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.
Global Program Premium Allocation: Why It Matters More Than You Think
Ten years after starting her medium-sized Greek yogurt manufacturing and distribution business in Chicago, Nancy is looking to open new facilities in Frankfurt, Germany and Seoul, South Korea. She has determined the company needs to have separate insurance policies for each location. Enter “premium allocation,” the process through which insurance premiums, fees and other charges are properly allocated among participants and geographies.
Experts say that the ideal premium allocation strategy is about balance. On one hand, it needs to appropriately reflect the risk being insured. On the other, it must satisfy the client’s objectives, as well as those of regulators, local subsidiaries, insurers and brokers., Ensuring that premium allocation is done appropriately and on a timely basis can make a multinational program run much smoother for everyone.
At first blush, premium allocation for a global insurance program is hardly buzzworthy. But as with our expanding hypothetical company, accurate, equitable premium allocation is a critical starting point. All parties have a vested interest in seeing that the allocation is done correctly and efficiently.
“This rather prosaic topic affects everyone … brokers, clients and carriers. Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
– Marty Scherzer, President of Global Risk Solutions, AIG
Basic goals of key players include:
- Buyer – corporate office: Wants to ensure that the organization is adequately covered while engineering an optimal financial structure. The optimized structure is dependent on balancing local regulatory, tax and market conditions while providing for the appropriate premium to cover the risk.
- Buyer – local offices: Needs to have justification that the internal allocations of the premium expense fairly represent the local office’s risk exposure.
- Broker: The resources that are assigned to manage the program in a local country need to be appropriately compensated. Their compensation is often determined by the premium allocated to their country. A premium allocation that does not effectively correlate to the needs of the local office has the potential to under- or over-compensate these resources.
- Insurer: Needs to satisfy regulators that oversee the insurer’s local insurance operations that the premiums are fair, reasonable and commensurate with the risks being covered.
According to Marty Scherzer, President of Global Risk Solutions at AIG, as globalization continues to drive U.S. companies of varying sizes to expand their markets beyond domestic borders, premium allocation “needs to be done appropriately and timely; delay or get it wrong and it could prove costly.”
“This rather prosaic topic affects everyone … brokers, clients and carriers,” Scherzer says. “Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
There are four critical challenges that need to be balanced if an allocation is to satisfy all parties, he says:
Across the globe, tax rates for insurance premiums vary widely. While a company will want to structure allocations to attain its financial objectives, the methodology employed needs to be reasonable and appropriate in the eyes of the carrier, broker, insured and regulator. Similarly, and in conjunction with tax and transfer pricing considerations, companies need to make sure that their premiums properly reflect the risk in each country. Even companies with the best intentions to allocate premiums appropriately are facing greater scrutiny. To properly address this issue, Scherzer recommends that companies maintain a well documented and justifiable rationale for their premium allocation in the event of a regulatory inquiry.
Insurance regulators worldwide seek to ensure that the carriers in their countries have both the capital and the ability to pay losses. Accordingly, they don’t want a premium being allocated to their country to be too low relative to the corresponding level of risk.
Without accurate data, premium allocation can be difficult, at best. Choosing to allocate premium based on sales in a given country or in a given time period, for example, can work. But if you don’t have that data for every subsidiary in a given country, the allocation will not be accurate. The key to appropriately allocating premium is to gather the required data well in advance of the program’s inception and scrub it for accuracy.
When creating an optimal multinational insurance program, premium allocation needs to be done quickly, but accurately. Without careful attention and planning, the process can easily become derailed.
Scherzer compares it to getting a little bit off course at the beginning of a long journey. A small deviation at the outset will have a magnified effect later on, landing you even farther away from your intended destination.
Figuring it all out
AIG has created the award-winning Multinational Program Design Tool to help companies decide whether (and where) to place local policies. The tool uses information that covers more than 200 countries, and provides results after answers to a few basic questions.
This interactive tool — iPad and PC-ready — requires just 10-15 minutes to complete in one of four languages (English, Spanish, Chinese and Japanese). The tool evaluates user feedback on exposures, geographies, risk sensitivities, preferences and needs against AIG’s knowledge of local regulatory, business and market factors and trends to produce a detailed report that can be used in the next level of discussion with brokers and AIG on a global insurance strategy, including premium allocation.
“The hope is that decision-makers partner with their broker and carrier to get premium allocation done early, accurately and right the first time,” Scherzer says.
For more information about AIG and its award-winning application, visit aig.com/multinational.