Lessons in Risk Management

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Lessons in Risk Management

• Jerry Belfiglio
• VP Risk Management
• Toll Brothers
• jbelfiglio_at_tollbrothersinc.com

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Toll Brothers is - -

• 7th largest builder based on 2006 revenue (6.1
  billion)
• 13th largest builder based on homes delivered
  (8,601)
• 300 selling communities in 22 states (as of
  10/31/06)
• 75 single family
• 25 attached product, high rise and condo
  conversions
• 712,000 average sales value per unit

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Risk Management Experience

• Over 30 years as
• Underwriter
• Broker / Agent
• Risk Manager

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Industries
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• Household Products

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Industries

• Steel Manufacturing

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Industries

• Farm Equipment Manufacturer

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Industries

• Insurance / Health Care

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Industries

• Housing materials

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Industries

• Toll Brothers

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Homebuilding is the most challenging
from a Risk Management standpoint !
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• Homebuilders
• Good Insurance Risks

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Homebuilding risks

• Mold
• EFIS
• Silica
• Subsidence
• Quality
• Customer Service
• ??? The next Asbestos ???

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(one) Customer Service issue

• Overlap of Construction Defects (called products
  or completed operations in insurance policies)
• and
• Warranty Claims

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Two areas weve tried to solve some of these
issues

• Insurance (risk funding)
• Risk attitude

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Historic Insurance Prospective

• Until 2000 or 2001 Toll had first dollar (no
  deductible) liability insurance programs where
  our risk was limited to the premium paid.
• Most everything was covered mold, EFIS,
  pollution, silica, etc.

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• Following 2001
• Series of carriers
• With ever increasing
• Deductibles
• Exclusions
• And ever decreasing
• Coverage
• Risk transfer

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Programs in place in 2004

• Different limits for different jobs
• Deductibles equal to primary limits (i.e. no
  coverage)
• Excess not following primary exhaustion of
  limits
• Primary policy was written on occurrence form
  excess on close of escrow

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Program in place in 2004- resulted in

• Coverage for claims using primary excess not
  guaranteed
• Lower limits on certain projects were gambling
  that the big loss would be somewhere else
• No real understanding of our industry / risks
  from the carriers
• No EPS protection for stockholders

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Began marketing in late 2004 for 9/1/05 renewal

• Changed broker
• Series of sales trips to domestic carriers /
  London / Bermuda to sell whats good about Toll

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Broker Selection

• Beauty Contest no bids
• Interviewed 5 or 6 firms
• Prepared questions
• References from lost clients
• Only account handlers no sales types
• Group interview multiple Toll disciplines
• Have to consider imbedded services (RMIS, Loss
  Control Services, WRAP admin., Cert. Issuance,
  etc.)
• 6 weeks start to finish

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Underwriter Meetings

• In Office
• 8 10 carriers sales folks / underwriters /
  loss control
• Multiple Toll Disciplines
• Finance
• Quality Control
• Product Standards
• Safety
• Operations
• Engineering
• Architecture
• Truss wall panel manufacturing

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Underwriter Meetings

• Outside of office
• Bermuda London 4 senior Toll managers met with
  carriers
• We utilized the same presentation that was used
  in Horsham Pa highlighting the multiple displines
  of Toll Brothers and how they all contributed
  to a quality product

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Result of selling Toll -
Received quotes from several primary casualty
carriers

• Selected Zurich Home Builders Program (HBP)

Including protection for (construction defect)
warranty claims
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Benefits of Zurich Program

• Warranty included with construction defects
  conflict between insurance and warranty
  departments eliminated
• Program provides EPS protection for abnormal
  warranty / defects claims
• Safety and quality assessment helps risk
  management identify weaknesses in field
  practices.
• Zurichs in-house capacity (limits) helps with
  structuring of umbrella
• 2 year program just extended to the third year

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Costs of Zurich Program -

• Third party inspection of most attached product
  is required
• Annual quality survey by Quality Built at one or
  more communities
• PWC must be used as warranty company 10 year
  warranty must be used on all product to get full
  value of Zurich coverage
• Arbitration wording in sales documents as well
  as warranty documents
• Zurich could be viewed as somewhat intrusive
  into operations / practices
• Larger deductibles than existing program
• They wont write everyone can you get in ??

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Todays Risk Funding

• Captive used for high retentions
• Fully funded each year tax deduction for
  reserves
• Zurich provides primary and first umbrella
• Excess liability includes warranty protection
• Going into 3rd year of guaranteed rate program

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Zurich (and at least one other carrier)

• Are trying to drive quality in our industry
• They get our business
• They understand our risks
• They feel they can handle our risks

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Risk Attitude

• A year or two ago
• vs
• Today

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Two years ago - -
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In the good old days

• Homebuilders were Order takers - -
• Risk Management worked with operations to
  minimalize risk but were free with our -
• You want to do What ?
• NO !
• HECK NO !

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Today -
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Today -

• Where is the next sale coming from - -
• How can we support operations in generating
  sales ?
• Lets see how that can work for your sales
  effort - -

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Recent Risk Assessment calls -

• Wedding reception in model home

OK !
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Recent Risk Assessment calls -

• Play gym in basement of model home

Maybe ??
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Recent Risk Assessment calls -

• Tethered balloon rides

OK !
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Recent Risk Assessment calls -

• Un tethered balloon rides

Heck NO !
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Recent Risk Assessment calls -

• Aircraft lift truck for views

NO NO NO NO NO NO NO NO NO
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Recent Risk Assessment calls -

• Renting a model home out for realtors group

OK !
Let County Inspector use our 3 story ladders to
inspect
- Ok -
What to do with kittens under sales center porch
that developed rabies ?
Dont feed them and they will go away - -
They did !
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Were saying YES andHeck YESa lot more
today !
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Thank You !