Property Risk

Beyond Protected

Research-based engineering and predictive analytics help underwriters take on bigger risks.
By: | December 14, 2016 • 8 min read

Properties designated as Highly Protected Risks (HPRs) can get significantly greater policy limits with a much lower rating structure for their P&C exposures if they continue to keep pace with technology.

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Highly Protected Risk properties often are subject to a much lower than normal probability of loss by virtue of low hazard occupancy or property type, superior construction, special fire protection equipment and procedures and management commitment to loss prevention.

It used to be a property could attain HPR status with just state-of-the-art fire sprinkler systems. Risk managers now need to think HPR 2.0, experts say, and expand the concept beyond sprinklers to the risk exposures that develop in tandem with new upgrades.

“The idea that the majority of loss is preventable has been the center of our business model for 180 years,” said Brion Callori, senior vice president of engineering and research at FM Global, one of the first and largest HPR insurers.

“The amazing thing is how well it still works,” he said. “I think this is why it’s gotten more industry interest in last five to 10 years.”

Brion Callori, senior vice president of engineering and research, FM Global

Brion Callori, senior vice president of engineering and research, FM Global

Underwriters are quantifying and underwriting the exposures that face a single building, a campus, a system, or even a supply chain by using modern tools such as computer models, heat maps and predictive analysis.

Solar panels, clean rooms, data storage and mega warehouses are all examples of property uses adding new hazards. As HPR engineers study those additions, they are also able to design ways to tackle the hazards they create.

Take for example, automatic storage and retrieval systems used in warehouses built larger today with narrower aisles and higher stacking. The ability to store more inventory becomes more important as space grows increasingly expensive. Research on the most advanced sprinkler technologies available aims to protect products, help reduce losses and minimize business interruptions.

“As we move to a just-in-time, more global economy, that’s where the clients’ exposures have changed in the past 30 years; they are all over the world.” — Mike Martin, EVP, general manager of national insurance property, Liberty Mutual

More carriers, armed with research and statistics, have a new perspective on HPRs and are willing to invest in the market. The more “protected” a risk is against specific exposures, the more capacity an underwriter will commit, with broader terms and at a better price.

“As it expands in different industry groups, the HPR engineering and underwriting has been able to expand to follow that and meet the exposure of these different facilities,” said Greg DiPrato, senior vice president of the global property practice at Lockton.

The modern HPR method is based on a system FM Global created nearly two centuries ago to identify ways to reduce losses from fire, explosions or natural disasters at mills. To this day, FM Global engineers continually research how to improve on safety measures such as using more efficient fire suppression, finding the strongest roofing materials or identifying less risky locations.

Liberty Mutual Insurance is another leading HPR insurer with a long history of finding solutions to risk exposures with help from a dedicated team of engineers.

“The definition of highly protected risk has really not changed, not one bit,” said Mike Martin, EVP and general manager of national insurance property at Liberty Mutual. “As we move to a just-in-time, more global economy, that’s where the clients’ exposures have changed in the past 30 years; they are all over the world.”

Research-Based Engineering

The traditional insurance model is an actuarial model, where you look at the losses that happen in an occupancy or an industry class, project forward and say those are the losses you expect in the future, Callori said.

HPR designation for FM Global goes along with what’s called research-based engineering aimed at preventing loss. It’s tough to justify the return on investment for becoming HPR based only on reduced pricing or increased capacity in today’s marketplace.

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“We want to learn from the losses that happened in the past and figure out how to prevent them from happening in the future,” said Callori. “Our clients can take control of their own destiny going forward, and the way we do that is through the engineering.”

“The buyers look for someone that can really add the value to the partnership and help them manage their total cost of risk, not only just the physical loss but also the business continuity,” Martin said.

While most new construction in the U.S. today is built to fire code, which usually confers HPR status, it’s what you put into it and what you do with it once it’s finished that can take away an HPR designation. Conversely, the exposures in almost any building can be adapted to attain HPR status, as long as you are willing to invest in the requirements, Lockton’s DiPrato said.

When a warehouse built to store steel is then converted to plastic products containing lithium ion batteries, it may lose its HPR status because the existing shelves and sprinkler system can’t adequately contain a lithium ion or plastic fire.

Adding solar panels atop a building creates a load factor, wind exposure and voltage exposure to firefighters that must be addressed. The HPR engineers will find ways to protect the buildings, DiPrato said.

“Everybody is worried about cyber hackers from another country, yet still the easiest way to get to your servers is for someone to just walk into your building if they are not questioned.”— Brion Callori, senior vice president of engineering and research, FM Global

After engineers identify a building’s hazards and make their recommendations on how to reduce losses, the client often must prioritize the budget to incorporate everything that’s recommended at every location, Callori said.

To help with that, engineers, such as those at FM Global and Liberty Mutual, have developed predictive analytics tools to help clients focus their limited capital for the most effective route to attaining highly protected risk status.

To help clients determine where best to invest, FM Global offers clients four predictive analytics tools: Risk Mark; Locations Predisposed; Relative Likelihood and Equipment Factors. These tools look at a structure, its location, its use and the machinery inside and make recommendation about likely losses and best value for investing in loss mitigation.

A quick review of losses at properties that follow recommended safety improvements compared with those that didn’t shows the HPR buildings had less loss, Callori said.  For example, 86 percent of the dollar value for 126 large losses at FM Global locations last year happened at non-HPR facilities.

What’s Next? Cyber and Energy HPR

“As a client develops a facility for their needs, the carrier engineers are brought into the process,” DiPrato said. “Lockton has broker engineers that work as consultants to the client and help in those discussions with the insurance carrier. There’s a lot that goes on to keep everything on an HPR status as technology keeps developing.”

Engineers are beginning to take the HPR approach to new directions, such as confronting alternative energy storage and cyber hazards. Field engineers look at physical security exposures and develop ways to protect against cyber hazards using HPR techniques in new ways.

“Everybody is worried about cyber hackers from another country, yet still the easiest way to get to your servers is for someone to just walk into your building if they are not questioned,” Callori said. “The HPR definition can evolve to hopefully protect [against] cyber hazards.

“We’re working on developing a tool that we think is going to be very valuable for the risk managers to actually understand what their exposures are,” Callori said. “That will be straight from HPR.”

Underwriters are going to start to think about HPR cyber protection in the same way they do about fire, said Michael Korn, a managing principal and leader of the national property practice at Integro Insurance Brokers. What are the data controls that are in place? Do you have really robust encryption? Do you have firewalls? How do you back up your information? What employee controls do you have over information?

Playing in the Primary

The most common HPR programs are structured as single carrier; quota share; and shared and layered, said Korn.

Each insurance company “has a particular appetite for where they like to play in a program,” he said.

Michael Korn, managing principal; leader of the national property practice, Integro Insurance Brokers

Michael Korn, managing principal; leader of the national property practice, Integro Insurance Brokers

“You have to put it together as part of a jigsaw puzzle,” said DiPrato. The way the market is today, with a lot of capacity and a lot of players out there, you can put together a lot of options, he said.

“The better the risk — the more HPR it is — the more underwriters are interested in being on it because the chances of having a loss are so much less,” Korn said. Some insurers have very large amounts of capacity and will do a single carrier deal.

Some larger risks might have 15 carriers, and each one is doing a different piece of the puzzle, Korn said.  For example, if a client needs $2 billion worth of capacity, a broker might set up a quota share, where one carrier assumes 30 percent of the program. The broker then builds a tower that goes all the way up to full value with additional quota share players, Korn said.

In a shared and layered program of the same size, a broker can set up a primary layer of $500 million, for example, and add additional layers to reach the needed $2 billion capacity.

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The lower in the tower, the more premium the insurer gets because the chance of impact from a loss is much greater. Those insurers that write excess of the primary get less premium because they take on less risk.

“You approach certain insurers with the idea they want to play in the primary,” Korn said.

Other insurers are more capacity players and typically don’t offer engineering services. They “like to play in the excess,” Korn said. They put up capacity rather than engineering services and receive less premium, Korn said.

The value proposition for Liberty, “is not just the pure insurance product, but things that aren’t covered such as protecting a client’s market share, helping with revenue streams and also reputational risk,” Martin said. “Our loss prevention solutions support a good risk management team, helping them avoid some of those things.” &

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

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]