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2008 FARM BILL Creates New Insurance Categories
MILEAGE-BASED INSURANCE Washington Considers PAYD Bill
INSURANCE/CREDIT SCORES Oregon Debates Score Re-Rating
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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.
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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 • West Region
IDEA EXCHANGE
WEST COVERAGE
N10 | Budget-Friendly Ideas to Retain Your Top Performers Career Development, Mentors and Flexible Schedules Can Help
10 | Utah Considers Cell Phone Ban Bill Would Prohibit Texting, E-mailing While Driving 10 | Oregon Bill Evaluates Merits of ReRating Insurance/Credit Score Would Prohibit Raising Premium Based on Re-Rating
N6 SPECIAL REPORT:
Agency Salary Survey Agencies Trim Payrolls and Raises
NATIONAL COVERAGE N1 | The Relative Calm Industry Insiders Credit Risk Management for Minimizing Recession’s Impact N2 | Reinsurers Seem Ready to Flex Muscles Predict Prices Should 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
N26 | Valuing the Deal: It’s What You Keep that Matters Hard Costs, Holdbacks and Soft Costs Impact Every Deal
10 | New Mexico Aims to Limit Space Flight Liability Participants Would Consent to Risks
52 | Securities Lawsuit Filings Are Up So What About D&O Pricing?
10 | Washington Considers Pay-As-YouDrive System Insurance Premiums Could Consider Annual Miles Driven
56 | Understanding the Appraisal Process The Appraisal Process is Different From an Arbitration
11
58 | Closing Quote: Implications of the 2008 Farm Bill Could Reduce Agent Commissions, But Create New Insurance Categories
| Wyoming Introduces Workers’ Comp Legislation Oil and Gas Operators Could Be Liable for Own Negligence on Their Job Sites
12 | Colorado Casualty Introduces Workers’ Comp in Nevada Coverage Now Available in Arizona, Colorado, Nevada, New Mexico and Utah
DEPARTMENTS 8 12 14 N16
12 | Employers Holdings Reducing Staff By 14% Company Consolidates Corporate Activities in Reno, Nev.
| | | |
Opening Note Business Moves People MyNewMarkets
46 | Operational Efficiency Should be Priority No. 3 for Agency Managers The Hartford’s Juan Andrade on Managing During Difficult Times 50 | Mercury Insurance’s George Joseph on Opportunities for Agents Independent Agents Will Always Have a Future
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
6 | INSURANCE JOURNAL-WEST REGION February 23, 2009
52
56
Securities Lawsuit Filings Are Up So What About D&O Pricing?
Understanding the Appraisal Process The Appraisal Process is Different From an Arbitration 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
They’re Baaaaack!
T
he lawmakers are back, at least in most of the Western states, such as Arizona, Colorado, Hawaii, Idaho, Montana, Oregon, Nevada, New Mexico, Utah, Washington and Wyoming. California legislators are back as well, but it appears that they’re present more so in body than in mind and spirit. In Oregon, legislators are considering a bill that would prohibit premium increases based on a consumer’s request to have his or her insurance/credit score re-rated. The bill, if passed, could create a variable rating system, in which consumers with the same scores could pay different rates, according to the Independent of Insurance Agents and Brokers of Oregon, which opposes the bill. Meanwhile in Washington, legislators are considering implementing pay-as-you-drive insurance premiums based on mileage driven, if they can come up with a sound proposal to track mileage without violating an individual’s privacy. Wyoming and Montana are evaluating their states’ workers’ compensation systems. Some in Wyoming hope to hold oil and gas operators liable for their own negligence in on-the-job injuries, whereas currently such companies owe no “duty of care” to contract employees. And Montana lawmakers are aiming for more oversight of the State Fund, in which the Fund would undergo financial examinations. In Utah, legislators are considering restricting the use of cell phones while driving, an issue that is not exactly insurMore layoffs ance, but definitely has an impact on the industry. The bill and shut-downs would prohibit texting and e-mailing while driving, and specifically ban teens from using any wireless device while in business driving. And despite all of that legislative activity, the Golden operations State has been stymied by lawmakers’ inability to pass a won’t help any budget. As of press time, Gov. Arnold Schwarzenegger noted the state was ready to begin layoffs for 20,000 government industry ... workers and halt work on public works projects — all insurance because legislators could not agree on a plan to close the state’s $42 billion shortfall. In 2009 alone, the state is facing a included. $11.2 billion revenue shortage. The proposed budget currently needs two-thirds majority in the state Assembly to end the stalemate. Democrats are accused of using the state’s fiscal crisis as an excuse to raise taxes, which Republicans oppose. But regardless of whether you’re a Republican or Democrat, after day 104 the legislature’s “failure to act” on the budget, as tallied by the Governor, it’s reasonable to begin questioning why these lawmakers were elected. The main job of any legislative body is to pass and amend laws that shape politics, economics and society — something that’s clearly not happening in California. Until these politicians put some of their differences aside to come to a compromise, the state is in a standstill that will trickle down to other businesses. (Some restaurants are already complaining about drops in income in locations where state employees have been furloughed.) So, let’s hope they soon realize that more layoffs and shut-downs in business operations won’t help any industry operating Patricia-Anne Tom in the state, insurance included. West Editor ptom@insurancejournal.com
Publisher Mark Wells Chief Executive Officer Mitch Dunford
EDITORIAL Editor-in-Chief Andrea Ortega-Wells | awells@insurancejournal V.P. Content/ and Interim Midwest/Southeast Editor Andrew Simpson | asimpson@insurancejournal.com East 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, Kevin, LaCroix, Henry Zangwill Contributing Writers Jerry Hillard, Chris Leliaert, Patty Lombard, 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 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 Web Developer Chris Thompson | cthompson@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: Guy Boccia
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 2009 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
8 | INSURANCE JOURNAL-WEST REGION February 23, 2009
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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West Coverage Snapshot
Utah Considers Cell Phone Ban on Texting, E-Mail While Driving
New Mexico Aims to Limit Liability from Space Flights
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T
he Utah Legislature is considering a bill that would prohibit a person from using a wireless communication device for texting messages or e-mailing while operating a motor vehicle, among other acts. Additionally, HB 281, which is being evaluated by the Utah House Law Enforcement and Criminal Justice Committee, also would prohibit a person from using a wireless communication device while operating a motor
vehicle in a reduced speed school zone or public parking lot unless the operator is using a hands-free device; and would prohibit a person younger than 18 from using such a device while driving. If passed, violating the bill would be considered an infraction, and the driver could be assessed points against his or her driving record. For more information, visit http://le.utah.gov/~2009/ htmdoc/hbillhtm/hb0281.htm. IJ
Oregon Bill Evaluates Merits of Re-Rating Insurance/Credit Score
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he Oregon Legislature is considering a bill that would prohibit an insurer that issues personal insurance policies in the state to cancel or non-renew a policy after evaluating the individual’s credit history or insurance score according to his or her request. The bill also would prohibit the insurer from raising the consumer’s premium based on the requested re-rating. If passed, Senate Bill 377 would apply to policies that have been in effect more than 60 days. The bill would, however, allow an insurer to use a consumer’s credit history to decline coverage of personal insurance in the initial underwriting decision in combination with other factors. If the insurer uses the consumer’s credit history or insurance score to determine the consumer’s personal insurance rating category, the
consumer may request no more than once per year that the insurer re-rate the consumer. If the consumer requests a re-rating, the insurer must complete it within 10 days. And, if, based on the rerating, the consumer qualifies for a more favorable rating category, the insurer shall reduce the premiums on all of the personal insurance policies the consumer holds, according to bill text. The Independent Insurance Agents and Brokers of Oregon said it’s important to note that “credit score is not the same as [an] insurance score.” The association believes the bill, if passed, would increase the workload to companies, and people with the same score could wind up paying different rates. For information, visit www. leg.state.or.us/09reg/measpdf/ sb0300.dir/sb0377.intro.pdf. IJ
10 | INSURANCE JOURNAL-WEST REGION February 23, 2009
he New Mexico Legislature is hoping to limit lawsuits stemming from southern New Mexico’s Spaceport America. Senate Bill 37, the “Space Flight Liability and Immunity Act” sponsored by Sen. Clinton Harden, R-Clovis, wants space flight participants to acknowledge that “commercial human space flight activities involve inherent risks that cannot be eliminated or controlled through the exercise of reasonable care, and that justify the exculpation of ordinary negligence, and that these inherent risks provide the challenge and excitement that entice space flight participants.” According to the bill’s text, the purpose of the measure would be “to permit the use of waivers and releases of liability for space flight entities that will
exculpate them from the inherent risks of space flight activities and their negligence.” Thus, if passed, the space flight entity would therefore not be liable for a participant’s injury because the participant has given informed consent to the risks, such as bodily injury, death, emotional injury or property damage. New Mexico acknowledges that commercial human space flight is an emerging industry that has the potential to have a significant economic impact on New Mexico and its residents, creating jobs and having a positive effect on the state’s tax base. The Senate Judiciary Committee is evaluating the bill. For information, visit www. nmlegis.gov/lcs/_session.aspx? chamber=S&legtype=B&legno=% 20%2037&year=09. IJ
Washington Considers Pay-As-You-Drive
W
ashington is the latest state that is considering implementing a pay-as-youdrive system, in which drivers would pay insurance premiums based in part on the miles driven per year. Senate Bill 5708, sponsored by Sen. Tracey Eide, D-Federal Way, provides that any insurance policy that grants the coverage required for a motor vehicle liability policy may also grant lawful coverage based on mileage-based factors. A mileage-based motor vehicle liability policy must be approved by the insurance commissioner. The bill text notes that “recent increases in gasoline prices have inflated the costs of transportation, requiring
Washington families to spend more of their income on transportation and further stretching families’ limited budgets.” Another reason for the proposal is the desire to reduce greenhouse gases and emissions in the Pacific Northwest “at the lowest cost to Washington’s economy.” If passed, the bill would create an incentive for drivers to drive less and save money on gas, while working toward the environmental goal. However, a concern with the bill, as with PAYD proposals in other states, is how mileage would be tracked, and whether that violates individuals’ privacy rights. California and Texas are among the states that recently have evaluated PAYD regulations. IJ www.insurancejournal.com
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Wyoming Introduces Workers’ Comp Legislation
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egislation has been introduced in the Wyoming House that could hold oil and gas operators liable for their own negligence resulting in injuries and fatalities on their job sites in the state. House Bill 273, introduced by Rep. Keith Gingery, R-Jackson, comes after three deaths in the oil patch within three weeks. Wyoming courts determined that big oil and gas operators owe no “duty of care” to contractor employees, such as drillers, mud-haulers and other service providers who work on their job sites. But advocates of the legislation say operators play a large role in the day-to-day operations and safety of the rig sites, and they ought to be held liable for their own negligence. “This bill says there is a duty of care, so a person has a right to take a case to court. Right now they get thrown out in a summary judgment,” said Riverton attorney John Vincent. Oil and gas lobbyists say the bill is an attempt by trial lawyers to make more money off lawsuits. Bruce Hinchey, president of the Petroleum Association of Wyoming, said operators ask their contractors to meet certain safety requirements — drug testing, for example. But it is the contractor itself that is responsible for its employees. Most contractors pay into the state’s workers’ compensation fund, which renders them immune to lawsuits even if they are found to be grossly negligent in an accident. “It’s ironic that they would bring something like that, to line their pockets with lots of money,” Hinchey said. Oil and gas operators, such as Shell Oil and Exxon Mobile, typically only pay into the state’s workers’ compensation program for their own direct employees — not for the contractor employees who work on their job site. Karen Mitchell, a paralegal from Riverton who has worked many rig injury and fatality cases, said there’s a public misperception that families of killed workers are taken care of by Wyoming’s workers’ compensation program. “These multinational corporations aren’t required to pay into workers’ comp when they hire independent contractors, even though they have a company man on location who calls all the shots out there 24-7, supposedly enforcing corporate safety policies,” Mitchell said. Hinchey believes the bill would subject anybody who hires a contractor to liability. “They’re trying to get around the law. Any person that hires anybody would be liable if they got hurt,” he said. Laurie Goodman, who is lobbying for the bill on behalf of worker advocates, said that’s a misrepresentation of the bill. According to the bill’s language, the operator or worksite owner would be held liable for its own negligence only if it “retains the right to direct the manner of the independent contractor’s performance or assumes affirmative duties with respect to safety.” “Our reaction to that is, ‘Are you in charge of that site or not?’ You have a man onsite 24-7 responsible for safety,” said Goodman, adding that that’s very different than the average small business owner who hires a third party contractor to install new wiring or equipment. IJ Copyright 2009 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. www.insurancejournal.com
Declarations Surplus Lines Standards “We believe that the bill would make the surplus lines marketplace more efficient by facilitating the payment of surplus lines premium taxes and eliminating unnecessary duplicative compliance requirements on surplus lines multistate risks.” — John Wood, president of the National Association of Professional Surplus Lines Offices Ltd., commenting on the NonAdmitted and Reinsurance Reform Act of 2009, that is designed to create national standards for how states regulate the surplus lines market and reinsurance as well as a uniform system of surplus lines premium tax allocation and remittance.
Tough 2008 “This was clearly the most challenging year in our company’s nearly 200-year history. The capital markets proved to be especially challenging during the latter half of 2008, particularly affecting our equity-based businesses and investment performance. Even still, we took several actions to finish 2008 well capitalized and well prepared to deliver on our commitments to customers. ” — Ramani Ayer, chairman and CEO of The Hartford, commenting on operations in 2008. He said that from an operational perspective, core insurance-based businesses had a strong 2008. IJ
It Figures 5.4% The average decrease the Automobile Club of Southern California customers will receive for auto insurance policies beginning on April 1, 2009. The company announced it would be implementing a $101 million rate reduction for insurance policyholders in California. The Auto Club insures more than 2 million California vehicles, according to the California Department of Insurance. Under the newly approved reduced rates, Auto Club auto policyholders will save about $100 per policy per year — a total of $101 million.
9.9 million The number of identity theft cases in 2008, according to a study released by Javelin Strategy & Research. The good news, however, was that the cost per incident — including unrecovered losses and legal fees — fell 31 percent to $496. One reason for the spike in cases, the report indicated, is likely the worsening economy. Just last month, 598,000 jobs were slashed across the country and unemployment jumped to 7.6 percent. (AP) IJ February 23, 2009 INSURANCE JOURNAL-WEST REGION | 11
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West Coverage News & Markets Colorado Casualty Introduces Workers’ Comp in Nevada
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nglewood, Colo.-based Colorado Casualty, a Liberty Mutual Agency Markets regional company, has added workers’ compensation coverage to its commercial insurance product line in Nevada. “Bringing workers’ compensation coverage to our Nevada agents comes on the heels of a successful launch last month in four other states in our territory,” said Rich Possanza, vice president, underwriting. In January, Colorado Casualty began offering workers’ compensation coverage in Arizona, Colorado, New Mexico, and Utah. Agents in Nevada are now submitting new business. Colorado Casualty’s workers’ compensation coverage can be quoted and issued by agents on Commercial IQ, an online application. Schedule credits of up to 15 percent are available to qualifying accounts with additional credit available upon underwriter considera-
tion, as allowed by statutory requirements. Packaged accounts are billed as one, and annual, semi-annual, quarterly, and monthly billing plans are available to employers. The Colorado Casualty Workers’ Compensation Program also offers locally supported, professional loss prevention services, including risk management solutions, safety program development and training, and cost containment strategies. A return-towork program is offered in conjunction with loss prevention and specialized workers’ compensation claims service includes nurse case management by dedicated workers’ compensation adjusters. Colorado Casualty offers property and casualty products, including commercial coverages, distributed only through appointed independent agents. The company provides insurance in Arizona, Colorado, Nevada, New Mexico, Utah, and Wyoming. IJ
West Coverage Business Moves EPIC, VRT Insurance Services EPIC (Edgewood Partners Insurance Center) acquired all the assets of VRT Insurance Services Inc. VRT Insurance Services Inc. is owned by David Alvarado, its key producers and Belvedere Capital, a private equity firm based in San Francisco. The company was established in 2007 and is led by founder and CEO Alvarado. The firm has offices in Oakland and Rancho Cordova, Calif., and specializes in complex property, casualty and employee benefits insurance for construction, real estate, information technology and municipalities. The acquisition expands EPIC’s market presence in construction, contracting, public entity, employee benefits and other industries. EPIC was launched in 2007 by former president and CEO of ABD Insurance, Dan Francis and John Hahn, former president of BISYS Commercial Insurance Services Inc. They have opened seven offices throughout the state of California since the firm’s launch.
Diablo Valley Insurance, Gingrich Insurance Brokers Diablo Valley Insurance Agency Inc. of Walnut Creek, Calif., acquired the assets of Gingrich Insurance Brokers of Orinda, Calif. Gingrich Insurance Brokers with annualized revenues of approximately $900,000, focuses on commercial property and casualty insurance. Ritch and Ted Gingrich, and their team will combine their agency operations with that of Diablo Valley Insurance Agency, under the leadership of Jon Oldfather, president of Diablo Valley Insurance Agency Inc. Acuity Acuity of Sheboygan, Wis., announced it will begin writing business in New Mexico starting in mid-2009. Acuity is a property and casualty insurer that operates in 18 states, writes $800 million in premium through 900 independent agencies, and manages $2 billion in assets. IJ
12 | INSURANCE JOURNAL-WEST REGION February 23, 2009
Employers Holdings Reducing Staff By 14%
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eno, Nev.-based Employers Holdings Inc., whose subsidiaries are specialty providers of workers’ compensation insurance focused on small- and medium-sized businesses, announced a strategic restructuring plan that includes a staff reduction of approximately 14 percent of the company’s total workforce, and a planned consolidation of corporate activities into its Reno headquarters. The company said the restructuring is designed to achieve the corporate and operational objectives set forth as part of its recently completed acquisition and integration of AmCOMP Inc., and in response to current economic conditions. As a result of its actions, Employers expects to achieve pre-tax cost savings of approximately $12 million in 2009 and annualized pre-tax cost savings of $20 million to $22 million beginning in 2010. The amounts include previously announced anticipated cost savings of $7.5 million in 2009 and $10 million in 2010. The company expects to incur pre-tax restructuring charges of approximately $3 million in the first quarter 2009. “Given the unprecedented economic climate we and our customers face, additional measures are being taken that we believe are necessary to continue providing competitively priced products and quality services. These decisions are carefully considered and difficult to make, but required given the current environment,” said Douglas D. Dirks, president and CEO. He noted the restructuring plan is consistent with objectives the company established when it announced its AmCOMP acquisition in January 2008. Employers geographic offices and underwriting functions will remain in place. A Regional Field Operation organization will be implemented, with geographic managers responsible for production, underwriting and profitability within their territories. Corporate and support functions will be managed centrally in Reno. The job eliminations are anticipated to be in large part complete by mid-year 2009. IJ www.insurancejournal.com
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West Coverage People
Peter Eastwood
Kevin Kelley
Juan Andrade
Neil Wolin
American International Group (AIG) named Peter Eastwood president and CEO of Lexington Insurance Co., a unit of AIG Commercial Insurance. Eastwood assumes management responsibility for Lexington from Kevin H. Kelley, who has left the company. Eastwood joined AIG in 1991 serving in senior management positions within AIG Executive Liability, AIG Risk Finance, AIG Reinsurance Advisors and Lexington Insurance Co., including division vice president of commercial directors and officers liability insurance, executive vice president and chief operating officer of AIG Risk Finance and president of AIG’s Risk Specialist Companies.
for the past several months. She has distribution, sales, marketing and general management experience in the property and casualty insurance industry. Most recently, she was chief marketing officer and head of distribution for Zurich North America. She also has held senior positions at Safeco Insurance, where she was senior vice president for sales and distribution, and at CAN, where she was senior vice president of sales and marketing. In addition, Barnard was president of Hilb Rogal and Hamilton Co.’s New Jersey operation. Randy Farless has accepted the newly created position of senior vice president for sales operations and marketing.
Ironshore Inc. named Kevin H. Kelley CEO. Kelley has been the longtime CEO of Lexington Insurance Co. Ironshore was formed in 2006 and writes property catastrophe and property all-risk coverage for small- to midsized commercial risks. Bob Deutsch, the company’s founding CEO, will become Ironshore’s president.
W.R. Berkley affiliate, Nautilus Insurance Group of Scottsdale, Ariz., promoted Kellie Barwick and Kimberly R. Levensky to vice presidents-claims. Barwick has been with Nautilus Insurance Group for 15 years and has served as assistant vice president-claims since January 2004. Her previous work includes direct claims handling and supervisory positions. She has more than 23 years of insurance industry experience. Levensky began her career with Nautilus Insurance Group in October 1995, and has held technical and managerial positions within the claims department, including assistant vice president-claims since January 2005. Prior to joining Nautilus, she worked as a paralegal, claims technician and regional claims manager for another insurance company. Levensky has 20 years of insurance industry experience.
Juan Andrade and Jonathan Bennett were named 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 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 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, he held several leadership positions with The Progressive Corp., and also held management positions with American International Group. Bennett is 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.
Gregory Case
Aon Corp. President and CEO Gregory C. Case was named “2008 Insurance Leader of the Year” by St. John’s University School of Risk Management. The award, which has been presented annually since 1995, recognizes the outstanding contributions of individuals whose leadership in the worldwide insurance and financial services industry sets them apart from their peers. Last year’s recipient was James J. Schiro, CEO of Zurich Financial Services
Eleanor Barnard
Fireman’s Fund Insurance Co. named Eleanor Barnard chief distribution, sales and marketing officer. Barnard has been working as an advisor to Fireman’s Fund
14 | INSURANCE JOURNAL-WEST REGION February 23, 2009
Modern Insurance Consultants, a joint venture between Rockwood Programs and Modern Insurance of Florida, named Mark Lann president and CEO. The operation will be located in Homestead, Fla., and will focus on errors and omissions insurance for insurance agents, insurance companies and miscellaneous professional liability classes. Atlanta-based Beecher Carlson expanded its National Property Practice, adding of four industry professionals in the company’s corporate office in Atlanta. The new team members include Cliff Simpson, Joel Troisi, Michael White and Sarah Waite. Simpson will be senior managing director of Beecher Carlson’s National Property Practice. He will lead the Practice nationally. He has 16 years of industry experience. Troisi will be managing director. Prior to joining Beecher Carlson, Troisi was managing director of the Southern U.S. Complex Property Group for Willis HRH. White will serve as managing director. Prior to joining Beecher Carlson, White was complex property marketing manger, midwest region, for Willis HRH. Waite will be assistant vice president, where she will be responsible for client satisfaction and retention, account management, and the support of new business production. Prior to joining Beecher Carlson, Waite was property broker for Willis HRH. IJ www.insurancejournal.com
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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
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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
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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
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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
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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
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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.
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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.
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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
www.insurancejournal.com
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Get Results...
....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:
www.insurancejournal.com/Classifieds Press Releases “Newswire” sponsored press release service – one release published per day. Announce a new product, award, appointment, acquisition, partnership etc. Sent to thousands of insurance and media contacts; by email, fax and online. Email us your press release text in word document format.
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We Know Insurance.
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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
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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
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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
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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
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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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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.
N28 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009
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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West Coverage News & Markets
Operational Efficiency Should Be Priority No. 3 for Agency Managers
M
anaging an independent insurwhich is really making sure that they are takWeb Resource: ance agency in today’s economy ing every single minute that they can to be as This is the third installment in an and soft market forces agents to sales-oriented as possible. Insurance Journal interview with The set priorities. Juan Andrade, It’s a great time to be looking at your Hartford’s Juan Andrade. View the entire executive vice-president for sales and distriprocesses within the agency, streamlining Insurance Journal video series, “Managing bution at The Hartford, who oversees his things that you do, and frankly being very an Agency in a Troubled Economy,” at company’s agency management consulting introspective in asking yourself questions about www.insurancejournal.tv. arm, Business Management should [you] continue to do these Group, previously identified types of things and making your to be those fixed costs. It’s a great time to be customer retention as priority own business plan and decisions negotiating with your vendors at this point in No. 1 (see Insurance Journal’s Jan. based on that. time. 26, 2009, West region issue, I know certainly as a company we do that; page 120). Next he explained Insurance Journal: Are hiring leasing particularly your space, taking advanpriority No. 2 as maintaining a freezes or salary freezes a good tage of the housing market [and] the commerdisciplined and systematic idea? cial real estate market and which way it’s gone. approach to sales (see Insurance Andrade: It really depends on There’s got to be some better deals out there. where you are from an agency perJournal’s Feb. 9, 2009, West Ask yourself questions. Do you really need to region issue, page 46). spective. If you are at a place where be in a Class A space, or is it OK to be in a your top line may be shrinking and Of course, there is more to Class B space? Those are decisions the princiJuan Andrade you’re seeing costs continue to successful management in diffipal will have to make based on the image he increase, you may ultimately be forced with cult times than managing and growing revwants to represent for his particular agency. having to make those decisions, because again enues. It’s also a time to take a hard look at But [with] vendors, whether it’s office supit goes back to 60 percent of your cost will be costs. Operational efficiency is priority No. 3. plies, staples, etc., this is a great time to be people related. Andrade said that while agents right now are looking at your costs with a great level of But there are a number of things that you wise to take a holistic approach to managedetail. If you haven’t done that, you ought to can do before you get there: changing the way ment, the expense picture has to be brought start right now in making sure that you have a you do things within the agency, changing into clear focus. lot of transparency as to where your money is processes, making sure that you’re more Insurance Journal’s Andrew Simpson asked going. focused on the art of sellAndrade where agencies might look for opering, on the science of sell- After personnel ational efficiencies during a time like this. Insurance Journal: How ing, if you will, that you does an agency know it’s costs are fixed are bringing in leads, you Andrade: Looking at it from an expense peroperating efficiently? What are actively working the spective, this really is an opportunity to look metrics might it look at to costs, it’s a great portfolio, managing your at your margins, particularly with a top line feel good about how it is time to be renegoti- doing? retention. that may be declining or may be flat. This is Those are all the things ating with vendors. Andrade: There are a number the time when you may want to defer certain I would be looking at to types of activities. … Travel … may be one. of metrics that [you] can look increase productivity before I would be going You may look at, maybe, self-funding your at. Revenue per employee is one. Commissions down the line of layoff or an impact of that sort own investments that you are making within per employee; new business commissions per on the employees. It really all depends on an your agency as opposed to adding incremental producer; these are all productivity measures individual situation of where [you] are today. cost to the agency at this point in time. that [you] could look at and say, “Okay, am I It’s always important to realize that 55 perreally maximizing the use of my personnel? Insurance Journal: How about renegotiatcent to 60 percent of all the cost within any Are we really focusing them on the right ing leases or supplier contracts from vengiven agency is going to be personnel cost. The thing?” dors? key here is making sure that your people, your Those type of flow metrics, whether it’s new Andrade: That’s actually another huge area of employees are being as productive as they can, commission, new production, those are very opportunity. Because I would think that secparticularly given the market situation right important things to be looking at. ond after personnel costs there really are going now. So, that’s back to the focus on sales, continued on page 48 46 | INSURANCE JOURNAL-WEST REGION February 23, 2009
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速速
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West Coverage News & Markets Juan Andrade, continued from page 46
Insurance Journal: We talked about efficiencies and how that sometimes involves layoffs as well as changing relationships with vendors or suppliers. Do you have advice for communicating the process of these decisions to what, in some cases, affects long time employees or long-time suppliers? Andrade: My approach has always been open and honest, and frankly that’s the best way to be with anyone who has to manage people in these times. The most important thing is making sure people are well-grounded in the context that the business is operating in, making sure people understand the current economic situation, making sure that people understand that really the business margins that we are trying to operate with, that they understand what the company, the business, the agency is focused on doing at this particular time to make sure that we keep a viable enterprise within that agency. But if it comes to making tough decisions, the open and honest philosophy is always the best, which is really letting people understand why the action has to take place. If it is because the agency is not meeting particular profit margins that need to be met, that the top line is not growing as fast as it needs to be, it is important to be very open and honest with people at that time. Part of that is also sharing with folks what your strategy is and how you are planning to manage all of this, so laying it out. Have a business plan for 2009 that … says if I can reach these goals from a top line perspective, if I can reach these revenue goals from a commission standpoint, this is where I need to keep my expenses at. And in order to do that, we need to do the following things on the commission side, maybe working with our company partners. I need to do the following things to generate new business or keep business that I already have in the books, and these are the following things that we are doing with the bookkeeper, the accountant, etc., within the agency to make sure that we manage those costs. Being able to lay all of that plainly to people so they understand [it] is very important. The other thing that enables you to do is it engages them in the plan. It engages them 48 | INSURANCE JOURNAL-WEST REGION February 23, 2009
from the perspective that if they know what targets you need to hit, to stay viable, to continue to grow, people can be very motivated by that. Insurance Journal: This is a time when insurance agents are monitoring their financial situation closely. What indicators should they look for and maintain? Andrade: There are a number of things that they ought to be looking at. Their pro forma earnings before tax 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? To me, it really does come down to liquidity type measures of cash on hand, ability to meet payrolls, etc., but also the amount of debt that [you] currently have within that particular agency: How leveraged are you. It goes back to the question you asked on leasing for example. I mean a big part of it is the building: Do you own it? Do you pay a mortgage on it? All of that comes into play. And so those are very wise things for all of us, frankly, to be looking at these days. Insurance Journal: You speak with agents across the country and I assume the suggestions you have now are the same ones that you might have even in a good economy. But are agents are listening more now? Andrade: I think so. I think everyone is listening more these days. I think you are right. 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. So I do find that the people that I am talking to across the country — and I spend probably four days out of every week traveling, meeting with our agents — are basically listening and they are acting. IJ www.insurancejournal.com
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West Coverage News & Markets
Mercury Insurance Chairman: Independent Agents Will Always Have Future By Patty Lombard
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espite the seemingly difficult concerns. He said he was closely watching times independent insurance the investments of the company and even agents may be facing today, they predicted that some companies would conwill always have a future, accordtinue to report poor results. Nonetheless, ing to George Joseph, chairman and Joseph said he is optimistic that prices had founder of Mercury Insurance, considered bottomed out and that insurers will recovone of the most innovative underwriters in er by the end of the year. the country and the largest insurer in “This is my 60th year in the business,” California working exclusively with indeJoseph said, “so I’ve been through cycles. pendent agents. As an agent, I remember when I would go through cycles. If Speaking at the recent my phone wasn’t ringing, I’d be Insurance Brokers and Agents out of the office.” He told the of the West (IBA West) annual audience of how years ago he meeting, Joseph recalled that would park his car and cover when he and newly installed an entire city block gathering IBA West President Rick new clients. He is convinced Dinger began working together that methodology still works in 1972. At that time, Mercury today. was a very small company with “There are still a lot of about $20 million dollars in George Joseph people who say their only conwritings, he said. But today, tact is an e-mail or a piece of paper,” he because of the efforts of independent said, but noted, “Your customers want to agents, that number is equal to less than talk with you. Take that time to make that two days business at Mercury, the chaircontact, and I guarantee whatever percentman said. age of business you are losing, you could Despite the millions of dollars spent on cut it in half.” risk classification technology and innovaJoseph stressed the importance of worktions to improve underwriting, independing a little harder than competitors to mainent agency companies have a tool that tain client relationships. “If you can show an their competitors don’t and cannot dupliinterest in your client, spend a little more cate — independent agents who establish time, we’ll do our part,” he said. “We will and maintain the relationship with the build facilities for consumers to get more customer, Joseph explained. He cited studinformation from their computers. My goal ies that illustrate how that relationship is for consumers to see their car in the inspires loyalty to the insurer and the garage being repaired,” he concluded. agent, and convinces [the customer] that IBA West’s annual conference was held independent agents add a great deal of Jan. 28, 2009 in Glendale, Calif. The associvalue to personal lines products. He said ation represents more than 1,000 firms in studies show that consumers who shop do California, Washington and Oregon and so in direct relationship to the amount of more than 14,000 insurance professionals. attention they receive from their agent or In California, IBA West is affiliated with company. the Independent Insurance Agents and Commenting on the state of the indusBrokers of America. IJ try, Joseph said there is a great deal of concern about layoffs and job cutting in the news today, and Mercury shares those Lombard is IBA West’s communications consultant.
50 | INSURANCE JOURNAL-WEST REGION February 23, 2009
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Idea Exchange D&O
Securities Lawsuit Filings Are Up, So What About D&O Pricing? By Kevin LaCroix
T
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 the 172 securities lawsuits filed in 2007, and nearly a 90 percent increase over the 119 securities lawsuits filed in 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 activity result in higher directors and officers (D&O) insurance pricing? It may eventually, but not right away. The most significant factor in 2008’s heightened securities litigation filing activity was the number of subprime and credit crisis-related securities lawsuit filings. Of the 226 new securities cases filed that year, 101 were subprime or credit crisis-related. There have been 141 total of these cases filed overall
LaCroix
during 2007 and 2008 combined. Another factor that increased the 2008 filings was the influx of lawsuits related to the Barnard Madoff fraud scheme. Investors have initiated Madoff-related securities class action lawsuits against at least seven distinct investment groups, and every sign indicates that this litigation will continue to flood in during the early weeks and months of 2009. The predominance of the subprime and credit crisis-related litigation during 2008 is borne out in the profile of the companies that
were sued in securities lawsuits during the year. Although the companies targeted represent more than 90 different categories in the U.S. Department of Commerce’s Standard Industrial Classification (SIC) Codes, fully 99 of the lawsuits affected companies with SIC Codes in the 6000 series (Finance, Insurance and Real Estate), including 19 in SIC Code 6021 (National Commercial Banks) and 20 in SIC Code 6211 (Security Brokers and Dealers). While securities suits against companies in the financial sector were a predominant factor in the 2008 securities lawsuits filings, there were other SIC Code categories that also saw significant litigation activity, including SIC Code 3674 (Semiconductors), which also saw 10 filings; SIC Code 2834 (Pharmaceutical Preparations), which saw nine lawsuit filings; and SIC Code 3845 (Electromedical and Electrotherapeutic Apparatus), which had five filings. The concentration of cases in the financial sector also affected the geographic distribution of the 2008 case filings. Although securities lawsuits were filed in 48 different federal continued on page 54
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Ad Index Idea Exchange D&O
National Agribusiness Conventions American Modern Insurance Group www.amig.com American Reliable www.americanreliable.com AMIS/Alliance Marketing & Insurance Services Applied Underwriters www.applieduw.com Applied Underwriters www.applieduw.com Astonish Results Atlass Insurance Group www.atlassinsurance.com CallTACT Marketing, Inc. CDS Business Mapping www.riskmeter.com Chubb Corporate Crump Insurance Services www.crumpins.com Demotech Iroquois Group Maritime General Agency Midlands Management Corporation www.midlandsmgmt.com National Alliance Production School RLI Scottsdale Insurance Co. www.scottsdaleins.com SIAA www.siaa.net TAPCO The Mechanic Group Trafalgar Marine Insurance Services, Inc. www.acemarineinsurance.com Travelers Insurance Western Heritage Western Maritime Marine Insurance Service, Inc. www.westmaritime.com
N16 N5 N15 N2 60 4,5 N13 N20 N25 N4 7 N17 N3 48 N22 N14 N19 N21 59 13 9 N14 N23 N11 N18 N24
West Anderson & Murison, Inc. www.andersonmurison.com Blue Ribbon www.ibawest.com Century National Foremost Insurance Group www.foremoststar.com General Star www.generalstar.com Grange Insurance Group www.grange.com IBA West www.ibawest.com IMCO Insurance Skills Center www.insuranceskillscenter.com Monarch E & S Ins Services www.monarchexcess.com Pacific Gateway Insurance Agency www.pgiainsurance.com Universal Insurance Yates & Associates www.yates-assoc.com
50 53 16 15 51 45 57 57 52 3 47 2 49
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district courts (as well as several state courts), not increase the aggregate losses to which insurance applies. Because the number of 97 of the 226 securities filings in 2008 were companies sued is less than the number of filed in the Southern District of New York. new lawsuits initiated, the aggregate claims The federal district with the second-highest frequency level is less than the overall filing number of new lawsuit filings was the levels might indicate. Northern District of California, where 12 new Third, many of the defendant entities are securities lawsuits were filed. Other districts not publicly traded companies. Many of the with a significant number of filings include defendant entities in new 2008 lawsuits were the District of Massachusetts (10), and the mutual funds, investment partnerships, Central District of California (9). hedge funds or other investment vehicles. The pace of new lawsuit filings increased The incidence of litigation against those as the year progressed, with 105 during the types of entities would have only an indirect first half and 121 in the second half. The impact at most on the market for public comfourth quarter, with 69 new filings, was the pany D&O insurance. most active quarter during the year. There Fourth, a significant amount of the securiwere a significant number of filings (32) in ties litigation activity in 2008 involved claims December, which is typically a quiet month likelier to create errors and for securities lawsuit filomissions (E&O) insurance ings. Indeed, the filings in Securities losses, rather than D&O lossthe fourth quarter of 2008 litigation activity es. For example, the Madoffand during December 2008 litigation and the aucrepresent, respectively, the in 2008 involved related tion rate securities litigation highest quarterly and may or may not produce D&O claims likelier monthly totals in more insurance losses, but may well than five years. Those lateto create E&O produce significant E&O lossyear trends suggest that the insurance losses. es. The spread of losses to heightened level of securiother insurance lines could ties filings will continue dilute the overall impact from the 2008 litigainto 2009. tion on the D&O carriers. The uptick in securities lawsuit filings in Fifth, most of these cases are still in their 2008 might well be expected to have an earliest stages, and it will be some time yet upward impact on D&O pricing, and indeed before the losses begin to accrue. Until loss it may yet have that effect. But particular feapayments begin to mount, D&O pricing is tures of the 2008 filings might moderate that unlikely to make dramatic changes (at least expected effect, at least in the near term. First, the concentration of the filings in the as a result of securities filing activity levels). All of that said, the increase in litigation financial sector means that the impact from the heightened filing levels is not widespread activity in 2008, together with the disruption involving market leader AIG and other leadthroughout the D&O industry. D&O carriers are not yet experiencing the impact of the fil- ing carriers, as well as the prospect for continued significant litigation activity in 2009, ing levels across their entire portfolio, and are likely to create uncertain conditions in carriers that do not have significant financial the D&O marketplace and could lead to industry exposure may not yet be experiencincreased carrier caution as 2009 progresses. ing elevated claims activity, although that Indeed, Advisen, a leading industry observer, likely will change as the credit crisis litigais predicting that a hard market for insurtion wave spreads outside the financial secance will develop toward the end of 2009. IJ tor. Second, even with respect to the heightened activity levels, the impact is muted LaCroix is an attorney and partner in OakBridge Insurance somewhat by the multiple different lawsuit Services’ Beachwood, Ohio, office. An earlier version of this filings against the same companies. The article appeared on LaCroix’s Internet Web blog, the D&O D&O impact from the third, fourth or fifth Diary: www.dandodiary.com. E-mail: klacroix@ new lawsuit against the same company may oakbridgeins.com.
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Idea Exchange Legal Beat
Understanding the Appraisal Process By Henry S. Zangwill
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alifornia Insurance Code requires the appraisal procedure to be contained in every policy containing fire coverage, and it is frequently found in other property and casualty policies. It is critical for all insurance agents to understand the appraisal process so they can advise their clients what an appraisal is and what the process entails should clients incur a loss. Prior to 2001, the appraisal procedure was mandatory. In 2001, Section 2071 of the Code was amended to narrow the circumstances under which the parties can be compelled to participate in an appraisal. That created uncertainty about what the circumstances are. In the event of a governmentally declared disaster, an appraisal may be requested by the insurer or the insured, but cannot be compelled. The amended section does not state whether appraisal is voluntary or compulsory in other cases. The section states an appraisal may be “requested” by either party, but it is ambiguous whether the request triggers mandatory participation in circumstances other than natural disasters. The Code provides that appraisal proceedings are a form of arbitration. Louise Gardens of Encino Homeowners’ Ass’n., Inc. v. Truck Ins. Exch., Inc. (2000) 82 Cal. App. 4th 648. Yet there are distinctions between appraisal and arbitration. First, an arbitration agreement generally makes arbitration mandatory upon the demand of either party. At least as to government-declared disasters, the appraisal procedures cannot be compelled. Second, in arbitration, each party desig-
Zangwill
nates its own arbitrator, and it is generally understood that party-appointed arbitrators are advocates on behalf of the party by whom they are appointed. In appraisal proceedings, the appraisers must be “disinterested.” Third, arbitrators are frequently given broad powers, whereas appraisers generally have more limited powers. Jefferson Ins. Co. v. Superior Court (1970) 3 Cal. 3rd 398. Section 2071 provides that, unless the insured and insurer agree otherwise, the proceedings are “informal.” No formal discovery can be conducted, formal rules of evidence do not apply, and, unless the parties agree otherwise, a court reporter is not used. Coopers & Lybrand v. Superior Court (1989) 212 Cal. App. 3rd 524. According to the Code, a formal evidentiary hearing is not required, although the parties can present evidence and cross-examine witnesses, and require that witnesses’ testimony be given under oath. The parties also have the right to be represented by an attorney. Appraisers are not, however, limited to evidence presented at any hearing. They have a right to make their own independent investigation, as long as notice is given to the parties. The parties can request an appraisal even though there is a pending lawsuit. Keating v. Superior Court (1982) 31 Cal. 3rd 582, and the right to an appraisal is not a waiver by engaging in limited discovery in a lawsuit. Lake Communications, Inc. v. Kollgel Co., Ltd. (9th Cir. 1984) 738 F. 2nd 1473. However, a court “should appropriately stay a pending lawsuit until the appraisal has been completed.” Cook v. Superior Court (1966) 240 Cal. App. 2nd 880. Appraisers have more limited powers than arbitrators. As stated in Hughes v. Potomac Ins. Co. (1962) 199 Cal. App. 2nd 239, 253, “The function of appraisers is to determine the amount of damage resulting to various items submitted for their consideration. It is certainly not their function to resolve questions of coverage and interpret provisions in the policy.” The sole function of appraisers is to determine the actual cash value of the loss. ACV is
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synonymous with “fair market value,” not replacement cost value less depreciation. Jefferson Ins. Co., supra at 402. Simply put, an appraisal resolves the question of the amount of the loss, but not the question of the amount, if anything, which might be owed under the terms of the policy. Appraisers are also precluded from determining whether a claim might be fraudulent or factually inaccurate. For example, in Safeco Ins. Co. v. Sharma (1984) 160 Cal. App. 3rd 1060, the insured claimed that a matched set of 36 Indian paintings was stolen. The appraisal panel determined the paintings were not a matched set, and that their value was less than claimed. The Court of Appeal concluded that the appraisal panel exceeded its power by improperly addressing whether the paintings the insured actually owned were those he claimed to have owned: “When an insurer disputes an insured’s description and identification of the lost or destroyed properly, it necessarily claims that the insured misrepresented ... the character of the loss in filing a proof of loss. ... This claim opens the door to allegations of fraud. Were an insurer permitted to include the former issue within the scope of an appraisal, a determination in the insurer’s favor would foreclose a court from determining one essential element of fraud at any subsequent litigation.” Likewise, appraisers cannot determine the cause of loss, or whether there is coverage. In Kancha v. Allstate Ins. Co. (2006) 140 Cal. App. 4th 1023, the insured submitted a claim for personal property damaged in a wildfire. The appraisal award set forth the loss, which the appraisal panel concluded was caused by the fire, but the award attributed no loss to property the panel concluded was not caused by the fire. The Court of Appeal ruled the appraisers exceeded their authority because they may not consider questions of causation or coverage. In Turnstone Consulting Corp. v. United States Fidelity & Guarantee Co. (N.D. Cal. 2007) 2007 www.insurancejournal.com
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W.L. 1430033, the insured submitted a business interruption loss resulting from a burglary. The insured contended his business was interrupted for about eight weeks, while the insurer claimed the business interruption loss was only two weeks. The carrier moved the court to compel the insured to participate in a binding appraisal to determine the amount of business interruption loss. The court ruled that an appraisal panel had no authority to make such a determination. “The appraisal panel’s role is only to determine the monetary value of the interruption to [the insured’s] business. The panel’s role is not to determine whether the policy covers that interruption.” Prior to 2001, when the two party-appointed appraisers were unable to reach an agreement on loss and damage, appraisers were required to jointly select a third person, an umpire. Section 2071 eliminates the requirement of a disagreement between appraisers and requires an umpire to be selected in all appraisals All of the appraisers, including the umpire, must be “competent” and “disinterested.” Gebers v. State Farm Gen. Ins. Co. (1995) 38 Cal. App. 4th 1648. That case held that the appraisers and the umpire are “held to a higher standard of impartiality than are arbitrators generally,” and ruled that a policy provision requiring that the appraisers be “independent,” failed to comply with the “disinterested” test. The court stated that the insurer could not, by altering the language specified by Section 2071, dilute the guaranty of impartiality. The court ruled that the appraiser selected by the insurer must be disqualified because he was concurrently retained by the insurer as an expert witness in two pending court actions. The court held that the ongoing litigation was a “direct pecuniary interest, which casts considerable doubt on the appraiser’s ability to act impartially.” Gebers relied upon Fiji v. New Hampshire Ins. Co. (1980) 108 Cal. App. 3rd 772, which evaluated whether the neutral umpire should be disqualified where he worked as an accountant, not for the insurer but for an appraiser chosen by the insurer. The court held that given that relationship, the umpire could not be “disinterested.” Although an appraiser must be “disinterested,” the existence of past business dealings between the appraiser and the party, by itself, does not disqualify the appraiser. In the real world, insurers and insureds generally select a “known quantity,” i.e., someone they expect to be sympathetic to their positions. www.insurancejournal.com
Because compromise frequently occurs in an appraisal, the insurer and insured generally look for advocates for their positions. When two of the three appraisers agree, they must submit a written appraisal award separately stating the cash value and loss to each item. A party can then petition the court to confirm the award. While the court must enter a judgment in accordance with the award, no monetary
judgment can be entered; the award only determines the amount of the loss, not whether the loss is covered. Challenges to an appraisal award must be submitted no later than 100 days after the award has been handed down. Koubnikin v. California Fair Plan Ass’n. (1978) 84 Cal. App. 3rd 393. IJ Zangwill is an attorney in Los Angeles specializing in insurance coverage. E-mail: HSZangwill@Verizon.net.
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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,
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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. www.insurancejournal.com
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