The third quarter of 2017 showed no mercy. Hurricane by hurricane, wildfire by wildfire, natural disasters destroyed countless properties and disrupted business operations from the Caribbean to California.
In the past, outlier CAT seasons such as this produced significant changes in both risk transfer markets as well as approaches to risk mitigation and claims management.
“Quarter after quarter of consecutive reductions have left us at the lowest pricing point in the market in the last 18 years. This low point coupled with significant catastrophe losses likely signals an inflection point,” said George Stratts, President and CEO of Lexington Insurance Company, AIG’s excess & surplus lines insurer. “We’re at a point where the market is most vulnerable to dramatic shifts.”
Though no two CAT seasons are the same, there are some historical examples that provide insights into how the current market may respond.
“Market conditions now are very similar to what we experienced in 1999. At that time, we were experiencing a prolonged soft market. Then a series of catastrophes occurred in the following years, including the 9/11 attacks and the devastating hurricane seasons of 2004 and 2005,” Stratts said.
Fast forward to today, and the situation looks very similar. Guy Carpenter’s Global Property Casualty Rate-On-Line Index reflects the current low pricing point; in 2017, the index value was at its lowest point since 1999. Then the tumultuous third quarter of 2017 heaped significant losses on the industry.
While no one can predict how the 2017 CAT season will impact the market landscape or price of risk transfer, it seems clear that changes are coming. This is, after all, the first time that alternative capital is being tested in a major way. How that capital responds and whether it returns remain to be seen.
But it’s not just about risk transfer. Increasingly, companies are just as concerned about their carrier’s ability to mitigate their risk. Regardless of how the risk transfer market responds, best-in-class carriers who have developed the analytical tools and engineering expertise to educate clients about their risks are the ones who survive and thrive through market disruption.
One proven maxim is that a more granular view of risk is a better view of risk. In the past, the carriers who invested time and resources to develop their own view of risk were better prepared to respond to catastrophic losses.
After Hurricane Andrew, for example, carriers were challenged to reevaluate their coastal property exposure, adopt more stringent underwriting, and focus on building resilience. Leveraging data, analytics and machine learning to build on old approaches will be the way forward.
“The first generation of widely-used catastrophe models established a technical baseline in the marketplace, which provided a guide to price the volatility of some of the risks we assume and better account for them in a long-term, sustainable way,” Stratts said.
“But as we move forward, broad-based market changes become much more nuanced and tailored to individual risk characteristics. Have carriers developed their own proprietary views of risk based on their experience, the experience of their portfolio, and insights garnered via data analytics and engineering? That’s what we’ll learn in the year ahead.”
Lexington invested in building out catastrophic risk capabilities, leading to CAT models that were adapted to the carrier’s own book of business and exposure and much more detailed than industry standard models.
In addition to fine-tuning existing tools, best-in-class carriers develop their own analytical tools to better evaluate risk. Lexington did this for one of the most difficult areas of risk to insure – flood.
Lexington dug deeper than standard flood maps and again built a more granular view of its flood exposure. In many cases, it was able to inform clients of exposure that they hadn’t been aware of because they were located outside of a flood zone as demarcated on standard maps. Or, the carrier determined that some locations were actually at a decreased level of risk.
Lexington demonstrated the success of its proprietary flood models in the response to Hurricane Harvey.
“As the events of Harvey were unfolding, the early message from many markets and modeling firms was that they couldn’t accurately estimate the loss because flood is so tough to model. But we were able to tell pretty quickly the impact on our portfolio, which meant we could respond to claims much faster,” Stratts said.
In the end, businesses need an insurance partner who help them rebuild. Risk engineering and analytical tools can help build resilience, but the strength of the claims team is what gets companies back on their feet.
“The commitment I see from our claims people to be able to take on Harvey, then Irma, then Maria, then the wildfires in California, all while traditional loss activity hasn’t stopped, is incredible. They haven’t skipped a beat,” Stratts said.
Paying claims quickly is even more urgent following natural catastrophes because businesses can’t begin repairs without access to working capital. Recognizing that need, AIG developed its ‘Property Claims Promise,’ which assures policyholders that they will receive a payment of up to 50 percent of the agreed total loss estimate within seven working days after coverage is confirmed. The funds can assist with cleanup costs, property repairs, and extra expenses incurred during the rebuilding process.
One of AIG’s larger clients in Houston, for example, sustained damage to over 600 of their 2400 locations when Hurricane Harvey hit, with two locations being a total loss. After an adjuster met with the client in the days following the storm, AIG saw no reason to wait for a formal report of damages and issued a $15 million advance within two weeks of Harvey making landfall.
Experience is vital as well. AIG has been through Hurricane Andrew in 1991, the tragedy of 9/11, and the catastrophic hurricane seasons of 2004 and 2005, among others. Through the influx of alternative capital and the challenges of prolonged soft market, AIG and Lexington have been constants.
“It’s one thing to offer capacity and to knowingly write catastrophe risk, it’s another thing to be able to respond when catastrophe happens,” Stratts said.
Being prepared to respond and come back stronger takes continual self-improvement and a dedication to getting the details right.
Post-event, Lexington conducts a comprehensive review of its loss response to determine what went well and what didn’t.
“We call it ‘loss lessons learned.’ It’s a multi-disciplinary approach where we examine a loss through six lenses: underwriting, risk engineering, analytics, claims, operational response and communications,” Stratts said. This exhaustive process pulls in people across the organization to gain a holistic view of the loss to reflect the way clients experience it.
“Those functions might be separate within any given company, but a client sees it all at once — the property damage that may reveal engineering flaws, the claims process, the impact on the insurance contract, etc.,” Stratts said. “Getting a holistic view of our response helps us to create and fine tune comprehensive solutions. We plan to conduct such a review for our losses following the catastrophes in late 2017.”
Through its experience, risk expertise and claims commitment, Lexington is positioned to not just transfer clients’ risk, but to truly partner with companies to build resiliency no matter what lies ahead.
To learn more, visit http://www.lexingtoninsurance.com/home.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.
Acts of violence and terror can break out in even the unlikeliest of places.
Look at the 2013 Boston Marathon, where two bombs went off, killing three and injuring dozens of others in a terrorist attack. Or consider the Orlando Pulse nightclub, where 49 people were killed and 58 wounded. Most recently in Las Vegas, a gunman killed 58 and injured hundreds of others.
The world is not inherently evil, but these evil acts still find a way into places like churches, schools, concerts and stadiums.
“We didn’t see these kinds of attacks 20 years ago,” said Glenn Chavious, managing director, global sports & recreation practice leader, Industria Risk & Insurance Services.
As a society, we have advanced through technology, he said. Technology’s platform has enabled the message of terror to spread further faster.
“But it’s not just with technology. Our cultures, our personal grievances, have brought people out of their comfort zones.”
Chavious said that people still had these grievances 20 years ago but were less likely to act out. Tech has linked people around the globe to other like-minded individuals, allowing for others to join in on messages of terror.
“The progression of terrorist acts over the last 10 years has very much been central to the emergence of ‘lone wolf’ actors. As was the case in both Manchester and Las Vegas, the ‘lone wolf’ dynamic presents an altogether unique set of challenges for law enforcement and event service professionals,” said John
Tomlinson, senior vice president, head of entertainment, Lockton.
As more violent outbreaks take place in public spaces, risk managers learn from and better understand what attackers want. Each new event enables risk managers to see what works and what can be improved upon to better protect people and places.
But the fact remains that the nature and pattern of attacks are changing.
“Many of these actions are devised in complete obscurity and on impulse, and are carried out by individuals with little to no prior visibility, in terms of behavioral patterns or threat recognition, thus making it virtually impossible to maintain any elements of anticipation by security officials,” said Tomlinson.
With vehicles driving into crowds, active shooters and the random nature of attacks, it’s hard to gauge what might come next, said Warren Harper, global sports & events practice leader, Marsh.
Public spaces like sporting arenas are particularly vulnerable because they are considered ‘soft targets.’ They are areas where people gather in large numbers for recreation. They are welcoming to their patrons and visitors, much like a hospital, and the crowds that attend come in droves.
NFL football stadiums, for example, can hold anywhere from 25,000 to 93,000 people at maximum capacity — and that number doesn’t include workers, players or other behind-the-scenes personnel.
“Attacks are a big risk management issue,” said Chavious. “Insurance is the last resort we want to rely upon. We’d rather be preventing it to avoid such events.”
The second half of 2017 proved a trying few months for the insurance industry, facing hurricanes, earthquakes, wildfires and — unfortunately — multiple mass shootings.
The industry was estimated to take a more than $1 billion hit from the Las Vegas massacre in October 2017. A few years back, the Boston Marathon bombings cost businesses around $333 million each day the city was shut down following the attack. Officials were on a manhunt for the suspects in question, and Boston was on lockdown.
“Many of these actions are devised in complete obscurity and on impulse, and are carried out by individuals with little to no prior visibility.” — John Tomlinson, senior vice president, head of entertainment, Lockton
“Fortunately, we have not had a complete stadium go down,” said Harper. But a mass casualty event at a stadium can lead to the death or injury of athletes, spectators and guests; psychological trauma; potential workers’ comp claims from injured employees; lawsuits; significant reputational damage; property damage and prolonged business interruption losses.
The physical damage, said Harper, might be something risk managers can gauge beforehand, but loss of life is immeasurable.
The best practice then, said Chavious, is awareness and education.
“A lot of preparedness comes from education. [Stadiums] need a risk management plan.”
First and foremost, Chavious said, stadiums need to perform a security risk assessment. Find out where vulnerable spots are, decide where education can be improved upon and develop other safety measures over time.
Areas outside the stadium are soft targets, said Harper. The parking lot, the ticketing and access areas and even the metro transit areas where guests mingle before and after a game are targeted more often than inside.
Last year, for example, a stadium in Manchester was the target of a bomb, which detonated outside the venue as concert-goers left. In 2015, the Stade de France in Paris was the target of suicide bombers and active shooters, who struck the outside of the stadium while a soccer match was held inside.
Security, therefore, needs to be ready to react both inside and outside the vicinity. Reviewing past events and seeing what works has helped risk mangers improve safety strategies.
“A lot of places are getting into table-top exercises” to make sure their people are really trained, added Harper.
In these exercises, employees from various departments come together to brainstorm and work through a hypothetical terrorist situation.
A facilitator will propose the scenario — an active shooter has been spotted right before the game begins, someone has called in a bomb threat, a driver has fled on foot after driving into a crowd — and the stadium’s staff is asked how they should respond.
“People tend to act on assumptions, which may be wrong, but this is a great setting for them to brainstorm and learn,” said Harper.
In addition to education, stadiums are ahead of the game, implementing high-tech security cameras and closed-circuit TV monitoring, requiring game-day audiences to use clear/see-through bags when entering the arena, upping employee training on safety protocols and utilizing vapor wake dogs.
Drones are also adding a protective layer.
“Drones are helpful in surveying an area and can alert security to any potential threat,” said Chavious.
“Many stadiums have an area between a city’s metro and the stadium itself. If there’s a disturbance there, and you don’t have a camera in that area, you could use the drone instead of moving physical assets.”
Chavious added that “the overhead view will pick up potential crowd concentration, see if there are too many people in one crowd, or drones can fly overhead and be used to assess situations like a vehicle that’s in a place it shouldn’t be.”
But like with all new technology, drones too have their downsides. There’s the expense of owning, maintaining and operating the drone. Weather conditions can affect how and when a drone is used, so it isn’t a reliable source. And what if that drone gets hacked?
“The evolution of venue security protocols most certainly includes the increased usage of unmanned aerial systems (UAS), including drones, as the scope and territorial vastness provided by UAS, from a monitoring perspective, is much more expansive than ground-based apparatus,” said Tomlinson.
“That said,” he continued, “there have been many documented instances in which the intrusion of unauthorized drones at live events have posed major security concerns and have actually heightened the risk of injury to participants and attendees.”
Still, many experts, including Tomlinson, see drones playing a significant role in safety at stadiums moving forward.
“I believe the utilization of drones will continue to be on the forefront of risk mitigation innovation in the live event space, albeit with some very tight operating controls,” he said.
In response to the terrorist attacks on Sept. 11, 2001, U.S. Homeland Security enacted the Support Anti-Terrorism by Fostering Effective
Technologies Act (SAFETY Act).
The primary purpose of the SAFETY Act was to encourage potential manufacturers or sellers of anti-terrorism technologies to continue to develop and commercialize these technologies (like video monitoring or drones).
There was a worry that the threat of liability in such an event would deter and prevent sellers from pursing these technologies, which are aimed at saving lives. Instead, the SAFETY Act provides incentive by adding a system of risk and litigation management.
“[The SAFETY Act] is geared toward claims arising out of acts of terrorism,” said Harper.
Bottom line: It’s added financial protection. Businesses both large and small can apply for the SAFETY designation — in fact, many NFL teams push for the designation. So far, four have reached SAFETY certification: Lambeau Field, MetLife Stadium, University of Phoenix Stadium and Gillette Stadium.
To become certified, reviewers with the SAFETY Act assess stadiums for their compliance with the most up-to-date terrorism products. They look at their built-in emergency response plans, cyber security measures, hiring and training of employees, among other criteria.
The process can take over a year, but once certified, stadiums benefit because liability for an event is lessened. One thing to remember, however, is that the added SAFETY Act protection only holds weight when a catastrophic event is classified as an act of terrorism.
“Generally speaking, I think the SAFETY Act has been instrumental in paving the way for an accelerated development of anti-terrorism products and services,” said Tomlinson.
“The benefit of gaining elements of impunity from third-party liability related matters has served as a catalyst for developers to continue to push the envelope, so to speak, in terms of ideas and innovation.”
So while attackers are changing their methods and trying to stay ahead of safety protocols at stadiums, the SAFETY Act, as well as risk managers and stadium owners, keep stadiums investing in newer, more secure safety measures. &