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Surety

Taking the Tedium out of Surety Reports

Technology will speed up a construction finance reporting requirement that was previously manual and tedious.
By: | August 29, 2017 • 8 min read

Construction surety is about to get significantly more sure. Two trade groups, the National Association of Surety Bond Producers (NASBP) and the Surety & Fidelity Association of America (SFAA) are working with two standards-setting organizations and several underwriters to develop a whole new online protocol.

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In trials, the new protocol reduced input time on contractor work-in-progress (WIP) reports from 30 minutes to about two seconds, and reduced transcription errors to zero. That new system is being rolled out for commercial scale testing later this year.

“Our industry has been way behind in this regard,” said Greg Davenport, senior vice president of global operations for Liberty Mutual Surety, and chair of the implementation subcommittee under NASBP that is a collaborative function with SFAA. Prior to his current position, Davenport was chair of the SFAA e-business advisory committee for 10 years.

As far back as the ’70s, the insurance business implemented standards established by the Association for Cooperative Research & Development (ACORD). Similar standards were brought into surety in 1996, Davenport recalled.

“We had always wanted to implement other standards, including those for financial data, and we thought of XBRL for those.”

XBRL is the organization that established the standards by which publicly traded firms report their financial data to the Securities and Exchange Commission. It is also used by banks reporting to the Federal Deposit Insurance Corporation.

“We have only been able to connect with XBRL in the past few years,” Davenport noted, “but are now ready to launch with the XBRL financial data standard as well as four new ACORD standards: report of execution [on a bond], construction bond requests, commercial bond requests, and addenda for those forms.”

A Giant Leap Ahead in Technology

He is optimistic that the financial data standards will be a compelling improvement that will drive the adoption of other standards across the business.

Robert Coon, chairman of the automation and technology committee of NASBP and vice president of surety at Scott Insurance, emphasized the speed, efficiency and accuracy of the XBRL system.

Greg Davenport, senior vice president, global operations, Liberty Mutual Surety

“It is a significant improvement in that surety has historically been a manual process. When I joined an agency from underwriting in 1999, the first thing that I did was buy a typewriter.”

Every contractor provides WIP reports to its surety every quarter.

“That is a huge effort to input,” Coon lamented. “It is tedious and extraordinarily error prone. We tried to get a broad cross-section of industry so that we had all data elements.”

He noted that there was also input from the Construction Financial Management Association.

“Now that we have this XBRL standard,” said Coon, “the focus will be on getting sureties to accept data in that format and to get some software vendors to be able to implement it as an export option just like a PDF or spreadsheet.

“Every software provider has indicated that this will be a fairly easy addition. Hopefully we will see full implementation across the industry over the next two to three years.”

Consensus was the key, said Joe Orgovan, director of information technology at SFAA.

“We have been looking at data standards for decades. Our members have their systems, contractors have theirs, agents and brokers have theirs. The ACORD standards have been in place since the ’70s and there was a big push in the ’90s to fine-tune that for surety, including construction. Just in the last two or three years have we been able to make use of the existing XBRL financial standards.”

There is an initial investment in coding time, but after that it’s all gravy.

“One member told me his developers took eight hours to do the programming internally. That is one day of work. Now intake of WIP reports takes two seconds, versus what used to take half an hour.”

“We have been looking at data standards for decades. Our members have theirs, contractors have theirs, agents and brokers have theirs.” — Joe Orgovan, director of information technology, SFAA

The arithmetic is compelling. After 16 reports, the new protocol is saving time. Considering that one small contractor can submit a few dozen reports each quarter, and a large contractor can file hundreds, that is about as close to instant return on investment as possible.

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“A few obligees will always stick with their own process, but SFAA has always been very vocal in supporting data standards. With the proof-of-concept trials we are now moving into the education phase across the industry.

“There is a huge potential return on investment here. The current process is time consuming, requires rekeying of data which increases chance of error, increases response time and ultimately costs more money. The XBRL standard is seamless. It increases efficiency, and reduces errors, expense, and response time.”

Rick Ciullo, COO for The Hartford Bond, said that his firm “went all in on the XBRL technology” for accuracy and efficiency, but also because it enables better deployment of capacity.

“When we have transparency through the WIP reports to the contractor, we can be sure of the correct amount of capacity for each client. Everyone benefits from that transparency. When underwriters have the best information, they can price correctly.”

John Gray, director of digital transformation for The Hartford’s specialty commercial operations concurs with the importance of consensus.

Robert Coon, chairman, automation and technology committee, NASBP

“We toyed for years with the idea of our own system for WIP ingestion, but decided against it without adoption by contractors. Our interest in the SFAA and NASBP initiative is that they pushed it as an industry need. They had the working group develop the taxonomy with XBRL. We provided the resources of The Hartford information technology department to the proof-of-concept trials.”

Gray elaborated on the distinction between the two types of data standards. “ACORD is the standard for transmitting transactional information. This is booking-level information. That was expanded to support surety standards, but there was no major uptake. As we talked about WIP data and taxonomy, we realized there was a better alignment with established financial reporting.”

He recalls a demonstration at a recent NASBP meeting.

“We had a shoddy wi-fi connection and the WIP upload took about five seconds. We thought it was embarrassing, but all the delegates were impressed.”

The human element also benefits from the tech wizardry, said Ciullo.

“Customers expect their underwriters to know them. We want to spend our time and effort and money thinking and analyzing risks, not inputting data.”

Gray confirms that The Hartford “is committed. We are testing internally now. We have quarterly upgrade cycles, so we expect to implement on one of those cycles, either later this year or early in 2018.”

In addition to The Hartford and Liberty Mutual, Travelers, AIG, and Zurich are involved in the project, said Michelle Savage, vice president of communications for XBRL. She estimated that implementation would pay for itself after 110 WIP reports.

XBRL originally stood for extensible business reporting language. Savage notes that there was more efficiency sought than just adopting an existing standard. When XBRL was first developed, the initial taxonomy built out of definitions in generally accepted accounting principles grew to 15,000 terms. The special taxonomy for contractor surety reporting only had to add 70 new terms to that.

“It is a significant improvement in that surety has historically been a manual process.” — Robert Coon, chairman, automation and technology committee, NASBP

“There is a lot of financial data, a huge amount of information,” said Savage. “Up to this point it has mostly been in portable-document format [PDF] or in a spreadsheet. The goal is to have a XBRL format for exporting documents.”

Even though the change in data standards and format is revolutionary, the emphasis from the start has been to evolve and expand from the existing practices.

Joe Orgovan, director of information technology, SFAA

“We followed the ACORD standards, but I believe that we and Travelers were the only ones to implement those fully,” for construction surety, said Liberty Mutual’s Davenport.

He was quick to add that was just an observation, not a criticism. “There were lots of enhancements that people wanted. Things like electronic transfer for requests for bids, for bid results, financial standards. But there was no point in going on with the other standards when only a few were implementing the most basic reports of execution. What has changed now is that we have XBRL on the scene.”

Davenport is confident that the adoption of a simple fix to a ubiquitous problem with a compelling business case will lead to further electronic upgrades. “My hope is that we, as an industry, can build more adoption and implementation for other standards.”

Once the materials have been made available, Davenport sees natural uptake. “The standard forms will allow contractors to send their information to carriers with the push of a button. At the other end, they will be converted to the carriers’ own systems.

“This is groundbreaking in surety. But frankly it is hard to believe that here we are in 2017 and we are still rekeying. That can now change.”

There is more to the change than just saving time and money. Davenport emphasized the importance of responsiveness.

“Carriers can better manage exposure. They can allocate appropriate capital to specific clients.”

Coon, of NASBP, also noted the benefits.“This not just about savings. XBRL is already the financial standard worldwide, and surety is very financially focused.”

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It is also important that while the new process is a data standard, it does not limit use of the data by insurers.

“This is a reporting standard, not software,” said Coon. “It does not affect what anyone does with the data.

“We tried to get a broad cross-section of the industry to get all data elements, define the sets and standards,” he continued. “Now we are out there trying to educate contractors and sureties to gain adoption. This is a huge enhancement.”

As part of that effort, XBRL will hold a free, half-day forum on Nov. 1, “Smart Data, Better Results” for investors, analysts, and regulators, as well as data and analytical tool providers. The event is hosted by Baruch College’s Zicklin School of Business in the Newman Conference Center, in Manhattan, with sponsorship by CFA Institute and CFA Society New York.

The program will emphasize practical information on using structured, automated smart data to perform better analysis. Speakers on the agenda include representatives from CFA Institute, Morgan Stanley, and the SEC, as well as several XBRL startup analytical tool providers. &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

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In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

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Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

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How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

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One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]