Construction on the Upswing
With the construction industry undergoing a solid rebound from the disaster brought on by the great recession of 2008-2009, it’s no surprise that the demand for P&C coverage is going along for the ride.
However, two brokers who specialize in the construction industry (both of whom were Power Broker® winners in 2014), said it’s not necessarily business as usual in this post-recession world.
Aon’s Matthew Walsh, managing director in the Chicago office, who serves the construction industry, said Aon has seen an appreciable uptick in projects nationwide, as well as outside the United States.
Segments within the construction industry that are on the upswing include federal and state government building projects, some private sector building, and a growth in public-private partnerships (P3s), which are typically funded and operated through a partnership of government and one or more private sector companies.
Walsh warned, however, that as the speed of the recovery increases, so do the challenges on a state-by-state jurisdictional basis from a liability standpoint.
“Syncing up the jurisdictions with new contracts is critical,” he said.
“As the velocity of the recovery increases, there also is an increase in the factors that come to bear on case law, both from a statutory and contractual perspective.”
Because of that, Walsh said, contractors are focusing even more on bringing a solid, quality labor force on board for projects, and that in turn increases the focus on subcontractors and their workforces.
The quality of the workforce has an impact both on liability and workers’ comp, as trained workers are less likely to be injured, more likely to be aware of safety issues, and more likely to provide high-quality work, lessening potential construction faults.
Keith Jurss, senior vice president, professional liability for Willis’ national construction practice, added that his firm is also seeing commensurate growth in construction coverage.
But this time around, Willis is being asked to look at programs within so-called “project” business, where owners and contractors join together to insure much larger efforts than prior to the recession.
“A $200 million construction project used to be really big,” he said. “Today, we are seeing billion-dollar projects on a regular basis, and the size continues to go up.”
The result is more joint venturing, which requires complex “project” coverages that consolidate many policies into a single coverage program.
Premium Fraud in the Spotlight
Unpaid workers’ comp premiums are costing New York hundreds of millions of dollars, according to an official. In the wake of a grand jury’s report, New York County Prosecutor Cyrus Vance is calling for major changes to the system.
The release of the report by the New York State Supreme Court Grand Jury coincided with the 103rd anniversary of the Triangle Shirtwaist Factory Fire in Greenwich Village that killed 146 people. The state’s workers’ comp law was closely associated with the tragedy.
“The widespread premium fraud detailed by this Grand Jury Report is deeply troubling and underscores the critical need to reform the workers’ compensation system,” Vance said in a statement. “My office’s Tax Fraud and Money Laundering Unit will continue to pursue those who cheat the system, but the best protection for New York’s workers is a system that is itself protected from fraud and abuse.”
The report followed investigations by the unit into false information provided to the New York State Insurance Fund in connection with applications for, and audits of, workers’ comp policies, the statement said. Vance said investigations by his office looked at incidents of insurance premium fraud that, among other things, cost New York City and state “substantial revenue.”
As Vance explained, an employer’s premium is based on each covered employee’s job classification. Rates for a relatively safe job can be much lower than that for a dangerous job.
“This system, which requires employer self-reporting, is easily abused by unscrupulous employers who misclassify employees,” Vance said. “Employers can easily lie about what work a particular employee performs, for example, reporting a roofer as a clerical worker, and thus paying a significantly lower premium. More egregious is fraud where an employer misclassifies a worker who is required to be insured under the system as an independent contractor, but is an employee.
Estimates indicate New York City’s construction industry in 2011 cost the city and state about $500 million due to worker misclassifications. This lost money is typically made up by cost shifting from somewhere else.
The grand jury’s report included a variety of recommendations from the following categories:
- Increased penalties to ensure that sentences are proportionate to the magnitude of the fraud.
- Increased transparency by reforming the application and audit process, thereby making it more effective and less susceptible to fraud.
- Increased dissemination of information into the hands of those charged with investigating and prosecuting fraud.
- Increased education for employees and the community at large about the workers’ comp system and its value to the public, so that everyone is better able to protect the system from fraud.
“A well-functioning workers’ compensation system not only generates significant revenues for the City and the state, but also fosters equality in the marketplace and allows small businesses to flourish, creating the sorely-needed jobs. It benefits every employer, every employee, every consumer, and every taxpayer,” the report said.
5 & 5: Rewards and Risks of Cloud Computing
Cloud computing lowers costs, increases capacity and provides security that companies would be hard-pressed to deliver on their own. Utilizing the cloud allows companies to “rent” hardware and software as a service and store data on a series of servers with unlimited availability and space. But the risks loom large, such as unforgiving contracts, hidden fees and sophisticated criminal attacks.
ACE’s recently published whitepaper, “Cloud Computing: Is Your Company Weighing Both Benefits and Risks?”, focuses on educating risk managers about the risks and rewards of this ever-evolving technology. Key issues raised in the paper include:
5 benefits of cloud computing
1. Lower infrastructure costs
The days of investing in standalone servers are over. For far less investment, a company can store data in the cloud with much greater capacity. Cloud technology reduces or eliminates management costs associated with IT personnel, data storage and real estate. Cloud providers can also absorb the expenses of software upgrades, hardware upgrades and the replacement of obsolete network and security devices.
2. Capacity when you need it … not when you don’t
Cloud computing enables businesses to ramp up their capacity during peak times, then ramp back down during the year, rather than wastefully buying capacity they don’t need. Take the retail sector, for example. During the holiday season, online traffic increases substantially as consumers shop for gifts. Now, companies in the retail sector can pay for the capacity they need only when they need it.
3. Security and speed increase
Cloud providers invest big dollars in securing data with the latest technology — striving for cutting-edge speed and security. In fact, they provide redundancy data that’s replicated and encrypted so it can be delivered quickly and securely. Companies that utilize the cloud would find it difficult to get such results on their own.
4. Anything, anytime, anywhere
With cloud technology, companies can access data from anywhere, at any time. Take Dropbox for example. Its popularity has grown because people want to share large files that exceed the capacity of their email inboxes. Now it’s expanded the way we share data. As time goes on, other cloud companies will surely be looking to improve upon that technology.
5. Regulatory compliance comes more easily
The data security and technology that regulators require typically come standard from cloud providers. They routinely test their networks and systems. They provide data backups and power redundancy. Some even overtly assist customers with regulatory compliance such as the Health Insurance Portability and Accountability Act (HIPAA) or Payment Card Industry Data Security Standard (PCI DSS).
1. Cloud contracts are unforgiving
Typically, risk managers and legal departments create contracts that mitigate losses caused by service providers. But cloud providers decline such stringent contracts, saying they hinder their ability to keep prices down. Instead, cloud contracts don’t include traditional indemnification or limitations of liability, particularly pertaining to privacy and data security. If a cloud provider suffers a data breach of customer information or sustains a network outage, risk managers are less likely to have the same contractual protection they are accustomed to seeing from traditional service providers.
2. Control is lost
In the cloud, companies are often forced to give up control of data and network availability. This can make staying compliant with regulations a challenge. For example cloud providers use data warehouses located in multiple jurisdictions, often transferring data across servers globally. While a company would be compliant in one location, it could be non-compliant when that data is transferred to a different location — and worst of all, the company may have no idea that it even happened.
3. High-level security threats loom
Higher levels of security attract sophisticated hackers. While a data thief may not be interested in your company’s information by itself, a large collection of data is a prime target. Advanced Persistent Threat (APT) attacks by highly skilled criminals continue to increase — putting your data at increased risk.
4. Hidden costs can hurt
Nobody can dispute the up-front cost savings provided by the cloud. But moving from one cloud to another can be expensive. Plus, one cloud is often not enough because of congestion and outages. More cloud providers equals more cost. Also, regulatory compliance again becomes a challenge since you can never outsource the risk to a third party. That leaves the burden of conducting vendor due diligence in a company’s hands.
5. Data security is actually your responsibility
Yes, security in the cloud is often more sophisticated than what a company can provide on its own. However, many organizations fail to realize that it’s their responsibility to secure their data before sending it to the cloud. In fact, cloud providers often won’t ensure the security of the data in their clouds and, legally, most jurisdictions hold the data owner accountable for security.
Risk managers can’t just take cloud computing at face value. Yes, it’s a great alternative for cost, speed and security, but hidden fees and unexpected threats can make utilization much riskier than anticipated.
Managing the risks requires a deeper understanding of the technology, careful due diligence and constant vigilance — and ACE can help guide an organization through the process.
To learn more about how to manage cloud risks, read the ACE whitepaper: Cloud Computing: Is Your Company Weighing Both Benefits and Risks?