Surety

Data Will Speed Surety

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.

Advertisement




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.

Advertisement




“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.”

Advertisement




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

Alternative Energy

A Shift in the Wind

As warranties run out on wind turbines, underwriters gain insight into their long-term costs.
By: | September 12, 2017 • 6 min read

Wind energy is all grown up. It is no longer an alternative, but in some wholesale markets has set the incremental cost of generation.

As the industry has grown, turbine towers have as well. And as the older ones roll out of their warranty periods, there are more claims.

This is a bit of a pinch in a soft market, but it gives underwriters new insight into performance over time — insight not available while manufacturers were repairing or replacing components.

Charles Long, area SVP, renewable energy, Arthur J. Gallagher

“There is a lot of capacity in the wind market,” said Charles Long, area senior vice president for renewable energy at broker Arthur J. Gallagher.

“The segment is still very soft. What we are not seeing is any major change in forms from the major underwriters. They still have 280-page forms. The specialty underwriters have a 48-page form. The larger carriers need to get away from a standard form with multiple endorsements and move to a form designed for wind, or solar, or storage. It is starting to become apparent to the clients that the firms have not kept up with construction or operations,” at renewable energy facilities, he said.

Third-party liability also remains competitive, Long noted.

“The traditional markets are doing liability very well. There are opportunities for us to market to multiple carriers. There is a lot of generation out there, but the bulk of the writing is by a handful of insurers.”

Broadly the market is “still softish,” said Jatin Sharma, head of business development for specialty underwriter G-Cube.

“There has been an increase in some distressed areas, but there has also been some regional firming. Our focus is very much on the technical underwriting. We are also emphasizing standardization, clean contracts. That extends to business interruption, marine transit, and other covers.”

The Blade Problem

“Gear-box maintenance has been a significant issue for a long time, and now with bigger and bigger blades, leading-edge erosion has become a big topic,” said Sharma. “Others include cracking and lightning and even catastrophic blade loss.”

Long, at Gallagher, noted that operationally, gear boxes have been getting significantly better. “Now it is blades that have become a concern,” he said. “Problems include cracking, fraying, splitting.

Advertisement




“In response, operators are using more sophisticated inspection techniques, including flying drones. Those reduce the amount of climbing necessary, reducing risk to personnel as well.”

Underwriters certainly like that, and it is a huge cost saver to the owners, however, “we are not yet seeing that credited in the underwriting,” said Long.

He added that insurance is playing an important role in the development of renewable energy beyond the traditional property, casualty, and liability coverages.

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine. Weather risk coverage can be done in multiple ways, or there can be an actual put, up to a fixed portion of capacity, plus or minus 20 percent, like a collar; a straight over/under.”

As useful as those financial instruments are, the first priority is to get power into the grid. And for that, Long anticipates “aggressive forward moves around storage. Spikes into the system are not good. Grid storage is not just a way of providing power when the wind is not blowing; it also acts as a shock absorber for times when the wind blows too hard. There are ebbs and flows in wind and solar so we really need that surge capacity.”

Long noted that there are some companies that are storage only.

“That is really what the utilities are seeking. The storage company becomes, in effect, just another generator. It has its own [power purchase agreement] and its own interconnect.”

“Most projects operate at lower capacity than anticipated. But they can purchase coverage for when the wind won’t blow or the sun won’t shine.”  —Charles Long, area senior vice president for renewable energy, Arthur J. Gallagher

Another trend is co-location, with wind and solar, as well as grid-storage or auxiliary generation, on the same site.

“Investors like it because it boosts internal rates of return on the equity side,” said Sharma. “But while it increases revenue, it also increases exposure. … You may have a $400 million wind farm, plus a $150 million solar array on the same substation.”

In the beginning, wind turbines did not generate much power, explained Rob Battenfield, senior vice president and head of downstream at JLT Specialty USA.

“As turbines developed, they got higher and higher, with bigger blades. They became more economically viable. There are still subsidies, and at present those subsidies drive the investment decisions.”

For example, some non-tax paying utilities are not eligible for the tax credits, so they don’t invest in new wind power. But once smaller companies or private investors have made use of the credits, the big utilities are likely to provide a ready secondary market for the builders to recoup their capital.

That structure also affects insurance. More PPAs mandate grid storage for intermittent generators such as wind and solar. State of the art for such storage is lithium-ion batteries, which have been prone to fires if damaged or if they malfunction.

“Grid storage is getting larger,” said Battenfield. “If you have variable generation you need to balance that. Most underwriters insure generation and storage together. Project leaders may need to have that because of non-recourse debt financing. On the other side, insurers may be syndicating the battery risk, but to the insured it is all together.”

“Grid storage is getting larger. If you have variable generation you need to balance that.” — Rob Battenfield, senior vice president, head of downstream, JLT Specialty USA

There has also been a mechanical and maintenance evolution along the way. “The early-generation short turbines were throwing gears all the time,” said Battenfield.

But now, he said, with fewer manufacturers in play, “the blades, gears, nacelles, and generators are much more mechanically sound and much more standardized. Carriers are more willing to write that risk.”

There is also more operational and maintenance data now as warranties roll off. Battenfield suggested that the door started to open on that data three or four years ago, but it won’t stay open forever.

“When the equipment was under warranty, it would just be repaired or replaced by the manufacturer,” he said.

“Now there’s more equipment out of warranty, there are more claims. However, if the big utilities start to aggregate wind farms, claims are likely to drop again. That is because the utilities have large retentions, often about $5 million. Claims and premiums are likely to go down for wind equipment.”

Advertisement




Repair costs are also dropping, said Battenfield.

“An out-of-warranty blade set replacement can cost $300,000. But if it is repairable by a third party, it could cost as little as $30,000 to have a specialist in fiberglass do it in a few days.”

As that approach becomes more prevalent, business interruption (BI) coverage comes to the fore. Battenfield stressed that it is important for owners to understand their PPA obligations, as well as BI triggers and waiting periods.

“The BI challenge can be bigger than the property loss,” said Battenfield. “It is important that coverage dovetails into the operator’s contractual obligations.” &

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]