Examining Claims Losses
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.
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.
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?”
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.
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.
6 Marine Services Risks
3 + 3: Theory of Risk
Anthony Valsamakis doesn’t just practice risk management, he wrote a book about it. And he doesn’t just consult with quants, he is one.
“Risk management has been in my blood for so long that I have to stop myself, otherwise I could go into a two-hour monologue,” said Valsamakis, whose career in the discipline goes back almost 35 years, to his first job with the Standard General Insurance Company.
In 1990, the London-based chairman of the Eikos Group received a doctorate in Business Economics. In 1992, “The Theory & Principles of Risk Management” was published, with Valsamakis the principal author, and is now in its 4th edition.
Valsamakis worked first with a carrier, then as a commodities broker, before taking up an academic post. The company he started in 1999, the Eikos Group, has a risk consulting arm, with clients in most industrial sectors, including the food, mining, forestry, industrial paper and packaging and banking industries. The group also includes a transportation risk brokerage and a Bermuda-based carrier.
“I think the idea of having a secure data base that everyone can access and can update at any moment is by far the best innovation that I can see happening in the information game.”
– Anthony Valsamakis, Chairman, Risk Financing Strategy, Eikos Group
For as long as he can remember, Valsamakis sought ways to get better information on the risks he underwrites, brokers or consults on.
“Over many years we’ve tried hard to increase the quality and timeliness of the information that enables us to do just that,” Valsamakis said.
Finally, it looks like Valsamakis has found a risk management information systems platform that enables him to do just that.
For the past year and a half, Valsamakis has been using a system developed by Riskonnect.
“What’s useful for me is that the platform basically resides within the client’s systems,” he said.
The information he needs to prioritize, depends on which client he is working with.
“By definition, depending on where I am working and what I am doing, risk management priorities are very different,” Valsamakis said.
The Riskonnect platform provides the necessary flexibility.
A mine, for example, could be in a location in Africa or South America with a high degree of political risk. A key risk for a furniture maker might be around trade secrets, the possibility that a disgruntled employee would leak a pricing catalogue to competitors. For a packaging manufacturer, their material supply chain is of the utmost importance, and so on.
For each client, Valsamakis can use Riskonnect platform and work with the client to compile the information that is most relevant to that client and its industry and enter that into a secure system.
“All of these are template facts that you can easily put into the Riskonnect system,” Valsamakis said.
The Riskonnect platform is housed within the client’s information technology system, and it is transparent enough, to give Valsamakis and his client access to the same sets of data.
“I think the idea of having a secure data base that everyone can access and can update at any moment is by far the best innovation that I can see happening in the information game,” he said.
Whose System Is It?
Valsamakis has been around long enough to know a few things about data and risk transfer. He’s seen a number of risk information management systems put out by brokers, for example, that he thinks are set up more for the broker’s business model than for the sharing of information.
Generally speaking, information about an insured’s risks come from the broker and the insured. The Riskonnect system works, according to Valsamakis, because it is designed to be adapted to the client, not the broker.
“I have seen efforts by brokers, for example, over the years to produce a type of risk information platform that becomes theirs,” Valsamakis said.
“It’s been a perennial problem in the industry, where depending on which broker you end up with, you’ll end up with system A, B or C,” he said.
The Underwriter Needs to Know
Using Riskonnect, Valsamakis encourages clients to be as transparent as possible, in order to give the most complete information to underwriters.
“For me the question is, ‘What is the volatility around the asset and can there be an impact on the balance sheet of our clients?’” he said.
“We need to describe this exposure in various contexts so that the underwriters know what they are covering,” he said.
It’s basic human psychology. If an underwriter doesn’t feel they are getting enough information about a particular risk, they will take a negative view of that risk.
The more accurate the information Valsamakis has about a client’s exposures, the better the pricing he gets from underwriters.
“If you were an underwriter putting your capital and risk and I gave you little information, you would actually be less inclined to look at the risk in favorable terms. There will be a natural inclination to downgrade it,” he said.
Where Valsamakis sees enormous value is in the Riskonnect system ability to tag which can be revisited at a later stage.
“It’s amazing how clients forget, in the passage of time, that there are profiles that have changed for better or worse.”
A Long-Term Investment
The Eikos Group invested significantly in the Riskonnect product and are taking it to a number of clients. The transparency of the system and the advantage it gives the Eikos Group and its clients with underwriters is in itself a business advantage over the competition.
“We made a decision as a small company, relatively speaking, to invest a lot of money in Riskonnect and be very proactive about it,” Valsamakis said.
“When I talk to executives I say we invested in it because it’s going to save our clients money. Better information will lead to a lower cost of risk,” he said.
“If I’m talking to someone at a high level, that’s fairly easily understood.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Riskonnect. The editorial staff of Risk & Insurance had no role in its preparation.