Technology to the Rescue
The growing scale and severity of natural and man-made catastrophes makes it increasingly difficult for insurance companies and claims handlers to access affected disaster sites. It can take weeks or even months for loss adjusters to see the true extent of damage caused by events on the scale of Hurricanes Andrew and Katrina.
But that’s changing with the development of technology such as drones, satellites and 3D imaging, which allow insurers to gather data and images quickly and efficiently, ultimately better protecting their clients against future risks.
There are still hurdles for insurers to overcome, starting with Federal Aviation Administration requirements for operating drones in U.S. airspace, as well as privacy issues, and the potential for property damage or civilian death in the event of a crash.
But uptake is still rising because of affordable hardware as well as increasing onboard instrumentation and offline data processing improvement.
“A lot of this new technology is great at assessing and understanding potential risks in a pre-loss scenario, as well as when an event happens,” said Sheri Wilson, national property claims director at Lockton.
“In some cases, there will always be the need for boots on the ground before the check is written, but this technology can certainly be used to get a more complete picture of what’s going on.”
Rise of the Drones
Jimmy Johnson, assistant vice president of commercial property claims at Zurich North America, said the main advantage of drones is the ability to provide access to difficult-to-reach disaster sites, allowing insurers and their customers to understand losses in greater detail.
“Being able to obtain information almost in real time, whether it’s taking pictures or communicating those losses, is a huge advantage not only to the insurer, but to their clients as well,” he said.
“The app allows them to record and send pictures and videos to the insurer to show them the extent of the damage and it is then uploaded to their server for them to assess.” — Andreas Shell, global claims executive of new technologies, Allianz Global Corporate & Specialty
Helen Thompson, director of commercial marketing at Esri, a geographic information system provider, said that another benefit is the speed of response, as well as use in hazardous situations, such as the port of Tianjin explosion last year.
“Drones are able to quickly assess large areas and identify, with human observation, the scope and scale of the disaster,” she said.
The main sticking point remains that only a handful of insurers, including State Farm, USAA and AIG, have obtained FAA approval to test drones for commercial use.
Gary Sullivan, vice president of property and subrogation claims at Erie Insurance, which was granted a license by the FAA last year to use drones for claims and in catastrophe situations, said that the biggest advantage is safety, as well as the time and cost efficiencies gained.
“It means the difference between keeping our employees on the ground versus the time and risk associated with having them climb a ladder to get onto a roof, and, ultimately, the imagery we obtain from a drone is just as good, if not better than we would otherwise be able to take,” he said.
Among the disadvantages, he said, were the need for a pilot’s license and having to get clearance to fly in no-go zones, for example, near airports and military bases.
Andreas Shell, global claims executive of new technologies at Allianz Global Corporate & Specialty, said one problem is that drones can only be used if the operator is in close proximity and maintains visual contact.
On top of that, he said, there are a host of legal and regulatory requirements.
“Right now, government agencies are tightening up these requirements more than ever due to the number of private operators currently out there,” he said.
Varying Image Formats
Video technology such as Skype and FaceTime has allowed insurers to develop smartphone apps that can be used to record property damage.
“[They can] send pictures and videos to the insurer to show them the extent of the damage.”
Such technology could be used in low value cases where sending out a loss adjuster may be more costly than paying the claim.
David Passman, national director of property claims for North America at Willis Towers Watson, said that when it comes to assessing wide areas of damage, satellites are often the best technology because they can capture a lot of data quickly.
The downside, he said, is that the picture quality may not be as good as a drone or 3D imaging.
“It enables you to take pictures before and after the event, and compare them side by side to determine not only what has happened to the property concerned, but also to the terrain around it,” he said.
“This can also help clients to put into action their business interruption or continuity plan, for example, by knowing what transport routes are open and putting in place an appropriate logistics strategy.”
Future of Technology
Thomas Haun, vice president of strategy for PrecisionHawk, an aerial data provider, said that as with all of these technologies, being able to quickly quantify the extent of damage and understand how safe something is, is critical in the response effort.
“Drones give you that ability to respond quickly and effectively to these types of disaster, but also to prevent or mitigate against future events,” he said.
However, Bud Trice, vice president of catastrophe services at Crawford, warned that despite the many advantages, the biggest challenge with this type of technology is fragmentation, with the possibility of each insurer deciding to go its own way with a different solution, many of which may be incompatible with one another.
Randall Ishikawa, vice president of property risk solutions at EagleView, a 3D imaging company, said that in the long run, technology could help expedite claims handling and reduce operational and claims costs for insurers.
“At the end of the day it can save money for the insurance carriers, and from an underwriting perspective it can determine the viability of the risk concerned as to what action needs to be taken at renewal,” he said.
Erie’s Sullivan added that the potential benefits are huge.
“From an industry standpoint there’s enormous potential because in the future you might be able to fly the drones much more often and to assess the risks on your books in order to identify potential hazards before they happen,” he said. &
The Cyber Captive Option
Cyber risk has become the top priority for many companies following the recent spate of high profile data breaches and hacking attacks that hit the headlines, including Target, JP Morgan and AT&T, to name but a few.
However, they have often struggled to find the right coverage in the commercial insurance market at an affordable price.
As a result, some companies are turning to the captive market, with a recent Aon study revealing that 7 percent of captive owners surveyed have indicated an interest in underwriting cyber risk through a captive.
Given the nature of cyber risk, a captive program can often be an attractive solution, allowing the owner to diversify its risk portfolio, build up its reserves and cover risks such as future lost revenue or first-party loss of inventory that are not always readily available in the traditional market.
It can also cover highly correlated risks including cyber and reputation that aren’t always included together in the commercial market.
Having a captive also allows the owner to assume a high deductible and/or higher coverage limit and to fund it through the captive in order to gain access to reinsurance markets offering cyber coverage.
Furthermore, it can allow companies to better track data and have greater control of claims, as well as provide access to various tax and financial statement benefits.
The main captive domicile to benefit from this influx of new business has been the State of Vermont, which currently has 17 licensed captives that write cyber risk as a stand-alone policy, not to mention those that have an endorsement built into their general liability programs.
“Company executives and risk managers recognize the threat of a cyber attack and that it could have a significant impact on their organization,” said Sandy Bigglestone, director of captive insurance at the State of Vermont.
“The risk managers of our captive owners understand and can measure their risk better than anyone, therefore considering a captive to address the problem of cyber risk is only a natural reaction to this phenomenon.”
Cyber Risk — the Next Step for Captive Owners
Bigglestone said that writing cyber risk into their program was often the logical next step for many captive owners.
She said that the main advantage Vermont has for prospective and existing captive owners is a strong and well-resourced infrastructure, as well as, crucially, laws that allow for cyber coverage to be written into captives.
“I believe that the growth potential of cyber coverage being written into captives is tremendous.” — Dan Towle, director of financial services, State of Vermont
“Cyber coverage is another vital element of risk financing and control that a captive owner and their manager needs to explore and, if they decide to, then implement,” she said.
“Here in Vermont, we have a host of highly skilled professionals who focus on managing, consulting and advocating for captive insurance companies, including attorneys, auditors, accountants, actuaries and consultants.
“They also have at their disposal a huge network of resources to assist captive owners with every type of solution, including cyber coverage.”
Dan Towle, director of financial services for Vermont, said he has seen the benefit of this move toward captives for cyber coverage. The problem is the traditional insurance market has failed to keep pace with the needs of the industry.
He said that because of the limited capacity available and existing exclusions on cyber coverage, captives are often a better solution for companies looking to insure their specific risks.
“I believe that the growth potential of cyber coverage being written into captives is tremendous,” he said.
“Above all, they can fill many of the needs for cyber coverage that are not readily available in the commercial marketplace.”
A Captive Risk Manager’s Perspective
Gary Langsdale, risk manager at Pennsylvania State University, which owns a captive domiciled in Vermont that writes cyber coverage, said that as a higher
education institute, it was often difficult to find the right policy in the commercial marketplace because of the risks associated with cyber, making a captive a more viable option.
He said that having a captive for this purpose gave the university the flexibility to self-fund its own program using a two-tiered deductible — the first for the academic units that don’t follow good practice and the second for those that suffer a breach regardless.
“Over the years, it has become increasingly difficult for us to find a home for cyber insurance, largely because as a university we have a very open IT infrastructure as often we need to share information with publications and other external collaborators,” he said.
“That has meant that in the past commercial insurers have held that as a black mark against us, but having our own program has allowed us to get information about those breaches more readily and be more in control of our own risks.”
Vermont — the Domicile of Choice
Jason Flaxbeard, executive managing director at Beecher Carlson, which manages 24 captives in Vermont, said that the state’s key selling point is its ability to be on the cutting edge of technology, as well as taking a risk-based approach to new coverages like cyber.
As a result, he said, Vermont has been proactive in opening its doors to new business and has already started to reap the rewards.
“Vermont is an excellent place to base efforts to provide protection against rapidly developing exposures such as cyber risk.” — Eric Dethlefs, CEO, Cassatt
“I’m a big fan of proper and appropriate regulation and in having someone who will take your call and help you to work out a solution to your problem; in that regard,
Vermont has always provided that service to a very high level,” he said.
“It’s a mature domicile, and there are enough people there who understand the captive insurance industry and the risks associated, and above all they understand who their clients are.”
Jim Swanke, director of risk consulting at Willis Towers Watson, said that
Vermont’s ability to provide “out of the box” innovative solutions made it an obvious choice for companies looking to write cyber in their captive programs.
“They got into the captive business in 1981 and they have really got the whole captive management process down to a science in terms of the regulatory environment and the solutions they can provide,” he said.
Eric Dethlefs, CEO of Cassatt, an insurance product and service provider, said that with more than 1,000 licensed captives on its books, Vermont was the “gold standard” for captive insurance regulation.
“Vermont is an excellent place to base efforts to provide protection against rapidly developing exposures such as cyber risk,” he said.
“As cyber and privacy breach risk continues to emerge as a widespread global threat, I think that the attractiveness of forming a captive for this purpose will become an increasingly popular option.”
The Future of Captives for Cyber Insurance
Julie Boucher, Marsh Captive Solutions Practice leader, Americas, said that the use of captives for cyber coverage would only continue to grow in the future.
“The growth potential is huge because every day I see the ongoing conversations
between captive managers, regulators and service providers, and the complexity of analytics around the use of cyber in captives continuing to evolve,” she said.
“For the moment, it remains to be seen how many captive owners will actually pull the trigger, but the interest is certainly there.”
Bigglestone believes that as companies continue to develop strategies to deal with cyber risk, the uptake of captives for that purpose will only increase going forward.
“I expect that Vermont’s role will be significant in that space, as we become more experienced with cyber risk, and well-positioned to accommodate new captives seeking to write cyber coverage, and existing captives expanding their businesses,” she said. &
Struggling With Safety Rules
Manufacturers that have operations in one or more states have the complex task of complying with either state or federal safety and health standards — and the provisions are not always in alignment.
Failure to do so means they run the risk of being hit with hefty fines totaling hundreds of thousands — or even millions — of dollars.
The U.S. Occupational Safety and Health Administration (OSHA) requires all companies to meet its regulations as a minimum. However, firms that have operations in one of the 26 states that have adopted their own occupational safety and health rules must also adhere to each state’s rules.
State-run programs are required to meet minimum federal requirements, but often they are more stringent. In many cases, companies operate in multiple states, so they have to subscribe to a range of different standards for each state.
Employers are required only to comply with the state-run program; if there is no state program, they must comply with the federal rules.
To compound this, according to industry sources, federal OSHA has just increased the maximum penalty by nearly 80 percent for failure to comply with its standards, meaning that companies that fail could be hit with a fine of $125,000 or higher for a serious violation.
And with thousands of cases of workplace injuries believed to be unreported every year, federal OSHA is now tightening the net on willful and repeat offenders.
“State plan standards are often higher or exceed those of federal OSHA,” said Robert Cartwright, safety and health manager for Bridgestone Retail Operations LLC and a board director of RIMS.
“With fire safety, for example, in states like California, where they have had a certain violation or frequency and severity of violation, the state may decide to apply their own set of standards that are tougher than the federal OSHA.
“In my experience, in those particular cases, the fines tend to be higher and the citations more detailed than they would be from the federal authority.”
State vs. Federal OSHA
David Carlson, Marsh’s U.S. manufacturing and automobile practice leader, said that state plans are often more stringent in terms of enforcement protocols and the composition of their hazard communication programs such as labeling requirements, exposure limits and types of chemical used.
For example, he said, California created a standard specifically focused on reducing and eliminating hazardous chemicals from the workplace. It has significantly tightened up exposure limits and the quantities that can be stored.
Dave Barry, senior vice president and national director of casualty risk control at Willis Towers Watson’s risk control and claims advocacy practice, said California’s state plan requires companies to implement a written injury and illness prevention plan, while federal OSHA does not.
Sometimes, he said, the U.S. regulations will be revised to match state rules, such as the requirement for reporting an amputation, hospitalization or loss of an eye within 24 hours, which had already been in force in states like California for several years.
“The state programs typically focus their efforts on the specific industries in their state, for example if they do a lot of agriculture, whereas federal OSHA standards are not necessarily geared toward one particular industry,” he said.
He said that regulations often vary widely from state to state.
On the other hand, Mike Heembrock, vice president and executive specialist, risk engineering at Chubb, said that states often fall short of federal OSHA enforcement performance in terms of inspections and fines because of staffing and resource limitations due to budget constraints.
“In general, because of the relatively low salary and operating budgets, states have struggled to recruit new inspectors and often they don’t have as much experience as federal inspectors, so it’s been difficult for them to meet federal OSHA performance criteria,” he said.
Risks for Manufacturers
Carlson said that the biggest risk for manufacturers operating in multiple states is to understand how to comply with different state and federal standards and record-keeping requirements.
“If you have operations, say, in California, Michigan, Oregon or Washington, those
all have their own state plan programs that you need to be aware of and comply with, not to mention the administrative burden and costs associated with complying with federal OSHA in other states where they may operate,” he said.
“That’s a challenge for not only a large manufacturer like Ford or GM, but also for smaller businesses with operations across the U.S.”
Carlson said that oftentimes companies become preoccupied with emerging risks such as cyber and overlook the broader risk of their employees’ health and safety.
“At the end of the day, the largest variable cost of risk for most manufacturers is still the workers’ compensation and employee benefits programs,” he said.
“The problem is that too many employers look at it simply as the cost of doing business; however if they focused on it, that’s the area where they could reduce claims and financially protect their balance sheet.”
Fines and Penalties
U.S. OSHA raised its penalties for the first time in 25 years, by 78 percent last November.
The maximum fine for a serious violation rose from $7,000 to $12,500, and the maximum willful or repeat violation increased from $70,000 to $125,000. State plans are expected to follow suit, taking effect from August this year.
And from now on, the penalties will be increased every year.
“I think we are going to see a lot more of these types of changes as the current administration leaves office,” said Barry.
“It’s been 25 years since the fee schedule has been increased and now it will be increasing every year, so I think we are going to see more additional requirements along these lines come into force.”
The maximum penalty per citation can also be higher if it is an egregious violation, said Adele Abrams, whose law practice is based in Beltsville, Md.
“If you have, for example, 10 employees working on a conveyor system in your facility and it doesn’t have adequate guards in place to protect them from injury, federal OSHA would usually issue a single citation with a maximum penalty of $70,000,” she said.
“However, if all of a sudden they decided it was an egregious violation, because there are 10 workers involved, you could be fined up to $700,000, and you would be put into a ‘Severe Violator Enforcement Program’ for at least three years.”
Christine Sullivan, vice president of risk control services at Lockton, said manufacturers should “avail themselves of the relevant programs that federal OSHA provides.”
“There are a lot of programs and resources out there than can help a risk manager to identify the pitfalls and build a thorough and reliable safety program.” &