Maximize the Advantage of Finite Risk
The concept of finite risk is not new. Finite risk, in this context, is intended to maximize your tax deductibility for known losses. Currently, the practice is to deduct losses as they are incurred, typical GAAP policy. An insurer, on the other hand, has the benefit of statutory accounting rules which allow for the deductibility when the loss is incurred, allowing for accelerated deductions early in the project term.
The principle of determining the optimal method of risk financing for known losses has various tax implications often influencing the cost effectiveness of the project. Based on specific criteria, the IRS has allowed deductions for the entire finite risk payment when in conjunction with certain insurance related policies.
Consider the advantages of finite risk transactions and remediation cost containment – the latter being an insurance policy.
The basic application for finite risk coupled with remediation cost containment is designed for entities that have acknowledged environmental liabilities that will require funding for a period of time extending into the future (usually 4-plus years).
The finite risk portion of the product is structured similar to an annuity generating payments for remediation expenses on a scheduled basis. Remediation cost containment coverage will provide financial security for the entity in the event the cost of the remediation project exceeds a previously determined level.
The remediation project is calculated on the basis of total cost, annual cost and projects duration. The total project is calculated at net present value factoring the time and frequency value of money. A lump sum payment is paid to a third-party fiduciary (the insurance company), and a commutation account is established in an off-shore or on-shore facility.
When remediation costs are incurred in conjunction with the previously determined payment schedule, payments are made from the commutation account on the behalf of the entity. If the cost of the cleanup exceeds the original estimates, even if for a change in law during the project period, the remediation cost containment insurance will pay the difference.
Depending on the fiduciary selected, the interest generated in the commutation account can be tax exempt. The lump sum payment or installments paid to the commutation account can be tax deductible in the year the payments are made. The insurance premium payments for the remediation cost containment coverage can also be tax deductible. In the event the project cost less than the original estimation and subsequent funding, any balance remaining in the account is returned to the entity.
In addition, risk-financing techniques such as this can result in substantial balance sheet adjustments, added financial security, increased credit ratings, and modifications in the accounting footnotes. Once the remediation phase is completed, any ongoing operation and maintenance that may be associated with the long-term monitoring may also be transferred to the third-party fiduciary.
To maximize the cost benefits of your risk management program, the underwriter must understand the specifics of the remediation project and the additional protection that can be extended under the Brownfields legislation.
Alternative Vision Saves Millions
Steve Stoeger-Moore saved Wisconsin’s 16 technical colleges $10 million in premium over the past 10 years.
He did it by helping to create an alternative insurance system whereby the schools obtain nine varieties of coverage — including general liability, auto liability, workers’ compensation, property, violent acts, and most recently, cyber risk — via a mutual municipal insurance company.
That company is Districts Mutual Insurance (DMI). The mutual taps reinsurance markets including Gen Re and Fireman’s Fund, to obtain coverages above retention layers held by the individual colleges.
Most of the time, DMI also holds a retention layer.
The alternative insurance structure was devised in the midst of the hard markets of 2001-2003, when a few of the schools’ finance professionals wondered whether there might be a better way to go, said Stoeger-Moore.
At the time, he said, the Wisconsin Technical Colleges — which had been purchasing their needed insurance products as a consortium — were reeling from annual rate increases year after year.
“The schools had been seeing double-digit increases in premium for three straight years as of 2003, with compounded increases of 20 percent each year during ’01, ’02, and ’03 — all driven by market conditions, not losses,” Stoeger-Moore said.
In fact, he said, the schools’ loss ratio over the three-year period was just 27 percent.
“The coverages appropriate to higher education had become more and more restricted. Carriers were selectively writing various businesses, and M&A activity among insurers was taking a lot of options off the table,” he said.
“No college pays for a loss suffered by another college. And no college pays a premium based on a loss at another college.” — Steven Stoeger-Moore, president, Districts Mutual Insurance
Meanwhile rates were going up and up and up every year, Stoeger-Moore said.
The solution: DMI.
Before the mutual was formed, Stoeger-Moore served as risk manager for the Milwaukee Area Technical College, one of only a few state technical schools that had a risk manager in place.
As the market hardened, school finance officials approached Stoeger-Moore, who developed the blueprint for DMI and agreed to take on the insurer’s day-to-day operations.
“It’s an insurance carrier that has no employees,” he said.
On the other hand, via independent vendors, DMI has experts working as third-party claims administrators, accountants, and auditors, besides commercial insurance carriers like London-based Beazley, which is now partnering with DMI in underwriting a cyber breach response program.
Stoeger-Moore said that it is illegal for insurers to pool their exposures, payments, or reserve funds under Wisconsin state law.
“No college pays for a loss suffered by another college,” he said.
“And no college pays a premium based on a loss at another college.”
Stoeger-Moore has his share of fans. “Steve is really the most knowledgeable insurance technical person I’ve ever met. He created this whole thing,” said Joe DesPlaines, DMI’s business continuity and crisis response consultant.
DesPlaines said Stoeger-Moore envisioned that the mutual would offer insurance coverage as well as risk management consulting including crisis response planning, employee health and safety, and security assessments.
DMI’s budget is derived from college premium payments, said Stoeger-Moore.
Linda Joski, area vice president for Arthur J. Gallagher and Co. in Wisconsin, which brokers all reinsurance coverages for DMI, said that Stoeger-Moore is one of a kind.
“He is innovative and creative and works so well with these colleges,” she said.
Steven is also being recognized as a 2014 Responsibility Leader.
Creating His Own Solution
When the 16 institutions comprising Wisconsin Technical Colleges faced persistent problems obtaining insurance coverage suited to their unique needs, Steven Stoeger-Moore didn’t just find the solution — he created it.
Stoeger-Moore helped to establish Districts Mutual Insurance (DMI) in 2004 to represent the colleges and provide better insurance and risk management services.
Under his self-implemented “Rule of 16,” he ensures that if any school has a problem, all 16 colleges benefit from DMI’s solution. That dedication led to the development of comprehensive risk management programs — provided to each school at no cost — for electrical and fire safety inspections, emergency response planning, legal consultations, and employee health and safety consultations, among many others.
And when those programs were tested, Stoeger-Moore sprang into action. In the past 10 years, the Wisconsin Technical College System has weathered both a tornado and a major fire. Both times, he was at the scene within 24 hours of the event, providing claims and insurance guidance as well as comfort for shaken colleagues.
Stoeger-Moore has also worked to bolster the industry’s future by encouraging young people to consider a career in risk management. Through DMI, he creates opportunities for young people to learn about the colleges’ unique challenges and the programs created to meet them.
Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, perseverance and/or passion.
Responsibility Leaders overcome obstacles by doing the right thing over the easy thing to find practical solutions that benefit their co-workers and community.
From Coast to Coast
The 3,920-ton Left Coast Lifter, originally built by Fluor Construction to help build the new Bay Bridge in San Francisco, will be integral in rebuilding the Tappan Zee Bridge by 2018.
The Lifter and the Statue of Liberty
When he got the news, Scot Burford could see it as clearly as if somebody handed him an 8 by 11 color photograph.
On January 30, the Left Coast Lifter, a massive crane originally built by Fluor Construction to help build the new Bay Bridge in San Francisco, steamed past the Statue of Liberty. Excited observers, who saw the crane entering New York Harbor, dubbed it the “The Hudson River Hoister,” honoring its new role in rebuilding the Tappan Zee Bridge over the Hudson River.
Powered by two stout-hearted tug boats, the Lauren Foss and the Iver Foss, it took more than five weeks for the huge crane to complete the 6,000 mile ocean journey from San Francisco to New York via the Panama Canal.
Scot took a deep breath and reflected on all the work needed to plan every aspect of the crane’s complicated journey.
A risk engineer at Liberty International Underwriters (LIU), Burford worked with a specialized team of marine insurance and risk management professionals which included John Phillips, LIU’s Hull Product Line Leader, Sean Dollahon, an LIU Marine underwriter, and Rick Falcinelli, LIU’s Marine Risk Engineering Manager, to complete a detailed analysis of the crane’s proposed route. Based on a multitude of factors, the LIU team confirmed the safety of the route, produced clear guidelines for the tug captains that included weather restrictions, predetermined ports of refuge in the case of bad weather as well as specifying the ballast conditions and rigging of tow gear on the tugs.
Of equal importance, the deep expertise and extensive experience of the LIU team ensured that the most knowledgeable local surveyors and tugboat captains with the best safety records were selected for the project. After all, the most careful of plans will only be as effective as the people who execute them.
The tremendous size of the Left Coast Lifter presented some unique challenges in preparing for its voyage.
The original intention was to dry tow the crane by loading and securing it on a semi-submersible vessel. However, the lack of an American-flagged vessel that could accommodate the Left Coast Lifter created many logistical complexities and it was decided that the crane would be towed on its own barge.
At first, the LIU team was concerned since the barge was not intended for ocean travel and therefore lacked towing skegs and other structural components typically found on oceangoing barges.
But a detailed review of the plan with the client and contractors gave the LIU team confidence. In this instance, the sheer weight and size of the crane provided sufficient stability, and with the addition of a second tug on the barge’s stern, the LIU team, with its knowledge of barges and tugs, was confident the configuration was seaworthy and the barge would travel in a straight line. The team approved the plan and the crane began its successful voyage.
As impressive as the crane and its voyage were, it was just one piece in hundreds that needed to be underwritten and put in place for the Tappan Zee Bridge project to come off.
The rebuilding of the Tappan Zee Bridge, due to be completed in 2018, is the largest bridge construction project in the modern history of New York. The bridge is 3.1 miles long and will cost more than $3 billion to construct. The twin-span, cable-stayed bridge will be anchored to four mid-river towers.
When veteran contractors American Bridge, Fluor Corp., Granite Construction Northeast and Traylor Bros. formed a joint venture and won the contract to rebuild the Tappan Zee, one of the first things the consortium needed to do was find an insurance partner with the right coverages and technical expertise.
The Marsh broker, Ali Rizvi, Senior Vice President, working with the consortium, was well known to the LIU underwriting and engineering teams. In addition, Burford and the broker had worked on many projects in the past and had a strong relationship. These existing relationships were vital in facilitating efficient communication and data gathering, particularly given the scope and complexity of a project like the Tappan Zee.
And the scope of the project was indeed immense – more than 200 vessels, coming from all over the United States, would be moving construction equipment up the Hudson River.
An integrated team of LIU underwriters and risk engineers (including Burford, Phillips, Dollahon and Falcinelli) got to work evaluating the risk and the proper controls that the project required. Given the global scope of the project, the team’s ability to tap into their tight-knit global network of fellow LIU marine underwriters and engineers with deep industry relationships and expertise was invaluable.
In addition to the large number of vessels, the underwriting process was further complicated by many aspects of the project still being finalized.
“Because the consortium had just won this account, they were still working on contracts and contractors to finalize the deal and were unsure as to where most of the equipment and materials would be coming from,” Burford said.
Despite the massive size of the project and large number of stakeholders, LIU quickly turned around a quote involving three lines of marine coverage, Marine Liability, Project Cargo and Marine Hull & Machinery.
How could LIU produce such a complicated quote in a short period of time? It comes down to integrating risk engineers into the underwriting process, possessing deep industry experience on a global scale and having strong relationships that facilitate communication and trust.
Photo Credit: New York State Thruway Authority
When completed in 2018, the Tappan Zee will be eight lanes, with four emergency pullover lanes. Commuters sailing across it in their sedans and SUVs might appreciate the view of the Hudson, but they might never grasp the complexity of insuring three marine lines, covering the movements of hundreds of marine vessels carrying very expensive cargo.
Not to mention ferrying a 3,920-ton crane from coast to coast without a hitch.
But that’s what insurance does, in its quiet profundity.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.