Insurance Advocate May 31, 2016 by C Acunto

5-29-16_INA 5-29-16 5/31/16 1:38 PM Page 1

Serving New York, New Jersey, Connec cut, Eastern Pennsylvania and Washington, DC

2015 P/C Results Vol. 127 No. 10 | May 31, 2016

5-29-16_INA 5-29-16 5/31/16 1:38 PM Page 2

5-29-16_INA 5-29-16 5/31/16 1:38 PM Page 3

Contents

May 31, 2016 | Volume 127 Number 10

[COVER STORY]

Guest Opinion: A Primer on Reinsurance Pricing Strategy Larry Warren

In the Associations: PIANY Members Meet Legislators at Capitol During Albany Lobby Day

On My Radar: Expert Witness May Not Testify to Legal Conclusions Barry Zalma

Looking Back: March, 1991

Classiﬁeds

2015 P/C RESULTS

[FEATURES]

[AD FEATURES] 9

On the Level: What’s the Difference Between a Customer and a Client? N. Stephen Ruchman, CPIA

Greater New York Councils, Boy Scouts of America: 49th Annual Insurance Industry “Good Scout” Award Luncheon

IIABSC: Annual Scholarship Golf Outing

Trend: Digital Access: Insurance Entities are “Not Keeping Up”

IIABNY: NYiDAY 2016

Mergers and Acquisitions: Insurance Agency M&A in Q1 Breaks Records

In Focus: How Clean is Your Agency? Kelly Donahue-Piro

In the News: Fitch: U.S. Commercial Insurance Market Performance Heading Downward

Foreword: Rank Sentiment Steve Acunto, Publisher

Biting News: Dog Bites Accounted for More Than One-Third of all Homeowners Liability Payouts Last Year

New York and New Jersey’s Leading Insurance Magazine Since 1889.

FOR ADVERTISING OR SUBSCRIPTION INFORMATION Call 914-966-3180 | g@cinn.com info@insurance-advocate.com www.insurance-advocate.com INSURANCE ADVOCATE / May 31, 2016 3

5-29-16_INA 5-29-16 5/31/16 1:38 PM Page 4

[ FOREWORD ]

STEVE ACUNTO

Rank Sentiment

VOLUME 127, NUMBER 10 MAY 31, 2016

uNew York CEOs are not happy. They rated the Big Apple 49th out of 50 for the second year in a row, making it the second-worst state in which to do business, according to Chief Executive magazine’s annual Best & Worst States for Business survey. This survey gauges the sentiment of CEOs on a variety of measures that they themselves have viewed as critical. These include the tax and regulatory regime, the quality of the workforce, and the quality of the living environment. CEO sentiment drives investments in offices, factories and other facilities that bring jobs to a region. Despite the CEOs’ concerns, New York is the third-largest state by GDP, with an output of $1.46 trillion. It has more Fortune 500 headquarters than any other state, and is one of the 10 best states for high tech. Oh, and there’s New York City itself – a business hub and one of the most popular U.S. tourist attractions. Within the last year, two large corporations—Cadillac and Anheuser-Busch— have both announced they will move their sales and marketing headquarters from the midwest to New York. “New York’s locale is ideal for companies across all industries,” said Marshall Cooper, CEO of Chief Executive magazine and ChiefExecutive.net. “But their tax burden and oppressive cost of living are going to continue to be problematic for the state if they don’t make some aggressive changes.”

Within the last year, two large corporations— Cadillac and AnheuserBusch—have both announced they will move their sales and marketing headquarters from the midwest to New York.

“New York, and in particular New York City, needs to be more supportive of businesses, or all the jobs will leave with the businesses,” one CEO said. Another responded, “We left New York after more than 30 years because of declining quality of life and heavy taxes.” On the positive side, another CEO stated that “New York has improved under the leadership of Governor Cuomo.” The magazine does not draw a conclusion, but the survey results are lopsided. The tax burden gives new meaning to the lyrics: “If I can make it there, I can make it anywhere….”[IA]

EDITOR & PUBLISHER Steve Acunto 914-966-3180, x110 sa@cinn.com CONTRIBUTORS Peter H. Bickford Jamie Deapo Kelly Donahue-Piro Michael Loguercio Christopher Paradiso Lawrence N. Rogak N. Stephen Ruchman Jerome Trupin, CPCU Barry Zalma PRODUCTION & DESIGN ADVERTISING COORDINATOR Creative Director Gina Marie Balog 914-966-3180, x113 g@cinn.com COPYEDITOR & PROOFREADER Maria Vano mariavano9@gmail.com SUBSCRIPTIONS P.O. Box 9001, Mt. Vernon, NY 10552 914-966-3180, x111 circulation@cinn.com PUBLISHED BY CINN Media, Inc. P.O. Box 9001, Mt. Vernon, NY 10552 (914) 966-3180 | Fax: (914) 966-3264 www.cinn.com | info@cinn.com President and CEO Steve Acunto

CINN MEDIA, INC.

INSURANCE ADVOCATE® (ISSN 0020-4587) is published bi-monthly, 20 times a year, and once a month in July, August, September and December by CINN ESR, Inc., 131 Alta Avenue, Yonkers, NY 10705. Periodical postage paid at Yonkers, NY and additional mailing ofﬁces. POSTMASTER Send address changes to Insurance Advocate®, P.O. Box 9001, Mt. Vernon, NY 10552. Allow four weeks for completion of changes. SUBSCRIPTION RATES $59.00 US, Canada $65.00, International $110.00. TO ORDER Call 914-966-3180, fax 914-966-3264, write Insurance Advocate® PO Box 9001, Mt. Vernon, NY 10552 or visit www.Insurance-Advocate.com.

FOR ADVERTISING OR SUBSCRIPTION INFORMATION Call 914-966-3180 | insurance-advocate@cinn.com 4 May 31, 2016 / INSURANCE ADVOCATE

INSURANCE ADVOCATE® is a registered trademark of CINN ESR, Inc. and is copyrighted 2016. All rights reserved. No part of this magazine may be reproduced in any form without consent. Trademark registered U.S. Patent and Trademark Ofﬁce.

For high-quality article reprints (minimum of 100), including e-prints, contact Gina Balog at g@cinn.com or call 914-966-3180, x113

5-29-16_INA 5-29-16 5/31/16 1:38 PM Page 5

One-Stop InsuranceShopping

GUARD Plus

Comp • Businessowner’s • Auto • Umbrella

We’re the quote you could come up against, so why not join us?

Workers’ Compensation insurance nationwide for a company’s employees.

Businessowner’s Policy for Total Insured Property Values up to $12.5 million (up to $25 million upon request) – now available in over half the U.S.

Commercial Umbrella for added protection.

A newly enhanced Commercial Auto product (gradually being introduced in our BizGUARD states).

Competitive Pricing • Coverage Extensions • Excellent Commission • Easy Submission Process • Superior Customer Service • New Complementary Lines in Select Jurisdictions!

Visit www.guard.com for product availability in speciﬁc states.

Berkshire Hathaway

GUARD

Insurance Companies

Go to www.guard.com/apply

5-29-16_INA 5-29-16 5/31/16 1:38 PM Page 6

[ ON THE LEVEL ]

N. STEPHEN RUCHMAN, CPIA

What’s the Difference Between a Customer and a Client? uBefore I share my opinion on this topic, I will admit to a brief Internet search. As I expected, Google revealed no shortage of customer service advice supporting what I have to say. One source opines that business interests consider the value of a client over a lifetime versus a customer who is forgotten after the transaction. Listen to the ubiquitous direct-writer ads on the radio and you will hear what I mean. They talk about their “customers” because, to direct writers, that’s what insureds are—one-time transactions. Professional independent agents, on the other hand, talk about our clients. The difference is about how we treat our customers and how we perceive our role with them. A person walks into a supermarket and says, “I’d like a pound of bologna.” That’s a customer; but we don’t sell bologna. We treat our clients as complicated systems; members of our families and communities. And, we consider ourselves part of a support team–with our clients’ attorneys and financial advisors, who keep our clients’ best interests in mind when we act on their behalf. We want to have a positive impact on our clients’ lives. And, as the Internet source indicated, this long-term partnership is important to our livelihoods. As an example, I recently served as a consultant for a client who was reconsidering its insurance broker in an effort to save money. This client worked with the same broker for several years, and every time we had a meeting with the incumbent broker, they would do it via conference call. There are agents out there who will never take a minimum premium of less than $750 or $1,000; and if they do take such a small account, they don’t provide service to them. I, myself, always believed that you treat each client the same. Otherwise, your small accounts are just customers. How we perceive ourselves and those we serve was a topic addressed recently in the keynote speech at PIANY’s Long Island RAP. The speaker, former New York Jets

lineman Marty Lyons, was quite inspirational and what he said bears sharing. “We live in a world of instant gratification,” he said. “But, real gratification comes from when you make a difference in someone’s life, and they come back years after, and they tell you how you had an influence.” Lyons, who was drafted by the Jets in 1979 after playing for Alabama State, shared with the Long Island RAP audience lessons he’s learned on, and more importantly, off the football field. While most famous for his ferocious role as part of the N.Y. Sack Exchange in the 1970s, Lyons is most proud of the work he’s done through his foundation, which has helped 35 million terminally ill kids in 13 states. Football, he said, provided him a platform—a voice. He reminded the audience of insurance professionals that we each have a platform too, should we choose to use it. He recalled working with legendary Alabama State Coach Bear Bryant, who told his team that he expected four things of them: 1) be proud of your family; 2) be proud of your religion; 3) get an education; and 4) try to win some football games. Keep these priorities, he said, and you will always grow in your career. Bryant later told him: “A winner in the game of life is a person who gives of themselves to others.” And, while Lyons said that message didn’t resonate immediately, it proved true throughout his life. I encourage readers to check out the speech on PIANY’s YouTube channel. It’s full of moving stories, including children who have motivated Marty Lyons, and lessons that apply to all of us. Perhaps most of all is the message that, if you do good deeds, you will always be rewarded: “When you leave here today ask yourself, do you want to make an impression in life or an impact,” he urged us. And he explained that “an impression will leave someone thinking ‘he’s a good guy,’ but an impact has an effect on their life.” These are words to live and work by. They’re certainly words to keep in mind about how to treat our clients.

N. Stephen Ruchman, CPIA, is a retired independent agent and founder of Ruchman Associates, Inc., the agency he started in 1961. A past president of the Professional Insurance Agents of New York State, Inc., he is an active supporter of PIANY, and he has sat on or chaired nearly every committee including the Executive Committee and the Long Island Advisory Council and PIANY’s Political Action Committee. He can be reached via email at: nsruchman@gmail.com.

Marty Lyons is a class act, and he took time out of his speech to acknowledge another class act, Steve Diamond, who received the UJA Insurance Division’s Man of the Year award on May 11. I can’t close this article without noting Steve’s welldeserved award. I must also mention the great job our good friend Justin Fries did as chair of the UJA’s award banquet. It, too, was a very successful evening, and we raised considerable money for worthy charities. Steve Diamond has represented our industry with class, and we’d like to thank him for all the work he put into being our honoree. Those who participated in the event earned a heartfelt thank you. Justin Fries and the insurance committee did a wonderful job— Hearty congratulations for coordinating such a successful event. Finally, speaking of inspirational, Alfred Nussbaum died the day after the UJA banquet on May 12. He was 80 years old and an independent agent through and through. He had a staunch German background, and great stamina to match. He bought his father’s Manhattan agency in 1976 and built Nussbaum Brunell, a well-known Long Island insurance agency. In my early years, I produced my business through Al in New York City. When I moved to Long Island, Al and I shared an office in Rockville Centre. Of all the people I’ve known in the business, he was one of the most knowledgeable. My sincere condolences to his wife Judy and his family who loved him. He will be missed.[IA]

6 May 31, 2016 / INSURANCE ADVOCATE

R_Fio

5-29-16_INA 5-29-16 5/31/16 1:38 PM Page 7

Real Dividends! $172 Million Paid

“The team from Friedlander Group consistently goes above and beyond the call of duty for HUB’s clients. In my personal experience working with them, they have done an outstanding job in working with many of my restaurant customers and are a valued partner of mine. They are extremely attentive and well-staffed, and we look forward to continuing our long-standing relationship with their team!” Robert Fiorito Vice President Hub International Northeast

Up to 20% Advance Discount Retailers

Wholesalers

Restaurants

Hotels

Oil Dealers

Social Services

Residential Care

Retail Group of NY, Workers’ Comp. Safety Group #544*

Wholesale Group of NY, Workers’ Comp. Safety Group #551*

Restaurant Group of NY, Workers’ Comp. Safety Group #556*

Hotel Group of NY, Workers’ Comp. Safety Group #578*

Oil Dealer Group of NY, Workers’ Comp. Safety Group #582*

Social and Health Services Group of NY, Workers’ Comp. Safety Group #585*

Residential Care Group of NY, Workers’ Comp. Safety Group #586*

2013-14 2012-13 2011-12

25% 25% 25%

35% average dividend since inception in 1992

2013-14 2012-13 2011-12

20% 5% 20%

31% average dividend since inception in 1993

2013-14 2012-13 2011-12

25% 20% 25%

34% average dividend since inception in 1993

2013-14 2012-13 2011-12

0% 2.5% 10%

15% average dividend since inception in 2006

2013-14 2012-13 2011-12

10% 0% 5%

6% average dividend since inception in 2010

2013-14 2012-13 2011-12

10% 5% 5%

7% average dividend since inception in 2011

2013-14 2012-13

2.5% 5%

Group formed on 2/1/2012

Fees paid to 560 Brokers Online Video: www.friedlandergroup.com/presentation.html

Retail 2003 Bakeries 7998 Hardware Store 8001 Florist Store 8006 Food/Fruit/Deli/Grocery 8008 Clothing/Shoe/Dry Goods 8013 Jewelry Store 8016 Quick Printing 8017 Retail (Not Classified) 8031 Meat/Fish/Poultry Store 8033 Supermarkets 8039 Department Store 8043 Retail (including Food) 8044 Furniture Store 8046 Auto Accessories 8072 Book/Music Store 8105 Leather Store 8382 Self serve gas w/conv. store Residential Care Facilities 8864 Developmental Organizations 8865 Residential Care Facility Hotel/Motel 9052 Hotels NOC 9058 Restaurants in Hotels

Wholesale 4310 Greeting Card Dealer 7390 Beer/Ale Dealer 7999 Hardware Store 8018 Wholesale Store/NOC 8021 Meat, Fish Dealer-Wholesale 8032 Dry Goods, Clothing, Shoe 8047 Drug Store 8048 Fruit & Vegetables 8111 Plumbers Supplies Dealer-Wholesale Restaurant 9061 Clubs 9071 Full Service Restaurants 9072 Fast Food Restaurants– Including Drivers 9074 Bars & Taverns Social and Health Services 8854 Home Health Care – Prof. Employees 9051 Home Health Care – Non Prof. Employees 8857 Counseling – Social Work – Traveling Oil and Gas Dealer 5193 Oil Burner Installation 8350 Fuel Oil & Gas Dealer 8353 Gas Dealers, LPG & Drivers

*Underwritten by the State Insurance Fund Ask about low DBL rates exclusive to safety group members, underwritten by First Rehabilitation Life Insurance Company of America

R_Fiorito_INS_ADV_v6.indd 1

The Workers’ Compensation Leader in NY

Call Cosmo Preiato at (800)394-7004 ext. 203 Fax: (914)694-6004 e-mail: cosmop@friedlandergroup.com 2500 Westchester Avenue, Suite 400A Purchase, New York 10577 www.friedlandergroup.com

How to Save Big on Workers’ Compensation: With Insights From Leading Industry Experts by Adam Friedlander, now on Amazon http://www.friedlandergroup.com/presentation.html

8/20/15 9:48 AM

5-29-16_INA 5-29-16 5/31/16 1:39 PM Page 8

[ TREND ]

Digital Access: Insurance Entities are “Not Keeping Up” Insurance Websites Not Keeping Pace with Changing Customer Expectations, Says J.D. Power Study uInsurer websites are not keeping up with customer expectations, with just over half of consumers surveyed saying they “definitely will” return to the site for their servicing needs, according to the J.D. Power 2016 Insurance Digital Evaluation StudySM. The study,[1] now in its fifth year, measures online consumer experiences among auto insurance shoppers seeking quotes and existing customers seeking typical policy-servicing activities. It examines the functional aspects of websites rather than such aesthetic aspects as look and feel. Consumers performed a number of tasks online and then rated the ease of performing them on a five-point scale. Their ratings were used to compute an overall index for shopping and servicing experiences based on a 500-point scale. While overall satisfaction among customers shopping online for auto insurance improves by seven index points to 376 in 2016, satisfaction among customers using their insurer’s website for servicing activities has a more modest four-point improvement to 424. Some of the more basic service tasks, such as printing or requesting new or replacement ID cards, updating the user profile or adding a driver or vehicle to the policy, earn the lowest overall experience scores. “While satisfaction hasn’t suffered yet, it likely will if insurers don’t invest in their websites and keep pace with other industries,” said Valerie Monet, director of the insurance practice at J.D. Power. “Compared with the servicing experience, there is still more room for improvement. The digital sales experience poses a growing financial risk for insurers as they work to close new business. Failed quote rates range between four and six percent[2] and can add up to substantial lost business if customers don’t turn to another channel to finalize their quote and close the deal.” Customer expectations of their insurer’s website are set based on their experiences on other sites, including non-insurance sites. Many insurance companies have 8 May 31, 2016 / INSURANCE ADVOCATE

begun using responsive design technology, which helps facilitate access across multiple devices. However, there is still work to be done when it comes to making sure information on the site is easy to find and understand. Nearly one-fourth of auto insurance customers do not completely understand the information about their current deductible, coverages, or the claims process when accessed via their insurer’s website. Monet noted that direct insurers have more heavily invested in their websites than agent-based insurers because it’s a primary channel of communication with their customers and key to new-customer acquisition strategies. Brands like Esurance, GEICO, Mercury and USAA achieve some of the highest scores in the overall service index.

rated apps from other industries typically focus on key actions while underperforming apps have outdated interfaces.” Among the 20 insurance companies included in the study, Esurance, GEICO, Mercury, Safeco and USAA (in alphabetical order) perform particularly well in the service index, while Erie Insurance, Esurance, Liberty Mutual, Travelers and 21st Century (in alphabetical order) perform particularly well in the shopping index.

Self-Service Customers • More than half (56%) of all customers have visited their insurer’s website in the past month. Additionally, customers have visited their insurer’s website an average of nine times in the past 12 months. • Nearly one-fourth (23%) of customers do not or only partially understand the policy information offered on their insurers’ website. • Only 26% of customers indicate the speed at which they can pay a bill on the website exceeds their expectations. • Over half (55%) of customers say they “definitely will” return to the website for service needs.

Shoppers Going Mobile Overall, 57% of insurance customers own a smartphone and 38% own a tablet. Gen Y[3] has the highest usage rate of mobile, with 95% owning a smartphone and 79% owning a tablet. Automotive insurance mobile application servicing continues to increase year over year, with Gen Y and Gen X not only having the highest proportion of users, but also growing at the highest rates. Gen Y’s adoption rate has nearly doubled to 53% in 2016 from 27% in 2014, while Gen X has increased to 35% from 22%. Among Gen Y users of mobile apps, 90% expect all the services and information to be available from the insurer’s website to also be available from the app. Among customers who delete their insurer’s app, two of the most common reasons are that they didn’t use the app or the app was too slow. “Across multiple industries, mobile devices are increasingly being used for online transactions,” said Monet. “Although apps have been slower to gain popularity in the insurance industry among consumers, once they do, customers’ expectations are likely to be high based on their experiences in other industries such as banking. Highly

• Eleven percent of shoppers indicate the online quote process is more complicated than they expected. • The speed of the quote process exceeds the expectations of only 25% of shoppers. In contrast, 12% of customers say the online quote process is slower than they expected. • Nearly half (46%) of all shoppers access and find videos of policy information helpful, an increase from 39% in 2015. The 2016 Insurance Digital Evaluation StudySM is based on responses from 3,854 shopping evaluations and 3,340 service evaluations of auto insurance websites. The study ranks 20 websites for both shopping and service. The study was fielded from January through March 2016.[IA] [1 ] The study was previously known as the J.D. Power Insurance Website Evaluation StudySM (IWES). [2] Source: J.D. Power 2016 Insurance Shopping StudySM. [3] J.D. Power defines the generations as PreBoomers (born before 1946); Boomers (19461964); Gen X (1965-1976); and Gen Y (19771994). Millennials (1982-1994) are a subset of Gen Y.

5-29-16_INA 5-29-16 5/31/16 1:39 PM Page 9

49th Annual Insurance Industry “Good Scout” Award Luncheon

Benefitting the thousands of boys and girls of the Greater New York Councils, Boy Scouts of America “Good Scout” Honoree

“Good Scout” Honoree

Distinguished Eagle Scout Award Recipient

John L. Lumelleau

John A. Kuhn

Jerry de St. Paer

President & Chief Executive Officer Lockton Companies

Chief Executive Officer, Global Insurance Endurance Specialty Holdings, Ltd.

Senior Advisory Partner Grail Partners

Monday, June 27, 2016 11:45am - Reception 12:30pm - Luncheon Gotham Hall - 1356 Broadway, New York, NY Chairman

Chairman

Eric J. Andersen Chief Executive Officer Aon Benfield

John Keogh Executive Vice Chairman & Chief Operating Officer Chubb Group/ Chubb Limited

Gregory S. Hendrick Executive Vice President & Chief Executive, Reinsurance Operations XL Group

Chairman

Todd Jones Chief Executive Officer Willis North America

Timothy Gardner CEO, US Operations Guy Carpenter & Company

Robert S. Schimek Executive Vice President & Chief Executive Officer, Commercial AIG

For more information, contact: Jeff Fanara, Luncheon Coordinator (P) 212-651-2940 (E) Jeff.Fanara@Scouting.org Register online at www.bsa-gnyc.org/insurance

5-29-16_INA 5-29-16 5/31/16 1:39 PM Page 10

[ MERGERS AND AC QUISITIONS ]

Insurance Agency M&A in Q1 Breaks Record uInsurance agency mergers and acquisitions hit an all-time high for the first quarter of a year, with 109 reported transactions in the first three months of 2016, according to OPTIS Partners’ M&A database. The data covers U.S. and Canadian agencies selling primarily property-and-casualty insurance, agencies selling both P&C and employee benefits, and those selling only employee benefits. The pace slightly outstripped 107 deals reported in the first quarter of 2015. OPTIS reported a record 455 M&A transactions in 2015. OPTIS is ranked as the fifth most active agent-broker M&A advisory firm in 2014 and 2015 by SNL Financial. “M&A activity seems to have unstoppable momentum,” said Timothy J. Cunningham, managing director of OPTIS, an investment banking and financial consulting firm specializing in the insurance industry. The OPTIS report breaks down buyers into five groups: private-equity backed brokers, privately held brokers, publicly held brokers, banks, and all others.

“The actual number of sales was undoubtedly greater than the 109 reported during the quarter since many buyers and sellers do not announce transactions.”

PE-backed buyers continued to lead the charge with 50 transactions, a 25 percent increase over the same period last year. Top buyers were Acrisure (13 transactions), AssuredPartners (11 transactions) and Hub International (8 transactions). Privately held brokers were the second largest group, completing 34 deals, down from 41 in Q1 2015. Publicly traded brokers completed 10 deals, down from 12. Bank acquisitions remained unchanged at

seven. Transactions by all others numbered eight, up one. Agency acquisitions continue to focus on P&C shops (63 announced transactions) and P&C/benefits brokers (21 deals). There were 10 employee benefits agency sales. Several active buyers from prior years did not announce any transactions during the first quarter, including NFP, Integro, TowneBank, Eagle American Insurance, and J. Smith Lanier. However, nearly 30 firms that announced a transaction in Q1 had not announced any prior deals. “The actual number of sales was undoubtedly greater than the 109 reported during the quarter since many buyers and sellers do not announce transactions,” said Daniel P. Menzer, CPA, partner with OPTIS. “However, because our database tracks a consistent pool of the most active acquirers, it’s a reasonably accurate barometer of activity.” Focused exclusively on the insurance distribution marketplace, Chicago-based OPTIS offers merger & acquisition representation of buyers and sellers, including due-diligence reviews. It provides appraisals of fair market value; financial performance review, including trend analysis and internal controls; and ownership transition and perpetuation planning.[IA]

Looking to buy, sell or hire, merge, sublesse, or simply promote an agency or product?

Post a classified ad the old-fashioned way and reach the audience you are looking to reach. 4441 Sepulveda Blvd., Culver City, CA 90230-4847 www.zalma.com | zalma@zalma.com 310-390-4455 | fax: 310-391-5614 http://zalma.com/blog

EFFECTIVE IN MORE WAYS THAN ONE!

Zalma Insurance Consultants provides expert advice to counsel for insurers and counsel for policyholders. Advice from Zalma Insurance Consultants is indispensable to the resolution of insurance disputes. Consultation from Zalma Insurance Consultants can save you, your counsel or client hundreds of hours of investigative and legal work.

For more information, call Gina Marie Balog at

10 May 31, 2016 / INSURANCE ADVOCATE

914.966.3180, x113

gmb@cinn.com www.insurance-advocate.com

5-29-16_INA 5-29-16 5/31/16 1:39 PM Page 11

Independent Insurance Agents & Brokers Brokers of Suffolk County Invite Y You oou T Too Their Annual Scholarship Golf Outing Benefiting The IIABSC Scholarship Endowment Fund at Stony Br Brook roook University College of Business

Honoring Peterr N. N Resnick NEW LOCATION

Monday August 22, 2016

Huntington Country Club, Huntington, NY

NEW LOCATION

Sponsorship Opportunities

All include prominent signage and promotion in Suffolk “Big Eye” Course and Dinner Sponsorships Major Sponsorships Tournament Sponsor $ 10,000 Sold! Hole in One $ 750 Awards Sponsor $ 500 Dinner Sponsor $ 5,000 Craft Beer Station $ 450 Golf Sponsor $ 2,500 Beverage Cart $ 400 Cocktail Sponsor $ 2,000 Driving Range $ 350 Lunch Sponsor $ 1,000 Cigar Sponsor $ 300 Tee Signs $ 250

G Golf olf & D Dinner inner $ 350 9:30 am – 11:00 am 11:00 am 5:00 pm Special Golfer Packages: The Event Package $2,500 Foursome Sponsor $1,500 The Special Package $1,000

D Dinner inner & C Cocktails ocktails O Only nly $ 1125 25

Golfer Registration and Brunch Shotgun Tee Off: “Scramble” Format Longest Drive & Closest to the Pin Challenges, Hole-In-One Prize Cocktail Hour & Dinner Buffet Includes four golfers, Dinner Co-Sponsor recognition & Tee sign Includes four golfers & Tee sign Includes two golfers, Golf Co-Sponsor recognition & Tee sign

AS Special pe p ciall T Thanks hanks ttoo O Our ur Tournament Tou o rnament Sponsor Spponsor Companies Com mppanies

Please reserve my early registration of the sponsorship circled above under the following: Company / Ind. Name_____________________________________ Contact /Title__________________________________ Address______________________________________________________________________________________________ Phone ________________________________ Email _________________________________________________________ Mail this completed form with check made payable to IIABSC Golf to: Jeanne Abatelli * 150 Dartmouth Drive * Hicksville, NY 11801 Or register with a credit card online at www.suffolkagents.com For additional information call Stephanie at 631-981-4364 or email sbarry@theresourcegroupinc.net

5-29-16_INA 5-29-16 5/31/16 1:39 PM Page 12

[ IN FOCUS ]

K E L LY D O N A H U E - P I R O

How Clean is Your Agency? uWe recently wrote a six-part blog series on how to Spring Clean your agency. It was amazing the feedback we received, as well as how many agencies shared the posts with their entire team. As it turns out, many agencies are, well, downright filthy! Just like that one junk closet you may have at home, it is really easy for your agency to get a little dusty. This time of year is a great time to address some sloppy behavior and clean it up. Too often you may hear how busy everyone is. We often start addressing this issue by reviewing what the team is doing. No doubt your biggest busy offenders are often the most disorganized. They have thousands of emails in their inbox, hundreds of open activities, and their desk looks like a forest fire hazard. Don’t even get me started on the number of icons on their desktop! How can you not feel overwhelmed, stressed and frustrated? Changing people’s organizational habits can be a challenge. But if we make it a team effort, we can get the entire agency in tiptop shape. If you didn’t follow along with our series, you will get a nice little recap here. But be sure to check out our blogs and sign up to get our updates! Agency Cleaning Tip #1: Clean Out Your Inbox Why is the entire insurance industry a bunch of email hoarders? Seriously, agency after agency that I go to, I find thousands of emails in their inboxes. It’s like no one has ever seen a folder, never mind the MANAGEMENT SYSTEM they should be in. There are several reasons we believe managing your email will help you better manage clients: • Everyone is busy and stressed, having 3654 emails looking at you every day is not helping • A lot of emails means that you look busy, but you’re just disorganized • You will drop balls and miss vital follow-ups and service requests • Email hoarders are often finger pointers rather than doers 12 May 31, 2016 / INSURANCE ADVOCATE

It’s time to break bad habits and make it an agency standard that there are no more than 50 emails (and that’s being generous) in your inbox at any given time. • You have a management system that documents your to-do list and documents. You can use Outlook for it. It’s time to move tasks, follow-ups and documentation to Outlook. Too many account managers are using email as their task management system, rather than the actual management system the agency has in place. It’s time to break bad habits and make it an agency standard that there are no more than 50 emails (and that’s being generous) in your inbox at any given time. So how do you begin? Start with a Spring Email Clean-Up Week. • Have a team meeting and ask everyone how many emails are in their inbox (you may be shocked). • Set a goal to clean out 100 emails per day until it’s reasonable. • Unsubscribe. We all get pointless emails, now is the time to get rid of them permanently. • Make sure the right people are getting the right emails. For example, E&S Markets often send updates to the person who bound coverage, not the person who may be doing the work. Let everyone know the person who should be getting the work, and don’t continue to forward it. • Create folders. This helps keep you organized on internal matters. Client matters should go into the management system. • Hold a weekly meeting to see if you can decrease the emails and make people update you on their progress. • Once everyone is at 50 emails in their inbox, celebrate! CONTINUED ON PAGE 14

Kelly Donahue-Piro, founder and president of Agency Performance Partners, is a no-nonsense effectiveness expert who has helped hundreds of insurance agencies identify and capitalize on sustainable improvement opportunities. Her specialties include agency culture assessment and change; management and supervisory coaching and benchmarking; customer retention strategy development; digital marketing strategy, planning and implementation; and sales planning, management and skillbuilding. In 2014, she created Agency Performance Partners with a mission to “partner with insurance entrepreneurs who dream to take their business to the next level and beyond, by relentlessly pursuing excellence in worldclass service and sales strategies.” The centerpiece of the organization’s transformational work is its Agency Performance AssessmentTM, a comprehensive survey tool Kelly created to zero in on organization-wide improvement opportunities and provide the foundation for a customized agency action plan. Mrs. Donahue-Piro is an engaging speaker who is available to conduct in-person and online agency success presentations that complement her firm’s one-on-one on-site and virtual consulting practice. Connect with her on social platforms, via email at kelly@agencyperformancepartners, or by phone at 401-415-6205.

5-29-16_INA 5-29-16 5/31/16 1:39 PM Page 13

[ IN THE NEWS ]

Fitch: U.S. Commercial Insurance Market Performance Heading Downward uUnderwriting performance for the commercial lines sector of the U.S. property/casualty (P/C) insurance industry is likely to deteriorate in 2016, according to a new report from Fitch Ratings. The decline follows a three-year underwriting profit for the industry with a combined ratio of approximately 94% in each of the last three years (2013-2015). "Catastrophe losses below historical norms contributed to strong 2015 commercial market results; however, results will likely stumble in 2016 as industry competition heats up and premium rates are declining in a growing number of

product segments," said James Auden, Managing Director, Fitch. Renewal rates are flat or declining for most commercial market segments following a hardened market from 2011-2014. The price competition comes from underwriting success and market capacity expansion from earnings accumulation. As price competition intensifies however, this will likely be a drag on premium growth, according to Fitch. Commercial lines written premium volume grew by only 1.8% in 2015. Workers’ compensation, the largest commercial lines segment, has steadily improved over the last five years to a sig-

“

nificant underwriting profit in 2015; however, Fitch views these results as a cyclical peak with future results deteriorating due to competitive pressure and the inherent volatility in this business. Commercial automobile liability insurance continues as a standout weak performer, generating a large 2015 underwriting loss and adverse loss reserve development due to claims severity issues. While commercial auto business continues to have meaningful premium rate increases, Fitch expects the segment to generate another underwriting loss in 2016. Favorable loss reserve development from prior underwriting periods declined in 2015 representing two percent of calendar year commercial lines earned premium. American International Group, Inc.'s (AIG) large fourth quarter reserve charge significantly affected this result. "Commercial property results will greatly influence overall commercial market results for 2016, a reversion toward more severe catastrophe losses would lead to a sharper decline in 2016 performance," added Auden.[IA]

It has ha been our sincere pleasure to work with some of the most talented insurance professionals in the business for the past 30 years. We are proud of our comprehensive coverage oﬀerings and superior customer service as we strive to oﬀer only the best to our insureds. On behalf of Clermont,

”

port I thank you for your con nued support. William J. Johnston President Clermont

years a W. R. Berkley Company

INSURANCE ADVOCATE / May 31, 2016 13

5-29-16_INA 5-29-16 5/31/16 1:39 PM Page 14

[ IN FOCUS ] CONTINUED FROM PAGE 12

Spring Cleaning Tip #2: Keep Activities Up To Date I was recently at an agency that is in need of a culture change. We popped open the management system to see how “busy” people were. What we found were tasks that were due in 2014 still in people’s open activity list. So either we are screwed or people enjoy being busy. Now, no doubt this happened because no one was watching and people were allowed to hoard tasks. But you cannot feel organized with activities from 2014 still open and looking at you. • So how do we tackle this problem? Have a management system Spring Cleaning week! • Run an activity report of overdue tasks by person (you will find some people are worse offenders than others) • Hold an agency management system Spring Cleaning Week and set the expectation that you will be at zero by the end of the week • Have prizes and bring in lunch to make it fun

• Anyone who does not participate you know loves looking busy…it needs to be addressed • Run reports weekly to keep an eye that it’s under control

work better. The best advice I have ever heard is to replace the notepad with a mini-whiteboard. Everyone has to put details in the management system in order to make more room on the whiteboard.

Spring Cleaning Tip #3: No More Notebooks Let’s start by explaining why the notepad hurts the agency: • If someone wins the lottery at lunch, it will be hard to dive in and provide the best service to their clients • You really have no idea what is on people’s desks to help balance out work • E&O, E&O, E&O • Duplicate entry means duplicate time spent • If the client calls back in with a question, there will be no notes in the system for anyone to jump in and answer them Many Account Managers hold their notepads like a safety blanket, so this may be shocking. However, when they break up with the notepad, everything starts to

Spring Cleaning Tip #4: Clean Your Desk When I see agents with piles of paper, folders, files and more, I know they are one of two things. Either they are a disorganized mess OR they like to display how busy they are for all to see, like a little fortress of protection. If everyone thinks they’re busy, then they can hide from more work. Wrong. You’re killing your mojo. It’s hard to feel accomplished when you have piles around you. Plus, it means two important things: • Not a single soul on the planet could dive into your desk if need be • I’m significantly worried what E&O nightmares are hiding in there Spring Cleaning Tip #5: Two-Minute Rule I have what I call the two-minute rule in insurance. If something comes in and you can do it in two minutes, do it and log it in the system. If it will take longer, then assign an activity. I love this rule as a leader and a manager. If I see someone with a bit of spare time, I can reassign them some duties. When it’s not in your management system, you are begging to be busy. However, if it only takes two minutes, do it and be done with it. There is no sense in wasting the same amount of time it takes to log it as it takes to do it. We all need to get better at moving efficiently and effectively through our day. Emergencies and bottlenecks will happen. Let’s not get stuck or busy and move to being more productive! Spring Cleaning Tip #6: Have a Strategy, Not a To-Do List In my personal and professional life I see people walking around with these todo lists. They are a mile long. To-do lists tend to make us all feel bad about our lack of accomplishment because we simply cannot get it all done in one day. Then we spend time each day reordering our to-do list for tomorrow. Get rid of it and have a strategy. I hope you have enjoyed our tips – we enjoyed delivering them to you![IA]

14 May 31, 2016 / INSURANCE ADVOCATE

5-29-16_INA 5-29-16 5/31/16 1:39 PM Page 15

Paid aid FFamily am a P amily Leave Leave is Coming York! Coming tto o New Y o ork! As the industry leader and your eexpert xpert x in New York Yo ork State State DBL we are are here here to to help... help...

Visit our w website ebsite ffor o or helpful FAQs FAQs on what you you need to to know know about Paid Paid Family Family Leave Leave (PFL). Plus, subscribe ttoday oday to to receive receive up-to-date up-to-date information inf fo orm ormation on PFL at:

shelt shelterpoint.com/PFL erpoint.com/PFL

This material is ffor or o producer prrodu oducer (agent and broker) brroker) o use only. It is not intended intended for for o the general general public. ShelterPoint SheltteerP Point o is a rregistered egistter e ed Service Servicce M Mark. ark. All images mages lic licensed censed e through thr rough o iStockphoto. iStockphoto. M#16-131 | G1 - 04/16

M#15- 478 | G2 12/15 M

www. s h e l t e r p o i n t . c om

sheltering you

800.365.4999 sales@shelterpoint.com | 800 .365.4999 (516.829.8100) (516.829.8100) facebook.com/shelterpointgroup fa cebook.com/shelterpointgroup

fee, Life, erPointt Lif ShelterPoint Shelt

fe Life hab Lif ehab Rehab ormerly First R o fformerly

5-29-16_INA 5-29-16 5/31/16 1:39 PM Page 16

2015 Results: Premium Growth

Slows, Combined Ratio Creeps Up for Property/Casualty Insurers

PRIVATE U.S. PROPERTY/CASUALTY INSURERS SAW THEIR NET

WRITTEN PREMIUM GROWTH SLOW TO 3.4 PERCENT IN 2015 FROM 4.2 PERCENT A YEAR EARLIER, WHILE THEIR NET INCOME AFTER TAXES GREW TO $56.6 BILLION IN 2015 FROM $55.9 BILLION IN 2014, ACCORDING TO ISO, A VERISK ANALYTICS

(NASDAQ:VRSK) BUSINESS, AND THE PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA (PCI). INSURERS’ OVERALL PROFITABILITY AS MEASURED BY THEIR RATE OF RETURN ON AVERAGE POLICYHOLDERS’ SURPLUS REMAINED VIRTUALLY UNCHANGED AT 8.4 PERCENT, EVEN THOUGH THEIR COMBINED RATIO DETERIORATED TO 97.8 PERCENT FROM 97.0 PERCENT AND THEIR NET UNDERWRITING GAINS DECLINED TO $8.7 BILLION FROM $12.2 BILLION. INSURERS’ NET INVESTMENT INCOME INCREASED TO $47.2 BILLION IN 2015 FROM $46.4 BILLION A YEAR EARLIER, BUT REALIZED CAPITAL GAINS DECREASED TO $9.4 BILLION FROM $10.3 BILLION, RESULTING IN $56.6 BILLION IN NET INVESTMENT GAINS FOR 2015, ESSENTIALLY UNCHANGED FROM 2014. 16 May 31, 2016 / INSURANCE ADVOCATE

5-29-16_INA 5-29-16 5/31/16 1:39 PM Page 17

uThe property/casualty insurance industry had another year of moderate profits in 2015, as measured by a return on average surplus of 8.4 percent, virtually the same as in 2014. Challenged by continuing low interest rates and a slumping stock market, the industry nevertheless posted modest premium growth and a below-100 combined ratio for the fourth straight year. Overall industry capacity (policyholder surplus) slipped slightly to $673.7

Analysis and Discussion by Dr. Robert P. Hartwig, CPCU, and Dr. Steven N. Weisbart, CLU

billion as of December 31, 2015, but was still extraordinarily strong, as measured by a premium-to-surplus ratio of 0.76—virtually the strongest it has ever been. Performance and Profitability Drivers The industry’s performance in 2015 could be characterized as its “new normal,” neither as profitable as in 2013 nor as affected by catastrophes as in 2011 and 2012. Indeed, in many respects, 2015 looked a lot like 2014. One contributor to positive underwriting performance in 2015 was continued net written premium growth. Net written premiums in 2015 crossed the half-trillion-dollar mark (to $514.0 billion), although the rate of increase slipped slightly to 3.4 percent growth from 4.2 percent in 2014. Net earned premium growth also slowed in 2015 (growing by 3.7 percent) compared to 2014 (4.4 percent growth over 2013). There are two main drivers of premium growth in property/casualty insurance: exposure growth and rate. Exposure growth—basically an increase in the number and/or value of insurable interests (such as property and liability risks)—is determined mainly by inflation and by the health and growth of the U.S. economy (including factors such as population growth and composition, household formation, housing preferences, and more). By most measures, inflation continued to be remarkably low; the Consumer Price Index for 2015 was near zero (actually +0.1 percent). Real (inflation-adjusted) GDP growth in 2015 remained at 2.4 percent (it was also 2.4 percent in 2014), although the annual rate masked starts and stops during the year (2015:Q1 growth rate was 0.6 percent, 2015:Q2 was 3.9 percent, 2015:Q3 was 2.0 percent, 2015:Q4 was 1.4 percent, all expressed at annual rates). Exposure growth in key areas of the economy such as new vehicle sales (at record-breaking levels, according to some reports), business investment, industrial production, construction and overall employment growth (the second-best yearly job gains since 1999, trailing only 2014) raised the value of exposures covered by the P/C insurance industry. With the pace of real GDP growth expected (at this writing) to slow in 2016 to somewhere in the

range of 1.8 to 2.3 percent, personal and commercial lines exposures—and the premiums they generate—should continue to rise modestly. With premiums for personal lines and some commercial lines (such as workers comp) trending positively, overall industry premium growth could continue to slightly lag the rate of overall economic growth in 2016, as was the case in 2015. Continuing improvement in labor market conditions in 2015 also aided top line growth in the P/C insurance industry. Job growth benefits the entire economy, of course, but it directly affects workers compensation insurers. Compared to employment in December 2014, the U.S. economy added 2.8 million nonfarm jobs by December 2015 (not seasonally adjusted)—the second highest yearly job growth numbers in the 21st century. Combined with pay raises for continuing workers, payrolls rose $319.1 billion by year-end 2015, driving billions of dollars in new premiums for workers’ compensation coverage in 2015. This job growth is likely to continue, though at a somewhat slower pace; the economy is getting closer to full employment, but there is still slack in the labor market (for example, the numbers of “involuntary parttime” and “discouraged” workers are still above their typical levels in prosperous times) and wage increases appear to be slightly higher than the rate of inflation. As a result, if economic growth and hiring continue as projected, workers’ compensation exposure is likely to remain among the faster-growing major P/C lines of insurance in 2016. The other major determinant of industry premium growth is rate activity. Rates are a function of a number of forces, but perhaps the most important is past and expected-future claims. Net of reinsurance recoveries, incurred losses and loss adjustment expenses for all lines in 2015 rose to $350.2 billion, up 4.6 percent from $334.9 billion in 2014. Premium growth in 2015 was significantly different for the personal lines vs. commercial lines. Insurers writing primarily personal lines saw premium growth of 5.2 percent—down from 5.8 percent in 2014 but still quite strong. Insurers writing primarily commercial lines saw premium growth of 1.4 percent—down even more sharply from 2014 (which had a growth rate of 2.9 percent)—and those with balanced books of business saw premium growth of 3.6 percent. Catastrophe Losses and Underwriting Performance Some of the credit for positive underwriting performance in 2015 can be attributed to what has come to be thought of as “moderate” catastrophe losses. Back in the 1990s, a “normal” CAT year produced claims in the high-single-digit billions of dollars. Fifteen billion in catastrophe claims was unusually high. In the last 15 years CAT losses reached or exceeded $30 billion six times. From the viewpoint of the combined ratio, in the 28 years prior to Hurricane Hugo in 1989, CAT claims rarely added even 2.5 percentage points. But since Hurricane Hugo in 1989, there have been only seven years (out of 28) in which CATs added fewer than 2.5 percentage points to the industry’s combined ratio. In 2014, ISO and PCI estimated U.S. catastrophe losses at $15.5 billion. In 2015, wildfires, winter storms, hail storms and tornadoes all took their toll, but there was no single event that did enormous damage; still, total U.S. CAT claims in 2015 were estimated to be $15.2 billion. The overall result in underwriting during 2015 was CONTINUED ON PAGE 20

INSURANCE ADVOCATE / May 31, 2016 17

5-29-16_INA 5-29-16 5/31/16 1:39 PM Page 18

Inspiring ideas • Innovative Solut

rregistration egistration now now open! open! Register Register at at www.NYiDAY.com w w w.NYiDAY.com

KKeynote eynote Speaker Speaker Mike Greenberg from ESPN Radio’s Mike & Mike

Unlike any insurance event y A

f ld

dd d

5-29-16_INA 5-29-16 5/31/16 1:39 PM Page 19

lutions • Invaluable Networking Inspiring Ideas Crucial agency operations topics with tangible action items, tools and ideas you can implement immediately.

Innovative Inno vative ttiv Solutions Engage with innovative people and products you may not even know about on the invitation-only Show Floor.

Invaluable Invaluable Networking Network with the movers and shakers of the industry on the Show Floorr, in the Lounge, and an at the can’t-miss Social Hour.

t you’ve ever attended.

Presenting Sponsor

/ /

5-29-16_INA 5-29-16 5/31/16 1:39 PM Page 20

CONTINUED FROM PAGE 17

such that the industry’s combined ratio rose only slightly to 97.8, compared with 97.0 in 2014. Claims Reserve Releases In addition to premium growth and moderate catastrophe losses, favorable development of prior-year claims reserves in 2015 totaled $8.0 billion, a notable decrease from the $11.2 billion in reserve releases in 2014, according to ISO/PCI. Reserve releases are generally associated with lower-than-expected costs for claims occurring in past accident years. Investment Performance: Interest Rates Remain Low For the full year 2015, net investment gains (which include net investment income plus realized capital gains and losses) were unchanged from 2014 at $56.6 billion. In measuring insurance company net investment gains, accounting rules recognize two components: (i) net investment income; and (ii) realized capital gains or losses. Unrealized capital gains or losses are not considered income and affect only surplus on the balance sheet. Net Investment Income in 2015 Net investment income itself has basically two elements— interest payments from bonds and dividends from stock. The industry’s net investment income for the full year 2015 was $47.2 billion, compared to $46.4 billion in 2014 (+1.9 percent). Most of this income comes from the industry’s bond investments, which are mainly high quality corporates and municipals. The environment for bond investing in 2015 was challenging. Average monthly corporate bond market yields in 2015, as captured by Moody’s AAA-rated seasoned bond index, dropped from 3.8 percent in December 2014 to near 3.5 percent for the first four months of 2015, then rose to about 4.0 percent for the last eight months of 2015, ending at 3.97 percent. For perspective, yields in 2014 were somewhat higher (4.25 percent or higher for the first half of the year and 3.9 percent or higher for most of the last half of the year, except December). For 2016, the environment is not expected to change materially from 2015. The U.S. economy still faces the same forces that have held interest rates down for the past few years: unused capacity (in both capital resources and labor); cautious consumer and business spending; low near-term future expectations for the economy; and Federal Reserve actions to keep short-term interest rates low, all of which contributed to low inflation expectations. Further, although the Federal Reserve Open Market Committee has begun raising short-term rates, it has signaled that it will do so gradually and depending on economic data, so that most forecasters do not expect interest rates to rise much in 2016. The other significant source of net investment income (apart from bond yields) is stock dividends. In 2015, market-wide net dividends from all common and preferred stock were fairly steady at $888.6 billion, about 3.3 percent above levels achieved in 2014. For the industry on average stock holdings constitute roughly only about one-sixth of the industry’s invested assets. Realized Capital Gains Realized capital gains in 2015 were $9.4 billion, compared to $10.3 billion in 2014. The broad stock market was essentially flat 20 May 31, 2016 / INSURANCE ADVOCATE

in 2015, providing few opportunities for capital gains. Again, however, the industry’s overall stock allocation represents only about one-sixth of invested assets. Policyholders’ Surplus (Capital/Capacity): New Continued Strength and Resilience Policyholders’ surplus as of December 31, 2015 stood at $673.7 billion, down $1.5 billion or 0.23 percent from year-end 2014. Thanks to a surging stock market until 2015, policyholders’ surplus has generally continued to increase with the end of the Great Recession and three consecutive years without large-scale catastrophe losses. But the lack of stock gains in 2015 ended (or at least stalled) this trend. The fact that the industry was able to rapidly and fully recoup its losses to surplus even in the event of disasters like Sandy (which produced $18.8 billion in insured losses in 2012) is continued evidence of the P/C insurance industry’s remarkable resilience in the face of extreme adversity. The bottom line is that the industry is, and will remain, extremely well capitalized and financially prepared to pay very large scale losses in 2016 and beyond. One commonly used measure of capital adequacy, the ratio of net premiums written to surplus, currently stands at 0.76, close to its strongest level in modern history. The property/casualty insurance industry turned in another year of good performance in 2015 in terms of underwriting performance and overall return on average surplus (profitability). In addition, policyholders’ surplus remained near an all-time record high. Profitability benefited again, as it did in 2013 and 2014, from moderate catastrophe losses and prior-year reserve releases. Premium growth, while still modest, is now experiencing its longest sustained period of gains in a decade. Fundamentally, the P/C insurance industry remains quite strong financially, with capital adequacy ratios remaining high relative to long-term historical averages.[IA]

To view the full report from ISO and PCI, go to http://www. verisk.com/downloads/InsuranceResultsReport2015Q4.pdf

5-29-16_INA 5-29-16 5/31/16 1:39 PM Page 21

INSURANCE INDUSTRY CHARITABLE FOUNDATION HELPING COMMUNITIES. ENRICHING LIVES. TOGETHER.

IICF combines the collective strengths of the insurance industry to help communities and enrich lives through grants, volunteer service, and leadership.

Join your industry colleagues and make an impact. Get involved today! Midwest Division 0DU\ &XPPLQV Phone: ( ) 99 - PFXPPLQV@iicf.com

Northeast Division Betsy Myatt Phone: 917-544-0895 emyatt@iicf.com

Texas-Southeast Division Sarah Conway Phone: 214-228-2910 sconway@iicf.com

Western Division Melissa-Anne Duncan Phone: (714) 870-1084 maduncan@iicf.com

Insurance Industry Charitable Foundation 1999 Avenue of the Stars, Ste. 1100 Los Angeles, CA 90067 P: (424) 253-1107 contact@iicf.com www.iicf.org FEIN: 20-1240972

5-29-16_INA 5-29-16 5/31/16 1:40 PM Page 22

[ BITING NEWS ]

Dog Bites Accounted for More Than One-Third of All Homeowners Liability Payouts Last Year uDog bites (and other dog-related injuries) accounted for more than one-third of all homeowners insurance liability claim dollars paid out in 2015, costing in excess of $570 million, according to the Insurance Information Institute (I.I.I.) and State Farm®, the largest writer of homeowners insurance in the United States. An analysis of homeowners insurance data by the I.I.I. found that while the number of dog bite claims nationwide decreased 7.2 percent in 2015, the average cost per claim for the year was up 16 percent. The average cost paid out for dog bite claims nationwide was $37,214 in 2015, compared with $32,072 in 2014 and $27,862 in 2013. “The average cost per claim nationally has risen more than 94 percent from 2003 to 2015, due to increased medical costs as well as the size of settlements, judgments and jury awards given to plaintiffs, which are still on the upswing,” said Loretta Worters, a vice president with the I.I.I.

22 May 31, 2016 / INSURANCE ADVOCATE

(Chart below) The trend in higher costs per claim is attributable not simply to dog bites but also to dogs knocking down children, cyclists, the elderly, etc., all of which can result in fractures and other blunt force trauma injuries that impact the potential severity of the losses. Another factor might be the surge in U.S. Post

ESTIMATED NUMBER AND COST OF DOG BITE CLAIMS, 2015 STATE RESULTS

number of claims in the U.S. at 1,684 in 2015, a decrease from 1,867 in 2014. Illinois had the second highest number of

ESTIMATED NUMBER AND COST OF DOG BITE CLAIMS (AND OTHER DOG-RELATED INJURIES), 2003-2015

(Chart above) The study noted that California continued to have the largest

registered the highest average cost per claim of the 10 states with the most claims: a staggering $56,654.

claims at 931. While Arizona had only the ninth largest number of claims at 393, it

Office worker attacks, many of which take place at the customer’s door. Be a Responsible Dog Owner Even normally docile dogs may bite when they are frightened or when defending their puppies, owners or food. However, the best way to protect yourself is to prevent your dog from biting anyone in the first place. The most dangerous dogs are those that fall victim to human shortcomings such as poor training, irresponsible ownership and breeding practices that foster viciousness. “The majority of dog bites come from dogs we already know, and the largest groups are children and the elderly,” said Dr. Bonnie Beaver, a veterinary professor at Texas A&M University, and executive director of the American College of Veterinary Behaviorists. “Dogs not raised with good social skills can become dogs that bite,” said Beaver, who is internationally recognized for her work in the normal and abnormal behaviors of animals. “It is important to socialize your CONTINUED ON PAGE 34

5-29-16_INA 5-29-16 5/31/16 1:40 PM Page 23

Focus. Vision. Reach.

New York Insurance Association

KNOW KNOW BE BETTER T TER NEW NE W YORK YORK CONNECTIONS CONNEC TIONS www.nyia.org w w w.nyia.org

5-29-16_INA 5-29-16 5/31/16 1:40 PM Page 24

[ GUEST OPINION ]

L A R R Y WA R R E N

A Primer on Reinsurance Pricing Strategy “A Checklist for Optimizing Reinsurance Negotiation” uThis article is written with the assumption that both the reinsurer and the direct writer would each benefit from fully exploring all appropriate assumptions and considerations directly and indirectly impacting reinsurance pricing. Such assumptions and considerations are discussed below. The reinsurer benefits by being able to offer the lowest YRT rates and the most competitive pricing that it can justify, enabling it to win a share in the pool. The direct writer benefits by giving the reinsurer the additional insights and justification for a lower priced quote, thus reducing their reinsurance premiums and increasing bottom line net income. This “negotiation process” should be looked at as more of a useful educational process. With less information the reinsurers may be more conservative in their pricing, while conversely with more information the reinsurer can use a sharper pen. The more knowledge and insights the reinsurer has about the direct writer’s business which may impact current mortality and future mortality patterns, the greater the likelihood that its quote will be more competitive. Obtaining reinsurance quotes may be a simple matter, but the selection of which reinsurers should participate in the bidding and the negotiation processes calls for special insights. We know that there is often a big disparity in the reinsurance quotes obtained from reinsurers competing for our business. It is necessary to understand the underlying reasons for big disparities in reinsurer pricing. We need to recognize each reinsurer’s methodology and assumptions which are driving its pricing. In most of what follows, I assume that the direct writer wants a first dollar quota share YRT reinsurance arrangement, but similar concepts apply to coinsurance as well. Outlined below are some of the most important assumptions and associated considerations that impact reinsurance pricing. These items are offered as a checklist for careful joint review by the reinsurer and the direct writer. 24 May 31, 2016 / INSURANCE ADVOCATE

The more knowledge and insights the reinsurer has about the direct writer’s business which may impact current mortality and future mortality patterns, the greater the likelihood that its quote will be more competitive.

Assumption A. Choice of Mortality Table Probably the most important assumption (and certainly the one with the largest financial impact) made in reinsurance pricing is the mortality table believed to have the appropriate slope for the client company’s mortality. We place the slope consideration at the top of our list as the paramount feature justifying painstaking research as part of the reinsurance pricing negotiation process. Most reinsurers currently use either the 1975-80 select/ultimate table or the 1990-95 select/ultimate table (2001 VBT) when developing quotes. The former table models relatively flat durational mortality progression, while the latter exhibits the opposite. Mortality rates in this more modern table exhibit marked and steep progression after issue. Once the issue of table suitability has been addressed, the chosen standard mortality table should be fine-tuned to reflect anticipated experience by developing scaling factors to initially assure a perfect fit. The working mortality table to be assumed for pricing purposes will reflect best estimates of the slope of future mortality experience. It may transpire that the table finally adopted is a hybrid of intermediate slope exhibiting features of more than one standard table.

Larry Warren is a Reinsurance Strategist and Negotiator. For the past six years, he has served as Chair of LICONY’s Resinurance Subcommittee working directly with the New York Department of Financial Services on actuarial and reinsurance matters. Mr. Warren has also served on the Reinsurance Committee of the Society of Actuaries, the Reinsurance Committee of the ACLI, the Reinsurance Premium Rate Guarantee Subcommittee, the Subcommittee to develop the Life Reinsurance Sourcebook, and have often been quoted in reinsurance literature. Mr. Warren has written several papers covering both technical and business matters relating to reinsurance appearing in various publications of the Society of Actuaries such as "Reinsurance News," "Product Matters," and "The Financial Reporter.” His most recent paper entitled: "A Primer on Reinsurance Pricing Strategy—A Checklist for Reinsurance Negotiation" received high recognition from the reinsurance community.

Considerations in Choosing a Mortality Table with Appropriate Slope 1. Underwriting Rules/Guidelines/Practices Variations in underwriting rules, guidelines and practices obviously impacts future mortality patterns. While underwriting guidelines vary from company to company, the degree to which the underwriters adhere to the guidelines (i.e., the frequency of underwriting exceptions) must certainly be recognized. Special underwriting programs such as table shaving, special credits, etc., must be properly defined and disclosed and can affect the overall slope. Generally, tighter underwriting requirements and stricter adherence to the CONTINUED ON PAGE 26

5-29-16_INA 5-29-16 5/31/16 1:40 PM Page 25

[ IN THE ASSOCIATIONS ]

PIANY Members Meet Legislators at Capitol During Albany Lobby Day uALBANY, N.Y.—Professional Insurance Agents of New York State Inc. members met with their legislators at their Albany offices during the association’s Albany Lobby Day, May 10, 2016. The PIANY members included: PIANY President Gene Sandy, CIC; PIANY President-elect John Parsons II, CIC,

“The day offered a great opportunity to thank our elected officials for sponsoring legislation, A.7537-A/S.253, which would standardize the deductible triggers for coastal homeowners policies,” said Sandy. “PIANY is grateful to the senators and assemblymen for taking the time to discuss these issues that are important to profession-

(L-R) PIANY PAST-PRESIDENT RICHARD A. SAVINO, CIC, CPIA; PIANY PRESIDENT-ELECT JOHN PARSONS II, CIC, CPIA, AAI; PIANY PRESIDENT GENE SANDY, CIC; ASSEMBLYMAN KENNETH P. ZEBROWSKI, D-96; AND PIANY DIRECTOR ANTHONY KAMMAS.

CPIA, AAI; PIANY Director Anthony Kammas; and PIANY past-President Richard A. Savino, CIC, CPIA. They discussed the association’s 2016 legislative priorities, which include: standardizing hurricane deductible triggers; reforms to the New York State Insurance Fund; and continuing education credits requirements for insurance producers. The PIANY members met with Sen. Neil D. Breslin, D-44, ranking minority member of the Senate Insurance Committee; Sen. Todd Kaminsky, D-9; Sen. James L. Seward, R-51, chair of the Senate Insurance Committee; Assemblyman Will Barclay, R-120; Assemblyman Kevin A. Cahill, D-103, chair of the Assembly Insurance Committee; and Assemblyman Kenneth P. Zebrowski, D-96.

to “double down” on CE during overlapping two-year licensing periods for both individual and business entity licenses. PIANY is working on behalf of professional, independent agents, their businesses and their clients for the passage of a comprehensive legislative agenda in 2016, which includes: • reform to New York’s “Scaffold Law,” to establish a comparative negligence standard for claims under Labor Laws 240 and 241; • elimination of the NYSIF’s 30-day notice rule for canceling a policy; • removal of the NYSIF’s exempt status from licensing and other insurance requirements;

(L-R) PIANY PAST-PRESIDENT RICHARD A. SAVINO, CIC, CPIA; PIANY PRESIDENT GENE SANDY, CIC; ASSEMBLYMAN WILL BARCLAY, R-120; PIANY PRESIDENT-ELECT JOHN PARSONS II, CIC, CPIA, AAI; AND PIANY DIRECTOR ANTHONY KAMMAS.

al, independent insurance agents and the insurance-buying public across the state.” Additionally, the PIANY members asked their representatives to pass legislation recently reported by the Senate Labor Committee S.5250/A.7742, which would repeal a state law requiring policyholders to provide 30 days’ advance written notice to the New York State Insurance Fund before canceling a policy. The legislation, sponsored by Sen. James L. Seward, R-51, and Assemblyman Zebrowski was introduced at the request of PIANY because the requirement is burdensome to New York’s small businesses. They also explained the difficulty Section 2132 of the New York State Insurance Law presents to agents, smallbusiness owners, as it requires a licensee

• adopting workers’ compensation policyholder protections; • standardizing the events that would trigger coastal homeowners insurance hurricane deductibles; • ensuring there are no insurance coverage gaps in any approved ride-hailing/ride-sharing regulations; and • eliminating duplication and waste in the current CE requirements for agent and business-entity licenses. PIANY is a trade association representing professional, independent insurance agencies, brokerages and their employees throughout the state.[IA]

www.insurance-advocate.com INSURANCE ADVOCATE / May 31, 2016 25

5-29-16_INA 5-29-16 5/31/16 1:40 PM Page 26

[ GUEST OPINION ] CONTINUED FROM PAGE 24

underwriting rules and guidelines will produce lower mortality rates on the outset and sharper increments in duration-specific slope. 2. Average Size of Policy (Face Amount) The distribution of face amount per life insured plays a dramatic role in the overall underwriting screening process. For example, two companies may have identical stringent underwriting guidelines, yet one company (company A) operates in a market where face amounts in excess of $500,000 are the norm, while another company (company B) may be issuing policies with face amounts averaging $100,000. Thus the actual underwriting requirements being obtained by company B would be very limited relative to company A, giving rise to relatively weak selection and an expectation of higher mortality rates with a flatter durational slope. 3. Distribution System The distribution system of the ceding company or for a particular product can have a significant impact on the degree of potential anti-selection. Anti-selection will likely impact the mortality level and durational slope. Brokers writing for multiple companies will seek out deficiencies in companies’ product designs, underwriting, or pricing, and exploit these to the detriment of the direct writer and its reinsurers. Career agents writing for only one company will generally produce business with less potential anti-selection. 4. Market Segment (Upscale, Middle America, geographic location, etc.) It is well known that each market segment will exhibit its own variation in mortality patterns resulting from social, economic, geographic, and cultural differences. Companies underwriting middle market risks with lower average face amounts are likely to experience higher mortality rates, and flatter durational slope. 5. Average Issue Age Distribution A younger average issue age distribution linked with a low average face amount per life will generally have less stringent underwriting requirements and likely flatter durational slope. 26 May 31, 2016 / INSURANCE ADVOCATE

6. Other Important Points It should be noted that studies have shown that the impact of choosing one mortality table or another in projecting the present value of future mortality can produce a swing of up to 20 percent or more in reinsurance

If after reviewing the various aspects of your business you cannot find any attributes which could justify a flatter slope, then I would recommend that the following point be raised with the reinsurers to encourage them to assume a flatter slope than the 1990-1995 mortality table (2001 VBT). YRT rates and hence turn a competitive quote into an uncompetitive one. This impact varies by issue age and gender distribution. For additional information, see the author’s article “The Relationship of Mortality Projections and the Underlying Mortality Tables Used” in the August 2002 issue of the SOA publication, “Product Matters!” It is therefore of utmost importance that you identify and explain all possible characteristics and aspects of your business, including those shown above in Assumption “A” (Choice of Mortality Table) to each reinsurer quoting, that would tend to justify an assumption of a flatter mortality slope than the 1990-95 (2001 VBT) select/ultimate table. The reinsurance quote may be expressed as a percentage of the 1975-80 select/ultimate table even though the reinsurer based its pricing on a steeper scale. In that case, you would still have ample opportunity to convince the reinsurer that a flatter slope is more appropriate for your business and have them improve their quote. Techniques for generating a hybrid, modified, or redesigned table exhibiting a flatter and more appropriate mortality table can be addressed during the negotiating process. Some techniques are dis-

cussed in the author’s article, “Generalized Mortality Table Analysis,” in the March 2003 issue of the SOA publication, Reinsurance News. If after reviewing the various aspects of your business you cannot find any attributes which could justify a flatter slope, then I would recommend that the following point be raised with the reinsurers to encourage them to assume a flatter slope than the 1990-1995 mortality table (2001 VBT). The 1990-1995 mortality table was based on intercompany mortality experience from calendar years 1990-1995. It is a known fact that the lapse rates for policies during this period were very high compared to current levels. Therefore, one could argue that the slope of this table is artificially high due to the anti-selective lapses which occur when lapse rates are atypically high. Consequently current mortality slopes should be expected to be flatter than the 1990-1995 mortality table.

Assumption B. Mortality improvement Factors Another very important assumption is the extent to which mortality improvement is factored into the pricing (i.e., the reinsurer’s mortality assumption for your business). For example, a one percent annual mortality improvement factor over 20 years produces a decrease in the present value of future claims ranging from 7-10 percent, depending upon issue age. As a result of the fact that reinsurers commonly build future mortality improvements into their pricing, coupled with the fact that projecting future mortality is an art as well as a science, it is not unusual to find reinsurers who will offer a YRT reinsurance premium rate scale (even after factoring in their expense and profit margins) which is lower than the ceding company’s pricing mortality assumption.

Assumption C. Reinsurer’s Expense Assumptions The reinsurer’s expense methodology and assumptions (per unit, per policy, percent of premium) can have a significant effect on pricing. For example, the perunit expense that a reinsurer may assume (unless subject to a reasonable cap) could lead to unrealistically high total treaty expenses where large business volumes are involved and can lead to substantially less competitive or even uncompetitive quotes.

5-29-16_INA 5-29-16 5/31/16 1:40 PM Page 27

[ GUEST OPINION ] Assumption D. End of Term Pricing Another very important assumption and special consideration is the reinsurer’s end-of-term pricing. Studies invariably confirm the severe anti-selection process occurring at the end of each level premium paying period. Severity of anti-selection varies from company to company and product to product. Many factors come into play that influence the end of term anti-selective continuation rate and the resulting anticipated deterioration in mortality experience of the term portfolio. The magnitude of the direct writer’s renewal premium after the initial level term period (typically an A.R.T. ranging from 200-300 percent of the 2001 CSO) impacts the degree of the shock lapse rate and resulting antiselection. The degree of mortality deterioration varies according to a number of factors such as the length of level term period, the magnitude of the renewal premium following the initial level premium term period, issue age, duration, risk class, and gender. Due to the complexity and subjectivity involved in recognizing, measuring, and evaluating each of these parameters in pricing post-level term-mortality, the reinsurers naturally tend to be very conservative in pricing for continuation. This can turn what would have otherwise been an attractive quote into one which is unacceptable. Technical approaches based on tools such as the Dukes-McDonald Method or the Becker-Kitsos approach are valuable in determining the appropriate end-of-term mortality assumption and hence in judging whether the reinsurer’s end-of-term pricing is equitable and reasonable. To address this problem and potentially enhance your quote, it might be prudent for the ceding company to request each reinsurer provide a quote predicated on the condition that at the end of the level-term period, the reinsurer has the unconditional right to increase premiums and the ceding company has the unconditional right to recapture.

capacity, and transactional facility (ease of doing business) are some of the important attributes that should be recognized when selecting reinsurers.

In a scenario where the actual claims are following the slope of the 1990-95 mortality table and reinsurance premiums have been based on the 1975-80 mortality table, the mortality claims will increase at a faster rate than the reinsurance premiums.

Important Additional Considerations

2. Treaty Language and Provisions Treaty language and provisions often vary from reinsurer to reinsurer and play an important role in the amount of effort and manpower which will be needed in the overall administration of the reinsurance arrangement, meeting the expectations of both parties, and the associated costs. Provisions such as Errors and Oversights and Policy Changes should be crisply and clearly written to prevent potential future disputes. Inclusion in your treaty documents of specific clarifying examples may be helpful in heading off future disagreements, but the examples also work against you if they are not clear and do not take into consideration all possible interpretations and applications. Writing, defining, and structuring treaty language and provisions is a specialist task requiring painstaking attention to detail that could pay dividends in the event of a dispute. Elaborating on this aspect is beyond the intended scope of this article, but it is worth mentioning two particular treaty provisions that, if not drafted with precision, can have significant financial impact.

1. Reinsurance is not a commodity Purchasing First Dollar Quota Share YRT Reinsurance is not exactly like purchasing a commodity where reinsurers with the lowest prices are necessarily the best deals. Credit rating, financial strength, services provided, jumbo limits, facultative

Reinsurer Premium Guarantee Provision The Premium Guarantee language must be clear, effective and have teeth. As we indicated earlier in our discussion, the reinsurer’s choice of which mortality table

to assume (i.e., which mortality table they believe reflects the appropriate slope for the particular company’s mortality that they are quoting on) and what level of mortality improvement factors to assume, have the greatest financial impact in pricing. There is clearly a significant amount of judgment and subjectivity involved in these two important assumptions and hence in projecting future mortality which the reinsurer uses in developing their pricing. In a scenario where the actual claims are following the slope of the 1990-95 mortality table and reinsurance premiums have been based on the 1975-80 mortality table, the mortality claims will increase at a faster rate than the reinsurance premiums. In a few short years, the reinsurers would find themselves in a situation where mortality claims are now considerably higher than the reinsurance premiums. This observation, or shall we say revelation, comes as the experience unfolds, when the reinsured block of in-force business has become quite large and is generating significant losses to the reinsurers. A similar effect would also occur if the mortality improvement that the reinsurer built into their pricing fails to materialize. In order to avoid or mitigate the recurring impact of significant losses, the reinsurers may attempt to raise rates, especially when the Premium Guarantee Provision in the treaty is weak, unclear or ambiguous, which has very often been the case in YRT reinsurance. An example of recommended Premium Guarantee language in YRT treaties that should prevent the reinsurer from raising its premium rates on in-force business is as follows: “We anticipate that the YRT rates shown in this agreement will be continued indeﬁnitely for all business ceded under this agreement. However, because of statutory deﬁciency reserve requirements, the only guaranteed premiums are premiums equal to the 2001 CSO Mortality Table discounted with the maximum prevailing statutory interest rate according to the issue year.” AND “We may only increase YRT rates if we increase rates for our entire class of YRT business with each of our clients. If we increase YRT rates, then you have the right CONTINUED ON PAGE 32

INSURANCE ADVOCATE / May 31, 2016 27

5-29-16_INA 5-29-16 5/31/16 1:40 PM Page 28

[ ON MY RADAR ]

BA R RY Z A L M A

Expert Witnesses May Not Testify to Legal Conclusions Unwise to Settle for Claimed Policy Limits Without Investigating All Available Coverages and Funds uLitigation of serious injuries will often be sidelined by limited available insurance and assets to pay a judgment for the true value of an injury. Injured parties and their lawyers will determine the available coverages and will often settle for policy limits because going to trial to prove larger damages would be expensive and uncollectible. In reaching such a settlement the plaintiffs will rely on the statements of the defendant directly or in response to discovery. When the plaintiffs’ lawyers are deceived as to available insurance new legislation will proceed and experts will be retained to establish the new case. In Turubchuk v. E.T. Simonds Construction Company, United States District Court, S.D. Illinois, Slip Copy 2016 WL 1029371 (03/15/2016), plaintiffs claimed that the defendants in an underlying lawsuit concealed available coverages and retained the services of an expert to establish their case. The defendants tried to eliminate the testimony of the expert.

BACKGROUND In 2007, Plaintiffs filed a negligence action seeking to recover for injuries resulting from a single vehicle rollover accident on August 21, 2005 (“the underlying action”). Plaintiffs sued Defendants E.T. Simonds Construction Company (“ETS”) and Southern Illinois Asphalt Company, Inc. (“SIAC”), alleging that Defendants were contractors on a State of Illinois road construction project responsible for repaving a stretch of Interstate 24. Plaintiffs alleged that the vehicle in which they were riding went off the paved road in the construction zone, slipped off of a severe edge drop-off, left the highway and rolled. At the time of the accident, ETS and SIAC were insured as a joint venture through an insurance policy issued by 28 May 31, 2016 / INSURANCE ADVOCATE

Injured parties and their lawyers will determine the available coverages and will often settle for policy limits because going to trial to prove larger damages would be expensive and uncollectible.

Bituminous Insurance Company. In addition to the Bituminous policy, both Defendants were individually insured through several policies. Attorney Richard Green represented ETS and SIAC in the underlying action. Plaintiffs were represented by Komron Allahyari. On May 14, 2007, Allahyari made a $1,000,000.00 policy-limits settlement demand after allegedly receiving confirmation from Green that the Bituminous policy was the only policy available to cover Plaintiffs’ claims against the Defendants. Defendants never disclosed their individual policies. Nearly six years later, Plaintiffs filed the instant action seeking damages for Defendants’ failure to disclose their individual policies in the underlying action. Plaintiffs allege that if Defendants had disclosed the individual policies, Plaintiffs would not have settled for what they believed were “policy limits” of the only policy disclosed to them. In the Second Amended Complaint, Plaintiffs assert claims for intentional misrepresentation, fraudulent concealment, negligent misrepresentation, and constructive fraud.

Barry Zalma, Esq., CFE, has practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary. The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide. The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at http:// shop.americanbar.org/eBus/Store/Pro ductDetails.aspx?productId=214624, or 800-285-2221 which is presently available. Legal Disclaimer: The author and publisher disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this blog. The information provided is not a substitute for the advice of a competent insurance, legal, or other professional. The Information provided at this site should not be relied on as legal advice. Legal advice cannot be given without full consideration of all relevant information relating to an individual situation.

5-29-16_INA 5-29-16 5/31/16 1:40 PM Page 29

[ ON MY RADAR ] LEGAL STANDARD In Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 589, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993), the U.S. Supreme Court instructed courts to function as gatekeepers and determine whether expert testimony should be presented to the jury. Courts function as gatekeepers of expert testimony to make certain that an expert, whether basing testimony upon professional studies or personal experience, employs in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field. Kumho Tire Co. v. Carmichael, 526 U.S. 137, 147, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999). In order to be considered reliable, proposed expert testimony must be supported on good grounds. Equally important to the gatekeeping function is a determination of whether the proposed testimony is relevant. Of particular relevance to an expert proffered for his experience, when determining whether an expert’s testimony is admissible, it is critical that there be a link between the facts or data the expert has worked with and the conclusion the expert’s testimony is intended to support. The court is not obligated to admit testimony just because it is given by an expert. The expert must explain how experience leads to the conclusion reached, why that experience is a sufficient basis for the opinion, and how that experience is reliably applied to the facts. An expert’s qualification and experience alone are not sufficient to render his opinions reliable. The testimony must also assist the trier of fact.

DISCUSSION In his report, Murphy, an attorney in private practice and a former federal district judge, states that he is familiar with the initial disclosure requirements of Rule 26 and that Plaintiffs are “stretching FRCP 26(a)(1)(A) well past its breaking point.” Murphy asserts that “the comments [to the Rule] make clear that initial disclosures are just that and a party should make its initial disclosures based on the pleadings and the information then reasonably available to it,” and that “it is anticipated that initial disclosures will be supplemented as time passes.” Murphy contends that Green had no reason to believe there was other insurance available to cover the joint venture and that Plaintiffs’ attorney negligently failed to serve detailed discovery

There is no question that a lawyer, before agreeing to settle a major injury case, must establish every available insurance policy and all assets available to pay a judgment. The plaintiffs’ lawyers in this case relied on a discovery response and did not look further and now seek to recover for their own errors and sloth.

requests to find out whether additional coverage existed beyond the joint venture policy. Murphy then propounds the following four opinions: 1. If there is coverage beyond that disclosed by Mr. Green, the plaintiffs’ lawyers neglected their duty to their clients by submitting a time-limited settlement demand before conducting the routine discovery that due diligence requires; 2. Mr. Green, as attorney for the defendants, did exactly what FRCP 26 required of him and he was not required at that time to conduct a thorough and complete investigation as to what other policies of insurance might provide additional coverage for plaintiffs’ claims. He made completely accurate “initial disclosures”; 3. It is not reasonable to rely only on information in initial disclosures to determine insurance coverage in a serious case (emphasis in report); and 4. The plaintiffs’ lawyers had ample time to satisfy themselves whether there was additional insurance available even after they had agreed to the $1,000,000.00 settlement, as the release was not signed until twenty months later. Plaintiffs first contend that Murphy’s second opinion is an improper legal conclusion. Next, Plaintiffs assert that the remaining opinions should be barred because they are based upon an assump-

tion that the initial disclosures prepared by Green were appropriate and they shift the burden of discovery onto Plaintiffs when Defendants were under an obligation to automatically produce insurance agreements pursuant to Rule 26. It is well-established that expert witnesses may not testify to legal conclusions or to the applicability or interpretation of a particular statute or regulation. Further, an expert witness may not offer an opinion or legal conclusion on issues that will determine the outcome of the case. The Court concluded that Murphy’s second opinion invades on the province of the Court to interpret the requirements of Rule 26. Whether Green complied with Rule 26 is a question of law that is clearly reserved for this Court. Similarly, whether Plaintiffs’ Counsel’s actions were “negligent” is also an inadmissible legal conclusion which Mr. Murphy may not proffer. However, Murphy’s remaining three opinions are relevant to the issue of sole proximate cause and he is clearly qualified by experience to give them. Further, the Court found that his testimony in that regard will assist the jury in determining issue of sole proximate cause.

CONCLUSION For the foregoing reasons, Plaintiffs’ Motion to Strike is GRANTED as to Murphy’s above-stated second opinion and opinion that Plaintiffs’ Counsel was negligent.

ZALMA OPINION The court properly limited the testimony of the expert whose report exceeded propriety by making conclusions of law and the ultimate issue. However, he can testify as to proximate cause. There is no question that a lawyer, before agreeing to settle a major injury case, must establish every available insurance policy and all assets available to pay a judgment. The plaintiffs’ lawyers in this case relied on a discovery response and did not look further and now seek to recover for their own errors and sloth. [IA]

www.insurance-advocate.com INSURANCE ADVOCATE / May 31, 2016 29

5-29-16_INA 5-29-16 5/31/16 1:40 PM Page 30

[ LOOKING BACK ]

I N S U R A N C E A D V O C AT E - 2 5 Y E A R S A G O

FOR ADVERTISING OR SUBSCRIPTION INFORMATION Call 914-966-3180 | info@cinn.com 30 May 31, 2016 / INSURANCE ADVOCATE

Serving New York, New Jersey, Pennsylvania and Connecticut Since 1889 www.insurance-advocate.com

5-29-16_INA 5-29-16 5/31/16 1:40 PM Page 31

I N S U R A N C E A D V O C AT E - 2 5 Y E A R S A G O

[ LOOKING BACK ]

Like us on Facebookâ&#x20AC;¦ www.facebook.com/InsuranceAdvocate

INSURANCE ADVOCATE / May 31, 2016 31

5-29-16_INA 5-29-16 5/31/16 1:40 PM Page 32

[ GUEST OPINION ] to all other clients. Thus, by virtue of the second paragraph, a reinsurer experiencing

CONTINUED FROM PAGE 27

to immediately recapture without penalty or recapture fee, any business affected by such increase.” The original intent of the first paragraph of the Premium Guarantee provision was to guarantee the current reinsurance premium rates in a way that the reinsurer would not have the ability to raise its rates. If, however, the reinsurer explicitly guaranteed the current rates, it would be required to set up deficiency reserves. Therefore, the actual language was constructed in a way that falls far short of actually guaranteeing the treaty rates. The first paragraph, although quite common, gives the direct writer very limited protection against the reinsurer actually increasing its rates on in-force business for any reason it considers justified or even for any reason at all. The lack of clarity and ambiguity in this paragraph can lead to disputes and arbitration proceedings with serious financial repercussions to the direct writer. The second paragraph denies the reinsurer the right to raise the treaty YRT rates unless it also raises YRT rates applicable

J U S T

rience. Only a reinsurer exiting the YRT business would follow this course of action. Even in such an extreme case the direct writer would have the ability to recapture without fee or penalty. Clearly, addition of the second paragraph virtually ties the reinsurer’s hands and substantially protects the ceding company.

In a reverse scenario from the one discussed in the Premium Guarantee Provision, if the actual mortality claim rates are following the slope of the 1975-80 mortality table and the reinsurance premium rates have been based on the 1990-95 table, then the reinsurance premiums will increase at a faster rate than the death claims.

Recapture Provision In a reverse scenario from the one discussed in the Premium Guarantee Provision, if the actual mortality claim rates are following the slope of the 197580 mortality table and the reinsurance premium rates have been based on the 199095 table, then the reinsurance premiums will increase at a faster rate than the death claims. After a few years the direct writer will find itself in a situation where the YRT reinsurance premiums are now considerably higher than its mortality claims. This usually occurs at a time when the reinsured block of in-force business is quite large and is generating significant reinsurance losses to the direct writer. The direct writer will be strongly motivated to improve its situation and will likely attempt to recapture its business.

significant losses, as in the scenario alluded to above, can only raise rates if it does so globally across all its YRT treaties, even with respect to clients with favorable expe-

R E L E A S E D -

N E W

T H I R D

E D I T I O N

The Law and Procedure of Insurance Appraisal For: Insurance Counsel, Claims Executives, Independent and Public Adjusters, Appraisers, Judges and Umpires Explains Recent Changes in Law The Guide to the Appraisal Process Legal Precedents Strategies Waiver Issues Public Policy State by State Comparison Issues of Coverage Forms Detailed Index Almost 850 pages of Material Table of Cases and Authorities Written for Insureds, Insurers and Neutrals Readable and User Friendly Table of Cases Scope of the Appraisal Provision Appraisal of Scope of Loss and Issues of Causation AVAILABLE IN HARDCOVER ON CD VIA EMAIL TO ORDER OR FOR MORE INFORMATION: CALL: 1-888-791-7781 EMAIL: APPRAISALBOOK@GMAIL.COM

32 May 31, 2016 / INSURANCE ADVOCATE

“The book…is as complete an exposition of the subject that seems possible.” “…like a cache of gold for lawyers, adjusters and claims people, on both sides of the appraisal debate.” “Wilkofsky’s articulate explanations and state-bystate supporting annotations, makes the book indispensable to anyone involved in fire insurance coverage on any level.” The Insurance Advocate

5-29-16_INA 5-29-16 5/31/16 1:40 PM Page 33

[ GUEST OPINION ] The Recapture Provisions in most reinsurance treaties are unclear and/or ambiguous for first dollar quota share arrangements, usually to the detriment of the reinsurers. For example, some treaties have no limitation at all regarding the business eligible for recapture. They merely allude to a recapture period (often shown on a separate schedule page). Other treaties refer to the fact that facultative and reduced retention cessions are not eligible for recapture, but never clearly indentify quota share arrangements as reduced retention. In addition, treaty provisions are often silent as to whether an increase in the ceding company’s quota share retention (e.g., 10 percent to 100 percent), represents a true increase in retention scale or not. Of course, the ceding company would assert that it is, in order to strengthen its justification to recapture. Since it is typically the reinsurers’ intent that quota share business not be subject to recapture, the treaty provision language must deal with this issue clearly and unambiguously. Until such time that the reinsurers revise and clarify the recapture provisions in their treaties, we will find direct writers falling into the scenario above, whose management teams will be compelled to focus on any ambiguous, unclear, or vague treaty language to recapture their business which is experiencing significant reinsurance losses. For additional information and details of the importance of this issue, see the author’s article “The Recapture Provision, Is It Up To Date?” in the March 2004 issue of the SOA publication Reinsurance News. Another helpful article titled, “How To Lose A Million Bucks Without Really Trying: Oversights In Negotiating Reinsurance Treaties,” may be found in the January 2011 issue of Reinsurance News. 3. How Many Reinsurers Should be Selected to Participate in the Pool? There is no universal answer to this question. A higher number of reinsurers participating in your pool (e.g., six to eight) may increase the number of facultative outlets for your underwriters and increase automatic binding limits. It would certainly add stability to the pool in the event that some reinsurers decide to drop out after giving the required notice of termination. These are all important attributes that a pool of many reinsurers would have. In today’s business environment where most companies are very cost conscious, I

suggest that a smaller reinsurance pool be considered. There is typically an increase in overall reinsurance costs as we increase the number of participating reinsurers in our pool. When a large number of reinsurers participate in the reinsurance pool, there is an added burden and hence added cost relating to managing paperwork and assisting the reinsurers as they routinely and periodically perform on-sight underwriting, administration, and claims audits. Additional costs which can become significant relate directly to higher aggregate reinsurance premiums, due to the fact that in forming your pool typically the lowest priced reinsurers are selected first, and therefore each additional reinsurer will have higher reinsurance premium rates than the previous ones. Let’s assume that a pool consisting of only three or four reinsurers can be formed which will support both the automatic binding limits and facultative outlets that your underwriting team requires. This should not be too difficult to obtain. Then the remaining attribute that is still lacking is stability; thus we must be able to assure that, if one or two members terminate, there is sufficient time to find replacement reinsurance companies before actual termination takes place. I am suggesting that establishing stability in a smaller reinsurance pool can be accomplished during the negotiation process by requiring that the customary 90-day notice of termination be changed to a 365-day notice of termination. We now will have produced the same attributes of a large reinsurance pool with stability, lower reinsurance premiums, and a less costly smaller pool. 4. Modification or Changes to Underwriting Guidelines or Requirements A. Minor Changes in Underwriting When the direct writer modifies or changes their underwriting guidelines or requirements, there will be no credible mortality experience (reflecting this change or modification) to rely upon for some time afterwards. Without credible mortality experience, the reinsurer will typically be more conservative out of necessity. If the underwriting guidelines or requirements were recently tightened, then CONTINUED ON PAGE 34

[ CLASSIFIEDS ]

www.insurance-advocate.com Please send editorial considerations to gmb@cinn.com

LICENSED INSURANCE BROKER LOOKING FOR SUBLESSEE ARRANGEMENT OR PARTNERSHIP Contact Robert: 917-922-8426

Michael Leff LICENSED BROKER

914.245.4500, X12 • FAX 914.245.0461 135 EAST MAIN ST. PO BOX 119 JEFFERSON VALLEY, NY 10535

INSURANCE UNDERWRITER/ SALE REPRESENTATIVE NEEDED Well known Brokerage in the heart of Long Island City, looking for a self‐motivated individual to add to our amazing team. Must be familiar with MS Office (Word, Excel & Outlook), along with the ability to review new business applications, helping us expand our busy brokerage. Qualifications: • Excellent Communication Skills, Detail Oriented • Be highly energetic and driven • Customer service or Retail sales experience • Able to handle a fast paced environment and multitask • Experienced in prospecting, networking and new business development • Ability to work in team environment • Must have applicable NYS license or must obtain applicable NYS license. Producers with their own book of business are welcome. For all inquiries please email resume to : Skoupas@qmbrokerage.com INSURANCE ADVOCATE / May 31, 2016 33

5-29-16_INA 5-29-16 5/31/16 1:40 PM Page 34

[ GUEST OPINION ] CONTINUED FROM PAGE 33

the credible mortality experience reflecting the previous underwriting standards could be used as a starting point. A scaling factor recognizing the anticipated improved mortality can then be negotiated with each reinsurer. Some reinsurers will be more optimistic than others in their assumption of the level of mortality improvement resulting from the tightened underwriting, which naturally can provide an opportunity for obtaining a more competitive quote from an aggressive reinsurer. Of course, all of the considerations previously discussed earlier in this article should be addressed in the negotiation process. When, on the other hand, underwriting guidelines or requirements are to be loosened, the rationale for this modification should be carefully explained to each reinsurer. The direct writer’s underwriting department can be very helpful in communicating to each reinsurer what impact, if any, this underwriting change is expected to have on mortality for new business and hopefully that the mortality experience reflecting the previous underwriting standards can be used without any upward adjustment. B. Major Changes in Underwriting Significant changes in underwriting requirements continue to be made over the years throughout the industry. For example, the transition from using blood and urine to oral fluid (subject to age and face amount limitations) was a major change in underwriting. Some reinsurers were initially more cautious than others in determining what impact this would have on mortality rates and how to reflect this in their pricing. Even today there is still a noticeable variation in reinsurer pricing differentials when comparing blood-tested business and non-blood-tested (oral fluid) business. We will address this issue further in our discussion on Flexible Reinsurance Selection Procedure below. Increasingly companies are moving away from oral fluid testing towards the use of the prescription drug (Rx) database, subject to age and face amount limitations, and often with the incorporation of automated underwriting programs. The objective is to accelerate, simplify, and streamline the agent and customer application and underwriting process. Exactly what impact this will have on 34 May 31, 2016 / INSURANCE ADVOCATE

mortality rates and how to reflect this in their pricing is currently a big challenge to both direct writers and reinsurers alike. It should therefore come as no surprise that currently there is a significant variation among reinsurers in their pricing differential between blood-tested and non-bloodtested (using an Rx database) business.

insights and knowledge into the important pricing concepts and considerations which are called upon in reinsurance pricing, and will serve as “A Checklist For Optimizing Reinsurance Negotiation.”[IA]

BITING NEWS CONTINUED FROM PAGE 22

5. Flexible Reinsurance Selection After discussing and fully exploring all appropriate assumptions and considerations with each reinsurer as outlined in this article, it may be advantageous to consider the feasibility of using a Flexible Reinsurance Selection Procedure (FRSP), a term which I took the liberty to coin, which will be addressed shortly. Typically on a first dollar quota share arrangement each reinsurer would assume a fixed percentage of the face amount for each and every life reinsured regardless of the risk classification of that life (e.g., Male/Female, smoker/nonsmoker, blood-tested/non-blood-tested, etc.). The ranking of the various reinsurance quotes is then developed by applying weights to the YRT rates of each reinsurer based on an assumed distribution of new issues by underwriting risk classification. Some reinsurers have very competitive rates for male lives, but are not as competitive on female lives. This typically happens when reinsurers build in aggressive mortality improvement factors for male risks, but little or no mortality improvement factors for female risks. Similarly, some reinsurers can have very competitive rates for bloodtested business, but uncompetitive rates for non-blood-tested business. (This disparity can be especially pronounced in those situations when the use of an Rx database replaces the use of oral fluid and urine.) In these situations, one should consider using an FRSP by reinsuring the bloodtested business and the non-blood-tested business separately. This would enable the direct writer to choose one group of reinsurers with the lowest prices for their blood-tested business and another group of reinsurers with the lowest prices for non-blood-tested business. Of course some reinsurers will be competitive for both and will be chosen for both risk pools. A similar approach could be employed when and if a large disparity in rates exists between male and female lives. It is hoped that the ideas touched upon in this article will give the reader additional

dog; see how the dog interacts with people,” she added. “Owners need to be able to read their dogs’ body language. Don’t assume that a dog won’t bite.” She noted that children and dogs should never be left together unsupervised. Not only can the child get hurt, but so does the dog because they are the ones that get put down.” National Dog Bite Prevention Week® (May 15–21, 2016), is an annual event designed to provide consumers with information on how to be responsible pet owners while increasing awareness of a serious public health issue. Taking the following steps can reduce the chances of your dog biting someone: • Consult with a professional (e.g., veterinarian, animal behaviorist or responsible breeder) to learn about suitable breeds of dogs for your household and neighborhood. • Spend time with a dog before buying or adopting it. Use caution when bringing a dog into a home with an infant or toddler. A dog with a history of aggression is inappropriate in a household with children. • Keep the family dog secured if a stranger comes to your door. • Be sensitive to cues that a child is fearful of or apprehensive about a dog and, if so, delay acquiring a dog. Never leave infants or young children alone with any dog. • Socialize your dog so it knows how to act with other animals and people. • Discourage children from disturbing a dog that is eating or sleeping. • Be cautious when exposing your dog to new situations in which you are unsure of its response. • Never approach a strange dog and always avoid eye contact with a dog that appears threatening. • Immediately seek professional advice from veterinarians, animal behaviorists or responsible breeders if your dog develops aggressive or undesirable behaviors.[IA]

5-29-16_INA 5-29-16 5/31/16 1:40 PM Page 35

Savings Through Safety Cost-Effective, risk-free coverage from the experts with over 75 years of experience. We have robust workers’ compensation plans to suit your clients in these trades: • Building Metal Trades • Cleaners • Construction • Electrical Manufacturers • Hospitals • Launderers and Cleaners • Municipalities • Printers

• Painters and Decorators • Paper Products Manufacturers • Retail Lumber • Roofers and Sheet Metal Workers • Truckers, Movers, and Warehouse people

Safety Pays Dividends Lovell Safety Management Co., LLC 110 William Street, New York, NY 10038-3935 212-709-8600 | 1-800-5-LOVELL | www.lovellsafety.com

5-29-16_INA 5-29-16 5/31/16 1:40 PM Page 36

Expect big things in workers’ compensation. E xpect to save a third of your clients 3 0% or more. Most classes approved, nationwide. For information call (877) 23 4 - 4 4 5 0 or visit auw.com/us. ©2016 © 2 016 Applied A p p l i e d Underwriters, U n d e r w r i te r s , Inc., I n c ., a Berkshire B e r k s h i re Hathaway H a t h aw ay company. c o m p a ny. Rated R a te d A+ A + (Superior) ( S u p e r i o r ) by b y A.M. A . M . Best. Best. IInsurance nsur an c e p plans lans p protected rote c te d U U.S. . S . Patent P a te nt No. N o . 7,908,157. 7, 9 0 8 ,15 7.