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For yet another year of this millennium, disaster-related tragedies, especially Hurricane Sandy, dominated the way the world thinks about risk. Preparedness, response and recovery were at the forefront of discussion in every city on the East Coast. It is fitting that these aspects are what comprise the essence of dealing with any form of adversity, whether it be a natural catastrophe, financial crisis, earnings announcement, tech meltdown or legal dispute.
The day-to-day work of risk management often goes unnoticed, but it is in readying an organization or community for these major, high-profile events that the discipline can take center stage. And while the following run down is by no means a comprehensive account of the past 12 months, it does highlight those stories that represent the core issues of 2012 as seen through this lens.
This was the Year in Risk.
by Jared Wade
Thirty-two people were killed and more than 60 were injured when the Costa Concordia, a cruise ship longer than three football fields, capsized after running aground among the rocks and reef off the coast of Italy. The captain, who reportedly deviated from the planned route through the Tyrrhenian Sea to sail closer to a nearby island, was arrested on manslaughter charges and remains mired in legal proceedings that will determine his fate. (He faces charges of abandoning the ship during the evacuation of some 4,000 passengers and has also sued his employer for wrongful termination.)
As for the vessel, which is twice as heavy as the Titanic and owned by Carnival subsidiary Costa Cruises, a team of nearly 500 people began the process of raising it from its resting spot in October, where it has sat half-submerged for more than 10 months. Some involved say the endeavor may take eight months and cost around $400 million. Carnival, which has a fleet of more than 100 ships, originally paid more than half a billion dollars for Costa Concordia and has watched its profits plunge this year as direct losses and a drop in cruise bookings have hit the company hard.
Standard & Poor’s revoked the triple-A ratings of France and Austria, and moved Portugal to junk status, calling EU policymakers’ actions “insufficient to fully address ongoing systemic stresses in the euro zone.”
Three days later, the ratings agency downgraded the Luxembourg City-based European Financial Stability Facility, a bailout fund established to deal with the euro-zone debt crisis that is authorized to lend up to €750 billion in financial assistance to member states.
“We cannot allow Greece to go bankrupt,” said Greek Prime Minister Lucas Papademos in a cabinet meeting that finalized the harsh austerity measures the EU required before giving a loan to the struggling nation. The reforms, which included dissolving 150,000 public sector jobs, lowering pensions and cutting the minimum wage by 22%, were met by violent, destructive protests throughout Athens.
As part of its operation “Exposure,” Interpol arrested 25 suspected members of the hacking group Anonymous—four in Spain and 21 in South America—for their role in denial-of-service attacks and publishing the private information of high-profile figures. After the arrests, Interpol’s website was attacked, as was that of the Spanish police.
Several states suffered tragedy after a series of twisters ravaged towns in the Southeast and Midwest. More than a dozen died in Indiana, causing Governor Mitch Daniels to tell his citizens that “we are no match for Mother Nature at her worst.” West Liberty, Kentucky, was hit particularly hard, as a tornado with winds of 140 mph “flattened everything,” according to resident Faye Isaac, who shared her account of being hit by a falling store roof in the Lexington Herald-Leader. “The whole town is gone.”
After months of public pressure from hedge fund giant John Paulson, who has an 8% stake in the insurer, The Hartford announced that it would wind down or split its struggling individual life and annuity units from its stronger property/casualty business.
After the government alleged that Apple and several other publishing companies were engaged in a conspiracy to fix the prices of e-books, three of the publishers, HarperCollins Publishers, Simon & Schuster and Hachete Book Group, settled the case in August for $69 million. “While publishers are entitled to their profits, consumers are equally entitled to a fair and open marketplace,” said Connecticut Attorney General George Jepsen in a statement. “This settlement will provide restitution to those customers who were harmed by this price-fixing scheme, but it also will restore competition in the e-book market for consumers’ long-term benefit.”
Economic data revealed what many had been feeling for much of the past half year: With two straight quarters of economic contraction, Britain had officially returned to recession. The UK emerged in October, however, as its economy, perhaps buoyed by the London Olympics, managed to get back in the black, albeit only with 0.6% growth.
Ina Drew, JPMorgan Chase’s chief investment officer, resigned following the revelation that a series of complex trades within the credit market caused immediate losses of at least $2 billion.
The derivative positions, which were made out of the firm’s London investment office that Drew headed, would eventually cost the bank $5.8 billion (and perhaps up to $9 billion) and become the subject of multiple congressional investigations for impropriety.
Company CEO Jamie Dimon, who came through the 2008 banking crisis with a reputation as being Wall Street’s best risk management executive, characterized the trading strategy as “flawed, complex, poorly reviewed, poorly executed and poorly monitored.”
The botched Facebook IPO was plagued by NASDAQ computer glitches that delayed its start, caused misorders and blocked trades. Those who did buy on day one have taken a bath, as the stock plummeted from its initial valuation of $38 per share to under $28 on June 1 and an end-of-day low of $17.79 on September 4.
Google later had a reputational and financial meltdown of its own, as it inadvertently released its underwhelming third-quarter earnings early and watched its stock price plummet from $755 per share to $695. This was not a one-day blip: in November, it saw its price fall below $660.
Even Apple got in on the act. The year was marked by continued controversy around its Chinese labor provider Foxconn, and the tech giant had to apologize to iPhone 5 buyers who were irate over the company’s decision to replace their favored Google Maps app with a chintzy Apple alternative.
In a year when these and other new tech companies were expected to further assert their dominance in today’s economy, the world was instead more often greeted with corporate gaffes. The brands of these firms remain strong and few actually doubt their fundamentals or influence in the marketplace. But after years of enjoying a certain prestige, they are losing a little of that shine.
In a data breach that seemed to confirm the privacy concerns many have about social media, some 6.5 million passwords of the professional networking site LinkedIn were posted to a Russian hacker site.
In other breaches this year, dating website eHarmony had 1.5 million of its users’ passwords compromised, Wyndham Hotels allowed 600,000 members’ credit card numbers to be stolen, Yahoo had 400,000 passwords taken, and credit card processor Global Payments had 1.5 million consumer records exposed.
More than 2,000 former National Football League players filed suit against the league, accusing it of concealing information linking concussions to long-term brain damage, including Alzheimer’s disease, dementia and chronic traumatic encephalopathy. By the end of the summer, the number of players involved had increased to more than 3,400 and observers suggested that the case could wind up costing the league billions. In August, the NFL sued 32 insurers in an effort to force them to pay defense costs. Travelers countersued on the grounds that it is only obligated to defend NFL Properties, the league’s merchandising unit.
After an avian flu outbreak hit the largest egg-producing region of Mexico and officials responded by killing some 20 million hens over a six-week period, an egg shortage and price spike hit the country, which, according to national figures, eats more huevos per capita than any other nation. At 430 eggs per year, the average Mexican eats nearly twice as many as their American peers.
The Waldo Canyon Fire raged on the outskirts of Colorado Springs for nearly a month, killing two, forcing tens of thousands from their homes, destroying nearly 350 houses (worth more than $110 million combined) and causing insured losses of at least $350 million.
In terms of homes burned, it was the worst wildfire in state history. Another nearby inferno, the High Park Fire, destroyed at least 250 houses and led to losses of around $100 million.
In what some analysts are calling a death knell for the once-ubiquitous Blackberry, its maker, Research in Motion, pushed back the launch of its new phone until 2013. Missing holiday sales may be a devastating blow and, in October, the company again delayed the release of its hyped Blackberry 10 from January to March. Worse still, RIM’s smartphone market share fell from 11.5% to less than 5% in 2012.
The Patient Protection and Affordable Care Act, better known as Obamacare, was upheld by the Supreme Court in a controversial 5-4 decision that allows the reform’s individual mandate provision to live on as a tax. “The theory is that the mandate is, in effect, just a tax hike on certain taxpayers who don’t have health insurance,” ruled the Court.
Through the first six months of the year, new catastrophe bond sales doubled compared to the first two quarters of 2011, reaching their highest volume since the record was set in 2007. The bottom fell out of the market during the financial crisis, but the boom that many analysts previously forecasted may be resuming.
Total outstanding volume of cat bonds is expected to reach $15 billion by the end of December—a 30% increase over last year, according to reinsurer Swiss Re.
New measures allowing the formation of captive insurance companies took effect in Oregon and Florida. To date, more than 30 states and the District of Columbia have enacted such legislation in the United States.
GlaxoSmithKline pled guilty to criminal charges and agreed to pay $3 billion in fines, the largest settlement ever involving a pharmaceutical company, for promoting the antidepressant Paxil for unapproved uses and not disclosing safety data about its diabetes drug Avandia. In May, Abbott Laboratories settled a similar suit for $1.6 billion on charges that it promoted its anti-seizure drug Depakote for unapproved uses.
President Barack Obama signed the Biggert-Waters Flood Insurance Reform Act, which extended the NFIP to 2017. This was the first long-term extension of the program in years, ending a period in which short-term renewals plagued the certainty surrounding the controversial program.
The summer of 2012 was one farmers would love to forget and weathermen never will. Daily temperature records were shattered throughout the U.S., and historic drought conditions devastated crop yields. By July 19, after weeks of “a lack of rain continued the downward spiral of drought conditions,” according to National Climate Data Scientist Richard Heim, nearly 64% of the nation had officially entered drought, the highest percentage since 1950s.
This was not just a U.S. phenomenon: India, Russia, Australia, Brazil and Argentina were among the other major food producers to suffer depleted harvests. The result was record-high prices for corn and soybeans in addition to a 6% increase in global food prices from June to July. Perhaps worst of all, some fear that this is less of an anomaly and more a sign of what is to come in a warmer future. If that is the case, farmers, states and the world at large will have to find new ways to ensure expected agricultural production can still be met.
Regardless, one thing is for sure: the summer of 2012 will be historically notable, either for its unusually harsh conditions or as a signpost marking the start of a new, extreme era.
The world, Hollywood and one small Colorado town awoke to horror after learning that a gunman killed 12 and injured 58 more during a midnight premiere of the new Batman movie, The Dark Knight Rises.
The bloody rampage was the highest-profile public shooting in a year full of them.
Seven died in an attack at a Wisconsin Sikh temple in August, six were left dead in May during a Seattle café shooting spree, four in Minneapolis were killed in September by a disgruntled sign company employee, two New Jersey supermarket employees were killed by a coworker in September, two were shot dead in a California chicken plant in November, and one man was killed in Manhattan when a laid-off employee returned to his former workplace to murder his boss.
Chinese state news agency Xinhua called it the “heaviest rain in six decades,” and the resulting floodwaters proved deadly. Ten hours of rain killed more than 75, affected two million, stranded 80,000 at the airport and did upwards of $1.5 billion in economic damage throughout the surrounding area. One suburb reported 18 inches of rain.
After Dan T. Cathy, Chick-fil-A’s president and son of its founder, expressed his support of “the biblical definition of the family,” gay rights advocates protested the fast food chain. As more information about the company’s contributions to anti-homosexual groups emerged, what likely would have been a run-of-the-mill advocacy campaign exploded into nationwide controversy.
Boston Mayor Tom Menino wrote a letter to Cathy saying that “there is no place for discrimination on Boston’s Freedom Trail and no place for your company alongside it.” Former Arkansas Governor Mike Huckabee responded by organizing a “Chick-fil-A Appreciation Day” on August 1, when patrons nationwide were asked to show their support for the company by eating at their local franchise.
“While we don’t release exact sales numbers, we can confirm reports that it was a record-setting day,” said Chick-fil-A vice president Steve Robinson in a statement.
In what could be the opening scene of a Hollywood apocalypse movie, nearly 10% of the world’s population lost power, as a blackout enveloped India and knocked out the lights for close to 700 million people. The largest blackout in history spanned 2,000 miles of the world’s second most-populous nation and showed that infrastructure development remains India’s main challenge to becoming a larger economic power.
Facing claims from the New York Department of Financial Services that it laundered $250 billion of dirty money to Iran over a decade, British bank Standard Charter agreed to a $340 million settlement but maintained that “99.9%” of the 600,000 transactions in question were conducted with legitimate Iranian companies.
With its recent line of phones and tablets, Samsung too closely copied iPhones and iPads, according to a jury that determined that the Korean electronics company violated six of Apple’s patents. Samsung called the verdict a “loss for the American consumer” and pledged to appeal.
Hurricane Isaac, which dumped more rain on the Gulf Coast than Katrina, killed five in Louisiana, two in Mississippi and two in Florida, while causing damages of some $2 billion throughout the United States.
In addition to the coastal flooding, heavy rainfall and debris-scattering winds, the remnants of Isaac’s cyclone led to the formation of at least nine tornadoes in Illinois.
Prior to U.S. landfall, the hurricane also killed at least 29 in Haiti and the Dominican Republic.
In August, a court rejected a claim by French footwear maker Christian Louboutin that an all-red women’s shoe sold by Yves Saint Laurent violated its signature style: a red lacquered sole.
But an appeals court in Manhattan later ruled that, while the rival’s shoe does not violate any trademark, Louboutin does own one for its red-bottom style if the entire shoe is not monochromatic.
It was a rare dispute in which both parties “won,” and the decision furthered the precedent that, even in the fashion world, a color can become proprietary.
Dozens were killed and more than 400 infected by an outbreak of what was called an “exceptionally rare disease” by John Dreyzehner, the health commissioner of Tennessee, which, with at least 13 deaths and 78 cases, has suffered more than any other state. Some 14,000 back-pain sufferers across the nation are believed to have received injections of the tainted steroid that started the outbreak and was produced by the Framingham, Massachusetts-based New England Compounding Center. The specialty pharmacy has recalled all of its products, and now faces lawsuits and federal subpoenas.
The Windy City’s teachers’ union organized a walkout for the first time in 25 years to protest education reforms of Mayor Rahm Emanuel’s administration. After an eight-day strike, the educators returned to their classrooms, claiming victory on many disputes (health insurance increases, seniority pay, school resource allocation) while conceding on others (lower raises than sought, longer school years, teacher evaluations). There was enough on the teachers’ side of the ledger, however, for most to call it a union win—the first major national victory in recent years after high-profile defeats in Wisconsin, Indiana and California.
In one fell swoop, the U.S. Treasury cut its stake in insurer AIG from 54.5% to 15.9%, selling more than 600 million shares over two days for $20.7 billion. The government says that it has now recovered the entire $182 billion committed to bail out AIG—plus a $15.1 billion return, which will grow after it sells the final 234 million shares it still owns.
After a salmonella outbreak sickened at least 38 people in 20 states, the company responsible, Sunland, Inc., the nation’s largest organic peanut butter processor and maker of Trader Joe’s brand peanut butter, recalled more than 100 of its products. Whole Foods, Stop & Shop and Target, among others, also pulled various other goods—including cookies, ice cream and crackers—from its shelves in fear that Sunland’s other nut-based ingredients were used their in production.
In what is likely the next major step towards the dystopian SkyNet-ruled future depicted in the Terminator film franchise, California Governor Jerry Brown signed a law that will soon allow automated cars to navigate streets in the Golden State.
This came after a driverless Google-operated vehicle “safely completed over 200,000 miles of computer-led driving” earlier in the year. A robot-car future has major implications for both road safety and the auto insurance business, which some believe would no longer be necessary in a world without accidents.
Claiming that the company’s board is “tainted by conflicts,” “cheating shareholders” and “serving its own financial interests,” MetroPCS’ shareholders sued to block a T-Mobile acquisition, which was expected to be finalized midway through 2013.
If the plan fails, this would be the second major deal to fall apart in as many years for T-Mobile, whose merger with AT&T was blocked by the Justice Department last year. The Deutsche Telkom AG-owned company continues to struggle for market share in an industry that is 70% dominated by Verizon and AT&T.
One of the industry’s highest-profile and charismatic executives announced plans to leave insurance broker Willis next year. The 54-year-old Dominic Casserley, who has worked at management consultant McKinsey & Company since 1983, will take over January 7.
A record 9.3 million Californians, and up to 19 million people across the world, participated in the Great ShakeOut, an earthquake drill launched in California in 2008 that now takes place worldwide.
“It is the worst deal in the history of American finance. Hands down.” When Tony Plath, a banking and finance professor at the University of North Carolina at Charlotte, said that to the Wall Street Journal in July, he was talking about Bank of America’s 2008 acquisition of mortgage lender Countrywide.
In October, federal prosecutors piled on, suing BoA for its subsidiary’s fraudulent lending practices during the housing boom, which Manhattan’s top federal prosecutor Preet Bharara, who filed the $1 billion suit, called “spectacularly brazen in scope.”
In a move to stay relevant in a world where paper is increasingly going the way of the dinosaur, the 80-year-old Newsweek announced its plans to stop printing a physical copy at the end of 2012.
This strategic shift punctuated a year in which, for the first time, the percentage of money spent on online advertising (22%) finally caught up to the amount of time people devote to this media realm (26%), a ratio that now mimics those of radio (15% to 11%) and television (43% to 42%). Print now remains the one medium where spending (25% of ad dollars) far outpaces the amount of their time that consumers devote to it (7%).
Amid the strongest allegations yet that the most decorated cyclist in history used performance-enhancing drugs throughout his career, the International Cycling Union stripped Lance Armstrong of his seven Tour De France titles. His sponsors fled in droves.
Fearing association with the inspirational hero turned pariah, long-time sponsors Nike, Trek and Oakley, as well as RadioShack and Michelob maker AB InBev, cut ties. Armstrong reportedly made up to $15 million per year from sponsors.
Seven members of Italy’s disaster-warning committee were found guilty of manslaughter, sentenced to six-year prison terms and ordered to pay €7.8 million in damages for providing “inaccurate, incomplete and contradictory” information in the lead up to an April 2009 earthquake that killed 309 in L’Aquila.
The conviction, which the American Association for the Advancement of Science called unfair and naive, was handed down due to the fact that the Major Risks Committee met days before the quake after small tremors were felt and, in the opinion of the court, were too confident in dismissing the foreshocks as signs of a looming, deadly seismic event.
After causing damage in the Caribbean and Middle Atlantic states, Hurricane Sandy made landfall in Atlantic City, New Jersey, where it unleashed massive devastation. Many beachfront communities throughout the Jersey shore, Staten Island and Long Island were rendered virtually uninhabitable as the storm surge destroyed homes and inundated the entire region.
More than 8 million residents were left without power, including much of downtown Manhattan, while transportation ground to a halt as subway tunnels were flooded and wait times on lines for scarce gasoline lasted hours. In all, nearly 200 people were killed by the storm. Early estimates suggest insured and economic losses could reach $20 billion and $50 billion, respectively, which would make Sandy the fourth-largest catastrophe in U.S. history.
President Barack Obama was re-elected in a race that was dominated by talk of economic recovery and expected to help decide the fate of both the health-care and financial sector reforms passed during Obama’s first term. From the business world’s point of view, his first order of business is clear: the pending fiscal cliff.
To avoid what CNN’s Jeanne Sahadi called “the legislative equivalent of a slow-motion train wreck,” the White House and Capitol will have to work together to raise the debt ceiling, balance the budget and reduce the deficit. Economists and CEOs alike fear that another recession will be the outcome if no meaningful solution is found.
With the Mayan Long Count calendar stopping abruptly, speculation remains as to whether or not the world will end as well.
Outcome: To be determined. Good luck.
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