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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
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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 riskletters@lrp.com.
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Danger in the Air

Aviation Pricing up Sharply

Worldwide losses could top $600 million, but impact on US airlines is muted.
By: | October 15, 2014 • 3 min read
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The horrors of airline disasters have been flashing on cable news for 24 hours, seven days a week, for months.

Four months ago, Malaysian Airlines Flight MG370 disappeared en route to Beijing with 239 passengers. Then on July 17, pro-Russian rebels apparently blasted Malaysian Airlines Flight MH17 out of the sky over eastern Ukraine, killing all 298 passengers on board.

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While The Guardian asked the legitimate question of whether Malaysian Airlines will survive the double-header disasters, the aviation insurance industry on the whole appears to be on solid ground.

“For the most part is, there hasn’t been a real knee-jerk reaction,” said Garrett Hanrahan, U.S. aviation practice leader for Marsh in Dallas. “The market has been rational in the way that it has approached what has happened.”

That’s saying something, given what the market is facing.

The war hull market takes in $60 million in worldwide premium but is looking at 10 times that in losses from recent events, estimated Hanrahan’s colleague, Brian Glod, Marsh’s U.S. airline practice leader in New York.

That includes paying out the full property value of MH17 as well as half of the missing Malaysian plane (with all-risk aviation taking the other half; common practice in these “unknown cause” scenarios).

Video: This report from the Canadian Broadcasting Corp. looks at how Malaysia Airlines Flight MH17 ended up flying in the volatile Eastern Ukraine region.

Then, there’s the biggest event from a monetary standpoint: a two-day battle between rebel groups in July that destroyed up to 12 aircraft at Tripoli’s airport in Libya. This event’s total losses could be upward of $500 million, Glod said.

While war hull underwriters may not be panicking, as Hanrahan suggested, they are looking to collect.

Paul Tuhy, head of XL’s Global Aviation business, reported he’s heard of rate increases in the market of 300 percent to 1,000 percent.

The other aviation coverage impacted is primary hull and liability, and underwriters there can be expected to recover losses in upcoming premiums. They’re also getting hit with the July 24 crash of Air Algerie Flight 5017, where terrorism was ruled out, and the July 23 crash of TransAsia Flight GE222, mostly likely caused by weather.

“I do think the market will react with rate increases,” Tuhy said, indicating it’s been a soft market looking for a rationale to pivot.

Still, underwriters aren’t panicking because, as A.M. Best reported in a briefing on MH-17, no ratings actions will result from the losses.

That, and the competitiveness in the primary aviation market, means ample availability.

“There still is an enormous amount of capacity in the aviation insurance marketplace, and that is keeping a lid on the pot,” said Hanrahan, echoing the conclusions of the Best report.

Airlines appear to be handling the spate of incidents in stride as well. Recent news reports (such as this article in The Economist) have made much of airlines’ decisions to reroute (or not reroute) flights away from Ukraine and other war zones.

These decisions, said Glod, are coming from senior management, well above the risk manager’s head.

But risk managers will be the ones asked by underwriters about flight paths and whether their planes will come close to hotspots.

“They’re asking those questions now,” Glod said, of underwriters.

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The result could be a tiered underwriting approach, Hanrahan said, where insurers will break down operators’ risk geographically — where do they fly to, over and from?

In such a system, U.S. operators — which are “extremely diligent and cautious,” said Glod — most likely will not pay a disproportionate amount of the rate increases.

XL confirmed that it has been asking about plane flight paths, said Tuhy.

These terrible incidents do not happen very often, he said, but “but when they do happen, they’re bad.”

Matthew Brodsky is editor of Wharton Magazine. He can be reached at riskletters@lrp.com.
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Sponsored: Helmsman Management Services

Six Best Practices For Effective WC Management

An ever-changing healthcare landscape keeps workers comp managers on their toes.
By: | October 15, 2014 • 5 min read

It’s no secret that the professionals responsible for managing workers compensation programs need to be constantly vigilant.

Rising health care costs, complex state regulation, opioid-based prescription drug use and other scary trends tend to keep workers comp managers awake at night.

“Risk managers can never be comfortable because it’s the nature of the beast,” said Debbie Michel, president of Helmsman Management Services LLC, a third-party claims administrator (and a subsidiary of Liberty Mutual Insurance). “To manage comp requires a laser-like, constant focus on following best practices across the continuum.”

Michel pointed to two notable industry trends — rises in loss severity and overall medical spending — that will combine to drive comp costs higher. For example, loss severity is predicted to increase in 2014-2015, mainly due to those rising medical costs.

Debbie discusses the top workers’ comp challenge facing buyers and brokers.

The nation’s annual medical spending, for its part, is expected to grow 6.1 percent in 2014 and 6.2 percent on average from 2015 through 2022, according to the Federal Government’s Centers for Medicare and Medicaid Services. This increase is expected to be driven partially by increased medical services demand among the nation’s aging population – many of whom are baby boomers who have remained in the workplace longer.

Other emerging trends also can have a potential negative impact on comp costs. For example, the recent classification of obesity as a disease (and the corresponding rise of obesity in the U.S.) may increase both workers comp claim frequency and severity.

SponsoredContent_LM“The true goal here is to think about injured employees. Everyone needs to focus on helping them get well, back to work and functioning at their best. At the same time, following a best practices approach can reduce overall comp costs, and help risk managers get a much better night’s sleep.”
– Debbie Michel, President, Helmsman Management Services LLC (a subsidiary of Liberty Mutual)

“These are just some factors affecting the workers compensation loss dollar,” she added. “Risk managers, working with their TPAs and carriers, must focus on constant improvement. The good news is there are proven best practices to make it happen.”

Michel outlined some of those best practices risk managers can take to ensure they get the most value from their workers comp spending and help their employees receive the best possible medical outcomes:

Pre-Loss

1. Workplace Partnering

Risk managers should look to partner with workplace wellness/health programs. While typically managed by different departments, there is an obvious need for risk management and health and wellness programs to be aligned in understanding workforce demographics, health patterns and other claim red flags. These are the factors that often drive claims or impede recovery.

“A workforce might have a higher percentage of smokers or diabetics than the norm, something you can learn from health and wellness programs. Comp managers can collaborate with health and wellness programs to help mitigate the potential impact,” Michel said, adding that there needs to be a direct line between the workers compensation goals and overall employee health and wellness goals.

Debbie discusses the second biggest challenge facing buyers and brokers.

2. Financing Alternatives

Risk managers must constantly re-evaluate how they finance workers compensation insurance programs. For example, there could be an opportunity to reduce costs by moving to higher retention or deductible levels, or creating a captive. Taking on a larger financial, more direct stake in a workers comp program can drive positive changes in safety and related areas.

“We saw this trend grow in 2012-2013 during comp rate increases,” Michel said. “When you have something to lose, you naturally are more focused on safety and other pre-loss issues.”

3. TPA Training, Tenure and Resources

Businesses need to look for a tailored relationship with their TPA or carrier, where they work together to identify and build positive, strategic workers compensation programs. Also, they must exercise due diligence when choosing a TPA by taking a hard look at its training, experience and tools, which ultimately drive program performance.

For instance, Michel said, does the TPA hold regular monthly or quarterly meetings with clients and brokers to gauge progress or address issues? Or, does the TPA help create specific initiatives in a quest to take the workers compensation program to a higher level?

Post-Loss

4. Analytics to Drive Positive Outcomes, Lower Loss Costs

Michel explained that best practices for an effective comp claims management process involve taking advantage of today’s powerful analytics tools, especially sophisticated predictive modeling. When woven into an overall claims management strategy, analytics can pinpoint where to focus resources on a high-cost claim, or they can capture the best data to be used for future safety and accident prevention efforts.

“Big data and advanced analytics drive a better understanding of the claims process to bring down the total cost of risk,” Michel added.

5. Provider Network Reach, Collaboration

Risk managers must pay close attention to provider networks and specifically work with outcome-based networks – in those states that allow employers to direct the care of injured workers. Such providers understand workers compensation and how to achieve optimal outcomes.

Risk managers should also understand if and how the TPA interacts with treating physicians. For example, Helmsman offers a peer-to-peer process with its 10 regional medical directors (one in each claims office). While the medical directors work closely with claims case professionals, they also interact directly, “peer-to-peer,” with treatment providers to create effective care paths or considerations.

“We have seen a lot of value here for our clients,” Michel said. “It’s a true differentiator.”

6. Strategic Outlook

Most of all, Michel said, it’s important for risk managers, brokers and TPAs to think strategically – from pre-loss and prevention to a claims process that delivers the best possible outcome for injured workers.

Debbie explains the value of working with Helmsman Management Services.

Helmsman, which provides claims management, managed care and risk control solutions for businesses with 50 employees or more, offers clients what it calls the Account Management Stewardship Program. The program coordinates the “right” resources within an organization and brings together all critical players – risk manager, safety and claims professionals, broker, account manager, etc. The program also frequently utilizes subject matter experts (pharma, networks, nurses, etc.) to help increase knowledge levels for risk and safety managers.

“The true goal here is to think about injured employees,” Michel said. “Everyone needs to focus on helping them get well, back to work and functioning at their best.

“At the same time, following a best practices approach can reduce overall comp costs, and help risk managers get a much better night’s sleep,” she said.

To learn more about how a third-party administrator like Helmsman Management Services LLC (a subsidiary of Liberty Mutual) can help manage your workers compensation costs, contact your broker.

Email Debbie Michel

Visit Helmsman’s website

@HelmsmanTPA Twitter

Additional Insights 

Debbie discusses how Helmsman drives outcomes for risk managers.

Debbie explains how to manage medical outcomes.

Debbie discusses considerations when selecting a TPA.

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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 wholly owned subsidiary 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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