhile, has become Andy Mears specialist broker. He says: response to meas- ‘With security levels more difficult. Picture Editor “Insurance market appetite ures, and in the UK looting so elastic, planning Jaime Burnell, a manager for terrorism and political in the summer led to sub- at PwC, the consultancy, For advertising, contact: violence risk continues to stantial damage and losses. and training provide manager specialising in Ceri Williams, Phone be buoyant, with several Leon Taylor, a partner at security and risk, says: +44 (0)20 7873 6321, the most pragmatic insurers entering the law firm DLA Piper, says: “Avoiding dangers is possi- Fax +44 (0)20 7873 4296 market over the past 12 “People have seen how civil approach’ ble, but with security levels Email: [email protected] months. and political unrest can Jaime Burnell, so elastic in many parts of or your usual “This is largely due to a result in widespread loot- PwC the world, planning and representative lack of major insured cata- ing, theft, arson and training provide the most strophic events. destruction or damage to pragmatic approach.” All FT Reports are “While insurers have seen property. According to some esti- “Governments can no available on FT.com. some losses arising from “In the countries affected mates, the total of exposure longer bear the responsibil- www.ft.com/reports the Arab Spring, they have by the Arab Spring, this to losses resulting from the ity in evacuations such as not proved to be significant has been a particular prob- Arab Spring may exceed we saw in Egypt and Libya, Follow us on twitter at enough to affect the market lem for multinational inves- $500m. so the duty of care remains www.twitter.com/ft. as a whole. tors. As a result, Mr Taylor on the individual business reports “More challenging is the “Globalisation and inter- says, it is likely that the to provide practical solu- redefinition of some politi- national has international insurance tions.” 4 ★ FINANCIAL TIMES WEDNESDAY NOVEMBER 9 2011 Risk Management: Property & Security Steps to secure against the loss of mission­critical staff

It could be used to replace lost people they could not function “It is a lot more liquid in that tract if certain key individuals India and . The study, pronounced concerns around Key man insurance revenue, or the expense of without, the asset management situation,” says Mr Richards. left, such as the portfolio man- based on 718 responses from 628 civil and political unrest, while replacing that person – for and sectors are par- “Investors can pull their money ager or investment manager. companies, representing 20 the construction and real estate Andrea Felsted shows example the cost of carrying out ticularly dependent on star out.” Marsh’s Mr Cook says smaller industry sectors in 70 countries, sector was most concerned how companies can an executive search mangers, whose name can He adds: “You can see a direct companies can be required by found that the so-called Bric about lawlessness, violent crime “It’s a bit like taking out an attract multimillion pound man- link to the record and the banks to take out insurance for countries all featured in the top and organised crime. take simple measures individual life insurance pol- dates or investments. investment performance. With key individuals when they are 20, with at number 16, Energy and natural resources to stay in business icy,” says Paul Richards, execu- In a publicly listed company, star fund mangers or hedge borrowing money. Russia at 14, at eight and companies, meanwhile, were tive director in Finex, the finan- the extent to which key person fund managers the issue is “If you are a smallish com- India at four. most concerned about the cial and professional risk serv- cover will be needed will depend pany, a one-man band, a small South Africa, Indonesia, the remoteness of work locations, Every institution has key people ices arm of Willis, an insurance on the importance of the indi- Simon Cook: entity, and you are asking for a Philippines and Vietnam were language and cultural estrange- without whom it would find it and reinsurance broker. vidual in question. smaller loan for new business premises, all categorised as high-risk, ment, and road accidents. difficult to function, whether Simon Cook, a consultant in Mr Richards says: “It depends companies in [the bank] may suggest, or alongside Algeria, Afghanistan, However, key man cover only this be the chief executive of a Marsh’s employee benefits prac- how much of a guiding light and particular may indeed request, you take life Colombia, the Democratic pays out if a critical person suf- publicly listed company or a tice, says that in smaller compa- influence that individual is. be required to assurance out, equivalent to the Republic of Congo, Iran, Iraq, fers death or permanent disable- star fund manager. nies, the cover is taken out “on “Obviously if you have a high- take out cover level of the loan.” Nigeria and Papua New ment. The more general risk of Key man insurance allows a the life and health of somebody profile chief executive seen by for key people Given the risk of losing key Guinea. their leaving the business for a company to take precautions they have identified as being the investor community and people, minimising the potential The five most commonly competitor is not covered. against the loss of critical peo- key person. That could be a key shareholders and customers as about how they make money, physical dangers to key staff is occurring serious health and Companies can minimise the ple. salesman, a managing director, really critical to the business if what their strategies are to also sensible. safety-related concerns were risk of key people leaving An organisation would assess an owner or somebody in they went, then the share price make money. It’s very difficult According to International lack of access to medical care, through competitive salary and the value of that key person to design. Somebody who if their could be affected, or customers to get someone to come in and SOS’s latest Duty of Care and opportunistic crime, workplace bonuses, or employee benefits. the business, and then use the services were suddenly lost, could leave.” replace that.” Travel Risk Management accidents, road accidents and Factors such as making sure cover to insure that person for could have a major impact on But the situation is more criti- Often investment mandates or Global Benchmarking Study, civil unrest an organisation is a good place that value if they die or are per- the ability of the company to cal when there is a direct link contracts with hedge funds have the five countries perceived However concerns varied to work can all play a part in manently disabled. The sum in- perform its duties.” between an individual and key man provisions. This would as the most dangerous were between sectors. The agricul- encouraging critical people to sured is payable to the employer While all organisations have investment returns. trigger the review of the con- Mexico, Nigeria, Afghanistan, ture and agribusiness sector had stay. ‘Darcstar’ is one weapon to fight personal threats

collapsed London hedge fund guilty of Directors’ cover “wilful neglect”. They face $111m in damages. Company officers, Features of Fund Protect – to which increasingly targeted by Mr Baird says about 70 funds have signed up since its launch in October regulators and others, – include fewer-than-usual indemnity might usefully look to their exclusions, lifetime cover for retired directors and high limits of public cover against liabilities, relations cover. writes Alistair Gray As insurers seek to widen their D&O offerings, however, clients should not necessarily expect Whether through investor lawsuits or increases in premiums. manslaughter charges, company man- Indeed, Willis says says companies agers and directors can be held indi- can “save up to 60 per cent” with vidually responsible for wrongdoing Fund Protect compared with their in many ways. existing policies. In that sector, some In addition to an increased threat of brokers say a fund that controls $1bn litigation from shareholders or credi- could enjoy comprehensive D&O tors as recession-hit companies run cover with a $5m pay-out limit for as into trouble, they also face numerous little as $5,000 a year. recently introduced laws and regula- “There’s a great deal of competi- tions, from the UK’s Bribery Act to tion,” says Chris Hewitt, executive the Dodd-Frank financial reforms in director at Lockton, an insurance bro- the US. ker. “We’re still seeing aggressive As a result, insurance brokers say, rates, even though the risks of pay- directors and officers are insisting outs have increased... The underwrit- that their employers take out on their ers have been lowering their margins.” behalf policies that cover a widening But he adds: “There’s a much more range of personal threats. aggressive approach to losses. The The case for so-called directors and underwriters are looking closely at officers (D&O) policies – which cover the facts to see if they can wriggle out defence costs and, potentially, dam- of potential claims.” ages – is straightforward enough. Francis Kean, executive director at As Julian Elms, class underwriter Willis, says the nature of many D&O at Catlin, a Lloyd’s of London insurer, policies is such that companies can puts it: “Why would you insure your house yet not your largest personal liability? ‘Why insure your house “Do you want to put your family’s yet not your largest inheritance on the line?” In the US, a litigation hotspot, the personal liability? Do you market for D&O insurance was worth want to put your family’s €4.7bn in written premiums in 2008, according to Advisen, the data pro- inheritance on the line?’ vider. Although the market in Europe is about three times smaller, it has been end up in protracted disputes with catching up. Advisen estimates that their insurers over the small print. He while the US market contracted as a says this risk has become more acute result of lower premiums in the four as insurers offer to “broaden out” years to 2008, its European counter- existing policies in response to new Shore threat: the increase in activity by pirates such as those based in Somalia has forced responses including a requirement for some ships to travel in convoy EPA part expanded from €1bn to €1.37bn. rules and regulations around the The risk of legal proceedings, partic- world, which take in such diverse ularly in Europe, may still be rela- areas as extradition. “The problem is tively small. Yet with regulators pur- that it leads to too much complexity suing individuals as well as compa- and a greater risk of gaps in the nies in the wake of the financial cri- cover.” Ransom demands ref lect sis, the consequences – large fines or In response, Willis has also recently even jail sentences – are potentially launched (in addition to Fund Protect) devastating. a policy it dubs Darcstar, or Directors’ “Previously thought a luxury of All Risk Cover. The aim is to simplify large companies, D&O liability insur- the coverage: “The assumption [is] ance in Europe is primed for robust that unless the risk is excluded, it is rapidly spreading unrest growth across companies of all sizes, covered. This has resulted in wording as it is increasingly viewed as essen- eight pages long, instead of the more tial,” says Advisen in a recent report conventional 20 to 30 pages.” “With the monsoon season in the 35 per cent of kidnaps of foreign recently Kenya are all popular tourist on the sector. The combination of hard economic Kidnap and piracy Indian Ocean ending, and calmer seas nationals in that period. and business destinations where the In response to the changing land- times, which make disputes more prevailing, there has been an increase It was followed by the Middle East risk of kidnapping exists. scape, insurers have devised a clutch likely, with laws that give aggrieved Pirates and criminal gangs in pirate attacks in the region. and Africa as regions where foreign- “In Latin America, local business of fresh D&O products that widen parties greater opportunity to pursue are looking beyond goods, “This has lead to an increase ers were most at risk of kidnap. These people and their dependants are the existing coverage, fill in gaps or meet individual directors, leads many in requests for insurance to cover statistics are based on information principal targets, while kidnappers in the needs of niche sectors. insurance brokers to expect an uptick says Anousha Sakoui the vessels and crew in this region,” that Control Risks, the global risk some isolated parts of Africa regard Examples of the latter include Fund in demand. says Amanda Rogers, vice-president consultancy, has collated on global tourists and aid workers as the most Protect, which Willis launched last Not all are so sure, however. “I’ve in Marsh’s kidnap and ransom kidnaps to July 2011, but they do not valuable victims. In Nigeria local month. The broker says it is offering been doing this for 20 years-plus, and here was a time when compa- practice. purport to illustrate the full extent of criminals frequently abduct employ- the policy partly in response to people have been talking in that nies had to worry only about The danger of theft for ransom is the problem. ees of large corporations.” demand from asset managers anxious entire period about an increase in the the theft of goods. But no not limited to vessels – it includes “Every year hundreds of people are While kidnap insurance has become about personal liability if their funds number of claims,” says Mr Kean. more. Nowadays kidnap and staff, and insurers are prepared for kidnapped for ransom. Many of these increasingly popular, risk specialists collapse. “It hasn’t really happened. There Transom of staff is a significant worry. this. While insurance is not the cases affect local families and go unre- warn that companies should commu- James Baird, executive director at are all sorts of reasons why one would Piracy of property for ransom is answer to the problem, it does provide ported,” says Richard Fenning, chief nicate strategies and give training Willis, cites a judgment this year by a imagine that it should be changing. another big concern. some comfort to companies. executive of Control Risks, “But any- before travel. court in the Cayman Islands that But will it definitely happen? I’m not As far as piracy is concerned, “Kidnap and ransom policies can be A key piece of advice from special- found two independent directors of a sure.” regions where it is rising include the arranged to provide current informa- ists for travellers for business or Gulf of Aden and west Africa, both in tion on the world’s trouble spots ‘Security measures may pleasure is to check government the number and severity of attacks, before any journey commences. involve armed guards, sources, such as the UK’s Foreign and according to David Thomson, director “Expert negotiators will be ready to Commonwealth Office, for the latest of international corporate risks at step in behind the scenes, advising perimeter protection, and travel security advice. Central Insurance, the insurance bro- policyholders in their negotiations the fitting of cameras and However insurers can treat the ker and risk manager. with kidnappers and also to provide risks and liabilities from kidnap and He says: “This affects not only the funds to assist with the release of tracking devices’ ransom differently – and some advis- vessel owner but also the owners of hostages,” says Mr Thomson. ers suggest specially tailored policies. the cargo and employers of the crew. While many global companies will “If travel to more risky destinations is “Marine insurers have identified the have their own infrastructure in place one who travels either for business or unavoidable, bespoke kidnap and ran- increased risk, and in addition to to deal with kidnap and ransom, pleasure, particularly in certain hot som insurance is available,” says Ms increasing premiums will also require smaller organisations dealing in spots, can also be at risk. Rogers. improved security measures, which unknown territories are unlikely to “Historically, Latin America was “In the event of an incident, it can may involve armed guards, perimeter have the capacity or expertise to han- regarded as the main high-risk kid- offer the company or family guaran- protection such as slippery material dle it themselves, he says. “It is essen- napping region, but in recent years teed and immediate access to an expe- and barbed wire and the fitting of tial, therefore, that they take the nec- the risk has grown in parts of Africa rienced response consultant, who can cameras and tracking devices.” essary precautions to plan ahead and and Asia.” give clear and practical help and Some of the requirements can have suitable cover in place before He says Nigeria, Pakistan and advice on the complex issues associ- include sailing in convoy at speeds of embarking on a potentially high-risk Afghanistan are among the countries ated with these incidents. These not less than 10 knots. route.” where kidnapping is most prevalent, issues include navigating local legal Many shipping companies, in partic- The hottest spot for kidnap in the alongside Mexico and Venezuela. and government issues, helping find ular, are making an effort to focus on first six months of this year was the “Beyond the high-risk countries, the local legal counsel and assistance in the risks. Asia-Pacific region – it accounted for Philippines, Malaysia, India and most dealing with the media.” Personnel touch: new products have filled gaps in individuals’ cover Dreamstime