Coping with Cancellations
Airlines typically can offset revenue losses for cancellations due to bad weather either by saving on fuel and salary costs or rerouting passengers on other flights, but this year’s revenue losses from the worst winter storm season in years might be too much for traditional measures.
At least one broker said the time may be right for airlines to consider crafting custom insurance programs to account for such devastating seasons.
For a good part of the country, including many parts of the Southeast, snow and ice storms have wreaked havoc on flight cancellations, with a mid-February storm being the worst of all. On Feb. 13, a snowstorm from Virginia to Maine caused airlines to scrub 7,561 U.S. flights, more than the 7,400 cancelled flights due to Hurricane Sandy, according to MasFlight, industry data tracker based in Bethesda, Md.
Roughly 100,000 flights have been canceled since Dec. 1, MasFlight said.
Just United, alone, the world’s second-largest airline, reported that it had cancelled 22,500 flights in January and February, 2014, according to Bloomberg. The airline’s completed regional flights was 87.1 percent, which was “an extraordinarily low level,” and almost 9 percentage points below its mainline operations, it reported.
And another potentially heavy snowfall was forecast for last weekend, from California to New England.
The sheer amount of cancellations this winter are likely straining airlines’ bottom lines, said Katie Connell, a spokeswoman for Airlines for America, a trade group for major U.S. airline companies.
“The airline industry’s fixed costs are high, therefore the majority of operating costs will still be incurred by airlines, even for canceled flights,” Connell wrote in an email. “If a flight is canceled due to weather, the only significant cost that the airline avoids is fuel; otherwise, it must still pay ownership costs for aircraft and ground equipment, maintenance costs and overhead and most crew costs. Extended storms and other sources of irregular operations are clear reminders of the industry’s operational and financial vulnerability to factors outside its control.”
Bob Mann, an independent airline analyst and consultant who is principal of R.W. Mann & Co. Inc. in Port Washington, N.Y., said that two-thirds of costs — fuel and labor — are short-term variable costs, but that fixed charges are “unfortunately incurred.” Airlines just typically absorb those costs.
“I am not aware of any airline that has considered taking out business interruption insurance for weather-related disruptions; it is simply a part of the business,” Mann said.
Chuck Cederroth, managing director at Aon Risk Solutions’ aviation practice, said carriers would probably not want to insure airlines against cancellations because airlines have control over whether a flight will be canceled, particularly if they don’t want to risk being fined up to $27,500 for each passenger by the Federal Aviation Administration when passengers are stuck on a tarmac for hours.
“How could an insurance product work when the insured is the one who controls the trigger?” Cederroth asked. “I think it would be a product that insurance companies would probably have a hard time providing.”
But Brad Meinhardt, U.S. aviation practice leader, for Arthur J. Gallagher & Co., said now may be the best time for airlines — and insurance carriers — to think about crafting a specialized insurance program to cover fluke years like this one.
“I would be stunned if this subject hasn’t made its way up into the C-suites of major and mid-sized airlines,” Meinhardt said. “When these events happen, people tend to look over their shoulder and ask if there is a solution for such events.”
Airlines often hedge losses from unknown variables such as varying fuel costs or interest rate fluctuations using derivatives, but those tools may not be enough for severe winters such as this year’s, he said. While products like business interruption insurance may not be used for airlines, they could look at weather-related insurance products that have very specific triggers.
For example, airlines could designate a period of time for such a “tough winter policy,” say from the period of November to March, in which they can manage cancellations due to 10 days of heavy snowfall, Meinhardt said. That amount could be designated their retention in such a policy, and anything in excess of the designated snowfall days could be a defined benefit that a carrier could pay if the policy is triggered. Possibly, the trigger would be inches of snowfall. “Custom solutions are the idea,” he said.
“Airlines are not likely buying any of these types of products now, but I think there’s probably some thinking along those lines right now as many might have to take losses as write-downs on their quarterly earnings and hope this doesn’t happen again,” he said. “There probably needs to be one airline making a trailblazing action on an insurance or derivative product — something that gets people talking about how to hedge against those losses in the future.”
Danger in the Cockpit
Improved risk management, advances in computer technology and an industry-wide focus on training and analysis transformed commercial aviation safety in recent decades, placing it among the safest industries in the world for both staff and customers.
Pilots now have their every input monitored and analyzed. This enables retraining of bad habits and a common aspiration to fly “the perfect flight.”
Improved airplane construction and in-flight safety systems also reduce the likelihood of system malfunction to a miniscule level.
However, a spate of unusual events in 2014 and 2015 serve as a tragic reminder of the ever-evolving challenges facing risk managers.
“Airlines are very determined when it comes to safety and security threats — they are constantly trying to mitigate risk, are very proactive in dealing with threats as they arise, and money is no object when it comes to implementing new safety measures.” — Nigel Weyman, CEO of aerospace, JLT
In July 2014, Malaysia Airlines Flight 17 was shot down over Ukraine by a rogue Russian missile, killing all 298 passengers, and just four months later the same airline’s Flight 307 simply disappeared — prompting many to speculate that its pilot committed suicide, taking 239 passengers with him.
This once inconceivable scenario occurred again less than a year later. In March of 2015, Germanwings co-pilot Andreas Lubitz locked himself in the flight deck and deliberately crashed Flight 9525 into a mountain in the Alps, killing 150 people.
Lubitz reportedly endured severe depression in the weeks leading up to the crash, but his doctors never told Lufthansa, his employer.
Within days of the Germanwings disaster, the vast majority of airlines introduced a rule that there must always be two members of crew in the flight deck at any one time (“two-pilot rule”), while the shooting down of Malaysia Airlines Flight 17 prompted carriers to re-evaluate routes, security threats and safe altitudes over certain geographical areas.
“Airlines are very determined when it comes to safety and security threats — they are constantly trying to mitigate risk, are very proactive in dealing with threats as they arise, and money is no object when it comes to implementing new safety measures,” said Nigel Weyman, CEO of aerospace at JLT.
Malicious Acts Offset Operational Safety Achievements
“The whole airline industry is benefiting from an improved period of operational safety, but malicious acts, from pilot suicides to the deliberate or accidental shooting down of aircraft, seem to have taken the place of expected operational losses, creating a sad counterbalance to what would otherwise be a very encouraging period for the sector.
“Psychological and terrorist losses are difficult to predict,” Weyman said.
Aviation regulatory bodies are currently discussing, with input from airlines and pilots, whether to make the two-pilot rule mandatory, but not all airlines buy into the logic behind it, according to a pilot for one of the world’s leading airlines, who wished to remain anonymous.
“My airline has been reluctant to implement [the two-pilot rule], and even Lufthansa resisted it initially before backing down due to media pressure,” he said, warning that implementing a “knee-jerk reaction” could increase an aircraft’s vulnerability to terrorism.
“There are in excess of 35 million commercial flights globally each year and only one known case of pilot suicide in European airspace history, so you have to weigh up the risks,” he said.
“If a terror organization wanted to plant a sleeper on a plane, it is far easier for a radicalized person to be employed as cabin crew than to pass the pilot exams.
“Many of my colleagues feel safer trusting the pilot community, and keeping the flight deck a pilot-only environment, as the chance of a pilot committing suicide is so slim it is not worth the risks associated with giving crew access to the flight deck.”
It could be argued that some aspects of the Germanwings disaster are rooted in the industry’s reaction to 9/11.
Following that attack, all airlines installed armored flight deck doors to prevent terrorists entering the cockpit — making it virtually impossible to break in if a suicidal pilot decided to lock themselves in.
There’s the rub; in mitigating one risk, you often create new ones.
“You can’t eliminate every risk from every aviation operation, no matter how miniscule those risks might be, and that’s why people buy insurance,” said Weyman.
Insurance Protection for Malicious Acts
Malicious acts by either staff or third parties are currently covered under stand-alone hull war policies, though passenger liability is covered under airlines’ standard hull liability programs.
Weyman noted that, in spite of a number of significant losses between 2013 and 2015, rates continue to slide.
“This is partly because we brokers have argued that these were very unusual events, the industry has closed the door on this happening again, and the world moves on,” he said.
“Mathematically, rates probably should have increased, but the aviation market is very competitive and overserved with capacity, preventing underwriters from reacting to these events.”
“Insurers,” said Richard Power, founding partner of specialist aerospace underwriter Altitude Risk Partners, “must determine whether the recent spike in this kind of incident is a temporary anomaly or whether it is indicative of heightened risk going forward.”
Power noted that the subjective nature of the risk — and the fact that pilot trade unions have resisted the introduction of psychometric testing and the sharing of pilots’ medical information with employers — make it extremely difficult to predict how frequently malicious acts will occur or how effective new security measures will be in preventing future incidents.
“One option may be for the insurance industry to exclude malicious acts from the standard hull liability policy,” Power said.
“Unlike modeling the frequency of losses caused by mechanical failure or human error, underwriters are now faced with the challenge of pricing a much less tangible and quantifiable risk, and it may therefore be necessary to separate malicious acts out into its own separately rated policy, as is done with hull war.”
Power added, however, that brokers and clients have no incentive to accept such changes in the current environment.
The aviation insurance industry is awash with capacity and aviation insurers are under pressure to broaden terms while cutting their cost base, giving them little room for leverage.
Spotting the Warning Signs
So far, there has been no repeat of the Germanwings disaster.
While it is impossible to tell whether a similar incident would have occurred without the new two-pilot rule, the tragedy has undoubtedly brought pilot mental health firmly into the spotlight.
“The best way to prevent another Germanwings is to catch the problem at its source and stop troubled individuals from flying,” the pilot said.
His airline has increased the psychological component of its annual medical checks.
“The best way to prevent another Germanwings is to catch the problem at its source and stop troubled individuals from flying.” — anonymous pilot
It created a new “well-being officer” role, and encourages staff to “self-regulate” by coming forward with concerns about either themselves or others without fear of judgment or punishment.
French air crash investigators in March called on aviation authorities around the world to take this one step further by loosening existing privacy laws to allow doctors to inform airlines if a pilot is mentally unstable.
This clearly presents a complex ethical conundrum.
On a practical level, the pilot said, it is essential that troubled pilots are able to seek counseling confidentially.
“The emphasis has to be on the pilot being able to pick up the phone and talk about their problems and get advice,” he said.
“If they think what they say will be reported back to the airline, they may fear they are risking their careers and decide not to make the call at all, which is far more dangerous.”
However, he added, it is important to keep the risks in context.
“Aviation is so safe now,” he said.
“We dedicate a huge amount of time and resources to identifying and removing what minute risks exist, with the aim of making every flight so accurate that the chances of a crash are one in a billion.”
Compounding: Is it Coming of Age?
The WC managed care market has generally viewed the treatment method of Rx compounding through the lens of its negative impact to cost for treating chronic pain without examining fully the opportunity to utilize “best practice” prescription compounds to help combat the opioid epidemic this nation faces. IPS stands on the front lines of this opioid battle every day making a difference for its clients.
After a shaky start cost-wise, prescription drug compounding is turning the corner in managing chronic pain without the risk of opioid addiction. A push from forward-thinking states and workers’ compensation PBMs who have the networks and resources to manage it is helping, too.
Prescription drug compounding has been around for more than a decade, but after a rocky start (primarily in terms of cost), compounding is finally coming into its own as an effective chronic pain management strategy – and a worthy alternative for costly and dangerous opioids – in workers’ compensation.
According to Greg Todd, CEO and founder of Integrated Prescription Solutions Inc. (IPS), a Costa Mesa, Calif.-based pharmacy benefit manager (PBM) for the workers’ compensation and disability market, one reason compounding is beginning to hit its stride is because some states have enacted laws to manage it more effectively. Another is PBMs like IPS have stepped up and are now managing compound drugs in a much more proactive manner from an oversight perspective.
By definition, compounding is a practice through which a licensed pharmacist or physician (or, in the case of an outsourcing facility, a person under the supervision of a licensed pharmacist) combines, mixes, or alters ingredients of a drug to create a medication tailored to the needs of an individual patient.
During that decade, Todd explains, opioids have filled the chronic pain management needs gap, bringing with them an enormous amount of problems as the ensuing addiction epidemic sweeping the nation resulted in the proliferation and over-consumption of opioids – at a staggering cost to both the bottom line and society at large.
As an alternative, compounded topical cream formulations also offer strong chronic pain management but have limited side effects and require much reduced dosage amounts to achieve effective tissue level penetration. In fact, they have a very low systemic absorption rate.
Bottom line, compounding provides prescribers with an excellent alternative treatment modality for chronic pain patients, both early and late stage, Todd says.
Time for Compounding Consideration
That scenario sets up the perfect argument for compounding, because for one thing, doctors are seeking a new solution, with all the pressure and scrutiny they’re receiving when trying to solve people’s chronic pain problems using opioids.
Todd explains the best news about neuropathic pain treatment using compounded topical analgesic creams is the results are outstanding, both in terms of patient satisfaction in VAS pain reduction but also in reduction potentially dangerous side effects of opioids.
The main issue with some of the early topical creams created via compounding was their high costs. In the early years, compounding, which does not require FDA approval, had little oversight or controls in place. But in the past few years, the workers compensation industry began to take notice of the solid science. At the same time, medical providers also were seeing the same science and began writing more prescriptions for compounding – which also offers them a revenue stream.
This is where oversight and rigor on the part of a PBM can make a difference, Todd says.
“You don’t let that compounded drug get dispensed when you’re going to pay for it without having a chance to approve it,” Todd says.
Education is Critical
At the same time, there is the growing, and genuine, need to start educating the doctors, helping them understand how they can really deliver quality pain management to a patient without gouging the system. A good compounding specialty pharmacy network offering tight, strict rules is fundamental, Todd says. And that means one that really reaches out to work with the doctors that are writing the prescriptions. The idea is to ensure that the active ingredients being chosen aren’t the most expensive sub-components because that unnecessarily will drive the cost of overall compound “through the ceiling.”
IPS has been able to mitigate costs in the last couple years just by having good common sense approach and a lot of physician outreach. Working with DermaTran Health Solutions and its national network of compounding pharmacies, IPS has been successfully impacting the cost while not reducing the effectiveness of a compounded prescription.
In Colorado, which has cracked down on compounding profiteering, Legislative change demanded no compound could be more than $350.00 period. What is notable, in an 18-month window for one client in Colorado, IPS had 38 compound prescriptions come through the door and each had between 4 and 7 active ingredients. Through its physician education efforts, IPS brought all 38 prescriptions down 3 active ingredients or less. IPS also helped patients achieve therapeutic success (and with medical community acceptance). In that case, the cost of compound prescriptions was down to an average of $350, versus the industry average of $788. Nationwide IPS has reduced the average cost of a compound prescription to $478.00.
Todd says. “We’ve still got a way to go, but we’ve made amazing progress in just the past couple of years on the cost and effective use of compound prescriptions.”
For more information on how you can better manage your costs for compound prescriptions, please call IPS at 866-846-9279.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with IPS. The editorial staff of Risk & Insurance had no role in its preparation.