Wind Turbines Slow Down Hurricane Winds
Off the New York coastline would be a perfect place for an array of wind turbines, according to a Stanford professor. It would not only offer clean energy to the Big Apple but it would protect it the next time a Superstorm Sandy comes calling.
“If you have a large enough array of wind turbines, you can prevent the wind speeds [of a hurricane] from ever getting up to the destructive wind speeds,” said Mark Jacobson, a professor of civil and environmental engineering at Stanford University.
Computer models demonstrated that offshore wind turbines reduce peak wind speeds in hurricanes by up to 92 mph and decrease storm surge by up to 79 percent, said Jacobson, who worked on the study with University of Delaware researchers Cristina Archer and Willett Kempton.
“The additional benefits are there is zero cost unlike seawalls, which would cost about $30 billion,” he said, noting that the wind turbines “generate electricity so they pay for themselves.”
The researchers studied three hurricanes, Sandy and Isaac, which struck New York and New Orleans, respectively, in 2012; and Katrina, which slammed into New Orleans in 2005. Generally, 70 percent of damage is caused by storm surge, with wind causing the remaining 30 percent, he said.
That’s why onshore wind farms would not be as effective, he said. While they would reduce the wind speed, they wouldn’t impact storm surge.
In 2013, one of the “most inactive” Atlantic hurricane seasons on record, insured losses totaled $920 million, according to Guy Carpenter, which relied on information from the Mexican Association of Insurance Institutions. The most noteworthy events were Hurricane Ingrid in the Atlantic and Tropical Storm Manuel in the Pacific, which displaced thousands as they caused excessive rainfall, flooding and mudslides.
According to the Insurance Information Institute, Katrina was the costliest hurricane in insurance history, at $48.7 billion, followed by Andrew in 1992 at $25.6 billion and Sandy at $18.8 billion. Economic losses, of course, were much higher.
Wind turbines, which can withstand speeds of up to 112 mph, dissipate the hurricane winds from the outside-in, according to Jacobson’s study. First, they slow down the outer rotation winds, which feeds back to decrease wave height. That reduces the movement of air toward the center of the hurricane, and increases the central pressure, which in turn slows the winds of the entire hurricane and dissipates it faster.
The benefit would occur whether the turbines were immediately upstream of a city, or along an expanse of coastline. It could take anywhere from tens of thousands to hundreds of thousands of wind turbines off the coast to offer sufficient hurricane protection.
At present, there are no wind farms off the U.S. coastline, although 18 have been proposed for off the East Coast. Proposals have also been made for off the West Coast and the Great Lakes. There are 25 operational wind farms off the coast of Europe.
“Overall,” Jacobson and his colleagues concluded in the study, “we find here that large arrays of electricity-generating offshore wind turbines may diminish hurricane risk cost-effectively while reducing air pollution and global warming, and providing local or regionally sourced energy supply.”
Mitigating the Difficulties
In few sectors does true proportional risk management come into sharper focus than in midstream and downstream energy and process industries.
“We have always had a very difficult placement from an umbrella standpoint,” said one risk manager. “We have always had serious carrier issues because they don’t like the things we make and sell.”
Never mind that the client is a major global company with a significant volume of business; some carriers have treated that worldwide scope as just a greater exposure. For that client, Monica Brecka, Aon’s umbrella and excess casualty practice leader for the southern region, “came in and shook things up. She rearranged things in our large global placement. She coordinated all the various pieces into one cohesive program that was very different from what we had before. That drove significant savings,” the client said.
Another client was facing a renewal in which its carriers insisted upon an exclusion for one of its product lines, noting accurately that such an exclusion was widespread in the industry.
“Monica was able to secure our renewal without the exclusion,” said the insurance buyer.
“We did have to accept a higher integrated occurrence, but at a lower attachment level, which in the end, reduced our premium.”
Brecka also handled a spin-off for the same client. The outgoing operations were sold to another company, so there was no need to create interim structures, but “Monica effectively got an upfront return of premium for us on an anticipated but not assured basis.”
Informed insight is necessary to win the Power Broker® designation, and it is indicative of Tandis Nili’s work this past year.
“We had an umbrella carrier who was wanting to move up and we needed to understand what our options were,” said one risk manager.
“I wanted to know whether it would be best to take our current primary carrier up, replace the umbrella carrier, replace the primary carrier. Tandis provided this guidance, and with her law degree, I always feel comfortable with the contract review provided.”
The risk manager continued, “Tandis also kept us to zero collateral increase for our [workers’ comp policy] for five years straight. Exposures have certainly increased and the insurer has requested an increase most years.”
In another situation, Nili saw changes at a carrier obviate what had been a relationship so close that the carrier had accepted a personal letter of guarantee from the CEO of the insured in lieu of some standard requirements.
In the middle of renewal, new leadership took over and the underwriter balked at such a handshake agreement. Nili had to present the client as a new prospect, running actuarial analyses and modifying retentions and credit risk for the client. After long negotiations, the new management accepted the existing personal guarantee.
In a successful end to that tense and complex negotiation, Nili’s double challenge was not just to win for the client, but to win over the client.
Almost any broker can handle trouble, but it takes a Power Broker® to head it off at the pass.
“Mike was able to show us a problem with our property policy,” said one risk manager of Mike Perron, an energy and engineered risks team leader at Willis.
“The policy had a limit of $25 million per occurrence, which looked sufficient. However, the coverage was limited to the values reported at a given location.” Perron pointed out that the previous broker should have requested the carrier remove the limitation. Then he engaged colleagues to review the values reported on the insurance schedule at a handful of locations, to see if the values adequately represented true replacement cost values.
“This analysis suggested that the replacement cost values of several properties was larger than what was reported on our schedule,” the risk manager said. “Consequently, these properties were underinsured. This finding and analysis was instrumental in choosing to appoint Willis as our new broker.”
Another client noted, “Our situation is a little different as a lot of our policies are reverse flow. We have some local placements and some legacy issues. Mike has done well in trying to hunt down people to resolve really old items like remnants of failed insurers or the last collateral issue related to long-closed projects.
“Sometimes the ability to find the person that has the right connection from a previous life is a very valuable skill from the client perspective,” the client said.
A Key Team Member
Risk managers often say that Power Brokers are key members of their teams. One director of insurance said that David Robinson is “an essential part of our risk management department” who has helped minimize costs with fronting policies and the use of a captive.
The client cited a project that called for construction affecting public-works infrastructure.
“The governmental body was adamant about requiring a separate GL policy with dedicated limits and a very low deductible. The limits were high and the premium was also high.
“After weeks of discussions, the governmental body accepted a fronting policy, which was much cheaper and fell within our corporate philosophy of taking high retentions. David was instrumental in helping us persuade the governmental agency to accept the front and also working with our insurance company to provide the fronting policy,” the client said.
Despite the best efforts of Power Brokers and their clients, however, losses will occur.
One risk manager credited the smooth resolution of a significant claim to his broker.
“It was a large loss, and came just before our renewal,” said the risk manager. “David set up the whole recovery process, from cost center to work orders to handling key adjusters. And then he had to turn around and face a very tough renewal.”
The client was particularly impressed with “how David was able to go from the very granular claims process to the theoretical consulting work needed to help me do the market recon I needed to do.”
Crafting Custom Solutions
Creativity is a hallmark of Power Brokers, and Aon’s Stephen Stoicovy is a prime example. That came into play recently when navigating the endorsement language on one client’s commercial general liability policy.
“As a global company, these endorsements are not only used in the U.S. but worldwide,” the client said. “Stephen was able to broaden the additional insured endorsement on our commercial general liability policy.
“[That means] our carrier can now insure an entity who has an agency agreement with it under our liability program. In the past, those entities had to procure separate insurance even though our carrier indemnified the entity,” the client said.
One recent trend for energy companies is the growth of master limited partnerships (MLPs). The model works, but is a challenge for brokers in that ownership of assets, and their associated exposures, is often in flux among affiliated MLPs and the parent company.
“We had an original C-corp, and created multiple MLPs with different formats. It was a very significant reorganization,” said one client, explaining the changes Stoicovy helped to orchestrate.
“We wanted to approach the market as one organization, but each operating entity now had its own, very different risk profile. We wanted to gain as much economy of scale as we could, but still keep discrete risks separate,” the client said. “Also, the disposition of assets among the affiliated operating companies was frequently in flux.”
Integrated into Daily Processes
This past year was a tumultuous one in the energy sector. Outright takeovers gave way to frequent asset-based transactions. That put pressure on brokers to keep pace.
“From day one, René made it a point to understand all o2015f our operations and intimate business trading partners to ensure he was able to negotiate the best terms and conditions for us,” said one insurance manager of Aon’s René van Winden.
“He literally left no option off of the table when we challenged him for unique underwriting and coverage placements during recent acquisitions and divestitures for some of our sensitive risks. René has earned the complete support of our executive management who are very well versed in many different insurance levels,” the insurance manager said.
“That is important because we have a lean staff internally. René is able to anticipate our questions prior to being asked. He is integrated into our operations on our day-to-day processes and procedures.”
Other clients are a challenge because of their size. The oil and gas industry requires huge investments, and the capital spend for any major player pressures limits and placements. One client asked Van Winden to cut insurance costs by 30 percent, though the program was already competitive. Van Winden went to Bermuda and London for capacity but ultimately had to restructure retentions. He placed more burden on business interruption than on property damage. That change in structure ultimately yielded a cost reduction of 45 percent.
2015 General Liability Renewal Outlook
There was a time, not too long ago, when prices for general liability (GL) insurance would fluctuate significantly.
Prices would decrease as new markets offered additional capacity and wanted to gain a foothold by winning business with attractive rates. Conversely, prices could be driven higher by decreases in capacity — caused by either significant losses or departing markets.
This “insurance cycle” was driven mostly by market forces of supply and demand instead of the underlying cost of the risk. The result was unstable markets — challenging buyers, brokers and carriers.
However, as risk managers and their brokers work on 2015 renewals, they’ll undoubtedly recognize that prices are relatively stable. In fact, prices have been stable for the last several years in spite of many events and developments that might have caused fluctuations in the past.
Mark Moitoso discusses general liability pricing and the flattening of the insurance cycle.
Flattening the GL insurance cycle
Any discussion of today’s stable GL market has to start with data and analytics.
These powerful new capabilities offer deeper insight into trends and uncover new information about risks. As a result, buyers, brokers and insurers are increasingly mining data, monitoring trends and building in-house analytical staff.
“The increased focus on analytics is what’s kept pricing fairly stable in the casualty world,” said Mark Moitoso, executive vice president and general manager, National Accounts Casualty at Liberty Mutual Insurance.
With the increased use of analytics, all parties have a better understanding of trends and cost drivers. It’s made buyers, brokers and carriers much more sophisticated and helped pricing reflect actual risk and costs, rather than market cycle.
The stability of the GL market also reflects many new sources of capital that have entered the market over the past few years. In fact, today, there are roughly three times as many insurers competing for a GL risk than three years ago.
Unlike past fluctuations in capacity, this appears to be a fundamental shift in the competitive landscape.
“The current risk environment underscores the value of the insurer, broker and buyer getting together to figure out the exposures they have, and the best ways to manage them, through risk control, claims management and a strategic risk management program.”
— David Perez, executive vice president and general manager, Commercial Insurance Specialty, Liberty Mutual
Dynamic risks lurking
The proliferation of new insurance companies has not been matched by an influx of new underwriting talent.
The result is the potential dilution of existing talent, creating an opportunity for insurers and brokers with talent and expertise to add even greater value to buyers by helping them understand the new and continuing risks impacting GL.
And today’s business environment presents many of these risks:
- Mass torts and class-action lawsuits: Understanding complex cases, exhausting subrogation opportunities, and wrangling with multiple plaintiffs to settle a case requires significant expertise and skill.
- Medical cost inflation: A 2014 PricewaterhouseCoopers report predicts a medical cost inflation rate of 6.8 percent. That’s had an immediate impact in increasing loss costs per commercial auto claim and it will eventually extend to longer-tail casualty businesses like GL.
- Legal costs: Hourly rates as well as award and settlement costs are all increasing.
- Industry and geographic factors: A few examples include the energy sector struggling with growing auto losses and construction companies working in New York state contending with the antiquated New York Labor Law
David Perez outlines the risks general liability buyers and brokers currently face.
Managing GL costs in a flat market
While the flattening of the GL insurance cycle removes a key source of expense volatility for risk managers, emerging risks present many challenges.
With the stable market creating general price parity among insurers, it’s more important than ever to select underwriting partners based on their expertise, experience and claims handling record – in short, their ability to help better manage the total cost of GL.
And the key word is indeed “partners.”
“The current risk environment underscores the value of the insurer, broker and buyer getting together to figure out the exposures they have, and the best ways to manage them — through risk control, claims management and a strategic risk management program,” said David Perez, executive vice president and general manager, Commercial Insurance Specialty at Liberty Mutual.
While analytics and data are key drivers to the underwriting process, the complete picture of a company’s risk profile is never fully painted by numbers alone. This perspective is not universally understood and is a key differentiator between an experienced underwriter and a simple analyst.
“We have the ability to influence underwriting decisions based on experience with the customer, knowledge of that customer, and knowledge of how they handle their own risks — things that aren’t necessarily captured in the analytical environment,” said Moitoso.
Mark Moitoso suggests looking at GL spend like one would look at total cost of risk.
Several other factors are critical in choosing an insurance partner that can help manage the total cost of your GL program:
Clear, concise contracts: The policy contract language often determines the outcome of a GL case. Investing time up-front to strategically address risk transfer through contractual language can control GL claim costs.
“A lot of the efficacy we find in claims is driven by the clear intent that’s delivered by the policy,” said Perez.
Legal cost management: Two other key drivers of GL claim outcomes are settlement and trial. The best GL programs include sophisticated legal management approaches that aggressively contain legal costs while also maximizing success factors.
“Buyers and brokers must understand the value an insurer can provide in managing legal outcomes and spending,” noted Perez. “Explore if and how the insurer evaluates potential providers in light of the specific jurisdiction and injury; reviews legal bills; and offers data-driven tools that help negotiations by tracking the range of settlements for similar cases.”
David Perez on managing legal costs.
Specialized claims approach: Resolving claims quickly and fairly is best accomplished by knowledgeable professionals. Working with an insurer whose claims organization is comprised of professionals with deep expertise in specific industries or risk categories is vital.
“We have the ability to influence underwriting decisions based on experience with the customer, knowledge of that customer, and knowledge of how they handle their own risks, things that aren’t necessarily captured in the analytical environment.”
— Mark Moitoso, executive vice president and general manager, National Accounts Casualty, Liberty Mutual
“When a claim comes in the door, we assess the situation and determine whether it can be handled as a general claim, or whether it’s a complex case,” said Moitoso. “If it’s a complex case, we make sure it goes to the right professional who understands the industry segment and territory. Having that depth and ability to access so many points of expertise and institutional knowledge is a big differentiator for us.”
While the GL insurance market cycle appears to be flattening, basic risk management continues to be essential in managing total GL costs. Close partnership between buyer, broker and insurer is critical to identifying all the GL risks faced by a company and developing a strategic risk management program to effectively mitigate and manage them.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.