Top news from RIMS: risks of aging infrastructure

Top news from RIMS: risks of aging infrastructure | Insurance Business

Top news from RIMS: risks of aging infrastructure

RIMS 2018 Annual Conference, one of the biggest events in risk management, is well underway in San Antonio, Texas. CR & I sat down with Paul Horgan from Zurich to get some additional insight into his Thought Leader Presentation on how aging US infrastructure impacts businesses, and what can be done to not only manage risk, but also capitalize on opportunities.

It’s not a pretty picture. An aging US infrastructure in serious need of repair. Increasing risks of lost productivity and major disruptions in supply chains and other critical business processes. Predictions of more severe and more frequent weather events adding to already strained systems. And the possibility that a deteriorating and unreliable US infrastructure could cost American businesses US$1.2tn by 2020, according to an estimate by the American Society of Civil Engineers (ASCE).

“Aging infrastructure is a major issue for all our customers and risk managers,” said Paul Horgan, head of North America commercial insurance for Zurich North America, which insures 90% of the Fortune 500 and is the largest writer of construction insurance in the US. “Over half the bridges in the country are more than 40 years old; most of the interstate highway system and over half the dams are more than 50 years old. There’s a lot of infrastructure out there that’s directly impacting business costs.”

How big is the problem? In 2017, the ASCE gave America’s infrastructure an overall rating of D+ for the condition of its roads, bridges, dams, ports and other vital areas like power and communications. In other words, says Horgan, it’s really failing across the board.

“In transportation alone,” he noted, “it’s estimated US businesses spend an extra US$27bn a year. That’s coming from congestion and delays, but also from a significant increase in accidents. And that’s a direct hit on our customers’ and our risk managers’ budgets.”

The solution, says Horgan, starts with is building back better – upfront investment aimed at creating more resilient and sustainable infrastructure.

“We want to bring resiliency into the conversation,” he explained. “We think it’s extremely important that infrastructure be built for the risks coming in the next 40 years. We also believe that resilience adds confidence to projects, and that helps attract capital, allowing private and public sector money and surety bonds to come in and back up the business.”

So, they went to Puerto Rico – where there were lessons to be learned – to have a conversation.

Puerto Rico as a warning and example

In early April, Zurich Insurance convened a multidisciplinary group in Puerto Rico to evaluate what was needed to rebuild its infrastructure, along with any ideas that could help in addressing rebuilding infrastructure across America.

“While the impact of Hurricane Maria presented more of an extreme example, a lot of the core characteristics in Puerto Rico could also translate to situations elsewhere in the US,” said Horgan, who hosted the event, “whether it’s dealing with aging infrastructure, the political challenges in getting consensus around a project, or that state governments don’t have a lot of funds. We realized all part of the economy are involved, so our group included government, academia, construction, engineering, private investment, and insurance.”

Using Puerto Rico as an example, the group examined the challenges and evaluated what was working and what was not working. “The first FEMA bridges to be rebuilt were rebuilt in a more resilient way,” he said, “so that was a positive. But we also saw electrical wires that were literally stapled to palm trees to get things back up and moving. We’ve spent all this money, the wind season is going to start in another two months, and people are nervous it’s all going to fall down again.”

Here’s the lesson, says Horgan, “We’ve got to stop making Mother Nature be the one to prioritize our infrastructure spend.”

The money comes when Mother Nature says it’s due, he added, because at the end of the day, we always end up paying. The challenge is that when we react to a disaster – as opposed to planning for the rebuild before it strikes – we don’t get much bang for our bucks. Recent studies indicate every dollar spent rebuilding or improving building to meet stronger building codes saves four dollars in damages. Much the same is true when building more resilient infrastructure.

“When you think about that,” explained Horgan, “we could do four times as much work to harden Puerto Rico, four times as much in Houston or in Florida. So, this is the conversation we want to have. Let’s be proactive in getting projects put forward, and when we talk about how they’ll be built, let’s talk about resiliency, which will add confidence as to why the checks should be cut to pay for them.”

What’s the risk manager’s role?

Horgan sees a struggle in risk management today. “Is it part of procurement or is it enterprise risk? I would say there’s a battle as to where it fits in. Resilience is an important topic for the C-suite, and that creates an opportunity for risk managers to play a key role in making the case for resilient and sustainable infrastructure solutions, armed with information that helps build consensus among key players.

As an example, he pointed to the recent significant auto rate pricing increases. Auto losses are getting more severe – and it’s not just due to distracted driving. It is absolutely that the infrastructure is deteriorating, causing more congestion, more potholes, and more accidents. Risk managers can show how loss costs are going up for automobiles, for property, for worker’s compensation.

The other piece, he added, is in the resilience of supply chains. Everything is interconnected. “We need to make sure there’s consensus that infrastructure needs to be rebuilt,” said Horgan. “Everybody gets stuck in the political middle, and that’s why we need to get the private sector aligned and pushing to move this forward.

“If risk managers are able to bring business reasons to the private sector – running from the costs to supply chain need to lean into the topic of building in resiliency –  that will help get them aligned. That’s where risk management moves from procurement to thought leadership and enterprise risk. We hope we can arm them and help create opportunities for risk managers to bring this way of thinking forward in their organisations.”