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Insuring battleships is no child's play

Source: Asia Insurance Review | Feb 2018

Australia Risk Management

Ms Melody Caffin, the first Pan-Asia Risk and Insurance Management Association (PARIMA) Australia board member, oversees what is believed to be the largest-ever maritime construction insurance programme in Australia. We speak to her on what her role entails. 
By Chia Wan Fen
As an employee of defence contractor Raytheon Australia, Ms Melody Caffin commenced in April 2015 to serve as insurance manager for the Air Warfare Destroyer (AWD) Project, which is constructing three warships for the Commonwealth of Australia’s Department of Defence (DoD) under a unique alliance structure that comprises the Commonwealth, shipbuilder ASC Pty Ltd and Raytheon as mission systems integrator.
   Adding to this portfolio, she was also tasked in 2017 to design, implement and manage an insurable-risk programme for DoD’s new shipbuilding construction projects, including sustainment – in other words, both the buying and maintaining of infrastructure. 
   While the AWD warship Project is worth some A$9 billion (US$6.8 billion), the established Maritime Integrated Risk and Insurance Services (MIRIS) represents over A$50 billion in asset value, for a minimum of 50 new ships and submarines and sustainment for 80 of these vessels.
   “Instead of all the insurance being placed by the project or contractors on a project by project basis, and in consideration of DoD’s commitment to continuous shipbuilding, I saw the opportunity to pull that all together into a single marine insurance programme,” she said.
Shipbuilding construction risks
The major risks for the projects include water ingress and fire, together with workplace injury risks typical for construction. Besides insurance for risk transfer, risk management also involves robust qualification procedures and induction processes for the employees and subcontractors. There is another team looking at workplace, safety and health (WSH), and the rigorous implementation of processes to govern occupational safety hazards and reporting systems for incident near-misses. 
   Risks of falling behind schedule for a defence project are more serious than a matter of profit and loss, so the AWD programme has a risk review board which looks at schedule and budget. “Everyone working on the programme is conscious about avoiding delays. Any delays that occur could impact the capability of the Royal Australian Navy (RAN),” she said. 
   This is a genuine concern, for the project had gone over its original budget by over A$1 billion and the first ship, the Hobart, was delivered to the RAN in June 2017, over two years after the original end 2014 deadline. The second and third are scheduled for 2018 and 2019 respectively.
“Rewriting” the market
For these major projects, the main insurable risk the Commonwealth takes on is contractor risk, as it does not perform the work but is the policyholder taking out the insurance on behalf of contractors. This is governed by a facility agreement with a comprehensive and bespoke policy wording arrangement. The insurance programme for MIRIS is placed primarily in London and is a consolidated policy which ranges from liability to cargo.
   “We went to the market in May this year, and the underwriters with about 35 years of experience said this is the biggest thing they have ever seen in their career. So we have been ‘rewriting’ the Lloyd’s marine market,” said Ms Caffin, explaining that the specialty insurer was one of few players which can take on the risk and complexities of a project of this scale. The broker was selected via a tender process that closed in eight weeks – exceptionally fast in a defence project where half a year is considered efficient, she said. 
   For the AWD Project, the core Builder’s All Risk policy was also placed in London, a demonstration of how the British capital still has most of the necessary capacity, experience and skills for niche sectors. That project “almost breached” that capacity when the insurance was taken out back in 2007, she said, while marine cargo and liability were placed in Australia. A large team of some 50 global underwriters is working on it.
Technical understanding
While Ms Caffin has had several years of work experience with major insurance brokers, what sets her current work apart are the technical complexities. The alliance structure means a Raytheon person could be managing an ASC person, and vice versa in other roles. There are organisational matrixes in place which aim to provide consistency and overarching processes across them. And though only three warships are being built, the working environment is akin to factory manufacturing, with defence combat systems thrown in the works. 
   “I get to challenge a lot of what the engineering thought processes are, not being familiar with the technical aspects of other people’s day to day jobs. We identify the critical items that could impact the programme if there are significant losses and damage,” she said, adding that loss adjusters are also engaged to help with the technical aspects. 
   Having seen both client and broker sides of the business, she feels that brokers need to embed themselves more into understanding client risks. “I would like brokers to be a step ahead of their clients a little bit more. It’s the forward thinking of what could be coming next, understanding clients’ growth strategies, looking at media releases, competitors, what papers are writing about their clients—pre-empting what’s on the horizon and pipeline rather than just ‘you might need this insurance’,” she said.
Next goals
What Ms Caffin would like to achieve in her risk management practice is to go significantly more beyond covering insurable risks. 
   Insurance was the focus when she first wore the AWD hat, but she would like to also focus on the “Integrated Risk” part of the MIRIS position. The DoD’s Capability Acquisition and Sustainment Group (CASG) manages commercial risk in the capability and procurement lifecycle and is now reforming the process, looking at an overarching process for all air, land and sea programmes. While she only looks after the sea part, she hopes to have more ownership of that space to complement the DoD’s work.
   “That’s the philosophy that we want going forward – creating more of an enterprise risk framework for the maritime acquisitions and sustainment too, to oversee operational, schedule, contractor risk and what the insurance programmes are supporting within that. I foresee a future opportunity to rewrite how maritime risk is managed,” she said.
   And as PARIMA’s first Australia board member, Ms Caffin also has a chance to make a difference to risk management in her country. She said that the association filled an existing gap by providing her with ample opportunities to meet other corporate risk managers. 
   Ms Caffin joined PARIMA in November 2016 and has since already nominated a second Australasian member, Ms Kimberley Pelly of Queensland Airports. Now, she is working to also eventually involve risk managers from Sydney and Melbourne, as they are where significant corporate businesses are located.
   “Australia’s territory is quite significant in comparison with other APAC countries. It’s really important for us to have people located in other capital cities to foster growth and support the risk management community,” she said.  A 
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