Betting on the Weather
Apart from an attendee dying, rain is perhaps the worst thing that can happen to a festival,” said Christian Phillips, contingency underwriter at Beazley. “An angry few hours from Mother Nature can cost hundreds of thousands of dollars, dampening profits even for sold-out festivals and negatively affecting on-the-ground consumer spending.”
Yet according the insurance industry, many event and hospitality companies continue to find themselves inadequately covered against losses that could arise from adverse weather, or are unaware of the insurance coverage options available to them.
“A protection gap exists on weather coverage for events companies,” said Tanguy Touffut, global head of parametric solutions at AXA, who believes those buying coverage are in the minority.
“However, increasing weather anomalies as a consequence of climate change, as well as the emergence of innovative insurance solutions such as parametric insurance, are fueling increased demand for such covers from events companies.”
Typically, event organizers must choose between event cancellation coverage — a broad policy that compensates the insured if their event is cancelled for a multitude of reasons beyond their control — or a parametric weather policy that pays an agreed sum if a certain weather trigger is hit, for example, half an inch of rain over four hours.
While the weather policy won’t cover against the wide range of perils the cancellation policy would (such as fire, terrorism or road blockages), it does cover against the lost income from attendees leaving a weather-affected event early. But that kind of loss wouldn’t be covered under a cancellation policy because the event must be cancelled to trigger a payout.
“This presents companies with a tough choice. They usually don’t have the budget for both policies, and weather can be a little more expensive as it is a stated value policy.
“If the client picks the wrong coverage and loses money, they will be upset,” said Marlene Benoit, promotions and events leader for broker Lockton.
Beazley has gone some way to bridge the gap with a new product that is a hybrid of both types of coverage. As well as offering broad cancellation cover, the product also establishes a weather trigger on which it will pay a fixed sum to compensate for lost revenue.
Benoit said she believed other insurers may soon introduce similar products.
“When the industry comes up with something unique in the marketplace, others will follow, particularly when it is well-received and there is demand.”
Weather observation techniques and data gathering has improved markedly in recent decades, and insurers now have a data bank of at least 30 years of high-quality data as a base for their underwriting.
“Additionally, the capacity to process these data has improved tremendously, which gives us very sophisticated indexes that better reflect the clients’ risk,” said Touffut.
However, gaps in coverage remain.
“We allow the insured to choose a threshold amount of rain at the front end of the policy. However, we can’t cover every eventuality,” said Phillips.
“If they insure against half an inch of rain but it rains 0.49 inches and people still leave their event, there will be a gap in cover.”
“Due to budgeting, companies may choose a threshold that is too high, and when they have a weather claim, it doesn’t hit the trigger mark, so they end up paying for a policy that doesn’t pay out,” said Benoit.
Indeed, while improved climate data makes weather parametrics relatively reliable, attendee spending behavior is harder to predict.
“We try to bring our knowledge of what we’ve seen in the past to give guidance, but it is still subjective,” admitted Phillips.
If more than one-third of an inch of rain falls, some attendees will normally leave an event, Phillips said, particularly if the rain falls persistently over several hours rather than in a short, sharp downpour. Clients typically stand to lose around 20 percent of their projected revenues from weather-related departures, though this figure could vary depending on the nature of the crowd, he added.
Combining weather data with Big Data on consumer spending habits to model the effect weather has on behavior at events seems an obvious next step to enhance the insurance offering.
Insureds can improve their chances of securing appropriate coverage by delving deep into their own revenue histories. “We ask the client for historical cancellation and revenue data over the longest period possible,” said Touffut.
Combining weather data with Big Data on consumer spending habits to model the effect weather has on behavior at events seems an obvious next step to enhance the insurance offering. However, James Ingham, head of renewables at risk analytics specialist Sciemus, said that in an age when “data is king,” it may be hard to get data providers to collaborate.
“It can be done, but you would need a large provider like Google Public, for example, to host data covering multiple events across multiple demographics and geographies over a number of years in order to give event organizers full confidence in the inferences. You would also need a secure neutral environment to encourage Big Data providers from other areas such as credit card providers to also collaborate,” he said.
Touffut added that as the quality and amount of data and Big Data processing methods continue to improve, “indexes will become more precise and the models used to design parametric insurance products will even more accurately reflect the clients’ risk.”
“Furthermore, as parametric insurance fixes most of the ‘pain points’ of traditional insurance, both from the claims view and from the purchasing view, we expect this type of insurance to greatly propagate and eventually cannibalize some forms of traditional insurance,” he said.
But as Phillips pointed out, it is often only after an events company suffers a damaging loss that they will consider seeking cover. “Someone may have run an event for 30 years and never had a problem, but weather is changing. Companies can’t afford to rest on past weather patterns.” &
Corporations Get Creative With Cells
Cell captives have become extremely popular self-insurance tools for companies of various sizes across all sectors, with cell legislation enacted in more than half of U.S. states and cell formations now outstripping stand-alone captive formations in many onshore and offshore captive domiciles.
Protected cell companies (PCCs, also known as a segregated accounts companies or segregated portfolio companies) consist of a core company that writes and administers ring-fenced insurance policies in underlying cells, whose policies and accounts are segregated from other cells in the PCC.
The recent development of incorporated cell company (ICC) legislation in a handful of jurisdictions enhances PCC features by granting each cell distinct legal status.
As well as being quick to set up, cells require significantly less capitalization than stand-alone captives, while shared costs among the participants and core lead to economies of scale. It is little surprise that since the first PCC was formed in Guernsey in 1997, they have proliferated and broadened.
“Risks written through cells are becoming more sophisticated, expanding beyond traditional medical malpractice, workers’ compensation and property insurance,” said Paul Scrivener, a partner in the Cayman Islands’ law firm Solomon Harris.
Cells are being touted, for example, as a potential solution to cyber risk, one of the insurance industry’s great challenges.
Cells for Every Risk
“If you have a structure with different risk profiles within different cells, it may make sense to put cyber risk in a separate cell rather than co-mingle it with traditional lines of insurance as it is very different and unique,” said Scrivener.
“Some have suggested using a cyber cell because you are looking at low frequency, high severity situations,” added Tom Jones, partner with McDermott, Will and Emery. Questions remain, however, over how best to address coverage terms, exclusions and payout limits, he said.
Cells are also growing in popularity in the health care space, particularly for medical malpractice risks.
“Hospitals may set up cells for independent physicians or group faculty plans if they want to assist them with insurance but don’t want to co-mingle the loss reserves,” Jones said.
Scrivener recently converted a single parent health care captive to a cell structure so it could put its existing hospital program into one cell and create a second cell to insure the risks of the self-insured physicians within the hospital.
Ascension Insurance Services set up Cayman’s first portfolio insurance company, AARIS, in 2015 to offer workers’ compensation solutions to agribusinesses, but now intends to roll out flexible workers’ comp cells to other sectors including the trucking and automobile racing industries.
“We’re getting calls from all around the country,” said Paul Tamburri, Ascension’s West Coast risk management practice leader, adding that the next step could be to write employee benefits stop loss through AARIS.
Cells can offer a fast route into captive insurance for employee benefits programs, while many regulators have yet to find a comfort level with stand-alone employee benefits captives.
“Getting the whole cell structure approved up-front makes it relatively easy to add cells. Instead of taking six months to get approval, we can get a cell approved in a matter of weeks,” said Karl Huish, president of captive services for Artex Risk Solutions, which runs a PCC-like employee benefits series business unit named Sentinel Indemnity in Delaware.
“Getting the whole cell structure approved up-front makes it relatively easy to add cells. Instead of taking six months to get approval, we can get a cell approved in a matter of weeks.” – Karl Huish, president of captive services, Artex Risk Solutions
“The cells in Sentinel each have different employee benefit captive structures, including one that is for a group of credit unions who want to pool risk together for their health insurance,” he added.
According to Guernsey Finance, multinational corporations can use cells as fronting vehicles through which to gain access to the reinsurance market. A cell can be used to issue an insurance policy to the insured that is mirrored by a policy between the cell and a reinsurer, and while the cell retains no risk, the corporation benefits from access to cheaper wholesale reinsurance cover.
The ability for numerous small companies to group their insurance risks in a cell means the self-insurance business is no longer reserved for big corporations. Huish believes a group of insureds must have projected annual losses in the region of $5 million or above to justify forming a cell, while that figure would be closer to $3.5 million for individual cell owners.
Insured Turns Insurer
More than simply participating in their own risks and enjoying greater control and premium savings from self-insurance, an increasing number of companies see PCCs as an opportunity to generate cash flows while strengthening bonds with business counterparts. Indeed, any company comfortable with the self-insurance concept can set up its own PCC to offer insurance solutions to third-party clients, suppliers or partners.
Not only does the sponsor of the PCC get closer to the risk of companies that affect its own risk profile, but it can also add value to its service propositions by offering valued third parties a quick, cheap route into self-insurance.
“Setting up your own PCC is a way of locking in clients, strengthening relationships and generating revenues, while also offering profit sharing opportunities between the PCC owner and its clients,” said Clive James, consultant at Artex Risk Solutions.
While this may be a natural fit for financial services firms, the concept can be applied to any sector, and may be particularly useful for those that operate on a project-by-project basis.
Construction firms, for example, are setting up PCCs through which the underlying cells write segregated insurance coverage for distinct projects, partners or groups of subcontractors. Freight storage unit owners are already using cells to self-insure the fire, theft and flood insurance they provide to licensees of the units, and there are myriad opportunities for health care organizations to offer insurance across their networks via cells.
Companies that lack the insurance expertise to run a PCC themselves would outsource this responsibility to an insurance manager in the same way stand-alone captive administration is outsourced — at a similar cost.
As PCC sponsors must ultimately compete with guaranteed cost options in the commercial marketplace, Tamburri noted it is essential to educate potential clients that participation is both a long term commitment and also an opportunity to recoup underwriting profits they would otherwise lose if they stayed with commercial insurers.
“One hurdle is getting data from prospective clients,” said Tamburri. “It’s a lot of work for them to get together historical loss and exposure information. Smaller companies may wish to join the group but fear that they will do a lot of work only for the cell not to get off the ground.”
Such is the decision all companies must make when considering self-insurance, whether taking an individual cell or going a step further by forming a full PCC for third parties to join. What is clear is that cells give risk managers more options than ever before. And when insured becomes insurer, it is surely a sign of insurance industry evolution and innovation.
From personal items such as e-cigarettes, cellphones and laptops to power tools, hoverboards, electric vehicles and alternative energy storage, rechargeable lithium-ion batteries (LIBs) come in all shapes and sizes, and are integral to modern living.
But despite their increasing application, the fire risks associated with LIBs have gained publicity of late, piquing the interest of insurers across a range of disciplines, from property and casualty to supply chain to product and environmental liability.
If overheated, LIBs can enter “thermal runaway,” emitting flammable material — sometimes in the form of small explosions; the bigger or more powerful the battery, the more impactful the event.
LIBs include a number of safety features to minimize the risk of thermal runaway. However, overcharging, damage to the battery, using an improper charging device or even excessive discharge can all trigger the problem.
After a UPS plane carrying a bulk LIB cargo caught fire and crashed in 2010, at least 18 airlines, including Cathay Pacific, Emirates and Qatar Airways, banned the bulk haulage of such cargo, causing supply chain headaches for companies transporting LIB products.
There have also been incidents when personal items have ignited in the carry hold on passenger flights.
A study by the Federal Aviation Administration (FAA) showed that gas venting from the batteries had the potential to “rocket” the battery away from the heat source. In a bulk storage facility, this could send batteries off into other parts of the warehouse, spreading the fire.
“If you are selling lithium batteries, it is even more important to have detailed instructions and warnings because there are so many things that can go wrong.” — Paul Owens, products liability manager, Sadler Products Liability Insurance
Indeed, bulk storage situations pose the biggest threat due to the risk of contagious overheating when multiple batteries are in close proximity.
“When you have a lot of these batteries together, fires can grow very quickly and be very damaging,” says Lou Gritzo, vice president of research at FM Global.
However, Gritzo’s firm said it made a major research breakthrough in April that could help mitigate LIB fire risk.
In partnership with the National Fire Protection Agency and the Fire Protection Research Foundation’s Property Insurance Research Group, FM Global conducted a first-of-its-kind warehouse fire test on the type of LIBs used in electric cars and energy storage. The test, he said, identified a sprinkler configuration that provides an “adequate fire protection point.”
Gritzo hopes the test results, which he expects to be published in a few months following data quality assurance checks, can be taken on board as an industry standard.
The results do not resolve the issue of air cargo safety, though some findings may be extrapolated out to develop in-flight fire extinguishing systems and improve safety for LIB cargo transportation.
Beyond the warehouse environment, LIB-powered devices present a product liability risk for manufacturers, importers, distributors and retailers. The biggest hazard lies in importing products that have been installed with defective or even counterfeited batteries that have been repackaged and rebranded to look superior.
In February, for example, U.S. Customs and Border Protection seized 3,500 hoverboards worth $1.8 million that reportedly contained substandard counterfeit batteries that posed a safety risk.
“If you are an electronics manufacturer, it is essential you know who and where you are buying your batteries from, that you are getting high quality batteries, and that they have high thermal runaway thresholds,” said Morgan Kyte, senior vice president and technology team leader at Marsh.
Detailed Warnings Required
The importer of defective goods is considered the manufacturer in the eyes of the law, and in the eyes of insurers in the event of a claim, said Paul Owens, products liability manager at Sadler Products Liability Insurance.
“Importers are top of the pyramid in the U.S. as no one is going overseas to recover,” he said. Most importers are buying from companies whose product liability policies won’t respond in the United States.
“Warning and instruction defect is a common entry into a product liability lawsuit,” Owens added.
“If you are selling lithium batteries, it is even more important to have detailed instructions and warnings because there are so many things that can go wrong.”
“When you have a lot of these batteries together, fires can grow very quickly and be very damaging.” — Lou Gritzo, vice president of research, FM Global
Retailers and wholesalers who purchase from U.S. manufacturers at least know they have a route of recourse in the event of a claim, though it is likely they would be dragged into litigation.
When e-cigarette user Jennifer Reis was set on fire in 2015 when the battery in her device exploded, the e-cigarette’s distributor, wholesaler and even the Tobacco Expo store where she bought it were all named in the lawsuit. Reis was awarded $1.9 million in damages.
“Retailers and distributors should ask their suppliers to name them as additional insureds on their policies,” said Owens.
“If you are named as an additional insured, the importer’s policy is primary and yours is secondary, which is an important step for retailers and wholesalers.”
However, Owen noted, not all insurance carriers are comfortable writing coverage for LIB-powered products.
“You have to be very careful with the policies you buy as some can be very narrowly written — some have full health-hazard exclusions, and for items like e-cigarettes this leaves very little coverage.”
It is not always easy to determine whether a thermal runaway event has been caused by a defective LIB, a defective electronic device or human error, Kyte said.
“Often there is not much material left after one of these, though there are certain tests that can be done and sometimes it is possible to extrapolate a sequence of events to determine the cause.”
The best way to avoid expensive product liability claims is to only buy and sell LIBs and chargers of the highest quality.
“This will cost you and your customer a little more, but it’s nothing compared to the increase in premiums after a product liability claim,” said Owens.
Lithium manganese (lMR) and hybrid (NiMH) batteries are considered chemically safer than most LIBs and do not require protection circuits, he said.
“Importers need to be good engineers. They should make sure they buy from reputable sources and it is advisable to batch test products that contain LIBs,” he added. &