Understanding the Risks
If it ain’t broke, don’t fix it. That was the clear message from a client to Richard Geiger when the firm reorganized itself and split off a large chunk of its business.
“We recently completed a spin-off where we needed to duplicate our marine liability structure at an aggressive price,” said the risk manager.
“Rick successfully completed that assignment, getting us the same coverage for the new entity with a cost structure we liked. I was confident he would be able to get it done. Rick was able to negotiate a very aggressive pricing structure at below minimum premiums with the same coverage for some of the layers.”
Another client had a workers’ compensation policy that included limited cover for the Jones Act and U.S. Longshore and Harborworkers’ Compensation Act.
The Jones Act is a federal law that requires the movement of cargo between U.S. ports be carried in vessels owned by and crewed by U.S. citizens. USLH is workers’ compensation for employees specifically when working on or near navigable waters and engaged in maritime employment.
The additional elements of the coverage were expensive, despite a million-dollar retention.
The client said Geiger was able to isolate those specific exposures and place a policy that effectively eliminated the retention and significantly reduced the costs.
Geiger worked with colleagues and insurers in London to create a financial guaranty cover to protect the client’s balance sheet in case of a significant loss after project completion.
Making It Happen
Often, Power Brokers earn their status through innovative coverage and placements, or by resolving a complex claim.
Mira Jacinto had to do it all at once for a client that had suffered “multiple large catastrophic claims,” said the risk manager.
A previous reorganization of the company’s business plan, combined with the losses, drove the firm into poor results and forced it to sell a significant portion of its operations.
The risk manager said that Jacinto was instrumental in getting things back on track. She revised the company’s program after the divestiture, supported management in crafting a risk program for its new, smaller operations, and went to domestic and international markets to secure placement.
Jacinto transformed the client’s turnaround story from a negative one to a positive one, and was able to place customized coverage and secure an overall reduction in rate.
For another client, the challenge could not have been more different.
The firm had prospered, and it asked Jacinto to recommend and implement opportunistic expansions in coverage.
At a time when many companies are emphasizing supply-chain efficiency and trying to reduce inventory, Jacinto found readily available capacity in the market for excess stock exposure, enhancing the client’s marine program at very low cost.
For a third client, a very large retail operation with an evolving business model, Jacinto was credited with keeping the inventory program current with rapid changes in the company.
Meeting the Challenge
“Our cargo coverage was a mess,” said one risk executive. “Our whole business practice had changed and suddenly we went from holding no inventory to holding a lot. It was suddenly a huge exposure both in warehouses and out in the supply chain.
“We had changed our whole stock-throughput policy, and our coverage had not kept pace. We were paying way too much.”
The exec’s company put out an RFP and ultimately chose Michael Pellegrini. “He fixed the gaps and saved us money.”
Part of the challenge, the client said, was that that the company is known for its lean supply chain. Presenting the company to the market was as much a question of perception as it was underwriting and risk management.
Nevertheless, Pellegrini was able to double limits to $200 million, and enhance coverage across the board for the transit and inventory risks, all while securing a rate reduction of more than one-quarter of the previous bill.
Having secured increasingly favorable successive multiyear cargo and transit placements for one client, Pellegrini had to dig a little deeper in 2014 to find efficiencies to be gained in the client’s excess layers that were placed offshore.
Pellegrini was able to craft a presentation that generated competition by previously reluctant domestic underwriters. The result was significant reductions by the incumbent London markets.
Expertise for Diverse Needs
Times have been tough for some in the marine sector, but companies were able to rely on the expertise of Kevin Sisk.
“This was a terrible year for our industry, and a tough one for our company,” said the owner of a private firm. “Margins sunk very low, to the bare bones.
“We put a lot of pressure on Kevin, and he really helped us when we needed it. We changed the whole nature of our company, sold off some big operations, and concentrated on a few others. Our whole financial structure changed and our whole risk profile changed.
“We had to go back to our underwriters — sometimes for our whole placement, sometimes just for segments. But Kevin really earned his stripes this year; we got seamless changes in coverage,” the owner said.
In a strikingly different testimonial, another client faced other needs at a fast growing firm with many small clients. The owner said that with expansion had come strong pressure from small clients for the company to handle the risk management and insurance for projects.
The Catch-22 was that if Sisk’s client refused to shoulder the burden, it risked losing the project or customer entirely; if Sisk’s client accepted, the risks exposures could be greater than any gain from the project.
The client credited Sisk with being able to accommodate the risks — in some cases within the firm’s existing program. In other cases, he worked with the client and its customer to craft coverage for the project that enabled it to proceed without unduly burdening the contractor.
Creative Solutions to Keep Clients Afloat
HUB International’s B.C. Thibeaux III earned his laurels this year by crafting powerful and innovative programs for small operators in a beleaguered industry.
“B.C.’s aggressive and creative thinking showed me how to limit my company’s and my customers’ exposure, by getting non-owned vessel owners to list us on their policy as additional insured,” said one owner. “And then he was the architect in implementing that policy.”
The client has been an owner and operator of offshore vessels for more than 30 years, along with marketing and managing a large fleet of non-owned vessels. So it was no mean feat to show him an approach he had not heard about before.
In another case, a client needed traction with underwriters before he could even begin to think about creative options.
“When I met B.C., my company was having a very difficult time getting underwritten,” said the company executive.
“Many brokers didn’t even acknowledge us with a return phone call. Although we are a small account, B.C. treated us like a major [one], aggressively attacked the market and got us coverage, which effectively saved us from tying up the fleet. B.C. kept us in business.”
Another client had multiple claims on both employer’s and general liability, which were separate. First, Thibeaux worked with the client on safety and risk mitigation, and then was able to find a Lloyd’s underwriter willing to take the placements under a single policy.
Out of Sight, Out of Mind
“Out of sight, out of mind.” That phrase is a useful reminder of the vulnerabilities many organizations unknowingly face when it comes to their far-flung supply chains.
Following some quiet years where natural catastrophes and supply chain disruption issues aren’t front page news, management often turns to seemingly more pressing matters.
However, low risk quality at one’s key facilities, or that of their suppliers and customers, can leave unprepared organizations susceptible to business disruption. Two often overlooked aspects warrant consideration: The first is an organization’s exposure to natural hazards on a country-by-country basis, given that all nations have particular vulnerabilities to one or more perils like earthquake, windstorm or flood.
While mega-catastrophes often spring to mind as a major contributor to supply chain disruption, outwardly smaller weather events can wreak fiscal havoc too.
The second aspect is a country’s level of commitment to addressing natural hazards (i.e., whether local building codes and standards exist, are robust and enforced).
Yet, lower costs and higher productivity often entice businesses, with little consideration of the supply chains consequences, into less resilient countries — regions where economies are emerging, labor is cheap, facilities are built in natural hazard-prone locations and risk management practices are weaker than more developed nations.
While mega-catastrophes often spring to mind as a major contributor to supply chain disruption, outwardly smaller weather events can wreak fiscal havoc too.
Last year, in a poll of the U.S. workforce, more than one in four employees said their company had been hit financially as a result of the winter weather and didn’t have an emergency plan to keep business going during such scenarios.
All told, since 2000, the economic losses globally from natural disasters are estimated to be approximately $2.5 trillion, according to the United Nations Office for Disaster Risk Reduction.
When you can’t make savvy decisions about the resilience of your supply chain to disruption, the chance of it disentangling increases. Under such circumstances, it can take two years or more for companies to recover from a supply chain failure, research finds.
Yet, despite those statistics, 90 percent of companies still do not quantify supply chain risk when outsourcing production, according to a recent study by the Global Supply Chain Institute.
Certainly, the need to continually gauge Mother Nature is just as important as assessing ongoing macroeconomic and geopolitical factors within each country where one’s supply chain extends. For example, what if a key supplier is located in a region with robust building codes and standards that adequately address local natural hazards, but the region’s economy is destabilizing by political upheaval?
By factoring suppliers’ differing risk profiles on a country-by-country basis and which firms could most affect revenue growth and profitability, a buying organization can make sounder choices.
The most resilient companies take pains to identify, analyze, quantify and correlate these various physical threats with other key factors that can jeopardize the timely flow of supplies from across the world.
Only after a comprehensive analysis of such data can organizations be in a position to soundly prioritize supply chain and risk management efforts to ensure their business continuity, competitiveness and reputation.
2015 General Liability Renewal Outlook
There was a time, not too long ago, when prices for general liability (GL) insurance would fluctuate significantly.
Prices would decrease as new markets offered additional capacity and wanted to gain a foothold by winning business with attractive rates. Conversely, prices could be driven higher by decreases in capacity — caused by either significant losses or departing markets.
This “insurance cycle” was driven mostly by market forces of supply and demand instead of the underlying cost of the risk. The result was unstable markets — challenging buyers, brokers and carriers.
However, as risk managers and their brokers work on 2015 renewals, they’ll undoubtedly recognize that prices are relatively stable. In fact, prices have been stable for the last several years in spite of many events and developments that might have caused fluctuations in the past.
Mark Moitoso discusses general liability pricing and the flattening of the insurance cycle.
Flattening the GL insurance cycle
Any discussion of today’s stable GL market has to start with data and analytics.
These powerful new capabilities offer deeper insight into trends and uncover new information about risks. As a result, buyers, brokers and insurers are increasingly mining data, monitoring trends and building in-house analytical staff.
“The increased focus on analytics is what’s kept pricing fairly stable in the casualty world,” said Mark Moitoso, executive vice president and general manager, National Accounts Casualty at Liberty Mutual Insurance.
With the increased use of analytics, all parties have a better understanding of trends and cost drivers. It’s made buyers, brokers and carriers much more sophisticated and helped pricing reflect actual risk and costs, rather than market cycle.
The stability of the GL market also reflects many new sources of capital that have entered the market over the past few years. In fact, today, there are roughly three times as many insurers competing for a GL risk than three years ago.
Unlike past fluctuations in capacity, this appears to be a fundamental shift in the competitive landscape.
“The current risk environment underscores the value of the insurer, broker and buyer getting together to figure out the exposures they have, and the best ways to manage them, through risk control, claims management and a strategic risk management program.”
— David Perez, executive vice president and general manager, Commercial Insurance Specialty, Liberty Mutual
Dynamic risks lurking
The proliferation of new insurance companies has not been matched by an influx of new underwriting talent.
The result is the potential dilution of existing talent, creating an opportunity for insurers and brokers with talent and expertise to add even greater value to buyers by helping them understand the new and continuing risks impacting GL.
And today’s business environment presents many of these risks:
- Mass torts and class-action lawsuits: Understanding complex cases, exhausting subrogation opportunities, and wrangling with multiple plaintiffs to settle a case requires significant expertise and skill.
- Medical cost inflation: A 2014 PricewaterhouseCoopers report predicts a medical cost inflation rate of 6.8 percent. That’s had an immediate impact in increasing loss costs per commercial auto claim and it will eventually extend to longer-tail casualty businesses like GL.
- Legal costs: Hourly rates as well as award and settlement costs are all increasing.
- Industry and geographic factors: A few examples include the energy sector struggling with growing auto losses and construction companies working in New York state contending with the antiquated New York Labor Law
David Perez outlines the risks general liability buyers and brokers currently face.
Managing GL costs in a flat market
While the flattening of the GL insurance cycle removes a key source of expense volatility for risk managers, emerging risks present many challenges.
With the stable market creating general price parity among insurers, it’s more important than ever to select underwriting partners based on their expertise, experience and claims handling record – in short, their ability to help better manage the total cost of GL.
And the key word is indeed “partners.”
“The current risk environment underscores the value of the insurer, broker and buyer getting together to figure out the exposures they have, and the best ways to manage them — through risk control, claims management and a strategic risk management program,” said David Perez, executive vice president and general manager, Commercial Insurance Specialty at Liberty Mutual.
While analytics and data are key drivers to the underwriting process, the complete picture of a company’s risk profile is never fully painted by numbers alone. This perspective is not universally understood and is a key differentiator between an experienced underwriter and a simple analyst.
“We have the ability to influence underwriting decisions based on experience with the customer, knowledge of that customer, and knowledge of how they handle their own risks — things that aren’t necessarily captured in the analytical environment,” said Moitoso.
Mark Moitoso suggests looking at GL spend like one would look at total cost of risk.
Several other factors are critical in choosing an insurance partner that can help manage the total cost of your GL program:
Clear, concise contracts: The policy contract language often determines the outcome of a GL case. Investing time up-front to strategically address risk transfer through contractual language can control GL claim costs.
“A lot of the efficacy we find in claims is driven by the clear intent that’s delivered by the policy,” said Perez.
Legal cost management: Two other key drivers of GL claim outcomes are settlement and trial. The best GL programs include sophisticated legal management approaches that aggressively contain legal costs while also maximizing success factors.
“Buyers and brokers must understand the value an insurer can provide in managing legal outcomes and spending,” noted Perez. “Explore if and how the insurer evaluates potential providers in light of the specific jurisdiction and injury; reviews legal bills; and offers data-driven tools that help negotiations by tracking the range of settlements for similar cases.”
David Perez on managing legal costs.
Specialized claims approach: Resolving claims quickly and fairly is best accomplished by knowledgeable professionals. Working with an insurer whose claims organization is comprised of professionals with deep expertise in specific industries or risk categories is vital.
“We have the ability to influence underwriting decisions based on experience with the customer, knowledge of that customer, and knowledge of how they handle their own risks, things that aren’t necessarily captured in the analytical environment.”
— Mark Moitoso, executive vice president and general manager, National Accounts Casualty, Liberty Mutual
“When a claim comes in the door, we assess the situation and determine whether it can be handled as a general claim, or whether it’s a complex case,” said Moitoso. “If it’s a complex case, we make sure it goes to the right professional who understands the industry segment and territory. Having that depth and ability to access so many points of expertise and institutional knowledge is a big differentiator for us.”
While the GL insurance market cycle appears to be flattening, basic risk management continues to be essential in managing total GL costs. Close partnership between buyer, broker and insurer is critical to identifying all the GL risks faced by a company and developing a strategic risk management program to effectively mitigate and manage them.
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.