Fear Takes No Holiday
In April 2013, an explosion rocked the street in front of the Charlesmark Hotel, a boutique property on Boylston Street in Boston that overlooked the finish line of the Boston marathon. In the chaos that ensued, the FBI closed a 12-block radius around the blast scene. Five hotels were completely locked down, including the Charlesmark, Mandarin and Lenox hotels.
Strictly from an insurance standpoint, the hotels, restaurants and businesses in that 12-block radius may have been the lucky ones. Direct impact to their operations would have at least given them access to insurance recovery for physical damage or for business interruption due to civil authority action, assuming they had the right coverages in place.
But what about the businesses outside that radius? No doubt their revenues suffered in the days and weeks that followed, as media coverage fanned the flames of fear, keeping Boston’s terrorism connection alive in the minds of the public.
It’s likely that few, if any of them, had language in their insurance policies that would help offset their losses while Boston struggled to regain some normalcy.
The volume of terror attacks has increased worldwide in a short period of time. At the time of this writing, three U.S. attacks with potential connections to terrorist organizations took place within a single 12-hour span on Sept. 17.
Fear has become one of the most challenging market conditions facing business that rely on travel and tourism. Gaps in coverage can take companies by surprise when high-profile events suppress travel, tourism and the general flow of commerce.
“There’s no question that the hospitality industry is affected by fear, as much or more than the event itself,” said Chad Callaghan, principal of Premises Liability Experts, based in Atlanta. Callaghan served Marriott International Inc. for 35 years, as vice president of safety and security.
Business hubs rebound more quickly, because business travelers can’t stay away for long. But companies dependent on leisure travelers for revenue can take heavy hits, depending on the nature and severity of an attack in their vicinity. It’s hard to calculate what the financial impact would be of a major attack at Disney World, or at the primary airport of the host city of the Super Bowl a week before the event.
“Terrorism is the thing that scares everybody,” said Joe Addison, executive vice president at JLT Specialty USA, “People don’t want to walk down Las Vegas Boulevard when two weeks ago there was a truck bomb there, and every time they look at a truck they’re going to worry, ‘Is there one in there?’ ”
Following the November 2015 terrorist attacks in Paris, bookings at luxury hotels in the city fell by 50 percent. Within days of the Brussels terror attack, hotel occupancy plunged from 82 percent to 25 percent across the city.
“Acts of terrorism have a lingering negative impact on revenue that simply can’t be recovered,” said Jan Schnabel, managing director and director of risk management with HUB International’s hospitality practice.
“The hundreds of billions of dollars that are lost in overall revenue in the tourism and hospitality world following an attack is inconceivable.”
The World Travel & Tourism Council estimates that it takes a region, on average, about 13 months to get back to normal following a terrorist attack. In the grand scheme of things, that’s not long. But it can still take a mighty toll.
And booking and cancellation stats don’t really give a complete picture of what hotels may face in the immediate wake of a terrorist attack, when trying to serve the limited guests they do have.
“It’s a tough thing for risk managers to really wrap their minds around,” said Sheri Wilson, national property claims director for Lockton.
“What if I can’t get laundry? What if the roads are closed so I can’t get the people in? What if I can’t get fresh fruit in?” Hotels may need to spend a considerable amount to get the goods and services they need.
Terrorism coverage for such losses and unexpected expenses is a tricky beast. Coverage under standard property policies is typically limited to property damage and business interruption related to property damage. It also relies upon the event to be certified as an act of terrorism by the U.S. Secretary of the Treasury.
“If you elect coverage through TRIPRA, or one of the other national terrorism pools, there may be limited or no cover depending on your underlying property policy and how the terrorism ‘pool’ ultimately responds,” said Steve Truono, vice president of global risk management and insurance for Starwood Hotels & Resorts.
Business interruption (BI), or time element coverage, can be triggered by other situations such as evacuation orders, transportation interruptions or power outages. Contingent BI can come into play as well, in some cases.
“I rely on housekeeping to keep my hotel open but if housekeeping [can’t get to work] because of a terrorist attack, I could, as a hotel owner, have [CBI] coverage,” said Wilson.
“Once the terrorism is certified, all of the coverages in the policy come into play.”
Consider the Boston marathon incident, said Christian Waeldner, vice president, crisis management and political risk at Starr Cos.
“You had a bunch of restaurants and hotels in close proximity to the finish line who were indirectly impacted by the bombing. … It took a quite some time for life to get back to normal in the city center after the bombing and that’s a huge financial impact.”
Waeldner said Starr Cos.’ cyber and terror response product includes contingent BI that can be triggered by a terrorist event within two miles of an insured’s property, even if they are not directly impacted.
But it’s important to remember that the Boston bombing was never declared a terrorist act. Products such as Starr’s or Lockton’s new terrorism crisis solutions offer more comprehensive coverage that doesn’t require the Secretary of the Treasury to certify an act of terrorism.
Stand-alone terrorism policies often have a distinct advantages for insureds, said John Welty, practice leader for SUITELIFE from program administrator Venture Insurance Programs.
“The hundreds of billions of dollars that are lost in overall revenue in the tourism and hospitality world following an attack is inconceivable.” — Jan Schnabel, managing director and director of risk management with HUB International’s Hospitality Practice
“A stand-alone terrorism insurance program can help to reduce the gray areas of where our standard insurance policies are providing coverage,” he said.
“Depending on the policy form obtained, you may find some coverage for cancellation of booking or non-physical damage,” added Truono, but “a lot depends on your business exposures, what markets you buy from, and how much you’re willing or able to spend.”
Even in cases where one has cancellation of booking included in their terrorism policy, it is very likely that the coverage is sublimited, well below the several hundred million dollars of limits you may have for direct property damage, he said.
Loss of attraction is a specialized time element coverage that may provide some relief. But like cancellation of booking, the coverage is typically subject to low sublimits and is often subject to annual aggregate, not per occurrence, limits as well.
Risk managers should keep in mind that it can be complicated to prove a loss, said Turono.
“As risk managers, we have to be able to support the loss and demonstrate that the loss of net income was a result of the terrorist act, despite no physical damage to one’s own property.
“For example, in the hospitality industry, we would need to show that the reduction in room occupancy, RevPAR and ultimately net income, is a direct result of the terrorist act which results in interruption of our business due to guests’ or customers’ inability to freely and safely access the hotel.
“Likewise, loss emanating from leader property interruption (airport, convention center, etc.) ingress-egress, and/or military-civil authority may also support the basis for a claim.”
“The terrorism policies are pretty staid and strict and there’s a lot that they don’t cover,” said a Western U.S. risk management professional for a large resort and casino operator.
That can potentially leave risk managers on the hot seat if the C-suite assumes that buying any kind of terrorism policy means the company will be covered no matter what the circumstances.
“The worst thing is to have your boss think that, ‘oh we have terrorism coverage so anything that happens around here might be covered,’ because that’s not necessarily the case,” the risk manager said.
But the marketplace is changing for the better.
We’ve gone from basic terrorism add-ons that most owners didn’t even look twice at [to] new offerings in the marketplace that are more comprehensive because of events such as [those in] Orlando and San Bernardino,” said Sean Spagnoli, vice president and client executive for HUB International’s hospitality practice.
“The notable changes are the new contingent products where you don’t have to have damage just to your location. It can be an event that happens anywhere from a 5 to a 50 mile radius.”
One such product from Florida-based New Paradigm provides parametric and contingent terrorism coverage for business income, extra expense, loss of attraction and brand protection. Coverage triggers can include terrorism occurring within a predetermined radius from insured locations, or occurring at other predetermined locations that could cause a loss.
“It will allow you to pick and choose different hotels and different scenarios,” said the Western U.S. risk professional, and it also offers the kind of capacity he needs for a large organization.
For many companies, said Addison, that kind of capacity is the key.
“Someone like MGM or Caesars … the amount of money going through those facilities a day — $10 million in coverage isn’t going to cut it. If they were to have a substantial event in Vegas and people just cancelled their reservations and were scared to go there, they’re going to need more like a quarter billion, half a billion.
“If they go from a 90 percent occupancy down to 60, that’s a lot of revenue because they’re making money from the food, they’re making money from the gambling. Then the question is — how long does it take before it comes back? Before people feel safe again?”
“Imagine if you were a company in Las Vegas and [after a terrorist event] you had to tell your shareholders that you didn’t have coverage for that, and your share price drops 20 percent.” — Joe Addison, executive vice president, JLT Specialty
These conversations need to happen with the CFO, experts agreed.
Finance and risk management need to look closely at what could make people afraid to come to your properties and how it would affect the balance sheet, or significantly impact share price or investor ownership value or dividends.
“Imagine if you were a company in Las Vegas and [after a terrorist event] you had to tell your shareholders that you didn’t have coverage for that, and your share price drops 20 percent,” said Addison.
When you look at what companies pay in property insurance, the potential financial exposure to non-physical could be so much bigger, he added. “You could lose a lot more by having occupancy at your hotel drop by 50 percent for three months.
“At the end of the day, the idea of something out of your control affecting your business scares the crap out of people.”
Decisions about terrorism coverage, said experts, should be part of a larger process that includes a detailed risk assessment, the creation of a comprehensive crisis management plan specific to acts of terrorism, and simple measures to reduce the likelihood of becoming a target.
A good risk assessment doesn’t have to be expensive, time-consuming or interfere with operations, said Peter DiDomenica, former director of security policy at Boston’s Logan International airport, and president of security firm Quantum Innovation Corp. It can be as straightforward as reviewing the geography and physical layout of the property and evaluating existing training and security measures.
“It’s going to give you a road map for everything else.”
Most U.S. hotels and resorts haven’t undergone the level of “hardening” common in many other countries, but it’s important to take all reasonable measures, experts said.
“We have hundreds of thousands of people at a hotel,” said the resort and casino risk manager. “If someone just starts shooting, you can have a huge loss of life that impacts your property, your workers’ comp, your liability and your reputation worse than anything else.
“The reputation is the thing that is very difficult to do anything with. So it makes sense to do as much as you can on the front end because you’re limited in what you can do after something happens.”
That said, most U.S. property owners are reluctant to anything that might appear extreme.
You want to “harden your properties, but do it in a soft way,” said Tarique Nageer, leader for U.S. property terrorism placements with Marsh USA. “By the nature of hotels, you can only do so much because they’re free-flowing places so you don’t want to impede guests or visitors … so you’ve got to weigh those needs.”
There are surprisingly simple ways to improve a property’s risk profile, said DiDomenica. Just trimming the hedges could be enough to “make it less inviting in terms of the physical environment for someone who’s going to do surveillance or plan an attack,” he said.
Staff members can also play a key role in helping to thwart an imminent attack, said Reggie Gibbs, senior underwriter and product manager with Starr Cos. In hotels, for example, they have the best handle on typical guest behavior and what might constitute a red flag.
“They can spot when a car is parked in an unusual place,” he said. “They know when a guest has been in a room for an extended amount of time and for some reason isn’t letting housekeeping in to clean.”
Brokers and insurers are key partners throughout the process. They have the experience to help insureds assess and quantify risks and coverage parameters. Truono, for instance, asks brokers to explain coverage through hypothetical claim scenarios.
“I don’t want to solely focus on coverage terms, but I also want to understand how the policy will be interpreted in the event of a claim. I want to understand how and if a claim will be covered, because in the end, that’s the inherent risk transfer value and what we are buying.”
An Evolving Risk
The forms and manifestations of terrorism keep changing, said Truono, and risk managers must continue to ensure their prevention and risk mitigation strategies evolve as well.
“A truck bomb is one type of an event with specific control countermeasures,” he said. “A lone-wolf or individuals who enter a hotel with IEDs [improvised explosive devices] or automatic weapons, however — that’s a totally different type of event requiring specialized tactics and controls, and it’s necessarily more difficult to manage.”
“How do you protect yourself against situations where someone just wants to kill people rather than destroy a building?” asked Nageer.
The harsh reality is that no one and no place is immune from terrorism acts.
“We must remain vigilant, aware and informed,” said Truono. “We need to continue to educate our people and enhance our prevention and response strategies. Our practices, processes, priorities and physical plants must be dynamic and continually adapt to ever-changing landscape and information.”
Betting on the Weather
Apart from an attendee dying, rain is perhaps the worst thing that can happen to a festival,” said Christian Phillips, contingency underwriter at Beazley. “An angry few hours from Mother Nature can cost hundreds of thousands of dollars, dampening profits even for sold-out festivals and negatively affecting on-the-ground consumer spending.”
Yet according the insurance industry, many event and hospitality companies continue to find themselves inadequately covered against losses that could arise from adverse weather, or are unaware of the insurance coverage options available to them.
“A protection gap exists on weather coverage for events companies,” said Tanguy Touffut, global head of parametric solutions at AXA, who believes those buying coverage are in the minority.
“However, increasing weather anomalies as a consequence of climate change, as well as the emergence of innovative insurance solutions such as parametric insurance, are fueling increased demand for such covers from events companies.”
Typically, event organizers must choose between event cancellation coverage — a broad policy that compensates the insured if their event is cancelled for a multitude of reasons beyond their control — or a parametric weather policy that pays an agreed sum if a certain weather trigger is hit, for example, half an inch of rain over four hours.
While the weather policy won’t cover against the wide range of perils the cancellation policy would (such as fire, terrorism or road blockages), it does cover against the lost income from attendees leaving a weather-affected event early. But that kind of loss wouldn’t be covered under a cancellation policy because the event must be cancelled to trigger a payout.
“This presents companies with a tough choice. They usually don’t have the budget for both policies, and weather can be a little more expensive as it is a stated value policy.
“If the client picks the wrong coverage and loses money, they will be upset,” said Marlene Benoit, promotions and events leader for broker Lockton.
Beazley has gone some way to bridge the gap with a new product that is a hybrid of both types of coverage. As well as offering broad cancellation cover, the product also establishes a weather trigger on which it will pay a fixed sum to compensate for lost revenue.
Benoit said she believed other insurers may soon introduce similar products.
“When the industry comes up with something unique in the marketplace, others will follow, particularly when it is well-received and there is demand.”
Weather observation techniques and data gathering has improved markedly in recent decades, and insurers now have a data bank of at least 30 years of high-quality data as a base for their underwriting.
“Additionally, the capacity to process these data has improved tremendously, which gives us very sophisticated indexes that better reflect the clients’ risk,” said Touffut.
However, gaps in coverage remain.
“We allow the insured to choose a threshold amount of rain at the front end of the policy. However, we can’t cover every eventuality,” said Phillips.
“If they insure against half an inch of rain but it rains 0.49 inches and people still leave their event, there will be a gap in cover.”
“Due to budgeting, companies may choose a threshold that is too high, and when they have a weather claim, it doesn’t hit the trigger mark, so they end up paying for a policy that doesn’t pay out,” said Benoit.
Indeed, while improved climate data makes weather parametrics relatively reliable, attendee spending behavior is harder to predict.
“We try to bring our knowledge of what we’ve seen in the past to give guidance, but it is still subjective,” admitted Phillips.
If more than one-third of an inch of rain falls, some attendees will normally leave an event, Phillips said, particularly if the rain falls persistently over several hours rather than in a short, sharp downpour. Clients typically stand to lose around 20 percent of their projected revenues from weather-related departures, though this figure could vary depending on the nature of the crowd, he added.
Combining weather data with Big Data on consumer spending habits to model the effect weather has on behavior at events seems an obvious next step to enhance the insurance offering.
Insureds can improve their chances of securing appropriate coverage by delving deep into their own revenue histories. “We ask the client for historical cancellation and revenue data over the longest period possible,” said Touffut.
Combining weather data with Big Data on consumer spending habits to model the effect weather has on behavior at events seems an obvious next step to enhance the insurance offering. However, James Ingham, head of renewables at risk analytics specialist Sciemus, said that in an age when “data is king,” it may be hard to get data providers to collaborate.
“It can be done, but you would need a large provider like Google Public, for example, to host data covering multiple events across multiple demographics and geographies over a number of years in order to give event organizers full confidence in the inferences. You would also need a secure neutral environment to encourage Big Data providers from other areas such as credit card providers to also collaborate,” he said.
Touffut added that as the quality and amount of data and Big Data processing methods continue to improve, “indexes will become more precise and the models used to design parametric insurance products will even more accurately reflect the clients’ risk.”
“Furthermore, as parametric insurance fixes most of the ‘pain points’ of traditional insurance, both from the claims view and from the purchasing view, we expect this type of insurance to greatly propagate and eventually cannibalize some forms of traditional insurance,” he said.
But as Phillips pointed out, it is often only after an events company suffers a damaging loss that they will consider seeking cover. “Someone may have run an event for 30 years and never had a problem, but weather is changing. Companies can’t afford to rest on past weather patterns.” &
Using Data to Get Through Hail and Back
4,600 hailstorms have rained down on the U.S. as of the end of July according to the National Oceanic and Atmospheric Administration. And these storms have left damage behind, cracking unprotected skylights, damaging exterior siding, dimpling rooftops and destroying HVAC systems.
While storm frequency is almost on par with last year’s 5,400, the rest of the picture isn’t quite the same. For example, the hail zone seems to be shifting south. San Antonio, Texas, a “moderate” hazard hail zone area, typically sees four or five hail storms a year, on average. Year to date, more than 30 storms have been reported. Overall, Texas has suffered nearly 20 percent of all hail storms this year.
Liberty Mutual’s Ralph Tiede discusses the risk hail poses to large commercial property owners.
The resulting damage is different too, with air conditioning (AC) units accounting for more than a third of the insurance industry’s losses, a greater proportion than in previous years. “In some cases, we’ve seen properties that sustained no roof damage but had heavily damaged AC systems. This may be a result of smaller hail stone size coupled with high winds,” noted Ralph Tiede, Vice President of Commercial Insurance and Manager of Property Risk Engineering at Liberty Mutual.
Despite the shifting trends, however, these losses are largely preventable if commercial property owners understand their exposures and take steps to mitigate them. By partnering with the right insurer, a company can gain access to the industry-leading resources and expertise to make it happen.
Understanding the Risk through Data
A property owner might know that his property is located in an area prone to hail, but could underestimate the extent of damage a storm could cause. Exposed skylights, solar panels, satellite dishes and other roof-mounted equipment can translate to serious losses.
Three trends that have emerged this hail season.
This is where Liberty Mutual’s property loss control engineers offer critical guidance for customers with large property exposures.
“Our property loss control engineers go out and inspect locations to develop loss estimates,” said Tiede. “They’re looking at the age and condition of the roof, the material it’s made of, and whether equipment is exposed or if there are adequate safeguards in place.”
Liberty Mutual can combine this detail with the hail data it has collected for more than 14 years and use this extensive library to help customers understand their exposures. The company’s proprietary hail tool looks at customer-specific factors, such as roof type, age, condition and geocodes, to better identify potential losses from hail. The tool provides a more detailed view of hail exposure on a micro level, as opposed to more traditional macro views based on zip codes.
“This way, we’re not just looking at a location’s exposure, we’re looking at an account’s cumulative hail exposure and providing a better understanding of where the risk is concentrated,” Tiede said.
Having a good understanding of a company’s specific exposure helps the broker, buyer, and insurer develop an effective insurance program. “Two customers may be in the same area, but if one’s building has a hail resistant roof, protected skylights, and hail guards for HVAC equipment and the other’s has unprotected sky lights and no hail guards or screens on rooftop equipment, they are going to have different levels of exposure. In both scenarios, we can design an insurance program that fits the customer’s situation and helps control the total cost of property risk,” said Brent Chambers, Underwriting Consultant for National Insurance Property at Liberty Mutual.
A Liberty Mutual property loss control engineer consults with the customer on ways to reduce or mitigate the exposure from hail so that the customer can make an informed decision as to where to deploy capital. “It’s not just about protecting a building’s roof and rooftop equipment. Roof damage can lead to extensive water damage inside a building and in some cases disrupt service, both of which can be costly for a business. By focusing on locations with the most exposure, a risk manager is better able to mitigate future losses,” said Tiede.
Actions commercial property owners can take to mitigate the risk of hail-related damage.
Liberty Mutual property loss control engineers also provide recommendations specific to each location. “We know that hail guards work, so we encourage clients to use those to protect HVAC equipment,” said Ronnie Smith, Senior Account Engineer for National Insurance Property at Liberty Mutual. “Condenser coils in air conditioning systems are fragile and easily damaged, and units don’t necessarily come with built-in protection. It’s important for property owners to take this step proactively to prevent a loss.”
The average cost to fix a condenser coil is $500, but replacing a coil can run at least $500 per ton of cooling, a measurement of air conditioning capacity that refers to the amount of heat needed to melt a ton of ice over a 24-hour period. As one ton of cooling typically covers about 250 square feet of interior space, replacement costs can quickly add up.
Replacing an entire AC unit can run more than $1,000 per ton of cooling. In a 250,000 square foot property, the replacement could easily reach $1 million. Given the increase in hail-related AC damage this year, these are numbers worth knowing.
Other risk mitigation recommendations include regular roof maintenance, such as inspections and repairs to small damages like blisters and installing protective screens over skylights.
“If a roof needs replacing, we also suggest using materials that have been tested and approved by an independent certification laboratory and are durable enough to fit the location’s exposures,” Tiede said. “The last thing a commercial property owner wants is to replace a roof again six months after it’s installed. Experience has shown that ballasted-type roofs are the most resistant to hail damage.”
Using Data to Develop Solutions
When a property owner has an understanding of the size of its exposure and potential losses, it is better able to work with its agent or broker and insurer to develop an insurance program to manage and mitigate potential risks.
“The data and advice we provide help clients focus on the largest risks and better mitigate that exposure,” Smith said. “The more data you have, the more you can understand your risk on a granular level and manage it.”
This data-driven approach to preparedness makes Liberty particularly well-suited to serve large commercial properties with multiple locations in high risk areas.
Prices for roof and air conditioning repairs and replacements have risen over last year, Tiede said, and are likely to grow more expensive as older equipment becomes obsolete. Property owners will be forced to buy newer, pricier replacements than perhaps they had originally planned for.
And if this year’s storm trends are any indication, hail is sometimes an unpredictable foe.
Amidst these shifting trends, the value of an insurer’s expertise in identifying, mitigating and managing hail exposure will be immeasurable to large commercial property owners.
For more information about Liberty Mutual’s commercial property coverage, visit https://business.libertymutualgroup.com/business-insurance.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.