The risk is high: insurance professionals are eyeing challenges in New York construction, social media use, terrorism and global expansion.
Whatever the goal, risk is threatening to derail it. It's in the language of some laws and the uncertainty of others, the global expansion of clients and the online presence of employees.
Here we take a look at some of the issues affecting commercial lines: labor and defect laws that are making some construction projects difficult to place; the risks social media poses to businesses; the challenges of servicing clients as they expand globally; and the uncertainty surrounding the Terrorism Risk Insurance Program Reauthorization Act.
Construction projects are on the rise, in what experts say is a sign of a recovering economy.
But not all construction projects are created equal, and some builders are finding it difficult to get coverage for their projects. An unfriendly labor law in New York and adverse construction defect laws in certain states are making New York City construction projects and certain housing development projects particularly unattractive, even to the excess and surplus lines markets.
A construction law broadly known as New York Labor Law imposes strict liability on contractors and project owners for any liability, which opens the door for injured workers to sue their employers and provides an out for workers' compensation.
"Any New York construction--commercial and residential--has been difficult to place," said Line Trimble, head of U.S. casualty for Torus. "New York Labor Law's imposition of strict liability makes it a very difficult casualty class to underwrite and make a profit on."
"It's evolved into a feeding frenzy for the plaintiffs' bar," said Jeremy Johnson, president and CEO of Lexington. "You're seeing significantly increased costs for contractors, and that's for contractors that can, in fact, get insurance."
Construction defect laws also are proving problematic in certain regions, particularly out west. While custom homes are relatively easy to insure, condominiums, townhouse developments and housing tracts are considerably more difficult.
"Some Western states have challenging construction defect laws, which have made residential construction historically a pretty tough risk," Trimble said. "You'd think, 'Home builders ... what could happen? 'Well, what happens is, a developer can build many, many residential units and all have the same really bad roofing material. Each individual loss is small, but when you add up thousands of units, then suddenly it becomes a pretty bad event."
The unfriendly legal landscape isn't just limited to residential construction, either.
"Other areas where we're seeing a trend in states with regard to construction are Colorado, South Carolina, Arkansas and Hawaii," Trimble said. "These states, either through statute or case law, have suggested that the definition of occurrence should include faulty workmanship.
"We're in the business of insuring fortuity, an accident. So in our minds shoddy workmanship doesn't constitute an accident and those states are becoming more difficult to insure construction risks for that reason."
Shawn Ram figures someone easily could create comic strips of social media missteps. Not him, though.
While Ram, the managing director of Aon Risk Solutions' national technology practice, has an arsenal of stories that will make you ask, "Are you kidding me?", he also knows that social media misuse is no laughing matter for organizations dealing with the resulting fallout. So rather than illustrating the mistakes of others, he uses such mistakes as illustrations of the dangers social media can pose to his clients.
"Social media is a risk that all organizations should be thinking about," he said. "It's becoming more and more a driving force behind potential revenue creation. It creates opportunities to interact with customers, it creates opportunity to leverage marketing across a broader range of potential buyers. And more and more companies of all industries and all sizes are using social media as a tool to generate revenue.
"The very nature of social media is that one social platform enables one individual to communicate to many, which ends up being a many-to-many communication channel. That creates a tremendous amount of opportunity for any business, but it also creates tremendous risk."
Publicity--both negative and positive--spreads fast on social media, enhancing or tarnishing a company's reputation along the way. Take the Burger King employee who posted a YouTube video of himself bathing in the restaurant's kitchen sink. Or fashion designer Kenneth Cole tweeting that a 2011 uprising in Cairo must have been because people "heard our new spring collection is now available online," a joke that created a bit of an uproar on social media.
"The greatest impact of social media can be on reputation and brand," Ram said. "Insurers have definitely tried to get their arms around the impact that social media can have, but the one thing that's difficult to calculate is the brand-damage loss."
Not all social media crises are created by rogue employees, of course, and not all are the result of intentional misuse. When Netflix founder Reed Hastings mentioned viewer-ship numbers on his Facebook page, it prompted an investigation by the Securities and Exchange Commission into whether he had violated disclosure regulations by announcing the news through social media. Hastings ultimately was cleared by the SEC. But the incident illustrated the risk of releasing information--especially confidential or private information--through social media.
Ram said it's important for companies to create a social media policy that establishes guidelines for the dissemination of information, lists protocols for employees to report negative social media interactions and includes a business continuity plan in the event of a negative outbreak.
"We would advise clients to reach out to outside counsel about creating a corporate policy of that nature," he said. "You have to have legal expertise in order to define the language appropriately."
Though some of the costs related to negative social media may be covered through a company's general liability, cyber or E&O policies, Ram said social media should be part of the discussion with brokers and insurers.
"It's important that risk professionals are mindful of the manner in which companies engage in social media practices, and that they proactively address a company's social media guidelines and policies with insurers, so that there is adequate protection with any damage that could occur," he said. "You have to be proactive about this."
Global Reach, Global Risk
When one of his clients expands operations into a new country, Randy Schreitmueller starts thinking about such things as infrastructure and political risk.
"Since we're so heavily invested in loss prevention, one of our big considerations is whether we can get our people in there safely to engineer facilities and offer loss prevention advice," said Schreitmueller, vice president of broker relations for FM Global. "That's an integral part of our product, so we depend on the ability to get engineers and claims people in to adjust losses."
Providing a consistent level of service to a clientele that's expanding globally is one of the biggest challenges for commercial property writers.
"From my perspective, one of the most important things going on today is meeting the service expectations of multinational companies," Schreitmueller said. "Multinationals tend to be very sophisticated, very demanding clients. It's a global economy, of course. So the ability to follow them around the world wherever they go and provide them with the level of service they're used to in their home territories is really important."
Commercial clients are going farther and farther afield, but they want consistent coverage to protect their facilities abroad.
"From a client perspective, they would like nothing better than to have a consistent broad policy in every single country," Schreitmueller said. "We do have a standard underlying policy where, all things being equal, we deliver to clients everywhere. But we also have to--and the clients have to--adhere to local regulations. So we have to keep track of those and adjust accordingly.
"There's also the protection aspect. We don't rely on what is the prevailing building standard in a given country; we go to our clients and tell them what level of protection would be most appropriate and best for them. Building standards and codes vary from country to country. Not every country is in the same place in terms of evolution of their building standards and building codes. We recognize that and increasingly we're trying to work with local authorities having jurisdiction to try to influence those codes so that they are appropriate when it comes to things like fire protection, windstorm, flood protection, etc."
Schreitmueller said FM Global, which issues policies in approximately 130 countries, has entered 15 new countries in the past five years. He expects the trend to continue.
"Clients increasingly are going to Africa and Asia," he said. "They're now going to places like Myanmar, which just opened up a year or two ago. That's the thing: You have to be prepared to go where the clients go."
It's been one year since two pressure-cooker bombs exploded at the finish line of the Boston Marathon.
With property/casualty losses of $2.5 million, the Boston Marathon bombing failed to meet the $5 million loss threshold necessary to trigger the Terrorism Risk Insurance Program Reauthorization Act. It did, however, shine a spotlight on the federal program, which is set to expire in December.
With uncertainty surrounding its future, TRIPRA has become a particularly hot issue. "Terrorism insurance absolutely is a standard part of the conversation in commercial lines," said Aaron Bueler, managing director and leader of Guy Carpenter's workers' compensation practice and terrorism task force.
"There's a lot more detail required on how many employees are under one roof at one time at what location. Writers also pay more attention to where a building is subject to an aggregation profile that will increase the projected losses from terrorism scenarios/models.
"The catastrophe models have a terrorism component. For example, a high rise building in Manhattan will have a larger charge for terrorism risk than a mall in Des Moines."
TRIPRA originally was developed in response to the terrorist attacks of Sept. 11, 2001. Following the attacks, many large-scale construction projects stalled because lenders did not want to provide funding without insurance in place that would cover terrorism.
Insurers, meanwhile, were reluctant to enter the terrorism coverage market because of the severity of Sept. 11. Congress responded by creating the program, which requires property insurers to offer coverage. In exchange, the program creates a federal backstop that would go into effect in the event of a catastrophic terrorist attack.
"There were significant reinsurance capacity reductions for workers' compensation after 9/11 and a complete rebuild was necessary," Bueler said. "The government provided a much needed backstop and both insurance and reinsurance capacity for terrorism has increased over time."
According to a report by the Congressional Research Service, since the start of the federal program prices for terrorism coverage have generally trended downward and approximately 60% of commercial policyholders have purchased coverage. A May 2013 report by Marsh found take-up rates have stayed in the range of 60% since 2009.
"If TRIPRA doesn't exist, we think that perhaps carriers may try to stop offering terrorism coverage or will offer less terrorism coverage," Bueler said.
The uncertainty surrounding the program already is affecting the market. "Starting Jan. 2, 2014, anybody writing an annual policy has an actual exposure to terrorism without the benefit of TRIPRA," Bueler said. "So if someone is managing their capital in a way that recognizes a market without TRIPRA, it could affect the way they underwrite throughout the year."
* Hard to Place: Construction risks in New York and certain other areas can be difficult to place.
* Hard to Control: Social media can be a best friend or worst enemy to businesses.
* Hard to Predict: The future of terrorism coverage remains uncertain.
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|Date:||Apr 1, 2014|
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