Coping with Cancellations
Airlines typically can offset revenue losses for cancellations due to bad weather either by saving on fuel and salary costs or rerouting passengers on other flights, but this year’s revenue losses from the worst winter storm season in years might be too much for traditional measures.
At least one broker said the time may be right for airlines to consider crafting custom insurance programs to account for such devastating seasons.
For a good part of the country, including many parts of the Southeast, snow and ice storms have wreaked havoc on flight cancellations, with a mid-February storm being the worst of all. On Feb. 13, a snowstorm from Virginia to Maine caused airlines to scrub 7,561 U.S. flights, more than the 7,400 cancelled flights due to Hurricane Sandy, according to MasFlight, industry data tracker based in Bethesda, Md.
Roughly 100,000 flights have been canceled since Dec. 1, MasFlight said.
Just United, alone, the world’s second-largest airline, reported that it had cancelled 22,500 flights in January and February, 2014, according to Bloomberg. The airline’s completed regional flights was 87.1 percent, which was “an extraordinarily low level,” and almost 9 percentage points below its mainline operations, it reported.
And another potentially heavy snowfall was forecast for last weekend, from California to New England.
The sheer amount of cancellations this winter are likely straining airlines’ bottom lines, said Katie Connell, a spokeswoman for Airlines for America, a trade group for major U.S. airline companies.
“The airline industry’s fixed costs are high, therefore the majority of operating costs will still be incurred by airlines, even for canceled flights,” Connell wrote in an email. “If a flight is canceled due to weather, the only significant cost that the airline avoids is fuel; otherwise, it must still pay ownership costs for aircraft and ground equipment, maintenance costs and overhead and most crew costs. Extended storms and other sources of irregular operations are clear reminders of the industry’s operational and financial vulnerability to factors outside its control.”
Bob Mann, an independent airline analyst and consultant who is principal of R.W. Mann & Co. Inc. in Port Washington, N.Y., said that two-thirds of costs — fuel and labor — are short-term variable costs, but that fixed charges are “unfortunately incurred.” Airlines just typically absorb those costs.
“I am not aware of any airline that has considered taking out business interruption insurance for weather-related disruptions; it is simply a part of the business,” Mann said.
Chuck Cederroth, managing director at Aon Risk Solutions’ aviation practice, said carriers would probably not want to insure airlines against cancellations because airlines have control over whether a flight will be canceled, particularly if they don’t want to risk being fined up to $27,500 for each passenger by the Federal Aviation Administration when passengers are stuck on a tarmac for hours.
“How could an insurance product work when the insured is the one who controls the trigger?” Cederroth asked. “I think it would be a product that insurance companies would probably have a hard time providing.”
But Brad Meinhardt, U.S. aviation practice leader, for Arthur J. Gallagher & Co., said now may be the best time for airlines — and insurance carriers — to think about crafting a specialized insurance program to cover fluke years like this one.
“I would be stunned if this subject hasn’t made its way up into the C-suites of major and mid-sized airlines,” Meinhardt said. “When these events happen, people tend to look over their shoulder and ask if there is a solution for such events.”
Airlines often hedge losses from unknown variables such as varying fuel costs or interest rate fluctuations using derivatives, but those tools may not be enough for severe winters such as this year’s, he said. While products like business interruption insurance may not be used for airlines, they could look at weather-related insurance products that have very specific triggers.
For example, airlines could designate a period of time for such a “tough winter policy,” say from the period of November to March, in which they can manage cancellations due to 10 days of heavy snowfall, Meinhardt said. That amount could be designated their retention in such a policy, and anything in excess of the designated snowfall days could be a defined benefit that a carrier could pay if the policy is triggered. Possibly, the trigger would be inches of snowfall. “Custom solutions are the idea,” he said.
“Airlines are not likely buying any of these types of products now, but I think there’s probably some thinking along those lines right now as many might have to take losses as write-downs on their quarterly earnings and hope this doesn’t happen again,” he said. “There probably needs to be one airline making a trailblazing action on an insurance or derivative product — something that gets people talking about how to hedge against those losses in the future.”
Winning the Benefits Battle
Employees at the national headquarters of the American Legion Auxiliary liked their health insurance plan, but they weren’t able to keep it.
Like five million other plans, their health plan was cancelled last year, leaving the Indianapolis-based veterans services organization scrambling to cover its employees.
“Anthem Blue Cross Blue Shield did away with all of their small group policies and made new ones,” said Donna Parrott, HR director of the nonprofit organization.
Fortunately for the group, they had Kevin Wiskus, an executive vice president at the Hays Cos., to protect their interests.
Wiskus, a 2014 Power Broker® winner in the Employee Benefits category, was able to find a plan that — ever mindful of the nonprofit organization’s fiscal constraints — reduced the organization’s health plan costs by about 10 percent, Parrott said.
To see all 2014 Power Broker winners, click here.
Wiskus was an area vice president at Gallagher Benefit Services when he put together a benefits solution for the American Legion Auxiliary. And, said Parrott, “it was about 16 percent cheaper than what Anthem recommended.”
“He goes above and beyond,” she said. “We are a small group but he doesn’t treat us as a small group. You would think we were his only client the way we get that personal touch.”
Going above and beyond is emblematic of Power Broker® winners in 2014 — and not just those focused on employee benefits plans.
But while Superstorm Sandy focused attention last year on the Power Brokers specializing in property, this year, it’s the Affordable Care Act that is taking center stage.
Employee benefits consultants and brokers have had to find ways to dig through 11,000 pages of regulations — regulations that have been changed at the last minute — and excavate the necessary information to protect their clients.
As individuals struggled to sign up via poorly functioning online sites and health care carriers fretted about an adverse risk pool, brokers and consultants stepped in to find solutions.
“It’s creating a lot more work for us as consultants to make sure our clients are following all the laws, and making them aware of the taxes and additional costs to them,” said Kim Clark, an account director at Gallagher Benefit Services.
“I am hopeful that 2014 is easier than 2013,” she said. “I can’t imagine it getting harder than it was this past year.
“The carriers had to make changes to every single one of their plans for Jan. 1. Even if employers didn’t want to change their health plans, there were plan changes because of health care reform,” said Clark, a 2014 Power Broker® in the Employee Benefits category.
A survey of health insurance brokers by Morgan Stanley found that quarterly-reported year-over-year rates in December 2013 were rising in excess of 6 percent in the small group market, and 9 percent in the individual market, according to an article in Forbes by Dr. Scott Gottlieb, a resident fellow at the American Enterprise Institute, a Washington think tank.
It is the largest reported increase since the firm started its quarterly surveys of brokers in 2010, he wrote. “Much of the rate increases are attributable to Obamacare.”
Thanks to Deb Mangels, senior vice president at ABD Insurance and Financial Services, the results were much more positive — and affordable — at the Piedmont Unified School District.
“It’s been an amazing year for us. We have transitioned our health care plans and it’s so much more than we have had,” said Michael Brady, assistant superintendent of the district, which employs more than 360 teachers, administrators and support staff in six schools near Oakland, Calif.
Mangels, a 2014 Public Sector Power Broker®, transitioned the district’s employee coverage from a health benefits pool with unsustainable cost increases to its own carrier at the same time the district was instituting its first medical benefits cap and increased premiums, following some “very intense labor negotiations,” Brady said.
“They reworked all of the plans,” negotiated a 15-month plan year so all plans would be on the same cycle, and added an online open enrollment tool. For the same benefits as the pool plan, the district’s employees pay about $100 less each month in premiums, he said.
Plus, employees have the option of choosing among some plan options related to copay and deductibles that were not available in the pool.
“I have never felt that we were in a better place than we are right now,” Brady said.
Communication is Key
When one HR director for an oil and gas drilling services company was holding employee meetings to discuss the introduction of a high-deductible plan, she faced resistance.
The materials she used to illustrate the changes were hampering her ability to clearly explain to employees and to foreign corporate parents the company’s new health benefit plans and options.
That’s when she called James Bernstein, a principal at Mercer and a 2014 Employee Benefits Power Broker® — at midnight that night. He’s the consultant she counts on to keep his eye on both the big picture and the gritty details necessary to keep her organization in compliance and on top of everything.
By the time she woke up in the morning, Bernstein had prepared and sent her a new set of PowerPoint slides that offered more clarity on the health benefit plans.
“I really couldn’t do this without him,” said the HR director. “I’ve got 10 balls in the air, and he will make sure I don’t drop one of them.”
Effective communication tools and strategies are a crucial part of plan design changes, said Robert Ditty, a partner at Mercer, and a 2014 Employee Benefits Power Broker®.
“You can design a plan until you are blue in the face but if people don’t understand it, you will not get the results you want,” he said.
Consumerism Takes Hold
Many plan design changes took place this year with his clients, Ditty said, because employers needed to make changes due to the ACA anyway. As a result, they opted to move ahead with some strategic alternatives that had been under consideration for a while.
One popular option among his mid-size and large company clients was the transition to a high-deductible health plan, coupled with health savings accounts and health reimbursement accounts.
The health care reform law “made people re-evaluate … and it really expedited that strategy for a substantial portion of clients.”
Analyzing and strategizing around health benefits isn’t going to end any time soon.
Ditty’s clients are already trying to prepare for a substantial excise tax that kicks in in 2018. That tax — which requires employers to pay a 40 percent tax on health care costs that exceed federally defined thresholds — is better known as a penalty on so-called Cadillac plans. He said, however, that thresholds imposed for the federal tax will fall on “employers who are not offering very generous or rich plans.”
Instead, as the regulations are now written, they will affect many employers who have older workers and higher health care costs. “A significant portion of my clients are projected to hit this threshold in 2018, and they don’t have rich plans,” Ditty said.
That tax will join the other taxes imposed this year on employers. All of these developments have made life interesting of late for employee benefits consultants — “interesting,” as in the Chinese curse: “May you live in interesting times.”
It was those additional fees imposed this year that forced Gallagher’s Clark to seek out different health plan designs for her clients.
The ACA-imposed taxes — either directly borne by employers or probably passed along as increased premiums because they are paid by health insurers — are the Patient-Centered Outcomes Research Institute Fee (PCORI); a Marketplace User Fee that “could be almost 3 percent of their premium,” Clark said; a Transitional Reinsurance Program Assessment Fee; an Annual Health Insurance Industry Fee; and a Risk Adjustment Program and Fee.
Often, she said, employers had to change plan design “to help their budget to account for those additional costs.”
Also adding costs were some other requirements in the ACA, such as requiring pediatric dental benefits on all plans, even if the policyholders did not have children or their children were older than 18.
One other wrinkle in the ACA, which is playing out in the courts, is the need for all plans to include contraception benefits. That offered a unique challenge for Jan Wigen, a principal at Mercer, who was working with a religious institution.
The faith-based organization, a Catholic college, refused to pay for the benefit. Wigen, a 2014 Employee Benefits Power Broker®, helped the college secure separate contraceptive coverage through an insurer without having to pay for it, itself. She then provided separate enrollment cards and communication tools so the college could comply with the law and employees could have the coverage, without administrators breaking the dictates of their faith.
That was a regulation that had a fairly limited employer impact, but there was plenty of fodder in the ACA for angst to be created among employers of all sizes and shapes — and their brokers as well.
“I can’t think of an employer I talked to or worked with,” Ditty said, “where the law is not driving them in many instances to be more proactive about how they manage their benefit programs. … They have really become progressive in what they are doing from a strategic standpoint.”
For those employers lucky enough to have Power Brokers as their consultants, the process will run a bit smoother and the results will likely be a bit better, even as the demands on them increase and the regulations continue to change.
Global Program Premium Allocation: Why It Matters More Than You Think
Ten years after starting her medium-sized Greek yogurt manufacturing and distribution business in Chicago, Nancy is looking to open new facilities in Frankfurt, Germany and Seoul, South Korea. She has determined the company needs to have separate insurance policies for each location. Enter “premium allocation,” the process through which insurance premiums, fees and other charges are properly allocated among participants and geographies.
Experts say that the ideal premium allocation strategy is about balance. On one hand, it needs to appropriately reflect the risk being insured. On the other, it must satisfy the client’s objectives, as well as those of regulators, local subsidiaries, insurers and brokers., Ensuring that premium allocation is done appropriately and on a timely basis can make a multinational program run much smoother for everyone.
At first blush, premium allocation for a global insurance program is hardly buzzworthy. But as with our expanding hypothetical company, accurate, equitable premium allocation is a critical starting point. All parties have a vested interest in seeing that the allocation is done correctly and efficiently.
“This rather prosaic topic affects everyone … brokers, clients and carriers. Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
– Marty Scherzer, President of Global Risk Solutions, AIG
Basic goals of key players include:
- Buyer – corporate office: Wants to ensure that the organization is adequately covered while engineering an optimal financial structure. The optimized structure is dependent on balancing local regulatory, tax and market conditions while providing for the appropriate premium to cover the risk.
- Buyer – local offices: Needs to have justification that the internal allocations of the premium expense fairly represent the local office’s risk exposure.
- Broker: The resources that are assigned to manage the program in a local country need to be appropriately compensated. Their compensation is often determined by the premium allocated to their country. A premium allocation that does not effectively correlate to the needs of the local office has the potential to under- or over-compensate these resources.
- Insurer: Needs to satisfy regulators that oversee the insurer’s local insurance operations that the premiums are fair, reasonable and commensurate with the risks being covered.
According to Marty Scherzer, President of Global Risk Solutions at AIG, as globalization continues to drive U.S. companies of varying sizes to expand their markets beyond domestic borders, premium allocation “needs to be done appropriately and timely; delay or get it wrong and it could prove costly.”
“This rather prosaic topic affects everyone … brokers, clients and carriers,” Scherzer says. “Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
There are four critical challenges that need to be balanced if an allocation is to satisfy all parties, he says:
Across the globe, tax rates for insurance premiums vary widely. While a company will want to structure allocations to attain its financial objectives, the methodology employed needs to be reasonable and appropriate in the eyes of the carrier, broker, insured and regulator. Similarly, and in conjunction with tax and transfer pricing considerations, companies need to make sure that their premiums properly reflect the risk in each country. Even companies with the best intentions to allocate premiums appropriately are facing greater scrutiny. To properly address this issue, Scherzer recommends that companies maintain a well documented and justifiable rationale for their premium allocation in the event of a regulatory inquiry.
Insurance regulators worldwide seek to ensure that the carriers in their countries have both the capital and the ability to pay losses. Accordingly, they don’t want a premium being allocated to their country to be too low relative to the corresponding level of risk.
Without accurate data, premium allocation can be difficult, at best. Choosing to allocate premium based on sales in a given country or in a given time period, for example, can work. But if you don’t have that data for every subsidiary in a given country, the allocation will not be accurate. The key to appropriately allocating premium is to gather the required data well in advance of the program’s inception and scrub it for accuracy.
When creating an optimal multinational insurance program, premium allocation needs to be done quickly, but accurately. Without careful attention and planning, the process can easily become derailed.
Scherzer compares it to getting a little bit off course at the beginning of a long journey. A small deviation at the outset will have a magnified effect later on, landing you even farther away from your intended destination.
Figuring it all out
AIG has created the award-winning Multinational Program Design Tool to help companies decide whether (and where) to place local policies. The tool uses information that covers more than 200 countries, and provides results after answers to a few basic questions.
This interactive tool — iPad and PC-ready — requires just 10-15 minutes to complete in one of four languages (English, Spanish, Chinese and Japanese). The tool evaluates user feedback on exposures, geographies, risk sensitivities, preferences and needs against AIG’s knowledge of local regulatory, business and market factors and trends to produce a detailed report that can be used in the next level of discussion with brokers and AIG on a global insurance strategy, including premium allocation.
“The hope is that decision-makers partner with their broker and carrier to get premium allocation done early, accurately and right the first time,” Scherzer says.
For more information about AIG and its award-winning application, visit aig.com/multinational.