Insurance Journal West 2015-09-07 by Insurance Journal

WEST EDITION Uber’s Employee Status Headache Geico’s $6M Practices Settlement Supreme Court Rules Against Hartford

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Inside This Issue

On The Cover

Special Report:

10 Drivers of Surplus Lines Growth

September 7, 2015 • Vol. 93 No. 17 • West

W10

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IDEA EXCHANGE

10 Auto Insurance Affordability Improves in Most States: IRC

W2 California Commissioner Applauds Supreme Court Decision Against Hartford

42 The Competitive Advantage: Chris Burand

10 Insurers Look to Cyber, M&A Coverage as Prices Decline: Marsh 14 MGAs Next to Feel Impact of Capital Markets: AmWINS’ DeCarlo 15 Cyber Risk Insurers Lag in Buying Cyber

48 The Hard Market That Wasn’t W2 Study: Ventura, Oxnard in California Could Be at Greater Tsunami Risk W6 California WCIRB Proposes Premium 7.8% Below 2015 Average

24 Survey Examines Agents’ Views of Agency Aggregators

W6 Geico Agrees to $6M Settlement over Business Practices in California

26 Special Report: Stamping Offices Report Moderate Growth in U.S. Surplus Lines Premium

W8 Former California Probation Officer Nabbed for Fraud While on Probation

28 Special Report: 10 Drivers of Surplus Lines Growth

W10 Uber Headache if More Drivers Want Full-Time Status

32 Special Report: Lloyd’s & Its Syndicates 2015 – Adapting to Changing Times

54 Minding Your Business: Catherine Oak & Bill Schoeffler 58 Managers as Employee Engagement Ambassadors 62 Closing Quote: Making Strides for Gender Equality

DEPARTMENTS W4 People 12 Declarations 12 Figures 18 Business Moves 52 MyNewMarkets

37 Spotlight: Marketers Have Lost Control of Insurance Buying Process 6 | INSURANCE JOURNAL-WEST September 7, 2015

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Opening Note

Publisher Mark Wells | mwells@wellsmedia.com

Repeating Mistakes

loyd’s international casualty reinsurance underwriters are running the risk of repeating the same mistakes that have placed the market in difficulty in the past, according to a new poll of Lloyd’s reinsurance specialists. The survey conducted by the Lloyd’s Market Association (LMA), revealed that 68 percent of casualty treaty underwriters believe that by offering more relaxed terms and conditions, the market could be repeating historical mistakes. Ninety-five percent of respondents said that they had seen softening of terms and conditions in the international casualty market and 39 percent believed that more than half of those changes were having a material impact on underwriters’ exposures. Worryingly for the market, 71 percent of those surveyed thought that differential terms across a placement were becoming more prevalent at Lloyd’s, the LMA survey revealed. (Differential terms are when some following carriers on a reinsurance slip or on a different layer underwrite the risk on terms and conditions different to those agreed by the slip’s lead carrier.) In terms of market conditions, underwriters felt that rates were at the bottom of the cycle, or were approaching bottom. By offering more relaxed The vast majority felt that terms and conditions, the current prices were unsusmarket could be repeating tainable. Considering these conditions, underwriters historical mistakes. were surprised that clients were not buying more international casualty reinsurance protection. Two-thirds of underwriters said they had declined more renewal business in 2015 than the previous year. Broadening terms and conditions was the reason most commonly cited for their decision not to renew, followed by pricing considerations and poor loss experience. “This is a fairly informal survey but its results point strongly towards a buyer’s market in which traditional underwriter discipline is under considerable pressure,” said Patrick Davison, the LMA’s senior executive – underwriting. “The growth in the prevalence of differential terms is particularly disturbing. These create headaches for the market’s back office and the efficiency with which claims in a subscription market can be managed. Differential terms might be one indicator that some reinsurers have concluded further amendments to coverage or retentions are unsustainable,” Davison said. “This view is supported by the clear perception in the market that the bottom of the cycle is approaching, as highlighted by the increasing number of underwriters declining business.” The LMA’s survey of members of its international casualty treaty business panel took place during August 2015. Respondents represented three-quarters (by gross written premium) of the internaAndrea Wells tional casualty treaty market in Lloyd’s.

Editor-in-Chief

8 | INSURANCE JOURNAL-NATIONAL September 7, 2015

EDITORIAL Chief Content Officer Andrew Simpson | asimpson@insurancejournal.com Editor-in-Chief Andrea Wells | awells@insurancejournal.com East Editor Young Ha | yha@insurancejournal.com Southeast Editor Amy O’Connor | aoconnor@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 Columnists Chris Burand, Catherine Oak, Bill Schoeffler Contributing Writers David Coons, Rudy Dimmling, Greg Hoeg, Betsy Myatt SALES Chief Marketing Officer Julie Tinney (800) 897-9965 x148 | jtinney@insurancejournal.com Sales Manager Lauren Knapp (800) 897-9965 x161 | lknapp@insurancejournal.com West Dena Kaplan (800) 897-9965 x115 | dkaplan@insurancejournal.com Allison Steinkamp (800) 897-9965 x172 | asteinkamp@insurancejournal.com Midwest Lisa Whalen (800) 897-9965 x180 | lwhalen@insurancejournal.com South Central Mindy Trammell (800) 897-9965 x149 | mtrammell@insurancejournal.com East (NY, PA and CT only) Dave Molchan (800) 897-9965 x145 | dmolchan@insurancejournal.com Southeast & East (except for NY, PA and CT) Howard Simkin (800) 897-9965 x162 | hsimkin@insurancejournal.com New Markets Sales Manager Kristine Honey | khoney@insurancejournal.com Classifieds, Jobs, Agencies Wanted/For Sale Kelly De La Mora (800) 897-9965 x125 | kdelamora@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 DESIGN/WEB Chief Technology Officer/Chief Innovation Officer Joshua Carlson | jcarlson@insurancejournal.com V.P. of Design Guy Boccia | gboccia@insurancejournal.com Audience Development Elizabeth Duffy | eduffy@wellsmedia.com Marketing Director Derence Walk | dwalk@insurancejournal.com Web Developer Jeff Cardrant | jcardrant@insurancejournal.com Web Developer Tim Layer | tlayer@wellsmedia.com IJ ACADEMY OF INSURANCE V.P. of Education Chris Boggs | cboggs@ijacademy.com Sales Executive Romeo Valdez | rvaldez@ijacademy.com Online Training Coordinator Barbara Whiffen | bwhiffen@ijacademy.com ADMINISTRATION Chief Executive Officer Mitch Dunford | mdunford@wellsmedia.com Chief Financial Officer Mark Wooster | mwooster@wellsmedia.com

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News & Markets Auto Insurance Affordability Improves in Most States: IRC

ersonal auto insurance has become more affordable over time for all income groups, including low-to-moderate income groups, and in most states, according to a report from the Insurance Research Council (IRC). The industry group says the study also shows that the degree of improvement in auto insurance affordability is not being witnessed in other industries. The study includes state estimates indicating that auto insurance affordability has also been improving in most states. All but five experienced improved affordability from the 1990s to the 2000s, and all but four have shown an improvement in affordability between the 2000s and the present. Affordability does vary across states, however. According to the report, auto insurance was least affordable in Louisiana (2.85 percent of income), Florida (2.45 per-

cent), New York (2.42 percent), Delaware (2.18 percent) and Michigan (2.10 percent). The most affordable states were found to be North Dakota (1.03 percent of income), Iowa (1.05 percent), New Hampshire (1.06 percent), Virginia (1.07 percent) and Wyoming (1.08 percent). The study, “Trends in Auto Insurance Affordability,” used an auto insurance expenditure-to-income ratio to analyze auto insurance affordability. The report does not prescribe a specific threshold at which auto insurance may be considered affordable. Instead, it examines trends in affordability. The report compares affordability trends for auto insurance to the affordability trends for other industries whose products or services are considered necessities. Auto insurance was found to represent a smaller

percentage of the average consumer’s budget and lower-to-moderate income consumer’s budget. It also has had unprecedented affordability improvements over time. The auto insurance expenditure-to-income ratio was calculated using insurance expenditure data from the National Association of Insurance Commissioners and the Bureau of Labor Statistics Consumer Expenditure Survey. Currently, about 1.5 percent to 1.6 percent of income is spent on auto insurance in the U.S. by the average consumer, which represents much lower figures than seen in previous decades, according to IRC. Low-to-moderate income consumers have also witnessed similar trends, the researchers said. “There is a lot of interest in the affordability of auto insurance .... This report adds to the discussion, showing that auto insurance is becoming more and more affordable,” said Elizabeth Sprinkel, senior vice president of the IRC.

Insurers Look to Cyber, M&A Coverage as Prices Decline: Marsh

ommercial insurance rates continued their global decline in the second quarter of 2015, a trend driven by an abundance of global capacity and a lack of large insured loss activity, Marsh said in its latest Global Insurance Market Quarterly Briefing. At the same time, property/casualty insurers are looking to specialty coverages including cyber and transactional risk insurance for mergers and acquisitions (M&A) as a way to grow, the report says. As of Q2, there have been nine consecutive quarters of overall rate declines. Globally, natural catastrophe losses are at historic lows, which is helping profitability but also reducing the drive for rate increases, according to Marsh. Pricing Marsh said the Asia-Pacific region saw the largest overall rate decreases, followed by the U.K., Continental Europe, Latin America and then the U.S. 10 | INSURANCE JOURNAL-NATIONAL September 7, 2015

Commercial casualty rates dipped at a more moderate rate than property, ranging from flat to a 5 percent decline dependent on the market. Property insurance dipped more than 5 percent on average, Marsh said. The Asia-Pacific region saw renewal rate declines greater than 7.5 percent on average. In Continental Europe, the average declines ranged from 5 percent to 7.5 percent, with the U.K. coming in at slightly worse averages. In Latin America and the Caribbean, rate declines varied on average from 2.5 percent to 5 percent. The U.S. saw the least declines, with renewal rates staying flat or dipping to 2.5 percent on average. Specialized Coverages One exception to the price declines — specialized coverages — is led by a cyber insurance market that continues to firm up, Marsh reports.

Another bright spot: transactional risk insurance, particularly for M&A deals. Demand for the specialty coverage continued to grow through the first six months of 2015, jumping by 15 percent overall compared to the same period last year in terms of limits placed by Marsh. “The demand for transactional risk insurance on M&A transactions continues to grow rapidly, as competition among acquirers continues to remain intense,” says Karen Beldy Torborg, global practice leader for Marsh’s private equity and M&A sales practice. Dealmakers in the private equity and corporate space are “increasingly using insurance capital to get deals over the line, and we don’t see this trend subsiding anytime soon.” In Europe, real estate deals are driving the demand for transactional insurance and U.S. and Asia-Pacific corporations involved in buying and selling are buying it. www.insurancejournal.com

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www.chubb.com Chubb Group of Insurance Companies (“Chubb”) is the marketing name used to refer to the insurance subsidiaries of The Chubb Corporation. For a list of subsidiaries, please visit our website at www.chubb.com. Actual coverage is subject to the language of the policies as issued. Chubb, Box 1615, Warren, NJ 07061-1615. © 2015 Chubb & Son, a division of Federal Insurance Company.

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FIGURES

$2 Million

The amount of damage caused by a fire that ripped through a 14th floor pool deck at The Cosmopolitan hotel-casino on the Las Vegas Strip in late July, according to fire officials, who say the cause of the fire is still unknown.

DECLARATIONS

6 Years

The amount of time a Florida man was sentenced to prison for after staging car crashes. Guillermo de la Vega of Jacksonville pleaded guilty to two counts of participating in an intentional motor vehicle crash and two counts of false insurance claims. The Florida Times Union reported the fraudulent personal injury protection claims originated at a Jacksonville rehabilitation clinic that authorities say provided bogus treatment for nonexistent injuries. De la Vega paid those who participated in the fake crashes after the clinic received the money.

Crop Insurance

“The lack of insurance for malt barley is preventing farmers from planting this crucial crop.”

— U.S. Sen. Charles Schumer, D-N.Y., during his Aug. 20 speech at the Empire Farmstead Brewery in Madison County, N.Y. Schumer called on the USDA to establish a new crop insurance program for Central New York farmers who grow malt barley, a crop that is crucial to the growth of the area’s burgeoning craft beer industry.

Much Better and Much Worse

“You’re going to hear a lot of folks say things are so much better, the economy is so improved, and other people are going to say it is so much worse.”

— Allison Plyer, with the New Orleans-based think tank, The Data Center, comments on the state of her city 10 years after it was devastated by Hurricane Katrina. Much of New Orleans has rebounded but many areas still struggle, particularly African-American neighborhoods and the chronically neglected Lower 9th Ward.

Biometric Identifier?

$8.9 Million The amount of a jury award favoring Michael Jordan in a civil trial focused on the market value of the former Chicago Bulls basketball star’s identity. The now-defunct grocery store chain Dominick’s Finer Foods has been ordered to pay Jordan for using his name in a steak ad without his permission. Jordan has said the lawsuit was about protecting the name he has worked hard for and not about the money. He plans to give the award amount to charity.

$71 Million The amount in the latest round of funding that the New Jersey Transit is getting from the federal government to pay for rebuilding and replacing equipment damaged by Superstorm Sandy. New Jersey’s Congressional delegation announced the award Aug. 21. The money comes from the Federal Transit Administration and is part of a $3.7 billion second round of funding for Superstorm Sandy relief.

31,400

The number of seasonally adjusted nonagricultural jobs added in Texas in July. The Texas Workforce Commission (TWC) says the state has added jobs in 57 of the last 58 months. The seasonally adjusted unemployment rate remained at 4.2 percent in July, the lowest monthly unemployment rate since July 2007. The state’s unemployment rate continues to trend well below the national rate of 5.3 percent and is down from 5.0 percent a year ago. 12 | INSURANCE JOURNAL-NATIONAL September 7, 2015

“I support technological innovation. Innovation, however, does not give companies a license to mislead consumers about issues affecting their safety.”

— San Francisco District Attorney George Gascon and another prosecutor filed a revised lawsuit in late August against Uber saying its background checks rely only on personal information, and the firm can’t ensure information is associated with an applicant without a “unique biometric identifier” — fingerprints, in other words.

A Strong Relationship

“We know, at least based on the spatial and temporal relationship between these earthquakes and brine disposal operations in Harper and Sumner counties, that these two are certainly linked. … There’s definitely a strong relationship between the two.”

— Kansas Geological Survey scientist Tandis Bidgoli, on the link between an uptick in the number of earthquakes in two southern Kansas counties and the injection into wells of saltwater used in oil and natural gas drilling.

Sinkhole Crisis

“We’re completely reactionary. We don’t have the resources to be proactive.”

— Lou Akers, executive director of the Huntington, W. Va., Water Quality Board, said in regards to a dramatic increase in sinkholes in the city. The Huntington Water Quality Board is reportedly getting at least three sinkhole-related calls a week. www.insurancejournal.com

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News & Markets MGAs Next to Feel Impact of Capital Markets: AmWINS’ DeCarlo

ow that traditional reinsurers are adjusting to the idea that third-party capital providers have moved into their space, managing general agents (MGA) may be next to feel the negative impact of new capital, the leader of a specialty broker said. Speaking at the Standard & Poor’s 2015 Insurance Conference in June, Steven DeCarlo, the chief executive officer of AmWINS Group, provided details of a deal between AmWINS and Nephila, an investment manager specializing in reinsurance risk, which is helping Nephila plow into new territory — the direct insurance marketplace. It’s the MGAs that were disintermediated in the deal, DeCarlo asserted during a session on trends in the specialty insurance market. DeCarlo made the remark after going over his rationale for accepting almost no commission under terms of a deal. Basically, he said the deal gives Nephila access to a vast retail distribution network without 10 points of commission going to an MGA to get there. (AmWINS has both MGA and wholesale brokerage operations.) AmWINS and Nephila Deal The background and basics of the arrangement are these, according to DeCarlo: “Nephila is a well-known brand, and they obviously have been on the reinsurance side for years. [But] more and more as they had seen less opportunity to acquire reinsurance, it was not lost on a lot of us that they weren’t going to sit there — that they were going to figure out a way to distribute their capital directly into the [insurance] marketplace … “They did it originally through some facilities at Lloyd’s, through some MGAs in the U.S. And then we struck a relationship. “They wanted to get access to insureds. They cannot manage 20,000 retail brokers. There are just too many …So they’ve hired us to do that on their behalf.” 14 | INSURANCE JOURNAL-NATIONAL September 7, 2015

In addition, DeCarlo noted that AmWINS handles a large book of property insurance business — $2.5 billion overall, including a $1.6 billion program of shared and layered premium. Nephila wanted to participate on that shared and layered premium. The issue was how, he said. To solve the problem, “what Nephila did was give us the ability to put their capital out on these property placements countrywide” — small, medium and large. “They follow form, basically like Lloyd’s. They follow terms and conditions and pricing established by somebody else.” Another underwriter establishes the layer’s pricing, and they participate on that pricing. “What people have missed on this is typically that looks like an MGA, and I would make an extra 10 points. [But] instead, I took a half a point. I took basically nothing,” DeCarlo said. “The reason I took it is because I want to sell exclusive product — because if I can get retailers to call me, I’m going to get more opportunities,” he explained. “I’m willing to distribute product that’s exclusive without the additional frictional cost.” “Nephila’s happy, less friction. We’re happy, exclusive product. That’s the distribution game that’s going on …We’re managing retailers with less frictional cost to the capital markets. And it was a quick way for Nephila to participate on a very, very big book of excess property business,” DeCarlo said. “Will they do it in [workers] comp? Will they do it in GL? I don’t know their strategy. That’s their choice,” he added. DeCarlo also explained that Nephila needed a fronting company to get this done, revealing that Allianz is the risk transfer agent in this arrangement. The specialty broker executive also revealed that he took a lot of heat from carrier executives “because it looks like we’re underwriting. We’re not. We’re distributing,” he stated. Carriers shouldn’t be upset, he said. “Who

Steven DeCarlo AmWINS’ CEO

‘We’re managing retailers with less frictional cost to the capital markets.’ got disintermediated in that transaction?” he asked the audience, quickly answering his own question. “Frankly, MGAs — because if I can do it myself without going through that big frictional cost, we’re going to save everybody money,” he said. Analytics AmWINS had the ability to do this because they had analytics to share with Nephila, he added. “We had the analytics where they could see through our book of business, [which] we distribute through to 600 markets … “They got comfortable with that big data. That’s one of our core skills,” he said. Summing up, DeCarlo said, “The reality of the Nephila transaction is [this]: If I had 600 direct insurance companies before, now I have 601. It’s the MGA and the Lloyd’s platforms that potentially could be impacted,” he concluded. www.insurancejournal.com

Beyond Security®

“It Takes Discipline”

Marty Hacala Fitness Enthusiast General Star President & CEO

“Rolling out of bed at 5am every morning to work out requires discipline. It’s my way of getting the very most out of my busy day. “At General Star, we strive to get the very most out of our wholesale broker relationships. As a member of the Berkshire Hataway family of companies, our financial strength is unsurpassed. But it’s our disciplined approach to building and maintaining profitable partnerships with a select group of brokers that drives us. “Discipline: Whether sticking with an early morning exercise regimen or standing firm with a limited number of valuable wholesale broker relationships, it remains the cornerstone of our success.” To locate the General Star broker nearest you, visit our website at www.generalstar.com.

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News & Markets California Commissioner Applauds Supreme Court Decision Against Hartford

alifornia Insurance Commissioner Dave Jones praised a recent unanimous California Supreme Court decision that he said ensures policyholders are protected from insurers refusing to cover third-party liability claims when the insured transfers the insurance benefits after the events triggering coverage have occurred but before claims are fully resolved. The Court in its decision in August in Fluor v. Superior Court (Hartford Accident & Indemnity Co.) relied heavily on the amicus brief field by Jones, which argued that once an insurer accepts premium for a risk and the covered events occur during the policy period, the insurer’s obligation is fixed and it must defend the insured against subsequent third-party claims even if the insurance benefits are transferred to another entity before claims are fully resolved.

This is codified in insurance code, and is a quintessential consumer protection that requires insurance companies to deliver on their promise to pay claims that arise from events that occur during the policy period, Jones said. “The court made the right decision in finding that once an insurer accepts premium to cover certain risks, and those risks actually occur, the insurer’s obligations are fixed regardless of any subsequent transfer of the insurance benefits,” Jones said in a statement. “The statute is clear. Insurers should not be able to avoid their obligations.” In the Fluor v. Superior Court case, the issue was whether Hartford could walk away from coverage obligations when Flour transferred the insurance benefit to another entity, after the events triggering the insur-

Federal Government Suing Southern California Edison over 2009 Fire

ust days before the federal statute of limitations would have run out, the government has filed a lawsuit against Southern California Edison in connection to a 2009 fire that primarily burned the San Bernardino National Forest east of Hemet. According to the lawsuit, an equipment malfunction sparked the fire that burned almost 4 square miles, about 3 of which were national forest land. The fire started Aug. 27, 2009 and was contained four days later. It cost more than $2.65 million to suppress. W2 | INSURANCE JOURNAL-WEST September 7, 2015

The federal statute of limitations for fires is six years, compared with the state of California’s three. An Edison spokesman said the utility company’s policy is not to comment on pending litigation. Copyright 2015 Associated Press.

ance coverage have already occurred. In this case, Fluor transferred its insurance coverage to another company and a liability claim was later filed. The court upheld the existing consumer protections long-codified in insurance code section 520 and required the insurer to meet its coverage obligations regardless of the transfer.

Study: Ventura, Oxnard in California Could Be at Greater Tsunami Risk

study says two California coastal cities are at greater risk from tsunamis than previously thought. The study released in August by the American Geophysical Union examined the flooding risk if earthquake faults in the Santa Barbara Channel area ruptured. Coastal buildings directly opposite the faults would naturally be at risk. But a computer simulation of a magnitude-7.7 quake suggests the resulting wave would split, turn and move much farther inland than previously thought — perhaps more than a mile. Ventura and Oxnard could be hit with a wave 23 feet high. The study’s lead author, Kenny Ryan of the University of California, Riverside, says the tsunami might penetrate twice as far as the line stated in the official state tsunami plan — which may need to be updated. Copyright 2015 Associated Press. www.insurancejournal.com

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People Robin Heller

Peggy Drew

Mark Martinez

Bridget Brundige

Andrea Cantlon

The IMA Financial Group Inc. has named Robin Heller its chief technology and operating officer in Denver, Colo. In the newly created role, Heller will oversee strategic technology development. Prior to IMA Heller was president and CEO of The Leadership Investment, a Colorado nonprofit. Her experience includes leading technology teams for American Express, First Data and Western Union. IMA is a financial services company specializing in risk management, insurance, surety and employee benefits solutions. Peggy Drew has joined Crystal & Co.’s commercial property/casualty department as managing director. Drew will also serve as the team leader for the firm’s Los Angeles, Calif., office. Her responsibilities include the development, administration and execution of account service strategies for a variety of industries including manufacturing and distribution, restaurants and nonprofit organizations. Drew has more than 25 years of experience in the insurance industry. Prior to Crystal & Co., Drew was a senior vice president with Wells Fargo Insurance Services. She began her insurance career with Marsh. New York-based Crystal & Co. is a risk and insurance advisor and insurance brokerage. Berkshire Hathaway Guard Insurance Cos. has named Mark Martinez senior field representative. Martinez will help promote growth in Southern California. In this capacity, he is responsible for identifying prospects for appointments while providing information about available resources and new developments to existing members of the distribution network. He also functions as agents’ field liaison with Berkshire Hathaway Guard’s underwriting, loss control and claims staff. Martinez has more than 25 years of experience, primarily representing national carriers. In October 2012, Guard Insurance Group was acquired by National Indemnity Co., a wholly owned subsidiary of Berkshire Hathaway. LP Insurance Services Inc. has named Bridget Brundige and Andrea Cantlon to its northern Nevada sales team. Brundige is responsible for developing new business relationships as well as retaining and servicing existing clients. Brundige was most recently a patient account specialist

W4 | INSURANCE JOURNAL-WEST September 7, 2015

with DaVita HealthCare Partners Inc. Cantlon is responsible for developing new business relationships, and retaining and servicing existing clients. She was most recently a private banker with Mutual of Omaha Bank in Reno. Reno, Nev.-based LP specializes in property/casualty, surety, workers’ compensation, employee benefits, medical/professional practice, personal and risk management services. King Insurance in California has named Laura Fondarella as vice president of marketing and product development. Fondarella has been involved in the development and merchandising of various personal lines and commercial niche products serving the homeowners, mobilehome park and professional liability specialties. She was previously a field representative and marketing manager. Fondarella has been with the firm for 18 years. King Insurance is a specialty program manager headquartered in San Juan Capistrano. Newport Beach, Calif.-based Alliant Insurance Services has named Robert Bennetsen to lead its Alliant Americas division as executive vice president and senior managing director. Bennetsen will spearhead Alliant’s effort to expand its presence in the middle market through strategic acquisitions and organic growth. Bennetsen has experience on the carrier and brokerage sides of the business. He previously served as executive vice president and managing director of Alliant Employee Benefits. Alliant is a large insurance brokerage that provides property/casualty, workers’ compensation, employee benefits, surety, and financial products and services. Alfred W. Bottalico has joined Locke Lord LLP’s global regulatory and transactional insurance practice group in Los Angeles, Calif., as an insurance specialist. Bottalico is a former deputy commissioner for the financial surveillance branch of the California Department of Insurance. Bottalico has 38 years of regulatory experience in all aspects of financial regulation and examination of insurance companies, including statutory accounting, auditing and California Insurance Code Dallas, Texas-based Locke Lord is an international law firm. www.insurancejournal.com

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News & Markets California WCIRB Proposes Premium 7.8% Below 2015 Average

he Workers’ Compensation Insurance Rating Bureau has submitted its Jan. 1, 2016, pure premium rate filing to the California Department of Insurance proposing advisory pure premium rates that average $2.45 per $100 of payroll. That WCIRB figure is 7.8 percent less than the corresponding industry average filed pure premium rate of $2.66 as of July 1, 2015, and 0.8 percent less than the average approved July 1, 2015 advisory pure premium rate of $2.47. The proposed further reduction in the advisory pure premium rate level for Jan. 1, 2016, follows a 10.2 percent reduction approved by the California Insurance Commissioner effective July 1, 2015. The primary drivers of the reduction include:

• Medical losses continue to develop favorably; • Recent severity growth continues to emerge below projections; • Increases in projected wage growth in California due to economic expansion. However, the filing cautioned that historically high levels of loss adjustment expenses, persistently high rates of indemnity claim frequency, an increasing number of independent medical review requests, a spike in lien filings in early 2015 and persistent increases in temporary disability duration require continued monitoring as they may drive increased costs in the future. The Department of Insurance will schedule a public hearing to consider the filing.

California Insurance Company Oversight Law Signed

alifornia Gov. Jerry Brown in late August signed Assembly Bill 553, which establishes new oversight aimed at reducing the number of insurance company insolvencies. AB 553 was authored by Assemblyman Tom Daly, D-Anaheim, and was sponsored by Insurance Commissioner Dave Jones and by insurance industry stakeholders. AB 553 improves oversight of the corporate governance of insurers by aligning state law with new and improved standards developed by the National Association of Insurance Commissioners in two key areas: Improved oversight of the corporate governance policies and practices of insurW6 | INSURANCE JOURNAL-WEST September 7, 2015

ance companies; including their board management structure, code of conduct and risk-management processes. Preserved national system of state-based insurance regulation by clarifying the role of state insurance departments as group-wide supervisors over multi-national insurance groups, as part of the Insurance Holding Company System Regulator Act. “As the largest insurance market in the country, California is again leading the way in improving the regulation of insurance companies,” Jones said in a statement. “AB 553 includes an urgency clause so California can have these new consumer protection tools in place as soon as possible. I’d like to thank Assembly Member Daly for authoring this important bill.” AB 553 was approved by the Assembly and Senate unanimously. The bill took effect immediately after signing.

Geico Agrees to $6M Settlement over Business Practices in California

eico has agreed to pay $6 million dollars and implement several changes to their business practices as part of a settlement with the California Department of Insurance, CDI announced late last month. The settlement stems from a petition in which Consumer Federation of California alleged Geico’s online premium quoting system was discriminatory and misleading to consumers. Based on information obtained through testing of the Geico website, the consumer group discovered the insurer misrepresented a $100,000/$300,000 limit quote as being a lowest-limits quote, when it was not, according to CDI. Consumer Federation of California alleged in their petition that these higher policy limits were only quoted to certain consumers, based on their education level, occupation and gender. Though insurers may also offer and sell policies with higher limits, California law requires insurers to offer a minimum limits policy of $15,000/$30,000. Geico’s online premium quoting system was inaccurately describing quotes for higher limits as the lowest limits, according to CDI. Insurance Commissioner Dave Jones issued an order approving the settlement agreement and requiring Geico to discontinue using consumers’ education level or occupation to quote coverage limits, and to offer a quote for a $15,000/$30,000 policy to certain consumers for the next three years. The insurer has also agreed to submit to twice-yearly audits of their website for the next three years, to ensure they are complying with the law. www.insurancejournal.com

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News & Markets Former California Probation Officer Nabbed for Fraud While on Probation

former Los Angeles County probation officer, Robyn Palmer, 29, of Long Beach, Calif., was arrested in late August on six felony counts of insurance fraud for

allegedly forging documents to illegally collect disability insurance benefits while serving probation for another insurance fraud conviction.

Palmer was arrested while serving five yearsâ&#x20AC;&#x2122; probation following a conviction on 14 felony counts of insurance fraud, forgery, wire fraud and grand theft in 2014 for illegally collecting disability benefits from Allstate Insurance. Robyn Palmer, A former California Department Los Angeles County probation officer, was of Insurance detectives arrested on six felony were contacted by counts of insurance fraud for allegedly forging docAmerican Family Life uments to collect disabilInsurance Co. after the ity insurance benefits while on probation for insurer identified susanother fraud conviction. pected fraud by Palmer. An investigation revealed that Palmer was allegedly collecting disability benefits totaling $24,000 from AFLAC while being prosecuted for the first crime against Allstate and continued to do so after her conviction and while on probation. If convicted, Palmer could be sentenced to five years in state prison.

Calif. Man Hurt in Trolley Station Fall Gets $21.5M Insurance Settlment

n Imperial Beach, Calif., man who was injured when he tripped and fell on trolley tracks is receiving a $21.5 million insurance settlement. Fifty-seven-year-old David Long was injured in May 2013 when he stepped off the trolley and tripped over a piece of track. He hit his head and suffered injuries to his neck and spinal cord, which his lawyers say left him quadriplegic. Long filed a lawsuit against HMS Construction Inc., Asphalt and Concrete Enterprises Inc., San Diego Transit Corp., San Diego Trolley Inc. and other agencies in January 2014. His lawyer said surveillance video showed as many as 10 people tripping over the exposed track. The case settled in late July. Copyright 2015 Associated Press. 1 W8ABRAM16741.indd | INSURANCE JOURNAL-WEST September 7, 2015

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News & Markets

Uber Headache if More Drivers Want Full-Time Status By Don Jergler

housands of new full-time workers would spring into existence if Uber is forced to stop treating some of its drivers like contract workers, and the benefits that come with that employee status may entice part-time rideshare drivers to beef up their hours of operation. A recent study from the consumer finance site NerdWallet shows Uber drivers in six major U.S. cities would receive paid holidays and healthcare benefits worth an W10 | INSURANCE JOURNAL-WEST September 7, 2015

average of $5,500 a year, plus thousands of tor. The ruling ordered Uber to reimburse dollars more in mileage reimbursement, Berwick $3,878 for mileage and tolls plus if the San $274 in interest. Francisco-based ‘Eighty-seven percent of In a similar matter, the firm provided Florida Department of drivers say the main reason Economic them with the Opportunity to use Uber is because they decided in May that forsame benefits love being their own boss.’ mer Uber driver Darrin as its full-time employees. McGillis had been an The catalyst for the study is a California employee, which entitled him to unemployLabor Commissioner’s ruling in June that ment benefits. Uber driver Barbara Berwick was an Both decisions apply only to the indiemployee of the company and not a contraccontinued on page W12 www.insurancejournal.com

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News & Markets continued from page W10 viduals involved, and do not set laws or regulations that Uber must follow with the rest of its employees in those states. Uber is appealing those decisions. In its appeal, Uber noted that in California, a previous ruling by the same commission concluded in 2012 that a driver performed services as an independent contractor and not as a bona fide employee. In a case that could be turned into a class-action suit and cover all of Uber’s drivers, three drivers took Uber to a federal court in San Francisco, contending they are employees and entitled to reimbursement for expenses, including gas and vehicle maintenance. The case in U.S. District Court, Northern District of California is Douglas O’Connor et al vs. Uber Technologies Inc. Uber provided a statement on that suit: “Eighty-seven percent of drivers say the main reason to use Uber is because they love being their own boss. As employees, drivers would drive set shifts, earn a fixed hourly wage, and lose the ability to drive using other ridesharing apps as well as the personal flexibility they most value. The reality is that drivers use Uber on their own terms: they control their use of the app. It’s why there’s no typical driver — the key question in this case. And why no three people can ever represent the interests of so many different drivers.” Aside from the possibility of a class-action suit, should the existing labor decisions be upheld, some believe more rideshare drivers could be motivated to seek status as full-time employees. Just how many employees this affects isn’t clear, but if all Uber drivers were considered full-time employees the firm would rank among the top 50 U.S. employers by size — somewhere above Boeing Co. and Starbucks, and below Safeway and Bank of America. Uber in January reported that nearly W12 | INSURANCE JOURNAL-WEST September 7, 2015

14 percent of its 160,000-and-counting left out other cost factors, such as workers’ U.S. drivers worked at least 35 hours a compensation insurance, which would week. The firm also reported drivers earned depend on Uber’s business model going for$17.56 on average. ward if some of its drivers were considered There are no specific figures for the full-time. numbers of Uber drivers in each state, but He thinks the figures in the study are Harry Campbell, who blogs for Forbes on enough to entice some drivers to consider the topic of ridesharing, believes California upping their rideshare driving each week. has a larger percentage of “If Uber provided fullrideshare drivers who are ‘I do think there’s a time benefits, that would full-time. lot of drivers that this motivate more drivers to His reasoning is that become full-time,” Chu said. would affect.’ the state is where the Uber has argued that ridesharing craze first exploded, and a many rideshare drivers don’t want to be significant portion of California is thin on full-time, because they drive to augment mass transit and heavily automobile reliant. their existing income and they don’t want Campbell, who often polls rideshare drivto give up their flexibility and indepeners on his website, TheRideShareGuy.com, dence. estimates that roughly 30 percent of Uber According to a poll by Uber of its own drivers spend 40 hours or more per drivers: 85 percent of respondents cited week scouring the streets for rides and more flexibility in their schedule and baltaking passengers to and fro. ance their work with life and family as a “I do think there’s a lot of drivers major reason to work with Uber; 50 perthat this would affect,” Campbell said. cent of U.S. Uber driver-partners drive on Asked to put a number on the total average fewer than 10 hours per week; and number of full-time Uber drivers, he 65 percent of driver-partners changed the postulated that as many as 15,000 could number of hours they worked by more than be considered full-time employees. 25 percent from one week to the next. The NerdWallet study outlined the Campbell believes some compromise in benefits costs for those employees in the employee vs. contractor issue could be paid holidays, health insurance, milefound that benefits both full-time drivers age reimbursement and auto insurance. and Uber Based on Uber’s stated average “I think there’s a lot of room for comprohourly wage for full-time drivers, the mise or middle-grounds where Uber could change in employment status adds provide more benefits,” he said. up to $1,264.32 for nine paid holidays He believes a compromise in which each year. Health insurance costs vary certain benefits were offered to full-time by area, but in Los Angeles it’s $2,859 drivers would enable Uber to also benefit per year and New York it’s $3,585 per by allowing it more control over those year, according to NerdWallet. drivers, such as enabling the firm to ensure To calculate estimated mileage reimthat fewer are drivers are bunched together bursement the study uses Berwick’s driving to offer rides from the 9 a.m.-to-5 p.m. midtotals, which if extrapolated to full year week slow time and that more drivers were would add up to 38,808 miles. An employee available during the primetime operating driving those miles would get $22,315 in hours. reimbursement. “I think that Uber has the mindset that Auto insurance rates also vary by locale, the situation is all or nothing,” Campbell but in Los Angeles it’s $1,175.61 and in New said. “I think that’s pretty misleading.” York it’s $1,614.71, the study shows. Linda T. Pierce, an attorney and area Jeffrey Chu, the author of the study, said executive vice president with global brokerhe stuck to a barebones comparison and continued on page W14 www.insurancejournal.com

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News & Markets continued from page W12 age Arthur J. Gallagher in Glendale, Calif., views workers’ comp as a major consideration for Uber going forward if the Berwick decision is upheld and other drivers seek the same status. Pierce believes workers’ comp judges overseeing disputes involving Uber drivers could use the Labor Commissioner’s ruling as guidance. “It would likely be a test a workers’ comp judge would use,” Pierce said. “I think that’s a real possibility.” The Berwick case fits an existing mold in which for years people have been classified as an independent contractor and have brought a case to get worker’s comp benefits, unemployment benefits or disability benefits. “There’s all sorts of different agencies that are pitfalls for California entities that use independent contractors,” Pierce said. As soon as enough Uber drivers are hurt on the job and they begin seeking workers’ comp benefits, that’s when trouble may arise between Uber and its insurer, she added. “If they get claims put in, they run the risk of being audited by their carrier and being assessed a huge premium,” Pierce said, adding that there’s also danger the carrier would just rescind the policy. Bob King, an attorney and founder of Legally Nanny, a California law firm that specializes in household employment, sees the decision in the Berwick case as far-reaching and “very dangerous for Uber.” The Labor Commissioner made the findings in the Berwick case based on level of control Uber exercises over its drivers. So unless the decision is overruled, there will be plenty of savvy plaintiffs’ lawyers armed with this decision as an argument who will go out and find other Uber drivers to make the same claim, King said. “Basically what the Labor Commissioner has done is say ‘Here’s what you have to say in your complaint to prevail,’” he said. “They’ve given employees a roadmap against Uber.” King typically represents firms that W14 | INSURANCE JOURNAL-WEST September 7, 2015

provide nannies, elder caregivers and other similar services that often send people out to homes, but those operations sometimes misclassify their employees as independent contractors, he said. He believes the Labor Commissioner’s ruling can be used as a standard other in

other industries outside of ridesharing to show that caregivers are employees and not contractors. “This ruling is actually a big deal for my industry as well,” King said. “This ruling puts another nail the coffin to confirm that workers are in fact employees. What this Labor Commissioner has done is provide this roadmap for employees to say the right thing in the hearing to win.” He added, “It’s not binding precedent, but it is persuasive.” Bryance Metheny, a partner and chair of the labor and employment practice group at Burr & Forman Burr & Forman in Birmingham, Ala., also believes such rulings aren’t going to be limited to one industry. “The future is going to reveal it’s not going to be limited to ridesharing,” Metheny said. Overtime pay could increasingly be another consideration Uber and others who operate with independent contractors will have to deal with if new rules proposed by the U.S. Department of Labor are enacted, he said. The Department of Labor recently proposed updates to the Fair Labor Standards Act that would extend overtime pay to an estimated 4.6 million workers who are currently exempt from under current regulations. These rules, along with decisions like those in the Berwick matter, go against ongoing employment trends that both employers and employees seem to favor,

such as allowing employees to work remotely, and reducing overhead by cutting down on needed office space while increasing employee flexibility, Metheny said. “The rules are making it even more challenging for employers to move with the trends,” he said. The reversal of these trends, possibly forcing some employers to bring workers back into the office and insist on tighter controls and less flexibility, could make for some unhappy employer-employee relationships. “We’re going to see lots of wage and hour suits,” he said. Metheny counts employment practices liability insurance as among the insurance implications for Uber if the Berwick case is upheld and more employees seek full-time status. An example is an employer that treats all of its employees as independent contractors, and then there’s an incident in which one independent contractor is accused of harassing another. Because the employer considers them independent contractors, they take “a hands off” approach. “But if they fail to investigate the complaint, and to try and remedy the situation, that opens them up to exposures that would be passed on to the insurer in the traditional EPLI policy,” Metheny said. This is what happened to an employer he represented in a case a year ago. The employer misunderstood the independent classification rule and treated hundreds of workers as independent contractors despite many of the putting in 50 hours a week, he said. A few employees were allegedly harassed by someone they considered their supervisor, yet who was also being treated as an independent contractor, and the employer told the workers to handle it between themselves, according to Metheny. That “hands off” policy didn’t work out so well. “It blew up on them,” Metheny said. www.insurancejournal.com

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News & Markets Cyber Risk Insurers Lag in Buying Cyber Cover By Susanne Sclafane

s recently as two years ago, only half of the top 10 carriers writing cyber insurance had purchased cyber coverage themselves, a broker specialist said recently. During an interview at the Standard & Poor’s 2015 Insurance Conference, Kevin Kalinich, global practice leader for cyber insurance at Aon, told Carrier Management that the number buying cyber insurance for their own companies is up to seven of the top 10 carriers, and that two more are in the process of purchasing insurance. (Kalinich defined the top carriers as the 10 that write the most premium volume in the cyber insurance market, noting that Aon is the broker for a number of the top carriers.) “It’s over a majority, but it’s still not unanimous that they all buy cyber insurance, the same product they’re selling,” he said. Kalinich also reported that 67 insurance companies write some form of standalone

cyber insurance today. Among market participants, “the appetite has changed but not necessarily expanded,” he said when asked if a soft market for commercial insurance has broadened carrier appetites or prompted price declines. “After the large data breaches, what has happened is that many of the insurance companies that jumped in with both feet suffered their first cyber losses and are reevaluating their commitment to cyber insurance. They have either contracted, or are reducing the limits that they’ll offer from a particular risk — from $20 million to $10 million or from $10 million to $5 million. Or they have moved from the large risks of retail, hospitality, financial institutions and healthcare into more middle-market risks that they view as [having] a smaller probability of a catastrophic loss.” Kalinich separates larger, higher-risk classes from lower-risk, middle-market categories, noting that there’s ”quite a bit

of competition” in the middle market. “Insurance carriers realize that they can make money as long as they have a diversified portfolio of risk and that the insured meets minimum standards.” In larger, high-risk categories, some carriers have pulled out from being primary, resulting in less competition. Kalinich reports that there is a greater focus on retention than on pricing among carriers, with retentions that were once $1 million rising to $5 million or $10 million. “Some of the exclusions have expanded and restrictions [have increased]. Unencrypted laptops — we’re not going to cover that,” carriers say. Or “we might cover business interruption for an entity, but we’re not going to cover business interruption if it’s a third party that is disrupted and now it affects your business interruption. Those are the types of coverage issues that are being introduced into the larger risks,” he said. How Carriers Price Cyber Insurance Standard & Poor’s released a report at the conference applauding insurers for their restraint in offering cyber coverage — a positive from a credit ratings perspective. “Even insurers with a larger market share are guarded enough to use low limits and a whole slew of exclusions (such as excluding damages resulting from data handled by an external contractor), which we believe is sensible. The need for risk-averse underwriting is heightened considering the lack of actuarial data, potential systemic consequences, loss creep and clash risk,” rating agency analysts wrote in “Look Before They Leap: U.S. Insurers Dip Their Toes Into the Cyber Risk Pool.” The report highlights the fact that providing cyber risk coverage presents “a huge area of opportunity” for insurers, with a $10 billion potential market size seen as a real possibility within the next five to 10 years. The challenges inherent in pricing a coverage for which reliable actuarial is not yet available and probabilistic models are suscontinued on page 16

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News & Markets continued from page 15 pect (mainly because of “the unpredictable behaviors associated with cyber attacks”). So how are insurers pricing coverage? Kalinich said insurers rely on a combination of methods. “Initially, they were using a number of personal identifiable information records and then multiplying it by a number — between $175 and $225 per record.” But insurers realized “there was differentiation depending on the type of information. Social Security number and patient information in healthcare is worth more than credit card information from a retailer.” “As you increase the number of records, the cost per record goes down dramatically to be below $5 per record.”

In addition to getting better at bifurcating the risks related to PII, insurers are getting better at differentiating risks beyond PII exposures. “An entity that is dependent on manufacturing, transportation, logistics, they’re looking at those types of risks now compared to what losses they’ve seen, doing modeling based on what they want to get for their return on the capital and adjusting as they get more claims and adjusting as they see more entities,” he said. “The second thing they’re doing different is partnering with modeling companies and rating companies — not rating agencies like the S&P but the equivalent for cyber risks.” “These entities now can assess their

S&P: U.S. Insurers Cautious to Respond to Soaring Cyber Demand

tandard & Poor’s predicts a major jump in demand for cyber insurance in the coming years, with interest initially outstripping supply. U.S. insurers will respond gradually, however, entering the market with caution, allowing for breathing room to develop knowledge and experience about the fast-evolving risk, the rating entity found in a new report. Insurers remain hesitant to embrace cyber risk quickly because it is “fast moving, impossible to predict, and difficult to understand and model, but change can be immense,” S&P noted. Another concern: aggregation risk and clash with other policies. S&P outlined these and other insurance-related cyber trends/concerns in its newly-released report: “Looking Before They Leap: U.S. Insurers Dip Their Toes In The Cyber-Risk Pool.” The report says cyber insurance demand will grow “as management teams utilize both offensive and defensive capabilities,” and perception of cyber risk and its financial costs grows due to increasing media coverage. Attacks will increase in both frequency and sophistication as losses grow. Lloyd’s estimates that there are around 16 | INSURANCE JOURNAL-NATIONAL September 7, 2015

$400 billion in annual losses due to cyber hackings, only a small number are insured, S&P said. With that in mind, cyber insurance is gaining more promotion and regulators are encouraging companies to buy it to help manage their risks and minimize the cost of a breach. Cyber breaches can damage an organization’s reputation, and that could spur the growth of the cyber market. More regulations passed in response to hackings should also trigger interest in cyber coverage, according to the report. “Cyber insurance is a sellers’ market, unlike more developed/traditional business lines,” S&P said. However, insurers aren’t exactly jumping in “with both feet” for a number of reasons. “Due to the changing nature of technology and hacking strategies, insurers don’t have an accurate loss history,” S&P noted. “Whereas traditional liability products may use revenue and industry as particularly important drivers of risk assessment, it is much more difficult to determine a company’s ability to defend itself from a very determined hacker.” S&P said it expects cyber insurance capacity to increase as experience in the sector grows.

cyber exposures and give them ratings in various categories to determine both the frequency and severity of a potential loss. The insurance companies reward those companies that embrace those assessments and make changes, and mitigate and remediate vulnerabilities,” Kalinich said. “Four or five years ago, the insured may have paid for an IT security assessment. Now, insurance companies are not only including some of those as part of their service offering, but they’re demanding that you take on this type of antivirus software or intrusion detection or the equivalent. They still let you do the equivalent.” “It’s actually a tremendous benefit, more so for the small and middle-market companies that might not have that expertise,” he said, distinguishing them from larger insureds who want to have direct relationships with third-party vendor partners instead of having those controlled by the insurance company. Kalinich said pricing differentials between carriers are decreasing as the use of these assessments are not becoming more widespread. “You would think that they would converge and come closer together based on their assessments. We have seen tremendous divergence in pricing and retention,” he said More typically, there are coverage variations among carriers. “Cyber insurance is not a homogeneous product,” S&P analysts said in their report — a situation that is not bothersome to Kalinich. “It’s okay to have the nuances in the policies to differentiate the coverages,” he said, when asked if a standardized offering might benefit insurers. “Where I think there needs to be more commonality is all carriers looking at some of the same type of factors that go into the risk,” he added, reasoning that “if they start taking into account the important factors on a more macro level, that will improve risk management in totality.” “So you can’t have an organization use adverse selection to go to a carrier that doesn’t understand the [right] questions [to ask]. It actually would improve the whole risk management if they have a baseline of the factors that they consider,” he said. www.insurancejournal.com

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Business Moves

Distinguished, Fulcrum Distinguished Programs Holdings LLC announced the pending acquisition of Bellevue, Wash.-based Fulcrum Insurance Programs. The businesses will be combined and rebranded as Distinguished Specialty. Fulcrum principals Dusty Rowland and Eric Arthur will be joining Distinguished Specialty as senior executives and Rowland will join Distinguished’s board of advisors when the deal is concluded. Brooks Chase will become president of Distinguished Specialty. The deal is expected to close at the end of October. New York-based Distinguished is a portfolio of businesses serving the insurance industry. Fulcrum is a program administrator focused on real estate and hospitality. Hub International, DISNE, Triangle Insurance Hub International Limited acquired the assets of Doctors Insurance Services of New England (DISNE). Terms of the acquisition were not disclosed. Based in the Boston suburb of Holliston, Mass., DISNE specializes in providing personal and professional liability, including medical malpractice insurance services, to 18 | INSURANCE JOURNAL-NATIONAL September 7, 2015

healthcare organizations and providers. Dan Nissi, DISNE’s president, will join Hub as president of Healthcare Solutions for Hub New England, a Hub International subsidiary, and report to Charles Brophy, CEO of Hub New England. In a separate deal, Hub also acquired the assets of Triangle Insurance Services Inc., an independent insurance agency based in Raleigh, N.C. Terms of the acquisition were not disclosed. Triangle Insurance specializes in providing property/casualty insurance services to clients in the Cary/Raleigh area. Cleve and Linda Folger, the founders and owners of Triangle Insurance, are joining the Hub Carolinas division of Hub International Southeast. Hub International is an insurance brokerage that provides property/casualty, life and health, employee benefits, investment and risk management products and services. Beneficial Insurance, PKA Beneficial Insurance Services, a subsidiary of Beneficial Bank in Philadelphia, acquired Pye Karr Ambler & Co. Inc. (PKA), an independent insurance agency in Jenkintown, Pa. Terms of the transaction were not disclosed. Under the transaction, PKA President and CEO Lou Karr and the agency’s two staff members will join Beneficial Insurance. PKA’s Jenkintown office will continue to be used for the immediate future, Beneficial Insurance said. Beneficial Insurance is an insurance brokerage offering commercial, personal, and benefit products. Union Insurance, McLaughlin Co. Union Insurance Group, a Chicago-based commercial insurance agency specializing in property/casualty and professional liability products for labor organizations, acquired The McLaughlin Co., an insurance agency in Rockville, Md. Terms of the transaction

were not disclosed. Union Insurance Group provides commercial insurance including property/casualty and professional liability coverage to labor organizations of various sizes. AAdvantage Insurance Group, Premier Insurance Associates AAdvantage Insurance Group in Glen Carbon, Ill., led by founder Dave Viox, recently announced a merger with Premier Insurance Associates located in Edwardsville, Ill. Vince and Deb Valesano, former owners of Premier Insurance Associates, will also join AAdvantage Insurance Group. AAdvantage specializes in farm, commercial, home, auto and life insurance and serves clients in the Metro-East/St. Louis area, as well as throughout Illinois and Missouri. Meadowbrook Insurance, Mackinaw Administrators Meadowbrook Insurance Group Inc., based in Southfield, Mich., has acquired Mackinaw Administrators LLC (Mackinaw). Mackinaw is a Michigan-based program and claims administrator that provides tailored insurance and risk management programs and other related services for both group and individual clients. Under the terms of the transaction, Mackinaw will operate as an independent subsidiary within Meadowbrook. Mackinaw will maintain its present headquarters in Brighton, Mich., and continue to be led by its current management team, including the company’s president, Stephen Flechsig. Higginbotham, Commercial Global Insurance Higginbotham, based in Fort Worth, and Commercial Global Insurance (CGI), based in Deer Park, Texas, are merging their operations in Friendswood, Texas. Higginbotham’s union with CGI is its second merger in the Friendswood area and brings its total number of employees to 660 in 22 offices. Higginbotham provides property, liacontinued on page 20 www.insurancejournal.com

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Business Moves continued from page 18

ENERGYRISKS

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TIA-TCOR TCOR Management, based in New Braunfels, Texas, has formed a new insurance agency, TIA-TCOR LLC, dba Texas Insurance Agency. With Ben Reedy as principal, San Antonio-based TIA-TCOR provides insurance, risk management, surety and employee benefits to organizations across Texas and the nation. The firm maintains a focus on the energy, construction, manufacturing, healthcare, life sciences, non-profit, real estate, retail and wholesale trade, and technology industries. Marsh & McLennan, Tequesta Insurance Advisors Marsh & McLennan Agency LLC (MMA), the middle market agency subsidiary of Marsh, has acquired Tequesta Insurance Advisors, a personal, commercial, and employee benefits insurance provider in Florida. Terms of the transaction were not disclosed. With approximately $10 million in annual revenues and 50 employees, Tequesta adds additional property/casualty capabilities and personal lines expertise to MMA’ s Florida region. All of Tequesta’s employees are joining MMA and will continue to operate out of the agency’s Tequesta, Fla. office. According to Shannon Alfonso, president of MMA’s Florida region, MMA now has more than 220 colleagues in eight offices throughout Florida. Marsh, Dovetail Insurance Marsh has signed a definitive agreement to acquire Dovetail Insurance, a provider of

20 | INSURANCE JOURNAL-NATIONAL September 7, 2015 GSR002.indd 1

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insurance technology services tailored to the U.S. small commercial market. Terms of the transaction, which is expected to close in the third quarter, were not disclosed. Based in Columbia, S.C., Dovetail has developed a cloud-based technology platform that enables independent insurance agents, on behalf of their small business clients, to obtain online quotes from multiple insurance providers and bind insurance policies in real-time. Upon closing, Steve Francis, CEO of Dovetail, and the entire Dovetail team, will join Marsh. Dovetail will be part of Marsh’s Global Risk & Specialties segment. Johnson & Johnson, John Handel & Associates Managing general agency Johnson & Johnson Inc. (J&J) has acquired John Handel & Associates Inc. (JHA), located in St. Petersburg, Fla. John Handel & Associates was established in 1983 as a full service multi-line E&S brokerage agency serving Florida. The company will continue to serve its agents and insureds from JHA’s office in St. Petersburg and from the current J&J office in Melbourne, Fla. The entire JHA team will join the organization. Based in Charleston, S.C., J&J is a full-service MGA offering E&S markets, standard markets, and premium financing to independent insurance agents. Patriot National, RCA Patriot National Inc., a workers’ compensation outsourcing services firm based in Fort Lauderdale, Fla., acquired R.C.A. Insurance Group (RCA), a Clifton, N.J.based property and liability program administrator to the hospitality industry. Terms of the transaction were not disclosed. RCA provides preferred insurance programs designed for restaurants, bars and taverns nationwide. RCA will become part of Trigen Insurance Solutions, Patriot National’s operating subsidiary focused on expansion into broader commercial insurance lines. www.insurancejournal.com

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News & Markets Survey Examines Agents’ Views of Agency Aggregators “some” (38 percent) or “a lot” (50 percent) of added value. Just 11 percent say their aggregator provides either “not very much” (8 percent) or no added value at all (3 percent). It’s no surprise, then, that fully 88 percent of agents whose firms belong to an aggregator say they are unlikely to leave their organization in the next year, and 72 percent are “very unlikely.” Only 12 percent are “very likely” or “somewhat likely” to leave. Unlikely to Join? Seventy-four percent of agents work at firms that do not belong to an aggregator. And very few (7 percent) of those agents say they are likely to join such an organization in the next year. Fully 94 percent of agents whose firms do not belong to an aggregator are unlikely to join one in the near future (45 percent “somewhat unlikely;” 49 percent “very unlikely”).

Fully 94 percent of agents whose firms do not belong to an aggregator are unlikely to join one in the near future. Has the growth of aggregators peaked?

bout a quarter of independent insurance agents say they work at a firm that belongs to an aggregator cluster. But very few whose agencies don’t already belong to an aggregator want their firms to join one, a fact challenging the trend of the recent, rapid growth in overall aggregator membership. This is one of the findings of a recent national survey of independent insurance agents conducted by Channel Harvest Research. The study, “Key Success Factors in Agent/ Carrier Relationships,” is the eighth in a series examining agents’ views on property/ 24 | INSURANCE JOURNAL-NATIONAL September 7, 2015

casualty carriers and various marketplace issues. More than 2,200 agents responded to the survey, which was sponsored by Insurance Journal. Aggregator Value Added for Agents Twenty-six percent of agents work for an agency that belongs to an aggregator or cluster. Those organizations range in size from having fewer than 10 agency members to having more than 100. Agents are impressed by what they get from their aggregator membership: Most respondents whose agencies belong to an aggregator think their group provides

Thus, has the growth of aggregators peaked? The full Channel Harvest report looks at what services and products independent agents want for their businesses, including niche marketing help, communications, annual planning process, and various other support areas. Aggregators that can satisfy these wants still may be able to grow in the increasingly saturated marketplace. For more information on obtaining the survey report as well as the raw data, contact John Campbell, principal of Channel Harvest, at john@ channelharvest.com.

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Surplus Lines Stamping Offices Report Moderate Growth in U.S. Premium

ollectively, the 14 U.S. surplus lines stamping offices have reported moderate growth in surplus line premiums during the first half of 2015. Approximately 60 percent of all surplus lines insurance is processed by stamping offices, according to the Surplus Lines Stamping Office of Texas (SLSOT), which bi-annually aggregates premium and filing statistics from the 14 U.S. stamping offices. SLSOT conducts the study to measure what may be occurring by state, region, and/or on a national basis to determine trends or changes in the marketplace. Collectively, the stamping offices processed in excess of $13 billion in surplus lines premium, reflecting 9.5 percent growth over the nearly $12 billion in premium processed during the first half of 2014. Furthermore, filings with these stamping

26 | INSURANCE JOURNAL-NATIONAL September 7, 2015

offices totaled more than 1.8 million, reflecting an increase of 5.3 percent over the 1.7 million filings recorded in the first half of 2014. From a regional perspective, stamping offices in the South recorded the highest premium at $5.7 billion while the western states followed closely with premium levels at $4 billion, as evidenced with the regional depiction. Within those regions, the stamping offices in the four largest surplus lines markets â&#x20AC;&#x201D; Texas, California, Florida, and New York â&#x20AC;&#x201D; showed varying levels of growth in the first half of 2015. California showed the strongest growth and the highest premium volume at $2.9 billion. Florida and Texas followed closely behind in premium reported, with $2.8 and $2.6 billion, respectively. By comparison, premium growth in each

of these states was lower, with Florida just under 7 percent and Texas just over 2.5 percent growth. While New York has seen 14 percent growth, the premium reported was $1.8 billion. Smaller volume offices displayed a wide range of change from significant growth to small decreases in premium. Oregon, with $159 million premium reported, showed the largest percentage gain of all states at 22.7 percent. On the other end of the spectrum, Idaho posted a loss in premium of 2 percent; however, a better perspective will be reviewed by the end of the year. The aggregate data supports a continued modest growth from 2013 to present with some outliers by region. This may be due to varying legislative changes that account for specific growth as evidenced in the west and east coast regions.

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State of the Market

By Andrea Wells

imes are good for surplus lines professionals. The surplus lines industry reached new heights in 2014, growing direct premium written (DPW) in 2014 to $40.2 billion — the highest point in history, reports A.M. Best’s “2014 Special Report U.S. Surplus Lines – Segment Review.” Surplus lines insurers grew DPW by 6.7

10 Drivers of Growth 1. More Capital 2. Continued Innovation 3. Improved Economy 4. Technology 5. Catastrophe Risk Lessons 6. Regulation 7. Specialization/Customization 8. Combination of Exposures 9. Pricing Support 10. Merger & Acquisition Activity

28 | INSURANCE JOURNAL-NATIONAL September 7, 2015

percent in 2014, exceeding the industry’s previous peak in direct written premium in 2006. And the first half of 2015 appears to be on track to mark another record-breaking year for surplus lines. According to the Surplus Lines Stamping Office of Texas more than $13 billion in premium was collected by surplus lines professionals during the first half of 2015 in the 14 states with U.S. stamping offices. That growth reflects a 9.5 percent uptick over the nearly $12 billion in premium processed during the first half of 2014. Even more impressive, according to Benjamin J. McKay, executive director of the Surplus Line Association of California, is the growth of the industry during the past four years. McKay said the industry has seen a 27 percent increase between 2010 and 2014 and his state of California saw about a 40 percent increase in DPW during that time. “The sector has grown dramatically for the past four years and that has driven the

influx of new capital and all of the positives and negatives that come along with that,” he said. The continued growth of surplus lines insurers doesn’t appear to be hurting their stability either. A.M. Best reports that for the 11th year in a row, the surplus lines industry reported no financially impaired companies. That’s in contrast to the admitted property/casualty www.insurancejournal.com

industry’s 12 known financial impairments in 2014, the rating agency said. The combined ratio average for surplus lines specialists held strong at 91.4 for 2014 compared to 97.2 for total P/C industry in 2014, A.M. Best reported. In general, the market position of surplus lines insurers continues to be described in favorable terms such as profitable, stable, well-capitalized and consistent performers, and A.M. Best’s outlook on the surplus lines insurance market remains stable. The year 2014 continued the pattern of growth and favorable results, according to Henry Witmer, assistant vice president at A.M. Best Co. “2014 was a continuation of 2013 results after a couple of more difficult years,” Witmer told Insurance Journal. “In 2012 we had Superstorm Sandy and other issues, but 2014 looks good and in line with 2013.” According to the report, results were driven by a combination of product diversification, underwriting discipline and advantageous market conditions. It all adds up to an enviable streak: “As a result, surplus lines companies continue to outperform the overall property/casualty industry and recorded a second straight year of underwriting profitability following three years of underwriting losses,” A.M. Best says. A.M. Best also noted that over the 21-year history of the report, the surplus lines market has more than doubled from 3.3 percent of total property/casualty direct premiums written in 1994 to approximately 7.1 percent by the end of 2014. When looking at just commercial lines DPW, the growth as a percentage has jumped from 6.1 percent in 1994 to 13.9 percent in 2014. “The A.M. best study presents some very positive news about the state of the market, A.M. Best’s outlook on the industry and the growth in 2013 and 2014 in terms of direct written premium,” said Brady Kelley, executive director of the National Association of Surplus Lines Offices (NAPSLO). “Surplus lines premium reached its all-time high in 2014 and that’s pretty noteworthy. The market hasn’t been that high since 2006 and all signs indicate that it’s continuing to grow. That’s a positive trend.” www.insurancejournal.com

What’s Driving Growth? Surplus lines premiums are up despite rates holding relatively steady. “Overall it’s a fairly competitive market,” said A.M. Best’s Witmer. “If there are any rate increases it would be fairly small or minimal to address inflationary trends. No dramatic changes up or down,” he said. Denis Brady, president of Burns & Wilcox Brokerage, says rates aren’t the reason premiums have increased. “A lot of the growth is driven by exposures as opposed to rate,” Brady said. “Casualty is flat at best. Property is pretty soft right now especially in catastrophe and DIC (difference-in-condition) areas. There hasn’t been a major catastrophe in a number of years and there’s a lot of capital out there.” Standard E&S business is flat while on the general liability side rates are flat at best, maybe down, Brady said. Plus many standard market insurers are coming into traditional E&S lines to “play,” he added. “Premiums are stable or up some, but it’s not due to rate.” In Texas — the third largest state in surplus lines premium — pricing support has helped spur growth, according to Gil Hine, incoming president of NAPSLO and presi-

dent of McClelland and Hine Inc., a managing general agent and E&S broker based in San Antonio. “We have seen support for pricing from underwriters and we haven’t seen a lot of discounting going on in our area of the industry,” Hines said. “The industry mirrors to some extent the economy overall and I think the positive economy and the things we are seeing there reflect what we are seeing in the market.” More capital entering the market is driving growth and innovation, argues McKay. “Perhaps coverages that no one had dreamed of before are now being developed with all this additional capital,” he said, citing several new industries that are getting attention from surplus lines underwriters. “I’m thinking of all the transportation network companies like Uber and Lyft. These companies up until last year weren’t insured. That’s a brand new product,” he said. “We are seeing new products being developed for e-cigarettes, marijuana and drones — all of these new and innovative products are being insured in the surplus lines market.” McKay said increases in commercial lending and asset values have also helped drive continued on page 30

U.S. Surplus Lines – Direct Premiums Written (DPW) by Segment (2005-2014) (USD millions)

Year

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Total P/C Industry DPW

491,429 503,894 506,180 492,881 481,410 481,120 501,555 523,360 545,760 570,187

Annual % Chg

2.0% 2.5% 0.5% -2.6% -2.3% -0.1% 4.2% 4.3% 4.3% 4.5%

Total Surplus Lines DPW

33,301 38,698 36,637 34,365 32,952 31,716 31,140 34,808 37,719 40,234

Annual % Chg

0.8% 16.3% -3.5% -6.2% -4.1% -3.8% -1.8% 11.8% 8.4% 6.7%

Source: Best’s Statement File - P/C, US, A.M. Best data and research

September 7, 2015 INSURANCE JOURNAL-NATIONAL | 29

SPECIAL REPORT

State of the Market continued from page 29 growth in the surplus lines market. But he thinks two of the most interesting drivers of growth are from catastrophe risk lessons learned and government regulation. “In the wake of Superstorm Sandy the industry gained a better understanding of natural catastrophe risks, which I think actually started to develop with Katrina,” McKay said. “As we began to understand these risks better, we saw the admitted market being a lot more careful in how they wrote that type of business — that’s leaving a significant portion for surplus lines.” Then there are regulatory actions that have helped drive growth. One example has been cyber liability. “Cyber coverage is the fastest growing

surplus lines business in history and it was caused by a regulation, not by some other market factor,” McKay said. “It’s a $1 billion line right now.” Robert Sargent, president & CEO Tennant Risk Services, is seeing excellent growth in his wholesale brokerage, which specializes in professional liability and cyber liability. But selling cyber policies isn’t easy. “I don’t know if it’s the fastest growing or the best thing since sliced bread but we’re seeing a lot of interest,” Sargent said. That interest doesn’t always translate to sales. “It’s still hard to get people to bind but it’s a fascinating and difficult area to insure … underwriters are still figuring this (market)

U.S. Surplus Lines – Top 25 Groups (2014) Ranked by direct premiums written (USD Thousands)

Total Surplus Surplus Lines Lines Market Rank Group Name DPW Share (%)

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

Lloyd’s American International Group Nationwide Group W.R. Berkley Group Zurich Financial Svcs NA Group Markel Corporation Group ACE INA Group Ironshore Insurance Group Berkshire Hathaway Fairfax Financial (USA) Group Alleghany Insurance Holdings CNA Insurance Companies XL America Group AXIS Insurance Group Chubb Group of Insurance Companies Arch Insurance Group Argo Group QBE Americas Group Allied World Group Great American P&C Group Catlin U.S. Pool State National Group Aspen US Insurance Group Starr International Group Swiss Reinsurance Group Subtotal of Top 25 Total U.S. Surplus Lines Market Source: A.M. Best data and research 30 | INSURANCE JOURNAL-NATIONAL September 7, 2015

8,157,000 4,679,470 1,780,987 1,485,813 1,204,753 1,191,418 1,032,388 894,986 835,316 793,974 780,702 745,886 726,916 591,135 574,425 548,931 526,338 522,550 517,559 472,564 443,724 434,505 425,002 396,987 378,134 $30,141,463 $40,233,826

20.3 11.6 4.4 3.7 3.0 3.0 2.6 2.2 2.1 2.0 1.9 1.9 1.8 1.5 1.4 1.4 1.3 1.3 1.3 1.2 1.1 1.1 1.1 1.0 0.9 74.9 100.0

out. The policies vary a fair amount and exposures vary between insureds.” In McKay’s view, regulations can, and do, create surplus lines markets, but so far nothing has come close to what’s developed into the cyber insurance market. “For example — transportation network companies — that’s an emerging market, partially the result of a regulation but mostly the result of innovation, but it doesn’t approach the size and velocity of cyber.” Another driver of growth: an increase in merger and acquisition activity led to a 15 percent jump in demand for transaction risk insurance during the first six months of 2015, according to Marsh’s latest Global Insurance Market Quarterly Briefing. Combo Exposures Sargent says increased specialization and customization can also be credited with encouraging growth in surplus lines. “The surplus lines market provides a great outlet when there is a more complex exposure or coverage requirement,” he said. That could be solving a coverage gap as simple as a physician offering consulting services that aren’t covered under a standard medical malpractice policy. Or the doctor could be providing independent medical reviews, or doing side work in a medi-spa, both of which are often in surplus lines. “We are seeing combinations of exposures that can’t fit on the standard side,” Sargent said. It’s not just in the medical liability world either. Sargent said many combinations of exposures in professional liability involve professional services exposures plus a technology exposure. “We just had an outsourcing service operation that was providing the professional service and the technology platform. We’ve seen that in financial services, compliance, and on the medical side,” Sargent said. “This is the kind of thing where the surplus lines business can be very innovative in trying to put coverage together for these multiple exposures.” “What drives the value of wholesalers is expertise,” Sargent said. “We can go to underwriters and customize coverage for clients,” he said. www.insurancejournal.com

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SPECIAL REPORT

Lloyd’s Lloyd’s & Its Syndicates 2015 – Adapting to Changing Times By Charles E. Boyle

f one word could describe Lloyd’s of London, it would be “change.” There are very few business enterprises that have stayed in business as long as Lloyd’s — 327 years. It has survived wars, plagues and famines. It has seen the age of sail become the age of steam, rail transport, the automobile, aviation and finally the age of space exploration. It’s seen communications develop from a postal system into telephones, radio, television, and now the internet and smart phones. Lloyd’s ability to react and adapt to new situations has been an integral part of its culture since its founding. It’s still doing so — now more than ever. Lloyd’s Chairman John Nelson gave an overall view of his vision for the future of the Lloyd’s market in an interview at last year’s Reinsurance Rendezvous in Monte Carlo. (www. insurancejournal.com/news/international/2014/09/29/341824.htm) In addition to handling the changing

32 | INSURANCE JOURNAL-NATIONAL September 7, 2015

nature of the reinsurance industry Nelson also singled out the need to expand the Lloyd’s market globally. At the very beginning of his tenure as chairman he put forward a plan to deal with it — Vision 2025 — which he said, “is now in the execution phase, where we’ve made extremely good progress.” (http://www.insurancejournal. com/news/international/2014/04/21/326847. htm) Changes happen fast in this technology driven age, so Nelson’s comments are somewhat prophetic. Lloyd’s released an interim progress report on Vision 2025, which set forth the “strategic priorities” for 2015-2017, separated into eight sections. Syndicates, as Nelson pointed out, play a central role in bringing the changes of Vision 2025 to fruition. Their role has been crucial in recognizing new risks, such as cyber and terrorism. Reinsurance syndicates at Lloyd’s have helped make insurance linked securities (ILS) part of the process. They have taken advantage of Lloyd’s many worldwide licenses to expand the market

geographically. And slowly, but surely, they are making greater use of modern technology. Reinsurance Although reinsurance is in somewhat of a crisis, the sector has the potential for significant growth. A year ago Nelson estimated that the current addressable reinsurance market for Lloyd’s is around $600 billion; however, he expects that to rise to $2 trillion within the next 15 years. “As a result we are going to need more capital,” he said. “While at the moment that capital has arrived a bit early,” he expressed confidence that as an insurance and reinsurance market Lloyd’s is in a good position “to harness that capital.” Doing so will require changes in the way Lloyd’s syndicates do business and where they do it, whether in geographical terms or by line of business. Lloyd’s began in a coffee house where paleo-brokers or ship owners met paleo-underwriters, who represented wealthy individuals that were willing to take a risk ‘Maintaining the by insuring success attractiveness of the of a voyage Lloyd’s to a range that could of capital provid- often take more than ers will underyears to pin the market’s two complete. future success.’ The need for capital to underwrite the risks is now more important than ever. “Maintaining the attractiveness of Lloyd’s to a range of capital providers will underpin the market’s future success,” said the strategic priorities report. Lloyd’s has been there before. In 21 years it has gone from reliance on individual “Names” to fund its syndicates to being increasingly reliant on large and generally publicly owned re/insurance corporations — probably the most important change in its 300-plus years. continued on page 34 www.insurancejournal.com

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Lloyd’s

continued from page 32 Lloyd’s acceptance of corporate capital to back its syndicates ushered in the modern era. The change to corporate capital providers has also coincided with changing regulations. Lloyd’s ceased to be a self-regulating body under the Lloyd’s Act in 2001, when it became subject to the supervision of the U.K.’s Financial Services Authority (FSA), which has since morphed into the Financial Conduct Authority (FCA). New, more stringent rules were applied to the UK’s insurance industry, which is also subject to the often delayed insurance regulatory provisions of the European Union’s Solvency II. The fact that public corporations are required to file financial reports, which are heavily scrutinized by lawyers and accountants, is perhaps even more important than the official regulations, as misstatements Chairman John Nelson can result in costly lawsuits, especially in the U.S. Nonetheless, if Lloyd’s hadn’t made by regulatory initiatives, which require the change, there probably wouldn’t be a more risk management, and in most cases Lloyd’s today. additional capital. Lloyd’s also completely overhauled its Lloyd’s Vision 2025 is attuned to having governing systems and procedures. It to increase capital and to diversify its sourcreplaced its former struces. The strategic priorities ture with a Franchise Board This enlarged focus report notes that “Lloyd’s in 2002, whose principle will retain its unrivalled on capital and its mandate is to oversee diversity of capital, through management has the Syndicate’s business growth in all types of capiproduced conseplans. Under Director of tal participating at Lloyd’s quences for Lloyd’s (private, trade, institutional Performance Management Tom Bolt it has been instru- syndicates, and has and other). The geographic mental in helping Lloyd’s diversity of the Lloyd’s capled to further conthrough the financial crisis, ital base will significantly solidation in the and achieving the best increase, subject to this re/insurance results in its long history. capital bringing new busi Lloyd’s annual report for industry. ness and people.” 2014 states that as of Dec. 31 This enlarged focus on its 94 syndicates, managed capital and its management by 59 managing agents, had posted a collechas produced consequences for Lloyd’s syntive net profit of £3.2 billion [$5.05 billion], dicates, and has led to further consolidation a combined ratio of 88.1 percent and a in the re/insurance industry through mergreturn on capital of 14.7 percent. ers and acquisitions (M&A). It is gradually Over 300 syndicates were once active at reshaping the Lloyd’s market as the larger Lloyd’s, but they were mostly small in comsyndicates continue to grow, and new playparison to the ones operating today. That is ers are attracted to the market. in keeping with the ongoing trend in many The biggest consolidation so far this year industries, especially in the financial sector, has been XL’s taking over the Catlin Group. towards forming ever larger enterprises. It’s In terms of gross written premiums in 2014 also the result of the requirements for manCatlin’s Lloyd’s Syndicate 2003 was the aging corporate capital, and most recently largest at Lloyd’s with GWP of £1.975 billion 34 | INSURANCE JOURNAL-NATIONAL September 7, 2015

[$3.1075 billion].The group also managed several smaller syndicates. Combined with XL’s Syndicate 1209 – 2014 GWP £302 million [$475.3 million] – the potential capacity is over $3.5 billion. Tokio Marine acquired a significant stake in Lloyd’s Syndicate 510, managed by RJ Kiln & Co. in September of 2014, and in November combined Kiln with its other operations. The Syndicates GWP for 2014 was £1.097 billion [$1.727 billion], which, when combined with other syndicates managed by Tokio Marine Kiln Syndicates Ltd. brings the total potential capacity to close to £1.291 billion [app. $ 2.02 billion]. Both ACE Limited and Chubb Corp. operate Lloyd’s Syndicates. Their merger potentially combines ACE’s Syndicate 2488 (2014 GWP £375 million [$590 million] and Chubb’s Syndicate 1882 (2014 GWP £88 million [$138 million]. By acquiring Montpelier Re, Endurance is also acquiring its Lloyd’s Syndicate 5151 (2014 GWP £172 million [$270 million]. Fairfax Financial acquired Brit’s Lloyd’s Syndicate 2987 (2014 GWP £1.303 billion [$2.045 billion], making Prem Watsa’s company among the five largest operators of a Lloyd’s syndicate. Hamilton Insurance Group added Sportscover’s Syndicate 3334 [2014 GWP £56 million [$88 million] to its operations. Will the trend continue? Two of Lloyd’s biggest syndicate managers, Amlin, which manages Syndicate 2001 (2014 GWP £1.538 billion [$2.415 billion]) and Hiscox, which manages Syndicates 0033, 3624 and 6104 (combined GWP in 2014 £1.205 billion [$1.892 billion]) have said they aren’t interested in being bought out. At the end of August Amlin’s CEO Charles Philipps reiterated a previous statement that the company is not looking for a buyer. All businesses have to change and adapt if they are going to survive, from the largest — see Kodak — to the smallest. Lloyd’s, as a specialty insurance and reinsurance market, has originated a significant number of the coverages that are now standard. It has maintained its position in the industry and has survived by doing so. It looks set to continue down that road. www.insurancejournal.com

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SPOTLIGHT

Marketing Marketers Have Lost Control of Insurance Buying Process By Andrew Simpson

resents an attempt to win over consumers by providing information that is more help and less hype. Before offering advice on content marketing itself, Brandt served up some search engine history as a way to explain how marketers lost control and why content marketing is the prescription they need.

fter careers spent crafting and controlling their companies’ messaging to customers, insurance marketing and advertising professionals have lost control. Customers and prospects have taken over. Increasingly, today’s insureds and prospects care more about what other parties have to say than they do about what an insurer or agency has to say about its products and services. “Today’s consumer will leverage pretty much everything except brand-centric content including social influence, ratings and reviews. They’re going to look at the wealth of information that’s out there, available on the Internet, that is published by someone other than the brand,” according to branding expert Kevin Brandt, director of operations for Trusted Choice, the brand for the nation’s independent insurance agents. Consumers may obtain information from other people like themselves, friends and relatives, experts, fellow customers, consumer advocates, regulators and other third parties. “They’re going to find what they want and need when they want it. They’re going to choose when to engage. And so, your content absolutely needs to provide relevance and a payoff for those consumers,” Brandt told marketers at the annual meeting of the Insurance Marketing and

Communications Association (IMCA) in Nashville. The typical consumer will visit, on average, 10 places online before contacting an insurer or agency, according to Brandt. “When they make first contact with the seller, their decision to purchase has already been made,” he said. In their effort to regain relevance in the buying process, marketers in many industries, including insurance, are turning to content marketing, also know as native advertising or sponsored content. This rep-

How It Happened As it is with so many things having to do with modern marketing, search engine giant Google is largely responsible for the switch from brand-centric to customer-centric content, from content that advertisers push onto customers to content that customers search, find and pull from the internet to meet their needs, according to the Trusted Choice executive. In 2013, Google change its search algorithm that ranked highly any content that used the right keywords. The new algorithm, called Hummingbird, looks beyond just keywords to the quality of the content and what it actually says. “Prior to the release of Hummingbird, your online content was really all about page mechanics. Your web pages came down to linking structure. It came down to keyword placement and keyword density. You could use keyword stuffing and link farms to pretty much fool the indexers,” Brandt told the IMCA crowd. “You could have pages upon pages of continued on page 39

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SPOTLIGHT

continued from page 37 junk content that was meaningless to the consumer but it still ranked well with the search engines because the search engine indexers were stupid, for lack of a better word. They didn’t know how to put groups of words and phrases together to derive real page meaning.” But since Hummingbird, the quality of content matters to search engines, he said. “The search engines, if you think about it, are in the business of delivering meaningful results to their users. If you go to Google and you type in a search phrase and it comes back with a bunch of junk, you’re going to move on to a different search engine. Google has a vested interest in making sure that they deliver meaningful content to you. Their indexing engines had to evolve to be able to meet that need,” he said. Page mechanics still matter to search engines but today’s search has everything to do with the usefulness of content and whether it’s going to solve a problem for customers, according to Brandt. Trust in Media Beyond Google, there’s another reason the quality of the content about a company or product matters more than it used to. It’s the lack of trust in businesses and traditional media. “You need to trust that what you’re buying as a buyer is the right thing at the right price,” Brandt said. “Corporate trust and trust in traditional media are really on a rapid decline. The world is becoming very media skeptical.

Marketing As a matter of fact, less than Watch: How Google Changed Marketing 50 percent of consumers find radio, television or newspaper ads credible.” He said that years ago, people believed what advertising told them. Thus a brand could reasonably correlate sales volume to the frequency with which consumers saw their advertising. “That’s not the case today. http://www.insurancejournal.tv/videos/12592/ People don’t trust brand. In particular, Millennials don’t why marketing and advertising departtrust brand. Their experience with their ments have turned to what is known as brand really needs to meet their interests content marketing, or sponsored content, on their time. That’s where content starts and why 70 percent of marketers plan to to come in,” according to Brandt. spend more on content marketing in the He said traditional marketing and adveryear ahead. tising content, which is brand-centered and He shared Forrester Research’s definition broadcast-based, is no longer working. of content marketing: “A marketing strategy He said the average consumer receives where brands create interest, relevance, and more than 5,000 marketing messages per relationships with customers by producing, day and consumers don’t open 90 percent curating, and sharing content that addressof the corporate marketing emails they es specific customer needs and delivers receive. Eighty-six percent of people skip visible value.” over television commercials thanks to DVRs The goal of content marketing, like puband TiVo. Forty-four percent of direct mail lishing, is to produce relevant content that gets thrown away without being opened. creates longer-tail visibility. In Brandt’s “They prefer to find content themselves. words, content marketing “needs to be We’re switching from this push environfocused on long-term engagement and it ment to a pull environment. It’s inbound needs to build relationships.” marketing instead of outbound marketing. He said magazines provide a good model Consumers really don’t want something because they have a loyal readership and shoved in their face,” Brandt said. subscribed readership. “The readership is familiar with the content pillars of that Age of Content Marketing publisher. They’re willing to engage with According to Brandt, all of this explains continued on page 40

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SPOTLIGHT

Marketing continued from page 39 the brand. These are people who are subscribed to the brand,” he said. “That is really where you want to get. You want to have people that are willing to come back to you, pull information from you because it’s useful, because there’s a payoff for them.” He said content marketing is complementary to other marketing channels and not a replacement for them. There remains a need for content that’s “produced simply to be in the game,” enough information to let people know about the company and products and information that will drive quick traffic to a web site. “Content marketing is not a replacement for paid media. It will reduce your dependence on paid media, but it will never replace it. There’s always going to be a place for paid advertising,” he said.

Red Bull, maker of the energy drink, as an example of a brand that is clearly doing content marketing the right way, so much so that the company has become known as much for its content production as for its drink. He said Red Bull has built an “extremely subscribed audience through some extreme sport and adrenaline focused content that’s designed to bring their target customer to consume their content in a way that still builds brand engagement, but is not an overt advertisement.” The Red Bull videos feature downhill mountain bikers, big wave riders, and people jumping out of airplanes and spaceships. Brandt described a video with a man in a kayak who is about to go over a waterfall. The kayak and the helmet have the Red Bull logos on them, and that’s the only advertising involved. “They don’t need to be more ‘in-your-

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face’ about it. It’s a subtle integration of the brand there. The reason why the consumer is there is because they want to watch this video. These are the adrenaline junkies that are the same people who buy the energy drink,” he said. The company’s home page has nothing but this content. “You’d be hard-pressed on their website to find anything about the energy drink,” he said. At the very top is a link for the company and its products. The strategy has been so successful for Red Bull that it has a completely separate web property for monetizing the content that it produces and the revenue received from licensing the extreme sports videos is approaching that of the revenue that it receives from selling energy drinks, according to Brandt. One likely reason Red Bull sells its marketing content is that content like this is expensive to produce. “You really have to have a solid strategy, goals, and objectives and ways that you can measure your return on investment,” he told the IMCA audience. Content for Marketing Brandt shared his recipe for producing content marketing. First, content marketing requires research. Marketers need to identify what their customers’ needs are, and what they’re searching for online, in order to develop the content that meets those needs. “You need to be able to research what your target customer is looking for and develop content to help solve that problem for them. You need to remember that we’re living in the age of the consumer. The only way that they’re going to know about you and your products and services is if they pull the content, and the only way that they’re going to pull the content is if it’s relevant to them, and meaningful and solve their problem for them, so you really need to build your strategy around what your target customer wants and needs,” Brandt said. Second, content marketing reflects authority. “Please be an expert. Your brand has absolutely had to have earned the right to talk about what you’re talking about. If it’s not www.insurancejournal.com

relevant to who you are, it’s not a relevant for them. Your end result, your endgame in part of your content marketing strategy,” he your content marketing strategy is building said. a subscribed audience. Absolutely needs to “You need to ask yourself, what is your happen. It’s critical,” he stressed. brand authority? What does your brand Getting Started allow you to talk about? If you’re in the Brandt urged the communications probusiness of selling insurance your brand fessionals to first determine what it is they probably doesn’t allow you to talk about want to accomplish with content marketcertain things, maybe ing. It could be to ‘People don’t trust brand. increase sales volume, lipstick.” In particular, Millennials He cited the Red establish thought leadBull example and ership, or develop lead don’t trust brand. Their how extreme adrenexperience with their brand generation. aline sports are Next, he advised really needs to meet their them to identify any “naturally aligned” with Red Bull’s target interests on their time.’ content that is already customer, people available that could who want to consume energy drinks. “Red serve the purpose because developing new Bull isn’t talking about tranquil beaches or content is expensive. soothing music. They’re not producing a list “You don’t want to have to redo it. You of the top 10 ways to lower your heart rate.” really need to go through and look at your He advised the IMCA professionals to entire organization and see where content learn what it is their company is good at. exists,” he said. This should include looking “Find what that is, be an expert at it, and outside of what the marketing department develop your content around that, but with has for materials to what other department one caveat: take the boring out.” in the company have as well. Third, the goal of content marketing He said it is also possible to curate and is to build a subscribed audience, that is borrow content through partnerships and to attract consumers who are willing to relationships with other brands. return to the company’s site again and again But there are limits on using others’ because the content is of value to them, content. “When it comes down to who you because it “had a payoff, either as entertainare as a brand and what differentiates you ment or knowledge.” from your competitors, create that content. Subscribed consumers are the “best form No one else can speak to your expertise like of earned recognition” but they’re not going you better than you can,” he said. to come back because they like a company’s Regarding distribution, he said it is logo or television commercial. “They’re important for a company to know who on only going to come back if there’s a payoff the web is also influencing its customers

and find ways to reach those influencers. “You want to identify who the loudmouths are. Who are your mavens out there in the social space that are influencing the audience that’s related to your brand,” he said. “You’re going to have friends and you’re going to have foes. You want to make sure you keep your friends close and your enemies closer. The foes can be influenced. If you influence your foes, you’ll find oftentimes that those loudmouths will become your biggest brand advocates.” He told the marketers not to expect to establish a perfect content marketing strategy overnight. They should, however, expect to spend some money. “You cannot publish content without having a good editor, please. Make sure you have quality assurance in place,” he said. He told the communicators to start by picking topics or what he called “topic pillars” that are important for their company and in which they can exhibit expertise. Next they should develop editorial guidelines that describe their brand’s voice—is it serious? funny? Define it and stick to it, he advised. Then, identify magazines and other media that address those topic areas. Finally, they should develop key performance indicators (KPIs), metrics they can track to see what results they are getting and if they justify the investment in content marketing. “It’s going to take time, but you absolutely need to kick it up a notch, and you need to start somewhere,” he said.

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The Competitive Advantage What to Know About Insurance Company Financial Status

recently listened to an insurance company executive give a discombobulated, “woe is me” speech to a room of agents who were largely ignorant of carriers’ financial success. To summarize his presentation: Insurance company investment income is down to 2 percent so companies have to make By Chris Burand an underwriting profit. Underwriting profit was good last year, but the economy is slow, and growth is slow, so insurance companies have to watch expenses and maintain higher prices. I have heard this same speech, sometimes it is a lecture and sometimes it is a marketing rep simply repeating what he/she has been told, so many times that I can give it. The presentation is almost always the same regardless of market conditions or carrier variance. And companies get away with their sorrow tales because agents are almost as ignorant of insurance company financial success as low-level company people. Some carrier CEOs do not understand their own financials. This is a potent statement but readers with key experience know its truth. Given the recent Wall Street Journal articles on an insurance company whose financials are clearly suspect, one has to wonder whether all insurance department analysts understand insurance company financials adequately, too. Here are some absolute facts based on simple math and A.M. Best and Insurance Information Institute data. Investment Income As taught in the first 15 minutes of Finance 101, investment income = investment portfolio x yield. I don’t think I have ever heard or read of an insurance company describe investment income as a function of anything but yield. It is as if the size of their investment portfolio never changes. It is as if they think or want to portray every 42 | INSURANCE JOURNAL-NATIONAL September 7, 2015

insurance company as having the same size of portfolio (relative to net premiums written). That is absolutely not the case because investment portfolios relative to NPW vary from one company to another by 100 percent-plus. Here’s how it works: If the investment portfolio is $100 million and yield is 3 percent, then: $100 million x 3 percent = $3 million in investment income. If the investment portfolio grows, which is the case for the industry (the industry has record surplus so it stands to reason investment portfolios are growing), then investment income still increases if the yield does not decrease too much: $110 million x 2.9 percent = $3.19 million in investment income. The carrier’s investment income increased 6.3 percent although the yield decreased 3.3 percent. In these situations, I typically hear insurance companies announce that the yield decreased by 3.3 percent, another sad year for investment income. That is just plain baloney! Yield decreasing then is really only an issue for undercapitalized and/or inadequately profitable carriers (often but not always prob-

lems that go hand in hand). For well-capitalized companies especially, marginally lower yield is just a nuisance. For example, if yield is 2 percent per the speaker’s presentation (that particular company’s yield is more than 3 percent, which is 50 percent better than stated — not a small increase so even here companies are hedging the true value of their investment income), they are making more money each year because their underwriting profits are so high and they are leaving their money in the company thereby investing their profits and growing their investment portfolio and investment income. The best companies are making so much money on their investments and their profitability is so large that investment income is huge. Consider that in 2014, many strong companies achieved combined ratios of less than 90 percent. Companies are profitable, at the industry average combined ratio of 103 percent (20-year average). Do not ever believe a story that companies are not profitable at a 103 percent or even a 104 percent, because if companies don’t make a good profit at a 103 percent over the past 20 years, the industry would be broke rather than having record surplus. If underwriting profit is at least 13 percentage points better than normal (which it was in 2014), some companies made absolutely huge underwriting profits. Even more, some companies made as much in investment income as underwriting profits. continued on page 44 www.insurancejournal.com

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The Competitive Advantage continued from page 42 I don’t feel sorry for them that yields are and outside capital coming in is why surlow. plus is at a record. If the company executive’s presentation was accurate, these results would not be Haves and Have Nots possible. This combination of great under These are all facts. What is missing is writing results, strong investment income, thePM distinction NAPSLO_IJ_halfv_print1.qxp_Layout 1 3/4/15 1:33 Page 1 between the haves and have

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nots. According to an A.M. Best special report (March 30, 2015), 30 percent of all carriers, by their own admission, have 0 percent excess surplus. For some companies I am not convinced their reported capital adequacy is quite as strong as their scores suggest. For example, a The best companies major source are making so much of capital for money on their one carrier, per A.M. Best, investments and is the capital their profitability is so contribution large that investment every new policyholder income is huge. makes. But I have done E&O audits for agents representing this carrier and any notification the insureds get regarding this capital contribution is so buried that agents selling the product don’t often understand it, much less the insureds. So if a capital call occurs, what happens versus a company that has cash in the bank with which to pay for a catastrophe? I am sure the regulators and rating companies have insights I do not have on these kinds of situations, including those where companies reinsure themselves. Somehow this makes sense but on the surface, it makes me wonder. I find inadequately capitalized companies (relative to their competitors — not necessarily solvency standards) want agents and employees to believe their profitability/surplus issues are shared by all carriers. That is clearly not the case by any intelligent measure. This means that they don’t have capacity to cut rates in a soft market as much as their competition. They may not have capacity to increase writings. They may not provide the support agents need. They are at a significant competitive disadvantage and obviously, no executive wants outsiders or even most insiders to understand the disadvantage exists. That is one aspect. However, some top executives have been drinking the Kool-Aid so long they have lost track of their true financial position. I have had conversations with company executives continued on page 46

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The Competitive Advantage continued from page 44 where I have had to cite their own filings because they have been so out of touch. Already moderately capitalized or inadequately capitalized (from a competitive perspective), they have another potential problem: when interest rates increase, the value

of their investment portfolio may decrease thereby cutting their surplus and ability to write business. Many relatively new companies that might have had reinsurance issues now reinsure themselves. Frequently some affiliated

reinsurer provides 100 percent or nearly 100 percent of the primary insurer’s reinsurance but the affiliated reinsurer is dependent on the primary company for cash flow, which then provides the capital for the reinsurance policy. I have never understood how reinsuring yourself is true reinsurance especially if the reinsurer needs the insured’s profits with which to reinsure. Beyond the capital double counting issue, there does not seem to be much spread of risk. There’s only one insured so it seems concentration of risk is as high as possible. I am not seeing agents and others making a distinction between this scenario and an insurance company purchasing reinsurance from A+ rated, completely separate reinsurance carriers either. Instead, I hear people say, “They’re (We’re) reinsured so nothing to worry about!” Being that their affiliated companies are often on islands, the phrase, “Don’t worry, be happy” comes to mind. Reinsurance Is Not Generic Reinsurance, much less the specific treaties, is not generic. An obvious statement clearly not understood by some important people. Maybe a large hurricane will teach this lesson but I worry about the insureds who may pay the price. If this happens, the entire industry will suffer. The call for federal regulation will escalate possibly past the tipping point. The industry has been lucky that no major hurricane has hit an insured area in 10 years, the longest period in modern history. This industry, by companies’ own admissions and by simple review, is an industry of haves and have nots. Understanding which is which, understanding just how profitable the haves are and how marginally profitable/capitalized the have nots are creates a true competitive advantage. Knowledge truly is power and knowledge in this case involves looking far past the simple letter grades. And at the next “woe is me” carrier presentation, listen between the lines. Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719485-3868. Email: chris@burand-associates.com.

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Market Cycle The Hard Market That Wasn’t Are Your Carriers Positioned For What Comes Next?

or the U.S., property/casualty industry recent events have mimicked the boxing idiom one, two punch. P/C industry professionals haven’t seen a combination of an underwriting cycle and an investment environment quite like this within recent By Rudy Dimmling & memory. The typical prolonged soft underwriting cycle followed by a much shorter, but very strong hard market has failed to materialize. In fact, the last three soft markets have averaged Greg Hoeg nine years in length while the last three hard markets have averaged only three years. And, thanks to the Fed’s prolonged stance of low interest rates, the soft cycle has now combined with anemic investment returns adding further strains on operating performance. Questions of “How long will both last?” and “Is this the ‘new normal’?” are just the tip of the iceberg of growing concerns. No one can guaranty how the P/C market will perform, leaving carriers to grapple with key issues about how to prepare for the future. Should they cut costs to survive, ride it out, invest in new initiatives to capture market share or look to other options? Do they even know where they stand relative to the industry, competitors or even their own past performance? Unfortunately, traditional performance measures and metrics 48 | INSURANCE JOURNAL-NATIONAL September 7, 2015

available to insurers, which have always had many weaknesses, are especially not useful at times like this. Most insurance executives have become frustrated with traditional performance measures because they are either purely internally oriented or they do not sufficiently differentiate carrier performance from competitors to be useful in understanding their company’s performance and position in the market. Efficient Frontier Analysis (EFA) helps answer these questions and may be the best tool to do so in such unusual times. Current Hard Market/Soft Market Coming out of the Great Recession, many

carriers were expecting rates to harden as the economy improved. Historically, as economic activity returns to normal and the economy expands, insurers benefit from high demand and hardening prices. But while rates did firm to a degree, the hard market stalled relatively quickly resulting in renewed rate compression in an already low interest rate environment. As the graph below shows, commercial lines rates have begun to trend downward. The typical P/C underwriting cycle is composed of a “hard” market lasting from two to three years with increasing rates. As shown in the graph below, it is not continued on page 50

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Market Cycle

continued from page 48 unusual for rate increases to range from 15 percent to 30 percent on a year-over-year basis. Hard markets are typically attributed to significant declines of surplus in the industry and/or significant increases in demand for insurance. Both can be tied to a robust expanding economy where capital is being deployed to growing industries driving overall growth and the associated need to insure the new risks created by innovation and the growth (properties, employees, businesses, goods, homes, cars, etc.). Combine this with a significant catastrophic event such as a hurricane or massive earthquake and the formula of supply (capital) and demand for the P/C industry Simultaneously, insurers retained high is primed for major price capital levels (see U.S. increases. Policyholder Surplus What is unusual this Soft market cycles typigraph), particularly in time around is that cally result after the hard the reinsurance segdespite a prolonged market has pushed rates ment. The hope for and significant soft beyond long-term sustainmany insurers had been able levels and the high to quickly capture hard market, the hard profitability of the industry market failed to fully market opportunities has attracted more capital through the ability to materialize and be seeking superior returns, immediately deploy thus increasing competition. sustainable. capital to new opportuUnfortunately, soft markets nities. tend to last much longer than hard markets, but with less dramatic year-over-year A New Approach for Moving Forward rate changes. Rate declines of 5 percent to The unusual twist now is that even 15 percent year-over-year are not uncommon as the economy continues its slow and in a soft market. unsteady recovery, the P/C market is turn What is unusual this time around is ing soft. The weight of the industry’s capital that despite a prolonged and significant is too much for the paltry new demand soft market, the hard market failed to experienced thus far from the recovery. So fully materialize and be sustainable. Price at a time of potential threat to the industry, increases never reached a level sufficient to most carriers’ financial strength will look be considered a truly hard market. In addigood by most existing measures. Standard tion, the “firming” market was relatively ratio analysis will show all companies being short lived. negatively impacted by soft market pricing, One of the drivers that prevented a without much differentiation. Insurance sustainable hard market from developing executives, investors, buyers, vendors and was the extended weak economy that folregulators will need more accurate mealowed the last recession. Most recoveries sures of carrier performance that pinpoint from recessions in the U.S. are much more insurance company operational efficiency rigorous and definitive than what we have and effectiveness. In literal terms, how seen recently. The dubious nature of any much “bang for the buck” each carrier gets real trending improvements in the econofrom its investment in operations. In the my dampened confidence in the recovery’s past, over reliance on financial strength sustainability and interest in investing in measures as the gage of success has led to it on the part of investors and the public. surprise liquidations and impairments of 50 | INSURANCE JOURNAL-NATIONAL September 7, 2015

carriers at the time of cycle swings. Carriers have three clear alternatives for navigating the current industry landscape. These are: • Do Nothing (Ride the Wave) • Hunker Down (Reduce Costs) • Manage Through the Challenge (Create/Identify Opportunities) • New Offerings • New Customer Segments • New Value Proposition • New Uses for Capital Winning in today’s P/C environment requires doing something. Any of these alternatives or combinations of them can be successfully used by carriers to out-perform competitors during the next stage of this unusual cycle depending on the carrier’s current situation and capabilities. Not all insurers are equal in terms of its capital, mix of business, scope of operations, distribution structure, etc. Management must know the strengths and weaknesses of the organization, and how they scale within the organization, before decisions about the best strategic approach for responding to this stage of the cycle can be determined. It isn’t enough for management to know that business segment “A” performs better than business segment “B.” Rather they must know how these businesses perform against specific competitors and the overall industry, including the degree to which they lead or lag. If a company’s top performing line of business is lagging behind the industry’s best carriers, maintaining continued on page 52 www.insurancejournal.com

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Market Cycle continued from page 50 the status quo might not be the best option. Reinventing a weaker business in a segment without exceptionally strong competition could be a better choice. Ultimately, management should think of their situation and the options available to them along two basic parameters, efficiency and effectiveness. Knowing exactly where the company is positioned, internally and competitively, provides a foundation for evaluating the impact of a continuing soft cycle. Further, knowing the degree to which the company is strong or weak in various business lines provides a gauge of how significant a market challenge it can withstand better informing when to change course, amongst other decisions. Efficient Frontier Analysis Efficient Frontier Analytics (EFA) are an excellent tool for identifying where a carrier stands in the industry and relative to its competitors, as well as, which components of its internal operations (lines of business, resource categories, functions, etc.) are contributing to or detracting from the company’s success. When properly applied, EFA can identify with a high degree of precision where a carrier is and is not operationally efficient and effective, including the degree to which it is or isn’t, in dollars. With such measures, management can have greater confidence in selecting strategies and tactics to address cycle changes. Knowing the value to be gained by implementing changes designed to outperforming competitors, puts the costs of doing so in context. The answer for P/C carriers is to incorporate EFA tools into their planning and monitoring to better measure operational performance thereby having the flexibility to act/react when markets change. Dimmling (rdimmling@alvarezandmarsal.com) is senior director and Hoeg (ghoeg@alvarezandmarsal. com) is senior director at Alvarez & Marsal, a global professional services firm, based in New York, N.Y. A&M delivers performance improvement, turnaround management and business advisory services. Phone: 212-328-8541.

52 | INSURANCE JOURNAL-NATIONAL September 7, 2015

NATIONAL COVERAGE

MyNewMarkets Nightclubs Market Detail: RMS Hospitality Group’s (www.rmshg.com) coverage for nightclubs is able to quote 100 percent liquor sales with excess coverage available. Program includes general liability; assault & battery; and liquor liability. Available limits: General aggregate limit $2 million; products-completed operations aggregate $2 million; personal & advertising injury $1 million; each occurrence limit $1 million; liquor liability limit $1 million; fire damage limit (any one fire) $100,000; medical expense limit excluded; assault & battery available up to $1 million; excess limits available up to $5 million; hired/non owned auto liability limit $1 million. Available limits: As needed Carrier: Unable to disclose, non-admitted States: All states except Alaska, Vt., and W. Va. Contact: Mark Derrenberger at 516-742-8585 or e-mail: info@rmshg.com

Commercial Auto Market Detail: Gladius Insurance Services LLC’s (www.gladiusins.com) commercial auto program is available nationwide. A15 admitted carrier (contact Gladius for carrier name); direct bill available. Eligible classes include: commercial auto, trucks, trailers, private passenger vehicles, contractors, retail, wholesale, etc. Ineligible classes include: trucking risks, taxis, limos, for-hire trucking, and concrete-in-transit. Available limits: Minimum $300,000, maximum $4 million Carrier: Unable to disclose, admitted States: All states except Alaska, Hawaii, Md., and Ohio Contact: John Baccarella at 877-587-4999 or e-mail: john@gladiusins.com

E&O Insurance for P/C Agents Market Detail: EOforLess.com (www.eoforless.com/products) offers coverage in all states (except N.Y.). Policy highlights: preferred risk rates; group rates sponsored by the National Ethics Association; instant proof of insurance; administered by Mercer US Consumer. Limits: $1 million each claim/$1 million annual Available limits: As needed Carrier: Everest States: All states except N.Y. Contact: Customer service at 866-795-2041

General Liabilty Market Detail: Northern Underwriting Managers Inc. (www.northernum.com) offers general liability and primary liability coverage with a broad appetite. Available in all 50-states; policies issued within 15 days; minimum premium $7,500 with no maximum. Target Appetite: construction (all types), stand-alone products & completed op’s; manufacturing and more. Submission requirements: full Acord apps and three to five years loss history, emailed to underwriter. Available limits: Minimum $1 million; maximum $2 million Carrier: Unable to disclose, admitted and non-admitted available States: All states Contact: Customer service at 855-825-9353 www.insurancejournal.com

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IDEA EXCHANGE

Minding Your Business Dressing Up for the Wedding: Book of Business, Part 2

ou can’t take it with you. Every business owner will eventually “sell” his or her business. It can either be on terms the owner defines, or it can be based on whatever happens at the end. So, if an owner desires to have an orderly sale at a fair price (and that can include options like gifting it to the next generation), then some By Catherine Oak & preparation work needs to be done before the big event. In part one of this two-part article, (see Insurance Journal magazine, July 20 issue, page 34, for part one) we introduced the Bill Schoeffler concept of “running your business like you are ready to sell your business.” That column covered tips on optimizing the agency’s operations for the eventual sale of the business in order to attract qualified buyers and a high value. This month’s column will focus on the agency’s book of business and related topics. The two things most buyers focus on are the agency’s profits and the book of business. Typically, the latter drives the former. A bunch of small accounts, or labor-intensive large accounts usually do not help make the firm profitable. That is why it makes sense to deliberately choose the types of accounts that the agency will focus on for new growth. When deciding which direction to grow the business, one approach is to model the business after future potential buyers. Typically, those buyers have a successful business model, so that alone is a good reason to mimic their approach. Another reason to model after potential buyers is that it will make the business more valuable, since the buyer will have an easier transition due to the similarity. In general, buyers are looking for prod54 | INSURANCE JOURNAL-NATIONAL September 7, 2015

ucts, services, processes and people that generate profits in the most efficient manner. Each buyer will have their own unique approach however there are only a few main components of the book of business on which they focus. Here are four of the most common components. A ‘Good’ Book of Business There are no absolutes in how to define a “good” book of business. It is a relative term depending on the buyer. Some buyers focus on profitability, some focus on the composition and some, maybe something else. Generally, larger commercial accounts tend to be more profitable, especially when they are rounded out with multiple polices and lines of business. These types of accounts also attract the large, well-funded buyers. But, they are difficult to obtain and maintain for smaller agencies. An efficiently run personal lines book or small commercial accounts can be very profitable and easier to write for smaller agencies. Buyers for these types of agencies

tend to be local peers, or at most regional agencies. The downside with these types of buyers is that they usually cannot pay top dollar and have less favorable terms compared to large regional or national brokers. A Strong Platform for Growth One of the most important attributes of a good agency is a stable of properly managed non-owner producers. This is an indication of a sales-oriented business. Also, if the owners are retiring, then it is important that there are producers in place to perpetuate the owners’ accounts. If not, then producers of the buyer need to be able to handle them. Buyers want to make sure that the owners and producers’ books are retained — the more producers the better the chances of this occurring. Keep in mind that often an earn-out is put in place anyway, especially if the buyer is worried that the accounts have not been properly transitioned. Sales Management in Place Many agencies have some problems with sales management. The agency owners are usually the drivers for new sales and the other producers are not properly managed. These firms are not sales organizations and must tout themselves as good retainers of business and service oriented. They should also get rid of the poor performing producers and not make this the buyer’s problem. There are even some basic sales management tools in place that will set the firm apart from those that don’t have any at all. As a minimum, continued on page 56 www.insurancejournal.com

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Minding Your Business

continued from page 54 biweekly or monthly sales meetings should be established. Goals should be set annually and monitored with individual sales coaching. Buyers look for firms with a good sales culture in place. It is also important for account managers to participate in sales and be rewarded for account rounding in all departments and across departments. Doing the Work The largest expense category for agencies is compensation. So, the key to increasing profits is to pay people for the work that they do. This philosophy comes into play with personal lines and small commercial accounts especially. The agency will often not make any money on these accounts if they are paying both a producer and CSR. Often, the CSR is doing all the work, so the producer is getting paid for doing nothing. Resentment often occurs. It is OK to have small accounts, however they should be handled much differently

than medium to large accounts. Producers can generate the business, but then the service staff should handle all the work from there on. This means producers can get paid commission on the new accounts, but they should not get renewal commissions on these small accounts. This approach applies to both PL and CL small accounts. How is a “small account” defined? It usually depends on where the agency is located. In a rural area, a small account might be anything under $250 to $500 in commission. For a medium size agency in an urban area that limit might be $2,500 in commission or more. Some producers will be quite upset if

they are told they will lose the commissions on these accounts. It is best to have management have a report done by producer based on size of account, so they can indeed see at varying levels the amount of commission they might lose out on if changes are made and if it really is significant or not. If significant, management can also ween the producers off these commissions over

LegaL Notice

If you paid or reimbursed others for the purchase of certain Aftermarket Automotive Sheet Metal Products between January 1, 2003 and September 7, 2015, you may be entitled to a cash payment from partial class action settlements. Settlements have been reached with Tong Yang Industry Co., Ltd., as successor-in-interest to Taiwan Kai Yih Industrial Co., Ltd., TYG Products, L.P., and Gordon Auto Body Parts Co., Ltd. (collectively “Settling Defendants”) in a class action lawsuit about whether they, together with Jui Li Enterprise Co., Ltd., Auto Parts Industrial, Ltd., and Cornerstone Auto Parts, LLC (“Non-Settling Defendants”), violated state and federal antitrust laws and other state laws by agreeing to fix prices and limit the supply of Aftermarket Automotive Sheet Metal (“AMSM”) Products. AMSM Products include any and all aftermarket automotive parts made of any kind of sheet metal including, but not limited to, hoods, doors, bumpers, fenders, bonnets, floor panels, trunk assemblies, trunk lids, tailgates, roof panels, and reinforcement parts. Defendants deny each and all of the claims, as well as all charges of wrongdoing or liability. The Court has not decided who is right. Who is included? The Settlements include all third-party payors who indirectly paid or reimbursed others for the purchase of AMSM Products for end use and not sale or resale, purchased anywhere in the United States between January 1, 2003 and September 7, 2015 (“Settlement Class members”). What can you get? Tong Yang Defendants have agreed to pay USD $6.7 million and Gordon Defendant have agreed to pay USD $2.5 million in settlement of the claims against them. Due to a requirement of Taiwan law that applies to the fund because it will originate from a Taiwan bank account, twenty percent will be withheld as taxes, resulting in a total deposit in the amount of USD$7.36 million (“Settlement Fund”) in an escrow account in the United States. Each Settlement Class member that submits a valid Claim Form will receive a pro rata share of the Net Settlement Fund based on their volume of qualifying AMSM Product purchases as compared to the total volume of all Settlement Class members’ qualifying AMSM Product purchases. How do I get a payment? To qualify for a payment from these Settlements and any future settlements or judgments in this litigation, you must complete and submit a Claim Form by February 26, 2016. Claim Forms are available at www.AftermarketSheetmetalIndirectPurchaserSettlement.com, by calling 1-866858-6088 or by writing to AMSM Indirect Settlement Claims Administrator at P.O. Box 43376, Providence, RI 02940-3376. Claim Forms may be submitted online or sent to the Claims Administrator via U.S. Mail. What are my other options? If you do not want to be legally bound by these Settlements or the continued litigation, you must exclude yourself by December 15, 2015. Unless you exclude yourself, you will not be able to sue any Defendant for any claim that was or could have been asserted in this lawsuit or is released by the Settlement Agreements. If you do not exclude yourself from these Settlements and continued litigation, you may object and notify the Court that you or your lawyer intends to appear at the Court’s final approval hearings. Objections are due December 15, 2015. For more information, including the Long Form Notice and Settlement Agreements, and the ability to register your name and address to receive future notices in the mail as there might be future settlements or judgments in this litigation, go to www.AftermarketSheetmetalIndirectPurchaserSettlement.com. The fairness hearings. The Court will hold Final Approval Hearings in these cases (Fireman’s Fund Insurance Co. v. Jui Li Enterprise Co., Ltd. et al., 2:13cv-00987, and National Trucking Financial Reclamation Services, LLC v. Jui Li Enterprise Co., Ltd. et al., 2:14-cv-01061, which were consolidated with the lead case Fond du Lac Bumper Exchange Inc. v. Jui Li Enterprise Co. Ltd., et al., 2:09-cv-00852) on January 14, 2016, at 11:00 a.m. CST, at the United States District Court for the Eastern District of Wisconsin. At these hearings, the Court will listen to any objections, and consider whether to approve: the Settlements; attorneys’ fees in the amount of $3,066,667 (i.e., one-third of the USD $9.2 million Settlement Fund); reasonable costs and expenses; $20,000 payments to each Representative Plaintiff (Fireman’s Fund Insurance Company and National Trucking Financial Reclamation Services, LLC); and the plan of allocation.

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56 | INSURANCE JOURNAL-NATIONAL September 7, 2015

8/20/15 7:46 AM

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something like a twoyear period, with the new plan applying to only new accounts until then, giving producers a little time to grow their book. If the producer is upset and can’t get over the change, that is a clear indication they are not sales oriented and might not be a good “fit” for the future direction of the agency. Producers need to focus on new sales and maintaining medium to large accounts. The agency cannot pay a producer and a CSR to handle a commercial account that brings in only $500 in commissions, for example. Niches or Specialties Agencies with niches or specialties tend

to be more profitable and are in a position to have faster growth. This is because program business allows the agency to be more efficient since they can often deal with only one product and one carrier. Producers and service staff get very familiar with the issues and don’t have to reinvent the wheel each time. Buyers could be attracted to either the specific type of program business the seller has or the profits they generate, or both. Agencies often don’t realize they have specialties; so it is a good idea to generate a report of the book of business by SIC code. It is also a good idea when hiring new producers to find out what niches they may already have. Once the niches are established, the agency resources can be spent on the producers’ niches to get them leads, marketing, conventions and establishing networking groups. Producers can better succeed in agencies that provide them these resources.

Marketing assistance is also a plus to producers. It is amazing today how many agencies hire and then just show new producers the desk, and they are expected to be on their own to produce! Summary The best way to plan an exit strategy is to create an agency that others will want to buy. This means that the agency operations and book of business need to be attractive, efficient and well-managed. This is not only the best way to attract buyers, but it is the best way to run the business. Oak is the founder of the consulting firm, Oak & Associates, based in Northern California. Schoeffler is an associate of the firm. Oak & Associates specializes in financial and management consulting for independent insurance agencies, including valuations, mergers acquisitions, sales and marketing planning as well as perpetuation planning. Phone: 707-936-6565. Email: catoak@gmail.com.

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September 7, 2015 INSURANCE JOURNAL-NATIONAL | 57

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Human Resources Managers as Employee Engagement Ambassadors

aced with an aging workforce, a shortage of incoming talent and an unemployment rate hovering around 2 percent, the insurance industry is encountering an increasingly challenging recruiting climate. In light of this tightening labor market, employee engagement is proving an important factor in ensuring organizational success. By David E. Coons Unfortunately for many companies, disengagement among employees is extremely high. According to a Gallup survey, nearly 52 percent of professionals in the U.S. are not engaged at work, while an additional 18 percent are actively disengaged. This means that only 30 percent of the U.S. workforce are actually happy with their jobs. Employees are a vital part of any organization. As a result, many companies are rethinking how they can combat the growing disengagement of their staffs. However, they may be overlooking the integral role

that management can play in cultivating an engaged workforce. The competition for talent is fierce. Insurance organizations who wish to come out ahead in the war for talent need to rethink their current engagement strategies and get their managers on board. What can organizations do to keep their employees engaged? What role can managers play in cultivating a happy workforce? Articulate a Clear Vision Organizations with a clearly defined, over-arching goal are more likely to have an engaged workforce than those without a shared vision. Today’s employees want to understand how their roles benefit the overall organization. They want to see how their work fits within the larger scope of the entire organization and how their contributions are impacting the overall success of the organization. In fact, 98 percent of engaged professionals attribute their on-thejob happiness to the knowledge that they are valued as an individual within the larger organization.

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The key is to determine a single, companywide goal that employees can rally behind. Not only does this ensure a shared vision throughout the organization, but it also encourages employees to better understand the value of their contributions. In order to ensure that the goal is not too “high-level” and distant, managers should establish milestone objectives that can be achieved throughout the year. Make sure to celebrate the “little victories” that are achieved along the path toward reaching the final goal. Seeing how their jobs intertwine with the overall company mission enables employees to feel better connected and thus more engaged. Managers must take the lead in ensuring that their employees make the connections and have a deep understanding of how their individual successes impact the greater goal. Foster Relationships No one wants to feel like a faceless number. Managers need to take time to ensure that their employees feel like they are more than just a cog in the corporate machine. When managers take a personal interest in their employees, they are not only helping build morale, but are cultivating a spirit of comradery and respect. This is particularly important for organizations looking to continued on page 60

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Human Resources

continued from page 58

increase engagement. Currently, 98 percent of engaged employees indicate that their positive relationships with their managers is a key reason behind their engagement. Building this relationship should expand

beyond work-related conversations. It is important for managers to relate to their employees on a personal, human level. Managers need to develop trust and respect beyond the day-to-day workings of the

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M.J. Hall & Company www.mjhallandcompany.com W13 McClelland & Hine www.mhi-tx.com SC8; SE4 Midlands Management Corporation www.midlandsmgmt.com 40 Monarch E&S Insurance Services www.monarchexcess.com W5 NAPSLO www.napslo.org 44 Nautilus Insurance Company www.nautilusinsgroup.com 53 Navigators Management Company, Inc. www.navg.com 43 NBIS www.nbis.com 46 Pacific Gateway Insurance Services www.pgiainsurance.com W15 PersonalUmbrella.Com www.personalumbrella.com 7 Quirk & Company www.quirkco.com SC6 Regency Insurance Brokerage Services www.regencyinsurancebrokerage.com SE3; E3 Scottsdale Insurance Company www.scottsdaleins.com 2 SIAA www.siaa.net 3; W11 South & Western www.southandwestern.com SC1 Specialty Insurance Managers www.simtexas.com SC3 St. James Insurance Group www.stjamesinsurance.com SE9 Texas Mutual www.texasmutual.com SC5 The Institutes www.theinstitutes.org 17 The Sullivan Group www.gjs.com 38 Tokio Marine www.tmsic.com 25 TWFG - The Woodlands Financial Group www.twfg.com 22, 23 United Fire Group www.ufgsolutions.com M5 V3 Insurance Partners www.v3ins.com 55 Vertafore, Inc. www.vertafore.com 13 Western World Insurance Group www.westernworld.com 49 Worldwide Facilities www.wwfi.com 21 XL Specialty Insurance Company www.xlgroup.com 27

office. Managers should encourage employees to share other aspects of what defines them outside of the office. What are their interests? Do they volunteer anywhere? What makes them tick? Open and honest communication should be encouraged and welcomed. A positive person-to-person relationship between managers and their employees allows leaders to better understand their team membersâ&#x20AC;&#x2122; individual strengths, personalities, desires and life goals. It also fosters a sense of support and relatability. Clear Goals and Objectives Organizations may be surprised to learn that employees place a greater value on knowing what is expected of them than personal development, praise or even positive workplace relationships. In fact, 99 percent of engaged employees pinpoint their knowledge of what is expected of them as the most important workplace requirement. Professionals are looking for guidance and leadership. They want and need direction on their tasks and projects. It is important for them to understand how they are being measured and what they are being measured against in order for them to plot their own successes. Managers should make sure to establish personal objectives for their individual employees and take time to discuss progress toward these goals. Building positive relationships, aligning projects with a common goal, and providing guidance strengthens employee commitment and happiness. Undertaking this engagement strategy will go a long way toward increasing retention and improving organizational performance and success. Coons is senior vice president of The Jacobson Group, a provider of talent to the industry. Phone: 800-466-1578. Email: dcoons@jacobsononline.com.

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Making Strides for Gender Equality

By Betsy Myatt

uring IICF’s 3rd Annual Women in Insurance Conference in New York, more than 650 insurance professionals gathered for insight and discussions regarding gender diversity in the industry. The themes and lessons shared throughout the conference focused on leadership topics as well as best practices for organizations to unlock the full potential of their workforce by championing and achieving better gender diversity. Besides serving as a learning and networking opportunity for industry representatives from more than 30 states and nine countries, the conference served another purpose — as a barometer for progress on issues of gender diversity. Three hundred women — nearly half of the conference’s participants — took part in an onsite survey held on the second day of the event in mid-June. The survey’s goal was simple — to evaluate how much progress, if any, has been made in the championing of women’s leadership development in the industry. With all the talk and effort being put forth to enable gender diversity in the industry, what do the results look like? The results are encouraging. The survey revealed that 72 percent of women in insurance believe their industry is making progress in gender equality. For the second year in a row, more than two-thirds (68 percent) of women said their company is working to promote gender diversity. It’s a positive trend to see, and one that many compa-

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nies are working tirelessly to continue. “There are some incredibly talented women in the insurance industry, but too often they feel isolated in their businesses,” said Deborah Aldredge, chief administrative officer at Farmers Insurance and an IICF Inclusion Champion Award winner. “Establishing a women’s network and making sure that men are included is a positive step. Putting leadership programs in place to support emerging talent from diverse backgrounds is another. Looking at policies, practices and work environment in the company to make sure that they are meeting the needs of all leaders and that they support the workforce of the future so that talent is retained is also important.” Other areas for improvement were also noted. When asked what is the greatest challenge women face in ascending to leadership, 39 percent cited limited opportunities for upward mobility within their company. Another 30 percent of respondents stated that the greatest challenge is women not promoting themselves effectively. While most conference speakers and attendees agreed that more work needs to be done, changes are already being noticed. Thirty-seven percent of respondents believe that the industry’s biggest improvement toward gender diversity is seen via shifts in corporate culture. The benefit of networking opportunities were seen as well, with 24 percent naming this the most important step toward gender diversity (up from just 9 percent last year). External barriers still exist for women who seek leadership positions in their company. However, the percentage of women who named “biases in advancement” Businesses in the and “lack of opportunities industry are seeing for professional advancethe value that comes ment” as the chief barriers fell to 68 percent, from from a diverse 76 percent in 2014. This leadership group. suggests that businesses in the industry are seeing the value that can come from a diverse leadership group. Companies are clearly recognizing the need for a more gender inclusive workplace. At the same time, women themselves are realizing new opportunities to affect change for themselves and their colleagues. There is an observable trend of individuals launching their own women’s networks and mentorship programs to foster the advancement of women in their organizations — and these result in measureable engagement and change. Myatt is executive director, Northeast Division, at Insurance Industry Charitable Foundation (IICF), a nonprofit organization funded by the insurance industry.

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