Brokers Bankrolling Adventures
When it comes to great adventures, youth will be served by large insurance brokerages.
On June 26, weather permitting, 31-year-old aviatrix Amelia Rose Earhart will embark on an around-the-world flight retracing the route of her famous namesake. If successful, Earhart will become the youngest woman to circumnavigate the globe in a single-engine aircraft.
Earhart and her aircraft will be insured on a pro bono basis through policies structured and secured by Kansas City, Mo.-based Lockton Cos., the world’s largest privately held insurance broker.
“Lockton is thrilled to be a part of this legendary journey,” said Ty Carter, aviation producer at Lockton and the liaison coordinating the insurance protection for Earhart and for the Pilatus aircraft that she will be flying.
“We are passionate about aviation and appreciate Amelia’s efforts to raise awareness of the opportunities and experiences she provides. Her tenacity and spirit are truly inspiring.”
Though she is not a blood relative of the late Amelia Earhart, Amelia Rose Earhart has had a love of flying from an early age.
“I started dreaming of flying when I was 18 years old, and I’ve been flying for 10 years,” said Earhart, who planned the entire 17-stop route of her flight, which originates in Oakland, Calif.
Journey to the South Pole
This venture was preceded by another headline-making adventure that teamed Willis Group Holdings plc with Parker Liautaud, a 19-year-old sophomore at Yale University who on Christmas Eve became the youngest man to ski to the South Pole.
Liautaud and companion Doug Stoup set a new speed record for the fastest-ever unsupported walk from the edge of Antarctica to the South Pole in 18 days, four hours and 43 minutes.
Known as the Willis Resilience Expedition, the venture was jointly sponsored by Willis and EMC, a large global technology company.
On their expedition, Liautaud and Stoup were tracked by sophisticated communications housed in Ice Broker, a custom-built Toyota Hilux six-wheel truck that broadcast live around the world and on the expedition’s website. The truck was created by a team assembled by Willis and tested in Iceland.
“It was Parker who first approached Willis,” said Nathan Hambrook-Skinner, London-based director of communications for Willis Global. “He came to us early in 2013 with the idea that he wanted to ski to the South Pole.”
For Liautaud, it was the end of a long journey.
Until he connected with Willis, Liautaud spent 8 p.m. to 1:45 a.m. “every night without fail in the basement of the nearest library sending out emails seeking support for the venture,” he said.
As part of Willis’ aid for Liautaud’s adventure, the global insurer handled all insurance aspects.
“Risk management was a key focus for us.” — Nathan Hambrook-Skinner, Willis global director of communications
“Risk management was a key focus for us,” said Hambrook-Skinner. “You can’t really go to Antarctica without full evacuation insurance, which you’ll need to cover you if there’s any accident. Obviously we had that fully covered.”
Willis, a leading global risk adviser and insurance and reinsurance broker operating on every continent, also handled the insurance for the Ice Broker. And of course Liautaud and four other expedition members, including Hambrook-Skinner, were covered by insurance.
“We had a crisis risk management consulting team in London that was constantly monitoring our progress,” said Hambrook-Skinner. “If anything had gone wrong, they would have covered the expedition.”
Along with the snow-skiing record, major accomplishments of the venture included:
• Liautaud took snow samples along the journey that formed a valuable contribution to current studies on climate change.
“Overall, we were able to do much more in terms of data gathering and scientific exploration in previously unexplored and untouched part of Antarctica,” said Hambrook-Skinner.
• The expedition partnered with EMC to create data visualizations to engage the public in a better understanding of the science behind climate change and the importance to society.
• A lightweight weather station was tested for the first time in Antarctica.
“The objective of the venture for us as a global risk adviser and insurance broker at the forefront of supporting businesses and individuals all around the world was to help build resilience to extreme events and natural disasters, this being one of those events,” said Hammond-Skinner.
“So it was very natural for us to help support an expedition like this which was seeking to enhance understanding of how the world is changing and how climate matters might be changing over time and help shed some light on that,” Hammond-Skinner said.
For “The Amelia Project,” Earhart and her aircraft are structured and secured by Lockton through Global Aerospace. The policy provides a combined single limit for property damage and bodily injury, as well as physical damage to the aircraft.
“One of the key parameters essential to the primary policy was the inclusion of ‘worldwide territory.’ ” — Ty Carter, aviation producer, Lockton
“One of the key parameters essential to the primary policy was the inclusion of ‘worldwide territory’ ” said Lockton’s Carter. “Due to the nature of this trip, which will occur over approximately 19 days and include 28,000 miles, having a policy that allowed for flexibility in routing was critical to the program’s success.”
Lockton was chosen to handle all aspects of the expedition’s insurance because of Carter’s long-standing and close relationship with Pilatus aviation.
“I’ve owned two Pilatus planes and I’ve also been the former president of the Pilatus Owners and Pilots Association,” said Carter. “I’ve had thousands of hours flying Pilatus aircraft.”
In financing the project, Earhart was greatly aided by Pilatus, which donated a Pilatus PC-12 NG single-engine aircraft for the flight.
In addition, with some help from Lockton, Earhart was able to sell 20 sponsorships to help pay for the flight.
“We were able to put their logos on the outside of the aircraft and also on my flight jacket as well as that of my co-pilot Shane Jordan,” said Earhart.
“I took it upon myself to bring in the sponsorships. I had never done any selling prior to that. I really knew nothing about the process getting started but I learned along the way.”
Lockton is dedicating a team of aviation experts to assist Earhart 24/7 during her flight, with regard to any insurance issue, “or for that matter any question to support her while she is making this journey,” Carter said.
“Our group internally is a mix of pilots, people who have been involved in the maintenance side and former underwriters,” he said. “We have a couple of people on our team who are fully dedicated to the project, literally from the time Amelia leaves until she returns.”
Prior to launching her flying career, Earhart was a helicopter traffic co-anchor for NBC affiliate KUSA in Denver, where she also is president of the Fly With Amelia Foundation, which grants flight scholarships to girls between the ages of 16 and 18 and supports the advancement of general aviation opportunities.
Round Two for Solar Impulse
In another aviation promotional undertaking, Swiss Re Corporate Solutions will join Solar Impulse in a joint venture to launch the Solar Impulse 2 airplane in 2015, in an effort to fly around the world using only solar power.
It took 12 years of calculations, simulations, construction and testing to arrive at the launch of Solar Impulse 2, one of the most technologically advanced aircraft of our time, company officials said.
In 2012, Swiss Re became the sole insurer of Solar Impulse 2. The plane was considered uninsurable by others and yet made the first coast-to-coast crossing of the United States by a solar plane. See R&I’s story on that journey here.
“Insurance plays an important role in supporting pioneering projects in the renewable energy sector,” said Agostino Galvagni, CEO of Swiss Re Corporate Solutions.
“We believe that advancing renewable energy and clean technologies, and establishing them as integral components of the global energy mix, is crucial to ensuring a sustainable future.
“The intent of the Solar Impulse-Swiss Re Corporate Solutions partnership is to endorse and promote this message,” he said.
Forging into the Final Frontier
Imagine if a flight from London to Sydney took a mere two hours instead of 21. And imagine that on that flight, passengers could experience the same breathtaking views and feeling of weightlessness usually reserved for astronauts.
These are the possibilities presented by suborbital space flight, in which an aircraft gets outside of the Earth’s atmosphere, traveling at speeds up to 5,600 miles per hour. At this altitude and speed, an aircraft would follow a parabolic flight pattern, eventually falling back through the atmosphere. By comparison, an aircraft in orbital space would have to maintain speeds of about 17,500 miles per hour at an altitude of at least 190 miles above sea level.
Imagine if the destination were space itself. Or the International Space Station (ISS) or the Russian space station Mir, or even a hotel suspended hundreds of miles above Earth. Private space tourism companies have been working toward launching such flights since the 1980s.
American businessman Dennis Tito became the first private citizen to take a tour of space, doling out a reported $20 million for a ticket to ISS in 2001. Others followed. Space Adventures, a Virginia-based space tourism company, has already flown seven tourists — including Tito — to ISS on eight different occasions.
While frequency of manned spaceflights dropped off in the mid-2000s, research and development has rekindled demand. Paid commercial flights are expected to be launching around the globe beginning as soon as the end of this year.
A New York Times report on space tourism.
NASA and the Federal Aviation Administration (FAA) also have a stake in this industry, as commercial space flights can be used to deliver cargo to space stations. The California-based company SpaceX is contracted with NASA to make 12 cargo resupply trips to ISS through 2016. They completed the first successfully in 2012.
These endeavors could be stalled, though, if space flight providers cannot obtain the right coverage to insure against third-party liability risks and property damage.
The role of insurance in allowing the space tourism industry to grow is “huge,” according to Bill Behan, CEO of AirSure Ltd., an insurance and risk management consulting company for the aviation industry.
“The financing, investment, stability and future of the commercial space industry will depend on a strong and enduring partnership with the insurance industry,” he said.
The federal government forged that relationship and fostered industry growth with the passage of the Commercial Space Launch Act of 1984 (CSLA). The CSLA provides a framework for the FAA to regulate companies by granting launch licenses as well as indemnifying launch providers from third-party claims. The indemnification provision requires companies to buy insurance coverage for third-party liability claims at a level calculated by the FAA, called the “maximum probable loss.”
Should an accident occur, the government would be liable for losses exceeding that level up to a limit of roughly $2.7 billion, though that limit is adjusted every year for inflation.
The Government Accountability Office (GAO), however, thinks that the FAA’s methodology for calculating maximum probable loss is flawed. Currently, the administration estimates the cost of a single casualty at $3 million, a figure that has not been updated since 1988. In calculating total loss value, the FAA adds 50 percent of the total cost of casualties for a given flight to account for potential property damage.
It arrives at an estimated number of third-party casualties by identifying areas that could be impacted by lethal debris, and then multiplying the size of the area by the probability of damage occurring there and the population density.
Risk modelers consulted for the GAO report “stated that FAA’s method might significantly understate the number of potential casualties, noting that an event that has a less than 1 in 10 million chance of occurring is likely to involve significantly more casualties than predicted under FAA’s approach.”
The FAA’s equation does not always consider details like an aircraft’s flight dynamics or the characteristics of its materials. Nor does it specifically analyze how many properties could be damaged by an event or what the value of that property might be.
If the FAA underestimates maximum probable loss, it means commercial space companies will purchase inadequate levels of insurance, exposing the government to more liability. The GAO recommended that the FAA regularly review its methodology and make amendments to the CSLA to better prepare for potential catastrophe, but so far no changes have been made.
That could spell big trouble for the space industry, especially with the number of FAA-licensed space launches expected to grow substantially over the next few years. NASA expects to launch at least two cargo resupply trips to ISS per year from 2017 to 2020, and that doesn’t include the stargazing adventures in the works from Virgin Galactic and its competitors. A tragedy not adequately insured could have the potential to wipe out the sector, or at least set it back many years.
Flight operators also need to worry about the safety of passengers and crew on board.
Companies and state legislatures require passengers to sign informed consent waivers, relieving companies from liability if an accident causes injury or death. But are the waivers strong enough to stand up in court?
“Informed consent is about giving the space flight participant enough technical knowledge to understand and appreciate the risks involved,” said Clive Smith, business unit leader with Aon’s International Space Brokers.
However, given the likely volume of space flight participants in the coming years, it’s safe to say that the protection of informed consent waivers remains to be tested.
There’s also no escaping the fact that a participant willing to pay a for trip to space can afford top lawyers and high legal fees in the event of a serious injury in the course of a flight.
“Stay tuned for creative plaintiffs’ lawyers who will challenge any contractual language laws because of the money involved.”
“Stay tuned for creative plaintiffs’ lawyers who will challenge any contractual language laws because of the money involved,” said Behan.
The laws could, however, make it easier for space tourism companies to attract insurers.
“Any laws that might protect space companies or manufacturers may facilitate broader terms and lower premiums for liability insurance,” said Esequiel Nathal, an analyst with Charles Taylor Risk Consulting.
Several states have adopted informed consent laws — including New Mexico, Virginia, Texas, Florida, Colorado and California — but they vary in their levels of protection. For instance, most statutes protect only the launch company and not their suppliers or manufacturers.
The lack of loss history in human spaceflight makes it difficult to determine the usefulness of the waivers, a problem that extends to all areas of space tourism.
Insurance and Risk Management
Insuring human spaceflight means navigating through lots of gray area, with little data and lots of faith. For instance, would a hull policy covering a spacecraft be dependent on whether it is bound for orbital or suborbital flight? Does it matter where in airspace an accident occurs? Would coverage fall under the realm of aviation or space flight insurance?
The answer to most of these questions: to be determined. Too few manned spaceflights have been launched and too few accidents have occurred to reveal weak spots in coverage.
“The debate really is whether the risks are covered under the aviation market or the space market, because they’re two different kinds of market although there’s some crossover in terms of the insurers,” Smith said.
“There will be lots of challenges as to whether the space market can pick up the aviation style of cover or whether part of it is placed in the aviation market and part in the space market.”
“This is specialized insurance normally requiring a specialized insurer and broker,” Nathal said. Underwriters must mostly rely on alternate data “in the form of successful private launch of satellites and other forms of transportation and safe operation.”
Luckily, space tourism companies are generally well-funded and can handle the high premiums that intrepid insurers will charge.
“More importantly, it is essential to conduct thorough risk assessments to understand what the risks are, their size and nature, and the best ways to mitigate the risks,” Nathal said.
“Insurance coverage is not a substitute for robust risk mitigation. Remember NASA’s motto: ‘Failure is not an option.’ ”
“Insurance coverage is not a substitute for robust risk mitigation. Remember NASA’s motto: ‘Failure is not an option.’ ”
Risk management includes not only educating passengers on flight risks, but also training them properly. While training for private citizens is nowhere near as rigorous as what astronauts receive, it should still include some time in “g-force” and exposure to a weightless environment. Again, only time and experience will show what level of training is best to ensure safety of passengers and crew alike.
Sending more manned missions to space opens up a wealth of opportunities for scientific advancement and the development of a brand new industry. But the risks involved are literally sky high.
Moving safely ahead demands innovation, flexibility and cooperation from all involved, from the FAA to launch companies to insurers willing to underwrite the unknowns of the final frontier.
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.