Agency Salary Survey; Boats & Marinas; Agribusiness / Farm & Ranch by Insurance Journal

FEBRUARY 20, 2012 | VOL. 90, NO. 4

WEST REGION

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Inside This Issue

February 20, 2012 • Vol. 90, No. 4 • West Region

NATIONAL COVERAGE

WEST COVERAGE

N8 Special Report: 2012 Agency Salary Survey Compensation Freeze Comes to an End? N11 Special Report: The New Normal in Producer Compensation

8 Colorado Lawmakers Review Spaceflight Liability 14 California Independent Contractor Law May Be Liability for Agents, Brokers

N19 Spotlight: Marina Market Tightens Up

20 Independent Agency System Marked by Changes and Challenges

N22 Closer Look: What to Know About Hobby Farm Insurance

22 Former Cal-OSHA Chief Defends Safety Program

N25 P/C Insurers’ Combined Ratio in 2011 Jumps to 107.5% N26 Agency Compensation Expected to Rise: Ward Group

N8 On The Cover Special Report: 2012 Agency Salary Survey

N22

IDEA EXCHANGE N1 Minding Your Business: Oak & Schoeffler N4 The Competitive Advantage: Burand N14 Growing Your Property Casualty Agency: Shulman N18 Aligning Compensation Rewards with Results N28 Closing Quote: AIA’s Wood on Colorado’s Pinnacol Assurance

24 Long-Time California Insurance Lobbyist Looks to 2012 Legislation

DEPARTMENTS 6 9 9 10 12 N16

4 | INSURANCE JOURNAL-WEST REGION February 20, 2012

Opening Note Declarations Figures Business Moves People MyNewMarkets

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Opening Note Index of Optimism Brighter in Norcal

hings must look brighter around the San Francisco Bay. People there tend to have a more positive outlook on the economy than folks in the bay areas of Los Angeles and San Diego. That’s according to a recent Citibank survey from the fourth quarter of 2011, which shows that nearly half of Californians believe 2012 will be better than 2011. According to the quarterly survey, 33 percent of respondents expect this year to be about the same as last year, and 17 percent say it will be worse. “Looking ahead 12 months, 66 percent of Californians say their personal financial situation will be better, 52 percent say the California economy will improve, and 51 percent say job opportunities will brighten,” according to the authors of the survey. However, the survey, which uses an “index of optimism,” shows that index is still pretty low. It rose to a -4 in the fourth quarter of 2011 from -7 in the third quarter. At 0, the index ‘… depending on how would be at the middle point of possible scores, which range from you personally feel +100 to -100. about the economy, The survey also shows that 64 that can be viewed as percent of respondents are still the other way around.’ worried about another recession. It’s the optimism index that reveals where Northern Californians have the better of their southern counterparts — though, depending on how you personally feel about the economy, that can be viewed as the other way around. The survey again found that in Northern California, particularly in the San Francisco Bay area, residents are more optimistic than the rest of the state. San Francisco rated a +11 on the index. Los Angeles was a -6, and San Diego came in at a -4. The total for all other counties in the state was -5. More than seven in 10 San Francisco Bay area respondents believe their financial situation will be better in 12 months, compared with 62 percent in San Diego and 61 percent in Los Angeles. And 62 percent of San Francisco Bay area respondents said they expect job opportunities will improve in the next 12 months, while 50 percent of Los Angeles respondents and 47 percent of San Diego respondents felt that way. The survey asks 12 questions and calculates its optimism index by subtracting negative responses to each from the positive responses. The quarterly poll was conducted last year via telephone with 1,480 residents from Dec. 16 to Dec. 22. Questions included: “How would you rate the condition of the national economy these days? Is it excellent, good, only fair, or poor?” and “How would you rate employment opportunities for people like yourself who may be looking for work in California? Do you think that job opportunities are excellent, Don Jergler West Editor good, only fair or poor?”

EDITORIAL Editor-in-Chief Andrea Ortega-Wells | awells@insurancejournal V.P. Content Andrew Simpson | asimpson@insurancejournal.com East Editor Young Ha | yha@insurancejournal.com Southeast Editor Michael Adams | madams@insurancejournal.com South Central Editor/Midwest Editor Stephanie K. Jones | sjones@insurancejournal.com West Editor Don Jergler | djergler@insurancejournal.com International Editor Charles E. Boyle | cboyle@insurancejournal.com ClaimsJournal.com Editor Denise Johnson | djohnson@claimsjournal.com MyNewMarkets.com Associate Editor Amy O’Connor | aoconnor@mynewmarkets.com Columnists Catherine Oak, Bill Schoeffler, Alan Shulman Contributing Writers Dave Coons, Michael Hrabovsky, Bruce Wood

SALES V.P. Sales & Marketing Julie Tinney (800) 897-9965 x148 jtinney@insurancejournal.com West Dena Kaplan (800) 897-9965 x115 dkaplan@insurancejournal.com South Central Mindy Trammell (800) 897-9965 x149 mtrammell@insurancejournal.com Midwest Lauren Knapp (800) 897-9965 x161 lknapp@insurancejournal.com Southeast Howard Simkin (800) 897-9965 x162 hsimkin@insurancejournal.com East Dave Molchan (800) 897-9965 x145 dmolchan@insurancejournal.com New Markets Sales Manager Kristine Honey | khoney@insurancejournal.com Classified Advertising (800) 897-9965 x125 classifieds@insurancejournal.com

MARKETING/NEW MEDIA Marketing Administrator Gayle Wells | gwells@insurancejournal.com Advertising Coordinator Erin Burns | eburns@insurancejournal.com (619) 584-1100 x120 New Media Producer Bobbie Dodge | bdodge@insurancejournal.com Videographer/Editor Matt Tolk | mtolk@insurancejournal.com

DESIGN/WEB Vice President/Design Guy Boccia | gboccia@insurancejournal.com Vice President/Technology Joshua Carlson | jcarlson@insurancejournal.com Design and Marketing Executive Derence Walk | dwalk@insurancejournal.com Art Director Jamie Bethell | jbethell@insurancejournal.com Web Developer Jeff Cardrant | jcardrant@insurancejournal.com Web Developer Chris Thompson | cthompson@insurancejournal.com

IJ ACADEMY OF INSURANCE Director of Education Christopher J. Boggs | cboggs@ijacademy.com Online Training Coordinator Barbara Dooley | bdooley@ijacademy.com

ADMINISTRATION Chairman Mark Wells Chief Executive Officer Mitch Dunford Accounting Manager Megan Sinclair | msinclair@insurancejournal.com

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insurancejournal.com/subscribe Insurance Journal, The National Property/Casualty Magazine (ISSN: 00204714) is published semimonthly by Wells Publishing, Inc., 3570 Camino del Rio North, Suite 200, San Diego, CA 92108-1747. Periodicals Postage Paid at San Diego, CA and at additional mailing offices. SUBSCRIPTION RATES: $7.95 per copy, $12.95 per special issue copy, $195 per year in the U.S., $295 per year all other countries. DISCLAIMER: While the information in this publication is derived from sources believed reliable and is subject to reasonable care in preparation and editing, it is not intended to be legal, accounting, tax, technical or other professional advice. Readers are advised to consult competent professionals for application to their particular situation. Copyright 2012 Wells Publishing, Inc. All Rights Reserved. Content may not be photocopied, reproduced or redistributed without written permission. Insurance Journal is a publication of Wells Publishing, Inc. POSTMASTER: Send change of address form to Insurance Journal, Circulation Department, PO Box 9049, Maple Shade, NJ 08052

6 | INSURANCE JOURNAL-WEST REGION February 20, 2012

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News & Markets U-Haul Parent to Strengthen Loss Reserves on Discontinued Workers’ Comp Business

Utah Offers New Earthquake Hazard Maps Utah is selling new maps that show the shaking intensity of earthquakes for the west half of Salt Lake County. The set of 10 maps also spotlights the risks of landslides, rock falls, floods, radon gas and other hazards in the area. The Utah State Geological Survey is selling a CD for $25 that contains a set of the maps and a 73-page report. State geologists say the set will help guide development as population overtakes the west half of the Salt Lake basin. The maps also spotlight the threat of collapsible or expansive soils, which can wreck buildings. AP

eno, Nev.-based AMERCO (Nasdaq: UHAL) announced earlier this month that following an internal review of its property and casualty subsidiary’s excess workers’ compensation business, Repwest will take a third quarter fiscal 2012 charge to strengthen its loss reserves. The additional reserves relate to excess workers’ compensation policies Repwest either wrote or assumed from other insurance carriers between 1983 and 2003. These policies cover risks totally unrelated to U-Haul’s core moving and storage business and Repwest has not written or assumed business of this nature in nearly a decade, according to a statement from the company. During the quarter Repwest undertook the comprehensive review of this discontinued line of business and found that claims have been developing much more adversely than previously anticipated, the company stated. The company said that total after-tax charge for this reserve strengthening in the third was $31 million. This was a non-cash adjustment and does not necessitate any capital

contributions from AMERCO, and as a result of the charge, Repwest anticipates incurring a net loss after tax of $28 million in the third quarter of fiscal 2012, according to the company. AMERCO is best known through its subsidiary, U-Haul International Inc., a moving and storage operator that supplies products and services, including the famous U-Haul trucks, to help people move and store their goods in the U.S. and Canada.

Colorado Lawmakers Review Spaceflight Liability

Washington Tribe OK’d to Move Out Of Tsunami Zone

olorado lawmakers are trying to promote the space industry by limiting liability for companies that carry passengers. State Sen. Mary Hodge, a Democrat from Brighton, says there are risks with spaceflight. She wants to help a spaceflight hub planned for the Front Range Airport east of Denver. According to the Denver Post, the airport wants to launch jets that would fire rockets at 50,000 feet, giving passengers a suborbital adventure. Under the bill, spaceflight companies could be sued only for the death or injury of passengers in cases of gross negligence or ignoring dangerous conditions.

8 | INSURANCE JOURNAL-WEST REGION February 20, 2012

he U.S. House of Representatives has approved a bill that will allow the Quileute tribe to move its school and other buildings out of a tsunami zone on the Washington coast to higher ground in Olympic National Park. The land transfer bill gives the tribe 785 acres in the park and settles a reservation boundary dispute. In return the tribe assures access to coastal beaches that are reached by trails through tribal lands. The Peninsula Daily News reports there’s similar legislation awaiting action in the U.S. Senate. The tribe needs higher land to put the school, elder and child care centers and the tribal headquarters out of reach of a tsunami. The tribe has been seeking land to move to outside of the tsunami zone for about 50 years.

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Declarations Climate Change “Climate change will have major implications for the insurance industry, yet few insurance companies are identifying their potential exposure and strategies for dealing with it.” — Andrew Logan, insurance program director at Ceres, an investor group that has been active in pushing for stronger climate disclosure by the industry, speaking on California Insurance Commissioner Dave Jones’ announcement that the California Department of Insurance has joined with Washington and New York to require insurers to disclose the effects of climate change on their business.

Big Brother Isn’t Everywhere

Brazilian Blowout

“Government can’t be everywhere.” — Len Welsh, acting chief counsel for California Department of Industrial Relations’ litigations unit, and a former chief of Cal-OSHA from 2003 to 2011, noted that Cal-OSHA has some 240 inspectors to police the state’s estimated 1.3 million businesses.

Workers’ Comp

“California laws protect consumers and workers and give them fair notice about the health risks associated with the products they use.” — California Attorney General Kamala Harris said in announcing a settlement of a lawsuit filed in November that forced labeling changes against the company that makes Brazilian Blowout products. The maker of a popular line of hairstraightening products has agreed to alert consumers that two of its formulations emit formaldehyde gas, a possible carcinogen.

“Coming into this new year, certainly, workers’ compensation is an issue everybody expects to be a top-tier issue for the 2012 legislative session.” — John Norwood, principal of Norwood & Associates, one of California’s best known legislative advocates for the insurance and financial services sectors.

Figures

Million

Is how much preliminary assessments show in damages caused to nine counties by the wind, rain and snow that hit Oregon in mid-January.

2.6

15 That’s the number of Washington counties the U.S. Agriculture Department has designated as primary natural disaster areas due to extreme weather conditions in the first seven months of 2011. Farmers in those areas are eligible to apply for USDA emergency assistance.

Million

In net premiums were written for the year by Mercury General Corp., which reported its fourth quarter and year-end earnings earlier this month. Premiums for both the quarter and the year were up slightly. www.insurancejournal.com

February 20, 2012 INSURANCE JOURNAL-WEST REGION | 9

WEST COVERAGE

Business Moves

ISU Network The San Francisco, Calif.-based ISU Network had expansions in four states, Utah, North Carolina, Maryland and North Dakota. Three Utah agencies have joined ISU Network. ISU Service Insurance Agency in Roosevelt, and ISU Rocky Mountain Insurance Services in Vernal, have joined the ISU network of independent insurance agencies. The agencies remain under Principals Craig and Brian Timothy. ISU GMI in Saint George also has joined the ISU Network. The principals are Bret and Duana Johnson. ISU’s North Carolina additions are: H. B. Cantrell & Co., O’Connor Insurance Agency, Wes Connor Agency, Twin City Insurance Agency and Lipstone Insurance Group. The agencies have long histories in North Carolina with founding dates ranging from 1946 to 2002. Henry Cantrell, and his son, John Cantrell are the principals of ISU H. B. Cantrell & Co. in Charlotte. The principals of ISU O’Connor Insurance Associates of Charlotte are Terrence O’Connor and Michelle O’Connor. Wes Connor is the principal ISU Wes Connor Agency in Charlotte. Lesa Williams is the principal of ISU Twin City Insurance Agency in Newton. 10 | INSURANCE JOURNAL-WEST REGION February 20, 2012

Steven Lipstone and Deborah Lipstone are the principals of ISU Lipstone Insurance Group in Cary. In Maryland, ISU added LB Insurance Services, an independent broker in Prince Frederick, to its network of offices. The firm will primarily provide the business and personal insurance needs of the population of Calvert County. The principals are Lisa Boyce and Linda Boyce. In North Dakota, ISU added ISU Papineau Insurance of Tioga to its network. The principal is David Papineau. The ISU Network is comprised of 140 independently owned and operated offices across the United States. ISU writes over $1 billion in premium. Strategic Insurance Agency Alliance Several agencies from the western region joined Strategic Insurance Agency Alliance in January. January’s new additions pushes SIAA’s number added to 47 for the month. Of January’s signed members, 33 are liberated “captive agents” new to the independent agency system, according to SIAA. January’s new western region members include: • Mega-Low Insurance of West Valley, Utah • Deardon & Associates Insurance of South Jordan, Utah • 1 Stop Shop of Roy, Utah • Thurston Family Insurance of Billings, Mont. • Martin Khalaf Insurance of San Diego, Calif. • Regan Financial Services of Butte, Mont. • Jeffery R. Olin of Westlake Village, Calif. • UME Insurance Agency of El Monte, Calif. • Erik Hansen Insurance Agency of Portland, Ore. Since its inception in 1995, SIAA has

signed over 4,000 members. The Buckner Co., Leonardson Insurance Salt Lake City, Utah-based The Buckner Co. is expanding operations Idaho with the acquisition of Leonardson Insurance in Rexburg. The Buckner Co.’s Rexburg office, at 1109 Summers Drive, will consist of two account executives, Jason Nielson and Jason Littlefield, and the support staff is made up of Stacey Farrow, account Manager, Barbara Brown, assistant account manager, and Vickie Muir, assistant account manager. The Buckner Co. now occupies four offices in two states. The Buckner Co. services a variety of industries, including construction, and agriculture, as well as personal homeowner and auto insurance, employee benefits, trucking and transportation insurance, and surety bonding. Kulchin Ross Insurance Services William Kulchin and Derek Ross have formed Kulchin Ross Insurance Services Inc., a new retail agency based in Tarzana, Calif., that provides all lines of insurance coverage across the United States. The agency comes with the existing customer base Kulchin and Ross owned at their previous firm, Woodland Hills, Calif.-based C.M. Meiers. Kulchin Ross Insurance Services has partnered with the ISU network of insurance agencies. Agency president Derek Ross is a past president of the Independent Brokers and Agents of the San Fernando Valley, and is media steering chairman of IBA West. CEO Kulchin has background in creating and managing insurance programs. Kulchin Ross is a “paperless agency,” and it has a proprietary program for clients that release a percentage of agency commissions back to local non-profit organizations. www.insurancejournal.com

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People Robert Mahl

Bernie Tillotson

Woodland Hills, Calif.-based Poms & Associates Insurance Brokers Inc. has named Robert Mahl senior vice president of its property/casualty group in the firm’s Woodland Hills office. Mahl was previously vice president of property/casualty insurance and apparel practice Leader for USI Insurance Services in Southern California. Poms is a brokerage firm focusing on commercial insurance, employee benefits, corporate wellness, personal lines, and risk management and risk control. San Jose, Calif.-based Thoits Insurance Service Inc. has named Bernie Tillotson senior vice president of employee benefits. Tillotson has more than three decades of benefits and human resources expertise, with a career that began in human resources for corporations such as Ross Stores and Orchard Supply Hardware. He specializes in self-funded health and welfare plans, including alternative funding arrangements. Tillotson previously held senior management positions Arthur J. Gallagher, Andreini & Company and Alliant Resources Group. United Fire & Casualty Co. has appointed Ed Sullivan West Coast regional manager for its office in Rocklin, Calif. Sullivan will be responsible for the overall performance of the office. He has served in various capacities within the insurance industry, including past management positions in underwriting and marketing. Cedar Rapids, Iowa-based United Fire is engaged in writing property and casualty insurance and life insurance and selling annuities. The company’s net premiums written totaled $453.4 million for the nine-month period ended Sept. 30, 2011, and its market capitalization was $451.1 million at Sept. 30, 2011.

12 | INSURANCE JOURNAL-WEST REGION February 20, 2012

Professional Program Insurance Brokerage of Novato, Calif. has hired Jay Striniste in the underwriting department. Striniste will be a senior underwriter focusing on the growth and development of program business with a specialty in allied health, directors and officers and employment practices liability insurance. He has 16 years of experience within the underwriting and claims disciplines. Striniste was most recently at Hiscox USA, where he had underwriting and business development responsibilities. Before that he worked for CNA. He started with American International Group. He also spent time with Fireman’s Fund and Travelers Insurance as a litigation manager. Del Mar, Calif.-based Champion Risk & Insurance Services L.P., an affiliate of Wood, Gutmann & Bogart Insurance Brokers, has hired Frank McDermott as a producer. McDermott, a licensed CPA, who previously owned his own accounting firm, focuses on complex workers’ compensation risks as well as the construction industry. Prior to Champion Risk, McDermott was a producer at Patriot Risk & Insurance Services. Champion specializes in all lines of personal insurance, business insurance, life and health insurance and employee benefits. Heffernan Financial Services, a division of Heffernan Insurance Brokers, has promoted Rebecca Tapia to education and communication specialist. In Tapia’s new role, she will be working with retirement plan sponsors conducting client education and enrollment meetings, as well as meeting one-on-one with individual client/employee participants. Heffernan advises individuals, corporations and endowments.

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News & Markets California Independent Contractor Law May Be Liability for Agents, Brokers By Don Jergler

new California labor law designed to punish employers for misclassifying workers has broad legal language that can possibly impact insurance agents and brokers who knowingly advise clients on employee classifications to the tune of thousands of dollars per misclassified worker. The law now in effect was signed on Oct. 9, 2011 by Gov. Jerry Brown. The new legislation that took effect in January added monetary fines and expanded the state’s labor code. It was created by the passage of Senate Bill 459, authored by state Senate Majority Leader Ellen M. Corbett, D-San Leandro. The law, found under labor code 2763, authorizes the California Labor and Workforce Development Agency to assess civil penalties on, and to take disciplinary actions against, persons or employers violating the new prohibitions. As chaptered, the bill provides “that

14 | INSURANCE JOURNAL-WEST REGION February 20, 2012

a person who, for money or other valuable consideration, knowingly advises an employer to treat an individual as an independent contractor to avoid employee status for the individual shall be jointly and severally liable with the employer if the individual is not found to be an independent contractor.” Depending on how it’s interpreted, that “person” may extend to anyone who gives paid advice to employers on employee classifications. The law excludes employees who offer this advice or attorneys who give this advice in the course of practicing law. “I think this new law is unique in that it’s found in the labor code, but it applies to other people, rather than just employers,” said labor attorney Spencer C. Skeen, with Fisher & Phillips LLP in San Diego. “This law creates liability to people who advise employers regarding classification of workers.” He added, “Advisors would not be looking for this law.” Skeen is warning insurance clients and others in the industry to consider

adopting best practices when advising their clients on issues like workers’ compensation, and employment practices liability insurance. Jim Fessenden, also with Fisher & Phillips, said, “as far as we know this the first time the labor code has imposed penalties on people other than employers.” Heavy Fines A number of other states have enacted legislation that imposes fines for misclassification of workers, though they often tend to have limited the scope of the statutes, and typically concern the construction or landscaping industry, Skeen said. California’s law is broader, and could be wide open to interpretation, he added. “California’s is the only statute that imposes liability on those who advise employers for a fee,” Skeen said. The law makes an adviser jointly and severally liable up to 100 percent. continued on page 16

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News & Markets Independent Contractor Law, continued from page 14

That means advisors can be fined indepen“The law says you have to dently from the employer, and they are liaknowingly advise on the ble up to 100 percent of any fines imposed. misclassification,” she said, Civil penalties for employers range from adding, “But ignorance of $5,000 to $15,000 per misclassified employee, the law is not sufficient and $10,000 to $25,000 per employee when to defeat a finding that it “a pattern and practice” of misclassification may have been willful.” is proven. In other words, if it can be State Labor Commissioner Julie A. Su shown a broker or agent had told Insurance Journal that the new law is any knowledge of the misclassifigeared to go after workers’ comp fraud and cation, they are liable and can be fined just employers who avoid wage obligations and as much as the employer doing the misclastax obligations “by calling someone who’s sifying. actually an employee a There are those ‘This law creates liabilcontractor.” who argue the ity to people who advise And Su said that if law won’t likely an insurance agent or employers regarding clas- affect agents and broker gives an employer brokers, as they sification of workers.’ advice on classifying are not qualified employees with the knowledge that the to make the call on employee classificaemployer may be misclassifying those tions, and that doing so would overstep the employees, then the broker or agent will be bounds of what an insurance agent does. held liable. “I do not view this provision as being

likely to impose significant liabilities upon broker-agents for at least two reasons,” said Steve Young, senior vice president of Insurance Brokers & Agents of West, which advocates on behalf of independent insurance brokers and agents in California. First, Young said, brokers and agents do not generally advise employers on how workers should be classified. And even if they were to offer such advice, liability could be imposed only upon evidence that the broker or agent had knowingly advised the employer to improperly classify a worker as an independent contractor, he added. Second, the bill requires the person providing the advice to be paid for providing it, Young noted. “It seems to me there is a potentially significant ambiguity regarding this require-

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News & Markets Independent Contractor Law, continued from page 16

ment,” he said. “No broker-agent is going sifying employees, according to Skeen. to charge a fee or receive any other consid“Then arguably the broker has received eration for providing advice on matters of compensation for telling you how to fill labor law. He or she would receive compenout the form,” he said, adding that brokers sation for the sale of insurance, but not for and agents would be advised to look at best providing advice on practices and even consider ‘The law says you have drawing up a form to have labor law.” Depending on to knowingly advise on their clients sign stating how the law’s lanthe agent had no hand in the misclassification. guage is construed, a employee classification. But ignorance of the broker-agent might “I’m not saying that it law is not sufficient to will” affect agents and never receive “money or other valuable defeat a finding that it brokers, Skeen added. “But consideration” for may have been willful.’ I’m sure saying ‘alert, alert, providing such alert.’ If you don’t think the advice, Young added. people who wrote this legislation are more But Skeen the labor attorney believes that concerned about misclassification on work“creative plaintiff lawyers may argue that ers’ comp and EPLI, you’re sorely mistaken. liability may be imposed.” This is definitely one of the targets on the Agents may be considered to have been bill, is to prevent misclassification on polipaid when placing EPLI or workers’ comp cies.” insurance when they instruct the employer Skeen added, “My insurance clients often how to fill out state paperwork when classit with the client and they fill out the

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(paperwork stating how many employees a company has), and it’s often filled out in the agent’s handwriting.” Joint and Several Additionally, the term “joint and several” in the law’s language, meaning together and apart, translates to this, Skeen said: agents and brokers can be the last man standing in a bankruptcy. If the agent or broker is the only viable entity left following the bankruptcy of an employer found to have misclassified his or her employees, Skeen added, “the broker could be easily liable for the fine. It basically gives the plaintive and the workforce agency another potential pocket from which to collect these fines.” And there’s yet another danger the law poses to anyone found guilty of violating it. If an employer, or advisor, is found guilty of misclassifying workers, they will be required to post a public notice on their website stating that they violated the law. “We recognize the growing problem that employee misclassification is contributing to the underground economy, and this is a strong tool to remedy that,” Su said of the new law. Insurance agent Derek Ross, president of ISU-Kulchin Ross Insurance Services Inc. in Tarzana, Calif., which writes a large amount of workers’ comp insurance, was only made aware of the new law when a reporter called him for his thoughts on how this would impact his business. “I’m not aware of that change actually. It’s very concerning,” he said, deferring offering any further thoughts until he could examine the potential impacts of the law further. “We are looking at it now. Clearly this is something that we all need to be looking at.” It is something to think about, Skeen said, adding that the trouble could start “when a broker asks how many employees do you have? The broker, I think, needs to steer clear of analyzing that issue. Best practices may require the broker to issue a letter or a memo or some sort of document that says: ‘I’m not participating in any classification of workers. The determination is made by you.’” www.insurancejournal.com

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News & Markets Independent Agency System Marked by Changes and Challenges By Stephanie K. Jones

obust merger and acquisition activity, carrier relocations and an aging workforce are influencing independent insurance agencies in ways an agency owner might not have experienced decades ago. But Bob Bramlett, president and CEO of The Bramlett Agency in Ardmore, Okla., and chairman-elect of the Independent Insurance Agents and Brokers of America (IIABA or the Big “I”), says one thing hasn’t changed — that the insurance business is a great one to be in. After graduating ‘I used to brag to people college in … that we didn’t have 1975, Bramlett anybody in this agency started working at the over 50 years old.’ agency his mother and father founded in 1948. He bought the agency in 1982. The Bramlett Agency today has 16 employees and in addition to property/casualty lines of insurance, derives much of its revenue from benefits. As he sees it, one of the biggest challenges faced by insurance agents today is that their insurance carriers are physically relocating away from them. “By that I mean, we used to have virtually all our property/casualty companies located in Oklahoma City or Tulsa or Dallas,” Bramlett says. “And today, you just don’t find very many On the there or even in Kansas City anymore. Web A lot of times we’re dealing with Listen to a pair people in Chicago or all the way back of podcast interviews with Bob to Hartford.” Bramlett on He adds that while it’s not the case Insurance Journal TV at http://www. for every carrier, “it is a challenge in insurancejournal. that you can’t sit across the desk from tv/videos/6451/ and http://www. an underwriter near as much as you insurancejournal. could back in the day when I started.” tv/videos/6455/. 20 | INSURANCE JOURNAL-WEST REGION February 20, 2012

Another change he’s seen over the years is that there aren’t as many mid-size agencies as there used to be. “There’s really becoming a division in the independent agency system,” Bramlett says. “You don’t see a lot of, say, the 10to 20-employee agencies. You see a lot of startups that are smaller, less than five employees. And then you see a lot of, say, 30 to four- or five-hundred employee agencies. But you just don’t really see that many my-size agencies anymore. Consequently, many of us that size have looked into doing the cluster model, which is what we did about 15, 16 years ago.” The M&A activity that has Bob Bramlett decreased the number of smallto-midsize agencies has created a problem of sorts for the associations seems like only a couple years ago, but that support independent insurance it’s obviously not, that we didn’t have agencies. For instance, Bramlett notes, anybody in this agency over 50 years in the 1980s the Big “I” had 34,000 memold.” Now, he says, “maybe a third of ber agencies. Today, there are around our people are under 50 years old.” 22,000 member agencies. The reduction Bramlett notes that “10,000 people has resulted in a loss of income for the a day are retiring from this business, association, he says. and will between 2008 and 2026.” It’s “It’s a real challenge in the associaimperative, then, that the industry tion business,” Bramlett says. “Because finds “the bodies to fill our spots,” he many of these smaller agencies that get says. acquired by large agencies, we lose the It’s important to “make people dues from that. Let’s say a 10- or 12- or understand that insurance is not just 15-person agency gets bought by a 75selling insurance,” he says. “I mean, person agency. Well, the way the dues we’ve got lawyers. We’ve got accounstructure is in the national association tants. We’ve got actuaries. We’ve got ... the state is only charged for up to safety people. … There’s all kinds of 22 employees. ... It doesn’t take very jobs within this business, and that’s the many agencies to be bought before the story we have to tell.” dues, both at the state level and at the The IIABA, with its Invest program, national level, really get hit hard.” is spreading the word in high schools Another big change, and one that and colleges around the country, he Bramlett finds worrisome, is the aging says. “We’ve got a great story to tell, of the insurance industry workforce. and we have just got to do a better job “I used to brag to people, and it of telling it.” www.insurancejournal.com

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News & Markets Former Cal-OSHA Chief Defends Safety Program

By Don Jergler

he former chief of the California Occupational Safety and Health Division defended its Injury’s Illness Prevention Program following a study by think tank RAND Corp. showing the occupational safety program that requires California businesses to eliminate workplace hazards only works when it’s adequately enforced. The study by Santa Monica, Calif.based RAND, which says this is the first study to be conducted on the program, shows the program reduces workplace injuries, but only at businesses that had been cited for not addressing the regulation’s more-specific safety mandates. The program is designed to save countless dollars in workplace injury payouts. The California Injury and Illness Prevention Program, or CIIPP, which began in 1991, mandates certain procedures for employers, including communicating to employees about risks, carrying out workplace surveys, abating hazards, safety training and investigating causes of injuries. It also requires employers to have a written document concerning the program. “We found the safety effects to 22 | INSURANCE JOURNAL-WEST REGION February 20, 2012

be real, but not very large,” John Mendeloff, lead author of the study and a senior public policy researcher for RAND, said. “We think that the most important reason for the limited impact of this program is that inspectors often did not go beyond a review of the employer’s written document.” Len Welsh, acting chief counsel for California Department of Industrial Relations’ litigations unit, and a former chief of Cal-OSHA from 2003 to 2011, said he views the study as a positive endorsement of CIIPP and he defended Cal-OSHA’s inspections. DIR oversees Cal-OSHA. “You can’t draw from a study like that the inspector wasn’t inspecting enough,” Welsh told the Insurance Journal. He added that to determine the quality and thoroughness of individual inspections would require looking at each inspection file. By DIR estimates Cal-OSHA has roughly 240 inspectors, but California has 1.3 million businesses, according to the Employment Development Department “People have this idea that OSHA can go inspect every workplace in the world and it’s never going to happen,” Welsh said. Welsh said a more “holistic approach” is being undertaken by OSHA in the battle to promote safety in the workplace, including inspections, education, consultation services, and Internet and media campaigns. “We do a lot of triage when we go to workplaces,” he said. “We have to ask ourselves, ‘Should we be spending halfa-day there to issue one or two tickets, or should be moving in on and trying to nail somebody who is in the underground economy?’” By targeting the worst actors, or “the underground economy,” the ones who

Cal-OSHA can best use its resources, he said, adding, “government can’t be everywhere.” What Welsh took away from the RAND study is that “if you really implement an IIPP, you will see a benefit, but if you get it and stick it on a shelf, it’s not going to do anything for you. To me the news is pretty much all good.” But, he added, “If the proposition is that the inspectors should dig deeper when they see no paper … I would say that’s a resource question that needs to be studied.” The RAND study shows that when Cal-OSHA inspectors did investigate further and found failures to comply with provisions that specific businesses must train workers, identify and abate hazards, and investigate injury causes, the average injury rates at targeted businesses declined more than 20 percent in the following two years. However, these provisions were cited in only about 5 percent of CalOSHA inspections, the study shows. In the other 20 percent of inspections where a violation of the rule was cited, it was only for the section requiring the employer have a written program, which carries a fine of $150. The 20 percent reduction in injuries following citations for the specific CIIPP requirements translates to about one injury per year at a workplace with 100 employees, and most estimates of the value of preventing a work injury are in the range of $15,000 to $50,000, according to RAND. The study was sponsored by the California Commission for Health, Safety and Workers’ Compensation, a public body with management, labor and public representatives located in the state’s Department of Industrial Relations. www.insurancejournal.com

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News & Markets Long-time California Insurance Lobbyist Looks to 2012 Legislation Watchdog. The group filed the Insurance Rate ohn Norwood is one of California’s Public Justification and Accountability best known legislative advocates for Act in November, and must get 500,000 the insurance and financial services signatures to qualify it for the Nov. 6, sectors. 2012 ballot. If the group gets the signaNorwood, principal of Norwood & tures, the health insurance rate initiaAssociates, has garnered recognition tive could be placed on the same ballot for his political work dating back to as the 2012 Auto Insurance Discount the early 1980s, including political batAct, which has qualified for the ballot. tles to amend the state’s insurance rate The stated purpose of the Consumer regulations, and reforming insurance Watchdog initiative is to “ensure fair agents and brokers licensing laws. and transparent rates for health, home His client list is lengthy. Among his and auto insurance.” long list of clients, Norwood repreIf it gets enough signatures, it would sents IBA West, California Wholesalers compete with the auto insurance disAssociation, Liberty Mutual Group, count act, which is being sponsored by Pacific Life Insurance Co., The Surplus the American Agents Alliance, which Line Association of California and says the initiative’s new law “will allow Zenith Insurance Co. consumers to receive a discount for Norwood spoke to the Insurance their years of continuous automobile Journal about legislation and regulation, coverage regardless of the company including a proposal by a consumer where they seek insurance.” advocacy group that would establish “The Consumer Watchdog’s health prior approval for healthcare insurance rate regulation initiative is out there and would make major changes to auto and being circulated, but it hasn’t insurance and homeowners insurance qualified yet, and it’s not clear that it in California. will qualify, but if it does, I think it’s going to be a very tough fight for the Consumer industry,” Norwood ‘Ever since the 2002- said. “This reminds Watchdog It looks like 2003 workers’ com- me of Proposition 103 there could be two pensation reforms, in 1988, when consumcompeting initiaers were pretty much labor has been con- fed up with the high tives on California’s cerned that they November ballot cost of auto insurance. that will impact really got the short Health care costs a Proposition 103. lot of money, and end of the stick.’ One offers portable whether you’re paying persistency. And the other is backed for it personally or businesses are payby a consumer group and addresses ing for it, it is a real concern. It’s also a health care, but it also addresses auto top item in national debates, and there insurance. seems to be a common sense that the The consumer group working healthcare system in the nation is to put an initiative on the ballot is broken.” Santa Monica, Calif.-based Consumer But only one initiative can be

By Don Jergler

24 | INSURANCE JOURNAL-WEST REGION February 20, 2012

John Norwood

successful. Norwood said he believes “it was a very good trick of Consumer Watchdog to take advantage of the situation, where if two initiatives are on the same ballot, on the same topic, the one with the most votes wins. So they’ve attached the provisions that would cancel out the persistency initiative, by prohibiting the use of persistency as a rating factor.” He added, “So this is going to be a real dogfight, I think, if both initiatives qualify, in terms of the advertising campaigns and that type of thing.” Workers’ Comp Norwood also said he’s keeping an eye on the all-important workers’ compensation issue, and he thinks health insurance exchanges will continue to dominate discussions. In fact, Norwood forecast that 2012 will rank as an important one when it comes to workers’ comp reform, and the year will bring even more dramatic change, or at least debates, on health insurance. “Coming into this new year, cercontinued on page 26 www.insurancejournal.com

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News & Markets Norwood, continued from page 24

tainly, workers’ compensation is an issue everybody expects to be a top-tier issue for the 2012 legislative session,” Norwood said. “(California Insurance Commissioner Dave Jones) has already been involved somewhat in workers’ compensation, with the change

‘So this is going to be a real dogfight, I think, if both initiatives qualify, in terms of the advertising campaigns and that type of thing.’ of the way that Workers’ Compensation Rating Bureau does its annual filing, so I think he’s getting comfortable with that issue. So we’re certainly going to see his interest in that area, I think.” Jones had several pieces of workers’ comp legislation he backed get to the governor and get signed, on issues ranging from

suitability for annuities to retained asset accounts to collateral agreements in workers’ compensation. In fact, California Gov. Jerry Brown signed nine bills sponsored by Jones this legislative year, giving Jones a perfect record on bills that reached Brown’s desk. Norwood also expects workers’ compensation will be a major issue in the 2012 legislature. “Ever since the 2002-2003 workers’ compensation reforms, labor has been concerned that they really got the short end of the stick,” Norwood said. “There have been some recent studies that (permanent disability) benefits, as a result of that legislation, were cut over 50 percent, maybe as high as 70 percent. And that’s been a top priority for labor, was to change the PD rates.” He added, “I think we’re going to see a number of individual bills on workers’ comp, and ultimately there’ll be one or two

major reform bills that will trade reforms for benefits. So we expect that.” Health Insurance Health insurance, of course, is another top item on Norwood’s radar screen. “Health insurance is one we really have our eye on this year,” Norwood said. “More and more property/casualty agents, a significant portion of their income is coming from employee benefits, including health insurance. Most of our members are telling us now, 25 to 40 percent of their income is coming from employee benefits.” Chief among health insurance issues on the horizon in California is the Health Benefits Exchange Board, which has monthly meetings, and that’s something of which Norwood his colleagues are a regular part. “We’re looking at how they’re trying to set up and establish that exchange,” he said. “And some of what the exchange is doing will affect legislation, because there’s certain current statutes and things that have to be changed to comply or to parallel what’s going on with the exchange in federal law. So we’re paying close attention to that, because it has the potential of affecting what role agents and brokers play in healthcare delivery from now on and what their compensation could be.”

On The Web See related Norwood videos at www. insurancejournal.tv. Listen to the full podcast at http://www.insurancejournal.tv/ videos/6441/. 26 | INSURANCE JOURNAL-WEST REGION February 20, 2012

www.insurancejournal.com

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News & Markets Out-of-Trust C.M. Meiers Brokerage in California Fetches $1.375 Million at Auction By Don Jergler

oodland Hills, Calif.-based C.M. Meiers Co. Inc. was auctioned earlier this month at a U.S. bankruptcy court near Los Angeles, with three competing bidders pushing the sales price to $1.375 million for the troubled brokerage’s assets and assumption of its liabilities, including between $400,000 to $1 million required to put the 76-year old firm back in trust. The United States Bankruptcy Court Central District of California San Fernando Valley Division courtroom was packed with nearly 50 people, many of those were formerly producers at the company and their attorneys, who argued against transferring their books of business and client data to any winning bidder. Attorneys for some of C.M. Meiers’ clientele were also on hand representing “highly confidential” clients arguing to ensure the security of their clients’ names and information. The brokerage was sold by appointed trustee Bradley D. Sharp. Following a Chapter 11 bankruptcy filed on Jan. 9, the brokerage was placed in the hands of Sharp by the court. The winning bidder was Woodland Hills-based Liberty Co., which also has offices in San Jose, Salinas and Irvine. The 25-year-old brokerage, which works with providers such as Mercury, Safeco, Hartford and Fireman’s Fund, has nearly $50 million in premium, and is a member of the Atlantic Pacific Insurance Brokers affiliation of Independent Insurance Agencies, according to its website. Liberty owners and attorneys hurried into a private conference room to hash out the details of the purchase and were not available to comment following the auction.

28 | INSURANCE JOURNAL-WEST REGION February 20, 2012

Since that time, the new owners have not returned calls or emails for comment. Liberty beat out two other firms. Woodland Hills-based Affinity was the stalking horse bidder. Then there was Woodland Hillsbased Capitol Financial Services, owned by Gensar Saleigh, who sued C.M. Meiers and was awarded nearly $400,000 in damages plus attorneys’ fees by a commercial arbitration tribunal over a breach of contract suit brought by Capital. Sharp had said the suit was the final blow that brought C.M. Meiers to its financial knees, but others at the proceeding argued the brokerage was not well managed. That it was out of trust was chief among the evidence they cited in support of their allegations. The minimum bid was set at $750,000, including the assumption of liabilities and replenishing the trust. After haggling over who owns the brokerage’s book of business, producers or the brokerage, the bidding started with Affinity, which bowed out early following its opening bid of $750,000. Saleigh and the attorney for Liberty, David Ruben, with Ruben & Sjolaner in Los Angeles, countered each other’s bids up to $1.3 million, which is where Saleigh bowed out. Asked after the auction why he stopped bidding, the 53-year insurance industry veteran said that after adding the up to $1 million required to put the firm back in trust and the purchase price, “you’re talking about $2.375 million.”

“How much is it worth?” the 75-year old Saleigh added, noting that most of the producers would likely keep their books of business. “At this age, you can’t afford to gamble.” However a former producer at the proceeding, Bill Kulchin, who left the firm to form his own brokerage with another former C.M. Meiers producer, Derek Ross, believes the brokerage is easily worth more than what was bid, despite it being out of trust. “You would expect to pay $3 to $4 million for that firm,” he said, adding that the book of business the brokerage owns even after producers take away their books is impressive, and he noted that $800,000 in contingency money is due the brokerage in the next few months. “They got a deal.” The troubled brokerage has been up for sale for some time, but its worsening financial condition has sped up the process, Sharp said. The brokerage had 50 employees before the financial troubles set in. Sharp didn’t say how many work there now, only that “it’s less than 50.” Sharp sold the right, title and interest to the assets of the brokerage, which includes accounts receivable, the brokerage’s book of business, its continued on page 30 www.insurancejournal.com

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News & Markets C.M. Meiers, continued from page 28

name, phone numbers and other intangibles, as well as tangibles like computers and office furniture. As for certificates of authority for the books of business, Sharp said, “The winning buyer will have to deal with the carriers.” Executives at Woodland Hills-based Affinity were not at the auction. On its website, Affinity states it offers a variety of services, including commercial property and auto enhancements, healthcare programs, and workers’ compensation enhancements. According to court documents, and competing bidders, Affinity is owned by Jason Adelman, the brother-in-law of Herb and Eric Rothman, the father and son owners of C.M. Meiers. At one point following financial collapse of C.M. Meiers, Affinity managed the brokerage for a week, Affinity attorney Diane Stanfield, with Alston & Bird LLP in Los Angeles, said just prior to her opening bid. She said that if Affinity didn’t help steer

the company through hard times, “there would be nothing to buy, there would be nothing left to bid on.” She added, “Affinity has acted in good faith from start to finish.” Saleigh’s attorney, Victor Sahn, with Los Angeles-based firm SulmeyerKupetz, started his client’s bid by referring to Stanfield’s opening statements and defense of Affinity,

‘You would expect to pay $3 to $4 million for that firm. They got a deal.’ which Sahn said, “none of which I agree with.” Sahn has publicly and in court documents raised concern about the brother-in-law of C.M. Meiers’ owners attempting to purchase the brokerage, and Herb and Eric Rothman’s possible return in some capacity to the entity that went out of trust with them at the helm.

30 | INSURANCE JOURNAL-WEST REGION February 20, 2012

”Herb and Eric are going to work for them, that’s what we presume, and they are the ones who brought us $400,000 to $1 million out of trust,” Sahn said. The lead up to the auction was a series of arguments from attorneys representing C.M. Meiers clients, former producers and other creditors. Sharp opened the proceedings stating that he and his attorneys had been in extensive talks with all parties to resolve the data transfer issue. “We can’t resolve it the way they want to resolve it,” Sharp told Federal Bankruptcy Court Judge Maureen Tighe, who presided over the auction. Several parties want clientele’s data deleted from C.M. Meiers databases, computers and backup systems. C.M. Meiers clients want data erased to protect their privacy, and former producers of the brokerage asked that the data be deleted or returned to them because they believe it’s their property. However, that data is tied with accounting data, which cannot be deleted, Sharp said. As a solution, Sharp agreed to collect and compartmentalize all data not sold, and keep hardcopies of all data that must be maintained for a period of time in a separate room. Attorneys for clients and former producers argued that no data should be made available to any buyer, but Tighe ruled that state law and a confidentiality agreement the winning bidder is subject to was enough to go forward with the auction. The matter of which clients belong to whom can be sorted out by Sharp and attorneys for the former producers following the auction, and rulings on those matters can be made later, Tighe ruled. Sharp said the books will be looked at on a “contract by contract basis” to determine which books of business belong to whom. “I’m only authorizing the sale of what the estate owns,” Tighe said, noting that following the auction that books of business later determined to be owned by former producers will not have been part of the sale. www.insurancejournal.com

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News & Markets Washington Senate Passes $100 Annual Electric Car Fee

Grade Insurance Commissioner Dave Jones

he Washington state Senate has passed a bill to charge electric car owners a $100 annual fee to compensate for the lack of gas taxes they pay. Sen. Mary Margaret Haugen, the Camano Island Democrat who sponsored the bill, says while electric cars are good for the environment, they put the same wear and tear on the state’s roads that gas vehicles do. The same bill passed in the Senate last year but failed in the House. Washington’s gas tax stands at 37.5

“They put the same wear and tear on the state’s roads that gas vehicles do.”

cents per gallon, and is the state’s largest source of transportation dollars. The bill does not apply to hybrid vehicles or to those that don’t exceed 35 mph. The bill passed on a 31-16 vote and goes next to the House. Copyright 2011 Associated Press. All rights reserved.

32 | INSURANCE JOURNAL-WEST REGION February 20, 2012

nsurance Commissioner Dave Jones marked his first full year in office last month by looking back on his and the California Department of Insurance’s accomplishments during 2011. Insurance Journal wants to know from those in the industry: Is Jones an effective insurance commissioner for both the public and the industry? Here’s your chance to answer and make yourself heard.

On The Web Go online and take Insurance Journal’s poll on Jones, and help us create an industry report card for Jones and his staff. http:// www.insurancejournal.com/news/ west/2012/02/14/235366.htm

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...ALL OF YOU! Kudos to the Winners of the 2011 Recall & Readership Study! The top scoring ads were Applied Underwriters, Texas Mutual, Golden Bear, Monarch E&S and Travelers. Third party research ďŹ rm Signet Research, Inc. conducted our print ad study via an online survey where readers of the print magazine were asked questions to determine scores based on a variety of factors, including those who recalled seeing and reading the advertisement. All full and Â˝ page advertisements in the Nov. 7, 2011 issue of Insurance Journal were studied as a free

service, and advertisers received a report with all scores and verbatim comments from readers. These scores and comments help our advertisers gear their messages to better serve readers. Insurance Journal would like to take a moment to thank all the advertisers who participated in the study and our readers who were so generous with their time and feedback. Our next issue available for study will be Nov. 5, 2012, which closes on Oct. 19.

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News & Markets Lawsuit Seeks to Block Google’s Privacy Changes

consumer watchdog group is suing complaints that the company had the Federal Trade Commission in an improperly exposed users’ email conattempt to prevent Google from making tacts in a now-defunct service called sweeping changes to its privacy policies Buzz. next month. A lawsuit filed by EPIC mainThe planned revisions would enable tains the agreement gives FTC the Google Inc. to bundle the personal informapower to stop Google from making tion gathered by its Internet search engine the planned privacy change. The and other services, such as Gmail, YouTube complaint also is seeking an order from a and Plus, so the company can gain a better Washington federal court to block Google’s understanding of its users and potentially policy changes from taking effect March 1. sell more advertisEuropean regulators already have ‘We take privacy asked Google to delay the policy ing. Google has depicted the switch very seriously.’ changes as an improvement Among other things, EPIC alleges that will make its privacy policies easier to Google’s new privacy guidelines require understand and help deliver more helpful users’ consent. The group also alleges Google information to users. hasn’t thoroughly explained the motives for But the Electronic Privacy Information the changes, making it an “unfair and decepCenter contends Google’s new policies tive business practice.” would violate restrictions imposed in an In a statement, Google said it has gone to agreement reached with the FTC last year. great lengths to explain the changes to users Google submitted to the rules to resolve since announcing the planned switch two

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weeks ago. The Mountain View, Calif., company previously has said it explained the privacy revisions to the FTC. “We take privacy very seriously,” Google said. “We’re happy to engage in constructive conversations about our updated privacy policy, but EPIC is wrong on the facts and the law.” FTC spokeswoman Claudia Bourne Farrell said the agency “takes compliance with our consent orders very seriously and always looks carefully at any evidence that they are being violated.” Copyright 2011 Associated Press. All rights reserved.

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Minding Your Business Agency Compensation: A General Guideline With Common Sense P ersonnel expenses remain the largest expense for any independent insurance agency today. Typically, personnel expenses account for about 50 percent to 70 percent of revenue. Therefore, smart agency owners should think through the agency’s compensation issues ahead of time. It is a good idea to have a plan in place to handle new positions and areas of shortage as they arise.

The First Basic Rule There are some basic rules that need to be factored into all compensation decisions. First, your compensation plans should be based on who is doing the work. For example, some business owners get into a situation where they keep unproductive employees, who get a raise each year because everyone gets one. After a few years, that unproductive employee is making way more than he or she should. The goal is to reward based on

individual efforts versus treating all employees the same.

Pay for Improvements A second rule to consider is to not give salary raises, but instead pay productivity bonuses. This approach makes even more sense in today’s weak economy. Keep everyone’s salary as the baseline and offer incentives or a bonus if employees take on additional work, increase sales or otherwise improve productivity. Offer an incentive plan for CSRs for their new business efforts, especially cross-selling existing accounts, such as a commission on new accounts, first

General Tips for Compensation

e creative with compensation and perquisites. Remember, most people are not motivated by additional money. Respect, recognition, challenge and nonmonetary benefits mean more to most people than a few dollars for a new sale. Some other basic rules to consider are: 1. Establish criteria for judging good performance for each position. When exceeded, they should be eligible for a bonus pool. 2. Have incentives for going beyond the job description. 3. Have non-monetary incentives/bonuses, such as: • Day off with pay • Tickets to sports, music or cultural events • Recognition: advertisement in the local newspaper, thanking employees for their contributions or plaque in the office • Donation in an employee’s name to the charity of his or her choice • Pay for tutoring for the employee’s child, or daycare for a month • Have the employee’s car detailed during work • Pay for the employee’s house to be cleaned • Special parking spot at work for employee of the month • Pay for an evening out for the employee and his or her spouse • Limo picks up employee at work to go shopping for the day www.insurancejournal.com

By Catherine Oak

& Bill Schoeffler

year only (10 percent to 20 percent range), or a flat dollar amount per policy written on new business (i.e., personal lines, $15 to $25, or $50 for a package policy; and commercial lines, $25 to $100 per policy depending on size). New business incentives for the CSR should be out of the producer’s portion. Then at renewal, the producer gets their entire share. Consider a compensation plan where CSRs’ salaries are based on a percentage of the work they handle, versus a salary. CSRs then may be willing to accept more work and be more efficient, if their efforts are directly rewarded. Generally, this concept does not match up with many CSRs, but it might be worth finding the CSR personality that finds this approach appealing. Redefine the Role It is all too common that there are excellent CSRs capable of doing everything and mediocre producers that are overcompensated for their sales effort. continued on page N2 February 20, 2012 INSURANCE JOURNAL-NATIONAL REGION | N1

IDEA EXCHANGE

Minding Your Business Agency Compensation, continued from page N1

A great approach is to create the account executive (AE) position that fits well with both types of people. It is a producer role without the need for new sales. The account executive position can be a promotion for CSR/account managers. The role is to be the producer on the account and not be a new business door opener. It is also

a more accurate description of those producers who maybe good with existing accounts, but poor with new sales. AEs keep the business on the books for the owners or key producers who generate the new business (the “hunters”), and then those producers will have more free time to write more new business!

The compensation for the AE role can either be a fixed dollar amount or a percentage of the book handled. They should receive a certain amount of CSR support, which would vary based on the size of the book they handle, the complexity of the accounts and the type of accounts that they handle. Owner Compensation When there is more than one owner, the owner compensation plan is the long-term pathway to the relationship between the owners. In most cases, what does not work is equal compensation. At some point, resentment will occur from one owner toward another. It is human nature. We go back to the first basic rule: compensation plans should be based on who is doing the work. This only works if the salesoriented owner (the “hunter”) respects the administrative work performed by the owner with very little new sales (the “farmer”). Credit needs to be rewarded to keeping the operation going. We recommend a Compensation three-part approach: plans should be • First, pay the based on who is owner for a role as a producer. For doing the work. example, 40 percent commission for new business and 30 percent for renewal. • Second, set aside a management fee and allocate the funds based on the management effort performed by each owner. • Third, create a profit-sharing plan for the owners based on equity, new business, existing business and management participation. Owner compensation is infectious. If the owners aren’t happy, it is very difficult for other employees to be happy. Summary If even some of these suggestions or basic rules are followed, employees will be happier and more motivated to help the agency grow and to be profitable. Schoeffler and Oak are partners at the international consulting firm Oak & Associates, providing services for mergers, acquisitions, management and financial consulting. Email bill@oakandassociates.com. Phone: 707-935-6565. Website: www.oakandassociates.com.

N2 | INSURANCE JOURNAL-NATIONAL REGION February 20, 2012

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The Competitive Advantage Analyzing Agency Management Benchmarks I

have been analyzing agencies for a long time, and I believe it is extremely safe to say that no two agencies are the same. At least I have never found two agencies to be the same. This By Chris Burand is the problem with so many popular benchmarks â&#x20AC;&#x201D; typical benchmarks by their nature treat all subjects the same. For example, recently an agency owner asked me whether $100,000 revenue per person is adequate. In some agencies, achieving $100,000 revenue per person should be considered a total failure. In other agencies, achieving $100,000 revenue per person should be considered a miracle. Revenue per person has more to do with account size than agency size. An agency writing large accounts should more easily achieve $100,000 rev-

enue per person than an agency writing small accounts. Another factor to consider when using this metric is contingencies. An agency on the Gulf Coast, where standard company contracts are not easily obtained, will earn much less in contingencies than their Midwestern cousins. Sure, their accounts are going to be larger, but because so much of their business has to be agency bill through surplus lines, they need more people, too. Another factor no one wants to talk about is whether the agency is actually servicing its accounts adequately. In tough times, some firms take shortcuts. They achieve high or at least higher revenue per person by taking shortcuts such as not reviewing policies at renewal, among many other shortcuts. The bottom line is every agency is different. I have clients who have achieved great results writing mostly personal lines and others that completely forego personal lines. I have clients that have achieved great results writing small accounts and other clients that have achieved great results writing only large accounts. I have clients that have achieved great results on the West Coast, the East Coast, and most places between. I have clients that have achieved great results

N4 | INSURANCE JOURNAL-NATIONAL REGION February 20, 2012

through organic growth and oth- are on opposite ends of Mohâ&#x20AC;&#x2122;s scale of hardness, but they are ers through acquisitions. I have basically the same thing. In other clients that have achieved great results writing in incredibly rural words, these two substances are basically the same but are at areas and in large metropolitan opposite ends of the hardness areas. I also have clients that on benchmark! the surface have achieved great Sometimes with people chemresults but below the surface istry, just like are complete normal chemdisasters. It Sometimes there is pays to know agencies just need a istry, only one way the differsmall change to start in which an ence. heading down the agency can My point be arranged is that this correct path. given the industry is people (employees, customers, so diverse, that managing by companies, community) involved. or trying to achieve generic Trying to force these entities benchmarks is pointless. There into a different but successful are many wonderful routes arrangement simply is not posfor achieving greatness, while sible without causing combusgeneric benchmarks try to force tion. Sometimes agencies need to everyone onto the same route. be blown up to get rid of deadweight and negative influences. Chemistry Another way of looking at the Sometimes agencies just need a small change to start heading situation is chemistry. Everyone always says this is a people busi- down the correct path. When using generic benchness. If true, then this means marks, combustion almost never people in agencies have to have works. I know agencies that are the right chemistry to bond as deteriorating because they are a team. Such chemistry is really forcing their agencies to achieve no different from the chemistry $x revenue per person without involved in studying molecules regard to the applicability of in a college chemistry course. It that standard. My advice to their is fascinating that a tiny little competitors? Strike while the tweak can change exactly the opportunity is hot. To achieve same atoms into a completely that goal, those agencies will different substance. The bestbe taking shortcuts, and that is known example involves graphyour opportunity. Sometimes ite and diamonds. The atomic the opportunity is to get good structure is the same. The way employees, sometimes it is to get the atoms have been arranged is different, with the results being good accounts. one of the softest Good Benchmarks substances and Some benchmarks are definiteone of the hardest substances. They continued on page N6 www.insurancejournal.com

s now m e t s Sy g at n i t r a t s

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IDEA EXCHANGE

The Competitive Advantage Agency Management, continued from page N4

ly good. For example, without exception, all agencies should always have trust ratios of 1.0. It does not matter what kind of agency, this is written in code, legal code. Another good benchmark is the percentage of activities in compliance with the agency’s procedures. This includes producers and whether they are in compliance with the agency’s standards for their sales activities. I know this sounds so corporate that some readers are angered simply by my mentioning it. Consistency results in lower costs and in an economy that does not show any signs of bouncing back strong, lower costs are essential. In the great business book, “Profit from the Core,” by Chris Zook, the author found that every market leader achieved that position through low costs. Think of McDonald’s. One critical reason its costs are low, and therefore, its sales are always increasing, is that McDonald’s has the same procedures in virtually every

store, regardless of the country. I know it may seem inadequate to compare an agency to fast food, but the principle is the same. Unless a business is catering to the extremely wealthy, think Ferrari or Bentley, standardization of processes and procedures is critical. From a benchmarking perspective, the standardization should be based on your agency’s personal processes and procedures, because what works for your people is vastly more important than what works for anyone else. That said, when an employee states that standardization will not work for him or her, you have an element that creates instability. Most of these instable elements do not bring enough value to offset the cost of such instability. It’s best to part ways, on a friendly basis. A really good third benchmark is whether the agency is truly profitable while still growing, at least a little. When using this

metric, take out all the rationalization accounting such as not paying the principals enough and INCLUDE amortization and depreciation and taxes and interest (excluding these expenses, otherwise known as EBITDA, is a poor decision). Finally, does the agency have goals to improve upon its own benchmarks and then is it achieving those goals consistently? If it is, success will meet the agency. In so many ways, this is a fairly simple business because what has to be achieved is fairly simple. Usually, benchmarks, goals, and even knowledge are not lacking. Usually, execution is lacking. Using the wrong benchmarks that do not take into consideration your unique chemical arrangement just gets in the way of great execution. Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. Email: chris@burand-associates.com

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N6 | INSURANCE JOURNAL-NATIONAL REGION February 20, 2012

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AGENCY

Average Agency Salary Adjustment Management/Agency Owner/Agency Principal Producer/Sales Support Staff/CSR/Account Executive

N8 | INSURANCE JOURNAL-NATIONAL REGION February 20, 2012

2011 1.1% 1.6% 2.1%

2010 -0.6% -0.2% 0.6%

2009 -1.2% -0.8% -0.1%

2008 2.2% 2.3% 2.7%

2007 2.9% 2.7% 3.2%

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SALARY SURVEY Compensation Freeze Comes to an End?

Agencies’ Plans to Change Payroll Expense in 2012 Reduce payroll expense Increase payroll expense Keep the same Not sure

Agencies Report Salaries and Compensation on the Rise, Slightly

t looks like the freeze may be over. For the first time since 2008, independent agency salaries rose in 2011, albeit only slightly. According to Insurance Journal’s annual Agency Salary Survey, the average salary hike last year for agency management, including owners, principals and other management positions came in at a 1.1 percent, compared to a decrease in 2010 of -0.6 percent. Sales staffs were granted an average salary raise in 2011 of just 1.6 percent, compared to a decrease of -0.2 percent in 2010. Agency support staffs had the highest raises in 2011, according to the survey, with a 2.1 percent raise on average. In 2010, support staffs had average raises of just 0.6 percent. The IJ Agency Salary Survey generated more than 900 responses from independent insurance agencies in every state, providing insight into who’s worth what in the independent agency system. Demotech Inc., IJ’s official research partner, provided analysis and input on this year’s survey results. Freeze Is Over, Maybe While 2011 was an improvement, independent agencies predict even better times are ahead with agencies not only further upping pay but also adding benefits and employees in 2012. One-third (33.9 percent) of agency owners and managers responding to the survey say they plan to increase compensation in 2012, compared to just 20.7 percent who expected to increase pay in 2011. Some 31 percent of agency owners/managers also report that they plan to increase hiring in 2012, compared to just 14.9 percent in 2011. Only 5 percent of agency owners/managers expect to utilize a forced reduction in staff in 2012, compared to 11.7 percent that expected a forced reduction in 2011. www.insurancejournal.com

49.3%

Agency Salary Increases in 2011

By Andrea Ortega-Wells

7.6% 8.7%

Another positive sign: benefits will get better for agencies in 2012. According to the IJ Agency Salary Survey, only 9.1 percent of agency owners/managers plan to shift more health care costs to employees. In the 2011 Survey, 19.5 percent of agency owners/managers expected to shift health costs. However, agency employees responding to the survey report a frustration when it comes to health insurance and other work-related benefits. “My compensation has been negatively affected as much by health care reform as by the economic downturn,” one respondent wrote. “Since 2007 my income has decreased 11 percent.” Another said: “I have been here four years; and now, because of health insurance increases, my salary is lower than when I originally started here. No raises, high increase in my own costs. ... doesn’t make a happy camper.” According to the IJ Agency Salary Survey, 76.8 percent of agencies will offer group health insurance in 2012, compared to 79.9 percent in 2011. Another important benefit for agency employees will take a hit in 2012 — educational reimbursement. Just 44.6 percent of agencies will offer reimbursement for education in 2012, compared to 48.2 percent in 2011. Consultants Skeptical Randy Schwantz, CEO of The Wedge Group consulting firm in Dallas, Texas, can’t say whether the compensation freeze in agencies is over, but believes that as a general rule producers are probably making less money today than they were two and a half to three years ago. The down economy and soft market have been negative influences on the amount of money producers make, Schwantz said. “But as the market’s starting to firm in certain

34.6%

30.1% 51.0%

Higher than 2010 Lower than 2010 Same in 2011 compared to 2010

18.9%

places, certain lines of business are getting harder, and so renewals are going up. Certainly that’s a good thing,” he said. Other industry onlookers also question how widespread the trend of compensation increases really is. Chris Burand, owner of the agency management consulting firm Burand and Associates LLC in Pueblo, Colo., thinks a freeze on compensation has remained intact in independent agencies. “I’m still not seeing very much in the way of staff raises,” Burand said. In his view, compensation raises in agencies today remain non-existent or very minimal at best. “The only place I’m really seeing (raises) is when there’s job-hopping involved, and that’s creating some interesting situations where the new people are paid materially more than the people that have been there for five to 10 years,” Burand said. Some respondents to IJ’s Agency Salary Survey agree with Burand’s assessment. One respondent said: “I have been with this agency for four years and I have never received a raise or health insurance.” Another respondent said: “No raises for four years make it a difficult work environment.” And yet another added: “In lieu of raises the last few years, what we have been told is ‘be glad you have a job.’ I am so tired of hearing that.” Al Diamond, president of the Cherry Hill, N.J.-based Agency Consulting Group, says agency salaries as a percentage of agency revenues appear to be holding steady in the 20 percent to 23 percent of revenue range for

February 20, 2012 INSURANCE JOURNAL-NATIONAL REGION | N9

SPECIAL REPORT

Agency Salary Survey Agencies Report, continued from page N9

non-production, non-executive salaries. “This has been ranging upwards of the 20 to 25 percent mark, and down to about 19 or 20 percent for the last 10 years,” Diamond said. However, as the market improves so will salaries, and growth indications are good for most regions in the United States. “It’s regional,” Diamond said. “It appears that with the exception of certain down markets, the market is balanced and firming a little bit. Rates are stabilizing and going up a little bit, and growth is coming back.” With growth comes pay raises, Diamond added. One agency owner responding to IJ’s survey claimed there has been no salary increases in his agency for the past three years. But, “we will give an average of 3 percent increase this year,” the respondent said. Another agency employee expressed gratitude in this year’s Salary Survey. “I’m thank-

ful I have a job,” the respondent wrote. “I’m not going to complain about salary increases or lack thereof. This is a good company. The economy will turn.” Slightly more than half (52 percent) of all agencies responding to the IJ survey said they see signs of economic recovery in their commercial lines book of business as well, which bodes well for agency salary raises in 2012. But holding out for a better economy and firmer market is not going to lead to higher compensation for most agencies, consultant Burand said. “If an agency likes to sit back and let customers come to them, barring some unusual set of circumstances like the North Dakota oil field, I think they’re going to have a very hard year, even with the market turning a little bit it can be a tough year,” Burand said. For producers willing to get out there

Compensation Doesn’t Drive Growth While many believe that compensation should help drive agency growth, Schwantz claims that when it comes to independent agencies, compensation is almost irrelevant to success — almost. “This goes against other common wisdom, but I’ve seen first-hand that compensation in the big picture has very little to do with those who produce and those who don’t,” Schwantz said. “It doesn’t drive production very much.” What drives production and agency growth is leadership, according to Schwantz. “Our industry is full of a lot of non-

Average Agency Total Income Change*

Average Agency Salaries by Region East Midwest South Central Southeast West

and work hard, the opportunities are great, Burand added. “When you get out there and really work it, the sales are there. The opportunities are there.”

Manager/Owners

Producers

$167,114 $168,532 $129,450 $137,102 $129,079

$88,957 $84,685 $62,125 $48,500 $54,441

Staff

$46,948 $46,231 $54,970 $56,086 $53,984

2011 3.9% 3.3% 2.2%

Management/Agency Owner/Agency Principal Producer/Sales Support Staff/CSR/Account Executive *Includes all income changes in 2011

CSR Salaries and Hours Commercial lines CSR Personal lines CSR Support staff average

Average Salary Paid

Average Hours Worked

$55,714 $39,239 $52,750

41.07 38.50 39.04

What Strategies Agencies Implemented in 2011, or Plan to Implement in 2012 2011 9.0% 19.5% 1.7% 11.7% 42.0% 40.5% 14.9% 20.7%

Cut benefits Shifted health plan costs to employees Increased benefits Forced reduction of employees Postponed hiring Postponed raises Increased hiring Increased compensation

2012 6.9% 9.1% 5.6% 5.0% 28.8% 27.6% 31.0% 33.9%

2012 76.8% 48.9% 56.6% 55.0% 17.4% 9.1% 5.4% 4.5% 1.8% 14.0% 44.6%

Agency profits Productivity Revenue growth Contingent commissions Individual performance No incentive plan

39.4% 35.4% 26.7% 18.7% 41.0% 20.2%

Agency Compensation Satisfaction Index* Management/Agency Owner/Agency Principal Producer/Sales Support Staff/CSR/Account Executive

6.56 5.73 5.16

* 10 = Most Satisfied; 1 = Least Satisfied

What Benefits Agencies Offer Group health insurance Dental Group life/disability 401(k) Profit Sharing IRAs Pension Plan ESOP Stock Options FSA Education reimbursement

How Agencies Base Compensation Incentive Plans

2011 79.9% 50.1% 56.1% 53.9% 20.1% 8.4% 5.0% 4.3% 2.6% 12.3% 48.2%

N10 | INSURANCE JOURNAL-NATIONAL REGION February 20, 2012

2010 79.1% 48.0% 54.6% 52.4% 19.2% 9.9% 7.4% 4.3% 3.1% 11.1% 48.5%

Average Agency Salaries By Experience Manager/Owners

Less than 1 year 1-2 years 3-5 years 6-10 years 11-20 years 21-30 years More than 30 years

$60,000 $48,000 $44,667 $94,978 $126,073 $129,712 $175,288

Producers

$50,000 $32,750 $45,853 $56,656 $66,860 $94,375 $83,771

Staff

N/A $26,000 $36,155 $38,591 $45,949 $53,343 $58,132

www.insurancejournal.com

producers with their own books of business. You change the commission rate … it doesn’t change producer behavior in hardly any cases,” he said. To drive growth, agency leaders must set real quality goals, run great sales meetings, offer training and skills building, and make sure to bring people into the agency who have the heart and the DNA to want to make something happen, Schwantz says. Burand contends that in order to keep producers happy and producing, agency owners need to make sure compensation is up to par. “In most agencies, the good producers subsidize the bad producers. If an agency wants to make sure that they keep their good producers and keep their good producers happy and keep their good producers producing, then they need to make sure that they are paying them enough,” Burand said. “Not too

much that they’re losing money, but paying them enough to keep them happy, and keep them motivated.” Diamond advocates that growth in compensation should come from increased production by sales people and increased productivity by employees. “We shouldn’t be giving raises based on how we feel about somebody,” Diamond says. “We should be giving raises based on enhanced productivity of that person within their job.” Diamond also advises agencies to continue streamlining in a post-recession, firmer market world. “Don’t look to add a lot of employees — look to use your automation better. Look to streamline things so that the employees you have can do 5 percent more customers, more revenue for you and then pay them

for that. They’ll appreciate it and you’ll get better employees.” Insurance Journal’s Agency Salary Survey collected 912 responses from independent insurance agencies nationwide via an online survey, Jan. 12 to Feb. 6, 2012. For more information, contact awells@insurancejournal.

Agencies’ Views of Economic Recovery in Commercial Lines

48.4%

51.6%

Yes – 52% No – 48%

Agencies’ Plans to Change Commission Structure Changed in 2011 Will change in 2012 No changes

5.3% 15.8% 79.0%

Agencies' Average Salaries by Premium Volume (Management) P/C Premium Volume

President/ CEO

Office Manager

Sales Manager

Accounting Manager

Personal Lines Mgr.

Commercial Lines Mgr.

Marketing Manager

Under $1 million $1 million - $5 million $5 million- $10 million $10 million - $25 million $25 million - $50 million $50 million - $100 million $100 million or more

$135,523 $92,445 $178,036 $200,114 $332,700 $525,000 $801,471

$54,583 $45,333 $56,961 $73,700 $93,500 $103,906 $130,972

$100,278 $39,000 $69,881 $116,739 $88,636 $113,958 $156,250

$65,833 $42,262 $48,485 $63,110 $79,405 $81,167 $125,395

$28,333 $39,180 $48,472 $55,000 $69,211 $66,667 $87,639

$47,500 $49,231 $55,606 $74,934 $86,111 $95,536 $96,000

$35,000 $50,278 $49,688 $70,114 $76,538 $105,000 $109,688

The New Normal in Producer Compensation By Andrea Ortega-Wells

hen it comes to producer compensation, there really is no norm. Rather, the norm is that producer compensation varies tremendously depending on demographics, geography, laws, experience, competition, the economy and age — and whatever agency owners think works best. Some agencies follow the tradition of offering a draw against commission for all their new producers, while others are tweaking their approaches because they find that draws are not effective in drawing young www.insurancejournal.com

recruits into insurance. “While compensation is important and the deal is important, it also fluctuates wildly,” says Bruce Crankshaw, chief sales officer of Cedar City, Utah-based Leavitt Group. “California is completely different than Atlanta. There are all kinds of state laws that affect opportunities to construct something from a compensation perspective.” Demographics are not the only criteria Crankshaw and Leavitt Group, an Insurance Journal Top 100 Agency, use when evaluating producer compensation. Current realities,

including the soft market and the economic recession, also affect producer compensation for this independent agency, which has approximately 400 producers in 115 locations nationwide. “Competition in the market to attract good people is challenging,” Crankshaw said. He believes that what producers are looking for today is different than what they looked for yesterday. That’s one reason Leavitt Group began revising its new producer compensation models last year. continued on page N12

February 20, 2012 INSURANCE JOURNAL-NATIONAL REGION | N11

SPECIAL REPORT

Agency Salary Survey Producer Compensation, continued from page N11

New, high-quality producers want more than the traditional producer compensation formulas today, he said. So his agency began developing a compensation package that would help it attract some of the best new producers through its the doors. “We recognized the traditional way a producer would come on board … they were immediately put on a draw against commission. They would build up a draw deficit over time, maybe three to four years. They would pay down their draw and switch to a pure commission base pay,” Crankshaw said. But a draw doesn’t cut it with some of the new generation. They expect a salary. “That (a draw) is so unappealing to the current generation coming into insurance,” he said. “In certain markets — and it’s not exclusive to every market — we have found that you flat out have to offer a salary and realize that it is going to take them some time to produce. You cannot hold a draw over their head.” Significant Change The move away from a draw against commission model for new producers has been a significant change for the Leavitt Group, Crankshaw said. His agency started planning at the beginning of 2011 to move from a draw to a salary model. The new plan was implemented in the fourth quarter of 2011. All new producers are financially managed by the firm’s Producer Compensation Management System, which sets production and pay expectations for the first four years of employment. “A compensation package upfront is critical to someone that has been a good sales person in another industry, or to someone that’s been out of college a few years and has been successful,” he said. “They say: ‘I don’t want to owe something. If I have two opportunities, and one is going to pay me $40,000 (in a draw) but I’m going to have to pay that back … that doesn’t sound appealing.’ “I think many large agencies in large metro areas that are competitive with fresh, vibrant, new producers, have moved into that kind of compensation mechanism,” Crankshaw said.

But not How Agencies Compensate Non-Owner Producers every large agency seems Salary only 17.1% to think a Salary plus commissions 30.0% change is Commission only 24.9% necessary. For Draw against commission 8.8% Woodbury, Other 5.1% N.Y.N/A 14.3% headquartered Source: Insurance Journal’s Agency Salary Survey 2012 Sterling and Sterling Inc., another IJ Top 100 Agency, producer compensation has not However, this arrangement is only made veered from traditional methods. for a producer who joins Sterling and Sterling “I can’t speak for other companies, howwithout a book of business and the newcomever, in our case, we have been pretty consis- er’s progress is monitored very closely due to tent over time,” said Mark Landisman, chief the nature of this arrangement, he said. financial officer of Sterling and Sterling. “You’re taking a gamble on them to say New producers, Landisman says, are comthat this person’s going to make it, and I’m pensated through a guaranteed draw, which willing to go with them for a certain period enables the new producer to build a book. of time to allow them to gain size or gain “I mean, you can call it a salary for all the size they need to maintain a lifestyle,” intents and purposes,” he said. However, Landisman said. “once they achieve a certain level, then they’re moved from the guaranteed draw/ Producers Who Produce salary to a strict commissions plan.” It’s the Both Landisman and Crankshaw agree same type of compensation structure that a that the real challenge is getting a producer more experienced producer would receive, to produce over the long term. Landisman said. “The issue that all agencies face out there The guaranteed draw is essential for a new is how to motivate producers that have producer entering the insurance business achieved a size book or a scale in their book since it can take some time to build a book that supports their own individual lifestyle,” of business. “For our purposes, a guaranteed Landisman said. draw is in effect a salary and does not conJust how do agencies motivate productemplate a repayment,” Landisman said. ers to continue producing? For Sterling and For example, if a new producer starts at Sterling’s team of mostly experienced produca $50,000 annual draw/commission and it ers, about 25 in all, the issue is a non-issue. takes the producer 12 to 18 months to develop “We’ve had a very stable workforce here. a book of business large enough to support We have producers that have been with that level of compensation, the producer the company for as much as 40-plus years,” could have been paid $75,000 against an Landisman said. earned commission of half that by the time For Sterling and Sterling, money remains the book has grown enough to support that the driver in producer production. level of compensation. “People who are really producers, they “That being the case, they would in have a sense of competitiveness. They’re lookeffect be $30,000 to $40,000 in the hole — a ing to slay the dragon. They want to be out very demoralizing place to be,” Landisman there, they want to be able to come back sayexplained. “Therefore the guaranteed draw is ing, ‘Hey, look what I did. I just landed this in effect an investment the company makes huge piece of business.’” in the producer since repayment is not Landisman said his agency has examined expected.” continued on page N24

N12 | INSURANCE JOURNAL-NATIONAL REGION February 20, 2012

www.insurancejournal.com

Who insures you doesnâ&#x20AC;&#x2122;t matter.

Until it does.

Chubb Group of Insurance Companies ("Chubb") is the marketing name used to refer to the insurance subsidiaries of The Chubb Corporation. For a list of these subsidiaries, please visit our website at www.chubb.com. Actual coverage is subject to the language of the policies as issued. Chubb, Box 1615, Warren, NJ 07061-1615. ÂŠ2012 Chubb & Son, a division of Federal Insurance Company.

IDEA EXCHANGE

Growing Your Property Casualty Agency Social Marketing for Agencies Is Never Free Opening a Basic Social Media Account Is Free — The Rest Isn’t

ost social media accounts are free of charge. You can open up Facebook, Twitter, LinkedIn, Google+ and Blogger accounts all without spending a dime. That’s what makes them free, right? Absolutely, as long as you don’t ever use them. While there is no cost to set up a basic account for By Alan Shulman yourself or your agency, after it’s up, you have to deal with the burden of every publisher and editor throughout time: content. Without it, all you have is a blank page. Authoring (or acquiring) and disseminating content for an agency’s social accounts is costly. If you do it in-house, as many agencies do, you have some serious decisions to make. Most cost money. Here are some key issues to address.

your social presence. And that involves time and expense.

Adding Content Accumulating contacts is one thing, communicating with them on a regular basis is something else. Like any other human contact, effort is involved, and the greater the effort, the greater the results. Social media is not monolithic, and as such, all content is not suitable for all sites. For instance, what you tweet on Twitter in 140 characters won’t fly on Facebook, which thrives on the visual. You need to match Attracting Contacts your postings to Regretfully, new social accounts don’t where they’re placed. come pre-packaged with interested insurAgencies typically imagine they can add ance buyers. You can easily invite your email contacts to join. Many social media sites everything they need, for free, in their spare offer this capability. It’s a handy, free service, time. But then, as they gain experience with the media, they realize what a time-eater but it’s only the beginning. You also need to competent social marketing really is. Some expand your reach beyond the people you already know. offices share the posting duties on their blog, This involves such Authoring (or acquirand Twitter actions as adding ing) and disseminating Facebook email and voicemail accounts to distribute content for an agency’s the opportunity costs taglines, liking and social accounts is costly. among multiple staffers. following the online Others hire young bucks posts of others (in the hopes that they’ll do the same for you), runto handle the chores. And certain agencies ning digital and print ads, placing publicabuy prewritten/predesigned posts from professional marketers. The best approach for tion inserts, mailing postcards, purchasing you depends on whether your staff has the and disseminating imprinted items, conducting contests and promotional events, etc. — time, communication skills and marketing all to attract social interest. savvy to do it well, over the long haul. Then, once you reach a certain level, some new contacts will “just appear,” but for the What About Risk? most part, you need to continuously market Someone from your office may post the N14 | INSURANCE JOURNAL-NATIONAL REGION February 20, 2012

copywritten work of others, from the web, without authorization. There is also the chance of hurt feelings or worse, damage to your agency’s reputation, as a result of posted comments. What if your staff reveals confidential information when communicating with insureds or prospects via social media? What if your accounts are breached? Managing these risks, and others like them, requires the purchase of insurance and potential outlays for damage control. It Ain’t Free Social marketing has a voracious appetite for content. You have to post on a regular , and it has a perpetual memory. Older posts are always accessible so you can’t surreptitiously reuse them. Plus, what’s the point of marketing this way if you don’t have many followers? So, you have to continuously attract them. All of this, plus the back and forth communications with insureds, prospects, carriers, and others, adds up to a significant expense. Consider social marketing an extended cost of agency automation and budget for it. Think of it like getting a friendly dog for free, while the real costs are keeping it healthy and fed. Shulman, CPCU, is the publisher of Agency Ideas, a subscription-only sales and marketing newsletter. He is also the author of the many tools posted on the Agency Ideas Instant Download Store. Phone: 800-724-1435. Email: alan@ agencyideas.com. Website: www.agencyideas.com. www.insurancejournal.com

NATIONAL COVERAGE

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nonadmitted available States: All states Contact: Marc Katz at or 800-214-0207 or email: mkatz@mechanicgroup.com

Bars, Restaurants & Taverns Market Detail: Brecht & Associates (www. brechtassoc.com) provides GL, property and

We Know What Insurance Agencies Need “It’s very comforting for an independent agent to be able to talk with a banker about the specialized banking needs of the insurance business. Few bankers can understand, even conceptually, the terminology and business practices of independent agencies. By working with InsurBanc, the agent does not have to explain the insurance business. It was critical for us to get to know the people at InsurBanc and understand what InsurBanc’s philosophy was with personal service. What convinced us to move our banking relationship to InsurBanc was the bank’s commitment from the top down to assist us.” — J. Bruce Cochrane, President, Renaissance Group A IInsurBanc, At B our only l focus f is i the h success off your agency. Our strength and unmatched expertise make us the most reliable source for your banking and financing needs. s !GENCY !CQUISITION Perpetuation Loans s %QUIPMENT ,EASING s ,INES OF #REDIT

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N16 | INSURANCE JOURNAL-NATIONAL REGION February 20, 2012

liquor liability as part of a package or monoline. Most all risks are acceptable except establishments open past 2:00 a.m. and pure night clubs with a cover charge. Brecht is best with bars, sports bars, etc., where the liquor is greater than 50 percent of receipts. Available limits: Minimum $100,000 maximum $5 million Carrier: Unable to disclose, nonadmitted States: Texas Contact: William Brecht at 800-990-9553 or email: bill@brechtassoc.com

Used Car Dealers Market Detail: J.L. von Arx & Associates (www.jlvonarx.com) has coverage for uninsured motorists, garage liability, medical payments, dealers open lot, physical damage, non-owned and hired auto, fire legal liability, real and business personal property, and garage keepers legal liability. Available limits: As needed Carrier: Unable to disclose, admitted and nonadmitted available States: Ariz. and Calif. Contact: Joyce Chambers at 800-818-1093 or email: joyce@jlvonarx.com.

Long Term Care Professional and General Liability Market Detail: Sapphire Blue (www. sapphireblueuw.com) offers professional and general liability for long-term care facilities throughout the United States. Available limits: Minimum $1 million, maximum $6 million Carrier: Beazley Group States: All states Contact: Kieran Dempsey at 312-784-6166 or email: kieran.dempsey@sapphireblueuw.com

Cargo Market Detail: Bolton & Co. (www.bolton mga.com) provides primary liability, nontrucking liability, physical damage and cargo coverages through A or A+ rated carriers. The commodity hauled and radius operated varies by company, but range from local to intermediate to long haul. Available limits: As needed Carrier: Unable to disclose States: Ill., Ind., Ky., Ohio and Tenn. Contact: Customer service at 502-583-8361 www.insurancejournal.com

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IDEA EXCHANGE

Agency Compensation The Compensation Connection: Aligning Rewards with Results

he state of the labor market is changing. Unemployment rates are dropping and companies are opening up hiring budgets. Organizations that believe employees are lucky to simply have a job in this economy are headed for trouble. The job market is quickly becoming a candidates’ market. Some 44.4 percent of By Dave Coons insurance companies plan to increase staff, according to “The SemiAnnual Insurance Labor Market Study” by The Jacobson Group and Ward Group. In today’s job market, top performers have options should they choose to move on. Retaining critical talent is a major concern. More than 70 percent of corporate leaders are highly concerned about retaining critical talent over the next year, and twothirds expressed the same concerns about their high-potential employees, according to “Talent Edge 2020: Blueprints for the new normal” published by Deloitte. These concerns are not unfounded as the industry veers toward an impending skills gap. With Boomers preparing for retirement, employers are finding that they lack incumbent talent. Adding to the complexity of the problem, many organizations made necessary cuts during a down economy, and hiring and training fell to the wayside. Faced with these threats to every organization’s talent pipeline, retention must be top of mind. The workforce may make or break a business. Why Compensation is Important It should come as no surprise that compensation ranks among the top concerns of today’s workforce. A competitive salary determines the caliber of talent organizations are able to attract, engage and retain. A majority of workers (59 percent) do not believe that employees within their organizations are rewarded according to job performance, reported a recent study, “Workforce Mood Tracker” by Globoforce. Seventy-four percent of respondents have left a job

because they did not feel appreciated. On the other hand, companies with engaged employees enjoy the benefits of more satisfied customers, higher revenue and increased efficiency. Engaged employees understand an organization’s goals, can clearly communicate their roles in achieving those goals and can discuss how they impact the overall success of the organization. Capitalizing on the connection between employee productivity and salary is paramount to keeping the talent pipeline strong. With competitive compensation, a company can raise each individual’s performance and affect the bottom line.

all contribution to the advancement of the organization’s desired cultural attributes. Don’t neglect the details of a compensation plan. Benefits are just as important to today’s employees as base salary. A retireAlign Your Strategy ment plan that offers some level of matchA solid compensation plan works handing will encourage employees to build their in-hand with the greater human resources career with your organization. Flexible work strategy. An agency’s current career developoptions factor into salary considerations. ment program will help define the intervals Many workers would opt to telework if given for advancement. While human resources the option, even if it means a lesser raise. must track and document the process, the Clarity in this process is essential. management and development of a workPosition descriptions must be created for force is best accomplished by line managers. each position and organized by job famStart with an assessment. Look at all posiily. Performance plans and assessments tions, organization-wide. Categorize posishould be documented for each position. tions as supportive or strategic. Supportive Transparency is important; employees want staff includes operational and administrative to know what is expected of them, as well as roles. These people keep what they can expect from the organization running. their employer. Performance Top performing Strategic players have an is improved when expectaemployees have effect on the bottom line; tions are communicated, options should they measured, recognized and those who contribute to choose to move on. rewarded. organizational wealth. Not all positions are To be effective, a compenstrategic, but all are important. If not, it is sation plan must reward high performance assumed that they are eliminated. Invest in while differentiating talent. It needs to be and manage different roles accordingly. attractive to high-caliber talent and have a Metrics for bonus plans must be clearly meaningful impact on retention and engagedefined. Vary bonus criteria between the ment. If these needs are met, your compensadifferentiated position groups. Incentive tion strategy can successfully support your compensation should recognize and reward business strategy. results, as well as commitment to company values. Therefore, bonus compensation Coons is senior vice president of The Jacobson Group. awards should reflect the participants’ overPhone: 800-466-1578. Email: dcoons@jacobsononline.com.

N18 | INSURANCE JOURNAL-NATIONAL REGION February 20, 2012

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SPOTLIGHT

Marinas and Boats Marina Market Tightens Up in the Wake of Catastrophe-Ridden 2011 By Charles E. Boyle

he marina insurance market seems to be heading for some changes, thanks to the stormy losses of 2011. While the hard/soft market cycle has been a fact of life for the insurance industry almost since its inception, it is beginning to morph into a more individual pattern, which could be termed “cycle specific.” Essentially, the cycle is affected by regional events. The Japan earthquake and tsunami raised rates in that country, as did the earthquakes in New Zealand and the floods in Australia. But these events had a far lesser effect on the overall cycle, which is still generally a soft market. Marina coverage is no exception. “Generally it’s still a soft market,” said Kerry Stuckey, COO and co-founder of Stuckey and Co., a St. Louis-based wholesale agent that specializes in marinas, as well as other specialty lines. However, the high number of tornadoes that struck the South and Midwest, particularly the massive destruction in Joplin, Mo., as well as the floods in Tennessee, have raised exposure levels and have pushed rates for marina coverage up by nearly 25 percent. “Marina owners can’t afford those kind of rates,” said Jerry Lovin, sales and production manager for Stuckey and Co. “They can’t pass them onto their customers.” Those natural catastrophes have combined with the economic recession to significantly affect the marina insurance market. Many carriers who formerly offered coverage have withdrawn from the market, Stuckey explained. “There are only about five or six [carriers] nationwide who now write coverage, he said. While some of the business has gone into the surplus lines market, a dearth of capacity nonetheless exists in certain regions.” As Stuckey & Co. is based in the Midwest, it is squarely faced with the problem. “We wrote fast in 2011,” Lovin www.insurancejournal.com

said. “We’ve already reached our aggregate exposure in some states, notably Arkansas and Tennessee.” The company, which up until 2001 placed most of it coverage with the Lloyd’s market, is fortunate to have an “A IX rated” carrier with whom its marina coverage is usually placed. Marina insurance — which involves coverage for buildings, other structures and docks in the event of an accident or disaster — can be expensive,

especially for larger facilities that may have restaurants, bars and leisure facilities in continued on page N20

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SPOTLIGHT

Marinas and Boats Marina Market, continued from page N19

addition to marina operations. The cost of coverage, therefore, varies depending on how extensive the facility is and what types of activities it engages in. Property Coverage Property typically covers well-known perils — fires, windstorms, thefts and other damage. In this sense, marina policies don’t differ too greatly from other commercial coverage. However, there are additional and unique perils that require specialized insurance policies. “The biggest losses are from weather claims — especially to floating property, mainly docks,” Stuckey said. He explained that in many areas, floating docks are especially exposed to severe weather, including tornadoes, hurricanes, blizzards and flooding. Boats owned by marinas are also at risk, as well as other facilities. “Covered docks are frequently damaged

by ice and snow, which can cause the roof to age usually is offered on a “program basis,” collapse,” Stuckey said. In areas where snow- and can include business interruption coverstorms are frequent, especially following the age. severe winter in 2010, a number of carriers The perils covered, as well as the cost — have withdrawn coverage for this type of the minimum premium, which includes liadamage, or have raised rates and increased bility, is $4,500 — take into account regional deductibles. variations in weather. HarborGuard is Stuckey Ice and snow may hit Disasters have & Co.’s flagship product, the Midwest and the pushed rates for which launched the combut they marina coverage up Northeast, pany 20 years ago. Today aren’t a serious probby nearly 25 percent. lem in Florida or along the company offers an ensemble of coverage for the Gulf Coast, where “onshore property, offshore property, vessels’ hurricanes are problematic. In contrast, property and rental boat physical damage.” California’s fires, earthquakes and Santa Ana Stuckey’s web site describes HarborGuard as winds pose a lesser risk to marinas. Because “a comprehensive program for this specialStuckey & Co. operates in 48 states, it tailors ized market, with tailored liability insurance policies to the insured’s specific needs. for a wide variety of businesses, including “It all depends on the location,” Stuckey marinas and boat yards, boat dealers, and said. marine artisans, including boat repair and supply shops.” Stuckey explained that cover- Liability Coverage As with property protection, commercial general liability (CGL) coverage for marinas includes most of the standard hazards, typically “slip and fall” type claims, both on land and in the water. “They’re basically the same [coverage] as you would have for a house or a car,” Stuckey said. It covers accidents occurring on docks and boats, as well as “products and completed operations that would provide coverage for boats that have been repaired or winterized.” Coverage specific to marina operators includes “exposures arising from mooring, fueling, launching, hauling, storage and repair operations for customers’ boats.” Coverage also protects a policyholder who may be “legally liable for damage or loss to a customer’s boat.” In addition, other types of policies cover a “marina operator’s legal liability” (MOLL), and P&I (protection & indemnity) coverage for “watercraft liability,” as well as one of boating’s leading non-natural catastrophe perils — liquor liability. Coverage may also be obtained for “non-owned auto liability” and boat rental liability. Marina owners, like all employers, are subject to rules mandating workers’ compensation coverage, Stuckey said.

N20 | INSURANCE JOURNAL-NATIONAL REGION February 20, 2012

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CLOSER LOOK

Agribusiness/Farm & Ranch Keeping up With the Greens What to Know About Hobby Farm Insurance

he Green family owns a small farm. It’s not their primary source of income, but it is a lifestyle choice, and their hobby farm is just that — a hobby. The Green family grows fruits and vegetables as their mainstay, but is also responsible for a By Michael Hrabovsky smaller number of cows, horses, chickens and goats. They also have a few buildings, vehicles and equipment on their 40 acres of property. Years pass, and the Green’s hobby farm is thriving. They’re selling surplus organic produce at the local farmer’s market and through a Community Supported Agriculture (CSA) cooperative. The Greens’ insurance agent has covered their home and property with a traditional homeowners policy, which may cover limited hobby activities. Yet some insurers main-

tain that once production and product sales occur, a farm policy is necessary. Significant loss of equipment, structures, products or livestock could devastate their investment if the Greens are not adequately covered. Insurance for Hobby Farmers Hobby farms account for a 12 percent rise in rural county populations since 1990, and they account for half of all farms as of 2007, says the U.S. Department of Agriculture.

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N22 | INSURANCE JOURNAL-NATIONAL REGION February 20, 2012

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As hobby farming grows, it is important to understand that typical homeowners insurance is not adequate because of the standard exclusion for “business/farming activities.” For instance, larger animals such as horses and cows usually are excluded from a standard homeowners policy, and the farming can potentially be excluded as a “business pursuit.” The exclusion for business and farming activities effectively removes liability and property coverage from all activities deemed a business or farming. It is possible that the policy can be broadened by attaching an incidental farming personal liability endorsement (e.g. ISO HO 24 72). Such an endorsement may be useful for low-exposure farm activity, where the farming is geared toward personal consumption. While it broadens liability coverage, the endorsement requires details about all farming activities. Omit one, and there may not be any coverage for the omitted activity. The homeowners policy also may be modified by adding a farmers personal liability endorsement (e.g. ISO HO 24 73). This endorsement would be appropriate for a hobby farm because it is geared toward families or individuals who are clearly

The Basics of a Farmowners Policy The typical farmowners policy provides the following basic coverages: • Farm and personal liability. • Products liability from sale of farming products. • Liability for sales at an off-premises farmers market. • Animal exposures, including equine coverage for boarding if the farm goes that route. • Farm buildings, dwellings and stables. If the farm is generating income, there may be a need for business interruption. • Farm equipment. • Medical payments. www.insurancejournal.com

operating a small, or true, hobby farm. Yet descriptions of all farming activities need to be declared on the form with the same consequences as found by using ISO HO 24 72. A good example of how a gap in coverage could occur would be the failure to indicate the sales of eggs at the local farmers market. If this activity was not specified, coverage may be negated for a food poisoning claim arising out of this activity. When it comes to animals, a traditional homeowners policy may not protect the hobby farm owner. Some carriers will allow a limited number of personal use animals such as horses, cows and goats. However, they will typically exclude any exposure where fees are collected and the animal is a business proposition. Assume the Greens are boarding a small number of horses. If one of the boarded horses escapes and is hit by a car there may be no coverage. Boarding horses can potentially be considered an excluded business pursuit.

The Greens Cultivate Peace of Mind Upon learning this, the Greens develop a clear statement of what they produce, how much and what is sold, so their insurance agent can determine whether their homeowners policy provides adequate coverage. They learn that the ISO farmowners policy provides liability and property coverages, and makes no distinction between hobby and regular farms. The farmowners policy is a blend of personal and business coverages. Farms traditionally have been considered the place where crops and animals are raised and sold, with the farmer generating income from the farm. Because the Green family lives on the land, they need coverage for their dwelling and personal liability exposures, as well as for commercial farming. The policy also can provide coverage for mechanical breakdown, ordinance of law for dwellings and farm buildings, business interruption and coverages for livestock. The best approach is to treat the Greensâ&#x20AC;&#x2122;

farm as a typical farm by securing a farm package that covers liability, property and other miscellaneous coverages as needed. Families who want to keep up with the Greens should get educated on the real exposures they face when they leap from homeowner to farmer â&#x20AC;&#x201D; even if it is a hobby. Hobby farm owners should keep their agents informed as to what they are doing. Itâ&#x20AC;&#x2122;s also a good idea for agents to evaluate what hobby farm owners are doing and intend to do in the future, because it may have a big bearing on their insurance needs and financial security. With the increasing popularity of hobby farms and locally grown organic food, the need for proper insurance protection is growing. The farmowners policy can be a great insurance solution. Hrabovsky is agribusiness manager for Acadia Insurance. Phone: 866-497-4697 ext. 2964. Website: www.acadia insurance.com.

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February 20, 2012 INSURANCE JOURNAL-NATIONAL REGION | N23

SPECIAL REPORT

Agency Salary Survey Producer Compensation, continued from page N12

other compensation models aimed at getting producers to keep producing. “I know there’ve been various permutations out there as to what people have done, and we’ve looked at certain things in terms of renewal commissions,” he said. “Do you increase renewal commissions for those who produce very well, or maybe (provide) a benchmark in your bookings, or do you reduce renewal commissions on those that don’t (produce well)?” he said. But Sterling and Sterling has not gone in that direction. “We instead look to help the producers individually manage their pipelines,” said Landisman. “And we have upper management work directly with the producers on a one-on-one basis on their pipelines to understand where they’re at, and what they could be doing to enhance them.” Upper management support is available for all the producers going after new business. “And that goes right up to the top, up to David Sterling,” the firm’s top leader, he said.

Landisman’s agency continues to pay a standard producer compensation of 40 percent commission on new business and 20 percent on renewals. “As long as I’ve been with the company, that’s been our structure. We have not changed it based on anything that’s gone on in the marketplace.” It seems to be working just fine. “Our growth is being generated by our production of new business and managing people’s pipelines and work flows,” Landisman said. “And we’ve had tremendous success in terms of increasing our sales on a year-onyear basis, where many agencies have gone backwards.” The Leavitt Group’s Crankshaw agrees that what producers want most today aside from compensation is support from agency leaders to help them grow their book. “They are looking for an environment that is supportive of their ability to grow their book of business to the next level,” Crankshaw said. “You have to provide the

resources behind the scenes to let them go from a half-million dollar book to a million dollar book to a multi-million book.” The same is true at the Leavitt Group — new business is often paid at a higher commission percentage than renewal commissions. But Crankshaw says commission splits vary and can range widely in the industry. “A general commission structure could be 50 percent new, 25 percent renewal. Sometimes an agency may provide additional support for its producers including claims management and loss control. In these circumstances an agency may lower the new and renewal commissions paid to producers to offset the cost of services to clients. Compensation, while it’s a critical part, is not everything, Crankshaw says. “It’s very important for producers to see opportunities where they have resources within the agency to free them up to provide resources to clients to sell more efficiently and effectively.”

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N24 | INSURANCE JOURNAL-NATIONAL REGION February 20, 2012

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NATIONAL COVERAGE

News & Markets P/C Insurers’ Combined Ratio for 2011 Estimated at 107.5%

he U.S. property/casualty (P/C) industry reported its largest underwriting loss since 2006 and saw its operating performance deteriorate sharply in 2011, as catastrophe-related losses throughout the year wreaked havoc.

have over the next year; inadequate rates in select lines of business; decreasing reserve adequacy levels; and the sluggish economy. Although pricing discipline seems to be

taking hold, A.M. Best said insurers still face a challenging environment and it believes a traditional “hard” market is likely at least a year or two away.

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Insurers were affected by an unprecedented number of natural catastrophes in the United States and abroad in 2011, resulting in cat-related losses more than double 2010’s total, according to A.M. Best. As a result, all three segments — personal lines, commercial lines and U.S. reinsurers—are expected to report relatively large underwriting losses. Policyholders’ surplus is anticipated to decline modestly, and return measures are expected to be in the low single digits, A.M. Best said. A.M. Best Co. estimates net premiums written increased 3.5 percent to $442.0 billion in 2011. The industry’s combined ratio is expected to deteriorate 6.5 points to 107.5 for 2011 from 101 in 2010. A.M. Best estimates total statutory pretax accident-year catastrophe-related losses were approximately $44.1 billion in 2011, up from an estimated $19.6 billion paid in 2010. Despite the high cat losses, A.M. Best estimates that the industry’s policyholders’ surplus decreased only 1.4 percent to $562.7 billion from its record year-end high of $570.4 billion reported in 2010. While the majority of rating actions in 2011 resulted in affirmations, downgrades outnumbered upgrades for the first time since 2005. A.M. Best has maintained a stable outlook for the personal lines and U.S. reinsurance segments in 2012. The outlook for commercial lines remains negative due to the incremental impact that rate increases will www.insurancejournal.com

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February 20, 2012 INSURANCE JOURNAL-NATIONAL REGION | N25

NATIONAL COVERAGE

News & Markets Agency Compensation Expected to Rise in 2012: Ward Group

ontingent commission payouts to • 39 percent of companies insurance agencies are estimated to be plan to modify their contin12 percent higher in 2012 than 2011, a new gent plan in 2012. study said. • The average capped loss The study by the Ward Group also found amount for stop loss threshthat carriers are continuing to increase their olds has increased substanvolume and premium requirements for agentially since 2009, and 5 percies, and both agency appointments and cent of companies increased terminations have slowed. the amount for 2012. The Ward Group study of agency compen• Minimum premium sation and management practices at proprequirements for contingent erty/casualty insurance companies focused commissions have increased on commission practices, agent incentives since 2009, and 11 percent and other agency management practices, and of companies increased preincludes aggregated results from 2010 and mium volume requirements for 2012. 2011 for a diverse group • 7 percent of companies of 69 companies. added growth requireThe economic The study identified downturn in the past ments in 2012 to their several trends for agency formulas, and three years has made contingent compensation practices, 5 percent added retention agency expansion including: requirements. more difficult. • Electronic fund trans• 17 percent more agents fer for commission payattended trips in 2011 comments has become more widely adopted. pared to 2010. • Base commission plans have not changed Ward Group said that comparing hissignificantly in the past three years. torical results, both new agent appoint-

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N26 | INSURANCE JOURNAL-NATIONAL REGION February 20, 2012

ments and agency terminations are lower. However, despite fewer agency terminations, five-year agency retention declined for both the independent and captive agency benchmarks. “The economic downturn over the past three years has made agency expansion more difficult,” said Jeff Rieder, president of Ward Group. “Companies may be unable to appoint enough agents to accomplish growth goals, and agents are not necessarily willing to move business from an existing carrier relationship.” Ward Group offered several predictions about agency management practices for 2012. Total agency compensation is expected to increase slightly, largely due to contingent commission changes. Agency trips and conferences continue to be smaller and less costly than pre-recession years, but appear to be regaining more use. Independent agency companies represented 78 percent of the participants. Key findings and observations were presented to participants in a webinar hosted by Ward Group, on Jan. 26, 2012. Ward Group, which was acquired last July by insurance broker and consulting firm Aon, said it did the study because for most property/casualty insurance companies, expenses relating to the distribution system represent the largest expense component outside of loss payments. Complete results of the “Agency Management and Compensation Practices” study are available from Ward Group. www.insurancejournal.com

Advertisers Index Readers, browse, contact, or do product searches on any of our full page advertisers at: http://www.insurancejournal.com/adshowcase/ E: East, M: Midwest, N: National, SC: South Central, SE: Southest, W: West Abram Interstate www.abraminterstate.com W26 Agent Support Network of America www.asnoa.com W3, M3 Anderson & Murison, Inc. www.andersonmurison.com W18 Applied Underwriters www.applieduw.com W64, SC52, SE52, E52, M56 Arrowhead General Insurance Agency www.arrowheadgrp.com W21 Astonish Results www.astonishresults.com N5, W12, SC12, SE12, E12, M12 Atlass Insurance Group www.atlassinsurance.com N19 Burnett & Company www.bcoinc.com SC16 Burns & Wilcox www.burnsandwilcox.com W13, SC17, SE13, E13, M13 California Earthquake Authority www.calquake.com W11 Century National www.cnico.com W31 Chartis www.chartisinsurance.co W7, SC7, SE7, E7, M7 Chubb Corporate www.chubb.com N13 Demotech www.demotech.com N15

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Fujitsu www.fcpa.fujitsu.com N3 General Star www.generalstar.com W17, SE17, E17, M23 GeoVera Insurance Company www.geovera.com SC14, SE16 Golden Bear Insurance Company www.goldenbear.com W27 Great American Insurance Group www.greatamericaninsurancegroup.com W23, SC21, SE3, E3, M17 Great American- Specialty Human Services Division www.specialtyhumanservices.com N22, N26 IICF www.iicf.org W32, SC20, SE20, E18, M20 IMCA www.imcanet.com N21 Insurbanc www.insurbanc.com N16 K&K Insurance Group www.kandkinsurance.com W19, SC19, SE19, E19, M19 Leavitt Group Enterprises, Inc www.leavitt.com SE18 Liberty Mutual www.libertymutual.com W15, SC15, SE15, E15, M15 M.J. Hall & Company, Inc. www.mjhallandcompany.com W30 Midlands Management Corporation www.midlandsmgmt.com N20

Monarch E & S Insurance Services www.monarchexcess.com W29 National Alliance for Insurance Education & Research www.scic.com N6 National Marine Insurance Wholesalers www.natmarins.com N25 PersonalUmbrella.Com www.personalumbrella.com W5, SC5, SE5, E5, M5 Pilot www.pilotcat.com N7 R. E. Chaix www.rechaix.com W16 RiskMeter.com www.riskmeter.com N2 Scottsdale Insurance Company www.scottsdaleins.com W2, SC2, SE2, E2, M2 SIAA www.siaa.net W25, SC11, SE11, E11, M11 Specialty Insurance Managers www.simtexas.com M21 Sunderland Insurance Services, Inc. www.sunderlandins.com N25 Tejas American General Agency www.taga1.com SC3 Texas Mutual Insurance Company www.texasmutual.com SC13 Westrope www.westrope.com N17 Zurich Insurance Company www.zurichna.com W63, SC51, SE51, E51, M55

February 20, 2012 INSURANCE JOURNAL-NATIONAL REGION | N27

IDEA EXCHANGE

Closing Quote Virginia — that have privatized their state’s workers’ compensation insurance funds in recent years. Confusion Over What Privatization Means There is fundamental confusion about what privatization means. Ask any Colorado business if it believes giving the state an ownership stake in its business is compatible with private ownership. Would these businesses feel independent of state government with the governor appointing a majority of their boards of directors? Accomplishing a bona fide privatization begins with repealing Pinnacol’s statutory authority — the legal foundation for its existence — and permitting Pinnacol to operate as a mutual insurance company in compliance with Colorado laws. The current board and operational members, designated by the governor, would sunset upon filing of its new charter. Then, establish a clearly defined residual market mechanism (independent of Pinnacol) designed to be self-funded, ensuring that better, safer employers do not subsidize losses of less safe employers. Next, financially secure pre-privatization liabilities through reinsurance, insulating the private market from Pinnacol’s retroactive liabilities once it becomes a member of the guaranty fund. Pinnacol would operate on a completely level playing field. Instead, this year’s proposals sought greater marketing freedom for Pinnacol while retaining key features of a governmentcreated insurer. The result would have been an enterprise guaranteed a market (residual risks) that is able to deploy its assets olorado Gov. John Hickenlooper and Pinnacol to compete unfairly against the private market, in Colorado and Assurance, the state-chartered workers’ compensation other states, while tasked with new public functions — “fundfund, made the right decision earlier this month in deferring ing economic development and higher education scholarships.” further consideration of plans to restructure Pinnacol. There How is a supposedly private entity mandated by statute to remains considerable misunderstanding about the future of use its capital to finance unrelated public policy objectives? Pinnacol, the state’s government-sponsored insurer for workPinnacol would continue to be governed by a majority of its ers’ compensation insurance. Now there is time to clear away board, appointed by the governor. It is not possible for Pinnacol the fog of confusion surrounding Pinnacol’s purpose and to be deemed private (or separate) with its board appointed by future, and to do the job right. government designees, any more than it The proposals were mischaracter‘Colorado and its state-run would be for a private insurer’s board to be ized as “privatization” or “separation.” That was inaccurate and evaded funworkers’ comp carrier are so designated. The governor and Pinnacol condamental questions about the future tackling a hot-button issue tended their proposals were fair because role of Pinnacol and of the state’s of privatization. They Pinnacol would pay federal income and involvement in that enterprise. At should look to Arizona, state premium taxes, just like private stake is the workers’ compensation Nevada and West Virginia insurers. However, so long as Pinnacol is environment if Pinnacol, which by as models for success.’ tethered to the state, the legislature and law guarantees insurance coverage governor can change the terms of the deal. to any employer, is put financially at Neither the governor’s nor Pinnacol’s restructuring proposal risk through its reorganization. would have been “privatization” nor a “separation,” in view of Because Pinnacol would have become a member of the the indicia of state interest Pinnacol retained. There now is an state’s property and casualty guaranty fund, the insurance opportunity to do the job right: Leave Pinnacol alone, or get the industry’s financial backstop to guaranty benefits owed state out of its business completely and free Pinnacol to compete injured workers by insolvent insurers, the private insurance as a private insurer in fact. market’s assets would have been jeopardized. All parties should reconsider their approaches and, rather than the faux privatization or separation envisioned, folWood is associate general counsel and director of workers’ compensation programs at low the lead of other states — Arizona, Nevada and West the American Insurance Association.

Colorado Defers Action on StateChartered Workers’ Comp Fund

C By Bruce C. Wood

N28 | INSURANCE JOURNAL-NATIONAL REGION February 20, 2012

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