Risk Insider: Pat Hickey

Intelligent Use of Technology Is the Key to Managing Risks in Third-Party Logistics Arrangements

By: | June 18, 2018 • 5 min read
Pat Hickey is Executive Vice President, Head of U.S. Marine, for Aspen Insurance, Pat’s expertise includes global freight forwarders, third-party logistics providers, warehousing and supply chain. He is a current member of the AIMU Cargo Committee and National Cargo Bureau. Pat can be reached at riskletters@lrp.com.

Estimates indicate that real gross domestic product (GDP) in the U.S. increased at an annual rate of 2.3 percent in the first quarter of 2018, with forecasts of +2.9 percent and +2.7 percent for 2018 and 2019 respectively.

Simplistically speaking, economic growth leads to more freight in transit, but the trend of globalization and increased retail-to-retail partnerships is gaining momentum and contributing to the upward trajectory of the Freight Transportation Index shown in the chart below. Growth in third-party logistics (3PL) is a key contributor to this trend.

Most manufacturers and retailers now employ 3PLs for at least a percentage of their domestic activities and almost all of their global operations. 3PL services embrace essentially all aspects of the supply chain from transportation and warehousing to global services and information technology requirements.

The advantages are numerous and include reductions in current costs and capital expenditures. 3PL global expertise includes documentation, customs and freight forwarding services as well as arranging global air-freight, vessel and truck transit.

Outsourcing supply logistics enables manufacturers and retailers to focus on their core activities and improve customer relationships through more certainty of timely and accurate delivery.

These companies are in a consumer-driven market, producing and selling goods with little margin for error. They are not in the business of moving goods around the world within a complex, global supply chain.

Global 3PLs help by providing expertise, efficiencies and insight into shipping issues so these businesses are able to meet the ever-increasing needs and demands of their consumers.

These 3PLs not only offer the benefits of shared costs, scalability, accountability and global reach, but also have capabilities for improving and reducing a company’s environmental and personnel risk.

Reduction in certain risks is not to say that risks do not still exist. Questions surrounding global insurance should be included in any client’s assessment of 3PLs together with those concerning performance indicators of claims, order error and success ratios, as well as on-time shipping percentage and inventory management.

In turn, the underwriter must be fully informed of the delivery route from start to destination – that includes multimodal transport on road, rail, sea and air and all staging posts in between, such as warehousing facilities. This entails fully understanding a carrier’s legal or contractual liability for damage to customers’ goods in their care, custody and control, at all stages of the global supply chain.

Risk assessment includes the value of the goods and degree of fragility. Poorly designed packaging, for example, may be a factor in the latter and high-value goods, such as pharmaceuticals or electronics, are more susceptible to theft, especially if they can be resold easily.

The track record of the carrier is also a consideration not only for the client but also the insurer should there be any indication of an unreliable record or poor visibility of their subcontracted carriers.

A strong, global logistics provider will be able to work with their insurance broker and underwriter to offer their customer a variety of insurance solutions for their goods in transit. In addition, the 3PL should be able to demonstrate long-term relationships with the companies who help them move freight and prove the commitments their partners make to them for the safe delivery of the goods.

Without reliable partners and the proper controls, freight could be sub-brokered multiple times. The freight then becomes highly susceptible to loss or damage, due to breakdowns in communication and failures to exercise adequate controls.

Outsourcing supply logistics enables manufacturers and retailers to focus on their core activities and improve customer relationships through more certainty of timely and accurate delivery. These companies are in a consumer-driven market, producing and selling goods with little margin for error. They are not in the business of moving goods around the world within a complex, global supply chain.

Changes in Logistics

The logistics industry – like many others – is facing considerable change, which is introducing new challenges to deliver better service at lower cost. New entrants and new collaborative partnerships are part of the strategic change, but intelligent use of technology is the common thread. This includes data analytics, automation, platform solutions and the Physical Internet.

Risk management needs to span these developments as the more digitally-advanced providers are able to benefit from improved forecasting, appropriate scalability and route flexibility.

The rate of technological progress is likely to be determined by customers’ acceptance and regulatory oversight but the opportunity is great.

Cyber exposure in all its manifestations is an emerging risk and the potential benefits will have to be set against the new challenges. The Physical Internet could bring improved supply chain transparency and more efficient planning through standardization of shipment sizes and labeling, but this is likely to be accompanied by issues of data privacy and security.

Likewise, IT standardization could enable greater collaboration, efficiency and transparency while also raising questions of data security. This is also the concern for data analytics, cloud platforms and crowd sharing.

Automization is increasing and is a vital part of the push for low-cost service goals as supply chains continue to increase in complexity. Automated loading and unloading are already in use but, in the future, technology could bypass obstacles and amend routes automatically at the appropriately adjusted speeds.

The use of robotics and automation has the potential to reduce human error, but the use of autonomous vehicles and drones is likely to depend on regulatory approval with liability issues yet to be clarified. Blockchain technology could reduce incidence of fraud and errors but there could be increased risk of aggregation.

The name of the game for 3PL companies – and their insurers – is coping with complexity. Technology, spurred on by customer demands, shifting requirements and the possibility for new competition and collaboration, is introducing change to the industry, and risk managers need to be part of the conversation with manufacturers and retailers reassessing their strategic direction.

Transportation is operating in a different world than it was five years ago, and it will keep evolving over the next decade as just-in-time supply chains continue testing the limits of saving time and money while raising the bar on consumer expectations.

This new world means it is more important than ever for risk managers, logistics professionals, insurance brokers and underwriters to partner together and address these changes and challenges so that the shipper, and ultimately the consumer, can enjoy the benefits of a seamless, fully integrated global supply chain.

More from Risk & Insurance

More from Risk & Insurance

High Net Worth

High Net Worth Clients Live in CAT Zones. Here’s What Their Resiliency Plan Should Include

Having a resiliency plan and practicing it can make all the difference in a disaster.
By: | September 14, 2018 • 7 min read

Packed with state-of-the-art electronics, priceless collections and high-end furnishings, and situated in scenic, often remote locations, the dwellings of high net worth individuals and families pose particular challenges when it comes to disaster resiliency. But help is on the way.

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Armed with loss data, innovative new programs, technological advances, and a growing army of niche service-providers aimed at addressing an astonishingly diverse set of risks, insurers are increasingly determined to not just insure against their high net worth clients’ losses, but to prevent them.

Insurers have long been proactive in risk mitigation, but increasingly, after the recent surge in wildfire and storm losses, insureds are now, too.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy,” said Laura Sherman, founding partner at Baldwin Krystyn Sherman Partners.

And especially in the high net worth space, preventing that loss is vastly preferable to a payout, for insurers and insureds alike.

“If insurers can preserve even one house that’s 10 or 20 or 40 million dollars … whatever they have spent in a year is money well spent. Plus they’ve saved this important asset for the client,” said Bruce Gendelman, chairman and founder Bruce Gendelman Insurance Services.

High Net Worth Vulnerabilities

Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

As the number and size of luxury homes built in vulnerable areas has increased, so has the frequency and magnitude of extreme weather events, including hurricanes, harsh cold and winter storms, and wildfires.

“There is a growing desire to inhabit this riskier terrain,” said Jason Metzger, SVP Risk Management, PURE group of insurance companies. “In the western states alone, a little over a million homes are highly vulnerable to wildfires because of their proximity to forests that are fuller of fuel than they have been in years past.”

Such homes are often filled with expensive artwork and collections, from fine wine to rare books to couture to automobiles, each presenting unique challenges. The homes themselves present other vulnerabilities.

“Larger, more sophisticated homes are bristling with more technology than ever,” said Stephen Poux, SVP and head of Risk Management Services and Loss Prevention for AIG’s Private Client Group.

“A lightning strike can trash every electronic in the home.”

Niche Service Providers

A variety of niche service providers are stepping forward to help.

Secure facilities provide hurricane-proof, wildfire-proof off-site storage for artwork, antiques, and all manner of collectibles for seasonal or rotating storage, as well as ahead of impending disasters.

Other companies help manage such collections — a substantial challenge anytime, but especially during a crisis.

“Knowing where it is, is a huge part of mitigating the risk,” said Eric Kahan, founder of Collector Systems, a cloud-based collection management company that allows collectors to monitor their collections during loans to museums, transit between homes, or evacuation to secure storage.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy.” — Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

Insurers also employ specialists in-house. AIG employs four art curators who advise clients on how to protect and preserve their art collections.

Perhaps the best known and most striking example of this kind of direct insurer involvement are the fire teams insurers retain or employ to monitor fires and even spray retardant or water on threatened properties.

High-Level Service for High Net Worth

All high net worth carriers have programs that leverage expertise, loss data, and relationships with vendors to help clients avoid and recover from losses, employing the highest levels of customer service to accomplish this as unobtrusively as possible.

“What allows you to do your job best is when you develop that relationship with a client, where it’s the same people that are interacting with them on every front for their risk management,” said Steve Bitterman, chief risk services officer for Vault Insurance.

Site visits are an essential first step, allowing insurers to assess risks, make recommendations to reduce them, and establish plans in the event of a disaster.

“When you’re in a catastrophic situation, it’s high stress, time is of the essence, and people forget things,” said Sherman. “Having a written plan in place is paramount to success.”

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Another important component is knowing who will execute that plan in homes that are often unoccupied.

Domestic staff may lack the knowledge or authority to protect the homeowner’s assets, and during a disaster may be distracted dealing with threats to their own homes and families. Adequate planning includes ensuring that whoever is responsible has the training and authority to execute the plan.

Evaluating New Technology

Insurers use technologies like GPS and satellite imagery to determine which homes are directly threatened by storms or wildfires. They also assess and vet technologies that can be implemented by homeowners, from impact glass to alarm and monitoring systems, to more obscure but potentially more important options.

AIG’s Poux recommends two types of vents that mitigate important, and unexpected risks.

“There’s a fantastic technology called Smart Vent, which allows water to flow in and out of the foundation,” Poux said. “… The weight of water outside a foundation can push a foundation wall in. If you equalize that water inside and out at the same level, you negate that.”

Another wildfire risk — embers getting sucked into the attic — is, according to Poux, “typically the greatest cause of the destruction of homes.” But, he said, “Special ember-resisting venting, like Brandguard Vents, can remove that exposure altogether.”

Building Smart

Many disaster resiliency technologies can be applied at any time, but often the cost is fractional if implemented during initial construction. AIG’s Smart Build is a free program for new or remodeled homes that evolved out of AIG’s construction insurance programs.

Previously available only to homes valued at $5 million and up, Smart Build recently expanded to include homes of $1 million and up. Roughly 100 homes are enrolled, with an average value of $13 million.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work.” — Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“We know what goes wrong in high net worth homes,” said Poux, citing AIG’s decades of loss data.

“We’re incenting our client and by proxy their builder, their architects and their broker, to give us a seat at the design table. … That enables us to help tweak the architectural plans in ways that are very easy to do with a pencil, as opposed to after a home is built.”

Poux cites a remote ranch property in Texas.

Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“The client was rebuilding a home but also installing new roads and grading and driveways. … The property was very far from the fire department and there wasn’t any available water on the property.”

Poux’s team was able to recommend underground water storage tanks, something that would have been prohibitively expensive after construction.

“But if the ground is open and you’ve got heavy equipment, it’s a relatively minor additional expense.”

Homes that graduate from the Smart Build program may be eligible for preferred pricing due to their added resilience, Poux said.

Recovery from Loss

A major component of disaster resiliency is still recovery from loss, and preparation is key to the prompt service expected by homeowners paying six- or seven-figure premiums.

Before Irma, PURE sent contact information for pre-assigned claim adjusters to insureds in the storm’s direct path.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work,” said Curt Goetsch, head of underwriting for Ironshore’s Private Client Group.

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“If you’ve got custom construction or imported materials in your house, you’re not going to go down the street and just find somebody that can do that kind of work, or has those materials in stock.”

In the wake of disaster, even basic services can be scarce.

“Our claims and risk management departments have to work together in advance of the storm,” said Bitterman, “to have contractors and restoration companies and tarp and board services that are going to respond to our company’s clients, that will commit resources to us.”

And while local agents’ connections can be invaluable, Goetsch sees insurers taking more of that responsibility from the agent, to at least get the claim started.

“When there is a disaster, the agency’s staff may have to deal with personal losses,” Goetsch said. &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at riskletters@lrp.com.