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]

More from Risk & Insurance

More from Risk & Insurance

Risk Report: Hospitality

Bridging the Protection Gap

When travelers stay home, hospitality companies recoup lost income through customized, data-defined policies.
By: | October 12, 2017 • 9 min read

In the wake of a hurricane, earthquake, pandemic, terror attack, or any event that causes carnage on a grand scale, affected areas usually are subject to a large “protection gap” – the difference between insured loss and total economic loss. Depending on the type of damage, the gap can be enormous, leaving companies and communities scrambling to obtain the funds needed for a quick recovery.

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RMS estimates that Hurricane Harvey’s rampage through Texas could cause as much as $90 billion in total economic damage. The modeling firm also stated that “[National Flood Insurance Program] penetration rates are as low as 20 percent in the Houston area, and thus most of the losses will be uninsured.”

In addition to uninsured losses from physical damage, many businesses in unaffected surrounding areas will suffer non-physical contingent business interruption losses. The hospitality industry is particularly susceptible to this exposure, and its losses often fall into the protection gap.

Natural catastrophes and other major events that compromise travelers’ safety have prolonged impacts on tourism and hospitality. Even if they suffer no physical damage, any hotel or resort will lose business as travelers avoid the area.

“The hospitality industry is reliant on people moving freely. If people don’t feel safe, they won’t travel. And that cuts off the lifeblood of the industry,” said Christian Ryan, U.S. Hospitality and Gaming Practice Leader, Marsh.

Christian Ryan
U.S. Hospitality and Gaming Practice Leader, Marsh

“People are going away from the devastation, not toward it,” said Evan Glassman, president and CEO, New Paradigm Underwriters.

Drops in revenue resulting from decreased occupancy and average daily room rate can sometimes be difficult to trace back to a major event when a hotel suffered no physical harm. Traditional business interruption policies require physical damage as a coverage condition. Even contingent business interruption coverages might only kick in if a hotel’s direct suppliers were taken offline by physical damage.

If everyone remains untouched and intact, though, it’s near impossible to demonstrate how much of a business downturn was caused by the hurricane three states away.

“Hospitality companies are concerned that their traditional insurance policies only cover business interruption resulting from physical damage,” said Bob Nusslein, head of Innovative Risk Solutions for the Americas, Swiss Re Corporate Solutions.

“These companies have large uninsured exposure from events which do not cause physical damage to their assets, yet result in reduced income.”

Power of Parametrics

Parametric insurance is designed specifically to bridge the protection gap and address historically uninsured or underinsured risks.

Parametric coverage is defined and triggered by the characteristics of an event, rather than characteristics of the loss. Triggers are custom-built based on an insured’s unique location and exposures, as well as their budget and risk tolerance.

“Triggers typically include a combination of the occurrence of a given event and a reduction in occupancy rates or RevPar for the specific hotel assets,” Nusslein said. Though sometimes the parameters of an event — like measures of storm intensity — are enough to trigger a payout on their own.

For hurricane coverage, for example, one policy trigger might be the designation of a Category 3-5 storm within a 100-mile radius of the location. Another trigger might be a 20 percent drop in RevPAR, or revenue per available room. If both parameters are met, a pre-determined payout amount would be administered. No investigations or claims adjustment necessary.

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The same type of coverage could apply in less severe situations where traditional insurance just doesn’t respond. Event or entertainment companies, for example, often operate at the whim of Mother Nature. While they may not be forced to cancel a production due to inclement weather, they will nevertheless take a hit to the bottom line if fewer patrons show up.

Christian Phillips, focus group leader for Beazley’s Weatherguard parametric products, said that as little as a quarter- to a half-inch of rain over a four- to five-hour period is enough to prevent people from coming to an event, or to leave early.

“That’s a persistent rainfall that will wear down people’s patience,” he said.

“A rule of thumb for parametric weather coverage, if you’re looking to protect loss of revenue when your event has not actually been cancelled, you will probably lose up to 20 to 30 percent of your revenue in bad weather. That depends on the client and the type of event, but that’s the standard we’ve realized from historical claims data.”

The industry is now drawing on data to establish these rules of thumb for more serious losses sustained by hospitality companies after major events.

“Until recently the insurance industry has not created products to address these non-physical damage business interruption exposures. The industry is now collaborating with big data companies to access data, which in turn, allows us to structure new products,” Nusslein said.

Data-Driven Triggers

Insurers source data from weather organizations that track temperature, rainfall, wind speeds and snowfall, among other perils, by the hour and sometimes by the minute. Parametric triggers are determined based on historical storm data, which indicates how likely a given location is to be hit.

“We try to get a minimum of 30 years of hourly data for those perils for a given location,” Phillips said.

“Global weather is changing, though, so we focus particularly on the last five to 10 years. From that we can build a policy that fits the exposure that we see in the data, and we use the data to price it correctly.”

New Paradigm Underwriters collects their own wind speed data via a network of anemometers that stretch from Corpus Christi, Texas, all the way to Massachusetts, and works with modeling firms like RMS to gather additional underwriting information.

The hospitality industry is reliant on people moving freely. If people don’t feel safe, they won’t travel. And that cuts off the lifeblood of the industry.– Christian Ryan, U.S. Hospitality and Gaming Practice Leader, Marsh

While severe weather is the most common event of concern, parametric cover can also apply to terrorism and pandemic risks.

“We offer a terror attack quote on every one of our event policies because everyone asks for it,” said Beazley’s Phillips.

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“We didn’t do it 10 years ago, but that’s the world we live in today.”

An attack could lead to civil unrest, fire or any number of things outside an insured’s control. It would likely disrupt travel over a wide geographic region.

“A terrorist event could cause wide area devastation and loss of attraction, which results in lost income for hospitality companies,” Nusslein said.

Disease outbreaks also dampen travel and tourism. Zika, which was most common in South America and the Caribbean, still prevented people from traveling to south Florida.

“Occupancy went down significantly in that region,” Marsh’s Ryan said.

“If there is a pandemic across the U.S., a parametric coverage would make sense. All travel within and inbound to the U.S. would go down, and parametric policies could protect hotel revenues in non-impacted areas. Official statements from the CDC such as evacuation orders or warnings could qualify as a trigger.”

Less data exists around terror attacks and pandemics than for weather, though hotels are taking steps to collect information around their exposure.

“It’s hard to quantify how an infectious disease outbreak will impact business, but we and clients are using big data to track travel patterns,” Ryan said.

Hospitality Metrics

Any data collected has to be verified, or “cleaned.”

“We only deal with entities that will clean the data so we know the historical data we’re getting is accurate,” Phillips said.

“There are mountains of data out there, but it’s unusable if it’s not clean.”

Parametric underwriters also tap into the insured’s historical data around occupancy and room rates to estimate the losses it may suffer from decreased revenue.

Bob Nusslein, head of Innovative Risk Solutions for the Americas, Swiss Re Corporate Solutions.

“The hospitality industry uses two key metrics to measure loss of business income. These include occupancy rate and revenue per available room, or RevPAR. These are the traditional measurements of business health,” Swiss Re’s Nusslein said.  RevPAR is calculated by multiplying a hotel’s average daily room rate (ADR) by its occupancy rate.

“The hotel industry has been contributing its data on occupancy, RevPAR, room supply and demand, and historical data on geographical and seasonal trends to independent data aggregators for many years. It has done an exceptional job of aggregating business data to measure performance downturns from routine economic fluctuations and from major ‘Black Swan’ events, like the 9/11 terrorist attacks, the 2008 financial crisis or the 2009 SARS epidemic.”

Claims history can also provide an understanding of how much revenue a hotel or an event company has lost in the past due to any type of business interruption. Business performance metrics combined with claims data determine an appropriate payout amount.

Like coverage triggers, payouts from parametric policies are specifically defined and pre-determined based on data and statistical evidence.

This is the key benefit of parametric coverage: triggers are hit, payment is made. With minimal or no adjustment process, claims are paid quickly, enabling insureds to begin recovery immediately.

Applying Parametric Payments

For hotels with no physical damage, but significant drops in occupancy and revenue, funds from a parametric policy can help bridge the income gap until business picks up again, covering expenses related to regular maintenance, utilities and marketing.

Because payment is not tied to a specific type or level of loss, it can be applied wherever insureds need it, so long as it doesn’t advance them to a better financial position than they enjoyed prior to the loss.

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Parametric policies can be designed to fill in where an insured has not yet met their deductible on a separate traditional policy. Or it could function as excess coverage. Or it could cover exposures excluded by other policies, or for which there is no insurance option at all. Completely bespoke, parametric coverages are a function of each client’s individual exposures, risk tolerance and budget.

“Parametric insurance enables underwriting of risks that are outside tolerance levels from a traditional standpoint,” NPU’s Glassman said.

The non-physical business interruption risks faced by the hospitality industry match that description pretty closely.

“Hotels are a good fit for parametric insurance because they have a guaranteed loss from a business income standpoint when there is a major storm coming,” Glassman said.

While only a handful of carriers currently offer a form of parametric coverage, the abundance of available data and advancement in data collection and analytical tools will likely fuel its popularity.

Companies can maximize the benefits of parametric coverages by building them as supplements to traditional business interruption or event cancellation policies. Both New Paradigm Underwriters and Beazley either work with other property insurers or create hybrid products in-house to combine the best of both worlds and assemble a comprehensive risk transfer solution. &

Katie Siegel is an associate editor at Risk & Insurance®. She can be reached at [email protected]