Insurance Solutions for 4 Critical Business Challenges
“Instead of thinking outside the box, get rid of the box.”
As globalization and technological innovation continue at a relentless pace, businesses are faced with new and unexpected risks. Companies need to manage these exposures as well as ensure regulatory compliance on a global scale. All the while, heightened competition demands constant innovation and improvement while maintaining financial flexibility and maximizing shareholder returns. It’s not easy.
Insurance is a vital tool that helps companies thrive in this difficult business world. And sophisticated practitioners of advanced risk management strategies understand that insurance can do much more than just cover traditional risks with a standard, annual policy.
At AIG, Global Risk Solutions (GRS) specializes in creating nontraditional solutions to unique risks and strives to be on the forefront of utilizing insurance in new ways. Whether it’s a Global Fronting Program that meets a company’s regulatory requirements for insurance, or a customized Alternative Solution that leverages innovative structures to insure complex or unusual risks, GRS utilizes a consultative approach to understand complicated challenges and structure programs tailored to the requirements.
The following case studies demonstrate how GRS designed insurance solutions to solve four pressing business problems.
1. State Lottery Worried “Lucky Numbers” Will Actually Hit
Some risks are truly unique. And while the risk may not have broad applicability, the approach used to address the challenge often provides insight into the ways that creative insurance solutions can apply to areas far afield from traditional insurable perils.
Example: In state lotteries, certain numbers get played much more often than others. When those “lucky numbers” are drawn as winners, there is the potential for a higher-than-average number of winning tickets.
Insurance Solution: To protect itself against such an outcome, one state lottery group sought catastrophe-like insurance coverage for the amount of the lottery’s annual payout that exceeded a fixed percentage of its annual revenue. By utilizing data collected by the lottery over 20 years, GRS structured a program that protected the state lottery from the adverse cash outflow resulting from one of the popular number sets being drawn. The program’s five-year term assured stable pricing and guaranteed capacity.
2. Prove It
Many risk professionals solely view insurance as a means for transferring risk, which limits their thinking of how insurance can address a wide variety of challenging issues. “This limitation is particularly relevant when risk transfer is not the motivation for the insurance purchase,” said Scherzer. “For example, when the sole need for insurance is to provide evidence of insurance to meet a regulatory requirement, paying to transfer the risk to a third party may be an unnecessary expense.”
“We can’t solve problems by using the same kind of thinking we used when we created them.”
– Albert Einstein
Example: A food-and-beverage company was comfortable retaining risk rather than transferring it to a third party but faced a requirement for locally admitted policies. The company needed insurance coverage for a number of different lines of business to protect against risks that included strikes, loss of key suppliers, cyber risk, event cancellation, property catastrophe, credit risk and more.
Insurance Solution: GRS designed a multiline fronted program with a substantial limit where AIG companies fronted the insurance policies for the different lines of insurance, and the risk was reinsured back to the company’s captive. This program enabled the company to satisfy the requirement for locally admitted policies, benefit from favorable loss experience and address different types of exposures, some of which were difficult to insure in the traditional insurance market.
3. Don’t Let Risks Hold up a Merger
Negotiating a company’s sale is always a complicated process, particularly in industries with long-tail risk exposures.
Example: A transportation company with three divisions — auto, bus and taxi — was being sold. The buyer estimated the transportation company’s exposure to auto liability to be $10 million higher than the seller’s estimate. In order to avoid reducing the sale price, the seller pursued an insurance solution to address the buyer’s concern.
Insurance Solution: GRS designed a program providing retrospective excess auto liability coverage with $10 million limits funded by the seller. At the end of the seven-year policy term, any remaining money (plus interest) not paid out for claims, is returned to the seller. The structure enabled the seller to get his sale price and potentially benefit financially if the actual losses end up lower than the buyer expected.
4. Un-trap Your Cash
Businesses want to avoid posting collateral that will trap cash because a counterparty doesn’t truly understand the risk created by certain activities. In many cases, it’s better to replace a capital requirement with an insurance policy that will not reduce the company’s liquidity position. The value to the customer may not be in the reduction of costs, but in freeing up lines of credit and releasing working capital for other applications.
Example: For its employer’s liability risks, a manufacturing company’s captive insurer maintained collateral in the form of letters of credit. The parent company wanted to reduce the amount of collateral letters of credit provided by its captive to the insurance companies that front for it.
Insurance Solution: GRS structured a buyout of the captive’s underlying insurance policies, which eliminated the need for the company to post collateral to cover the risk.
It’s time to think differently about risk and insurance. The examples above show that the world is changing and businesses need insurance solutions that are adaptable, creative and meaningful for companies to thrive in this interconnected, globalized world.
AIG’s GRS is more than a traditional insurance provider — it’s a problem-solver with a wide array of resources to address risk. Learn more about GRS here.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with AIG. The editorial staff of Risk & Insurance had no role in its preparation.
Making the Grade
Taking the time to match a tough job with a worker who can actually do it reduces the potential for costly workplace injuries, employers are now finding.
That concept is leading more employers to study their essential job functions and test the ability of job candidates, particularly when a job requires a new hire to perform functions known to cause injuries.
Increased nationwide hiring, the rising cost of treating workplace injuries and a less physically fit job applicant pool are driving more employers to employ the practice known as post-offer employment testing.
Post-offer employment testing, or POET, involves simulating the lifting, pushing, pulling and other physical activities that make up a job’s essential functions. Employers are increasingly making employment offers conditional upon a job applicant’s physical ability to perform those activities.
And in another recent trend, employers are expanding the strategy to help determine when to return an established employee to their duties following a workplace injury or a non-occupational disability leave.
“Pre-work screens are not a good strategy if your injuries are coming three years into employment.”
–Drew Bossen, founder, Atlas Ergonomics
At Cooper Standard, the Novi, Mich.-based automobile parts manufacturer, for example, workers desiring a strenuous job first participate in “simulated work.” That helps determine whether they are physically capable of performing the real job, said Patricia Hostine, the company’s global manager of workers’ compensation.
A job requiring continual force to press rubber hose into a mold that forms radiator hoses is desirable because it is one of the better paying tasks the auto parts manufacturer offers, Hostine added.
But it’s also one of the company’s most physically demanding roles.
“It’s very hard work,” Hostine said. “That is where a lot of our injuries are found.”
After performing the simulated work, more applicants decide against taking the job than the company disqualifies. That’s because the testing showed them they couldn’t do the job anyway.
Cooper Standard also requires a functional evaluation, conducted by physical therapists, for any worker who has been away from work either because of a workplace injury or a non-occupational disability.
That requires employees who normally form radiator hoses to show that they are once again physically capable of performing the work after returning from an absence.
Employers that have benefited from conducting POET evaluations for newly hired employees are increasingly adopting a similar worker evaluation as part of their return-to-work programs, several experts said.
“Historically, these [physical evaluations] have been used at the point of offer, at the point of employment,” said Drew Bossen, a physical therapist and founder of Atlas Ergonomics. “But in the last 12 months, we have clients formulating methodologies to use them for return to work as well.”
Data from an initial POET exam can also provide a measured baseline of an employee’s abilities that can be reviewed post injury to help determine when the worker has regained their ability to return to their original job, or whether they should take up other duties.
Using data that way can reduce return-to-work durations by providing support for a doctor’s determination to release their patient.
Most employers using a POET system, however, still use it only to test newly hired workers.
Evaluating whether potential new hires have the physical ability to perform certain tasks can substantially reduce a company’s injury rate because newer workers typically account for a greater number of injuries than their more-experienced counterparts, POET advocates said.
Data compiled by the National Council on Compensation Insurance Inc. showed that workers on the job less than a year in 2007 accounted for nearly 34 percent of injuries although they made up only 23 percent of the labor force.
“Pre-work screens are not a good strategy if your injuries are coming three years into employment,” Bossen said.
Now, as the U.S. Labor Department reports increased hiring across the country, vendors that provide physical ability testing programs said they are seeing increased demand, which had dropped off during the recession.
“We have seen a big uptick in companies interested in doing this across all industries,” including transportation, mining and health care, said Connie Vaughn-Miller, vice president of business development for BTE Technologies.
The testing may be more beneficial for the most strenuous types of work.
Hostine at Cooper Standard said, for example, that she does not see a cost/benefit advantage for testing workers engaged in light production jobs.
Most employers adopting a POET strategy do so for certain positions and many start with a pilot program, experts said. It’s best to decide which job categories to include in a pilot program by reviewing the company’s claims history to pinpoint where injury frequency and severity are problems. Or, they recommend starting with the company’s most physically demanding jobs, then add others if the pilot results warrant doing so.
“We can’t be a better place to work if we’re hiring people that are not able to perform the job. That’s bad for the company and the associate.”
–Libby Christman, vice president of risk management, Ahold USA.
Making Work Safer
“One of our company promises is to be a better place to work,” said Libby Christman, vice president of risk management at Ahold USA.
“We can’t be a better place to work if we’re hiring people that are not able to perform the job. That’s bad for the company and the associate.”
Ahold is a retailer with about 120,000 employees operating stores under the names of Stop & Shop, Giant Food Stores, Martin’s Food Markets, and Peapod, an online grocery ordering unit.
Late last year, Ahold launched a pilot program for Peapod delivery drivers and for certain strenuous jobs in two warehouses, Christman said. The warehouse jobs require pushing, pulling, bending and lifting.
Since September, Christman has found that about 25 percent of job applicants could not pass its physical demands test. Screening for an employee capable of doing the job, though, not only reduces injuries, but improves productivity.
“We know that obtaining an accurate assessment of an applicant’s physical abilities can help us place him or her in a suitable job, potentially eliminate injuries and ensure efficiency and performance on the job,” Christman said.
Stepped-up hiring is not the only factor driving employer demand for POET services, observers said.
Employers — continually pushing for more sophisticated safety measures in the face of an aging, more obese, and less physically fit U.S. workforce — are also driving the demand, BTE Technologies’ Vaughn-Miller said.
The Discrimination Question
Employers cannot discriminate when hiring, but they can legally ask a worker to demonstrate that they can meet the physical demands of a job’s essential functions, experts said.
That requires careful analysis, however, to clearly understand a job’s essential functions, so the designed test measures just those functions and does not go beyond evaluating a worker’s ability to perform those specific tasks.
Employers have run afoul of the Equal Employment Opportunity Commission when implementing POET programs that evaluated for abilities beyond those required by the job.
If employees must lift 75 pounds only once a year, and can use a mechanical lift assist to help them when they do so, then testing to see whether a worker can lift 75 pounds is not a fair test, advised Colleen M. Britz, managing director and ergonomics practice leader for Marsh Risk Consulting.
Employers may also face discrimination complaints if they do not require a POET evaluation of everyone seeking a specific job, experts warned.
The tests themselves, however, vary substantially, depending on the vendor or employer providing them.
Some resemble gym equipment with electronic systems for measuring a worker’s strength and agility. Those results can then be compared to computerized measurements of a task. Other tests may be as simple as requiring a worker to lift bags of sand.
“I do consider it a best practice to have a well-designed post-offer employment test that truly is measuring an employee’s capacity to meet physical demands,” Britz said. “It’s a matter, from my perspective, of whether some of the methodologies are truly testing that.”
The wide variation in testing methodology has hampered the collection of data on POET’s impact on overall employee injury rates across industries or multiple employers, experts said.
But individual employers have experienced success, Britz said.
“I don’t know of any company that has stopped doing POET after starting — because they are seeing a positive return on investment,” she added.
A physical abilities test helped Prince William County in Virginia mitigate a double loss driven by candidates seeking to become firefighters.
The county was losing tens of thousands of dollars on hiring and training costs each time a job candidate washed out of a 26-week training course simply because they could not perform the physical challenges firefighters face in the line of duty, said Tim Keen, assistant chief for the county’s Department of Fire and Rescue.
Because firefighting is a tough job, a lack of physical capability also contributed to recruit training injuries.
“Not only is it a hard job, but when you add all the gear they wear, their air packs, as well as the functional movements that it takes to accomplish certain tasks, it puts strains on the body,” Keen said.
Those strains became costly workers’ compensation claims when recruits could not return to an existing job as would occur after an established firefighter suffered an injury, added Lori Gray, the county’s risk management division chief. That forced the county to continue paying workers’ compensation benefits to recruits who did not have a job to return to.
So in 2003, the risk management and fire department helped the county establish its own facility where applicants wanting to become firefighters must first participate in a standardized Candidate Physical Ability Test.
The International Association of Fire Fighters and the International Association of Fire Chiefs developed the CPAT test the county licenses.
The test used by fire departments across the country requires candidates to climb stairs while wearing weight vests, drag hoses and simulated bodies, simulate forcing their way into a building, and conduct other physical feats within a certain time period.
“There are a variety of firefighting tasks they must go through in this course,” Keen said. The course tests their aerobic capabilities, their flexibility, core strength, and upper and lower body fitness.
The test’s standardization ensures it is true to the firefighter’s actual work role and that is legal and fair to all candidates, he added.
“Regardless of age or gender the course is the same for everybody,” he said.
“The test is appropriate so you are not losing people due to injuries, especially early in their careers, Keen said. “It’s the right thing to do, making sure they are physically capable of doing the job.”
The screenings have resulted in fewer recruits lost due to a lack of physical ability.
“We have also seen a huge reduction in the number of injuries that were occurring because recruits are coming in more physically fit to do the job,” Keen said.
POET advocates said the screening results have other applications as well.
In some cases, post-offer physical test results provide employers with a defense in permanent disability cases, Britz said.
In states allowing employers to apportion responsibility for permanent disability claims, for example, the baseline results from the initial post-offer exam can limit an employer’s liability by showing that a worker lost only a certain portion of their functional ability during their employment tenure.
Britz added that she expects to see more large, sophisticated employers counter rising claims severity driven by factors such as aging and obesity by integrating their ergonomics, wellness intervention and physical ability testing programs.
For example, an employee returning from a leave might undergo a fitness for duty exam to evaluate their ability to perform the job without injuring themselves.
Simultaneously, the employee could be referred to the employer’s wellness program to address health-related issues such as high body mass index or to learn exercises that would strengthen certain body parts, such as their shoulders, if frequently used in their daily work routines.
“That is the evolution of post-offer employment testing into fitness-for-duty programs,” she said.
“Not so they lose the job, but to recognize that this person needs to work on shoulder strength. So we create an opportunity to increase shoulder strength. I think that is going to be the wave of the future.”
Sparking Innovation and Motivating Millennials
Two trends in the insurance industry, if they continue, could compromise its vitality in today’s fast-paced, technology-driven business world: slow innovation and a scarcity of millennial talent.
The quests to develop innovative solutions and services and to recruit young people to the field have raised concerns in the industry for several years, causing some insurers to think about how they will stay viable in the future when senior-level managers begin to retire.
But Lexington Insurance Company, a member of AIG, may have found a way to spark innovation that also engages millennial minds.
Innovation Boot Camp started three years ago as a one-off project meant to identify young, high-potential employees, give them exposure to senior management and evaluate their teamwork and leadership capabilities.
“The original concept was fairly straightforward. We would bring together a group of about 30 high potential employees for some semblance of team project work and it would allow management to gauge and assess talent,” said Matt Power, Executive Vice President, Head of Strategic Development, Lexington Insurance.
Little did he know how well the program would not only generate a plethora of innovative ideas that would drive the company forward, but also reinvigorate younger employees.
“The boot camps would be focused on innovation, with the idea that if we ended up with a concept or product that we could commercialize, then the boot camp would have been effectively self-funded. When they came back at the end of the 12 weeks, we were absolutely shocked because they produced about half a dozen products that have since been commercialized and are in some phase of being rolled out.”
— Matt Power, Executive Vice President, Head of Strategic Development, Lexington Insurance
New Ideas Emerge
The inaugural Innovation Boot Camp began with a two-day kick off meeting for participants— consisting of six teams with five or six participants. Each team was tasked with developing a business plan, and began to connect virtually over the next 12 weeks. The plan would culminate in a presentation to a senior management judging panel at the program’s conclusion.
“The boot camps would be focused on innovation, with the idea that if we ended up with a concept or product that we could commercialize, then the boot camp would have been effectively self-funded,” Power said. “When they came back at the end of the 12 weeks, we were absolutely shocked because they produced about half a dozen products that have since been commercialized and are in some phase of being rolled out.”
Power credits the program’s success in part to the participants’ youth. They were tuned in to different trends and issues than their more experienced counterparts.
Cyberbullying, for example, was a problem that didn’t exist for Power and his contemporaries as they grew up, but was salient for millennials. Based on the presentation of one group, Lexington developed coverage on their personalized portfolio for exposures associated with cyberbullying.
Likewise, “they educated us on the emergence of the craft brewing industry and how rapidly it was growing in the U.S.,” Power said. “That led to us launching a whole suite of products for craft brewers.”
Another team brought forth the concept of how rapid sequencing laser photography could be used to create a three-dimensional picture of a construction work site. That would allow contractors or claims managers to virtually walk through the site at a given point in the construction process to identify deviations from the original blueprint plans.
The images could memorialize the building process down to the millimeter, to every screw and wire. If a loss emerges later on due to a construction defect, the 3D map would be a valuable investigation tool.
Innovation Boot Camp proved so successful that Lexington expanded it to other arms of AIG all over the world.
“Suddenly we started getting calls from London, Copenhagen, Brazil,” Power said. “We were doing these programs for our global casualty team, for our lead attorneys in New York, for our financial lines group, and so on. We recently embarked on the 16th iteration of this program in London, with additional programs in the works.
“It’s a journey that has evolved from trying different things and not being afraid to fail, not being afraid to try new ways of thinking about the business.”
Engaging Millennial Minds
In addition to generating new product ideas, Innovation Boot Camp also engages younger employees more fully by offering the opportunity to make meaningful contributions to the company through independent work that requires some creative thinking.
Past participants are often great crusaders for the program.
“A program like IBC is something rarely seen at a large corporate conglomerate, and really a concept for new age startup companies,” said Alyson R. Jacobs, Vice President, Broker and Client Engagement Leader in AIG’s Energy & Construction Industry Segment. “But we were given a chance to work with people of all different professional backgrounds, and that environment unearthed concepts and solutions that have made a significant impact in the lives of our insureds and their employees.”
The chance to do work that makes a difference, both for the success of their company as well as the clients its serves, is what attracts millennial employees to the program and motivates them to devote their best effort to the project.
“Millennials want to be able to share their ideas and make meaningful contributions at work,” Power said. “Innovation Boot Camp has evolved into the perfect forum for that.”
David Kennedy, Esq., Product Development Manager for Lexington Insurance and former Coach for two Innovation Boot Camps, said the program engenders an “entrepreneurial spirit of developing something new, of applying analytical rigor to emerging risks to create unique and timely solutions for our clients and the marketplace.”
Exposure to senior executives doesn’t hurt either.
“It provided a platform for me to not just interact with our Senior Executive leadership but present a concept that could potentially be adopted by our company in the future,” said Ryan Pitterson, Assistant Vice President, AIG. “It helps to build your internal network, elevate your profile in the company and connects you with our client base as well.”
At a time when recent college graduates choose employers based on how much opportunity they’ll be given to have meaningful input — as well as opportunities for advancement — projects like Innovation Boot Camp could be the answer to the insurance industry’s struggle to pull in millennials.
“We give them the time, space and resources to create something new,” Power said. “When employee engagement is done right, it inspires passion and creativity.”
As multiple arms of AIG adopt Innovation Boot Camp around the globe, both the quantity and quality of new ideas are bound to flourish.
“The bottom line is, many heads are greater than one, and AIG has figured out how to leverage this. AIG hears their employees’ voices and enables those ideas to take our company into the future,” Jacobs said.
To learn more about Lexington Insurance, visit http://www.lexingtoninsurance.com/home.
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.