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Managing Risks for Hydrogen Industry

Hydrogen is of growing importance for the substitution of fossil fuels in the fields of energy, supply, mobility and industry. Hydrogen has the potential to morph from a niche power source into big business, with countries committing billions to scale up their infrastructure and with projects being introduced around the globe. But there are challenges to overcome for hydrogen, such as the cost of production, supply chain complexity and a need for new safety standards.  

Allianz Global Corporate & Specialty (AGCS) just released a risk bulletin that highlights some of the opportunities and challenges of a trend at the forefront of the energy industry and assesses the risk environment of technologies associated with the production, storage and transportation of green hydrogen.

Backed by governments: Over 30 countries have produced hydrogen road maps

The global shift toward decarbonization has triggered strong momentum in the hydrogen industry. Hydrogen offers several options for the transition toward a low-carbon economy: as an energy carrier and storage medium for conversion back to electricity, as a fuel for all means of transport and mobility and as a potential substitute for fossil hydrocarbons in industries such as steel production or petrochemicals. 

Around the world, there is strong governmental commitment for hydrogen initiatives, backed by financial support and regulation: As of the beginning of 2021, over 30 countries have produced hydrogen road maps, and governments worldwide have committed more than $70 billion in public funding, according to McKinsey. There are more than 200 large-scale production projects in the pipeline. 

In the U.S., more than 30 states have already adopted plans to promote hydrogen technology. The goal is to build a broad-based hydrogen industry that will generate $140 billion in annual income and employ 700,000 people by 2030. China is also planning to invest several billion yuan in the promotion of fuel cell technology over the next four years, which should result in innovative hydrogen production facilities throughout the country. 

Assessing the risk environment 

Many of the technologies used for the generation of hydrogen or energy from hydrogen are well-known in principle. AGCS risk consultants have considerable experience with handling hydrogen projects in a number of different areas. From a technology perspective, the operational risks include:

Fire and explosion hazards

The main risk when handling hydrogen is of explosion when mixed with air. In addition, leaks are hard to identify without dedicated detectors because hydrogen is colorless and odorless. A hydrogen flame is almost invisible in daylight. Industry loss investigation statistics show approximately one in four hydrogen fires can be attributed to leaks, with around 40% being undetected prior to the loss.

Fire and explosion protection needs to be considered on three different levels. Preventing the escape of inflammable gases as much as possible. Ensuring safe design of electrical and other installations in areas where ignition sources cannot be excluded. Constructing buildings and facilities to withstand an explosion with limited damage.

Proper handling of hydrogen gas is critical, and any emergency requires appropriate fire safety equipment.

An AGCS analysis of more than 470,000 claims across all industry sectors over five years shows how costly the risk of fire and explosion can be. Fire and explosions caused considerable damage and destroyed values of more than €14 billion ($16.7 billion) over the period under review. Excluding natural disasters, more than half (11) of the 20 largest insurance losses analyzed were due to this cause, making it the #1 cause of loss for businesses worldwide.

Material embrittlement

Diffusion of hydrogen can cause metal and steel (especially high-yield steels) to become brittle, and a wide range of components could be affected, for example, piping, containers or machinery components. In conjunction with embrittlement, hydrogen-assisted cracking (HAC) can occur. For the safety of hydrogen systems, it is important that problems such as the risk of embrittlement and HAC are taken into account in the design phase. This is ensured by selecting materials that are suitable under the expected loads as well as considering appropriate operating conditions (gas pressure, temperature, mechanical loading). High-yield strength steels are particularly at risk of hydrogen-related damage. 

Business interruption exposures

Hydrogen production or transport typically involves high-tech equipment, and failure to critical parts could result in severe business interruption (BI) and significant financial losses. For example, in case of damage to electrolysis cells (used in water electrolysis) or heat exchangers in liquefaction plants it could take weeks, if not months, to replace such essential equipment, resulting in production delays. In addition, business interruption costs following a fire can add significantly to the final loss total. For example, AGCS analysis shows that, across all industry sectors, the average BI loss from a fire incident is around 45% higher than the average direct property loss – and in many cases the BI share of the overall claim is much higher, especially in volatile segments such as oil and gas. 

See also: How Insurers Can Step Up on Climate Change

Significant increase in demand for insurance expected 

While standalone hydrogen projects have been rare in the insurance market to date, hydrogen production as part of integrated refining and petrochemical facilities, and as a part of AGCS’ coverage of industrial gas programs in its property book, has long been a staple of AGCS’ insurance portfolio. Given the numerous projects planned around the world, insurers can expect to see a significant increase in demand for coverage to construct and operate electrolysis plants or pipelines for hydrogen transportation.  

As with any energy risk, fire and explosion is a key peril. Business interruption and liability exposures are also key, as are transit, installation and mechanical failure risks. We are developing a more detailed underwriting approach for hydrogen projects, ensuring that we can serve clients globally. There is rightly great enthusiasm around hydrogen solutions as a key driver toward a low-carbon economy, but we shouldn’t overlook that these projects involve complex industrial and energy risks and require high levels of engineering expertise and insurance know-how to be able to provide coverage. We will apply the same rigor in risk selection and underwriting for hydrogen projects that we do on our existing energy construction and operational business.

For the full overview of loss prevention measures for the hydrogen economy, download the new risk bulletin here.

COVID-19: A Catalyst for Key Reviews

Law firms and accounting firms alike have complex and often rigorous conflicts and intake processes to vet new business and determine the worthiness of accepting and representing clients. These processes need to consider many different ethical and compliance considerations, depending on the type of work and the jurisdiction(s) the work will reside in. Internally, there are often multiple approvals that must be obtained before representing a new client, and the intake requests often must pass through multiple teams for review and input. While firms have, at times, bolted on additional functions and ad hoc workflows to accommodate new or growing needs, it is not common for these processes to get routinely reviewed for improvements and adjustments. That was until COVID-19.

The COVID-19 pandemic has influenced firms to pause and review three key areas: conflicts and intake processes, technology investments and personnel. Considering conflicts and intake are the initial gateways for all business coming into a firm, and a way to provide a first impression for how a potential client’s firm operates, firms should assess every aspect of their processes to ensure the resources involved can seamlessly adapt to the challenges a pandemic creates, such as using a distributed workforce and a greater need for more mobile technology functionality.

Processes

Firms should use this challenging time to take a deep dive into reviewing their conflicts and intake processes and make these reviews an annual exercise. Create a small team responsible for this annual review. Review all procedures starting at each process stage and the correlating micro-level inputs and outputs, and then learn where the efficiency gaps are. Often, these gaps are caused by a bottleneck at a process stage because this particular step takes more time, and there are not enough resources to handle the volume, or the manual steps are not automated. An effective way to identify this bottleneck is to create quick, easy and routine internal surveys of users’ thoughts on the processes. Include all users that touch these processes, including partners, executive assistants, conflicts and intake staff and departments with overlapping interests or information sharing needs, such as billing, HR, marketing, and IT-support personnel. These annual reviews of the current conflicts and intake processes will help to identify and prioritize areas of improvement. Use the information gathered in the reviews as the building blocks to execute the necessary changes. Performing these reviews annually will help transform a firm from reactive to proactive, which will help firms be more agile as they pivot to address challenges and needs now, and in the future before those challenges and needs become a problem for the firm.  

Technology

The COVID-19 pandemic has also forced firms to review their technology investments, and it is prudent to do so while reviewing the current conflicts and intake technology contracts. There are resources and tools already paid for to help review technology investments that may not be utilized. Reach out to each vendor to find out if there are any new or additional mobile features associated with the product’s use. Finally, ask each technology vendor what its future road map holds for innovation, as well as additional features and functionality. By reviewing conflicts and intake related technology and associated contracts, a firm may realize additional value, features and functionality from their existing technology. A review can also shine a light on potential inadequacies of existing technology and help firms start researching and moving to a better solution. 

See also: 3 Silver Linings From COVID-19

Personnel 

As important as reviewing the conflicts and intake processes is, as well as evaluating what technology investments are, it is equally important to check in on the people who perform these functions. The COVID-19 pandemic has generally resulted in the conflicts and intake staff working from home. This situation can create an environment where collaboration and teamwork could decrease because the workforce is distributed rather than being centralized. To avoid problems, consider cross-training personnel so they learn new skills and can serve the firm in other capacities. Cross-training also creates collaboration and teamwork among the conflicts and intake teams. These efforts will enrich the personnel’s skill sets, increase social interaction with each team and create contingency options for times when a need for a certain position, role or responsibility arises due to changing circumstances. This will also help a firm adapt to situations, such as a pandemic, without missing a beat.   

The COVID-19 pandemic has shown the importance of preparedness and review. A continuous review of a firm’s conflicts and intake processes, technology and personnel should help firms improve in agility and efficiency while also strengthening risk management. Use the COVID-19 pandemic as an opportunity to create a refreshed conflicts and intake process by coupling a firm’s internal resources with an external, independent practitioner skilled in the conflicts and intake arena. Clients, partners and staff will reap the benefits immediately and in the future.

Cyber Risk Impact of Working From Home

The novel coronavirus (COVID-19) and the resultant move to widespread homeworking has created vulnerabilities for criminals to exploit. Homeworking has exposed new access points for cyber criminals to gain entry to corporate systems, including domestic PCs, laptops and Wi-Fi routers. Homeworking has also led to a diminution in employees’ distinction between work and personal emails, to increasing usage of devices with insecure passwords and to use of online applications that would be prohibited in the corporate environment due to security concerns.

Criminals have also exploited the public’s need for information on COVID-19 to create a range of social media and text message attacks, particularly in those countries worst affected by the virus. In addition, the rapid rise of online shopping due to lockdown has exposed the public to a higher level of well-established cyber scams such as form-jacking and spoofing.

Any organization that rapidly deployed new technology, applications, services or systems at the onset of the pandemic should now be focused on taking a look back and ensuring that the organization has implemented best practices in security configuration and architecture. Many organizations are discovering that their rapid deployments, while necessary, may have introduced undesirable security vulnerabilities.

In a new report, Darren Thomson, Head of Cyber Security Strategy at CyberCube; Jon Laux, Head of Cyber Analytics, Reinsurance Solutions, at Aon; and Rebecca Bole, Head of Industry Engagement at CyberCube; explore the changes to our digital landscape and lay out ways to head off problems.

video featuring Jon and Darren discussing some of the report’s key findings can be found on CyberCube’s YouTube channel. Here is a press release.

How Startups Will Save Insurance

Digital disruption used to be seen by insurance industry watchers as an existential threat to the sector. That argument no longer applies. Today, there’s no argument that the insurance needs digitalization to secure its future. 

Across the financial services sector, companies are being re-defined by their clients’ needs.

It’s what happened with banks. They were driven to embrace fintech because of the speed of innovation required, and what their customers were experiencing elsewhere, particularly in the retail sphere. In the same way, insurers (and brokers) are looking to insurtech for answers.

Actually, the insurance industry doesn’t have a choice, with insurance spending as a percentage of GDP declining over the course of the last two decades. The industry’s share of GDP has declined from a high of 7.5% in 2002 to 6.1% in 2017 (source: Swiss Re Sigma Explorer Dataset 2019).

This is happening in part due to an increase in the world’s population and disproportional prosperity growth in emerging markets, creating more consumers who need to protect their property and families. Meanwhile, value is changing in the corporate rankings, where businesses with high-value intangible assets, like Google, Alibaba or Apple, have overtaken companies trading in more tangible products.

It all points to a need for risk management and for the insurance industry to drive innovation and its relevance – especially during a period of great change. Arguably, the incumbent market simply should be innovating at a quicker pace to meet the evolving needs of its client base and its stakeholders.

Many clients today have unmet risk transfer needs, related to intellectual property, the gig worker economy, cyber threats, pandemic or climate, for example. We as an industry need to acknowledge these differences across traditional and emerging markets, tangible and intangible assets, and deliver a differentiated approach in our increasingly connected world.

Meanwhile, the entire sector – brokers and insurers – has been making healthy profits. This combination of an inverted innovation curve and profit pool has proved to be irresistible to entrepreneurs.

See also: Will COVID-19 Disrupt Insurtech?  

Incumbents’ fears around digital disruption are misplaced, however. After all, when the fintech wave hit the banking sector, it didn’t knock out the big players like JPMorgan Chase, Bank of America and Citi. They retained their positions because they took the best of innovation and applied it.

In a similar way, the insurance industry can and will adapt to the direction of change in the use of technology-enabled platforms.

The insurance industry has to incorporate digital distribution and automation in underwriting, the intersection of data science and actuarial science, to design modern underwriting models and create larger pools of insurable risk in ways that insurers remain profitable covering them.

Common ground with clients

Our clients themselves are looking for innovative solutions, so we have common ground. For example, new technology in trucks now allows for user-based analysis of driving behavior. Aon Affinity partnered with CarrierHQ to roll out a new motor insurance program that applies third-party data, real-time driving analytics and a proprietary rating algorithm to score each driver in a fleet of 20 or fewer trucks. Premiums are adjusted monthly for each truck based on the driver scores. To power this behind the scenes, Aon partnered with Instec to enhance the customer experience for small fleet trucking while improving underwriting results for the insurers.

By using our data analytics and insight, we can design technology-enabled platforms for all kinds of business, big and small. It’s why Aon acquired Coverwallet, the leading digital insurance platform for small and medium-sized businesses. 

The evolution is unstoppable because innovation benefits both the insurance markets and the underlying consumer. 

Even pacesetters like Amazon and Uber continue to be defined by their clients and appreciation of the transparency and convenience these platforms afford them.

See also: Time to Retire the Term ‘Insurtech’?  

To meet the needs of a changing consumer, incumbent businesses – including insurers – need to be client-driven and data-centric to embrace innovation and better network among themselves.

But crucially, everyone needs to stay safe in a dynamic environment heightened by cyber risk, global pandemics and climate change, a problem that insurtech is helping resolve to the benefit of both insurers and insureds.

Coronavirus Boosts Cyber Risk

Concern about the spread of the coronavirus has triggered the largest “work-from-home” mobilization in history. Here are practical steps that organizations can take to remain cyber resilient amid the crisis.

The outbreak of COVID-19 has caused significant disruption to businesses and a degree of panic within the employee community. Companies across Asia have activated contingency and business continuity plans and have allowed or instructed employees to work from home to limit the spread of the virus. In a new reality where millions of people are working remotely, secure networks are now more critical than ever. To remain operational and secure, Aon recommends that companies take the following steps:

Defend Against the Phishing Wave

Malicious actors will leverage the intense focus placed on the virus and the fear and panic it creates. Security researchers have already observed phishing emails posing as alerts regarding COVID-19. These emails will typically contain attachments that purport to offer information about the outbreak or updates on how recipients may stay safe. In an environment where people are stressed and hungry for more information, there is a lack of commitment to security best practices.

This is the time for organizations to remind employees of the need for vigilance and the dangers of opening attachments and links from untrusted sources. Running a simulated spear phishing campaign can also demonstrate the level of resilience to these attacks. At a more technical level, up-to-date antivirus and monitoring tools can limit the effectiveness of successful spear phishing attacks.

Test System Preparedness

Organizations will be experiencing an unprecedent amount of traffic accessing the network remotely. Companies with an agile workforce have been preparing for this contingency for some time and will be well-equipped to maintain network integrity through the use of sophisticated virtual private networks (VPNs) and multi-factor authentication. Enterprise security teams are recommended to increase monitoring for attacker activities deriving from work-from-home users, as employees’ personal computers are a weak point that attackers will leverage to gain access to corporate resources.

For those less prepared, COVID-19 presents a challenge. There is a risk that the increased volume of network traffic will strain IT systems and personnel and that employees will be accessing sensitive data and systems via unsecure networks or devices. We recommend that these organizations migrate as quickly as possible to remote working and bring-your-own-device (BYOD) standards. Virtual private networks (VPNs) should be patched regularly (for example, a vulnerability in the Pulse Secure VPN was patched in April 2019, but companies that failed to update were falling victim to ransomware in December), and networks should be load-tested to ensure that the increased traffic can be handled.

See also: Coronavirus: What Should Insurers Do?  

Brace for Disruption

A remote workforce can make it more difficult for IT staff to monitor and contain threats to network security. In an office environment, when a threat is detected, IT can immediately quarantine the device, disconnecting the endpoint (i.e., the compromised computer) from the corporate network while conducting investigations. Where users are working remotely, organizations should ensure that, to the extent possible, IT and security colleagues are readily contactable and ideally able to physically address a compromise at its source. Sophisticated endpoint detection and response (EDR) software can also be used to quarantine workstations remotely, limiting the potential for malicious actors to move through the network.

As this risk moves beyond the technical, companies should adopt
an enterprise risk approach. This can include rehearsing business continuity plans (BCP) and senior management response through tabletop crisis simulations that focus on cyber scenarios as well as how pandemics and other similarly disruptive events are likely to affect automation, connectivity and cyber resilience.

Companies can also safeguard against the increased risk of disruption through a robust cyber insurance policy that, in the event of a digital disruption to systems, can provide cover for business interruption losses, as well as the costs of engaging forensic experts to investigate and remediate a breach.

COVID-19 presents a range of challenges to businesses across Asia, but developments in technology since the SARS outbreak mean companies can remain operational and nimble in the face of uncertainty. Keeping one eye on the pervasive cyber threat in the midst of this crisis is critical to ensuring continuing success.