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Aviation Woes

Coping with Cancellations

Could a weather-related insurance solution be designed to help airlines cope with cancellation losses?
By: | April 23, 2014 • 4 min read

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.”

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at
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Risk Management

Tales of an Aviation Risk Manager

Faced with an abrupt change in circumstances, Chris Thorn rose to the challenge.
By: | September 11, 2014 • 9 min read

Aviation broker David Ekes remembers very well the moment months of hard work flew out the window.

It was 30 minutes before the autumn 2010 renewal meetings between Southwest Airlines Co. and the London insurance markets when the Willis aviation practice brokers and Southwest Airlines’ risk manager Chris Thorn received news that would have unnerved a lesser team of professionals.


The group was standing in the foyer of Willis’ global headquarters in London when Southwest’s treasurer turned to them and said the company would announce in five minutes its purchase of AirTran Airways.

At that moment, practically every line of the renewal documentation the Southwest risk management team held in their briefcases became meaningless. The team had carefully prepared its renewal pitch on what had been Southwest’s traditional business model, one which stressed organic growth, not growth through acquisitions.

And now, the Southwest team was going to announce the acquisition of an Orlando, Fla.-based low-cost competitor for $1.4 billion.

“It was humorous to the market,” said Ekes, an executive vice president for global aviation for Willis.

“We told them, ‘Look we spent weeks preparing this thing and I guess you can use this as a coaster now,’ ” Ekes said.

It may have been shocking and humorous, but to the quick-witted Thorn and his longstanding team of brokers, the acquisition of AirTran was also an insurance opportunity.

“The one thing in business in good times and bad they need accountants, so all of a sudden, I became an accountant.” − Chris Thorn, senior manager, payments and risk, for Southwest Airlines

“We knew that this was going to be a great opportunity to try to save some money on our aviation placement,” Thorn said.

In short order, Thorn and his risk management partners created the first savings for the merged airline. AirTran and Southwest went into the market as a joint placement. That resulted in lower pricing for both sets of risk exposures.

AirTran, which was founded back in 1992 as ValueJet Airlines, had grown into an airline serving 25 million passengers a year to and from 70 cities coast to coast. At the time of the merger in 2010, Air Tran was offering 700 flights a day, and employing more than 8,500 people. Its safety record was very good.

“It also helped that AirTran was a very good risk as well,” Thorn said.

Southwest, with more than 3,300 flights a day, 37,000 employees, and 88 million passengers carried in 2010, remains the pre-eminent success story in the low-fare airline category.

“The only reason their rates were higher than ours was that they didn’t have our size and they didn’t have the long history we had,” Thorn said.

Southwest, founded in 1967 as Air Southwest Co., did have year after year of good results to show for itself, and its underwriters well knew that. But that day in the Willis foyer was saved for another reason that has less to do with numbers that can be set down on a page.

Savings were achieved because of the intangibles that Chris Thorn brings to his work. As much as anything else, his long-time brokers said, he is a risk manager that has a deep understanding of the strategic value of relationships.

“I would argue that really pays off in the long term,” said Garrett Hanrahan, CEO of Willis Global Aviation, Americas.

“When something happens or there is a loss, those insurers or those brokers, or whomever is involved in the transaction take great pride at the end of the day that Chris and Southwest Airlines get exactly what they deserve,” Hanrahan said.

It’s true that in the successes that Chris Thorn has achieved, he has two brands working for him: the respected brand of Southwest and the brand and reputation of Chris Thorn, which he has built in 12 years as an aviation risk manager.


That reputation is built on having smarts, but not hitting people over the head with how smart he is, on being a great listener, and on placing a premium on long-term relationships and getting long-term value.

“Some people, when you interact with them, they need to prove to the other party that they know something,” said Peter R. Taffae, a Los Angeles-based directors’ and officers’ specialist and managing director of Executive Perils Inc.

Peter Taffae, managing director, ExecutivePerils

Peter Taffae, managing director, ExecutivePerils

“He has never been that way. He is a great listener and he asks great questions that always get to the heart of the issue,” Taffae said.

The Beginnings

Like many who have ended up in positions of responsibility in insurance and risk management, Thorn didn’t set out to become a risk manager.

His father headed up the accounting department at the University of Arkansas in Fayetteville, Ark. When Chris went off to school, he didn’t think he wanted to follow in his father’s footsteps. He initially had his heart set on engineering.

But calculus has a way of deterring people, intimidating them perhaps, and Chris, like many of us, didn’t take to that discipline. So he headed for a business degree. But there, another twist of fate occurred that would change his flight path.

He was an undergraduate in Fayetteville on Oct. 19, 1987, when Black Monday struck. The crash of the U.S. and global stock markets that wiped more than 20 percent from the value of the Dow Jones Industrial Average by the end of that month had a domino effect on young people who were graduating with business degrees.

“I saw all of these folks who had job offers have them taken away, and that had a huge impact,” Thorn said.

Thorn was about to get one of his great first lessons in pragmatism. Yes, he had told himself he wasn’t keen on doing what his father did, but that’s what he ended up doing.

“The one thing in business in good times and bad they need accountants, so all of a sudden, I became an accountant,” Thorn said.

Thorn turned a senior year internship in the accounting department at Tyson Foods into a job offer from Coopers & Lybrand, then one of the Big Eight accounting firms. But he preferred working as part of a company’s internal accounting team to working as an accounting service provider, so he eventually went back to working at Tyson Foods.

He was five years into his job as an internal auditor at Tyson when a friend who was relocating to Dallas told him about a job interview she had at Southwest Airlines. The company was looking for an internal auditor and did she know anybody? She knew somebody.

Southwest Airlines' Chris Thorn depends on solid, long-term relationships

Southwest Airlines’ Chris Thorn depends on solid, long-term relationships

Thus it was that in 1996, Thorn packed his bags for Dallas, where he spent a year and half in the internal auditing department at Southwest, before moving over to the fixed assets department.

In 2000, Southwest’s then-treasurer Laura Wright was looking to create a full-time risk management position. There was Thorn, already putting his analytical accounting skills to work for the company. He applied for the job of risk manager and got it.

In doing so, he had already put himself on his current path, using his relationships with his brokers to learn the business. “I did know the brokers because of working with them as the manager of fixed assets accounting and I knew that they were very friendly and knowledgeable and willing to help me,” Thorn said.

Thorn and Innovation

He was also looking for a challenge and a challenge was what he got.

Within a year of Thorn becoming an aviation risk manager, terrorists would fly commercial jets into the World Trade Center and the Pentagon, and aviation insurance would be turned upside down.

At dawn on Sept. 11, 2001, the global aviation premium stood at just under $2 billion, Thorn said. Before the day was over, the reserves had shot up to $4.5 billion. War risk coverage, which for the most part had been thrown in for free as a policy endorsement, was cancelled immediately for all airlines, worldwide.

“That becomes very problematic because it’s not coverage that you want to have it’s coverage that you are required to have,” Thorn said.

Thorn and his fellow aviation risk managers banded together and with the help of their general counsels, drafted language for war risk hull and liability coverage backed by the U.S. government. That coverage became part of the Air Transportation Safety and System Stabilization Act, which was passed by Congress before the end of September 2001.


Southwest’s lead insurer at the time had attempted to reinstate a layer of war risk coverage that was priced at $1.25 per revenue passenger mile. Perhaps unintentionally, the formula penalized an airline like Southwest, which flies tens of millions of passengers relatively shorter distances. Average aircraft trip length is 658 miles, or 1 hour, 55 minutes, according to the airline.

“All it was was an allocation on all the airlines in the world to collect a large sum of cash quickly to pay these claims,” Thorn said.

Southwest replaced the incumbent carrier as lead and instead took on a carrier that it felt better understood its business model.

That replaced carrier has proven to be the exception in Chris Thorn’s long risk management tenure at Southwest.

“We have pretty much had a longstanding partnership with all of the insurance companies that we have worked with,” Thorn said. And he has had to innovate at times to keep those relationships.

When the credit crunch threatened to wreck AIG in 2008, Thorn and his brokering partners came up with a solution to keep AIG as a carrier on Southwest’s program.

Dubbed the “supercontinuity option,” their innovation, for pennies on the directors’ and officers’ premium dollar, gave the insured the option of switching directors’ and officers’ coverage to a backup carrier if the primary carrier on the insured’s first directors’ and officers’ layer suffered a crippling ratings downgrade. The solution was designed specifically to address AIG’s instability at the time.

“I felt it allowed us to stick by AIG and we have a very good relationship with AIG to this day,” Thorn said.

Greg LeJune, partner and president of commercial property/casualty of Catto & Catto LLP, an Assurex Global partner based in San Antonio, Texas, recalls the same sense of reasonableness governing Thorn when Southwest sought to resolve a business loss claim due to Hurricane Katrina at the New Orleans airport.

“We could only get so far with real data and we had to settle the claim based on some assumptions,” LeJune recalled. He said Thorn allowed him to go forward and settle a sizable claim where others might have balked due to the absence of hard data.

“He was reasonable,” LeJune said.

“He understood that there were going to be limitations on the facts,” he said.

LeJune’s partner said the fact that Thorn didn’t set out to be in risk management must be aiding him.

“He didn’t come into the job with some preconceived notions about how he was supposed to do the job,” said Jaimie Hayne, the CEO of Catto & Catto.

“I felt it allowed us to stick by AIG and we have a very good relationship with AIG to this day.” − Chris Thorn, senior manager, payments and risk for Southwest Airlines

“We were really able to work together and work on that relationship and figure out where each other’s strengths and weaknesses are and it has worked out beautifully,” Hayne said.


The roots of Thorn’s abilities as a problem solver, Hayne said, may be his understanding and compassion for his fellow professionals, and their personal and professional limitations.

“At the end of the day it’s Chris’ view that everybody is trying to do the right thing. It’s just helping everybody get to that spot,” Hayne said.

“He realizes that everybody has got struggles and everybody has people that they report to, and because of his experience he understands the political dynamics between companies and the decision making process,” Hayne said.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at
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Sponsored: Lexington Insurance

The Re-Invention of American Healthcare

Healthcare industry changes bring risks and opportunities.
By: | September 15, 2014 • 5 min read

Consolidation among healthcare providers continues at a torrid pace.

A multitude of factors are driving this consolidation, including the Affordable Care Act compliance, growing costs and the ever-greater complexity of health insurance reimbursements. After several years of purchasing individual practices and regional hospital systems, the emergence of the mega-hospital system is now clear.

“Every month, one of our clients is either being bought or buying someone — and the M&A activity shows no signs of slowing down,” said Brenda Osborne, executive vice president at Lexington Insurance Co.

This dramatic change in the landscape of healthcare providers is soon to be matched by equally significant changes in patient behavior. Motivated by growing out-of-pocket costs and empowered with new sources of information, the emergence of a “healthcare consumer” is on the horizon.

Price, service, reputation and, ultimately, value are soon to be important factors for patients making healthcare decisions.

Such significant changes bring with them new and challenging risks.

Physician integration

Although physicians traditionally started their own practices or joined medical groups, the current climate is quite the opposite. Doctors are now seeking out employment by health systems. Wages are guaranteed, hours are more stable, vacations are easier to take, and the burdens of running a business are gone.

“It’s a lot more of a desirable lifestyle, particularly for the younger generation,” said Osborne.

Brenda Osborne discusses the changing healthcare environment and the risks and opportunities to come.

Given the strategic importance of successfully integrating acquired practices into a larger healthcare system, hospitals are rightfully focused on how best to keep doctors happy, motivated and focused on patient safety.

A key issue that many hospitals struggle with is how to provide effective liability insurance for their doctors. Physicians who previously owned their practice are accustomed to a certain type of coverage and they expect that coverage to continue.

Even when operators find comparable liability insurance solutions for their doctors, getting buy-in from their staff is often an additional hurdle to overcome.

“Physicians listen to two things — physician leaders and data,” said Osborne. “That’s why Lexington provides assessments that utilize deep data analysis, combined with providing insights from leading doctors to help explain trends and best practices.

“In addition, utilizing benchmarks against peers helps to identify gaps in best practices. It’s a very powerful approach that speaks to doctors in a way that will help them improve their risk.”

Focusing on the “continuum of care”

There’s been a fundamental shift in how healthcare providers care for patients: Treatment is becoming more focused on a patient’s overall health status and related needs.

SponsoredContent_LexA cancer patient, for example, should have doctors in a number of specialties communicating and working together toward a positive patient outcome. But that means a change in thinking: Physicians need to work collaboratively with one another — not easy for individuals or groups that are used to being independent. Healthcare is a team sport.

“If there isn’t strong communication, strong leadership, and the recognition of proper treatment procedures between physicians, healthcare providers can increase the risk of error,” said Osborne. “The provider has got to treat the whole patient rather than each individual condition.”

That coordination must extend from inpatient to outpatient, especially since the ACA has led to a rapid increase in patients being treated at outpatient clinics, or via home health or telehealth to reduce the cost of inpatient care

“Home health is going be a growing area in the future,” Osborne continued. “Telehealth will become an effective and efficient way of managing and treating patients in their home. A patient might have a nurse come in and help the healthcare provider communicate with a physician through an iPad or computer. The nurse can also convey assessment findings to the physician.”

Metrics matter more than ever

Patients have not always thought of themselves as healthcare consumers, but that’s changing dramatically as they pay more out of pocket for their own healthcare. At the same time, there’s an increase in metrics and data available to the public — and healthcare consumers are drawing upon those metrics more and more when making choices that affect their health.

SponsoredContent_Lexington“Consumers are going to start measuring physicians against physicians, healthcare systems against healthcare systems. That competition will force everyone to improve the quality of care.”
– Brenda Osborne, Executive Vice President, Lexington Insurance

Think about all the research a consumer does before buying a car. Which dealership has the best price? Who provides the best service? Who’s offering the best financing deal?

“Do patients do that with physicians? No,” said Osborne. “Patients choose physicians through referrals from friends or health plans with minimal information. Patients may be putting their lives in the physicians’ hands and not know their track record.

That’s all going to change as patients’ use of data becomes more widespread. There are many web based resources to find information on physicians.

“Consumers are going to start measuring physicians against physicians, healthcare systems against healthcare systems,” said Osborne. “That competition will force everyone to improve the quality of care.”

Effective solutions are driven by expertise and vision

The rapidly evolving healthcare space requires all healthcare providers to find ways to cut costs and focus on patient safety. Lexington Insurance, long known as the leading innovative and nimble specialty insurer, is at the forefront in providing clients cutting-edge tools to help reduce costs and healthcare exposures.

These tools include:

  • Office Practice Risk Assessment: To support clients as they acquire physician practices, Lexington developed an office practice assessment tool which provides a broad, comprehensive evaluation of operational practices that may impact risk. The resulting report, complete with charts, graphs and insights, includes recommendations that can help physicians reduce risk related to such issues as telephone triage, lab results follow-up and medication management. .
  • Best Practice Assessments: High risk clinical areas such as emergency departments (ED) and obstetrics (OB) can benefit significantly from external, objective, evidence-based assessments to identify gaps and assure compliance with best practices. In addition to ED and OB, Lexington can provide a BPA for peri-operative care, prevention of healthcare-acquired infections, and nursing homes. All assessments result in a comprehensive report with recommendations for improvement and resources along with consultative assistance and support. .
  • Continuing Education: In an effort to improve knowledge, decrease potential risk and support healthcare providers in the use the most current tools and techniques, Lexington provides Continuing Medical Education credits at no cost to hospitals or their physicians.
  • Targeting the Healthcare Consumer: With Medicare reimbursement impacted by patient-satisfaction surveys, assuring a positive patient experience is more critical than ever. Lexington helps hospitals understand and improve the patient experience so they can continue to earn the trust of healthcare consumers while preserving their good reputation. .

To learn more about Lexington Insurance’s scope and depth of the patient safety consulting products and services healthcare solutions, interested brokers may visit their website.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.

Lexington Insurance Company, an AIG Company, is the leading U.S.-based surplus lines insurer.
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