Understanding the Risks
If it ain’t broke, don’t fix it. That was the clear message from a client to Richard Geiger when the firm reorganized itself and split off a large chunk of its business.
“We recently completed a spin-off where we needed to duplicate our marine liability structure at an aggressive price,” said the risk manager.
“Rick successfully completed that assignment, getting us the same coverage for the new entity with a cost structure we liked. I was confident he would be able to get it done. Rick was able to negotiate a very aggressive pricing structure at below minimum premiums with the same coverage for some of the layers.”
Another client had a workers’ compensation policy that included limited cover for the Jones Act and U.S. Longshore and Harborworkers’ Compensation Act.
The Jones Act is a federal law that requires the movement of cargo between U.S. ports be carried in vessels owned by and crewed by U.S. citizens. USLH is workers’ compensation for employees specifically when working on or near navigable waters and engaged in maritime employment.
The additional elements of the coverage were expensive, despite a million-dollar retention.
The client said Geiger was able to isolate those specific exposures and place a policy that effectively eliminated the retention and significantly reduced the costs.
Geiger worked with colleagues and insurers in London to create a financial guaranty cover to protect the client’s balance sheet in case of a significant loss after project completion.
Making It Happen
Often, Power Brokers earn their status through innovative coverage and placements, or by resolving a complex claim.
Mira Jacinto had to do it all at once for a client that had suffered “multiple large catastrophic claims,” said the risk manager.
A previous reorganization of the company’s business plan, combined with the losses, drove the firm into poor results and forced it to sell a significant portion of its operations.
The risk manager said that Jacinto was instrumental in getting things back on track. She revised the company’s program after the divestiture, supported management in crafting a risk program for its new, smaller operations, and went to domestic and international markets to secure placement.
Jacinto transformed the client’s turnaround story from a negative one to a positive one, and was able to place customized coverage and secure an overall reduction in rate.
For another client, the challenge could not have been more different.
The firm had prospered, and it asked Jacinto to recommend and implement opportunistic expansions in coverage.
At a time when many companies are emphasizing supply-chain efficiency and trying to reduce inventory, Jacinto found readily available capacity in the market for excess stock exposure, enhancing the client’s marine program at very low cost.
For a third client, a very large retail operation with an evolving business model, Jacinto was credited with keeping the inventory program current with rapid changes in the company.
Meeting the Challenge
“Our cargo coverage was a mess,” said one risk executive. “Our whole business practice had changed and suddenly we went from holding no inventory to holding a lot. It was suddenly a huge exposure both in warehouses and out in the supply chain.
“We had changed our whole stock-throughput policy, and our coverage had not kept pace. We were paying way too much.”
The exec’s company put out an RFP and ultimately chose Michael Pellegrini. “He fixed the gaps and saved us money.”
Part of the challenge, the client said, was that that the company is known for its lean supply chain. Presenting the company to the market was as much a question of perception as it was underwriting and risk management.
Nevertheless, Pellegrini was able to double limits to $200 million, and enhance coverage across the board for the transit and inventory risks, all while securing a rate reduction of more than one-quarter of the previous bill.
Having secured increasingly favorable successive multiyear cargo and transit placements for one client, Pellegrini had to dig a little deeper in 2014 to find efficiencies to be gained in the client’s excess layers that were placed offshore.
Pellegrini was able to craft a presentation that generated competition by previously reluctant domestic underwriters. The result was significant reductions by the incumbent London markets.
Expertise for Diverse Needs
Times have been tough for some in the marine sector, but companies were able to rely on the expertise of Kevin Sisk.
“This was a terrible year for our industry, and a tough one for our company,” said the owner of a private firm. “Margins sunk very low, to the bare bones.
“We put a lot of pressure on Kevin, and he really helped us when we needed it. We changed the whole nature of our company, sold off some big operations, and concentrated on a few others. Our whole financial structure changed and our whole risk profile changed.
“We had to go back to our underwriters — sometimes for our whole placement, sometimes just for segments. But Kevin really earned his stripes this year; we got seamless changes in coverage,” the owner said.
In a strikingly different testimonial, another client faced other needs at a fast growing firm with many small clients. The owner said that with expansion had come strong pressure from small clients for the company to handle the risk management and insurance for projects.
The Catch-22 was that if Sisk’s client refused to shoulder the burden, it risked losing the project or customer entirely; if Sisk’s client accepted, the risks exposures could be greater than any gain from the project.
The client credited Sisk with being able to accommodate the risks — in some cases within the firm’s existing program. In other cases, he worked with the client and its customer to craft coverage for the project that enabled it to proceed without unduly burdening the contractor.
Creative Solutions to Keep Clients Afloat
HUB International’s B.C. Thibeaux III earned his laurels this year by crafting powerful and innovative programs for small operators in a beleaguered industry.
“B.C.’s aggressive and creative thinking showed me how to limit my company’s and my customers’ exposure, by getting non-owned vessel owners to list us on their policy as additional insured,” said one owner. “And then he was the architect in implementing that policy.”
The client has been an owner and operator of offshore vessels for more than 30 years, along with marketing and managing a large fleet of non-owned vessels. So it was no mean feat to show him an approach he had not heard about before.
In another case, a client needed traction with underwriters before he could even begin to think about creative options.
“When I met B.C., my company was having a very difficult time getting underwritten,” said the company executive.
“Many brokers didn’t even acknowledge us with a return phone call. Although we are a small account, B.C. treated us like a major [one], aggressively attacked the market and got us coverage, which effectively saved us from tying up the fleet. B.C. kept us in business.”
Another client had multiple claims on both employer’s and general liability, which were separate. First, Thibeaux worked with the client on safety and risk mitigation, and then was able to find a Lloyd’s underwriter willing to take the placements under a single policy.
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.
A Modern Claims Philosophy: Proactive and Integrated
According to some experts, “The best claim is the one that never happens.”
But is that even remotely realistic?
Experienced risk professionals know that in the real world, claims and losses are inevitable. After all, it’s called Risk Management, not Risk Avoidance.
And while no one likes losses, there are rich lessons to be gleaned from the claims management process. Through careful tracking and analysis of losses, risk professionals spot gaps in their risk control programs and identify new or emerging risks.
Aspen Insurance embraces this philosophy by viewing the data and expertise of their claims operation as a valuable asset. Unlike more traditional carriers, Aspen Insurance integrates their claims professionals into all of their client work – from the initial risk assessment and underwriting process through ongoing risk management consulting and loss control.
This proactive and integrated approach results in meaningful reductions to the frequency and severity of client losses. But when the inevitable does happen, Aspen Insurance claims professionals utilize their established understanding of client risks and operations to produce some truly amazing solutions.
“I worked at several of the most well known and respected insurance companies in my many years as a claims executive. But few of them utilize an approach that is as innovative as Aspen Insurance,” said Stephen Perrella, senior vice president, casualty claims, at Aspen Insurance.
“We do a lot of trending and data analysis to provide as much information as possible to our clients. Our analytics can help clients improve upon their own risk management procedures.”
— Stephen Perrella, Senior Vice President, Casualty Claims, Aspen Insurance
Utilizing claims expertise to improve underwriting
Acting as adviser and advocate, Aspen integrates the entire process under a coverage coordinator who ensures that the underwriters, claims and insureds agree on consistent, clear definitions and protocols. With claims professionals involved in the initial account review and the development of form language, Aspen’s underwriters have a full sense of risks so they can provide more specific and meaningful coverage, and identify risks and exclusions that the underwriter might not consider during a routine underwriting process.
“Most insurers don’t ever want to talk about claims and underwriting in the same sentence,” said Perrella. “That archaic view can potentially hurt the insurance company as well as their business partners.”
Aspen Insurance considered a company working on a large bridge refurbishment project on the West Coast as a potential insured, posing the array of generally anticipated construction-related risks. During underwriting, its claims managers discovered there was a large oil storage facility underneath the bridge. If a worker didn’t properly tether his or her tools, or a piece of steel fell onto a tank and fractured it, the consequences would be severe. Shutting down a widely used waterway channel for an oil cleanup would be devastating. The business interruption claims alone would be astronomical.
“We narrowed the opportunity for possible claims that the underwriter was unaware existed at the outset,” said Perrella.
Risk management improved
Claims professionals help Aspen Insurance’s clients with their risk management programs. When data analysis reveals high numbers of claims in a particular area, Aspen readily shares that information with the client. The Aspen team then works with the client to determine if there are better ways to handle certain processes.
“We do a lot of trending and data analysis to provide as much information as possible to our clients,” said Perrella. “Our analytics can help clients improve upon their own risk management procedures.”
For a large restaurant-and-entertainment group with locations in New York and Las Vegas, Aspen’s consultative approach has been critical. After meeting with risk managers and using analytics to study trends in the client’s portfolio, Aspen learned that the sheer size and volume of customers at each location led to disparate profiles of patron injuries.
Specifically, the organization had a high number of glass-related incidents across its multiple venues. So Aspen’s claims and underwriting professionals helped the organization implement new reporting protocols and risk-prevention strategies that led to a significant drop in glass-related claims over the following two years. Where one location would experience a disproportionate level of security assault or slip & fall claims, the possible genesis for those claims was discussed with the insured and corrective steps explored in response. Aspen’s proactive management of the account and working relationship with its principals led the organization to make changes that not only lowered the company’s exposures, but also kept patrons safer.
World-class claims management
Despite expert planning and careful prevention, losses and claims are inevitable. With Aspen’s claims department involved from the earliest stages of risk assessment, the department has developed world-class claims-processing capability.
“When a claim does arrive, everyone knows exactly how to operate,” said Perrella. “By understanding the perspectives of both the underwriters and the actuaries, our claims folks have grown to be better business people.
“We have dramatically reduced the potential for any problematic communication breakdown between our claims team, broker and the client,” said Perrella.
A fire ripped through an office building rendering it unusable by its seven tenants. An investigation revealed that an employee of the client intentionally set the fire. The client had not purchased business interruption insurance, and instead only had coverage for the physical damage to the building.
The Aspen claims team researched a way to assist the client in filing a third-party claim through secondary insurance that covered the business interruption portion of the loss. The attention, knowledge and creativity of the claims team saved the client from possible insurmountable losses.
Modernize your carrier relationship
Aspen Insurance’s claims philosophy is a great example of how this carrier’s innovative perspective is redefining the underwriter-client relationship. Learn more about how Aspen Insurance can benefit your risk management program at http://www.aspen.co/insurance/.
Stephen Perrella, Senior Vice President, Casualty, can be reached at Stephen.email@example.com.
This article is provided for news and information purposes only and does not necessarily represent Aspen’s views and does constitute legal advice. This article reflects the opinion of the author at the time it was written taking into account market, regulatory and other conditions at the time of writing which may change over time. Aspen does not undertake a duty to update the article.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Aspen Insurance. The editorial staff of Risk & Insurance had no role in its preparation.