Withstanding the Storm
The impact of a hurricane or severe windstorm can be devastating.
The risk of damage to your property is even greater if you’re in a hurricane-prone state like Florida, as in the case of Miami-Dade County Public Schools (M-DCPS).
Between 2004 and 2014, M-DCPS, which owns $10 billion worth of property, received more than $30 million in assistance from the Federal Emergency Management Agency (FEMA) for damage caused by windstorms or hurricanes.
But last year, FEMA published new guidance that essentially reduced funding for properties that had received assistance in the past. If damage was caused by the same peril, FEMA would reduce its assistance by the amount required for the previous disaster, regardless of the deductible.
That’s where Scott Clark, the recently retired risk and benefits officer of M-CDPS, stepped in. To plug the gap, Clark drew up a three-year program with Swiss Re based on a parametric model of coverage.
The new “storm policy,” effective from May 1, provided a limit of $10 million per loss, with a three-year aggregate limit of $20 million. The policy is triggered by wind speeds in excess of 87.5 mph on a weighted basis.
M-DCPS is believed to be the only public entity in the U.S. that has purchased such coverage to address its FEMA shortfall.
This was in addition to a rolling three-year base windstorm property policy that provided a 10 percent to 15 percent no-claims bonus for every storm-free year, net of commissions.
“The problem was that at the time we didn’t have the ability to secure coverage for every property, and we were already spending $25 million to $30 million on property insurance as it was,” said Clark, who is a former Risk and Insurance Management Society president and director.
“So we started looking at the alternatives and that is where we brought in Swiss Re. They came up with a solution that would monitor wind speeds across all of the ZIP codes that our properties were in.
“Provided there was a sustained wind speed of 87.5mph in that area and we could provide out of pocket expenses, the policy would be triggered and pay out $10 million per loss.”
“The problem was that at the time we didn’t have the ability to secure coverage for every property, and we were already spending $25 million to $30 million on property insurance as it was.” — Scott Clark, recently retired risk and benefits officer, Miami-Dade County Public Schools
He added: “Over the last years, since there have been no significant windstorms, year after year we have made savings of 10 percent to 15 percent in the property marketplace through the no-claims bonus.
“On top of that, we have seen a 10 percent to 12 percent increase in the total insurable value of our properties, translating into an overall saving of 20 percent every year.”
“Scott is one of those amazing people who can jump from topic to topic,” said Kathy Silver, vice president at Insurance Consultants. “One minute he can discuss a complex health insurance problem, then walk into a property insurance meeting and not miss a beat. He consistently challenged himself and the people he worked with to consider new solutions and ideas.” &
A-Plus in Risk Management
James Colorado Robertson, assistant director of risk management at Louisiana State University, bleeds his alma mater’s colors, purple and gold.
The fighting Tiger enrolled at LSU as an undergraduate student in 2003 and never left.
He obtained two degrees there, was hired to create the university’s enterprise risk management plan before he graduated and helped build the first stand-alone public higher education insurance program in Louisiana in 25 years.
“Risk management finds you,” Robertson said. “I don’t think you find risk management.”
When he became an LSU employee, new legislation allowed the university to self-insure for the first time in 25 years.
Insurance autonomy would reduce costs so the college could reinvest its savings to benefit its 31,000 students. But the process was harder and filled with more challenges than anyone predicted, including approval and certification from the five different state offices.
Extensive negotiations, more than 1,200 pages of plans, and the daunting task of placing and creating the many contractual arrangements that other insureds take for granted: brokerage service, third party administration, loss control services, insurance market relationships and many more.
Workers’ compensation was also newly written to insure more than 13,000 full-time employees.
Robertson also drafted an entirely new set of risk management policies for LSU and introduced a Total Cost of Risk Model to demonstrate the value of investment in risk management.
“He wants LSU to be empowered by risk management,” said Nancy Sylvester, managing partner, public sector at Arthur J. Gallagher & Co., who has worked with Robertson for about five years.
“Every day I go to work, I take the passion and thankfulness for what LSU has given me and I try to return that by doing the best job I can do in risk management.” — James Colorado Robertson, assistant director, risk management, Louisiana State University
“I don’t want you to think I was out there doing this alone,” Robertson said. “If it wasn’t for the vision and commitment our senior leadership provided, I don’t think any of this would have been possible.”
“Colorado has been a vital component in the development and success of LSU risk management,” said Brian T. Nichols, associate vice president for administration and IT, and CIO at LSU. “I believe it is this commitment and passion that has allowed Colorado to lead some of the most innovative improvements to the risk management program at LSU.”
Last year, Robertson led the effort to place the first foreign travel policy for LSU employees while also driving improvements to foreign casualty and response programs.
It was a timely move that came into play this summer when four LSU students were in Nice, France, celebrating Bastille Day and a terrorist plowed a truck into crowded streets killing 84. The students were unharmed, but the new protocol enabled LSU to contact them immediately and offer counseling if needed.
“Every day I go to work, I take the passion and thankfulness for what LSU has given me and I try to return that by doing the best job I can do in risk management.” &
Why Marine Underwriters Should Master Modeling
Better understanding risk requires better exposure data and rigorous application of science and engineering. In addition, catastrophe models have grown in sophistication and become widely utilized by property insurers to assess the potential losses after a major event. Location level modeling also plays a role in helping both underwriters and buyers gain a better understanding of their exposure and sense of preparedness for the worst-case scenario. Yet, many underwriters in the marine sector don’t employ effective models.
“To improve underwriting and better serve customers, we have to ask ourselves if the knowledge around location level modeling is where it needs to be in the marine market space. We as an industry have progress to make,” said John Evans, Head of U.S. Marine, Berkshire Hathaway Specialty Insurance.
CAT Modeling Limitations
The primary reason marine underwriters forgo location level models is because marine risk often fluctuates, making it difficult to develop models that most accurately reflect a project or a location’s true exposure.
Take for example builder’s risk, an inland marine static risk whose value changes throughout the life of the project. The value of a building will increase as it nears completion, so its risk profile will evolve as work progresses. In property underwriting, sophisticated models are developed more easily because the values are fixed.
“If you know your building is worth $10 million today, you have a firm baseline to work with,” Evans said. The best way to effectively model builder’s risk, on the other hand, may be to take the worst-case scenario — or when the project is about 99 percent complete and at peak value (although this can overstate the catastrophe exposure early in the project’s lifecycle).
Warehouse storage also poses modeling challenges for similar reasons. For example, the value of stored goods can fluctuate substantially depending on the time of year. Toys and electronics shipped into the U.S. during August and September in preparation for the holiday season, for example, will decrease drastically in value come February and March. So do you model based on the average value or peak value?
“In order to produce useful models of these risks, underwriters need to ask additional questions and gather as much detail about the insured’s location and operations as possible,” Evans said. “That is necessary to determine when exposure is greatest and how large the impact of a catastrophe could be. Improved exposure data is critical.”
To assess warehouse legal liability exposure, this means finding out not only the fluctuations in the values, but what type of goods are being stored, how they’re being stored, whether the warehouse is built to local standards for wind, earthquake and flood, and whether or not the warehouse owner has implemented any other risk mitigation measures, such as alarm or sprinkler systems.
“Since most models treat all warehouses equally, even if a location doesn’t model well initially, specific measures taken to protect stored goods from damage could yield a substantially different expected loss, which then translates into a very different premium,” Evans said.
That extra information gathering requires additional time but the effort is worth it in the long run.
“Better understanding of an exposure is key to strong underwriting — and strong underwriting is key to longevity and stability in the marketplace,” Evans said.
“If a risk is not properly understood and priced, a customer can find themselves non-renewed after a catastrophe results in major losses — or be paying two or three times their original premium,” he said. Brokers have the job of educating clients about the long-term viability of their relationship with their carrier, and the value of thorough underwriting assessment.
The Model to Follow
So the question becomes: How can insurers begin to elevate location level modeling in the marine space? By taking a cue from their property counterparts and better understanding the exposure using better data, science and engineering.
For stored goods coverage, the process starts with an overview of each site’s risk based on location, the construction of the warehouse, and the type of contents stored. After analyzing a location, underwriters ascertain its average values and maximum values, which can be used to create a preliminary model. That model’s output may indicate where additional location specific information could fill in the blanks and produce a more site-specific model.
“We look at factors like the existence of a catastrophe plan, and the damage-ability of both the warehouse and the contents stored inside it,” Evans said. “This is where the expertise of our engineering team comes into play. They can get a much clearer idea of how certain structures and products will stand up to different forces.”
From there, engineers may develop a proprietary model that fits those specific details. The results may determine the exposure to be lower than originally believed — or buyers could potentially end up with higher pricing if the new model shows their risk to be greater. On the other hand, it may also alert the insured that higher limits may be required to better suit their true exposure to catastrophe losses.
Then when the worst does happen, insureds can rest assured that their carrier not only has the capacity to cover the loss, but the ability to both manage the volatility caused by the event and be in a position to offer reasonable terms when renewal rolls around.
For more information about Berkshire Hathaway Specialty Insurance’s Marine services, visit https://bhspecialty.com/us-products/us-marine/.
Berkshire Hathaway Specialty Insurance (www.bhspecialty.com) provides commercial property, casualty, healthcare professional liability, executive and professional lines, surety, travel, programs, medical stop loss and homeowners insurance. The actual and final terms of coverage for all product lines may vary. It underwrites on the paper of Berkshire Hathaway’s National Indemnity group of insurance companies, which hold financial strength ratings of A++ from AM Best and AA+ from Standard & Poor’s. Based in Boston, Berkshire Hathaway Specialty Insurance has offices in Atlanta, Boston, Chicago, Houston, Los Angeles, New York, San Francisco, San Ramon, Stevens Point, Auckland, Brisbane, Hong Kong, Melbourne, Singapore, Sydney and Toronto. For more information, contact [email protected].
The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service. Any description set forth herein does not include all policy terms, conditions and exclusions. Please refer to the actual policy for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Berkshire Hathaway Specialty Insurance. The editorial staff of Risk & Insurance had no role in its preparation.