Damages wrought by the natural catastrophes of 2017 were a wake-up call for companies of every industry. No business should assume it is safe.
Of particular concern is the risk of non-physical damage business interruption, where a facility sustains minimal damage itself, but suffers a lapse in normal operations due to devastation to their immediate area. Loss of infrastructure and loss of attraction can keep customers at bay for significant lengths of time.
Traditional business interruption policies, however, only kick in when the insured entity sustains physical damage. No damage means no coverage.
That’s why companies with significant exposure to non-physical damage business interruption have begun to utilize parametric insurance to supplement traditional policies.
Parametric policies are index-based solutions that trigger a payout as long as an event meets certain severity thresholds, without necessarily requiring the insured asset to sustain physical damage. Thresholds can refer to wind speed, earthquake magnitude, or hurricane category as measured at predetermined locations. If the parameters are met, pre-determined payouts are issued within 30 days; no need for adjusters or a lengthy claims process.
“Once a parametric policy is triggered, the insured simply has to provide a certification of loss that is equal or greater to the payout amount, usually within 12 to 24 months of the event,” said Robert Nusslein, Head Innovative Risk Solutions Americas, Swiss Re Corporate Solutions.
Over the last decade, uptake of parametric policies has grown exponentially, and the growth is not limited to any one industry. Hospitality, energy, public entities, utilities, and health care organizations have all been buying parametric coverage.
“The common theme across these disparate buyers is that they all have an unmet need,” Nusslein said.
“Many companies have very high deductibles for hurricane and earthquake coverage, from 2 to 5 percent of their total insurable value. This amounts to a very large self-insured risk. They have a need for supplemental limit to cover uninsured or underinsured exposures or to fill in deductibles.”
Recent iterations of parametric solutions that allow for more flexibility and customization are driving increased uptake of these policies as supplements to traditional business interruption coverage.
First-generation parametric products debuted more than 20 years ago. Along with triggers set around event intensity, these polices also stipulated a defined geographic region in which the event must occur, usually a radius centered around the insured location.
“These are what we call ‘CAT-in-the-circle’ solutions,” Nusslein said. “They define a geographic area with a center on the latitude and longitude coordinates encompassing the insured assets. A policy trigger would require that the epicenter of an earthquake or eye of a hurricane be within that area.”
The downside of these policies is that they introduce basis risk — the risk that a sustained loss will exceed insurance recovery.
“Let’s say a policy has a payout triggered by a 6.5-magnitude earthquake with an epicenter within a 40-mile radius of the insured location. If a quake occurs within that region but is only a 6.2 in magnitude, or if it is 7.0 in magnitude but the epicenter is 41 miles away from the insured facility, there’s no cover,” Nusslein said. “The insured will likely still have damage but will recoup nothing from that policy. That’s basis risk.”
The second generation of parametric policies eliminates this gap by doing away with defined geographic regions as triggers.
“The coverages evolved to designate certain severity thresholds at specific locations, rather than within a radius. So it would not matter where the epicenter of the quake is as long as the shake intensity meets a certain level at your facility,” he said. “This is much more flexible and nimble and reduces basis risk.”
The third generation of parametric structures allows even more flexibility by creating “either/or” triggers — a design driven by the convergence of multiple factors of wind, rain and storm surge that make hurricanes so damaging.
“What made Hurricane Harvey so devastating was that in addition to being a wind event, it also created storm surge that pushed a lot of water up where the eye made landfall, which was then compounded by several feet of rainfall,” Nusslein said.
That drove exploration into the possibility of having custom triggers for each one of those factors, so even if wind speeds didn’t meet the designated threshold, a significant storm surge could still trigger the policy.
“Each evolution of parametric coverages has been driven by companies needing a way to better protect themselves from natural catastrophes. As brokers and buyers have become more sophisticated and aware of their exposure, they’ve asked for more customized solutions to meet their needs,” Nusslein said.
While the most common parametric covers address natural catastrophes like earthquakes and hurricanes, there is considerable interest in adapting the policies to respond to non-cat weather events like flooding, fire, snowfall, hail and temperature fluctuations.
Some solutions go beyond weather to focus on industry-specific triggers, like drops in occupancy rates or revenue per available room for hotels, decreased passenger seat miles flown for airlines, or reduced container traffic through a port resulting in tax revenue loss.
“Swiss Re Corporate Solutions is already developing products in these areas,” Nusslein said. “We listen to our broker partners and our clients to really hear what they need, and we have the intellectual curiosity to keep innovating to meet those needs.”
Swiss Re Corporate Solutions’ involvement in parametric structures goes back to their inception roughly 25 years ago, and it has remained dedicated to the space ever since, building a deep bench of atmospheric specialists, seismic specialists, geologists and data scientists.
“Our NAT CAT perils team and our ability to develop our own models around hurricane and seismic activity is second to none,” Nusslein said.
But with speed of payment a primary benefit of parametric insurance, understanding NAT CAT exposure is only half of the equation. Getting funds into the hands of policyholders quickly is where insurers really deliver value. The one-two-three punch of Harvey, Irma and Maria last year would test the mettle of any top-tier carrier.
“It was all-hands-on-deck here to make sure we could deliver on time. We had a number of claims on parametric policies, and we met the 30-day deadline for every one of them. Some payments were delivered in as few as 13 days,” Nusslein said.
“It was a testament not only to the expertise and commitment of our people, but to the strength of Swiss Re’s balance sheet and its reputation for reliability built over our 150 years in the industry.”
To learn more about Swiss Re Corporate Solutions’ parametric solutions, visit https://corporatesolutions.swissre.com/innovative_risk/parametric/.
Insurance products underwritten by Westport Insurance Corporation, Overland Park, Kansas, a member of Swiss Re Corporate Solutions. This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Swiss Re Corporate Solutions. The editorial staff of Risk & Insurance had no role in its preparation.
The U.S. manufacturing industry is at a crossroads.
Faced with a shortfall of as many as two million workers between now and 2025, the sector needs to either reinvent itself by making it a more attractive career choice for college and high school graduates or face extinction. It also needs to shed its image as a dull, unfashionable place to work, where employees are stuck in dead-end repetitive jobs.
Added to that are the multiple risks caused by the increasing use of automation, sensors and collaborative robots (cobots) in the manufacturing process, including product defects and worker injuries. That’s not to mention the increased exposure to cyber attacks as manufacturers and their facilities become more globally interconnected through the use of smart technology.
If the industry wishes to continue to move forward at its current rapid pace, then manufacturers need to work with schools, governments and the community to provide educational outreach and apprenticeship programs. They must change the perception of the industry and attract new talent. They also need to understand and to mitigate the risks presented by the increased use of technology in the manufacturing process.
“Loss of knowledge due to movement of experienced workers, negative perception of the manufacturing industry and shortages of STEM (science, technology, engineering and math) and skilled production workers are driving the talent gap,” said Ben Dollar, principal, Deloitte Consulting.
“The risks associated with this are broad and span the entire value chain — [including] limitations to innovation, product development, meeting production goals, developing suppliers, meeting customer demand and quality.”
Manufacturing companies are rapidly expanding. With too few skilled workers coming in to fill newly created positions, the talent gap is widening. That has been exacerbated by the gradual drain of knowledge and expertise as baby boomers retire and a decline in technical education programs in public high schools.
“Most of the millennials want to work for an Amazon, Google or Yahoo, because they seem like fun places to work and there’s a real sense of community involvement,” said Dan Holden, manager of corporate risk and insurance, Daimler Trucks North America. “In contrast, the manufacturing industry represents the ‘old school’ where your father and grandfather used to work.
“But nothing could be further from the truth: We offer almost limitless opportunities in engineering and IT, working in fields such as electric cars and autonomous driving.”
To dispel this myth, Holden said Daimler’s Educational Outreach Program assists qualified organizations that support public high school educational programs in STEM, CTE (career technical education) and skilled trades’ career development.
It also runs weeklong technology schools in its manufacturing facilities to encourage students to consider manufacturing as a vocation, he said.
“It’s all essentially a way of introducing ourselves to the younger generation and to present them with an alternative and rewarding career choice,” he said. “It also gives us the opportunity to get across the message that just because we make heavy duty equipment doesn’t mean we can’t be a fun and educational place to work.”
Automation undoubtedly helps manufacturers increase output and improve efficiency by streamlining production lines. But it’s fraught with its own set of risks, including technical failure, a compromised manufacturing process or worse — shutting down entire assembly lines.
More technologically advanced machines also require more skilled workers to operate and maintain them. Their absence can in turn hinder the development of new manufacturing products and processes.
Christina Villena, vice president of risk solutions, The Hanover Insurance Group, said the main risk of using cobots is bodily injury to their human coworkers. These cobots are robots that share a physical workspace and interact with humans. To overcome the problem of potential injury, Villena said, cobots are placed in safety cages or use force-limited technology to prevent hazardous contact.
“With advancements in technology, such as the Cloud, there are going to be a host of cyber and other risks associated with them.” — David Carlson, U.S. manufacturing and automobile practice leader, Marsh
“Technology must be in place to prevent cobots from exerting excessive force against a human or exposing them to hazardous tools or chemicals,” she said. “Traditional robots operate within a safety cage to prevent dangerous contact. Failure or absence of these guards has led to injuries and even fatalities.”
The increasing use of interconnected devices and the Cloud to control and collect data from industrial control systems can also leave manufacturers exposed to hacking, said David Carlson, Marsh’s U.S. manufacturing and automobile practice leader. Given the relatively new nature of cyber as a risk, however, he said coverage is still a gray area that must be assessed further.
“With advancements in technology, such as the Cloud, there are going to be a host of cyber and other risks associated with them,” he said. “Therefore, companies need to think beyond the traditional risks, such as workers’ compensation and product liability.”
Another threat, said Bill Spiers, vice president, risk control consulting practice leader, Lockton Companies, is any malfunction of the software used to operate cobots. Then there is the machine not being able to cope with the increased workload when production is ramped up, he said.
“If your software goes wrong, it can stop the machine working or indeed the whole manufacturing process,” he said. “[Or] you might have a worker who is paid by how much they can produce in an hour who decides to turn up the dial, causing the machine to go into overdrive and malfunction.”
Spiers said risk managers need to produce a heatmap of their potential exposures in the workplace attached to the use of cobots in the manufacturing process, including safety and business interruption. This can also extend to cyber liability, he said.
“You need to understand the risk, if it’s controllable and, indeed, if it’s insurable,” he said. “By carrying out a full risk assessment, you can determine all of the relevant issues and prioritize them accordingly.”
By using collective learning to understand these issues, Joseph Mayo, president, JW Mayo Consulting, said companies can improve their safety and manufacturing processes.
“Companies need to work collaboratively as an industry to understand this new technology and the problems associated with it.” — Joseph Mayo, president, JW Mayo Consulting
“Companies need to work collaboratively as an industry to understand this new technology and the problems associated with it,” Mayo said. “They can also use detective controls to anticipate these issues and react accordingly by ensuring they have the appropriate controls and coverage in place to deal with them.”
Manufacturing risks today extend beyond traditional coverage, like workers’ compensation, property, equipment breakdown, automobile, general liability and business interruption, to new risks, such as cyber liability.
It’s key to use a specialized broker and carrier with extensive knowledge and experience of the industry’s unique risks.
Stacie Graham, senior vice president and general manager, Liberty Mutual’s national insurance central division, said there are five key steps companies need to take to protect themselves and their employees against these risks. They include teaching them how to use the equipment properly, maintaining the same high quality of product and having a back-up location, as well as having the right contractual insurance policy language in place and plugging any potential coverage gaps.
“Risk managers need to work closely with their broker and carrier to make sure that they have the right contractual controls in place,” she said. “Secondly, they need to carry out on-site visits to make sure that they have the right safety practices and to identify the potential claims that they need to mitigate against.” &