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> This occurred just four months after 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.”
Advocacy: The Impact of Continuous Triage
In the world of workers’ compensation, timing is everything. Many studies have shown that the earlier a workplace incident or injury is acted upon, the more successful the results*. However, there is further evidence indicating there is even more of an impact seen when a claim is not only filed promptly, but also effective triage is conducted and management of the claim takes place consistently through closure.
Typically, every program incorporates a form of early intervention. But then what? While it is common knowledge that early claims reporting and medical treatment are the most critical parts of a claim, if left alone after management, an injured worker could – and often does – fall through the cracks.
All Claims Paths are Not Created Equal
Even with early intervention and the best intentions of the adjuster, things can still go wrong. What if we could follow one injury down two paths, resulting in two entirely different outcomes? This case study illustrates the difference between two claims management processes – one of proactive, continuous claims triage and one of inactivity after initial intervention – and the impact, or lack thereof, it can have on the outcome of a claim. By addressing all indicators, effective triage can drastically change the trajectory of a claim.
While working at a factory, David, a 40-year-old employee, experienced sudden shoulder pain while lifting a heavy box. He reported the incident to his supervisor, who contacted their 24/7 triage call center to report the incident. After speaking with a triage nurse, the nurse recommended he go to an occupational medicine clinic for further evaluation, based on his self-reported symptoms of significant swelling, a lack of range of motion and a pain level described as greater than “8.”
The physician diagnosed David with a shoulder sprain and prescribed two weeks of rest, ice and prescription strength ibuprofen. He restricted David from any lifting over his head.
By all accounts, early intervention was working. Utilizing 24/7 nurse triage, there was no lag time between the incident and care. David received timely medical attention and had a treatment plan in place within one day.
A critical factor in any program is a return to work date, yet David was not given a return to work date from the physician at the occupational medicine clinic; therefore, no date was entered in the system.
One small, crucial detail needs just as much attention as when an incident is initially reported. What happens the third week of a claim is just as important as what happens on the day the injury occurs. Involvement with a claim must take place through claim closure and not just at initial triage.
The Same Old Story
After three weeks of physical therapy, no further medical interventions and a lack of communication from his adjuster, David returned to his physician complaining of continued pain. The physician encouraged him to continue physical therapy to improve his mobility and added an opioid prescription to help with his pain.
At home, with no return to work in sight, David became depressed and continued to experience pain in his shoulder. He scheduled an appointment with the physician months later, stating physical therapy was not helping. Since David’s pain had not subsided, the physician ordered an MRI, which came back negative, and wrote David a prescription for medication to manage his depression. The physician referred him to an orthopedic specialist and wrote him a new prescription for additional opioids to address his pain…
Costly medical interventions continued to accrue for the employer and the surmounting risk of the claim continued to go unmanaged. His claim was much more severe than anyone knew.
What if his injury had been managed?
A Model Example
Using a claims system that incorporated a predictive modeling rules engine, the adjuster was immediately prompted to retrieve a return to work date from the physician. Therefore, David’s file was flagged and submitted for a further level of nurse triage intervention and validation. A nurse contacted the physician and verified that there was no return to work date listed on the medical file because the physician’s initial assessment restricted David to no lifting.
As a result of these triage validations, further interventions were needed and a telephonic case manager was assigned to help coordinate care and pursue a proactive return to work plan. Working with the physical therapist and treating physician resulted in a change in David’s medication and a modified physical therapy regimen.
After a few weeks, David reported an improvement in his mobility and his pain level was a “3,” thus prompting the case manager’s request for a re-evaluation. After his assessment, the physician lifted the restriction, allowing David to lift 10 pounds overhead. With this revision, David was able to return to work at modified duty right away. Within six weeks he returned to full duty.
With access to all of the David’s data and a rules engine to keep adjusters on top of the claim, the medical interventions that were needed for his recovery were validated, therefore effectively managing his recovery by continuing to triage his claim. By coordinating care plans with the physician and the physical therapist, and involving a case manager early on, the active management of David’s claim enabled him to remain engaged in his recovery. There was no lapse in communication, treatment or activity.
After 24/7 nurse triage is conducted and an injured worker receives initial care, CorVel’s claims system, CareMC, conducts continuous triage of all data points collected at claim inception and throughout the life of a claim utilizing its integrated rules engine. Predictive indicators send alerts to prompt the adjuster to take action when needed until the claim is closed – not just at the beginning of the claim.
This predictive modeling tool flags potentially complex claims with the risk for high exposure, marking claims that need intervention so that CorVel can assign appropriate resources to mitigate risk.
Claims triage is constant – that is the necessary model. Even on an adjuster’s best day, humans aren’t perfect. A rules engine helps flag things that people can miss. A combination of predictive systems and human intervention ensures claims management is never stagnant – that there is no lapse in communication, activity or treatment. With an advocacy team in the form of an adjuster empowered by a powerful rules engine and a case manager looking out for the best care, injured employees remain engaged in their recovery. By perpetuating patient advocacy, continuous triage reduces claim severity and improves claim outcomes, returning injured workers to the workforce and reducing payors’ risk.