Climate Change is Real and Hurts Our Industry
While many aspects of managing environmental risks are very complicated, sometimes the direct relationship of a cause and its effect is clear.
In October of 1948, a historic air inversion over Donora, Pa., acted like an upside down fish bowl and trapped a layer of pollution from the local zinc and steel plants. Sulfuric acid, nitrogen dioxide, fluorine and other poisonous gases that usually were dispersed into the atmosphere mixed with fog to create a deadly smog. Twenty people died and 7,000 became ill, some seriously. Sixty years later, the New York Times described it as “one of the worst air pollution disasters in the nation’s history.” (Nov. 1, 2008)
As I tell my friends, “if you want to be a climate change denier, do it quietly, alone, so others don’t know how foolish you are!”
Dr. Devra Davis, director of the Center for Environmental Oncology of the University of Pittsburgh Cancer Institute, after a long study, concluded that the pollutants trapped by stagnant air were the primary cause of deaths (Pittsburgh Gazette, Oct. 21, 2008).
While the science behind climate change is on a much larger scale than the Donora smog, the cause and effect are still the same. When we put a lot of “bad stuff” into the environment over a period of time, we are not going to like the results.
And who puts that “bad stuff” in the environment? Man does. We do. Climate change is man made, man caused. As I tell my friends, “if you want to be a climate change denier, do it quietly, alone, so others don’t know how foolish you are!”
In the recently concluded National Climate Assessment, White House Science Advisor John Holdren said, “The study is the loudest and clearest alarm bell to date signaling the need to take urgent action to combat the threats to Americans from climate change.” If you need more persuading, read the report here.
Most of us probably studied something other than science in school. That is not a reason to dismiss science. Science gave us a cure for polio, put a man on the moon and an iPhone in your pocket.
I can only guess at the motivations of some politicians who think climate change is a hoax, but we are an industry that studies facts, patterns and prior results. When you study the facts about climate change, I have no doubt you will be in agreement — climate change is real. It is happening.
Changing weather patterns are having an effect on our business. Droughts, wildfires, hurricanes, etc. … I understand energy fuels our economy. I would not advocate not using oil, coal or gas, which all generate emissions. I just believe they need to be used in a cleaner way. At the same time, wind, solar and nuclear have a role to play as well.
Not dealing with the issue of climate change has and will continue to have an adverse effect on our business.
When our industry sounds an alarm, people usually listen. It is time to clang the alarm.
Read all of Joe Boren’s Risk Insider contributions.
Brokers Bankrolling Adventures
When it comes to great adventures, youth will be served by large insurance brokerages.
On June 26, weather permitting, 31-year-old aviatrix Amelia Rose Earhart will embark on an around-the-world flight retracing the route of her famous namesake. If successful, Earhart will become the youngest woman to circumnavigate the globe in a single-engine aircraft.
Earhart and her aircraft will be insured on a pro bono basis through policies structured and secured by Kansas City, Mo.-based Lockton Cos., the world’s largest privately held insurance broker.
“Lockton is thrilled to be a part of this legendary journey,” said Ty Carter, aviation producer at Lockton and the liaison coordinating the insurance protection for Earhart and for the Pilatus aircraft that she will be flying.
“We are passionate about aviation and appreciate Amelia’s efforts to raise awareness of the opportunities and experiences she provides. Her tenacity and spirit are truly inspiring.”
Though she is not a blood relative of the late Amelia Earhart, Amelia Rose Earhart has had a love of flying from an early age.
“I started dreaming of flying when I was 18 years old, and I’ve been flying for 10 years,” said Earhart, who planned the entire 17-stop route of her flight, which originates in Oakland, Calif.
Journey to the South Pole
This venture was preceded by another headline-making adventure that teamed Willis Group Holdings plc with Parker Liautaud, a 19-year-old sophomore at Yale University who on Christmas Eve became the youngest man to ski to the South Pole.
Liautaud and companion Doug Stoup set a new speed record for the fastest-ever unsupported walk from the edge of Antarctica to the South Pole in 18 days, four hours and 43 minutes.
Known as the Willis Resilience Expedition, the venture was jointly sponsored by Willis and EMC, a large global technology company.
On their expedition, Liautaud and Stoup were tracked by sophisticated communications housed in Ice Broker, a custom-built Toyota Hilux six-wheel truck that broadcast live around the world and on the expedition’s website. The truck was created by a team assembled by Willis and tested in Iceland.
“It was Parker who first approached Willis,” said Nathan Hambrook-Skinner, London-based director of communications for Willis Global. “He came to us early in 2013 with the idea that he wanted to ski to the South Pole.”
For Liautaud, it was the end of a long journey.
Until he connected with Willis, Liautaud spent 8 p.m. to 1:45 a.m. “every night without fail in the basement of the nearest library sending out emails seeking support for the venture,” he said.
As part of Willis’ aid for Liautaud’s adventure, the global insurer handled all insurance aspects.
“Risk management was a key focus for us.” — Nathan Hambrook-Skinner, Willis global director of communications
“Risk management was a key focus for us,” said Hambrook-Skinner. “You can’t really go to Antarctica without full evacuation insurance, which you’ll need to cover you if there’s any accident. Obviously we had that fully covered.”
Willis, a leading global risk adviser and insurance and reinsurance broker operating on every continent, also handled the insurance for the Ice Broker. And of course Liautaud and four other expedition members, including Hambrook-Skinner, were covered by insurance.
“We had a crisis risk management consulting team in London that was constantly monitoring our progress,” said Hambrook-Skinner. “If anything had gone wrong, they would have covered the expedition.”
Along with the snow-skiing record, major accomplishments of the venture included:
• Liautaud took snow samples along the journey that formed a valuable contribution to current studies on climate change.
“Overall, we were able to do much more in terms of data gathering and scientific exploration in previously unexplored and untouched part of Antarctica,” said Hambrook-Skinner.
• The expedition partnered with EMC to create data visualizations to engage the public in a better understanding of the science behind climate change and the importance to society.
• A lightweight weather station was tested for the first time in Antarctica.
“The objective of the venture for us as a global risk adviser and insurance broker at the forefront of supporting businesses and individuals all around the world was to help build resilience to extreme events and natural disasters, this being one of those events,” said Hammond-Skinner.
“So it was very natural for us to help support an expedition like this which was seeking to enhance understanding of how the world is changing and how climate matters might be changing over time and help shed some light on that,” Hammond-Skinner said.
For “The Amelia Project,” Earhart and her aircraft are structured and secured by Lockton through Global Aerospace. The policy provides a combined single limit for property damage and bodily injury, as well as physical damage to the aircraft.
“One of the key parameters essential to the primary policy was the inclusion of ‘worldwide territory.’ ” — Ty Carter, aviation producer, Lockton
“One of the key parameters essential to the primary policy was the inclusion of ‘worldwide territory’ ” said Lockton’s Carter. “Due to the nature of this trip, which will occur over approximately 19 days and include 28,000 miles, having a policy that allowed for flexibility in routing was critical to the program’s success.”
Lockton was chosen to handle all aspects of the expedition’s insurance because of Carter’s long-standing and close relationship with Pilatus aviation.
“I’ve owned two Pilatus planes and I’ve also been the former president of the Pilatus Owners and Pilots Association,” said Carter. “I’ve had thousands of hours flying Pilatus aircraft.”
In financing the project, Earhart was greatly aided by Pilatus, which donated a Pilatus PC-12 NG single-engine aircraft for the flight.
In addition, with some help from Lockton, Earhart was able to sell 20 sponsorships to help pay for the flight.
“We were able to put their logos on the outside of the aircraft and also on my flight jacket as well as that of my co-pilot Shane Jordan,” said Earhart.
“I took it upon myself to bring in the sponsorships. I had never done any selling prior to that. I really knew nothing about the process getting started but I learned along the way.”
Lockton is dedicating a team of aviation experts to assist Earhart 24/7 during her flight, with regard to any insurance issue, “or for that matter any question to support her while she is making this journey,” Carter said.
“Our group internally is a mix of pilots, people who have been involved in the maintenance side and former underwriters,” he said. “We have a couple of people on our team who are fully dedicated to the project, literally from the time Amelia leaves until she returns.”
Prior to launching her flying career, Earhart was a helicopter traffic co-anchor for NBC affiliate KUSA in Denver, where she also is president of the Fly With Amelia Foundation, which grants flight scholarships to girls between the ages of 16 and 18 and supports the advancement of general aviation opportunities.
Round Two for Solar Impulse
In another aviation promotional undertaking, Swiss Re Corporate Solutions will join Solar Impulse in a joint venture to launch the Solar Impulse 2 airplane in 2015, in an effort to fly around the world using only solar power.
It took 12 years of calculations, simulations, construction and testing to arrive at the launch of Solar Impulse 2, one of the most technologically advanced aircraft of our time, company officials said.
In 2012, Swiss Re became the sole insurer of Solar Impulse 2. The plane was considered uninsurable by others and yet made the first coast-to-coast crossing of the United States by a solar plane. See R&I’s story on that journey here.
“Insurance plays an important role in supporting pioneering projects in the renewable energy sector,” said Agostino Galvagni, CEO of Swiss Re Corporate Solutions.
“We believe that advancing renewable energy and clean technologies, and establishing them as integral components of the global energy mix, is crucial to ensuring a sustainable future.
“The intent of the Solar Impulse-Swiss Re Corporate Solutions partnership is to endorse and promote this message,” he said.
Global Program Premium Allocation: Why It Matters More Than You Think
Ten years after starting her medium-sized Greek yogurt manufacturing and distribution business in Chicago, Nancy is looking to open new facilities in Frankfurt, Germany and Seoul, South Korea. She has determined the company needs to have separate insurance policies for each location. Enter “premium allocation,” the process through which insurance premiums, fees and other charges are properly allocated among participants and geographies.
Experts say that the ideal premium allocation strategy is about balance. On one hand, it needs to appropriately reflect the risk being insured. On the other, it must satisfy the client’s objectives, as well as those of regulators, local subsidiaries, insurers and brokers., Ensuring that premium allocation is done appropriately and on a timely basis can make a multinational program run much smoother for everyone.
At first blush, premium allocation for a global insurance program is hardly buzzworthy. But as with our expanding hypothetical company, accurate, equitable premium allocation is a critical starting point. All parties have a vested interest in seeing that the allocation is done correctly and efficiently.
“This rather prosaic topic affects everyone … brokers, clients and carriers. Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
– Marty Scherzer, President of Global Risk Solutions, AIG
Basic goals of key players include:
- Buyer – corporate office: Wants to ensure that the organization is adequately covered while engineering an optimal financial structure. The optimized structure is dependent on balancing local regulatory, tax and market conditions while providing for the appropriate premium to cover the risk.
- Buyer – local offices: Needs to have justification that the internal allocations of the premium expense fairly represent the local office’s risk exposure.
- Broker: The resources that are assigned to manage the program in a local country need to be appropriately compensated. Their compensation is often determined by the premium allocated to their country. A premium allocation that does not effectively correlate to the needs of the local office has the potential to under- or over-compensate these resources.
- Insurer: Needs to satisfy regulators that oversee the insurer’s local insurance operations that the premiums are fair, reasonable and commensurate with the risks being covered.
According to Marty Scherzer, President of Global Risk Solutions at AIG, as globalization continues to drive U.S. companies of varying sizes to expand their markets beyond domestic borders, premium allocation “needs to be done appropriately and timely; delay or get it wrong and it could prove costly.”
“This rather prosaic topic affects everyone … brokers, clients and carriers,” Scherzer says. “Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”
There are four critical challenges that need to be balanced if an allocation is to satisfy all parties, he says:
Across the globe, tax rates for insurance premiums vary widely. While a company will want to structure allocations to attain its financial objectives, the methodology employed needs to be reasonable and appropriate in the eyes of the carrier, broker, insured and regulator. Similarly, and in conjunction with tax and transfer pricing considerations, companies need to make sure that their premiums properly reflect the risk in each country. Even companies with the best intentions to allocate premiums appropriately are facing greater scrutiny. To properly address this issue, Scherzer recommends that companies maintain a well documented and justifiable rationale for their premium allocation in the event of a regulatory inquiry.
Insurance regulators worldwide seek to ensure that the carriers in their countries have both the capital and the ability to pay losses. Accordingly, they don’t want a premium being allocated to their country to be too low relative to the corresponding level of risk.
Without accurate data, premium allocation can be difficult, at best. Choosing to allocate premium based on sales in a given country or in a given time period, for example, can work. But if you don’t have that data for every subsidiary in a given country, the allocation will not be accurate. The key to appropriately allocating premium is to gather the required data well in advance of the program’s inception and scrub it for accuracy.
When creating an optimal multinational insurance program, premium allocation needs to be done quickly, but accurately. Without careful attention and planning, the process can easily become derailed.
Scherzer compares it to getting a little bit off course at the beginning of a long journey. A small deviation at the outset will have a magnified effect later on, landing you even farther away from your intended destination.
Figuring it all out
AIG has created the award-winning Multinational Program Design Tool to help companies decide whether (and where) to place local policies. The tool uses information that covers more than 200 countries, and provides results after answers to a few basic questions.
This interactive tool — iPad and PC-ready — requires just 10-15 minutes to complete in one of four languages (English, Spanish, Chinese and Japanese). The tool evaluates user feedback on exposures, geographies, risk sensitivities, preferences and needs against AIG’s knowledge of local regulatory, business and market factors and trends to produce a detailed report that can be used in the next level of discussion with brokers and AIG on a global insurance strategy, including premium allocation.
“The hope is that decision-makers partner with their broker and carrier to get premium allocation done early, accurately and right the first time,” Scherzer says.
For more information about AIG and its award-winning application, visit aig.com/multinational.