Their emergence has been hailed as a “game changer” and “the biggest discussion topic in insurance.” Inspired by developments in the consumer marketplace, connected personal protection equipment, or “wearables,” can track a variety of employee risk factors and generate data so powerful that many believe it will revolutionize workplace safety procedures and risk modeling.
Health-related wearables such as the FitBit are taking the consumer market by storm, but far more powerful technology is being developed and implemented in commercial settings, from heavy industry to aviation, logistics and manufacturing.
Mining giant Rio Tinto is an early adopter of wearables, providing its workers with a “SmartCap” that measures brainwaves to detect fatigue. Honeywell and Intel recently released a prototype of their “Connected Worker” solution for industrial workers and first responders, which uses a hub of sensors to track workers’ location, vital signs, motion and exposure to hazardous gases.
Whether in the form of vests, caps, glasses or materials, it is now possible to generate valuable data that brings risk managers and insurers closer to workplace risk than ever before. It is hoped these insights should in turn help safety supervisors improve workplace design and procedure, foster safer worker behaviors and reduce workers’ compensation claims.
Having observed several pilot studies closely, David Bassi, former head of innovation and risk consulting, casualty for AIG, said safety wearables could reduce losses by up to 50 percent in some situations.
“The test cases are so compelling, it’s just a matter of scalability,” he said.
“The explosion will come pretty quickly. Virtually everyone I know in a safety role at a big company is interested in participating in a pilot or thinking about how to incorporate this kind of technology into their workplace.”
With demand strong, supply growing and costs coming down, the final piece of the puzzle is the insurance market, which insureds hope will begin to offer responsive pricing, customized products and client incentives once wearables’ benefits begin to be realized.
“In an age when data is becoming ever more critical for the insurance industry, this is huge,” said Michael Sillat, CEO of WKFC Underwriting Managers (part of Ryan Specialty Group). “A lot of the technology being developed is only being spoken about and is not available in the marketplace, but it has certainly grabbed my attention and that of many of my peers,” he said.
“Connected devices are going to have profound implications for the commercial property casualty insurance world, and wearables in particular are going to be very important in improving worker safety,” said Lex Baugh, president of casualty at AIG, which recently invested in wearable tech firm Human Condition Safety.
Nigel Walsh, vice president of CapGemini, expects more partnerships of this ilk, and heralds the ability to interact and advise on a daily, hourly or real-time basis as “game changing” for insurers.
“Insurers will no longer be claims paying companies — they will become better risk managers. When you provide value-added service and insight driven out of IoT, rather than just changing the price, you create real engagement and real value,” he said.
However, insurers don’t make knee-jerk adjustments to their terms or pricing, so for now organizations will need to take something of a leap of faith, and invest in wearables knowing it may take a number of years for improved loss experience to yield premium reductions.
The costs associated with implementing wearables into the workplace vary hugely, from a few dollars for the most rudimentary device up to millions for enterprise solutions including real-time feedback loops, network operation centers and the latest wearable technology. While the cost of equipment and data capacity continues to slowly decline, companies will need to think carefully before investing.
Rachel Michael, senior consultant in Aon Global Risk Consulting’s ergonomics practice group, said there are “no excuses” for not knowing the location and well-being of workers in hazardous jobs like firefighting or mining, for whom even expensive investments will be worthwhile, but she pointed out that companies should be sure they have done all they can to improve workplace ergonomics prior to investing.
“If an employer is palletizing 30-lb. boxes at ground level, do they really need a wearable spinal loading measurement system to determine whether this is bad?
You could save lots of time and money if you fix your line first,” she said.
Data management is also a concern — both in coping with the sheer volume of data (which Bassi said runs on some pilots into exabytes per week) and also avoiding what Michael terms “death by data” — having reams of information at your disposal but no clear plan of action.
Before a wearable technology is even considered, Michael said a planning discussion including the risk manager, HR, IT and possibly several other departments must take place. “You need to understand how much and what type of data is to be collected, how it is to be used, and what changes can be driven with the outcomes,” she said.
And companies should be prepared in case data raises uncomfortable truths, she added.
“If you hook all your workers up to smart caps and find that they are all suffering fatigue, are you willing to shut down your operations?” Michael asked, noting that this would be all but impossible in industries such as health care, firefighting or aviation.
Wearables are faced with various other challenges — from unions raising objections over potential worker discomfort or invasion of privacy, to workers becoming over-reliant on or overconfident because of the technology, or even the potential health risks associated with prolonged proximity to sensors and WiFi.
Then there are the questions around liability. If a worker with known heart issues has a heart attack on the job, could an employer tracking the vital signs be deemed negligent for not acting on warning signs? Would companies use wearables to offload responsibility for unsafe practices and workplace injury on their staff?
Ultimately, this highly promising technology should offer a win-win for insureds and insurers alike, but it can only be successful if the data is used effectively and risk managers enforce best practices through training, education and procedures.
“If all we do is sit back at the end of the week and look at the data, we’ve missed the opportunity,” said Michael.
Danger in the Cockpit
Improved risk management, advances in computer technology and an industry-wide focus on training and analysis transformed commercial aviation safety in recent decades, placing it among the safest industries in the world for both staff and customers.
Pilots now have their every input monitored and analyzed. This enables retraining of bad habits and a common aspiration to fly “the perfect flight.”
Improved airplane construction and in-flight safety systems also reduce the likelihood of system malfunction to a miniscule level.
However, a spate of unusual events in 2014 and 2015 serve as a tragic reminder of the ever-evolving challenges facing risk managers.
“Airlines are very determined when it comes to safety and security threats — they are constantly trying to mitigate risk, are very proactive in dealing with threats as they arise, and money is no object when it comes to implementing new safety measures.” — Nigel Weyman, CEO of aerospace, JLT
In July 2014, Malaysia Airlines Flight 17 was shot down over Ukraine by a rogue Russian missile, killing all 298 passengers> This occurred just four months after the same airline’s Flight 307 simply disappeared — prompting many to speculate that its pilot committed suicide, taking 239 passengers with him.
This once inconceivable scenario occurred again less than a year later. In March of 2015, Germanwings co-pilot Andreas Lubitz locked himself in the flight deck and deliberately crashed Flight 9525 into a mountain in the Alps, killing 150 people.
Lubitz reportedly endured severe depression in the weeks leading up to the crash, but his doctors never told Lufthansa, his employer.
Within days of the Germanwings disaster, the vast majority of airlines introduced a rule that there must always be two members of crew in the flight deck at any one time (“two-pilot rule”), while the shooting down of Malaysia Airlines Flight 17 prompted carriers to re-evaluate routes, security threats and safe altitudes over certain geographical areas.
“Airlines are very determined when it comes to safety and security threats — they are constantly trying to mitigate risk, are very proactive in dealing with threats as they arise, and money is no object when it comes to implementing new safety measures,” said Nigel Weyman, CEO of aerospace at JLT.
Malicious Acts Offset Operational Safety Achievements
“The whole airline industry is benefiting from an improved period of operational safety, but malicious acts, from pilot suicides to the deliberate or accidental shooting down of aircraft, seem to have taken the place of expected operational losses, creating a sad counterbalance to what would otherwise be a very encouraging period for the sector.
“Psychological and terrorist losses are difficult to predict,” Weyman said.
Aviation regulatory bodies are currently discussing, with input from airlines and pilots, whether to make the two-pilot rule mandatory, but not all airlines buy into the logic behind it, according to a pilot for one of the world’s leading airlines, who wished to remain anonymous.
“My airline has been reluctant to implement [the two-pilot rule], and even Lufthansa resisted it initially before backing down due to media pressure,” he said, warning that implementing a “knee-jerk reaction” could increase an aircraft’s vulnerability to terrorism.
“There are in excess of 35 million commercial flights globally each year and only one known case of pilot suicide in European airspace history, so you have to weigh up the risks,” he said.
“If a terror organization wanted to plant a sleeper on a plane, it is far easier for a radicalized person to be employed as cabin crew than to pass the pilot exams.
“Many of my colleagues feel safer trusting the pilot community, and keeping the flight deck a pilot-only environment, as the chance of a pilot committing suicide is so slim it is not worth the risks associated with giving crew access to the flight deck.”
It could be argued that some aspects of the Germanwings disaster are rooted in the industry’s reaction to 9/11.
Following that attack, all airlines installed armored flight deck doors to prevent terrorists entering the cockpit — making it virtually impossible to break in if a suicidal pilot decided to lock themselves in.
There’s the rub; in mitigating one risk, you often create new ones.
“You can’t eliminate every risk from every aviation operation, no matter how miniscule those risks might be, and that’s why people buy insurance,” said Weyman.
Insurance Protection for Malicious Acts
Malicious acts by either staff or third parties are currently covered under stand-alone hull war policies, though passenger liability is covered under airlines’ standard hull liability programs.
Weyman noted that, in spite of a number of significant losses between 2013 and 2015, rates continue to slide.
“This is partly because we brokers have argued that these were very unusual events, the industry has closed the door on this happening again, and the world moves on,” he said.
“Mathematically, rates probably should have increased, but the aviation market is very competitive and overserved with capacity, preventing underwriters from reacting to these events.”
“Insurers,” said Richard Power, founding partner of specialist aerospace underwriter Altitude Risk Partners, “must determine whether the recent spike in this kind of incident is a temporary anomaly or whether it is indicative of heightened risk going forward.”
Power noted that the subjective nature of the risk — and the fact that pilot trade unions have resisted the introduction of psychometric testing and the sharing of pilots’ medical information with employers — make it extremely difficult to predict how frequently malicious acts will occur or how effective new security measures will be in preventing future incidents.
“One option may be for the insurance industry to exclude malicious acts from the standard hull liability policy,” Power said.
“Unlike modeling the frequency of losses caused by mechanical failure or human error, underwriters are now faced with the challenge of pricing a much less tangible and quantifiable risk, and it may therefore be necessary to separate malicious acts out into its own separately rated policy, as is done with hull war.”
Power added, however, that brokers and clients have no incentive to accept such changes in the current environment.
The aviation insurance industry is awash with capacity and aviation insurers are under pressure to broaden terms while cutting their cost base, giving them little room for leverage.
Spotting the Warning Signs
So far, there has been no repeat of the Germanwings disaster.
While it is impossible to tell whether a similar incident would have occurred without the new two-pilot rule, the tragedy has undoubtedly brought pilot mental health firmly into the spotlight.
“The best way to prevent another Germanwings is to catch the problem at its source and stop troubled individuals from flying,” the pilot said.
His airline has increased the psychological component of its annual medical checks.
“The best way to prevent another Germanwings is to catch the problem at its source and stop troubled individuals from flying.” — anonymous pilot
It created a new “well-being officer” role, and encourages staff to “self-regulate” by coming forward with concerns about either themselves or others without fear of judgment or punishment.
French air crash investigators in March called on aviation authorities around the world to take this one step further by loosening existing privacy laws to allow doctors to inform airlines if a pilot is mentally unstable.
This clearly presents a complex ethical conundrum.
On a practical level, the pilot said, it is essential that troubled pilots are able to seek counseling confidentially.
“The emphasis has to be on the pilot being able to pick up the phone and talk about their problems and get advice,” he said.
“If they think what they say will be reported back to the airline, they may fear they are risking their careers and decide not to make the call at all, which is far more dangerous.”
However, he added, it is important to keep the risks in context.
“Aviation is so safe now,” he said.
“We dedicate a huge amount of time and resources to identifying and removing what minute risks exist, with the aim of making every flight so accurate that the chances of a crash are one in a billion.”
Last November, a global study of 3,000 small and mid-size enterprises (SMEs) found that only one in seven SMEs think their business would be significantly affected if they lost their main supplier.
Overall, 39 percent of SMEs consider themselves at risk from the loss of their main supplier, yet 55 percent believe it would not influence their day-to-day business.
Meanwhile, the “2015 Supply Chain Resilience Study” by Zurich and the Business Continuity Institute (BCI) found that while 74 percent of companies experienced at least one supply chain disruption in the last year, only half of those disruptions were known to originate from Tier 1 (immediate) suppliers, and 72 percent of respondents admitted they did not have full visibility into their supply chain.
“Supply chain risk is a blind spot for a lot of organizations.” — Karl Bryant, senior vice president at Marsh Risk Consulting
“This makes us believe that SMEs probably underestimate their supply chains risk exposure, and we urge them to reassess this,” said Nick Wildgoose, Zurich’s global supply chain product leader. He added that visibility and resilience along supply chains are major sources of competitive advantage.
BCI warned that organizations could be “driving blindfolded into a disaster.”
Companies at most risk are those reliant on “sole source” suppliers — one-of-a-kind manufacturers whose components are either of unique quality or are unavailable elsewhere in the market.
In today’s lean manufacturing era, fewer companies keep spare inventory, so if a critical component ceases to be available it can quickly prevent a company from producing its core product or service, leading to lost revenue, diminished service, dissatisfied customers and, in extreme cases, business closure.
Supply chain risk lurks in many forms. According to the BCI, IT and telecoms outages, adverse weather, and for the first time, cyber attacks/data breaches are
the top three causes of supply chain disruption. Another emerging risk is “business ethics,” which placed in the top 10 for first time.
“Supply chain risk is a blind spot for a lot of organizations,” said Karl Bryant, senior vice president at Marsh Risk Consulting.
Complacency that suppliers have everything under control can be a problem, said
Ken Katz, property risk control director at Travelers.
“When a risk exists outside your own four walls and you are focusing on your core business there is reduced visibility to the potential destruction it can cause,” Katz said.
To make matters worse for SMEs, smaller companies are likely to feel the effects of a supply shortage first as suppliers will invariably prioritize their biggest accounts if outflow is reduced.
“I’d love to see companies with six months’ supply, or matching supply against their expected downtime and their assets, but that’s a losing battle — no one wants inventory these days,” said Bryant.
Former RIMS President Rick Roberts, director of risk management and employee benefits at Ensign-Bickford Industries (EBI), said supply chain disruption is a “huge issue. People who’ve never had a problem often sit back and don’t pay much attention, but up-front work is critical because when a problem hits it can be major.”
Roberts, whose company is both a customer and supplier, said some of EBI’s customers require his company to keep a number of months’ worth of supply as inventory as part of their agreement. However, few SMEs have the leverage to wield this kind of influence.
To fully understand their supply chain exposures, Bryant suggested SMEs conduct a “value segmentation” exercise, identifying mission-critical areas of their
business, such as those that generate the highest margins or growth.
Then, Katz said, they should conduct a “business impact analysis,” simulating the repercussions of vital components being undeliverable.
It is also essential for SMEs to get to know their suppliers’ finances and quality of work as best they can, he said.
Bryant said that companies should compile a matrix of their supply chain in as much detail as possible, including suppliers of suppliers, and if possible, the exposure of suppliers’ plants and operations (as opposed to regional offices) to natural catastrophe such as flood or earthquake.
SMEs should ask all their suppliers what business continuity plans and insurance they have in place, and get clarity on exactly how they will be treated should the supplier run into problems.
However, warned Bryant: “It can take a lot of man hours to send out questionnaires, follow up on them and pull the information together in a meaningful way, and many smaller companies don’t have the resources to invest in that kind of process.”
Nevertheless, this is information that empowers risk managers to make informed continuity plans. This could include, for example, finding alternative single source suppliers or new methods of production in case a sole source supplier fails to deliver, or even potentially acquire that supplier to ensure it stays in business.
There must also be a communications strategy for dealing with clients and negotiating delays. “You need a good explanation that is more sophisticated than ‘we can’t help you, I’m sorry’,” said Bryant.
Continuity planning, he said, requires a coordinated approach between risk and operational departments to ensure that gathered data is optimally leveraged. According to the BCI, only 54 percent of SMEs currently have a business continuity plan, compared to 74 percent of large organizations.
It also found that nearly six in 10 SMEs don’t insure losses from supply chain disruption, even though contingent business interruption (CBI) insurance would compensate for lost revenues during a supply problem.
This usually applies only to an insured’s first tier of suppliers, and can only be acquired if the SME has business interruption coverage.
Roberts would like to see more insurers extend coverage to second tier suppliers. “It can be expensive, and you can’t always see the benefits of being proactive — but when you get hit with a loss you’ll wish you had been prepared.” &