There's a silver lining in every cloud, and for specialtyinsurers there's opportunity present behind every emerging risk,two carrier executives say.

Stanley Galanski, president and CEO of Navigators Group, andMario Vitale, president of Aspen U.S. Insurance, revealed insurancesolutions that their companies are working on to respond toemerging risks of pharmaceutical recalls, environmental-regulationchanges and supply-chain disruptions.

The two men shared the examples while participating in a specialNU magazine feature titled, “Isthe world becoming safer or more risky?”

This week's edition of NU magazine features theresponses of more than 30 thought leaders who understand somethingabout the business of risk. Both Galanski and Vitale voted with themajority—saying the world is getting riskier.

MORE SCIENCE, MORE RISK

“What is clear is the nature of risk is continually evolving.Significant risks we face today weren't on the radar a decade ago,”Galanski says, beginning with risks associated with product recallsand outsourcing activities emerging in the “extraordinarilydynamic” life-sciences industry.

“While the Food and Drug Administration (FDA) reported 27 new medical devices approved for public use in2010, on the flip-side, the FDA also recalled 46 medical devices,” he reports.

“Contract research organizations (CROs) help biopharmaceuticalsfirms reduce fixed costs by outsourcing—a big priority consideringmany patented drugs will end shortly and also because of thegeneral economic environment,” he adds. “The rising demand for CROscreates potential exposures that we didn't see before,” he says,citing a report estimating that roughly 40 percent of drugdevelopment would be outsourced by 2012 and that the world market for CROoutsourcing was projected to exceed $26 billion by 2012.

“In response to that, Navigators is now offering coverage that is tailored specifically for CROs—a coverage thatwasn't necessarily needed ten years ago, but that is critical intoday's world,” Galanski reports, referring to a combinedproducts-completed operations and errors & omissions liabilityinsurance product called “Life Sciences Research Related LiabilityCoverage,” launched last June by Navigators Management Co., anunderwriting agency subsidiary.

SOLUTIONS TO SUPPLY

Vitale, the former CEO, Global Corporate, Zurich FinancialServices, and former CEO Willis North America, says that over thecourse of his 30-plus years in the industry, he's seen workplacemanagement, automobile safety and construction design improve tomake these aspects of the world less risky.

“I do believe that we in business and in life do learn somelessons, and do make the world a safer place…The whole idea behindrisk management—the definition—is to identify risk and then figureout how to mitigate it or transfer it.”

However, “if you look at real risk in a more holistic way, youhave to conclude that it is a much more severe world, and not onlyis severity worse in risk, but the correlation between risks isgreater.”

Deepwater Horizon, the Japanese earthquake, the volcaniceruption in Iceland last year—“these headline events clearly pointto a more risky world,” Vitale says, adding that supply-chaininterruption intensifies their impacts.

“We saw that with the Icelandic volcano, when goods and partsfrom Europe could not be flown to the United States. Assembly-line plants ground to a halt,” he reports. More recently,he notes disruptions in Japanese manufacturing following the Marchearthquake, which personally impacted Vitale and other buyers ofApple's iPad, who could not order accessories because of six-weekdelivery delays.

“That, of course, had a greater effect on business than people'spersonal lives,” Vitale says. “It's been very real and veryrelevant, and that's part of the reason why the need for insurancesolutions and creativity has never been greater.”

“Unfortunately, you need one of these events to actually getcustomers and risk managers to think more about these things,” hesays. “In some cases, [disruptions] were totally unexpected, andnow [they] have a greater appreciation.”

Vitale believes such events and a global shift to leaner,just-in-time manufacturing systems “actually create a whole newvalue proposition for the insurance industry,” stressing that alack of understanding of supply-chain-interruption risk persistsamong businesses today “What the insurance industry can do is notonly help companies understand it, but also help them mitigate it,and then also transfer the risks to the balance sheet of a thirdparty.”

“It's a great opportunity for creative and solution-orientedinsurers to help bring those value propositions directly to thebrokers and the customers they represent,” he says. Supply-chainand business-interruption insurance providers today look not justat the interruption for the individual customer, but also at whathappens to key suppliers, the key purchasers of their products, hesays. They look at seemingly uncorrelated risks associated withfinancial institutions around these customers as well aspower-supply interruptions and other issues—filling in gaps thatmight have existed in business-interruption policies before, Vitaleadds.

“This global shift to just-in-time production is wonderful whenyou're trying to run a corporation at a very lean balance sheet.But it has a cost. It has a supply-chain-interruption cost,” hesays.

“We need to quantify that for companies, make sure theyunderstand that risk that they're taking, and if they want to keepthat risk so be it…But just-in-time production is not going to goaway. You're not going to see warehouses filled up just to dealwith a catastrophic event.”

WORLDWIDE EXPOSURES

Galanski notes that globalization also creates new and emergingrisks.

“How can a U.S. importer be assured of the safety offoreign-manufactured products from jurisdictions that lack enforcedsafety standards,” he asks, referring to the Chinese-drywallheadaches for U.S. builders and suppliers.

Globalization has even impacted the U.S. directors and officersinsurance industry with a large increase in securities class actionclaims in 2011 being brought in the United States against Chinese companies,he notes.

Within U.S. borders, Galanski sees new environmental-liabilityrisks emerging also—specifically risks associated with a new,environmentally conscious regulatory world. “Just last year, therewas a new U.S. EPA regulation mandating lead-safe constructionpractices,” he says, pointing to an insurance coverage need forcontractors that did not exist 10 years earlier—and one for whichNavigators has specifically tailored a new coverage to protect againstlitigation that arises from a “pollution incident.”

At Navigators, where the 2010 Annual Report carriers the title“Embracing Risk,' marine insurance remains the largest coverageline—a situation that prompts Galanski to comment on emergingchallenges for oil drillers.

“The world's insatiable demand for oil has led to new risks inoffshore oil exploration and production,” he says. “Deep-waterdrilling requires new technologies to drill for oil at previouslyuntapped depths of the ocean. This presents technical engineeringchallenges [and] ultimately, we will learn about the efficacy ofthese techniques through [insurance] losses.”

“The financial consequences are significant,” Galanski says.“Deep-water production platforms are valued in the hundreds ofmillions of dollars compared to the tens of millions for the oldshallow-water units.”

“Our demand for oil impacts the shipping industry,” he adds.“Oil has risen from under $10 a barrel in the early 1990s to over$130 a barrel a little earlier this year. So, now, when oil isshipped around the world, the oil inside the tanker is often worthmultiples of the value of the ship carrying it.”

Finally, Galanski notes that “cyber-technology risks areevolving on a daily basis. Hacking, theft of property data andrelated government-imposed consumer-protection requirements havedramatically increased business exposure to claims for failure toprotect data,” he says.

THEY'RE OUT THERE

Bottom line: “Sure, there are many advancements that may make usfeel safer, but emerging risks may be barely visible and, to someextent, not fully understood,” says Galanski

Vitale says he “subscribe[s] to a theory that for every riskthat actually gets safer, a new one is added.

“You don't have to go far [to find] concerns over nanotechnologyand some of the hazards that this may be presenting to healtharound the world” being addressed in newspaper articles. “Orcell-phone radiation.”

“The point is we can easily identify some things that clearlypresent a safer world, but it wouldn't be hard to find a few thingsthat actually replace those every day with new risks and newconcerns that ultimately will affect both individual and corporatebalance sheets,” Vitale says.