Hot New Markets; High Risk Property; Corporate Profiles by Insurance Journal

MARCH 19, 2012 | VOL. 90, NO. 6

WEST REGION

OCEAN MARINE CONSTRUCTION ENERGY PRIMARY CASUALTY EXCESS CASUALTY & UMBRELLA E&S PROPERTY

RAILROAD D&O / FIDELITY / EPLI KIDNAP, RANSOM & EXTORTION PROFESSIONAL LIABILITY PROGRAMS PRODUCT RECALL PRODUCT CONTAMINATION

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N16 On The Cover Special Report: Hot Markets in 2012

Inside This Issue March 19, 2012 • Vol. 90, No. 6 • West Region

NATIONAL COVERAGE 25 Advertising Special: 2012 Corporate Profiles N16 Special Report: Hot Markets in 2012 N20 Closer Look: 2011 M&A News Report N22 E&O Insights: Pearsall on M&As N24 Spotlight: Catastrophe Risk Management N26 Wealthy Americans Fear Costly Lawsuits

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N22

N10

IDEA EXCHANGE

8 Colorado Revisits Marijuana DUI Standard

22 Breathing Life into a P/C Agency

14 Low-Cost Online Commercial Lines Quoting Tool for P/C Agents Launched

N10 Growing Your Property Casualty Agency: Shulman

16 Report: Arizona P/C Insurers See Premiums Written Fall, Losses Rise

N15 The Competitive Advantage: Burand N28 Closing Quote: Surplus Lines Tax Allocations

18 Lawyer Claims Highest Known Workers’ Comp Settlement in California History 21 Investigative Unit to Target California’s Serial Labor Law Violators

DEPARTMENTS 6 9 9 10 12 N12

4 | INSURANCE JOURNAL-WEST REGION March 19, 2012

Opening Note Declarations Figures Business Moves People MyNewMarkets

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Opening Note Need for El Nido

o non-Spanish speakers, El Nido may sound like it translates to “the need.” While “need” is just about right when it applies to the ideology behind a program to help victims of domestic violence in San Diego, Calif., the phrase actually means “the nest.” The program is part of the Interfaith Shelter Network in San Diego, a collaborative effort by congregations, human services and government agencies to provide shelter and resources to the homeless. IICF board members Bryan A. Anderson, Zenith Insurance Co., El Nido, through the and Mitch Dunford, CEO Wells Publishing Inc., presented a donation for domestic violence to Rosemary Johnston (middle), executive Interfaith Shelter, was director of the Interfaith Shelter Network of San Diego. a target of insurance industry charitable giving recently when the Insurance Industry Charitable Foundation gave $5,000 to El Nido through the shelter. The money was raised by IICF’s annual bowling tournament in San Diego in October. The donation was presented to Rosemary Johnston, executive director of San Diego’s Interfaith Shelter program. Almost as important as helping domestic violence victims, is raising awareness of ways that the insurance industry can give back to the community, said Bryan A. Anderson, an IICF board member and senior vice president and regional manager of Zenith Insurance Co. “We do a number of things around town to try and raise the awareness of IICF,” Anderson said. Anderson said El Nido, a 12- to 18-month transitional living program, was picked as the recipient of the donation because it provides battered women things like a place to live, as well as their children, job training, home finance assistance and other help getting back on their feet. “It helps them start over again,” Anderson added. IICF is funded and directed by insurance industry professionals, including reinsurers, agents and brokers, property/casualty companies, health/life companies, advertising and public relations firms, law firms, accountants, IT and other companies that work with the insurance industry. In 2010 alone, the U.S. Property/Casualty industry contributed more than $500 million to charity, according to a recent report from McKinsey & Co. To be part of the next IICF Bowling Fundraiser, or to find out more about giving or working with IICF, visit www.IICF.org and click on “Events” in the menu bar.

Don Jergler West Editor

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 Chris Burand, Curtis Pearsall, Alan Shulman Contributing Writers Richard Brown, Karen Clark

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 March 19, 2012

ARTICLE REPRINTS: For reprints of articles in this issue, contact Rhonda Brown at 1-866-879-9144 ext. 194 or rhondab@fosterprinting.com. Visit insurancejournal. com/reprints for more information.

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News & Markets Utah Justices: Doctors Should Consider Impact on Family

Immigrant Files $1M Claim Against Arizona Sheriff A Mexican immigrant who had a romantic relationship with an Arizona sheriff has filed a $1 million notice of claim against the sheriff and the county. Pinal County Sheriff’s officials say the precursor to a lawsuit was received by their office, but they declined further comment. Last month, Sheriff Paul Babeu announced that he’s gay and once had a relationship with Jose Orozco while the immigrant was a campaign volunteer. Orozco has accused Babeu of threatening to deport him if he revealed their relationship. Babeu has denied any wrongdoing and has asked for an independent investigation into the matter. The Arizona Republic newspaper says Orozco’s claim creates new complexities for Babeu, who’s completing his first term as sheriff and is running for a congressional seat in Arizona’s conservative 4th District. AP

tah’s Supreme Court has ruled that lawyers can pursue a lawsuit seeking to hold doctors responsible for the actions of a man who fatally shot his wife while under their care. The justices said medical providers need to consider the consequences of the drugs they prescribe and the broader impact a patient’s treatment may have on a family. The ruling overturned a lower court decision and allows a lawsuit by the children of Kristy and David Ragsdale to proceed against the medical providers who prescribed antidepressants to the children’s father. Kristy Ragsdale, 30, was gunned down by her husband outside a Lehi church in 2008 in front of the two children, ages 4 and 19 months at the time. David Ragsdale pleaded guilty to the murder and is serving a life sentence. He claimed he would not have shot his wife if The children’s conservator sued their father’s medical prohe hadn’t been taking a mixture of psychotropic drugs. viders, but a state judge threw out the case in January 2010. Justice Thomas Lee, who wrote the court’s opinion, said The appeal was argued before justices in November. considering the dangers of a prescription or treatment should Copyright 2011 Associated Press. All rights reserved. be part of a doctor’s analysis.

Colorado Revisits Marijuana DUI Standard

Study: California Cell Phone Restrictions Reduce Deaths

divisive driving-while-high bill is back before the Colorado Legislature as senators revisit a measure to say how much marijuana can legally be in a driver’s system. A marijuana DUI bill was defeated last year amid heated opposition from pot activists and members of both parties. The legislation being considered would say drivers are too impaired to drive if they test positive for 5 nanograms or more of THC, the psychoactive ingredient in marijuana. Current Colorado law says drivers can’t be impaired by drugs but does not set a THC limit. Pot activists say impairment and THC levels aren’t directly related. The Republican sponsor of this year’s bill says law enforcement needs a standard to measure impairment.

study from the University of California, Berkeley says a nearly 4-year-old ban on drivers using hand-held cellphones is saving lives. The study finds that overall traffic deaths dropped 22 percent in that time while deaths blamed on drivers using handheld cellphones are down 47 percent. Deaths among drivers who use hands-free phones dropped at a similar rate. The university’s Safe Transportation Research and Education Center examined deaths for two years before and two years after the cellphone ban took effect in July 2008. It found a similar drop in injuries attributed to drivers’ cellphone use. The California Office of Traffic Safety released the study. The office says deaths and injuries are declining in part because of an overall decrease in drivers using cellphones.

8 | INSURANCE JOURNAL-WEST REGION March 19, 2012

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Declarations Shell Suit

Su Seeks Serial Violators

Memory Like a Hurricane

“Shell probably would not have filed this case if they did not have real fear about whether the spill plan would survive legal scrutiny.” — Attorney Brendan Cummings of the Center for Biological Diversity said a pre-emptive lawsuit by Shell Oil Co. against environmental groups that have put legal roadblocks in the company’s path to offshore drilling in the Arctic Ocean is unlikely to succeed.

“We will enforce all of the laws that are on the books to protect the honest employers who are really struggling to compete against the underground economy and to protect working people and to make sure they are paid the wages they earned.” — California Labor Commissioner Julie A. Su said in speaking about the creation of the Department of Industrial Relations Criminal Investigative Unit, which will be focusing on serial violators, a large number of which tend to be workers’ comp violators.

“The biggest challenge is to crack the denial. If you haven’t cracked the ‘it won’t happen to me thought process’ you can do everything else right and they are going to say it won’t happen to me and not do it. If you can get past the denial, the rest of it is not as difficult as you think.” — National Hurricane Center Director Bill Read, who said that science will improve to the point where forecasters can reliably issue forecasts showing where a hurricane will be a week ahead of time. But, he said, better forecasts won’t help the public if they ignore them.

iPhone Throttling “I need the money, but for me, this case is not about money at all. You don’t tell somebody ‘you have unlimited’ and then cut them off.” — Matt Spaccarelli, an unemployed truck driver and student, took AT&T to small claims court and won $850 for purposely slowing down, or throttling back, his iPhone.

Figures

Million

The total for which thousands of newspaper carriers have settled their class-action lawsuit against the Orange County Register. The carriers alleged that the Southern California newspaper’s parent company classified them as independent contractors and not employees, denying them overtime pay and mileage.

7.4

Million

That number signifies a drop in written premiums in Arizona for 2010 from a year earlier, according to a report from the Arizona Insurance Council. The report shows P/C premiums written by Arizona insurers have fallen steadily in the past four years. www.insurancejournal.com

Billion

Is how much Pacific Gas & Electric Co. proposed for its customers to pay the lion’s share of a plan to boost safety on its gas lines in the wake of the deadly San Bruno, Calif. explosion.

1-5%

of tsunami debris could reach the West Coast, according to scientists, who believe ocean currents are carrying some of the lumber, refrigerators, fishing boats and other objects from the tsunamis generated by the magnitude-9 earthquake in Japan last March across the Pacific toward the United States.

March 19, 2012 INSURANCE JOURNAL-WEST REGION | 9

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Business Moves Alleghany offers property/casualty and surety insurance. It provides specialty insurance coverages in the property, umbrella/excess, general liability, directors and officers liability, professional liability lines of business, and homeowners insurance. Transatlantic, based in New York, offers reinsurance for property/casualty, including general liability, medical malpractice, architects’ and engineers’ liability, automobile liability, and surety lines.

Golden Bear Stockton, Caif.-based Golden Bear Insurance Co. has opened its first office in the Pacific Northwest. The new office is in Edmonds, Wash. It was opened by Golden Bear Vice President Carl Heckman and his team, and Sarah Cress and Kim Seljestad. The Washington office will be responsible for the Pacific Northwest and certain Rocky Mountain states concentrating on difference in conditions insurance. Alleghany, Transatlantic Global specialty insurer Alleghany Corp. and reinsurer Transatlantic Holdings announced the completion of their previously announced merger. With the closing of the transaction, Transatlantic is now an independent stand-alone subsidiary of Alleghany. The cash-and-stock deal, which was first announced on Nov. 20, 2011, is valued at around $3.4 billion. The merger puts to an end months-long takeover talks involving Transatlantic. Last September, Transatlantic and Switzerland-based Allied World Assurance called off their previously announced merger deal. Several other suitors including Validus Holdings and National Indemnity had also expressed interest in acquiring Transatlantic. Headquartered in New York, 10 | INSURANCE JOURNAL-WEST REGION March 19, 2012

AIG, Blackstone Bailed-out insurer American International Group Inc. recently sold its entire $500 million stake in private equity firm Blackstone Group LP, according to a source familiar with the situation. AIG, which became majority owned by the U.S. government after it was bailed out during the financial crisis of 2008, had acquired the stake before Blackstone went public in 2007, the source said. The sale is part of AIG’s ongoing effort to monetize non-core assets, reduce risk and deleverage, another source said. AIG and Blackstone declined to comment. Navigators Navigators Management Co. Inc. (NMC) has launched a new operating unit that will focus on working exclusively with wholesale brokers in the United States. The unit will be called Navigators Specialty. Jeff L. Saunders will serve as president of the unit. He was previously president of the Excess Casualty Division. Other members of the executive management team for the unit will consist of Mark J. Richards, president of Primary Casualty and Don W. Roberts, chief underwriting officer. Noel Higgitt and Henry A. Lopez, both formerly regional vice presidents of NMC, will

also join the team. The New York-based NMC is part of The Navigators Group Inc., an international specialty insurance holding company. XL Group XL Group plc’s North America Construction is establishing a west coast underwriting operation in San Francisco, Calif. XL is setting up its west coast presence with Michael Simone, currently executive underwriter of construction primary casualty, and Markus Bachmann, vice president of builder’s risk. The two are relocating from New York to XL’s San Francisco office. XL Group plc, through its subsidiaries, is a global insurance and reinsurance company providing property, casualty and specialty products to industrial, commercial and professional firms, insurance companies and other enterprises. Confie Seguros, Power Auto New York, N.Y.-based Confie Seguros, a national provider of personal lines insurance focused on Hispanic consumers, acquired Power Auto Insurance, a privately-owned Cerritos, Calif.-based firm specializing in auto insurance. The purchase increases Confie’s retail presence and expands its California footprint to 160 offices. Power Auto Insurance was founded in 2007. The company offers auto insurance, as well as motorcycle, commercial and homeowners insurance. Confie has a national portfolio of regional auto insurance brokerages. It generates annual revenues in excess of $180 million. The company was founded in partnership by Genstar Capital, a private equity investment firm focused on accelerating growth and profitability of portfolio companies, and insurance industry executives. www.insurancejournal.com

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People Hilton Brown

Chuck Somers

Stephanie Roush

Edgewood Partners Insurance Center, a retail property, casualty and employee benefits insurance brokerage, named Hilton Brown to oversee client claims and advocacy in the company’s California offices in Los Angeles and Irvine. Brown will also provide claims support for EPIC’s sister company PowerGuard Insurance Services in Irvine. Brown, who has 22 years in claims management and client advocacy, will oversee client care and service, claims management, claims review and audits, negotiation and client advocacy. Before EPIC, Brown spent nine years with Marsh Inc. in Los Angeles, starting as an associate consultant and moving to vice president.

since 2008. Prior to Marsh & McLennan, she was CFO and executive vice president of Adelphia Communications Corp. from 2003 to 2007. She also served as CFO of 360networks, and has held positions with Microsoft, Metricom Inc. and Morgan Stanley. San Diego, Calif.-based Arrowhead Wholesale Insurance Services named Tony McIntosh assistant vice president of its workers’ compensation practice in Northern California. McIntosh, who will be based in Bencia, Calif., has more than 25 years of experience in workers’ compensation and has held positions in on both the carrier and agency side of the business, including field underwriting, program development and management and wholesale brokering. He will be responsible for primary and excess workers’ compensation brokering along with agency development for AWIS.

Concord, Calif.-based Jenkins Insurance Group, a Leavitt Group firm, has hired Chuck Somers as vice president of business insurance. With more than 28 years’ experience, Somers will specialize in construction, food processing and manufacturing. Somers first worked with California Casualty in San Mateo, Calif., specializing in personal lines, including homeowners and auto insurance. He later joined Andreini and Co. and worked as a producer in its agriculture and construction divisions, and worked for Arthur J. Gallagher. Jenkins provides risk management, property/casualty insurance and employee benefits programs to clients.

Dotson Louie has joined Tustin, Calif -based managing general agent Yates in its Walnut Creek, Calif., office. Louie spent the past 11 years at a national wholesale MGA. Louie, who has a broad background in commercial property/casualty as well as professional lines, brings over 20 years of underwriting and wholesale brokering experience to Yates.

Marsh & McLennan Companies announced that Vanessa Wittman, the company’s executive vice president and chief financial officer, is resigning for a senior role at Google Inc. Wittman will assist the company in the transition of her responsibilities until later this month before joining the Internet search giant. Mike Bischoff, vice president of corporate finance, will assume the role of chief financial officer on an interim basis while the company conducts a search for a permanent CFO. Wittman has been serving as Marsh & McLennan’s CFO

Stephanie Roush joined Agoura Hills based B & B Premier Insurance Solutions Inc. as an account executive. Roush, who specializes in workers’ compensation and business insurance, joined B & B after relocating to California from Colorado. Her expertise is in restaurants, nonprofits, professionals and the real estate industry. B & B provides coverage in the areas of property/ casualty, personal insurance and business/commercial insurance.

12 | INSURANCE JOURNAL-WEST REGION March 19, 2012

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News & Markets Low-Cost Online Commercial Lines Quoting Tool for P/C Agents Launched By Don Jergler

he launch of a real-time commercial lines rater that gives agents access to a handful of large carriers was announced recently by a division of Networked Insurance Agents. MyNTrack, a division of Grass Valley, Calif.-based Networked, integrates with the technology of seven carriers through the use of cloud computing to produce single-entry, multiline bindable quotes in more than 4,000 classes, according Paula Joudrey, vice president of MyNTrack. MyNTrack allows licensed and insured agents online access for a $59 signup and a monthly fee of $39, according to the company, which launched the product without fanfare in late February before making an official announcement.

14 | INSURANCE JOURNAL-WEST REGION March 19, 2012

There is no commitment to length Chartis, Hartford, Main Street America of membership, no minimum written and Progressive Corp. business and agents are not required to The lines it offers are standard prebe members of Networked, a wholesale ferred markets: business owner’s poliaggregator that provides product to cies, workers’ compensation, business small- and mid-sized auto, general ‘We’ve leveraged our agents, according to liability and existing technology, so umbrella. Joudrey, who is also vice president of marAnd we don’t have a huge keting for Networked. nut to crack to recover.’ it’s for preMyNTrack is availdominantly able in 45 states, not including the small businesses, so depending on the states of Alaska, California, Florida or risk, policies can go up to $40,000 or Hawaii, which may be added later, $50,000, Joudrey said, adding, “It is according to Joudrey. She said technidefined as a small business insurance cians on both coasts split online chat play.” duties so agents in all U.S. time zones Commissions vary by line of busican be assisted during business hours. ness and by carrier. Right now MyNTrack has only three For example, BOP policies earn 15 employees, but “we’ll gear up and grow percent on both new and renewal along with the business,” Joudrey said. business. For workers’ comp, new poliThere are no fees per transaction, cies are 10 percent and it’s 7 percent nor other hidden fees, for renewals. Business auto, general according to Joudrey. liability and umbrella are all 13 percent According to for new and 12 percent for renewals. Joudrey, MyNTrack Agent members of MyNTrack own 100 keeps its rates low percent of their books. by relying on preThe founders of MyNTrack think existing technical and they are filling a need of smaller agenpersonnel infrastruccies. ture. “Anyone out there who has a similar “We’ve leveraged offering would be competition, but our existing technolfrankly we’re not seeing anybody out ogy, so we don’t have there who has an offering like this,” a huge nut to crack Joudrey said. “I think it was a logical to recover,” she said. place to go with this. There was a need “Our touch is very for a smaller agent who didn’t need light. It’s an inexfull-scale placement, and who would pensive, online selflike to have access to markets at an service model.” affordable rate. It’s pretty clear there The insurance was a market need.” companies MyNTrack The MyNTrack quoting tool progives agents access duces quotes online in about eight minto are: Sequoia utes, according to the company. Insurance, Liberty More information can be found at Mutual, CNA, www.MyNTrack.com. www.insurancejournal.com

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News & Markets Report: Arizona P/C Insurers See Premiums Written Fall, Losses Rise the past four years: 2009 ($7.6 billion), 2008 ($8.1 billion), 2007 ($8.4 report on Arizona’s property/casualty billion). Written premiums were insurers issued recently shows a drop $8.2 billion in 2006. in written premiums to $7.4 billion, and a “It has been a trend of slightly large increase in losses incurred to $6.4 bildecreasing written premiums,” said lion for 2010. Ron Williams, executive director of The report, from the Arizona Insurance AIC. Council, shows these and other economic Williams attributes that downimpacts of the P/C insurance industry, ward trend to largely strong comwhich covers competition and the ‘It has been a trend remaining impacts mercial, home and auto of slightly decreasing of the prolonged risks; 2010 is the most recent year for data. written premiums.’ economic recession. The yearly compila“During recessionary tion of data by AIC comes from numertimes people are looking to cut back on ous sources, including insurers and the expenses whenever they can,” Williams said. Insurance Information Institute. As a sort of double whammy on the The report shows P/C premiums written state’s P/C industry, 2010 was also bad year by Arizona insurers have fallen steadily in because of intense storms, many of which

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caused “significant hail damage,” he said, adding that rising costs of parts and labor to repair those claims for commercial, home, property and auto were also contributors to the increase in losses incurred. The $6.4 billion in losses for Arizona insurers in 2010 dwarf the last five years on record. They were up from $4.6 billion in 2009 and $5 billion in 2008. Losses were $4.8 billion in 2007 and $4.3 billion in 2006. But Williams couldn’t say whether falling premiums and rising losses would be enough to start to turn the market in Arizona. “I don’t think anybody can really anticipate that,” he said. “There are so many factors involved between soft markets and hard markets. I don’t think anyone can really anticipate that.” The report also shows the 950 insurers operating in Arizona have a significant economic impact on the state. In terms of employment, in 2010 there were more than 28,000 P/C insurance professionals residing in the state, and insurance companies paid in excess of $153 million in state premium taxes. More than $9 billion of P/C insurers’ assets were invested in Arizona municipal bonds, according to the report. Insurers invest in a variety of public projects including airport, street, highway and water utility construction, as well as education-related bonds, and insurers also purchase general obligation bonds that finance ongoing government operations, the report shows. www.insurancejournal.com

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Lexington Insurance Company, a Chartis company, is the leading U.S.-based surplus lines insurer. Chartis is the marketing name for the worldwide property-casualty and general insurance operations of Chartis Inc. For additional information, please visit www.chartisinsurance.com. All products are written by insurance company subsidiaries or affiliates of Chartis Inc. Coverage may not be available in all jurisdictions and is subject to actual policy language. Non-insurance products and services may be provided by independent third parties. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. 2012 © Chartis Inc. All rights reserved.

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News & Markets Lawyer Claims Highest Known Workers’ Comp Settlement in California History By Don Jergler

ttorney Christopher Asvar believes he has secured the highest known workers’ compensation insurance settlement in California history, totaling $8.9 million on behalf of a Antonio Enriquez, who suffered a traumatic brain injury in 2004 at the age of 18 after falling from a scaffold. Asvar said he’s talked to “structured settlement folks up and down the state,” and with those negotiating the settlement on behalf of California’s State Fund, and everyone he’s spoken with agrees this is the highest known workers’ comp settlement in California. Workers’ comp settlements in California are not tracked by size, and what those involved with the case wouldn’t know about would be confidential settlements, or cases where the “usual players” were not involved, Asvar said. According to State Fund, this may very well be one of the largest settlements that California’s biggest provider of workers’ comp insurance has been involved with. “It’s pretty darned large,” said State Fund spokeswoman Emily Gorin. “I think it would be safe to say that this ‘It’s pretty darned is among our biggest large. I think it cases.” would be safe to say Gorin, who said research is being conthat this is among ducted to see if this our biggest cases.’ is State Fund’s largest settlement, noted that State Fund has a lot of high risk businesses, and insures a large number of big employers. Gorin said the settlement was so large due to the nature of Enriquez’ injuries, because he’s so young and that 18 | INSURANCE JOURNAL-WEST REGION March 19, 2012

intense care is likely to be required for the rest of this life. “He had a catastrophic injury as a young man,” Gorin said. “When somebody has an injury like that he’s going to need help the rest of his life. Settlements like this can get awfully large, given the extent of his injuries and his age. He’s going to need a lifetime of medical treatment.” Three years ago, Asvar who specializes in workplace and civil brain injury litigation, took Enriquez’ case. Enriquez had five years earlier fallen 20-foot from a scaffold while employed as a painter. He suffered from depression, cognitive deficits, anxiety, psychosis, selfmutilation and a psychiatric diagnosis of multiple personality disorder, Asvar said. “I think the challenge was showing how settling would save a great deal of money for the carrier, as opposed to proceeding forward,” he said. “This is a young man who will need care for many years to come.” Enriquez was at first in a day-time rehab facility, but over time his father, the primary care giver, struggled to keep his own job and deal with his son. So to assist the father, his son was placed in a rehab facility day and night, Asvar said. “It could have been double over his lifetime,” he said of the settlement amount. “I think if left to their own devices, the father would have been run down and the son would have

been abandoned.” But as to the question whether the workers’ comp settlement is the highest ever in California? “It’s huge. Is it the biggest ever? I don’t know,” said workers’ comp attorney Don Barthel, with Bradford and Barthel LLP in Sacramento. Barthel, who has argued several landmark worker’s comp cases in California, said he’s seen settlements of $5, $6 and $7 million, but “my firm guess is that is not the highest.” He added, “$8.9 million is pretty high.” The settlement, signed Jan. 25, became final on Feb. 25 but it wasn’t made public until March. The structured settlement will be paid monthly over the extent of Enriquez’ life. www.insurancejournal.com

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News & Markets Commercial Lines Prices Up for 4th Straight Quarter: Survey

ommercial insurance prices increased all of 2010. Prices for commercial property an aggregate 3 percent during the increased for the third consecutive quarter. fourth quarter of 2011, the fourth consecu“While modest, aggregate increases in tive quarter during which prices for all prices continued, and more importantly, standard commercial lines rose. these increases ‘We are now at a Additionally, earned price accelerated in point where we can each quarter of increases are beginning to offset portions of reported claim cost ‘call the pricing turn’ 2011,” said Thomas inflation levels, according to the Hettinger, propin the market.’ most recent Commercial Lines erty/casualty Insurance Pricing Survey from Towers sales and practice leader for the Americas Watson. at Towers Watson. “We are now at a point CLIPS data reveal that, once again, prices where we can ‘call the pricing turn’ in the for workers’ compensation and commermarket.” cial property showed the largest quarterly CLIPS data also show that specialty lines increases — in the mid- to high-single digas a whole were relatively flat, as directors its — followed closely by general/products and officers (D&O) liability pricing finally liability. showed signs of stabilizing. During the fourth quarter of 2011, workPrice increases were observed across all ers’ compensation pricing continued to account sizes for the standard commercial exhibit the increasing trend observed lines, with the largest increases observed in earlier in the year, after flat pricing during mid-market accounts.

20 | INSURANCE JOURNAL-WEST REGION March 19, 2012

Historical loss cost information reported by participating carriers points to a 3 percent deterioration in loss ratios in accidentyear 2011 relative to 2010. This indication is more favorable than the estimated level of 5 percent deterioration for the accident-year 2010 loss ratio over 2009, as earned price increases are beginning to offset portions of reported claim cost inflation. CLIPS data are based on new and renewal business figures from carriers underwriting the business. This survey compared prices charged on policies underwritten during the fourth quarter of 2011 with the prices charged for the same coverage during the same quarter in 2010. For the most recent survey, data were contributed by 41 participating insurers representing roughly 20 percent of the commercial insurance market (excluding state workers’ compensation funds).

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News & Markets Investigative Unit to Target California’s Serial Labor Law Violators By Don Jergler

alifornia Labor Commissioner Julie A. Su’s aim is to send a message to the state’s underground economy. The message is that the principals of companies with shady employment practices, such as those who try to cut costs by underreporting employees or employee wages to save on workers’ compensation premiums, may face jail time. And Su is backing up her message through the creation of the Criminal Investigative Unit. The unit, an arm of the Department of Industrial Relations, will be focusing on serial violators, and a large number of those violators tend to be workers’ comp violators, Su told Insurance Journal. “We will enforce all of the laws that are on the books to protect the honest employers who are really struggling to compete against the underground economy and to protect working people and to make sure they are paid the wages they earned.” According to her, the unit will “level the playing field for California” by targeting employers who try to scam the system by “underpaying, underbidding and underreporting.” DIR’s field enforcement already goes out the workplace to check on and identify red flags being thrown up by lawbreakers, but the investigative unit gives DIR the firepower to step up the punishment for these violations and ferret out those whose violations extend beyond just one or two, Su said.

‘The largest percentage of citations that my office issues is for failure to secure workers’ compensation as required.’ “It makes it more costly to violate the law,” she said, noting the cost will be above the normal citations, and that “these provisions provide for jail time.” She added, “We just want the message to be very strong: the good guys and working people who are playing by the rules to make www.insurancejournal.com

a living — we are out there to protect them.” The unit will look at several workplace violations, most notably wage violations and workers’ comp fraud, Su said. “The largest percentage of citations that my office issues is for failure to secure workers’ compensation as required,” she said. Under the state’s labor code it’s a misdemeanor for failure to obtain workers’ comp punishable by a fine and up to a year in county jail. The California Professional Association of Specialty Contractors applauded the creation of the unit. “What we’ve been concerned about regarding flagrant violations for those of us in construction is that they don’t get caught quickly enough,” said Brad Diede, executive director of CALPASC. “It takes a long time for state agencies to be able to catch them and convict them and publish the conviction. What we think this is going to help is to convict these criminals, these bad actors, more quickly.” The violators Diede is talking about often are able to under-bid legitimate contractors on jobs, and that puts those who are abiding by the law at a disadvantage, he said. “The cost of compliance has fixed costs to it,” he said, adding that legitimate con-

tractors pay things like payroll taxes, and ensure appropriate funding for workers’ comp premiums and funding for safety programs. “Cheating contractors don’t add those costs to the bids,” he said. “Legitimate contractors lose the work. In this economy particularly, legitimate contractors need to get the work.” A report issued late last year from University of California Berkeley’s Center for the Study of Social Insurance, “Measuring the Impact of the Underground Economy on Employers & Anticipating the Effects of Health Reform,” states an estimated average of $15 to $68 billion of California wages each year went unreported from 1997 to 2005. This amounted to 4 percent to 12 percent of total wages in California, and many more dollars may have been misreported into lowpremium rate class codes, the report states. For Su, it’s all about the serial violators, who not only repeatedly flaunt California labor laws, but who operate so brazenly as to factor in the cost of citations into their bottom lines. “I do think they’re definitely a priority for me,” she said of serial violators. “They have operated under the radar for far too long. We’re trying to change that calculus.” March 19, 2012 INSURANCE JOURNAL-WEST REGION | 21

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Marketing Breathing Life into a P/C Agency By Matt Martin

f someone were to hand you a blank check to enhance your bottom line, would you let it sit on your desk and collect dust? Or, would you fill in a number ending with a few zeroes and take some extra cash for doing no extra work. For most business owners, that’s the ultimate no brainer. Even so, it’s surprising that many property/casualty agents are content with leaving money on the table. Although they have a life insurance license, they fail to capitalize on the opportunity for extra commissions and improved client retention. At the top of just about any list of reasons why P/C agents are reluctant to sell life insurance is prolonged underwriting. They are used to relatively quick turnaround with auto, home, and liability insurance, while a life insurance app seems to hang in limbo forever. Such a complaint has not fallen on deaf ears. Carriers are recognizing the problem and many have developed express underwriting processes, particularly for term life products. There are also policies that don’t require a physical. While the cost can be slightly higher than fully underwritten plans, some agents and clients prefer the convenience. Additionally, P/C agents that work with a life brokerage agency discover that the process is as painless as possible. Simply submit

22 | INSURANCE JOURNAL-WEST REGION March 19, 2012

the application and deliver the policy, while the brokerage handles everything else. Benefits of Selling Life Insurance Beyond the obvious benefit of additional income by adding life insurance to your product menu, there are others to consider. As any good fisherman knows, the more hooks you have in a fish, the less likely it will get away. The same concept holds true for your clients. Already insuring their car and home is a great start, but adding life insurance can keep them from leaving. Let’s say Bob, a life insurance agent in town, gets referred to your clients for life

Insuring a client’s car and home is a great start, but adding life insurance can keep clients from leaving. insurance. Bob sells the newly married couple two basic 20-year term-life insurance policies. At first glance, this may not seem to be a particular threat to your business. However, there’s more to the story. Bob has a relationship with Sally, a local P/C agent, and recommends that the couple have her quote their auto and home insurance. Whether they leave or not isn’t important, for this example. But what’s significant is the fact that you are now forced to work

harder to beat anything Sally presents to your clients. The big question is how you go about cutting Sally out of the picture before she even meets your client. You do it by selling life insurance and making it well known to your clients that you offer more than just auto and home coverage. Let’s use this same example, but take it a step further. Let’s say Sally contacts your clients through a referral from a different source. Even if she can beat your current auto and homeowners rates, the clients may opt to stick with you for convenience. Many individuals, families and business owners prefer to keep all of their insurance in one place. If you offer life insurance and another agent doesn’t, it can only help you gain and retain more clients. Growing Life Insurance Sales There are two popular strategies you can use to increase your life insurance sales and bring more money into your agency. Many P/C agents are already life licensed and passively sell life insurance. The two strategies can take your current life insurance sales and increase them significantly. The first strategy is partnering with a life insurance agent. There are many life insurance agents looking for a P/C agency to work beside. Life insurance agents are happy to give you up to continued on page 24

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Marketing P/C Agency, continued from page 22

60 percent of the commission on anything they sell to your clients. There are a few important things to remember when selecting a partner: • Be sure your personalities work well together. • Have a detailed and clear working arrangement. You want to be sure the life agent works with your clients on your terms. • Prescreen any proposed marketing material that’s to be sent on your behalf. With the right combination, the addi-

tional sales that are generated will provide consistent agency income. The feedback from these partnerships has always been positive. The P/C owners are quite happy taking a cut of the life sales because even 50 percent of something is more than 100 percent of nothing. The life agent couldn’t be happier taking the other 50 percent of the commission since it comes from a new client that came from a referral. It doesn’t get better than that. Even if you’re making some life insurance sales currently, this approach could dramatically increase your revenue. Life specialists are experienced in finding larger sales and even more of the smaller sales you haven’t tapped into yet. There is another hidden benefit in using this strategy. Experienced life producers can easily identify large-case opportunities using advanced concepts such as buy-sell solutions, estate planning, and charitable gift strategies. The life insurance agent is also accustomed to asking for referrals from each and every client, whether or not a sale is made. This will undoubtedly generate more busi-

ness not only for the life agent, but also for you as a P/C agent as well. For example, your life insurance partner, Joe, is meeting with the Smiths. He doesn’t get a life insurance sale, but asks them for referrals. The Smiths refer him to their friends, the Jones family, who recently had a baby and live in the next town over. Not only does Joe sell the Jones life insurance, but he also asks if they would like a free, no obligation quote on their homeowners and auto insurance. All of a sudden, you are collecting life commissions and receiving free leads, just because you partnered with a life insurance specialist. Using Resources Another effective strategy is to use the resources of a life brokerage agency, one that represents a broad range of life insurance companies. This gives you access to extensive marketing support opportunities, so you can send out company specific marketing pieces to generate more life insurance interest. To make it even better, the brokerage firm takes care of everything in between the application and policy delivery. Let’s assume you decide to try increasing your sales by working with a brokerage agency without bringing in a life specialist. If you do run into a case where there is an advanced concept opportunity, you won’t be alone. You will have access to advanced sales specialists within the brokerage, as well as from the life carriers. Whether you need a quick review or someone to join you in meeting with the client, everything is made as convenient as possible. If, after taking the time to read this, you’re still not convinced that breathing life into your P/C practice is a step you want to take, there’s no need to worry. No one can force you to cash that blank check sitting on your desk. However, you just may be missing out on an additional revenue stream that could take your practice to the next level. Don’t worry. Your competition may not hesitate at the chance to make that extra money. Martin, a life insurance agent, is an Illustration Specialist at First American Insurance Underwriters Inc. in Needham, Mass. Phone: 781-449-6800. Email: mmartin@faiu.com.

24 | INSURANCE JOURNAL-WEST REGION March 19, 2012

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Monarch Expands It’s ‘Royal Treatment’ into Hawaii Monarch E&S Insurance Services, one of California’s leading managing general agents and wholesalers, is expanding its ever-growing reach into paradise. “We’ve expanded to Hawaii,” says owner Derek Borisoff. “And the irony is the message in our ad campaign. We are servants to our agents who are deemed ‘royalty’ in our eyes.” Hawaii is our only state to have a history of royalty. Although, on Jan 17, 1893, the monarchy came to an end in Hawaii, Monarch’s expansion into Hawaii will restore the “Royal Treatment” to their retail agency customers. “We want to make sure that we are a good fit before appointing an agency,” Borisoff says. “The mainland perceives Hawaii as a very laid back vacation paradise, but the reality is the Hawaiian agents are as sophisticated and focused on customer service as anyone.” To ensure they are a good fit for the islands and for their customers, the MGA matches up underwriters from their mainland offices to the personality and culture of the offices in Hawaii. “Matching up our underwriters with the personalities of their offices helps facilitate good communication,” he says. “The ‘Aloha Spirit’ is alive and well on the Hawaiian Islands. It’s about how you treat people. Service that comess One Who Serves from the heart.” Monarch writes a broad range of coverages in n the state of Hawaii and has been successful in n developing specific programs for agents with h such a need. Borisoff makes the trip to the state once a month to make sure that all service and market expectations are being met and that everything runs smoothly.

Derek Borisoff, President / CEO monarchxs@monarchexcess.com

â&#x20AC;&#x153;Our Hawaii agents expect and deserve superior service and we provide just that,â&#x20AC;? he said. â&#x20AC;&#x153;The success of our company revolves around our people,â&#x20AC;? says Borisoff, who has been at the helm of Monarch since 1994. â&#x20AC;&#x153;We have a good reputation for taking care of our people which means we donâ&#x20AC;&#x2122;t lose people very often. As a result, our retail agent customers receive a knowledgeable, enthusiastic and engaging underwriter who is there to help them place their account.â&#x20AC;? Borisoff, who lives in Southern California and has a home on the Big Island, has a strong thorough knowledge of Hawaiian customs and expectations when it comes to insurance. He has been visiting Hawaii his entire life. â&#x20AC;&#x153;Hawaii is a state that Iâ&#x20AC;&#x2122;m very familiar with,â&#x20AC;? says Borisoff, who has several family members who live in Hawaii, and in fact, his grandfather, a famous cellist, was instrumental in starting the Hawaii Philharmonic. He adds, â&#x20AC;&#x153;Hawaii is a great place to do business.â&#x20AC;? Monarch writes both personal and commercial lines in Hawaii, including marine business and professional liability. Monarchâ&#x20AC;&#x2122;s commercial lines product list features property including full wind, general liability, professional liability, GKLL, and marine. Monarch delivers homeowners including ocean front and high protection class, jewelry and ďŹ ne art ďŹ&#x201A;oaters, and personal umbrellas. Monarch has the pen for most of the ďŹ ne carriers that it does business with. The 26-year-old independently owned Californiabased MGA has six California locations: La Crescenta (headquarters), San Diego, Rancho Mirage, Simi Valley, Novato and Fresno. Monarch also has an ofďŹ ce in Arizona.

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The Kaufman Financial Group is a successful, international insurance organization poised for aggressive growth. With numerous insurance-related entities, the Kaufman Financial Group is looking to grow through acquisitions in a variety of areas. For successful firms and individuals in the businesses of wholesale insurance distribution, loss control, risk management, premium audit, premium finance and claims administration, the Kaufman Financial Group provides an outstanding platform for growth. How is the Kaufman Financial Group well-positioned for acquisitions? Financial Strength – With a strong, debt-free balance sheet and long track record of profitable growth, we can fund a majority of acquisitions internally. Independent and Private – Our decisions are not driven by outside sources such as Wall Street or private equity. Rather, we make quick decisions based on the value an organization and its talent can bring to the Kaufman Financial Group. Flexible Approach – Kaufman Financial Group was built through strategic acquisitions with a thoughtful approach to fit. We have no set formula or approach for acquisitions so we can be flexible in meeting the needs of the seller. Entrepreneurial History and Culture – We value risk-taking and new ideas – it’s the foundation on which our company was built. We move decisively when we see a great opportunity. What can Kaufman Financial Group offer your business? In addition to partnering with a financially strong organization, joining the Kaufman Financial Group’s network of insurance-related companies provides immediate access to an unparalleled array of resources. Our financial strength provides us with the ability to make investments in people and technology that continually outpaces the competition. Specialty products and services enjoy immediate growth potential through our distribution network of 45 offices worldwide and more than 15,000 retail brokers and agents. Our clout in London and the ability to place international business gives your organization instant leverage in the world marketplace. Our corporate services support team – accounting, finance, human resources, information technology, marketing and advertising – allows your organization to focus on its core business. What is Kaufman Financial Group looking for in potential acquisitions? Any insurance professional or company that can add value to any of the Kaufman Financial Group companies is a potential fit. We are looking for successful companies in the areas of wholesale brokerage, underwriting, loss control and risk management, premium audit and claims administration. Contact us today to discuss how we can benefit each other.

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Growing Your Property Casualty Agency The Death of Direct Mail Is Greatly Exaggerated Converge Direct Mail with Digital Marketing

nly marketers that “don’t get it” pay printers and the U.S. Postal Service (USPS) to output and distribute printed materials that promote their business. The cool kids eschew dead trees and trucks and use digital media exclusively to instantly communicate with like-minded folks and firms. By Alan Shulman To them, direct mail is an advertising anachronism akin to the Yellow Pages. This is fallacious thinking, as the Yellow Pages are seldom looked at, while postal mail is perused five or six days a week. To paraphrase Mark Twain, “the death of direct mail is greatly exaggerated.”

received. I scanned the code with my iPhone QR reader app (free) and was taken to a small Gecko-emblazoned welcome page that thanked me for reading my mail. It also contained two buttons: “Click to Call” and “Get Quote Now.” The first button dials their 800# for you; the second takes you to a mini-questionnaire to complete for your quote. This approach is another excellent example of converging direct mail and digital marketing. Independent agents can do something similar in their own mailings. Start by visiting a site like QRstuff.com to create your own QR codes.

Cool Kid Speaking of cool kids, Selena Gomez is an under-20 Disney star. According to an interview posted on TUAW.com, Gomez said she likes to send and receive mail the old-fashioned way. So if this popular Millennial likes Marketing Postcards and Letters getting things in the mail, others of her genDirecting postcards to prospects is a loweration do as well, even if they don’t readily cost way to test the quality of a mailing list admit it. It’s why Gomez asked to invest in and to be seen. Target-focused letters sent to “Postcards on the Run,” an iPhone/Android specific prospects also can be effective, parapp she liked and used. It allows users to ticularly when they employ digital marketcreate and send real posting convergence and more. cards from their phone, For instance, you can Less first class mail featuring photos they build a picture “postcardmeans that your mail letter hybrid” by combintook and messages they stands out simply by ing color photos, oversized type. Cards are printed virtue of being there. headlines, and creative by the vendor and mailed to recipients. This techtarget-specific text. Visit nology represents a simple convergence of www.agencyideas.com/instant for examples. the old and new worlds of communication. Tip: Always send your mailings by first class to make certain they are promptly delivered GEICO Mails and any non-deliverables are returned. GEICO regularly uses direct mail to generate phone calls, web visits, and mobileDown But Not Out based quote activity. It performs the latter Over a recent four-year period, first class by including a Quick Response (QR) code mailings have declined by 20 percent. Just in its marketing letters, including one that I look in your mailbox; there’s not nearly N10 | INSURANCE JOURNAL-NATIONAL REGION March 19, 2012

as much mail (first class and otherwise) in there as there used to be. The USPS is aggressively cutting costs to stay viable. But, what’s

bad for them isn’t necessarily bad for you. Less first class mail means that your mail stands out simply by virtue of being there. Give 110% Still, your success depends on more than an empty mailbox. Use Ed Mayer’s famous 40-40-20 direct marketing rule as your guide. Essentially, it states that 40 percent of success depends on your mailing list. Another 40 percent is who you are and what you offer. The remaining 20 percent is creativity, paper and postage. Perhaps today, another 10 percent could be added for converging your direct mail piece with digital marketing. Yes, these numbers add up to 110 percent. But hey, isn’t that what you are supposed to give according to that equally famous sports cliché? 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

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MyNewMarkets Fine Arts Market Detail: Dowell/IAS (www. dowellias.com) insures private collections (e.g. jewelry, gems, coins, stamps, etc). Classes include museums and associated businesses with a wide selection of lossprevention and safety services. Retail insurance coverage is available for fine art and

collectibles stores. Comprehensive insuredto-value (no deductible) coverage is available for private collections. Available limits: As needed Carrier: Lloyd’s States: All states Contact: Laurette A Merusi at 201-794-7144 or email: lmerusi@dowellins.com

Workers’ Comp / Payroll Service Market Detail: LowRateWorkComp (www.LowRateWorkComp.com) professional employer organization provides employee leasing services. It can manage: payroll administration; workers’ comp insurance coverage for employees through the leasing company; and filings for FICA and Medicare taxes, federal unemployment taxes, state unemployment taxes and workers’ comp. Available limits: As needed Carrier: Unable to disclose States: All states Contact: Customer service at 850-625-5190

Builders Risk Buydown Market Detail: Technical Risk Underwriters (www.truins.com) has deductible buy downs for projects in the course of construction. Available limits: Minimum $100,000, maximum $25 million Carrier: Various, non-admitted States: All states Contact: Mike Pilla at 512-591-8785 or email mpilla@truins.com.

Medical Marijuana Dispensaries Market Detail: Ck Specialty Insurance Associates (www.ckspecialty.com) offers general liability for medical marijuana dispensaries and grows. Features include: medicine agreed value; no coinsurance on medicine; sewer backup; employee dishonesty; tenants glass; accounts receivable; and outdoor signs. Available limits: Maximum $1.75 million Carrier: Lloyd’s States: All states Contact: Justin Connors at 800-411-0083. Email: justin@ckspecialty.com

Mexican Insurance Market Detail: Mexican Insurance Specialist (www.macafeeandedwards. com) assists in placing insurance exposures in Mexico, including: manufacturing or warehousing operations, construction risks, transit/cargo exposures, crime, K&R, auto, aviation, and others. Available limits: As needed Carrier: ACE, Allianz, AXA, Chartis, Chubb, GMX, GNP, Mapfre, QBE & Zurich States: All states Contact: Juan Buendia at 213-629-9777 N12 | INSURANCE JOURNAL-NATIONAL REGION March 19, 2012

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Tell us about your client. . .and your ideas. We’ll listen. And then we’ll gather our resources - experts on market developments, coverages, issues and appetites. Our specialized industry teams will provide information on trends, demographics and market differentiators. We’ll recommend the best solution for your client. Pick up the phone and give us a call today. There are 27 Crump ofﬁces throughout the US, waiting to hear from you.

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IDEA EXCHANGE

The Competitive Advantage 25 Years in Agency Management Today’s Market Demands Greater Efficiencies, Operational Management and Discipline

have been working with agency owners in one capacity or another for 25 years. During this quarter-century, some aspects of agency management have greatly transformed, while others have not changed at all.

Clusters & Aggregators A noticeable transformation is the development By Chris Burand of clusters, aggregators and other similar market-providers. These providers have completely changed managing carrier relationships for thousands of agencies. For small agencies and for startup agencies, this has been a wonderful change. For some medium-sized agencies and some carriers, this change has been less than wonderful (although they may not know this) because they have entered into Faustian bargains with these organizations. IT Systems Information technology (IT) systems have changed dramatically, too. When my insurance career began, I knew many agencies that did not even have a single computer. Now, almost every agency has an IT system. A great IT system, when properly used, can help decrease the cost of sales, decrease errors and omissions (E&O) exposures, improve morale, decrease employee turnover and related costs, and improve the quality of customer service. The improvements and opportunities for agencies in this area are phenomenal. At the same time though, the fan-

tastic opportunities these systems provide are often so abused and neglected that I sometimes wonder why some agencies even have an IT system. If, for example, agency management does not require employees and producers to document files correctly, why bother with the IT system at all? To a large extent, the system becomes so underutilized, it is just a waste. An important reason Wal-Mart is so fantastically successful is that it uses its IT system more effectively than many other similar retailers. By using its system so successfully, Wal-Mart is able to cut prices below the cost of what other retailers pay. Other stores have the opportunity to sell all the same products (i.e., all the carriers they would ever need) but most cannot match Wal-Mart’s price. Young people in this industry today understand the power of technology. They know that becoming more efficient (like

N14 | INSURANCE JOURNAL-NATIONAL REGION March 19, 2012

Wal-Mart) is critical. The alternative is to keep focusing on just making sales and believing more companies are the solution to all an agency’s woes. Producer Management Producer development opportunities have grown magnificently during the past quarter century. The industry today has a number of great producer hiring and training programs. When hiring producers, these programs can help reduce the otherwise horrible failure rate. Unfortunately, I see few agencies truly taking advantage of these programs. This is a key issue because producer management is even more critical for agencies today. Agencies are larger, commission rates are less, and producer development cost is higher. For some agencies though, the old way of just telling people to go out and sell must be working because so many agencies keep on trying it. ‘ E&O Management E&O management simply has not kept up with the times. Many agency owners/managers still truly believe in luck, good karma, and that bad things always happen to others. Plaintiff attorneys, though, have kept up with the times. And while agencies may not always use technology well, attorneys do. They know how to quickly find incriminating evidence using state-of-the-art methods. Companies are suing their own agencies more often, too, and they know where to look in your files. I have not seen evidence that positive thinking alone will overcome these developments. Cost In two wonderful books, “The Core” and “Beyond the Core” (which should be mustreads for all executives, entrepreneurs and agency owners), author Chris Zook analyzed thousands of market leaders and losers in www.insurancejournal.com

cent but another carrier offers to write the every SIC code. The results are amazing. risk for 20 percent less than expiring while Every market leader had the lowest cost. insisting the loss ratio will actually decrease, They may not have had the lowest prices, someone is either playing with reserves but they had the lowest cost. Another key to achieve better results or simply fooling finding: The financial services industry, themselves. including insurance, had the greatest rate For agencies, of people trying to cost was not previfool themselves that Every day in this industry ously a factor because focusing on the latest I see the immensity of the agencies were small and greatest cross-sell challenges and changes and each new sale would work. ahead — and I see the made the owner more Historically, cost money (notwithstandhas not been a driver opportunity. ing the opportunity in this industry. It is cost). In the past, a good salesman could creonly a delayed driver for insurance compaate enough fat to pay for inefficiencies. Good nies because with reserves and tails, cost is sales paid for good morale, too. either not adequately immediately evident, With larger agencies, cost became more and if it is evident but does not paint the complex and in the softest market ever, it is picture management wants, games can be much more difficult to create excess fat. In played with reserves and price setting. For today’s market, it is quite easy for an agency example, today when a large commercial to spend more than it makes. client has a consistent loss ratio of 80 per-

Every day in this industry, I see the immensity of the challenges and changes ahead, and I see the opportunity. While recognizing sales, positive attitudes and good karma remains important, the market now demands discipline, true efficiency,and true operational management. In today’s marketplace, operations have become more important and will become even more important. The great potential is in the combining the historical mindset of cutting deals and positive thinking with the new need for strong operational management. The change is not that one or the other is more important, but that if an insurance agency is going to thrive, it needs both — just like all true market leaders have both. 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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March 19, 2012 INSURANCE JOURNAL-NATIONAL REGION | N15

SPECIAL REPORT

Insurance Journal examined recent product and market announcements in the property/casualty insurance industry. Here are a few market sectors that are delivering hot market opportunities for agents and brokers today.

New Hope in Housing Market

012 is delivering a sense of growing optimism for the housing industry — a welcomed relief to a market that has been troubled in recent years. Housing starts in January 2012 were up 1.5 percent from December 2011 and up 9.9 percent from January 2011, according to the Department of Commerce. Sales of new single-family homes in January 2012 were up 3.5 percent from January 2011. “This is actually the best sales pace we’ve seen since April of 2010, when the home buyer tax credit was in effect,” noted Barry Rutenberg, chairman of the National Association of Home Builders (NAHB) and a home builder from Gainesville, Fla. “Moreover, many recent indicators — from our builder confidence surveys to housing

starts and permits data and the expanding list of improving local markets — have provided evidence that consumers are becoming more confident about making a home purchase.” Even so, foreclosures are expected to rise significantly in 2012, according to analysts. Homes in some stage of foreclosure accounted for nearly one in four homes sales during the fourth quarter, said RealtyTrac, an online marketplace for foreclosure properties in the United States. The high-rate of U.S. foreclosures is helping to drive the growth in what some experts call the brightest spot in the housing sector — multi-family projects. The apartment and condo sector continues to be a bright spot in the housing market, with the overall index at its highest

N16 | INSURANCE JOURNAL-NATIONAL REGION March 19, 2012

level in six years, said National Association of Home Builders’ Chief Economist David Crowe. The index measures builder and developer sentiment about current conditions in the multifamily market. “The rental components have been the driving force behind the increased index level. And although the for-sale component remains weaker, it is still double what it was just six quarters ago,” he said. Analysts for Capital Economics, an international economic research consulting firm, predict multi-family housing starts will increase by as much as 50 percent in 2012. The property/casualty industry has responded to conditions in the housing market with products focused on protecting home values, as well as other products centered on multi-family projects. Here are a few www.insurancejournal.com

High-Tech Crime and the Cloud

he technology industry has been a growing sector in today’s economic environment and many insurers are responding by developing new products to cover cyber related exposures. Data breaches have been in the news almost constantly and businesses and insurers are paying attention. Betterley Risk Consultants recently stated that it believes interest in technology coverage is largely driven by concerns over privacy breaches. A Betterley sponsored survey found that more than 95 percent of readers see coverage for data breaches as highly or somewhat interesting. “Combined with increasing pressure by business partners to show evidence of real coverage, the days of self-funding this risk may be about over,” Betterley states. As demand for this coverage increases throughout the business world, carriers have responded by offering higher capacity and more targeted products. Betterley reports that large carriers will offer up to $25 million in limits for technology risks, and even small carriers will put up between $5 million and $10 million in limits. Excess coverage is available, too. Cyber related crimes continue to reach new levels of sophistication as well, opening

the door to additional risk. “We continue to witness cyber attacks of unprecedented sophistication and reach, demonstrating that malicious actors have the ability to compromise and control millions of computers that belong to governments, private enterprises and ordinary citizens,” said Mustaque Ahamad, director of Georgia Tech Information Security Center and the Georgia Tech Research Institute in a report, “Georgia Tech Emerging Cyber Threats Report for 2012.” Cyber crimes such as search poisoning, mobile web-based attacks and stolen cyber data for marketing use have become more common, Ahamad says.

housing insurance products responding to recent trends.

the insurer and Marsh U.S. Consumer. The program is currently available to property owners and managers in 30 U.S. states, with rollout to additional states planned for later in 2012. The LeaseTerm Insurance Group is another company that recently introduced a multifamily policy. The product was designed to protect multi-family property owners and managers in reducing the risk of lease defaults and turnover expense. LeaseTerm is teaming up with Great American Insurance Group to offer the product. The product can help with administration of security deposit, collections, eviction and recovery expenses. Another new product for a niche within the multi-family real estate sector comes from Assurant Specialty Property and

Multi-family: In response to the growing number of multi-family tenant property owners and managers requiring tenants to purchase renters insurance, Marsh’s Real Estate Practice and Marsh’s U.S. Consumer division, created the Multi-Family Tenant Renters Insurance Program. This program provides property owners and managers with a way to offer guaranteed renters insurance coverage to their tenants. The coverage also protects property owners and managers against losses caused by tenants to their units or to surrounding units. The program is underwritten by an “A” rated U.S. insurer. Policy administration and customer support services are provided by www.insurancejournal.com

In the Cloud: Cloud computing is another area that is attracting attention. Forecasters predict this industry segment will reach nearly $241 billion by 2020. However, this fast-growing technology brings in a new element of risk exposure when it comes to data protection. The concentration of data, applications and systems on mega-servers maintained by remote personnel presents distinct risks, according to Judi Lamble, vice president, claims, for OneBeacon Technology Insurance. The risks include loss of service and data, invasion of privacy, compliance

issues and other disputes. “As with any emerging technology, balancing risk tolerance with business benefit is key,” Lamble wrote in a recent Insurance Journal article. “Mitigating that risk with appropriate insurance coverage, such as a data protection and errors or omissions insurance policy, is one way to strike the balance.” Lloyd’s MGA CFC Underwriting recently launched a cyber liability product with wording to cover the risks of storing data in the “cloud.” CFC designed the new policy to include the risk of data breach at a third-party cloud provider. “Cloud computing services are increasingly popular and undoubtedly a huge step forward,” said Graeme Newman, CFC director. “But they do present businesses with new risk exposures.” Newman said that when a cloud service is adopted, data is effectively “given away” without any type of contractual agreement to protect it. Since most cyber liability policies focus on the policyholders’ systems, these policies end up excluding the third-party coverage in the event of a breach. The new CFC policy will cover both the policyholders’ systems and a data breach or data loss from a third-party cloud system.

SureDeposit, which launched a risk management product for the multi-family housing industry. Assurant purchased the Livingston, N.J.-based SureDeposit in June 2011. Now Assurant is integrating SureDeposit’s security-deposit alternative through surety bonds with its line of renters insurance. The product will target multi-family housing managers and owners. The renters insurance protects property owners and managers from resident-caused damages. The surety bond covers companies against lost rent, damages and other lease violations. Wells Fargo Insurance Services also caters to the broad multi-family housing market with its affordable housing product. It launched the Multi-family Affordable continued on page N18

March 19, 2012 INSURANCE JOURNAL-NATIONAL REGION | N17

SPECIAL REPORT

Hot Markets Green Building, Retrofits Offer Growing Opportunity

reen homes accounted for 17 percent of the overall residential construction market in 2011. And the trend of going green isn’t expected to stop. By 2016, green homes are expected to grow to between 29 percent and 38 percent of the market, according to the National Association of Home Builders’ (NAHB) recently released “Green Home Builders and Remodelers Study.” The housing market is critical to the U.S. economy, and despite the drastic downturn in housing starts since 2008, green has grown significantly, says Harvey Bernstein, vice president of Industry Insights and Alliances, McGraw-Hill Construction. The greening of existing homes is also a hot spot in the construction market. Remodeling homes to be green is expected to grow dramatically as some 22 percent of remodelers report that they anticipate they will be dedicated to green work in 2016.

That’s nearly triple the 8 percent who report being dedicated to green work in 2011, the study said. The greening of commercial properties has also experienced tremendous growth in recent years, which may be opening doors for brokers targeting these risks. Green retrofitting of commercial buildings now outpaces the construction of new green buildings. As of December 2011, square footage of Leadership in Energy & Environmental Design (LEED) certified existing buildings surpassed LEED-certified new construction by 15-million square feet on a cumulative basis. McGraw Hill Construction’s Green Outlook 2011 report states that by 2015, the green share of the largest commercial retrofit and renovation activity will more than triple, representing a $14 billion to $18 billion opportunity in major construction projects alone.

“The U.S. is home to more than 60 billionsquare-feet of existing commercial buildings, and we know that most of those buildings are energy guzzlers and water sieves,” Rick Fedrizzi, president, CEO and founding chair of the U.S. Green Building Council’s (USGBC), said in a statement. “Greening these buildings takes hands-on work, creating precious jobs especially for construction workers.” David Cohen, senior director of property at Fireman’s Fund Insurance Co., said his company has seen increased customer interest in retrofitting to make their buildings greener. “Green buildings can boost real estate owners’ bottom line by protecting and building net operating income, attracting and retaining quality tenants and improving the environment,” he said. “Simply put, green buildings create a triple-net effect, benefitting the owners’ bottom line, its tenants and the environment.”

Home Values: Protecting the value of a newly built home in today’s market conditions has been another area of opportunity for product innovation. Home Value Insurance Co. re-entered the insurance market with a product that promises to protect homeowners from falling home values. Home Value Insurance initially launched the product in 2009. The company has retooled it to make it an insurance coverage rather than just a “swap” or financial guarantee product. The product works by covering a loss of owner-occupied primary residences if the homeowner sells for less than the home’s value when it was insured. Homeowners who acquire a policy are locked in at the present home’s value for 10 years, ensuring that they are protected and compensated in case of a market decline of up to 25 percent. If home values appreciate during the policy term, insureds can cancel their current policy at no cost and purchase a new one.

Home Value Insurance Co. only covers homes valued at $500,000 or less, but homes valued over that can be submitted for approval. The policy applies to both existing and new homebuyers. Insential Inc. also designed a program for owners of newly built homes and condos. The program, called Home Value Plus+, will reimburse homeowners up to 20 percent of the diminished sales price of their home if it sells for a loss within three to eight years of buying the home. That number is subject to a 5 percent deductible. The product is only available to home builders and developers to place on spec homes, new condos, and custom homes. It is administered exclusively through Insential to retail insurance agents and realtors in all states except New York. Home Value Plus+ will also pay up to six mortgage payments for up to $1,500 each if a home buyer suffers involuntary unemployment. This coverage is available in all states except New York, Oregon and Texas.

Housing Market, continued from page N17

Housing Insurance Program in conjunction with the National Affordable Housing Management Association. It offers broad coverage and is available nationwide through approved sub-brokers. Aon also expanded availability of its Aon Rent Protect, which reimburses landlords for lost income when tenants default on rent payments. The product was initially launched in 11 states and the District of Columbia, but will be available nationwide. Rent default coverage has been sold overseas for years, but has not been available in the U.S. until recently, says Kevin Madden, managing director of the Real Estate practice at Aon Risk Solutions. The product is backed by the QBE Insurance Group and was designed to address all sectors of the residential rental property market, including individual property owners and large property owners. The product will replace rental income for up to six months and offer assistance with legal expenses associated with evictions. Annual premiums start at $250 per rental unit.

N18 | INSURANCE JOURNAL-NATIONAL REGION March 19, 2012

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Healthcare Remains a Healthy Market

ealthcare is one of the counsional liability (MPL) insurance business is try’s largest industries. Annual integral to the U.S. healthcare system. spending on healthcare in the The MPL business has performed strongly U.S. tops $2.6 trillion, more in recent years, according Moody’s Investors than 16 percent of the U.S. economy. While Service, thanks in part to tort reforms and healthcare spending has leveled off the past favorable judicial decisions. few years, the industry remains a significant Changes in the delivery of healthcare in segment of the economy. the U.S. are affecting MPL. There is a shift toward multi-specialty and multi-state phyAs one of the largest industries, healthsician networks and hospitals, as well as care provides 14.3 million jobs. Ten of the 20 integrated regional and national healthcare fastest growing occupations are healthcare organizations. related. Moody’s expects a corresponding shift The nation’s nearly 600,000 healthcare toward MPL insurers with multi-specialty establishments range from small-town priand multi-state underwriting and claimvate practices of physicians with one assistant to large hospitals that provide thousands servicing capabilities. of jobs. About 76 percent are offices of physiOther Healthcare Interests cians, dentists, or other health practitioners, While medical professional liability may according to the Bureau of Labor Statistics. be an active area, every week another insurer In addition, the healthcare industry or broker introduces a program, tweaks a includes nursing and long term care facilicoverage, forms a healthcare specialty unit, ties, home healthcare services, ambulatory or expands into a new segment of the healthservices and a variety of other practitioners. care market. Here are some recent developHealthcare is a fast-changing environment ments: in which technology, cost concerns and regulation are creating new challenges, opportuWellness Centers: The nities and risks every day. Technology, cost demand for cosmetics Technology is making has proved to be somepossible new methods of concerns and what recession proof. diagnosis and treatments. regulation have Susan Preston, president In addition, information created new of Professional Program technology is improving challenges for the Insurance Brokerage patient care and worker healthcare industry. (PPIB), said that 2011 saw efficiency and replacing a huge boom in wellness paper records with elecclinics. PPIB offers a program backed by tronic, while posing cyber risks. Lloyd’s of London. Preston said wellness Cost pressures and regulation are forcing centers are looking for coverage for everythe industry to emphasize more outpatient thing from laser-assisted lipolysis and tumesand ambulatory care, preventive care and cent liposuction to hormone replacement the use of integrated delivery systems. Also, therapy and hair restoration. federal healthcare reforms promise to affect the number of people who will be treated by Sleep Centers: Philadelphia Insurance providers, and the number and type of mediCos. has begun offering coverage for sleep cal procedures that will be performed. centers and laboratories that diagnose and An industry this large and important obvitreat sleep disorders, a growing industry ously has great need for P/C insurance. designed to help combat serious health problems. With an estimated 50 to 70 million U.S. Medical Professional Liability: It comadults facing sleep disorders, this could be a prises only about 2 percent of annual direct big growth area for the company. premiums for the U.S. property/casualty Philadelphia’s coverage includes general insurance industry, but the medical profeswww.insurancejournal.com

and professional liability, as well as property insurance for independently owned and operated centers. Loss Transfer: IronHealth has developed a Loss Portfolio Transfer Plus Program for captive insurance entities and other alternative self-insurance vehicles in the medical professional liability sector. LPT Plus is designed to help alternative risk financing vehicles in two ways. It helps them monetize any excess reserves and distribute them to insureds as dividends. In addition, it helps them structure the transfer of old liabilities off the captive’s balance sheet, thereby freeing up excess reserves and allowing the captive to offer more attractive pricing to its members. Skilled Nursing: The long term care and nursing segment has been experiencing growth thanks to the baby boomer generation, and this market is expected to grow exponentially in the future, according to Sandy Elsass, CEO of Uni-Ter in Atlanta, who specializes in this market. “Every eight seconds someone turns 60; the 85-plus population is growing faster than any other generation today,” said Elsass. Increased scrutiny by Medicare is putting more pressure on nursing homes or long term care facilities to make sure they are coding and billing Medicare and Medicaid claims accurately. Willis launched a reimbursement coverage for providers that are dealing with Medicare and Medicaid services. The policy covers claims or penalties arising out of miscoding or improper billing. Healthcare Cyberisk: Huge data security breaches appear to be happening in the healthcare industry on a regular basis and insurers are even willing to throw in cyber coverage at no cost in order to get insureds to take the exposure seriously. Over the past year several carriers including Medical Protective and ISMIE started writing cyber liability for doctors at no extra cost. Markel has also begun offering data breach coverage to health-related risks as an endorsement. It’s free, but only offers low limits.

March 19, 2012 INSURANCE JOURNAL-NATIONAL REGION | N19

CLOSER LOOK

Mergers & Acquisitions Top 2011 U.S. Agency M&A News Here are the key agency merger and acquisition headlines featured in Insurance Journal in 2011. Q1 Alliant Acquires T&H Group In New York (East – Jan. 4, 2011) Neace Lukens Acquires Equine Insurance Agency In Kentucky (Southeast – Jan. 4, 2011) Marsh & McLennan Agency Buys Georgia Benefits Brokerage (Southeast – Jan. 4, 2011) Hub Intl. Acquires Four Western Brokers (West – Jan. 4, 2011) Chicago-based Hub International Ltd. (Hub) acquired Hall-ConwayJackson Inc. and Cascade Insurance Group Inc., Bothell, Wash.; Sander A. Kessler & Associates Inc., Santa Monica, Calif.; Davis & Graeber Insurance Services Inc., Redlands, Calif.; and Benefit Resources Inc. (BRI), Colorado Springs, Colo. Wilson Smith Group Acquires Tennessee Transportation Agency (Southeast – Jan. 5, 2011) Lockton Dunning Benefits Acquires Grizzaffi Darby In Texas (South Central – Jan. 5, 2011) Wells Fargo Insurance Acquires Ohio’s Prestige Professional Plans (Midwest – Jan. 5, 2011) Brown & Brown Buys Balcos, Mike Howard Insurance In Washington (West – Jan. 5, 2011) Marsh & Mclennan Agency Acquires Minnesota-Based RJF Agencies (Midwest – Jan. 6, 2011) Hub Intl. Acquires Florida’s Farr Agency (Southeast – Jan. 6, 2011) Wells Fargo Insurance Acquires JFK Consulting Group Of Kansas (Midwest – Jan. 11, 2011)

USI Acquires Commercial Marine Business Of Calif.’s Venbrook (West – Jan. 12, 2011) Confie Seguros Acquires Seguros Sin Barreras Of Calif. (West – Jan. 12, 2011) Midwest-Based Hylant Group, Swartzel Affiliated Insurance Merge (Midwest – Jan. 13, 2011) Brown & Brown Acquires Nies Insurance Agency In Washington (West – Jan. 14, 2011) Kentucky’s Neace Lukens Acquires Ohio’s Lent Agency (Midwest – Jan. 26, 2011) Bollinger Acquires Charles G. Treloar Agency Of New Jersey (East – Jan. 27, 2011) Lawson-Hawks Acquires Christopher Lee Insurance Of Calif. (West – Jan. 27, 2011)

Abram Interstate Acquires Align General’s Equine Business (West – Feb. 7, 2011) Align Financial Group Acquires Elm Insurance Of Calif. (West – Feb. 8, 2011) Ryan Specialty Group Buys Concord Specialty Risk Of New York (East – Feb. 10, 2011) BKS-Partners Finalizes Acquisition Of IRMS In Florida (Southeast – Feb. 16, 2011) Marsh & Mclennan Agency Buys Kinloch Consulting Boston Office (East – Feb. 16, 2011) Brown & Brown Acquires United Benefit, Gottleib Of Mass. (East – Feb. 17, 2011) Morrill Group Acquires Goldman Ernest & Liner In Mass. (East – Feb. 18, 2011) USI Acquires Amerisc In New York (East – March 7, 2011)

Hylant Acquires Michigan Benefits Agency (Midwest – Feb. 2, 2011) Upstate Agency In New York Acquired By Glens Falls Bank (East – Feb. 2, 2011) Distinguished Programs Acquires Dallas’ Greenline Underwriters (South Central – Feb. 4, 2011) Breckenridge Acquires Interest In Calif. Broker Recentis (West – Feb. 4, 2011) Marsh & Mclennan Agency Acquires Hampton Roads Bonding Of Virginia (East – Feb. 7, 2011)

U.K. Brokerage Acquires Dallas-Based CSI Entertainment Insurance (South Central – March 8, 2011) RCM&D Buys Trion’s Commercial P&C Division In Philadelphia (East – March 10, 2011) Brown & Brown Acquires Louisiana’s Robert Ellis & Associates (South Central – March 11, 2011) Integro Acquires Windward International In New Jersey (East – March 16, 2011) Bowen, Miclette & Britt Acquires Florida’s Huckleberry Sibley (Southeast – March 22, 2011)

Q2 R-T Specialty Completes Acquisition Of American E&S From Wells Fargo (National April 1, 2011)

Brown & Brown Acquires Global Intermediaries In Oregon (West – May 9, 2011)

Confie Seguros Buys Royale, First Americano In New Jersey (East – May 27, 2011)

Brown & Brown To Acquire Tennessee Bank’s First Horizon Insurance (Southeast – April 1, 2011)

Acentria Acquires Stant Agency In Florida (Southeast – May 10, 2011)

Hub Intl. To Acquire South Carolina’s First Southeast Insurance (Southeast – May 27, 2011)

Confie Seguros Acquires NII In New York (East – April 5, 2011)

A.J. Gallagher Acquires Oklahoma’s Meyers-Reynolds (South Central – May 10, 2011)

A.J. Gallagher Acquires Fish & Schulkamp In Wisconsin (Midwest – May 31, 2011)

Acentria Acquires Advanced Comp In Florida (Southeast – April 5, 2011)

Crump Buys Workers’ Compensation Self-Insurance Firm SFA In Pa. (National – May 16, 2011)

Texas’ William Gammon, Higginbotham Join Forces (South Central – June 7, 2011)

Appalachian Underwriters Buys Reliance Administrators Of South Carolina (Southeast – April 8, 2011)

Hub Intl. Acquires Texas-Based The Transportation Group (South Central – May 19, 2011)

Private Equity Firm Buys Stake In Virginia’s Hilb Group (National – June 9, 2011)

Arrowhead General Insurance Acquires Trafalgar Marine In Calif. (West – May 19, 2011)

Anthony Clark Sells California’s Clark International (West – June 13, 2011)

A.J. Gallagher Buys Singapore Broker (International – May 24, 2011)

A.J. Gallagher Buys Florida’s Bushong Agency (Southeast – June 13, 2011)

Acentria Acquires Jim Harris Agency In Florida (Southeast – May 24, 2011)

Digital Insurance Acquires Employee Benefits By Design In Illinois Digital Insurance Acquires Strategic Benefits In Arizona (National – June 20, 2011)

Pointenorth Acquires 2 Georgia Agencies: Hodges, Smith (Southeast – April 8, 2011) Ascension Acquires California’s Walter L. Clark & Associates (West – April 8, 2011) Oklahoma’s Insurica Buys Guaranty Insurance Of Texas (South Central – April 11, 2011) Frost Insurance Acquires Clark Benefit Group In Texas (South Central – May 2, 2011) Hub Intl. Acquires Lawson-Hawks In Calif., Mark Tauber In New York (National – May 9, 2011)

PBS Insurance Acquires Todd R Soll Insurance In Calif. (West – May 25, 2011)

A.J. Gallagher Acquires Mortgage Insurance Agency In Illinois (Midwest – June 30, 2011)

Georgia’s Pointenorth And Love, Douglas & Pope Agencies Merge (Southeast – May 26, 2011)

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Q3 Hub Intl. Acquires Texas-Based Roy Agency (South Central – July 4, 2011)

Wells Fargo Insurance Acquires New Jersey-Based Procomp (East – Sept. 16, 2011)

BB&T To Acquire Liberty Benefit In California (Sept. 22, 2011)

Hub Intl. Acquires Assets of Roeder & Moon In Texas (South Central – July 6, 2011)

Assuredpartners Acquires Kentucky-Based Agency Neace Lukens (Southeast – Sept. 21, 2011)

USI Acquires Florida’s De La Parte Agency (Southeast – Sept. 23, 2011)

Acentria Acquires Ft. Myers, Florida Agency, FHC (Southeast – July 6, 2011)

USI Acquires Ohio’s First Place Insurance Agency (Midwest – Sept. 21, 2011)

Ryan Specialty Completes Acquisition Of Lloyd’s Insurer Jubilee (International – Sept. 26, 2011)

NFP Acquires Lapre Scali Of Arizona (East – July 7, 2011)

U.S. Risk Acquires American Special Risk Of California (West – Sept. 21, 2011)

BB&T Expands Acquires Atlantic Risk Management In Maryland (East – Sept. 28, 2011)

Marsh & Mclennan Agency Acquires Prescott Pailet Benefits In (South Central – July 11, 2011)

continued on page N27

Hub Intl. Acquires Workplace Benefits Solutions In N.H. (East – July 12, 2011) Hub Intl. To Acquire Strategic Employee Benefit Services Of Louisiana (South Central – July 18, 2011) Aon Acquires Benchmarking Firm Ward Financial In Ohio (National – July 19, 2011)

We Know What Insurance Agencies Need

USI Completes Acquisition Of Tricerion Of Georgia (National – July 19, 2011) USI Acquires Plumhoff & Associates In Houston (South Central – July 22, 2011) A.J. Gallagher Acquires Georgia’s Potter-Holden (Southeast – July 29, 2011) Calif’s Northridge Insurance, Scanlon Guerra Burke Merge (West – Aug. 1, 2011) Bankers Insurance Acquires Gateway Insurance In Virginia (East – Aug. 2, 2011) A.J. Gallagher Acquires Group Benefits Of Arkansas (South Central – Aug. 3, 2011) Acentria Acquires Florida’s Concord Commercial Insurance (Southeast – Aug. 4, 2011) A.J. Gallagher Buys Alabama’s Robinson-Adams (Southeast – Aug. 12, 2011) Calif. Software Firm Acquires Multifamily Insurance Of Dallas (West – Aug. 17, 2011) Willis Acquires Polish Broker (International – Aug. 26, 2011)

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Northeast Bancorp Sells Insurance Unit To 2 Maine Agencies (East – Aug. 31, 2011) Marsh Acquires Brokerage Business Of Africa’s Alexander Forbes (International – Aug. 31, 2011) National Financial Partners Acquires Calif.’s DA Financial (West – Sept. 7, 2011) NSM Acquires New York Program Manager, AFPD (East – Sept. 7, 2011) Hub Intl. Acquires Montana’s Mountain West Insurance (Sept. 8, 2011) Hub Intl. Buys William Palumbo Agency Of Mass. (East – Sept. 13, 2011) Venture Capital Firm Buys Calif. Wholesaler Yates (West – Sept. 14, 2011)

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Hub Intl. To Acquire Canadian Broker Horizon Insurance (International – Sept. 15, 2011) A.J. Gallagher Acquires The Benetex Group In Texas (South Central – Sept. 15, 2011)

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March 19, 2012 INSURANCE JOURNAL-NATIONAL REGION | N21

CLOSER LOOK

Mergers & Acquisitions

E&O Insights: What to Consider When Buying or Selling an Agency

here is a tremendous amount of mergers and acquisitions activity going on in our industry. Every day, insurance news providers report on insurance acquisitions. The big agencies are not only getting bigger, they seem to becoming more diversified. There are many issues involved for these agencies and others in the By Curtis M. Pearsall acquisition mode. What happens with the staff? What about the offices? How do they get the new agency onto the existing agency management system? Without a doubt, many other issues must be discussed and resolved. What about errors and omissions (E&O) for the buyer and the seller? Is this even on the list? Often it is not — and yet without the proper structure, agencies could find themselves, whether they are the buyer or the seller, without the proper coverage. Bring in Your E&O Carrier Both parties must realize that not all

E&O carriers handle this transaction the bring your E&O carrier into the discussion same. The process could vary, depending early on. If you are a retail agency and are on whether the transaction is a merger or acquiring a wholesaler, or an agency that an acquisition. So, it is important to know specializes in a tough class of business, your exactly what the transaction technically is. E&O carrier might not be so agreeable. As a result, it is best to contact your E&O carrier and advise them of your intentions, Buy the Longest Option letting them help guide you through the Is there a premium involved? Typically, process and the issues. They will ask you the there is — although some E&O carriers key questions and advise you of any papermight not make a premium charge until the work that must be completed. next renewal. This is another example that For the buyer, the demonstrates that not traditional approach is It is best to contact the all E&O carriers handle to have your E&O policy this issue the same. Some agency’s E&O carrier endorsed to provide of the more preeminent prior to a merger or coverage for the “new” E&O carriers in the maracquisition venture. agency. The coverage, ket provide 90 days of commonly called a automatic coverage when Purchased Entity Endorsement, will provide you buy an agency. This is a significant issue coverage for errors made by the “new” agenand benefit. cy beginning with the effective date of the For the agency that is selling, although acquisition. In other words, the policy will there are a number of approaches, some not provide coverage for errors made by the options can cause serious issues down the “new” agency prior to the date of the sale. road. Once again, it is best to contact the More about this later. E&O carrier and advise them of the plan to Will the E&O carrier provide this coverage sell the agency. automatically? No. This is why you should The traditional approach involves the sell-

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er purchasing an extended reporting period endorsement (a.k.a “tail”). This provides an additional period of time after the expiration of the policy for which valid claims will continue to be accepted, provided the wrongful act occurred before the end of the policy period. While virtually all claims-made policies contain this provision, this does not mean there is consistency among carriers as to the available options. Some policies may only allow options up to three years, while some carriers provide up to 10 years — or even an unlimited period. There is a premium associated with this — 200 percent of the last full annual premium for a 10-year tail is common — so be sure to plan for this expense. You only have a finite time to make this important decision, so don’t delay. You cannot buy a three-year tail, and then buy another three years, three years later. This is a one-time decision, so give it serious consideration. Buying the longest option available is highly recommended.

there are definite E&O implications that must be carefully discussed and resolved. Including your E&O carrier in the discussion should help you make the right decision. The bottom line is that the seller has no control over its E&O coverage. Purchasing a tail under your own E&O policy provides

the best protection. Pearsall, CPCU, ARM, is president of Pearsall Associates Inc., a risk management consulting firm specializing helping agents protect themselves. He is also a special consultant to the Utica National Agents E&O program. Phone: 315-768- 1534. E-mail: curtis@pearsallassociates.com.

The Best Protection E&O policies are not assignable. Giving your E&O policy to the buyer and requesting that they keep making the payments could very well leave both the buyer and seller with absolutely no coverage if a problem develops. From time to time, a buyer agrees to provide coverage for the seller on an ongoing basis under the buyer’s E&O coverage. Is this a good deal? It may appear so on the surface, but it is fraught with problems. Consider the following: • What if the buyer’s E&O policy is not as broad and thus does not cover all of the activities the seller had covered under its policy? • If the deductible is higher or is of a different type (loss-only as opposed to a combined loss and expense deductible), the seller could find itself paying more if an E&O problem develops based on an error prior to the date of the sale. • What is the E&O for the buyer that is nonrenewed due to loss history and when the buyer cannot find coverage or finds inferior coverage? The seller is now at the mercy of this decision. Whether you are the buyer or the seller, www.insurancejournal.com

March 19, 2012 INSURANCE JOURNAL-NATIONAL REGION | N23

SPOTLIGHT

High Risk Property A Role for Characteristic Event Methodology in Catastrophe Risk Management

hen catastrophe models were first introduced in the late 1980s, they provided insurance and reinsurance companies with an improved methodology to estimate potential catastrophe losses from hurricanes. While the models provide a dramatic improvement over the simplistic rules of thumb used prior to their introduction, they are blunt tools that provide rough estimates of loss potential and not accurate numbers. By Karen Clark The models also present challenges to users due to the volatility in the model-generated loss estimates and the lack of transparency around model calculations. To manage risk effectively, companies require a credible, scientific view of the risk that allows for more consistent decisions from year-to-year and maintains the confidence of external stakeholders, such as regulators and policyholders. A new approach, based on characteristic events (CEs) for each peril region, complements catastrophe models, and it provides a more consistent and effective framework for catastrophe risk management. The CE approach delivers transparent information and operational risk metrics that companies can use to proactively develop risk management strategies and monitor their effectiveness over time. Characteristic Events CEs are defined-probability events created for specific peril regions and return periods. They are based on the same science and data underlying the catastrophe models but eliminate the volatility in the loss estimates caused by noise in the hazard component of the models. For each hurricane region, CE wind footprints have been created to represent 100-, 250- and 500-year type events. The footprints are transparent to the user and can be peer-reviewed by external experts. To estimate losses, CE footprints are “float-

ed” along the coast and superimposed on company exposures at 10-mile increments. Instead of producing a point to estimate 100-year probable maximum losses (PMLs), CE scenario losses enable companies to estimate the ranges of 100-year losses by region and to see where they are most exposed to 100-year type events. Last year, many companies using the model-generated 1-in-100 year PMLs to manage risk saw increases in their PMLs of 100 percent or more. When models change significantly, companies have to re-underwrite their books of business, buy more reinsurance, and/or change their risk assessment techniques and models. While the most recent model updates have been much more extreme than previous revisions, all model updates are disruptive to business strategies. CEs act as an antidote, providing a wealth of information to insurers and illuminating data previously obscured using models alone. Rather than simply generating numbers, CEs illustrate the event types that can impact a company. A sophisticated exposure management tool, CEs highlight exposure concentration areas. CE losses can be estimated at a location level so the marginal impact of individual policies can be calculated. Because event losses are additive, CE losses can be monitored at the corporate level and drilled down to individual business units, lines of business, and policies. By weighting individual scenario losses, the “expected” or mean 100-year CE loss can be estimated and compared to the model-estimated 100-year PMLs. Because CEs do not change from year to year, they provide a common currency and consistent yardstick for measuring and monitoring risk. Risk management decisions can be supported and more easily explained to internal and external stakeholders. Companies are using CEs in multiple ways to better understand their catastrophe

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risk and loss potential. Companies use CEs as independent benchmarks to test vendor model loss estimates. Catastrophe model loss estimates also can be compared to CEs by peril region to determine appropriate modelblending weights. More Than One Tool Necessary Catastrophe losses are already the largest component of homeowners premiums and a growing percentage of all property premiums. Given their significance, companies require more than one type of tool to help understand and manage catastrophe losses. Hurricane Andrew was the first industry wakeup call to the need for scientific approaches to catastrophe risk management; RMS Version 11 was the second wakeup call to the over-reliance on the models. Estimating catastrophe loss potential is an inherently uncertain undertaking, and no methodology can eliminate the uncertainty. CEs help companies make more informed, transparent, and consistent decisions in light of the uncertainty. Clark is CEO of Karen Clark & Co. a catastrophe risk modeling consulting firm in Boston. She pioneered catastrophe modeling for P/C insurers and has been helping corporations estimate and manage potential losses from catastrophes since 1983. www.insurancejournal.com

NATIONAL COVERAGE

News & Markets Wealthy Americans Fear Lawsuits But Lack Sufficient Coverage

merica’s wealthiest families increasingly worry that their wealth alone makes them a target for a high-stakes liability lawsuit in this uncertain time of high unemployment and tepid economic growth, according to a new insurance report. But many wealthy families remain poorly prepared for such lawsuits in spite of their concern. They fail to appreciate the different aspects of their lifestyle that can lead to a lawsuit. They underestimate the cost of the potential damages, and they misunderstand the affordability of effective protection. As a result, wealthy families often lack the proper types and amounts of liability insurance. These are among the findings of a new study by ACE Private Risk Services, the high net worth personal insurance business of the ACE Group. The study, “Targeting the Rich: Liability Lawsuits and the Threat to Families with Emerging and Established Wealth,” included a survey of individuals

from households with more than $5 million of investable assets about their perceptions and behavior regarding the threat of personal liability lawsuits. “Wealthy families feel increasingly targeted, especially given the national discourse over disparities in wealth, income and taxation,” said Bob Courtemanche, division president of ACE Private Risk Services. In the study, more than two-thirds said they think public perceptions of the wealthy have grown more negative since 2008. Almost 40 percent believe they are more likely to be sued in the aftermath of the economic crisis,

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compared to 7 percent who said they are less likely to be sued. More than 80 percent agreed their wealth alone makes them an attractive target for liability lawsuits. “Nevertheless, many underestimate the risk,” added Jim Hageman, ACE senior vice president of claims for global personal and small commercial insurance. “Half of the people we surveyed thought the worst-case lawsuit would be less than $5 million. But our experience is that awards for lawsuits involving serious injury can equal many times that.” Because wealthy families tend to underestimate their potential liability from a car accident or other incident, they often lack sufficient liability insurance, according to the ACE executives. More than 40 percent of survey respondents reported carrying less than $5 million in umbrella liability insurance; 21 percent have none. Umbrella liability is important because the liability coverage in automobile and homeowner policies rarely exceeds $500,000, according to the insurer. Insurance companies that specialize in insuring high net worth families usually offer coverage from $1 million up to $100 million, and the cost can be offset by increasing the deductibles in the homeowner and auto policies. “Choosing a higher deductible and accepting more responsibility for minor losses so that you can insure against a multi-milliondollar lawsuit is a wise strategy,” Hageman said. The survey also found that more than half of respondents employ domestic staff such as a nanny, and yet do not have employment practices liability insurance. More than 60 percent of respondents serve or have served as a volunteer board member or trustee of a charitable organization, but some 35 percent do not have their own directors and officers insurance. Wealthy Americans also underestimate the risks posed by dog bites and libel, slander, or character defamation resulting from participation in social media platforms, the survey said. www.insurancejournal.com

CLOSER LOOK

Mergers & Acquisitions Q4 Burns & Wilcox Acquires South Carolina Wholesaler Kimbrell (Southeast – Oct. 3, 2011)

Mass. Agency Farrell Backlund Merges With Richardson-Cuddy (East – Nov. 8, 2011)

North Carolina’s Strickland Acquires Carolina Insurance Services (Southeast – Dec. 8, 2011)

Holmes Murphy Acquires Bridge Insurance Partners In Texas (South Central – Oct. 5, 2011)

Amwins Confirms Intention To Acquire London-Based THB Group (International – Nov. 14, 2011)

A.J. Gallagher Acquires Transwestern In Utah (West – Dec. 8, 2011)

A.J. Gallagher Acquires S.A. Freerks In Missouri (Midwest – Oct. 7, 2011)

A.J. Gallagher Acquires Washington MGA Mutual Insurance Services (West – Nov. 14, 2011)

Frost Insurance Acquiring Stone Partners In Texas (South Central – Dec. 13, 2011)

Atlantic Specialty Acquires Financial Guarantee, American Tri-State (South Central – Oct. 7, 2011)

Marsh & Mclennan Agency Acquires Florida’s Seitlin Insurance (Southeast – Nov. 17, 2011)

USI Insurance Acquires Bluff Head Enterprises In Rhode Island (East – Dec. 13, 2011)

Concordis To Acquire Advance Underwriting Managers Of Ohio (Southeast – Oct. 11, 2011)

USI Acquires Barros International In Virginia (East – Nov. 29, 2011)

Confie Seguros Buys Florida’s Trustway Agencies (Southeast – Oct. 11, 2011)

Confie Seguros Acquires Houston’s Auto Insurance Discounters (South Central – Dec. 1, 2011)

Bell-Anderson Agency Acquires Unico In Washington (West – Oct. 11, 2011)

KMRD Partners Acquires General Insurcorp In Penn. (East – Dec. 2, 2011)

Four New Hampshire Agencies Form Regional Alliance (East – Dec. 13, 2011) Four insurance agencies in New Hampshire have formed a partnership called Northern United Agents Alliance (NUAA). The four agencies are: Clark-Mortenson Agency in Keene; Davis & Towle Insurance Group in Concord; Eaton & Berube Insurance Agency in Nashua; and The Melcher & Prescott Insurance Agency in Laconia.

Townebank Acquires North Carolina’s Stanton Taylor Agency (Southeast – Oct. 13, 2011)

Assuredpartners Acquires N.Y.-Based Agency SKCG Group (East – Dec. 2, 2011)

Florida’s Ranew, Ranzino Agencies Merge (Southeast – Oct. 18, 2011)

Bell-Anderson Acquires Cornelius Insurance In Washington (West – Dec. 2, 2011)

A.J. Gallagher Acquires Trissel Graham & Toole In Iowa (Midwest – Nov. 2, 2011)

TWFG Buys Heartland Marketing Group In Texas (South Central – Dec. 6, 2011)

BB&T Continues California Expansion With Precept Acquisition (West – Nov. 3, 2011)

Markel To Acquire Program Administrator Thomco Of Georgia (National – Dec. 7, 2011)

Marsh & Mclennan Agency Acquires Gallagher & Associates In Minn. (Midwest – Nov. 3, 2011)

Boston’s Risk Strategies Acquires Global Insurance Network (East – Dec. 8, 2011)

Arrowhead In San Diego To Be Acquired By Brown & Brown (West – Dec. 16, 2011) Digital Insurance Acquires Florida’s Kellogg Smith (Southeast – Dec. 20, 2011) A.J. Gallagher Acquires Kahl Insurance Of Colorado (West – Dec. 21, 2011) Washington’s Neff Risk And Cochrane Combine (West – Dec. 28, 2011)

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, SEF: Special Florida Section

Abacus Insurance Brokers, Inc. www.abacus.net W19 Agent Support Network of America www.asnoa.com W36, W37, M18, M19 American Integrity Insurance Group www.aiicfl.com SEF5 Amwins Group, Inc. www.amwins.com W11, SC11, SE11, E11, M11 Applied Underwriters www.applieduw.com W68, SC52, SE52, E52, M52 Arrowhead General Insurance Agency www.arrowheadgrp.com W26, W27 Astonish Results www.astonishresults.com N11, W12, SC12, SE12, E12, M12 Burns & Wilcox Ltd www.burnsandwilcox.com N1 California Earthquake Authority www.calquake.com W7 Catlin US www.catlinus.com W13, SC15, SE13, E13, M13 Charity First Insurance Services, Inc. www.charityfirst.com N2, N3 Crump Insurance Services www.crumpins.com N13

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FSLSO www.fslso.com SEF7 Gateway Specialty Insurance www.gatewayspecialty.com W24, SC14, SE15, E14, M14 IICF www.iicf.org W20, SC16, SE16, E17, M16 Insurbanc www.insurbanc.com N21 ISU Group www.joinisu.com N4, N5 K&K Insurance Group www.kandkinsurance.com W32, W3, SC20, SC21, SE20, SE21, E20, E21 M20, M21 Lexington www.lexingtoninsurance.com W17, SC7, SE7, E7, M7 Liberty Mutual www.libertymutual.com W2, SC2, SE2, E2, M2 M.J. Hall & Company, Inc. www.mjhallandcompany.com W16 Monarch E & S Insurance Services www.monarchexcess.com W34, W35 Pacific Gateway Insurance Services www.pgiainsurance.com W15

Partners Specialty Group www.psgins.com N26 PersonalUmbrella.Com www.personalumbrella.com W5, SC5, SE5, E5, M5 Pilot www.pilotcat.com N6, N7 Quirk & Company www.quirkco.com SC10 RiskMeter.com www.riskmeter.com N12 Shelly Middlebrooks & Olearly Inc. www.shellyins.com SEF3 SIAA www.siaa.net W3, SC3, SE3, E3, M3 TAPCO www.gotapco.com N8, N9 Texas Mutual Insurance Company www.texasmutual.com SC13 Westrope www.westrope.com N15 Zurich Insurance Company www.zurichna.com W67, SC51, SE51, E51, M51

March 19, 2012 INSURANCE JOURNAL-NATIONAL REGION | N27

IDEA EXCHANGE

Closing Quote

Surplus Lines’ Multistate Clearinghouse Numbers Don’t Work

R By Richard Brown

ecent data from Florida indicate that the economics for a multistate surplus lines tax allocation clearinghouse are unworkable. There simply is not enough multistate surplus lines tax to support the cost of a clearinghouse. This is not new information. (See “Much State Regulatory Ado About Little,” Insurance Journal Jan. 24, 2011.) With the Nonadmitted and Reinsurance Reform Act, (NRRA) effective July 21, 2011, Congress sought to establish a uniform nationwide system of home state taxation and regulation of surplus lines transactions. Surplus lines brokers would remit premium tax to the home state based on 100 percent of the Home State’s tax rate. In response to state concerns that their premium tax revenues might suffer under home state taxation, Congress offered states the option of creating a mechanism for reallocating premium tax revenues among themselves. Twelve states (AK, CT, FL, HI, LA, MS, NE, NV, PR, SD, UT and WY) joined NIMA (Nonadmitted Insurance Multistate Agreement) to establish a clearinghouse to redistribute surplus lines premium tax among participating states. NIMA states selected the Florida Surplus Lines Stamping Office (FLSLSO) as the clearinghouse. The NIMA clearinghouse was intended to be operational in September 2011. That date slipped, and the NIMA clearinghouse is re-estimated to become operational on July 1, 2012, about one year after the effective date of the NRRA. As required by Florida statute, the Florida Office of Insurance Regulation (FLOIR) submitted a report to the

N28 | INSURANCE JOURNAL-NATIONAL REGION March 19, 2012

Florida Legislature on Dec. 30, 2011, reporting annualized FLSLO multistate premium allocation results for 2011. Total premium tax collected and reallocated was $2.589 million. Of that grand total, $2.464 million (95.15 percent) was allocated to Florida. The 11 other NIMA states collectively received $125,555 (4.85 percent). Multistate premium taxes allocated to non-Florida NIMA participants ranged from a high of $40,632 for Louisiana to a low of $230 for Wyoming. These numbers are not in millions of dollars. Nebraska, which was allocated $11,654 per the FLOIR Report, recently withdrew from NIMA. Other states may soon follow. The FLOIR Report notes estimated clearinghouse startup costs of $2.8 million and that the clearinghouse will charge the same 0.3 percent service fee presently charged by the FSLSO. But the FLOIR Report data reveal only part of the picture. The true economics require consideration of at least three more factors: • The FLOIR Report does not reflect the amount of home state premium tax that each NIMA state is required to allocate back to the clearinghouse. This means that a NIMA state’s net share of clearinghouse premium tax revenue is less than shown in the FLOIR Report; the net share for some states might be negative. • Participating states necessarily must incur costs to monitor and audit their share of premium tax revenues, thereby reducing their net premium tax revenues. Those costs are not reflected in the FLOIR Report. • The complexity and frequent changes to NIMA allocation formulas likely result in some amount of premium tax not being reported due to inadvertence or otherwise. Applying a clearinghouse “service fee” of 0.3 percent to the Florida data produces a total annualized service fee of $157,101 — a cost of $31,546 more than the amounts of premium tax allocated to non-Florida NIMA states. If the Florida data are any guide, clearinghouse solutions would appear to be a “lose-lose” proposition for state treasuries. In the meantime, surplus lines brokers are incurring substantial unnecessary costs to slice and dice multistate premium taxes in anticipation of a clearinghouse. Premium taxes collected in the absence of a clearinghouse are not being banked for future redistribution. These premium taxes will never be shared. Last and apparently least, the consumer receives no benefit from a multistate tax allocation clearinghouse. The consumer, however, ultimately will bear the systemic costs of a clearinghouse through increased fees, taxes or other charges. The multistate clearinghouse approach disserves state treasuries and the consuming public. Under the NRRA, there are no frictional costs. One hundred percent of multistate surplus lines premium tax is paid to the Home State at its tax rate. Given the capital in startup investment, operating costs and frictional costs associated with a clearinghouse, state treasuries will fare better under home state taxation. So will consumers. Brown is an insurance regulatory attorney who has authored articles about the NRRA and its implementation. He regularly represents surplus lines brokers, insurers and industry organizations in a variety of regulatory and other surplus lines matters. Email: RAB@InsuRegulatory.com. Website: www.InsuRegulatory.com. www.insurancejournal.com

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