Public Sector Risk

For Less Police Violence, Train More

Insurers who help pay for improved police training today may save on future claims.
By: | June 1, 2017 • 5 min read

In the emotionally and politically charged climate surrounding police violence, a consensus emerges from the right and the left, from cops, attorneys, academics and the insurance community: Mitigation depends on more and better training for law enforcement.

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Every stakeholder — from the cop on the beat through prison management and the insurance industry — has a role in affecting change.

“Sometimes police have to use force, and then bad things happen,” said Greg Champagne, a sheriff in St. Charles Parish, Louisiana, and president of the National Sheriff’s Association. “The best risk management is the best training a police force can afford. Insurers can help us provide free training.”

Communities are feeling the financial impact of police training. Bloomberg reported in February 2016 that spending on police training in 23 of the 25 biggest U.S. cities grew 17 percent to $317.9 million in 2015 from 2013.

The cost of not training may be even higher. For example, Chicago residents paid nearly half a billion dollars in settlements over the past decade, according to the Chicago Sun-Times, and spent $84.6 million in fees, settlements and awards in 2013.

Costs fall primarily on taxpayers, since most large cities are self-insured. Many smaller cities belong to self-insured risk pools.

Fewer than five insurers cover public entities nationally, said Scott K. Thomason, vice president, public sector, at Arthur J. Gallagher & Co., but the self-insured cities rely on reinsurers, which have a vested interest in improving risk profiles.

Greg Champagne, president, National Sheriff’s Association

“Civil unrest is not created equal, in likelihood and severity,” said Hart S. Brown, senior vice president, organizational resilience, HUB International. For example, riot-type events explode with high energy and emotion but usually dissipate within 72 hours. Labor unrest may last longer but has less geographical impact.

“Carriers and brokers can conduct real risk assessments of the kind of event that’s likely and its cost to municipalities.” Brown said.

Many experts believe that a disproportionate number of claims are caused by a small number of officers, said John Rappaport, assistant professor of law, University of Chicago School of Law.

Insurers “could be bolder” in urging departments to get rid of the bad apples, he said. While carriers don’t want to be perceived as interfering in personnel matters, he said, “this is an occasion for managing risk.”

Training, Training and More Training

In April, the National Association of Black Law Enforcement Officers Inc. (NABLEO) conducted a two-day de-escalation training program. The curriculum aims to unpack “implicit bias,” which the Justice Department defines as “the unconscious or subtle associations that individuals make between groups of people and stereotypes about those groups.”

“Our assumptions of who other people are dictate how we treat them,” said Charles P. Wilson, national chairman at NABLEO. “Assumptions create risk.”

Training aims to change the attitudes and behaviors that can erupt into violence. “How does the officer perceive the other person? How is he speaking to him? What kind of words is he using? How does he interpret body language? How does his cultural lens affect what he sees?”

Implicit bias training is part of the reform in some of the consent decrees the Justice Department reached under the Obama Administration with several troubled police departments.

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The current attorney general, Jeff Sessions, is seeking a review of the consent decrees, citing concerns about their overuse and potential stigma for the police departments.

The DOJ action is “a disservice to law enforcement and the community,” Wilson said. “Police have to understand what they’re doing wrong so they can stop doing it.”

The Fraternal Order of Police, which vociferously supports Sessions on its website, may disagree.

“Sometimes police have to use force, and then bad things happen.” —Greg Champagne, president, National Sheriff’s Association

Regardless, said Rappaport, if consent decrees were abandoned, affected municipalities could see more violent interactions and lawsuits to follow. Most of these cities are self-insured, so only their excess carriers might be affected.

And if federal funding for de-escalation and other training were withdrawn, would the insurance industry have a role in picking up the tab?

Derek Broaddus, senior vice president, Allied World Insurance

“Absolutely,” Rappaport said. “Carriers can do the calculations: Do we expect to save more on claims and lawsuits than we spend on training? Research suggests they will.”

Police liability insurers — many of which are non-competitive, state-specific municipal risk pools — are an important “bumblebee” in cross-pollinating best practices, he said.

Just as carriers share positive results about telematics devices installed in police cars, revealing location, speed and response times, they also share technology and training success stories.

The need for thorough training runs the entire law enforcement and judicial gamut, said Champagne.

“Use of force, medical care, automobile crashes — those are the liability triggers. Sheriffs run jails, and they and their deputies have to understand the law and procedures in their operations,” he said.

Body Cameras, Pros and Cons

With some reservations, body cameras attached to police officers’ shirts are almost universally hailed by police organizations, insurers, academics and even the ACLU.

Some insurers offer grant funding to municipalities to help finance the equipment, said Derek Broaddus, senior vice president at Allied World Insurance, a specialist primary and excess carrier.

Others offer grant-writing training to help put the funds within smaller municipalities’ reach.

The pros? “Body cameras can raise the level of officers’ responsibility because they know they’re being recorded,” said Thomason. They can also influence the behavior of the person on the other side of the lens.

The cons? At $400 to $1,000 apiece, they’re expensive, said Kenny Smith, risk control manager at OneBeacon.

“And then you have the cost of storage, retrieving images, copying and redaction when someone requests them through the Freedom of Information Act,” he said.

“Cameras alone may be prohibitively expensive for an entire police department,” said Brown, “and storage is expensive, whether on a municipality’s own servers or on the cloud.”

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Taser International — now Axon — announced in April a program to equip every U.S. police officer with a free body camera and provide police departments with supporting hardware, software, data storage and training, free for one year. After a year, cameras would cost $399 and use of the company’s Evidence.com platform $15 to $89 per month, per officer.

“The image that appears on the evening news can look awful, but it doesn’t show the run-up to the incident,” Broaddus said. “It doesn’t show the pre-arrest history between the participants, the altercation or instigation.”

“When you don’t have the full scope of context, it creates more risk,” said Thomason.

Video footage can stir up negative public perception, Smith said.

“Once it’s released to the public or the media, it can be very damaging. Police departments need to have their procedural ducks in a row before they venture into this thing.” &

Susannah Levine writes about health care, education and technology. She 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]