Risk Management

Risk Management by Design

Palo Alto-based The Risk Authority Stanford is incubating risk management solutions using design thinking; that means elevating end users into key roles in addressing health care risk exposures.
By: | January 9, 2017 • 7 min read

A health care risk management team based in Silicon Valley is using the latest technology to make patients, doctors and health care systems safer and more sustainable.

Using the concept of design thinking, veteran health care chief risk officer Jeff Driver and his team at The Risk Authority Stanford believe they can engage risk and mitigate it in a way that involves client participation and is client-specific.

Design thinking, briefly stated, involves enlisting the participation of end users to find and build the solution to a pain point.

Here’s Simon Mawer, The Risk Authority Stanford’s assistant vice president of risk management, on that topic in more detail.

“Design thinking is using the tools and mindsets of designers to address problems outside the traditional fields of design. It’s a process that elevates people—and more particularly, the end-users of a product, transaction, or system—as experts for understanding the frontline realities behind the hard data. Through a creative, collaborative and experimental process, design thinking helps us generate solutions that are effective, because they are uniquely shaped by and for the people and the context for which they are designed.”

Jeff Driver, CEO, The Risk Authority Stanford

In his decades-long experience as a health care risk manager, Driver, The Risk Authority Stanford’s CEO, said he repeatedly encountered situations where off-the-shelf risk analysis products with supposedly sterling resumes and recommendations failed.

“We know from 20 years or so of purchasing solutions that not all solutions really work,” Driver said.

“There are closets full of these solutions that have never taken off,” he said.

“Design thinking solutions are those solutions that emerge from the sharp end or where the problem originates,” he said.

“We use a team of risk managers and staff quality experts to look at the possibilities of designing a solution that is specific to that problem and that culture, rather than buying an off-the-shelf solution,” he said.

It’s on the beat of that word “culture” where a lot of health care risk managers will start nodding their heads.

All work cultures are complex. The degree to which interpersonal dynamics or workplace culture can affect performance in areas like operations and risk management cannot be underestimated.

One traditional communication snare in health care is between doctors and nurses. A veteran nurse might see a doctor making a mistake, but because of the hierarchies that can exist in a hospital, won’t say anything.

Overwork, staff on staff or patient on staff violence in workplace settings, or miscommunication due to simple language differences can all lead to disruption and distraction, with the end result that those the profession swears not to harm get harmed.

Advertisement




Veronique Grenon, a vice president of analytics with The Risk Authority Stanford, talks about how analytics can drive understanding of cultures, to unearth the places where one member of a hospital team, or a patient, may have one view of a medical error or event, and another party may see things through an entirely different lens.

“I think analytics is like writing a story. But data reporting isn’t enough anymore. We are working on predictive and prescriptive analytics,” Grenon said.

“We need to know what to focus our risk management strategies on,” she said.

Let’s say a medical error occurs and is reported. Using analytics to understand who initiated a report in a given system can help a risk analyst’s valuable perspective on that report, compared to other reports produced about the same health system.

“Where did this initiate, did it initiate by a patient complaint? Or did it initiate from a nurse’s concern?”

And then analyzing the event based on who wrote the report.

“The new modeling techniques are there to help us with that. We use natural language processing, machine learning, sentiment analysis to uncover more of not just the hard facts but information about the patient and how they are feeling,” Grenon said.

Veronique Grenon, vice president of risk analytics, The Risk Authority Stanford

“We combine data sets, create common language, and analyze data from many sources,” she said.

Drawing on her background as an actuary, Grenon is using analytics to touch every piece of what The Risk Authority Stanford is doing, be it a new product for insurance underwriters who are trying to get a grasp of their health care clients risk exposures, or risk managers who are trying to get their hands on a tool that can help them understand, in a more intimate way, the risks within their own organizations.

“We are using risk analytics to understand where our hotspots are,” she said.

“Then we use design thinking, we want to uncover the true drivers of the issues we are seeing. And then we create solutions,” she said.

“Together they are very powerful and complement each other very well,” she said.

“I am really glad I am a part of this project,” she said. “I was skeptical at the start and now I love it.”

“The most exciting thing about the work that Vero(nique) and her colleagues are doing is that they are giving us an accurate, nuanced, and actionable running start into the most important issues driving liability risks,” said Mawer.

“We say the data provides a direction for investigation—and to really understand clinical risks you have to walk in the shoes of the people you are designing for: before you start going straight to solutions, you have to empathically understand the people and the systems in which they live and work, from their perspective,” Mawer added.

Innovence

Driver founded what was then known as Stanford Risk Consulting in 2009. By 2013, the group decided to shed its nonprofit status and enter the for-profit realm as The Risk Authority Stanford.

“Over time we accomplished that but we had this whole other side of our brain so we built this new product which we call ‘Innovence,’ said Driver. The name is a cross between “innovation” and “evidence”.

The software piece of the business is known as Innovence Pulse. One product, Innovence Pulse: Enterprise, is helping carriers look at the data from their insureds to understand what is driving losses at those insured entities.

A second software product, Innovence Pulse Risk Manager, was released this past fall. That product allows risk managers to essentially “shrink wrap” an analytics solution around their particular set of risks, allowing them to get their arms around disparate sets of data systems.

Advertisement




The Risk Authority Stanford’s Grenon said that while some modules of Innovence Pulse are complete and some are still under construction, the team is, in a sense, always in process.

“We’re giving risk managers a tool to be proactive about what they are doing,” Grenon said.

“My personal objectives come into this as well,” she said.

“I don’t want to add a data entry burden to people. I want to be able to use what intelligence is available

History

Jeff Driver’s first job in health care risk management was at tiny Geauga Hospital in Chardon, in Ohio’s Amish country.

“Literally, the Amish would roll up in their buggies, take off their boots, leave them at the door and walk in with bags of cash,” Driver recalls.

From those humble beginnings at a 110-bed hospital in Ohio, Driver is using his Silicon Valley connections to shape the future of the health care risk management profession.

The Risk Authority, as it is known for short, not only consults in risk management for Stanford Health Care and Stanford Children’s Health, but works with health care clients and insurance carriers across the globe.

Due to confidentiality agreements, Driver can’t reveal the carriers or the hospitals that he is working with. Suffice to say that there are a number of them.

Driver’s career in health care began some years earlier than that risk management stint in Chardon, when he worked at the Cleveland Clinic as a respiratory therapist. Almost immediately, he was confronted with the issue of medical error.

It didn’t take long for him to decide that he wanted to study and help mitigate medical error(s) and their aftermath for a living.

“I was personally involved in medical errors,” Driver said. “I watched other people be involved in medical errors,” he said.

“It changed my vision of what I wanted to do. Rather than be a clinician I wanted to be a person that was involved in preventing those kinds of errors,” he said.

Following risk management positions at San Diego Children’s Hospital and at the Beth Israel Deaconess Medical Center in Boston, Driver took a position as the Chief Risk Officer at the Stanford University Medical Center in 2004.

The move to Stanford was fortuitous because it placed Driver in one of the leading medical facilities in the country. It also put him in Silicon Valley, in the company of hundreds of aspirational people who through a technology revolution, are reshaping commerce globally.

“Obviously we are heavily influenced by our geography,” said Driver.

“On the Stanford campus we are right in the middle of Silicon Valley,” he said.

“Hewlett Packard is right across from us. Google is right here. You mingle with these people and you can’t help but want to learn about what they are doing.”

Simon Mawer, assistant vice president of risk management, The Risk Authority Stanford

Like Driver, The Risk Authority’s Simon Mawer encountered the issue of medical error earlier in his career, became intrigued by its dynamics and was drawn to a career in health care risk management.

Mawer began his professional life as a litigator in Australia, working in the tort-liability field on cases involving personal injury, medical malpractice and aviation accidents, among other topics.

“Part of what I loved about that work was the sacred privilege of meeting people in their hour of greatest need, understanding their situation deeply, and advocating in close collaboration with them for the resolution they deserved,” Mawer said.

Mawer moved to California, and worked for a number of years in claims and litigation in-house for the Stanford University health system. That experience deepened his knowledge of the importance of empathy in understanding how patients view health care, and how wronged they can feel if they are injured as part of their medical treatment and their concerns not listened to.

“After spending hours and hours listening to the experiences of patients, nurses and physicians in the aftermath of medical errors and health care gone wrong, I developed a passion for getting on the other side of it, to see if I could be part of preventing the errors themselves, and solving the issues that forced patients to sue in order to get the support they needed,” he said.

“It made no sense to me that after a medical injury, patients should be further harmed by the claims handling process,” Mawer said.

It’s a classic and painful —some might say shameful— dilemma in health care risk management that injured parties traditionally felt shut out by the way claims are handled in the aftermath of medical error.

Advertisement




Legal counsel might be given to the treating physician to not speak to the injured party. Getting any information about how the mistake happened, be it wrong-site surgery, the wrong medical dose given, or some other mistake, proved to be extremely difficult for most patients.

Many times, to get the information they needed, to get an apology, or to get the financial support they needed to heal, patients and/or their families did the only thing they thought they had available to them; they sued.

In the super-powered environment of Silicon Valley, Driver and his colleagues are marshalling analytics and the concept of design thinking to find a way to avoid that kind of outcome. &

Dan Reynolds is editor-in-chief of Risk & Insurance. He 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.

Advertisement




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.

Advertisement




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.

Advertisement




“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.

Advertisement




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]