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Risk Insider: Chris Mandel

Risk Standards Gain Traction

By: | September 3, 2014 • 3 min read
Chris Mandel is SVP, strategic solutions for Sedgwick. He is a long-term risk management leader and a former president of RIMS. He can be reached at chris.mandel@sedgwickcms.com.
Topics: ERM | Risk Insider

Having just returned from the G31000 annual conference, I’d like to share my thoughts on current risk standards and where we seem to be headed. Full disclosure, this forum I attended promotes ISO31000 (31K), which grew out of the Australian/New Zealand 4360 standard.

For starters, the statistics generated by an extensive G31000 sponsored survey were nothing short of astounding. Adoption of ISO31000 around the world has reached an all-time high. After getting its DNA from ASZ4360 in the late ‘90s, with very competent shepherding by Kevin Knight, this most flexible risk “standard” represents a comprehensive guide for practitioners to design and implement customized risk strategies, which would then inform and flesh out their resulting frameworks. Your framework of course defines the tactics you would use to “make things happen.”

The survey of more than 1,800 respondents in 111 countries (with 40 percent from the U.S., UK and Australia) by G31000, the organization that has helped evolve and perpetuate global use of this standard, revealed that 60 percent have a clear understanding or some knowledge of 31K while 40 percent use the standard to guide “all” key decision making in their organizations. Interestingly, 74 percent said that they believe their professional associations should strongly endorse or recommend 31K as the best standard in order to achieve organizational success.

Contrasting 31K with other common risk standards, the survey showed that twice as many adhere to 31K over COSO ERM, the auditor/accountant designed standard that emerged at the time of Sarbanes Oxley and that, some say, derailed early efforts to deploy ERM strategies in favor of the more narrow focus on financial reporting accuracy.

The survey … revealed that 60 percent have a clear understanding or some knowledge of 31K while 40 percent use the standard to guide “all” key decision making in their organizations.

While useful in many respects, its control environment focus leaves it less flexible and customizable (notwithstanding the recent issuance of the COSO 2013 update of their Internal Controls framework). Interestingly, 40 percent of respondents claim to have created and use their own “standards,” though I strongly suspect this finding is more likely a reference to risk frameworks since practitioners don’t typically create their own “standards,” however, it is not impossible to do so.

Adoption of risk standard ISO31000 is on the rise globally.

Adoption of risk standard ISO31000 is on the rise globally.

Disappointingly, results for U.S. respondents reflect a 31K take-up rate that lies in stark contrast to the global take-up rate. Only 20 percent of U.S. based respondents claim to use 31K, while 12 percent claim to use COSO ERM.

This latter statistic is the more surprising of the two as the longstanding impression among U.S. ERM experts has been that COSO was much more commonly used. All the better however, since migration away from COSO to 31K would be an advisable strategy for those that prefer less prescriptive risk guidance.

Finally, a surprising 43 percent believe that 31K ought to have certification as a requirement, with only 9 percent supporting it as a mandate. While on its face, organizational certification may seem useful, I believe users will ultimately regret the way it layers costs and time requirements on organizations whose time and resources can be better applied to the management of risks. Encouragingly, 24 percent plan to implement 31K in the future, which will undoubtedly only increase its gravitational pull towards even wider adoption over time.

Read all of Chris Mandel’s Risk Insider contributions.

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Risk Insider: Allen Melton

Top 10 Tips for Submitting a Claim

By: | August 26, 2014 • 2 min read
Allen Melton is a partner and the leader of EY's Insurance & Federal Claims Services Practice. He has 20+ years of experience working for both policyholders and insurers in the claims process. He can be reached at allen.melton@ey.com.

Napa residents and businesses were awakened early Sunday morning to the ground swells of a strong 6.0 earthquake. Buildings crumbled, glass shattered, gas and water lines ruptured, and other destruction ensued.

Now begins the unfortunate task of completing the repairs and, in many situations, preparing an insurance claim.

Below is a top 10 list of items to consider when faced with an impending claim:

1. Read your insurance policy.

Understand what types of losses are covered (earthquake damage, fire damage, water damage), what is insured (building, equipment, stock and supplies, business interruption, extra expenses), what deductibles apply, and whether there are any coverage limits that might apply?

2. Assemble a claims team.

All areas of your business may be affected and you should get the details from all facets of your operations. Impact to building and equipment, operations, sales, finance, and logistics should all be considered when trying to understand how your business has been affected.

3. Establish procedures to capture expenses.

Develop charge codes, purchase orders, or accounts to capture all claim-related expenses.

4. Designate a single point of contact.

Information about a loss has a tendency to change as more facts are known. Having a single point of contact providing information to insurers can avoid confusion about the details of your loss.

5. Manage expectations.

Keep management apprised about the details of the loss such as claim estimates, and timeframe to rebuild/restore operations as well as details regarding the claims process including the amount of time and effort that is required to adequately document and support a claim.

Be cautious of loss estimates and recovery timeframes that are too low or overly optimistic, which can result in a false sense of security and mismanage expectations internally and externally.

6. Prepare for meetings.

Coordinate your claim team in advance of insurer meetings to set the agenda, assemble supporting documentation, and ensure that the right people are present to answer questions that might arise.

7. Explain your business model.

Don’t assume that others have a thorough understanding of your business. Explain your business model so that the adjuster and his/her team will have better context around the measurement of the loss.

8. Help the insurance adjuster set the loss reserve.

Explain the areas of loss and provide sufficient information to allow the adjuster to set an appropriate loss reserve. Setting a reserve that is too low or too high can cause issues down the road.

9. Document substantive discussions with insurers.

Confirm discussions or verbal agreements in writing to maintain a record of the loss.

10. Request a cash advance.

Once the magnitude of the loss is determined, request an advance from the insurance company to offset expenditures you already incurred. Obtain additional cash advances as claim items are agreed to. This will limit the amount of open claim items at the end of the process.

Read all of Allen Melton’s Risk Insider contributions.

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Sponsored: Liberty International Underwriters

A New Dawn in Civil Construction Underwriting

Civil construction projects provide utility and also help define who we are. So when it comes to managing project risk, it's critical to get it right.
By: | September 15, 2014 • 5 min read
SponsoredContent_LIU

Pennsylvania school children know the tunnels on the Pennsylvania Turnpike by name — Blue Mountain, Kittatinny, Tuscarora, and Allegheny.

San Francisco owes much of its allure to the Golden Gate Bridge. The Delaware Memorial Bridge commemorates our fallen soldiers.

Our public sector infrastructure is much more than its function as a path for trucks and automobiles. It is part of our national and regional identity.

Yet it’s widely known that much of our infrastructure is inadequate. Given the number of structures designated as substandard, the task ahead is substantial.

The Civil Construction projects that can meet these challenges, however, carry a unique set of risks compared to other forms of construction.

SponsoredContent_LIU“The bottom line is that there is always risk in a Civil Construction project. If the parties involved don’t understand what risk they carry, then the chances are there are going to be some problems, and the insurers would ideally like to understand the potential for these problems in advance.”
– Paul Hampshire, Vice President – Civil Construction, LIU

The good news is that recent developments in construction standards and risk management techniques provide a solid foundation for the type and risk allocation of Civil Construction projects they are underwriting. Carriers need to be able to adequately assess the client and design and construction teams that are involved.

For Builder’s Risk Programs, a successful approach prioritizes a focus on four key factors. These factors are looked at not only during the underwriting phase of the project but also in the all-important site construction phase, under the umbrella of a Risk Management Program, or RMP.

Four key factors

Four key factors that LIU focuses on in underwriting and providing risk management services on a Civil Construction project include:

1. Resource knowledge and experience: When creating a coverage plan, carriers work to understand who is delivering the project and how well suited key staff members are to addressing the project’s technical and management challenges. Research has shown that the knowledge and experience of those key players, combined with their ability to communicate effectively, is a big factor in the project’s success.

“We look to understand who is delivering a project, their expertise and experience in delivering projects of similar technical complexity in similar working conditions, even down to looking at the resumés of people in key positions,” said Paul Hampshire, Houston-based Vice President with Liberty International Underwriters.

2. Ground conditions and water: Soil and rock composition, the influence of ground and surface water, and foundation stability are key additional considerations in the construction of bridges, tunnels, and transit systems. If a suitable level of relevant ground (geotechnical) investigation and study has not been undertaken, or the results of such work not clearly interpreted, then it’s a red flag to underwriters, who would then question whether the project risk profile has been adequately evaluated and risks clearly and transparently allocated via suitable contract conditions.

SponsoredContent_LIU“As we all know, ground is very rarely a homogenous element within Civil Construction projects,” LIU’s Hampshire said.

“It tends to vary from any proposed geotechnical baseline specification with the consequential potential for changes in behavior during construction. We need to understand who has assessed the condition of the ground, its behavior and design parameters when compared with a particular method of construction, and all importantly, who has been allocated the ground risk in a project and the upfront mechanisms for contractual ground risk sharing, if applicable,” he said.

Knowing how much water is associated with the in-situ ground conditions as well as the intensity, distribution and adequate accommodation (both in the temporary as well as in the permanent project configurations) of rainfall for a site location and topography are also key. Tunneling projects, for example, can be hampered by the presence of too much or unforeseen quantities of groundwater.

“In major tunneling infrastructure projects, the influence of in-situ groundwater pressures and /or water inflows is a major factor when considering the choice of excavation method and sequence as well as tunnel lining design requirements,” LIU’s Hampshire said.

According to a recent article in Risk & Insurance, tunneling under a body of water is one of the most challenging risk engineering feats. Adequate drainage layouts and their installation sequence for highway projects and, in particular, the protection of sub-grade works are also important. “But under all circumstances, we need to understand how the water conditions have been evaluated,” Hampshire said.

3. Technical Challenges: This risk factor encompasses the assessment of the technical novelty or prototypical nature of the project (or more often, specific elements of it) and how well the previously demonstrated experience of both the design and construction teams aligns with the project’s technical requirements and the form of contract determined for the project. The client can choose the team, but savvy underwriters will conduct their own assessment to see how well-suited the team is to technical demands of the project.

4. Evaluation of Time and Cost: With limited information generally provided, we need to be able to verify as best as possible the adequacy of both the time and cost elements of the project. Our belief is simply that projects that are insufficient in either one or both of these elements potentially pose an increased risk, as the construction consortium tries to compensate for these deficiencies during construction.

SponsoredContent_LIU
Small diameter Tunnel Boring Machine designed for mixed ground conditions and water pressures in excess of 2.5 bar.

New standards

In the 1990s and early years of this millennium, a series of high-profile tunnel failures across the globe resulted in major losses for Civil Construction underwriters and their insureds.

In the early 2000s, both the tunnel and insurance industries worked together to create new standards for high-risk tunneling projects.

A Code of Practice for the Risk Management of Tunnel Works (TCoP) is increasingly relied on by project managers and underwriters to define the best practices in tunnel construction projects. This process ideally starts at project inception (conceptual design stage or equivalent) and continues to the hand-over of the completed project.

LIU’s Hampshire said alongside TCoP, the project-specific Geotechnical Baseline Report and its interpretation and reference within the project contract conditions gives the underwriter greater clarity as to who recognizes and carries the ground risk and how it’s allocated.

“The bottom line is that there is always risk in a Civil Construction project,” Hampshire said. “Is the risk transparently allocated or is it buried? If the parties involved don’t understand what risk they carry, then the chances are there are going to be some problems, and the insurers would ideally like to understand the potential for these problems in advance,” Hampshire said.

Paul Hampshire can be reached at Paul.Hampshire@libertyiu.com.

To learn more about how Liberty International Underwriters can help you conduct a Civil Construction risk assessment before your next project, contact your broker.

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.

LIU is part of the Global Specialty Division of Liberty Mutual Insurance.
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