3 + 3: Theory of Risk
Anthony Valsamakis doesn’t just practice risk management, he wrote a book about it. And he doesn’t just consult with quants, he is one.
“Risk management has been in my blood for so long that I have to stop myself, otherwise I could go into a two-hour monologue,” said Valsamakis, whose career in the discipline goes back almost 35 years, to his first job with the Standard General Insurance Company.
In 1990, the London-based chairman of the Eikos Group received a doctorate in Business Economics. In 1992, “The Theory & Principles of Risk Management” was published, with Valsamakis the principal author, and is now in its 4th edition.
Valsamakis worked first with a carrier, then as a commodities broker, before taking up an academic post. The company he started in 1999, the Eikos Group, has a risk consulting arm, with clients in most industrial sectors, including the food, mining, forestry, industrial paper and packaging and banking industries. The group also includes a transportation risk brokerage and a Bermuda-based carrier.
“I think the idea of having a secure data base that everyone can access and can update at any moment is by far the best innovation that I can see happening in the information game.”
– Anthony Valsamakis, Chairman, Risk Financing Strategy, Eikos Group
For as long as he can remember, Valsamakis sought ways to get better information on the risks he underwrites, brokers or consults on.
“Over many years we’ve tried hard to increase the quality and timeliness of the information that enables us to do just that,” Valsamakis said.
Finally, it looks like Valsamakis has found a risk management information systems platform that enables him to do just that.
For the past year and a half, Valsamakis has been using a system developed by Riskonnect.
“What’s useful for me is that the platform basically resides within the client’s systems,” he said.
The information he needs to prioritize, depends on which client he is working with.
“By definition, depending on where I am working and what I am doing, risk management priorities are very different,” Valsamakis said.
The Riskonnect platform provides the necessary flexibility.
A mine, for example, could be in a location in Africa or South America with a high degree of political risk. A key risk for a furniture maker might be around trade secrets, the possibility that a disgruntled employee would leak a pricing catalogue to competitors. For a packaging manufacturer, their material supply chain is of the utmost importance, and so on.
For each client, Valsamakis can use Riskonnect platform and work with the client to compile the information that is most relevant to that client and its industry and enter that into a secure system.
“All of these are template facts that you can easily put into the Riskonnect system,” Valsamakis said.
The Riskonnect platform is housed within the client’s information technology system, and it is transparent enough, to give Valsamakis and his client access to the same sets of data.
“I think the idea of having a secure data base that everyone can access and can update at any moment is by far the best innovation that I can see happening in the information game,” he said.
Whose System Is It?
Valsamakis has been around long enough to know a few things about data and risk transfer. He’s seen a number of risk information management systems put out by brokers, for example, that he thinks are set up more for the broker’s business model than for the sharing of information.
Generally speaking, information about an insured’s risks come from the broker and the insured. The Riskonnect system works, according to Valsamakis, because it is designed to be adapted to the client, not the broker.
“I have seen efforts by brokers, for example, over the years to produce a type of risk information platform that becomes theirs,” Valsamakis said.
“It’s been a perennial problem in the industry, where depending on which broker you end up with, you’ll end up with system A, B or C,” he said.
The Underwriter Needs to Know
Using Riskonnect, Valsamakis encourages clients to be as transparent as possible, in order to give the most complete information to underwriters.
“For me the question is, ‘What is the volatility around the asset and can there be an impact on the balance sheet of our clients?’” he said.
“We need to describe this exposure in various contexts so that the underwriters know what they are covering,” he said.
It’s basic human psychology. If an underwriter doesn’t feel they are getting enough information about a particular risk, they will take a negative view of that risk.
The more accurate the information Valsamakis has about a client’s exposures, the better the pricing he gets from underwriters.
“If you were an underwriter putting your capital and risk and I gave you little information, you would actually be less inclined to look at the risk in favorable terms. There will be a natural inclination to downgrade it,” he said.
Where Valsamakis sees enormous value is in the Riskonnect system ability to tag which can be revisited at a later stage.
“It’s amazing how clients forget, in the passage of time, that there are profiles that have changed for better or worse.”
A Long-Term Investment
The Eikos Group invested significantly in the Riskonnect product and are taking it to a number of clients. The transparency of the system and the advantage it gives the Eikos Group and its clients with underwriters is in itself a business advantage over the competition.
“We made a decision as a small company, relatively speaking, to invest a lot of money in Riskonnect and be very proactive about it,” Valsamakis said.
“When I talk to executives I say we invested in it because it’s going to save our clients money. Better information will lead to a lower cost of risk,” he said.
“If I’m talking to someone at a high level, that’s fairly easily understood.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Riskonnect. The editorial staff of Risk & Insurance had no role in its preparation.
Can Predictive Analytics Help Prevent Injuries?
Can predictive analytics help reduce workplace risk? It’s a question researchers are hoping to answer as they seek input from health and safety practitioners.
“Clearly, there is tremendous potential for improved prevention if accurate predictions of injury and disease probability are possible. It seems likely that if injuries can be predicted accurately, they can be prevented,” wrote Dr. Gregory R. Wagner, senior advisor to the director of the National Institute for Occupational Safety and Health. “But there are many barriers to employing predictive analytics to improve occupational safety and health.”
In a recent science blog posted on the NIOSH website, Wagner explained the many possible applications of predictive analytics to safety and health, challenges to fully utilizing its potential, and the type of help the agency is seeking from experts who are or would consider using predictive analytics in their practices.
PA, as he explained, is “the application of recently developed analytic techniques to build, test, refine, and apply algorithms in an effort to, as Eric Siegel famously wrote, ‘predict who will click, buy, lie, or die.’”
In the retail environment, PA is used by Amazon to inform customers of a particular product that may interest them; Netflix to recommend a particular movie to a customer; and credit card companies to target customers with specific incentives to buy the card. Some police departments use PA to improve crime prevention by assigning patrols to specific locations.
“NIOSH has been exploring the potential application of predictive analytics and related approaches to reducing risk of death, injury, and disease from work,” Wagner wrote. “The data potentially relevant to predicting injury or disaster are plentiful: prior safety experience; a worker’s age and time in a specific job; time during a shift and hours worked during the prior day, week, or month; geographic location; how recently a workplace inspection occurred and what the results were; season; enterprise profitability; the presence of an injury prevention program; union representation of the workforce; and on and on.”
But using PA or big data to predict and prevent workplace injuries also faces potential industry pushback. “Some large workplaces have large quantities of relevant data available but do not know what to do with it,” Wagner explained. “Others may have the potential to analyze and react to their data, but they may lack the motivation to apply analytics beyond sales and marketing.”
“Some large workplaces have large quantities of relevant data available but do not know what to do with it.” — Dr. Gregory R. Wagner, senior advisor to the director of the National Institute for Occupational Safety and Health
Smaller companies, he noted, may lack sufficient data or the resources to use it. There are also privacy concerns about the potential use of available data. “And some employers may believe that they are doing just fine without the benefits of prediction — that the potential benefit isn’t worth the effort.”
Predicting health and safety risks depends on having a sufficient amount of quality data, trained analysts to use it, and the ability to post questions and identify situations that may benefit, Wagner said. Major disasters such as oil rig failures or plane crashes could be difficult to predict because they are rare. “But it is likely that other workplace problems from long-haul truck crashes to chemical line leaks could be anticipated and prevented by employing existing sensor technologies and predictive analytics.”
While some companies are beginning to use predictive analytics in various ways, NIOSH is seeking answers from industry participants to the following questions:
- What circumstances could benefit from the application of predictive analytics?
- Do you know of situations where predictive analytics is being used to improve workplace health and safety?
- What are the barriers to adoption of advanced analytics for occupational health and safety?
- What can be done to overcome these barriers?
Construction’s New World
Get off a plane at Logan Airport and cross the harbor toward Boston and you will see construction cranes, a lot of them.
Grab an Amtrak train from Philadelphia into New York and pulling into Penn Station, you will see more construction cranes, many more of them. The same scene repeats in Denver, Los Angeles, San Francisco and Chicago.
All that steel and cable in the skyline signifies a construction industry that is growing again, after having the rug pulled out from under it in the Great Recession of 2008-2010.
The cranes these days look the same as cranes looked in 2008, but the risk management and insurance environment in construction is anything but the same now.
A variety of factors are now in play that have drastically changed construction risk underwriting, according to Doug Cauti, a senior vice president and chief underwriting officer with Boston-based Liberty Mutual’s construction practice.
Doug Cauti characterizes the current construction market.
Talent and Margins
For one thing, according to Cauti, the available talent pool in construction is nowhere near what it was pre-recession.
“When the economy went into its downturn, a lot of talent left the business and hasn’t returned,” Cauti said.
Cauti said recent conversations with large contractors in Ohio and Pennsylvania confirmed once again that contractors are facing a workforce that is either aging or very inexperienced. That leads to safety management and project quality concerns at just the moment in time that construction is rebounding.
Doug identifies one of the top risk management issues facing construction firms today.
Workers compensation risks in construction, already a problematic area, are seeing an impact from that dynamic.
Contractors are also facing much more competition. In the past, contractors might have bid on 10 jobs to get one, now they have to bid on 50 or 60 jobs to get one. That’s putting pressure on margins.
“There are a lot of contractors out there competing for business,” Cauti said.
“Margins are going up but not at the same rate as the industry’s recovery,” he added.
Financing and Risk Transfer
Another factor impacting the way construction risk is being underwritten is the size of projects and the way they are being financed. Construction’s recovery from the recession might be slow and steady, but the size of projects requiring risk management and insurance has increased substantially.
In 2010, there were 85 projects under contract nationally that were worth $1 billion or more, according to Cauti. One year later, the percentage of projects of that value or higher had grown by 30 percent, and the trend continues.
A lot of those projects are design-build, a relatively new approach to construction that Liberty Mutual has grown comfortable underwriting over the years. But design-build is still an additional complication, blurring the traditional lines of responsibility.
“We did it when the growth in contractor-controlled insurance programs happened, we did it with the evolution in design-build and we’re laying the groundwork to be a thought leader in public-private partnerships and integrated project delivery.”
– Doug Cauti, Chief Underwriting Officer, Liberty Mutual National Insurance Specialty Construction
Given the funding demands of these much larger and more valuable projects — many of them badly needed public sector infrastructure improvements — public-private partnerships, otherwise known as P3s, are now coming into vogue as a financing option.
But deciding how risk should be allocated, underwritten and transferred in this new arrangement between contractors, the state, and private partners is a relatively new and untested science.
As a thought leader in the underwriting of the design-build approach – and the more traditional design-bid-build – Cauti said construction experts within Liberty Mutual are growing their knowledge to stay in step.
“We did it when the growth in contractor-controlled insurance programs happened, we did it with the evolution in design-build and we’re laying the groundwork to be a thought leader in public-private partnerships and integrated project delivery,” he said.
That means attending relevant industry conferences like the annual IRMI Construction Risk Conference where Liberty Mutual has maintained a significant presence, and engaging in dialogues with contractors and government officials, and maintaining clear and active lines of communications with brokers.
Doug discusses emerging approaches to construction.
Legal and Regulatory
Another change that is creating challenges for construction risk underwriting, according to Cauti, stems from what’s happening in United States courtrooms.
Across the country, how a court interprets coverage can vary widely, especially in the area of construction defect.
“In the past, many jurisdictions viewed construction defect simply as shoddy workmanship and they had to go back and redo it,” Cauti said.
But now, on a state by state basis, courts are ruling that a construction defect is an accident under certain circumstances that may be covered by a contractor’s general liability policy.
In 2014 alone, according to Cauti, Supreme Courts in West Virginia, Connecticut and North Dakota ruled that construction defects can sometimes be considered accidents.
Cauti said doing business with a carrier that pursues contract clarity whenever possible – and that possesses an experienced claims team that can navigate the wide variety of state interpretations – is absolutely essential to the buyer.
Having claim teams not only dedicated to construction but also to construction defect, adds a lot of value to a carrier’s offering.
Doug outlines another top risk management issue facing construction firms in today’s booming market.
Now, as never before, contractors are relying on experienced construction insurance teams to help them address these complexities.
Insurers need to have the engineering expertise to analyze a project, to make sure the right contracting team is in place and to insure that risk exposures are being properly assessed. Another key in a construction insurance team, according to Cauti, is the claims department.
A Strategic Approach
The legal and financing changes that are taking place in the construction market, from a risk transfer standpoint, aren’t going to get ironed out overnight.
Cauti said it could be 10 years until the construction and insurance industries fully understand the complications of public-private partnerships and integrated project delivery, these approaches gain traction, and the state-by-state legal decisions that are causing so much uncertainty can be digested.
In the meantime, an engaged, collaborative approach between carriers, brokers, contractors, and their financing partners will be necessary.
Doug discusses how his area can provide value to project owners and contractors.
For more information on how Liberty Mutual Insurance can help assess your construction risk exposure, contact your broker or Doug Cauti at firstname.lastname@example.org.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.