A Watchful Eye on Tianjin Losses
As I write this, little is yet known about the total loss impact, both locally and globally, of the recent explosions in the port of Tianjin, China. Current estimates as reported in news media are that losses could exceed $1.5 billion.
Around the globe, risk managers are keeping a watchful eye on the escalating impact of this event. Potential losses continue to unfold within companies, and insurers are already being put on notice accordingly.
Given the nature of this event, it is likely that analyses of coverage and the various loss impacts will be vastly complex.
Some of the key areas to monitor include:
Supply chain / contingent business interruption impact
Damages to products and materials flowing through and stored at the port of Tianjin will likely impact companies throughout multiple tiers of the supply chain.
Similar to supply chain impacts following the earthquake/tsunami in Japan and flooding in Thailand, it could take some time for the full impact of losses from Tianjin to be realized by many companies.
This creates a critical need for risk professionals to communicate early and often with their organizations’ supply chain management and sales departments to identify potential business interruption, contingent business interruption and extra expense losses.
Marine cargo, stock throughput, and other property coverage
The myriad of different coverages maintained by most companies can create a complex mix, requiring careful analysis to determine how each applies to the situation in Tianjin.
Because the event encompassed direct destruction of product and materials, contamination due to toxic chemicals and quarantine of vessels at the port, unraveling the related coverage issues may be a daunting and lengthy task, particularly given the limited flow of information concerning the explosion and its impact.
It is essential that risk professionals work closely with their advisors to understand application of their coverage.
Civil authority and ingress-egress claims
The closure of the port by Chinese authorities has prevented companies from accessing or moving their assets, thereby creating causes of loss that may trigger business interruption coverage.
Insurers typically require explicit documentation, including government documents, to support these types of claims. The capture of necessary and crucial documentation should occur as soon as possible and continue throughout the claims process.
Local versus master insurance policies and related coverage issues
Companies need to be aware that differences in underwriting practices and policies by Chinese insurers may create gaps in coverage.
Additionally, any operating companies in China that are part of joint ventures with foreign companies may face issues regarding varying interests by the parties to the joint venture.
It is crucial to fully understand these interests and their potential impact on insurance recovery early in the claims process.
At this time, we anticipate losses resulting from Tianjin will continue to unfold over the months ahead. Risk professionals are well encouraged to closely monitor potential losses as discussed above and to consult with their advisors, as required, throughout the process.
10 Years Later: Lessons From Hurricane Katrina
Businesses learned a great deal from the impact of Hurricane Katrina, but underwriters are concerned that institutional memories are fading and there may be “unintended complacency” about exposures to future catastrophic events.
It was Katrina that showed the impact of storm surge can often be more damaging than high wind speeds and that the physical size of the hurricane can affect the surge itself, according to Allianz Global Corporate & Specialty (AGCS).
There has been a steep rise in the cost of claims for extreme weather events — from an average of $15 billion a year between 1980 and 1989, to an average of $70 billion a year between 2010 and 2013, according to AGCS.
Windstorm losses account for approximately 40 percent of all natural hazard losses by number of claims and 26 percent by value, it said.
However, growth of exposure is far outpacing take-up of insurance coverage resulting in a growing gap in natural catastrophe preparedness, according to AGCS.
Jayanta Guin, executive vice president, researching and modeling at catastrophe modeling firm AIR Worldwide in Boston, said the damaging effects of storm surge convinced AIR of the need for a more detailed, hydrodynamic model as opposed to the simpler parametric approach that had been used.
Today, both AIR’s U.S. hurricane model and its recently introduced U.S. inland flood model use a physical modeling approach to capture flood risk.
“For both models, particular engineering attention has been paid to the current-day vulnerability of the levee system in and around New Orleans,” Guin said. “While that system has clearly been strengthened since Katrina, we maintain a healthy dose of skepticism about the levee systems’ longer-term upkeep.”
Katrina, which struck New Orleans on Aug. 29, 2005, also revealed new insights into the vulnerability of commercial structures, such as the large number of casinos built on barges along the Mississippi coast, he said. Now, there is greater recognition of the wide array of buildings that companies are insuring. As a result, underwriters’ view of the vulnerability of commercial assets has increased.
Video: National Geographic provides a day-by-day account of Hurricane Katrina’s wrath, from its birth in the Atlantic Ocean to its catastrophic effects: flooded streets, flattened homes, and horrific loss of life.
Lou Drapeau, director of risk management at the University of Kentucky in Lexington and vice-chairman of Disaster Recovery Institute International, said that before Katrina, most organizations did not have someone in charge of business continuity, but now many do.
Moreover, he said, Katrina “got a lot of people’s attention” on the need to coordinate risk management, emergency preparedness and emergency response, business continuity and disaster recovery.
“Those functions can’t exist in their own towers — they really have to work together,” Drapeau said. “Katrina really caused those four separate areas of an organization to work more closely than they have in the past.”
One of the lessons learned from Katrina is that the complexity — and losses — associated with hurricanes in highly developed areas with significant infrastructure are far greater than imagined, said Andy Castaldi, head of catastrophe perils Americas at Swiss Re in Armonk, N.Y.
Over time, carriers learned how to better estimate potential losses, but there are still “quite a bit of surprises,” Castaldi said, such as the damage due to storm surge from Katrina.
Thus, it’s important that manufacturers and other businesses be prepared not only to cover losses from property damage, but also from business interruption.
“People tend to forget how devastating events can be, and I’m not sure many companies have done enough to protect themselves financially with business interruption plans if they have extensive downtimes,” he said.
Losses escalate quickly due to the increased automation in manufacturing, Castaldi said. Thirty years ago, employees could come the next day after a hurricane, clean up and start working, but today, plants have robotics and other electronics, which are more susceptible to hurricane damage and more costly.
“It might take months for these highly specialized electronics to get repaired as there may be a long waiting list, which can cause bigger problems and bigger losses than ever before,” he said.
Monica Ningen, head of property underwriting U.S. and Canada for Swiss Re, said that the question commercial property owners often asked before Katrina was, “Can we afford to take steps to mitigate against these sort of events?” But the question after Katrina, is, “Can we afford not to?”
Ningen is concerned that many organizations are starting to forget about the disaster plans that were conceived after the hurricane.
“New risk managers are coming in and their organizations are forgetting the importance of response time and response in general,” she said. “Public and private entities need to figure out how to work together to find disaster preparation and mitigation solutions.”
Resiliency of an area after a catastrophic event can be measured in three ways: whether people have work, whether their home is habitable and whether children can go to school, Castaldi said.
“Corporations have to think beyond their four walls and make sure their workforce has adequate housing and schools that are properly protected,” he said. “There is such a thing as unintended complacency — the further time away from an earlier catastrophic event, the more people don’t prepare for another one.”
Cheryl Harper, president of RIMS’ South Louisiana chapter, lived through Hurricane Katrina — her house flooded and her employer had 8 feet of water in its offices.
Harper is operations manager for Catholic Mutual Group in New Orleans, the Louisiana office of the Roman Catholic Church’s self-insurance fund, which provides insurance and risk management services for the Archdiocese of New Orleans and two smaller Louisiana dioceses.
After Katrina, the organization set up temporary offices in Baton Rouge and didn’t return its operations to New Orleans until January of 2006.
Businesses must have a solid business continuity plan in place that is updated annually, including emergency contact numbers for all employees, she said. Fortunately, with hurricanes there are advance warnings, so if an event is forecast, Harper makes sure she reconfirms that information before any storm hits.
“It’s important to be able to reach your team by several different methods, as after Katrina we had no cell service, but we could text,” she said.
“You need to invest a little more money on the front end for a secure roof, which will help prevent substantial damage when the next storm does come.” — Cheryl Harper, operations manager, Catholic Mutual Group
Since the organization’s servers were damaged due to flooding during Katrina, the Catholic Mutual Group now has a back-up server in northern Louisiana that it can access remotely. If Harper and her team need to evacuate in the future, she plans to take the minimal amount of operational equipment to make sure she can access the remote server and provide services from any location.
Moreover, the organization published a hurricane manual, which includes emergency contact information as well as guidance on property protection, claim reporting, remediation, reconstruction, and templates for contractor bidding and other forms. Before any storm hits, her company puts remediation companies on standby.
Another crucial lesson learned after Katrina was to strongly encourage parishes and other members to install standing seam metal roofs in new buildings or replace outdated roofs with them, as those roofs typically hold up better during hurricanes, she said.
This is particularly important now that named storm deductibles are anywhere from 2 percent to 5 percent of the insured value of the building. Replacing with this type of roof can be very costly, but it will save the building from interior water damage and extensive remediation from typical roof damage in a storm.
“You need to invest a little more money on the front end for a secure roof, which will help prevent substantial damage when the next storm does come,” Harper said.
In addition to roofs, AGCS recommended examining and shoring up all “building envelopes,” including walls and windows, and making sure gutters and other drainage systems are clear of debris or vegetation, so water can properly run off during a storm event.
“These steps allow us to better support clients in determining potential repairs or maintenance needs,” said Thomas Varney, the company’s ARC regional manager for North America in Chicago.
Businesses should also make sure to adhere to four primary areas of windstorm loss mitigation, according to AGCS’ report “Hurricane Katrina 10: Catastrophe Management and Global Windstorm Peril Review,” released August 18:
- Pre-windstorm planning includes the development of a comprehensive, well-tested emergency plan, site and equipment inspections, and preparations for possible flooding.
- During a windstorm, response personnel should monitor for leaks, fire and damage.
- After a windstorm, the site should be secured to prevent unauthorized entry. An immediate damage assessment should be conducted if safe to do so.
- Business continuity management is crucial as just-in-time production, lean inventories and global supply chains can easily multiply negative effects. Property damage and business interruption are usually covered by insurance policies, but often there is loss of market share, suppliers, clients and staff. Businesses should develop and test business continuity plans and communication cascades.
The Quality Assurance Journey
Not too long ago, if you were planning a trip, you would buy a map or an atlas and draw out the route you would take. If you continued to drive this route repeatedly, you might discover better ways to avoid a heavily congested area or take advantage of a new highway.
Similarly, a third party administrator (TPA) draws on years of experience to develop best practices for claims handling, discovering better routes and avoiding areas of delay. Payers trust their TPA to formalize these best practices, and to develop a Quality Assurance (QA) program that helps ensure claims are effectively managed. Like a roadmap, a QA program tracks the journey to the desired destination.
Mark Siciliano defines a quality assurance program.
With today’s technology, a cumbersome map is replaced with a GPS; just follow the step-by-step instructions. Sometimes the technology works flawlessly, and other times, it doesn’t deliver the best route.
Likewise, many QA programs have developed a checklist mentality, listing the steps to take. Such QA programs typically involve a small team reviewing a limited number of claims to ensure that key standards are consistently applied. While important, this doesn’t necessarily guarantee claims are optimally handled, or uncover ways to improve claim workflows and performance.
Mark Siciliano explains how Helmsman’s QA approach differs from the industry’s standard “checklist” mentality.
A New Process
Helmsman Management Services LLC, a third-party claims administrator and a member of Liberty Mutual Insurance, began to re-examine its QA program with the help of its clients several years ago. In doing so, they developed a new methodology that is a welcome departure from robotic checklist behavior.
“Our QA program dives deeper to find actionable ways we can improve claims outcomes, the performance of claims professionals, and the entire claims management process,” noted Mark Siciliano, vice president and managing director of Helmsman Management Services. “We conduct more in-depth reviews on a higher volume of claims – more than 80,000 each year – at key points in the lifecycle. We involve over 800 field claims professionals and engage individual claims handlers and their managers through an online dashboard that reports performance and highlights opportunities to improve performance through additional training and coaching.”
Mark Siciliano discusses the Helmsman approach to quality assurance.
The new approach to QA was successful, enabling Helmsman to improve the overall quality of its clients’ claims by eight points in 2014. In fact, 92.7 percent of the claims Helmsman managed met or exceeded the TPA’s service standards in the fourth quarter of 2014, up from 84.5 percent in the first quarter of that year.
“Re-engineering our QA program and moving it beyond the standard industry checklist approach took our claims management from really good to great,” said Siciliano. “And, it is helping us drive further improvements.”
One of the reasons for that improvement is Helmsman’s QA process keeps adjustors focused on what works best.
“We looked at the common characteristics of really great outcomes and worked backwards,” said Siciliano. “We found that when our claims professionals start with an empathetic approach, they are better able to connect with the injured employee and deliver better outcomes, both for the claimant and her or his employer.”
Like blindly following GPS instructions, a claims professional can easily fall into a pattern of completing tasks and forget that an injured person may be experiencing a very challenging time in their life. Helmsman trains its claims professionals to treat the injured worker as if they are dealing with a family member. It’s not just asking questions and moving through a checklist; it’s answering an injured worker’s questions, providing important information, and doing so with a level of compassion.
Once a conversation has begun and the injured worker is more at ease, the claims professional can ask questions beyond what might be in the process to really understand the injury, the individual, and the claim, and to find that best route to the ultimate destination of return to work. This inquisitive nature of the claims professional also allows for early discovery of any specific challenges in the claim – such as co-morbid conditions or psycho-social issues – paving the way for intervention to get the claim back on track.
“We call it humanistic common sense,” said Siciliano. “We know we have to ask the tough questions and protect our clients’ financial interests, but when we do so through a positive and supportive lens, it permeates throughout the entire process, facilitating the journey.”
Building a relationship with medical providers using this same approach can also assist the claim.
“Re-engineering our QA program and moving it beyond the standard industry checklist approach took our claims management from really good to great. And, it is helping us drive further improvements.”
— Mark Siciliano, Vice President and Managing Director, Helmsman Management Services
In the case of light duty restrictions, instead of ‘check’ and move on after the initial call with the treating physician, Helmsman asks for more details on what the injured worker can do, and helps the physician understand the claimant’s duties and the temporary jobs available. Helmsman might ask the doctor to join them for a site visit to better understand the work environment.
As a result, light duty jobs become gainful and meaningful work for the injured worker because they are tailored to their capabilities.
“We’re not just asking for medical information and work capacity; we’re actually working with our clients and the physicians to create a return-to-work environment that works for the injured worker, employer, and physician,” said Siciliano.
Evolution of Change
A QA program that delivers a high level of value to the employer and improves outcomes for the injured worker is just the beginning. QA is more than a program—it’s a process. Quality assurance programs are critical for tracking and improving performance. It’s a continuous cycle of training, learning, client feedback, and process improvement.
“Our enhanced QA program helps us better service our clients, but we know it’s an ongoing process,” said Siciliano. “Our continuous improvement process is built around the investment that we put in our people, systems, and technology. It’s also response to the changing landscapes around us, and how well we adapt to them.”
Mark Siciliano describes characteristics of effective quality assurance programs.
As a result, quality assurance programs are not working towards just a destination; they’re working towards the evolution of change, and how risk managers, brokers, and TPAs respond to it. The QA process becomes that journey.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Helmsman Management Services. The editorial staff of Risk & Insurance had no role in its preparation.