Tag Archives: Will Carbone

Considerations for sports and entertainment insurance

Individual sport and entertainment attractions have distinct insurance needs that make traditional actuarial and underwriting approaches insufficient. Insurers needs to customize policies according to the unique risks present at different events.

In the article “Insuring a lazy Saturday afternoon: Insurance for entertainment,” Milliman’s Will Carbone uses a hypothetical family outing to frame the distinct insurance needs associated with a county carnival and a baseball game. Here is an excerpt:

On Long Island, traveling carnivals pop up in parking lots all summer long, attracting kids of all ages and fans of Americana. On this sunny Saturday, I packed up the family and we headed down to the train station, the site of this weekend’s festival. My oldest son let us know definitively that our first stop would be the bouncy houses he loves so dearly. Much to our dismay, this particular carnival had all sorts of rides, games, and food, but did not have a single inflatable attraction. “Where is the bouncy house?!”

“Well, not all carnivals have the same rides,” I tried to explain.

This example highlights the difference between providing coverage for traveling carnivals, theme parks, and other one-off facilities compared with a franchised location. With few exceptions, each of these entertainment spaces was tailored to maximize profit.

For small, mobile operations, this means selecting the rides and games that will make them attractive to the host facility. For the insurer providing cover for the carnival, this means that the pricing needs to be done on a more granular level. Typically, the approach is to price the coverage for each attraction rather than for the collective carnival. A premium is determined for each attraction, and the cost of coverage is based on the sum of the premiums for the attractions at the carnival. This simplifies the underwriting efforts as a unique quote is only needed once for each attraction and does not need to be tailored to each insured.

Pricing individual rides becomes difficult when the ride itself is a unique risk. Larger scale operations seek to provide the big thrill that will draw in crowds. Those big thrills are coming not from tried-and-true roller coasters but from the cutting-edge rides that are considered a “one-of-a-kind” experience. By definition, these rides don’t have a credible history on which underwriters can gather data and price the risk, increasing the challenge of pricing these facilities.

Agent Orange is the new black lung

Carbone-WilliamLatent occupational diseases began to emerge in the 1970s as complex risks that could result in future, unknown costs. While asbestos comes to most people’s minds, asbestos claims have generally been handled in tort outside the workers’ compensation systems. Compensation for exposure to coal dust (black lung) generally predated asbestosis and has been handled under workers’ compensation since 1973, under both state workers’ compensation systems and the Federal Coal Mine Health and Safety Act of 1969. So what other latent occupational diseases are potentially of interest to workers’ compensation insurers?

Agent Orange coverage and benefits are still being shaped and molded today. Claims started coming to the Department of Veterans Affairs shortly after the Vietnam War, but were mostly denied until the 1990s when a list of presumptive diseases was created, making it easier for veterans to receive benefits. Similar to black lung, the rules guiding who receives benefits have been changing over time. Under the Agent Orange Act, the Department of Veterans Affairs has expanded the list of “presumptive” conditions. However, the area where less progress has been made is deciding who is covered. Just last year coverage was expanded from “boots on the ground” soldiers to include Air Force personnel who served on the aircraft used to spray Agent Orange. “Blue Water” veterans of the Navy are still fighting to get coverage today.

The effects of black lung and Agent Orange exposure have a potentially obvious link back to their source; however, other occupational hazards are harder to track. The link between coffee roasting and lung cancer is being investigated, with diacetyl exposure being the possible connection. A lack of accurate occupational information in the workplace-illness records or death certificates makes the connection harder to identify. The debate is likely to rage on, even as the number of small, artisanal coffee shops—not to mention the number of potentially exposed employees—continues to grow.

Every beer drinker in America knows about the recent growth in the craft brewery business. Like a genie popping out of a bottle, a new tap seems to show up in your local watering hole every week. Similar to coffee roasting, the milling part of the beer brewing process releases dust into the air. This dust poses two problems; it’s potentially combustible and it can be irritating to the respiratory system. Air handling at breweries is very important and proper dust management guidelines are in place, but it is not clear how effectively these guidelines are followed or the number of people working in the industry. The exposure may continue to grow and, as with coffee roasters, should be tracked.

Readying itself for the potential cascade of occupational hazard claims on the horizon is in the best interest of the insurance industry. One way to do this is to push for improvement in occupational definitions, especially in medical records accompanying workers’ compensation claims. Developing a sterling database to help identify the connections between occupational exposure and conditions would also be helpful. In the end, no insurer wants to see their centennial celebration at the local Knights of Columbus ruined by a magnum cluster of latent injury claims.

The insurance risks of handheld devices

Carbone-WilliamAs handheld devices continue their march toward world domination, they have brought along a new set of insurance risks to threaten the bottom lines of insurers. While some of these risks are simply altering the landscape of traditional coverages, others are creating a need for innovative products that can address the arrival of new kinds of claims that may emerge. Let’s take a look at some of the dangers handheld devices have introduced to us and, in turn, the insurance world.

Distracted driving
No list of insurance risks related to handheld devices, specifically cell phones in this instance, would be complete without discussing the impact of distracted driving on the auto liability industry. The details and statistics are abundant and vary by source, but according to the latest annual report from the National Highway Traffic and Safety Institute over 3,100 people were killed and 420,000 people were injured in motor vehicle accidents involving a distracted driver during 2013. While talking on a cell phone is still the leading cause of distracted driving accidents, texting receives a great deal of attention because of the nearly universal understanding that it is a serious detriment to driving ability. Combine this with texting being the preferred mode of communication of most teenagers and young adults—the cohort with the least driving experience—and we have a dangerous combination on the roads and a rise in the auto liability frequency statistics.

Text (or iPhone) neck
Despite what you may believe about the egomaniac down the hall, most human heads weigh about 10 pounds, balanced atop a cord of bones and cartilage called a spine. For each inch we tilt our spine out of its proper alignment, checking e-mail on our tablet or instagramming our cheeseburgers, we double the pressure on it. This can lead to symptoms ranging from soreness and inflammation to pinched nerves to an overall decrease in our metabolism. These all seem like issues that the health industry will likely face as handheld device use—and chiropractor salaries—continue to trend upward.

Distracted walking
Despite an overall decrease in pedestrian injuries since 2005, the number of pedestrian fatalities that are due to distracted walking has doubled. Distracted walkers tend to walk at a slower pace with little to no arm swing, typically with their heads down, as cognitive abilities are focused on the task at hand rather than at foot. As those in heavily used pedestrian areas will tell you, distracted walkers also tend to change direction or stop seemingly at random and often struggle with obstacles such as curbs and other pedestrians. The potential for injuries is significant, whether it is due to stepping in front of moving vehicles or to rolling an ankle on an uneven sidewalk. Despite public service announcements to raise awareness of the issue, it does not appear to be going away.

Cyber liability
One of the hottest topics at any actuarial convention is intimately linked with your handheld device. While cyber security headlines focus on the large-scale theft of personally identifiable information, there is also an omnipresent threat of losing individual information through a stolen or hacked cell phone or tablet. A hacked cell phone (or one not password-protected) can be used to gain access to personal records, data, and information saved on apps as well as sensitive material, which can be held ransom. Those using these devices for professional purposes may also have corporate secrets or other nonpublic information on their phones or tablets. It is not a stretch to imagine that a lost handheld device could be as damaging as a lost laptop.

Product liability?
The pilot episode of “CSI: Cyber” was centered on a hacked baby monitor, a terrifying thought for any parent. Unfortunately, this was not a work of science fiction, but one based in fact. As the Internet of Things (IoT) grows to include more and more items, it opens up our daily lives to cyber vulnerability. Despite the basic preventive measures we take, allowing wireless access to nanny cams, security systems, and home heating systems will also open the virtual door for the motivated hacker as well. If damages occur and the manufacturer of these products, or the apps that service them, are deemed to have been negligent in protecting customers’ security or in warning them about security vulnerabilities, product liability claims may be brought against them. While the standard of care does not appear to be high to date, it would only take one landmark case to change the shape of the products liability landscape in the IoT universe.

Jurassic World: Unbelievable creatures and uninsurable risk

Carbone-WilliamWhile it’s often said that every man has his price, this is not true of insurance companies. Some risks are simply considered uninsurable to insurers at any reasonable price. Think about collision coverage for the Duke brothers’ General Lee, homeowners coverage for the Human Torch’s log cabin, or a liability policy at Jurassic World (the remodeled Jurassic Park of the early 1990s). While the reasons behind avoiding these insurers seem obvious, there are several attributes that may make a risk uninsurable.

One attribute that can make insurers turn away is the type of risk. For example, broad coverage for reputational risk is generally hard to insure. There are simply too many ways for a corporation to suffer hits to its reputation and the actual economic loss is generally hard to quantify. Pandemic risk is another coverage not commonly available. Because of the widespread impact any large-scale pandemic would have, coverage would need to be very broad in scope, and insurers generally do not open themselves up to that kind of exposure. While risk managers can take steps to insure parts of the potential losses or to mitigate the risk in different ways, these coverages are a few of the ones considered to be uninsurable. However, the types of risks in a property like Jurassic World are not the types that are considered uninsurable.

In general, third-party liability is an insurable risk for most commercial properties. Zoos, public swimming pools, and theme parks all have liability coverage in place to protect themselves from claims by their visitors. The price for these policies is typically related to their safety records, the potential hazards, and the size of the property. A small petting zoo with a good safety record will have lower premiums than a brand-new rock climbing facility. For a theme park such as New Jersey’s previous version of Action Park, poor safety records, intentionally aggressive ride designs, and lax safety protocols led to overly expensive insurance costs and eventually the closing of the park. This individual park became uninsurable at a cost that was acceptable to the insured.

Given that Action Park was unable to obtain coverage, it is hard to believe many underwriters and actuaries were pushing to get in the raptors den with Jurassic World. Back in its development stage as Jurassic Park, the safety records were spotty at best and the project was abandoned. The potential hazards of this park, where genetic engineering meets drive-through safari, are rather unique. Even an optimist would project a relatively high frequency of claims for Jurassic World relative to your average zoo or theme park. While insurance is often provided for insureds with high claim frequencies, this is connected with stable and predictable claim costs. Based on its history and attractions, it is not a stretch to believe too many claimants would be eaten to keep claim costs low and predictable.

Potential insureds can be classified as uninsurable either by the nature of the coverage requested or by the attributes of the individual risk. Jurassic World would need to take drastic measures to attract any insurers, perhaps enhancing safety measures or bringing in someone experienced with parks and recreation to bring experienced leadership. Only time and a movie ticket will tell if Jurassic World can overcome its reputation and become a safe, functioning park and an insurable risk.

Washington Redskins: Appraising a brand name

The Washington Redskins nickname has been highly controversial. The U.S. Patent and Trademark Office has gone so far as to cancel the team’s trademark because it considers the name derogatory. A significant aspect of the battle is the value of the team’s name, logo, and imagery, and the brand recognition that comes with it.

Maintaining the value of a company’s brand name is an important part of an organization’s risk management program. In his article “The Redskins: What is the value of a brand name?,” Milliman’s Will Carbone discusses some financial and marketing issues that risk managers must consider to assess a brand’s equity and protect an organization’s name.

Here is an excerpt:

The Redskins name, similar to Apple, Coca-Cola, or McDonald’s, provides a clear value to the franchise. Where does this high value come from? It comes from the associations made by customers when hearing the brand name. These associations can be related to exceptional organizational reputation, historically good consumer relations, or recognition as a leader in the field. Customers hear the brand name or see the company’s logo, and their long-held perception of the company often dominate their thoughts.

The positive feelings that some brand names bring to mind are a valuable and marketable commodity. Over the past few years, both Hostess Brands and Crumbs Bake Shop struggled financially and were looking at liquidation. However, they had one key asset that was available, the fond feelings and satisfied taste buds many customers associated with their brands. While both companies were suffering from management issues (and, for Hostess, legal troubles as well), the images associated with the brands were untouched in the snacking community. Today’s Hostess and Crumbs are not the same organizations that existed five years ago, but the brand names have remained intact.

Evaluating and capitalizing on the value of the brand is an essential part of a risk management framework. While these examples reflect opportunities presented by the presence of recognized goodwill, there should also be steps taken to avoid the downside risk of having a recognized brand. This includes both preemptive risk avoidance measures and contingency plans to protect or salvage brand equity. Preemptive measures would likely include marketing strategies focused on protecting the organization from reputational risk, or put more simply, trying to avoid bad publicity. This could take the form of vetting of spokespeople, doing careful due diligence on corporate alliances, or monitoring public opinion on the brand. If these efforts fail and an organization suffers from bad publicity, the organization will need to enact its contingency plan and work to rehabilitate the brand’s image.

Could the lapse in TRIA coverage disrupt the Super Bowl?

Carbone-WilliamAs the 113th session of Congress came to a close, one of the noteworthy items left in limbo was the Terrorism Risk Insurance Act (TRIA), which will expire on December 31. While TRIA directly affects the insurance markets, its impact could extend well beyond insurers. The biggest rumor out there is that, without TRIA, the Super Bowl could be in jeopardy. What exactly is TRIA, and how does a federal insurance program affect football games?

Prior to the terrorist attacks of September 11, 2001, terrorism coverage was generally included in insurance policies for little to no charge, as the risk was considered below the threshold for concern. After the attacks, the inability to accurately price these events and the absence of appropriate models caused a ripple effect through the insurance market. Unwilling to absorb the tail risk, reinsurers withdrew from the terrorism coverage market. Unable to find reinsurance, primary insurers started including terrorism exclusions to protect themselves. State regulators approved these exclusions, as the exclusions helped to protect the solvency of the insurers. This left the insureds without sufficient coverage in the eyes of lenders, and greatly impacted the construction and real estate markets, among others. The lack of funding caused delays in projects, such as infrastructure improvements, and lost jobs, impacting the economy outside of the insurance industry.

Congress stepped in with the Terrorism Risk Insurance Act of 2002, which created a temporary program to allow the federal government to act as a backstop reinsurer. In the event of a major terrorist attack, the federal government would provide the capital to pay claims immediately, subject to deductibles, coinsurance, and indemnity triggers, and recoup the money in the following years through assessments. In exchange, insurers would be required to offer terrorism coverage for certain lines of business in commercial policies. TRIA protected the market from tail risk while the market developed methods to properly price the coverage and develop the needed capacity. The act has been extended twice already, each time pushing a greater share of the potential liability of a future terrorist act to the private insurance market without material changes to the availability or rates of the coverage.

Both the House and Senate approved different versions of a TRIA extension during 2014, but the session ended with the bill blocked in the Senate, which was due to the attachment of an unrelated provision. Proponents point to the potentially crippling nature of a major event or series of events to the insurance industry, and the likely impact on the whole economy, while critics think the industry will move on without the federal support. With TRIA expiring, insurers will need to have capital to cover the tail risk the federal government would have covered. Insurers would likely respond to the missing coverage by either increasing rates to supply the additional capital, or reducing (or excluding) coverage, leading to decreased supply of coverage and, again, increased premiums. By passing the costs on to the insureds, the economy could again be affected by the lack of affordable terrorism coverage.

So how does this affect the Super Bowl? The NFL, or any other sports organization, needs to have insurance covering the game sites. Without insurance at an acceptable price, games would likely be canceled. The NFL has joined other sports leagues and other businesses in the construction, entertainment, and hospitality areas as part of the Coalition to Insure Against Terrorism, a lobbying group in favor of the extension of TRIA. However, with TRIA on the shelf until the next session of Congress, does this put the Super Bowl in jeopardy? Well, no. The NFL has said, “The Super Bowl will be played.” Even without TRIA, there is a chance that terrorism coverage will remain in place and even if coverage is canceled, alternative risk transfer devices could be utilized, as was done for that other football’s final match in 2006. So while the lapse in TRIA coverage could significantly impact the economy, don’t worry, we can still look forward to the Super Bowl.