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RISK SCENARIO



HOW A ONE-TWO WEATHER PUNCH AND AWOL ADJUSTERS BECAME A PROPERTY PROGRAM’S
PERFECT STORM

A carrier’s inability to clearly assess storm claims rocks its reputation and
bottom line.
By: Dan Reynolds | April 3, 2023
Topics: Business Interruption | Mar./Apr. 2023 Issue | Reputation | Risk
Management | Risk Scenarios

Risk Scenarios are created by Risk & Insurance editors along with leading
industry partners. The hypothetical, yet realistic stories, showcase emerging
risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity
to any corporation or person, living or dead, is merely coincidental.



PART ONE: SLOW TRAIN A COMIN’

Risk managers never sleep easy, nor do they take anything for granted. Charlene
Schultson, the Executive Vice President Commercial, North America, for the
Patriot Mutual Insurance Company, is no exception.



What she’d like to do is ease back and celebrate the fact that her beloved and
long-suffering New York Giants have made the playoffs.

Schultson might be able to keep an eye on the game this weekend, but she’s also
got plenty of weather events to keep her attention on this Friday afternoon. For
one, headache already, a big blustery Nor’easter has skirted the Carolinas and
is sluggishly, menacingly, making its way toward the Northeast.

It’s not the speed of the storm that has Schultson worried. It’s the storm’s
volume and its potential to push millions of gallons of icy sea water into Lower
Manhattan and beyond that is making her uneasy.

Patriot’s commercial portfolio has a sizable concentration of office buildings
and other assets in Manhattan worth a total insured value in the hundreds of
millions. But the exposures don’t end there. The insurer also has accumulated
risks in Boston, Rochester and Buffalo. The portfolio in those cities includes
not just office space but some retail and residential mixed-used policies.

Adding to Schultson’s never ending list of worries is that a brutal cold front
is moving down from Canada. It’s projected to cast temperatures in the single
digits over much of New York State and New England. A heavy load of the white
stuff is also forecast. She makes a mental note to check in with Patriot’s
catastrophe management (CAT) teams to better understand the potential financial
implications of these events if they strike concurrently.


PART TWO: PREPARE THE STORMTROOPERS

Not 10 miles from where Ms. Schultson is hunkered down in front of her laptop,
her colleague, Frank Boyer, the Executive Vice President for Property, North
America, for Patriot Mutual Insurance Company, is doing his own calculations
from the 34th floor of an office building on Water Street.



Like Schultson, Boyer is well aware of the potential these two coinciding
weather events have for losses. Patriot Mutual is a big player in Northeast U.S.
property risk transfer, but neither of these two executives have a holistic view
of the exposure of these overlapping lines.

In advance of the Nor’easter’s arrival in New York, Boyer has messaged his
claims colleagues that he wants to make sure the company’s adjusters and any
freelance adjusting assistance are ready to go into action if bad things happen.

“Are we good to go here?” Boyer asks his EVP for claims, as the storm advances.
“With all that’s about to happen, I don’t want us to get caught flat-footed on
the claims handling side,” he adds.

“We’re good to go,” the EVP of claims confirms. “If any of our in-house claims
folks get hung up for any reason, I have about two dozen contractors on backup,”
he says.

By midday on Saturday, bad things are happening. While the Nor’easter was
rightly feared, it’s actually the Canadian cold front that tragically tips the
scales.

Heavy snows and unexpectedly fierce winds cause blackouts in much of the
Northeast. The cold front’s seemingly never-ending barrage knocks out power to
more than 5 million people in a straight line from Buffalo and Rochester,
through Syracuse and on towards the East Coast.

By Sunday, both Charlene and Frank are scrambling to reach anyone who can
provide an accurate picture of the damage to their portfolios.

Frank Boyer, himself bereft of any hope of enjoying a leisurely Sunday, is
getting reports from the claims and adjuster teams about the Manhattan losses.
The sea damage in Manhattan is severe, with losses in the mid hundreds of
millions, mostly from office buildings that weren’t properly defended against
the sea surge.

The Manhattan losses are big, but that’s not what irks him. What’s peaked his
anxiety is that he can get next to no information from points West and North.
Roads are impassible in many places, cell phone service has been interrupted and
very few adjusters are out there adjusting.

Desperate for answers, Charlene reaches out to a close friend and former
colleague from a rival firm. “You know I have to tell you Charlene, that we are
not having these difficulties, and we’ve already issued payments within our
residential portfolio” her friend tells her as they swap war stories over coffee
on Tuesday of that week.

“Why…” Charlene attempts to begin a question but her friend interrupts her.

Her friend shares that her company uses technology-aided enterprise location
strategies and is seeing very little delay in getting accurate projections on
the severity of the damage to its customers.

“Before they even call us to file a claim, we’ve run damage assessments to
expedite known losses,” her friend says, without divulging too much more on
their competitive advantage.

“I take it Patriot doesn’t have a location strategy,” her friend continues.

There is then an awkward silence.

“I don’t know. I’ve seen maps, but I don’t know,” Charlene answers weakly.

“Find out. It may be too late now, but find out,” her friend implores.

Frustrated and feeling defeated, neither Charlene nor Frank seem to be able to
get the actionable information needed to understand the financial loss, let
alone begin making their customers whole again. Making matters worse, calls to
Patriot Mutual Insurance aren’t being answered very quickly – further alienating
their policyholders on both the personal property and commercial side. With no
eyes on the ground to report the amount of actionable claims data needed, the
company’s ability to communicate is as frozen as Oneida Lake, outside of
Rochester.

“What’s happening over there?” One exasperated parent says as their family
continues to take temporary shelter in the only generator powered motel outside
Poughkeepsie.


PART THREE: WINNERS AND LOSERS

It’s now the Thursday after the Saturday when two major weather events acted
like a pincer to squeeze what is eventually determined to be about $750 million
in property values from the State of New York.



Charlene Schultson’s knows her client’s opinion of Patriot Mutual Insurance
Company is tarnished. Patriot’s dependable customer service and competitive
pricing strategy for years a lynchpin of their brand value, now gone through the
floorboards like the melting icing inhabiting their customers structures.
Charlene’s friend’s company however, is still in good standing with their
customers. Her focus and interest in professional football has evaporated.

Allison Crestlake, CEO of Patriot Mutual Insurance Company, isn’t in a mood to
spare anyone’s feelings when she convenes an emergency meeting at 2 pm on that
Thursday, where both Frank and Charlene meet for the first time since the storm.
Allison knew the damage the storm had caused, both financially and in terms of
brand value, and she gave it to her team straight, with no cream or sugar.

Sponsor

“How come almost every major carrier we compete with had some understanding of
the impact by Tuesday? We had next to nothing, outside of what we could see with
our own eyes in the City.” is the gist of her grievance – preparing for what she
would have to tell the board when they inevitably call for someone’s job.

The heat isn’t as heavy on Charlene Schultson as it is on Frank Boyer, but it’s
still a very unpleasant winter week for everyone. Not to mention the teams
responsible for risk accumulation models which failed to see the high-loss
potential of their policy concentration.

“Did you not know that our adjusting capabilities were this weak?” was another
hard-to-swallow pill Allison dropped in the meeting.

The claims process is excruciatingly long, but the Patriot Mutual Insurance
Company’s customers are eventually made whole for its dual winter storm losses.
Although the financial costs were significantly higher than their rivals due to
a late start and rising contractor rates, what isn’t as recoverable is their
reputation in the market.

A promise to pay is simply that and nothing else will do, really. Patriot’s
inability to move with expediency in the aftermath of the winter storms will
haunt its reputation and dog its top line growth for years to come.

Oh, and by the way, the Giants lost the game. &


Risk & Insurance® partnered with ESRI to produce this scenario. Below are ESRI’s
recommendations on how to prevent the losses presented in the scenario. This
perspective is not an editorial opinion of Risk & Insurance.®

Patriot Mutual Insurance Company was impacted by a series of concurrent severe
weather events, leading to significant primary and peripheral losses within both
their property and commercial portfolios. However, the insurer’s inability to
maintain situational awareness may have been costlier than the storms.
Significant delays in obtaining actionable intelligence on the damages resulted
in poor customer experiences and irrecoverable reputation damage.

Despite the widespread damages of these overlapping incidents, an enterprise
geospatial strategy powered by geographic information systems (GIS) may have
helped streamline response efforts, before, during, and after they occurred. An
enterprise geospatial strategy creates a data framework to integrate and
contextualize disparate data streams. This empowers carriers to:

 * Avoid asymmetric information failures. Adverse risk selection can be avoided
   when the underlying data used for making decisions leverages a spatial
   context, so that underwriters, risk managers, and actuaries all share a
   common basis for decision making. In this scenario, Patriot Mutual Insurance
   Company did not have a single source of truth to guide their underwriting
   decisions, and there were hidden risk concentrations that weren’t realized
   until after losses occurred.
 * Create a digital twin of an insurance portfolio so that insurance leaders can
   visualize their entire book of business across product lines. In this
   scenario, Patriot’s managers worked in disconnected environments and were not
   able to overlay policy locations with storm severity to see where damages
   likely occurred.
 * Forecast potential damages across multiple “what if” scenarios. Prior to the
   Nor’easters landfall, Patriot’s competitors who utilized geospatial tools
   were able to forecast several scenarios to see which policies would likely be
   impacted. Given the impending risk of the Northern cold front, those firms
   were able to combine projections to determine where they would likely
   experience losses at a hyperlocal scale.
 * Leverage AI/ML workflows for damage assessment to expedite claims processes.
   By integrating and contextualizing disparate data through a geospatial
   filter, Patriot’s competitors could leverage third party data sources to get
   an accurate picture of impacted communities that were without power. This
   holistic picture of the immediate and peripheral damages expedites claims
   processing, by empowering insurers to know the location and severity of
   impacted policies before the first calls come in from policyholders.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at
reynolds@theinstitutes.org.





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SPONSORED CONTENT BY BHSI



SEARCHING FOR A SURETY PARTNER? LOOK FOR SOMEONE INVESTED IN STABILITY FOR THE
YEARS TO COME

Surety customers need stability and consistency to support their operations.
By: Berkshire Hathaway Specialty Insurance | April 3, 2023

While insurance products exist to help an insured in the event of a loss, surety
bonds are purchased so that a customer can guarantee their work on a particular
project will be completed within a certain timeframe and at a reasonable cost.

Bonds support everything from a guarantee that a construction project will be
completed on time to license and permit products that ensure a company will
operate following any specific laws and regulations. If a surety customer is
unable to complete these requirements, their surety partner will step in to
cover any financial obligations.

“Surety is an indemnity product,” said Geoff Delisio, head of surety, Berkshire
Hathaway Specialty Insurance (BHSI). “If our customers are unable to perform and
they’re in bankruptcy proceedings, we are there to stand in the shoes of our
customers.”

Governments often require surety bonds for businesses to become involved in a
particular contract. If a contractor wants to bid on a project to build a
highway, for example, they will be required to purchase a bond to guarantee the
work will be completed.

Since businesses are often required by law to purchase surety bonds, it’s
important they find a carrier partner that’s able to offer consistency and
stability over the long term. Look for underwriters who thoroughly consider your
business model, and who remain abreast of challenges like supply chain risks
that could cause project delays.


WHY CONSISTENCY AND STABILITY ARE KEY FOR SURETY CUSTOMERS

Geoff Delisio, Head of Surety, Berkshire Hathaway Specialty Insurance (BHSI)

Since surety bonds are often a statutory requirement, contractors and other
commercial customers are looking to build long-term partnerships with the
institutions issuing their bonds. Rates may be rising in traditional insurance
markets, but Delisio says that BHSI’s surety rates are “fairly stable,”
something surety customers — from contractors to airlines — appreciate.

“You tend to have long-term relationships,” Delisio said. “What really makes
that alignment is understanding their strategy and understanding where they want
to go with their business.”

In order to create consistent and stable surety capacity , underwriters need to
have a full understanding of an organization’s business model and the risk it
needs a bond to cover. Some underwriters rely on credit models to select which
surety risks they’re comfortable with, but Delisio believes that to truly make
the long-term commitments necessitated by bonding institutions requires a longer
view.

Credit models often offer only 12-month projections of financial performance,
but the projects a surety bond is guaranteeing can last much longer than that.
“If you’re looking at one-year default models and you write a six-year
obligation, that may not end up well at all times,” Delisio said.

Construction projects in particular can last a number of years, so bond
underwriters often want to have a strong understanding of a contractor’s
financials, its business models and the particular project it needs bonded.

“The typical duration of a performance and payment bond is right around 36 to 40
months. It is not uncommon to have five- or six-year duration obligations,”
Delisio said. “No one can predict the future, but just a strong understanding of
what the business does well, what they don’t do well and where they want to take
the business is important.”


SUPPLY CHAIN AND OTHER EXPOSURES MAKE UNDERWRITING SURETY MORE COMPLEX

One reason that carriers need to rely on more than credit models when
underwriting surety bonds is the unpredictability of today’s exposures.

Supply chain, inflation and labor issues are just a few factors that might
affect a firm’s ability to meet the commitments guaranteed by the bond in a
timely and cost-effective manner.

Take supply chain issues, for example. In 2020 and 2021, the pandemic and other
events led to shortages of large numbers of products. In some cases, businesses
couldn’t find any suppliers for a particular resource. Delisio knows of one
supplier who couldn’t guarantee when a supply would arrive or how much it would
cost when it did.

“There were times in 2020 and 2021 that people just couldn’t get things at any
price,” Delisio said.

By understanding a company’s business models, surety partners can ensure that
they can support their customers, even through these challenges. Delisio says
that BHSI has worked with customers to understand their contingency plans for
supply chain issues and other risks in order to keep projects on track.

“There were a lot of discussions. How are they handling their supply chain? How
are they handling contingency?” Delisio said.


A SURETY PARTNER COMMITTED TO LONG-TERM PARTNERSHIPS

BHSI is committed to underwriting practices that allow it to offer long-term
stability for its customers. The firm is still writing bonds for customers who
began working with the firm in 2014 when its surety business first began.

BHSI’s underwriters work directly with customers seeking surety bonds and their
brokers, ensuring BHSI has a robust understanding of a customer’s financials,
business model and long-term strategy. Rather than relying on credit models,
they emphasize careful risk selection in order to maintain a consistent appetite
in the market. To date, they’ve completed just over a half-billion dollars in
gross written premium.

“Our underwriters are going to work with the broker and the customer daily,”
Delisio said.

Since surety is an indemnity product, ensuring that a carrier’s claim
professionals and its underwriters are aligned is key to its long-term success.
If the underwriting team starts to notice a deterioration in a company’s
quarterly financials, they’ll get the claims team involved in an attempt to help
the company remain solvent.

They might bring in an accountant to independently review the customer’s books
and identify opportunities for cost savings that could help a company avoid
bankruptcy.

“We get claims involved really early,” Delisio said. “With an indemnity product,
anything that we can do to help the customer stay solvent helps us. At the end
of the day, our customers get much better outcomes.”

To learn more, visit: https://bhspecialty.com/us-products/us-surety/.





This article was produced by the R&I Brand Studio, a unit of the advertising
department of Risk & Insurance, in collaboration with Berkshire Hathaway
Specialty Insurance. The editorial staff of Risk & Insurance had no role in its
preparation.

Berkshire Hathaway Specialty Insurance Company (incorporated in Nebraska, USA)
ABN 84 600 643 034, AFS License No. 466713 (www.bhspecialty.com) provides
commercial property, casualty, healthcare professional liability, executive and
professional lines, transactional liability, surety, marine, travel, programs,
accident & health, medical stop loss, homeowners, and multinational insurance.
The actual and final terms of coverage for all product lines may vary. Berkshire
Hathaway Specialty Insurance Company holds financial strength ratings of A++
from AM Best and AA+ from Standard & Poor’s. Based in Boston, Berkshire Hathaway
Specialty Insurance has offices in Atlanta, Boston, Chicago, Columbia, Dallas,
Houston, Indianapolis, Irvine, Los Angeles, New York, Plymouth Meeting, San
Francisco, San Ramon, Seattle, Stevens Point, Adelaide, Auckland, Barcelona,
Brisbane, Brussels, Cologne, Dubai, Dublin, Frankfurt, Hong Kong, Kuala Lumpur,
London, Lyon, Macau, Madrid, Manchester, Melbourne, Munich, Paris, Perth,
Singapore, Sydney, Toronto, and Zurich.

For more information, contact info@bhspecialty.com.

The information contained herein is for general informational purposes only and
does not constitute an offer to sell or a solicitation of an offer to buy any
product or service. Any description set forth herein does not include all policy
terms, conditions and exclusions. Please refer to the actual policy for complete
details of coverage and exclusions.

Berkshire Hathaway Specialty Insurance (www.bhspecialty.com) provides commercial
property, casualty, healthcare professional liability, executive and
professional lines, surety, travel, programs, accident and health, medical stop
loss, and homeowners insurance. The actual and final terms of coverage for all
product lines may vary. It underwrites on the paper of Berkshire Hathaway's
National Indemnity group of insurance companies, which hold financial strength
ratings of A++ from AM Best and AA+ from Standard & Poor's.







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