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Construction Risk

Keeping the Water Flowing

The project to install an intake tunnel beneath Lake Mead has been beset with delays and insurance losses.
By: | August 4, 2014 • 7 min read
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It has been described as one of the most challenging tunneling projects in the world. As if the technical demands weren’t tough enough, a major city is waiting on its completion in order to avert a potential water supply crisis.

Lake Mead is the largest reservoir in the United States, fed primarily from snowfall from the Rocky Mountains. The lake is the primary water source for Las Vegas (providing 90 percent of its drinking water), but due to increasing droughts, water levels are gradually declining, putting the city’s and surrounding areas’ water supply at risk.

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The lake currently feeds the valley through two intake pipes, but with water levels dropping year-on-year, it is projected that one of the existing pipes will soon find itself above the water and obsolete.

If successful, an $817 million project to build a third intake pipe under Lake Mead, sponsored by the Southern Nevada Water Authority (SNWA), will vastly improve the efficiency of water flow to Las Vegas. At present, almost half of the water piped through the existing intake routes is lost through leakage.

Video: This CBS Evening News report on the drought in Nevada and California highlights the Lake Mead construction.

However, Lake Mead Intake No. 3 has been beset with problems and delays. The ground beneath the lake has proved hazardous and unpredictable. Since construction began, the tunnel has suffered collapse, flooding and even a fatality.

SNWA declined to speak to Risk & Insurance® about the project as it was in the midst of negotiating insurance renewals. However, it did confirm that the latest setbacks — worse than expected ground conditions and damage to a major digging machine — have pushed the projected completion date back to “summer 2015.”

Mark Reagan, leader of Marsh’s Global Construction Practice, assembled the project’s insurance program on behalf of SNWA and lead contractor SA Healy (parent of Las Vegas Tunnel Constructors). It is an insurance program that has already been put to the test.

According to Reagan, the program — which is underwritten jointly by numerous leading insurers from around the world, including the major European reinsurance markets — has so far taken the various losses in its stride.

“Builders risk coverage is designed to deal with issues arising from collapses and other unforeseen events, and is responding appropriately. There is still some work to do, but a substantial portion [of the claims activity] has been agreed to,” he said.

While the Lake Mead project may be challenging, engineering underwriters suggest that collapse, flooding and even fatalities are nothing new when it comes to projects of this nature.

The safety and working conditions of the contractors, who toil in high temperatures and unpredictable conditions, are covered by a workers’ compensation policy. Sadly, one contractor was killed in 2011 when a pressure build-up behind a wall he was working on led to a lethal explosion.

“It is always tragic when there is a fatality. In this case, the workers’ compensation was effective and kicked in immediately,” said Reagan.

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In addition, the program includes professional liability policies, while the various contractors and subcontractors on the project may also arrange separate property insurance for certain machines and equipment.

On revenue-generating projects, delays like those experienced at Lake Mead could cause billions of dollars of business interruption losses, which would often be insured under a delayed start-up policy. However, said Reagan, public entities with large balance sheets typically choose to absorb this risk rather than buy insurance.

Regardless, there is no potential income from the Lake Mead intake tunnel to insure; its entire purpose is to improve the water supply to Las Vegas. Yet, while the delays may not have catastrophic financial implications, they could be a disaster for the city if the project is not completed soon. One working intake pipe is simply not enough.

Risky Business

While the Lake Mead project may be challenging, engineering underwriters suggest that collapse, flooding and even fatalities are nothing new when it comes to projects of this nature.

“Tunneling projects all over the world have encountered problems, and it is not unusual for a tunnel project to face a delay,” said Manfred Schneider, head of engineering, North America, for Allianz.

The biggest challenge when tunneling, he said, is that it is almost impossible to predict how the ground beneath the surface will perform.

“Any tunnel project, to a degree, faces uncertainty. The problem is that you can only be 100 percent sure what you are facing when you start digging,” Schneider said.

“There are always imponderables when you start digging hundreds of meters under the earth.”

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According to Marsh’s Reagan, even the most well prepared tunnel engineers can face setbacks.

“You could go to a site and drop 100 test bores, but until you put your 5- to 6-foot diameter pipe or 20-foot tunnel in the ground you just don’t know.”

“It is vital,” said Patrick Bravery, an underwriter at Lloyd’s syndicate Talbot Underwriters, “to have a system in place enabling you to react to what you find and adjust your design and processes to meet the challenges the ground throws at you.

“The challenge is to weigh the technical requirements the ground imposes upon you against the commercial realities of trying to deliver the project on time and on budget — that’s where tension can arise.”

According to Bravery, a major concern for tunneling underwriters is that the cost to repair a tunnel problem is often more than the original construction cost.

“This gearing effect has caught insurers out in the past,” he said.

He added that problems and costs can be further exacerbated when tunneling under a body of water.

“It is essential to keep the tunnel bore dry and open — if you lose that position and the bore becomes inundated, the cost to recover the situation is going to climb very rapidly.”

Reagan said that, while the issues experienced at Lake Mead have caused lengthy delays, the cost could have been worse.

“It wasn’t as bad economically as some collapses have been, relative to the cost of the project,” he said, estimating that the most recent collapse equated to about 4 percent to 5 percent of the value of the tunnel.

Reagan added that only underwriters able to absorb potential catastrophic losses involve themselves in these projects.

“This is a beefy business; you don’t get hobbyists in this space,” he said.

“Tunneling is a high hazard, catastrophic loss business. Insurers need strong balance sheets, engineering expertise and appetite.”

Market Capacity

Reagan — whose employer, Marsh, brokers the majority of the world’s major tunnels — estimated there is typically capacity of about $500 million for large tunneling projects. But according to Schneider, insurers were “scratching their heads” back in the early 2000s over whether to even continue insuring tunnels due to the high levels of uncertainty and frequency of expensive losses.

Since then, the insurance and tunneling industries jointly produced a code of practice for contractors designed to mitigate risk.

“The code of practice didn’t solve all the issues, but it did make tunneling more insurable,” Schneider said, explaining that, while not all insurers insist on contractors meeting code of practice standards as a condition of coverage, it is common practice — particularly in Europe.

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“We expect contractors to demonstrate they are following a rigorous risk management program,” said Bravery, noting that Talbot benchmarks potential clients against the code. And according to Bravery, risk management standards have improved dramatically over the last 10 to 15 years.

“Insurers can take some credit, but most of the credit has to go to the contractors and client bodies who recognized that the best way to get secure funding and approvals was to demonstrate they could work underground more predictably, on time and on budget,” he said.

“Regular collapses were not helping them.”

With loss experience improving, competition to insure tunnel projects is increasing.

“The number of insurers prepared to consider tunneling projects has grown massively in the last five or six years,” said Bravery.

“The appetite for tunneling projects is sufficient and quite competitive now, compared to 10 or 12 years ago.”

Events at Lake Mead have done little to dispel the perception of tunneling as one of the riskiest construction endeavors. But there is no time to dwell on that.

Insurance is doing its job to keep the project going, and the future of Las Vegas depends on it.

Antony Ireland is a London-based financial journalist. He can be reached at riskletters@lrp.com.
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Brokers

Construction on the Upswing

State by state jurisdictional concerns mark the recovering construction industry.
By: | June 2, 2014 • 2 min read
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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.

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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.

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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.

Tom Starner is a freelance business writer and editor. He can be reached at riskletters@lrp.com.
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Sponsored: Rising Medical Solutions

Beware of Medical Hyper-Inflation!

Workers’ comp medical costs are spiking in hidden pockets across the country.
By: | August 4, 2014 • 5 min read
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Historically, medical inflation rates nationwide have been fairly consistent. However, data is now showing that medical inflation is not a “one size fits all” phenomenon, with hyperinflation spikes occurring in some locations…but not others.

This geographical conundrum means hyperinflation can occur as narrowly as two hospitals having dramatically different charges on the same street in Anytown, USA. So, uncovering these anomalies is akin to finding the proverbial needle in a haystack.

“In recent years, workers’ compensation saw claim frequency decline, while severity rates went up. This basically means that increased job safety has offset increased medical costs,” explained Jason Beans, CEO of Rising Medical Solutions, a national medical cost management firm. “So, whenever a client’s average cost-per-claim went up, it was almost always caused by catastrophic, outlier-type claims.”

But beginning in 2013 and extending into 2014, Beans said, things changed. “I’ve never seen anything like it in my 20-plus years in this industry.”

SponsoredContent_Rising“Our analytics made it very clear that small pockets around the country are experiencing what could only be described as medical cost hyperinflation. The big spikes in some clients’ claim costs were driven by a broader rise in medical costs, rather than catastrophic claims or severity issues.”
– Jason Beans, CEO, Rising Medical Solutions

Data dive uncovers surprising findings

On a national level, most experts describe medical costs increasing at a moderate annual rate. But, as often is the case, sometimes a macro perspective glosses over a very different situation at a more micro level.

“Our analytics made it very clear that small pockets around the country are experiencing what could only be described as medical cost hyperinflation,” explained Beans. “The big spikes in some clients’ claim costs were driven by a broader rise in medical costs, rather than catastrophic claims or severity issues.”

This conclusion is supported by several key data patterns:

  • Geographic dependency: While many payers operate at the national level, only relatively small, geographically clustered claims showed steep cost increases.
  • Median cost per claim: The median cost per claim, not just the average, increased greatly within these geographic clusters.
  • Hospital associated care: Some clusters saw a large increase in the rates and/or the number of services provided by hospital systems, including their broad array of affiliate locations.
  • Provider rates: Other clusters saw the same hospital/non-hospital based treatment ratios as prior years, but there was a material rate increase for all provider types across the board.
  • Utilization increases: Some clusters also experienced a larger number of services being performed per claim.

One of the most severe examples of hyperinflation came from a large Florida metropolitan area which experienced a combined 47 percent workers’ compensation healthcare inflation rate. Not only was there a dramatic increase in the charge per hospital bill, but utilization was also way up and there was a shift to more services being performed in a costlier hospital system setting.

“The growth of costs in this Florida market stood in stark contrast to neighboring areas where most of our clients’ claim costs were coming down or at least had flat-lined,” Beans said.

An Arizona metropolitan area, on the other hand, experienced a different root cause for their hyperinflation. Regardless of provider type, rates have significantly increased over the past year. For example, one hospital system showed dramatic increases in both charge master rates and utilization. “Even with aggressive discounting, the projected customer impact in 2014 will be an increase of $773,850 from this provider alone,” said Beans.

ACA: Unintended consequences?

So what is going on? According to Beans, a potential driver of these cost spikes could be unintended consequences of the Affordable Care Act (ACA).

First, the ACA may be a contributing factor in recent provider consolidation. While healthcare industry consolidation is not new, the ACA can prompt increased merger and acquisition efforts as hospitals seek to improve financials and healthcare delivery by forming Accountable Care Organizations (ACO). ACOs, the theory goes, can take better advantage of value-based fee arrangements in existing and new markets.

“As hospital systems grow by acquisition, more patients are being brought under hospital pricing structures – which are significantly more expensive than similar services at smaller facilities such as independent ambulatory surgery centers and doctors’ offices,” Beans said.

Unfortunately, there is little evidence that post-consolidation healthcare systems have become more efficient, only more expensive. For example, a recent PwC study reported that hospital IT infrastructure consolidation alone is projected to add 2 percent to hospital costs in 2015.

Another potential ACA consequence is group health insurers may have less incentive to keep medical costs down. An ACA provision requires that 85% of premium in the large group market must be spent on medical care and provider incentive programs, leaving 15% of premium to be allocated towards administration, sales and subsequent profits. “Fifteen percent of $5000 in medical charges is a lot less than 15% of $10,000,” said Beans. “This really limits a group health carrier’s incentive to lower medical costs.”

How do increased group health rates relate to workers’ comp? In some markets, a group health carrier may use its group health rates for their work comp network so any rate increase impacts both business types.

In the end, medical inflation is inconsistent at best, with varying levels driven by differing factors in different locations – a true “needle in the haystack” challenge.

What to do?

Managing these emerging cost threats, whether you have the capabilities internally or utilize a partner, means having the tools to pinpoint hyperinflation and make adjustments. Beans said potential solutions for payers include:

  • Using data analytics: Data availability is at an all-time high. Utilizing analytical tools to spot problem areas is critical for executing cost saving strategies quickly.
  • Moving services out of hospital systems: Programs that direct care away from the hospital setting can substantially reduce costs. For example, Rising’s surgical care program utilizes ambulatory service centers to provide predictable, bundled case rates to payers.
  • Negotiating with providers: Working directly with providers to negotiate bill reductions and prompt payment arrangements is effective in some markets.
  • Underwriting with a micro-focus: For carriers, it is vital that underwriters identify where these pockets of hyperinflation are so they can adjust rates to keep pace with inflation.

“This trend needs to be closely watched,” Beans said. “In the meantime, we will continue to use data to help payers of medical services be smarter shoppers.”

Contact Rising Medical Solutions: info@risingms.com | www.risingms.com

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Rising Medical Solutions. The editorial staff of Risk & Insurance had no role in its preparation.


Rising Medical Solutions provides medical cost containment, care management and financial management services to the workers’ compensation, auto, liability and group health markets.
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