By DAN REYNOLDS, senior editor
As a risk manager for the Disney Co., one of the largest and most advanced entertainment companies in the world, Steve Wilder has more than a few things going for him. The list is long, but first, the former president of the Risk and Insurance Management Society is experienced and knows what he is doing. Two, he has the support of upper management, and three, the very nature of his company, from its roots in creator Walt Disney's animation, to the technical work involved in creating its theme parks, is rooted in engineering and engineering safety.
"I have the best risk management job in the world and part of it is working for a company like Disney," says Wilder, and when he says it although others say it too, you know he means it.
But even people with great jobs working for great companies have their dark moments. That was what Wilder faced back in 2006, after Hurricane Katrina had got done doing what she did to the Gulf Coast in late 2005.
As the man responsible for managing risk and arranging insurance coverage for Walt Disney World, in Orlando, Fla., Wilder was flying back from a meeting with part of his insurance panel in Bermuda, a meeting regarding wind damage coverage for Walt Disney World that, from Wilder's perspective at least, hadn't gone extremely well.
"In 2005, after Katrina, Rita and Wilma I think the insurance industry in our case overreacted and didn't have the capacity that we needed," Wilder says. "Because as you know, insurance companies rely on wind models and the wind models they rely on are fairly generic."
Wilder was in the process of his reinsurance renewals for 2006 when he got the bad news. There was resistance from some parts of his insurance panel to provide what he felt was the necessary wind capacity.
"It came out of a meeting in Bermuda that an insurance company didn't particularly want to participate in a Disney placement because they had run all the numbers through their model and their model said there would be mass devastation, and intuitively we know that's not right, but we can't prove it," Wilder recalls.
To understand why Wilder and his risk management team, which numbers 86 at Disneyland and 150 at Walt Disney World, had the faith that they did in their risk, one needs to go back a bit.
Ever since the opening of Walt Disney World, in 1971, Disney's construction and engineering arm, Disney Imagineering, had been going above and beyond local code enforcement regulations, analyzing and strengthening the roofs and walls of the resort's hotels, rides and other structures to protect them from wind damage.
That included the help of Disney's long-time risk management partner, FM Global, which is Disney's lead property underwriter. Randy Hodges, an operations vice president and client service manager for FM Global's Los Angeles operation, says FM Global's engineers have been working slide rule to slide rule with Disney's for the length of the two companies' 60-year relationship.
"We have worked with Disney from day one in the design and build of Walt Disney World," says Hodges. "Ensuring that their roofs were compliant with the latest thinking on wind was always part of the design process," says Hodges.
But since 1992 and Hurricane Andrew with its Cat-5 status and $30 billion in damage, those efforts had only been redoubled. Add to that the loss experience Disney gained when hurricanes Charley, Frances and Jeanne passed through Central Florida in 2004.
This company, with its own engineering arm and an engineering-inclined partner in FM Global, has records on the construction history of every building on Disney's Orlando property and also has the advantage of having watched hurricanes of some serious magnitude pass through Central Florida.
But Wilder and the rest of his risk management team at Disney needed to know more than that. To cut even closer to the bone, and to satisfy their underwriters, they decided to talk to Risk Management Solutions Inc., the wind damage modeling company whose models Wilder knew his insurers were using.
To get the capacity they needed, RMS advised Wilder and his team to, in effect, build their own model.
"Because our model is going to make certain assumptions and certain defaults," Wilder was told. "So if you don't know the kind of construction it's going to make an assumption, if you don't know the occupancy it's going to make an assumption, if you don't know the number of stories it's going to make an assumption."
Wilder had much of the information that he needed, but what he needed to make his model really sing was the replacement value of every building and the precise GPS locations for every building at Walt Disney World with a value of more than $5 million, a staggering task.
"They said you need to dive into each building and have a value associated with each building," Wilder says. "Trust me when I say our head was spinning."
To gather its GPS information, Disney turned to an intern from the risk management program at Florida State University.
That intern spent an entire summer pinpointing to seven digits the exact location of each one of those 500 buildings. That precision enabled Disney to make distinctions, for example, between a building standing by itself next to water, which would have a greater level of exposure than a building shielded by a cluster of buildings that was further away from the water's edge.
"Because without that information we have this value of buildings that we report to the insurance company and they are all in the same zip code and you think they are all right next to each other. When in fact, Walt Disney World is a huge property and there is a lot of spread of risk."
There was also the library of data that both Disney and FM Global engineers could access.
"The wind models that are available in industry typically only gather data about a facility's construction, their occupancy, very, very simple pieces of information that don't take in excellent risk quality," says FM GLobal's Hodges.
"So what we were able to do is take the all the upgraded roofing systems that we work on with Disney, take that data and provide a very, very large amount of detail on how that was done, so that RMS could use a very expanded model. So it wasn't the model that they typically use for their customers, it was a highly customized one. And it was one that could also take advantage of having risk characteristics that were much better than average for that area," Hodges says.
There is some irony in FM Global's involvement with the project because the firm has such a long history with Disney and has such fgood knowledge of its buildings at Walt Disney World that it doesn't use models to help it underwrite Wilder's risk.
"From my standpoint, my capacity essentially remained unaltered pre-Katrina and post-Katrina, because we had this very long understanding of the risks at Disney World whereas many of the other insurers on the panel if not all of them had to react based on what the models told them and that was what created the situation that Steve started this project on."
"So we don't react to the models and we don't use the models in our analysis of underwriting Disney but the engineering information that we do use to underwrite was very beneficial. By us sharing that helped to give them a much more accurate, favorable model result."
What Wilder and his crew ended up finding out was an insurable value that was much larger then they thought it was.
"So, in a way it was a good thing because we knew what the right values were," he says. "In a way, we're wondering, okay, we're going down this modeling road and all of a sudden we've increased our exposure, is this going to be a good thing or a bad thing? But our goal was not to find a good thing or a bad thing. Our goal was to find what the actual probabilities associated with certain events were. So we would know what the outcomes of various events were."
"The impetus of this project was to basically create custom vulnerability curves for every single property on the location, which would reflect the fact that their standards have been changing over time from the early 1970s to today and developing. And also to compare and contrast what the regular Florida building code would have asked them to do," says RMS' Michael Young, a senior director of mitigation and regulatory affairs in the Newark, Calif. office, and another of the key players in the phalanx of professionals that Wilder was able to throw at the Walt Disney World wind modeling challenge.
The improved modeling meant that the fact that individual properties had gone up in value over time was offset by reductions in vulnerability for other specific properties, according to Young.
Young says Disney was also able to show a radically lower exposure to business interruption because of Walt Disney World's unique properties. Disney has the capability to shift guests from hotel to hotel and from theme park to theme park, should any piece of its entertainment empire in Orlando be damaged.
For example, should Disney's Epcot Center in Orlando be damaged, guests can be switched over to Disney's Animal Kingdom park, or its Magic Kingdom.
"We see huge spikes whenever you get any kind of damage in a hotel," says Young. "So the fact that they are able to shuttle between properties was really one of the main drivers that we found in our study that reduced the expected losses for this property relative to what it was under what we would call a generic model."
That was indeed, exactly what the underwriters were looking for.
"It basically modeled better," says John Turner, the London-based chairman of the Property and Casualty Americas Division for Aon. "They had a better overall aggregate so that they could place the Disney risk alongside other risks they had in the region. And they were able to respond with more capacity and improved terms."
How much more capacity? How about an additional $300 million more in wind capacity.
"The model results are only as good as the data provided," says Mark Donald, a director and senior underwriter for the Lloyd's syndicate Ascot. "Walt Disney World provided a large amount of data and also took time to explain the features of many of their assets. It is this level of data that allows the model to differentiate Walt Disney from other accounts with more generalized location data."
Because Disney was able to provide more detailed information, it was not only able to add more wind coverage post-Katrina where some insurers had been loathe to provide it, it was also able to present an exposure that created a wide delta between what a generic model would have produced and what its customized model ended up producing.
In 2006, Disney wound up with modeling results that represented a 60 percent decrease of the baseline average annual loss. If Wilder's team hadn't done the work that it did, post-Katrina, it would have ended up with an increase of 302 percent of the baseline average annual loss, or AAL.
In 2007, with an updated version of an RMS model and continuing to use its customized data, it created an 86 percent decrease of the updated 2006 AAL. The company would have seen an increase of 483 percent of AAL in 2007 if it hadn't customized its model.
"So there is a huge delta between what the insurance industry would have seen, compared to the tools we gave them and the tools we now had ourselves to know what really would happen," says Wilder. "It became evident to us that what the industry wanted from us and other insureds more than anything was good, good data."
"That kind of precision you don't normally see with a client," says Peter Opinante, a senior vice president for U.S. property facultative in Swiss Re's Armonk, N.Y. office. "Keep in mind, Disney has some fairly unique properties and buildings so they wanted to make sure they had some adequate insurance values before they would even retain RMS and those are the kinds of basic things I felt pretty good about up front," says Opinante, whose company is one of the reinsurers of Disney's property coverage.
"Notwithstanding the amount of work that obviously RMS had done. But the initial data work made both RMS and the insurers and the reinsurers very comfortable," Opinante says.
Perhaps it was the long-standing relationships and the amount of trust in them that enabled Wilder and his team to pull off what they did.
"We have got a number of very strategic partners on our insurance program. There is a great deal of mutual trust and respect and I think that underlying relationship makes it a lot easier," says Wilder. "So when you go to them on a model and say 'Here is something I'd really like you to think differently than people have thought about before about a property exposure,' I think because of the strategic relationship that goes back years, they are more willing to listen to the story."
Now here's a question. Could other companies do what Disney did, or should they even try?
"One, you only do a model if you think you are a great risk, which we really felt we were intuitively but we couldn't prove it. Two, safety is totally imbedded in our culture. And three, to make it meaningful, an insured would have to have a concentration of values in one location. So, if I'm an insured with a thousand locations spread out all over the place, I can't really model that," says Wilder.
"Let's be honest, not every risk in the world will benefit from this risk analysis because not every risk will model as well as the Disney risk did," says Aon's Turner. "So, people need to understand or have a feel for whether, as good as the information is, it is going to improve the outcome or make it worse. If it's going to make it worse they're unlikely to do it. If it's going to improve it they are likely to do it."
"I welcome the entire industry to go through some of the precision and it is not just on the industrial and commercial accounts," says Swiss Re's Opinante. "A good example would be municipalities, school boards where they have huge numbers of locations. It would be great if they could do a similar exercise and provide the insurers and reinsurers with longitude information and break down in values that would significantly help insurers and reinsurers in their ability to employ CAT capacity at a reasonable price."
October 15, 2008
Copyright 2008© LRP Publications