The Gap in the Clouds
Cloud computing is integral to modern business. According to market research firm Gartner, the global cloud service industry will be worth $180 billion by 2015, while cloudhypermarket.com estimated a third of all IT expenditures in 2013 would be on cloud computing.
The cloud network is maintained by nearly 35,000 data centers (cloud service facilities containing physical servers), about 25,000 of which are located in the United States. These facilities are extremely well protected, employing the very best physical and cyber security systems, and are usually located in secretive locations away from obvious natural perils.
However, these facilities still require traditional property coverage to insure against risks including flood, fire, storm, earthquake, sabotage, civil commotion and terrorism. If one or more major cloud service facilities were damaged, service could be disrupted and data lost, with far-reaching economic implications for businesses that rely on the service.
Last year, Superstorm Sandy shut down data centers in Manhattan, while Amazon suffered two separate power outages at its Northern Virginia cloud facility forcing many popular websites including Netflix, Instagram and Pinterest offline. But it’s not just media outlets that suffer — thousands of businesses are now actively using the cloud for business purposes, with basic data storage only accounting for 13 percent of cloud usage, according to research firm IDC.
Despite growing reliance on the cloud, Florence Levy, senior vice president and head of Lockton’s Global Technology and Privacy Practice, believes there is a gap in the insurance market that could leave cloud users uninsured for lost data or business interruption in the event of a physical event damaging a cloud facility.
“Traditionally, property policies address physical triggers and harm, while cyber and even errors and omissions policies are intended to address non-physical triggers and economic damage,” she said. “In the event of a physical trigger causing non-physical harm, property underwriters and cyber underwriters will be left pointing fingers at each other.”
According to Jim Charron, Technology Practice leader for Zurich, it is possible to insure data under a property policy, although coverage language often doesn’t capture the entire exposure. “Some [policies] are very clear that they cover computing resources and will specifically state that the coverage includes voice, data and even video, while others are not,” he said. “There are requests for this exposure to be covered and underwriters are responding, but the wording isn’t always reflective of the exposures.”
Charron added that underwriting becomes even more complicated when data is being held by a third-party on behalf of potentially millions of clients.
“Traditional property and business interruption risks already existed for insureds who maintained their computing resources within their own buildings, but with the use of the cloud those risks are subject to equipment not owned by the insured. Once the risk has been transferred to another party the insurance needs to change along with that,” he said. “I think there is an opportunity for insurers to refresh their approach.”
“People are starting to realize this may be a bigger issue than we had previously allotted for in the last couple of years. Savvy clients are asking a lot of questions,” said Levy, adding that brokers are trying to encourage insurers to develop enhanced coverage to ensure cloud users’ data is properly insured.
“The market is trying to figure out a way to address this, whether it is some sort of ‘difference in conditions’ policy that sits above the property and cyber policies, or more collaboration between the property and cyber underwriters and brokers to come up with a more effective solution,” she said.
Levy admitted, however, that creating some kind of hybrid product would be very challenging for insurers. “Cyber and property are two very different coverages with different profitability standards and historical data sets. The most likely solution is an umbrella or difference in conditions policy rather than stretching either set of underwriters beyond their comfort zone,” she said.
Another major challenge is aggregation of risk, with tens of thousands of businesses potentially facing disruption if any of the leading cloud providers went down.
“What is the aggregated business interruption and property damage exposure of one or several of these facilities if they were attacked all at once or there was a large weather event?” asked Charron. “If a major facility is taken down it could have a dramatic impact on the insurance industry.”
When in Doubt, Sue
Cloud users may have another form of protection. Robert Parisi, Network Security and Privacy Practice leader at Marsh, who places E&O and professional liability (PL) risks for cloud service providers, believes providers are vulnerable to PL claims, even if interruption or loss of data was caused by a physical risk rather than negligence.
“I don’t think there are gaps in coverage. If a cloud provider is unable to provide their service, it is going to come back at them as a PL claim. The end user is not going to care one whit why the cloud provider wasn’t there when they needed them — they just know they have a contract and the provider didn’t honor it,” he said.
Accordingly, cloud providers have to ensure their E&O and PL policy wordings are airtight in their response to ‘act of God’ type risks or even deliberate physical sabotage and terrorism risks.
“From an end user’s perspective, the principal recovery vehicle is going to be that PL policy, so the cloud providers and their brokers need to look under the hood of their policies,” said Parisi. “The market has evolved and is getting better at providing solutions, and the coverage is fairly broad. It is up to the broker to be aware those solutions exist and stitch them together for [the cloud provider].”
Parisi said PL claims against cloud providers are common, particularly in the litigious United States where cloud users also have very high expectations — anything less than 24-hour service at optimal speed could result in a PL claim, particularly from users whose businesses rely on real-time data feeds, he said.
“Tech companies are regularly sued for failing to provide service or failing to render the service non-negligently. Tech is not perfect, and when it goes wrong, usually the first thing a client of a tech company is going to do is assume the tech provider must have done something wrong,” he said.
“Not only is the cloud provider going to be held to rendering the service and having the service functioning as intended, there is also an element of latency risk; clients want their service working now, on demand, and without any delays.”
In order for the cloud providers to ensure they get adequate coverage against such claims, they must demonstrate high levels of risk management including building redundancies into their systems so that if one facility is damaged, the data can be switched rapidly to another network or facility without being lost.
“One of the large tech companies runs an entirely parallel network right next to their production network so if anything happens they can switch their customers from the day-to-day network to the parallel redundant network in the blink of an eye,” said Parisi.
“That’s an extreme example – most providers don’t have a parallel network. But if they are going to guarantee 100 percent up-time they need to make sure they have the facilities that can do that — and if that means geographically separating their data centers then that is what must be done.”
When it comes to liability for data loss or service downtime, much hinges on the service level agreement between the two parties.
“This agreement defines what level of liability the provider assumes. In that contracting process the provider can say they will deliver their service but there are things outside of their control, and if those things prevent the service the user will have to live with that,” said Parisi. “That won’t always necessarily fly in the negotiation process — in which case the provider may put liquidated damages or limitations of liability clauses with pre-agreed settlements or caps on liability into the contract.”
Parisi added that one of the best things a cloud provider can do to limit their liability is to manage the expectations of the cloud user.
“The quickest way for someone to think the provider did something wrong is for the provider to overpromise,” he said, noting that startup cloud providers are most susceptible to this as they aggressively compete for business.
Ultimately, though, cloud users must take responsibility for their own data — particularly if it is critical to their business. “Cloud users should take it as incumbent upon them as part of their risk management policy to ensure they have their data backed up, and most of them probably do,” said Zurich’s Charron. “The rub is if they are creating new data all the time and there is value in the creation of this new data being generated. Identifying whether data is confidential or mission-critical can help the user understand how often they should back up their data.”
Parisi said cloud use should be treated with the same common sense as any other enterprise risk.
“If you’re relying solely on a third party for the sanctity and security of your data, you are probably making a lot of other mistakes in your business,” he said.
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.”
Achieving More Fluid Case Management
Risk management practitioners point to a number of factors that influence the outcome of workers’ compensation claims. But readily identifiable factors shouldn’t necessarily be managed in a box.
To identify and discuss the changing issues influencing workers’ compensation claim outcomes, Risk & Insurance®, in partnership with Duluth, Ga.-based Healthcare Solutions, convened an April roundtable discussion in Philadelphia.
The discussion, moderated by Dan Reynolds, editor-in-chief of Risk & Insurance®, featured participation from four tenured claims management professionals.
This roundtable was ruled by a pragmatic tone, characterized by declarations on solutions that are finding traction on many current workers’ compensation challenges.
The advantages of face-to-face case management visits with injured workers got some of the strongest support at the roundtable.
“What you can assess from somebody’s home environment, their motivation, their attitude, their desire to get well or not get well is easy to do when you are looking at somebody and sitting in their home,” participant Barb Ritz said, a workers’ compensation manager in the office of risk services at the Temple University Health System in Philadelphia.
Telephonic case management gradually replaced face-to-face visits in many organizations, but participants said the pendulum has swung back and face-to-face visits are again more widely valued.
In person visits are beneficial not only in assessing the claimant’s condition and attitude, but also in providing an objective ear to annotate the dialogue between doctors and patients.
“Oftentimes, injured workers who go to physician appointments only retain about 20 percent of what the doctor is telling them,” said Jean Chambers, a Lakeland, Fla.-based vice president of clinical services for Bunch CareSolutions. “When you have a nurse accompanying the claimant, the nurse can help educate the injured worker following the appointment and also provide an objective update to the employer on the injured worker’s condition related to the claim.”
“The relationship that the nurse develops with the claimant is very important,” added Christine Curtis, a manager of medical services in the workers’ compensation division of New Cumberland, Pa.-based School Claims Services.
“It’s also great for fraud detection. During a visit the nurse can see symptoms that don’t necessarily match actions, and oftentimes claimants will tell nurses things they shouldn’t if they want their claim to be accepted,” Curtis said.
For these reasons and others, Curtis said that she uses onsite nursing.
Roundtable participant Susan LaBar, a Yardley, Pa.-based risk manager for transportation company Coach USA, said when she first started her job there, she insisted that nurses be placed on all lost-time cases. But that didn’t happen until she convinced management that it would work.
“We did it and the indemnity dollars went down and it more than paid for the nurses,” she said. “That became our model. You have to prove that it works and that takes time, but it does come out at the end of the day,” she said.
The ultimate outcome
Reducing costs is reason enough for implementing nurse case management, but many say safe return-to-work is the ultimate measure of a good outcome. An aging, heavier worker population plagued by diabetes, hypertension, and orthopedic problems and, in many cases, painkiller abuse is changing the very definition of safe return-to-work.
Roundtable members were unanimous in their belief that offering even the most undemanding forms of modified duty is preferable to having workers at home for extended periods of time.
“Return-to-work is the only way to control the workers’ comp cost. It’s the only way,” said Coach USA’s Susan LaBar.
Unhealthy households, family cultures in which workers’ compensation fraud can be a way of life and physical and mental atrophy are just some of the pitfalls that modified duty and return-to-work in general can help stave off.
“I take employees back in any capacity. So long as they can stand or sit or do something,” Ritz said. “The longer you’re sitting at home, the longer you’re disconnected. The next thing you know you’re isolated and angry with your employer.”
“Return-to-work is the only way to control the workers’ comp cost. It’s the only way,” said Coach USA’s Susan LaBar.
Whose story is it?
Managing return-to-work and nurse supervision of workers’ compensation cases also play important roles in controlling communication around the case. Return-to-work and modified duty can more quickly break that negative communication chain, roundtable participants said.
There was some disagreement among participants in the area of fraud. Some felt that workers’ compensation fraud is not as prevalent as commonly believed.
On the other hand, Coach USA’s Susan LaBar said that many cases start out with a legitimate injury but become fraudulent through extension.
“I’m talking about a process where claimants drag out the claim, treatment continues and they never come back to work,” she said.
Social media, as in all aspects of insurance fraud, is also playing an important role. Roundtable participants said Facebook is the first place they visit when they get a claim. Unbridled posts of personal information have become a rich library for case managers looking for indications of fraud.
“What you can assess from somebody’s home environment, their motivation, their attitude, their desire to get well or not get well is easy to do when you are looking at somebody and sitting in their home,” said participant Barb Ritz.
As daunting as co-morbidities have become, roundtable participants said that data has become a useful tool. Information about tobacco use, weight, diabetes and other complicating factors is now being used by physicians and managed care vendors to educate patients and better manage treatment.
“Education is important after an injury occurs,” said Rich Leonardo, chief sales officer for Healthcare Solutions, who also sat in on the roundtable. “The nurse is not always delivering news the patient wants to hear, so providing education on how the process is going to work is helpful.”
“We’re trying to get people to ‘Know your number’, such as to know what your blood pressure and glucose levels are,” said SCS’s Christine Curtis. “If you have somebody who’s diabetic, hypertensive and overweight, that nurse can talk directly to the injured worker and say, ‘Look, I know this is a sensitive issue, but we want you to get better and we’ll work with you because improving your overall health is important to helping you recover.”
The costs of co-morbidities are pushing case managers to be more frank in patient dialogue. Information about smoking cessation programs and weight loss approaches is now more freely offered.
Managing constant change
Anyone responsible for workers’ compensation knows that medical costs have been rising for years. But medical cost is not the only factor in the case management equation that is in motion.
The pendulum swing between technology and the human touch in treating injured workers is ever in flux. Even within a single program, the decision on when it is best to apply nurse case management varies.
“It used to be that every claim went to a nurse and now the industry is more selective,” said Bunch CareSolutions’ Jean Chambers. “However, you have to be careful because sometimes it’s the ones that seem to be a simple injury that can end up being a million dollar claim.”
“Predictive analytics can be used to help organizations flag claims for case management, but the human element will never be replaced,” Leonardo concluded.