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ANTI-FREEZE IN MICHIGAN Industry Cool to Governor’s Plan
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D&O PRICING AHEAD Effects of Securities Suits
FARM BILL FACTS What Agents Should Know
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Business owners shouldn’t be experts in everything. Applied Underwriters® gives them the tools to focus on what they know best: their business. Uniquely powerful products like SolutionOne® that combine payroll, casualty coverages and risk reduction services. And insurance carriers with an A.M. Best Rating of A (Excellent). The result? A client retention rate of over 90%. For more information call 1-877-234-4450 or visit www.applieduw.com.
© 2007 Applied Underwriters, Inc. A Berkshire Hathaway Company.
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Steve Monahan, Structural Engineer & Business Owner. Builds foundations that support 100 tons. Doesn’t want to think twice about his insurance carrier’s stability.
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Inside This Issue February 23, 2009 • Vol. 87, No. 4 • Midwest Region
IDEA EXCHANGE
MIDWEST COVERAGE 8 8
10
10
44 Muslim American Takaful Market AIG Takes the Lead Given the Potential, Others May Follow
NATIONAL COVERAGE N1 | The Relative Calm Industry Insiders Credit Risk Management for Minimizing Recession’s Impact N2 | Reinsurers Seem Ready to Flex Muscles Prices Could Increase by Double-Digits N4 | International Coverage Hope, Straight Talk and Despair Amid the Ruins N6 | SPECIAL REPORT: Agency Salary Survey Agencies Trim Payrolls and Raises N12 | Spotlight: Agribusiness/Farm and Ranch Top 5 Insurance Issues for Farmers in a Soft Economy N19 | Closer Look: Boats and Marinas 5 Solutions for Marine Clients in Today’s Challenging Times N22 | Closer Look: Boats and Marinas Marine Broker, Carrier Share Views on the Market
10
44 44
45
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| Industry Blasts Granholm’s Rate Freeze, Advocate’s Report But 5 Insurers Agree Not to Hike Rates | Chicago’s 2016 Olympic Game Plan Includes Safety Net $375 Million in Cancellation Insurance, $500 Million Additional Coverage | Swiss Re Exec Huff Named New Missouri Insurance Commissioner Gov. Jay Nixon Has Picked a Missouri Native Working in Zurich | Illinois Court Rejects Claim 2 Deaths Were Single Event Not Enough Evidence to Conclude Deaths Were Close in Happening | Michigan Blue Cross Wins Workers’ Compensation Battle Insurer Cleared to Own Workers’ Comp Subsidiary, Accident Fund | Industry Starts to Pay Attention to Muslim American Market AIG Takes the Lead But Others May Follow | Lawsuit Seeks to Stop Bailout Because of AIG’s Takaful Sales Michigan-Based Christian Rights Group Files Taxpayer Suit | Insureds Must Know What’s In Their Flood Policies They Can’t Rely On Representations From Insurance Agents | Managing an Agency In a Troubled Economy: Priority No. 3 The Hartford’s Juan Andrade with Tips on Operational Efficiency | Effect of Securities Lawsuits on D&O Pricing Upward Pressures Might Not Be Felt Right Away
DEPARTMENTS N16 6 44 50
| | | |
MyNewMarkets Opening Note People Closing Quote
50
46
Chicago’s Olympics
Farm Bill
Operational Efficiency
2016 Game Plan Includes Cancellation, Other Insurance
What Agents Need to Know About Commissions and More
Andrade’s Priority No. 3 for Managing an Agency In a Troubled Economy
8
4 | INSURANCE JOURNAL-MIDWEST REGION February 23, 2009
N10 | Budget-Friendly Ideas to Retain Your Top Performers Career Development, Mentors and Flexible Schedules Can Help N26 | Valuing the Deal: It’s What You Keep That Matters Hard Costs, Holdbacks and Soft Costs Impact Every Deal 50 | Closing Quote: Christopher Leliaert Implications for Agents of 2008 Farm Bill
www.insurancejournal.com
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Who insures you doesn’t matter.
Until it does.
Financial Strength and Exceptional Claim Service Property | Liability | Executive Protection | Workers Compensation | Marine | Surety Homeowners | Auto | Yacht | Jewelry | Antiques | Accident & Health Chubb Group of Insurance Companies ("Chubb") is the marketing name used to refer to the insurance subsidiaries of The Chubb Corporation. For a list of these subsidiaries, please visit our website at www.chubb.com. Actual coverage is subject to the language of the policies as issued. Chubb, Box 1615, Warren, NJ 07061-1615
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Idea Exchange Opening Note Publisher Mark Wells Chief Executive Officer Mitch Dunford
Priceless
EDITORIAL
I
n a bold and gutsy move in the face of an economy in downward spiral and unemployment levels approaching record highs, Michigan Governor Jennifer Granholm has called for a freeze on price increases by all hospitals, doctors, physical therapists, auto manufacturers, car dealers, auto mechanics, auto body shops, pharmaceutical companies, oil and gas suppliers, car part manufacturers, utility companies, tire makers, windshield installers, glass manufacturers, auto rental companies, upholsterers, GPS makers, radio installers, phone companies, emergency medical technicians, ambulance companies, tow trucks, paper manufacturers, printing companies, Internet providers, computer retailers, commercial landlords, advertising and marketing firms, forensic experts, accountants, information technology consultants, lobbyists, political fundraisers and lawyers. She also asked all charities and nonprofits to refrain from requesting additional contributions from insurance companies serving their communities. Oh wait, no she didn’t. Oops. She called for a freeze on auto insurance rate increases only. Just a cap on insurance premiums— no cap on the things auto insurance premiums pay for. Granholm wants to buy some time, or rather wants insurance companies to pay for some time, until lawmakers can consider changes to the state’s costly auto insurance system. Now if only Yet is auto insurance really a priority for Granholm or lawmakers? Is the cost of auto insurance really what is dragging those Detroit down Michigan’s economy and driving up its unemployment figures? car makers According to the state itself, auto insurance rates in Michigan have gone up an average of 3.45 percent per year since would lower 1989. That hardly seems like a crisis. In fact, according to a National Association of Insurance their costs. Commissioner’s report for the two-year period of 2004-2006, Michigan’s average premium actually declined 6 percent. Granholm criticized auto insurers for premium growth during the last 20 years. But as one industry representative pointed out, in 1989 the average price of a car was $15,350 while in 2008 it was $28,715 – an increase of 87 percent. Now if only those Detroit car makers would lower their costs. It’s hard to take seriously the Governor’s reform drive when she runs over many of the people whose cooperation she will need just pulling out of the driveway. Governor, there’s still time to check your mirrors, back up and put your reform effort in forward all over again. By the way, the higher car insurance premiums go, the more the state gets. Property casualty insurers pay more than $220 million a year in state premium taxes. Just a reminder in these difficult days of falling revenues and budget cuts.
Andrew Simpson East/Southeast Editor asimpson@insurancejournal.com 6 | INSURANCE JOURNAL-MIDWEST REGION February 23, 2009
Editor-in-Chief Andrea Ortega-Wells | awells@insurancejournal Vice President/Content Andrew Simpson | asimpson@insurancejournal.com Midwest Editor Andrew Simpson | asimpson@insurancejournal.com East/Southeast Editor Andrew Simpson | asimpson@insurancejournal.com East/Associate Editor Kenneth J. St. Onge | kstonge@insurancejournal.com South Central Editor Stephanie K. Jones | sjones@insurancejournal.com West Editor Patricia-Anne Tom | ptom@insurancejournal.com MyNewMarkets Associate Editor Chris Boggs | cboggs@insurancejournal.com International Editor Charles E. Boyle | cboyle@insurancejournal.com Columnists Susan Henry Contributing Writers Jerry Hillard, Kevin La Croix, Christopher Leliaert, Chris Ohrenich, Alfonso Ventoso
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 Eric Jeter (281) 655-0234 ejeter@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
MARKETING Marketing Administrator Gayle Wells | gwells@insurancejournal.com Marketing/Design Assistant Ryan Graef | rgraef@insurancejournal.com Advertising Coordinator Erin Burns | eburns@insurancejournal.com (619) 584-1100 x120 New Markets Sales Manager Kristine Honey | khoney@insurancejournal.com Classified and Ancillary Sales Manager Nicola Coghill | ncoghill@insurancejournal.com (619) 584-1100 x125 New Media Producer Chad Reese | creese@insurancejournal.com
DESIGN/WEB Vice President/Design Guy Boccia | gboccia@insurancejournal.com Vice President/Technology Joshua Carlson | jcarlson@insurancejournal.com Graphic Designer Jamie Bethell | jbethell@insurancejournal.com Web Developer Jeff Cardrant | jcardrant@insurancejournal.com
A D M I N I ST R AT I O N Accounting Manager Megan Sinclair | msinclair@insurancejournal.com Admin./ Marketing Asst. Kristina Delavega | kdelavega@insurancejournal.com Cover designed by: Jamie Bethell
Insurance Journal, The National Property/Casualty Magazine (ISSN: 00204714) is published semi-monthly 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 2008 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 FOR QUESTIONS REGARDING SUBSCRIPTIONS: please call 856-380-4176 or email subscribe@insurancejournal.com. You may subscribe or change your address online at insurancejournal.com/subscribe. ARTICLE REPRINTS: For reprints of articles in this issue, contact Rhonda Brown at 1-866-879-9144 ext. 194 or rbrown@fostereprints.com. Visit insurancejournal.com/reprints for more information.
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Midwest Coverage News & Markets
Industry Blasts Granholm’s Rate Freeze, Advocate’s Report
I
nsurance trade groups have come out swinging against Michigan Gov. Jennifer Granholm’s call for auto insurers to freeze rates until lawmakers can enact some of the reforms in a report by the state’s insurance consumer advocate, Melvin Hollowell. The trade groups have also taken swipes at Hollowell’s report that calls for requiring prior approval of rates, banning the use of credit scoring and imposing other restrictions on carriers. Despite the trade groups’ opposition, within a week after Granholm’s call for the rate freeze, five insurers had said they would comply. According to the Michigan Office of Insurance Regulation, these companies had pledged to freeze rates for a 12month period: American International South Insurance, Electric Insurance, IDS Property Casualty Insurance, Merchants Mutual Insurance and Wolverine Mutual Insurance. Hollowell’s report claims statistics used by the industry are inherently tainted and contrived. But Erin Collins, state affairs manager for the industry’s National Association of Mutual Insurance Companies, called
Hollowell’s report “highly questionable” and “unscientific” and cautioned officials to tread carefully regarding its recommendations. “In such a tenuous economic time, the governor’s recommendations would make Michigan one of the most arduous and least attractive insurance markets in the country and could threaten the future existence of insurance jobs,” she said. NAMIC said these officials criticize the industry for premium growth during the last 20 years without considering the rise in costs of vehicles, accidents and other factors insurance premiums must pay for. According to NAMIC, in 1989, the average price of a car was $15,350 while in 2008 it was $28,715 — an increase of 87 percent. Milk was $2.62 per gallon in 1989 and today is $3.38. “Does the governor want to freeze these prices, too? “ asked Collins, who also disputed that the average premium increase in Michigan has been 3.45 percent a year since 1989 but suggested that even if true, the hike is “hardly staggering.” A National Association of Insurance Commissioner’s report for 2004-2006, found the average declined 6 percent. David Snyder, assistant general
Joining NAMIC and AIA in counsel for the American attacking was the Property Insurance Association, said rising Casualty Insurers Association of medical costs are partly to blame America. Ann Weber, PCI regional for any increase in the state’s premanager, claimed Michigan’s premiums. He said that in 2007, the average PIP claim in Michigan had miums reflect the fact that the state’s insurance law offers some of increased more than 290 percent since the mid-1990’s to $29,392 com- the most generous benefits in the pared to $8,458 in all other no-fault nation. It is the only state that offers unlimited first-party medstates. “This is an unsustainable ical benefits to claimants, she said. trend resulting from fast rising In addition, medical costs — a while major component of Trade groups are Michigan has PIP benefits, possithe second ble fraudulent claims upset but five highest collipadding and a lack sion insurance of benefit level insurers have premium in choices. Yet, despite the nation, these strains, the pledged to due in part to average price of auto the state’s insurance in freeze rates. broadened Michigan is relativecollision covly affordable - 13th erage. The colnationally - and lision loss per reflects significant competition among insurers,” said insured vehicle in Michigan is highest in the nation, according to Snyder. Weber. “The reality is that medical Snyder also dismissed the call for prior approval of pricing, argu- and repair costs continue to increase, and auto insurers need ing that creating “a more restrictive business environment will not the ability to assess and adjust rates so they have the reserves serve consumers as well as promoting competition and providing available to pay policyholders when they have a claim,” said fair, balanced regulation,” said Weber. Snyder.
Chicago’s 2016 Olympic Game Plan Includes $1 Billion Safety Net
C
hicago is hoping its financial strength will help it win the 2016 Olympic Games. Organizers, led by a well-known Chicago insurance executive, have incorporated into their bid what they say is a $1 billion safety net if the games exceed their $4.8 billion price tag. The financial safety net includes a $450 million “rainy day fund,’’ as much as $375 million in cancellation insurance, another $500 million in insurance coverage — and a “last-resort’’ $500 million guarantee of taxpayer money from the city of Chicago. Olympic games are notorious for going over budget. The 2012 Olympics in London will cost an estimated $16.5 billion, three times its original estimate. “Our aspirations for welcoming the world to Chicago and the United States are represented in nearly 600 pages in this three-volume docu8 | INSURANCE JOURNAL-MIDWEST REGION February 23, 2009
ment,’’ said Chicago 2016 Chairman and CEO Patrick Ryan. Ryan is founding chairman of Aon Corp., the large insurance broker, which is based in Chicago. The economic crisis has had its effect. Chicago’s organizers are predicting a $500 million profit, down from the initial estimate of $725 million because they reduced the anticipated sale price of the Olympic village to a real estate developer for mixed-use housing. The games run from July 22 to Aug. 7. Tokyo, Madrid and Rio de Janeiro have also submitted bids. The winner will be chosen Oct. 2. www.insurancejournal.com
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Midwest Coverage Snapshots
Swiss Re Claims Executive Huff Named Missouri Commissioner
G
ov. Jay Nixon has picked a Swiss Re insurance claims executive to lead the Missouri insurance department. John Huff, a Missouri native, has worked since July 2008 at the Zurich headquarters of Swiss Re, one of the world’s larger reinsurance companies. Huff, 48, joined Swiss Re as a managing director and strategic claims officer in the United States in June 2006. In July 2008, Huff was promoted to the position of global head of
key case management and moved to the Swiss Re’s global headquarters in Zurich, to oversee some of the company’s most complex issues in dispute. Prior to joining Swiss Re, Huff was a global claims leader for GE Insurance Solutions from 1998 to 2006. From 2002 to 2004, he led GE Frankona’s property claims teams throughout the European and Asian markets. Huff began his career with
Field, Gentry & Benjamin, P.C., an insurance law practice
in Kansas City, Mo., from 1992 to 1998. IJ
Illinois Supreme Court Rejects Insurer’s Claim That 2 Deaths Were Single Event
Michigan Blue Cross Wins Workers’ Compensation Battle
T
M
he accidental deaths of two teenage boys at an excavation site in 1997 were separate occurrences under the liability insurance policy of the property owner, the Illinois Supreme Court has ruled in reinstating a $2 million judgment against the insurer. In Addison Insurance Company v. Donna Fay, in a Jan. 23 opinion written by Justice Rita Garman, the high court found that there was not enough evidence to conclude that the deaths were close enough to be considered a single occurrence as Addison Insurance and the appellate court maintained. The doctor who performed the autopsies concluded that the immediate cause of one boy’s
death was hypothermia and the other boy’s was drowning secondary to hypothermia. Addison’s forensic expert concurred with those findings and neither of the physicians could conclude with any certainty the time of death of either boy, or how closely in time the boys had perished. The Supreme Court applied the limiting principle or “time and space” test that the appellate court used but came to a different conclusion on the facts. The court found that there was not enough evidence to know whether he boys’ death were “simultaneous or so closely linked in time and space as to be considered by the average person as one event.” IJ
10 | INSURANCE JOURNAL-MIDWEST REGION February 23, 2009
ichigan Attorney General Mike Cox said he is not giving up in his battle and will appeal a judge’s ruling in support of Blue Cross Blue Shield of Michigan’s ownership of workers’ compensation insurance businesses. Cox maintains that the workers’ compensation carrier Accident Fund, a Blue Cross subsidiary, illegally shifted money when it acquired CompWest Insurance Co. of California in 2007. However Ingham County Circuit Judge Paula Manderfield recently dismissed Cox’s complaint. It was the latest setback for Cox over the dispute; three counts he has lodged in the case have been dismissed. Blue Cross officials welcomed the circuit court ruling, claiming it validates Accident Fund’s ability to own and operate subsidiary workers’ compensation insurance companies and paves the way for Accident
Fund to continue to grow its national business, which the insurer said will bring jobs and economic growth to Michigan, its home base. In her ruling, Judge Manderfield stated that the statute did not bar Accident Fund from owning or controlling insurance companies and did not prevent Blue Cross from indirectly purchasing or owning insurance companies. She wrote in her ruling that “this decision resolves the last pending claim and closes this case.” Cox had asked the court to force BCBSM to divest itself of CompWest. Alternatively, Cox asked the court to force BCBSM to recover the $125 million of subscriber funds it transferred to the Accident Fund. BCBSM is the state’s largest health insurer. The Accident Fund is the state’s largest voluntary market workers compensation carrier. IJ www.insurancejournal.com
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It Figures
Declarations Drunken System
$105 The current per vehicle assessment charged by the Michigan Catastrophic Claims Association to help pay claims of seriously injured accident victims. Michigan is the only state to offer unlimited lifetime medical benefits for people seriously injured in auto accidents. Gov. Jennifer Granholm said she doesn’t want the assessment raised.
$1.4 Million The amount that the St. Paul school district is getting from the Travelers Cos. for college-readiness for students and leadership training for principals. School officials hailed the gift as a corporate model.
2,487
The number of teen driving fatalities in Illinois in 2008, which was down from 155 the year before. Illinois Secretary of State Jesse White is crediting the state’s tougher teen driving laws for the drop.
$56 Million The value of the flood relief package signed by Gov. Chet Culver to help Iowa recover from last summer’s record flooding. The Legislature unanimously approved the recovery package, with the money coming from the state’s economic emergency fund. The measure sets aside $24 million for housing assistance and $22 million to flood-stricken communities. Another $10 million will be spent on grants of up to $2,500 for individuals, helping with such costs as food, replacement of personal property and mental health counseling.
29-16 The vote by which the North Dakota Senate killed legislation (SB 2330) that would have banned insurers from using credit information in underwriting and rating.
9.9 Million The number of Americans ensnared by identity theft in 2008, a 22 percent rise from 2007. The good news, however, is that the cost per incident — including unrecovered losses and legal fees — fell 31 percent to $496, according to Javelin Strategy & Research.
11 | INSURANCE JOURNAL-MIDWEST REGION February 23, 2009
“It is surprising to the authors that these tragedies do not occur more frequently than they do in Kansas. As we studied this issue, we found many things that need attention, and many parts of the system about which we could be critical. It is this entire system that needs repair, or more appropriately reconstruction.’’ —The Kansas Substance Abuse Policy Board in its report that found the state’s system for punishing drunken drivers is “so complex and so dysfunctional that it is likely impervious to quick fixes.’’
Simply Put “Simply put, Governor, auto insurance has become unaffordable for a significant and growing portion of our population, at the same time industry profits have skyrocketed to their highest levels in U.S. history, even factoring in the losses from September 11, 2001, and Hurricane Katrina. Moreover, these rising profits have grown proportionally with a 30-year expansion in industry deregulation. Today, Michigan has the weakest laws in America for regulating the insurance industry,” —Melvin Butch Hollowell, Michigan insurance consumer advocate, in his report to Gov. Jennifer Granholm calling for major reform of the state’s auto insurance system. Granholm endorsed the report and called for an auto insurance rate freeze for 12 months to give lawmakers time to implement its recommendations.
Grandstanding “The advocate’s report ignores the very high costs inherent in Michigan’s no-fault auto insurance system and makes regressive policy recommendations that could harm an otherwise stable, competitive market. Unless the governor can freeze medical, litigation, motor vehicle crash and other costs, this is simply anticompetitive, anti-business and anti-consumer grandstanding. “ —David Snyder, vice president and assistant general counsel for the American Insurance Association, rejecting Hollowell’s report and Gov. Granholm’s call for a rate freeze.
Whistleblower Protection “The lessons of the WSI whistleblowers ... have a chilling effect on other state employees. The way it is seen, broadly, is that several state employees blew the whistle and then ended up losing their jobs. Wrongdoing at the agency was eventually confirmed ... but the damage to the employees had been done.’’ —North Dakota Sen. Tracy Potter, D-Bismarck, in sponsoring legislation that would strengthen protections for “whistleblowers.” He said the dismissals of four Workforce Safety and Insurance employees after they questioned how the agency was being run showed current state law intended to guard against such firings is almost useless.
www.insurancejournal.com
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Beyond Security®
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National Coverage News & Markets
The Relative Calm At New York Forum, Industry Insiders Credit Risk Management for Minimizing Recession’s Impact By Kenneth J. St. Onge
T
o many, the insurance world seems to operate on its own theory of physics. And to the hundreds of high-powered industry execs who gathered on the third floor of the Waldorf-Astoria in New York earlier this year, there is a new way to explain — or, at least, describe — how it’s all working: The theory of “relativity.” “Property casualty did quite well last year on a relative basis, given the damage to balance sheets,” said Vincent (V.J.) Dowling, managing partner of Dowling & Partners, a Connecticut-based institutional stock brokerage specializing in P/C and other lines of insurance. “I think it comes out with its model unbroken.” To put it another way: Not as bad as the other industries hammered by recession, namely retail, automotive, Wall Street, real estate and manufacturing, to name a few battered sectors which have seen massive layoffs, losses and consolidation. So despite a year that saw the collapse of a bellwether company (AIG) and huge financial strains damaging others (The Hartford, for example), the industry actually did not perform too badly. Relatively. Dowling was one of six speakers during the first afternoon panel of the Insurance Information Institute’s annual Joint Industry Forum, a half-day
www.insurancejournal.com
gathering featuring two panels of executives, regulators and other industry watchers who tried to distill a year’s worth of challenges into some meaningful insight to the future of the industry. “Relative”-ity was a phrase oft-repeated. “Surplus is down $80 billion, and while significant, it’s not catastrophic,” said Michael Pritula, a director of McKinsey & Co.’s global insurance practice. “Retail, securities (and others) are down. Relative to those other groups, this is a relative calm. It was an OK 2008, all things considered.” For some, given the conditions, the industry’s performance in 2008 left a lot of reasons to applaud. “We had the double whammy in 2008,” said Charles (Chuck) Kavitsky, chairman, president and CEO of Allianz
‘The business model of the P/C industry remains strong, vital and proven yet again,’ said Michael S. McGavick, chief executive officer of XL Capital Ltd. of America Corp. “Between the catastrophe issues that we had to deal with as well as what was happening in the financial
markets, we had a pretty significant test and the industry did great.” Risky Business But why did the industry do great? According to panelists, the insurance world pulled through the storms of 2008 because of its
In the not too distant future, Connecticut Insurance Commissioner Thomas Sullivan predicted ‘we’ll see some systemic risk regulator in Washington.’ experience and insight into risk management. “The industry has weathered the storm,” said Thomas Sullivan, commissioner of insurance in Connecticut. “(Insurers) seem to be very good risk managers.” Pritula agreed, adding that the financial troubles faced by all insurers will create a new culture of back-to-basics risk management in a lot of companies — a move he applauded. “A crisis is a terrible thing to waste,” he joked. Pierre L. Ozendo, CEO of the Americas Division at Swiss Re, said the P/C industry is resilient because it is conserva-
tive in its risk management and focused on a strong business model “that has been proven over hundreds of years and continues to be proven today.” Michael S. McGavick, CEO of XL Capital Ltd. agreed. “The business model of the P/C industry remains strong, vital and proven yet again. We’re the survivor or beneficiary because we spend every moment focusing on the worst that can happen. Whenever we don’t start from there we put ourselves at risk of being the alternative outcome.” Changes Ahead? But Connecticut Commissioner Sullivan also credited regulation with helping to ensure the industry — which despite economic troubles saw no P/C insolvencies — handled the downturn as well as it has. “State-based regulation works. This has proven it.” But he also said that changes in the regulatory structure of insurance could be coming. In the not too distant future, Sullivan predicted “we’ll see some systemic risk regulator in Washington.” McKinsey’s Pritula agreed that some regulatory changes would probably place a greater oversight role in Washington, although he’s unsure of exactly what remains to be seen. Still, he said, “two years from now we will have something.” IJ
February 23, 2009 INSURANCE JOURNAL-NATIONAL REGION | N1
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National Coverage News & Markets
Reinsurers Seem Ready to Flex Muscles, Raise Prices by Double-Digits By Jonathan Gould
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crisis meant no outside capital was available to take on reinsurance risks as in the past. Reinsurers’ upbeat outlook has helped underpin their shares over the last six months, with Munich Re flat, world No. 5 player Scor down just 2 percent and No. 4 reinsurer Hannover Re down 8 percent, compared with a 43 percent drop in the DJ Stoxx European insurance index. “From an investor point of view, you have the feeling that reinsurance is a genuinely defensive sector,” said Collins Stewart insurance analyst Ben Cohen. Cohen pencilled in percentage price rises in the high single digits or low a price double digits in the next big reinsurance contract renewal in the talks in April and July.
einsurers’ tough talk about raising prices on the risk cover they sell to insurers may have rung hollow before, but this time the promise is credible. Reinsurance companies such as global leader Munich Re have been flexing their muscles, predicting the damage to insurers’ investment income and capital base from the financial crisis means they have to pay more for cover. “The turnaround has been achieved,” Torsten Jeworrek, Munich Re board member in charge of reinsurance, said this month, adding that the price fall of the last few years had been stopped. ‘I expect “There is a very strong increase expectation of further price increases during the course of teens in the Old Habits the year,” Jeworrek said. course of the Even so, there are still Munich Re was the first to some who doubt reinsurers’ predict a price surge, but other year. There are resolve in delivering a “hard reinsurers chimed in, with always excepmarket,” where reinsurers’ some forecasting double-digit prices and conditions percentage gains in premiums. tions, but this is improve relative to their Reinsurers have vowed discithe trend.’ insurance company clients. pline on pricing in the past, JP Morgan analyst Michael only to slide into competitive price wars to seize or defend market share, sac- Huttner said the damage to insurers’ balance sheets from the financial crisis might not be rificing profitability for volume. enough to allow for big price increases withThis time may be different, says industry out big natural catastrophes. observers. “Overall, we have seen very disci“We haven’t lost enough on large natural plined behaviour from reinsurers,” said Michael catastrophes to create the immediate surge in Handler, chairman for continental Europe at demand that you need to get into a full-blown reinsurance specialist Guy Carpenter, part of hard market cycle,” Huttner said. “Pricing will the world’s biggest insurance broker, Marsh. probably be flat for the next few months, until “I expect a price increase in the teens in the course of the year. There are always exceptions, we get a signal for more firming, and that signal would come from increased demand after but this is the trend.” a big nat. cat.” And tighter budgets may mean insurers buy Weak Capital Bases The financial market meltdown has prompt- less reinsurance, muddying the impact of higher prices on reinsurers’ bottom line. ed writedowns and drained investment “There is not a lot of excess reinsurance preincome at insurers, siphoning off some of their mium around,” said Guy Carpenter’s Handler. equity capital base and limiting their ability to underwrite risks without help from reinsurers. “People are retaining more risk and buying less “The financial strength of companies is a major reinsurance at higher prices,” he said. IJ issue at this stage, which it has not been for a Copyright 2009 Reuters. very long time,” Handler said, adding that the N2 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009
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REVIEW YOUR RISK
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International Coverage News & Markets
Hope, Straight Talk and Despair Amid the Ruins Obama to the Rescue; Hartwig on the Banks; Davos Devotees Duck He’s got plenty of help, so he’s not the ‘Lone Ranger;’ even if the world’s press freBlame for instigating the current eco- quently treats him as if he were. Barack Obama’s inauguration as America’s 44th nomic mess starts with the banks. President was greeted with an outpouring of Munich Re’s recent webinar gave Dr. Robert enthusiasm in the U.S. that was echoed P. Hartwig, president of the Insurance throughout the world. He is a symbol of Information Institute, a chance to point that hope in the mold of Roosevelt, Churchill and out and to describe the essential differences Kennedy. between banks and insurers, which put the Will he succeed in fulfilling the hopes that financial crisis in a much needed perspective. his election has created? Probably not, as he Hartwig ticked off a number of points as has acknowledged. That’s not the point, howproof that the insurance industry differs ever. Obama embodies the greatly from the banks. This ideal of equality, a better life means that insurers continue ‘Insurers in a better world, which to: 1) Pay claims — whereas always encouraged millions of 25 banks have gone under; 2) Europeans to emigrate to Renew existing policies — maintain a America. as banks are reducing and stake in the He’s not a scion of wealth eliminating lines of credit; 3) and privilege, but an outsider Write new policies — while business they of mixed race, who succeeded banks are turning away peounderwrite ...’ by dint of his intellect and his ple who want or need to borpassion. For those reasons row; 4) Develop new prodalone Europe and the world rejoiced at his ucts — while banks are scaling back the election. The fact that he might actually be products they offer. the right man for the almost impossible job He gave the following reasons: superior he’s taken on is an added bonus. (See IJ Web risk management model; low leverage; consite: www.insurancejournal.com/news/ servative investment philosophy; strong relainternational/2009/01/20/97084.htm). tionship between underwriting and risk bearing; tight regulation and greater transThen there’s the diminished Davos parency. debate, from which many of those remain“Insurers always maintain a stake in the ing masters of the universe are strangely business they underwrite, keeping ‘skin in absent. As reported by Reuters, the worst the game’ at all times,” Hartwig said, adding financial crisis since the Great Depression that “Insurers are more stringently regulated served to mute the enthusiasm of previous than banks, investment banks and hedge years as some 2,500 business and political funds.” leaders met in the Swiss Alps on Jan. 28 for Although he didn’t mention it, it’s fairly the World Economic Forum. certain Hartwig would agree that whenever Economist Stephen Roach gave a grim forethe world’s politicians get around to tackling cast for the global economic outlook, saying the problem of preventing the next generagrowth worldwide in 2009 was only likely to tion of “Masters of the Universe” from trashbe about 2.5 percent — what the Morgan ing the global economy with their innovative Stanley Asia chairman and longtime Davos products, they could do worse than follow attendee — termed a “near recession.” the trail already blazed by the insurance Underscoring the sober mood, some of the industry. glitz has been scaled back and previous (See IJ Web site: www.insurancejournal. celebrity guests such as Angelina Jolie, com/news/international/2009/01/16/97036. Sharon Stone and Bono are not attending. IJ htm). By Charles E. Boyle
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N4 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009
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SPECIAL REPORT Agency Salary Survey
By Andrea Wells
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ndependent insurance agencies remain reliable employers even in these rocky economic times, but even they have to cut back occasionally. Whether due to efficiencies from technology, the lingering soft market, the continuing economic downturn or all three of these, the number of agencies cutting staff rose in 2008 — and still more have plans to cut payroll in 2009. A quarter (25 percent) of all agencies reduced staff size in 2008, while 11 percent indicated they would downsize in 2009, according to the annual Insurance Journal Agency Salary Survey. The good news is that overall, far more agency jobs and paychecks are being spared than eliminated. More than half (54 percent) of all agencies’ staff sizes remained the same in 2008 and two-thirds (67 percent) plan to remain the same in 2009. (See charts on this page.) The IJ Agency Salary Survey generated 1,453 responses from independent insurance agencies nationwide, providing insight into who’s worth what in the independent agency system. Demotech Inc., IJ’s official research partner, provided analysis and input again on this year’s survey results. Julie Brown, founder and talent manager of San Diego Insurance Staffing (SDIS), has witnessed the effects of staff downsizing up close. “There are a lot more unemployed people than I have ever seen,” Brown said. “There’s been a lot of changes, some mergers and acquisitions in the industry, and so when you used to have one candidate for six openings, you now have six candidates for one job opening.” Service staff — including customer service
or even gone out of business. representatives (CSRs) and account executives The IIABA’s Agency Universe Study 2008 — appear to be bearing the brunt of staff reported that more agencies are experiencing reductions, according to Brown, who founded revenue reductions than in the past. More than SDIS 14 years ago to provide staff to southern half (57 percent) of agencies saw revenue California insurance organizations. increase from 2006 to 2007, while 23 percent As recently as a year ago, there were plenty reported decreases. That’s a big shift in reportof jobs and not enough candidates. Account ed revenue changes from 2004 to 2005, when executives were able to negotiate better com73 percent reported revenue increases and just pensation packages, including bonus options. 10 percent reported decreases, the study said. But that’s not always the case today, according to Brown. “Agencies still have some kind of continued on page N8 bonus or profit sharing in place, but CSRs are not demanding wages as Staff Size in 2008 high as they used to be because right now there are a lot of them unem54% 25% ployed,” she said “We’ve seen the Decreased 21% salaries come down a little bit Increased Stayed the Same because of the marketplace changes. Clients [employers] are feeling that they have a lot more choices today so they might be able to pay less.” Staff Size in 2009 The downsizing in 2008 comes as no surprise to Madelyn Flannagan, 67% 22% Plan to Stay the Same Independent Insurance Agents & 11% Plan to Decrease Brokers of America’s vice president Plan to Increase of education and research. Flannagan says agencies are feeling the effects of the economic Average CSR Salaries by Region recession and Personal Personal Commercial Commercial the soft marLines Lines Lines Lines ket, and some Region CSR High CSR Low CSR High CSR Low of their comEast $49,708 $32,331 $55,084 $41,939 mercial Midwest $38,861 $29,497 $44,053 $33,971 clients have South Central $38,540 $26,754 $47,285 $34,011 reduced their Southeast $40,877 $29,555 $53,494 $35,816 own payrolls West $43,716 $31,503 $53,895 $40,131
Average Agency Salaries by Region Average Agency Income President/CEO - Salary Office Manager - Salary Sales Manager - Salary Accounting Manager - Salary Personal Lines Manager - Salary Commercial Lines Manager - Salary Marketing Manager - Salary Average Years Experience - Personal Lines CSR Average Years Experience - Commercial Lines CSR Average Agency Raise - Management Average Agency Raise - Sales Average Agency Raise - Support Average Agency Size - Employees % believe recession has affected agency
www.insurancejournal.com
East $4,543,253 $250,425 $77,305 $112,941 $73,431 $62,949 $78,410 $89,375 9.6 10.7 2.6% 2.2% 2.8% 5.7 80.6%
Midwest $3,425,506 $186,294 $56,660 $110,913 $63,731 $48,235 $68,750 $74,872 9.0 9.3 2.6% 2.6% 2.8% 5.9 72.6%
South Central $4,438,567 $189,926 $61,572 $93,988 $62,123 $50,563 $64,053 $86,094 8.7 10.2 2.4% 2.8% 3.0% 5.1 65.0%
Southeast $3,303,283 $231,701 $63,827 $113,385 $58,333 $55,563 $76,620 $79,239 8.6 9.7 1.8% 2.5% 2.3% 6.0 90.3%
West $2,943,188 $192,083 $78,875 $94,578 $64,780 $55,081 $72,008 $71,563 8.5 9.4 1.6% 1.7% 2.5% 5.5 84.5%
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SPECIAL REPORT Agency Salary Survey Who’s Worth What?, continued from page N7
According to Flannagan, while smaller service staffs might suggest more work for each staff person, and higher salaries due to that workload, technology may be keeping this from happening. “We haven’t seen support staff salaries increase according to what is being perceived as an increase in workload because many agencies are really using technology to offset the decrease in staff sizes,” she said. “The workloads per employee, if you look at the number of accounts they are handling, they are going up but they are also able to use technology to service those clients, as well as [carrier] customer service centers, which have taken some of that everyday burden off support staff.” To Raise or Not to Raise Given declining commissions and the stark economic conditions, holding down costs is a top priority for agency managers. Since personnel is one of the biggest agency expenses, payroll is where agents are doing what they can to contain costs, the IJ Salary Survey shows. Nearly half (47 percent) of agencies postponed hiring in 2008 and 48 percent said they would postpone hiring in 2009. (See charts on page N9.)
Salary raises also suffered. Some 42 percent of agencies postponed salary raises in 2008 and 47 percent plan to postpone salary raises in 2009, the survey revealed. According to the IJ survey, more than half of agency employees in management (51 percent) and sales staff (52 percent) received no salary increase in 2008, while 30 percent of support staff received no salary increase last year. One survey respondent wrote, “Due to economic conditions, management has basically reduced staff and commissions. No raises but most salaries remain unchanged.” Another wrote that his agency “will give no raises in 2009” and will not replace lost positions or add new staff in 2009. IIABA’s Flannagan believes agencies are doing what they must to stay afloat. “I think a lot of people are making concessions to keep their employees, like asking them to take a smaller cut in order to keep their job,” she said. “Especially in small town America, where many of our members are, we’ll begin to see agencies looking for ways that they can keep their great support staff but maybe find ways to more creatively work with them. Everybody wants to keep their job,” she said. Flannagan said the Agency Universe Study
2008, which is produced by IIABA every two years, did not show a correlation in decreased revenues and decreased staff size, but she thinks 2010’s study may tell a different story. “I think in the 2010 study we will see a decrease in agency revenues, and probably a corresponding decrease in employees, and probably a decrease in their pay,” she said. Stagnant Salaries Not surprisingly, average salary increases in 2008 were minimal, according to this year’s IJ Agency Salary Survey. Average salary increases for those lucky enough to receive them were: 2.2 percent (management); 2.3 percent (sales staff); and 2.7 percent (support staff). (See chart on page N9.) Most salaries stayed the same in 2008 compared to 2007 (48 percent), while 26 percent reported lower salary increases and another 26 percent reported higher increases than the previous year. (See charts on N7 and N8 for average salaries by region and agency size.) Marty Murphy, senior vice president of The Jacobson Group, an insurance staffing and executive search firm, says salary increases will not be much better in 2009. “I am not sensing that companies are planning on giving
Average Salaries by Agency Premium Volume (Management) P/C Premium Volume
President/ CEO
Office Manager
Sales Manager
Accounting Manager
Personal Lines Mgr.
Commercial Lines Mgr.
Marketing Manager
Avg. Comm. and Fee Income
Under $1 million $1 million - $5 million $5 million - $10 million $10 million - $25 million $26 million - $50 million $50 million - $100 million $100 million or more
$102,646 $109,910 $180,431 $267,449 $398,333 $401,269 $643,367
$36,333 $46,334 $62,389 $76,285 $95,742 $106,009 $139,894
$131,029 $51,280 $81,758 $118,152 $135,982 $126,184 $224,342
$44,231 $38,356 $51,424 $60,546 $73,537 $86,094 $100,735
$33,088 $38,109 $51,658 $57,195 $68,100 $72,182 $94,679
$53,000 $50,064 $59,121 $70,736 $88,500 $89,461 $145,150
$60,556 $40,583 $71,442 $71,102 $90,975 $93,073 $123,295
$550,350 $500,410 $1,822,128 $3,403,229 $5,437,109 $9,872,423 $27,833,333
Average Salaries by Agency Premium Volume (Support Staff)
P/C Premium Volume
Personal Lines CSR Salary - High
Personal Lines CSR Salary - Low
Personal Lines Years of Experience
Commercial Lines CSR High
Commercial Lines CSR Low
Commercial Lines Years of Experience
Under $1 million $1 million - $5 million $5 million - $10 million $10 million - $25 million $26 million - $50 million $50 million - $100 million $100 million or more
$31,869 $37,906 $40,918 $43,881 $47,182 $62,103 $57,056
$22,100 $27,089 $30,865 $31,998 $33,739 $33,803 $36,606
7.6 8.2 9.5 10.2 8.8 8.6 8.3
$34,161 $43,392 $50,223 $54,610 $61,083 $67,581 $80,660
$17,134 $33,883 $42,030 $40,421 $41,125 $43,532 $44,146
6.4 9.0 11.4 11.2 10.3 10.4 8.6
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huge increases to individuals,” he said. “I think that what they are hoping for is that the general overall increase — whether it is incentive comps or other perks — will keep people happy at their positions. I think a lot of people are concerned about their jobs and whether or not they are going to have one in one, two or five months.” Murphy’s prediction is supported by the IJ survey, in which 48 percent of agents said they would postpone hiring in 2009 and 47 percent plan to postpone raises in 2009. Sales Staff Even when they may be reducing staff or postponing hiring in the service sector, agencies are always looking for good sales professionals. The Jacobson Group’s Murphy says there has been an uptick in firms looking for sales professionals. “We’re getting a lot of requests for that,” he said. “I would say we’ve probably had an increase in agencies in distribution organizations that are trying to find sales people.” Murphy suspects the uptick has to do with current market competition and the possibility of a firmer market in the near future. “They feel they need to grow because they are hoping the market is going to turn and in anticipation of firming they are able to capture up more market share,” Murphy predicts. On the west coast, SDIS’s Brown sees a similar trend. “There are a lot of agencies looking to hire people in the producer role because they are trying to build up a bigger book because the agency needs to grow,” Brown said. The tough marketplace may also be forcing agencies to reevaluate how non-owner producers are being compensated, at least in California, says Brown. A year and half ago, newer producers placed by SDIS could pick through offers that compensated via base pay for a few years. Now, Brown sees few agencies willing to offer new producers base pay at all. “I have one particular candidate where a year ago he was made an offer from one of my clients and they were looking to develop new producers in the agency, so they were willing to do a base pay for three years and eventually go full commission,” Brown. Such a structure afforded the new producer ample time to www.insurancejournal.com
build up a book of business. “But today that same client is saying, ‘I can’t. It’s got to be 100 Management 2.2% percent full commisSales Staff 2.3% sion. We’re not paying Support Staff 2.7% any bases because times are tough.’” IJ’s Agency Salary Strategies Agencies Implemented in 2008 Survey differs slightly from Brown’s perspective Cut Benefits 15% on non-owner producer compensation strucIncreased Benefits 5% tures. According to the Postponed Hiring 47% survey, 77 percent of Postponed Raises 42% agencies did not change Increased Hiring 10% their commission strucIncreased Compensation 14% ture, however 8 percent reported a change and 16 percent said they plan to Strategies Agencies Plan to Implement in 2009 change commission structures in 2009. Cut Benefits 13% Some 31 percent of agencies reported offerIncrease Benefits 3% ing salary plus commisPostpon Hiring 48% sion in the IJ survey, Postpon Raises 47% while 24 percent paid Increase Hiring 15% commission only; 12 perIncrease Compensation 13% cent paid a draw against commission and 15 perStrategies for the Future cent paid only a salary in 2008. The Jacobson Group’s Murphy said in times Premiums are down so commissions are down, Brown said. “Most of my clients looking like these, communication is critical. “What I think agencies need to do for their for producers right now are looking for somecurrent staff is to make sure that they’re comone who already has a book of business to municating very clearly with everybody inside bring over, or they are looking at commission only candidates. They are not looking at bases. the organization as to what is going on,” Murphy advised. They are even trying not to pay a draw if they The IIABA’s Flannagan advises agencies to don’t have to pay a draw,” she said. be creative in their cost-cutting efforts and to Murphy is somewhat surprised that despite rising unemployment, there has not been a sig- make sure to maximize the use of technologies. “Technology has done so much for agennificant increase in job applicants from the property/casualty industry. “I know there are a cies to help them be more efficient,” she said. While new hires will probably be few and lot of candidates on the street looking and far between and pay raises might be smaller, actively searching but I don’t think that has or non-existent, Flannagan feels confident dramatically increased over the last eight to 12 agencies will rebound once the market stabimonths,” he said. “I think we are getting more lizes again . calls from outside the P/C industry, on the life And even though times are tough right now, side and from the investment side.” Murphy says agents should remember “this P/C candidates could be taking a wait-andisn’t the first time we’ve gone through cycles see approach, even for those not pleased in like this” and as most agencies know, it will their current position. “Maybe they want to probably not be the last. IJ wait to see what happens next,” he added.
Average Salary Raise in 2008
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Idea Exchange HR Management
Budget-Friendly Ideas to Retain Your Top Performers Career Development, Mentors and Flexible Schedules Help Keep A-Level Talent Henry
By Susan Henry
T
he current economy is causing many changes within the employment marketplace. Increased employee concerns and lowered morale are just a few reasons organizations should place greater focus on their retention strategies. Even at a time when many companies are facing lay-offs, retaining top talent should still be an essential part of your business plan. Increase your chances of retaining A-level performers with stand-out compensation packages. While you do not have to offer salaries at the highest end of the spectrum, monetary compensation is by no means irrelevant. Complement a competitive salary with exceptional non-monetary compensation to attract and retain the best talent available. Keep employees engaged through great benefits, company culture and development opportunities. With that in mind, below are a few budget-conscious ideas to explore. Career Development Programs Your top performers will not be satisfied in roles that lack advancement opportunities. Remain committed to career development pro-
grams, even if your organization is not growing. This allows employees to maintain control over their career paths despite difficult circumstances. Employees must understand how their personal goals and responsibilities roll up into the enterprise-wide objectives.
In addition, offer corporate or division-wide learning opportunities. This may include lunch and learns, external speakers or webinars. Encourage employees to become involved in the industry and promote attendance at association luncheons, meetings and networking events. If you cannot increase monetary compensation, provide them with special projects, along with greater responsibility and autonomy. Even at Encourage Mentorships Mentoring is a great way for less experienced employees to connect with company leaders who are not their immediate managers and to gain valuable insight into their fields and careers. Whether you introduce a formal program or encourage independent mentoring, these relationships provide employees with career direction in an open, friendly and encouraging environment.
a time when many companies are facing lay-offs, retaining top talent should still be an essential part of your business plan.
Offer Flexible Work Schedules It is likely that most of your employees have busy lives outside of the office. Whether they have a family, participate in volunteer programs or attend graduate courses, consider offering flexible work schedules. This could include telecommuting opportunities, the ability to work four 10-hour days in exchange for Friday off, or job sharing. If you are hesitant about offering unusual work hours, consider starting small. Offer an early release on Fridays for those who make up the hours Monday through Thursday. Alternatively, you could offer flexible work hours as a reward for employees who have surpassed set goals. Increase Recognition and Rewards In today’s economy, it is vital to depart from the traditional “no news is good news” approach. Do not let good work go unnoticed.
N10 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009
Create a culture that embraces positive feedback. Show employees your appreciation at the time it is deserved, not just at the holidays or quarter-end. This may include simple dayto-day recognition or even formal rewards programs. Let employees know they are valued by celebrating career milestones. Promote Team Building Historically, employee morale plummets along with the economy. Many companies are cutting morale programs from their budgets. It may make sense on paper, but employee morale programs are vital to withstanding an economic crisis. In fact, now is the time to improve your corporate culture.
Use the Hidden Paycheck Are there additional perks you can include in your employees’ compensation plans? Work with your human resources team to ensure you are offering the best health benefits possible. Focus on retirement plans and if your company is able, match your employees’ contributions to their 401(k). Offer casual Fridays, gym memberships or corporate sports teams. Additionally, support your employees’ commutes by offering reduced costs on parking and public transportation, or even setting up carpool programs. A-level employees are always in demand, no matter the state of the economy. Focus on your human capital investment. Keeping employees engaged, challenged and well-compensated will ensure your organization is best-positioned to come out ahead when the economy turns. IJ
Henry is senior vice president of Jacobson Solutions, the temporary staffing division of The Jacobson Group. Phone: 800-466-1578. E-mail: shenry@jacobsononline.com. www.insurancejournal.com
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We insure the printing industry from A to Z. Not to mention C, M, Y and K. Technology in the printing industry is constantly evolving. And so are the risks your clients face. From the breakdown of sophisticated equipment to errors and omissions in a customer’s order, the economic implications can be huge. That’s why Travelers has developed insightful insurance solutions that stay in-synch with printers’ needs, including a product that addresses the expense of replacing or recreating a customer’s lost files. Which is something we think you will find is well worth the paper it’s printed on. To find out more information, contact your local Travelers Commercial Accounts Representative. ©2009 The Travelers Companies, Inc. All rights reserved. The Travelers Indemnity Company and its property casualty affiliates. One Tower Square, Hartford, CT 06183
travelers.com
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Spotlight Agribusiness/Farm and Ranch
Top 5 Insurance Issues for Farmers in a Soft Economy Review Exposures, Values and Maximize Insurance Value to Ensure Satisfied Farm Customers By Jerry Hillard
Hillard
rebuild a storage barn because of today’s higher cost of materials. When is the last time you walked through the property and recalculated values for the farm’s or ranch’s assets? If the farm operation holds inventory, is that inventory insured to its true value considering commodity prices are still relatively high? Does the farmer have or need peak season coverage? If your farm policyholder has a loss and doesn’t have enough insurance coverage, it could be an unwelcome surprise weakening your credibility and effectiveness.
T
hanks in part to commodity prices that are still higher than average and, thankfully, less volatile than in 2008, the agricultural economy has not yet felt the same contractions the general economy is reeling from today. That’s not to say there haven’t been some challenges, including rising costs for equipment, fuel and fertilizer. As the U.S. economy continues to struggle — along with watching the stock market and other investment results — it’s a good idea for farmers to review their insurance policies with their agents. Here are the top five items agents may want to consider. 1. How well do you understand the exposures of the farm operations? As a farm’s profit margins are squeezed, farmers may look for ways to diversify farm income. This leads to farmers implementing new business ventures — retail, processing or agritourism — each with its own set of risks and liabilities. Each time you visit the farm, ask about any changes — new buildings or structures, new machinery and new activities. The more information an agent has about a farm’s operations, the more he or she can enhance their role as a trusted adviser.
On the other side of that coin — how well do you understand farming and agriculture? If you insure farms or ranches of any size, you know how complex they can be. Is this an area in which you’ve developed some expertise? Do you know what to look for, or what to ask about to ensure your farm policyholders are adequately protected? The relationship between agent and farm owner should be a partnership built on mutual trust. That’s the best way to ensure the security of the farms you insure for the long-term. Nationwide Agribusiness will roll out a new “Certified Farm Agent” training program in 2009. The program provides indepth education for agents who make a commitment to farms as part of their overall portfolio of protection.
3. Help farmers maximize their insurance investment. Farmers are always looking to lower input costs, including the costs of insurance. Agents should consider providing guidance on the use of deductibles, cause of loss selection, valuations and other means to control costs while still ensuring proper coverages. Helping a farmer save money on his insurance investments is a great way to gain a loyal customer, who could also become an advocate for you and your agency. Helping to prevent losses in the first place is the best way to save on insurance costs, as well as benefit your policyholders’ overall bottom lines. 4. Is the insurance company committed to the agriculture industry? Not all insurance companies that provide farm policies take the time or make the commitment to truly understand the unique risks and exposures the agricultural industry inherently faces. Nationwide Agribusiness and other insurance companies have roots in agriculture and don’t provide farm coverage as a division of an overall commercial or personal lines focus. A dedicated farm underwriting team
As a farm’s profit margins are squeezed, farmers may look for ways to diversify farm income.
2. Is the farm’s insurance up-to-date for today’s values? It may cost more to replace steel bins or
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Spotlight Agribusiness Soft Economy, continued from page N12
can provide the expertise and knowledge to augment your own. According to Doug Becker, associate director of farm underwriting for Nationwide Agribusiness, “It’s highly beneficial for farm customers if agents work with a team of trained underwriters who have developed expertise with specific aspects of farming.” Becker points out that a team approach allows an insurance company to spend time and resources understanding what’s involved, and can bring farmers innovative protection. “With knowledgeable people who know enough to ask about custom spraying or what to bring to the table when the operation hires outside employees, you have the basis for a real partnership and can get the best protection for each operation,” Becker added.
Helping a farmer save money on his insurance investments is a great way to gain a loyal customer, who could also become an advocate for you and your agency.
Insurance Programs for Security, Investigation and Electronic Security Companies Marc Katz I Principal mkatz@mechanicgroup.com 800 -214- 0207 Ext.105
Let us work for it. If your book of business includes private security, investigation, background screening or electronic security firms, we hope you will give us a chance to work for your business. We offer Broad Form programs with a wide range of coverage options: Commercial Liability Workers Compensation Commercial Umbrella/Excess Liability Third Party Fidelity (Employee Dishonesty) Contact us today to learn why hundreds of retail agencies already depend on us for comprehensive insurance products, expertise and competitive pricing. WE WORK FOR IT. Our exclusive programs utilize “A” or better A.M. Best rated insurers and are available in all 50 states.
www.mechanicgroup.com N14 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009
5. Is the insurance company growing, stagnant or declining? Just as farmers should examine the financial health of their suppliers, they should take a good look at their insurance companies’ health too. If the farm experienced a large loss — for example, a $1 million tornado or animal collision liability loss — would the farm’s insurance company have the capital to stand by the policy? Insurance companies’ financial ratings should be checked by various rating agencies. Although the farm economy may not be experiencing some of the same stresses as the national economy yet, now is a great time to get closer to your farm customers. It may be especially appropriate now to ensure you’re helping your farm customers protect the things that matter most to them! IJ Hillard is farm sales director with Nationwide Agribusiness Insurance in Des Moines, Iowa. Nationwide Agribusiness provides coverage for farms, commercial agribusinesses and related businesses. Web site: www.NationwideAgribusiness.com. www.insurancejournal.com
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New Markets The following markets were selected from the MyNewMarkets database of 25,000 coverages and programs. To find additional markets, or to submit markets, go to www.MyNewMarkets.com. Fire Protection Contractors Market Detail: McNeil & Co. (www.mcneil andcompany.com) brings agents the FireWatch Program. This is a comprehensive insurance and risk management program offering high quality, specialty insurance products to the complete fire protection market including firms that engage in the sales, service and installation of fire suppression systems, fire extinguishers, burglar and fire alarm systems, and those involved in selling or distributing fire equipment or emergency apparatus. Available Limits: As needed. Carriers: Arch Insurance Co. “A” rated by A.M. Best. Admitted. States: Alaska, Ariz., Ark., Calif., Colo., Conn., Del., Fla., Ga., Idaho, Ill., Ind., Iowa, Kan., Ky., La., Maine, Md., Mich., Minn., Miss., Mo., Mont., Neb., Nev., N.H., N.J., N.M., N.Y.,
N.C., N.D., Ohio, Okla., Ore., Pa., R.I., S.C., S.D., Tenn., Texas, Utah, Vt., Va., Wash., W. Va. and Wis. Contact: Shawn Yingling at 717-646-8886 or email syingling@mcneilandcompany.com.
Hard-to-Place Commercial Market Detail: Camford National Insurance Brokers LLC (www.camford national.com) offers a commercial package program for hard-to-place risks. Some target classes include: amusement park and device operators, apartments buildings, Chapter 11 risks, chemical manufacturing and storage operations, new ventures, student housing, manufacturing operations, water parks, resorts, restaurants, bars and taverns just to name a few. A deductible buyback program for wind, hail and earthquake is also available.
N16 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009
Minimum premiums begin at $50,000. Available Limits: As needed. Carriers: Multiple. Rated “A-” or better by A.M. Best. Admitted and non-admitted. States: All except N.D., S.D. and Wyo. Contact: David OKeeffe at 908 647-4900 or e-mail d.okeeffe@camfordnational.com.
Truckers Occupational Accident Market Detail: US Specialty Insurance Co. (www.ussic.com) provides occupational accident, contract and employers liability for independent owner operator truck drivers. Available Limits: As needed. Carriers: US Specialty Insurance Co. “A+” rated by A.M. Best. Admitted. States: Ala., Ariz., Ark., Calif., Del., Fla., Ga., Idaho, Ill., Ind., Iowa, Ky., Md., Mich., Miss., continued on page N18
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....with the Insurance Journal's help! Classifieds (Magazine ads & Website postings) Advertise; job openings, agencies for sale/wanted, services, training courses etc. Dedicated classified ad section in magazine and insurancejournal.com website. FREE classified print ad design service – email your ad text to receive a quote. Discounted rates for magazine/web combo ads and repeat advertising. Website ad postings can be submitted online 24/7 and are viewable instantly. Submit and pay for web postings at:
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My New Markets, continued from page N16
Mo., Mont., Neb., N.M., N.D., Ohio, Okla., Pa., S.C., S.D., Tenn., Texas, Utah, Va. and Wis. Contact: Ruth Young at 713-996-1204 or e-mail ryoung@ussic.com.
Environmental Consultants Market Detail: Victor O. Schinnerer & Co.
Inc. (www.PlanetENV.com) offers environmental consultants a broad range of coverages to meet the complex exposures faced by environmental engineers and consultants. Directors and officers, fiduciary liability, employment practices liability and commercial package coverage are all available for eligible
firms. Risk management educational service is included in coverage. Minimum premiums and minimum deductibles begin at $1,000. Available Limits: Up to $20 million. Carriers: CNA. “A” rated by A.M. Best. Admitted. States: All. Contact: Matt McWilliams at 301-961-9833 or e-mail matthew.mcwilliams@schinnerer.com.
Hard-to-Place Marine Risks Market Detail: Capacity Marine Corp. (www.capacitymarine.com) specializes in hard-to-place marine business. Eligible classes range from complete port operations to single vessel owners. The safety and loss control division will work independently as a loss control and safety program design, management and survey report provider to insurance carriers, insurance brokers and marine clients. Minimum premiums begin at $2,500. Available Limits: As required. Carriers: Not disclosed. “A” rated by A.M. Best. Admitted and non-admitted. States: All. Contact: Walter Wynne at 800-222-2425 or email wwynne@capacitymarine.com.
Marine Cargo Market Detail: Chopra Insurance Brokerage Inc. (www.choprainsurance.com) offers coverage for ocean-going domestic transit for many types of commodities. Policy provides all risk including war coverage. Coverage can extend to cover domestic air, rail, truck and warehouse to warehouse coverage with an extension to cover goods stored in warehouses. Minimum premiums begin at $1,500 and the minimum deductible is $500. Available Limits: $1 million to $15 million. Carriers: Unable to disclose. “A” rated by A.M. Best. Admitted. States: Ala., Ariz., Ark., Calif., Colo., Ga., Idaho, Ill., Ind., Iowa, Kan., Ky., La., Maine, Md., Mass., Mich., Mo., Mont., Neb., Nev., N.H., N.M., N.C., N.D., Ohio, Okla., Ore., S.C., S.D., Tenn., Utah, Vt., Va., Wash., W.Va. and Wis. Contact: John Upchurch at 818-551-4588 or email Jupchurch@choprainsurance.com. IJ Submit your company’s property/casualty markets to the industry’s leading searchable database at www.mynewmarkets.com. N18 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009
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Closer Look Boats and Marinas
Retail Marine Business Meet Darwinism in 2009 – The Strong Do Survive 5 Possible Solutions to Today’s Challenging Times By Chris Ohrenich
T
he year 2009 has begun and our nation’s business communities have their backs against the wall. No segment of the economy is without its worries and perils. Daily the mass populous decides how to spend their hard earned dollars. Specific retail segments are hardest hit. One standout is the recreation industry and one even more targeted — the retail boating or marine industry. With fuel prices “the gremlin” of the marine industry in 2008, precious lessons were learned. Those lessons have helped wary, prudent and entrepreneurially minded marinas and boat dealers For all agents out cope with what there with marine is poised to be businesses as clients, another challenging year. use this time of Marinas, boat hardship to promote dealers and a stronger undermarine service companies come standing of your in many shapes client’s business. and sizes, from small “mom and pops” to multi-location boating businesses owned and run by national organizations. These organizational differences are the predicate upon which their business plans have been established. Irrespective of these differences, certain trends, both negative and positive, continue to pervade the declining and most successful marine businesses. Here is a short list of five current economic realities faced by marine businesses and what may be possible solutions that some business leaders can utilizing to combat recessionary pressures.
Ohrenich
businesses. It is no different in the marine industry. However, businesses that find opportunity in crisis also develop processes that lead to increasing sales. For example, treating every customer as if they are your only customer — while maybe not the reality — the effort helps promote a true solutionoriented focus. Discovering new ways to uniquely set your business apart from the rest is simple, tried and truly results-oriented. 2. Boat Service Requests Decline. Negative mindsets transcend to customers during repair conversations. This can be in the form of verbal communication as well as attitudinal demeanors, resulting in decreased numbers of service requests by
clients, and reductions in the size of the service ticket requested. The best professional service managers explain necessary service needs in detail. This most often results in positive discussions, up-selling and increased service receipts. Training is paramount to continue this form of discussion at all levels of business. 3. Layoffs Top the List of Solutions. Layoffs become one of the first reactions a business owner considers, when a business’ receipts take a significant tumble. While seemingly obvious, it is relatively impossible to increase business revenue, when there are not enough employees to complete the continued on page N20
1. Scarcity Mentality Prevails. A scarcity mentality is prevalent in those businesses with declining sales. We hear it and feel it in our discussions with most www.insurancejournal.com
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Closer Look Boats and Marinas Retail Marine, continued from page N19
necessary tasks required by customers. When an average service or warranty request turnaround time increases, from two days to four days, not only does a boat owner become irritated, future income decreases and customers can be lost forever. Locating, hiring and developing the most talented sales professionals and service technicians, especially in an economic downturn, is the reaction most successful marine businesses turn to as a best practices tool to increase sales or service ticket size. When the economy turns, these businesses are poised for immediate growth. 4. Budget Cuts and Expense Sharpening. Tight budgets and realistic expenses are the hallmark of a successful marine business. Often as a result of scarcity, broad sweeping cuts dig into business development areas such as marketing and business protection areas, such as insurance. It is a simple known fact that marketing produces sales and sales produces income. Yet marketing is the frequently jettisoned, seemingly unnecessary piece of luggage. Marketing should be considered as important as your carry-on — always by your side, available for emergencies and an ace in the hole when crisis rears its ugly recessionary head. 5. Endangered Loss Leaders. Loss leaders when used correctly bring buyers to your business. Fueling at marinas, albeit an expensive loss leader, has often been used to draw boaters to a marina, and promote others sales, whether in the form of boating supplies, bait, tackle, service or others. To stop offering this service and reduce its related expenses may show an immediate response to a bottom line. Before this or any final decision, think twice, and at least once get creative, very creative! For example, offering a raffle or drawing to customers, up playing higher fuel prices, and providing a particular amount of free fuel can be the creative draw that adds to a business’s positive mindN20 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009
ed culture, leading to better and greater business results and happy return customers. Transfer of Risk Many marine business owners are turning to their insurance agents for advice as to how to decrease insurance premiums to lower that expense line item. We as agents know as
sales and payrolls decrease, premiums correspondingly decrease, yet never enough to the liking of a sinking business. This is when a marine business can appreciate the work of an insurance professional specializing in the marine industry. Knowing policy forms, manuscripting capabilities, which carriers offer the strongest remedies, etc., demonstrates a marine insurance agent’s true worth. For all agents out there with marine businesses as clients, use this time of hardship to promote a stronger understanding of your client’s business. Relationship building is crucial and knowing the ins and outs of a niche business, in the end, results in a trusting business relationship. Use this article, pass it out to your clients, engage them in business building provoking thought. They will appreciate your service all the more at the end of the day and at renewal time. IJ Ohrenich is an insurance broker with the John B Wright Agency, in Manasquan N.J., specializing in the marine industry since 1987. He also participates as a board director for the Marine Trades Association/N.J. Phone: 609-513-0355. E-mail: cohrenich@johnbwright.com. www.insurancejournal.com
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Closer Look Boats and Marinas
Eye on Boats and Marinas Marine Broker Shares Views on the Current State of the Market marine insurance as the agency’s primary niche market. “We had many boat owners as he marina and boat industry is a clients and started attending all of the boat natural fit for John Harvey, founder shows in Texas and the surrounding states,” and president of Harvey said. “We decided Voyager to start marketing nationInsurance Services in ally and are now licensed Frisco, Texas. Harvey has in 40 states.” been in the insurance The marine insurance business for 50 years and industry has changed like has been a boat enthusiast many other insurance since his childhood. markets. Even so, Harvey says it continues to be an “I grew up enjoying excellent niche for his boating as a child with my agency. family and have had a boat “We have a full brokerage since I was in high department to help retail school,” Harvey said. agents looking for boat Since 1958, Voyager has John Harvey markets for their clients. served its community as a We also work closely with boat dealers and full-lines independent insurance agency, but provide insurance binders for their new made the decision in the late 1980s to target
By Andrea Wells
T
N22 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009
clients purchasing a boat,” he added. Insurance Journal asked Harvey his views on the current state of the market for marinas and boats. Here’s what the marine specialist and life-long boater had to say. How is the economy affecting the marine industry? Harvey: We work with many new boat dealers who report that their industry has been severely impacted. There have been a number of boat dealers that have filed for bankruptcy and left a very large inventory of mostly 2008 boats sitting unsold. Many dealers are buying this inventory rather than ordering new boats because the inventory is deeply discounted. Another issue affecting their sales is their floor plan financing companies’ refusal to lend the full amount of their credit line and controlling how much inventory they can buy. Dealers report that getting a customer
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approved for financing has become quite difficult with several national banks exiting the boat financing market. Those left have severely curtailed their lending except to the very highest credit scores. Boat dealers advise that this is an excellent time for the consumer to buy due to the deep discounts being offered; however, many consumers cannot qualify. Boat dealers also advise that their customers who usually pay cash are holding back to see what happens with the economy. Attendance at the winter boat shows was down dramatically. The Dallas Boat Show actually closed for Monday, Tuesday and Wednesday nights due to poor attendance. However, dealers reported the people who did attend the show were there to purchase. Our marina clients report much of the same. They find slip rentals have dropped significantly and many see people canceling their slip rental and taking their boats into dry storage or putting the boat back on a trailer. While fuel has dropped significantly, the consumer is too fearful of returning to $6 to $7 per gallon gas [prices], so many large boats are on the market. Again, credit is very tight with almost no movement in financing for large boats, even with excellent credit.
Are you a boater as well? Harvey: I have been boating since childhood with my family. I built my first boat in my high school woodshop class. My mother always used to shudder as she talked about watching her entire family pull away from the dock in that homemade boat, hoping and praying everyone returned to her safe. My wife and I have owned a number of boats but we have
developed a passion for old wooden boats. I purchased my first wooden boat in 1985 and still have that boat, a 1952 Chris Craft Custom Sedan named “Unforgettable” (Golden Pond boat with a hardtop). ... My wife and I have become very involved in the “International Antique and Classic Boat Society” where I served as president in 1999 and 2000. continued on page N24
Today’s Economy Tough on Boat Owners, Marinas
R
obert Merluza, underwriting consultant for CNA’s marine division, says times are tough for the marina and boat industry. Merluza, an expert in marine coverage for boat dealers cover, marine operators and boat owners, says many boat owners are getting rid of their boats or not using them as frequently, which is hurting marina operators and the boat industry nationwide. Below, Merluza offers some key underwriting considerations brokers should be aware of in today’s market. How is the economy affecting the marina and boat industry? The economy definitely is impacting boat owners. It’s expensive to keep a boat. For people that can’t fit their boats on their drive ways, they keep their boats at marinas but to keep a boat there — to store it, to fuel it, to keep it in shape — it definitely costs money. continued on page N24 www.insurancejournal.com
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Closer Look Boats and Marinas Today’s Economy, continued from page N23
Eye on Boats, continued from page N23
What’s your best claims story? Unfortunately, there have been many claims stories. I don’t have a best, but I will say that Hurricane Ike was absolutely devastating to our boating clients on the Texas coast and very little has been reported. We have many people who have still not found their boats and are trying to get their claims settled. Our marine
companies responded quickly and were able to get most claims handled within a week to 10 days. Considering the circumstances, we were very pleased with our insurance companies’ responses. IJ Voyager offers full online quoting for any size boat for insurance brokers at: http://agent.voyagermarine.com.
Boats are luxury items. If someone is going to cut something out it’s going to be their boat. So boat owners are looking for an insurance market where they can lower their insurance costs. Price is a big issue these days. A lot of boat owners are getting rid of their boats; asking boat dealers to help sell them. There’s still a number of people that do go out and buy boats, but it is a much shorter list. From an insurance standpoint we are not seeing a lot of new business come our way. Dealers are not selling as many boats as they did in the past. In addition, if boaters aren’t fueling their boats because they are not using them that often, that impacts the marina and the bottom line. What are the key things you consider when underwriting marinas and boats in today’s market? Most obviously is the maintenance of the facility. Is the marina keeping everything in good working condition? We want to make sure that they are not cutting corners with safety or housekeeping. Another concern is storage. Depending on where the boats are located you will find a lot of boats out of the water, either on racks or even indoors. If rack storage is not done properly you could have boats topple over or collapse inside a building damaging the boats. We also look at the other operations the marina does in addition to slip rentals. Do they provide fueling? With fueling operations, obviously fire would be a concern. … In addition, some marinas provide other related services — restaurants, parties, entertainment. That can be a concern especially if you are talking about liquor, so safety would be a big issue. When marina operators aren’t getting the income from gasoline sales and rent slippage then they are going to promote their entertainment, restaurants and bars more, which therefore could increase that exposure. Another thing, if marinas are not selling boats then they are going to try to sell other things — maybe ATVs, fire arms or sporting goods. They might even sell motorcycles or other things that are not as expensive as boats just to keep their businesses running. Those are again things we look at from an underwriting standpoint. IJ
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Idea Exchange Agency Management
Valuing the Deal: It’s What You Keep That Matters By Alfonso Ventoso
W
e talk with clients all the time about the mergers and acquisitions (M&A) marketplace, advising owners on positioning their businesses for the best exit whether they are three months or three years away from transitioning out. Once fit has been determined and price is settled, clients may think the work is over. It is true that once the timing is right for a client to go to market, we spend much of our energy analyzing and negotiating deal pricing to get the best results. We haggle with buyers over pro forma earnings before interest, taxes, depreciation and amortization (EBITDA), and we go back to them to make the case for why higher EBITDA multiples are justified. We negotiate structure: guaranteed proceeds versus earn-out, stock sale versus asset sale, and many other facets. Ultimately, three components must align in order for a deal to close: culture, pricing/structure and terms. As advisors, we will typically justify our fee several times over through our impact on pricing and structure alone. However, more deals unravel over terms than anything else. We will focus on the terms that generate various kinds of hard costs, holdbacks and soft costs that are the frictional costs of selling a private business and impact every deal. These often come as surprises to our clients who are selling their businesses. Getting our minds around these issues early in the process avoids loss of momentum later. As clients get comfortable with these costs, the resulting net number they should expect is revised to a realistic level. Let’s use an example of an agency with $10 million in net commission revenues, and pro forma EBITDA of $3 million or 30 percent. After negotiations, the parties agree on pricing of 7.0 times EBITDA guaranteed (most now, some later), plus an earn-out potential of another 1.0 times EBITDA. The many ways earn-outs can be structured have been the subject of many an article, and will not be repeated here. This example implies a potential gross value to the seller of $24 million. While there is some kind of target to be hit over a two- to four-year timeframe to achieve the $3 million earnout component, it is the maximum number, in this case $24 million, that typically becomes the “anchor” number in the seller’s head. It is important to note this will be the gross amount the buyer is willing to pay for the earnings power N26 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009
of the business represented on the income statement. Now for a walk through the hard and soft costs that will erode this number significantly. Hard Cost 1: Balance Sheet and Working Capital Balance sheet adjustments can include the removal of intangible assets resulting from acquisitions (the buyer can’t count them twice, as the earnings power represented by these assets is already being paid for as a multiple of the income stream). Producer vesting or deferred compensation liabilities can also be significant and often leave balance sheets neutral or even negative. Let’s say our agency has the following simplified balance sheet: All amounts in Cash Receivables Intangibles Total Assets
$000 $200 $300 $1,000 $1,500
Payables Equity
$300 $1,200
Since the buyer is paying for the earnings power of intangibles that are already flowing through the income statement, these are removed and the pro forma equity (tangible net worth) is now $200,000. Our agency’s pro forma expenses of $7 million per year imply average operating expenditures of $580,000 a month. A buyer does not want to pay you $24 million for your business and then have to inject more money into the business during the first month in order to keep the lights on and make payroll. This is why a working capital holdback is customary. A 30-day working capital requirement in this case would result in a $580,000 deduction from proceeds. Some buyers start by asking for 60 days, which would be almost $1.2 million. The seasonality of revenues, the margins, and the likeliness that revenues will recur all drive a buyer’s comfort level as to how low a requirement they will accept. We find that 30 to 45 days is reasonable in most cases. Using 30 days in this example, recall there is $200,000 of tangible equity in the business and a working capital requirement of $580,000. Though the mechanics are different in a purchase of stock versus a purchase of assets, in continued on page N28 www.insurancejournal.com
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Insurance Industry Charitable Foundation presents the
5th Annual
Club100 Dinner The Club100 Dinner is an intimate gathering of the top 100 insurance professionals and their guests from California and the West Coast. Enjoy a social evening of fine wine and food in a unique setting that reflects the beauty of the Southern California region. Proceeds will benefit local community nonprofit agencies.
Event Sponsor: Chubb & Son Thursday, March 12, 2009 6:30pm – 10:00pm Cicada Restaurant 617 S. Olive Street Los Angeles, CA Register by March 6th at www.iicf.com/events Contact Mary Reynolds at 925-280-8009 mreynolds@iicf.com
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Idea Exchange Agency Management
Valuing the Deal, continued from page N26
price as a range, though prior to our negotiations it might be more like 5 percent to 15 percent. Twelve to 18 months is a typical timeframe. In 99 percent of cases, the seller recovers this, with interest. Buyers need this cushHard Cost 2: E&O Tail Insurance ion to true-up the working capital Sellers are responsible for securing their own errors and Ultimately, three and make sure they’ve bought the asset that was represented. Still, omissions liability for incicomponents there is a small risk some or all of dents taking place after closthis amount could be forfeited. ing. A typical coverage period must align in would be three years. A preorder for a deal Soft Cost 2: Indemnification, mium in the range of $50,000 to close: culture, Representations, Warranties to $100,000 for this size busipricing/structure Seller clients often ask us why ness is a small price to pay the buyer wants more than just rather than suffer a claim that and terms. their word that the accounts, relacould jeopardize the entire tionships, and the entire business pot. being transferred are above board. Anyone paying $24 million for someone’s business would Hard Cost 3: Other Closing Costs want reassurance that Hiring competent advisors for the transacpotential skeletons in tion along with legal and tax representation the closet were vetwill provide instant return on investment ted. Buyers put themwhile also dramatically increasing the likeliselves at the highest hood that a deal gets done at all. A working risk when they buy assumption might be 3 percent to 7 percent of the stock of the sellthe total purchase price, depending on the ing corporation. Since complexity of the transaction and the way the most agencies are Sagreements are structured. corporations, most deals are transacted as Hard Cost 4: Capital Gains Tax Most deals are structured so that sellers cap- asset purchases which mitigates these risks ture capital gains rates above their cost basis. for buyers. In an asset deal, a buyer will allocate this Wrongful terminaamount between intangible assets (which are tion claims, sexual amortizable and provide a tax shield) and harassment claims, goodwill, which is not. Capital gains taxes are currently at an all time low of 15 percent at the ERISA non-compliance, tax liabilities, and slip and fall claims are federal level. The best case is that the rate stays at its current level, with the fallback that just some examples of time bombs that can come back to bite a buyer. What if an error is it reverts back to 20 percent in 2011. With the discovered by accountants or tax authorities new administration, it is a good bet the rate post deal? Consider knowledge in the legal will increase to as much as 25 percent or even 28 percent. No matter where it ends up, it will context: what if it is alleged the seller knew at always be the biggest item reducing the seller’s the time of sale that two or three of the top accounts would be non-renewing? Whether take-home proceeds. groundless or not, costs would be incurred in defending these claims. If action were to be Soft Cost 1: Escrow This holdback is one of the least understood taken just after a transaction, the buyer and seller would likely both be named. by sellers. In fact, many become personally What is normal as far as indemnification? offended at the implications of this customary For more than one of the public buyers, it is inconvenience. Our favorite answer to the 100 percent of purchase price paid, jointly and question of “what is normal?” is “it depends.” severally shared among all shareholders. An Let’s use 2.5 percent to 7.5 percent of purchase either case the buyer will reduce the purchase price received by the seller by a net of $380,000 to have sufficient working capital.
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honest seller negotiating in good faith should be able to sleep at night with these terms. However, soft costs can keep even the most ethical seller awake at night until everything is collected and all related agreements have expired. So, what is left for shareholder(s) after this sample transaction? In this example below, 20 percent of the total purchase price is lost to adjustments. Obviously the vast majority is lost to taxes, but even so these other items in this example clip several percentage points and several hundred thousand dollars from the deal proceeds. Bear in mind when you hear “so and so sold for 8 times EBITDA” that perhaps 6 times or 7 times of that was guaranteed, and the rest had to be earned after the closing. Further, realize that every seller incurs some combination and
magnitude of the above costs and holdbacks which make up the accumulated frictional costs of selling a privately-held business. Being informed about all of these components will help you set a more accurate and realistic goal when you try to decide what your net number is. Terms are at least as important as price. Good advisors can easily pay for themselves yet again by negotiating the most favorable terms once price has been settled. IJ Ventoso is a vice president with Hales & Co., located in Hales’ Hartford, Conn., office. He advises agents and brokers on valuation, perpetuation and transaction matters. Email: aventoso@halesgroup.com. Phone: 860-487-9722. Web site: www.halesgroup.com. www.insurancejournal.com
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Midwest Coverage People
Juan Andrade
Neil Wolin
Dan Klaras
Michael Paulsen
Juan Andrade and Jonathan Bennett have been named as interim co-leads of the Property and Casualty Operations of The Hartford. Their appointment to those interim positions follows the departure of Neil Wolin, president and chief operating officer of the The Hartford’s Property and Casualty Operations, who has accepted a position in the White House as Deputy Counsel to the President for Economic Policy and Deputy Assistant to the President. Andrade is currently executive vice president of sales and distribution for Property and Casualty. He joined The Hartford in 2006 when he assumed leadership of the P/C claims organization. Prior to joining The Hartford, Andrade held several leadership positions with The Progressive Corp., and before that with American International Group. Bennett is currently executive vice president of personal lines and small business insurance. Bennett joined The Hartford in 1999 as staff assistant to Ayer. He has since served in several leadership roles at the company, including vice president of corporate development, head of the eBusiness Ventures Team, and senior vice president of product management for the personal lines division. He was promoted to his current role in 2005. Assurance Agency Ltd., based in Schaumburg, Illinois, has promoted Dan Klaras from executive vice president to president. Klaras takes over for Anthony Chimino, who previously held the titles of both president and CEO. Chimino will continue to serve as Assurance’s CEO and top officer of the company. In his new role as president, Klaras will be directly responsible for all the property/ casualty insurance practices; the overall sales management of the agency; producer education and development and deciphering new property and casualty products to deliver to Assurance clients. Klaras joined Assurance in 2005 and assumed management responsibility for one of the company’s three property/ casualty business units. Prior to Assurance, Klaras was a field vice president for Fireman’s Fund Insurance Co. from 2003 through 2005. He was responsible for 200 agencies across five Midwestern states. Prior to joining Fireman’s Fund, was with Kemper Insurance and Safeco Corp. Independent insurance broker The Lockton Cos. has named Michael D. Paulsen as vice president in the firm’s Chicago office. Paulsen is responsible for new business development and client advocacy for property/casualty and employee benefits clients. He has experience counseling middle market firms in transportation, manufacturing, senior housing and professional services. He has also worked with distressed companies and mergers and acquisitions. Paulsen previously served for more than six years as a producer in Chicago at Willis HRH and its predecessor, Thilman Filippini. He has been in the insurance industry for 15 years
42 | INSURANCE JOURNAL-MIDWEST REGION February 23, 2009
and has experience in workers compensation risk management, employee benefits, loss control and claims. Richmond, Virginia-based Markel Corp. has named Mike Crowley as president of Markel Corp.’s Specialty Division. In his new position, Crowley will be responsible for specialty insurance business, which includes Markel Insurance Co. and Markel American Insurance Co. Prior to joining Markel, Crowley was president of Willis HRH North America, and was with Johnson & Higgins and Palmer Cay. Markel also promoted Britt Glisson to chief administrative officer. In this role, he will be responsible for assuring efficient, cost effective operations in North America. Glisson joined Markel in 1990, first as chief financial officer and later as president and chief operating officer of Essex Insurance Co. In 1996, he became president and chief operating officer of Markel Insurance Co., the positions he held just prior to his promotion. The Professional Insurance Agents Association of Ohio Inc. elected Douglas J. Fox, of Perrysburg, president of its board of directors. Fox is an independent insurance agent with Diversified Insurance Service, in Toledo. An active member of PIA, Fox has served on the board of directors since 2000 and serves as chairman of the Executive Committee. He has also been a member of PIA’s Membership Committee, Agents Resource Committee and Education Committee. John Burtch, of Westerville has been named presidentelect. Burtch is president of American Agency, Inc. in Columbus. An active member of PIA, Burtch is a member of PIA’s Executive Committee and has served on the board of directors since first being elected in 2005. He is also a member of the Agents Resource Committee serving as chairman in 2006, and MarketSource Agency Network where he served as president in 2007. Lori Ault has joined S. H. Smith & Co., a national specialty insurance broker, as vice president of sales. She will be part of the Midwestern Ohio sales team. Ault’s responsibilities will include fostering new agency relationships as well as servicing the firm’s existing agency base. Prior to joining S.H. Smith, she was at Mercator Risk Services. She has also been with Wells Fargo Insurance Services and prior to that, Royal & SunAlliance Co. Kansas City-based UMB Financial Corp. has named Roger Forystek as president of its insurance subsidiary, UMB Insurance. He will manage insurance sales and distribution. Forystek has more than 20 years of experience in the industry. Prior to joining UMB, he was president and CEO of Hub International Southwest, managing the insurance brokerage organization in four states. He has also held positions with KeyCorp, Aon and Minnesota Mutual Life during his career. IJ www.insurancejournal.com
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Midwest Coverage News & Markets
Insurance Industry Starts to Pay Attention to Muslim American Market 24% of All Muslims in U.S. Have College Degrees; 16% Are High Income Earners Insurance,” said Matthew F. Power, president, Risk Specialists hile there are an estimated Companies, Inc. (RSC), a surplus 130 entities selling takaful — lines brokerage subsidiary of AIG cooperative insurance that is true Commercial Insurance. to Shariah tenets of Islamic reliThis new U.S. takaful homegious law — in foreign countries owners policy builds on LexElite, around the globe, the insurance the popular homeowners policy industry has largely overlooked the from AIG’s surplus lines insurer needs of Muslims in the U.S. But Lexington that is sold throughout that is changing. the U.S. While AIG’s takaful homeA 2008 report by Ernst & Young owners operations honor Islamic estimated that law, the coverthe takaful age, terms, The Midwest has market will commissions surpass $10 biland sales procepotential within the dures are the lion by 2010. This alternative same as they takaful market that are for LexElite, insurance market is definitely according to growing, partic- is expected to Jim Crain, assoularly in the ciate vice presisurpass $10 billion dent and perMiddle East and Malaysia, sonal lines by 2010. according to underwriting A.M. Best. director for Only recentRSC. AIG plans ly has the potential of the takaful a series of products under the insurance market within the U.S. name Lexington Takaful Solutions. attracted attention. Last year, a division of American International Muslims in America Estimates of the Muslim populaGroup (AIG), which sells takaful tion in the U.S. vary considerably abroad, began adapting its tradifrom 2 million to 7 million. While tional insurance products and the exact number may be up for operations to the meet the needs discussion, the Muslim-American of Muslims in the U.S. This is not population has been growing rapgiant AIG’s initial foray into the idly as a result of immigration, a takaful market. The company high birth rate and religious conlaunched AIG Takaful Enaya in versions, according to the U.S. 2006 in business-friendly Bahrain State Department. to provide takaful products in the According to Being Muslim in Middle East. America, published by the State The first U.S. takaful product Department’s Bureau of from AIG is a homeowners policy International Information and AIG says it’s a first for the Programs, Muslims live in just industry. It’s available in all states. about every city and state, with “The introduction of takaful concentrations in the metropolitan products in the U.S. represents an areas of Detroit, Chicago, New important and emerging growth York and Los Angeles. The 10 opportunity for AIG Commercial
By Andrew Simpson
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44 | INSURANCE JOURNAL-MIDWEST REGION February 23, 2009
states with the largest Muslim populations are California, New York, Illinois, New Jersey, Indiana, Michigan, Virginia, Texas, Ohio and Maryland. The 2007 Pew survey found that Muslim Americans are similar to the general U.S. public in education. Twenty-four percent have college degrees, compared to 25 percent for the U.S. general population.
The Muslim American population also mirrors the nation in income. Forty-one percent of all Muslim Americans report annual household income of $50,000 or higher; the U.S. average is 44 percent. Muslims are well represented among higher-income earners, with 16 percent having incomes of $100,000 or higher – compared to 17 percent for the U.S. average. IJ
Lawsuit Seeks to Stop U.S. Bailout Because of AIG’s Takaful Sales
A
merican International Group’s involvement with the Islamic insurance market at the same time it is taking government bailout funds has provoked the ire of a Christian rights group in the U.S. The Michigan—based Thomas More Law Center filed suit against the federal government claiming the government’s loan to insurance giant AIG is illegal because, it claims, AIG’s takaful sales “promote Islam and are antiChristian.”
AIG, which is not being sued, declined comment on the suit. The suit protests the use of taxpayer funds to acquire ownership of a business that “intentionally promotes, endorses, supports, and funds Shariahbased Islamic religious practices.” The lawsuit was filed in the Federal District Court for the Eastern District of Michigan on behalf of Kevin J. Murray, a former Marine infantryman who served two tours of duty in Iraq. IJ www.insurancejournal.com
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Idea Exchange Legal Beat
Insureds Must Know What’s In Their Flood Policies By Robert Redfearn Jr.
I
n this litigious day and age, lawsuits alleging breach of the insurance policies, bad faith, unfair claims handling, unfair settlement practices or negligence by an insurance agent are so common that they are not considered particularly unique. Attorneys, insurers, insureds and the courts are confronting issues unique and peculiar to flood insurance claims which had not been fully addressed in the past or which were not widely understood. Two of the more significant issues are whether all claims related to recovery under flood insurance policies are preempted by federal law or whether they are otherwise subject to limitations imposed by federal law. The number of opinions issued since 2005 addressing these two issues illustrates the uncertainty in the answer to these questions. While the judicial decisions have since begun to reach a consensus, the application of that consensus to individual cases still requires some fleshing out. Because Louisiana, Mississippi and Texas incurred some of the most significant flooding due to recent hurricanes, the Federal Fifth Circuit Court of Appeals and the Federal District Courts within that circuit have issued a number of opinions addressing the issue of federal preemption since 1993. Courts have come to draw a distinction between state law causes of action arising from claims handling of flood insurance and those arising out of procurement of flood insurance coverage, holding that the latter are preempted but the former are not. Although these rulings permit state law causes of action to be brought against insurance agents or WYO companies in connection with their procurement of flood policies, at the same time, many courts have issued rulings suggesting that it will be impossible to prevail on most procurement related causes of action. www.insurancejournal.com
Redfearn
Specifically, most procurement claims allege misrepresentations by the insurance agent or the Write Your Own company about an insured’s need for flood insurance or the amount of flood insurance coverage available. The Fifth Circuit has held that insureds have a duty to read and understand the terms of their SFIP, and, even if they do not have a copy of the SFIP, they are charged with constructive knowledge of the terms of the SFIP because it is published in the Code of Federal Regulations. This knowledge is imputed to the insured “regardless of actual knowledge of what is in the regulations or of the hardship resulting from innocent ignorant.” As a result, numerous district courts in the Fifth Circuit have concluded that even if an insurance agent or WYO company makes a representation that is contrary to the provisions of the SFIP as contained in the Code of Federal Regulations, it is unreasonable as a matter of law for the insured to rely on such representation, notwithstanding that the insured may look to the insurance agent as an expert or how confusing regulations may be. While further refinement will undoubtedly be forthcoming as additional decisions are issued, insurance agents, WYO companies and their respective attorneys should be aware that other than possibly those claims involving the procurement of flood insurance coverage, all such claims are governed exclusively by federal law and that any claims, even procurement claims, alleging misrepresentations that are contrary to provisions of the SFIP as contained in the Code of Federal Regulations may be deemed unreasonable as a matter of law. IJ Redfearn (Redfearnjr@spsr-law.com) is a partner in Simon, Peragine, Smith & Redfearn, a regional law firm with offices in New Orleans, La., and Mississippi. February 23, 2009 INSURANCE JOURNAL-MIDWEST REGION | 45
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Idea Exchange Managing an Agency in a Troubled Economy
Operational Efficiency Should Be Priority No. 3 for Agency Managers anaging an independent insurance agency in the current hard economy and soft market requires agents to set priorities. In the Jan. 28, 2009, issue of Insurance Journal, Juan Andrade, executive vice-president for sales and distribution at The Hartford, who oversees his company’s agency management consulting arm, Business Management Group, identified customer retention as agency priority number 1. Next, in the Feb. 9, 2009, issue he described priority number 2 as maintaining a disciplined and systematic approach to sales. Operational efficiency is priority number 3. Andrade says that while agents right now are wise to take a holistic approach to management, the expense picture has to be brought into clear focus. Insurance Journal’s Andrew Simpson asked Andrade where agencies might look for operational efficiencies at a time like this.
M
agency, streamlining things that you do and frankly being very introspective in asking yourself questions about — should we continue to do these types of things?. Are hiring or salary freezes a good idea? Andrade: It really depends on where you are from an agency perspective. If you are at a place where your top line may be shrinking and you’re seeing costs continue to increase, you may ultimately be forced to make those decisions because again 60 percent of your cost will be people related. But there are a number of things that you can do before you get there. Changing the way you do things within the agency, changing processes, making sure that you’re more focused on the art of selling, on the science of selling, if you will. That you are bringing in leads, you are actively working the portfolio, managing your retention. I think those are all the things I would be looking at to increase productivity before I would be going down the line of layoff or an impact of that sort on the employees.
Andrade: This really is an opportunity to look at your margins, particularly with a top line that may be declining or may be flat. This is the time when you may want to defer certain types of activities. You may look at, maybe, self-funding How about renegotiating leases or vendor your own investments that you are making contracts? within your agency as opposed to adding Andrade: That’s actually another huge area of incremental cost to the agency at this point in opportunity. Because second after personnel time. costs are going to be those fixed costs. It’s a It’s always important to realize that 55 to 60 great time to be negotiating with your venpercent of all the cost within any given agency dors. I know as a company we do that. On is going to be personnel cost. The key here is leasing, particularly your space, taking advanmaking sure that your people, your employees, tage of the housing market …there’s got to be are being as productive as they can, particularsome better deals out there. Asking yourself ly given the market situation right now. So, questions: Do you really need to be in a Class that’s back to the focus on sales, A space, or is it Web Resource which is really making sure OK to be in a that they are taking every single This is the third installment in an Insurance Class B space? Journal interview with The Hartford’s Juan minute that they can to be as Those are deciAndrade. View the entire Insurance Journal sales oriented as possible. sions the princiIt’s a great time to be looking video series, Managing an Agency in a Troubled pal will have to Economy, at www.insurancejournal.tv. at your processes within the make based on 46 | INSURANCE JOURNAL-MIDWEST REGION February 23, 2009
the image he wants for Andrade his agency. [T]his is a great time to be looking at your costs with a great level of detail. If you haven’t done that, you ought to start right now in making sure that you have a lot of transparency as to where your money is going. How does an agency know it’s operating efficiently? Andrade: I think there are a number of metrics. Revenue per employee is one. Commissions per employee; new business commissions per producer; these are all productivity measures that we could look at and say, “Okay, am I really maximizing the use of my personnel? Are we really focusing them on the right thing?” What are some financial indicators agents should be looking at? Andrade: I think there are a number of things that they ought to be looking at. Their pro forma earnings before tax I think is going to be a critical measure that they ought to be looking at. They ought to be looking at their liquidity ratios— how much cash on hand do they have? They ought to be looking and assessing their debt— how leveraged is the agency at that point in time. You speak with agents across the country and in many ways the suggestions you have now are the same ones that you might have even in a good economy, but I wonder if agents are listening more now? Andrade: I think so. I think everyone is listening more these days. I think you are right. I mean a lot of what we have been talking about, whether it is a focus on retention, a focus on sales, a focus on your operating efficiencies, well that just applies across the board and that’s just a good way to run a business regardless. But right now, boy, we have to be a lot more vigilant, because the stakes have been raised and it is dangerous out there from an economic perspective. IJ www.insurancejournal.com
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Idea Exchange: Directors & Officers Liability
How Securities Lawsuits Will Affect D&O Pricing Litigation May Result in Higher D&O Prices But Not Right Away LaCroix
By Kevin LaCroix
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he pace of securities lawsuit filings increased significantly in 2008 compared to recent years. There were 226 new securities lawsuits filed in 2008, which represents a 31 percent increase over 2007, and nearly a 90 percent increase over 2006. The 2008 filing total also represents the highest annual filing total since 2004. All signs seem to indicate that the heightened filing levels will continue into 2009. Will this increased litigation result in higher directors and officers (D&O) insurance prices?
It may eventually, but not right away. The most significant factor in 2008’s heightened securities litigation activity was the number of subprime and credit crisis-related lawsuits — of the 226 new cases, 101 were subprime or credit crisis-related. A total of 141 of these cases were filed during 2007 and 2008 combined. Another factor was the influx of lawsuits related to the Barnard Madoff fraud. The predominance of the subprime and credit crisis-related litigation during 2008 is borne out in the profile of the companies sued. Although the companies targeted represent more than 90 different categories in the Standard Industrial Classification (SIC) Codes, 99 of the lawsuits affected companies with SIC Codes in the 6000 series (Finance, Insurance and Real Estate), including 19 in SIC Code 6021 www.insurancejournal.com
(National Commercial Banks) and 20 in SIC Code 6211 (Security Brokers and Dealers). There were other categories that also saw significant litigation activity, including Semiconductors (10 filings); Pharmaceutical Preparations (9); and Electromedical and Electrotherapeutic Apparatus (5). The concentration in the financial sector also affected the geographic distribution of the 2008 filings. Although securities lawsuits were filed in 48 different federal district courts (as well as several state courts), 97 of the 226 securities filings were in the Southern District of New York. The federal district with the second-highest number (12) was the Northern District of California. Other districts with a significant number include Massachusetts (10), and the Central District of California (9). The pace of new lawsuit filings increased as the year progressed, with 105 during the first half and 121 in the second half. The fourth quarter, with 69, was the most active quarter during the year, suggesting that the trend will continue into 2009. The uptick in securities lawsuit filings in 2008 might well be expected to have an upward impact on D&O pricing, and indeed it may yet have that effect. But particular features of the 2008 filings might moderate that expected effect, at least in the near term. First, the concentration of the filings in the financial sector means that the impact is not widespread throughout the D&O industry. D&O carriers are not yet experiencing the impact across their entire portfolio, and carriers that do not have significant financial industry exposure may not yet be experiencing elevated claims activity, although that likely will change as the credit crisis litigation wave spreads outside the financial sector. Second, the impact is muted somewhat by the multiple different lawsuit filings against the same companies. The D&O impact from the third, fourth or fifth new lawsuit against the same company may not increase the aggregate losses to which insurance applies.
Third, many of the defendant entities are not publicly traded companies; they are mutual funds, investment partnerships, hedge funds or other investment vehicles. Litigation against these entities would have only an indirect impact on public company D&O insurance. Fourth, a significant amount of the securities litigation activity in 2008 is more likely to create errors and omissions (E&O) insurance losses, rather than D&O losses. Examples include the Madoff-related litigation and the auction rate securities litigation. The spread of losses to other insurance lines could dilute the impact from 2008 litigation on D&O carriers. Fifth, most of these cases are still in their earliest stages, and it will be some time before losses begin to accrue. Until then, There are multiple D&O pricing is unlikely to make dramatic changes (at different lawsuits least as a result of against the same securities filings). The increase in litcompanies and igation activity in 2008, together with many of the the disruption involving market defendants are leader AIG and other leading carrinot publicly ers, as well as the prospect for continued significant litiga- traded companies. tion activity in 2009, are likely to create uncertain conditions in the D&O marketplace and could lead to increased carrier caution as 2009 progresses. Indeed, Advisen is predicting that a hard market will develop toward the end of 2009. IJ LaCroix is an attorney and partner in OakBridge Insurance Services’ Beachwood, Ohio, office. An unedited version of this article appeared on LaCroix’s Internet Web blog, the D&O Diary: www.dandodiary.com. E-mail: klacroix@oakbridgeins.com.
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Idea Exchange Closing Quote
Implications of the 2008 Farm Bill Could Reduce Agent Commissions, But Create New Insurance Categories By Christopher Leliaert Leliaert
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he Food, Conservation and Energy Act of 2008 (the Farm Bill) authorizes farm programs for the next five years. The Act’s provisions encompass a range of issues, including commodity price supports, conservation, trade, bio-energy, rural development, crop insurance and commodity futures regulation. Title XII of the Act also has important implications for crop insurers and agents. Title XII was introduced, at least in part, because of pressure to find cost savings that could be used to fund other provisions of the Act. Key provisions of the Act will result in direct taxpayer savings and mandate development of new insurance products and enhancements to existing products. Multiple Peril Crop Insurance (MPCI) programs are administered by private insurance companies that are regulated by the Risk Management Agency (RMA) of the U.S. Department of Agriculture. These insurers are authorized to conduct MPCI sales and servicing through the Standard Reinsurance Agreement (SRA). To ensure the SRA’s contractual stability, the Act extends the SRA for the next five years. RMA will only be allowed to renegotiate the SRA under extraordinary circumstances as outlined in the provision. The private crop insurance industry has grown significantly in the past several years. Gross written premium grew to $9.856 billion in 2008, driven by record commodity prices and farmers’ increased participation and coverage. The Act reduces the rate that insurers’ administrative and operating (A&O) expenses are reimbursed by the RMA by 2.3 percent. A&O covers the administrative cost of the providing crop insurance to farmers. Agents’ commissions are a significant part of the expense. The reduction will result in the loss of about $225 million in annual income for private crop insurers, which will put pressure on insurance company operating expenses. It could also result in reduced agent commissions, particularly in locations where underwriting profits are limited. Another important provision of the Act is the introduction of the Average Crop Revenue Election (ACRE) program, an alternative to the current price counter-cyclical program. The ACRE program is not an insurance policy; however, payments under this program are triggered if a state’s realized revenue is less than the target revenue. To be eligible for an ACRE payment, 50 | INSURANCE JOURNAL-MIDWEST REGION February 23, 2009
a farmer’s actual revenue for a crop must be less than the farm’s ACRE benchmark revenue for the crop. The ACRE program may be complementary to MPCI programs. Selection of the proper MPCI insurance program by the agent and farmers is key to the farmer’s overall risk management program. The Act introduces the implementation of the Supplemental Revenue Assistance Program (SURE), a whole farm disaster assistance program. If the whole farm actual revenue is less than the SURE guarantees, the farm receives a SURE payment equal to 60 percent of the difference. SURE requires a declared disaster in the farmer’s county or contiguous county and mandates the farmer purchase MPCI or NAP (Noninsured Crop Disaster Assistance Program) policies for all crops. This program, like ACRE, is another farm management tool intended to work in conjunction with crop insurance. The biggest change is farmers must insure and sign up all crops, including minor crops such as hay that were previously uninsured. The Act also mandates the FCIC to offer or improve coverage for organic crops, dedicated energy crops, aquaculture, poultry, beekeeper and nursery crops. Many of these crops or crop categories enjoy growing consumer demand, and expansion of coverage for them could benefit the insurance industry. The Act has a new provision that prohibits farmers from setting up insurance agencies to collect commissions and payments on their own policies, except when less than 30 percent of commissions derive from their own policies, family policies or policies they otherwise control. This ensures the program will be administered by professional crop insurance agents. MPCI insurance policies and rates are the same for all private crop insurers. Although the Federal Crop Insurance Act allowed insurers, with FCIC approval, to sell crop insurance at a reduced premium, that provision has been eliminated. This change offers protection for insurance agents and allows companies to compete only on service and commissions to agents. The Act also authorizes changes in government premium subsidy to farmers that will likely change the mix of business in insurers’ portfolios. A reduction in the subsidy in the Group Risk Plan and an increase in the Enterprise Unit discount will cause a shift toward individual crop insurance products. It’s important to understand the changing crop farm management products. Their implication won’t be known until later in 2009, as the Act is fully implemented. IJ Leliaert is vice president at Towers Perrin (www.towersperrin.com) based in Chicago, responsible for the firm’s Agricultural Reinsurance business. He will discuss this topic at the 22nd Annual Agribusiness Conference. www.AgribusinessConference.com.
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