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
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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.

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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.

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“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 [email protected]
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Risk Insider: Eamonn Cunningham

Is Stand-Alone Drone Coverage Necessary?

By: | July 6, 2015 • 3 min read
Eamonn Cunningham is Chief Risk Officer for Scentre Group. He was chief risk officer of the Westfield Group, which was restructured in 2014, when he became CRO for Scentre. A member of the board of The Risk and Insurance Management Society Australasia Limited, he can be reached at [email protected]

You see an increasing amount of comment on the very topical subject of drone cover. Some skeptics might argue that there is an element of self-interest at play here on the part of those initiating or promoting the discussion on this subject.

However, let’s just assume that this is all driven by the very best of intentions with one purpose in mind, the common good, indeed a lofty ideal!

My real issue with this development is the concept of what I call the proliferation of insurance products. The example of the commentary around the so-called drone insurance cover, is a case in point.

If the pursuit of separate policies for everything new continues, the insurance industry runs the risk of been seen as simply the provider of narrowly defined risk capital commodities.

Why do we need to go through the time consuming and expensive process of developing this supposedly fit-for-purpose insurance product, when there can be equally effective options available at a far cheaper development cost?

If something falls from the sky and someone suffers a “loss” in the form of bodily injury and/or property damage, there are existing remedies available which invariably revolve around conventional insurance products.

Why should all of this not be available when the “something” just happens to be a drone? What makes this event so particularly special that the liability arising from it cannot be covered under existing insurance products, even if minor adaption of those solutions is required?

The real point here is to try to not make our current market risk-transfer mechanisms even more complex than they already are. The better practice might be to investigate, indeed stress-test current solutions wherever possible to see if they can be utilized as new risks arise, or existing ones evolve.

There are exceptions to this, those obvious examples when that new risk is so unique that conventional solutions will just not provide the comprehensive cover required, cyber risk being a case in point.

The real point here is to try to not make our current market risk-transfer mechanisms even more complex than they already are.

If the pursuit of separate policies for everything new continues, the insurance industry runs the risk of been seen as simply the provider of narrowly defined risk capital commodities.

We should, as an industry, take a good hard look at new risks and see whether the current insurance market solutions can (even with adaption) work. Let’s not pre-empt that process by hastily imposing exclusions on an existing product which only serve to increase the impetus to buy the new product.

Good risk management leadership in 2015 adds value to the organization it serves when its response to questions raised about risks associated with new ventures or opportunities is, “Why not?” as opposed to the traditional “NO.”

Surely carriers (in fact all participants in the insurance industry) should also adopt similar thinking. Why can’t the existing solutions be made to work?

This insight covered the prospect of drone insurance now coming our way. What next? Policies for risks arising from nano-technology, solar flares or even artificial intelligence?

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Sponsored: Helmsman Management Services

The Quality Assurance Journey

Helmsman TPA is changing the claims management game with their enhanced quality assurance process, a welcome departure from the industry standard checklist approach.
By: | August 3, 2015 • 5 min read
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Not too long ago, if you were planning a trip, you would buy a map or an atlas and draw out the route you would take. If you continued to drive this route repeatedly, you might discover better ways to avoid a heavily congested area or take advantage of a new highway.

Similarly, a third party administrator (TPA) draws on years of experience to develop best practices for claims handling, discovering better routes and avoiding areas of delay. Payers trust their TPA to formalize these best practices, and to develop a Quality Assurance (QA) program that helps ensure claims are effectively managed. Like a roadmap, a QA program tracks the journey to the desired destination.

Mark Siciliano defines a quality assurance program.

With today’s technology, a cumbersome map is replaced with a GPS; just follow the step-by-step instructions. Sometimes the technology works flawlessly, and other times, it doesn’t deliver the best route.

Likewise, many QA programs have developed a checklist mentality, listing the steps to take. Such QA programs typically involve a small team reviewing a limited number of claims to ensure that key standards are consistently applied. While important, this doesn’t necessarily guarantee claims are optimally handled, or uncover ways to improve claim workflows and performance.

Mark Siciliano explains how Helmsman’s QA approach differs from the industry’s standard “checklist” mentality.

A New Process

Helmsman Management Services LLC, a third-party claims administrator and a member of Liberty Mutual Insurance, began to re-examine its QA program with the help of its clients several years ago. In doing so, they developed a new methodology that is a welcome departure from robotic checklist behavior.

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“Our QA program dives deeper to find actionable ways we can improve claims outcomes, the performance of claims professionals, and the entire claims management process,” noted Mark Siciliano, vice president and managing director of Helmsman Management Services. “We conduct more in-depth reviews on a higher volume of claims – more than 80,000 each year – at key points in the lifecycle. We involve over 800 field claims professionals and engage individual claims handlers and their managers through an online dashboard that reports performance and highlights opportunities to improve performance through additional training and coaching.”

Mark Siciliano discusses the Helmsman approach to quality assurance.

The new approach to QA was successful, enabling Helmsman to improve the overall quality of its clients’ claims by eight points in 2014. In fact, 92.7 percent of the claims Helmsman managed met or exceeded the TPA’s service standards in the fourth quarter of 2014, up from 84.5 percent in the first quarter of that year.

“Re-engineering our QA program and moving it beyond the standard industry checklist approach took our claims management from really good to great,” said Siciliano. “And, it is helping us drive further improvements.”

One of the reasons for that improvement is Helmsman’s QA process keeps adjustors focused on what works best.

“We looked at the common characteristics of really great outcomes and worked backwards,” said Siciliano. “We found that when our claims professionals start with an empathetic approach, they are better able to connect with the injured employee and deliver better outcomes, both for the claimant and her or his employer.”

Like blindly following GPS instructions, a claims professional can easily fall into a pattern of completing tasks and forget that an injured person may be experiencing a very challenging time in their life. Helmsman trains its claims professionals to treat the injured worker as if they are dealing with a family member. It’s not just asking questions and moving through a checklist; it’s answering an injured worker’s questions, providing important information, and doing so with a level of compassion.

Once a conversation has begun and the injured worker is more at ease, the claims professional can ask questions beyond what might be in the process to really understand the injury, the individual, and the claim, and to find that best route to the ultimate destination of return to work. This inquisitive nature of the claims professional also allows for early discovery of any specific challenges in the claim – such as co-morbid conditions or psycho-social issues – paving the way for intervention to get the claim back on track.

“We call it humanistic common sense,” said Siciliano. “We know we have to ask the tough questions and protect our clients’ financial interests, but when we do so through a positive and supportive lens, it permeates throughout the entire process, facilitating the journey.”

Building a relationship with medical providers using this same approach can also assist the claim.

Helmsman_BrandedContent“Re-engineering our QA program and moving it beyond the standard industry checklist approach took our claims management from really good to great. And, it is helping us drive further improvements.”
— Mark Siciliano, Vice President and Managing Director, Helmsman Management Services

In the case of light duty restrictions, instead of ‘check’ and move on after the initial call with the treating physician, Helmsman asks for more details on what the injured worker can do, and helps the physician understand the claimant’s duties and the temporary jobs available. Helmsman might ask the doctor to join them for a site visit to better understand the work environment.

As a result, light duty jobs become gainful and meaningful work for the injured worker because they are tailored to their capabilities.

“We’re not just asking for medical information and work capacity; we’re actually working with our clients and the physicians to create a return-to-work environment that works for the injured worker, employer, and physician,” said Siciliano.

 

Evolution of Change

Helmsman_BrandedContentA QA program that delivers a high level of value to the employer and improves outcomes for the injured worker is just the beginning. QA is more than a program—it’s a process. Quality assurance programs are critical for tracking and improving performance. It’s a continuous cycle of training, learning, client feedback, and process improvement.

“Our enhanced QA program helps us better service our clients, but we know it’s an ongoing process,” said Siciliano. “Our continuous improvement process is built around the investment that we put in our people, systems, and technology. It’s also response to the changing landscapes around us, and how well we adapt to them.”

Mark Siciliano describes characteristics of effective quality assurance programs.

As a result, quality assurance programs are not working towards just a destination; they’re working towards the evolution of change, and how risk managers, brokers, and TPAs respond to it. The QA process becomes that journey.

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




Helmsman Management Services (HMS) helps better control the total cost of risk by delivering superior outcomes for workers compensation, general liability and commercial auto claims. The third party claims administrator – a member of Liberty Mutual Insurance – delivers better outcomes by blending the strength and innovation of a major carrier with the flexibility of an independent TPA.
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