2016 Power Broker

Power Brokers of Negotiation

In a record year for M&As, the 2016 Power Brokers excelled at marrying risk management cultures and firming up carrier relationships.
By: | February 22, 2016 • 7 min read

Spurred on by low interest rates and an appetite for scale, business leaders in 2015 sought to create market heft through mergers and acquisitions.

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Winners of the 2016 Risk & Insurance® Power Broker® award were right there with them; marrying risk management cultures, ironing out coverage gaps and redundancies, and getting the insurance carriers to behave on price.

Alex Michon, a Sacramento, Calif.-based senior vice president with Aon, is a 2016 Power Broker® in the health care category. In a health care system merger that came out of the gate as a fire drill and then dragged on for months, Michon was reminded of a key M&A consideration: the human cost in acquisitions is often underestimated.

That’s something commercial insurance brokers need to keep in mind if they are going to build productive relationships and achieve the goals of both the buyer and the seller. Many times the risk manager for the acquired company is losing his or her job. Yet they still have to perform at the top of their game to bring off the deal.

“I think the human cost is usually under-represented in terms of the stress that these people are going through,” Michon said.

In these cases the broker can be a friend to the risk manager, who might not be first in the thoughts of finance executives or other company leadership. The risk manager might be driving in to work every day, knowing that a merger is underway and be unable to tell colleagues about it; even though hundreds of jobs may soon be on the chopping block.

“We are one of the few people who can openly talk to them,” Michon said.

In most cases, Michon said, the risk manager will perform admirably, giving the brokers and carriers all the information they need to be able to write the risk of the combined companies.

But Michon has seen cases where risk managers became so concerned with their futures that they put most of their energy into job hunting.

That tension can also impact dialogues with brokers who are working on a target company account, according to Arthur J. Gallagher’s Amy Sinclair, a 2016 Power Broker® in the pharmaceutical category and a veteran of many merger deals.

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“Employees of the target company are concerned about redundancy at the acquisition partner,” Sinclair said.

“There is a good chance they may no longer have a job once the transaction closes,” she said.

Smaller brokerages that don’t have a lot of experience with M&As may dig in their heels a little bit.

“Generally speaking, brokers for the target and acquisition partner work well together,” Sinclair said.

“Regardless of what side of the transaction you are on, you still want to provide the best service to your client. It is not in anyone’s best interest to withhold information or to be uncooperative,” she said.

Carrier Relationships

The broker’s burden of relationship maintenance in the case of an acquisition also extends to those that underwrite the risks — the carriers. There is a lot of work to be done to convince the carrier that the risk they know won’t change when one company acquires another.

Herman Brito Jr., assistant vice president, Marsh

Herman Brito Jr., assistant vice president, Marsh

Marsh’s Herman Brito Jr.,  a 2016 Power Broker® in the marine category who places cargo and inland marine policies, played a part in two blockbuster deals in 2015; the acquisition by General Electric of the French electric railcar maker Alstom and the marriage of global food giants Kraft and Heinz.

Marsh was new to the Heinz account when the Kraft merger loomed. Pre-merger, Brito convinced Heinz to ditch its captive for global cargo exposures and transfer the risk to AIG. Even though Marsh wound up with both accounts, the rules of broker-client confidentiality meant that Brito couldn’t call his colleagues in Chicago — where Kraft is based — and check up on Kraft’s loss history.

Brito is a big fan of AIG’s multinational placements, calling them “best in class.” His challenge was to make sure that Kraft benefitted from the same aggressive terms he was getting for Heinz post-merger. As the cargo broker, Brito knew that the carriers had bigger concerns about things such as combined property exposures than what he was placing.

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“Not only am I asking you to make it clear and concise for Heinz/Kraft, let’s make it easy on ourselves by implementing a mergers and acquisitions clause and a multi-year rate agreement,” Brito told the underwriters.

“It took a tremendous effort to change the structure that was in place in August 2014, and to obtain the coverages implemented in May 2015, but when claims occurred they started to see the benefits in certain coverages and why we pursued those,” Brito said.

“I think the human cost is usually under-represented in terms of the stress that these people are going through.” — Alex Michon, senior vice president, Aon

The General Electric/Alstom merger was another kettle of fish.

“GE’s acquisition of  Alstom was the hardest acquisition I have ever done,” Brito said.

The reason?

General Electric has a highly centralized risk management department, four risk managers handling the entire global program. Alstom had up to 30 risk managers, many of them with local authority.

Another difference was that General Electric has a huge retention and Alstom had more of a “trading dollars” philosophy, spending so much on premium against so much in expected losses.

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Brito needed to convince the carrier that when GE bought Alstom, the cargo risk management programs would become one. Initially, the insurer wasn’t buying it. But eventually Brito convinced the underwriters that once the companies were married, Alstom’s standards would come up to GE’s.

Part of Brito’s job was to make sure he was available at any hour of the day to answer questions from Alstom risk managers around the globe and help them buy into the GE program.

“If you demonstrate that you are willing to have conference calls at a time that is most convenient in India, people are more willing to do what you are asking them to do,” Brito said.

The GE/Alstom deal closed in November of 2015. Brito was still spending a lot of time on it when we spoke to him in January.

Odd Couples

Marrying risk management cultures in a merger is a must; having the tools and the drive to convince carriers to take on the combined risk is crucial; and so is conducting enough due diligence to manage risk and provide adequate employee benefits when two very different company cultures get together.

Consider the challenges faced by Eric Wittenmyer, a 2016 Power Broker® in the health care category.

Eric Wittenmyer, senior vice president, Aon

Eric Wittenmyer, senior vice president, Aon

Wittenmyer, a senior vice president with Aon based in Chicago, was tasked with ironing out employee benefits for a large hospital system merger involving thousands of employees. One of the organizations classified hundreds of their employees as executives, eligible for a special category of benefits. The other organization counted slightly more than a dozen executives in a similar category.

“What we did was a tremendous amount of benchmarking, and an awful lot of cost modeling,” Wittenmyer said. That science determined that the hospital with the smaller group of employees classified as executives was closer to the norm.

Then came the art. That was figuring out how different employees perceived the value of certain ancillary benefits, such as life insurance and disability benefits.

Once that was determined, the in-house benefits team, with Wittenmyer’s guidance, offered one-time cash payments to employees who felt they were having a guaranteed benefit taken away, while still offering them access to an employer supported program; just not one in which the employer paid for the whole nut.

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“So once we had done all of the plan design work, we had to manage significant transitional coordination issues,” Wittenmyer said.

Because coverage of certain benefits for the merged entities was taking effect on a staggered schedule, with some benefits being in place Jan. 1, for example, and others March 1, Wittenmyer had to earn the trust of underwriters who were being asked to stay on certain programs for a few months — some of them involving high potential life insurance pay-outs — without the corresponding premium income.

In the end, Wittenmyer was able to convince the carriers to work with him, with no price increases, because of the attractive size of the merged accounts.

“I think everything was as transparent as it could be and the vendors understood that,” Wittenmyer said.

See the complete list of 2016 Power Broker® winners.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Robotics Risk

Rise of the Cobots

Collaborative robots, known as cobots, are rapidly expanding in the workforce due to their versatility. But they bring with them liability concerns.
By: | May 2, 2017 • 5 min read

When the Stanford Shopping Center in Palo Alto hired mobile collaborative robots to bolster security patrols, the goal was to improve costs and safety.

Once the autonomous robotic guards took up their beats — bedecked with alarms, motion sensors, live video streaming and forensics capabilities — no one imagined what would happen next.

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For some reason,  a cobots’ sensors didn’t pick up the movement of a toddler on the sidewalk who was trying to play with the 5-foot-tall, egg-shaped figure.

The 300-pound robot was programmed to stop for shoppers, but it knocked down the child and then ran over his feet while his parents helplessly watched.

Engaged to help, this cobot instead did harm, yet the use of cobots is growing rapidly.

Cobots are the fastest growing segment of the robotics industry, which is projected to hit $135.4 billion in 2019, according to tech research firm IDC.

“Robots are embedding themselves more and more into our lives every day,” said Morgan Kyte, a senior vice president at Marsh.

“Collaborative robots have taken the robotics industry by storm over the past several years,” said Bob Doyle, director of communications at the Robotic Industries Association (RIA).

When traditional robots joined the U.S. workforce in the 1960s, they were often assigned one specific task and put to work safely away from humans in a fenced area.

Today, they are rapidly being deployed in the automotive, plastics, electronics assembly, machine tooling and health care industries due to their ability to function in tandem with human co-workers.

More than 24,000 robots valued at $1.3 billion were ordered from North American companies last year, according to the RIA.

Cobots Rapidly Gain Popularity

Cobots are cheaper, more versatile and lighter, and often have a faster return on investment compared to traditional robots. Some cobots even employ artificial intelligence (AI) so they can adapt to their environment, learn new tasks and improve on their skills.

Bob Doyle, director of communications, Robotic Industry Association

Their software is simple to program, so companies don’t need a computer programmer, called a robotic integrator, to come on site to tweak duties. Most employees can learn how to program them.

While the introduction of cobots into the workplace can bring great productivity gains, it also introduces risk mitigation challenges.

“Where does the problem lie when accidents happen and which insurance covers it?” asked attorney Garry Mathiason, co-chair of the robotics, AI and automation industry group at the law firm Littler Mendelson PC in San Francisco.

“Cobots are still machines and things can go awry in many ways,” Marsh’s Kyte said.

“The robot can fail. A subcomponent can fail. It can draw the wrong conclusions.”

If something goes amiss, exposure may fall to many different parties:  the manufacturer of the cobot, the software developer and/or the purchaser of the cobot, to name a few.

Is it a product defect? Was it an issue in the base code or in the design? Was something done in the cobot’s training? Was it user error?

“Cobots are still machines and things can go awry in many ways.” — Morgan Kyte, senior vice president, Marsh

Is it a workers’ compensation case or a liability issue?

“If you get injured in the workplace, there’s no debate as to liability,” Mathiason said.

But if the employee attributes the injury to a poorly designed or programmed machine and sues the manufacturer of the equipment, that’s not limited by workers’ comp, he added.

Garry Mathiason, co-chair, robotics, AI and automation industry group, Littler Mendelson PC

In the case of a worker killed by a cobot in Grand Rapids, Mich., in 2015, the worker’s spouse filed suit against five of the companies responsible for manufacturing the machine.

“It’s going to be unique each time,” Kyte said.

“The issue that keeps me awake at night is that people are so impressed with what a cobot can do, and so they ask it to do a task that it wasn’t meant to perform,” Mathiason said.

Privacy is another consideration.

If the cobot records what is happening around it, takes pictures of its environment and the people in it, an employee or customer might claim a privacy violation.

A public sign disclosing the cobot’s ability to record video or take pictures may be a simple solution. And yet, it is often overlooked, Mathiason said.

Growing Pains in the Industry

There are going to be growing pains as the industry blossoms in advance of any legal and regulatory systems, Mathiason said.

He suggests companies take several mitigation steps before introducing cobots to the workplace.

First, conduct a safety audit that specifically covers robotics. Make sure to properly investigate the use of the technology and consider all options. Run a pilot program to test it out.

Most importantly, he said, assign someone in the organization to get up to speed on the technology and then continuously follow it for updates and new uses.

The Robotics Industry Association has been working with the government to set up safety standards. One employee can join a cobot member association to receive the latest information on regulations.

“I think there’s a lot of confusion about this technology and people see so many things that could go wrong,” Mathiason said.

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“But if you handle it properly with the safety audit, the robotics audit, and pay attention to what the standards are, it’s going to be the opposite; there will be fewer problems.

“And you might even see in your experience rating that you are going to [get] a better price to the policy,” he added.

Without forethought, coverage may slip through the cracks. General liability, E&O, business interruption, personal injury, cyber and privacy claims can all be involved.

AIG’s Lexington Insurance introduced an insurance product in 2015 to address the gray areas cobots and robots create. The coverage brings together general and products liability, robotics errors and omissions, and risk management services, all three of which are tailored for the robotics industry. Minimum premium is $25,000.

Insurers are using lessons learned from the creation of cyber liability policies and are applying it to robotics coverage, Kyte said.

“The robotics industry has been very safe for the last 30 years,” RIA’s Doyle said. “It really does have a good track record and we want that to continue.” &

Juliann Walsh is a staff writer at Risk & Insurance. She can be reached at [email protected]