Wednesday, 29 February 2012 19:01

How to handle the latest risk management topics

At the Risk and Insurance Management Society (RIMS) annual Conference and Exposition, risk professionals including CEOs, CFOs and risk managers come together with brokers, insurers, thought leaders and industry experts to learn about new products and services, share ideas and gather information about the evolution of risk and risk management.

“Our goal is to create an environment for clients of all sizes to learn about our breadth of expertise and unmatched ability to support their businesses,” says Kathleen Delaney, a senior vice president with Aon Risk Solutions. “Often, CEOs are not aware of the different liabilities they carry as an officer for the company and the emerging exposures facing their business as a whole. RIMS presents a wonderful opportunity to share the solutions available to manage these risks and help decision makers sleep at night.”

Smart Business spoke with Delaney and Patrick Lawton, vice president, strategic account manager at Aon Risk Solutions, about why business leaders should consider attending the RIMS conference.

What is RIMS, and who are its members?

RIMS is a nonprofit organization that focuses on advancing the practice of risk management. The majority of its members are risk managers or intermediaries for corporations and other organizations, insurers and other service providers. Financial officers and executives overseeing risk management with corporations and other organizations are also members.

Why is continuing education important in risk management?

Risk management is a combination of art and science, and the tools used to understand, forecast and manage risk are constantly evolving. It is vital for risk professionals to understand this evolution so they are best equipped to competently serve their organizations.

From preparing for insurance renewals to analyzing total cost of risk to managing risk enterprisewide, risk professionals as well as business executives must be diligent about continuing education and professional development. Without knowledge and awareness, businesses become much more vulnerable to the risks they face.

In addition to the RIMS international conference, Aon provides numerous educational opportunities for its clients each year. It produces white papers, develops fact-based benchmarking and industry reports, participates in educational programs at the RIMS local chapter level and hosts client events across the country to share information about current and emerging risk management issues and trends impacting various industry sectors.

What issues will be tackled at RIMS 2012?

The agenda is robust and comprehensive. The biggest and most current issues facing businesses today will be tackled. Because risk management is so specific to each business, the hot issues are different for every risk professional. Eleven of Aon’s thought leaders will participate in panel discussions about acute and emerging risk management issues, including mergers and acquisitions and cyber liability.

Professionals from across the globe will come to the conference and meet with clients and prospects to discuss risk management needs and share insights and ideas.

For more specialized topics than are covered in the panels, attendees can visit Aon’s Clientopia. It is set up in a nearby offsite area but done in conjunction with the conference.

There, you can get very personalized attention to your business needs and set up meetings with insurers to discuss issues and receive a more detailed overview of what a risk manager can bring to the picture for your business.

What kind of business is done at the conference?

The relationship-building and transfer of knowledge that occurs is strategic and lasting. The conference allows business leaders from many industries to discuss their approach with industry-leading risk advisers and brokers, meet with insurance carriers, talk about current issues and prepare for the future. The conference can be an eye opener for those who do not understand their company’s risk profile. They may blindly approach a booth and leave with ideas and tools to support the growth of their organization.

How can someone who is interested get involved with RIMS?

There are great opportunities for professionals of all levels who deal with issues of risk to learn more. There are Risk Management 101-esque sessions at the annual RIMS conference for everyone from general counsel to chief financial officers to get familiar with the issues facing their businesses so they can make intelligent decisions that will have a direct impact on their balance sheets. In addition, several cities have very robust local chapters.

You mentioned local RIMS chapters. What other types of local opportunities are available for education?

RIMS and Aon alike present sessions and forums in cities around the country. The basic issues covered can be valuable, especially for busy executives who may not be able to attend the three-day annual conference.

These programs are designed to speak to the different aspects of risk and target general counsel or CEOs who may not be risk professionals but need to have a grasp of the issues. The programs are especially useful for CFOs of firms that may not have dedicated risk managers and for someone who is wearing many hats in an organization, including risk management.

For information on Aon at RIMS in Philadelphia April 15-18, visit rims.aon.com.

Kathleen Delaney is a senior vice president with Aon Risk Solutions. Reach her at (212) 441-1662 or Kathleen.Delaney@aon.com. Patrick Lawton is vice president, strategic account manager at Aon Risk Solutions. Reach him at patrick.lawton@aon.com.

Published in St. Louis

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After the hit insurance companies took in 2011, businesses should expect changes in the property market for 2012.

“Companies can expect modest upward rate pressure due to severe global property losses,” says Rick Miller, managing director of the National Property Practice for Aon Risk Solutions. “Capacity remains stable and some increased underwriting discipline is apparent, particularly around the peril of flood.”

Risk Management Solutions’ (RMS) latest version of catastrophe modeling software is estimating increased damage impact from Atlantic-based tropical storms from Texas to Maine. Miller says the new software has translated to many underwriters pushing for higher pricing for exposures subject to losses from tropical storms.

Smart Business spoke with Miller and Bill Novak, assistant director of Aon’s National Property Brokerage Group, about what is happening in the property market and what new developments companies should expect to see this year.

What kind of market conditions can businesses expect as a result of recent developments, and who will be most affected?

Businesses can expect a modestly firming property market for natural catastrophe — exposed risks (windstorm, earthquake and flood) and generally flat pricing for all other risks. Windstorm and earthquake are more geographically predictable: Gulf Coast and Eastern Seaboard for windstorm and California and Pacific Northwest for earthquake, while flood-prone areas exist in every U.S. state.

The newest versions of catastrophe modeling software contemplate more severe losses further inland for windstorm than previous models. While global earthquakes have been severe over the past couple of years, the U.S. property marketplace has only been minimally impacted.

Earthquake risk in the U.S. is more commonly associated with the West Coast, but Virginia had a moderate earthquake felt from Washington to Boston this past August. There are seismic areas in the middle of the U.S., as well.

What is behind the firming market?

The biggest driver behind the firming property market and the resulting upward price pressure are insurer-incurred losses and lack of profitability. Most large property carriers suffered significant losses in 2011.

The good news for businesses looking for property coverage is industry surplus or capacity is near historic highs. Buyer demand has been (at best) flat following a few years of a slow economy. Strong supply and lagging demand has maintained a relatively competitive pricing environment despite the recent lack of profitability for insurers.

How quickly will these changes occur?

 

We saw modest upward pricing pressure the last two quarters of 2011. That’s not to say that if you look at the entire portfolio of accounts that all received an increase. Certainly, accounts that are more challenging from an exposure perspective or those that have had losses have already seen pricing pressure.

Most natural catastrophe property business renews in the first two quarters of the year as these buyers do not want to be in negotiations during hurricane season of June through November. Many large businesses say, ‘I don’t want to be in the market buying insurance if there is a big storm coming.’ You lose negotiating ability and potentially are exposed to reactive market behavior.

The flip side to that argument is that if there isn’t a big storm, you might have a market that is keener to do business; however, most buyers still choose to renew their property insurance in the first two quarters.

How will new developments affect limits, deductibles and coverage?

As far as limits, deductibles and coverage, we expect the market will remain generally stable. Some increase in underwriting discipline is likely to be felt in respect to coverage, limits, deductibles and pricing for commercial flood coverage (not the national flood insurance program).

What new products and services have been developed for the property market, and how can these benefit companies?

Aon has developed bed bug and rent protect insurance products. The bed bug product can provide cleanup/extermination and loss of income coverage to a variety of businesses and has seen the most interest from the hospitality and real estate industries.

The rent protect product can help real estate owners protect their income stream from tenants that default on their obligations.

Rick Miller is managing director of the National Property Practice for Aon Risk Solutions. Reach him at (617) 457-7707 or richard.miller@aon.com. BILL NOVAK is assistant director of the National Property Brokerage Group with Aon Risk Solutions, Southfield, Mich. Reach him at (248) 936-5257 or bill.novak@aon.com.

Published in Detroit

After the hit insurance companies took in 2011, businesses should expect changes in the property market for 2012.

“Companies can expect modest upward rate pressure due to severe global property losses,” says Rick Miller, managing director of the National Property Practice for Aon Risk Solutions. “Capacity remains stable and some increased underwriting discipline is apparent, particularly around the peril of flood.”

Risk Management Solutions’ (RMS) latest version of catastrophe modeling software is estimating increased damage impact from Atlantic-based tropical storms from Texas to Maine. Miller says the new software has translated to many underwriters pushing for higher pricing for exposures subject to losses from tropical storms.

Smart Business spoke with Miller about what is happening in the property market and what new developments companies should expect to see this year.

What kind of market conditions can businesses expect as a result of recent developments, and who will be most affected?

Businesses can expect a modestly firming property market for natural catastrophe — exposed risks (windstorm, earthquake and flood) and generally flat pricing for all other risks. Windstorm and earthquake are more geographically predictable: Gulf Coast and Eastern Seaboard for windstorm and California and Pacific Northwest for earthquake, while flood-prone areas exist in every U.S. state.

The newest versions of catastrophe modeling software contemplate more severe losses further inland for windstorm than previous models. While global earthquakes have been severe over the past couple of years, the U.S. property marketplace has only been minimally impacted.

Earthquake risk in the U.S. is more commonly associated with the West Coast, but Virginia had a moderate earthquake felt from Washington to Boston this past August. There are seismic areas in the middle of the U.S., as well.

What is behind the firming market

The biggest driver behind the firming property market and the resulting upward price pressure are insurer-incurred losses and lack of profitability. Most large property carriers suffered significant losses in 2011.

The good news for businesses looking for property coverage is industry surplus or capacity is near historic highs. Buyer demand has been (at best) flat following a few years of a slow economy. Strong supply and lagging demand has maintained a relatively competitive pricing environment despite the recent lack of profitability for insurers.

How quickly will these changes occur?

We saw modest upward pricing pressure the last two quarters of 2011. That’s not to say that if you look at the entire portfolio of accounts that all received an increase. Certainly, accounts that are more challenging from an exposure perspective or those that have had losses have already seen pricing pressure.

Most natural catastrophe property business renews in the first two quarters of the year as these buyers do not want to be in negotiations during hurricane season of June through November. Many large businesses say, ‘I don’t want to be in the market buying insurance if there is a big storm coming.’ You lose negotiating ability and potentially are exposed to reactive market behavior.

The flip side to that argument is that if there isn’t a big storm, you might have a market that is keener to do business; however, most buyers still choose to renew their property insurance in the first two quarters.

How will new developments affect limits, deductibles and coverage?

As far as limits, deductibles and coverage, we expect the market will remain generally stable. Some increase in underwriting discipline is likely to be felt in respect to coverage, limits, deductibles and pricing for commercial flood coverage (not the national flood insurance program).

What new products and services have been developed for the property market, and how can these benefit companies?

Aon has developed bed bug and rent protect insurance products. The bed bug product can provide cleanup/extermination and loss of income coverage to a variety of businesses and has seen the most interest from the hospitality and real estate industries.

The rent protect product can help real estate owners protect their income stream from tenants that default on their obligations.

Rick Miller is managing director of the National Property Practice for Aon Risk Solutions. Reach him at (617) 457-7707 or richard.miller@aon.com.

Published in St. Louis

After a year marked by unprecedented economic and catastrophic losses, many companies are wondering what impact this will have on the insurance marketplace in 2012.

With insured losses expected to exceed $90 billion, 2011 will likely be one of the costliest years on record for insurance companies.

“We expect to see rates going up,” says Dave Schaake, resident sales director of Aon Risk Solutions. “Generally, underwriters are becoming more cautious and re-evaluating their books of business, both in terms of rates, as well as terms and conditions.”

Smart Business spoke with Schaake about what companies can expect in 2012.

What does 2012 hold for the property and casualty markets?

We are beginning to see strong movement from property underwriters to get more rate, particularly from companies with natural catastrophe (CAT) exposures such as flood, wind and earthquake. The introduction of Risk Management Solutions (RMS) U.S. hurricane model version 11 guidance for expected losses is up by 25 to 55 percent for most wind exposed accounts.

As far as casualty, workers’ compensation is the one line of coverage where we are seeing rate increases. Businesses are being forced to do more with less, which has had a direct impact on the well being of their employees.

Also, because of the inherent liability, doctors and hospitals are becoming much more cautious when treating injured workers. Coupled with the uncertainty of health care reform, this all adds up to more costs for the insurance companies, which are ultimately being passed on to the consumer.

For certain risks, we are also seeing umbrella/excess liability rates trending upward, despite an abundance of available capacity.

What factors are affecting the 2012 outlook?

Companies with CAT exposures, a poor loss history or a lower risk quality are more likely to be faced with underwriters requiring rate increases and possibly higher deductibles/attachment points. Another factor that continues to impact the insurance industry is the lack of investment income. In the past, insurance companies were able to offset higher loss ratios by the yields obtained on their investments, but underwriters have not had that luxury in recent years. As a result, to achieve acceptable margins, insurance companies are forced to underwrite to a lower loss ratio.

How will the new outlook affect companies’ insurance purchasing and risk management plans?

The impact will depend on how companies budgeted for the upcoming year. Often, when faced with the prospect of higher premium costs, companies will re-evaluate their insurance program and assess the limits and deductibles being purchased.

They will likely also want to seek alternatives from other markets to ensure their program provides the best value for the dollars being spent.

What risk management issues should companies watch for in 2012?

It sounds basic, but companies need to understand their risk and how to control it. They also need to be able to convey that to management and to underwriters. For property risks, this means understanding the potential for loss at their various locations. Companies should also know the impact suppliers and other vendors have on their business. Underwriters will tell you that the recent catastrophes caused many of their insureds to suffer significant ‘indirect’ business interruption losses as a result of losing one of their key suppliers.

For casualty related risks, it is important to have a strong loss control/safety management program. Underwriters want to know how serious a company is about controlling risk. That means not only protecting their employees, but also others while on their premises.

Regardless of the risk, the key is to have the metrics to make sound business decisions, rather than arbitrary decisions based simply on cost. Determine the appropriate level of coverage and work toward it.

What steps can companies take to handle these challenges?

Begin the process well in advance of your renewal. Communicate early and often with your broker. Establish objectives for your renewal, along with a course of action to help you achieve these objectives. This should include meetings with your underwriters to ensure they understand not only your risk but also what makes it better than your peers.

Work with your broker to ensure your renewal submission is thorough and complete; the better the submission, the better the results. Again, talk to your broker throughout the process, but also make sure you have the opportunity to talk to your underwriter. Remember, no one can tell your story better than you.

Published in St. Louis

You don’t need a crystal ball to plan your risk management strategy for 2012. You do need an advisor with an understanding of the market and the right expertise.

“As far as rates go, we see a casualty market that is starting to firm,” says Kevin J. Pastoor, CPCU, a managing director of Aon Risk Solutions. “Some low and medium hazard firms are still receiving low single-digit rate decreases, but the size of the decreases, as well as the numbers of firms receiving them, are both continuing to abate. We see this trend continuing in 2012 and rate increases becoming more the norm. Increases are already being seen for higher hazard classes of business and where limited competition exists.”

For property, Pastoor sees more of the same: rates increasing in 2012. According to estimates from reinsurance company Swiss Re AG, 2011 will be the most costly catastrophe loss year on record, with $350 billion in total disaster losses. Approximately $108 billion of those losses will be covered by insurance, making 2011 the second most costly year on record for insurers, trailing only hurricane-plagued 2005, which had $123 billion in insured losses. Pastoor says these losses are increasing the pressure on rates.

“In Q4 of 2010, we were seeing average rate decreases of 6.3 percent,” he says. “By Q3 of 2011, rate decreases were less than 0.5 percent on average across all business segments, with our largest customers (with greater worldwide exposure) seeing a 2.3 percent average increase in rate.”

Smart Business spoke with Pastoor about what companies can expect in 2012.

What factors are affecting the 2012 outlook?

The high catastrophe losses in property and challenges facing the casualty market, such as tort issues and medical inflation, are having a negative impact on insurance company profitability. In addition, continuing low interest rates are negatively impacting insurance company investment income results. Also, many insurance companies have taken significant reserve releases (reserves are the surplus an insurance company holds to protect against incurred but not reported losses) over the last several years so the ability to prop up profitability with reserve releases has diminished.

However, these issues are not having the impact that many had predicted: significant rate increases and a tightening of coverage terms. This is mainly due to two factors. First, the industry still has considerable excess surplus. Second, we still don’t see consistent underwriting and pricing discipline. While commercial lines pricing has turned from negative to more flat over the last half of 2011, competition still remains fairly intense as companies are looking to maintain market share.

What are some of the emerging risks for 2012?

Two important emerging or evolving risks for businesses to consider are contingent business interruption and security and privacy risk. The Japan earthquake and tsunami, as well as flooding in Thailand, have increased awareness of the importance of understanding your supply chain risk and the effect it has on your contingent business interruption.

Contingent business interruption coverage is intended to respond when your supplier can’t operate and supply you with needed product and, therefore, you can’t operate. What was learned from the Japan disaster is that these policies respond differently. For example, some only respond when the disruption to your operations is caused by a direct supplier. If a supplier of your supplier is the business that suffered the direct loss, you may not be covered.

It’s critical that you understand your supply chain so that you can make sure you are purchasing appropriate coverage from both a language and limits standpoint. Working with a broker or agent with specific expertise in this area is critical.

Security and privacy risk is another evolving area. Security and privacy risk stems from the destruction, loss or unauthorized disclosure of information, including trade secrets, customer lists, or data such as personally identifiable information (credit card, Social Security or bank account numbers). This risk includes third-party liability, fines and penalties, as well as significant reputational harm.

Data breaches are becoming more frequent, more sophisticated and more financially damaging. In fact, 78 percent of Fortune 1,000 companies have suffered a breach. However, you do not need to be a large company to suffer a loss because virtually every organization has this type of data on customers and employees. Every company should conduct a data privacy and network security review.

You should also work with a broker or agent who understands this coverage, as base policy forms vary widely and usually need to be customized to ensure maximum coverage.

How will this outlook affect companies’ insurance purchasing and risk management programs?

With the market starting to firm, companies need to be more diligent when it comes to managing risk. Insurance companies are being more careful in how they deploy capacity.  As such, the better your risk profile and the more complete you are in terms of how your information is presented, the more likely you are to be one of the companies that is still seeing favorable pricing.

Work with your broker or agent to get the data right in terms of your exposures. For property, this means you need to know your facilities’ secondary characteristics, such as the year built, type of roof, number of stories, etc. Provide details of your loss control and safety programs. Explain the details of any large losses and what you have done to make sure they don’t occur in the future.

It’s critical that you work with a broker or agent who understands your risk and the marketplace and who knows how to present your risk in the appropriate light. Remember, the reality of your situation is never worse than an underwriter’s assumption if information is missing.

Kevin J. Pastoor, CPCU, is a managing director of Aon Risk Solutions. Reach him at kevin.pastoor@aon.com or (248) 936-5346.

Published in Detroit

You don’t need a crystal ball to plan your risk management strategy for 2012. You do need an advisor with an understanding of the market and the right expertise.

“As far as rates go, we see a casualty market that is starting to firm,” says Kevin J. Pastoor, CPCU, a managing director of Aon Risk Solutions. “Some low and medium hazard firms are still receiving low single-digit rate decreases, but the size of the decreases, as well as the numbers of firms receiving them, are both continuing to abate. We see this trend continuing in 2012 and rate increases becoming more the norm. Increases are already being seen for higher hazard classes of business and where limited competition exists.”

For property, Pastoor sees more of the same: rates increasing in 2012. According to estimates from reinsurance company Swiss Re AG, 2011 will be the most costly catastrophe loss year on record, with $350 billion in total disaster losses. Approximately $108 billion of those losses will be covered by insurance, making 2011 the second most costly year on record for insurers, trailing only hurricane-plagued 2005, which had $123 billion in insured losses. Pastoor says these losses are increasing the pressure on rates.

“In Q4 of 2010, we were seeing average rate decreases of 6.3 percent,” he says. “By Q3 of 2011, rate decreases were less than 0.5 percent on average across all business segments, with our largest customers (with greater worldwide exposure) seeing a 2.3 percent average increase in rate.”

Smart Business spoke with Pastoor about what companies can expect in 2012.

What factors are affecting the 2012 outlook?

The high catastrophe losses in property and challenges facing the casualty market, such as tort issues and medical inflation, are having a negative impact on insurance company profitability. In addition, continuing low interest rates are negatively impacting insurance company investment income results. Also, many insurance companies have taken significant reserve releases (reserves are the surplus an insurance company holds to protect against incurred but not reported losses) over the last several years so the ability to prop up profitability with reserve releases has diminished.

However, these issues are not having the impact that many had predicted: significant rate increases and a tightening of coverage terms. This is mainly due to two factors. First, the industry still has considerable excess surplus. Second, we still don’t see consistent underwriting and pricing discipline. While commercial lines pricing has turned from negative to more flat over the last half of 2011, competition still remains fairly intense as companies are looking to maintain market share.

What are some of the emerging risks for 2012?

Two important emerging or evolving risks for businesses to consider are contingent business interruption and security and privacy risk. The Japan earthquake and tsunami, as well as flooding in Thailand, have increased awareness of the importance of understanding your supply chain risk and the effect it has on your contingent business interruption.

Contingent business interruption coverage is intended to respond when your supplier can’t operate and supply you with needed product and, therefore, you can’t operate. What was learned from the Japan disaster is that these policies respond differently. For example, some only respond when the disruption to your operations is caused by a direct supplier. If a supplier of your supplier is the business that suffered the direct loss, you may not be covered.

It’s critical that you understand your supply chain so that you can make sure you are purchasing appropriate coverage from both a language and limits standpoint. Working with a broker or agent with specific expertise in this area is critical.

Security and privacy risk is another evolving area. Security and privacy risk stems from the destruction, loss or unauthorized disclosure of information, including trade secrets, customer lists, or data such as personally identifiable information (credit card, Social Security or bank account numbers). This risk includes third-party liability, fines and penalties, as well as significant reputational harm.

Data breaches are becoming more frequent, more sophisticated and more financially damaging. In fact, 78 percent of Fortune 1,000 companies have suffered a breach. However, you do not need to be a large company to suffer a loss because virtually every organization has this type of data on customers and employees. Every company should conduct a data privacy and network security review.

You should also work with a broker or agent who understands this coverage, as base policy forms vary widely and usually need to be customized to ensure maximum coverage.

How will this outlook affect companies’ insurance purchasing and risk management programs?

With the market starting to firm, companies need to be more diligent when it comes to managing risk. Insurance companies are being more careful in how they deploy capacity.  As such, the better your risk profile and the more complete you are in terms of how your information is presented, the more likely you are to be one of the companies that is still seeing favorable pricing.

Work with your broker or agent to get the data right in terms of your exposures. For property, this means you need to know your facilities’ secondary characteristics, such as the year built, type of roof, number of stories, etc. Provide details of your loss control and safety programs. Explain the details of any large losses and what you have done to make sure they don’t occur in the future.

It’s critical that you work with a broker or agent who understands your risk and the marketplace and who knows how to present your risk in the appropriate light. Remember, the reality of your situation is never worse than an underwriter’s assumption if information is missing.

Kevin J. Pastoor, CPCU, is a managing director of Aon Risk Solutions. Reach him at kevin.pastoor@aon.com or (248) 936-5346.

Published in Detroit

You don’t need a crystal ball to plan your risk management strategy for 2012. You do need an advisor with an understanding of the market and the right expertise.

“As far as rates go, we see a casualty market that is starting to firm,” says Kevin J. Pastoor, CPCU, a managing director of Aon Risk Solutions. “Some low and medium hazard firms are still receiving low single-digit rate decreases, but the size of the decreases, as well as the numbers of firms receiving them, are both continuing to abate. We see this trend continuing in 2012 and rate increases becoming more the norm. Increases are already being seen for higher hazard classes of business and where limited competition exists.”

For property, Pastoor sees more of the same: rates increasing in 2012. According to estimates from reinsurance company Swiss Re AG, 2011 will be the most costly catastrophe loss year on record, with $350 billion in total disaster losses. Approximately $108 billion of those losses will be covered by insurance, making 2011 the second most costly year on record for insurers, trailing only hurricane-plagued 2005, which had $123 billion in insured losses. Pastoor says these losses are increasing the pressure on rates.

“In Q4 of 2010, we were seeing average rate decreases of 6.3 percent,” he says. “By Q3 of 2011, rate decreases were less than 0.5 percent on average across all business segments, with our largest customers (with greater worldwide exposure) seeing a 2.3 percent average increase in rate.”

Smart Business spoke with Pastoor about what companies can expect in 2012.

What factors are affecting the 2012 outlook?

The high catastrophe losses in property and challenges facing the casualty market, such as tort issues and medical inflation, are having a negative impact on insurance company profitability. In addition, continuing low interest rates are negatively impacting insurance company investment income results. Also, many insurance companies have taken significant reserve releases (reserves are the surplus an insurance company holds to protect against incurred but not reported losses) over the last several years so the ability to prop up profitability with reserve releases has diminished.

However, these issues are not having the impact that many had predicted: significant rate increases and a tightening of coverage terms. This is mainly due to two factors. First, the industry still has considerable excess surplus. Second, we still don’t see consistent underwriting and pricing discipline. While commercial lines pricing has turned from negative to more flat over the last half of 2011, competition still remains fairly intense as companies are looking to maintain market share.

What are some of the emerging risks for 2012?

Two important emerging or evolving risks for businesses to consider are contingent business interruption and security and privacy risk. The Japan earthquake and tsunami, as well as flooding in Thailand, have increased awareness of the importance of understanding your supply chain risk and the effect it has on your contingent business interruption.

Contingent business interruption coverage is intended to respond when your supplier can’t operate and supply you with needed product and, therefore, you can’t operate. What was learned from the Japan disaster is that these policies respond differently. For example, some only respond when the disruption to your operations is caused by a direct supplier. If a supplier of your supplier is the business that suffered the direct loss, you may not be covered.

It’s critical that you understand your supply chain so that you can make sure you are purchasing appropriate coverage from both a language and limits standpoint. Working with a broker or agent with specific expertise in this area is critical.

Security and privacy risk is another evolving area. Security and privacy risk stems from the destruction, loss or unauthorized disclosure of information, including trade secrets, customer lists, or data such as personally identifiable information (credit card, Social Security or bank account numbers). This risk includes third-party liability, fines and penalties, as well as significant reputational harm.

Data breaches are becoming more frequent, more sophisticated and more financially damaging. In fact, 78 percent of Fortune 1,000 companies have suffered a breach. However, you do not need to be a large company to suffer a loss because virtually every organization has this type of data on customers and employees. Every company should conduct a data privacy and network security review.

You should also work with a broker or agent who understands this coverage, as base policy forms vary widely and usually need to be customized to ensure maximum coverage.

How will this outlook affect companies’ insurance purchasing and risk management programs?

With the market starting to firm, companies need to be more diligent when it comes to managing risk. Insurance companies are being more careful in how they deploy capacity.  As such, the better your risk profile and the more complete you are in terms of how your information is presented, the more likely you are to be one of the companies that is still seeing favorable pricing.

Work with your broker or agent to get the data right in terms of your exposures. For property, this means you need to know your facilities’ secondary characteristics, such as the year built, type of roof, number of stories, etc. Provide details of your loss control and safety programs. Explain the details of any large losses and what you have done to make sure they don’t occur in the future.

It’s critical that you work with a broker or agent who understands your risk and the marketplace and who knows how to present your risk in the appropriate light. Remember, the reality of your situation is never worse than an underwriter’s assumption if information is missing.

Kevin J. Pastoor, CPCU, is a managing director of Aon Risk Solutions. Reach him at kevin.pastoor@aon.com or (248) 936-5346.

Published in Detroit

As a result of the earthquake and subsequent tsunami in Japan, and the ongoing flooding in Thailand, many U.S. companies have filed or are considering filing contingent business interruption claims against their property insurers.

“Both Japan and Thailand have a significant number of suppliers for various industries, particularly automotive and semiconductors, which is resulting in losses for a number of insureds,” says Russ Opferkuch, managing director at Aon Risk Solutions, and senior officer of Aon’s Property Risk Consulting group and Aon’s Global Rapid Response program. “These insureds can’t get a part, or one of the items they need to put their product together because the manufacturing plant that makes what they need is either underwater in Thailand or impacted by one of the many loss exposures in Japan.”

Smart Business spoke with Opferkuch and Dean G. Mandis, risk adviser, Aon Risk Solutions, about how contingent business interruption insurance works, and how to maximize your chances of success with such a claim.

What is contingent business interruption insurance?

There are a lot of misconceptions as to what contingent business interruption coverage is. The intent of the coverage is simple: to reimburse you for losses you have because either your supplier or customer, or both, are impacted by physical damage resulting in their inability to provide you with their product or accept your product. For coverage to apply, the physical damage has to be from a peril that is covered by the policy, and to property of a type that is covered by the policy.

On the surface, it seems pretty simple, but when you need to quantify what your loss is and prove it to the insurance company, it becomes a difficult task. There also are wide variations in policy wordings and, as a result, it is difficult to generalize in terms of coverage.

Why can contingent business interruption be a difficult claim for companies?

Suppliers that may be impacted by a disaster, interrupting your business, may be either direct suppliers or indirect or ‘second-tier’ suppliers. Thus, for example, if the company two tiers upstream from you has a loss and can’t produce its product, then your supplier can’t produce its product, so you can’t produce yours. The further removed from you a loss is, the more difficult it is to connect your financial loss to the physical damage experienced by your supplier.

You have to present and document the loss just as if it is a direct loss to you. You need evidence of what caused the damage that resulted in interruption of the product. The insurer will want to inspect the supplier’s facility to verify the damage and to determine how long it will take for that company to get back into business and continue producing the product you’re waiting for.

One of the easiest ways to explain some of the complexities in documenting these claims is to use the losses in Japan as an example. If a company there is making an item or part for you, production could be interrupted for many reasons. Its facility might have been damaged by the earthquake or the resulting tsunami — which typically are considered two different perils. It could have been impacted by the radioactivity, which is not insured. A claim requires that you prove to your insurer that the interruption your suppliers had was caused by a specific covered peril and that the supplier is doing its best with due diligence and dispatch to rebuild its facility and restart its operations.

What does CBI insurance cover?

Assuming you purchase the appropriate coverage and can document that you had a financial loss, it will cover such things as your loss of earnings for a product you were unable to produce and associated fixed costs/continuing expenses. It also covers the incremental costs of finding another source: Some companies need to recertify their product to appropriately recognize the use of a replacement item different than the original.

For example, an automaker may need to use a certain chip in a car. If the automaker can’t get that chip, it will need to get a different chip, but it will have to recertify the system to ensure the new chip works correctly. There is a cost to that, and those costs can be recovered under CBI coverage.

What should companies do in the event of an interruption?

It’s a policy obligation to mitigate the loss by seeking other suppliers. I find our clients do that, not because of the insurance requirement, but because it’s the necessary thing to do to maintain one’s business. Some of the manufacturers in Thailand or Japan fortunately have facilities in other countries, so they are able to move portions of their production elsewhere.

The Wall Street Journal reported a Japanese trade ministry survey indicated that 97 percent of manufacturers that used suppliers in northern Japan have found alternate sourcing since the quake. Caution applies, because even if you think you have alternate suppliers set up, they may get the product from the same place.

For some items, there just isn’t another supplier. For example, a number of auto manufacturers used a particular pigment in their paint. While some may have gotten the pigment from several vendors, all those vendors sourced from the same manufacturing plant — a second-tier supplier.

So the auto manufacturers could not produce some colors while they were unable to get this pigment.

Russ Opferkuch, ARM, CPCU, CSP, is managing director at Aon Risk Solutions. He is senior officer of Aon’s Property Risk Consulting group and Aon’s Global Rapid Response program. Reach him at (212) 479-4656 or russ.opferkuch@aon.com. Dean G. Mandis is risk advisor at Aon Risk Solutions. Reach him at (314) 854-0872 or dean.mandis@aon.com.

Published in St. Louis

As a result of the earthquake and subsequent tsunami in Japan, and the ongoing flooding in Thailand, many U.S. companies have filed or are considering filing contingent business interruption claims against their property insurers.

“Both Japan and Thailand have a significant number of suppliers for various industries, particularly automotive and semiconductors, which is resulting in losses for a number of insureds,” says Russ Opferkuch, managing director at Aon Risk Solutions, and senior officer of Aon’s Property Risk Consulting group and Aon’s Global Rapid Response program. “These insureds can’t get a part or one of the items they need to put their product together because the manufacturing plant that makes what they need is either underwater in Thailand or impacted by one of the many loss exposures in Japan.”

Smart Business spoke with Opferkuch about how contingent business interruption insurance works, and how to maximize your chances of success with such a claim.

What is contingent business interruption insurance?

There are a lot of misconceptions as to what contingent business interruption coverage is. The intent of the coverage is simple: to reimburse you for losses you have because either your supplier or customer, or both, are impacted by physical damage resulting in their inability to provide you with their product or accept your product. For coverage to apply, the physical damage has to be from a peril that is covered by the policy, and to property of a type that is covered by the policy.

On the surface, it seems pretty simple, but when you need to quantify what your loss is and prove it to the insurance company, it becomes a difficult task. There also are wide variations in policy wordings and, as a result, it is difficult to generalize in terms of coverage.

Why can contingent business interruption be a difficult claim for companies?

Suppliers that may be impacted by a disaster, interrupting your business, may be either direct suppliers or indirect or ‘second-tier’ suppliers. Thus, for example, if the company two tiers upstream from you has a loss and can’t produce its product, then your supplier can’t produce its product, so you can’t produce yours. The further removed from you a loss is, the more difficult it is to connect your financial loss to the physical damage experienced by your supplier.

You have to present and document the loss just as if it is a direct loss to you. You need evidence of what caused the damage that resulted in interruption of the product. The insurer will want to inspect the supplier’s facility to verify the damage and to determine how long it will take for that company to get back into business and continue producing the product you’re waiting for.

One of the easiest ways to explain some of the complexities in documenting these claims is to use the losses in Japan as an example. If a company there is making an item or part for you, production could be interrupted for many reasons. Its facility might have been damaged by the earthquake or the resulting tsunami — which typically are considered two different perils. It could have been impacted by the radioactivity, which is not insured. A claim requires that you prove to your insurer that the interruption your suppliers had was caused by a specific covered peril and that the supplier is doing its best with due diligence and dispatch to rebuild its facility and restart its operations.

What does CBI insurance cover?

Assuming you purchase the appropriate coverage and can document that you had a financial loss, it will cover such things as your loss of earnings for a product you were unable to produce and associated fixed costs/continuing expenses. It also covers the incremental costs of finding another source: Some companies need to recertify their product to appropriately recognize the use of a replacement item different than the original.

For example, an automaker may need to use a certain chip in a car. If the automaker can’t get that chip, it will need to get a different chip, but it will have to recertify the system to ensure the new chip works correctly. There is a cost to that, and those costs can be recovered under CBI coverage.

What should companies do in the event of an interruption?

It’s a policy obligation to mitigate the loss by seeking other suppliers. I find our clients do that, not because of the insurance requirement, but because it’s the necessary thing to do to maintain one’s business. Some of the manufacturers in Thailand or Japan fortunately have facilities in other countries, so they are able to move portions of their production elsewhere.

The Wall Street Journal reported a Japanese trade ministry survey indicated that 97 percent of manufacturers that used suppliers in northern Japan have found alternate sourcing since the quake. Caution applies, because even if you think you have alternate suppliers set up, they may get the product from the same place.

For some items, there just isn’t another supplier. For example, a number of auto manufacturers used a particular pigment in their paint. While some may have gotten the pigment from several vendors, all those vendors sourced from the same manufacturing plant — a second-tier supplier.

So the auto manufacturers could not produce some colors while they were unable to get this pigment.

Russ Opferkuch, ARM, CPCU, CSP, is managing director at Aon Risk Solutions. He is senior officer of Aon’s Property Risk Consulting group and Aon’s Global Rapid Response program. Reach him at (212) 479-4656 or russ.opferkuch@aon.com.

Published in Detroit

The Patient Protection and Affordable Care Act is well named, as its aim is to make health care providers accountable for delivering better care. As a result, the reforms make skilled health care risk management even more vital.

“The Patient Protection and Affordable Care Act has initiated a fundamental shift in the manner in which health care providers are going to be paid,” says Ron Calhoun, managing director and national health care practice leader with Aon Risk Solutions. “We are beginning a transition from volume-based methodologies to outcome-based methodologies. Prior to this, we have been on a fee-for-service model, as health care providers were compensated for volume.”

Smart Business spoke with Calhoun about how risk management integrates with health care in an age of reform.

What effect is health care reform having on the health care delivery system?

One of the consequences is that reform is creating the need for delivery systems to more fully integrate and provide a broader continuum of services. To take a bundled reimbursement, as opposed to the old pay-for-volume model, health care providers will be compensated based on outcomes. That creates a need for them to more fully integrate. On the front end, they will need to build out their ambulatory capabilities, and on the back end, they will need to improve post-acute capabilities.

How will the shift to outcome-based compensation affect providers?

The Centers for Medicare and Medicaid Services has implemented a compensation mechanism called the value-based purchasing program for providers to measure quality. There are 12 clinical process measures and nine patient experience measures. This program, which takes effect in fiscal year 2013, is about 70 percent weighed toward the 12 clinical processes and about 30 percent weighed toward the nine patient experience measures.

If health care providers have Medicare or Medicaid reimbursements in 2013, they can participate in this program. Then, those measures will have a real impact on their reimbursement thresholds. The measurements, plus the overall shift away from volume toward getting paid for outcomes, makes risk management programs even more critical than their historical place in patient safety.

How can a risk management program help with those measures?

Nationally, our health care delivery system does not have a standardized, systemic quality measuring process. When The Institute of Medicine issued its 1999 report, ‘To Err is Human,’ it started the patient safety movement.

Risk management has been proactive in patient safety since 1999, but we still have negative outcomes in our health care delivery service. After a six-year decline, we are starting to see an increase in the frequency of health care professional liability claims.

What factors affect the frequency and severity of health care liability claims?

From 2000 to 2006, there was a decrease in the frequency of health care professional liability claims, driven by three factors. One was the proliferation of tort reform. Second, there was an investment in patient safety systems at the provider level. Third, the provider community did a good job managing the perception of there being an availability-of-care crisis because of malpractice costs. Those have contributed to a downward pressure on health care professional liability claims.

From 2007 to the present day, there have been continued investments in patient safety initiatives, but we are seeing an increase in claims because of two factors. The first is tort reform erosion. In some states, tort reform bills have been either reformed or weakened. The second factor is economic stress.

There is an interesting correlation between the unemployment rate and an increase in health care professional liability and medical malpractice claims frequency. For every 1 percent increase in the unemployment rate, there is a corresponding 0.3 percent increase in health care professional liability and medical malpractice claims frequency, with a three-year lag. We are starting to see the post-2007 unemployment rate as a contributing factor to increasing claims frequency.

Unlike claims frequency, claim severity has increased at a steady rate, 4 percent over the past six years. That is cause for concern.

What can be done to improve outcomes and reduce medical claims?

One of the biggest barriers to improving risk management and patient safety is the ability to measure outcomes and the speed with which outcomes can be measured. One feature of the Patient Protection and Affordable Care Act is providing financial incentives to hospitals and physicians to further the meaningful use of electronic medical records (EMRs). The proliferation is dramatic, but it is still a fractured business.

There are three levels of sophistication in EMRs. The first level is simply making a paper file electronic. The second is computerized physician order entry, or CPOE. The third and most complex level is platforms with clinical decision support data. That third level will be necessary going forward to drive down the incidence of preventable medical errors.

More sophisticated EMRs will improve outcomes because physicians will have clinical decision support to help them adhere to clinical protocols at their fingertips. This is important because one of the biggest variables for integrated delivery systems to manage as they make the shift from volume-based to outcome-based methodologies is their ability to narrow physician practice pattern variation.

This technology comes with liabilities. If physicians have clinical decision support at their fingertips and depart from protocols, and an adverse event occurs, these errors could have a greater financial consequence than in the absence of such technology.

Ron Calhoun is managing director and national health care practice leader with Aon Risk Solutions. Reach him at (704) 343-4128 or ron.calhoun@aon.com.

Published in Detroit