© 2013, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO Yellow R= 255 G= 255 B= 0...

© 2013, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO

INTERDEPENDENCE OF GLOBALIZED PRODUCTION – A NEW RISK DIMENSION

Dr. oec HSG Mukadder ErdoenmezChief Underwriting Officer Casualty, International Middle MarketsInsurance – XL Group

X Seminário internacional de Gerência de Riscos e Seguros, Sao Paulo, Brazil23 de Outubro de 2013

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© 2013, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 2

Brazil – one of the major economies in the World

1948195119541957196019631966196919721975197819811984198719901993199619992002200520082011

0

50,000

100,000

150,000

200,000

250,000

300,000

ExportsImports

Rank Country 2012 GDP (USD m)1 United States 14'991'3002 China 7'203'7843 Japan 5'870'3574 Germany 3'604'0615 France 2'775'5186 Brazil 2'476'6517 UK 2'429'184

Rank Country 2020 GDP (USD m)1 United States 22'600'2762 China 16'776'3463 Japan 6'252'7134 Germany 4'183'2335 Brazil 3'674'1846 Russia 3'432'2257 India 3'413'443

Source: PWC Jan 2011; WTO data base 2013


Brazil‘s foreign trade more than tripled in the last 10 years – now with 1.4% of the worldwide exports & 1.3% of imports

Source: WTO data base 2013

2003 2008 2012

73,203

197,942242,580

Exports CAGR 14%

2003 2008 2012

50,881

182,377233,372

Imports CAGR 18%

Split Total Exports

Country Volume (USD M)

ProductsVolume (USD m)

1. EU 27 20.7 Agricultural products

33.82. China 17.3

3. US 10.1 Fuels & mining products

30.44. Argentina 8.9

5. Japan 3.7 Manufactures 32.8

Split Total Imports

Country Volume (USD M)

ProductsVolume (USD m)

1. EU 27 20.5 Agricultural products

6.02. US 15.1

3. China 14.5 Fuels & mining products

22.04. Argentina 7.5

5. Korea 4.5 Manufactures 72.0


The risk landscape of Brazilian companies is changing rapidly

Change Driver Change in Risk Profile NeedsRelevance

Short term

Long term

Globalization of all industry segments is going to accelerate. Increased export activities and higher interdependencies

Production and sales structures will gain complexity

Global Solutions for the interdependency risks

X

Raising importance of emerging markets (China, India, Brazil, CEE, Africa)

Increased economical activity abroad increases exposure

Global solutions with strong local relevance X X

Increased use of technology in production and sales

Increase of Cyber risk Industries with new risk profiles & demands X

Increase of reputational risks . Protection of global brand

Clients are concerned about production standards and quality

Reputational cover as a new business X

Increased Consumer Protection Increased contract uncertainties

Increased service demand by clients

X

Compliancy of all products & solutions in each and every territory

Changing of legal frame work

Global compliancy protocol and regime

X

Aggravation of environmental laws (emission control etc.)

International production facilities are exposed

Environmental insuranceX

4


Emerging countries‘ growing share of product manufacturing increases their liability for product claims

5

• Increased globalization in all manufacturing areas. • Labour intensive and mass production is increasingly moved to emerging economies. • Countries like Brazil, India and China will move from low profit manufacturing to market

leaders in certain manufacturing segments.• Increased collaboration between manufacturers and suppliers – and suppliers among

each other in product development and manufacturing of parts and final product. • Increased complexity of supply chains will be driven by IT technology resulting in new,

more efficient production methods

Brazil China India France Germany UK US

1.8%

9.1%

1.3%3.4%

7.2%3.9%

28.9%

2.8%

21.0%

2.2% 2.2%

6.5%

2.1%

17.0%20002011

% of Worldwide Manufacturing GDP


The manufacturer of a simple product is exposed to huge indemnification requests in litigious environments

The Incident: A significant fire destroyed the premises of the Client C of Company M. Initial information received:

a) A Fire/Police report concludes the fire was caused by the self-ignition of approximately 250 litres of frying oil which was contained in an electrically heated deep fryer.

b) Total damages (PD and consequential financial loss – BI loss) amount to USD 100m+ as per the property insurer‘s Insurer P assessment.

The Manufacturer: Company M’s business focus is the design, manufacturing and installation of fire extinguishing systems.

Case Study I.


Indemnification is requested in many cases – even if the manufacturer assumes no liability

Four months after the incident Insurer P informs the Company M that they plan to seek recovery (subrogation) against them for all damages (estimated at USD 100m+) paid to Client C under their property policy. They base their claim on their own expert‘s findings, which in summary stats:

• Incorrect electric wiring of the oil frying machine. The emergency-stop functionality failed.

• Inappropriate conception and design of Company M’s fire extinguishing installation as specifically fitted to this individual frying machine.

• The expert concluded that the inappropriate design of the insured extinguishing system was considered the main cause of the fire‘s severity.


An in-depth investigation by the insured together with their independent expert strongly disputes the analysis and subsequent conclusions presented to Insurer P.

• Company M extinguishing system was tailor-made for this individual frying machine. It was properly designed and installed, and per the available evidence adequately responded when it was triggered by the oil‘s self ignition.

• The success of the system was physically not possible under the circumstances, due to the deep fryer‘s defects – (continuing electricity supply after ignition and releaseof the extinguishing system). This must be considered the primary and only cause of the subsequent fire damage.

• Both the insured and the independent expert consider the risk of a liability finding againstthe insured to be very limited (below 20%)

Even if the insured percieves no liability, it incurrs costs of defence against filed cases


Insurer P filed suit against Company M and five smaller co-defendants, asking for compensation of € 85m in property and business interruption damages and also requesting the Court to declare defendants joint and severally liable for some additional, non quantified business interruption damages sustained by Client C

• Counsels and experts for Company M continue to believe the insured‘s defense is very strong from a technical perspective. However, there are some concerns with respect to contractual, post-installation‘ consulting obligations. They say there is a 50% risk of a limited contributory negligence finding against Company M, accordingly.

• The law of joint and several liability applies, where the Plaintiff can recover 100% from a defendant, even if that party‘s contributory negligence is less than that of the other defendants.

• The amount of coverage for co-defendants is limited

The malfunction of a third party product generating a loss can result in a high indemnification for a company


The automotive industry is one of the most optimized production industries

• Recall Notice on the Website of the US National Highway Traffic Safety Agency

• Involved Product: Diesel fuel filters for Brand X cars

• Cause of Loss: Dimensional deviation of the top part of the plastic stack forming the filter cartridge allows fuelleakage. The dimensional deviation is the consequence of a change in the manufacturing process in July 2011

• Affected Production: Only limited information available. Manufacturer M non specified estimate is that approx. 180‘000 cartridges might potentially be affected.

• Brand X apparently launched a world-wide service campaign for approx. 100‘000 cars

Case Study II.


Automotive part suppliers under great commercial pressure – dealing with indemnification requests is difficult

• Loss quantum: Brand X debit notes show a total recall costs of €1.58m, which apparently incorporates an amount of €526K for the costs of the non-covered replacement products. No underlying detail is available

• A second update of Brand X shows a significant increase in the debit notes

Debit Note No. Date Labour Material Total B 1 03.07.2012 13,048.81 2,439.07 15,487.88B 2 24.07.2012 28,442.30 9,942.42 38,384.72B 3 29.08.2012 1,011,822.49 514,427.97 1,526,250.46B 4 02.10.2012 823,705.05 357,124.53 1,180,829.58B 5 05.11.2012 359,124.72 133,651.28 492,776.00 Total 2,353,643.37 1,017,585.27 3,253,728.64

• The second loss report received from loss adjuster confirmed the original cause of loss: Dimensional deviation is the consequence of an inadequate drying process for unfinished components.

• Affected production: Production between September 2010 and May 2011, with a total number of 241‘561 potentially affected filter cartridges.

• Reserve recommendation to be considered: €2.95m gross and €2.9m net of the applicable deductible, reflecting an anticipated 80% recall completion


Key Message: The world is becoming increasingly complex – as is the risk profile of our clients


INTERDEPENDENCE OF GLOBALIZED PRODUCTION – A NEW RISK DIMENSION

Dr. oec HSG Mukadder ErdoenmezChief Underwriting Officer Casualty, International Middle MarketsInsurance – XL Group

X Seminário internacional de Gerência de Riscos e Seguros, Sao Paulo, Brazil22 October 2013

13

© 2013, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO Yellow R= 255 G= 255 B= 0...

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