A New Dawn in Civil Construction Underwriting
Pennsylvania school children know the tunnels on the Pennsylvania Turnpike by name — Blue Mountain, Kittatinny, Tuscarora, and Allegheny.
San Francisco owes much of its allure to the Golden Gate Bridge. The Delaware Memorial Bridge commemorates our fallen soldiers.
Our public sector infrastructure is much more than its function as a path for trucks and automobiles. It is part of our national and regional identity.
Yet it’s widely known that much of our infrastructure is inadequate. Given the number of structures designated as substandard, the task ahead is substantial.
The Civil Construction projects that can meet these challenges, however, carry a unique set of risks compared to other forms of construction.
“The bottom line is that there is always risk in a Civil Construction project. If the parties involved don’t understand what risk they carry, then the chances are there are going to be some problems, and the insurers would ideally like to understand the potential for these problems in advance.”
– Paul Hampshire, Vice President – Civil Construction, LIU
The good news is that recent developments in construction standards and risk management techniques provide a solid foundation for the type and risk allocation of Civil Construction projects they are underwriting. Carriers need to be able to adequately assess the client and design and construction teams that are involved.
For Builder’s Risk Programs, a successful approach prioritizes a focus on four key factors. These factors are looked at not only during the underwriting phase of the project but also in the all-important site construction phase, under the umbrella of a Risk Management Program, or RMP.
Four key factors
Four key factors that LIU focuses on in underwriting and providing risk management services on a Civil Construction project include:
1. Resource knowledge and experience: When creating a coverage plan, carriers work to understand who is delivering the project and how well suited key staff members are to addressing the project’s technical and management challenges. Research has shown that the knowledge and experience of those key players, combined with their ability to communicate effectively, is a big factor in the project’s success.
“We look to understand who is delivering a project, their expertise and experience in delivering projects of similar technical complexity in similar working conditions, even down to looking at the resumés of people in key positions,” said Paul Hampshire, Houston-based Vice President with Liberty International Underwriters.
2. Ground conditions and water: Soil and rock composition, the influence of ground and surface water, and foundation stability are key additional considerations in the construction of bridges, tunnels, and transit systems. If a suitable level of relevant ground (geotechnical) investigation and study has not been undertaken, or the results of such work not clearly interpreted, then it’s a red flag to underwriters, who would then question whether the project risk profile has been adequately evaluated and risks clearly and transparently allocated via suitable contract conditions.
“As we all know, ground is very rarely a homogenous element within Civil Construction projects,” LIU’s Hampshire said.
“It tends to vary from any proposed geotechnical baseline specification with the consequential potential for changes in behavior during construction. We need to understand who has assessed the condition of the ground, its behavior and design parameters when compared with a particular method of construction, and all importantly, who has been allocated the ground risk in a project and the upfront mechanisms for contractual ground risk sharing, if applicable,” he said.
Knowing how much water is associated with the in-situ ground conditions as well as the intensity, distribution and adequate accommodation (both in the temporary as well as in the permanent project configurations) of rainfall for a site location and topography are also key. Tunneling projects, for example, can be hampered by the presence of too much or unforeseen quantities of groundwater.
“In major tunneling infrastructure projects, the influence of in-situ groundwater pressures and /or water inflows is a major factor when considering the choice of excavation method and sequence as well as tunnel lining design requirements,” LIU’s Hampshire said.
According to a recent article in Risk & Insurance, tunneling under a body of water is one of the most challenging risk engineering feats. Adequate drainage layouts and their installation sequence for highway projects and, in particular, the protection of sub-grade works are also important. “But under all circumstances, we need to understand how the water conditions have been evaluated,” Hampshire said.
3. Technical Challenges: This risk factor encompasses the assessment of the technical novelty or prototypical nature of the project (or more often, specific elements of it) and how well the previously demonstrated experience of both the design and construction teams aligns with the project’s technical requirements and the form of contract determined for the project. The client can choose the team, but savvy underwriters will conduct their own assessment to see how well-suited the team is to technical demands of the project.
4. Evaluation of Time and Cost: With limited information generally provided, we need to be able to verify as best as possible the adequacy of both the time and cost elements of the project. Our belief is simply that projects that are insufficient in either one or both of these elements potentially pose an increased risk, as the construction consortium tries to compensate for these deficiencies during construction.
Small diameter Tunnel Boring Machine designed for mixed ground conditions and water pressures in excess of 2.5 bar.
In the 1990s and early years of this millennium, a series of high-profile tunnel failures across the globe resulted in major losses for Civil Construction underwriters and their insureds.
In the early 2000s, both the tunnel and insurance industries worked together to create new standards for high-risk tunneling projects.
A Code of Practice for the Risk Management of Tunnel Works (TCoP) is increasingly relied on by project managers and underwriters to define the best practices in tunnel construction projects. This process ideally starts at project inception (conceptual design stage or equivalent) and continues to the hand-over of the completed project.
LIU’s Hampshire said alongside TCoP, the project-specific Geotechnical Baseline Report and its interpretation and reference within the project contract conditions gives the underwriter greater clarity as to who recognizes and carries the ground risk and how it’s allocated.
“The bottom line is that there is always risk in a Civil Construction project,” Hampshire said. “Is the risk transparently allocated or is it buried? If the parties involved don’t understand what risk they carry, then the chances are there are going to be some problems, and the insurers would ideally like to understand the potential for these problems in advance,” Hampshire said.
Paul Hampshire can be reached at Paul.Hampshire@libertyiu.com.
To learn more about how Liberty International Underwriters can help you conduct a Civil Construction risk assessment before your next project, contact your broker.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.
Carriers See Strong First Half
Carriers are enjoying a profitable second quarter and first half of 2014, thanks in part to fewer natural catastrophes and weather-related losses, as well as strong underwriting.
“There has been less catastrophic activity,” said Andrew Colannino, vice president at A.M. Best. “Those focused on property may have seen fewer losses.”
“2014 will go on the books as one of the better years for the industry, barring any major catastrophe,” said Cliff Gallant, managing director of equity research for Nomura Securities. “Through the first six months of the year, we did have some tornadoes and some hail losses; it wasn’t completely quiet, but so far it’s a normal year.”
In addition to the absence of major catastrophes, “the industry is also benefitting from reserve releases from several years of good pricing and fairly benign inflation trends,” Gallant said. “There are reasons to be worried about the outlook, but at this point the industry is still enjoying some very good underwriting years.”
Gallant pointed to increased pressure on pricing – on both the insurance and reinsurance sides – and more signs of competition as possible impediments to continued growth.
“Investment yields are still pretty weak, so investment income growth will probably be weak, and some of those reserve releases might start to slow as well,” he said.
Allianz reported total revenues for the second quarter up 10 percent from the same period last year, while the operating profit was up 17 percent. Gross premiums written in property and casualty alone reached about $14.3 billion.
“In the second quarter, the segment property and casualty insurance again contributed roughly half to Allianz Group’s operating profit,” according to the company. “The impact from natural catastrophes was lower compared to the high level of the second quarter of 2013 and the underwriting result improved.”
Zurich echoed that experience. “In general insurance, business operating profit increased considerably, driven by a substantially improved net underwriting result reflecting the favorable underlying loss experience and the absence of major catastrophe and weather-related losses, especially when compared with the prior year period,” its report stated.
“Zurich remains especially strong in the large commercial business, with a lot of the operating profit generated in North America while mature markets remained generally stable,” said Bjorn Emde, Zurich’s senior media relations manager. “We saw an improvement in the underlying profitability and in the expense ratio while profiting from a positive development in catastrophe losses compared to the prior year period.”
Zurich posted a business operating profit of $1.2 billion for the second quarter, up 32 percent from last year, with a half year operating profit of $2.6 billion, up 15 percent.
Part of its success can also be attributed to organizational streamlining, which affected 670 positions across the company.
“This will make our decision-making processes quicker and leaner,” Emde said.“Apart from making the company more agile, we also expect to generate cost savings of roughly $250 million per year by the end of 2015.”
ACE Group also saw strong performance in property and casualty lines. Global earnings from P&C net premiums increased about 8.5 percent on a constant-dollar basis, according to the company’s earnings report.
CEO Evan Greenberg said in the report, “P&C underwriting income was up 10 percent with a combined ratio of 87.5 percent. The growth in underwriting was driven by current accident year underwriting income before catastrophe losses.”
Boston-based Liberty Mutual ended the second quarter with a consolidated net income of $388 million, with $650 million in net income for the first half of the year.
Second quarter revenues were up 3 percent from last year at nearly $10 billion. Net written premiums also saw an increase of 5.2 percent at $9 billion. That improvement, however, came in spite of large catastrophe losses.
“Underwriting improvements lowered the combined ratio by a point despite sizable severe storm losses,” CEO David Long said in an earnings report. Liberty Mutual’s catastrophe losses for the second quarter were $676 million, an increase of $29 million, or 4.5 percent over the same period in 2013.
“In short, we continue to improve underwriting results and grow where we can do so profitably,” Long said.
Zurich and Allianz also reported being on track to achieve improved profit outlooks for the full year. Zurich “projects full year cash remittances in excess of $3.5 billion, ahead of 2013.” Allianz confirmed an operating profit outlook for 2014 of about $13.2 billion.
These are just a few examples of earnings by insurers in the property and casualty segment.
Improved overall economic conditions could also be a contributing factor to higher earnings, A.M. Best’s Colannino said, but there is still variability among market leaders. Those with more focus on property are more susceptible to catastrophe losses; severe storm activity will have to remain low in order to hit full year projections.
A Dreaming Team
Chris Thorn is known as one of the most creative risk managers in the business. After all, his risk management program hit the cover of Risk & Insurance® in March, 2012.
Now the senior manager, payments and risk, for Southwest Airlines is working with Riskonnect, a technology partner that he thinks can take his program to new heights.
“For us, it’s a platform that gives you so many different tools that if you can dream it, you can build it,” said Thorn.
Thorn ditched his legacy risk management information system in 2012 and started working with Riskonnect, initially using the platform solely for liability claims management.
But the system’s “do-it-yourself” accessibility almost immediately caught the eye of Thorn’s colleagues managing safety risk and workers’ compensation.
“They were seeking a software solution at the time and said, ‘Hey, we want to join the party,” Thorn recalls of his friends in safety and workers’ compensation.
“For us, it’s a platform that gives you so many different tools that if you can dream it, you can build it.”
–Chris Thorn, senior manager, payments and risk, Southwest Airlines
What was making Thorn’s colleagues so jealous was the system’s “smart question” process which allows any supervisor in the company to enter a claim, while at the same time freeing those supervisors from being claims adjusters.
The Riskonnect platform asks questions that direct the claim to the appropriate category without the supervisor having to take on the burden of performing that triage.
“They love it because all of the redundant questions are gone,” Thorn said.
The added beauty of the system, Thorn said, is that allows carriers and TPAs to work right alongside the Southwest team in claims files while maintaining rock-solid cyber security.
“This has sped up the process,” Thorn said.
“Any time you can speed up the process, the more success you’re going to have when you make offers to settle claims,” he said.
Since that initial splash in claims management, the Riskonnect platform has gone on to become a rock star at Southwest in a number of other areas. And as Thorn suggests, the possibilities of the system are limited only by the user’s imagination.
With a little creativity and help from Riskonnect as needed, a risk manager can add on system capabilities without having to go on bended knee to his own information technology department.
In the area of insurance policy management, for example, the Riskonnect platform as built by Thorn now holds data on all property values and exposures that can in turn be downloaded for use by underwriters.
Every time Southwest buys a new airplane, the enterprise platform sends out a notice to the airlines insurance broker, who in turn notifies the 16 or 17 carriers that are on the hull program.
Again, in that “anything’s possible” vein, the system has the capability of notifying the carriers, directly, a tool Thorn said he’s flirting with.
“It is capable of doing that,” he said.
“We’re testing out this functionality before we turn on it loose directly to the insurance companies.”
In alignment with the platform’s muscle in documenting, storing and reporting liability and property exposures, the system monitors and reports on insurance carrier financial strength.
If a rating agency downgrades a Southwest program carrier’s financial strength, for example, the system “pings” Thorn and his colleagues.
“Not only will we know about it, but we will also know all programs, present and past that they participated on, what the open reserves are for those policy years and policies,” Thorn said.
“That gives us even more comfort that we have good, solid financial backing of the insurance policies that are protecting us,” Thorn said.
Like many of us, Chris Thorn didn’t set out to work in risk management and insurance. Thorn is a Certified Public Accountant, and it’s that background that allows him to take creative advantage of the Riskonnect platform’s malleability in yet another way.
With the help of the Riskonnect customer service team, Thorn added a function to the platform that allows him to calculate the cost of insurance policies on a monthly basis, enter them into a general ledger and send them over to his colleagues in accounting.
“It’s very robust on handling financial information, date information, or anything with that much granularity,” Thorn said.
The sky is the limit
Thorn and Southwest are only two years into their relationship with Riskonnect and there are a number of places Thorn thinks the platform can take him that have yet to be explored, but certainly will be.
“It’s basically a repository of anything that’s risk-related, it continues to grow,” Thorn said.
“This has sped up the process. Any time you can speed up the process, the more success you’re going to have when you make offers to settle claims.”
–Chris Thorn, senior manager, payments and risk, Southwest Airlines
Not only have Southwest’s safety and workers’ compensation managers joined Thorn in his work with Riskonnect, business continuity has come knocking as well.
Thorn met in July with members of Southwest Airline’s business continuity team, which has a whole host of concerns, ranging from pandemics to cyber-attacks that it needs help in documenting the exposures and resiliency options for.
That Enterprise Risk Management approach will in the future also involve the system’s capability to provide risk alerts, telling Thorn and his team for example, that a hurricane or fast moving wildfire is threatening one of the company’s facilities.
Supply chain resiliency and managing certificates of insurance for foreign vendors are other areas where Thorn and his team plan to put the Riskonnect platform to good use.
“That’s all stuff that’s being worked on by us,” Thorn said.
“They’ve given us the tools, but we’re trying to develop how we’re going to use it,” he said.