Project Cargo

Moving the Big Stuff

With capacity ample, project cargo insurers emphasize project management.
By: | August 31, 2015 • 8 min read

Big changes in global energy markets and the infrastructure needs of developing nations are driving large-scale construction projects globally. The building blocks for many of those projects must move by sea, a perilous passageway with the potential for massive losses.

Soft insurance rates and plenty of capacity erase any notion of project cargo insurance as a commodity. It’s in the engineering and project management that carriers win the business.

09012015_03_ProjectCargo_Weiss

Steve Weiss, SVP, marine, Aspen

“In many insurance lines, loss control and risk management are reactive but in project cargo, it is very proactive, especially for us,” said Steve Weiss, now senior vice president, marine, for Aspen who spoke to Risk & Insurance® when he was a senior vice president for Liberty International Underwriters.

“Engineering is the life cycle of project cargo, from the time of submission through underwriting, post binding and execution.

“You don’t make money in project cargo on rates or terms and conditions, you make money on project management,” Weiss said.

Not that anyone is making a great deal of money in project cargo at present.

“The project cargo market is still very active globally,” said Kevin Wolfe, global head of project cargo for Allianz Global Corporate & Specialty.

Advertisement




“There is more than ample capacity overall, but there are still a limited number of major players that prefer to lead the largest projects. Rates are more competitive than they were several years ago, but still are at a viable level where profitability can be maintained.

“Terms and conditions are always being tested by the marketplace. Some can be adjusted, but some are very specific to project cargo, such as survey warranties.

Without those in place, coverage becomes so broad that we just won’t entertain the specific risk.”

Weiss concurred: “There is plenty of capacity to build any tower you need, up to $1.5 billion or so. But there are only a handful of lead underwriters.”

Global Infrastructure Needs

By definition, project cargo varies practically with every shipment. Wolfe said that Allianz is seeing activity in all regions. In Asia-Pacific and Africa there are quite a few projects related to quality of living, water filtration, power generation and transmission. In South America and Australia, there has been a lot of bridge and tunnel construction, while the Middle East is seeing more rail building.

“In the last year, we have seen a lot more activity in plant upgrades and expansions,” said Wolfe, “whereas a few years before, we saw more greenfield projects. We continue to see jumbo projects, like the natural-gas liquefaction projects, but have seen much more activity in small to mid-sized ones.”
The project cargo market is notable for the high-profile moves of huge, expensive, heavy, fragile and unusual items.

John Michel, marine underwriting manager for Global Special Risks (GSR) Group, a subsidiary of RSG Underwriting Managers, said those moves tend to go well because there is often just one shipment, and every one is paying close attention.

That was not always the case, he said.

John Michel, marine underwriting manager, Global Special Risks (GSR) Group,

Richard Neylon, partner, Holman Fenwick and Willan

“A few years ago we had a project shipment of a complete factory being moved from North America across the Atlantic. It was thousands of parts in many shipments. We just knew there were going to be some loss(es) because of the numerous shipments.”

Michel added that GSR was able to implement a program, and handle any claims.

The highly variable nature of the project cargo market also means that any given move can be expensive to cover.

“We just bound a contract for a big generating plant,” said Kevan Gielty, president and CEO of Coast Underwriters.

“The overall market is soft, but in many projects such as this one there is heavy exposure in lag time if anything went wrong. So the pricing for that policy was firmer than we have seen recently. In cases where premiums are more competitive, there is an even greater emphasis on loss control.”

Gielty noted a continuing trend in project cargo is manufacturers offering coverage. This is not new, but in a soft market every competitor is a factor. Some very large utilities and energy companies will simply self-insure to a point and only go to the market for excess.

“We typically get involved in the delay-in-start-up [DSU] component,” he said.

“When the U.S. was slow, Latin America was busy, especially expanding power sectors, most notably in Brazil. Now we are anticipating an uptick in Mexico as the energy sector is liberalized.”
— Steven Weiss, senior vice president, marine, Aspen

Advertisement




“That is not written alone because we need to be involved in the whole process.”
Weiss said that “North American rates have declined the last five to six years. The high was in 2007-08, and they are down 15 to 20 percent since then, although relatively flat so far this year. The U.S. and Canada have seen a decent uptick in project cargo because of power generation and natural gas.”

Different regions can often be countercyclical, he said. “When the U.S. was slow, Latin America was busy, especially expanding power sectors, most notably in Brazil. Now we are anticipating an uptick in Mexico as the energy sector is liberalized.”

Growth Areas

Even as underwriters track geographic and sector changes, they are also seeking new types of business.

09012015_03_ProjectCargo_sidebar_400pxGSR has recently begun to write stock throughputs. “We cover every aspect from procurement through delivery,” said Michel.

“It is a bit more of a challenge for the underwriter, but it simplifies things for the insured. This is definitely a growth area for us.

“Another extension of the project cargo market is contractor’s equipment. The energy markets in London can be expensive, and they are focused on windstorm.

“Covering that through the cargo market gets away from restrictions of geography and storm. It also moves to a market where there is ample capacity and moderate rates.”

Despite the current conditions where terms and conditions are broad and rates are trending down, Michel is sanguine.

“These trends will catch up with the industry at some point, it cannot go on forever.”

One of the interesting — and challenging — aspects of project cargo is that it can be counterintuitive.

For example, globalization of green energy might seem to be a boon, but Wolfe noted that more and more solar arrays and wind-turbine components are being made in each region, so the coverage of those moves tends to be within the engineering and construction policies, rather than in the deep-sea marine realm as it used to be when only a few places had industry capable of making such components.

“Mining is still active in North and South America, as well as sub-Saharan Africa,” Wolfe said, but again there can be an overlap with construction.

“In many regions, the biggest challenge of a mining or manufacturing project can be the adequacy of roads and bridges necessary to get components and then raw materials in, or production out.”

The variable nature and size of some coverage also makes project cargo unusual in that lead underwriters have to adapt their organizations to a large project.

“We have to consider deployment of our own resources even before we bind,” said Wolfe.

“By the time we have a contract, we have already had multiple conversations with our loss-control team. They are an integral part of the underwriting process. They might identify 40 critical items in the project that could require 100 or more surveys in total.”

Given the size and scope of Allianz, the company naturally prefers to use its own people whenever possible. But that still requires adaptation by the underwriters and marine loss control.

“As a result, we move our people around globally as needed,” said Wolfe.

“That varies with the size and type and number of projects. There can be hundreds of surveys required on different projects in different parts of the world at similar times.”

“Managing a project is a very fluid environment, modes of transit and shipping schedules change, the people change, even the risk managers. We constantly have to match people to risks and risks to people.”
— Kevin Wolfe, global head of project cargo, Allianz Global Corporate & Specialty

Adding a fourth dimension, “nothing ever stays the same over the course of a multiyear project,” said Wolfe.

“Managing a project is a very fluid environment: modes of transit and shipping schedules change, the people change, even the risk managers.

Advertisement




“We constantly have to match people to risks and risks to people. We do have a short list of outside vendors that have been vetted by our head of marine loss control, but even then the internal dialogue stays lively throughout the life of each project.”

Insureds can deploy risk management as well. There are several service providers that aggregate and analyze exposures and losses.

“Data is often spread across many losses, claims, exposures, policies, programs and different companies with different platforms,” said Bob Petrie, CEO of Origami Risk.

“We use analytics to look for patterns and events that cause losses. Insureds can use those to identify sources of exposure. Then, if there is a loss, the software can be used to report a claim, and it will get the loss reports and supporting documents to the underwriters.”

One of the new targets in project cargo risk management is tracking near misses, said Phil Wiedower of Origami.

Near-miss data is often held within an owner’s records, but tends to get overlooked because there is no claim, he said.

“Owners are looking to understand what risks to retain and what to transfer. Knowing the near misses as well as the loss history is important in the transfer cost-benefit analysis,” Wiedower said.

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

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 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.

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]