Property Risks

Engineering Answers to Property Losses

Site-specific risk assessments do what standard models can’t, benefitting both insurer and insured.
By: | February 22, 2016 • 8 min read

Catastrophe modelers did data even before “big data” became cool.

Advertisement




The vast statistical, scientific and engineering brainpower packed into their software tools allows insurance companies to churn out numbers for massive portfolios of properties and properly price their coverage, as well as allow regulators to feel confident they’re doing so.

Still, CAT models have their critics and their limitations. Some of the biggest related to engineering.

Corporate risk managers often listen to these criticisms. As they should. When it comes to the complex and unique structures in some of their catalogs of properties — think a chemical plant or a microchip fabricator — a model cannot properly paint an accurate portrait of its exposure.

“We (our brokers and us) were convinced that the traditional hurricane modeling that the industry relies upon did not accurately reflect the true measure of loss exposure we faced as a port authority.” — Danny Thompson, risk manager, Georgia Ports Authority.

And when it comes to the handful of physical plants that are driving the vast amount of a risk manager’s total cost of risk, a model will not be able to provide the loss-prevention recommendations to reduce that cost.

That’s where the engineers come in. With their notepads, tape measures and fold-up ladders — and certainly more sophisticated equipment — engineers on the ground can understand what is driving the cost of risk at a special or important physical site.

The tailored data they collect can be fed into the models to reduce uncertainty for a key property and lower the exposure numbers across an entire portfolio. The things they see can be turned into concrete suggestions for how to strengthen a property against the risk of fire, windstorm, flood, quake … you name it.

Brokers and insurers can offer these engineering services — and if you listen to some insiders, these services are nothing short of a competitive advantage — allowing them to take millions in premiums from their more model-dependent competitors.

Selling It

If we talk with someone at a carrier or broker that provides risk engineering services, they will say that these services provide a distinctive advantage for everyone involved.

Ryan Barber, managing director and U.S. property practice industry specialization leader, Marsh

Ryan Barber, managing director and U.S. property practice industry specialization leader, Marsh

“It is a significant differentiator for us,” said Ryan Barber, a managing director and U.S. property practice industry specialization leader for Marsh, referring to the broker’s loss-control engineering and, in particular, its natural hazards engineering group.

As Barber explained, Marsh offers its engineering services not as an added line item to a risk manager’s bill, but as an investment. To have an engineering team visit the 10 critical locations in a risk manager’s portfolio, for instance, may cost $50,000.

But what happens if the data collected leads to a brand-new modeling output for that client — and, say, a $500,000 reduction in the average annual loss (AAL) number? A lower AAL would indicate to underwriters that they should charge that client lower rates on their property insurance.

“We have never done a [loss-control engineering] project where the cost of the project itself wasn’t covered by the reduction we saw in the AAL,” Barber said.

Better data for crucial facilities can benefit a risk manager in another way. CAT models primarily pump out two types of numbers. There’s the AAL, which tells underwriters the losses they can expect from a risk manager’s properties on average per year and how much premium needs to be charged over time to fund those expected losses.

Advertisement




The models also put out numbers to gauge the tail end of a risk manager’s exposure.

How much loss across the portfolio of properties can underwriters expect on a one-in-250-year return period? Or even worse, one-in-500? These numbers often tell risk managers how much property-catastrophe limits they ought to buy.

Insurance provisions in commercial loans often demand borrowers buy enough insurance to cover a 250-year return period. For this latter type of number, Barber said, clients can see a 40 to 50 percent reduction after engineers are sent in.

Before taking that step, though, risk managers should make sure they need risk engineering in the first place.

A good broker typically can advise a client on the need of site-specific data. A good broker will also crunch the analytics on a client’s portfolio and gain a sense for which few individual locations are driving the exposure, explained Charles Macaulay, chief engineer at risk engineering firm Global Risk Consultants (GRC).

Risk managers then know which critical sites to target for a boots-on-the-ground site-specific engineering study, which provides potential loss estimates similar to a model (but of course with far less uncertainty).

Buying It

Such services could make Marsh stand out, as well as other brokers that have their own teams of structural engineers and property risk control specialists — or even partnerships with third-party engineering firms like GRC. But how much of a differentiator are these services?

Andy Kao, director of catastrophe engineering consulting, AIR Worldwide

Andy Kao, director of catastrophe engineering consulting, AIR Worldwide

Another way to look at that question is how much demand there is for the services. Andy Kao of AIR Worldwide, director of the modeling firm’s catastrophe risk engineering consulting arm, estimated that 90 percent of the property exposures out there are “vanilla” and do not require site-specific analysis to understand their exposure.

“It will always be fairly uncommon for them to pursue this because of the nature of what is at risk,” he said of risk managers. “For 90 percent of the stuff out there, the models do a great job.”

Macaulay estimated that as many as one in five of GRC’s clients ask the firm to collect data on a site-specific basis to feed into their models. The rest of their clientele come for the loss-control aspects, whereby engineers make suggestions that would reduce the damage if an event were to happen.

The knowledge can strengthen properties and risk managers’ resolve to reduce their amount of CAT coverage and limits.

Advertisement




“We (our brokers and us) were convinced that the traditional hurricane modeling that the industry relies upon did not accurately reflect the true measure of loss exposure we faced as a port authority,” said Danny Thompson, risk manager at the Georgia Ports Authority.

“The site-specific engineering study verified this. Additionally, we wanted to identify any loss control measures we could implement in order to reduce the magnitude of our wind and flood exposures. There seemed to be a greater comfort level for the underwriters based on having the site-specific engineering study to rely upon.”

Sharing It

Some carriers appreciate this “greater comfort level” so much that they keep risk engineering teams in-house — as is the case with FM Global, AIG, Berkshire Hathaway Specialty and Allianz.

Are these carriers pulling in millions of premiums from competitors because of their engineers? We could look at their premium underwritten numbers and guess.

But what we can say with certainty that an insurer like FM Global doesn’t offer risk engineering services just because they think it sounds attractive to a prospective client. It’s woven into the core of what FM Global does.

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

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

“From the FM Global perspective, whatever is driving [interest in site-specific engineering] hasn’t changed,” said Brion Callori, senior vice president of engineering and research.

That is, what has always been driving it is the desire to prevent losses. Better data for underwriting and modeling is a by-product, Callori said.

FM Global’s site-specific engineering can deliver insights all the way up to an insured’s C-suite to help those executives know how to better allocate capital for risk improvement and understand how risk impacts the bottom line.

Not every client is ready for the heavy-duty site-specific engineering reports at a lot of locations, Callori added. FM Global meets with clients to understand how much engineering they want across different locations and exposures.

“The level of commitment and implementation varies per company,” agreed Maarten van der Zwaag, global head of property risk consulting for Allianz Global Corporate & Specialty. “This is a key item to address when starting discussions and setting up any site-specific engineering loss control program.”

FM Global, for its part, fosters that commitment and understanding through tech-enabled tools to communicate the value of engineering at any level.

The Rhode Island-based insurer, for instance, offers a benchmarking and analytics tool called RiskMark, which scores individual locations by their comparative risk management quality. Insureds’ executives can receive the scores, and other engineering reports, through a cloud-based and now mobile portal called MyRisk.

Callori estimated that FM Global participates in the property insurance programs of one-third of the Fortune 1000. In other words, loss control to the point of site-specific engineering resonates with risk managers no matter the market conditions.

Van der Zwaag also stressed that when both an insurer and client drive the process, the collaboration tends to lead to stronger long-term bonds. That’s a bonus for carriers: client retention.

“Effective risk management programs will require commitment and investments of both client and insurer.” — Maarten van der Zwaag, global head of property risk consulting, Allianz Global Corporate & Specialty

“Effective risk management programs will require commitment and investments of both client and insurer. This will increase client retention and at the same time generate steady risk improvements year on year, resulting in a reduction of losses. This is a win-win situation.”

Advertisement




If it presents that “win-win” situation consistently and effectively, the Munich-based executive said, an insurance company can gain the interest of new clients and win business.

But millions of dollars in new client business? Instead of guessing, it might again be better to look at it in terms of demand, and the timing of that demand. For risk managers, the power of site-specific engineering comes to the fore when they need to prove how good their risks are during hard markets, said AIR’s Kao.

During soft markets, risk managers can shop their property programs. It’s the insurers that have to sell themselves. To win business in a competitive market, they may offer up value-added engineering services, as well as the modeling and big data reporting bells and whistles to go
with it.

Matthew Brodsky is editor of Wharton Magazine. He 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.

Advertisement




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.

Advertisement




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?

Advertisement




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.

Advertisement




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 and 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.

Advertisement




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]