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Danger in the Air

Aviation Pricing up Sharply

Worldwide losses could top $600 million, but impact on US airlines is muted.
By: | October 15, 2014 • 3 min read
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The horrors of airline disasters have been flashing on cable news for 24 hours, seven days a week, for months.

Four months ago, Malaysian Airlines Flight MG370 disappeared en route to Beijing with 239 passengers. Then on July 17, pro-Russian rebels apparently blasted Malaysian Airlines Flight MH17 out of the sky over eastern Ukraine, killing all 298 passengers on board.

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While The Guardian asked the legitimate question of whether Malaysian Airlines will survive the double-header disasters, the aviation insurance industry on the whole appears to be on solid ground.

“For the most part is, there hasn’t been a real knee-jerk reaction,” said Garrett Hanrahan, U.S. aviation practice leader for Marsh in Dallas. “The market has been rational in the way that it has approached what has happened.”

That’s saying something, given what the market is facing.

The war hull market takes in $60 million in worldwide premium but is looking at 10 times that in losses from recent events, estimated Hanrahan’s colleague, Brian Glod, Marsh’s U.S. airline practice leader in New York.

That includes paying out the full property value of MH17 as well as half of the missing Malaysian plane (with all-risk aviation taking the other half; common practice in these “unknown cause” scenarios).

Video: This report from the Canadian Broadcasting Corp. looks at how Malaysia Airlines Flight MH17 ended up flying in the volatile Eastern Ukraine region.

Then, there’s the biggest event from a monetary standpoint: a two-day battle between rebel groups in July that destroyed up to 12 aircraft at Tripoli’s airport in Libya. This event’s total losses could be upward of $500 million, Glod said.

While war hull underwriters may not be panicking, as Hanrahan suggested, they are looking to collect.

Paul Tuhy, head of XL’s Global Aviation business, reported he’s heard of rate increases in the market of 300 percent to 1,000 percent.

The other aviation coverage impacted is primary hull and liability, and underwriters there can be expected to recover losses in upcoming premiums. They’re also getting hit with the July 24 crash of Air Algerie Flight 5017, where terrorism was ruled out, and the July 23 crash of TransAsia Flight GE222, mostly likely caused by weather.

“I do think the market will react with rate increases,” Tuhy said, indicating it’s been a soft market looking for a rationale to pivot.

Still, underwriters aren’t panicking because, as A.M. Best reported in a briefing on MH-17, no ratings actions will result from the losses.

That, and the competitiveness in the primary aviation market, means ample availability.

“There still is an enormous amount of capacity in the aviation insurance marketplace, and that is keeping a lid on the pot,” said Hanrahan, echoing the conclusions of the Best report.

Airlines appear to be handling the spate of incidents in stride as well. Recent news reports (such as this article in The Economist) have made much of airlines’ decisions to reroute (or not reroute) flights away from Ukraine and other war zones.

These decisions, said Glod, are coming from senior management, well above the risk manager’s head.

But risk managers will be the ones asked by underwriters about flight paths and whether their planes will come close to hotspots.

“They’re asking those questions now,” Glod said, of underwriters.

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The result could be a tiered underwriting approach, Hanrahan said, where insurers will break down operators’ risk geographically — where do they fly to, over and from?

In such a system, U.S. operators — which are “extremely diligent and cautious,” said Glod — most likely will not pay a disproportionate amount of the rate increases.

XL confirmed that it has been asking about plane flight paths, said Tuhy.

These terrible incidents do not happen very often, he said, but “but when they do happen, they’re bad.”

Matthew Brodsky is editor of Wharton Magazine. He can be reached at riskletters@lrp.com.
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Claims Trends

Examining Claims Losses

Marine, aviation and energy sector losses accounted for much of the losses. Employee training would help.
By: | September 24, 2014 • 7 min read
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Marine-related claims — skewed by the expensive Costa Concordia loss — resulted in the highest insurance claim losses, by dollar amount, according to a recent report by Allianz Global Corporate & Specialty.

The top causes of claims losses between 2009 and 2013 were, in order: ship and boat grounding, fire, aviation crash, earthquake, storm, bodily injury (including fatalities), flood, professional indemnity, product defects and machinery breakdown, according to AGCS’ Global Claims Review 2014.

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The report listed the top causes of loss and emerging trends, based on more than 11,000 major business claims in 148 countries, each costing more than €100,000 ($136,455).

“This report is the first of its kind, and it demonstrated the kind of technical understanding we have and the fact that we continue to invest in our claims departments and technical training,” said Terry Campbell, AGCS vice president, regional claims head, in New York City.

“While the losses analyzed are not representative of the industry as a whole, they give a strong indication of the major risks which dominate industrial insurance,” according to the report, which noted that the claims involve other carriers as well.

Within the marine industry, rising claims inflation along with the growing problem of crew negligence and the high cost of wreck removal have all contributed to a worrying rise in the cost of claims, according to the report.

However, frequency of claims, especially from cargo losses, appears to be declining.

Repair costs resulting from a grounding have increased in recent years due to improved technology of underwater machinery, said Rob Winn, area vice president, marine claims, Arthur J. Gallagher & Co. (AJG)

Items such as drop-down thrusters and multi-pitch props are often damaged in a grounding and are very expensive to repair, he said.

Video: This CNN segment shows some of the salvage operation involving the Costa Concordia.

While the grounding numbers in 2012 were skewed by the Costa Concordia loss in 2012, groundings were relatively infrequent (8 percent) in the insurer’s report. Crew negligence was more often a main driver of claims, with it being listed as a potential contributing factor in more than six in 10 claims over $1.4 million.

“Those companies that invest in training and education can see a significant reduction in the number of ship groundings and related incidents,” Campbell said.

Bumpy Triche, regional executive vice president at Arthur J. Gallagher Risk Management Services Inc. in New Orleans, said shipping companies involved in global trade rely heavily upon foreign crews, and so it’s “imperative” that training and operational manuals are done in the preferred languages of their multinational crews.

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Crew training also should be done on the particular navigational electronic system used on the vessel where the crew will be assigned, he said.

“Boats working in our local waters here in Louisiana need to be aware of the impacts of diminishing wetlands and coastal erosion and the effect on bayous and other inland waterways,” Triche said. “They may not realize they are now in much shallower water than what the navigational charts might depict, and can get stuck.”

Not only are the vessels operating in shallower water as a result of coastal erosion, but they are also encountering pipelines that were originally on land, Winn said. Those pipelines are not properly buried and are hazards to navigation.

As “blue water” vessels age and offshore vessels become larger and more sophisticated, companies should proactively address maintenance problems and “not use their hull policy as a maintenance program,” Triche said.

Aviation Claims Rising

Improvements in airline safety have led to far fewer catastrophic losses overall, despite 2014’s extraordinary loss activity, according to the AGCS report.

However, the cost of aviation claims is rising, driven by the widespread use of new materials and rising aircraft complexity, as well as more demanding regulation and the continuing growth of liability-based litigation.

Video: The Canadian Broadcasting Corp. reports on the shooting down of MH 17 over Ukraine, which may result in insurers’ insisting that airlines avoid “hot spots.”

While aviation crashes were the top causes of loss in terms of number of claims (23 percent) and value (37 percent), on-the-ground incidents accounted for 18 percent claims in number, and 15 percent in value, according to the report.

Bird strikes were a notable cause of loss, averaging $22.8 million every year from 2009 to 2013, with a total of 34 incidents.

Bradley Meinhardt, AJG area president and managing director, aviation, in Las Vegas, said that aviation safety innovations over the past several decades include enhanced ground proximity warning systems, terrain awareness and warning systems,and traffic collision avoidance systems.

Such systems offer pilots increased situational awareness in a semi-autonomous environment, reacting to synthetic voice instructions, he said.

“Even in a potentially disastrous situation contemplating an airspace controller’s error, the aircraft may be saved by these on-board systems,” Meinhardt said. “These innovations have literally changed the landscape of aviation safety.”

While all of these systems reduce workload, pilots still need to be prepared to fly the aircraft themselves if the systems go awry, he said.

“Pilots should manually fly their aircraft every so often – one airline pilot tells me he routinely flies one of the five flights he has on a given day,” Meinhardt said.

Aircraft manufacturers are using alternative, lightweight materials to make aircraft lighter and more capable to fly longer distances, said Peter Schmitz, chief executive officer of Aon Risk Solutions’ national aviation practice in New York City.

However, manufacturers need to continue to improve newer generation aircraft and perhaps consider making them more capable to withstand issues like severe turbulence and outside interferences, he said.

“Airlines also have to seriously consider whether they should fly over hot spots where there is conflict, after what happened to Malaysian Airlines over Ukraine this summer,” Schmitz said.

“But the commercial issue becomes, how far does the plane have to go around such hot spots. Is the public willing to spend longer periods onboard the plane and potentially pay more to satisfy those safety requirements?”

Energy Sector

For the energy sector, the cost of claims is increasing due to higher asset values combined with increasingly complex and interrelated risks, according to AGCS. The rising cost of business interruption and emerging risks such as cyber threats and new technologies will also make for a more challenging future environment.

Fire is the No. 1 cause of energy losses, according to the report, both by number (45 percent) and value (65 percent), followed by blow-out (18 percent and19 percent, respectively).

Machinery breakdown, explosion, natural hazards such as storms and contingent business interruption, were the other main causes of loss, according to the report.

Bruce Jefferis, chief executive officer of Aon’s energy practice in Houston, said that because the energy sector has very high-valued assets, losses are typical more costly than losses in many other industries.

“Even if it’s a relatively minor incident at a refinery or a petrochemical plant, it doesn’t take much to lose a lot of dollars,” Jefferis said.

“Even with the best safety and loss control procedures, natural disasters and other incidents can still cause damage which results in significant loss of property and business interruption.”

Stuart Wallace, AJG area executive vice president, energy practice, in Houston, said the energy sector is growing “incredibly,” both in traditional markets like Texas, Oklahoma and Louisiana, and new areas of the country like the Bakken Formation in Montana, North Dakota, South Dakota and parts of Canada.

“But with the growth comes a higher demand for people, and at times, the hiring pool becomes a big challenge, and energy companies are likely not hiring the most experienced, trained, people to work on crews or drive vehicles — and that tends to lead to accidents,” Wallace said.

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Moreover, energy companies are now in areas that historically haven’t had infrastructure such as pipelines and roads, he said.

With the lack of infrastructure, trucking accidents have seen an increase due to road conditions, less qualified drivers and start-up transportation companies with less experience in transporting oil or gas.

“To lessen accidents, it starts at the beginning with better hiring practices, then ongoing training, continuing education, and monitoring of employees’ performance and accident rates, particularly for workers’ compensation and automobile liability,” Wallace said.

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at riskletters@lrp.com.
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Sponsored: Liberty International Underwriters

A Renaissance In U.S. Energy

Resurgence in the U.S. energy industry comes with unexpected risks and calls for a new approach.
By: | October 15, 2014 • 5 min read

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America’s energy resurgence is one of the biggest economic game-changers in modern global history. Current technologies are extracting more oil and gas from shale, oil sands and beneath the ocean floor.

Domestic manufacturers once clamoring for more affordable fuels now have them. Breaking from its past role as a hungry energy importer, the U.S. is moving toward potentially becoming a major energy exporter.

“As the surge in domestic energy production becomes a game-changer, it’s time to change the game when it comes to both midstream and downstream energy risk management and risk transfer,” said Rob Rokicki, a New York-based senior vice president with Liberty International Underwriters (LIU) with 25 years of experience underwriting energy property risks around the globe.

Given the domino effect, whereby critical issues impact each other, today’s businesses and insurers can no longer look at challenges in isolation one issue at a time. A holistic, collaborative and integrated approach to minimizing risk and improving outcomes is called for instead.

Aging Infrastructure, Aging Personnel

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Robert Rokicki, Senior Vice President, Liberty International Underwriters

The irony of the domestic energy surge is that just as the industry is poised to capitalize on the bonanza, its infrastructure is in serious need of improvement. Ten years ago, the domestic refining industry was declining, with much of the industry moving overseas. That decline was exacerbated by the Great Recession, meaning even less investment went into the domestic energy infrastructure, which is now facing a sudden upsurge in the volume of gas and oil it’s being called on to handle and process.

“We are in a renaissance for energy’s midstream and downstream business leading us to a critical point that no one predicted,” Rokicki said. “Plants that were once stranded assets have become diamonds based on their location. Plus, there was not a lot of new talent coming into the industry during that fallow period.”

In fact, according to a 2014 Manpower Inc. study, an aging workforce along with a lack of new talent and skills coming in is one of the largest threats facing the energy sector today. Other estimates show that during the next decade, approximately 50 percent of those working in the energy industry will be retiring. “So risk managers can now add concerns about an aging workforce to concerns about the aging infrastructure,” he said.

Increasing Frequency of Severity

SponsoredContent_LIUCurrent financial factors have also contributed to a marked increase in frequency of severity losses in both the midstream and downstream energy sector. The costs associated with upgrades, debottlenecking and replacement of equipment, have increased significantly,” Rokicki said. For example, a small loss 10 years ago in the $1 million to $5 million ranges, is now increasing rapidly and could readily develop into a $20 million to $30 million loss.

Man-made disasters, such as fires and explosions that are linked to aging infrastructure and the decrease in experienced staff due to the aging workforce, play a big part. The location of energy midstream and downstream facilities has added to the underwriting risk.

“When you look at energy plants, they tend to be located around rivers, near ports, or near a harbor. These assets are susceptible to flood and storm surge exposure from a natural catastrophe standpoint. We are seeing greater concentrations of assets located in areas that are highly exposed to natural catastrophe perils,” Rokicki explained.

“A hurricane thirty years ago would affect fewer installations then a storm does today. This increases aggregation and the magnitude for potential loss.”

Buyer Beware

On its own, the domestic energy bonanza presents complex risk management challenges.

However, gradual changes to insurance coverage for both midstream and downstream energy have complicated the situation further. Broadening coverage over the decades by downstream energy carriers has led to greater uncertainty in adjusting claims.

A combination of the downturn in domestic energy production, the recession and soft insurance market cycles meant greatly increased competition from carriers and resulted in the writing of untested policy language.

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In effect, the industry went from an environment of tested policy language and structure to vague and ambiguous policy language.

Keep in mind that no one carrier has the capacity to underwrite a $3 billion oil refinery. Each insurance program has many carriers that subscribe and share the risk, with each carrier potentially participating on differential terms.

“Achieving clarity in the policy language is getting very complicated and potentially detrimental,” Rokicki said.

Back to Basics

SponsoredContent_LIUHas the time come for a reset?

Rokicki proposes getting back to basics with both midstream and downstream energy risk management and risk transfer.

He recommends that the insured, the broker, and the carrier’s underwriter, engineer and claims executive sit down and make sure they are all on the same page about coverage terms and conditions.

It’s something the industry used to do and got away from, but needs to get back to.

“Having a claims person involved with policy wording before a loss is of the utmost importance,” Rokicki said, “because that claims executive can best explain to the insured what they can expect from policy coverage prior to any loss, eliminating the frustration of interpreting today’s policy wording.”

As well, having an engineer and underwriter working on the team with dual accountability and responsibility can be invaluable, often leading to innovative coverage solutions for clients as a result of close collaboration.

According to Rokicki, the best time to have this collaborative discussion is at the mid-point in a policy year. For a property policy that runs from July 1 through June 30, for example, the meeting should happen in December or January. If underwriters try to discuss policy-wording concerns during the renewal period on their own, the process tends to get overshadowed by the negotiations centered around premiums.

After a loss occurs is not the best time to find out everyone was thinking differently about the coverage,” he said.

Changes in both the energy and insurance markets require a new approach to minimizing risk. A more holistic, less siloed approach is called for in today’s climate. Carriers need to conduct more complex analysis across multiple measures and have in-depth conversations with brokers and insureds to create a better understanding and collectively develop the best solutions. LIU’s integrated business approach utilizing underwriters, engineers and claims executives provides a solid platform for realizing success in this new and ever-changing energy environment.

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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.


LIU is part of the Global Specialty Division of Liberty Mutual Insurance.
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