Hot Targets: Upscale Urban Projects
Earlier this year, a pair of spectacular fires just weeks apart, the first in San Francisco and the second two weeks later in Houston, highlighted the perils of a new trend in residential construction: the mid-rise luxury apartment complex.
In both cases, dramatic aerial images showed roiling flames and a thick column of black smoke towering over each city’s downtown as the fires completely destroyed the projects that were still under construction.
What the images did not show were many streams of water directed on the fire. That omission was not for lack of capability.
San Francisco authorities said half of the city’s firefighters on duty were at the scene on March 11, while the Houston Fire Department has a national reputation for aggressive attacks and fast stops.
Video: A wood-frame fire roared in San Francisco in March
But in both cases, there was no life or personal property at stake, and the uncompleted multi-story timber construction gave the fire a head start, lots of fuel, and few impediments to growth.
In such situations, crews often target their efforts at protecting nearby structures, according to loss-control experts and firefighting sources.
“These sites are very tight,” said Ryan Scheinfeld, president of national construction at Technical Risk Underwriters (TRU), part of Ryan Specialty Group, based in Chicago.
“These are more dense than the garden apartments of recent decades, and there is pressure to build quickly. Most of the contractors are experienced and careful, but by their nature these [wood-frame] projects are just more volatile than other modes of construction.
“And because of the higher combustible load, incidents go from incipient to catastrophic in very short order.”
Such construction projects are usually worth much more than the single-family homes or low-rise garden apartments that they replace, and are often on an expedited construction schedule.
Due to the increase in the use of wood framing in such projects, the National Fire Protection Association (NFPA) and other industry groups are reviewing risk mitigation standards and best practices. Many underwriters are doing the same.
Converging economic and demographic trends known as the new urbanism are combining to increase the size and number of such mid-rise high-end projects, according to underwriters.
“We average 500 to 600 projects a year,” Scheinfeld said.
“The boom in downtown luxury housing includes mixed-use neighborhoods with upscale supermarkets, megaplex cinemas, retailers, and health centers,” he said.
“We write builders risk for large, wood-frame multi-family projects all across the country.”
“If people did what they know they are supposed to do we would not have these problems.” — Rich Luongo, executive property specialist, Chubb
With such developments “going up everywhere,” Scheinfeld said, “the law of numbers says the losses will be where there is activity.”
Not only are these projects more volatile, they are more valuable.
“Developers are moving from the spread, garden-style to a podium style. We call this urban infill. It varies greatly from city to city based on zoning and existing density, but the pronounced trend is to high luxury in wood frame,” he said.
Based on industry estimates, a city-block-sized garden apartment development can have 30 to 60 units and be worth $20 to $35 million. A townhouse development on the same parcel can go up four or more stories plus basement, have hundreds of units, and be worth $100 million.
Rich Luongo, executive property specialist at Chubb, is encouraged that fire-protection groups are reviewing their standards and recommendations, but said that best practices are still care and diligence.
“This is basic blocking and tackling,” he said. “If people did what they know they are supposed to do we would not have these problems. As the senior person in loss-control for Chubb, I walk the buildings we write all the time. We work both top down and bottom up. If we see problems, we make critical recommendations.”
A complicating factor in supervision is that there are multiple operators on any site, Luongo said.
“There is the general contractor, the project manager, the subcontractors, and often subs can get lost in the shuffle.
“The No. 1 thing is a regulation hot-work program, a fire watch and a three-hour post-work monitoring,” Luongo said. “No hot-work late in the day, especially on Fridays, or on windy days. Quick debris removal and housekeeping. No smoking on the job site — absolutely, positively, never. But go to any job site and you will find butts on the ground.”
On a positive note, he said that “industry and standards groups are aware there is a trend in this construction, and are starting to respond.” The NFPA recently issued a new standard targeted at fire protection during welding, cutting and other hot work.
A Collaborative Effort
The key for insurers when it comes to risk-transfer implications on wood-frame projects is to eradicate hazards and minimize exposures through a loss prevention approach with clients from the outset, said Sam Whitnell, construction and engineering underwriter with Canopius Managing Agents Ltd. in London.
“As insurers, we try to remove what we can by way of risk, but also control those risks which we cannot remove through loss prevention programs such as material handling, housekeeping on site, fire protections and security outside of normal working hours to prevent incidents such as arson.
“This is achieved through site inspections once framing begins, but there has to be a willingness on the contractors’ part to work with insurers and safeguard against any possible threats. This ultimately ensures successful completion of a project, which is the common goal for all parties involved, including financiers.”
Starting early in the process is important, said Gary Keith, vice president of engineering standards at FM Global.
“Construction is a very vulnerable phase. We work very closely with insureds to ensure that protection systems keep pace with construction.
“Fire protection systems can be installed piece by piece or section by section; they do not have to be installed all at once late in the project. Fire protection has to be managed with the construction schedule regardless of the construction materials or methods,” he said.
FM Global also urges insureds to collaborate with local responders on pre-incident planning.
“The fire inspector is not going to be the one arriving at 3 a.m. on a Sunday,” said Keith. “The local fire commander should know where the job site and building access points are, especially as they change through the project. They have to know where the water supply is.”
At the research level, “we are heavily involved in field operations,” said Keith. “We are comparing existing engineering standards and best practices to what we are finding in the field for all types of projects.
“We understand that clients may want to take advantage of new techniques or trends in construction. We can deal with them directly on a project-by-project basis. But then we work back through our system and check our processes as necessary. We want to take into account model codes and real life.”
That work has led to improved protection systems, and modular approaches to fire protections for projects through all stages of construction.
“There are some major research projects under way right now, in research and testing, and we hope to see some findings and results soon,” said Keith.
“But the most important thing is for protection to maintain pace with the project.”
Scheinfeld noted that TRU gets involved in projects even before construction starts, and is “very active in loss control. We are on each site multiple times to be sure that NFPA standards are enforced.”
In a small irony, Scheinfeld said that aside from catastrophic loss from fire, the second most common loss for these types of projects is from water.
“They often happen late in the project. The first model units are finished, and there is a leak in the line to the dishwasher. A quarter-inch line can leak a lot of water over a weekend.”
Connected to Custom Coverage
Seismic changes are afoot in the insurance world with new technological developments stemming from the rush to the Internet of Things (IoT).
According to a report from McKinsey Global Institute, IoT has the potential to unleash as much as $6.2 trillion in new global economic value annually by 2025.
But what value will it bring to the insurance industry and, more specifically, to their customers? Let’s take a look at a few common areas of insurance — automotive, health benefits and commercial real estate — and see what the future holds.
Do you have the same driving patterns as your friends, family and colleagues? It’s highly unlikely, but until now, you’ve had no choice but to pay the same rates and premiums, based on the average risk level. If you are a safer than average driver, you end up paying to cover those at greater risk. Is it fair and is this the best system we can have?
One in five new cars already collect driver and driving data for car manufacturers, but the future of the connected car will allow consumers to manage their individual automotive policies from the comfort of their driver seats.
Automotive dealers will be able to team up with insurance companies to provide data on driving habits and behaviors such as acceleration and taking corners too harshly via embedded sensors, and assign highly personalized risk scores.
But take this another step into the future and picture your car connecting to your Facebook. According to Ovum, insurers should focus on creative initiatives that analyze data from a number of sources, including social media and machine-to-machine communications.
If your car could sort through your contacts and match your driving profile (developed by the embedded sensors) to other people with similar driving profiles then you could band together to buy insurance as a group. For this example’s sake, imagine that you’re the picture-perfect driver with zero black marks on your record and your car has grouped you with other spotless drivers.
Your group of safe drivers can now buy insurance for a much lower premium and will qualify for a massive safe driver discount. Will connected cars be the ticket to replacing individual or company policies?
Driving Like a Girl
You may read this and think I’m being sexist, but the insurance industry has notoriously charged teenage male drivers much higher premiums than their female counterparts. In 2012, however, the European Court of Justice passed the “EU Gender Directive” that stated men and women must be offered the same quote if their circumstances are otherwise identical.
In response, Drive Like a Girl, a UK-based, telematics car insurer, has used little black boxes to record driving behaviors and discern whether a driver is driving with the profile of a 17-year-old girl regardless of age, gender, occupation, etc.
Video: Wireless Car describes the wide-ranging benefits of telematics to both drivers, manufacturers and businesses.
Telematics allows an insurer to provide lower rates accordingly. So, you don’t actually have to be a 17-year-old girl to catch a break on your insurance; you just have to drive like one!
The EU ruling is only one factor fueling the massive growth of global insurance telematics subscriptions, expected to grow 81 percent from 5.5 million at the end of 2013, to 107 million in 2018. More consumers want to take insurance underwriting into their own hands.
The United States doesn’t have a similar ruling on the books yet, but some companies, such as Progressive, are relying on the technology.
More than one million drivers have chosen to install that company’s device under the wheel, which allows Progressive to analyze individual driving habits and track projected savings, allowing a totally personalized rate for the driver.
The emergence of mobile apps and enhanced customer experiences through the use of technology in order to improve customer retention are additional reasons for this growth.
Impact on Health
Wearable devices such as smart watches or wristbands allow employees and consumers to say, and prove, that their lifestyles are low-risk. Fitness junkies and professional athletes are already commonly using this technology to monitor heart rate, stress levels, sleep schedules and calories burned.
But the next logical step is to use these devices to qualify for better employee health insurance or personal health insurance discounts.
Video: Some employees at Atlantic Corp. talk about the health changes they have experienced since wearing Fitbit.
According to research from the Henry J. Kaiser Family Foundation and the American Hospital Association’s Health Research and Educational Trust, the cost of employee health insurance is still increasing faster than wages and overall inflation.
Currently, the average price for a single worker is $6,025 and the average annual premium for a family plan rose to $16,834. But with the Affordable Care Act’s higher costs for employers, we will begin to see more companies turning to wearable devices to help them monitor their employee’s health in the near future.
In order to combat costs, wearables will be given to employees, and incentive programs will be created to encourage their use.
For example, British Petroleum handed out Fitbit Zip devices to about 14,000 employees in 2013. If employees took one million steps, they received points that qualified them for lower insurance premiums.
In fact, Fitbit reports that sales to companies are one of the fastest growing segments of its customer base. We may need to establish a new technology acronym to replace BYOD — perhaps BYOW will take off in 2015?
The technology can also usher in crowdsourcing for personal health insurance as well — there is undeniably more buying power with 1,000 individuals than just one person.
Perhaps this will even open the door to pet insurance as well given new wearables designed specifically for man’s best friend continue to roll out. And what does the insurance industry love more than the ability to break into niche markets? Insurance companies can use this technology to target low-risk opportunities to drive a better return and greater volumes.
The advent of smart commercial buildings will eliminate the need for building managers to total a stated insurable value by listing everything on its premises.
With a smart building monitoring itself and updating its central system in real time, the building can tell an insurer that its risk profile this afternoon is at at a lower risk than it was just yesterday.
Instead, property premiums can be automatically tallied by connecting the insurance company to the building’s central smart hub, which houses all of the data such as air quality and temperature.
Access to security systems, sprinklers, and disaster recovery plans in one location provides a much crisper insurance profile than just relying on raw building and cost data.
With a smart building monitoring itself and updating its central system in real time, the building can tell an insurer that its risk profile this afternoon is at at a lower risk than it was just yesterday.
Rather than replacing an annual policy or going through the hassle of a three year deal, policies can be adjusted daily.
As such, building owners could qualify for better insurance premiums by providing a historical view of building trends. There are also benefits aside from cost savings.
For example, say you own a building in Miami. You can match and profile your hurricane risk by the minute and remediate high-risk issues very quickly. Additionally, the need to hire field evaluators to do this process manually is eliminated.
Thanks to the advancements taking place within the IoT, shopping for insurance of any sort will be akin to shopping for new clothes.
It won’t be a cumbersome process where you are purchasing retrofitted policies that don’t seem to match. It will be a sleek and automated experience where policies will be developed to fit individual needs.
We’re entering an insurance era where consumers and companies are empowered and we all should be ready for it.
3 + 3: Theory of Risk
Anthony Valsamakis doesn’t just practice risk management, he wrote a book about it. And he doesn’t just consult with quants, he is one.
“Risk management has been in my blood for so long that I have to stop myself, otherwise I could go into a two-hour monologue,” said Valsamakis, whose career in the discipline goes back almost 35 years, to his first job with the Standard General Insurance Company.
In 1990, the London-based chairman of the Eikos Group received a doctorate in Business Economics. In 1992, “The Theory & Principles of Risk Management” was published, with Valsamakis the principal author, and is now in its 4th edition.
Valsamakis worked first with a carrier, then as a commodities broker, before taking up an academic post. The company he started in 1999, the Eikos Group, has a risk consulting arm, with clients in most industrial sectors, including the food, mining, forestry, industrial paper and packaging and banking industries. The group also includes a transportation risk brokerage and a Bermuda-based carrier.
“I think the idea of having a secure data base that everyone can access and can update at any moment is by far the best innovation that I can see happening in the information game.”
– Anthony Valsamakis, Chairman, Risk Financing Strategy, Eikos Group
For as long as he can remember, Valsamakis sought ways to get better information on the risks he underwrites, brokers or consults on.
“Over many years we’ve tried hard to increase the quality and timeliness of the information that enables us to do just that,” Valsamakis said.
Finally, it looks like Valsamakis has found a risk management information systems platform that enables him to do just that.
For the past year and a half, Valsamakis has been using a system developed by Riskonnect.
“What’s useful for me is that the platform basically resides within the client’s systems,” he said.
The information he needs to prioritize, depends on which client he is working with.
“By definition, depending on where I am working and what I am doing, risk management priorities are very different,” Valsamakis said.
The Riskonnect platform provides the necessary flexibility.
A mine, for example, could be in a location in Africa or South America with a high degree of political risk. A key risk for a furniture maker might be around trade secrets, the possibility that a disgruntled employee would leak a pricing catalogue to competitors. For a packaging manufacturer, their material supply chain is of the utmost importance, and so on.
For each client, Valsamakis can use Riskonnect platform and work with the client to compile the information that is most relevant to that client and its industry and enter that into a secure system.
“All of these are template facts that you can easily put into the Riskonnect system,” Valsamakis said.
The Riskonnect platform is housed within the client’s information technology system, and it is transparent enough, to give Valsamakis and his client access to the same sets of data.
“I think the idea of having a secure data base that everyone can access and can update at any moment is by far the best innovation that I can see happening in the information game,” he said.
Whose System Is It?
Valsamakis has been around long enough to know a few things about data and risk transfer. He’s seen a number of risk information management systems put out by brokers, for example, that he thinks are set up more for the broker’s business model than for the sharing of information.
Generally speaking, information about an insured’s risks come from the broker and the insured. The Riskonnect system works, according to Valsamakis, because it is designed to be adapted to the client, not the broker.
“I have seen efforts by brokers, for example, over the years to produce a type of risk information platform that becomes theirs,” Valsamakis said.
“It’s been a perennial problem in the industry, where depending on which broker you end up with, you’ll end up with system A, B or C,” he said.
The Underwriter Needs to Know
Using Riskonnect, Valsamakis encourages clients to be as transparent as possible, in order to give the most complete information to underwriters.
“For me the question is, ‘What is the volatility around the asset and can there be an impact on the balance sheet of our clients?’” he said.
“We need to describe this exposure in various contexts so that the underwriters know what they are covering,” he said.
It’s basic human psychology. If an underwriter doesn’t feel they are getting enough information about a particular risk, they will take a negative view of that risk.
The more accurate the information Valsamakis has about a client’s exposures, the better the pricing he gets from underwriters.
“If you were an underwriter putting your capital and risk and I gave you little information, you would actually be less inclined to look at the risk in favorable terms. There will be a natural inclination to downgrade it,” he said.
Where Valsamakis sees enormous value is in the Riskonnect system ability to tag which can be revisited at a later stage.
“It’s amazing how clients forget, in the passage of time, that there are profiles that have changed for better or worse.”
A Long-Term Investment
The Eikos Group invested significantly in the Riskonnect product and are taking it to a number of clients. The transparency of the system and the advantage it gives the Eikos Group and its clients with underwriters is in itself a business advantage over the competition.
“We made a decision as a small company, relatively speaking, to invest a lot of money in Riskonnect and be very proactive about it,” Valsamakis said.
“When I talk to executives I say we invested in it because it’s going to save our clients money. Better information will lead to a lower cost of risk,” he said.
“If I’m talking to someone at a high level, that’s fairly easily understood.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Riskonnect. The editorial staff of Risk & Insurance had no role in its preparation.