Why exploding pager attacks should give P&C pros pause

An attack causing pagers and walkie-talkies used by members of terrorist organization Hezbollah in Lebanon to explode, killing and injuring both militants and civilians, should concern P&C insurers and brokers working with companies reliant on global supply chains, sources say.

It’s not fully clear how the attack was perpetrated, but theories suggest a state intelligence operation accessed points along the supply chain to modify pager and walkie-talkie units to include explosives and the necessary circuitry to remotely trigger detonation.

The fact that the manufacturer didn’t know where the stock of pagers was in the supply chain is a red flag, says Will Mulé, executive vice president and Global Risk Solutions practice leader at Hub.

“They discontinued them, but you should always know where your product is in supply chain,” he tells Canadian Underwriter. “You’re not necessarily checking for bombs, but you [establish] some kind of system.

“Insurers writing business coverages look for systems that allow a manufacturer or shipper to know where products are at all times for purposes of traceability, to issue product recalls and to know where discontinued models are located so they can be either returned or destroyed. If the intention is to continue to sell them, they should be logged the same as any of your brand-new products.”

Coverage specifics

From an insurance perspective, Mulé notes the incident opens a window into roles played by different coverages. That includes terrorism policies, commercial general liability, product liability, cyber, and even directors and officers, he adds, since victims could potentially seek to sue company directors.

It’s uncertain which policies would apply, though, since governments use different terminologies to describe the Hezbollah pager incident – ranging from ‘civil unrest,’ to ‘terrorism,’ to ‘war.’ Triggering an insurance policy requires clarity about what took place – and policies often have exclusions to prevent them from triggering in certain circumstances, sources note.

The attacks also clarify why brokers should make sure clients engaged in global shipping fully monitor their supply chains. Mulé says his team takes clients through rigorous testing.

“When we talk to our clients, we try and break [their supply] chain on purpose just so we can see where the vulnerabilities are,” he tells CU.

“It’s not just about following that process, but also if that chain does get broken how robust is your system? Are you able to get those goods back, or at least track them or understand what’s happened to them?”

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While the pager attacks on their own won’t make business activities in select regions uninsurable, “there’ll definitely be a market correction on wordings [and] ratings,” says Mulé.

Shipping destinations for a company’s goods will be scrutinized, and the existing list of excluded countries will likely be expanded.

Plus, some clients likely will be told, “if you want us to insure this – because you’re going into some high-risk countries –  we’re going to need an agreed amount of security, and we need to have these measures in place in order for us to insure you.

“It won’t be uninsurable, but there’ll certainly be more hoops to jump through in order to get this insurance placed, and obviously it will be rated a lot differently, depending on the level of security measures the client is putting in place and the kind of high-level countries they are entering.”

As for costs, Mulé says insurers won’t need to use premium hikes to incentivize businesses to toughen their supply chains – because the threat of losing contracts is a far greater concern.

“For the clients I deal with, it’s more about their reputation, their business risk. It’s the value of the goods and reputation damage, as opposed to the premium cost itself,” he says.

“Depending on the product – we deal with wine merchants, we deal with fashion houses – that’s gone. You’ve lost the season. It’s the same with wine, you’re not going to get the year 2010 back. And that’s almost uninsurable.”

Feature image courtesy of iStock/Dmitriy83