Risk Management Education

Butler’s Risk Business

A university risk management program establishes a student-run captive; and in the process succeeds in impressing incumbent risk management professionals.
By: | July 27, 2017 • 7 min read

Butler University’s bomb-sniffing dog Marcus is being insured by a student-run captive.

Butler University’s Zach Finn possesses such a passion for risk management that steam practically emanates from the top of his head when he talks about it.

So when the former J.M. Smucker Co. risk manager got the chance to work with a university risk management program, he jumped at the chance to begin teaching and innovating.

And one of his dreams was to guide his students in developing a student-run captive.

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“One of the reasons I wanted to set up a student-run captive at Butler was to show not only students what they could do with a risk management degree but show the industry what students could do with a risk management degree,” said Finn, the director of the Davey Risk Management & Insurance Program at Butler.

The program was launched with funding from 1947 Butler graduate William Davey, who enjoyed a long career with the Indiana Department of Insurance, including being appointed Insurance Commissioner in 1955.

The captive, which underwrites risks for Butler University’s liberal arts college, came into being in April, is licensed in Bermuda, and will become operational this month.

But the direct roots of the program date back to 2015, when Finn sat down with Michael M. Bill, the founder of MJ Insurance, to begin planning.

“I spent a lot of time in my career sitting down with people saying, ‘This is what this means, this is how this could be a benefit to the organization,’ ” Finn said.

Finn built a class within Butler’s risk management curriculum charged with putting together a feasibility study on the captive formation. He then hand-selected students from the risk management program to work on the study.

Zach Finn, director, Davey Risk Management & Insurance Program, Butler University

One recruit was Kentucky native Brad Weber, who was brought to Butler to play football and is now a risk professional, having landed a job as a risk analyst with the Moog Corporation after graduating from Butler’s risk management program in May.

“Butler University as a whole is all about experiential learning and it sounded like a great way to learn about insurance and not just from a textbook,” Weber said.

“Plus there was the opportunity to take a trip to whatever domicile was selected,” Weber said.

“That ended up being Bermuda, which was a really cool trip.”

After the class wrote its feasibility study and vetted it with the captive program’s professional advisory board, Finn and his students sent out inquiries to 10 domiciles.

“To their credit, Vermont and Bermuda were the only domiciles that responded,” Finn said.

Akilah Wilson, an assistant director of the Bermuda Monetary Authority, recalls her department being contacted by Butler University in September.

“Their original e-mail provided an Insurance Captive Brochure which outlined their initial proposal and demonstrated their commitment to establishing a captive. It was very well constructed from the outset,” she said.

“From what I gathered during the initial conversation, the students were very independent in producing their feasibility study on domiciles,” she said.

“They also led the first question and answer session. This demonstrated that they were leading the charge, with the help of their professors, of course.”

“One of the reasons I wanted to set up a student-run captive at Butler was to show not only students what they could do with a risk management degree but show the industry what students could do with a risk management degree.” — Zach Finn, director, Davey Risk Management & Insurance Program, Butler University

Don Ortegel, Aon Chicago managing director and a member of the school’s advisory board, also recalls being impressed with the Butler students when his team presented their RFP in the effort to win the job of captive manager.

“It was very clear from the process that the students were very engaged, very thoughtful,” he said.

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“They not only reviewed the RFP we had to present to them, they made the recommendation for the final decision,” Ortegel said.

What is now known as the MJ Student-Run Insurance Company Ltd. was established with a cross-class aggregate limit of $265,000 and will insure science equipment, books and fine arts collections in Butler University’s College of Liberal Arts and Sciences.

“We are insuring the first $150,000 of all of the scheduled fine arts and inland marine. Travelers will sit in excess,” Finn said.

Part of the students’ risk management work is performing loss control tours of the college’s library and its observatory.

As part of their analysis they determined that the college’s 38-inch Cassegrain reflector telescope was underinsured, by about $1 million. They also found out that they could automate closure of the observatory’s dome to close it remotely in the event of inclement weather.

Butler University’s student-run captive is insuring the university’s telescope; and conducting observatory safety evaluations.

“If the power goes out [in a storm] and somebody has to go over and manually shut the dome and it doesn’t happen, we’re out $2 million,” Finn said.

“That’s a $2,000 fix,” he said.

The captive is also insuring the university’s bomb-sniffing dog, Marcus. In an era when the alarming threat of terror attacks is on almost everyone’s minds, Finn thinks he has hit on a way to not only teach students about terrorism, but use risk management to fight it.

Finn and his Butler student team are developing a line of duty endorsement to the policy covering Marcus. The endorsement will allow for two dogs to rise up and take Marcus’ place should he ever be lost in the line of duty.

“Once we have developed this endorsement, we are going to float it out to the entire insurance industry. We’re going to ask that any carrier that insures a police dog or a bomb-sniffing dog include this line of duty endorsement.”

Butler grad Brad Weber said the experience he picked up in establishing a student-run captive in Bermuda proved invaluable in the job interview process.

Don Ortegel, managing director, Aon

“I would say what was really valuable about the class, more than what we learned which was specific to the captive industry, were project management skills,” Weber said.

“I think my education did a lot for me,” he said.

The position Weber is in at Moog required two to three years’ experience.

“Which I didn’t have coming right out of school,” Weber said.

“I was able to write a cover letter talking about how I would be able to handle all of the other requirements,” he said.

“And why my education gave me the experience required for a job like this,” he said.

Aon’s Ortegel said the Butler University accomplishment of establishing a student-run captive is a game changer.

“This isn’t necessarily about education,” he said.

“This is about the way we bring students or talent to the industry.”

As a result of the experience of helping to develop a captive at Butler, Ortegel said he and his teammates at Aon have been approached by other university risk management programs.

“We have had multiple inquiries and multiple conversations as a result of this,” he said.

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Given that only the domiciles of Vermont and Bermuda responded to the initial inquiries from the Butler team — although other domiciles later entered discussions — one might surmise that many didn’t take the Butler students seriously.

One who had no problem taking the Butler risk management students seriously was Bermuda’s Akilah Wilson, who holds a risk management degree from Philadelphia’s Temple University.

“Being a graduate of Temple and a member of the Fox School of Business & Management’s Gamma Iota Sigma Chapter, I understood that there is a level of real world experience that you are exposed to during one of these programs,” she said.

“It actually did give me a greater appreciation for their initiative. I thought it was a great, practical hands-on experience for students to embark on.” &

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

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Business Interruption Risk

Hidden Risks of Violence

The Las Vegas shooting and other tragedies increase demand for non-physical damage BI coverages. The market is growing, but do new products meet companies’ new needs?
By: | December 14, 2017 • 5 min read

Mass shootings in the United States and the emergence of new forms of terrorism in Europe are boosting demand for insurance against losses caused by business interruption when a policyholder suffers no direct property damage, according to insurers.

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But brokers say coverage for non-physical damage BI (NDBI), needs to evolve to better meet the emerging needs of corporate clients.

For years, manufacturing clients sought a more comprehensive range of NDBI coverages, especially due to the indirect effects of natural catastrophes such as the Thai floods that disrupted global supply chains in 2011.

More recently, however, hospitality and entertainment companies are expressing interest as they strive to adapt to realities such as the mass shootings in tourism hotspots Las Vegas and Orlando and terror attacks in such popular destinations as New York, Paris, Berlin, Barcelona and London.

In addition to loss of life and property, revenue loss is a real risk. Tragedies that cause a high number of fatalities can cause severe financial losses, especially for companies relying on tourism, as visitors shy away from crime scenes.

Precedents already exist. Paris received 1.5 million fewer visitors than expected in 2016, after the French capital was targeted by a series of deadly terror attacks the year before.

More recently, bookings declined in the immediate aftermath of a shooting at the Mandalay Bay Resort and Casino in Las Vegas that took the lives of 58 people on October 1: Bookings at the hotel have since recovered.

Joey Sylvester, national director of operations & planning, Public Sector, Gallagher

“The recent horrific mass shootings in Las Vegas, Nev., and in Sutherland Springs, Texas, raised awareness and concerns about similar events occurring in areas where the public congregates, such as entertainment venues like sporting events, concerts, restaurants, movie theaters, convention centers and more,” said Bob Nusslein, head of Innovative Risk Solutions Americas, Swiss Re CS.

“The second highest NDBI cover to natural catastrophes is terrorism, including active shooter and mass shootings.”

However, products available in the market do not always provide the protection companies would like. Active shooter coverages, for example, focus mostly on third-party liabilities that policyholders may face after a shooting.

Loss-of-attraction policies often define triggering events with a high degree of detail. These events may need to be characterized as a terrorist attack or act of war by authorities. In some cases, access to the venue needs to be officially cut off by police.

It follows that an attack by a 64-year old ex-accountant who shoots hundreds of people for no apparent reason — as was the case in the Mandalay Bay tragedy — isn’t likely to align with a typical policy trigger.

But insurers say they are trying to adapt to the evolving realities of both mass shootings and terrorism to meet the new needs expressed by clients.

“The active shooting coverage is drawing much interest in the U.S. market right now. In Europe, clients are increasingly inquiring about loss of attraction,” said Chris Parker, head of terrorism and political violence, Beazley.

“What we are doing at the moment is to try and cross these two kinds of products, so that a client can get coverage for the loss of attraction resulting from an active shooting event.”

Loss-of-attraction policies cover revenue loss derived from catastrophic events, and underwriters already offer alternatives that provide coverage, even when no property damage is involved.

To establish the reach of such a policy, buyers can define a trigger radius — a physical area defined in the policy. If a catastrophic event takes place within this radius, coverage will be triggered. This practice is sometimes called “cat in a box.”

Some products specify locations that, if hit by a catastrophic event, will result in lost revenue for the insured. For resorts or large entertainment complexes, for example, attacks on nearby airports could cause significant loss of revenue and could be covered by NDBI insurance.

Measuring losses is a challenge, and underwriters may demand steep retention levels. According to Parker, excess coverage may kick in after a 20 percent to 25 percent revenue drop.

Insurers will also want proof that the drop is related to the catastrophic event rather than economic downturn, seasonal variances or other factors.

“Capacity is very large for direct acts of terrorism but lower for indirect terrorism and violent acts because the exposure is far greater,” said Joey Sylvester, national director of operations & planning, Public Sector, Gallagher.

“Commercial businesses, public entities, religious and nonprofit organizations have various needs for this type of coverage, and the appetite is certainly trending upward.”

It is difficult to foresee which events will cause business disruption. As a result, according to Nusslein, companies generally prefer to purchase all-risk NDBI covers rather than named-perils coverage.

“The main reason is that, if they have coverage for four potential NDBI events and a fifth event occurs, the fifth event is not covered,” he said. “Insurers, new to NDBI covers, still prefer named-perils covers over all-risk cover.”

Current geopolitical tensions are also fueling buyers’ demands.

“Many companies want nuclear, biochemical, chemical and radiological exclusions removed from terrorism NDBI covers. While this is more difficult for insurers, it is not impossible,” Nusslein said.

“War risk NDBI cover is becoming more sought after due to political tensions between the U.S. and North Korea.”

“Many companies want nuclear, biochemical, chemical and radiological exclusions removed from terrorism NDBI covers. While this is more difficult for insurers, it is not impossible.” — Bob Nusslein, head of Innovative Risk Solutions Americas, Swiss Re CS

Natural catastrophes still constitute the largest share of perils underlying NDBI products.  Parametric indexes are increasingly employed to provide uncontroversial triggers to policies, said Duncan Ellis, U.S. property practice leader, Marsh.

These indexes range from rainfall levels and wind speed to the measured intensity of earthquakes. Interest in this kind of NDBI coverage expanded after the recent hurricane season.

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“The benefit of these products is that you do not have to go through the settlement process, which clients hate,” Ellis said.

NDBI policies are often bespoke, which is more common for very large insurance buyers.

“Usually, the market offers bespoke coverages for individual industries or clients, with very significant deductibles,” said Tim Cracknell, partner,  JLT Specialty.

NDBI cover can also help transfer regulatory and product recall risks. The life science sector is expressing interest in this kind of solution for cases where a supplier goes bankrupt or is shut down by a regulator, or a medication needs to be recalled due to perceived flaws in the manufacturing process.

Experts say that concerns still to be addressed are NDBI losses caused by cyber attacks and pandemics.

Capacity is an ongoing concern. According to Swiss Re CS, $50 million to $100 million, or even more, can be achieved through foundation capacity provided by a lead insurer, with syndicated capacity to other insurers and reinsurers, depending on the risk. &

Rodrigo Amaral is a freelance writer specializing in Latin American and European risk management and insurance markets. He can be reached at [email protected]