Emil Metropolous, Senior Vice President
Risk is rarely one-dimensional. The convergence of different threats on a single carrier is becoming increasingly common. They compound, yielding greater potential insured losses. Catastrophe risk modeling analysis can not be limited to known factors, as they have in the past. One catastrophe can cause insured losses to spike, rendering carriers more exposed than they may have expected. Enterprise Risk Management (ERM) plays a specific role in mitigating the risks of such unexpected exposures. Part of implementing an ERM strategy effectively entails identifying all potential threats. One that has been overlooked—or difficult to identify and model, given a lack of applications and a paucity of data—can be found on the convention center floor.
A single catastrophe striking a convention center could damage property, lead to casualties and trigger workers compensation claims. Until recently, modeling capabilities and available data have not been sufficient to address the intersection of workers compensation exposures with other property and casualty lines. Insurers have assumed an unknown risk that is difficult to quantify. Now, there is an alternative course of action allowing for a more holistic and realistic approach to workers compensation catastrophe modeling and risk management.
Clash at the Convention Center
Workers compensation risk management has evolved. Identifying threats and mitigating their effects has become an exercise in “known” and “unknown accumulations of employees. Convention center risk involves the latter, and insurers strive to understand what has been hidden by the fluidity of their portfolios’ underlying convention exposures.
Carriers identified “known accumulations” as a problem following the terror attacks of September 11, 2001. Employees gather at a large building or office park based on predictable patterns, such as a normal workday. Exposure, though, is influenced by more than total headcount. A certain percentage of employees may work outside the office, or temporary staff may be engaged. A “late shift” may bring some employees to the office during off-peak hours. With this information, carriers can model disaster scenarios and determine probable maximum loss results.
More recently, “unknown accumulations” have become a consideration for workers compensation carriers. The rise of large conventions in the United States has resulted in business-related gatherings of thousands of employees in major destinations. Insurers have had to struggle with insufficient knowledge. In addition to limited access to convention data, convention attendance is never fixed. People come and go, causing any measurement to be imprecise. Frustrating the effort further is the fact that workers compensation data has been considered challenging to obtain, leading to inaccurate exposure estimates and hindering the efficient transfer of risk. The only alterative has been to accept this risk, without realizing where or how large it can be.
Enterprise Implications for Convention Carriers
Convention center risk is anything but trivial. Tens of thousands of people may come together at a central location for a common reason. Key executives are often present, in addition to companies’ premier talent. The workers compensation exposure is substantial, but this constitutes only part of the potential loss. The facility, of course, has defined and measured property-catastrophe threats, and its employees represent yet another exposure. A single earthquake or terrorism catastrophe could cause severe losses to known and transient employees, as well as to the convention center itself.
The exposures that convention centers face have a distinct place in a carrier’s ERM strategy. One event could affect several lines, compounding insured losses. In some cases, one carrier may suffer multiple types of insured loss. If a diversified insurer covers the convention facility, workers compensation for the convention center’s employees and convention attendees from across the country, the carrier could suffer disproportionate losses.
The discipline of ERM uses a framework involving risk identification, measurement, management and monitoring to understand and mitigate convention center risks—as well as the many other perils that carriers face. Once potential convention threats have been conceived, they should be quantified, with the results ultimately driving a comprehensive risk management approach. The implemented strategy then is monitored continually to ensure that it remains relevant and effective.
The other factor limiting the use of ERM practices to manage convention center exposure has been the ability to measure pertinent risks. While property-catastrophe risk management has reached maturity, workers compensation exposures have been more difficult to gauge. The data has been unreliable, making effective measurement and modeling challenging. Though data quality has been considered the primary weakness in modeling workers compensation exposures, it has improved substantially. Prudent ERM practices suggest that firms move beyond the basic requirements and advance their knowledge of risks that may not have been recognized yet. In providing a foundation for modeling, though, the next weakness in workers compensation modeling has become apparent: determining key insured accumulations emanating from transient employees.
ERM Is Knowing and Being Known
Known accumulation modeling practices can be applied to convention scenarios, with a few adjustments. Like corporate parks and large building complexes, patterns can be found in convention behavior, and they can be used to refine modeling assumptions. The actual business of the convention is dispersed throughout the facility and into neighboring buildings. Similar to the office park dynamic, people will arrive late and leave early. Sometimes, business will take them off-site. The process is inexact, but a reasonable view of risk does emerge.
The baseline assumption would be that all participants are in the convention center’s main hall from start to finish every day. Actual behavior is much different (as it is with corporate parks). First and last day attendance may be lower because of travel. Business dinners and other recreation often lead to late-morning starts or a tendency to quit early for the day and squeeze in nine holes. New business opportunities draw participants away from the convention center and into hotel lobbies, restaurants and coffee shops across the convention city.
The agenda has an impact as well. Keynote speeches and highly anticipated events can draw disproportionate attendance. Other days may have few events scheduled, allowing participants to conduct business or view exhibit booths. As a result, fewer people may be in the main hall, either as a result of professional obligations or recreational pursuits. When this occurs, exposure may be lower. The accumulation of participants, therefore, can vary by day—or even by hour.
Catastrophe modelers need to take their cues from the details of a particular convention in order to construct an accurate view of carrier exposure. Assumptions should vary by time of day and be supported by convention-specific observations. The resulting output will provide both targeted and aggregate assessments to support the development of a useful risk management plan.
Of course, this is only part of a broader effort. The workers compensation exposure assessment must be integrated into the broader ERM framework, avoiding the pitfall of single-factor catastrophe modeling. If the carrier covers accident and health for convention attendees and workers compensation for the staff, these factors must be included in the risk management measures taken. Impact to the convention center itself, if covered, must be addressed as well. Unknown accumulations, in such cases, have masked larger unknown portfolio risks that could have threatened a carrier’s viability.
Through this exercise, insurers may learn that they have assumed more risk than they realized. A worst-case scenario could entail billions of dollars in insured losses across property, accident and health and workers compensation lines. Because the frequency and severity of these scenarios varies from one carrier to another, portfolio-level convention analysis is essential. Although a portfolio’s risks may be considered well-diversified geographically, they could be over-concentrated at large industry gatherings. What results is a risk situation that clearly calls for an ERM approach. While traditional risk management measures are insufficient to address the convergence of risk on the convention center, ERM is well-suited to facilitate effective planning and risk transfer.
Reduce Risk, Measure Results with CASUS
The information barrier has been pierced, and convention risk can claim its rightful place in the ERM framework. CASUS, a model that Guy Carpenter developed in collaboration with, and licenses exclusively from, Arium Limited, facilitates the inclusion of single- and multi-peril convention center catastrophe risks in an insurer’s broader risk management plan. Through an analysis of quantitative inter-industry clustering, carriers can ascertain peak convention vulnerabilities as part of a broader ERM strategy and develop effective risk management strategies to cover many possible scenarios.
CASUS uses data from conference and convention sources as a starting point for determining convention-related workers compensation exposures. By aligning destinations and participants with corresponding workers compensation information, the exposure becomes clearer. CASUS thus plays a role in identifying portfolio diversification risks, as well as measuring the effects of scenarios and providing a platform for management and monitoring.
To portray total risk effectively, CASUS first uses a variety of data types. These include the industries attending the convention and the seniority of participants and the convention center catchment area to determine the attendance (of insured employees in an insurer’s portfolio) at specific industry gatherings. Risks are identified, and intricate deterministic loss models are applied to different scenarios, based on convention-driven assumptions. Insurers can compare and combine these outcomes to their existing views of enterprise risk, resulting in a comprehensive and actionable risk management plan.
Using assumptions as to the flow of convention business and the distribution of attendees across the facility, modeled losses become more accurate. On one day, only half the convention population may be in the main hall, with 30 percent at meetings, 10 percent conducting business off-site and the remainder either traveling or enjoying non-convention recreation. The keynote address, though, could bring 80 percent of the participants into the main hall. Workers compensation exposure, in this situation, would spike, if only for a few hours.
While skeptics question the accuracy of workers compensation databases and catastrophe modeling, both have matured considerably, and enhancement efforts continue. Further, in the past, convention databases were rarely used. CASUS integrates them into a broader environment that enables sophisticated modeling and the development of scenarios that begin to show carriers the risks to which they are exposed.
Ultimately, convention center risk management circles back to the basics of ERM. Risk is interconnected and pervasive; no factor exists in isolation. Measuring the impact of previously unforeseen exposures requires a combination of research, testing and intuitive evaluation to validate the threat and formulate credible scenarios. Convention center risk has largely been overlooked so far, and it is continuing to emerge. CASUS represents a critical step forward in making these currently unknown accumulations known.
Emil Metropolous, Senior Vice President