Make a Decision and Move the Needle
U.S. Airways merged with American Airlines in 2013 to form the world’s largest airline. The high profile marriage also came with a large portfolio of complex and open workers’ compensation cases.
Jennifer Saddy, director of the combined airline’s workers’ compensation program, immediately set out to eliminate thousands of legacy claims. But there was no clear formula for her to follow to help fuse together the two distinct processes.
“The merging of cultures is really difficult,” Saddy said during the session, “Fostering a Claims Closure Culture to Swiftly Resolve the Difficult Challenges.” Saddy was joined in the discussion by Mark Pew, senior vice president of PRIUM.
With almost 6,000 lingering workers’ compensation claims, Saddy asked employees, the airline’s insurance carrier, lawyers, third party administrator, adjusters and medical support providers to find creative ways to satisfactorily settle claims as quickly as possible to the benefit of the employee.
“I found it to be a great opportunity,” Saddy said. “I have embraced this process and learned from it.”
Saddy’s approach required leadership support, employee empowerment, communication, accountability and teamwork, Pew said. All while clearly focused on taking care of their fellow employees.
This was no small job. The combined company has about 120,000 employees today with more than 11,000 injuries each year – about one injury every 43 minutes.
In the first year, American Airlines decreased its open claims by 20 percent and reduced claims that were two years or older by almost 30 percent.
“We gave our employees a sense of ownership,” Saddy said. “Settle your claim today … but we’re not going to continue with the status quo.”
“We encouraged employees to be creative and move claims forward,” Saddy said.
Today, American Airlines has about 3,340 claims and has greatly reduced pharmacy costs, litigation referrals and Medicare Set Aside costs.
Drones, on Demand
When the Federal Aviation Administration eased licensing requirements on piloting drones in late August, conditions ripened for explosive growth in their use. Yet the vast majority of drones are not insured, according to experts.
More than 600,000 drones will be sold this year for commercial use in the skies over the United States, according to FAA estimates. That’s three times more than manned aircraft such as airplanes and helicopters. An additional 1.9 million drones will be sold to hobbyists for recreational use, the FAA forecast earlier this year.
Look ahead to 2020 and the FAA expects there will be more than 4.7 million drones flying worldwide. Each and every one has the potential to crash into buildings, wires or worse, people. The downstream effect of these accidents could be more worrisome than the crash itself.
Increasingly, drones are a standard business tool used to survey crops and construction sites, photograph properties for real estate listings and insurance assessments, and even to deliver goods. Expect them to become much more commonplace as companies discover new and creative uses, and drone manufacturers find ways to make them smaller, cheaper, safer and easier to use.
Yet, 80 percent of all drones in use today may be uninsured, according to one estimate. Many are piloted by neophytes who sat on the sidelines until the FAA’s less restrictive guidelines opened the door for them to soar the skies this year.
“For the first time in aviation history, you’ve got tens of thousands of people bringing flying lawn mowers up into the air without any formal background in aviation training or any understanding of the international air space system,” said Alan Perlman, the founder of UAV Coach, a website offering industry information and training certification to drone pilots.
Swiss Re brought together drone experts, hackers, business leaders and insurance experts to discuss the risks and insurance underwriting of drones.
More drones taking to the skies add new risks and vastly change the insurance business, according to a report by Allianz Global Corporate & Specialty (AGCS): “Rise of the Drones: Managing the Unique Risks Associated with Unmanned Aircraft Systems.” The U.S. drone insurance market may be worth more than $500 million by the end of 2020, according to the report. Globally, it could approach $1 billion.
Global Aerospace Inc., a leading provider of aircraft insurance and risk management solutions, was one of the first to offer drone insurance under an aviation policy just four years ago.
“The sheer volume of requests for insurance is fast becoming overwhelming, and I think it will continue to grow at an exponential pace,” said Christopher Proudlove, senior vice president, general aviation team leader of the Northeast regional office at Global Aerospace.
“Covering the hazards and coming up with the appropriate products is probably the easiest part; dealing with the volume is going to be a challenge.”
Insurers are working to offer affordable products to the growing crowds of drone pilots. Niche brokerages aimed at commercial drone pilots are springing up, as are tech startups offering on-demand insurance apps, Uber-like drone pilot searches and safety features for night or long-distance flying.
On-Demand Drone Insurance
One company, Verifly, developed a mobile application offering on-demand drone insurance at hourly rates.
Verifly was launched in August in a partnership with Global Aerospace. It offers $1 million in liability insurance for as low as $10 an hour on any drone weighing less than 15 pounds and flying up to a one-quarter mile away from the pilot. Users order the insurance on their phones and receive instant approval.
Verifly uses geospatial mapping to assess the risks based on location and current weather conditions to provide a real-time quote. Users can purchase third-party liability insurance instantly. Coverage includes injury to people and property damage, unintentional invasion of privacy and unintentional flyaways.
“We are assessing ways to make the process of buying drone insurance easier because we recognize the fact that the vast majority of operators are millennials who rely on their smart phones,” Proudlove said.
“We definitely have some projects in the works that will help facilitate buying insurance. This is a user group that won’t be walking down to the local insurance office to fill out an application with a pen.”
FairFleet, developed in partnership with Allianz X (which helps develop new business ideas in the insurance space), is another new product that could be described as Uber for the drone business. Currently available in Europe — and planned for the U.S. next year — it connects “drone for service” pilots with nearby businesses in need of one-off jobs.
The FAA Requirements
Under the updated FAA rules, commercial drone pilots must pass a written test to receive certification. In the past they were required to obtain a manned aircraft pilot’s license first and submit detailed logs for each flight.
Now, owners register when they fly an unmanned drone outdoors weighing more than 0.55 pounds but less than 55 pounds. Under FAA regulations, devices can’t be flown higher than 400 feet and should not fly over populated areas, near airports or after dark. The operator must be able to see the device at all times.
The FAA is working with companies such as CNN (on using drones for newsgathering in populated areas) and BNSF Railroad (on using drones in rural/isolated areas out of sight of the pilot) to test safety technology under a program called Pathfinder.
While operators must have a drone pilot certification, there’s currently no rules on the actual drone, unlike the rigorous requirements the FAA places on manned airplane manufacturers.
“Certainly a great distinction can be drawn between that and manned aircraft,” Proudlove said.
“You can go onto the internet, spend $800 and two days later a drone turns up on your doorstep that has no federal oversight whatsoever. Moreover, you can go off and operate it commercially and for recreation.”
It’s an interesting dilemma for insurers who have to consider the safety of the drone in the absence of any federal oversight. If just one commercial drone crosses into the path of an airliner, the collision damage could exceed $10 million, not to mention the potential loss of lives.
“I see a lot of people missing a lot of steps and this is where insurance is really important,” said Perlman of UAV Coach.
“You can go onto the internet, spend $800 and two days later a drone turns up on your doorstep that has no federal oversight whatsoever. Moreover, you can go off and operate it commercially and for recreation.” — Christopher Proudlove, SVP, Global Aerospace.
Far too often, he said, people watch a “cool video on YouTube and think they can buy a drone, get unmanned pilot certified, and instantly have a profitable business.”
“There’s a lot of work to do,” he said.
“That’s where the industry is now; helping to facilitate that path for drone pilots,” Perlman said, noting that his drone insurance guide is the most popular page on his website.
Insurers routinely mandate higher safety standards than those set by the FAA for traditional aviation risks, Global Aerospace said in a report. Merely meeting the legal safety requirements to become a pilot may not be enough to guarantee that a new operator will be a safe operator.
“The minimum FAA standard is a great starting point and new commercial operators may need additional training to be proficient and safe,” said James Van Meter, an aviation practice leader at AGCS who helped to write the AGCS study.
“We are used to dealing with certificated pilots, certificated aircraft, a different level of sophistication and sort of a shared fate; if we insure a pilot in an airplane, his fate is in his own hands when he’s operating his own aircraft.”
With drone use, the pilot may be minimally trained and newly certificated, and operating equipment that cost under $1,000, so “there’s no shared fate,” Van Meter said.
“There are some challenges there, but the new regulation provides good basic training on air space, risk management and some introductory safety issues,” he said.
Alexander Sheard co-founded Skyvuze Technologies LLC, a brokerage specializing in drone insurance, after he had trouble figuring out how to insure the drones he used in an aerial photography business.
Sheard said Skyvuze bridges the gap between drone entrepreneurs and the underwriters that offer unmanned aviation policies. He helps other drone pilots figure out what insurance they need and additional safety measures they should take.
“It’s really looking at all the risk and exposure and coming up with a complete package for these new operators that are popping up every day,” Sheard said.
Any commercial drone operator should assume that their customers and partners will eventually require them to certify that they are insured, Sheard said. Many experts also expect to one day see a type of vehicle registration similar to that required on cars.
“The ones that recognize there are risks as a key part of their business every time they bring this bird up into the sky, those are the ones that are going to be successful,” Perlman said.
“Those are the ones insurance companies are going to want to work with because they are mitigating their risks anyway and they have a ‘safety first’ mind-set.”
“We don’t yet truly understand the hazards, we don’t understand the capabilities of the system, how long they’ll last, what type of experience an operator needs to safely operate a certain make and model of drone,” Proudlove said.
“We are learning all this as we go. It’s really unbelievable what we are going to see over the next couple of years as far as the drone pilots and continued innovations,” Perlman said.
“That’s really exciting but I’m worried for that one operator who loses control for whatever reason and, maybe it’s cynical, but these things are dangerous.” &
Mind the Gap in Global Logistics
Manufacturers and shippers are going global.
As inventories grow, shippers need sophisticated systems to manage it all, and many companies choose to outsource significant chunks of their supply chain management to contracted providers. A recent survey by market research firm Transport Intelligence reveals that outsourcing outnumbers nearshoring in the logistics industry by 2:1. In addition, only 16.7 percent of respondents stated they are outsourcing fewer logistics processes today than they were three years ago.
Those providers in turn take more responsibilities through each step of the bailment process, from processing, packaging and labeling to transportation and storage. Spending in the U.S. logistics and transportation industry totaled $1.45 trillion in 2014 and represented 8.3 percent of annual gross domestic product, according to the International Trade Administration.
“Traditionally these outside parties provided one phase of the supply chain process, perhaps transportation, or just warehousing. Today many of these companies are extending their services and product offerings to many phases of supply chain management,” said Mike Perrotti, Senior Vice President, Inland Marine, XL Catlin.
Such companies are known as third-party logistics (3PL) providers, or even fourth-party logistics (4PL) providers. They could provide transportation, storage, pick-n-pack, processing or consolidation/deconsolidation.
As the provider’s logistics responsibilities widen, their insurance needs grow.
“In the past, the underwriters would piecemeal together different coverages for these logistics providers. For instance, they might take a motor truck cargo policy, and attach a warehouse form, a bailee’s form, other inland marine products, and an ocean cargo form. You would have most of the exposures covered, but when you start taking different products and bolting them together, you end up with gaps,” said Alexander McGinley, Vice President, US Marine, XL Catlin.
A comprehensive logistics form can close those gaps, and demand for such a product has been on the rise over the past decade as logistics providers search for a better way to manage their range of exposures.
“Traditionally these outside parties provided one phase of the supply chain process, perhaps transportation, or just warehousing. Today many of these companies are extending their services and product offerings to many phases of supply chain management.”
–Mike Perrotti, Senior Vice President, Inland Marine, XL Catlin
A Complementary Package
XL Catlin’s Logistics Services Coverage Solutions takes a holistic approach to the legal liability that 3PL providers face while a manufacturer’s stock is in their care, custody and control.
“A 3PL’s legal liability for loss or damage from a covered cause of loss to the covered property during storage, packaging, consolidation, shipping and related services would be insured under this comprehensive policy,” McGinley said. “It provides piece of mind to both the owner of the goods and the logistics provider that they are protected if something goes wrong.”
In addition to coverage for physical damage, the logistics solution also provides protection from cyber risks, employee theft and contract penalties, and from emerging exposures created by the FDA Food Modernization Act.
This coverage form, however, only protects 3PL companies’ operations within the U.S., its territories and possessions, and Canada. Many large shippers also have an international arm that needs the same protection.
XL Catlin’s Ocean Cargo Coverage Solutions product rounds out the logistics solution with international coverage.
While Ocean Cargo coverage typically serves the owner of a shipment or their customers, it can also be provided to the internationally exposed logistics provider to cover the cargo of others while in their care, custody, and control.
“This covers a client’s shipment that they’re buying from or selling to another party while it’s in transit, by any type of conveyance, anywhere in the world,” said Andrew D’Alessio, National Ocean Cargo Product Leader, XL Catlin. “When provided to the logistics company, they in turn insure the shipment on behalf of the owner of the cargo.”
The international component provided by ocean cargo coverage can also eliminate clients’ fears over non-compliance if admitted insurance coverage is purchased. Through its global network, XL Catlin is uniquely positioned as a multi-national insurer to offer locally admitted coverages in over 200 countries.
“In the past, the underwriters would piecemeal together different coverages for these logistics providers. For instance, they might take a motor truck cargo policy, and attach a warehouse form, a bailee’s form, other inland marine products, and an ocean cargo form. You would have most of the exposures covered, but when you start taking different products and bolting them together, you end up with gaps.”
–Alexander McGinley, Vice President, US Marine, XL Catlin
A Developing Need
The approaching holiday season demonstrates the need for an insurance product that manages both domestic and international logistics exposures.
In the final months of the year, lots of goods will be shipped to the U.S. from major manufacturing nations in Asia. Transportation providers responsible for importing these goods may require two policies: ocean cargo coverage to address risks to shipments outside North America, and a logistics solution to cover risks once goods arrive in the United States or Canada.
“These transportation providers are expanding globally while also shipping throughout the U.S. That’s how the need for both domestic and international logistics coverage evolved. Until now there have been few solutions to holistically manage their exposures,” D’Alessio said.
In another example, D’Alessio described one major paper provider that expanded its business from manufacturing to include logistics management. In this case, the paper company needed coverage as a primary owner of a product and as the bailee managing the goods their clients own in transit.
“That manufacturer has a significant market share of the world’s paper, producing everything from copy paper to Bible paper, wrapping paper, magazine paper, anything you can think of. Because they were so dominant, their customers started asking them to arrange freight for their products as well,” he said.
“These transportation providers are expanding globally while also shipping throughout the U.S. That’s how the need for both domestic and international logistics coverage evolved. Until now there have been few solutions to holistically manage their exposures.”
–Andrew D’Alessio, National Ocean Cargo Product Leader, XL Catlin
The global, multi-national paper company essentially launched a second business, serving as a transportation and logistics provider for their own customers. As the paper shipments changed ownership through the bailment process, the company required two totally different types of insurance coverage: an ocean cargo policy to cover their interests as the owner and producer of the product, and logistics coverage to address their exposures as a transportation provider while they move the products of others.
“As a bailee, they no longer own the products, but they have the care, custody, and control for another party. They need to make sure that they have the appropriate insurance coverage to address those specific risks,” McGinley said.
“From a coverage standpoint, this is slowly but surely becoming the new standard. A logistics form on the inland marine side, combined with an international component, is becoming something that a sophisticated client as well as a sophisticated broker should really be asking for,” McGinley said.
The old status quo method of bolting on coverage forms or additional coverages as needed won’t suffice as global shipping needs become more complex.
With one underwriting solution, the marine team at XL Catlin can insure 3PL clients’ risks from both a domestic and international standpoint.
“The two products, Ocean Cargo Coverage Solutions and Logistics Service Coverage Solutions, can be provided to the same customer to really round out all of their bailment, shipping, transportation, and storage needs domestically and around the globe,” D’Alessio said.
The information contained herein is intended for informational purposes only. Insurance coverage in any particular case will depend upon the type of policy in effect, the terms, conditions and exclusions in any such policy, and the facts of each unique situation. No representation is made that any specific insurance coverage would apply in the circumstances outlined herein. Please refer to the individual policy forms for specific coverage details. XL Catlin, the XL Catlin logo and Make Your World Go are trademarks of XL Group Ltd companies. XL Catlin is the global brand used by XL Group Ltd’s (re)insurance subsidiaries. In the US, the insurance companies of XL Group Ltd are: Catlin Indemnity Company, Catlin Insurance Company, Inc., Catlin Specialty Insurance Company, Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., and XL Specialty Insurance Company. Not all of the insurers do business in all jurisdictions nor is coverage available in all jurisdictions. Information accurate as of December 2016.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with XL Catlin. The editorial staff of Risk & Insurance had no role in its preparation.