P3 Model in Action

Speed and Savings

A $1 billion bridge rebuild is boosted by new surety claims and liquidity elements. 
By: | November 2, 2015 • 7 min read

The dilemma of limited public sector budgets and crumbling infrastructure may have found a cure. The state of Pennsylvania took advantage of recent developments by surety bond underwriters to help secure an aggressive program to replace bridges around the state.

Advertisement




Surety bonds are required for work done by government entities, but this is a public-private partnership, so letters of credit were an option. But the sponsor, the state Department of Transportation (PennDOT), decided to use a surety bond program using new elements that included a fixed claims-determination process, and also liquidity provisions to ensure that work could continue during a claim.

The Rapid Bridge Replacement Project (RBR) is addressing 558 structurally deficient bridges across the commonwealth under a design-build-finance-maintain public-private partnership (P3) arrangement between PennDOT and Plenary Walsh Keystone Partners — the joint venture concessionaire, owned 80 percent by Plenary Group USA and 20 percent by Walsh Investors.

“This feature, which is more seen with contractor performance bonds in Europe, reduces the period of uncertainty in relation to a claim from a surety and for that reason it is assessed in a positive way from rating agencies and lenders.” — Michael R. Bonini, director, Public-Private Transportation Partnership Office, PennDOT.

Plenary Walsh is responsible for demolishing the existing bridges, maintaining traffic during construction, and then maintaining the new bridges for 25 years following construction. PennDOT will retain ownership of the bridges throughout.

It is the largest road project in Pennsylvania history.

Most of the bridges included in the program range from 40 to 75 feet in length and are located in rural regions on the state highway system.

Advertisement




The RBR is the first project to be completed under Pennsylvania’s 2012 P3-enabling legislation.

PennDOT said it chose the P3 structure to accelerate the replacement of the bridges and facilitate efficiencies in design and the construction of bridge components. This has resulted in a 20 percent cost savings over the life of the concession period, compared to PennDOT’s replacing the bridges itself, according to the agency.

Substantial completion of the project is expected on Dec. 31, 2017. Total cost is $1.119 billion; the design-build contract is for $899 million.

PennDOT said the batching of the projects will allow the bridges to be replaced and maintained at an average cost of $1.6 million each versus $2 million each if completed by PennDOT.

Commercial close occurred on Jan. 9, financial was March 18. Construction on the first bridges began this summer, and the bridges will be completed in batches. Substantial completion of the project is expected on Dec. 31, 2017. Total cost is $1.119 billion; the design-build contract is for $899 million.

“The key feature of the performance bond used for the Rapid Bridge Replacement project that is different from more traditional ones is that it spells out a specific process about accepting claims, dispute resolution and how long such a process can take,” said Michael R. Bonini, director of the Public-Private Transportation Partnership Office at PennDOT.

“This feature, which is more seen with contractor performance bonds in Europe, reduces the period of uncertainty in relation to a claim from a surety and for that reason it is assessed in a positive way from rating agencies and lenders.

“For PennDOT, this means a more streamlined process in relation to timely completion of the project and access to this mechanism if the contract is terminated and the design-build contract is assigned to PennDOT.”

New Delivery Method

Surety bonding is “in a state of rapid development,” said Michael Bond, head of surety for Zurich, which was a participating surety in the RBR. “This is a new delivery method in the U.S.

Advertisement




“The enabling legislation for P3 programs does not necessarily specify surety as opposed to letters of credit or other forms of performance security. Letters of credit have been used worldwide to provide liquidity to a project, but they don’t protect subcontractors.

“Performance bonds also cover payments for labor and materials. That ensures workers and suppliers are covered.”

“The Pennsylvania program is a very creative example of how the public works and surety industries are responding to current needs.” Michael Bond, head of surety,  Zurich

Bond said that the innovations in the RBR program address some of the prevailing concerns about surety, namely the uncertainty of the claims process, and the possibility of untimely payments, that could cause a liquidity problem for the project.

“The Pennsylvania program is a very creative example of how the public works and surety industries are responding to current needs,” said Bond.

To be clear, the surety bonds are different from the public-works bonds or funding bonds that are issued by the state authority and actually pay for the project.

The surety bonds provide performance security that the concessionaire, Plenary Walsh in this case, will complete the project satisfactorily. If there is a default, there would be a call on the bond and the surety would step in to work with the authority and the contractors to complete the project.

“What is new and different is that in a traditional public-works project the government is the owner and counterparty to the contractor,” said Bond. “In the P3 model, the counterparty is a private entity created to execute the project.”

Doug Wheeler, regional managing director for construction services, Aon Infrastructure Solutions

Doug Wheeler, regional managing director for construction services, Aon Infrastructure Solutions

He added that while such a special-purpose entity has some advantages over traditional public-works operations, it also has some proscriptions. Notably, the project is funded on a limited-recourse basis, so if there are cost escalations or unforeseen expenses, the concessionaire cannot dip into the government pockets to cover. There is some contingency, but it is limited.

“This is the next level in construction [risk management],” said Doug Wheeler, regional managing director for construction services at Aon Infrastructure Solutions. Aon was the broker for the contractor.

A European Model

“This alternative project delivery model came out of Europe and into Canada, then into the U.S. There is more legwork up-front, but there are dozens of projects already on board. Pennsylvania is a big proponent, New Jersey is almost there [with enabling legislation], but Governor Christie vetoed the most recent proposal. In New York, there has been a push.”

This is a very exciting time in public works and surety, said Aon’s Grace Drinker, senior analyst of infrastructure.

She stressed that even though the P3 process is different than the traditional design-bid-build approach, “there are still checks and balances aplenty in P3. There have been P3 contracts cancelled because of oversight and scrutiny.

Grace Drinker, senior analyst of infrastructure, Aon

Grace Drinker, senior analyst of infrastructure, Aon

“There is no risk to public safety or the public purse in the P3 process,” Drinker said. “What it does is bring operating efficiency to infrastructure.”

With the P3 approach, she said, “it is possible to have a higher initial cost, but the operating efficiency over the 30-year lifecycle of a project is a net savings. There is a real value for money in this.”

Drinker added that “contractors prefer to use surety capacity to letters of credit capacity to meet lender requirements on projects.”

Wheeler concurred that contractor preference is a big piece of the puzzle. “Surety is more efficient for the construction industry.” He added that capacity in surety is finite, but not a concern.

“Bundling the bridges allows them to be replaced faster and cheaper,” said Steve T. Park, senior associate with Ballard Spahr in Philadelphia, the bond counsel to PennDOT.

Lynn Schubert, president, Surety & Fidelity Association of America

Lynn Schubert, president, Surety & Fidelity Association of America

“The typical design-bid-build process would have taken longer. They selected bridges that could be easily bundled, designs that were similar, so they could fix the most in one program.”

There was equal diligence on the other side of the table.

“We spent a lot of time de-risking the program,” said Sarah Roberts, president of Intech Risk Management, insurance advisers to the concessionaire.

“We spent a lot of time de-risking the program.” — Sarah Roberts, president, Intech Risk Management

“When people hear 558 bridges, the initial perception is that they were not certain it could succeed. But the project is actually easier to manage with a lot of bridges than it would be for a single project of the same size.

“With a single project, if there is a delay, the whole timeline is thrown off. With so many bridges, it is possible to swap out one for another and work around delays to keep the whole project on schedule.”

She is sanguine about the growth potential for P3 projects in the U.S., at least in the long term.

Advertisement




“I don’t think we are there yet in P3 in the U.S.; there is still a lot of coming of age to do. In this case, the P3 model had a direct benefit to the owner, PennDOT, and indirectly to the taxpayers of the state.”

Lynn Schubert, president of the Surety & Fidelity Association of America, confirmed that P3s, and most public construction in Europe are protected by letters of credit.

“In the U.S., our public construction prefers performance bonds for completion and payment. But the concern of the ratings agencies is the speed with which surety bonds are called upon.

“In the Pennsylvania [project], the contracts include a quick-resolution process. It is a little extra piece, but it is very exciting.”

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Lead Story

Improving the Claims Experience

Insureds and carriers agree that more communication can address common claims complaints.
By: | January 10, 2018 • 7 min read

Carriers today often argue that buying their insurance product is about much more than financial indemnity and peace of mind.

Advertisement




Many insurers include a variety of risk management services and resources in their packages to position themselves as true risk partners who help clients build resiliency and prevent losses in the first place.

That’s all well and good. No company wants to experience a loss, after all. But even with the added value of all those services, the core purpose of insurance is to reimburse loss, and policyholders pay premiums because they expect delivery on that promise.

At the end of the day, nothing else matters if your insurer can’t or won’t pay your claim, and the quality of the claims experience is ultimately the barometer by which insureds will judge their insurer.

Why, then, is the process not smoother? Insureds want more transparency and faster claims payment, but claims examiners are often overburdened and disconnected from the original policy. Where does the disconnect come from, and how can it be bridged?

Both sides of the insurer-insured equation may be responsible.

Susan Hiteshew, senior manager of global insurance and risk management, Under Armor Inc.

“One of the difficult things in our industry is that oftentimes insureds don’t call their insurer until they have a claim,” said Susan Hiteshew, senior manager of global insurance and risk management for Under Armour Inc.

“It’s important to leverage all of the other value that insurers offer through mid-term touchpoints and open communication. This can help build the insurer-insured partnership so that when a claim materializes, the relationships are already established and the claim can be resolved quickly and fairly.”

“My experience has been that claims executives are often in the background until there is an issue that needs addressing with the policyholder,” said Dan Holden, manager of corporate risk and insurance for Daimler Trucks North America.

“This is unfortunate because the claims department essentially writes the checks and they should certainly be involved in the day to day operations of the policyholders in designing polices that mitigate claims.

“By being in the shadows they often miss the opportunity to strengthen the relationship with policyholders.”

Communication Breakdown

Communication barriers may stem from internal separation between claims and underwriting teams. Prior to signing a contract and throughout a policy cycle, underwriters are often in contact with insureds to keep tabs on any changes in their risk profile and to help connect clients with risk engineering resources. Claims professionals are often left out of the loop, as if they have no proactive role to play in the insured-insurer relationship.

“Claims operates on their side of the house, ready to jump in, assist and manage when the loss occurs, and underwriting operates in their silo assessing the risk story,” Hiteshew said.
“Claims and underwriting need to be in lock-step to collectively provide maximum value to insureds, whether or not losses occur.”

Both insureds and claims professionals agree that most disputes could be solved faster or avoided completely if claims decision-makers interacted with policyholders early and often — not just when a loss occurs.

“Claims and underwriting need to be in lock-step to collectively provide maximum value to insureds, whether or not losses occur.” – Susan Hiteshew, senior manager of global insurance and risk management for Under Armour Inc.

“Communication is critically important and in my opinion, should take place prior to binding business and well before a claim comes in the door,” said David Crowe, senior vice president, claims, Berkshire Hathaway Specialty Insurance.

“In my experience, the vast majority of disputes boil down to lack of communication and most disputes ultimately are resolved when the claim decision-maker gets involved directly.”

Talent and Resource Shortage

Another contributing factor to fractured communication could be claims adjuster workload and turnover. Claims adjusting is stressful work to begin with.

Advertisement




Adjusters normally deal with a high volume of cases, and each case can be emotionally draining. The customer on the other side is, after all, dealing with a loss and struggling to return to business as usual. At some TPAs, adjuster turnover can exceed 25 percent.

“This is a difficult time for claims organizations to find talent who want to be in this business long-term, and claims organizations need to invest in their employees if they’re going to have any success in retaining them,” said Patrick Walsh, executive vice president of York Risk Services Group.

The claims field — like the insurance industry as a whole — is also strained by a talent crunch. There may not be enough qualified candidates to take the place of examiners looking to retire in the next ten years.

“One of the biggest challenges facing the claims industry is a growing shortage of talent,” said Scott Rogers, president, National Accounts, Sedgwick. “This shortage is due to a combination of the number of claims professionals expected to retire in the coming years and an underdeveloped pipeline of talent in our marketplace.

“The lack of investment in ensuring a positive work environment, training, and technology for claims professionals is finally catching up to the industry.”

The pool of adjusters gets stretched even thinner in the aftermath of catastrophes — especially when a string of catastrophes occurs, as they did in the U.S in the third quarter of 2017.

“From an industry perspective, Harvey, Irma and Maria reminded us of the limitations on resources available when multiple catastrophes occur in close succession,” said Crowe.

“From independent and/or CAT adjusters to building consultants, restoration companies and contractors, resources became thin once Irma made landfall.”

Is Tech the Solution?

This is where Insurtech may help things. Automation of some processes could free up time for claims professionals, resulting in faster deployment of adjusters where they’re needed most and, ultimately, speedier claims payment.

“There is some really exciting work being done with artificial intelligence and blockchain technologies that could yield a meaningful ROI to both insureds and insurers,” Hiteshew said.

“The claim set-up process and coverage validation on some claims could be automated, which could allow adjusters to focus their work on more complex losses, expedite claim resolution and payment as well.”

Dan Holden, manager, Corporate Risk & Insurance, Daimler Trucks North America

Predictive modeling and analytics can also help claims examiners prioritize tasks and maximize productivity by flagging high-risk claims.

“We use our data to identify claims with the possibility of exceeding a specified high dollar amount in total incurred costs,” Rogers said. “If the model predicts that a claim will become a large loss, the claim is redirected to our complex claims unit. This allows us to focus appropriate resources that impact key areas like return to work.”

“York has implemented a number of models that are focused on helping the claims professional take action when it’s really required and that will have a positive impact on the claim experience,” Walsh said.

“We’ve implemented centers of excellence where our experts provide additional support and direction so claim professionals aren’t getting deluged with a bunch of predictive model alerts that they don’t understand.”

“Technology can certainly expedite the claims process, but that could also lead to even more cases being heaped on examiners.” — Dan Holden, manager, Corporate Risk & Insurance, Daimler Trucks North America

Many technology platforms focused on claims management include client portals meant to improve the customer experience by facilitating claim submission and communication with examiners.

“With convenient, easy-to-use applications, claimants can send important documents and photos to their claims professionals, thereby accelerating the claims process. They can designate their communication preferences, whether it’s email, text message, etc.,” Sedgwick’s Rogers said. “Additionally, rules can be established that direct workflow and send real time notifications when triggered by specific claim events.”

However, many in the industry don’t expect technology to revolutionize claims management any time soon, and are quick to point out its downsides. Those include even less personal interaction and deteriorating customer service.

While they acknowledge that Insurtech has the potential to simplify and speed up the claims workflow, they emphasize that insurance is a “people business” and the key to improving the claims process lies in better, more proactive communication and strengthening of the insurer-insured relationship.

Additionally, automation is often a double-edged sword in terms of making work easier for the claims examiner.

“Technology can certainly expedite the claims process, but that could also lead to even more cases being heaped on examiners,” Holden said.

“So while the intent is to make things more streamlined for claims staff, the byproduct is that management assumes that examiners can now handle more files. If management carries that assumption too far, you risk diminishing returns and examiner burnout.”

Advertisement




By further taking real people out of the equation and reducing personal interaction, Holden says technology also contributes to deteriorating customer service.

“When I started more than 30 years ago as a claims examiner, I asked a few of the seasoned examiners what they felt had changed since they began their own careers 30 year earlier. Their answer was unanimous: a decline in customer service,” Holden said.

“It fell to the wayside to be replaced by faster, more impersonal methodologies.”

Insurtech may improve customer satisfaction for simpler claims, allowing policyholders to upload images with the click of a button, automating claim valuation and fast-tracking payment. But for complex claims, where the value of an insurance policy really comes into play, tech may do more harm than good.

“Technology is an important tool and allows for more timely payment and processing of claims, but it is not THE answer,” BHSI’s Crowe said. “Behind all of the technology is people.” &

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]