Contingency Clouds Business Interruption
Broadly speaking, capacity across the U.S. for business interruption insurance (BI) is ample, and terms and conditions are far from onerous.
That said, brokers report that the utility sector as well as a few others have experienced unexpected high losses, both in frequency and in value.
A few carriers have reduced their exposure to BI coverage in general, or to specific sectors or sub-segments.
As a result, there have been several situations where insureds were in the uncomfortable position of having to file and pursue a claim or claims, and simultaneously seek new placements after underwriters declined to renew or sought smaller positions in the owners’ programs.
On top of those tactical concerns for owners and their brokers, there are also more strategic shifts taking place in BI and more generally in the property and casualty market, driven by the realization by underwriters that contingent coverage is far less quantified than had long been thought.
Overlooked Supply Chain Risk
The trends of outsourcing, just-in-time delivery, and electronic orders and billing have been highly effective in reducing costs and boosting profitability. But that same evolution leaves even the most stable companies vulnerable to small disruptions in the physical supply chain or the internet.
Several of this year’s Power Brokers earned their laurels sorting complex BI claims compounded by short-notice renewals.
Michael J. Perron, senior vice president for the northeast region and property placement leader in the energy and engineered risk group at Willis Towers Watson, has made something of a cottage industry out of slicing through Gordian knots in BI claims.
“In general, BI capacity and coverage are available,” said Perron, a Power Broker® in the Utilities-Alternative category.
“Some carriers have seen losses in the power sector, and a few other places, but generally P&C remains soft. Still, carriers are being especially careful these days on contingent coverage. They are finding they did not realize the full exposures they had. They are finding it difficult to get their arms around all the exposures.”
Part of the problem, Perron suggested, is modeling, especially in the catastrophe market. “For the most part insurers do a good job of monitoring CAT risk. But for the most part those models do not include supply chain.”
Even those that do can cause further complications for insureds. Perron recalled that recently one client wanted to increase its coverage. Based on limits, that should not have been a problem.
“But their carrier, which is one that is particularly good with contingency and with supply chain, also writes for several of their suppliers, so the carrier was concerned about aggregation risk,” he said.
That situation was resolved by going back to the market, but for other clients it hasn’t been that straightforward.
Solving Complicated Claims
In one instance, the owner of a hydropower plant had a failure in one of twin turbines. The second unit continued to operate normally, albeit under more careful watch.
The property insurer decided not to renew because they feared the second unit could suffer the same failure as the first. Only one of the units could be dewatered at any given time, so it was impossible to open the operating unit to inspect until the disabled turbine was back in operation. A real Catch 22.
It is difficult to compile traditional best practices for unique situations.
Several insurers would not write the risk. One offered to write the risk but excluded BI and equipment breakdown (boiler and machinery).
“That approach would render the policy effectively useless against common failures very different than what impacted the disabled turbine,” noted Perron.
Another insurer offered coverage, including BI and equipment breakdown, but with a deductible of $20 million for the turbines until the operating unit was inspected and found to be free of the problems that seemed to have damaged the other.
For a permanent resolution, Perron said he and his group “worked with several insurers to provide coverage that was not perfect, but better than the coverage offered by the first two to bid.
Two carriers offered coverage similar to the client’s expiring coverage with one key exception: They would exclude an event emanating from a failure similar to what had occurred.
Another insurer charged a higher premium, but provided coverage without this limitation.”
In another case, a gas-fired power generator sustained three very different losses: one involving turbine failure, another involving a generator breaker failure, and a third involving a transformer failure.
“In any loss, in any claim, you want to show that you are working to maximize recovery and minimize losses.” — Michael Perron, senior vice president, Willis Towers Watson
“The incumbent carrier recognized that the client had taken appropriate steps to address lessons learned from each of these events, and actually had taken steps to minimize the carrier’s claim payments with savvy negotiations with providers and others,” said Perron.
“Still, the carrier chose to take a reduced line on the renewal.”
It is difficult to compile traditional best practices for unique situations, but Perron does suggest some guidance.
“Together the broker and the client have to convince the underwriters that the owner is managing the situation,” he said.
“Losses happen. That is why you have insurance. It helps for owners to understand that if they have multiple losses, their carrier is going have internal questions from management about the situation and the insurability of this client.”
Just as Perron spoke with underwriters and the carriers’ engineers to understand their take on the loss, he urges owners to do everything they can to help insurers understand that the owner can manage and mitigate the loss.
That may seem counterintuitive; BI by definition is for events out of the owner’s control.
“In any loss, in any claim, you want to show that you are working to maximize recovery and minimize losses,” said Perron.
In one recent situation a client needed a replacement transformer. Rather than order a new one with a longer lead time from the manufacturer of the original equipment, the owner was able to rent a transformer. That enabled them to accelerate the recovery time, and also saved the carrier a million dollars.
That little maneuver also expanded the owner’s supply chain. Ultimately, the insured ordered a new replacement transformer from the rental supplier, rather than from the maker of the initial unit, thus broadening its portfolio of suppliers.
In the end, maximizing recovery and minimizing loss is not just a sound strategy for expediting claims and mitigating for renewal after the claim. It is enlightened self interest.
“Companies often underestimate the tremendous impact that business interruption has,” Perron said. “It is not just the loss of revenue. It can be loss of prestige in the industry. It can be loss of customers.” &
Young Brokers for a Young Product
A broker’s youth can often work against them, as many clients typically prefer the most seasoned professional to lead the broker team, or to work with them on a regular basis.
But the case can be different when dealing with cyber insurance, as the product itself is fairly young, experts said.
Cyber insurance has only been around for about 15 years, and is now very different than it was many years ago, when it was a liability-only product, said Stephanie Snyder, national cyber sales leader in the financial services group at Aon Risk Solutions in Chicago.
The evolving cyber insurance field provides a lot of younger brokers “a ton of opportunity.” — Stephanie Snyder, national cyber sales leader, financial services group, Aon Risk Solutions
Given the small number of underwriters and brokers who have historical expertise with the product, the evolving cyber insurance field provides a lot of younger brokers “a ton of opportunity,” Snyder said.
“Since cyber insurance itself is such a young product, there’s really only a handful of people who were around when it came into being,” Snyder said.
“So as need for the product continues to grow, there’s a need for brokers with product expertise in cyber, whether they come from fields outside insurance such as technology or legal, or whether they are joining the insurance industry as their first job.
“So long as brokers demonstrate their technical expertise, clients tend to be more forgiving of youth in this situation.”
That is not to say that Aon doesn’t have both senior and junior brokers on its teams, she said.
“We don’t push any person who doesn’t have the appropriate experience — we want all people to be learning together with cyber,” Snyder said. “It is an evolving product as cyber exposure continues to evolve.”
Jeffrey Lattmann, executive managing director, national executive liability practice with Beecher Carlson in New York City, said that clients want the most knowledgeable cyber professionals placing their business in the marketplace.
The younger brokers are likely to be more in tune with various parts of the risk due to the advancement of technology.
“This encompasses a team made up of seasoned brokers with significant technical knowledge, understanding of the market appetite for a specific risk, experienced risk management personnel and younger brokers who bring a different level of understanding technology risk to the table,” Lattmann said.
“Additionally, helping to identify areas of risk aids in the understanding of the profile of the company looking for coverage.”
For all types of insurance, Beecher Carlson has a senior broker leading each client account, with younger brokers accompanying them to client meetings in order to learn, he said.
Senior brokers have typically been in the business for 15 or 30 years, and understand strategy, insurance companies’ appetites for risk, how to best structure specific programs, and placing sophisticated transactions with significant limits.
Younger brokers are likely to be more in tune with various parts of the risk due to the advancement of technology.
“We just took over a large client and they specifically wanted a senior person on our team to be the lead person,” Lattmann said.
“The other brokers they’ve used in the past had senior people in the presentations, but when it got down to the transaction, they never saw them again. We committed the senior person to be the point person all the time.”
Still, young brokers need to sit in on meetings with the client.
“In order for seasoned professionals to educate the young brokers to one day be leaders, younger brokers have to spend time with clients and experienced brokers,” he said.
“Working in the background is not the most effective learning tool — they have to be upfront and learning alongside the senior people.”
Regardless of age or experience, a young producer should nevertheless take “a mature risk management approach to cyber — measure the exposure and mitigate it,” said Martin J. Frappolli, senior director of knowledge resources for The Institutes’ risk and insurance knowledge group in Malvern, PA.
When there is a newly discovered risk, insurers typically scramble to exclude coverage and those at risk scramble to insure the risk, Frappolli said. The Institutes has been examining the ramifications of the maturity model pertaining to cyber insurance.
“As time goes by, market participants understand that insurance is just one tool in a risk manager’s toolbox.” — Martin J. Frappolli, senior director of knowledge resources, The Institutes
“As time goes by, market participants understand that insurance is just one tool in a risk manager’s toolbox,” he said.
“We like to compare cyber to fire. We build fire-safe structures, we hold fire drills, we install extinguishers and sprinklers. We do all we can to mitigate the fire risk. Then we buy insurance.
“At some point, we’ll have better cyber hygiene and follow the mature risk management model just as we handle the threat of fire.”
Cyber is “immature” in the sense that some insurers still scramble to exclude it — though many are figuring out, as always, there is a right price for every risk, Frappolli said. Those at risk often do nothing to mitigate the risk other than seek insurance.
“All this is to say that an experienced agent or broker already knows all this,” he said. “If the young producer is focused on sales instead of risk management, he or she could indeed be closed out by prospective customers.
“But when the agent or broker takes a mature risk management approach to cyber — measure the exposure and mitigate it — that approach should be persuasive to any client.”
Compounding: Is it Coming of Age?
The WC managed care market has generally viewed the treatment method of Rx compounding through the lens of its negative impact to cost for treating chronic pain without examining fully the opportunity to utilize “best practice” prescription compounds to help combat the opioid epidemic this nation faces. IPS stands on the front lines of this opioid battle every day making a difference for its clients.
After a shaky start cost-wise, prescription drug compounding is turning the corner in managing chronic pain without the risk of opioid addiction. A push from forward-thinking states and workers’ compensation PBMs who have the networks and resources to manage it is helping, too.
Prescription drug compounding has been around for more than a decade, but after a rocky start (primarily in terms of cost), compounding is finally coming into its own as an effective chronic pain management strategy – and a worthy alternative for costly and dangerous opioids – in workers’ compensation.
According to Greg Todd, CEO and founder of Integrated Prescription Solutions Inc. (IPS), a Costa Mesa, Calif.-based pharmacy benefit manager (PBM) for the workers’ compensation and disability market, one reason compounding is beginning to hit its stride is because some states have enacted laws to manage it more effectively. Another is PBMs like IPS have stepped up and are now managing compound drugs in a much more proactive manner from an oversight perspective.
By definition, compounding is a practice through which a licensed pharmacist or physician (or, in the case of an outsourcing facility, a person under the supervision of a licensed pharmacist) combines, mixes, or alters ingredients of a drug to create a medication tailored to the needs of an individual patient.
During that decade, Todd explains, opioids have filled the chronic pain management needs gap, bringing with them an enormous amount of problems as the ensuing addiction epidemic sweeping the nation resulted in the proliferation and over-consumption of opioids – at a staggering cost to both the bottom line and society at large.
As an alternative, compounded topical cream formulations also offer strong chronic pain management but have limited side effects and require much reduced dosage amounts to achieve effective tissue level penetration. In fact, they have a very low systemic absorption rate.
Bottom line, compounding provides prescribers with an excellent alternative treatment modality for chronic pain patients, both early and late stage, Todd says.
Time for Compounding Consideration
That scenario sets up the perfect argument for compounding, because for one thing, doctors are seeking a new solution, with all the pressure and scrutiny they’re receiving when trying to solve people’s chronic pain problems using opioids.
Todd explains the best news about neuropathic pain treatment using compounded topical analgesic creams is the results are outstanding, both in terms of patient satisfaction in VAS pain reduction but also in reduction potentially dangerous side effects of opioids.
The main issue with some of the early topical creams created via compounding was their high costs. In the early years, compounding, which does not require FDA approval, had little oversight or controls in place. But in the past few years, the workers compensation industry began to take notice of the solid science. At the same time, medical providers also were seeing the same science and began writing more prescriptions for compounding – which also offers them a revenue stream.
This is where oversight and rigor on the part of a PBM can make a difference, Todd says.
“You don’t let that compounded drug get dispensed when you’re going to pay for it without having a chance to approve it,” Todd says.
Education is Critical
At the same time, there is the growing, and genuine, need to start educating the doctors, helping them understand how they can really deliver quality pain management to a patient without gouging the system. A good compounding specialty pharmacy network offering tight, strict rules is fundamental, Todd says. And that means one that really reaches out to work with the doctors that are writing the prescriptions. The idea is to ensure that the active ingredients being chosen aren’t the most expensive sub-components because that unnecessarily will drive the cost of overall compound “through the ceiling.”
IPS has been able to mitigate costs in the last couple years just by having good common sense approach and a lot of physician outreach. Working with DermaTran Health Solutions and its national network of compounding pharmacies, IPS has been successfully impacting the cost while not reducing the effectiveness of a compounded prescription.
In Colorado, which has cracked down on compounding profiteering, Legislative change demanded no compound could be more than $350.00 period. What is notable, in an 18-month window for one client in Colorado, IPS had 38 compound prescriptions come through the door and each had between 4 and 7 active ingredients. Through its physician education efforts, IPS brought all 38 prescriptions down 3 active ingredients or less. IPS also helped patients achieve therapeutic success (and with medical community acceptance). In that case, the cost of compound prescriptions was down to an average of $350, versus the industry average of $788. Nationwide IPS has reduced the average cost of a compound prescription to $478.00.
Todd says. “We’ve still got a way to go, but we’ve made amazing progress in just the past couple of years on the cost and effective use of compound prescriptions.”
For more information on how you can better manage your costs for compound prescriptions, please call IPS at 866-846-9279.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with IPS. The editorial staff of Risk & Insurance had no role in its preparation.