Insurance Journal - Oct 21 2013 by Insurance Journal

OCTOBER 21, 2013 | VOL. 91, NO. 20

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Baker: Calif.’s Workers’ Comp Shows Progress $189B in Western U.S. Properties at Risk Hole-In-One Golf Insurer Pleads Guilty

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Inside This Issue

On The Cover

Special Report:

Risks of the New Economy

October 21, 2013 • Vol. 91 No. 20 • West

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IDEA EXCHANGE

W2 Hole-In-One Golf Insurer: Guilty of 3 Felonies in Washington

36 The Competitive Advantage: Chris Burand

W2 Idaho Parents Sue Football Helmet Company

40 Recruiting and Retention in the New Economy

W2 Wyoming Court OKs Phone Approvals for DUI Testing

44 Growing Your Property Casualty Agency: Alan Shulman

W6 Baker: California’s Workers’ Comp Reform Showing Signs of Progress

46 Minding Your Business: Catherine Oak

W8 Report: $189B in Western U.S. Properties High Wildfire Potential

50 Closing Quote: Cybercriminals

Tech Risks Threaten Supply Chain More than Weather

12 Top 50 Commercial Lines Leaders 14 Decreasing Agency Balance Sheet Value: A Positive Impact? 20 Product Recall Capacity Needed for Life Sciences Segment 22 The Future is Now for Usage Based Auto Insurance 25 Managing Nanotechnology and Other Emerging Risks 26 The Robots Are Coming! 28 Insurance Industry to Benefit from Clean Energy Boom 32 Green Insurance Market: Competitive and Growing 34 Is TRIA for Cyber Terrorism?

4 | INSURANCE JOURNAL-WEST October 21, 2013

DEPARTMENTS 6 Opening Note 10 Declarations 10 Figures W4 People 11 Business Moves 18 MyNewMarkets

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Opening Note Insurer Complaints

t’s no surprise that claims handling ranks in the top 10 when it comes to insurer complaints, but producer licensing issues also appear to be a top grievance. According to a new report by Waltham, Mass.-based Wolters Kluwer Financial Services, the failure to handle claims within specified time frames is the number one criticism found on U.S. property/casualty insurer market conduct exams. And using unapproved forms and rates ranks number two. The data from the company’s ninth annual report show that claims-handling, licensing and underwriting issues continue to dominate regulators’ complaints against insurers. “The regulatory landscape is getting more complex as industry requirements, laws and regulations change constantly under the direction of government and industry oversight, making it extremely challenging to embed regulatory requirements into claims, underwriting and distribution processes,” said Kathy Donovan, senior compliance counsel, Insurance, at Wolters Kluwer Financial Services. “Strong regulatory change management processes and frequent self-audits are extremely effective in helping stay on top of these changes.” In addition to those criticisms on the Top 10 list, insurers were also frequently criticized for the manner in which they maintained complaint handling, their failure to provide requested data to market conduct examiners, as well as the failure to conduct business in their “own name.” To develop its list, the company said its regulatory experts reviewed last year’s state market conduct exams to identify areas with the most criticisms. The company provides compliance and risk management services for banking, insurance and other financial firms. The firm says its report can serve as a checklist to help insurers minimize compliance risk exposure. According to Wolters Kluwer Financial Services, the top 10 most common market conduct compliance criticisms for property and casualty insurance are: 1. Failure to acknowledge, to pay, or deny claims within specified time frames. 2. Using unapproved/unfiled forms and rates. 3. Failure to provide required compliant disclosures in claims processing. 4. Improper documentation of underwriting files. 5. Failure to maintain claims documentation. 6. Failure to process/pay total loss claims properly. 7. Failure to provide required compliant disclosures in underwriting processing. 8. Failure to adhere to producer appointment, termination and/or licensing requirements and adjuster licensing requirements. 9. Failure to issue compliant adverse action underwriting notices. 10. Failure to apply rates, rules and guidelines correctly.

Andrea Wells Editor-in-Chief 6 | INSURANCE JOURNAL-NATIONAL October 21, 2013

EDITORIAL Editor-in-Chief Andrea Wells | awells@insurancejournal.com V.P. Content Andrew Simpson | asimpson@insurancejournal.com East Editor Young Ha | yha@insurancejournal.com Southeast Editor Michael Adams | madams@insurancejournal.com South Central Editor/Midwest Editor Stephanie K. Jones | sjones@insurancejournal.com West Editor Don Jergler | djergler@insurancejournal.com International Editor Charles E. Boyle | cboyle@insurancejournal.com Senior Editor Susanne Sclafane | ssclafane@insurancejournal.com ClaimsJournal.com Editor Denise Johnson | djohnson@claimsjournal.com MyNewMarkets.com Associate Editor Amy O’Connor | aoconnor@mynewmarkets.com Columnists Chris Burand, Alan Shulman, Catherine Oak Contributing Writers Michael Bruemmer, Molly M. Connell, Dave Coons, Molly E. Lang, John F. Mullen, Kimberly Tallon, Burke Coleman SALES V.P. Sales & Marketing Julie Tinney (800) 897-9965 x148 | jtinney@insurancejournal.com West Dena Kaplan (800) 897-9965 x115 | dkaplan@insurancejournal.com South Central Mindy Trammell (800) 897-9965 x149 | mtrammell@insurancejournal.com Midwest Lauren Knapp (800) 897-9965 x161 | lknapp@insurancejournal.com Southeast Howard Simkin (800) 897-9965 x162 | hsimkin@insurancejournal.com East Dave Molchan (800) 897-9965 x145 | dmolchan@insurancejournal.com New Markets Sales Manager Kristine Honey | khoney@insurancejournal.com Classifieds, Jobs, Agencies Wanted/For Sale Ly Nguyen (800) 897-9965 x125 | lnguyen@insurancejournal.com MARKETING/NEW MEDIA Marketing Administrator Gayle Wells | gwells@insurancejournal.com Advertising Coordinator Erin Burns (619) 584-1100 x120 | eburns@insurancejournal.com New Media Producer Bobbie Dodge | bdodge@insurancejournal.com Videographer/Editor Matt Tolk | mtolk@insurancejournal.com DESIGN/WEB V.P. of Design Guy Boccia | gboccia@insurancejournal.com V.P of Technology Joshua Carlson | jcarlson@insurancejournal.com Design and Marketing Executive Derence Walk | dwalk@insurancejournal.com Web Developer Jeff Cardrant | jcardrant@insurancejournal.com Web Developer Chris Thompson | cthompson@insurancejournal.com IJ ACADEMY OF INSURANCE Director of Education Christopher J. Boggs | cboggs@ijacademy.com Online Training Coordinator Barbara Whiffen | bwhiffen@ijacademy.com ADMINISTRATION Chairman Mark Wells Chief Executive Officer Mitch Dunford Accounting Manager Mark Wooster | mwooster@wellsmedia.com

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News & Markets Tech Risks Threaten Supply Chain More Than Weather: Guy Carpenter

By Kimberly Tallon

echnology failure and cyber attacks represent a greater threat to most organizations than adverse weather, fire and social unrest combined, according to a new report by Guy Carpenter. The report, “Tomorrow Never Knows,” highlights critical emerging risks facing the insurance and reinsurance sector, focusing in particular on cyber risk, climate change and space risk. Other threats include pandemics and nanotechnology. “It is critical that [companies] are prepared to anticipate and react to a rapidly changing and uncertain risk landscape,” says David Flandro, global head of business intelligence for Guy Carpenter, in a statement. “We are observing the rise of many new risks as technological, economic and scientific advancements are made,” Flandro adds. “Only by analyzing and seeking to better understand these risks can we mitigate the element of surprise.” Cyber Risk Rapidly developing computer technology and the unrelenting evolution of cyber risks present some of the biggest challenges today. Liability from cyber attacks and threats to the data security of cloud computing and social media have become significant emerging risks for carriers. Cyber attacks have reached alarming lev8 | INSURANCE JOURNAL-NATIONAL October 21, 2013

els. With 2,644 incidents reported through mid-January 2013, 2012 more than doubled 2011, the previous highest year on record. And the true extent of attacks is likely to be far higher since around 20 percent of reported incidents did not disclose the number of records involved. The immediate risks associated with a cyber attack can range from legal liability and computer security breaches to privacy breaches and reputational damage. A company may also be vulnerable to risks to their supply chain as a result of cyber threats, as technology has become a critical enabler of a supply chain’s operations. While recent natural disasters such as floods, tornadoes and Superstorm Sandy emphasize the devastating power of Mother Nature, technology failures outpace adverse weather as the major force disrupting corporate supply chains. Cyber attacks now outstrip fire and social unrest, and if failure of service provider is added into the mix, these make up the majority of all supply chain disruptions, according to the Business Continuity Institute’s 2012 Supply Chain Resilience Survey. Climate Change Risk Climate change, global warming and the resulting landscape shift for meteorological perils is a growing area of concern for insurers and reinsurers. Based on consistent and scientifically defensible evidence, the Intergovernmental Panel on Climate

Change (IPCC), a United Nations body for the assessment of climate change, has concluded that global warming over the last 50 years cannot be explained without “external radiative forcing.” The most pervasive hazard of global warming is coastal flooding. According to the IPCC, a sea-level rise of at least 25-50 centimeters is expected by the end of the century. This is of great significance for coastal cities as well as to many inland areas of the world prone to flood. Global warming is also impacting drought and wildfire patterns around the world, according to the IPCC. Areas that see diminished precipitation will face water shortages, as will areas that are supplied from glacial sources. Wildfires are another hazard imposed by drought conditions, and the IPCC has noted that the wildfire season in western regions of the U.S. has increased by about 78 days in the last three decades. Space Risk The most serious threat to high-value satellites and space infrastructures in the Earth’s orbit today is the risk of collision with other satellites or space debris. As more satellites are sent into orbit to provide vital services and technology, such as global communications, air traffic control, weather forecasting and disaster management, the area is becoming increasingly cluttered. According to the U.S. Strategic Command’s Space Surveillance Network, more than 20,000 objects above 10 centimeters in size are currently orbiting Earth — only about 1,000 of which are active satellites. While the cost of insuring a satellite during launch has traditionally been higher than the cost to cover its life in orbit, this is likely to change. Solar weather is another space-related risk that has the potential to cause huge disruption to infrastructure and businesses around the world. Major solar disturbances have the potential to cause significant losses and could ripple critical infrastructure and global supply chains would likely fail. www.insurancejournal.com

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Declarations Growth Positive “Despite all of the domestic economic uncertainty, the Mid-America survey points to positive growth for the final quarter of 2013.” — Creighton University professor and economist Ernie Goss, who oversees a quarterly survey of business leaders in nine Midwest and Plains states. A report released on October 1 suggests that manufacturing growth will help fuel the regional economy through the end of the year.

No Flood, Just Sandbags “It’s always easier to pick up sandbags than to clean up a flood.” — Lafitte, La., Mayor Timothy Kerner commenting on the removal of sandbags placed in low-lying stretches of shoreline along Bayou Barataria, in advance of the expected landfall of what was once Tropical Storm Karen. Bayou Barataria empties into the Gulf of Mexico. Kenner said he was relieved that the storm lost steam off the coast and didn’t continue to push up the tide in his flood-prone community.

Top Down “The culture, as you will see, comes from the very top.” — Gregory Kafoury, a Portland, Ore., lawyer representing three women seeking $6 million each in lawsuits that accuse an anesthesiologist of sedating patients and colleagues and then sexually abusing them. The suits also name the hospital, Mid-Columbia Medical Center, and two top officials.

Combating Distracted Driving

Unique Situation

“New York State is continuing to use every tool at its disposal to combat texting while-driving.” — New York Gov. Andrew Cuomo on the state’s unveiling of “Texting Zones” last month to help reduce distracted driving. Some 90 existing Park-n-Ride facilities, rest stops and parking areas along the state’s thruway and highways will now dual-function as Texting Zones to give motorists a pull-off area to park and use their mobile devices.

“We’re facing something almost unique in Florida, which is really a period of stability [in workers’ compensation]. A lot of states experience this, but Florida doesn’t often.” — Lori Lovgren, NCCI

Figures $2 Million

The amount an insurance trust representing Minnesota counties has agreed to pay to settle a lawsuit over driver’s license data snooping. A child support officer in Rock County, Janet Patten, allegedly made more than 4,000 photo queries of the Driver and Vehicle Services database in 2010 and 2011. Patten was fired and several law firms sued on behalf of about 3,000 people who received data breach letters. The settlement must be approved by a federal judge.

$3.6 Million The amount in private donations being distributed to victims of the April fertilizer plant explosion in West, Texas, which killed 15 people and injured 200 others. Mayor Tommy Muska said he’d heard complaints from residents about the slow pace of distribution but says legal and logistical hurdles had to be overcome until and after the center received tax-exempt status.

10 | INSURANCE JOURNAL-NATIONAL October 21, 2013

261 The number of people killed in traffic accidents in New York City during fiscal year 2013 that ended in June, which includes 93 motorists/passengers fatalities and 168 bicyclists/pedestrians fatalities. The figure represents a 10 percent decline from 291 traffic deaths recorded during fiscal year 2012, which included 115 motorists/passengers fatalities and 176 bicyclists/pedestrians fatalities.

$150 Million How much outstanding debt Stockton, Calif., and Assured Guaranty have reached an agreement on to restructure and help the city exit from bankruptcy.

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Business Moves Confie Seguros Personal lines insurance brokerage Confie Seguros acquired three additional brokers: James S. Sullivan Agency and Advanced Auto Insurance in New York, and Family Insurance in Corpus Christi, Texas. James S. Sullivan Agency is an independently owned agency selling personal lines and small commercial insurance at 16 retail locations in towns in the Buffalo, Rochester and Syracuse regions with 41 employees. Advanced Auto Insurance is an independent agency with locations in downtown Rochester and Greece. Family Insurance was established in 1990 and serves the Corpus Christi area through two retail locations. Confie Seguros said that the staffs and locations of the agencies will remain in place. Terms of the transaction were not disclosed. AssuredPartners, AJM Insurance AssuredPartners of New Jersey, an AssuredPartners Inc. platform operation, acquired Anderson-Jackson-Metts (d/b/a/ AJM Insurance). AJM Insurance specializes in commercial insurance coverage, personal insurance coverage, financial planning, and health benefits for corporations and individuals. The agency is one of the largest firms in southern New Jersey, reporting revenues of $5.3 million. As part of the acquisition, 30 AJM Insurance employees will join AssuredPartners of New Jersey. Operations are based in Mt. Laurel, N.J., and will continue under the leadership of Tony Mahon and Salvatore Abate. Headquartered in Lake Mary, Fla., AssuredPartners Inc. is a portfolio company of Chicago-based private equity firm GTCR. USI, Richard J. Princinsky & Associates Briarcliff Manor, N.Y.-based USI Insurance Services has acquired Richard J. Princinsky & Associates Inc., located in Hunt Valley, Md. Terms of the transaction were not disclosed. Established in 1976, Richard J. Princinsky & Associates has partnered with corporate www.insurancejournal.com

and nonprofit businesses to provide services for employee benefits programs focusing on strategic planning, regulatory compliance, HR support, corporate wellness services, custom benefits communications and retirement plan services. USI said the acquisition expands its employee benefit practice into Maryland and enhances its employee benefits business in the MidAtlantic region and nationally. Arthur J. Gallagher & Co., RJ Dutton Insurance brokerage and risk management services firm Arthur J. Gallagher & Co., has acquired RJ Dutton Inc. (RJ Dutton) of Overland Park, Kan. Established in 1995, RJ Dutton provides employee benefit consultation and brokerage services for primarily self-funded, large group clients throughout the United States. The firm also offers benefits plan design; group purchasing programs; consumer directed plans such as health savings accounts, health reimbursement arrangements and cafeteria plans; retirement plans and regulatory compliance. It specializes in the medical, energy, professional sports, mining, retail and hospitality industries. Ron Dutton and his associates will continue to operate from their current location under the direction of John Neumaier, leader of Gallagher’s south central employee benefit consulting and brokerage operations. Alliant Insurance Services, EnRisk Specialty insurance brokerage firm, Alliant Insurance Services Inc. has acquired EnRisk Services Inc., a Ft. Worth, Texasbased firm that specializes in insurance and risk management for the energy industry. EnRisk also has offices in Houston and Denver. EnRisk CEO John B. Ludwig will join Alliant as executive vice president and managing director with the firm’s Energy and Marine Group, which will combine

leadership teams and risk professionals from both companies. Ludwig has more than 28 years of experience in the energy and insurance industries, and his leadership is credited with establishing a team at EnRisk that more than quadrupled revenue while expanding the firm with offices in Houston and Denver. Hub, Connelly, Carlisle, Fields & Nichols Global insurance broker Hub International Ltd. has acquired the assets of Connelly, Carlisle, Fields & Nichols (CCFN), a Clearwater, Fla.-based insurance brokerage firm. Terms of the acquisition were not disclosed. The CCFN operations will do business as Hub International Florida. Hub’s existing Florida-based operations, currently led by Latimer Farr, will merge into the newly formed platform, and Farr will serve as president, Hub International Florida Personal Lines. In connection with the acquisition, John Connelly, president of CCFN, will join Hub as CEO, Hub International Florida, reporting to W. Kirk James, president, Hub International, Southeast/Mountain regions and chief operating officer for Hub. October 21, 2013 INSURANCE JOURNAL-NATIONAL | 11

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News & Markets Hole-In-One Golf Insurer: Guilty of 3 Felonies in Washington

businessman accused of insuring golf tournament hole-in-one prizes then failing to pay has pleaded guilty in a Washington court to two counts of selling insurance without a license and one count of first-degree theft. Kevin Kolenda, 55, of Norwalk, Conn., entered his plea in King County Superior Court in Seattle in early October. In addition to the three felonies, Kolenda was ordered to pay $15,000 in restitution. In 1995 Kolenda started a business called Golf Marketing in Norwalk. The business’ name has changed several times, including: Golf Marketing Worldwide LLC, Golf Marketing Inc., Hole-in-Won.com, and currently Hole-in-Won.com Worldwide. The company also has a regional office in Rye, N.Y.

Kolenda repeatedly failed to pay winning golfers in Washington, according to the charges. Those payment failures include: In 2004, Kolenda sold insurance for a Vancouver tournament, where a golfer got a hole in one. Kolenda did not pay the $50,000 prize. In 2010, Kolenda sold coverage to pay $25,000 for a hole in one during a golf tournament in Snohomish. A player got a hole in one, his golf partners signed notarized forms attesting to the hole in one, but prize remains unpaid, according to the Washington Insurance Commissioner’s office. In some cases, charities had to come up with the unpaid prize money. In others, the prize winners agreed to forgo a prize. Similar allegations have been made

against Kolenda and his business in other states, including Montana, Ohio, Georgia, California, New York, Hawaii, Alabama, Massachusetts, Florida, Connecticut and North Carolina. Kolenda will be sentenced in four months.

Idaho Parents Sue Football Helmet Company

Utah Man Blames Bathroom Emergency for High-Speed Chase

Wyoming Court OKs Phone Approvals for DUI Testing

he family of a northern Idaho teenager who suffered a traumatic brain injury during a football game is suing the school district and the maker of the football helmet. The Bonner County Daily Bee reported that Robert Clark II and Julie Clark filed the lawsuit in September on behalf of Robert “Bobby” Norman Clark III. The lawsuit names the West Bonner County School District and helmet maker Riddell. The lawsuit contends Bobby Clark was injured on Sept. 30, 2011, while a lineman for the Priest River Lamanna High School Spartans. The lawsuit says Bobby Clark was briefly removed from the game but then put back in by unidentified coaches. He returned to the sidelines after two plays and collapsed. The suit contends he suffered permanent and irreversible disability. Copyright 2013 Associated Press. W2 | INSURANCE JOURNAL-WEST October 21, 2013

Utah man was sentenced to seven days in jail after a high-speed chase that he blamed on a bathroom emergency. Thirty-nine-year-old Jeffrey Laub told a judge that he ate something that upset his stomach and was racing to get to a rest area in Logan Canyon. The Herald Journal reported 1st District Judge Thomas Willmore called the explanation “one of the worst stories” he ever heard. The judge pointed out that Laub passed several outhouses while he led a Utah Highway Patrol trooper on a chase last spring that reached 111 mph. Laub, who’s from Garden City, pleaded guilty in August to failure to stop and impaired driving. Copyright 2013 Associated Press.

he Wyoming Supreme Court has endorsed a 2011 state law allowing judges to grant authority to police over the telephone to force motorists to submit to DUI testing. In the October ruling, the court concluded it’s not a violation of the state constitution for judges to grant telephonic approval to police to test motorists they suspect of driving drunk. The Wyoming Supreme Court has endorsed a 2011 state law allowing judges to grant authority to police over the telephone to force motorists to submit to DUI testing. In its ruling, the court concluded it’s not a violation of the state constitution for judges to grant telephonic approval to police to test motorists they suspect of driving drunk. Copyright 2013 Associated Press. www.insurancejournal.com

QBE

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People Linda Long

Travis Campbell

Joe Williams

Eva English

ASTISH14873.indd ASTISH15197.indd 11 ASTISH5333.indd

Willis North America named Linda Leigh Long regional placement officer in its West region. Long will lead a team of insurance placement professionals across Willis’ West region, which includes operations in Arizona, California, Colorado, Nevada, Oregon, Texas, Washington and Wyoming. She will oversee roughly $2 billion of insurance premiums placed on behalf of Willis’ clients. Long will report to Matt Keeping, chief placement officer of Willis North America, and Bill Creedon, national partner of the West region. Long previously served as senior vice president and global placement officer for Willis’ Southern California operations. Long joined Willis in 2001. Her career in insurance has also included leadership roles at Insureon Inc., and Golden Pacific Insurance Services Inc. Willis North America is a unit of Willis Group Holdings. Willis has more than 17,000 employees in more than 400 offices. USG Insurance Services Inc., a national wholesaler and managing general agent, added Travis Campbell as a producer/broker based in San Diego, Calif. Campbell most recently held the position of wholesale broker at Sloan Mason North America. Previous roles include sales and account manager at Olin Hill and Associates and sales and office manager at Trinity Insurance Services Inc. USG has 15 offices across the country. BB&T Tanner Insurance Services named three staff members to its office in Pleasanton, Calif. Ken Clark was named director of risk control. Clark has more than 25 years of experience. Joe Williams was named vice president of employee benefits. Williams has more than 10 years of sales experience in the insurance industry, primarily in employee

W4 | INSURANCE JOURNAL-WEST October 21, 2013

benefits for non-profit organizations. Eva English was named employee benefits account manager. She has more than six years of experience in employee benefits. BB&T Tanner is part of BB&T Insurance Services, which operates in Alabama, North Carolina, Virginia, Georgia, South Carolina, Maryland, West Virginia, Tennessee, Florida, Kentucky and California. The Professional Independent Insurance Agents of Colorado named Dot Wright its executive vice president following a national search. Wright starts Nov. 1. She comes to PIIAC from the Arvada Chamber of Commerce. Wright follows as head of PIIAC Barbara Fidler, who represented the group executive vice president for 17 years. PIIAC membership is comprised of leaders in the insurance industry. The organization represents 2,500 independent insurance agents in Colorado. John A. Miklus has been named president of the American Institute of Marine Underwriters, the trade association representing the U.S. ocean marine insurance market. Miklus succeeds James M. Craig, president of AIMU since 2003. He will retire Dec. 31. A senior ocean marine insurance and reinsurance executive, Miklus most recently was senior vice president at Guy Carpenter & Co., where he managed reinsurance client relationships for several U.S. marine insurers, as well as global marine insurance companies based in Japan, South Korea and China. Miklus began his insurance career as an inland/ocean marine underwriter trainee at The Hartford Insurance Group in 1982 and held several positions at Hart Re Co. before becoming senior vice president and marine treaty underwriter.

1/27/11 9:42 AM 6/11/11 9/6/11 2:54 8:30 PM

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News & Markets Baker: California’s Workers’ Comp Reform Showing Signs of Progress

activities are cluing her and her staff into hundreds of thousands of liens filled each en months after “historic reforms” were that activity, or just what those activities year costing the system hundreds-of-millions made to California’s workers’ compensaare. of dollars, according to SB 863 backers. tion system there is evidence that the chang Despite the gaming, However some of those es are taking hold, however bad actors conBaker said there is evidence reforms may have pushed people tinue to find ways to game the system, said the IMR process, which she to file liens quicker to get them in Department of Industrial Relations Director noted uses “evidence-based” on time, while other reforms may Christine Baker. facts to resolve disputes, is have prompted quicker resolution Baker, who’s considered one of the working. According to her, of ongoing workers’ comp disputes state’s top labor officials and oversees the 73 percent of IMR applicato get them out of the way before Department of Workers’ Compensation, tions have been denied. reforms kick in. offered an update on Senate Bill 863 during “IMR represents a major Some believe that activity may the California Workers’ Compensation & paradigm shift for stakeholdbe the impetus for the Workers’ Risk Conference in Dana Point in early ers in the workers’ comp Compensation Insurance Rating October. Christine Baker community,” she said. Bureau decision to pursue a sug The annual three-day conference was Much of Baker’s talk was gested hike in California’s advisory attended by a broad swath of professionals interspersed with references to “gamers” workers’ comp rates of nearly 7 percent. The with interest in workers’ comp, including and “the underground economy,” which she filing will propose advisory pure premium insurance agents, insurers, attorneys, interblames for a significant amount of cost overrates that average $2.70 per $100 of payroll, preting services, investigative agencies, mediruns in the workers’ comp system. 6.9 percent higher than the industry average cal provider networks and billing services. “We must level the playing field and elimfiled pure premium rate of $2.53 as of July 1. The theme of this year’s conference was inate the underground economy,” she said, There were also significant front-end “Surf’s Up! Navigating the ‘Waves of Change’ adding that her department is stepping up costs created by SB 863, which included the in Risk Management.” The conference enforcement efforts to track down and punincreased benefits for injured workers, and included an expo, several panels and guest ish bad actors in the system. the newly created independent medical speakers. Other keynote speakers included The qualified medical evaluator process is review and bill review processes. motivational speaker Bethany Hamilton, a an area of the state’s workers’ comp system Baker said it’s not clear the reforms professional surfer and shark attack survithat needs cleaning up, according to Baker. prompted WCIRB’s decivor. QMEs are qualified physicians who are sion. Baker was one of a ‘IMR represents a certified by DWC’s medical unit to examine “It may not have anyhandful of people who major paradigm shift injured workers to evaluate disability and thing to do with SB 863,” hammered out the workfor stakeholders in write medical-legal reports used to detershe said. ers’ comp reform passed mine eligibility for benefits. However, she said it’s literally at the 12th hour as the workers’ comp QMEs include medical doctors, osteopossible the increased loss Legislative session was end- community.’ paths, chiropractors, dentists, optometrists, experience in workers’ ing in 2012. podiatrists, psychologists and acupuncturcomp may be due to “things getting closed She told the crowd it was too early to ists. quicker.” tell if some reforms were having an effect, “It’s a disaster,” Baker said. “It’s a major “You do have a slight increase as you’re although immediate results were seen in disaster.” closing things,” she said. the form of a 30 percent increase in perma Baker said there are more than 27,000 Addressing the independent medical nent disability indemnity rates for workers QMEs that are stuck in the system, and the review and independent bill review prophased in over two years and lien reform. problem with many of those QMEs may simcesses — IMR and IBR — Baker said she Under SB 863, liens for reasonable medical ply be improperly filled out paperwork. believes there are already people attempting expenses incurred by or on behalf of the She anticipated having those and other to find loopholes, or take advantage of any injured employee are subject to a filing fee of short-term problems with the QME process weaknesses in the system. $150. For liens filed before Jan. 1, there will worked out by the end of the month, but “I’m going to assume there’s some gaming,” be a $100 activation fee which must be paid that a long-term solution is needed. she said. “There’s a little bit of evidence of prior to Jan. 1, 2014, or the lien will be sub “Long-term, something has to be done to that going on right now.” ject to dismissal. fix the QME process,” she said. However, she didn’t elaborate about what The fees were intended to reduce the W6 | INSURANCE JOURNAL-WEST October 21, 2013

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News & Markets Report: $189B in Western U.S. Properties High Wildfire Potential By Don Jergler

espite some wetter and cooler weather, the 2013 wildfire season isn’t over, and the Western states in particular should be prepared for a few more potentially active months. That’s according to the 2013 CoreLogic Wildfire Hazard Risk Report released on Oct. 9, which calls out drought and continued new home construction in the wildland-urban interface for putting at risk billions of dollars’ worth of properties. The report takes a focus on 13 states in the drought-plagued Western U.S. and breaks down the risks into regions, categories and dollar signs. “Though this year’s fires haven’t been quite as frequent or widely destructive as the 2012 record-setting season, drought conditions that reached unprecedented levels last year are still plaguing many of the western and plains states and are forecast to persist into late fall,” the report states. Why such a focus on the West? In 2012, 87.5 percent of the total acreage lost to wildfire in the coterminous U.S. occurred within these 13 states, the report states. According to the report, there are more than 1.2 million residential properties in the Western U.S. that are currently located in “High” or “Very High” wildfire-risk categories valued at more than $189 billion. Leading the way in the “Very High” category for total potential exposure to wildfire damage are Colorado ($15.2 billion) and California ($13 billion). Those states were followed by Texas ($6.3 billion), Oregon ($1.7 billion), Arizona ($1.2 million) and New Mexico ($1.18 billion). While the 2013 wildfire season turned out tamer than a year prior, there is still time left for some of these wildfire threats to be realized, said Thomas Jeffery, senior hazard scientist with CoreLogic. “Ultimately we’re still looking at a tremendously high volume of properties that are at risk there,” Jeffery said. W8 | INSURANCE JOURNAL-WEST October 21, 2013

He added, “According to all estimates we’re still in a fairly significant drought over much of the West.” The monthly outlook from the National Interagency Fire Center for October calls for “Above Normal” wildland fire potential outlook for a large portion of California. In California the wildfire scenario could be compounded by an increasing chance of winds and dry weather being forecast, said Scott Carpenter, a National Weather Service meteorologist. “The general idea is lately we are looking at least a few offshore wind events through the middle of November,” Carpenter said. Of even greater concern than the ongoing drought is a longer-term trend: the increase in the number of properties and the property values as the U.S. real estate market continues its recovery. Much of this new development is going in the wildland-urban interface, which has a greater chance for homes to be impacted by wildfires, Jeffery said. A report from the Commerce Department in September shows construction starts on single-family homes rose 7 percent to an annual rate of 628,000 units last month, the highest level in six months. Wildfire activity tends to follow a cyclical pattern, according to the report. So while cooler temperatures and higher levels of

rainfall might result in lower levels of wildfire activity for a particular region over the course of a year or two, those conditions also allow for increased vegetation growth and accumulation of fuel that could drive higher wildfire activity in future seasons, the report states. “This is one hypothesis for why California had relatively less wildfire activity recorded in 2010 and 2011, and then experienced a significant jump in acres burned in 2012,” the report states. “California’s recent Rim Fire supports this hypothesis as yet another fire fueled by drought and historic fire suppression that is contributing to an active wildfire season in 2013. According to U.S. National Park Service Director Jonathan Jarvis, these large fires are likely to continue in the western U.S. into the foreseeable future.” Despite that, this year brought the Rim Fire, which at more than 257,000 acres is considered the third largest fire in California history. Additionally, the Black Forest Fire south of Denver consumed more than 486 structures in June, making it the most destructive fire in Colorado state history. This fires this year in Colorado, along with the High Park and Waldo Canyon fires last year, now account for the three most destructive fires ever recorded in Colorado, according to the report. www.insurancejournal.com

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Commercial

Lines Leaders Top 50 Commercial Lines Agencies

About the Commercial Lines Leaders: The 2013 Commercial Lines Leaders in this special feature are taken from Insurance Journalâ&#x20AC;&#x2122;s Top 100 Property/Casualty Independent Agencies as reported in August. This list utilizes only the 2012 commercial lines property/casualty revenue numbers of the privately owned agencies and brokerages that submitted data to the Top 100 agencies report. For more information on Insurance Journalâ&#x20AC;&#x2122;s Top 100 Property/Casualty Independent Agencies list, contact awells@insurancejournal.com.

Ranked by Total 2012 Commercial Lines P/C Revenue 2013 Rank Agency Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

2012 2012 Commercial Total Lines P/C P/C Revenue Revenue

Lockton Cos. $743,375,000 HUB International Ltd. $539,624,123 Alliant Insurance Services Inc. $326,976,000 USI Insurance Services $273,805,495 AssuredPartners Inc. $138,611,200 Leavitt Group $97,534,307 Crystal & Co. $92,921,335 Insurance Office of America $84,287,950 The IMA Financial Group $80,425,004 Heffernan Insurance Brokers $68,495,780 J. Smith Lanier & Co. $66,224,000 Hylant $62,550,017 Mesirow Insurance Services $53,262,554 INSURICA Insurance Management Network $52,825,128 Woodruff-Sawyer & Co. $51,812,905 PayneWest Insurance $51,272,300 Barney & Barney LLC $46,924,564 EPIC Insurance Brokers and Consutants $43,305,000 Higginbotham $43,301,000 Assurance Agency Ltd. $39,770,000 Frenkel & Co. $36,003,634 Sterling & Sterling Inc. $34,628,000 The Graham Co. $33,931,640 The Mahoney Group $32,722,534 Houchens Insurance $32,503,540 Risk Strategies Co. $32,350,000 Propel Insurance $31,050,000 Bowen, Miclette & Britt Insurance Agency LLC $30,303,320 Robertson Ryan & Associates Inc. $29,574,246 InterWest Insurance Services Inc. $29,173,333 Marshall & Sterling Enterprises Inc. $28,508,950 MHBT Inc. $28,100,000 Ascension Insurance Inc. $28,031,000 Riggs Counselman Michaels & Downes Inc. $24,939,199 Andreini & Co. $24,510,240 The Horton Group Inc. $24,264,995 SullivanCurtisMonroe $23,400,000 Parker Smith and Feek Inc. $23,201,000 Starkweather & Shepley Insurance Brokerage Inc. $22,000,000 Charles L. Crane Agency $22,000,000 Lawley Insurance $21,070,348 LMC Insurance & Risk Management Inc. $20,842,843 Risk Transfer $20,000,000 James G. Parker Insuarance Associates $19,829,322 Advanced Insurance Underwriters LLC $19,528,000 Bainswest Inc. $19,086,578 TWIW Insurance Services LLC $18,859,628 Haylor, Freyer & Coon Inc. $18,600,000 TrueNorth $18,498,393 Professional Insurance Associates Inc. $18,000,000

12 | INSURANCE JOURNAL-NATIONAL October 21, 2013

$747,375,000 $749,731,437 $331,170,100 $334,907,369 $173,264,000 $119,859,378 $115,458,915 $87,425,201 $83,171,487 $71,558,734 $80,460,000 $66,464,177 $60,129,731 $59,656,368 $52,357,053 $65,667,300 $48,150,564 $44,803,000 $49,291,000 $40,647,000 $40,233,765 $37,295,000 $34,187,314 $32,722,534 $34,722,500 $37,250,000 $34,500,000 $33,284,111 $29,574,246 $31,221,988 $44,821,461 $29,950,000 $33,086,000 $26,179,368 $26,224,000 $30,103,935 $24,500,000 $25,333,000 $30,000,000 $30,000,000 $28,159,229 $23,534,527 $20,000,000 $21,029,086 $23,650,000 $29,675,190 $22,412,073 $23,500,000 $19,459,375 $29,000,000

2012 Other than P/C Revenue $269,376,000 $153,461,485 $175,022,000 $377,638,888 $66,171,000 $65,938,315 $21,921,085 $9,487,676 $18,363,428 $13,048,592 $32,068,000 $26,729,112 $26,953,851 $14,955,463 $22,470,569 $21,153,900 $42,678,362 $17,067,000 $42,814,000 $14,771,000 $20,559,941 $5,995,000 $2,585,987 $8,018,187 $10,958,500 $7,900,000 $11,900,000 $9,534,163 $3,063,670 $9,035,821 $7,226,068 $18,600,000 $44,664,000 $11,459,005 $9,200,000 $16,687,697 $6,540,000 $6,909,000 $0 $0 $16,050,964 $8,766,655 $0 $4,103,329 $0 $9,033,251 $5,475,229 $3,500,000 $11,792,260 $0

2012 Total P/C No. Premium of Main Written Employees Office $9,860,400,000 $5,554,900,760 $4,076,090,380 $3,068,345,869 $1,750,114,141 $1,089,630,718 $934,395,367 $891,935,779 $865,000,000 $559,323,490 $1,150,000,000 $709,986,000 $479,437,312 $450,439,083 $428,929,985 $682,456,200 $459,005,000 $755,525,000 $429,370,130 $517,642,000 $332,002,359 $311,000,000 $202,784,351 $216,400,000 $336,018,100 $498,500,000 $280,000,000 $351,922,073 $230,000,000 $296,465,402 $276,080,369 $278,500,000 $236,703,000 $302,695,116 $218,533,833 $252,698,607 $285,000,000 $200,800,000 $261,000,000 $182,000,000 $211,292,858 $228,704,090 $245,000,000 $157,553,590 $215,000,000 $222,987,050 $163,764,626 $174,000,000 $153,309,099 $225,000,000

4,950 6,148 1,508 3,316 1,326 1,463 450 655 482 425 554 618 315 410 317 645 456 320 543 303 233 203 155 185 211 190 212 218 210 255 365 260 433 255 170 255 178 179 186 240 311 174 66 185 157 272 164 198 210 50

Kansas City, Mo. Chicago, Ill. Newport Beach, Calif. Briarcliff Manor, N.Y. Lake Mary, Fla. Cedar City, Utah New York, N.Y. Longwood, Fla. Wichita, Kan. . Walnut Creek, Calif. West Point, Ga. Toledo, Ohio Chicago, Ill. Oklahoma City, Okla. San Francisco, Calif. Billings, Mont. San Diego, Calif. San Francisco, Calif. Fort Worth, Texas Schaumburg, Ill. New York, N.Y. Woodbury, N.Y. Philadelphia, Pa. Mesa, Ariz. Bowling Green, Ky. Boston, Mass. Tacoma, Wash. Houston, Texas Milwaukee, Wis. Sacramento, Calif. Poughkeepsie, N.Y. Dallas, Texas Overland Park, Kan. Towson, Md. San Mateo, Calif. Orland Park, Ill. Irvine, Calif. Bellevue, Wash. East Providence, R.I. Saint Louis, Mo. Buffalo, N.Y. West Des Moines, Iowa Orlando, Fla. Fresno, Calif. Hollywood, Fla. Tulsa, Okla. Ventura, Calif. Syracuse, N.Y. Cedar Rapids, Iowa San Carlos, Calif.

Website www.lockton.com www.hubinternational.com www.alliant.com www.usi.biz www.assuredptr.com www.leavitt.com www.crystalco.com www.ioausa.com www.imacorp.com www.heffins.com www.jsmithlanier.com www.hylant.com www.mesirowfinancial.com www.insurica.com www.wsandco.com www.paynewest.com www.barneyandbarney.com www.edgewoodins.com www.higginbotham.net www.assuranceagency.com www.frenkel.com www.sterlingrisk.com www.grahamco.com www.mahoneygroup.com www.houchensins.com www.risk-strategies.com www.propelinsurance.com www.bmbinc.com www.robertsonryan.com www.iwins.com www.marshallsterling.com www.mhbt.com www.ascensionins.com www.rcmd.com www.andreini.com www.thehortongroup.com www.sullivancurtismonroe.com www.psfinc.com www.starshep.com www.craneagency.com www.lawleyinsurance.com www.lmcins.com www.risktransfer.com www.jgparker.com www.advancedins.com www.bainswest.com www.twiw.com www.haylor.com www.truenorthcompanies.com www.piainc.com

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NATIONAL COVERAGE

News & Markets Decreasing Agency Balance Sheet Value: A Positive Impact?

espite significant optimism about key market fundamentals, year-over-year agency valuation increases and agency performance metrics, ownership perpetuation continues to be the biggest long-term challenge to independently-owned insurance agencies, according to the MarshBerry 2013 Market & Financial Outlook Survey. The survey also found that despite the strongest (revenue) growth By Molly M. in recent history and a Connell significant percentage of agency owners indicating higher profitability, agency balance sheets, as measured by average tangible net worth, dropped as a percentage of net revenues in 2012 — and continues to drop into 2013 (See Average Tangible Net Worth in Figure 1). In June, MarshBerry launched the 28th Annual Market & Financial Outlook Survey in conjunction with Insurance Journal. The survey compiled anonymous general independent agency information along with financial, market, carrier and technology data. The survey results indicate there is an optimistic outlook for the insurance industry. For most lines of business, commission

income is growing, and the survey respondents expect profits to be similar or better in 2013 compared to 2012. Decline in Tangible Net Worth Taking a more granular look at the potential driving forces behind the decline in average tangible net worth, the survey revealed the following trends. 1. Interest rates steadily decreased over the past six years, due to the Federal Reserve’s loose monetary policy, which includes the still present unconventional Quantitative Easing (QE) program, to stimulate the tepid U.S. economy. The year 2012 marked the lowest average return on U.S. Treasury securities at five- and 10-year constant maturity. (www.federalreserve.gov/ releases/h15/data.htm) 2. U.S. domestic banks have reported increasingly stronger demand for commercial and industrial (C&I) loans over the last two years due, in part, to banks easing their lending standards. (Federal Reserve Economic Data Board of Governors of the Federal Reserve System “Senior Loan Officer Opinion Survey on Bank Lending Practices” www.federalreserve.gov/boarddocs/ SnLoanSurvey) With interest rates at historically low

levels, many firms are taking advantage of cheap borrowing to finance their business activities. These loans are typically used for funding needs related to merger and acquisition financing, investment in plant or equipment, accounts receivable, or inventories, among others. 3. Long-term debt on the balance sheet has slowly crept up over the last few years, also contributing to the decrease in average tangible net worth, which is calculated as total equity less intangible assets. Longterm debt typically relates to acquisition strategy, and internal perpetuation strategy, such as external financing (See Average Long Term Debt in Figure 2). Figure 2 is based on data from a proprietary financial management system of Marsh, Berry & Co. Inc., Perspectives for High Performance - PHP. Agencies subscribe to the PHP reports, and data from each subscriber is updated every quarter. The system calculates critical financial and productivity ratios and compares these ratios to the Average Performance in the group. Balance sheet ratios are averaged over a four quarter period. 4. Cash on the balance sheet has steadily increased in the past several years, while continued on page 16

Source: The data is from a proprietary financial management system of Marsh, Berry & Co. Inc., Perspectives for High Performance (PHP). Agencies subscribe to the PHP reports and data from each subscriber is updated every quarter. The system calculates critical financial and productivity ratios and compares these ratios to the Average Performance in the group. Balance sheet ratios are averaged over a four quarter period. 14 | INSURANCE JOURNAL-NATIONAL October 21, 2013

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NATIONAL COVERAGE

News & Markets continued from page 14 the average debt retirement ratio has decreased, indicating an enhanced ability to meet debt obligations. Cash flow is calculated by the sum of pre-tax profits and noncash expenses less average current portion long-term debt. The average debt retirement ratio is calculated by dividing average long-term debt by net revenues. This trend echoes one of the many effects of the Great Recession that businesses are cautious and continue to hold on to or increase their cash reserves while paying-off debt (See Average Debt Retirement Ratio in Figure 3). 5. Weighted average owner age has decreased in 2012 compared to 2011. Weighted average owner age is calculated by taking the percentage ownership of a shareholder and multiplying it by the shareholder’s age. The summation of all shareholders represents the weighted average owner age. A decrease in this ratio may signify perpetuation of ownership, although the overall trend seems to be increasing (See Weighted Average Owner Age in Figure 4). The decrease in agency balance sheet value, while seemingly negative at face value, may be an indication that agencies are taking advantage of positive market conditions — including low interest rates and available external financing — to reinvest in their agency, whether it be for acquisition growth and/or perpetuation of ownership through an internal sale. If this is the case, agencies should strive to maintain a tangible net worth ratio of 15 percent to 20 percent of revenues. Whether the goal is to perpetuate internally or grow through acquisitions, a strong balance sheet is often both necessary and beneficial. Agencies should carefully consider the use of cash and debt leverage to determine how to best enhance growth, profitability and perpetuation of ownership, and remain a viable force in the distribution system. The 2013 Market & Financial Outlook highlights these areas and others including: •Key agent and broker performance trends from 2007–2014 with results segmented by revenue size and region; •Largest threat to agency growth; •Carrier partner strengths; 16 | INSURANCE JOURNAL-NATIONAL October 21, 2013

•Five-year expense trends — Compound Annual Growth Rate (CAGR); and •Staffing trends. Respondents that completed the survey and provided contact information will receive a link to download the complete report on Oct. 23, 2013. The complete report

will be available for purchase online on Oct. 23 via www.MarshBerry.com for $199. Visit http://info.marshberry.com/ExecutiveSummary to download the Executive Summary. Connell is a senior consultant for MarshBerry. Email: Molly.Connell@MarshBerry.com. Phone: 440-392-6584.

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Risks of the New Economy Product Recall Capacity Needed for Life Sciences Segment By Amy O’Connor

he life sciences industry has seen a dramatic increase in product recalls, and while insurance capacity for the life sciences industry generally has been increasing, insurers have been wary about offering more product recall coverage to the segment. As of Sept. 12, 2013, there have been 50 medical device recalls compared to 49 for all of 2012. In 2012, there were 45 pharmaceutical drug recalls in total, but as of Sept. 13, 2013, that number had already increased to 48, according to recall information on FDA.gov. Most recalls are voluntary, meaning the drug and device manufacturers have chosen to take the drug off the shelves, notified consumers and doctors to stop using the product and/or return it, or required that a medical device be inspected to make sure it is safe to continue using. The FDA reports that the majority of recalls are those that are considered to have “a reasonable probability that the use or exposure to a violative product will cause serious adverse health consequences or death” — also known as Class I recalls. Fran Stockwell, vice president and chief underwriting officer for Medmarc, a life sciences and medical technology insurer in Chantilly, Va., says the increase in recalls can be partly attributed to companies being more proactive in voluntarily recalling

20 | INSURANCE JOURNAL-NATIONAL October 21, 2013

medical devices or drugs. Companies have an advantage if they can get ahead of any problems — both with consumers and legally. The FDA also has stepped up its safety efforts, with more investigators looking closer at the products produced by the life sciences industry. “The frequency of recalls doesn’t reflect poorly on this industry because in this business, you have to be vigilant because you are working with patient safety. These companies are held to a high standard and supervised by the FDA,” Stockwell says. “Everyone is putting in more effort than in the past. Companies realize the damage that can be done to their reputation.” Stockwell says the life sciences industry is mostly populated by small- and mid-size companies with revenues up to $100 million, so their business could be devastated if a recall is not handled quickly and efficiently. “I have seen this multiple times — a company has to conduct a recall and it shakes people’s confidence about purchasing their product. When that happens, companies have been crippled to the extent of having to sell their business. I think that’s why we are seeing more effort spent,” Stockwell says. Coverage Needs The insurance industry, on the other hand, has not been as quick or efficient at responding to the need for more coverage. Aside from the costs associated with pulling and replacing an expensive medical device or drug, publicizing the recall, and managing the reputational harm, recalls — especially those within the medical industry — also attract litigation, which could trigger bodily injury claims. That means there is the potential for insurers to end up with a very expensive claims scenario. Stockwell says the industry is struggling with the best way to cover the exposure while maintaining profitability.

“We realize that [product recalls] are something our customers are very concerned about — but it’s a devilish issue because of the frequency and severity of recalls,” he says. “How much capital does an insurer want to commit to any line of business? All underwriters are asking this.” Medmarc currently offers first-party product recall expense coverage with a standard $50,000 limit for a company that recalls its own devices or drugs. The coverage includes mitigation expenses and crisis management. Stockwell says Medmarc is not intimidated by the rising number of recalls and is, in fact, considering some enhancements to its coverage that would include third-party liability coverage. The company also is considering expanding its limits. Stockwell says the company hopes to introduce these product enhancements later this year. The industry can expect to see more capacity in the marketplace eventually, Stockwell says, as insurers look closer at the root causes of recalls and create analytical/predictive tools to assist the buyer, broker and underwriter to avoid or mitigate these events. “As the recall issue is better understood, then the seeming randomness of recall activity will be demystified and more limit should become available,” he says. Carriers also are paying close attention to product recalls that may be symptomatic of endemic problems or conditions within a company, or whether it’s just an isolated/episodic event. Insurers do know that certain devices and drugs tend to be more risky, Stockwell says. Looking at the predictability of failure allows underwriters to place more accurate terms and pricing around the exposure. Also, underwriters are focused on the culture within a life sciences company, such as how much emphasis is placed on quality-control and whether the proper procedures, staff, and resources are available to handle a recall so it doesn’t get to the point where the FDA has to get involved. www.insurancejournal.com

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SPECIAL REPORT

Risks of the New Economy The Future is Now for Usage-Based Auto Insurance

echnology is spurring innovation and altering risk scenarios throughout the economy including in auto insurance. While advanced auto safety features, the shared economy and driverless cars promise to reshape auto insurance down the road, usage-based insurance (UBI) powered by telematics is already having an impact. UBI is on the road to becoming a standard offering, with more insurers offering it and more consumers willing to let insurers monitor their driving habits with a telematics device in exchange for potential insurance savings. These telematics devices can measure miles driven; time of day; where the vehicle is driven (GPS); rapid acceleration; hard breaking; hard cornering; air bag deployment and other behaviors of interest to underwriters. UBI allows premiums to more closely reflect actual driving behavior than traditional pricing methods. Boston-based insurance consultant Strategy Meets Action (SMA) claims that 70 percent of North American property/ casualty insurers are operating or planning UBI programs, and 75 percent believe UBI will “fundamentally alter the auto insurance industry between now and 2020.” SMA study co-author Richard Welch of REW Consulting says the industry has been experimenting with UBI for 15 years and is now nearing a tipping point. “Even if consumer adoption is in the low end of the consensus range, usage-based insurance will grow rapidly, and as it grows, the tra-

22 | INSURANCE JOURNAL-NATIONAL October 21, 2013

ditional market will shrink, making it very difficult for companies not playing in the usage-based segment to maintain market share,” he says. According to the National Association of Insurance Commissioner (NAIC), 20 percent of all motor vehicle insurance in the U.S. is expected to incorporate UBI in some form within five years. Most of the top 10 auto insurers have UBI programs, with giant GEICO being one of the holdouts. UBI programs have typically relied upon proprietary devices installed in each vehicle, an investment only large carriers could afford. But now firms like San Francisco’s Driveway Software are making UBI cheaper for any-size carrier with smartphone applications, and cloud based analytics and portals. Public Acceptance Public awareness and acceptance of UBI are gradually rising. A recent LexisNexis Risk Solutions consumer survey found that awareness of UBI has more than tripled in the past three years to 36 percent. Among aware consumers, Progressive far outranks competitors in recognition — with 78 percent saying they are aware of Progressive’s UBI program, compared with 8 percent for Allstate and 6 percent for State Farm. The survey also suggests auto insurers still have work to do to get the word out, given that only 3 percent of those consumers who are aware say they actually use UBI. Drivers aged 21 to 34, those who buy minimal coverage and those who drive every

day are the most likely to be receptive to UBI, surveys show. Not surprisingly, consumers’ interest in UBI goes up when promised their premiums could go down. While half of the consumers surveyed by LexisNexis said they are likely to sign up for a 10 percent discount, the figure jumps to 62 percent for a 15 percent discount. A Towers Watson survey similarly found that while 79 percent say they either would buy a UBI policy or are willing to consider the concept, that rises to 89 percent if insurers guarantee premiums won’t rise. According to Allstate, a third of all new customers enroll in its Drivewise UBI program in the 20-plus states where it’s available. The company says that seven-in-10 Drivewise customers save money and no one receives an increase. Of the drivers earning a discount, the average saving is 14 percent per vehicle. “Drivers’ views on UBI are rapidly evolving — they are embracing the technology and making it part of their driving experience,” says Robin Harbage, global lead for Towers Watson’s UBI practice and its DriveAbility product for insurers. Despite all the momentum, Progressive, which pioneered in UBI with its Snapshot product, recently acknowledged that getting customers to adopt the technology has been more difficult than it anticipated. “You get about 30 percent of people saying, ‘Yeah, why not?’; you get another 30 percent of people saying, ‘Maybe, I need to know more’; and you get about 40 percent of people saying, ‘No way in hell,’”

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Progressive CEO Glenn Renwick says. According to Progressive, more than 1.6 million drivers have signed on to use its Snapshot product since 2008. The insurer has increased the percentage of its direct channel customers who have tried Snapshot to about 35 percent from 20 percent two years ago, he says. Privacy Matters Consumers in the Towers Watson survey cited several concerns related to privacy including insurers sharing consumer data (41 percent), fears that insurers will monitor and track driving destinations (42 percent) and apprehensions about insurers using data to invalidate claims (38 percent). A recent study by University of Denver professors could stoke those privacy fears. They maintain that the UBI tracking programs installed in millions of vehicles can collect data that shows where drivers are going, unbeknown to most users. Many telematics devices on the market do not incorporate GPS information that reveals a person’s fixed position on the planet. It turns out insurers don’t need GPS to pinpoint a driver’s destination; they can use an algorithm along with the data they do collect to learn where the driver is going. The Denver study’s authors have called for new policies to inform customers of possible risks. “Mostly we are asking for more transparency from the ones who are offering these programs,” said Rinku Dewri, an assistant professor in the Department of Computer Science, adding that UBI users are given a sense when they sign up for the programs that the data can’t be used to track them. The LexisNexis survey found that in

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addition to discounts, factors that increase lated legal entanglements, Nee says. “Can consumer interest in UBI are the ability to you imagine how many divorce attorneys opt out without penalty and the ability to would subpoena information on a suspectchoose the information provided. ed wayward spouse?” he says. A Consumer Federation of America Diane Koken, a former insurance com(CFA) report suggested that privacy conmissioner for Pennsylvania who is now a cerns are less of an issue if UBI is voluntary. consultant, told the Insurance Regulatory Privacy concerns “will be Symposium at St. Joseph’s eased if insurers do not pres- Insurers still have University that one of sure policyholders to partici- a long way to go in the benefits is that UBI pate in related programs but minimizes carrier reliance getting the word rather offer participation as an on proxies for driver risk out about UBI. option,” the CFA said. such as marital status, Not all agree that the privacy concern age, credit scores and gender. over GPS-like tracking cited by the Denver “It allows customers to understand and professors is real. actually eliminate their risk behaviors, and According to Progressive, the company hopefully to even reduce accident frequenhas collected more than 8 billion miles of cy,” she says. driving data. This information is not shared Sixty percent of those in the Towers with other companies, and “we’re not conWatson survey interested in UBI programs cerned about where a person’s going,” says said they would be willing to change their spokesman Jeff Sibel. driving behavior. When asked how, they Timothy B. Nee, president of Dorman listed: sticking to the speed limit (71 perConsulting Associates, thinks the Denver cent); keeping a safer distance from other study is unrealistic because it takes a vehicles (52 percent); and driving more conhigh-intensity approach to tracking one siderately (49 percent). vehicle. “It’s hard to see what person or The Towers Watson survey also sought group — outside a government — would to gauge consumers’ interest in additional have similar resources available to track services that can be enabled by the technola single vehicle. This calls into question ogy underlying UBI devices. Seventy-two whether this privacy concern is more than a percent of those interested in UBI said they theoretical one,” Nee says. would be willing to pay for them; roughly According to Nee, most carriers sift eight-in-10 drivers showed most interest in through for the information they need to vehicle theft tracking, automated emergency make good underwriting decisions, and the response and vehicle wellness reports. information beyond that often never makes Still, there’s a downside to this innovait to the carrier. Carriers don’t store much tion, Koken says. “Regulators like that costs of the data because the volume would be are going down, but they’re not going to go huge. down for everybody,” she says. “There will Also, carriers don’t want to gather or be winners and there will be losers, and keep information on where each customer that will create a lot of public policy conhas driven to avoid getting drawn into unrecerns.”

October 21, 2013 INSURANCE JOURNAL-NATIONAL | 23

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SPECIAL REPORT

Risks of the New Economy Managing Nanotechnology and Other Emerging Risks

and revolutionized nsurers need to learn how to manage new moisturizers and sunrisks, not just exclude them, and actuarscreens, and hundreds ies can help. of other products. Since the mid-1980s, casualty insurance The potential is has shrunk as a share of gross domestic tremendous. Nanotech product. Insurers have been able to push products may one day liabilities out of the insurance space, says zap tumors or make Parr Schoolman, a fellow of the Casualty drugs more effective. Actuarial Society and a senior managing They could make batdirector at Aon Benfield. teries last longer or For example, the multi-billion-dollar BP make materials stronoil spill has been primarily borne by the oil ger and lighter. industry. “A lot of really won While that has helped short-term profits, derful things are going it hurts long-term growth, Schoolman says. to happen because of Many of the 40 largest insurers in the 1980s nanotech,” says Charlie Kingdollar, vice have disappeared in a bevy of mergers and a president and emerging issues officer of few financial flameouts. General Reinsurance Corp. But insurance Schoolman separates risks into two exposure is growing, types: sudden and gradual. Insurers handle Nanotech products are lightly regulated, sudden accidents, like car wrecks, tornaand their long-term effects are not underdoes, and hurricanes well, he says. They stood. Nanotech is growing so fast that reliknow how to monitor the risk and make able data is difficult to find and may be out sure they haven’t taken on too much. of date by the time it is published. Gradual risks emerge slowly, like the There are more than 5,400 nanotech firms mythical frog dipped into a pot of water globally, Kingdollar says. Every state has at brought slowly to a boil. Before the frog least one nanotech manufacrealizes the water is hot, he is cooked. Nanotech is growing turer; California has the most. The federal government The underwriting cycle, fast — so fast that encourages the industry, Schoolman notes, seems like the soon-to-boil frog. reliable data is hard spending $1.6 billion a year. to find. The majority is in product Trying to hold market development. Little is spent share, companies loosen studying short- or long-term effects. coverage terms. Then they let rates dip. There also are few labeling requirements. Then reserve inadequacies creep in. Many manufacturers, he says, have failed to test product safety. And some early Emerging Tech tests show risks, such as dying brain cells Asbestos is a classic example of a grador genetic cellular damage. Some products ually emerging risk, but there are others. pass through the skin and are distribAn emerging technology can leave insurers uted throughout the body, with effects covering risks they never contemplated. unknown. Others appear to kill human Enter nanotechnology. Scientists have liver and skin cells. Several studies have learned how to rearrange atoms to get the linked carbon nanotubes to asbestosis and benefit of atomic-level superpowers. That’s mesothelioma. why anti-aging cosmetics can seep deep Two-thirds of firms and universities fail into human’s pores. It’s why lifeguards to conduct toxicity tests on nanomaterials. no longer have white stuff on their noses. At many firms, employers protect themManufacturers have harnessed the atoms www.insurancejournal.com

selves with nothing more than paper masks. More than a third don’t require masks. “We’re not spending a whole lot of time and money on environmental safety,” Kingdollar says. Exposure Grows Despite the risks, the insurance industry has reacted slowly. Few applications ask about nanomaterials, Kingdollar says. Standard policies don’t specifically exclude nanotech products. And it’s not clear whether courts in all jurisdictions would apply a policy’s pollution exclusion. “By and large our industry is pretending this is something in the future,” Kingdollar says. “It’s already here. The question is what are we doing about it.” Actuaries can help insurers handle this emerging risk, Schoolman says. They can encourage underwriting discipline, as well as help integrate pricing, planning and reserve setting to manage the underwriting cycle. And they can help underwriters develop insurance policies to handle new products, like those a nanotech firm might need. Actuaries are keen analysts, he says. Their ability to analyze a situation can help develop a product and a rate — even without much data. The key, Schoolman says, is to look for opportunities within each new risk. October 21, 2013 INSURANCE JOURNAL-NATIONAL | 25

SPECIAL REPORT

Risks of the New Economy The Robots Are Coming!

obots of the future could improve business efficiencies, but companies must implement risk management beyond legal requirements to minimize accidents and damage to their reputation. In recent years, robotics applications have increasingly been demanded by a growing range of industries that see it as a way of increasing efficiency and reducing costs. However, accompanying these advantages is a raft of risks, some of which relate to the general public and could therefore have serious ramifications for a company’s reputation. There are two distinct robotics markets and communities: industrial and service. Industrial robots are typified by robotic arms on assembly lines, whereas service robots reflect the iconic humanoid form and have their roots in the academic or research community. The automotive industry is the largest customer for industrial robots, but demand from the food and pharmaceutical sectors is increasing as technology improves, says Grant Collier, head of marketing at the British Automation and Robot Association. Unmanned air vehicles are potentially the most significant application of robotic technology in the near future, says Chris 26 | INSURANCE JOURNAL-NATIONAL October 21, 2013

Mailey, vice president of knowledge resources at the Association for Unmanned Vehicle Systems International (AUVSI). The association recently completed an economic impact report on the integration of unmanned aircraft systems into the U.S. national airspace system, which is scheduled for 2015. “We found that more than 70,000 new jobs could be created in the following three years and the total economic impact could exceed $13 billion during that period,” Mailey says. The precision agriculture industry is expected to be the largest market for such technology, helping farmers monitor crops and distribute pesticides to a much higher level of accuracy than currently possible. This could help improve efficiency and also reduce the total amount of pesticides

sprayed, saving money and reducing environmental impact. In the service robot space, the focus is on systems that can be used in conjunction with humans and could provide companionship. But robots would need to look human, Collier says. “Many researchers are looking at what is known as the human-machine interface, enabling robots to emulate our body language, for example.” Rehabilitation of injured people is a care service that will increasingly be delivered by robots, says Professor Chris Melhuish, director at Bristol Robotics Laboratory. “We will be controlling robots made from new materials in new ways, and this will require a different flavor of artificial intelligence because the robot will be required to act as an intentional agent. This will involve

Robotic Figures In the United States, robot shipments increased again by 9 percent to a new peak level of 22,414 units in 2012 compared to 2011. In 2013, global robot sales will increase by about 2 percent to 162,000 units. In 2012, about

41,200 industrial robots were sold in Europe.

28,100 industrial 43% Increase in saleas of industrial In 2012,

robots were shipped to the Americas, 7% more than in 2011.

Source: International Federation of Robotics

robots in Europe between 2010 and 2011. From 2014 to 2016, robot installations are estimated to increase by 6% on average per year. www.insurancejournal.com

ly — before they require maintenance, and once programmed correctly they don’t make mistakes.”

robots being able to respond to prompts such as facial expression or gestures.” Removing Human Error Driverless cars have attracted attention through the work of researchers at Oxford University and Google, as well as the leading vehicle manufacturers. AUVSI’s Mailey believes autonomous vehicles could eliminate more than 90 percent of accidents, with manufacturers suggesting that mass-market robotic cars could be commercially viable within a decade. “This will be a huge development for the insurance industry, particularly since the amount of data carried in the vehicle will make it possible to re-create the circumstances of an accident. It won’t stop people suing each other, but it will make the investigative process easier. There will also be new insurance opportunities created in the unmanned air vehicle market and for robots in the home in the longer-term.” British Automation and Robot Association’s Collier agrees that robotics could revolutionize the car insurance industry by reducing the impact of human error. “Anything that reduces risk must be positive. Industrial robots typically run for about 100,000 hours — continuouswww.insurancejournal.com

The Risks All these uses of robotics can enable companies to do things more cheaply and efficiently. But many of them carry risks that are not fully understood and could result in a large lawsuit and seriously damage a company’s reputation. In the service space, because machines can be incredibly powerful, even a slight miscalculation could seriously harm any humans they interact with. Work is being done to develop “soft” socially intelligent robots that have some awareness of their environment so that a sensor failure would not be potentially dangerous to nearby humans. “A care service robot’s interaction with humans is at least partially subject to user behavior, so it can be difficult to apply current risk analysis methods because there are so many variables, in terms of an elderly or unwell person’s movement and behavior,” Collier cautions. Because robotic uses are in their relative infancy, and models may be upgraded regularly in the future, manufacturers will not have large amounts of data on previous accidents, near accidents, claims and their causes. Similarly, the benefits of widespread unmanned air vehicles must be balanced against the risks and uncertainties they would bring. For example, in the event of such a vehicle crashing into a ground-based structure, who would be liable? “Would it be the manufacturer who developed the system or the operator who may or may not have been flying the vehicle under proper constraints?” Mailey asks. “How would you prove that an operator was following manufacturer guidelines for use, training and maintenance?” Robotics could also be subject to cyber criminality, Mailey suggests. In a similar

way to how a company’s network could be hacked, robotics could be accessed remotely by cyber criminals that might control a company’s unmanned aircraft or driverless car. “This is a long-standing problem not unique to unmanned air vehicles but it’s likely to gain more attention as the internet of things becomes of a reality,” Mailey says. Cyber attacks also could be directed against the health care sector to seize control of robotic carers down to things such as controllers for prosthetic limbs. Mitigation Matters To minimize these risks as well as the risk of an expensive lawsuit that damages a company’s brand, companies must undertake risk management measures beyond what is legally required, and be able to demonstrate these measures to external parties, if necessary. Robotic products should be checked against the three main causes of accidents caused by robots: engineering errors, human mistakes and poor environmental conditions. Engineering errors include programming bugs, faulty algorithms, and loose connections across parts and faulty electronics. Accidents caused by these errors are difficult to predict, but human errors — such as inattention or in observance of the guarding procedures — can be minimized by installing stringent company training programs and regularly reviewing procedures. Adverse environmental factors refer to extreme temperature, poor sensing in difficult weather or lighting conditions, which can lead to incorrect response by the robot. Ultimately, companies might be able to outsource work to robotics, but they cannot outsource the risks. This article was first published in Progress +, ACE European Group’s flagship publication for brokers and clients”. October 21, 2013 INSURANCE JOURNAL-NATIONAL | 27

SPECIAL REPORT

Risks of the New Economy Insurance Industry to Benefit from Clean Energy Boom

he renewable energy industry could be spending three times as much on insurance every year by 2020 to mitigate risks to

projects, says a report by Bloomberg New Energy Finance. The report, commissioned by Swiss Re,

looked at six of the worldâ&#x20AC;&#x2122;s leading markets for solar and wind, namely Australia, China, France, Germany, the United Kingdom and the United States. Depending on the scenario, insurance premium volumes in these markets could increase from $850 million today to between $1.5 billion and $2.8 billion by the end of this decade. Drivers of increased demand include growing industry scale, but also the trend to more difficult offshore wind environments and interest in the sector from more risk-averse investor groups. Based on current projections, new renewable power capacity built worldwide between now and 2030 will account for more than $2 trillion in total investment. Of this, 75 percent or 900 gigawatts of capacity additions will be in solar and wind sectors, both onshore and offshore, and over half of this will be attributable to Australia, China, France, Germany, the United Kingdom and the United States. The growing demand for managing risk in these six markets comes as owners and developers of renewable energy projects are seeking to tap into new sources of financing, including from institutional investors such as pension funds, according to the report. To make investments in renewable energy more attractive to these investors, projects must become less risky, from construction to operation. A key sector where risk management is needed is offshore wind. Besides the technological complexity involved, offshore wind farms are exposed to adverse weather and operate in a very difficult physical environment. Damage, delays and downtimes are not uncommon and can significantly reduce the returns on investment. Onshore wind and solar projects carry construction and operational risks as well, but are also likely to become more exposed to new, market-related risks as regulators try to wean operators off subsidies and encourage them to compete in open, competitive electricity markets. These risks continued on page 30

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SPECIAL REPORT

Risks of the New Economy continued from page 28

New renewable power capacity built worldwide between now and 2030 will account for more than $2 trillion in total investment. include balancing charges, curtailment due to grid constraints, counterparty risk, retroactive policy changes and power price volatility. Operators may find ways to manage these risks internally but are also likely to make greater use of third-party services as new risk management products are developed. Guy Turner, chief economist at Bloomberg New Energy Finance and lead author of the report, says the demand for risk management in the sector will grow, partly because the renewable energy sec-

tor will get bigger, but also because of increasing uncertainty affecting power markets in general. “As the renewables mature and become part of the mainstream energy industry, they will need to evolve from an innovative sector where risks are taken on the chin, to one where returns are predictable and there are fewer surprises,” Turner says. Insurance can help the sector deal with surprises. “Insurance is not a silver bullet. But by mitigating the risk in the construction phase and improving the consistency and surety of revenues during operation,

insurance can help improve the return on investment for renewable energy projects,” says Juerg Trueb, head of environmental and commodity markets at Swiss Re Corporate Solutions. “This, in turn, would allow the sector to attract the scale of investment necessary to put the world’s energy mix on a more sustainable footing.”

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SPECIAL REPORT

Risks of the New Economy Green Insurance Market: Competitive and Growing By Andrea Wells

he green insurance market is a good market in every sense of the word. The green building industry is growing. The insurance market for green buildings — both residential and commercial property coverage — is also growing. And for a new and emerging industry, the claims history for green insurance coverage has so far proven to be what was expected. “The green building market is very strong,” says Steve Bushnell, a senior director at Novato Calif., based-Fireman’s Fund Insurance Co. “New construction and renovation took a little bit of a hit in 2008-2012 but it’s rebounding well.” Bushnell believes that green building is the future. “Green buildings will be the way buildings are built or renovated in the future.” By 2015, an estimated 40 percent to 48 percent of new nonresidential construction by value will be green, equating to a $120145 billion opportunity, according to the U.S. Green Building Council, the organization responsible for the LEED green building program of which Bushnell serves as a board member. “There’s 2.1 billion square feet of LEED certified space now and over 16,000 commercial buildings have been LEED certified,” Bushnell says. Another 50,000 commercial properties are registered by LEED and will be certified when construction is complete, he adds. Residential properties are also gaining in the green movement. McGraw Hill Construction estimates that the green market for residential starts could be as high as 20 percent of the market by the end of 2013. That compares to just 2 percent of residen32 | INSURANCE JOURNAL-NATIONAL October 21, 2013

tial starts in 2005 that were green and 6 percent to 10 percent in 2008. The green construction movement has attracted many in the insurance industry looking to cash in. That competition has slowed the growth of Fireman’s Fund’s own green products. While Bushnell and Fireman’s Fund have been credited as the originators in the green insurance movement, they are no longer alone in this space. “We are meeting expectations,” Bushnell says, “but we are not growing at the rate that we were back in 2007-08 after we launched our product simply because our competitors have pretty much all developed their own products.” Green insurance products, in many ways, have gone mainstream, Bushnell says. While more green insurance products have hit the market in recent years, the coverage provided is not always the same, says Travis Pearson, president of CMR Risk & Insurance Services Inc. based in San Diego. Pearson, who heads up his agency’s real estate practice, says nowadays almost every insurance company offers some type of green upgrade coverage but their offerings vary. “Some have a small sublimit where it’s barely anything, maybe $10,000 or $25,000, where other companies like Fireman’s Fund, ACE, Zurich, Chubb or Great American have much higher limits to offer in green upgrade coverages.” That type of green upgrade coverage is more readily available. Green coverage lacks capacity in areas such as tax incentive reimbursement coverage and business income, often needed for an extended period of restoration time due to green upgrades.

Another coverage owners of green commercial properties might need is recertification expense reimbursement, he says. “The market is more limited for some of those financial expenses and not just the hard costs of upgrading.” The biggest hurdle Pearson encounters with his real estate clients when it comes to green insurance coverage is the lack of information. “There’s mass confusion in the industry,” Pearson says. “Even companies that own these green buildings — even those that own LEED certified properties with vegetative roofs and the whole works — a lot are not aware that these types of coverage really exist.” Green buildings have only been around for the last 10 years or so and many property owners do not even know they need green insurance coverage for their green buildings. Also, not many green property owners have had to file a claim. “Most real estate owners haven’t experienced a loss, and aren’t aware that if my platinum or silver certified building has a major loss they have to pay an engineer to come in there and recertify all the materials. They don’t understand the replacement costs of the uninsured expense,” says Pearson. Another hurdle in selling green coverage, according to Pearson, is that the industry doesn’t have a hard-and-fast way to quantify purchasing the coverage. Insurers may offer a discount for making an apartment building “smoke-free,” as an example. “The end consumer wants to know that if I do this (green upgrade), this is what will happen to my premium but at this point we don’t have the ability to tell them that,” Pearson says. “Right now the only thing we can do from an agency perspective is educate our clients,” he says. If insurance companies could help in that education the results would be better for consumers, agents and insurers, he adds. www.insurancejournal.com

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SPECIAL REPORT

Risks of the New Economy Is TRIA for Cyber Terrorism? By Molly E. Lang and John F. Mullen

evident is whether cyber terrorism would fall squarely into the requirement of being an act he insurance industry will count on that is dangerous to human life, the Terrorism Risk Insurance Program property or infrastructure. An (Program) if there is a terrorist strike on the additional concern is that TRIA’s United States, but will the Program respond geographic limitations do not if the act of terrorism is a cyber event? realistically address the potential Cyber terrorism is an emerging threat to impact of a cyber terrorist attack. be considered as debate surrounding the A conference committee report modernization and reauthorization of the from 2002 suggests that the origiProgram intensifies. The Terrorism Risk nal version of TRIA was intended Insurance Act (TRIA) of 2002 established to apply to cyber terrorism coverage. But the Program, which has been reauthorized what if damage resulting from a cyber event twice, most recently by the Terrorism is not covered under the primary policy? Risk Insurance Program Reauthorization Most commercial liability policies would Extension Act of 2007. While the Program not respond to an act of cyber terrorism. provides a federal backstop for catastrophic There would be questions about whether terrorism events — above $100 million in there is coverage for damage to networks or losses — many have argued that whether electronic data and systems. and the extent to which it covers cyber ter The cyber liability policy market is relrorism is not entirely clear. atively new, and the scope of coverage pro Fortunately, the Program, currently vided is developing. To the extent a cyber scheduled to expire on Dec. 31, 2014, has event is not covered under an underlying never been put to the test. As former cyber policy, TRIA may not be implicated Secretary of Homeland Security, Janet for cyber terrorism. Napolitano, cautioned in her recent farewell Some interested parties have suggested address, the U.S. will “at some point, face that damages resulting from cyber acts of a major cyber event that will have a serious terrorism falling under TRIA-covered lines effect on our lives, our economy and the of insurance may be covered by the act, but everyday functioning of our society.” But the Program has gaps to the extent cyber questions remain regarding whether the insurance is written as professional liability federal backstop would be implicated if a or another line that cyber attack is considCould cyber terrorism be is not TRIA-covered. ered terrorism. Others contend that TRIA requires dangerous to human life? clarifying TRIA’s certain commercial application in the event of a massive cyber property and casualty insurers to make terattack would encourage additional capacity rorism coverage available on terms similar to in the cyber insurance market. non-terrorism coverage. As set forth in the The Federal Insurance Office (FIO), existing iteration of TRIA, the term “act of which has been tasked with assisting the terrorism” means any act that is certified by Treasury Secretary in administering the the Treasury Secretary, in concurrence with Program, is aware of the threats of cyber the Secretary of State and the Attorney attacks and the potential implications on General. the insurance industry. FIO Director Michael McRaith parCyber Terrorism ticipated in a recent briefing for the It is certainly fathomable that an act insurance industry on cyber security. of cyber terrorism could result in losses Representatives from the Federal Bureau exceeding $100 million. What is not as

34 | INSURANCE JOURNAL-NATIONAL October 21, 2013

of Investigation and the Treasury Office of Critical Infrastructure Protection presented information on the nature of cyber attacks and initiatives within the financial services sector. The FIO is also taking a lead role in drafting the President’s Working Group on Financial Markets 2013 report on the longterm availability and affordability of terrorism risk insurance. Both houses of Congress have held hearings on reauthorizing TRIA. The reauthorization has noticeable bipartisan support, but there is debate concerning whether the Program should be modified. A number of recommendations have been offered, ranging from providing a time frame for the certification process to changing the deductible, aggregate threshold and copay percentage. Currently, there are three TRIA reauthorization bills on the table, but none remedy the ambiguity that exists with respect to coverage for cyber terrorism. Terrorism risks have evolved since TRIA was enacted and cyber terrorism is a real threat. The Program should not simply be reauthorized with a blanket stamp of approval, but there needs to be discussion about whether acts of cyber terrorism should be explicitly included in TRIA. Lang is a partner in the Columbus, Ohio, office of Nelson, Levin de Luca & Hamilton law firm. She advises insurance companies on a range of compliance and regulatory matters. Email: mlang@ nldhlaw.com. Mullen is chair of the Privacy and Data Security group for the firm’s Blue Bell, Pa., office. Email: jmullen@nldhlaw.com.

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The Competitive Advantage Hard Work Is Not the Only Key to Producer Success

sophomore’s practice efficient and progress nsurance sales success can be like a game quick. of tennis. Many summers ago I fell in love with the game of tennis. For the next Sales Success six years, I played every day possible. One What does rehashing my high school of my limitations was tennis have to do with sales success? I see that living in Colorado, many agency owners make the same miswinter presented a sigtake I made. They force producers to sink nificant limitation so for or swim on their own. “Go out and make about four months a year, your sales calls! I did it. I manned up. Just playing tennis was not a work harder!” possibility. (I don’t think Hard work is definitely, undeniably a my town had indoor prerequisite to success. However, today courts and if it did, I By Chris Burand hard work is only enough if a producer has definitely had no access). more than his share of raw talent. Finding The little middle school where I practiced these extraordinarily talented producers is sometimes took the nets down the moment like finding a needle in a haystack. Building winter began, limiting the possible days a business plan based on finding these even more. And then as all players can people, time after time, is not any different relate, having someone to practice against is than playing the lottery. important. My athletic talents are limited. But with Tennis was not the coolest sport to play, good coaching, I could have been a much so finding good players to play against was better player. It is next to impossible for another limitation. I used a backboard a young player, of any sport, to simultanewhenever I could, but while better than ously diagnose what they are doing right nothing, it was a poor substitute. By my and wrong while playing the game. They sophomore year, I was playing all summer, have too little context, too little experience. at least five days a week, early in the mornEven if they can diagnose the ing. Think about that issues, they likely cannot idendrive, with my being a Every producer who tify the correction. A player teenager willing to get is committed and has no way to know the effect up early in the summer coachable can benefit on a backhand of holding a just to practice on my from a quality coach. racket slightly different. They own. Work ethic was have no way of knowing a five not a limitation. degree difference in their foot position can I have some trophies from those days, generate five more aces per match. and I lettered throughout high school, but I Moreover, forming a new habit on your never became a very good player. I worked own is really difficult because it is so hard harder than anyone I met, and yet I never to practice and simultaneously see yourtruly advanced my skills beyond mediocre. self holding form. Practicing then, like I During my senior year, a sophomore showed did, without any coaching only improved up. He was a runt that beat everyone on the my stamina and reinforced whatever habteam. Even back then, size mattered a great its, good and bad, I had already formed. deal in tennis. Yet he beat everyone. Practice did not really advance my skills. Of course natural talent was key to his Sales is no different. I have been selling wins. He definitely had more gift for the my services for 20 years, so I know sales is game than I did. But what really made a difno different. ference was that he had his own coach, and Every producer who is committed and I had never had a coach, other than the high coachable can benefit from a quality coach. school team coach. This coach made the 36 | INSURANCE JOURNAL-NATIONAL October 21, 2013

Will the coach turn them into a Wimbledon champion? Probably not. But a good coach should easily improve results by 20 percent. Five mediocre producers at $250,000 each with a 20 percent increase equals $250,000 more revenue. Sales Coach Once an agency decides hiring a sales coach makes sense, the next step is to hire a good sales coach. I do not coach producers, but I often evaluate coaches’ results when I value agencies. I get to see whether the coaches are helping producers generate more sales. Unfortunately most coaches do not have much effect. Agency owners want to believe even ineffective coaches make a difference. I have seen owners swear these coaches make a difference when the results indisputably prove otherwise. For example, having no quality producers after using a “sales coach” for 10 years is as clear of proof as possible. Every force of nature and finance possesses multiple variables. No single factor ever makes all the difference. The human mind, or at least the minds of many agency owners, yearns mightily for the simple solution, continued on page 38 www.insurancejournal.com

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The Competitive Advantage

continued from page 36

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Good sales coaches do exist. Sometimes finding just the right one for your agency is a real challenge. Sometimes, too, the failure is not entirely the coach’s. The greatest tennis coach could easily have improved my game 20 percent, maybe 25 percent, but 50 percent? Never. Coaches’ achievements are limited by their student’s ability and work ethic. To be fair to insurance sales coaches, a material percentage of producers they are supposed to coach have far too little talent. Some have no sales talent. Coaches are also limited if the agency lacks a sales culture. Hard work then is clearly a component of success, but hard work without skill will not generate success. Hard work applied by someone without any talent for a profession or a sport is only enjoyed by a masochist, of which this industry must possess a disproportionate share. Hard work simply is not even applicable to sales people that will not listen to a coach. Package hard working producers with some talent and a quality coach, and you will succeed if the agency has at least a modicum of a sales culture. These three variables are like a three-legged stool. Three-legged stools cannot wobble. They are steady as a rock. Effort can easily be identified in resumes and interviews. Talent potential can mostly be identified with the best sales profile tests. Good coaches can be identified empirically. Records speak for themselves. The only exception is to make sure the growth the coach claims is pure alpha growth. Alpha growth is pure organic growth. For example, 5 percent growth when rates are rising 5 percent is not attributable to a coach’s efforts. Growth honestly attributable to mergers is not attributable to a coach’s efforts either. Instead, ask for proof the coach improved the sales of groups of mediocre producers one by one. That is the real test. Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719485-3868. E-mail: chris@burand-associates.com.

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Recruiting Recruiting and Retention in the New Economy

e made it! We survived the economic instability of the past few years and have more than rebounded. The insurance industry is well ahead of the greater economy; and the picture painted by our labor market is much different than that of one year ago. In fact, the insurance industry is boasting virtually no unemployment with the Bureau of Labor By Dave Coons Statistics reporting that the insurance carrier unemployment rate decreased to 2.5 percent in August. Even when industry unemployment was high, we were still experiencing difficulty recruiting talented employees. As optimism continues to grow and is reflected in hiring plans (according to The Jacobson Group and Ward Group’s Mid-Year Labor Outlook Study, 54.4 percent of industry organizations plan to increase staff in the next 12 months), the demand for talent will undoubtedly outstrip the supply. With only 26.6 percent of the industry’s workers under the age of 35 and the disappearance of training programs during the recession, it isn’t a matter of if, but when. The war for talent is real. Hiring high performers and high potentials is becoming more and more difficult. Organizations that are not prepared for this competitive envi-

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40 | INSURANCE JOURNAL-NATIONAL October 21, 2013

ronment will find themselves at a sincere disadvantage. If your recruitment strategy is outdated, you are not alone. During the height of the recession and amidst hiring freezes, talent plans were not a priority. But now is the time to dust off your strategies — and throw them in the trash. The new economy looks and feels different and pre-recession approaches may no longer be the right fit. Evaluating Risks and Needs Whether you are growing your staff through temporary or permanent hires, experienced or emerging talent, or a combination, evaluating your talent risk and creating a strategy for success will give you the competitive advantage you need in the new economy. It is up to your business to determine what will most significantly impact your needs not only today, but tomorrow, and refocus your strategy. Temporary vs. Permanent Many companies are wary of onboarding talent that may not be a long-term fit. They are taking precautions in their approach to spending and turning to temporary staffing as a solution. In fact, the use of temporary staffing increased 51 percent in the past five years. There are many advantages to a

temporary approach. Time-to-fill is typically faster and less expensive than that of a permanent position; and temporary roles are a common vehicle for “trying before buying,” alleviating the risk of a traditional new hire. Of course, restricting yourself solely to the temporary sphere also limits your talent pool. Traditionally, employed passive or active candidates are unwilling to give up the perceived security of a permanent role for something temporary. Experienced vs. Emerging Experienced workers supply the highly sought after skills and knowledge that are often needed to make an immediate impact. It will typically cost you more to hire someone with the expertise you need, but they will be able to jump right in with a shorter learning curve. However, the majority of the insurance continued on page 42

3/6/13 9:08 AM

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Recruiting continued from page 40

industry will enter retirement within the next 15 years. It is important to take an honest look at your organization’s knowledge gaps and identify succession concerns. Now is the time to invest in new graduates and young professionals. Eager to learn and contribute, and often at a lower cost of entry, the next generation is a long-term solution, giving organizations the opportunity to implement a formal succession planning and development program. In the new

top candidates spend their time. Are they frequently checking LinkedIn for new job openings? Do they attend networking events? Are they active in specific online forums? Create a presence to further your employer brand awareness. Be aware of what they value. According to a recent survey, besides salary, potential candidates are also evaluating work flexibility, benefits and company culture. Yes, candidates worry about that economy, too. Look at your company from the candidate’s lens. transparency is key. Recruiting Ask for referrals. Your Opportunities current employees are Within this challenging recruiting cliambassadors for the company. Asking for mate lies the opportunity to stand out employee referrals is one of the most powabove the rest as an employer of choice. A erful ways to recruit qualified talent. There competitive recruiting strategy will not is also no better way to promote your comonly attract qualified employees that can do pany. It speaks volumes when an employee the job, but also those that exemplify the is willing to recommend your organization organization’s values are a good culture fit: as a place to work. Go where they are. Find out where your Don’t overlook emerging talent. With nearly

42 | INSURANCE JOURNAL-NATIONAL October 21, 2013

50 percent unemployment among recent college grads, this is an untapped market for the insurance industry. This bright, new talent may be lacking in industry experience, but can make up for it with innovation and passion. Embrace new ideas and be innovative. Be a game-changer and set the tone for how companies should approach recruitment in the new economy and what candidates should expect from an employer. The last chapter in our economic history has introduced a new workforce and, in turn, changed the way we should recruit and retain skilled employees and tomorrow’s leaders. Be sure to carefully weigh your risks and opportunities, so you can capitalize now to build a strong workforce for the future. Coons is senior vice president of The Jacobson Group, a provider of talent to the insurance industry. Email: dcoons@jacobsononline.com.

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Growing Your Property Casualty Agency 8 Ways to Organically Grow Your Independent Agency

rganic produce is popular. Free-range chicken is chic. So, why not get trendy and organically grow your agency? Naturally, inorganic growth is faster because it involves the buying of agencies, hiring producers with books of business, and other speedy volume builders. But organic growth has its own set of virtues, particularly its relative low cost and high By Alan Shulman retention compared to buying agencies. Also, developing new commissions on your own, from internal sources, is personally and professionally satisfying. Here are eight ways to do it.

writing data, making your job easier. (See “7 Ways for Independent Agents to Recover Lost Policies” in the April 22 issue for tips.) Unused Referrals Agencies that actively gather referrals sometimes neglect to follow up on them. So continue to request fresh referrals from quality insureds, but also go after those you’ve collected but not yet contacted. Internal Advertising Attract business by promoting specific policies and endorsements through the agency’s existing media. “Free” digital advertising venues encompass staff email signatures, promotional emails, ads on your own website and blog, and creative social media postings with enticing links back to you. Traditional approaches include adding inserts to outgoing policies and other mailings and old school promos like newsletters, fax cover pages, and on-hold messages.

Cross-Prospecting Most firms transact business with a semi-defined collection of suppliers and customers. Often, these relationships evolve into small local networks where information, ideas and referrals are exchanged. Discover who belongs to each insured’s CSR Production network by exploring the company’s social Cross-selling, up-selling, prospecting media connections and postings, its weband new business development belongs in site, and by simply asking. Endeavor to gain every CSR’s job description. an introduction to as many Organic growth If these front-line staffers network members as possisimply service policies and ble. Perform these cross-pros- is more than a fail to probe for fresh sales, pecting activities with each choice, it’s a real then your office is missing quality business you insure. business-saver. out on the easiest, most effective method of organic growth. Third-Party Prospecting Your claims files and certificates of insurHire a Marketer ance contain potential business leads. Not An in-house marketer is a smart investat-fault third-party claimants involved in ment for any agency dedicated to organic car accidents with your insureds, and firms growth. This individual helps to spot and that request certificates of insurance may be generate leads from inside and outside your amenable to a competitive quote. client base, using digital and traditional devices. They can add qualified leads to a Revisit Your Failures commercial producer’s pipeline while assist Dig up and revive recent cancellations ing CSRs to identify salable leads and marand re-solicit failed quotes. You already have ket personal lines. Tip: If you can’t afford to semi-fresh contact information and under44 | INSURANCE JOURNAL-NATIONAL October 21, 2013

hire a full- or part-time marketer, consider a college intern who’ll happily work at or near minimum wage. Meet and Greet Connect and reconnect with agency insureds. Hold periodic “meet the staff” events in your office that are friendly and low key. Don’t try to sell anybody anything. This social-only approach is refreshing as it lets producers and CSRs act as hosts, instead of salespeople. Offer insurance information only upon request. This faceto-face “image advertising” favors your longterm interests. Organic growth is more than a choice, it’s a real business-saver for agencies that can’t afford or attract acquisitions and producers. Most of the internal sales activities cited here are free or low cost. Being an independent agent partly means doing stuff for yourself — so take aggressive advantage of your firm’s many internal resources. Shulman, CPCU, is the publisher of Agency Ideas, a subscription-only sales and marketing newsletter. He is also the author of the many tools posted on the Agency Ideas Instant Download Store. Phone: 800-724-1435. Email: alan@agencyideas.com. Website: www.agencyideas.com.

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Specialty Insurance…We Live It.

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Dina Sapienza, Great American underwriter and rider

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Minding Your Business How to Value Small Books of Business & Terms

ak & Associates receives many calls about valuing small books of business, and is asked if it is worth doing a valuation when the buyer knows what they want and the buyer does not want to spend a lot of money. Usually on a small deal — those under $500,000 in commissions — a fair market valuation does not need to be done. Instead, an Opinion of Value By Catherine Oak basically covers the creation of the pro forma income statement on the book of business, a basic description and the value calculations using three methods of valuation. Cost is usually in the $2,500 to $4,000 range versus a Fair Market Valuation for $4,000 to $6,000.

Hypothetical Example For example, look at a hypothetical book of business that is $250,000 in commissions in both personal and commercial lines. Assume a strong 95 percent retention rate. Personnel Expenses. A producer is needed to service accounts totaling only $150,000 of the book. The producer is paid at 30 percent of commission or $50,000. For the servicing expenses, there would probably be half of a commercial lines CSR and half of a personal lines service CSR, probably $30,000 for commercial lines, $15,000 for personal lines and $5,000 for accounting and administrative help. The purchaser will have a little management time, so $10,000 is allocated for that effort. Total compensation expenses is $110,000. Add in benefits of 15 percent or $16,500 for all these payroll costs, which covers payroll taxes at 8 percent, health insurance, dental and some other employee cost, like a 401(k) plan. Thus, total personnel expenses are $126,500, or 50.6 percent of revenue. Business Development and Operating Expenses. Business development costs, such 46 | INSURANCE JOURNAL-NATIONAL October 21, 2013

as telephone, postage, advertising expenses of about 4 percent or about $10,450, will be assigned in this example. Operating expenses, such as rent, insurance, automation expenses will be assigned at about 9 percent or $22,400. This costs a total of $32,850 or 13.2 percent of commissions. So, now we have $84,900 in profit or 34 percent on a $250,000 book of business. With this profit do some valuation calculations. Valuation Methods First, there is the Capitalization Method, which looks at the rate of return on the buyer’s money in something risk-free and then adds a risk factor for putting one’s money into the purchase of a book of business. The range is usually in the 10 percent to 15 percent range. Then, add an additional 13 percent to a risk-free rate of 4 percent. This becomes 17 percent, and divided by the profit is about $500,000 about 2 times commissions. Next, there is the Price/Earnings Method of valuation, which uses a multiple of profits to determine value. A typical range for

the multiplier is 5 times to 6.5 times pro forma pre-tax profit. For this example risk has been measured and the potential of sustaining a 34 percent pre-tax pro forma profit is set at 5.5, so the value becomes $467,000 using 5.5 times $84,900, which is 1.87 times commissions of a $250,000 book of business. Lastly is the Present Value of Future Earnings approach, which is looking ahead at what this book could earn if it is growing and profitability is maintained. It is difficult to explain all of the factors in this method, but the calculations were done, and a 5 percent growth rate was maintained and the same 34 percent profit resulted, and the value became about $500,000. In all three examples, subtract some working capital for the buyer, which is usually 30 to 45 days, or about $13,000 to $20,000. These three valuation methods are weighted appropriately, and the value would be about $500,000. This is two times commissions, which may seem high, but based on a profitability of 34 percent in a continued on page 48 www.insurancejournal.com

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continued from page 46 growing book of business, this is probably right. Not all books or agencies have this kind of profit. Usually profitability is in the 15 percent to 25 percent range today. If an agency rolls a book of business into an existing agency versus leaving it as a standalone firm, there is usually a much better chance of having this type of profitability. Most buyers would not allow a book to stand alone as a separate office unless there was $1 million in commissions. Please note that if the pre-tax profit is only 20 percent for this book of business, for example, then the value would probably be closer to one times to 1.25 times commissions, or $300,000 to $375,000, with the three methods weighted again on appropriate valuation for the situation. Typical Book Terms If a buyer gives the seller 30 percent down, that is $150,000. Typical down pay-

ments are 20 percent to 50 percent for a book of business. Then the buyer still owes $350,000. The balance is usually on an earnout. That amount that is still owed, which

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is 70 percent of the money at 2 times or 150 percent is turned into a percentage for the next three years. The payout rate is 150 percent divided by three years, 50 percent renewed commissions. With an Usually on a small earn-out, interdeal — those under est is usually not paid. That $500,000 in comway the buyer missions — a fair can tell the market valuation seller no matter does not need to be what comes in, the seller will done. receive about 50 percent of renewal commissions. With commercial lines rates increasing, that is great. If an account is lost, the buyer is protected. The down payment is paid the first year and buyers usually don’t start paying until the beginning of the second year, then can be paid monthly, quarterly or annually. . Letter of Intent (LOI) It is best to draft a LOI that each party signs before a purchase agreement is drafted by an attorney. Having a well-drafted LOI saves a lot of the attorney’s time and is in layman’s language. Oak is the founder of Oak & Associates, based in Santa Rosa, Calif. Email: catoak@gmail.com. Phone: 707-935-6565. Website: www.oakandassociates.com.

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Closing Quote

The New Target for Cybercriminals

By Michael Bruemmer

usinesses both large and small, across industries, fall victim to data breaches every day. One of the top targeted industries remains financial services. Top financial institutions have made headlines in a string of cyber-attacks against major U.S. banks. While the headlines may not shock anymore, a closer look at why might raise a few eyebrows: employees might be the weak link. A fraud alert was released by the Federal Bureau of Investigation, the Financial Services Information Sharing and Analysis Center and the Internet Crime Complaint Center warning banking institutions of a trend of cyber criminals targeting bank employees versus the customer. Cybercriminals are targeting employees through spam, phishing, key loggers and remote-access Trojans to intercept bank employees’ login credentials to access an internal network, and schedule illegal wire transfers and payments from the banking institutions. According to a recent study ‘Managing Cyber Security as a Business Risk: Cyber Insurance in the Digital Age’ released by Experian Data Breach Resolution, conducted in partnership with the Ponemon Institute, more than 50 percent of financial services have experienced a data breach or material security exploit in the past 24 months. The same study also found that 45 percent of those

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breaches were a result of negligence or mistakes that resulted in the loss of business confidential information. While it is vital for an organization to have a data breach response plan and the right type of cyber insurance for the organization to mitigate potential damage, it is equally important to provide employees education about data breaches and what policies a company has in place. When developing cyber security policies, it’s important to include the following advice: Teach employees to recognize phishing attempts. Additionally, employees should learn not to click on suspicious links or open attachments from unsolicited or unknown emails. Even emails that include personal details about them or comes from an official-sounding organization or employee should be viewed with skepticism. Do not allow employees to use work computers for personal use. Compromises happen when employees visit sites or use services that are known to host malware that if downloaded from a work computer can get onto the network. Many Next Generation Firewalls also provide some technical protection against employee use of unsanctioned programs or web applications. Implement a strict BYOD (bring your own device) policy. Decide if your organization is going to allow corporate devices to the network, and manage connections appropriately. If you decide not to limit employees from using their personal computers, tablets and smart phones, require mobile device management software be installed on the devices to protect and control corporate information. Remind employees to keep track of USB devices New data shows that that contain work inforemployees might be mation. Loss of sensitive information, even if not to the weak link. a hacker, is still a breach and presents liability. Make sure that if sensitive data is being carried through these devices, employees know the responsibility they have to protect that information. Monitor employee log-ins for suspicious activity, such as unusual log-in times and file access. These are often the best indication that there was a compromise. Regularly checking security logs and configuring network identity and access controls to protect against anomalous login activity will significantly improve security. As technology evolves, it is imperative for an organization to implement policies to protect their business and brand from potential negative consequences, such as loss of customers, regulatory fines and class action lawsuits. Bruemmer is vice president with the Experian Data Breach Resolution group. www.insurancejournal.com

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