High Income / High Profile; Top Workers' Comp Writers; Residential Contractors

WEst REGION

september 10, 2012 | Vol. 90, No. 17

Top Workers’ Comp Writers A Duty to Settle Too Far Hartwig on Dodd-Frank Provisions

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2 | INSURANCE JOURNAL-WEST REGION September 10, 2012

Applied Experience. Applied Intelligence. www.insurancejournal.com

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© Copyright 201

N12 On The Cover

WEST

Inside This Issue

Special Report: Tapping the High Net Worth Market

September 10, 2012 • Vol. 90, No. 17 • West Region

10

N11

12 16

8

NATIONAL COVERAGE

WEst COVERAGE

Idea exchange

N10 Spotlight: Contract Bonds

8 Calif. Sues Doctor Over Aggressive Billing Tactics

N11 Spotlight: Construction Firms Face Liability Increases: Marsh

8 49ers, NFL Sued by Fans Attacked During SF Game

16 Settlement Duties: A Duty (to Settle) Too Far

N1 Minding Your Business: Oak & Schoeffler

N26 Business Ideas to Challenge Our Thinking

N12 Special Report: Tapping the High Net Worth Market

8 Lawsuit Says Travel Agencies Conspired with Hotels

N16 Special Report: High-Value Home Flood Option

N18 Closer Look: Top Workers’ Comp Writers

N24 Closing Quote: Hartwig on Dodd-Frank Provisions

N20 Lower Cat Losses Boost P/C Earnings N20 P/C Insurer Results Improve Mid-Year N22 AIG Off Hook for Claims

by Madoff Clients Under Home Policies 4 | INSURANCE JOURNAL-WEST REGION September 10, 2012

DEPARTMENTS 6 10 12 12 N2

Opening Note People Declarations Figures MyNewMarkets

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We found 5.

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Available nationally. Underwriting criteria September 10, 2012 INSURANCE JOURNAL-WEST REGION | varies 5 by state.

Visit us online for guidelines.

California Insurance License 0D08438

WeST COVERAGE

Opening Note

E D I TOR I A L

Workers Comp by a (Big) Nose

W

ith the last minute workers’ compensation reform bill for California racing to the end of legislative session then passing resoundingly, I felt it would be interesting to look back at what some people had to say in a poll on InsuranceJournal.com asking people their opinions on reform as efforts to push through the bill were ongoing.

Several who took the poll — it ran from Aug. 21 to Aug. 29 — expressed increasing pessimism about the government’s ability to pass reform. They also had some interesting ideas on how to fix the system, a few of which I’ve edited for grammar, clarity and brevity and reprinted here.

“We have to keep premiums down in this economy,” stated one polltaker. “If we don’t, it will drive more underground companies. We have to find a way to cut fraud. The cost of fraudulent claims could go to increase benefits to those actually injured.”

Said another: “We need to get rid of medical provider networks, raise permanent disability, Dismantle the regulate insurance companies who are sucking state workers’ employers dry for greedy profit and then blamcomp system… ing injured workers for higher rates.”

Some were in favor of getting rid of the system entirely.

“Dismantle the state workers’ comp system … allow employers the option of risk evaluation ... to seek insurance coverage protections or not ... allow injured parties full access to the civil courts in seeking fair resolutions,” read one comment.

Some commenters listed their solutions: “Control medical cost, eliminate doctors referring patients to their own physical therapy clinics, diagnostic clinics, etc.; 2) eliminate professional employer organizations, unfair competition, reduces premium for carriers; 3) stronger legislation to limit psych claims; 4) employers need stronger defense for post termination claims, remove the liberal construction language on labor code for post termination claims. Require employees to prove injury notice was provided to employer via medical records or establish a system that informs employees of reporting claims, to prevent disputes for post termination claims.”

Another suggested incentivizing better medical treatment: “Provisions that would compensate physicians based on outcomes, ie. higher payments for faster return to full duty, lower litigation and less unnecessary treatment.”

There were some who suggested certain parts of the system should be changed.

“Remove attorneys and the inclusion of ‘multiple body part’ litigated claims used as a method of increasing the claim pay out and increasing legal fee payout,” wrote one.

One commenter wrote a 450-word treatise that included suggestions on changing how applicant attorneys are compensated, and policing physicians “who have a history of keeping workers out of the work force,” as well as changing the way injured workers are tracked, along with suggestions for giving instructions to judges.

“These are amongst the major changes I would make as a former professional from the industry,” the polltaker wrote. “I’ve since left that madness, much to my own peace of mind.”

Don Jergler West Editor

6 | INSURANCE JOURNAL-WEST REGION September 10, 2012

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

S A LES

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 Classifieds, Jobs, Agencies Wanted/For Sale (800) 897-9965 x125 Ly Nguyen | lnguyen@insurancejournal.com

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News & Markets Calif. Sues Doctor over Aggressive Billing Tactics

T

he California Attorney General’s office is suing a Los Angeles County doctor over her practice of refusing to accept lower insurance company reimbursements and instead billing patients for the full amount.

The lawsuit against South Pasadena physician Jeannette Martello is the first of its kind in the state, the Los Angeles Times reported.

Martello’s attorney Andrew Selesnick said the doctor has done nothing wrong and she is lawfully pursuing her right to be paid a fair amount for her services.

A judge in May ordered Martello to stop her aggressive tactics, includ-

Ashland Gun Club Insurance Dispute with Lloyd’s

Lloyd’s of London says the liability insurance it provides for the Ashland Gun Club in Oregon covers bodily injury and property damage, but it won’t pay any damages related to lead contamination from ammunition.

The Mail Tribune reported underwriters filed documents in federal court in Medford after three gun club neighbors sued the city and the club, which sits on city land.

The neighbors say the gun club is contaminating soil and water. They want the club to pay fines, legal fees and damages.

The gun club president declined to comment on the case.

@2012 Associated Press.

All Rights Reserved.

ing lawsuits and liens on homes, to force patients to pay for emergency care when they were covered under managed-care health insurance plans.

According to state law, that is illegal because emergency room patients have

little say in who treats them.

Selesnick said that even though Martello was treating patients in the emergency room, the patients were in stable condition.

Court records show Martello has filed more than 50 lawsuits in the past two years, mostly for breach of contract.

In one case, she started the process to force the sale of a patient’s home to pay a $12,630 bill for emergency room treatment of a severed fingertip.

The state Attorney General’s lawsuit seeks to stop Martello’s billing collection policies and to have her pay back the patients. @2012 Associated Press. All Rights Reserved.

49ers, NFL Sued by Fans Attacked During SF Game

T

wo San Francisco 49ers fans who were attacked during a preseason home game against the rival Oakland Raiders have sued the team, parking lot security firm and National Football League.

Daniel Long and Gabriel Navarrette, both 26, claim the defendants failed to create a safe environment for fans attending the game on Aug. 20, 2011, at Candlestick Park.

The previously unpublicized litiga-

tion was filed in San Francisco Superior Court in November, the Contra Costa Times reported in late August. A trial is scheduled to start Aug. 19, 2013.

Navarrette was beaten unconscious by a group of men in the parking lot.

Long was shot four times while attempting to help his friend. No suspects have been charged.

The lawsuit, which seeks unspecified damages, says the incident has affected both men physically and economically.

The 49ers declined to comment on the lawsuit, but in a prepared statement said the team is “committed to providing a safe game day environment for all fans.

That commitment has led to the highest security level rating given by the NFL.” The NFL’s attorney declined to comment, and an attorney representative for Landmark Security said the company’s lawyer would not be able to respond, according to the newspaper. @2012 Associated Press. All Rights Reserved.

Lawsuit Says Travel Agencies Conspired with Hotels

A

California lawsuit claims online travel agencies like Travelocity conspired with hotels to fix room prices nationwide.

The suit filed in San Francisco federal court claims the Hilton Hotels, Sheraton Hotels & Resorts, Marriott International and others fixed prices with Expedia, Travelocity and other online sites.

8 | INSURANCE JOURNAL-WEST REGION September 10, 2012

Although travel websites say they buy blocks of unsold rooms to give consumers low hotel rates, the lawsuit claims hotels set a minimum room rate for online travel websites to offer to consumers.

The Los Angeles Times said hotels agree to the fixed prices for fear of losing online travel business.

The suit filed on behalf of travelers

Nakita Turik of Chicago and Eric Balk of Cedar Falls, Iowa, seeks an injunction to prevent further price fixing as well as unspecified damages. @2012 Associated Press.

All Rights Reserved. www.insurancejournal.com

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weST COVERAGE

People Don Woods

Antonio Derossi

Paul Fuegner

David Richter

Bryan Ware

Denver, Colo.-based Van Gilder Insurance Corp. named Don Woods its new president.

Woods is co-founder and CEO of Community Bankshares Inc. and its subsidiaries.

Under Woods, Community Bankshares Inc. grew to over $2 billion in assets and had 42 branches in Colorado and northern California.

A privately held insurance brokerage firm, Van Gilder is in its fourth generation of leadership by the Van Gilder family.

and identity. He will be responsible for maintaining and protecting the company’s brand as well as developing and implementing strategies to further strengthen the brand.

Fuegner comes from ViVa Beverages, where he served as chief marketing officer. He also held executive marketing roles with The Griffin Group, SKYY Spirits and Diageo. Throughout his career, Fuegner has managed a variety of global and startup brands across multiple distribution channels.

Fireman’s Fund is a member of the Allianz Group.

California’s State Compensation Insurance Fund named Marjorie Hutchings its chief information officer.

Hutchings, who was senior vice president for infrastructure engineering at State Fund, will transition to her new role as chief of the division that provides IT operations support to California’s largest provider of workers’ compensation insurance.

As State Fund’s new CIO, Hutchings will lead the implementation of a comprehensive technology platform for the organization. She has more than 20 years of experience in the technology field.

Prior to State Fund, Hutchings was vice president of internet operations with Esurance from 1999 to 2012. She began her information technology career in 1989 as a project manager with Electronic Data Systems (EDS). She has also worked with Dallas-based Sterling Software and NEON/Convoy in Emeryville, Calif.

San Francisco, Calif.-based Woodruff-Sawyer & Co. named David Richter vice president of executive benefits and succession planning.

The firm also named Jeff Robinson an associate producer for its Southern California Practice.

Richter will focus on high net-worth individuals and smallto medium-sized corporations and their executives.

Richter has over 26 years of experience working as a broker, and he has focused on co-marketing with wealth managers and property-casualty brokers for the last 23 years.

Before Woodruff-Sawyer, he was the owner and founder of Richter Insurance.

Robinson will focus on business development, retention and client relationship management. He has a background in sales and marketing, and a long track record of sales, management, and marketing experience throughout the last decade.

Prior to Woodruff-Sawyer, he was a sales representative a health insurance carrier.

Woodruff-Sawyer has offices throughout California and in Portland, Oregon.

Novato, Calif.–based Fireman’s Fund Insurance Co. named Antonio Derossi its chief operations officer. The firm also named Paul Fuegner vice president of brand management.

Derossi will be responsible for operations at Fireman’s Fund and will be based in Novato at the corporate headquarters.

He most recently served as the COO of Allianz Central and Eastern Europe, Middle East and Africa (CEEMA) where he was responsible for IT, operations, claims, and strategic direction and management of project portfolios and budgets.

Derossi joined Allianz in 2008 as the senior vice president of the Global Life Unit at Allianz SE and prior to that held consulting roles with Andersen Consulting and McKinsey & Co. Fuegner will be the steward of the Fireman’s Fund brand

10 ASTISH14873.indd | INSURANCE JOURNAL-WEST REGION September 10, 2012 ASTISH15197.indd ASTISH5333.indd 11

Terry Brandt was named Lockton San Francisco’s executive vice president and director of the Lockton Alliance for Ministry Protection (LAMP) practice.

Brandt will lead LAMP, Lockton’s non-profit and religious organization practice, by providing risk management advice and consulting to large parachurch organizations, church denominations, educational institutions and faith-based businesses.

Brandt will be based in Lockton’s San Francisco office, but will reside in Minneapolis. He will have a lead role in expandcontinued on page 14

www.insurancejournal.com 1/27/11 9:42 AM 6/11/11 9/6/11 2:54 8:30 PM

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September 10, 2012 INSURANCE JOURNAL-WEST REGION | 11

weST COVERAGE

Declarations Yes on Technology

No on Technology

Sex Ed

“Today is a big moment for automotive safety. This cutting-edge technology offers real promise for improving both the safety and efficiency of our roads. That is a winning combination for drivers across America.”

— U.S. Transportation Secretary Ray LaHood, who joined elected officials and industry and community leaders on the University of Michigan campus to launch the second phase of the Safety Pilot, the largest road test to date of connected vehicle crash avoidance technology.

“While there are occasional discussions with certain insurers and vendors, the department has no imminent plans to initiate usage-based rating factors.”

— Pat McConahay, a spokeswoman for the California Department of Insurance, which is opposed to expanding the technology that allows auto insurers to track their customers’ driving behavior and offer them lower premiums.

“The sex ed in Clovis high schools violates state law and gives inaccurate, biased information to students.”

— Phyllida Burlingame, Reproductive Justice Policy Director at the ACLU of Northern California, commenting on a suit by the American Civil Liberties Union that alleges the students’ health is being put at risk by the school failing to provide students with information about condoms and contraception.

Rodents

“Rodents and mice are native to the park, but we are looking at the populations and working with our wildlife biologists to determine if the population is too high. There are rodents here, and we could never trap them all so that’s not going to mitigate it.”

— Yosemite National Park spokesman Scott Gediman discussing an outbreak of hantavirus pulmonary syndrome at the park in August that killed at least two park visitors. Studies are being done to determine if the Yosemite rodent population is higher than normal after a record snowpack in 2011 provided ample water for the grass seeds mice favor.

Figures

77

$

Million

The size of the fund that organizers of the Reno National Championship Air Races have established to be distributed to those who suffered injuries or lost family members in last year’s mass-casualty crash in Nevada.

1,000

How many earthquakes rattled Arizona from 2006 to 2009, according to a new study published by Arizona State University researchers.

35 Million

$

18,691

In property losses each year result from an estimated 2,900 clothes dryer fires in residential buildings, according to a report by the U.S. Fire Administration.

The number of accepted disability claims in Oregon in calendar year 2011. That’s about half the 35,857 accepted in 1990, despite a 30 percent increase in Oregon’s workforce since that time.

12 | INSURANCE JOURNAL-WEST REGION September 10, 2012

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People People, continued from page 10

ing Lockton’s presence throughout the United States.

For more than 30 years, Brandt has amassed risk management and captive experience in leadership roles at Aon Risk Solutions. Prior to Lockton he was a resident director at Aon in Minneapolis.

Joe Costamagna

Reno, Nev.-based EMPLOYERS named Bryan Ware senior vice president and chief actuary.

Ware will be responsible for EMPLOYERS’ reserving, pricing, and risk analysis and will work with executive management to develop and implement strategies and initiatives that support operational and strategic goals. He will be based out of EMPLOYERS’ corporate offices in Reno reporting to CEO Douglas Dirks.

Ware has 30 years of experience in the insurance industry, with experience in workers’ compensation. Ware joins EMPLOYERS from KPMG, where he led an actuarial consulting team.

Employers is a holding company with subsidiaries that are specialty providers of workers’ compensation insurance and services focused on select small businesses engaged in low-tomedium hazard industries.

Jessica Bentson

Sarah Ledbetter

Folsom, Calif.-based Edgewood Partners Insurance Center added Joe Costamagna as a principal in their Petaluma office.

EPIC also added Jessica Bentson as a senior account manager in its Folsom office, and named Sarah Ledbetter as a property-casualty insurance account manager in its Fresno office.

EPIC added Ryan Yoo and Ricky Choi its Los Angeles office.

Costamagna has 10 years of experience in insurance and risk management, working with a range of businesses and specializing in the construction industry.

Costamagna’s responsibilities include acquiring new clients, growing existing accounts and managing the insurance and risk management programs of current clients.

Prior to EPIC, Costamagna spent more than three years as an account executive with Woodruff-Sawyer & Co., handling risk management strategies, client relations, loss control analysis, and claims management for clients in construction and related industries. Before joining Woodruff-Sawyer, he was a vice president and commercial lines producer for Willis HRH. Bentson’s responsibilities at EPIC will include providing clients with benefits planning and program design support. She

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September 10, 2012 INSURANCE JOURNAL-WEST REGION | 15

IDEA EXCHANGE

Settlement Duties A Duty (to Settle) Too Far

S

ometimes, courts should leave well enough alone – and this especially applies to the law that has been developed over decades as to a liability insurer’s duty to settle third-party claims.

In the overwhelming majority of liability claims, the third party’s claim is resolved relatively quickly and usually within the policy limits. In those instances when an insurer rejects a

By Larry Golub reasonable settlement offer, and the liability of the insured is reasonably clear, the insurer’s rejection of such an offer (and its exposing its insured to an excess of policy limits verdict) may be found to constitute a breach of the covenant of good faith and fair dealing, otherwise known as bad faith.

The basic requirement to trigger such a duty to settle is a demand by the injured party.

A recent decision by the Ninth Circuit Court of Appeals seeks to change the rules. Not only has the above duty-to-settle tenet worked quite effectively for years, but the rule change envisioned by the Ninth Circuit would open the floodgates to higher insurance premiums not to mention more (and wholly unnecessary) bad faith litigation. Indeed, such a rule change would make settlement less likely, contrary to the accepted public policy in favor of settlement and protecting insureds from personal liability.

In Du v. Allstate Insurance Company, 681 F.3d 1118 (9th Cir. June 11, 2012), a three-judge panel of the Ninth Circuit concluded that “under California law, an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand.” (Emphasis added.)

No California decision has ever extended the duty to settle to cases where there is no

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The Ninth Circuit’s pronouncement in Du that a liability insurer must ‘effectuate’ or initiate a settlement within policy limits after liability has become reasonably clear is bad law and makes no sense in the real world. demand presented by the injured party.

Indeed, an array of California Supreme Court and Court of Appeal decisions over more than 50 years has established that “an insurer may be held liable for a judgment against the insured in excess of its policy limits where it has breached its implied covenant of good faith and fair dealing by unreasonably refusing to accept a settlement offer within the policy limits.” See, e.g., Commercial Union Assurance Companies. v. Safeway Stores, Inc., 26 Cal.3d 912, 916-17 (1980).

Ironically, after announcing its new rule in Du, the Ninth Circuit went on to conclude that, in the context of that case, there was no evidence that the insurer “should or could have made an earlier settlement offer” to the injured party and therefore the trial court did not err in refusing a proposed jury instruction requiring the insurer to “effectuate” a settlement within policy limits after liability has become reasonably clear.

As noted above, the system works well.

Once a third party determines that his or her claim is one that he or she is willing to compromise for an amount within the policy limits, the demand is made to the insurer. At that point, the insurer must consider the demand, and, if liability is reasonably clear, either accept the demand or risk exposure to uncapping the policy limits. The present rule places the insurer on notice that making the conscious decision continued on page 20 www.insurancejournal.com

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September 10, 2012 INSURANCE JOURNAL-WEST REGION | 17

weST COVERAGE

People People, continued from page 14

Mike Sukle

Lance Daschle

Kyle Ramstetter

will also focus on developing employee benefit communication programs, and coordinating client service team resources.

Bentson has eight years of experience in the healthcare and wellness insurance sector, including six years with Tevis Insurance Solutions as a senior account manager. Before that she was an account manager for Chandlee Insurance Agency.

Ledbetter’s responsibilities as an account manager will include marketing, negotiations, client program management, and the supervision of account assistants. She will report to EPIC Principal Patrick McCaleb.

Ledbetter brings extensive experience in customer service and the management of commercial insurance and risk management programs to EPIC.

Yoo and Choi are focused on growing EPIC’s presence in the Korean business community and they have a combined 40 years of industry experience.

Yoo and Choi will be responsible for expanding EPIC’s footprint as well as leading client services. Additionally, they will design, place and manage insurance and risk management programs.

Prior to EPIC, Yoo spent six years with a regional insurance brokerage where he was a senior vice president.

Yoo also worked with Wells Fargo Insurance Services. Choi joined Yoo’s team after eight years with the same regional insurance brokerage where he served as director.

EPIC is an employee benefits insurance brokerage and consulting firm operating from eight offices across California: Los Angeles, Irvine, Fresno,

Folsom, San Francisco, San Mateo, Petaluma and San Ramon.

Concord, Calif.-based Jenkins Insurance Group named Michael Sukle as a vice president.

Sukle’s primary focus will be personal and financial insurance and risk management solutions for high net worth clients.

Sukle has a background in banking and insurance.

Jenkins Insurance Group, as part of the Leavitt Group, has offices in Concord, Sacramento and San Jose.

San Diego, Calif.-based Atlas General Insurance Services named Lance Daschle as senior network administrator.

Daschle will oversee Atlas’ IT infrastructure.

Prior to Atlas, he was the head system administrator for a large company datacenter.

He also worked as a consultant, and worked as a network administrator for University of California San Diego’s administration and student affairs.

Tustin, Calif.-based Yates & Associates named Lisa A. Foley to its team.

Foley, a 16-year veteran of E&S broking, will be charged with expanding the footprint of Yates in the San Diego and surrounding areas.

Dan Cullinan has joined Yates in their Roseville office. Having spent the last nine years at a national wholesale MGA/brokerage, Cullinan specializes in property and casualty.

Foley most recently worked at another brokerage firm in the San Diego area, focusing mostly on heavy property and DIC/quake and flood risks.

Kyle Ramstetter has joined Lockton as a producer based in the insurance broker’s Denver, Colo. office.

Ramstetter will be responsible for client advocacy and new business development in property and casualty insurance for commercial clients.

Most recently, Ramstetter worked as a commercial real estate broker at Cassidy TurleyFuller Real Estate. He also held positions at Vaco LLC and Clayton Fixed Income Services. as vice president and unit manager.

Lockton is the world’s largest privately held insurance broker.

18 ABRAM16066.indd | INSURANCE JOURNAL-WEST REGION September 10, 2012 1

8/23/12 8:46 AM

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September 10, 2012 INSURANCE JOURNAL-WEST REGION | 19

IDEA EXCHANGE

Settlement Duties Idea Exchange, continued from page 16

not to settle may have severe consequences.

In contrast, without any demand by the third party, the insurer may have little, if anything, by which to base a demand. In fact, that was the case in Du, where the injured third party had failed to provide any medical documentation to the insurer so that it could assess the seriousness of the injury and determine whether this claim was one that required the payment of the policy

limits. Yet, despite the lack of cooperation from the injured party in Du, when a policy limits offer was made by the insurer, the third party rejected the offer as “too little too late.” The third party then proceeded to trial, obtained a huge excess of policy limits liability verdict and brought a bad faith claim against the insurer. Fortunately, as stated above, the Du paradigm did not fall within the rule announced by the appellate court.

The Ninth Circuit’s pronouncement in

Du that a liability insurer must “effectuate” or initiate a settlement within policy limits after liability has become reasonably clear is bad law and makes no sense in the real world. As a federal court decision seeking to apply California state law, but based on no actual state court authority, one would hope that the Du aberration is ignored by future courts. Better yet, when next confronted with a bad faith failure to settle case, perhaps the California Supreme Court or one the panels of the California Court of Appeal will relegate Du to the graveyard of appellate decisions dead on arrival.

Larry M. Golub is a litigation partner in the Los Angeles office of Barger & Wolen LLP. His practice focuses on property-casualty and life & health insurers, including coverage litigation and class action litigation, regulatory work and an appellate practice.

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IDEA EXCHANGE

Minding Your Business The Secret Behind ‘The Secret’

I

t has been said, “those that can see what they desire will have their dreams.” This is the power of intention. This idea has been catching hold because of a movie called “The Secret.”

This movie and corresponding book focuses on the “Law of Attraction and Intention.” Several authors, such as Jack Canfield, discuss bringing into life things wanted, dreamed about and hoped for, and how to do that. Those who think positive thoughts, look for the good in others and keep in their forefront their desires, most likely will attain these things.

What does any of this have to do with running a business, let alone business management?

For anyone who has taken a business planning or goal setting class, it most likely has a reference to the now famous Harvard University study. The study found that only 3 percent of Harvard’s 1953 graduating class had clear written goals with plans to achieve them. Twenty years later, the same class was surveyed again, and the same 3 percent was worth more in financial terms than the other 97 percent combined! In addition, the researchers found that the 3 percent had better health, relationships and social skills.

Was this “the power of intention” or just plain old goal setting?

“The Secret” describes the benefits of visualizations. The movie includes several examples of people that have actual displayed pictures of their goals, or create visuals in their minds. This technique is a powerful “secret” that helped these people achieve their goals.

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Many years ago, a university study assessed the power of visualization’s affect on sports performance. There were three groups, and each was assigned the task of shooting a basketball into a hoop.

Everyone’s ability was measured initially. The first group shot baskets on a regular schedule. The second group practiced shooting while visualizing each shot as successful and with as much detail as possible. The third group simply visualized a successful shot.

The outcome was as follows: the second group improved the most — 24 percent better — when they combined actual shooting practice and visualization. The third group that just visualized shooting baskets followed up second, with a 23 percent improvement. The first group that just shot baskets, recorded no change.

This study and “The Secret” reveal that our minds don’t differentiate what we do and see from what we imagine or visualize. The movie, and any good sales class, explain that one can manifest almost anything into life if that dream or goal is clearly visualized.

“The Secret” also covers the power of affirmations and the power of positive thought.

Many sales training classes recommend that a sales person repeat empowering affirmations everyday and before every sales call.

Norman Vincent Peale fathered this idea in his 1952 book “The Power of Positive Thinking.” There is evidence that both of these “secrets,” visualization and positive affirmations, work extremely well.

“The Secret” describes that people can even bring in “bad luck” by focusing on the negative.

People have the power to manifest the helpful, or not so helpful by thoughts and actions. So look for the good in people, things and events.

To unlock “The Secret:” 1. Create written specific goals.

2. Develop visual representations of those goals that can be placed in a goal book or on the conference room walls for sales meetings.

3. Repeat daily empowering affirmations.

4. Take action. Do something to achieve the goal. This was the main piece left out of the movie!

5. Focus on the positive aspects of life and of other people.

The key behind “The Secret” is to put out there what you want in life, and it will be achieved. The same is true of business planning and reaching corporate goals. Most people already know what they want and how to get there. They just need to focus on it and take action!

Schoeffler and Oak are partners at the international consulting firm Oak & Associates.

Email catoak@gmail.com. Phone: 707-9356565. Website: www.oakandassociates.com.

September 10, 2012 INSURANCE JOURNAL-NATIONAL REGION | N1

IDEA EXCHANGE

Agency Management 6 Business Ideas to Challenge Our Thinking

A

company president was excited about a popular cartoon depicting warriors fighting a battle with bows and arrows, along with a suited salesman carrying a machine gun and a briefcase.

“Can’t you see I have no time to see a salesman?” says a beleaguered officer. “I’ve got a battle to fight.”

Ironically, this is the same executive who nixed new opportunities for his company to grow its sales.

Ideas challenging the status quo can face roadblocks in any company, whether in sales, marketing or, most importantly, the future.

Yet, those ideas may let in more light so that effective change can take place. Here are six.

Business owners can be wrong. Entrepreneurs have immense pride in their businesses and, ironically, a dogmatic belief in their own ideas may do damage.

A president of a highly successful industrial business became so enamored with breaking new ground in his industry by selling equipment on the Internet that he made a substantial investment in an e-commerce website without taking the time to determine whether customers would purchase his company’s products online. The venture failed, just when the recession began taking its toll on the economy.

What we think about our business can distort reality and interfere with meeting today’s challenges and tomorrow’s opportunities.

Everything is never on the table. It’s pure posturing, and anyone who puts it to the test gets hurt. Just ask GM’s recently fired N2 | INSURANCE JOURNAL-NATIONAL REGION September 10, 2012

marketing chief Joel Ewanick.

He came up with the campaigns for Chevrolet, “Love it or return it” and “Chevy runs deep.” He also opted out of Super Bowl XII advertising and cancelled GM’s Facebook ads just prior to the social media giant going public.

Most revealing, he also discovered that other things run deeper at GM: namely, “That ain’t the way we do it around here.” When someone says, “Everything is on the table,” don’t believe it. Putting them to the test can be dangerous.

There are always ideas, practices and activities that are untouchable.

It’s all about strategy. When the Boston Business Journal asked Mark B. Kerwin, deputy director and chief financial officer of Boston’s Museum of Fine Arts, about the biggest challenge he faces in his field, he said, “Staying strategic as opposed to tactical.”

Steve Jobs couldn’t have said it better. He was a brilliant strategist. He was committed to building a company that built beautiful things that consumers admire and love to use in their daily lives. It’s no accident that M.G. Siegler of TechCrunch describes Mountain Lion, Apple’s latest operating system, as “the most polished and robust version of OS X yet.”

Tactics are easier to understand and far more fun, but most of the time, they’re temporary and don’t advance us to the goal.

Customers for life is deception. Why? Because it’s counterintuitive, naïve and dangerous.

Yet these three words seem so ingrained in our thinking that

Googling them produces 1.4 million results. Even against such a mountain of evidence, it’s still an illusion.

It should be obvious that customers are never for life: they die, find a better deal, move, change their lifestyles, retire or want something new. In B2B, some merge or sell, go out of business, or become obsolete.

In spite of doing everything possible to keep customers satisfied, they still leave. Yet, blogIn business, gers, speakers and ideas make business writers a difference. implore us to embrace the belief that we can keep them forever.

Businesses are best served by abandoning mythical thinking, such as “customers for life,” and embrace reality with a “nothing is forever” mentality.

Downed by the demon of self-deception. More than just about anything else, selfdeception is continued on page N4

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IDEA EXCHANGE

Agency Management Business Ideas, continued from page N2

in business, watch employees’ faces when a president or sales manager holds forth on the company’s newest product launch, announces next year’s goals or the need to increase productivity. Then, you can see the clash of two quite different realities.

the biggest human stumbling block, and just about every business is plagued with this unrelenting problem.

In a study of a group of college students, researchers discovered that cheating gives students false confidence in their abilities, Forget about ‘The Great Person.’ At according to a report in the Chronicle of women’s clothing retailer Talbot’s, there Higher Education. The upshot seemed to be has been a parade of CEOs, each with the that once we lie, it doesn’t take much for us answer to the company’s troubles, and each to convince ourselves that we’re not lying. taking it deeper into lower sales and debt.

Ask the president of a highly successful The story is the same at Yahoo!, where hope consumer services company to describe his hangs on yet another CEO. primary business objective and he would It might be helpful if boards of directors undoubtedly say, “Putting our customers first.” In all sincerity, he would mean it. Yet, stopped wanting to believe that the next executive holds the key. The “Great (Man) this same president sent a letter to his cusPerson Theory” has had its day, although its tomers filled with dozens of references as to vestiges can be found everywhere, including why customers should do business with his business. company, but no rationale was given as to why it would benefit the customers to do so. The fallacy rests in believing that success It was if he was writing the letter to himself. will follow with the right person. But as Westrope IJ-BB4_IJ-BB4 6/6/11 3:20 PM Page 1 science writer Matt Ridley says (Wall Street To test how widespread self-deception is

Journal, May 22, 2010), innovation depends on exchange. He points to Uruk, in Southern Mesopotamia. It “was probably the first city the world has ever seen, housing more than 50,000 people within its six miles of walls.

Uruk, its agriculture made prosperous by sophisticated irrigation canals, was home to the first class of middlemen, trade intermediaries.”

It’s the same in America: Silicon Valley in technology, Boston in medical care, New York in finance and Las Vegas in casinos.

As Ridley points out, “In the modern world, innovation is a collective enterprise that relies on exchange.”

In business, as elsewhere, ideas, as much as action, make a difference. Companies that put action above ideas may find that they are doing a lot of things backward.

Graham of GrahamComm is a marketing and sales consultant and business writer. Email: johnrg31@me.com. Phone: 617-774-9759. Website: johnrgraham.com.

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MyNewMarkets Hotel/Motel Program Market Detail: Specialty Insurance Agency (www.specialtyagency.com) has expanded its hotel/motel program to California. The program targets risks up to seven stories with $15 million property and $1 million/$2 million liability limits, including liquor liability. A special hotel/motel endorsement includes coverages unique to this class, including mechanical breakdown. Available limits: minimum $25,000, maximum $2 million.

Carrier: QBE States: Calif., N.Y., N.J., and Pa. Contact: Mel Watters at 732-701-8900 or e-mail: bmoffett@specialtyagency.com.

Petrochemical Risks Market Detail: James River Insurance Co. (www.jamesriverins.com) covers manufacturers of chemicals, oils, soaps, lubricants, paints, coatings and other products; mix and blend operations, distributors - PLL and GL (including products pollution). Minimum premiums start at $5,000 with limits up to $5

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Motor Vehicle Dealer Surety Bond Market Detail: Patriot Bonding LLC (www. patriotbonding.com) offers surety bonds in all states, whether you are looking to open a car dealership or to renew your license.

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Storage Tank Liability Market Detail: ISM General Insurance Agency’s (www.ismga.com) storage tank pollution liability (STL) policy provides coverage for onsite and offsite cleanup costs, and for third-party bodily injury and property damage loss from scheduled underground and aboveground storage tank systems.

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SPOTLIGHT

Contractors Help Contractors Prepare for the Rebound with Contract Bonds

By Dave Harbeck

A

re you offering your commercial clients all the products and services they need?

You may want to consider establishing a bond program for contractors. Bonds complement a commercial book because: •Bonds boost retention by strengthening client relationships; •Bond commissions provide another revenue stream; and •Bonds often are the livelihood of con-

struction contractors desiring work in the public sector.

A surety bond offers a guarantee that within a three-party agreement between a principal (insured), obligee (owner) and the surety (insurance company), the principal will fulfill the terms of a contract or agreement between themselves and the obligee.

If the principal fails to meet the terms and conditions of the agreement and bond, the

surety stands in the principal’s shoes to fulfill the obligation. A surety acts like a cosigner on a loan where the principal is the primary borrower.

Contract or construction bonds provide financial security and construction assurance by guaranteeing that a contractor will perform the work per the construction contract and deliver the project lien-free by paying all subcontractors, laborers and material suppliers involved with the project.

Of the most common contract bond types: •Bid bonds guarantee that a contractor will enter into a contract, if awarded, and furnish contract bonds as required by the contract.

•Performance bonds guarantee faithful performance of the terms of a contract of construction or furnishing of supplies.

•Payment bonds guarantee payment for labor and materials used in the work that the contractor is obligated to perform under the terms of a contract.

•Maintenance bonds guarantee against loss because of defective workmanship or materials used in the construction project.

Before a contract surety bond is issued, a surety company will evaluate your customer based on what is referred to as the three C’s of Credit — character, capacity and capital.

Character refers to how a contractor has met obligations in the past and how he manages his business. Capacity is the firm’s ability to perform the work as contracted. Capital is the financial strength of the contractor.

The economic downturn has affected the construction industry, and many contractors

N10 | INSURANCE JOURNAL-NATIONAL REGION September 10, 2012

Surety Industry Loss and Combined Ratios

Loss Ratio Combined Ratio 2001 82.5% 138.4% 2002 69.9% 127.4% 2003 48.1% 101.8% 2004 59.5% 113.6% 2005 39.8% 89.1% 2006 16.1% 69.2% 2007 18.8% 69.1% 2008 11.3% 62.6% 2009 18.7% 73.4% 2010 13.4% 67.8% 2011 13.9% 67.2% 2001-2011 31.9% 89.1% Source: Surety & Fidelity Association

have been forced to expand their geographic area of operations, bid on work at or below margins, or pursue work outside their experience. This has affected their financial condition and ability to attain surety credit.

While the construction industry is predicted to face economic challenges into 2013, many contractors who are managing their operations well would have no problem obtaining surety credit in what has become a highly competitive surety market.

Now is the time to get pre-qualified with a surety company for bid bond, performance bond, payment bond and/or maintenance bonds. As construction projects pick up, your customers will be prepared to bid on projects that will grow their businesses.

Harbeck is an operations consultant for Nationwide Surety & Fidelity.

www.insurancejournal.com

SPOTLIGHT

Contractors U.S. Construction Firms Facing Double-Digit Increases for Liability Insurance: Marsh

T

he commercial general liability market for the U.S. construction industry continues to firm with underwriters seeking rate increases of up to 15 percent, according to a report published by Marsh.

Construction firms with poor loss histories are experiencing even larger liability rate increases, and in some cases receiving nonrenewal notices from their underwriters.

After nearly a decade of rate declines, insurers also are typically seeking to raise rates on umbrella and excess liability insurance of between 8 percent and 10 percent, according to Marsh’s August 2012 “Construction Market Update.”

“U.S. construction firms are experiencing a much more challenging liability market as underwriters seek to raise rates and restrict coverage to make up for years of soft market conditions. This comes against the backdrop of medical cost inflation and changes to some state statutes ‘Construction that have extended firms are coverage beyond the experiencing a insurers’ originally much more intended scope,” said Michael Anderson, challenging Leader of Marsh’s U.S. liability Construction Practice. market.’ “However, the insurance industry’s capital position remains very strong. So while underwriters attempt to apply rate increases across the breadth of their contractor portfolios, the market remains competitive, especially for well-managed risks.”

According to Marsh’s report, rates for project-specific general liability, general liability wraps, controlled insurance programs, builders’ risk, environmental insurance, and contractors professional insurance, have generally remained flat or up slightly in 2012.

Although the workers’ compensation market has been relatively stable for good quality risks, rates have increased in many states as underwriters continue to grapple with deteriorating combined ratios and escalating medical costs, Marsh said. Forthcoming changes to the National Council on Compensation Insurance’s experience modification www.insurancejournal.com

calculations — which help to determine workers’ comp rates — could have a negative impact for the construction industry in 2013.

“Those construction firms that proactively

distinguish their risk profiles from their peers are best positioned to secure more favorable terms, conditions and pricing from underwriters,” Anderson added.

we were the GEEKS

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SPECIAL REPORT

High Net Worth

How Agents and Carriers Can Find Gold in Personal Lines

N12 | INSURANCE JOURNAL-NATIONAL REGION September 10, 2012

www.insurancejournal.com

By Andrea Wells

I

ndependent agents and their companies have over the years been beaten in the personal lines market by direct response carriers and captive agents.

But being down so long means there is plenty of room for independent agents to go up in personal lines market share — and the high net worth (HNW) segment of the personal lines market might just be the best place for them to make inroads into personal lines, say experts.

These experts see opportunity for independent agents where other agents may lack the products they need to do as good a job with this clientele as independent agents could do.

Many independent agents have not yet tapped the sales potential in personal lines in general or in serving the personal lines needs of the wealthy in particular.

Captive carriers dominate the overall personal lines market, writing 53.1 percent, or $125.5 billion in premium in 2010, according to the latest Property-Casualty Insurance Market report published in 2012 by the Independent Insurance Agents & Brokers of America and A.M. Best Co. Direct response carriers write 13.1 percent ($30.9 billion) of the personal lines market, while independent agency carriers — both national and regional carriers— represent 33.8 percent ($79 billion) of the market.

Estimating market share in the HNW segment of the personal lines market is not as easy, the experts say.

Bob Courtemanche, division president, ACE Private Risk Services, says that less than one-fourth of the HNW personal lines market is insured with independent agency carriers that have products and services tailored for the affluent. He bases his estimate on a Conning Research & Consulting study in 2008 that pegged the HNW personal insurance premium opportunity at about $30 billion. Isolating the personal lines premium written by the carriers that specialize in the HNW market and then dividing it by the $30 billion, produces a rough idea of market share.

Jerry Hourihan, executive vice president, chief marketing officer, U.S. Personal Lines at Chartis, says his company defines the HNW market as clients whose main residence is worth at least $1 million or individuals who purchase as least $10,000 continued on page N14

www.insurancejournal.com

September 10, 2012 INSURANCE JOURNAL-NATIONAL REGION | N13

SPECIAL REPORT

High Net Worth to insure $500,000 homes — and a lot of High Net Worth, continued from page N13 them.” in total insurance premium. Under that definition, Hourihan estimates as much as 50 Chartis’ Hourihan agrees. Carriers that do not specialize in the high net percent of the new business he sees coming worth market do not have the to Chartis’ Private Client Group is in whole products, risk management or in part insured by non-high net worth services and loss prevention specialist companies, or captive or direct services that are critical insurers. to the wealthy, he says.

Ruthie Kerns, a personal insurance pro“They fall way short. ducer for Lockton Cos. who used to be an The traditional insurance agent for Allstate, believes non-agency carpolicy is typically inferior,” riers such as State Farm, Allstate and Geico have captured the bulk of the HNW personal he says.

Affluent policyholders who lines market share — as much as 80 percent are with non-specialty carriers in her estimation. are possibly underinsured for their personal But that’s exactly why she likes the marproperty and liability exposures and they ket now. With a large majority of the HNW may be overpaying for this inadequate coverpersonal lines market being served by direct age, these experts contend. and captive writers, Kerns says the oppor Kerns says she often sees direct and captunities for independent agents and carriers specializing in this class are huge. “It’s a great tive carriers charging too much for too little coverage in the HNW market. A month ago, market and what I have found is it is a very Kerns wrote an account for an insured who untapped market,” Kerns says. owned a multimillion dollar property in Colorado. The homeownToo Much, Too Little But how should agents go It is a great market ers’ policy had been placed with a large captive carrier about attracting this HNW business? and is also a very for many years at $4 million.

One way independent “When we came in, we agents can gain new busiuntapped market. did an onsite appraisal and ness is by educating wealthy found out the property was customers who have tradinot worth $4 million, but was worth $8 miltionally been insured by captives or direct lion. They were underinsured,” she said. response carriers on how the specialty insur Through a high net worth carrier, Kerns ance market can do a much better job of was able to raise the limits on the home from meeting their needs than the standard offer$4 million to $8 million, replace actual cash ings of direct writers. value on the automobiles with agreed upon Captive and direct response carriers do replacement cost and increase the personal not have the specialty products and experexcess policy limits from $2 million to $8 tise high net worth personal lines customers million. need, she says.

“All in total, we kept their premium the “The Allstates, State Farms, American same,” Kerns says. “Were they overpaying for Families … those are great companies,” being underinsured? Absolutely.”

Kerns says. “But their risk models are more N14 | INSURANCE JOURNAL-NATIONAL REGION September 10, 2012

Christie Alderman, vice president and new products and services manager at Chubb Personal Insurance, says it’s not uncommon for her to see high net worth customers who are underinsured. That customer may have been underinsured for years, she says.

“That’s true both from a property standpoint and also from a liability standpoint,” she says. “Very frequently, our appraisers go out and take a look at a house that was submitted to us at a real estate value for the coverage A, and we spend a lot of time explaining why we think it needs to be a different value, a replacement cost value.”

Alderman sees contents within an affluent home, such as fine arts and jewelry, often underinsured: “Our appraisers often go into our customer’s home and sometimes will say, ‘Is there anything of terrific value that you might want to think about insuring in case there’s ever a loss that might financially impact you or emotionally impact you, so you’d want to replace that in the future?’ We’re always surprised at the frequency at which customers say, ‘Oh yes! I do have that Renoir upstairs.’”

Courtemanche asks HNW individuals if they had a significant loss tomorrow, or if their home burned to the ground, would there be enough coverage to replace what they had accumulated over the years, at today’s replacement values? “That’s an important point,” says Courtemanche. “Are they properly scheduling items of particular value that they’ve collected over the years?”

The concerns of the affluent often go beyond jewelry and art. “To wine (and) all those things that someone might be accumulating, but not thinking about how the value increases over time,” Courtemanche says. “People generally don’t have a good idea www.insurancejournal.com

about what it would cost to replace all that they’ve accumulated over the years … the general contents tend to be underinsured.”

In Hourihan’s view HNW homes often times are not insured to the correct value because direct and captive writers lack the engineering expertise to price replacement cost on a custom made home.

The property is not all that may be underinsured.

ACE’s Courtemanche says that when his company picks up a new client from a captive or direct response carrier, there is a gap in the liability coverage.

“From an umbrella standpoint, we see time and again when we write new business how much more umbrella liability the clients are taking when they have an agent that’s properly counseling them, and asking the right questions,” Courtemanche says.

“Invariably, they wind up buying more umbrella insurance, which is a good thing to protect their net worth.”

High-profile wealthy clients in particular are endangered by rising jury awards and they need liability limits that are current.

“Gone are the days where the $1 million liability policy is adequate for most customers,” Chubb’s Alderman says. “When we’re looking at high net worth customers, there are a lot of contributing factors to evaluate.

Are they online a frequent amount? Are they high profile? Do they have employees in the home? All of those questions should lead you to think about higher limits.” Chubb offers limits up to $50 million quite regularly, she says.

Hourihan says not carrying enough liability insurance is the biggest problem he sees in HNW accounts.

“From at-fault car accidents, slip and falls, to entertaining at their home and someone gets injured … not carrying enough liability www.insurancejournal.com

is probably the most prevalent underinsur “I have been using my commercial producance issue that we see,” Hourihan says. ers and we’ve been working together to get Lockton’s Kerns has also noticed that her some of the key executives that we have here wealthy clients are being targeted more in in Lockton,” Kerns says. “I have had wonderlawsuits. “When I came to Lockton two and ful success,” she says. a half years ago, we were probably seeing a Lockton’s commercial producers want to maximum of $11 million in make sure that their clients are propa liability claim. This past Not carrying erly insured on not just the comyear, we’ve been seeing mercial but on their personal side as $30 million to $45 milenough liability well, she says. lion,” she said.

Bruce Humphrey, CEO of PCG Agencies Inc. in St. Paul, Minn., says is the biggest Real Opportunity working in the HNW market can be The HNW market presdifficult and takes expertise from issue. ents a real opportunity agents and carriers. for independent agencies because HNW con “It’s exceptionally important to work with sumers tend to also be high-level executives carriers that know how to adjust claims of and corporate business owners, says Robert that size and that have the ability to write Allan Paul, vice president of Entrepreneurial risk throughout the country. Many of our Advantage based in Minneapolis, Minn., an clients own homes in many states and these organization that works with carriers understand what the typical affluthe Consumer Agent Portal ent person owns, the kinds of possessions (CAP), a digital marketing they have, the unique construction of these and digital media prohomes,” he says. “These clients are best vider for independent served by those types of carriers.” agencies and carriers in Chubb’s Alderman says agents targeting the personal lines insurance the wealthy need to understand how the market. lives of the rich can be very different than The commercial lines market is those of a typical already majority owned by the indepenpersonal insurance account. dent agency channel, Paul says. “I would The risk profile can be much hypothesize that if independent agents and more complex. carriers could figure out how to convert High net worth those commercial lines clients into HNW specialty carriers personal lines clients, there is a huge opporcan address that tunity there,” he told Insurance Journal. complexity with But that doesn’t seem to happen very “bells and much, Paul says. “For some reason your comwhistles” that mercial client business owners don’t seem just are not to make that transition over to the personal available lines side of the house with the independent in the broker or agent. It’s not as common as you direct and think it would be.” captive market, However that strategy seems to be workLockton’s Kerns ing well for Kerns. says.

September 10, 2012 INSURANCE JOURNAL-NATIONAL REGION | N15

SPECIAL REPORT

High Net Worth New PURE Program Provides Extra Flooding Services for High-Value Homeowners

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policy. If you want to buy flood insurance, generally speaking you buy it from the NFIP. We see a service need there. While the NFIP serves a very important purpose, we think there’s an opportunity to improve the claims service proposition of flood insurance.

This was really crystallized with Irene, a major storm in the Northeast that caused many of our members to suffer losses, some of them both wind related, trees falling on roofs, as well as flood related ... In resolving those claims, we would send our claims adjuster out to adjust the wind loss, and the NFIP would send its adjuster to resolve the flood loss; two separate visits, two separate phone numbers, no coordination, and, in some instances, leaving our member with not an ideal service experience.

The idea behind PURE Flood Solutions was to tackle that issue. We will offer NFIP coverage on PURE paper. That means that we’ll be able to offer the same strong NFIP coverage at NFIP prices to our members. The IJ: Why was developing PURE’s Flood difference will [be] that we will be able to Solutions important?

Hartley: Flood coverage is generally not a USA12043.qxd 1/4/08 2:26 PM Page 1appoint our own adjusters to adjust that loss.

Maybe more importantly, in the event of peril that is insured under a homeowner’s new flood coverage suite from Privilege Underwriters Reciprocal Exchange, or PURE, is offering high-value homeowners an alternative flood insurance option.

PURE Flood Solutions works as an extension of the National Flood Insurance Program’s (NFIP) Write Your Own Insurance program, in which PURE issues and services the flood insurance policies, but NFIP covers the losses. Coverage is available for jewelry, art, watercrafts, personal liability, as well as auto and homeowner’s insurance.

Chief Operating Officer Martin Hartley said the company saw a need for a better flood insurance option for the high net worth segment after Hurricane Irene in 2011.

Speaking with Insurance Journal, he explained how the coverage works, as well as how the company is working with agents and brokers to educate insureds on their flood insurance exposures.

N16 | INSURANCE JOURNAL-NATIONAL REGION September 10, 2012

a storm where you have damage caused by wind and also by flood, that member will experience better claims service with one adjuster visiting and adjusting the loss under both policies.

One point of contact, one phone number and better service delivery.

Think about it in two components. The first is that NFIP policy with our exceptional claims service. The second piece is a range of optional endorsements to our homeowner’s policy that both broaden the coverage provided by the NFIP and increase the amount of coverage available.

Let me talk a little bit about that. While the NFIP does a solid job of providing coverage for flood losses, it certainly has some deficiencies in serving high net worth individuals. The most obvious is that the NFIP only provides $250,000 worth of coverage for the home itself, the buildings, and $100,000 worth of coverage for the contents.

Our average home rebuilding cost is just over $2 million, so that is not nearly adequate to cover the exposure our clients have.

One of the endorsements we provide under our homeowner’s policy is to provide what we call “excess flood” coverage with limits above the NFIP. We offer those limits at any coverage amount at the option of the member, up to the limit of the insurance they buy on their homeowner’s policy.

The second obvious To listen to the full shortfall of the NFIP podcast interview, visit: policy is that it’s not very http://www.insurancebroad. For example, if journal.tv/videos/7516/ you’re insuring a second home with an NFIP policy, the policy only covers actual cash value on the home rather than replacement costs. The NFIP will look at what the extent of the loss is, and then apply depreciation www.insurancejournal.com

and make a settlement based on that lower figure.

We provide an endorsement on our homeowner’s form that broadens that NFIP coverage to pick up the difference between what the NFIP pays and what the true replacement cost is, so the cost to repair or replace that damaged property without depreciation.

There are many examples of shortfalls to the NFIP policy that we would pick up.

IJ: What limits are available?

Hartley: The limits on the NFIP are $250,000 for buildings, and $100,000 of coverage for content. Above that, we provide excess flood, the limits hopefully up to the insured value of the home. Up to the sort of $15 million or $20 million homes that we would insure, we would be happy to provide excess flood insurance.

IJ: Who is eligible for this coverage?

Hartley: We’re only offering this coverage to PURE members who buy a homeowner’s policy from us. To that extent, yes, there’s a limitation that we’re only offering it to our members. But within our membership, it’s available to all.

IJ: The Federal Flood Insurance Program extension act will end premium subsidies for second and vacation homes. How will that affect your program?

Hartley: It’s appropriate for the NFIP to look at ways to avoid subsidies within the book, within what they insure. It certainly doesn’t change our basic philosophy that the NFIP coverage is very valuable. It’s appropriate for people to buy it, and by buying it from us, if you also buy your homeowner’s from us, we can deliver a claims service experience that’s far better. That basic premise doesn’t change.

But I think the notion that second homeowners may pay a little more for their flood insurance ... we understand that. www.insurancejournal.com

IJ: Have you had much of a response?

Hartley: One of the things that our agents worry about is the claims response on an NFIP policy. We distinguish ourselves by delivering an exceptional claims experience to our members. The agents who are representing the interests of high net worth people really rely on us delivering on that promise.

When it comes to NFIP coverage, there has been no company that has focused that same dedication on claims service, specifically focused to owners of high value homes. Our agents are excited, from what we hear, to be able to provide a solution to their clients that is far better than what’s been available previously.

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Top Workers’ Comp Writers Top 25 Workers’ Compensation Insurers Grow Premium 29.8% Based on June 30, 2012 Results Versus June 30, 2011

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emotech’s review of second quarter 2012 data, as reported by insurers to the National Association of Insurance Commissioners, shows that industry workers’ compensation direct written premiums continued to grow. The question remains, however, whether those increases are enough to improve profitBy Steven J. ability given adverse loss Groeschen

cost trends and low investment returns.

Workers’ compensation insurers reported a 9.1 percent increase in direct premiums written during the first six months of 2012 versus the same period in 2011. Coupled with the 9.6 percent increase observed last year, premium writings are significantly higher than in 2010, yet have recovered only half of the decline from their peak in 2006.

The top 25 workers’ compensation insurers, ranked by the highest direct premium growth, reported a 29.8 percent increase dur-

ing the first six months of 2012 versus the same period in 2011.

As noted in an article published in the June 8 issue of Insurance Journal, premium growth for Texas Mutual Insurance Co. was driven by the financially strong Texas economy. AmTrust Financial Group’s acquisition of workers’ compensation business that had formerly been written by Majestic Insurance Co. resulted in premium growth for Technology Insurance Co., Wesco Insurance Co. and Security National Insurance Co.

Top 25 Workers’ Compensation Insurers Ranked by Direct Written Premium Growth

Rank Company Name Group Name

Year to Date 6/30/2012

Year to Date 6/30/2011

Growth

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Travelers Group N/A Liberty Mutual Group AmTrust Financial Services Group AmTrust Financial Services Group Berkshire Hathaway Group Employers Insurance Group Chubb & Son Inc. Group Zurich Insurance Group Markel Corp. Group ICW Group BCBS of Michigan Group QBE Insurance Group Liberty Mutual Group Travelers Group Ace Ltd. Group WR Berkley Corp. Group Hartford Fire & Casualty Group Chubb & Son Inc. Group Fairfax Financial Group American International Group BCBS of South Carolina Group Berkshire Hathaway Group Travelers Group AmTrust Financial Services Group

$623,480,079 $442,536,227 $247,212,259 $218,381,034 $77,811,615 $139,666,166 $178,061,957 $282,518,955 $414,560,881 $73,810,453 $131,540,372 $76,596,240 $51,456,569 $240,085,748 $163,155,230 $302,091,359 $94,419,315 $290,999,251 $137,233,248 $251,620,493 $388,448,860 $193,398,341 $65,910,918 $198,596,665 $67,402,505

$503,360,005 $349,569,833 $173,242,766 $150,564,013 $14,990,115 $84,996,866 $127,628,898 $233,982,708 $366,534,437 $26,417,002 $86,154,357 $32,129,016 $7,747,911 $196,803,588 $124,156,575 $263,137,319 $55,531,884 $254,208,811 $100,712,529 $216,593,947 $354,721,828 $160,964,608 $33,856,255 $167,169,862 $36,736,981

$120,120,074 $92,966,394 $73,969,493 $67,817,021 $62,821,500 $54,669,300 $50,433,059 $48,536,247 $48,026,444 $47,393,451 $45,386,015 $44,467,224 $43,708,658 $43,282,160 $38,998,655 $38,954,040 $38,887,431 $36,790,440 $36,520,719 $35,026,546 $33,727,032 $32,433,733 $32,054,663 $31,426,803 $30,665,524

Top 25 All others Total

$5,350,994,740 $4,121,912,114 $1,229,082,626 29.8% $17,317,938,902 $16,652,513,466 $665,425,436 4.0% $22,668,933,642 $20,774,425,580 $1,894,508,062 9.1%

Travelers Property Casualty Co. of America Texas Mutual Insurance Co. LM Insurance Corp.

Technology Insurance Co. Wesco Insurance Co. Cypress Insurance Co. Employers Compensation Insurance Co. Federal Insurance Co. American Zurich Insurance Co. Markel Insurance Co. Insurance Co. of the West Accident Fund General Insurance Co. QBE Insurance Corp.

Liberty Mutual Fire Insurance Co. Phoenix Insurance Co. ACE American Insurance Co. Riverport Insurance Co. Hartford Underwriters Insurance Co. Chubb Indemnity Insurance Co. Zenith Insurance Co. Commerce and Industry Insurance Co. Companion P&C Insurance Co. Berkshire Hathaway Homestate Insurance Co. Travelers Indemnity Co. Security National Insurance Co.

% Change 23.9% 26.6% 42.7% 45.0% 419.1% 64.3% 39.5% 20.7% 13.1% 179.4% 52.7% 138.4% 564.1% 22.0% 31.4% 14.8% 70.0% 14.5% 36.3% 16.2% 9.5% 20.1% 94.7% 18.8% 83.5%

Data Source: The National Association of Insurance Commissioners (NAIC), Kansas City, Mo., by permission. Information derived from an SNL Financial product.

The NAIC and SNL Financial do not endorse any analysis or conclusion based upon the use of this data. This exhibit is based upon the initial reporting of second quarter 2012 data, estimated to be in excess of 95 percent of the market.

N18 | INSURANCE JOURNAL-NATIONAL REGION September 10, 2012

www.insurancejournal.com

Industry Historical Workers’ Compensation Direct Premium Written (DPW) Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

DPW Through 6/30 $20,733,173,799 $22,269,120,294 $23,860,086,821 $25,214,881,058 $24,687,236,743 $22,394,863,537 $19,887,833,327 $18,956,981,545 $20,774,425,580 $22,668,933,642

Growth (Loss) $2,310,466,101 $1,535,946,495 $1,590,966,527 $1,354,794,237 ($527,644,315) ($2,292,373,206) ($2,507,030,210) ($930,851,782) $1,817,444,035 $1,894,508,062

% Change DPW Through 12/31 Growth (Loss) 12.5% $39,163,619,129 $3,302,484,629 7.4% $42,315,807,562 $3,152,188,433 7.1% $45,762,359,867 $3,446,552,305 5.7% $47,071,457,362 $1,309,097,495 -2.1% $46,243,683,923 ($827,773,439) -9.3% $41,601,440,772 ($4,642,243,151) -11.2% $37,354,843,425 ($4,246,597,347) -4.7% $36,599,729,899 ($755,113,526) 9.6% $40,145,468,639 $3,545,738,740 9.1%

% Change 9.2% 8.0% 8.1% 2.9% -1.8% -10.0% -10.2% -2.0% 9.7%

Data Source: The National Association of Insurance Commissioners (NAIC), Kansas City, Mo., by permission. Information derived from an SNL Financial product. The NAIC and SNL Financial do not endorse any analysis or conclusion based upon the use of this data.This exhibit is based upon the initial reporting of second quarter 2012 data, estimated to be in excess of 95 percent of the market.

Several of the top 25 companies — Travelers Property Casualty Co. of America, Cypress Insurance Co., Employers Compensation Insurance Co., Markel Insurance Co., Insurance Co. of the West, and Zenith Insurance Co. — wrote the majority of their premium in California, where these companies and their competitors filed for significant rate increases in the past year, in line with bureau loss cost increases. However, the recently passed reform bill creates additional uncertainty about future claim costs and bureau recommendations in California. Most of the other top 25 companies are National or Near National companies that benefited from the rate increases filed in a majority of states in the past year.

The weak economic recovery, less favorable claim frequency trends, increases in medical and pharmaceutical costs, and price reductions to retain renewal business will continue to pressure workers’ compensation financial results. Lower interest rates will result in less investment income to offset these unfavorable loss cost trends.

= at 12/31 = at 6/30

Groeschen is chief consulting actuary and risk analyst with Demotech Inc. Founded in 1985, Demotech is a Columbus, Ohio-based financial analysis firm that provides services to regional insurance companies, title underwriters and specialty insurance markets. Demotech has been assigning Financial Stability Ratings® (FSRs) in these markets since 1989. The FSR is an indicator of future financial stability and is accepted by mortgage lenders as well as underwriters of umbrella insurance and agents’ errors and omissions insurance. Website: www.demotech.com. www.insurancejournal.com

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NATIONAL COVERAGE

News & Markets Lower Catastrophe Losses Boost P/C Insurers’ Earnings in Q2: Moody’s

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.S. property/casualty insurers reported significantly higher net income in the second quarter of 2012 relative to 2011, driven by lower catastrophe losses and increased growth in earned premiums, said Moody’s Investors Service.

Yet operating income — excluding the positive impact of lower cat

losses and favorable reserve development — declined by about 11 percent over Q2 of 2011 for Moody’s-rated insurers. Many companies are reporting rising rates across all business lines with an upward trend from Q1 of 2012. Thus, Moody’s expects improvement in margins in the second half of 2012, as rates are recognized in earnings.

“Investment income remains stable and reserve releases, while higher this quarter, are expected to continue their moderating trend through the second half of the year, prompting companies to turn up the dial on rate increases to meet their return targets,” said Moody’s Brandan Holmes.

Severe weather and wildfires led to Q2 catastrophe losses above the 10-year average, although losses were lower than those in Q2 of 2011. Diversification allowed many large underwriters to absorb losses. The Midwest drought is likely to drag on earnings in Q3 and Q4 of 2012 for companies writing crop insurance, Moody’s said.

P/C insurers’ equity capital remains solid and increased on average 4 percent, driven by profits and unrealized capital gains, although trailing net written premium growth of 6 percent.

Companies continue to pursue active share buyback programs. To the extent insurance markets and economic conditions continue to improve, companies are expected to retain a greater proportion of capital to support growth, Moody’s said.

P/C Insurers Show Improved Results Mid-Year: Fitch

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.S. property/casualty insurers’ operating performance improved significantly in the first half of 2012, according to Fitch Ratings.

The aggregate combined ratio of 47 publicly traded property/casualty (re)insurers improved to 96.2 percent through mid-year 2012 from 107.9 percent the prior year. This improvement was driven largely by sharp reductions in catastrophe-related losses, which declined to approximately 4 percent of the group’s earned premium from 16 percent in the first half of 2011. Core loss ratio improvements from recent premium rate increases and other underwriting actions was a more modest factor in the year-to-year change in underwriting results, Fitch said.

A large number of insurers and reinsurers returned to generating underwriting profits in the first half of 2012.

Underwriting results improved for all but six companies in Fitch’s universe of

N20 | INSURANCE JOURNAL-NATIONAL REGION September 10, 2012

(re)insurers in the first half of 2012.

Reinsurance specialists experienced the sharpest turnaround in performance, as there have been no large cat loss events in 2012 of the magnitude of 2011’s earthquakes and floods. Regional underwriters continue to post underwriting losses and weaker earnings due to several inland-storm related losses and inadequate pricing, according to Fitch.

The aggregate group reported an operating profit of $22.4 billion through mid-year 2012 versus a $10.2 billion operating gain in 2011’s first half.

The operating return on average equity (ROAE), which excludes realized investment gains and losses from earnings, grew to 8.5 percent in the first half of 2012 from 4.1 percent in 2011.

Seventeen companies reported operating ROAE above 10 percent thus far versus only three companies a year ago.

The group’s shareholders’ equity

grew by 5 percent since year-end 2011, as earnings growth was coupled with higher unrealized gains. Share repurchase activity declined modestly relative to the first-half of 2011. Commercial line pricing improvements are likely to continue into early 2013, Fitch said.

In the longer term, competitive forces will promote a shift back toward stabilizing rates. A return to the broad hard market and mid-2000s’ operating performance is unlikely, Fitch said. www.insurancejournal.com

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NATIONAL COVERAGE

News & Markets AIG Off the Hook for Claims by Madoff Clients Under Home Policies

By Jessica Dye

A

merican International Group Inc. (AIG) does not have to cover insurance claims from two former Bernard Madoff clients who sought compensation for their losses under their homeowner’s policy, a federal appeals court ruled in August 2012.

The 2nd U.S. Circuit Court of Appeals rejected an appeal from Robert and Harlene Horowitz, who had sought up to $30,000 in coverage under a fraud safeguard provision in their homeowner’s policy with AIG. The two California residents had sought to make their lawsuit a class action on behalf of other AIG policyholders.

The Horowitzes said they lost $8.5 million from their Madoff account when the money manager’s Ponzi scheme was uncovered in 2008, reflecting the amount on their final account statement.

AIG denied they suffered any direct loss under the terms of their insurance policy.

The Horowitzes had deposited $4.3 million in their Madoff account over nearly 10 years and had withdrawn about $4.5 million over the same period, leaving them with $226,000 more than they invested, according to the Court of Appeals ruling. The $8.5 million claim was the indirect loss of potential returns on their initial investment, a scenario that was explicitly excluded from coverage under their policy, AIG argued.

In September 2010, U.S. District Judge Paul Crotty in Manhattan, N.Y., agreed with AIG and dismissed the lawsuit. The plaintiffs appealed to the 2nd Circuit, which backed Judge Crotty’s ruling.

“The policy expressly excludes coverage for indirect losses — a term that includes the inability to realize income from the money, securities or other property that would have been realized but for the fraud,” the Appeals Court wrote.

AIG could not immediately be reached for comment.

A lawyer for the plaintiffs was also not immediately available.

Madoff is serving a 150-year prison sentence after admitting to running what prosecutors called a $65 billion Ponzi scheme.

Copyright 2012 Reuters

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Closing Quote

Dodd-Frank Provisions Still Hold Concern for Insurers

T

By Robert Hartwig

he Dodd-Frank Act of 2010 brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression. It represented a significant change in the American financial regulatory environment affecting all federal financial regulatory agencies and almost every aspect of the nation’s financial services industry, including insurance.

The essential nature of insurance has given rise to a large and dynamic industry in the United States with more than $1 trillion in annual premium income, $4.5 trillion in assets and more than 2 million employees.

The industry necessarily maintains assets must be large enough to pay claims in times when asset values fluctuate as underlying market conditions shift due to developments in the financial markets and/or the broader economy. The good news is that the insurance industry’s capital resources are at, or near, all-time record-highs and are growing.

The strength of the industry is without parallel within the financial services segment. P/C and virtually all life insurers were able to operate normally throughout the financial crisis and have continued to do so. Consequently, financial industry regulations must avoid imposing bank-centric regulations on the insurance industry, whose operating record and business model are distinct from that of the banking sector.

Institutional Investor The insurance industry’s need to maintain large holdings of assets to back claims and satisfy regulators and ratings

N24 | INSURANCE JOURNAL-NATIONAL REGION September 10, 2012

agency requirements implies that the industry is one of the largest institutional investors in the world. Indeed, the industry is usually ranked among the top three institutional investors across a range of asset categories.

Insurers are necessarily conservative investors, and as such concentrate their investments in relatively low risk, highly liquid securities, especially bonds. P/C insurers hold two-thirds of their invested assets in bonds. Life/annuity insurers hold threequarters of their portfolio in fixed income securities.

The sheer size of the industry’s investment portfolio suggests that its role as an institutional investor is important on many levels. Forty-four percent of the P/C insurance industry’s bond portfolio is invested in municipal securities (munis) issued by all 50 states and thousands of counties, cities and towns nationwide. In other words, P/C insurers alone in 2011 held bonds that served to finance some $331 billion in projects such as schools, roads, bridges, mass transit initiatives and health care facilities.

Life and annuity insurers held approximately 11 percent of their portfolio in such investments last year, translating into a $123 billion stake in state and local government financing. Hence collectively, the insurance industry has investments in state and local projects and initiatives that now exceed $450 billion.

The insurance industry is an important U.S. employer, providing work for 2.3 million people, with a total payroll approaching $200 billion. These figures include not only employ- Never lose sight of the ees of insurance carriers, but fact that insurers are also agents/brokers, third-party fundamentally different administrators and others.

from banks.

Fundamentally Different In the current era of ongoing financial market uncertainty and tsunami of federal regulations, it is important to never lose sight of the fact that insurers are fundamentally different from banks. Congress acknowledged this fact by largely leaving intact the existing system of state-based regulation under Dodd-Frank. Yet that recognition is not complete. Several provisions could reduce insurers’ ability to mitigate risk on their own books or adversely impact the capital available for underwriting risk.

The business of insurance was not the cause of the U.S. financial crisis that began in 2008. Consequently, insurance was not the focus of the Dodd-Frank Act, and insurers were exempted from much of the regulation to which banks and other financial institutions were subjected. However, the danger is not over.

Congress must recognize that a number of Dodd-Frank provisions, including the Volcker Rule and provisions related to resolution of Systemically Important Financial Institutions (SIFIs) when fully implemented or because of potential misinterpretations of the Act’s intent, could reduce the ability of insurers to accumulate capital or mitigate risk — which could negatively impact the economy overall.

Hartwig is an economist and president of the Insurance Information Institute. www.insurancejournal.com

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