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Vice President, Environmental
Markel Corp.
Red Bank, N.J.

A possible platform for an alternative energy underwriting strategy.

As a marine biologist, Mark Brown, vice president of Markel Corp.'s environmental division, often wondered if there was money to be made on marsh grass. Now as head of a large wholesaler's environmental operation, he does indeed make money on the processing of marsh grass. And algae. And used cooking oil. But not conventional energy exploration and production.

No, drilling for oil and gas is not exotic enough for Brown and Markel. He said that with a smile, but there is truth to the irony: Brown makes money providing blended, prepackaged, preapproved coverage for the fringe energy, biotech, and environmental entrepreneurs that no one else will write.

"When we started this group nine years ago," said Brown, "we were the only segmented program 100 percent catering to wholesale insurance. Also, we were the only ones using an ISO-based language that the brokers could understand, versus a scientific language."

The big innovation from Brown was the blended coverage to fit specialty energy, chemical and environmental risks. "We can give the insureds what they need straight out of the block--general liability, products pollution, contractor, product liability--everything blended without having to go back to get coverage approved," said Brown.

The money is in the fringes of alternative energy and reprocessing, he said. "Some guy is collecting waste oil and blending it to a BTU value and using it to fire a cement kiln. That is not unusual for us, but not something that the mainstream is going to be able to cover out of the box. All of a sudden there is a geothermal boom now. And people using aquaculture to grow algae to press for oil." For example, the Salton Sea, in south central California, has potential for algae farming. A recreational desert lake turned to a toxic stew, the Salton Sea has resisted rehabilitation for decades.

That is still experimental, but other alternative energy businesses are well established. "We wrote our first biodiesel risk in 2003. In those days it was some guy with a reactor in his garage. He was collecting maybe 100,000 gallons in about a $200,000-a-year business. For that we could collect a $25,000-a-year premium. Now with the price of oil that is close to a million-dollar operation and the big guys are happy to write it for a $5,000 premium. The correct price should be somewhere in between."

No matter. There are always more niche operations that need coverage. "The innovation at Markel is that they go into the risk and try to find a way to write it rather than a way to qualify or differentiate it," said Davis D. Moore, president of Worldwide Securities in Los Angeles. "We do business with almost all of their points of entry," he added. "They are one of our largest sources of production."

Brown's operation "has a very broad underwriting appetite," said Moore. "They have great form capabilities and probably the greatest flexibility in the market. Both of those are very important to us." The payoff, said Moore, is that Brown's innovative approach to writing converge has brought in more business.

--By Gregory DL Morris

Director
Aon
Chicago

Commodity price and operational risk spark risk evaluation approach for ERM in energy markets.

Rather than debate the merits of hedging versus insurance, Mike Giacobbe, a director in the Chicago offices of Aon Corp., has incorporated both of those as well as other risk considerations into an innovative enterprise risk management analysis approach.

"The idea of enterprise risk managment is an approach to quantify all risks," he said "For oil and gas companies, especially upstream firms in exploration and production, those risks include commodity price fluctuations, production volume variations, political risk around the world, and weather disruptions such as hurricanes."

Of course actuarial techniques have been around for ages, and banks have been modeling commodity prices for some time. Giacobbe's revelation was to combine risk assessment principles from different sectors and then develop a coherent model in which they could be brought to bear on ERM.

The original pilot project was completed three years ago, and dollar volume has grown tenfold today, with incremental improvements along the way, said Giacobbe. The next quantum change, version 2.0, is under development. The key to that will be an improved commodity price risk model that will be valid for a year or more. The risk-appetite analysis is available for a fee to both Aon clients and as a one-off third-party service to others.

Having cast the ERM net as wide as it could go, Giacobbe continues to work with clients to enlighten them. "We engaged him just to look at the risks for which we could buy insurance, but had chosen not to," said Stephen J. Foster, assistant treasurer for risk management at Anadarko Petroleum, based in the Woodlands, Texas, outside Houston.

Anadarko had undertaken a comprehensive enterprise risk management assessment after two major acquisitions.

"In a brain-storming session before the analysis began we discussed our biggest risk of all, commodity prices," Foster recalled. "All other risks paled compared to that. But we can't forecast that, the swings are too large, and it was not my department--we have a planning department for that. Mike said we could model commodity risk. I reminded him that was not the assignment. He countered that the project was to survey risk, and how can we leave out the biggest risk of all? So we brought in other senior managers, and Mike was able to convince them that we could model commodity risks and figure that into the overall risk-bearing capacity for the company."

In the end, said Foster, "we were able to incorporate commodity price modeling into our hedging strategy for our planning department to use, and my department was able to weigh that in our risk capacity."

"Mike's process makes a business case for whether to buy coverage or retain a risk," said Ryan W. Brown, director of insurance and ERM at coal company Peabody Energy. "And if we chose to offload a risk, it helps us be sure we are buying in the sweet spot of the coverage."

--By Gregory DL Morris

Executive Director
Contractors Safety Council of Texas City
Texas City, Texas

Safety veteran looks for ways to better assess contractors working in one of the most risk-prone cities in America.

Texas City holds the dubious distinction of the being the only city in American history ever to be destroyed by an industrial disaster. On April 16, 1947, a chain reaction of explosions killed 500 people and injured more than 1,000. Most of the city was either flattened or burned. Property damage was $125 million in 1947 dollars.

Texas City was rebuilt, and remains a center of the oil and chemical industry. Process safety has come a long way in 60 years, but one factor has resisted advanced solutions. Refineries and chemical plants need few workers during normal operations, but many hundreds during scheduled maintenance "turnarounds."

Certifying that all those workers are properly trained and free of criminal records or drug and alcohol abuse is a low-tech problem that has eluded high-tech answers until R. Ronald Sokol, executive director of the Contractors Safety Council of Texas City, led the effort to develop the Contractor Assurance Process.

There are several innovations in the CAP. One is that every subcontractor coming onto the plant site is registered on its own, rather than by the general contractor as has often been the case. "That way you end up with a sub of a sub of a sub," said Sokol. "Under CAP everyone is on their own." Contractor certification is the cornerstone of the five-point program. The others are worker fitness for duty, owner requirements, safety training, and craft skill assessment.

"Contractors always say they can handle any project," said Sokol. "CAP allows the owner to assess contractors based on the quantified and qualified data in the system. Next it allows the owner and the contractor to access the OSHA requirements for a job. It also allows owners to adjust the system appropriate to the level of risk."

Auditors verify that a contractor is in compliance. The audits are valid for three years, and are accepted by all owners in the CAP. National Compliance Management Systems of Hutchinson, Kan., handles the audits. The National Center for Construction Education & Research of Gainesville, Fla., handles the craft skill assessment. The Contractors Council hopes to be able to license the supporting software by early 2009.

Sokol credits the pilot program to the Amoco refinery in Texas City. At one time it was the largest in the country. "But it was too much for one company to keep up." Sokol convinced seven other plants in the area to participate in a scale-up of the program, and commit to reciprocal certifications. Two other safety councils also participated in an affiliation called the Contractor Safety Association.

Amoco is now part of BP, and Tom Williams project safety manager for the refiner credits Sokol with "dealing with a recurring issue at the point of entry. CAP makes it easy for contractors and gives us a significant level of risk reduction." While many process plants are self-insured, said Williams, CAP has been a factor for contractors' workers' comp. "Carriers have definitely seen the benefit, and premiums are lower for the participating contractors," he said.

Two years ago the BP refinery suffered a major fire that killed 15 workers and injured another 180 people, both employees and contractors. Federal investigators found that contractors were in no way responsible for the accident.

Cookie McKee, administrator for the Cleveland, Texas-based Association of Reciprocal Safety Councils, recalled previous attempts, all unsuccessful, to instill standards on subcontractors. Yet Sokol never wavered, McKee said, even when people told him that he would never get plant owners to agree on reciprocal standards for contractors.

"Today there are 15 signatory safety councils across the country, and our training curriculum is taught at 38 locations," she said. "Insurance companies should love that because the process is a known quantity."

--By Gregory DL Morris

Manager, Disability
Southern California Edison Co.
Rosemead, Calif.

Coaxing, or coaching, the unions with a restructured disability program was the key to Southern Cal Edison's Return-to-Work Job Coach program.

Labor-management antagonisms go back to the dawn of civilization. Few elements of human behavior are older, but one is the tendency to leave temporary solutions in place rather than put time and effort into comprehensive overhauls.

Thus some consider Deborah Jacobs' innovation to be near-miraculous. Jacobs, disability manager for Southern California Edison, in Rosemead, Calif., led a team that enlisted the union representing linemen and other skilled workers at her utility to assist in the complete redesign of the company's long-term disability program.

Then, as if that were not enough, she went one step further and crafted a coaching program that solved a chronic problem of people having difficulty making the transition from suffering from a disability to getting back to work.

"This utility is more than 100 years old," said Jacobs, "and we have had disability coverage as part of our union contract for about 50 years. In all that time we had a lot of temporary fixes, so we ended up with a tire that was all patches. The program was not rewarding the behavior we wanted."

Jacobs took a leading role in the effort to form a task force with the union to overhaul the disability program. Her timing was less than ideal. "Relations between the union and the company were not especially good, and we were about to enter negotiations for a new contract. We did not want adjustments to the disability program as part of the contract. We wanted to redesign the program completely. That is why we had the task force before the general negotiations. It was still a very painful process that took a year."

One pleasant surprise was that once the union was convinced to participate, Jacobs and her colleagues found that labor leaders agreed with the task force's guiding principles. "The union did not want people on permanent disability. They wanted people back to work, back to being dues-paying active members."

The biggest snag was that field work injuries, even when healed, often did not allow a worker to resume those duties.

"If a lineman fell off a pole, he was not going to be able to climb again," said Jacobs. "But those workers would not take office jobs at lower pay. So we arranged for disability to pay the difference between a lower-paying office job and the 70 percent of former pay that the worker got under long-term disability. That continued until the office job raises equaled the 70 percent level, to a maximum of two years. There was also a bonus if the worker found himself a new job within the company."

Workers returned to work, disability payments decreased, and retention increased. The only wrinkle was that people who came back did not always stay.

"Southern California Edison developed and introduced the Return-to-Work Job Coach Program under Deborah's leadership," said John Koval, at Sedgwick, Sothern California Edison's third-party disability and leave-of-absence claim administrator. "In its 2007 pilot implementation, the program reduced repeat disability absences among recently returned workers from 30 percent to zero. The program was developed using existing company resources, and a new partnership using employee-assistance professionals from Horizon Healthcare, and claims professionals from our firm."

The coach program "has proven to be an effective way for Southern California Edison to identify any psychosocial barriers and obstacles affecting an employee's ability to return to work and/or stay at work," said Koval. "Based on the outstanding improvement in stay-at-work rates achieved by the pilot program, Southern California Edison is planning to implement the Return-to-Work Job Coach program throughout all divisions within the company."

Koval cited Jacobs' description of the program as "a holistic strategy for improving stay-at-work rates, improving employees' lives and addressing supervisors' concerns."

He said that Horizon provides training to Sedgwick's claims examiners to help them recognize behavioral health issues and other nondisability-related red flags so that they could facilitate transfers of "at risk" disability cases to an appropriate employee assistance person for support and counseling.

--By Gregory DL Morris

Founder And CeO
Riskonnect
Marietta, Ga.

Leaving the minutia of spreadsheet-clogged white papers where they belong: on the shelves.

The persistence, even popularity, of analogue watches and clocks, even those without numbers, is testament to the fact that telling time is more about the spatial relationship of the hands on the face and less about the exact hour and minute.

The same underlying truth is behind the innovation of Bob Morrell's latest technology foray, Riskonnect. It uses an advanced software package to present risk considerations in an intuitive way. It also follows a strong legacy. Morrell's previous software project, the Risk Laboratory, was launched in 1994 and was acquired by Aon in 2003. Today that risk management information systems application has more than 100,000 users.

"Enterprise risk management is ripe for innovation all over the place," said Morrell. "Anyone who takes a process or a program and says 'this is the way ERM is done' doesn't know what he is talking about. This is still very much an evolving field."

Putting an even finer point on the need for clearer communication and comparison of risk Morrell added, "We are living today with the utter failure of interconnection. Risk professionals ask why the board of directors and company executives have not understood the big picture."

His response is Riskonnect. "We have filed for patent protection on the way we took a business process and wrapped technology around it. We help people visualize and understand risk at very high levels. This is essential because too many consultants only use complicated calculations. But many people don't need that. ERM is not about quantitative analysis."

Riskonnect is an online service. Morrell said that once users have registered, they upload technical current risk data. The application then allows users to drag and drop information to compare risks visually. "We even put the visuals on the left of the screen so that the right side of the brain can interpret them. Users can define how risks relate to one another. For example, if one factory goes down, how other factories and the supply chain would respond."

Although he does not specifically quote the line from "Cool Hand Luke," Morrell's premise is that the main problem with enterprise risk management is a failure to communicate. What he does say is that "we are changing the way people think about enterprise risk management. Implementing practice is much better than just writing white papers."

Make no mistake, though. Morrell believes in hard data behind the graphics and is a leading proponent of higher data standards in insurance and risk management. "In other parts of the financial sector, they refer to the risk and insurance people as the Amish of data standards because we are so far behind the current technology," he said.

Karen Fleming is a long-standing Risk and Insurance Management Society Inc. colleague of Morrell. In her current capacity as risk manager for the Secure Border Initiative Tactical Infrastructure for the Department of Homeland Security she has a unique perspective on Morrell.

"I practice pure risk management," she said, "no insurance, no claims, no brokers. Just a $1.5-billion operation. Bob looked at all aspects of my business from contractors to management after I went to him and said I could not find a database that was not based on tracking claims. Six months later he called me to look at what he had built."

Application, not measurement, is the key to enterprise risk management, said Fleming. Morrell could not agree more. He's already a convert.

--By Gregory DL Morris