Event Cancellation Risk

Doubts Buzz Around Rio Olympics

The threat of Zika continues to prompt calls for the cancellation of the 2016 Olympic Games.
By: | July 5, 2016 • 6 min read
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As the threat of the Zika virus remains an urgent one in Brazil, calls have been made for the cancellation or relocation of the 2016 Olympic Games – an extreme decision that would cause enormous losses to the global insurance market.

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Some of the world’s largest insurers and reinsurers, including Swiss Re and Munich Re, have exposures to the tune of hundreds of millions of dollars each for cancellation insurance policies that would likely be triggered if the games were not to take place.

Such policies cover financial losses caused by the cancellation of events and are purchased by the International Olympic Committee (IOC), which organizes the games, and by companies and organizations with significant interests in the games. They include sponsors, TV networks, tourism operators, airlines, brands with Olympic-focused marketing campaigns and others.

Underwriters must have sighed with relief when the World Health Organization said “there is no public health justification for postponing or cancelling the games.”

The risk of cancellation gained steam in recent weeks after a group of more than 150 high-profile scientists released an open letter urging the games to be suspended in order to prevent Zika from spreading around the world.

“An Unnecessary Risk”

“The Brazilian strain of Zika virus harms health in ways that science has not observed before,” the scientists said in the letter. “An unnecessary risk is posed when 500,000 foreign tourists from all countries attend the Games, potentially acquire that strain, and return home to places where it can become endemic.”

They pointed out in the document that the 2003 Women’s World Cup was moved from China to the U.S. due to the risk of SARS, which should be a precedent for the cancellation of Rio 2016.

Royal Oakes, insurance partner, Hinshaw & Culbertson

Royal Oakes, insurance partner, Hinshaw & Culbertson

Underwriters around the world must have sighed with relief when the World Health Organization released an answer to the scientists, stating that “there is no public health justification for postponing or cancelling the games.”

“It is very likely that current policies have no exclusions for public health events such as epidemics,” said Royal Oakes, an insurance partner at Hinshaw & Culbertson in Los Angeles.

The market may have dodged a bullet, but insurers and reinsurers may still face a bill due to the pesky Aedes mosquitoes, which transmit not only Zika, but also other viruses such as chikungunya, dengue and yellow fever; all common diseases in Brazil.

“Cancellation policies are such long shots that usually nobody gives them any attention,” Oakes said. “But now everybody is talking about cancelling Rio 2016 due to Zika.”

According to sources, at least one of Europe’s largest reinsurers signed a large cancellation contract with NBC, which owns TV rights to the Olympics in the U.S. It has been pressured to consider the possibility of triggering the coverage even if the games go ahead, but key American athletes decide not to compete, affecting ratings and, consequently, publicity revenues.

Although this kind of clause may not be usual in policies, Oakes said, it may have been arranged between the parties, as wordings are non-standard and are subject to agreements between buyers and underwriters. That said, he would be surprised if a policy was triggered by the fact that athletes do not show up.

Top golfers Rory McIlroy of Ireland and Jason Day of Australia, and Tejay van Garderen, one of America’s top cyclists, have already announced they are not going to Rio in August because of Zika.

Others include NBA star Pau Gasol, the most famous member of Spain’s Olympic team, U.S. soccer player Hope Solo and tennis star Serena Williams. All have expressed doubts about participating in the games due to the risk of contamination. Some NBC staffers are also passing on the opportunity.

Companies that send staff to Brazil during the games have been advised to provide information to their employees on Zika prevention.

The Brazilian government said that measures have been taken to stop the propagation of Zika during the Olympics. Furthermore, it argued that the games will take place during the Brazilian winter, when the activities of the mosquitoes diminish considerably.

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“There is no risk for the spreading of Zika to gain pace during the Olympics,” Health minister Ricardo Barros said in early June.

But the failure of the Brazilian authorities to stop the virus so far raises doubts about the minister’s claim.

Since the autochthonous version of the outbreak was first spotted in April last year, almost 92,000 cases of Zika contamination were reported in the country, according to the government.

Since October, there have been nearly 1,500 known cases of babies born with microcephaly, which has been linked to the virus. A total of 223 have already been associated to Zika via lab tests. The actual number could be much higher, as the tests to identify both Zika and microcephaly cases are not available to all Brazilians.

Companies that send staff to Brazil during the games have been advised to provide information to their employees on Zika prevention.

They range from simple measures such as applying repellent and wearing long-sleeved clothes that reduce the skin area that can be targeted by mosquitoes, to avoiding poorer regions of Rio de Janeiro, where sanitation infrastructure is precarious, and practicing safe sex, as the virus can also be transmitted during sexual intercourse.

Security Risks

But Zika is not the only risk that worries participants in the event.

Debora Rocha, regional security manager, International SOS

Debora Rocha, regional security manager, International SOS

Security is a big issue in Brazil, and 90,000 security agents will be deployed by the authorities to guarantee safety. Although terrorism is not a common threat in the country, the security forces said that they have been collecting information about potential attacks during the games and are working with other countries to neutralize the risk.

“Brazil has hosted the Pan American games, the Confederations Cup and more recently the FIFA World Cup, so there is considerable experience in dealing with large events and collaborating with security forces from other countries,” said Debora Rocha, the regional security manager at International SOS in Brazil.

But crime is a major concern in Rio de Janeiro, and it is on the rise as a consequence of Brazil’s economic crisis.

Rocha said visitors should avoid walking around beautiful Rio de Janeiro while carrying valuable items — such as iPads, smartphones or expensive watches — and they should not wander around impoverished parts of the city.

“We do not recommend that people go to ‘favela’ tours that have been fashionable in recent years,” she said, referring to Rio’s famous, and very dangerous, shantytowns.

Another important precaution is to only take taxis that are called by hotels, restaurants or telephone services. Picking a taxi on the road is a particularly bad idea as some cab drivers can be criminals in disguise.

In general, information on risk management systems and structures have not been made public, which has raised questions about the robustness of ERM at the Rio games.

“Crime is among the top two or three concerns, along with Zika and the general preparedness of infrastructure and venues in Rio,” said Abbott Matthews, an analyst at IJET International.

In the latter case, the Olympics organization has been dogged by work delays, bribery suspicions and faulty execution, as illustrated by the crumbling in April of a scenic, seaside waterway that was built as a legacy of the games to the city of Rio de Janeiro.

Preparedness has in fact been a concern throughout all of the construction of Rio’s Olympic structures, and a lack of focus on risk management may have played a role.

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The local organizers hired an experienced Brazilian risk manager to focus on enterprise risk management in 2013, but he left the next year after disagreements with his bosses. Since then, the position has not been filled.

Public speeches on risk management at the games have been delivered by a military police colonel who is in charge of security and who focuses mostly on policing issues.

In general, information on risk management systems and structures have not been made public, which has raised questions about the robustness of ERM at the Rio games.

“In large scale events, especially when there is taxpayers’ money involved, there is a deep obligation to have the most transparent processes in place,” said Joanna Makomaski, president of Baldwin Global Solutions, who was the vice president of ERM with the Toronto 2015 Organizing Committee of the Pan American Games.

Rodrigo Amaral is a freelance writer specializing in Latin American and European risk management and insurance markets. He can be reached at [email protected]
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Reinsurance

Basking in the Sun Once More

Solvency II equivalency and NAIC’s “qualified jurisdiction” designations help Bermuda strengthen its position as a leading reinsurance domicile.
By: | May 24, 2016 • 5 min read
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Bermuda is one of the world’s biggest and most successful offshore reinsurance markets, largely as a result of its tax advantages, strong regulatory system and its proximity to the U.S. and Europe.

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But in recent years, many of the island’s reinsurers redomiciled to Europe, amid concerns over Bermuda’s international reputation, regulatory uncertainty and political instability.

The outflux started in 2010, when Flagstone Re redomiciled to Luxembourg and Allied World moved its holding company to Switzerland. The latest, Canopius, followed suit at the end of last year.

Companies are now returning to the island, though, after the announcement in March that the European Union granted it Solvency II equivalence.

Bermuda, along with Switzerland, is the only country that garnered Solvency II equivalence and was designated a “qualified jurisdiction” by the National Association of Insurance Commissioners (NAIC), allowing free cross-border trade with the U.S.

Brad Kading, president and executive director, ABIR

Brad Kading, president and executive director, ABIR

Further evidence of the island’s resurgence is borne out by the fact that 64 new reinsurance companies incorporated in Bermuda last year, according to the Bermuda Monetary Authority (BMA).

Meanwhile, seven of the island’s biggest reinsurers merged or were acquired over the last four years, with more deals expected, according to the Association of Bermuda Insurers and Reinsurers (ABIR).

Bermuda is also firmly established as one of the leading offshore domiciles for captive insurance, as well as an alternative capital market.

“Bermuda was always a leading reinsurance domicile,” said Brad Kading, president and executive director of ABIR. “These two bilateral agreements [Solvency II and NAIC qualified jurisdiction status] further cemented its position as a reputable domicile for reinsurance.”

Movers and Shakers

XL Catlin’s proposed move from Ireland back to Bermuda made the biggest headlines this year and will be accomplished in the third quarter, subject to shareholder approval. Bermuda was a stronghold for both companies before their merger. XL moved its main operations there 30 years ago, and Catlin incorporated its holding company in Bermuda in 1999.

XL Catlin’s CEO Mike McGavick said the fit with Bermuda is a natural one, given that a significant part of the company’s business and its largest operating subsidiary are already there.  He cited Solvency II equivalence as the main reason behind the move, adding that it would benefit clients, partners and shareholders alike.

“These two bilateral agreements [Solvency II and NAIC qualified jurisdiction status] further cemented its position as a reputable domicile for reinsurance.” — Brad Kading, president and executive director, Association of Bermuda Insurers and Reinsurers

“With the recent determination of full Solvency II equivalence in Bermuda, it has been concluded that the BMA is best situated to serve as XL’s group-wide supervisor and to approve XL’s internal capital model,” McGavick said.

Qatar Re also announced at the end of last year that it would relocate its main operations from Dubai to Bermuda after its merger with parent Qatar Insurance Co.’s Bermuda-domiciled reinsurer Antares Reinsurance.

CEO Gunther Saacke cited Bermuda’s “decades of proven reliability” and said that the move would enable the company to consolidate its capital and move closer to its brokers and clients in the U.S.

Ross Webber, CEO of the Bermuda Business Development Agency (BDA), said the decision by all of these companies to redomicile to Bermuda sent a “very positive message.”

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“No doubt Solvency II equivalence played a big part in all this, but Bermuda’s improving economic outlook and growth in business confidence is also a factor,” he said.

“Our company register is growing across all sectors at present, while consolidation only strengthened the physical presence of companies such as XL Catlin here on the island.

“As a result of all this, we are already seeing companies looking to set up new operations, to merge or to expand their operations here in Bermuda.”

Taking Flight

Webber said that the main reason behind companies leaving Bermuda in the first place was a move from U.S. and European regulators to bring companies back onshore.

Being offshore “was perceived as somehow being unpatriotic and somewhere you shouldn’t be,” he said.

Ross Webber, CEO, Bermuda Business Development Agency

Ross Webber, CEO, Bermuda Business Development Agency

“Some left simply because the CEO and leadership wanted to physically move themselves back onshore, along with the corporate structure that goes along with it.”

David Brown, a retired insurance industry veteran and former CEO of Flagstone Re, which redomiciled from Bermuda six years ago, said there was no single trigger for the exodus.

“I think that people were almost hedging their bets — not knowing if Bermuda was going to get Solvency II equivalence — by moving to jurisdictions in the EU that were considered more likely to succeed,” he said.

“Another factor at the time was the political risk associated with an unsustainable public debt growth, as well as a negative political climate against international business and expat employees generally.”

But he added that since the government started to tackle the debt problem and make the island more welcoming to international business, companies now are taking another look at the island.

Solvency II Equivalence

Gaining Solvency II equivalence means that Bermuda is now better positioned to meet the regulatory standards being redrawn by the International Association of Insurance Supervisors, said Kading,  as well as to provide more capacity for markets like Asia and Oceania.

Being offshore “was perceived as somehow being unpatriotic and somewhere you shouldn’t be,” — Ross Webber, CEO, Bermuda Business Development Agency

“All this means is that the Bermuda Monetary Authority is now recognized as a global group supervisor for targeted insurance groups and reinsurance can be conducted on a cross-border basis without market barriers,” he said.

“For Bermuda insurers, this means an efficient rather than redundant layer of group supervision and for reinsurers, it means cross-border trade without individual jurisdictional restrictions.”

Susan Molineux, senior financial analyst at A.M. Best, who was based on the island for more than a decade, said that achieving Solvency II equivalence was a “big win” for Bermuda.

“Bermuda expended a lot of effort to really explain to Europe what they do and how they do it, and it paid off in the long run,” she said.

The Future

Despite the positives, Bermuda still has a way to go to convince everyone that it is on the rise.

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Saddled with a $2 billion debt after seven years of deep recession, the government is under pressure to rein in costs and to find new revenue sources, mainly through tax collection.

A.M. Best said last year that it maintained a negative outlook for the island’s reinsurance industry. In response to this, the BDA is setting up industry focus groups. It is promoting Bermuda as a domicile in conjunction with ABIR members to attract new business from emerging markets such as Latin America and China.

After years of departures and uncertainty, Bermuda is seemingly restoring its position as a leading reinsurance market. &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]
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From Drones to Defects: Planning for Construction’s Top Challenges

Construction buyers must be more vigilant about protecting projects before breaking ground.
By: | November 2, 2016 • 6 min read

The construction industry is firing on all cylinders. New projects spring up every day, but not all go according to plan.

Three out of every four construction projects fail to finish on time. Every party involved – owners, designers, contractors and subcontractors – expects perfection, with the final product delivered on schedule and on budget. Those expectations leave little room for uncertainty, so even a small hiccup can have ripple effects that disrupt a project for everyone.

As outlined in a recent report by McGraw Hill Construction “a lack of thoroughness of preconstruction planning, estimating and scheduling” is a leading cause of uncertainty.1

“There’s often a big disconnect on the front end of project planning,” said Doug Cauti, Senior Vice President, National Insurance, Chief Underwriting Officer, Construction, Liberty Mutual.

Proactive risk mitigation is also important to manage emerging challenges facing the construction industry ‒ drone regulations are evolving, commercial auto losses are rising, and so is uncertainty about which party might be held responsible for a construction defect. Without the proper planning, these issues can easily be overlooked and result in major losses and project disruption.

Liberty Mutual’s Doug Cauti discusses key challenges facing the construction market.

“Key risk management strategies have to be aligned among all parties from the beginning to minimize these uncertainties.”

Before construction begins, there are actions that project owners, designers and contractors can take to address these challenges and better protect their projects and businesses:

Drone Dangers

Drones can be useful tools on construction sites, providing an extra set of “eyes” for large commercial projects or tall buildings. They provide a real time aerial glimpse of works in progress, giving supervisors an added perspective to spot potential flaws, assess safety hazards, and check on workers. But many challenges remain in the safe — and legal — operation of drones.

Liberty Mutual’s interactive infographic highlights risks related to managing drones at construction sites, and also includes a pre-planning drone use guide and a pre-flight checklist that includes making sure to review the latest drone regulations.

How construction buyers can manage the insurance implications of using drones in their operations.

General contractors and project owners need to stay up to speed on FAA regulations, which changed in August, 2016.

“For one thing, operators need to have the drone in sight at all times,” Cauti said.

“And you need to make sure any operators are appropriately licensed and trained, that the drones are regularly maintained, and that the machines don’t impede on others’ safety and privacy.”

Clear flight paths and work zone boundaries can minimize the risk of a drone striking another property, or worse, a person. Operators should also know how to conduct an emergency landing if the drone suddenly loses power. It’s also important to consider how you are going to manage and use drone footage. Advertising liability can be a concern if third party images are captured and released. Know who is in charge of the data collected, who has access to it, and how you are going to protect it.

“If the contractor owns the drone, it takes on more liability. The contractor should review its insurance policies to make sure the coverage will respond to that risk,” Cauti said.

SponsoredContent_LM“As an insurance carrier, we may have a role to play in those proactive discussions. We are uniquely positioned to help project stakeholders see their risks and work to minimize them.”

— Doug Cauti, Senior Vice President, National Insurance, Chief Underwriting Officer, Construction, Liberty Mutual Insurance

Contractors and project owners can protect themselves through enhancements to their commercial general liability policies or through separate aviation policies, he said.

If a general contractor leases a drone through a third party, “they bear the responsibility of making sure the vendor is fully insured,” Cauti said. Vendors should have “non-owned” aviation coverage with limits suitable to handle the size of the risk.

Fleet Safety

Commercial auto losses challenge many business sectors, and construction is no exception.

More vehicles on the road and more miles driven, combined with fewer experienced commercial drivers, are driving up the frequency of accidents. On construction sites in particular, congestion created by closed roads, piles of materials and roving heavy machinery may lead to work zone accidents. Rising medical costs and repair and replacement costs of high-tech vehicles increase claim severity.

“I don’t see this trend reversing any time soon,” Cauti said.

Mitigating commercial auto losses begins with driver hiring practices.

“Pay attention to who you put behind the wheel,” Cauti said.

“Motor vehicle reports (MVRs) and driving history can alert employers to previous accidents or tickets. But there also needs to be regular communication with the drivers you do hire, and clear protocols in place that define expectations of how the job should be performed,” he added.

Ways construction buyers can manage rising commercial auto loss costs and better protect their fleets and employees.

Those protocols include requiring the use of seat belts, prohibiting cell phone use while behind the wheel, mandating scheduled breaks, outlining maintenance procedures, defining if company vehicles can be used for personal use, and establishing crash report procedures that delineate who to contact and what information to collect in the event of an accident.

Contractors can also monitor fleet performance through telematics systems. These on-board systems can track unsafe driving behaviors like hard braking, sharp turns, and speeding. But the data is only as good as the person analyzing it. Contractors and project owners should partner with an insurer who can use fleet telematics data effectively to pinpoint common causes of accidents and recommend specific risk mitigation strategies.

Liberty Mutual’s Managing Vital Driving Performance is one tool that leverages insureds existing telematics data to identify unsafe driving behaviors and accident patterns.

“Our risk control consultants can drill deeper into the data and interview drivers to identify patterns and find out the root causes of bad driving behaviors in the first place,” Cauti said.

For example, a post-accident interview with a driver could reveal that he had been skipping breaks and spending too many hours on the road, leading to fatigue and inattentive driving.

Identifying those connections enables consultants to make specific risk mitigation recommendations, such as adjusting drivers’ schedules and workloads to reduce overtime, or adjusting dispatch protocols so employers can ensure drivers aren’t working too many shifts in a short period of time.

Construction Defects

Another uncertainty project owners, designers and contractors have to face is how insurance coverage will apply should a project end up in a dispute. “The struggle is around the definition of ‘faulty workmanship’ and who is responsible for the defect. Is it in the design or the build?” Cauti said.

“There can be a lot of finger pointing involved. This reinforces the need for contractors to have a systematic quality assurance (QA) program that adheres to best practices, and for every party to have a role in it.”

Elements of a QA program could include testing of construction materials, conducting regular walk-throughs and obtaining approvals from the owner at key phases, and final sign-off by the owner at the project’s completion.

How construction defects and the current legal climate are affecting projects.

Construction defect claims can affect a business’s reputation, profits, and ability to maintain insurance coverage. That’s why it’s so important to be vigilant about avoiding construction defects, whether you’re a designer, developer, owner or general contractor.

Ultimately, though, these risks should be addressed before ground is broken. Discussing these challenges and collaborating on loss prevention strategies up front reduces the likelihood that any “hiccups” will throw off project timelines or increase costs for the various stakeholders.

Pre-planning discussions also offer the opportunity for these parties to take advantage of carrier partners’ risk control services.

“As an insurance carrier, we may have a role to play in those proactive discussions,” Cauti said.

“We are uniquely positioned to help project stakeholders see their risks and work to minimize them.”

To learn more about Liberty Mutual’s solutions for the construction industry, visit https://business.libertymutualgroup.com/business-insurance/industries/construction-insurance-coverage.

[1] Managing Uncertainty and Expectations in Building Design and Construction SmartMarket Report

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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.








Liberty Mutual Insurance offers a wide range of insurance products and services, including general liability, property, commercial automobile, excess casualty, workers compensation and group benefits.
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