Project Cargo: Bigger is Beautiful
After years of declining activity, the project cargo risk management business is back on the move, with carriers expecting growth opportunities going forward.
Project cargo involves the movement of large, heavy, valuable goods, often over vast distances, and usually on specialized trucks, trains, aircraft, or vessels. Energy is a major client, as in oil rigs, wind-turbine blades, turbines, and refinery processing units.
Infrastructure is also a fast-growing segment, especially in Asia, Africa, and Latin America. Major losses are rare but represent a double whammy to owners and underwriters: The components themselves are often custom-built and can be worth many millions of dollars. Beyond their inherent value, the damage or loss of big project pieces can cost many times their replacement value in project delays and business interruption.
The size of the global project cargo business varies with economic activity, governmental spending, and infrastructure development, said Steve Weiss, Latin American marine manager and vice president of marine engineering and project cargo for Liberty International Underwriters.
“There are years when the global book would exceed $100 million in total premium and years where this would be much less,” Weiss said.
“Prior to 2008, the project cargo business was very busy globally; 2008 to 2011 showed a dramatic slowdown except in some of the developing countries like in Latin America, as the need for power was great. The market is on an upswing due to lenders getting back in the market and pent up demand. We expect a growth in project opportunities in the next few years.”
As business grows, lead underwriters remain focused on the skills of the contractors both on the procurement and transportation ends of the business. “We focus our engineering and underwriting efforts on the long lead, critical items that could most affect the project timeline,” said Weiss. “The critical item moves are the things that keep underwriters up at night.”
Innovation in this market is typically focused on policy wording and the day-to-day management of the account.
“One service enhancement is the ability, with mobile devices, to support the client directly in the event they forgot to notify us of a critical item move. With a series of photos or other documentation, we can often forgo a survey and enable the client to not incur any delay,” Weiss said.
Follow the Leader
Capacity needs of larger projects require more than one insurer to cover the project. There are often three or four other underwriters — sometimes up to twice that many — that are known as slip carriers or following players, that will take a smaller percentage of a cover on a subscription basis.
In those cases, they are truly subscribers or followers; they underwrite the lead carrier’s capabilities with respect to underwriting, risk management, or claims handling before they sign on to the slip with a following position. They get a check for their percentage of the premium, and if there is a claim they write a check for their percentage.
Carriers said the arrangement suits them well. The followers like to have operators like Liberty Mutual, Allianz, or a few specialized underwriters such as Coast Underwriters lead the project. They have the size and expertise.
The leads like to have the followers, which can be large underwriters themselves, to boost capacity. The covers in project cargo can be extremely large, and are often placed in conjunction with a major construction project, so there is usually some coordinated coverage.
“There are many carriers active in the project cargo market, but only a very limited number that will act as lead underwriter,” said Kevin Wolfe, global head of project cargo at Allianz Global Corporate & Specialty.
“That is because the loss-control and risk-management aspects from underwriting through the project require more assets and capabilities than most carriers wish to allocate to this business segment.”
There have been some recent important shifts in the global project cargo business. Instead of being built on site, many structures — say, for a bridge — are built in modules and shipped.
That means that frequency of project-cargo shipments is increasing, as is the total insured value. Loss frequency is still low, but underwriters said the rising value of shipments means the risk of loss is also rising.
“A cargo of steel is worth one thing, but a bridge section could be worth $400 million and weigh 1,000 tons,” said Wolfe.
As noted, a bigger problem would be project delays.
“We are not just talking about the cost to refabricate the component,” said Wolfe. “Maybe the heavy-lift ship or aircraft is not available again for six weeks after the new completion date. Maybe the utility building a new power plant has contracts to supply power from it, and now has to buy power until the delayed generator can come on. The equipment can cost $40 million and the delay to refabricate, ship, and commission, including lost business and other costs, can be 10 times as much.”
Beyond energy and infrastructure, project cargo can get exotic, said Michelle E. O’Donovan, national product line director at International Marine Underwriters/OneBeacon, based in New York.
“We were involved with the movement of the Space Shuttle Enterprise to the Intrepid Museum in New York. In addition to project cargo transportation, carriers require special liability coverage too when moving project cargo. Even the military has need of project cargo. For example, the movement of submarine parts down river by barge to Newport News [Va.].”
O’Donovan added, however, that “not all project cargo involves $100 million in limits done by the major project-cargo players. Many are successfully handled by other marine insurers. Due to the competitive nature of our market and with some inexperienced carriers writing project cargo, some brokers have modified the terms to expand coverage. Some new markets have accepted changes to the standard project cargo and delay-in-start-up clauses while others continue to write business on market standard terms.”
Among the few underwriters that take lead positions in project cargo, Coast Underwriters, based in Vancouver, British Columbia, might seem like a fighter punching above his weight, but the company is a subsidiary of the RSA Group, based in London. Kevan Gielty, president and CEO, relishes his company’s ability to consider a wide range of project cargo business.
“To be effective, we look to write all of the risk or at least lead. If we take a following position, then we are very careful who we choose to follow, as we have to then rely on the risk management of the lead underwriter. There are two keys to the ability to lead on project cargo,” said Gielty: the technical expertise and breadth to handle the underwriting, and adequate capacity.
“If you are bringing $5 million or so of capacity, you have little influence on a potential deal. Our capacity on any given project can be in the $50 million to $100 million range. Risk management is essential, because of the size and weight and complex challenges in this business.”
Coast has two risk managers on staff, and Gielty said they stay busy.
“You can only be profitable in this business if you write.”
— Kevin Gielty, president and CEO, Coast Underwriters
“There is always something new in the proposals that come across our desks. As the underwriter, we set the price, but we rely heavily on our risk managers because damage or loss to a covered move is often not the worst hit, often it is the consequential loss, the business interruption.”
The best way to ensure losses are kept to a minimum is “to survey each project, each move, each lift to death,” said Gielty, “but that is just not cost effective. This is a very competitive market. That is why you need different horses for different courses. If we are writing a rail move, we have to know more than just the bridge weights and tunnel clearances. We have to know speed, elevation, inline, even the season and the right-of-way.”
In spring, for example, soggy ground can shift so a track weight limit might be compromised.
One insight Gielty offered is that “in this business, you have to listen to the insured. They are the ones making the move, they know their business. You don’t have to understand every single detail of their business, as long as you know that they know every detail of their business.”
That said, the old adage that “ya gotta know the territory,” is especially true in project cargo. In one recent case, a surveyor noticed a crew lashing an ocean-going cargo with nylon straps, when the shipment required chains; the change was made and the cargo shipped safely.
In another instance, a client had two large turbines coming from overseas for a new power generating station. They were large and heavy, but not so much that they could not have travelled on the same vessel.
That would have saved some money but Gielty said his risk managers, in consultation with the client, decided to ship them separately.
“If at least one turbine was delivered on time in good condition, then the plant could operate at reduced capacity versus both being damaged in a single incident. The decision illustrates comprehensive risk management: time, money, probability, and contingency planning.”
As an underwriter, Gielty takes a broad approach to his job, and the way Coast makes money.
“You can only be profitable in this business if you write,” he said.
P/C Rate Outlook
From a risk perspective, 2014 will be characterized by competitive property rates, a hard market for marine risks, and continued challenges in the terrorism-risk space, according to Marsh executives.
During 2013, the U.S. property/casualty insurance market benefited from lower catastrophe losses, an influx of new capacity, and four quarters of profitable underwriting results, said Dean Klisura, Marsh’s U.S. Risk Practices and Specialties leader, during a webinar on Jan. 29.
While today’s low-interest rate environment remains a challenge for insurers, the P&C market is essentially one of “abundant capacity and competitive terms and pricing,” said Klisura.
With some exceptions, risk purchasers will see 2013’s competitive rates and policy terms continue into 2014, Marsh officials agreed.
For example, Klisura said, surplus capacity among insurers and reinsurers alike kept pricing relatively stable for property risks, even in the aftermath of Superstorm Sandy, in the third quarter of 2012.
“Property insurance pricing has generally increased after a major catastrophe such as Hurricanes Katrina and Ike,” he said. Following Hurricane Sandy, however, only those with flood zone exposures or organizations in local areas directly impacted by Sandy saw rates increase significantly.
Moreover, in the reinsurance space, Jan. 1, 2014 treaty renewals saw average rates “fall significantly across nearly all regions and business segments” due to low loss experience and the influx of “billions” of dollars in new capital of late, he added.
Nevertheless, there will be challenges this year for catastrophe-exposed risks with flood zone exposures, as well as for those with large transportation fleets or rail exposures, according to Marsh.
Another challenge may be terrorism coverage, which will undoubtedly be in short supply if Congress does not reauthorize the Terrorism Risk Insurance Reauthorization Act (TRIPRA), said Duncan Ellis, Marsh’s U.S. Property Practice leader.
The private insurance market is unlikely to be an adequate substitute to the federal program, he said, suggesting price increases and property shortages if the federal reinsurance program — first instituted as a response to September 11, 2001 attacks — is not extended.
“As they address the uncertainty of TRIPRA, organizations may consider alternative solutions for terrorism coverage, including stand-alone terrorism placements, reservation of capacity, sunset provision discussions, and captive insurer strategies,” Ellis told Risk & Insurance®.
There are several areas risk managers should keep an eye on, Marsh leaders said:
- Auto liability, where insurers may call for larger attachment points this year.
- Marine liability, where the market hardened in 2013, and will likely continue that trend this year, with 5 percent to 20 percent premium increases for insureds with good loss histories.
- Limited capacity for property insurers in catastrophe-prone regions. Property rates began to trend downward second part of 2013. While that should continue into 2014, those with insured values concentrated in catastrophe-prone areas could see rates that are flat to 10 percent higher going forward.
- Those with windstorm exposures located in the Southeastern or inland Texas and mid-Atlantic United States will want to remodel their risks this year to incorporate the impact of Risk Management Solutions’ newest version 13 model.
Finally, whereas most casualty lines should see only low-single digit increases this year, according to Steve Kempsey, Marsh’s U.S. Casualty leader, workers compensation remains a difficult risk for some.
Fortunately, however, many organizations are apparently serious about keeping medical costs in check.
Nearly two-thirds (63 percent) of 200 or so webinar participants said their organization “regularly monitors the programs used for medical cost management (such as bill review, nurse case management, and utilization review) in order to assess return on investment.”
Three in10 said they felt they did a good job monitoring returns, and one-third said they were doing some monitoring, but could still do a better job.
The Next Wave of Workers’ Comp Medical Cost Savings
Managing medical costs for workers’ compensation claims is like pushing on a balloon. As you effectively manage expenses in one area, there are bound to be bulges in another.
Over the last decade, great strides have been made in managing many aspects of workers’ compensation medical costs. Case management, bill review and pharmacy benefits management are just a few categories that produce significant returns.
And yet, according to the National Council on Compensation Insurance (NCCI), medical costs remain the largest percentage of workers’ comp expenses. Worse still, medical costs continue to be the fastest growing expense category.
Many medical services are closely managed through provider negotiations, bill review, utilization review, pharmacy benefits management, to name a few. But a large opportunity for medical cost containment remains largely untouched and therefore represents a significant opportunity for cost savings.
Ancillary medical services is a term used to describe specialty or supplemental health care services such as medical supplies, home health care, durable medical equipment, transportation and physical therapy, etc.
According to Clifford James, Vice President of Strategic Development at Healthesystems in Tampa, Fla., modernizing the process for managing ancillary medical services presents compelling opportunities for cost savings and improved patient care.
Source: 2014 Healthesystems Ancillary Medical Services Survey
“The challenge of managing these types of medical products and services is a cumbersome and extremely disconnected process,” James said. “As a result, it represents a missing link in an overall medical cost management strategy, which means it is costing payers money and patients the most optimal care.”
James singled out three key hurdles:
Lack of transparency
As the adage goes, you can only manage what you can measure.
Yet when it comes to the broad range of products and services that comprise ancillary benefits, comprehensive data and benchmarking metrics by which to gauge success are hard to come by.
The problem begins with an antiquated approach to coding medical services that was developed in the 1970s. The coding system falls short in today’s modern health care environment due to its lack of product and service level detail such as consistent units of measure, quantity and descriptors.
As a result, a meaningful percentage of ancillary benefits spending is coded as “miscellaneous,” which means a payer has little to no visibility into what product or service is being delivered — and no way to determine if the correct price is being applied or if the item is even necessary or appropriate.
Source: 2014 Healthesystems Ancillary Medical Services Survey
“It’s a big challenge. Especially when you consider that for many payers, it’s difficult to determine exactly what they are spending, or identify what the major cost drivers are when it comes to ancillary services,” James said. And when frequently over 20 percent of these types of services are billed as miscellaneous, payers have zero visibility to effectively manage these costs.
Measurement and monitoring
Often, performance that is monitored is given the most attention. Therefore, ancillary programs that are closely monitored and measured against objective benchmarks should be the most successful.
However, benchmarks are hard to determine because multiple vendors are frequently involved using disparate data and processes. There isn’t a consistent focus on continuous quality improvement, because each vendor operates off of their own success criteria.
“Leveraging objective competitive comparisons breeds success in any industry. Yet for ancillary services there is very limited data to clearly measure performance across all vendors,” James said. “And for payers, this is a major area of opportunity to promote service and cost containment excellence.”
Source: 2014 Healthesystems Ancillary Medical Services Survey
If you ask claims executives about their strategies for improving the claims management process, a likely response may be “workload optimization.” The goal for some is to enable claims professionals to handle a maximum case load by minimizing administrative duties so they can leverage their expertise to better manage the outcome of each case.
But the path towards “workload optimization” has many hurdles, especially when you consider what needs to be coordinated and the manual way it frequently is done.
Ancillary benefits are a prime example. For a single case, a claims professional might need to coordinate durable medical equipment, secure translation services, arrange for transportation and confirm the best physical therapy plan. Unfortunately they often don’t have the needed time, or the pertinent information, in order to make quick, yet informed, decisions about the ancillary needs of their claimants.
In addition there is the complexity of managing multiple vendor relationships, juggling various contacts, and accessing multiple platforms and/or making endless phone calls.
“We’ve been called the ‘industry integrator’ by some people, and that’s accurate. We are delivering a proven platform connecting payers with providers and vendors on the ancillary medical benefit front. It’s never been done before.”
– Clifford James, Vice President of Strategic Development, Healthesystems
Modernizing the process
To the benefit of both payers and vendors, Healthesystems offers Ancillary Benefits Management (ABM).
The breakthrough ABM solution consists of three foundational components — a technological platform, proprietary medical coding system and a comprehensive benefits management methodology.
The technological platform integrates payers and vendors with a standardized architecture and processes. Business rules and edits can be easily managed and applied across all contracted vendors. All processes – from referral to billing and payment – are managed on a single platform, empowering the payer with a centralized tool for managing the quality of all ancillary providers.
But when it comes to ancillary products, the critical and unique challenge Healthesystems had to solve is the antiquated coding system. This was completed by developing a highly granular, product-specific coding system including detailed descriptions and units of measure for all products and services. This coding provides payers with the clearest understanding of all products and services delivered including pricing and all the necessary utilization metrics.
“We bring the highest level of transparency and visibility into all ancillary products and services,” James said, adding that the ABM platform uses an extensive preferred product coding system 15 times more detailed than any other existing system or program.
This combination of sophisticated technology, proprietary coding system and benefit management methodology revolutionizes the ancillary category. Some of the benefits include:
- Crystal-clear transparency
- A more detailed and comprehensive view into ancillary products and services
- An automated process that eliminates billing discrepancies or resubmittals
- Integrated and consistent processes
- Strategic program management
Taken together, the system leapfrogs over the existing hurdles while creating entirely new opportunities. It’s a win for vendors and payers, and ultimately for patients, who receive the optimal product or service.
“We’ve been called the ‘industry integrator’ by some people, and that’s accurate,” James said. “We are delivering a proven platform connecting payers with providers and vendors on the ancillary medical benefit front. It’s never been done before.”
To learn more about the Healthesystems Ancillary Benefits Management solution visit: http://www.healthesystems.com/solutions-services/ancillary-benefits