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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 Mutual Insurance

Construction’s New World

The underwriting of construction risk is undergoing a drastic change, one that may take many years to resolve.
By: | November 3, 2014 • 5 min read

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.

SponsoredContent_LM“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 douglas.cauti@libertymutual.com.

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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 Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.


Liberty Mutual Insurance offers a wide range of insurance products and services, including general liability, property, commercial automobile, excess casualty, workers compensation and group benefits.
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