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Technical Risk Underwriters CivicRisk LifeScienceRisk PERse
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Property: Builders Risk, Coastal Property, Difference in Condition, Energy, Inland Marine, Habitational Transactional Liability: Representations & Warranties, Tax, Specific Litigation Casualty: General Liability, Cyber, Business Interruption, Management Liability Professional Liability: Miscellaneous Professional Liability, Healthcare Providers, Architects & Engineers, Insurance Agents
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RSGUM has grown rapidly since its formation in 2010, and this growth reflects the entrepreneurial culture of Ryan Specialty Group and its belief in the advantages and bright future of the MGU business model. However, increased size does not
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mean decreased agility; RSG continues to ensure that the MGUs remain at the cutting edge of the industry and that they continue to develop new ways to benefit their clients.
Ryan Specialty Group
In early 2010, Patrick G. Ryan, founder and former Chairman and CEO of Aon Corporation, founded Ryan Specialty Group (RSG). From the beginning, RSG has been designed to meet the need in the marketplace for creative insurance and risk management solutions for complex, sophisticated and highhazard risks. RSG is today a recognized leader in international specialty insurance and continues to expand its capabilities.
For more information, please contact: Miles Wuller, Chief Operating Officer Phone: 312.784.6157 Email: mwuller@ryansg.com
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RSG Underwriting Managers, LLC, is a Delaware series limited liability company and a subsidiary of Ryan Specialty Group, LLC, specializing in underwriting management and other services for insurance products distributed through agents and brokers. In California: RSG Insurance Services, LLC, Lic. #0E50879. Direct Group Limited (Registered No. 2461657) and Millennium Insurance Brokers Limited (Registered No. 3566382) are insurance distribution businesses and are authorized and regulated by the Financial Services Authority. © 2016 Ryan Specialty Group, LLC
Contents September 19, 2016 • Vol. 94 No. 18 • West
West W2 Arch Coal Agrees to Fund Mine Cleanups to Exit Bankruptcy
W10 GAMIFICATION IN INSURANCE:
PLAYING TO WIN
14 Weak Profits Leading to Takeovers of Smaller Reinsurers: Fitch
W8 NAIC Dignitaries Remember Former California Commissioner Kinder
16 P/C Insurance Agency Mergers & Valuations Up Again: OPTIS
W16 How Kilkenny and Kimmel Have Grown K2 Insurance Services
12
AUTONOMOUS CARS TO CUT U.S. AUTO PREMIUMS BY 20% IN 20 YEARS
W10 Savvy Strategy: Gamification in Insurance: Playing to Win
28 Low Prices Ultimately Could Bite London Market Insurers
36 Special Report: How Competition Brings Out E&S Market’s Creativity
45 Morale, Predatory Attorneys Keep El Pollo Loco Risk Director Busy
38 14 States Process $13.1B in Surplus Lines Premium in First Half 2016
48 Tech Talk: Digital Transformation 2.0
54 New York’s Attempt to Subject Surplus Lines Insurers to Franchise Tax
21 Future Workers’ Compensation Profitability Faces Obstacles
32 Special Report: Active Shooter Insurance Steps Up in Crisis
40 New Technologies: A Double-Edged Sword for Insurers
50 The Wedge: Traditional Producer Hiring Process is Arcane
12 Autonomous Cars to Cut U.S. Auto Premiums by 20% in 20 Years 14 What’s Driving Reinsurance Growth: Aon
W6 More Businesses Fear Losing Data than Getting Hacked, Survey Shows
Idea Exchange
National
28 LOW PRICES ULTIMATELY COULD BITE
LONDON MARKET INSURERS
56 7 Key Trends Producers Should Watch to Keep from Being Left Behind 60 Minding Your Business: How to Create & Reward Exceptional Agency Leaders 62 Closing Quote: Health and Optimism in Surplus Lines 8 | INSURANCE JOURNAL | WEST SEPTEMBER 19, 2016
Departments W4 People 15 Declarations 15 Figures 18 Business Moves 59 MyNewMarkets INSURANCEJOURNAL.COM
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OPENING NOTE
Write the Editor: awells@insurancejournal.com
Big Box or Boutique?
I
‘At the end of the day there are a lot of opportunities that come with consolidation.’
Publisher Mark Wells mwells@wellsmedia.com
EDITORIAL
SALES
Editor-in-Chief Andrea Wells awells@insurancejournal.com
West Sales Dena Kaplan (800) 897-9965 X115 dkaplan@insurancejournal.com
East Editor Elizabeth Blosfield eblosfield@insurancejournal.com
Romeo Valdez (800) 897-9965 X172 rvaldez@insurancejournal.com
Chief Content Officer Andrew Simpson asimpson@insurancejournal.com
Southeast Editor/MyNewMarkets 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 L.S. Howard lhoward@insurancejournal.com
Chief Marketing Officer Julie Tinney (800) 897-9965 X148 jtinney@insurancejournal.com
South Central Sales Mindy Trammell (800) 897-9965 X149 mtrammell@insurancejournal.com Southeast and East Sales (except for NY, PA and CT) Howard Simkin (800) 897-9965 X162 hsimkin@insurancejournal.com Midwest Sales Lisa Whalen (800) 897-9965 X180 lwhalen@insurancejournal.com East Sales (NY, PA and CT only) Dave Molchan (800) 897-9965 X145 dmolchan@insurancejournal.com
Advertising Coordinator Columnists Erin Burns (619) 584-1100 X120 Catherine Oak, William Schoeffler Jr., eburns@insurancejournal.com Randy Schwantz, Tom Wetzel Insurance Markets Manager Contributing Writers Kristine Honey (619) 584-1100 X132 Mike Baukes, Jim Gallagher, Steven khoney@insurancejournal.com Danny Anderson, Andrew Appleby, James Auden, Bruce Berthelsen, Social Media Manager Kathleen Foody, Claire Galofaro, Ly Short (619) 890-7735 Kaenan Hertz, Gregory Hoeg, Brady Lshort@insurancejournal.com Kelley, Alla Raykin, Erik Schelzig Classifieds, Jobs, IJ ACADEMY OF INSURANCE Agencies Wanted/For Sale V.P. of Education Sr. Sales & Marketing Coordinator Chris Boggs Kelly De La Mora (800) 897-9965 X125 cboggs@ijacademy.com kdelamora@insurancejournal.com Online Training Coordinator Barbara Whiffen bwhiffen@ijacademy.com
ADMINISTRATION
Chief Financial Officer Mark Wooster mwooster@wellsmedia.com
MARKETING
DESIGN/WEB
Chief Technology Officer/ Chief Innovation Officer Joshua Carlson jcarlson@insurancejournal.com V.P. of Design Guy Boccia gboccia@insurancejournal.com
Marketing Director Derence Walk dwalk@insurancejournal.com
Senior Web Developer Chris Thompson cthompson@insurancejournal.com
Marketing Administrator Gayle Wells gwells@insurancejournal.com
Web Developer Jeff Cardrant jcardrant@insurancejournal.com
NEW MEDIA
Web Developer Tim Layer tlayer@wellsmedia.com
New Media Producer Bobbie Dodge bdodge@insurancejournal.com Videographer/Editor Ashley Waldrop awaldrop@insurancejournal.com
CIRCULATION
Circulation Manager Elizabeth Duffy eduffy@wellsmedia.com
t’s no secret that the world of insurance is consolidating. The number of insurance agency mergers and acquisitions in the first half of 2016 ranked as the second-most-active six-month period since 2008, according to a new report by Chicago-based investment banking and consulting firm OPTIS Partners. But it’s not just the retail agency world experiencing consolidation. The wholesale community is merging right along with the rest. Wholesalers are becoming larger. Jeremy Johnson, president, U.S. Commercial, AIG, thinks this can be a good thing. “As wholesalers become larger they become more sophisticated and I think they have more value to offer their customers and frankly I think they have more value to offer their insurers as well,” he says. Whether that value is through risk specialization or through data and analytics, opportunities arise when organizations get bigger. Johnson is not alone in that view. “I think ultimately it is good for the industry in a sense that larger brokers have access to virtually every market,” says Art Davis, president, Argo Group, Excess and Surplus Lines. “At the end of the day there are a lot of opportunities that come with consolidation. For example, a smaller, independent broker might have three, four or five markets where a larger wholesale shop might have 40 or more markets. What they can bring to the table is different.” But wait. Smaller wholesalers aren’t going away. Davis sees smaller wholesalers excelling in specialization. “Smaller brokers can add value by being a specialist. It’s harder to be a generalist if you are small,” he adds. Davis believes that as specialists, smaller brokers can clearly define their value proposition as something different than what a generalist brings. Everyone is looking for great advice so there will always be a place for the smaller broker, he says. Both believe that consolidation is likely to continue. “I don’t see any reason why it would slow down other than a little bit of exhaustion on the wholesale broker side. At the end of the day I think it’s going to be a big positive for the FOR QUESTIONS industry but it’s definitely a big change,” says REGARDING SUBSCRIPTIONS: Call: 855-814-9547 Davis. Outside the U.S., call 847-400-5951 or you may subscribe or change your address online at: Johnsons agrees that the growing size of insurancejournal.com/subscribe wholesale brokers is a good thing: “Whether Insurance Journal, The National Property/Casualty Magazine (ISSN: 00204714) is published semi-monthly by Wells Media it’s Lexington or AIG we very much value our Group, Inc., 3570 Camino del Rio North, Suite 200, San Diego, CA 92108-1747. Periodicals Postage Paid at San Diego, CA and at additional mailing offices. SUBSCRIPTION RATES: $7.95 per copy, $12.95 distribution channel and we welcome the per special issue copy, $195 per year in the U.S., $295 per year all other countries. DISCLAIMER: While the information in this pubscale advantages that we think the emerging lication is derived from sources believed reliable and is subject to reasonable care in preparation and editing, it is not intended wholesaler landscape can bring to the industo be legal, accounting, tax, technical or other professional advice. Readers are advised to consult competent professionals for application to their particular situation. Copyright 2016 Wells try.” Media Group, Inc. All Rights Reserved. Content may not be photocopied, reproduced or redistributed without written permission. Insurance Journal is a publication of Wells Media Group, Inc.
Andrea Wells Editor-in-Chief
10 | INSURANCE JOURNAL | NATIONAL SEPTEMBER 19, 2016
POSTMASTER: Send change of address form to Insurance Journal, Circulation Department, PO Box 708, Northbrook, IL 60065-9967 ARTICLE REPRINTS: For reprints of articles in this issue, contact: Kelly De La Mora at 1-800-897-9965 ext. 125 or kdelamora@wellsmedia.com Visit insurancejournal.com/reprints/ for more information.
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National
Autonomous Cars to Cut U.S. Auto Premiums by 20% in 20 Years
T
he rollout of autonomous vehicles in the next few decades could lead to a massive reduction in U.S. motor vehicle premiums in the coming years, Aon Benfield said in a new report. Expectations are that “industry pure premiums” will drop 20 percent under their 2015 levels by 2035, even if the technology is adopted at just a moderate pace, Aon Benfield said. Assuming the same moderate trajectory, those premiums could plunge by more than 40 percent if full adoption of autonomous vehicles takes place, as expected, by 2050. The prediction assumes a number of variables. As Aon Benfield noted, the prediction of premium reduction dovetails with an envisioned 81 percent drop in
claims frequency over time, after the first commercially available autonomous vehicle technology hits the road in 2018. There’s also an assumption of higher claims severity behind those numbers, because of sensor costs and greater cost of handling product liability claims. Aon Benfield explained that autonomous vehicle sensors currently go on vehicle bumpers, a practice that leaves them the first thing to get damaged in an accident. As well, accident liability is expected to shift from the vehicle driver to “the future operator of the autonomous vehicle fleet.” Aon Benfield said it bases its predictions for self-driving technology adoption on historical precedent for other modes of transportation.
12 | INSURANCE JOURNAL | NATIONAL SEPTEMBER 19, 2016
“Cars took approximately 80 years from the date of the first commercial availability to reach 90 percent adoption; air travel took approximately 60 years; mobile phones 30 years; while smart phones have taken only 10 years,” Aon said. Based on those numbers, its prediction for adoption of self-driving technology in the next 30 years (and resulting premium shifts) is very much “a middle-of-the-road” approach. The report said this timeframe “is consistent with the historical adoption of safety features in personal vehicles.” Aon Benfield’s findings are part of its annual Global Insurance Market Opportunities report, which came out in September 2016 as part of this year’s Monte Carlo Rendez-Vous gathering. INSURANCEJOURNAL.COM
If you can think it, we’ll think of a way to insure it.
At Lexington Insurance, our solutions have to be as original—and daring—as the ideas we insure. After all, for over 50 years we’ve taken on the risks that others won’t. Introducing insurance innovations that make the world safer for people. And for companies. To see our innovation timeline, go to www.lexingtoninsurance.com/50years
Lexington Insurance Company, an AIG company, is the leading U.S.-based surplus lines insurer. AIG is the marketing name for the worldwide property-casualty, life and retirement, and general insurance operations of American International Group, Inc. For additional information, please visit www.aig.com. Products and services are written or provided by subsidiaries or affiliates of American International Group, Inc. Not all products and services are available in every jurisdiction, and insurance coverage is governed by actual policy language. Certain products and services may be provided by independent third parties. Insurance products may be distributed through affiliated or unaffiliated entities. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds.
NATIONAL | News & Markets
What’s Driving Reinsurance Growth: Aon
R
einsurance demand has increased over the past 18 months, with the cession ratio across the global property/casualty insurance industry registering a small rise for the first time in several years, and the trend expected to continue for the remainder of 2016. Aon Benfield, in the September 2016 edition of its Reinsurance Market Outlook report, analyzes the key variables affecting reinsurance buyers leading up to the January 1 renewals. “The catalysts for this increased demand for property and casualty reinsurance include factors such as the emergence of poor underwriting results in certain casualty classes, out-sized losses from
regional exposures, and the introduction of the Solvency II regulatory regime across the European Union,” said Eric Andersen, CEO of Aon Benfield. The report highlights four key emerging areas of growth for the re/insurance industry: Property Catastrophe – Demand for property catastrophe protection is expected to remain relatively stable for January 2017 renewals, absent any material reinsured loss events. While certain regions affected by regulatory changes may look to secure additional capacity, overall demand change is expected to
Weak Profits Leading to Takeovers of Smaller Reinsurers
W
eak profitability is likely to leave more reinsurers worldwide vulnerable to takeover in 2017, reinvigorating mergers and acquisition activity as healthier firms seek growth and efficiency savings, according to Fitch Ratings. Consolidation in the sector has stalled after a flurry of deals in 2014 and 2015 as potential buyers have been put off by high valuations. But Fitch analysts believe the combination of overcapacity, which will continue to weigh on premiums, and worsening
investment returns will reduce profits for many firms in 2017. The worst-hit reinsurers are likely to be smaller, less diversified, and operating in markets where premiums have fallen to the point where they are barely covering the cost of capital.
‘We believe the weak market environment will create significant risks for M&A transactions.’ These firms may become acquisition targets as stresses
14 | INSURANCE JOURNAL | NATIONAL SEPTEMBER 19, 2016
increase by approximately five percent across the market. Mortgage – Demand for re/ insurance of U.S. mortgage default exposure continues to grow, driven by both new and existing cedents. Most of the re/insurance purchased is driven by new regulatory capital requirements, as government entities Fannie Mae and Freddie Mac continue to access private markets for credit risk transfer. To date, Aon Benfield has placed around USD10 billion of reinsurance capacity in this sector, which equates to approximately USD2.5 billion of projected lifetime ceded premium. Cyber – Demand for cyber insurance coverage and product continues. With approximately USD1.7 billion in premium,
nearly 90 percent of the market is based in the United States, with annual growth running at 30 to 50 percent. International growth will be driven by upcoming European Union regulations covering data protection that will become effective in 2018. Crop – While a more mature market, crop re/insurance has returned to profitability in the US. Growth has mainly emanated from Asia with the Indian market seeing five times the insurance premiums for the 2016/2017 season compared to the year prior. Thailand has also seen growth. According to the report, the low interest rate environment that has persisted in the developed world since the 2007 financial crisis has had a pervasive effect on traditional re/insurance carriers that are mainly invested in cash and bonds, and has significantly influenced market behavior.
leave them more likely to accept lower valuations, Fitch says. Meanwhile, organic growth will be hard to achieve due to the large surplus capacity in the market, including from alternative sources of reinsurance capital such as catastrophe bonds and collateralized reinsurers. This will leave acquisitions as the main source of growth for larger firms. The increasingly competitive market will also make firms keener to eke out benefits from efficiencies of scale, increased diversification, cost-cutting opportunities and more efficient capital management. All of these factors will contribute to the desire for acquisitions, according to Fitch. “We believe the weak mar-
ket environment will create significant risks for M&A transactions despite the potential for greater efficiency and scale, particularly if valuations do not fall much,” the report says. “Risks are particularly high in transactions driven by a desire to diversify, as the buyer’s lack of experience in the market it is entering makes mistakes more likely. Deals that combine two struggling companies in the same segment will have less execution risk but could offer very limited benefits.” Fitch believes that the overall impact on the reinsurance sector from increased M&A will depend on how much capacity is removed from the market and whether alternative sources of reinsurance expand. INSURANCEJOURNAL.COM
West
Arch Coal Agrees to Fund Mine Cleanups to Exit Bankruptcy
U
.S. coal miner Arch Coal has agreed to set aside collateral to cover future mine cleanup costs as part of its bankruptcy reorganization plan, according to a court filing, ending its controversial use of “self-bonds.” For decades the largest U.S. coal companies have used a federal subsidy known as “self-bonding,” which exempts companies from posting bonds or other securities to cover the cost of returning mined land to its natural state, as required by law. Arch had $485.5 million in self-bonds in Wyoming when it filed for bankruptcy protection in January, saddled with $6 billion of debt and a deep slump in the coal sector. Under a reorganization plan set for a confirmation trial in U.S. Bankruptcy Court in St. Louis this month, Arch must replace all of its self-bonds within 15 days of its bankruptcy exit plan becoming effective, a court filing by the company showed on Sunday. Environmental groups that have waged
legal battles to hold coal companies accountable for their cleanup obligations welcomed the news. “Better financial assurance will protect taxpayers and will ensure that the mining company remains responsible for any clean-up costs for its large Wyoming coal mines,” said Shannon Anderson, a lawyer for Powder River Basin Resource Council, a Wyoming conservation group. Arch operates one of the largest U.S. mines, Black Thunder, in the coal-rich Powder River Basin in Montana and Wyoming. Arch had initially resisted replacing its self-bonds, arguing in court filings that providing other forms of guarantees would eat into its delicate liquidity. Coal businesses have suffered from falling demand in China and competition from lower natural gas prices. “Arch has demonstrated it is possible to phase out self-bonding while keeping
W2 | INSURANCE JOURNAL | WEST SEPTEMBER 19, 2016
mines going, and we hope other companies, including Peabody, follow their example,” Anderson said. U.S. coal watchdog Office of Surface Mining and Reclamation Enforcement has asked state regulators to crack down on self-bonding following Chapter 11 filings by some of the largest U.S. coal companies. Peabody Energy Corp., Alpha Natural Resources and Arch had a combined $2.2 billion in self-bonding liabilities when they filed for bankruptcy over the past 13 months. Peabody, which filed for bankruptcy in April with $10 billion of debt, has $1.14 billion of self-bonds in four states. In July, Alpha agreed to replace its selfbonds in Wyoming with other guarantees as part of a complex deal to exit bankruptcy but will continue to cover reclamation at former mine sites in West Virginia with self-bonds. Copyright 2016 Reuters. INSURANCEJOURNAL.COM
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WEST | PEOPLE
Suzie Elliott
Jan Berger
Lori Boggs
John Meister
Los Angeles, Calif.-based Farmers Insurance has named Suzie Elliott head of human resources. With her new appointment, Elliott also becomes part of the group’s senior leadership team. She will report to Deborah Aldredge, chief administrative officer for Farmers Group Inc. Elliott was the human resources business partner for the head of claims at Farmers prior to her new post. Her experience includes serving as group head of inclusion and diversity for Zurich Insurance. Farmers Insurance is part of a group of affiliated insurers providing insurance for automobiles, homes and small businesses and a range of other insurance and financial services and products. Integro Insurance Brokers has named Jan P. Berger managing principal to lead the Los Angeles office and the Southern California entertainment practice. He will also be a member of the U.S. entertainment leadership committee. Berger has been vice president and chief risk officer of Live Nation Entertainment Inc. since 2010. He was responsible for global risk, including insurance program strategy and procurement, operations risk and claims management. Berger also has more than 20 years of global risk management and finance experience in food retailing. He was vice president and treasurer at Smart & Final Inc., treasurer at Autodesk Inc. manager of financial strategies at Bechtel Group and treasurer at Homestake Mining Co. Integro is an international insurance brokerage and risk management firm. Valencia, Calif.-based Petersen International Underwriters has named Lori Boggs a regional vice
Meagan Felish
Ken Allen
president of the firm. Boggs previously was the national account management vice president of MetLife Insurance Co. At MetLife one of her focuses was disability insurance. Petersen specializes in disability insurance programs for highly compensated individuals, professional athletes, entertainers, small businesses and large corporations. Woodruff-Sawyer & Co. has named John Meister assistant vice president in the firm’s Southern California office. Meister will work at developing and implement-
W4 | INSURANCE JOURNAL | WEST SEPTEMBER 19, 2016
ing growth opportunities for Woodruff Sawyer and further advancing the office’s employee benefits practice. Meister was a benefits consultant at Digital Benefits Advisors prior to joining WoodruffSawyer. He was an employee benefits consultant with Burnham Benefits Insurance Services before that. San Francisco, Calif.-based Woodruff-Sawyer has offices throughout California, and in Oregon, Washington, Colorado, Hawaii and New England. Irvine, Calif.-based Burnham Benefits Insurance Services Inc. has named Meagan Felish a technology specialist. Felish has experience in online enrollment systems. Felish previously worked at Beal Benefits in Scottsdale, Ariz. Burnham is a privately held employee benefits consulting and brokerage firm. California Insurance Commissioner Dave Jones has appointed Ken Allen as deputy commissioner of the rate regulation branch for the California Department of Insurance. Allen will fill the vacancy left by Joel Laucher, who was appointed chief deputy insurance commissioner in June. He will lead the property/casualty rate regulation and prior approval processes. Allen joined the rate regulation branch in 1989 when it was newly formed after voters passed Proposition 103. During his 27 years with the department, Allen has worked in a variety of capacities, including associate insurance rate analyst, senior insurance rate analyst and supervising insurance rate analyst/bureau chief. Allen is also the president-elect for the Insurance Regulatory Examiners Society. San Diego, Calif.-based ICW Group Insurance Cos. has named Kristin Guthrie vice president of
customer experience. At this new position for the company, Guthrie will be reporting directly to Chief Operating Officer David Hoppen. Guthrie was vice president of customer experience at Honeywell Aerospace prior to joining ICW Group. Guthrie was also previously director of marketing and sales at Cessna Aircraft Co. ICW is a privately held group of insurance companies domiciled in California. INSURANCEJOURNAL.COM
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WEST | News & Markets
More Businesses Fear Losing Data than Getting Hacked, Survey Shows By Don Jergler
L
osing data strikes more fear in businesses than getting hacked. A survey released earlier this month by San Francisco, Calif.based Wells Fargo Insurance shows 47 percent of mid-sized companies were concerned with losing private data compared with 26 percent worrying about hackers disrupting their systems. The survey highlights the top network security and data privacy concerns among companies with $100 million or more in annual revenue. It was constructed by talking to 100 decision makers empowered to make insurance purchases about network security and data privacy issues. While losing data topped the list, followed by concerns over hacking, it appears few companies are worried about their employees misusing technology. Seven percent of those polled cited that as a concern. That didn’t surprise Dena Cusick, national practice leader with Wells Fargo Insurance’s technology, privacy and network risk national practice. “I honestly think that people don’t realize how many mistakes people make throughout the day,” Cusick said. A study commissioned by Verizon last year shows 10.6 percent of cyber issues were a result of insider misuse, and a NetDillegence study showed carriers reported 11 percent
cyber claims resulted from staff mistakes. “Human error is a huge factor,” she said. “And that is what gets people every time.” While many companies have yet to wake up to potential problems caused by employee misuse, Cusick believes a few businesses are beginning to recognize it as emerging problem. No respondents in the 2015 Wells Fargo Insurance survey named employee misuse as a concern. Cusick reasoned the slight uptick reflected in this year’s survey may come from more companies possessing the tools to figure out where breaches are occurring. “I think people are able to engage better forensics,” she said, adding that a number of companies have developed the ability to drill down and discover the point of entry in attacks and breeches. Following are the top eight
‘I honestly think that people don’t realize how many mistakes people make throughout the day.’
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network security and data privacy concerns with last year’s ranking in parentheses: • Loss of data – 47 percent (45 percent) • Hackers – 26 percent (25 percent) • Security breaches – 26 percent (20 percent) • Maintaining reputation – 9 percent (4 percent) • Viruses – 7 percent (10 percent) • Software vulnerabilities – 7 percent (7 percent) • Employee misuse of technology – 7 percent (0 percent) • Other – 7 percent (13 percent) Spear phishing from foreign hackers targeting employees is one trend Cusick is seeing is more of. “They’re falling for spear phishing attacks and downloading these viruses into the system,” Cusick said. One of her clients became the victim of a spear phishing attack when an employee clicked on an email that prompted the recipient to “Click here to find out how
much vacation time you have.” The email looked like it was from human resources, but when the web browser opened it was a different link, Cusick said. Another type of scam that seems to be popular lately is fake photocopier repair personnel coming to offices and telling a receptionist they are taking the office’s copier in for repair. Most modern photocopiers have large capacity hard drives embedded in them, Cusick noted. “There could be 100,000 documents in there,” she said. These are among the reasons why Cusick and others in the industry are encouraging clients to beef up employee awareness training, such as teaching employees to check with the office manager before letting office equipment out the door, and that emailed requests to log onto a third-party portal should raise a red flag, as should emails with a strange font, or a fuzzy company logo that may have been copied and pasted into an email. INSURANCEJOURNAL.COM
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NAIC Dignitaries Remember Former California Commissioner Kinder By Don Jergler
O
n a recent morning at the National Association of Insurance Commissioners meeting in San Diego, Calif., a group of people with impressive credentials gathered to pay tribute a man they held in high regard. Wesley J. Kinder was a California insurance commissioner who served during a turbulent time. Kinder, a resident of La Habra, Calif., died in late July at age 94. At the time, former colleagues decided they’d host a breakfast meeting at the NAIC meeting at the end of August to honor the former NAIC president. Roger McNitt, a San Diegobased attorney who served as Kinder’s chief deputy insurance commissioner, planned the event. McNitt said old friends flew in from around the country to be at the breakfast. Attendees included nine past state insurance commissioners, including Ben Nelson, a former governor, a U.S. Senator and an insurance director from Nebraska. Nelson was also formerly executive director of the NAIC. Also there was Kinder’s son-in-law, Tom Kearney. McNitt talked about how Kinder was self-taught, having to drop out of school in 10th grade when his father died to work and help support his family, and how he worked his way up literally from the bottom of the industry. “He went from the mail room
of an insurance company all the way up to president of the NAIC,” McNitt said, adding that as California’s commissioner Kinder oversaw a big part of the state’s economy in terms the proportion of insurance premiums to total gross domestic product. “He firmly and fairly regulated more than 12 percent of what was then the fifth largest economy in the world.” David Brummond was counsel and general counsel for the NAIC in the 1970s and 1980s and worked there when Kinder was president. Kinder came into office as California insurance commissioner when the Medical Injury Compensation Reform Act, MICRA, was being hammered out. Among its many changes to the state’s medical malpractice landscape, it capped non-economic damages. That was followed by a prod-
‘He went from the mail room of an insurance company all the way up to president of the NAIC.’ uct liability crisis Kinder had to deal with, Brummond said. Kinder was invited to speak to Congress about the product liability crisis, so Brummond, in the role of counsel, wrote a brief for Kinder to help him explain what approach the NAIC was talking to deal with the crisis. Kinder read and easily comprehended the highly technical legal document despite him not being an attorney, Brummond
W8 | INSURANCE JOURNAL | WEST SEPTEMBER 19, 2016
said. “I was just blown away at how he had absorbed all the things I had put in there,” Brummond said. “He was not even a lawyer, and I was impressed that someone who hadn’t had a formal education was so sharp.” The speech went off well. Among the things Brummond learned from Kinder during the visit to Congress, and working with him for years afterward, was the importance of having a good presentation and knowing how to get things done. “Wes was a terrific mentor to me in teaching me how the process works,” Brummond said. Kinder helped put together a bailout package for Geico in 1976. Under the plan more than two dozen companies agreed to reinsure 25 percent of Geico’s policies, providing a much needed boost to Geico’s ailing surplus. Kinder was part of a three-person committee overseeing the deal. The other committee members were Max Wallach, and Dick Rottman. Also involved was Nelson, who was a staff member at the time. “The committee strongly believed that Geico was worth saving and not liquidating because its business model was then very efficient,” McNitt said. At the last moment one of the major insurers that was to be part of the bailout pulled out and the deal fell apart. However, Berkshire Hathaway
Wesley J. Kinder at the time had wanted to get in on the deal so Kinder and Nelson, who were familiar with Berkshire, convinced the NAIC to let Berkshire rescue Geico. “Berkshire was not a household word, but Kinder and Nelson felt they could do it,” McNitt said. “And the rest is history.” Kinder was appointed insurance commissioner by Gov. Jerry Brown during his first stint as the state’s governor and served from 1975 to 1980. He served as the state’s chief assistant insurance commissioner under Gov. Ronald Regan. He was NAIC president in 1980. He was born in Dubuque, Iowa on Sept. 8, 1921. Kinder is survived by his daughter, Kathy Kearney, and her husband Tom; 3 siblings: James Kinder (wife: Diane), Mary Kalisch, and Betty Ramm, as well as 4 grandchildren: Caitlin, Kyle, Corey and Claire, plus numerous nieces and nephews. He was preceded in death by his wife Annette. McNitt said he felt it was important to honor Kinder because of his numerous accomplishments, which many may not know about. “He did so many things and he never took credit for them,” McNitt said. INSURANCEJOURNAL.COM
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Savvy Strategy
Gamification in Insurance: Playing to Win
By Kaenan Hertz
A
mong the many innovations happening in the insurance industry today, gamification is surely one of the more interesting. At the nexus of trends ranging from behavioral science and social networking to the Internet of Things and wearable
tech, gamification is a powerful lever for insurers and insurance agents seeking to enrich digital experiences and adopt new customer-centric business models, such as pay-as-you-live offerings. Gamification involves the use of game techniques and elements to influence the behaviors of individuals. The use cases are many and diverse, but most involve prizes and points, competition and/or teamwork and scorekeeping to motivate people to meet specific goals. Agents’ first experiences with gamification may come through carrier “agent engagement” initiatives that offer competition and rewards for selling new products that go beyond traditional contests. Incentives for completing product education cycles, issuing policies faster, updating customer data more frequently, providing more information for reports or for complying with new policies may
W10 | INSURANCE JOURNAL | WEST SEPTEMBER 19, 2016
also factor into gamified experiences for agents. Agents should also recognize how gamification may help them engage with their own customers. The winning combination provides agents and insurers with the right gamification approach, on the right device, at the right time. This will help them to improve internal processes and engage more proactively with clients. For this to happen, agents and insurers need to focus their use of gamification on the areas where there is a common goal towards change — either in processes or behaviors — that has proved difficult to achieve. By designing the right gamified incentives, insurers and agents can save time and effort so they can focus on improving efficiencies and raising returns.
continued on page W12 INSURANCEJOURNAL.COM
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WEST | Idea Exchange continued from page W10 Why Gamification Matters
Within insurance, gamification offers the greatest potential value in the realm of consumer engagement. Among early adopters, it has emerged as a useful practice and effective means to:
• Transform ordinary tasks into interesting and fun experiences that keep users coming back • Strengthen brand awareness, affinity and penetration • Educate customers about product suit-
ability and guide them to purchase • Motivate people to act in areas such as health and wellness, safe driving, financial planning and sustainability Certainly agents stand to benefit from closer relationships with their customers, and gamification can be a good way to set up more regular interactions. For those agents who are seeking to move more interactions to digital channels, gamification can be a boon. Applications, policy renewal forms and information updates are all areas where gamification can help agents provide a better experience for their customers. More frequent interactions and richer experiences are especially important to millennials, a cohort that has shown little interest in life insurance and has higher expectations for digital channels. Through gamification, insurers can demonstrate their understanding of this cohort’s needs and preferences. More importantly, insurers can present a more positive and compelling value proposition.
Designing Compelling Games and Experiences
It is important to recognize how gamification influences behavior. Drawing upon extensive research into human psychology, the most effective games leverage our natural desire to feel good and induce the release of dopamine, a neurotransmitter that motivates people to act. Therefore, game experiences must be fun and motivating, with both extrinsic and intrinsic rewards. The ideal mix of rewards will be customizable, for the simple reason that different people are motivated differently. For instance, competition positively motivates some people, but does not appeal to others. The best techniques for encouraging older policyholders to exercise will naturally vary from those that entice millennials to drive more safely. Beyond attractive rewards, other hallmarks of effective games include: • Simple cues for action and clear feedback
continued on page W14
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• Easily identifiable markers of progress and paths for advancement • Intuitive user interfaces
Gamification in Action
The first generation of insurance adopters shows the many viable applications of gamification: • A global insurer has built a comprehensive online wellness program around gamification, with personal challenges around preventive care or disease management, which has increased customer retention, generated valuable risk and behavior data, and enriched customer relationships. • The rapid growth of a U.K. firm with four million insured drivers between ages 17 and 25 has been driven by a quasi-gamified usage-based insurance model that monitors driving, provides consistent feedbacks and offers premium discounts for safe driving. • A Canadian insurer has significantly
increased customer engagement with a younger customer segment through a gamified app that requires players to demonstrate knowledge of investment and retirement planning principles. • A U.S. insurer applied gamification to its claim scheduling process, with employees rewarded for submitting innovative solutions to common problems, with nearly $20 million saved through efficiency gains.
‘Gamification involves the use of game techniques and elements to influence the behaviors of individuals.’
Winning with Gamification
Insurers and agents interested in gamification should be encouraged by the experiences of early adopters, which have clearly demonstrated that relatively limited investments and focused pilot programs can yield tangible returns. There are a number of questions to consider: • The alignment of games to digital strategy and broader transformation initiatives, such as pay-as-you-live models or customer engagement • The right use case for the right business issue and right customer niche,
•
•
•
•
including the optimal balance of simplicity and sophistication in game design Testing, learning and iterating to gain a deeper understanding of customer needs and behaviors The right team, including internal functions (IT, product development, underwriting, sales) and specialists (data scientists and game designers) Knowledge of relevant rules and regulations, especially around risk pooling and data privacy and labor laws for games involving employees Collaboration with external partners or service providers
Insurers and agents should also explore opportunities to leverage and share the data that a gamification strategy will be able to produce. Agents should use that data to improve processes and customer relationships. Insurers should leverage that same data to develop an accurate view of agents’ and policyholders’ behaviors, continuing to tailor their gamification approach to make it more effective. Further, agents should recognize how carrier programs can help them increase internal efficiencies and with consumer education, a focus on particular customer segments or use of digital service channels. In other words, this is a game agents will play with both carriers and policyholders, with potential wins for all.
The Bottom Line: Insurers Get in the Game
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Given that early adopters have fully operationalized gamification, it is clear that gamification is here to stay for the insurance industry. There are clear and tangible benefits in terms of customer engagement and bottom-line impact, and direct alignment with pressing imperatives regarding customer centricity and engagement. In this sense, gamification is a game that insurers must play. Hertz is executive director at Ernst & Young LLP. Email: kaenan.hertz@ey.com. Phone: (917) 288-2530.
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How Kilkenny and Kimmel Have Grown K2 Insurance Services By Mark Wells
P
at Kilkenny and Bob Kimmel put the K’s in K2 Insurance Services five years ago. That’s when they began using their combined 60 years of insurance experience to work buying up and developing businesses with the backing of investment firm Endeavour Capital. San Diego-based K2 Insurance is today a fast-growing family of two specialty insurance companies and 10 business units offering both commercial and personal lines. Through acquisitions and investments, K2 has developed a network of MGAs to manage, underwrite and distribute products on behalf of its carriers, including Aegis Security Insurance Co., which K2 acquired in 2013. Aegis Security is licensed in all 50 states and specializes in manufactured homes, other low-value dwellings and motorcycles. It also underwrites surety bonds and accident and health. K2’s first acquisition was in 2012 when it bought a majority stake in Midwestern Insurance Alliance, which specializes in workers’ compensation for transportation risks. Later that same year, K2 invested in a new Texas MGA, Mission Select Insurance Services, which focuses on residential property. Along the way K2 has also formed Aegis General Insurance Agency, Allied Public Risk and Vikco Insurance Services. This past March, it acquired High Point Underwriters of New Jersey, which with Midwestern Insurance Alliance is offering a national workers’ compensation and occupational accident insurance program. Kilkenny previously ran and owned Arrowhead General Insurance, an industry leading general agency he took private and helped build from $5 million in annual premiums to more than $1 billion in written premiums. Kimmel was executive vice president and MGA practice leader at Guy Carpenter before teaming with Kilkenny to launch K2. Kilkenny, CEO, and Kimmel, president,
both put company culture on top of a short list of firm-wide qualities they believe are responsible for driving K2’s growth. The pair spoke with Insurance Journal publisher Mark Wells about their past, their company and its future. Following is a profile of K2 and its leaders Kilkenny and Kimmel. This has been edited for brevity.
Pat Kilkenny
Wells: [When you came
to Arrowhead] the state of the industry was a little different then. Could you talk a little bit about the differences and how they’ve changed and what’s going on right now?
Bob Kimmel
Kilkenny: It was part of a publicly traded
company that myself and an employee group took private in ’86, I believe it was, and hyperfocused on nonstandard auto, single state, single program. Did that pretty aggressively until ’95. Following the Northridge Earthquake, we decided that we had a lot of the key elements to get in the property business and leverage some of our infrastructure and assets at that point. It was a totally different time and place. No technology. Companies didn’t really invest in technology back then. I was 33 at the time. I think I was the senior person in our ownership group, too, which shows what a young, fairly long horizon that we had to build a business. We weren’t really thinking about anything other than trying to do things the right way. In any business you have to figure out how to distinguish yourselves, and we felt technology was a way that we could do something different than our peer group.
W16 | INSURANCE JOURNAL | WEST SEPTEMBER 19, 2016
We invested heavily in technology. It was in the personal auto business. At one point we had 250,000 policies in force. We’d grown pretty significantly. The business was becoming really, really competitive and we were really having a hard time trying to figure out how to earn margins even with good technology. We felt like we had some leverageable assets with distribution technology and some of the product skill sets that we had, mathematicians, actuaries, people like that. Northridge happened. The first year after Northridge we insured 60,000 homes from a dead start, taking a really aggressive pricing strategy to fill a niche in the market. We had great success doing that. We were deemed as being a firm that could be opportunistic, respond to marketplace opportunities. We started filling other niches after that and became a multiline, multistate.
Wells: Bob, you were involved as a reinsurance broker with Arrowhead. What made you decide to get into the business?
Kimmel: My relationship with Pat was
always as a reinsurance broker, and most of the time, that was market finding. They would need a new set of paper or want to get an additional set, and that’s how we helped Arrowhead grow. We’d introduce them to an underwriter at a company, they’d form a division of Arrowhead to build around that person. We’d bring in the paper, then we’d probably bring reinsurance support behind that. Through that, I got to know Pat quite well. INSURANCEJOURNAL.COM
We were successful together doing that, and built a friendship. When he got out of the business and I got into the program practice group at Carpenter, we still remained friends and kept talking about what we were seeing in the marketplace, and again, it was a challenging time in 2009 and 2010, with the economy just coming back from 2008 meltdown. Anyway, we decided to get together and try to aggregate or roll up these MGAs. That’s what we’ve done.
Wells: Let’s jump to the current state of
affairs right now. What kind of environment are you working in in the industry?
Kilkenny: I’d say from the time that I’ve
been in the business until now, it’s about as difficult as I’ve seen … it’s overcapitalized, people are stepping on the same rake they’ve been stepping on in cycles over the years. It just doesn’t seem like there’s the discipline there should be in the business, in a mature business. It’s harder to distinguish yourself than it probably has ever been. Having said that, Bob and his leadership team have done a fabulous job of identifying some opportunities, some people, and been able to have those disciplines and been able to get the rate levels that we need in order to generate the profitability, and grow, which has been really commendable. I love the culture. A lot of similarities to Arrowhead from what we had over the years. Very entrepreneurial, silo oriented, where we will give people tools and resources, and quite frankly get out of their way, let them build their businesses. Bob’s been able to do that with the team here in Solana Beach. He can give you a lot more detail on the silos.
we were at about $30 million then, now we’re about $45 million, growing at least 20 percent a year in that space by hiring new leadership and focusing on marketing and relationships. Our other biggest unit is our work transportation for truck drivers. Other than that, we’ve got a public entity business that started with zero and has gone to about $40 million of premium. We’ve got a surety book of business that’s about $25 million, mainly focused on the contract surety business. We’ve got an accident and health division that we’ve just staffed up with good leadership last year. We let that sit idle when we purchased Aegis, and now we’re trying to ramp that up. We were at $12 million, we’ll probably get to about $20 million next year. We have a division in Texas focused on personal property. We’ll do about $25 million of personal property there, really low-value dwelling. We’ve got an earthquake book of business, commercial earthquake, we’ll write about $25 million of that business this year. We started a new division in Northern California. We just focused on residential
personal property in California. We just hired a recreational team to go after RVs, boats and yachts.
Wells: Eighty percent of Insurance Journal
readers are probably independent agencies throughout the country. What’s the advantage that K2 can offer these people?
Kilkenny: We’re fabulous business partners
because we’re entrepreneurial. If somebody comes to us with an opportunity where they can grow their franchise, because agents have the same darn problem we have, they have to figure out how to distinguish themselves. We have a hybrid in that we’ve got a capital base that we can leverage. Bob has an incredible Rolodex with branches internationally that we can lever up in a safe and sane way, and grow and expand in those kinds of areas and give them outsized margins by being a very efficient partner of theirs. Our food chain’s very short because of that. We don’t have layers. We’re able to do all those kinds of functions within our group.
continued on page W18
“There is little success where there is little laughter.” -Andrew Carnagie
Wells: Bob, let’s talk about the silos. Kimmel: We currently have two insurance
companies and 10 business units, almost equally split between commercial and personal lines. Also, when we bought Aegis it had a tremendous mobile home book of business that we’ve been able to grow, probably
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WEST | News & Markets continued from page W17 Wells: Technology and different aspects of
technology are suddenly taking the insurance industry by storm. Can you talk about that?
Kilkenny: I think a lot of it is appropriate.
It allows predictive modeling, although some of your older underwriters that have the same hair color I do probably take some exception to it. But I think it’s like a lot of things in life, it will morph. People bring value. Technology brings value. Figure out how to coexist together, and I think that’s the nice part about this culture we have here. We have a few people we brought in. Our CIO originally was the CIO at Arrowhead, but the plan was to bring him in and get him out in a year or two, but that helped us with the disciplines we needed. Our general counsel was our general counsel at Arrowhead, yet our CFO here is maybe 31 years old. It’s a great combination of people that are willing to listen. Listening is pervasive here, it’s very important. Energy’s really important too, a lot of hard work. I think it’s a powerful combination, and it’s exciting. The character of the people is A-plus. It’s something
Integrity
that you can’t compromise and feel really good about. I think some people sell a little short on business opportunities versus sustainability, I guess maybe would be a way to put it.
Kimmel: I’ll talk a little bit on the efficiency
side. We’ve got commercial business, personal lines business. Our smallest account’s probably $400. Our largest account’s a $4 million account. The $4 million account does not need much technology. It needs old school underwriting, looking at the application, understanding the risk. The $400 account needs to be totally automated. The agent’s making $40 on that account. If he picks up the phone, talks to you three times, we’ve lost it, he’s lost it. We’re focusing so much more technology on our smaller transactional accounts, and we’re getting there.
Wells: Anything you’d like to add? Kimmel: The only thing I want to add is
kind of where we see ourselves heading. Obviously, we’ve got some great platform companies, and they’re going to have tre-
Service
Security
Stability
mendous organic growth. Like I said, we’re growing about 20 percent-plus a year. The nice thing about being a hybrid, we have a balance sheet, we have an A-rated insurance company, so it allows us to go out and talk to reinsurance brokers and insurance executives and talk about ideas. This morning we were talking about cyber. Maybe we can incubate a cyber program on our paper, heavily reinsure with someone else. It gives us a leg up on all our other MGA competitors who, they’ll hire somebody, they’ll go look for paper, they don’t find paper, they end up probably having to terminate somebody. We have that security that we give them a long-term commitment, and we have our A-rated paper to fall back on, which has been a really nice comfort blanket.
Kilkenny: I would offer one other thing
that I think’s very important. At Arrowhead and also K2 there’s altruism. Giving back’s always been something that’s been very important to us. We had a foundation at Arrowhead that ultimately morphed into something by the name of the Lucky Duck Foundation. We have an event once a year. This year it’s on Oct. 3. We give away north of a million dollars to charity from our one-day event every year to three local charities: Father Joe’s Villages, which is a continuum for the homeless; Helen Woodward’s, which is an animal shelter which does amazing things for people with animals, young, the old, people who have issues. Also with Challenged Athletes, which is a national charity that provides prosthetic devices primarily for wounded soldiers, it’s something we’re quite proud of. It’s not necessarily an industry gathering, but when you go to the event I’d say half the people in the building have association with the insurance industry.
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The amount awarded in a medical malpractice lawsuit brought by Claudia Ball against Dr. Catherine Doty and the Allied Physicians Group LLC, which ran the now-closed Breakthrough Pain Relief Clinic in Chesterfield, Mo. Ball had accused the doctor of negligence for embedding an inch-and-a-half needle in her back during a 2009 treatment for bulging and degenerative discs. Efforts to extract the needle have failed. The defendants plan to appeal.
1,200
The number of bee hives stolen from Florida bee farmers so far this year, with more than 500 hives stolen since June in Lee and Charlotte counties. The thefts are hurting smaller bee operations enough that some are considering quitting the business. Nationwide bee provider, Wonderful Bees, has accumulated more than $150,000 in losses from the thefts since June.
A Noncompensable Taking
“The South Carolina Constitution does not contemplate that damage occasioned to private property by law enforcement in the course of performing their duties constitutes a compensable taking.” — The South Carolina Supreme Court, in its decision against owners of a convenience store that was demolished after being severely damaged in a police standoff. The court found that because the police did not officially appropriate the building for government use before breaking into it with a bulldozer, they don’t have to compensate the owners of the property.
Uber, Lyft Rift
“Uber Technologies Inc. did this to discourage Lyft drivers from contracting with Lyft, to deprive the marketplace of Lyft drivers so that Uber drivers would benefit, and to create a higher wait time for Lyft customers in order to steer their patronage to Uber.” — Ryan Smythe claims that he and hundreds of fellow Lyft drivers in California were sabotaged by Uber drivers using disposable cellphones for the fake rides scheme as part of Uber’s driver recruitment initiative. He’s part of a lawsuit against Uber.
Damage Done
“Even if we do successfully enact laws and regulation on scrap yards, the damage is already done by the time the scrap hits the yard. Prevention is where you’ll see 90 percent of your return.” — Mark Oldham, senior consultant and assistant vice president at Lockton, on the best strategies for building owners to avoid metal theft, which has become a growing concern since the financial crisis due to rising global demand for scrap metal.
The amount a 10-year-old girl will receive in a settlement from the Virginia Safari Park in Natural Bridge, Va., after being bitten by a camel at the drive-thru zoo in May 2015 while attending a birthday party. She will receive $10,000 when she turns 18, followed by $1,000 per month for 14 years after she turns 21. Nearly $40,000 will go toward her medical and legal expenses.
$850,000 The amount for which the California Department of Transportation has settled a wrongful death lawsuit brought by the parents of a 24-year-old woman who was killed by a drunk driver while working on a nighttime paving project.
INSURANCEJOURNAL.COM
Declarations
Foul Ball
“Whatever they put up was clearly insufficient to protect my client.”
— Michael Sperling, attorney for Dana Morelli of Glendora, N.J., who was hit by a baseball and suffered multiple injuries during batting practice before a Milwaukee Brewers game in 2014. Morelli claims in a lawsuit against the team and its insurer that they didn’t provide an adequate ball barrier and did not properly warn about the danger of foul balls. The Brewers extended the safety netting at Miller Park before the 2016 season started.
InsuranceJournal.com
Poll
Would you recommend that a younger person consider a career as an independent insurance agent/broker?
Yes - 81.64% (409 votes) No - 7.19% (36 votes) Not sure - 11.18% (56 votes) Total 501 votes
SEPTEMBER 19, 2016 INSURANCE JOURNAL | NATIONAL | 15
NATIONAL | News & Markets
P/C Insurance Agency Mergers and Valuations Up Again: OPTIS
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he number of insurance agency mergers and acquisitions in the first half of 2016 ranked as second-most-active six-month period since 2008. According to a new report on agency merger activity by Chicago-based investment banking and consulting firm OPTIS Partners, which began tracking transactions in 2008, there were 232 announced deals over the period, one fewer than the 233 done in the first half of 2015. The OPTIS database covers U.S. and Canadian agencies selling primarily property/ casualty insurance, agencies selling both P/C insurance and employee benefits, and those selling only employee benefits. “Buyers and sellers contin-
ued to feed their hearty appetites for deals and push up the M&A activity trend line,” said Timothy J. Cunningham, managing director of OPTIS. Agency M&A activity has climbed steadily over the past four years, other than the spike at the end of 2012 and related drop in early 2013 related to the tax-law change, he added. “We anticipate the recent strong industry-consolidation trend will continue for the near term as acquisitions are an important growth strategy for many firms, especially those backed by private-equity capital,” Cunningham said.
Agency Valuations Near Peak Strong buyer interest is
pushing up prices. “If you’re an agency owner thinking about the best time to put your agency in play, consider taking action sooner than later,” said Daniel P. Menzer, CPA, partner with OPTIS. “Interest from buyers is high and agency valuations are near their peak.”
But buyers need to crunch the numbers and do due diligence, he cautioned. “A premium price paid for acquisition can have signif-
icant adverse implications on the long-term viability of your agency,” he added. “If the agency you buy does not perform up to snuff and you do not have the capital base to absorb the shortfalls, you can get in a lot of trouble.” The OPTIS report breaks down buyers into five groups: private-equity backed brokers, privately held brokers, publicly held brokers, banks, and all others. Privateequity backed buyers continued to lead the charge with 114 transactions. Privately-owned brokers were the second-most active group of buyers with 68 deals — or 29 percent of the total, up from 24 percent during the year-earlier period. Publicly-traded brokers announced 24 deals, down three deals from last year’s first-half count. Banks announced 15 transactions, three more deals than during last year’s first half. Insurance companies and other buyers also were less active this year compared to the first six months of 2015 and remain relatively inactive. Agency acquisitions continue to focus on P/C shops (124 announced transactions) and P/C and benefits brokers (40 deals). There were 43 employee benefits agency sales.
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NATIONAL | Business Moves organizations of all denominations, as well as schools, camps, denominational offices and senior living facilities.
Integro Insurance Brokers, Insurance Revolution
Arthur J. Gallagher, Blue Horizon
Arthur J. Gallagher & Co. has acquired Blue Horizon Insurance Services in San Diego. Terms of the deal were not disclosed. Ronald Zappelli and his team will continue to operate in San Diego under the direction of James G. McFarlane, head of Gallagher’s Western retail property/casualty brokerage operations, and Norbert Chung, head of Gallagher’s Western employee benefits consulting and brokerage operations. Blue Horizon is a retail insurance broker providing property/casualty, employee benefits and risk management insurance services. The firm offers insurance coverage and consulting for a range of industries, including healthcare, real estate, construction, technology, financial, and media and entertainment. Arthur J. Gallagher is an insurance brokerage and risk management services firm headquartered in Itasca, Ill.
School Boards Insurance Company of Pennsylvania, Church Mutual Insurance Company
School Boards Insurance Company of Pennsylvania Inc. has rebranded to CM Regent Insurance Co. after being acquired by Church Mutual Insurance Co. in June. The rebranding was carried out to better reflect the company’s position as a member of the Church Mutual Group following the acquisition. As part of the rebranding, CM Regent will adopt a new corporate identity through a new logo and website. Pennsylvania School Boards Association approved the acquisition and is endorsing the continuing programs and services CM Regent will provide to the Pennsylvania market. CM Regent Insurance Co. is a property/casualty insurance company that serves the public and private K-12 schools, colleges and universities in Pennsylvania. Church Mutual Insurance Co. is based in Merrill, Wis., and offers specialized insurance for religious
18 | INSURANCE JOURNAL | NATIONAL SEPTEMBER 19, 2016
Integro Insurance Brokers has acquired Insurance Revolution Inc. Integro Insurance Brokers is a New York-headquartered international broker and risk management firm. Insurance Revolution is based in Princeton, N.J., and serves as the parent company of Maloy Risk Services Inc., a niche insurance retail broker, and Piedmont Managers LLC, a Lloyd’s cover holder for hedge fund management liability and technology errors and omissions insurance products. Following the acquisition, Maloy’s financial, life science and technology teams will operate as part of Integro’s risk management division, while Piedmont Managers will continue to operate within the same division.
Kraus-Anderson Insurance, Onyx Benefit Advisors
Minnesota-based KrausAnderson Insurance has acquired Onyx Benefit Advisors based in Bloomington, Minn. Onyx was founded by Jenny Wiederholt-Pine, who built the company into a successful agency offering services that include health risk management and wellness plans. Wiederholt-Pine will serve as KA Insurance’s senior benefit advisor and will market benefit programs and other agency services to employers in the Twin Cities metro area. Onyx relocated its office
to KA Insurance’s Burnsville location on Sept. 1. Onyx’s three employees joined KA Insurance’s 68 employees. The acquisition complements KA Insurance’s benefits portfolio and reflects an investment in intellectual capital that will support the insurance firm’s growth and depth of expertise regionally and nationally. Onyx is KA Insurance’s third strategic acquisition in recent years. The company also acquired Minnesota Insurance Brokers (MIB) in 2009 and Advanced Risk Manager in 2012.
Hub, Patterson Insurance Brokers
Hub International Ltd. has acquired the assets of Anchorage, Alaska-based Patterson Insurance Brokers. Terms of the deal were not disclosed. Kent Patterson, Patterson’s president, will join Hub Northwest as vice president, and he will be based in Anchorage. Patterson specializes in providing commercial lines and employee benefit insurance solutions. Chicago-based Hub is a brokerage that provides property/casualty, life and health, employee benefits, and investment and risk management products and services.
Andrew G. Gordon Insurance, Atlantic Advisers Insurance Agency
Andrew G. Gordon Insurance Inc. and Atlantic Advisers Insurance Agency Inc. have announced their merger.
continued on page 20
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NATIONAL | Business Moves continued from page 18 The companies will combine to operate as Gordon Atlantic Insurance. They will also operate a separate division, Gordon Atlantic Advisors LLC, to provide specialized risk assessment and risk management services for businesses. This merger comes as the insurance industry has grown increasingly complex and competitive in the past decade, said Geoff Gordon, who is set to serve as president of Gordon Atlantic Insurance. Andrew G. Gordon Insurance Inc. is a Norwell, Mass.-based insurance provider. Atlantic Advisers Insurance Agency Inc. is also a Norwell-based provider of insurance products and services.
LP Insurance shareholders. Terms of the deal were not disclosed Reno, Nev.-based LP Insurance is a risk management and commercial insurance brokerage firm.
Triumph Insurance Group, Southern Transportation Insurance Agency
Triumph Insurance Group has acquired Dallas-based Southern Transportation Insurance Agency Ltd. Triumph is a full-service commercial insurance agency specializing in the transportation sector, and is a subsidiary of TBK Bank SSB. Triumph’s footprint and product offering for clients in the transportation industry expands with this acquisition. The producers and staff of Southern Transportation Insurance Agency are now LP Insurance, McMullen employees of Triumph Insurance Group LP Insurance Services Inc. has acquired and work out of the Triumph office. Elko, Nev.-based McMullen Insurance. McMullen Smales and Stephen president of Southern A&M co-owners, IJ Personal John Umbrella.pdf 1 12/28/15 10:22Trent, AM Trinity Steelman, have both been named Transportation Insurance Agency, will
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continue in his role as key thought leader, client advocate and team builder within Triumph Insurance Group. TBK Bank, SSB, a subsidiary of Triumph Bancorp Inc., is a Texas-state savings bank headquartered in Dallas. This acquisition is not expected to have a material impact on the financial results of Triumph Bancorp Inc. for the 2016 fiscal year.
Marsh & McLennan, Benefits Advisory Group
Marsh & McLennan Agency LLC (MMA), the middle-market agency subsidiary of Marsh, has acquired Benefits Advisory Group, an Atlanta-based employee benefits consulting firm. Terms of the transaction were not disclosed. Created in 2003, Benefits Advisory Group offers employee benefit services to midsize employers throughout Georgia. All of the firm’s employees, including its owner Al NeSmith, will join MMA and operate as part of the existing Atlanta operations. Thomas R. Brown, vice chairman of MMA’s Mid-Atlantic region, said the acquisition will enhance its employee benefits offering in the Atlanta market. MMA is a subsidiary of Marsh established in 2008 to serve as a platform for the middle market. In 2015, it expanded its national footprint into Canada. MMA offers commercial property, casualty, personal lines, and employee benefits to midsize businesses and individuals across North America.
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BMS Re, Texas Reinsurance Broker
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London-based BMS Re US, a specialist insurance and reinsurance broker, has acquired a reinsurance intermediary that complements its own operations. BMS, the broking arm of Minova Insurance, acquired Advocate Reinsurance Partners, a privately held reinsurance intermediary for middle-market insurance carriers, captives, risk retention groups and other specialty insurance operations. Advocate Reinsurance Partners is based in Dallas. The deal solidifies a producer/wholesale relationship between both companies that has existed more informally.
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Workers’ Compensation | Closer Look | NATIONAL
Future Workers’ compensation Profitability Faces Obstacles
By James B. Auden
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orkers’ compensation, the largest product segment in the U.S. commercial lines insurance sector, has experienced a recent profit renaissance, moving to a significant underwriting profit in 2015. However, longterm profitability in this traditionally more volatile line remains uncertain. Market competition is fueling a move toward declining premium rates, and favorable trends in claims cost factors and loss reserve experience may not prove long lasting
Performance Turnaround
For the property/ casualty industry aggregate, workers’ compensation underwriting results have vastly improved in the past five years INSURANCEJOURNAL.COM
with the combined ratio moving to 95 in 2015. This is the industry’s first posted result below 100 since 2006. This result compares with a recent cyclical peak combined ratio of 117 in 2011. The change in fortune for workers’ compensation is attributable to a number of factors, including strong premium revenue growth from better pricing and economic factors, favorable loss cost trends, and favorable loss reserve experience tied to more conservative reserving practices. Net written premium in workers’ compensation has expanded at an average annu-
al rate of 7 percent from 2011 to 2015, although growth has tapered off recently with a 3.5 percent increase in 2015. Premium growth reflects improvement in insured exposures from employment and payroll growth, as well as benefits from past pricing changes. The broader commercial lines insurance sector experienced a hardening phase of the market underwriting cycle from approximately mid-year 2011 through the latter half of 2014. As one of the weaker performing market segments at that time, workers’ compensation rate changes were among the highest among
individual sectors. Underwriting improvements and stability in both frequency and claims costs drivers have promoted better loss reserve experience in the segment as well. Loss reserves exhibited moderate deficiencies from 2009 to 2011 amidst the economic recession and weak market conditions. However, reserve experience has turned favorable in the past four years, with favorable prior years reserve changes representing more than 5 percentage points of industry premiums in 2015.
Market Share Shifts
While the workers’ compensation market in aggregate has staged a strong recent recovery in performance, individual company results vary considerably. Shifts in marketshare leadership reveal a relationship between underwriting performance and marketshare growth, as some traditional, large workers’ compensation writers have retrenched in efforts to bounce back from larger recent underwriting losses. Several of the fastest-growing companies have reported significant recent underwriting profits. Based on direct written premiums, long-time market participants Travelers
SEPTEMBER 19, 2016 INSURANCE JOURNAL | NATIONAL | 21
NATIONAL | Closer Look | Workers’ Compensation continued from page 21 and Hartford held the No. 1 and No. 2 workers’ compensation market positions in 2014 and 2015. Traditional market leaders AIG and Liberty Mutual have dropped to the fifth- and seventh-largest positions in efforts to reverse poorer segment underwriting results. AIG and Liberty Mutual have posted five-year average net combined ratios in workers’ compensation that are worse than industry averages — and is only exceeded by the State Compensation Insurance Fund, California’s insurer of last resort, among the top 10 writers. AmTrust Financial Services, Inc. (fourth-largest workers’ compensation direct writer in 2015) and Berkshire Hathaway (sixth-largest workers’ compensation direct writer in 2015) have each expanded workers’ compensation premiums more than four-fold in the past five years. These two underwriters have also reported very strong underwriting profits in the past five years, although rapid growth in a more volatile longtail business line such as workers’ compensation can add considerable risk to an insurer’s underwriting profile. Recent acquisition activity is also affecting market composition. The creation of Chubb Ltd. following ACE Ltd.’s January 2016 acquisition of The Chubb Corporation creates a
more formidable competitor as the eighth-largest direct workers’ compensation writer on a pro forma basis.
Keys to Future Workers’ Comp Profits
The historical cyclicality of workers’ compensation underwriting results and the rarity of underwriting profits naturally leads to questions regarding the sustainability of future profits. Market fundamentals are becoming less attractive due to competitive dynamics and other external forces (economic, regulatory, legal), which makes it likely that combined ratios will rise in 2016 and that a return to underwriting losses is probable in 2017. Numerous obstacles lie ahead for property/casualty
insurers to sustain recent underwriting profitability in workers’ compensation. Companies’ future success in workers’ compensation will require deft navigation of several factors:
accelerating rate. In a soft market environment, more proficient underwriters manage the cycle by moving more swiftly to cull less profitable accounts when competitor prices swing more aggressively.
Market Competition/Pricing. The hardening market in workers’ compensation peaked in 2014. Underwriting success and ample market underwriting capacity are promoting a market shift in which renewal premium rates are now broadly in decline. The Council of Insurance Agents & Brokers (CIAB) Commercial Lines Market Survey indicates that workers’ compensation renewal premium rates have declined for the past five consecutive quarters and are falling at an
Use of Underwriting Technology. Expansion of data analysis and more sophisticated use of information technology continue to accelerate in the insurance market. More extensive use of data from internal underwriting and claims information, and a wider universe of external sources in predictive modeling and analysis, can provide benefits in risk selection, pricing differentiation and reduced claims volatility. Smaller companies face future challenges in keeping pace with technology investments of larger scale peers, which is a likely driver of future market consolidation. Portfolio Management and
continued on page 24
22 | INSURANCE JOURNAL | NATIONAL SEPTEMBER 19, 2016
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To learn more visit: www.westchester.com See related articles at: ij.com/riskmanagers Insurance provided by Westchester Fire Insurance Company and its U.S. based Chubb underwriting company affiliates. Chubb is the marketing name used to refer to subsidiaries of Chubb Limited providing insurance and related services. For a list of these subsidiaries, please visit our website at chubb.com. All products may not be available in all states and surplus lines products can only be offered through licensed surplus lines producers. This communication contains product summaries only. Coverage is subject to the language of the policies as actually issued. Š2016 08/2016
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NATIONAL | Closer Look | Workers’ Compensation
continued from page 22
Geographic Mix. Underwriters with greater diversification in terms of account size, industry and hazard class, geographic mix, and an ability to adjust to changing opportunities within underwriting subsegments have greater opportunities to succeed in the constantly evolving workers’ compensation market. Workers’ compensation insurance across individual states can be quite different in terms of pricing, underwriting regulations, benefits and claims requirements, and legal environment. These factors can greatly influence the ability for an insurer to have consistent underwriting success in a market. As an example of the variability of state circumstances, California, the largest state for workers’ compensation by premium volume, is historically more volatile than the overall industry. Recently, however, the state combined ratio returned to a level below 100 — in part as a result of the impact of recent legislative reforms on claims costs, which is now leading to heightened
price pressure within the market. Conversely, Florida, the fifth largest state for workers’ compensation, is likely to see large future rate increases as two recent court rulings regarding attorney fee limits in workers’ compensation (Marvin Castellanos v. Next door company, et al.), and the length of benefit payments (Bradley Westphal v. City of St. Petersburg) are anticipated to increase claims costs in the state. Claims Cost Management. The workers’ compensation market has benefited from relatively stable claims trends in recent years. The evolution of risk management
24 | INSURANCE JOURNAL | NATIONAL SEPTEMBER 19, 2016
and employee safety practices has favorably influenced long-term workers’ compensation claims frequency patterns. In its annual State of the Line Report presentation, the National Council on Compensation Insurance (NCCI) stated that claims frequency declined by 3 percent in accident-year 2015. Claims severity trends also moved favorably in 2015. According to the NCCI, workers’ compensation indemnity cost severity was up by only 1 percent in 2015, while medical costs, which traditionally exhibited higher inflation levels, actually decreased by 1 percent for the year. Uncertainty remains regard-
ing future medical claims cost trends, particularly relating to the implementation and evolution of the Affordable Care Act. Growth in prescription drug costs in workers’ compensation claims are another factor that can influence future medical severity. Insurers are more actively managing pharmaceutical costs and utilization, particularly relating to extensive opioid prescriptions for pain treatment, in efforts to control costs and generate better claims outcomes. Loss Reserving Practices. While considerable attention is given to the effects of continued low interest rates and inflation on investment yields and performance, another consequence of these conditions is greater predictability in insurance claims losses, particularly in longer tail lines such as workers’ compensation. The onset of any future rise in claims costs, particularly medical costs, and inflation, could materialize rather quickly. Promptly recognizing the effects of these changes in loss reserves and accident-year profitability can boost the chance for
continued on page 26
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NATIONAL | Closer Look | Workers’ Compensation not greatly increased asset risk exposures in response to declining bond yields. In contrast, a number of insurers have reduced portfolio durations in anticipation of future interest rate increases that are yet to materialize, which further restricted the investment contribution to earnings. When the next material increase in interest rates transpires, it will take some time for insurers’ bond portfolios book yields to adjust. In the meantime, a prudent course of action lies in maintaining closer durations between loss reserves and fixed income assets backing liabilities, while staying within risk appetite allocations for assets with equity market risk.
continued from page 24 future pricing to more accurately reflect a shift in claims trends. Macroeconomic Uncertainty. The U.S. economy continues to expand at a sluggish pace, and the potential for future economic weakness or a slip to a recession cannot be dismissed. Premium revenue in workers’ compensation significantly declined in the economic downturn from 2007 to 2010. The most recent economic recession also saw an increase in workers’ compensation claims filings, breaking a long trend of declining claims frequency. Workers’ compensation underwriters must also prepare for a higher propensity of fraudulent claims activity during weaker economic conditions.
insurers have reported flat to declining changes in investment income, given a prolonged extremely low interest rate environment. A lower yield on investments adds to the imperative for insurers to produce meaningful annual
underwriting profits to generate an adequate return on capital. While individual underwriters hold varying levels of risk assets (common equities, high yield bonds, limited partnerships, private equity or hedge funds), the P/C industry has
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Auden, CFA, is sector head for North America Property/Casualty Insurance ratings at Fitch Ratings. Reach Jim at jim.auden@fitchratings.com.
Investment Challenges. Outside of underwriting performance. Property/casualty 26 | INSURANCE JOURNAL | NATIONAL SEPTEMBER 19, 2016
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I am your data. Protect me. I sit in the cloud. I am in your databases and devices. I grow by 100 terabytes every day. I am millions of confidential records. Names, addresses, social security numbers. I want more than insurance. I want the kind of insight that comes from decades of experience insuring companies against the risk of network breaches and compromised data. A level of protection and personal service that only Chubb provides. Not just coverage. Craftsmanship.SM Not just insured.
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Š2016 Chubb. Coverages underwritten by one or more subsidiary companies. Not all coverages available in all jurisdictions. ChubbŽ, its logo, Not just coverage. Craftsmanship.SM and all its translations, and Chubb. Insured.SM are protected trademarks of Chubb.
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NATIONAL | News & Markets
Low Prices Ultimately Could Bite London Market Insurers: A.M. Best, PwC Reports By L.S. Howard
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he business outlook for the London insurance market is a familiar one across other global markets: underwriting profits are under pressure as ongoing soft market prices begin to take a toll. In separate reports on the London market, both A.M. Best and PwC cautioned about the effects of lower premium rates. A.M. Best said, while London market insurers performed well in the first half, these good results conceal “fundamental challenges to the market’s competitive position and prospective profitability.” In its review of pricing conditions in the Lloyd’s market, PwC revealed a similar story: counter-intuitive pricing trends could lead to nasty surprises. PwC indicated that pricing may not be adequate in certain classes of business, such as casualty and cargo, energy and terrorism. “Our review points to a number of potential problem hot spots and numerous examples of the market assuming a greater level of profitability than what may be supported by recent experience and rate changes,” said Jerome Kirk, London mar-
ket, actuarial leader at PwC. A.M. Best’s report, titled “London Market Insurers Adapting to an Evolving Operating Environment,” said pressure on underwriting profitability is a challenge for the entire London market. “Premium rates across the market continue to fall, as traditional and alternative capital compete for business,” according to Catherine Thomas, senior director at A.M. Best, and author of the report.
‘Maintaining access to profitable business is increasingly difficult and some insurers will need to expand their global footprint in order to remain competitive.’ “Large property and energy risks, particularly those that are catastrophe exposed, remain under most pressure.” Historically, disciplined London market players have been able “to materially shrink their businesses during difficult underwriting periods, ready to expand
28 | INSURANCE JOURNAL | NATIONAL SEPTEMBER 19, 2016
rapidly when rates improve,” said rating agency’s report. But in today’s operating environment, where diverse and plentiful capital quickly exploits any post-event market upturn, insurers need to adapt their traditional soft market strategies, A.M. Best noted. “A more granular segmentation of portfolios, supported by strong data analytics, is increasingly necessary to identify pockets of profitable business,” said Thomas. “In the property sector, a higher proportion of insurers’ catastrophe budgets are being allocated to binder business, where prices are proving more resilient to competition than in the reinsurance and open market segments.” The A.M. Best report said there also has been more focus on casualty business because it is “less vulnerable to competition from capital markets.” “Maintaining access to profitable business is increasingly difficult and some insurers will need to expand their global footprint in order to remain competitive,” A.M. Best said, noting, however, that the subsequent pressure on expense ratios will “necessitate an increase in scale.” “For others, superior niche expertise and strong relationships with clients, brokers and MGAs may be sufficient to maintain their competitive positions,” the report went on to say. In comments accompanying its review of Lloyd’s pricing, PwC’s Kirk encouraged Lloyd’s managing agents to look “carefully and critically at both their half year reserves,” while ensuring they have “the right pricing management information including bridging to reserves to avoid nasty surprises in terms of either financial results or regulator interventions.”
‘Poorly Performing’ Classes at Lloyd’s
In its review, PwC focused on business classes that Lloyd’s has identified as “poorly performing.” Inadequate pricing was identified the root cause for underwriting pressures in the following classes: Casualty and cargo. PwC said its analysis highlights evidence that experience and rate changes are “not being appropriately
continued on page 30
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I am a CEO. Protect me. I have thousands of employees worldwide, working in dozens of offices. I have a C-suite of talented executives and my company’s reputation and profitability to protect. I have a broad range of risks facing me, my business and my employees. I want more than insurance. I want the kind of insight that comes from decades of experience insuring large corporations and their unique assets. A level of protection and personal service that only Chubb provides. Not just coverage. Craftsmanship.SM Not just insured.
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continued from page 28 reflected in pricing for these classes.” “In May 2016, we observed often counterintuitive material reductions in the booked, planned and priced loss ratios in the casualty class of business ... These reductions are particularly acute when recent rate reductions are considered.” A similar picture was apparent in the cargo class with market average planned combined ratios of around 100 percent after allowing for reinsurance. This makes
the business “wholly reliant on good fortune in claims experience and investment returns to make a profit.” Energy. Market average risk adjusted rate reductions exceeded 25 percent last year for offshore property risks exposed to natural catastrophes in the Gulf of Mexico, said PwC, noting that market business plans include, on average, a 30 percent catastrophe loss ratio for this class. While catastrophes have been relatively benign in recent years, “there are increasing concerns over rate adequacy, with the market average initial 2016 planned combined ratio being 100 percent after allowing for reinsurance.” Terrorism. Recent terrorism activity in Europe has led to material uncertainty for re/insurers over loss frequency, “with implications for the ongoing appropriateness of current pricing and catastrophe models.” The growth in terrorism premiums during the past four years has been “fueled by more than a doubling of pre-
miums from a variety of delegated underwriting sources, such as broker facilities, binding authorities and where re/insurers chose to follow another lead underwriter.” However, PwC noted that this growth in terrorism premiums has been “outstripped by the growth in exposures and highlights ongoing rating pressure for this class, with overall market average risk adjusted rate reductions between 5 and 7 percent per annum since 2013.” Excess of loss reinsurance treaties, which included the reinsurance of national pools, experienced the greatest risk adjusted rate reductions of nearly 10 percent in 2015. “The market needs to ask whether the reward on offer is worth the (extreme) downside risk and how they can adapt the product to better meet the needs of corporations and society,” said Harjit Saini, London market director, who led PwC’s pricing review. Share this article with a
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LifeScienceRisk
LifeScienceRisk is a managing general underwriter specializing in product and related professional liability coverage for companies engaged in the life sciences industry. We partner with a consortium of “A XV” rated carriers to bring you tailored coverage enhancements specific to the needs of firms involved in the development, manufacturing and distribution of pharmaceuticals, medical devices, biotechnology products, and natural health/nutritional supplements.
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Contact: Mark D. Wood | President & CEO | mark.wood@lsrisk.com Life Science Risk is a series of RSG Underwriting Managers, LLC. RSG Underwriting Managers is a Delaware series limited liability company and a subsidiary of Ryan Specialty Group, LLC, specializing in underwriting management and other services for insurance products distributed through agents and brokers. In California: RSG Insurance Services, LLC License #0E50879. ©2016 Ryan Specialty Group, LLC
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NATIONAL | Special Report | Emerging Risks
By Amy O’Connor
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here’s a new insurance market emerging in light of a disturbing reality in today’s world — active shooter risks. The new coverage is meant to address a gray area in insurance policies that may leave insureds vulnerable to claims in the aftermath of an active shooter incident. Incidents involving an active shooter, defined as one or more individuals actively engaged in killing or attempting to kill people in a populated area, are increasing around the country. An FBI study of 160 active shooter incidents in the U.S. between 2000 and 2013 found an average of 11.4 annually, or one every three weeks. During the first seven years studied, there was an average of 6.4 incidents per year but that number jumped to 16.4 in the latter seven years. The number rose again to 20 mass shootings per year in both 2014 and 2015 in an analysis of 2014 and 2015 active shooter incidents released by the FBI in June. The FBI’s “Study of Active Shooter Incidents in the United States Between 2000 and 2013” found 70 percent of incidents took place in either a commerce/business or educational environment.
The largest percentage of active shooter incidents — 45.6 percent — took place in a business; 24.4 percent occurred in educational environments, and 10 percent on government properties. The shootings occurred in 40 out of 50 states and the District of Columbia, and claimed the lives of 1,043 people. That number has obviously grown in recent years, with the most notable recent active shooter incident at a nightclub in Orlando that left 50 people dead. “The findings establish an increasing frequency of incidents annually,” the FBI report says. “This trend reinforces the need to remain vigilant regarding prevention efforts and for law enforcement to aggressively train to better respond to — and help communities recover from — active shooter incidents.” The insurance market has begun to respond to this emerging risk
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INSURANCEJOURNAL.COM
By the Numbers
40
231
casualties
incidents in 26 states: 92 killed and 139 wounded 20 incidents in 2014 (excluding the shooters) 20 incidents in 2015
26
incidents ended with an exchange of gunfire between shooters and law enforcement
42 shooters
incidents ended with law enforcement at the scene
14
Active Shooter Incidents, 2014-2015, FBI, Schweit, Katherine W. (2016)
39 male 3 female
6
incidents ended when citizens acted to end the threat
2 husband-and-wife teams 16 shooters committed suicide 14 shooters were killed by law enforcement 12 shooters were apprehended with several new active shooter insurance programs, all launched this year.
Coverage ‘Gray Area’
The policies provide coverage for both pre- and post-active shooter incident services. Aside from recovering from the physical and emotional harm, and potential loss of life, the affected entities must pick up the pieces and respond to the situation. There is also the likelihood of lawsuits from allegations of negligence that allowed the incident to happen in the first place. Currently, says John Powter, INSURANCEJOURNAL.COM
president of GDP Advisors in McKinney, Texas, there is a misconception among clients that their insurance policy covers an active shooter event. Insureds may also believe that active shooter incidents are automatically covered by terrorism insurance, all of which can lead to a debate between insureds and their carriers. While a property policy is designed to handle physical damage, the general liability part of a policy doesn’t clearly cover or exclude active shooter incidents, Powter says. “There is a concern, or gray area, with the general liability
policy — in reality it was never designed to cover an active shooter incident,” said Powter. “We think there is a disconnect there and it’s a concern.” Paul Marshall, program manager for McGowan Program Administrators’ new dedicated Active Shooter Division, says there has been little case law so far to establish if an active shooter incident is covered by an insured’s general liability (GL) or professional liability policy. “Some are saying it’s under GL and some are saying it’s more of a professional liability ‘failure to protect’ type cov-
er, but there is a little bit of confusion as to the response,” Marshall said. “What I tell agents is any time there is a new, unidentified exposure, the best way to manage that risk in the short term is with a named peril policy.”
Active Shooter Insurance Market
Marshall said McGowan’s new program division offers a standalone, primary liability policy for lawsuits arising from harm caused by attacks using deadly weapons. It features risk assessment and crisis manage-
continued on page 34
SEPTEMBER 19, 2016 INSURANCE JOURNAL | NATIONAL | 33
NATIONAL | Special Report | Emerging Risks continued from page 33 ment services, as well as event responders and post-event counseling services. Coverage limits are available up to $25 million, but Marshall said the company is really targeting smaller risks through low limits of $250,000 to $500,000 and minimum premiums starting at $500. “We whittled down the policy limit so a small business can buy a policy and still get all the immediate services and loss control but don’t have to shell out thousands of dollars. We wanted to make it affordable for any risk that is out there,” Marshall said. All classes of business will be considered, including healthcare, education, religious, lodging, entertainment, restaurants, night clubs, and hospitality, to name a few. The coverage is available nationwide through a Lloyd’s line slip with four syndicates. A business income and expense coverage extension was recently added as well. GDP launched its Active Shooter Insurance Program in February of this year to address policy gray areas and the increase in these incidents. The coverage was originally designed for educational institutions like public and private schools and universities because of the abundance of information available to underwrite the risk, Powter said. However, immediately after the program was launched, GDP started receiving coverage inquiries from other entities such as banks, hotels, sports venues and amusement parks. Now it will look at all classes of business. “There is a lot of data about school shootings — that’s the
School shooting memorials created following Dec. 14, 2012, massacre at Sandy Hook Elementary School in Sandy Hook, Conn. saddest part about this program,” Powter said. “There is no excluded class, but there are some we can’t rate. We have recently added the following industries: healthcare institutions, special events including sports, retail, religious, government, and industrial and commercial risks.” The coverage, available through Lloyd’s, is a primary policy with clear third party coverage and no exclusions related to the types of incidents. It also addresses if an active shooter leaves explosives behind or doesn’t use a gun but another weapon, such as a knife. Limits range from $1 million to $20 million and premiums are based on several factors like number of students, location in terms of demographics, square feet and number of campuses. But, Powter says, the real value of the policy is the risk management and crisis response pieces. The coverage includes onsite active shooter and security vulnerability assessment, as well as preparedness seminars and training modules, and post-event crisis management services. These services are important, Powter says, because many businesses and educational
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institutions are now taking steps to understand how to best respond if an incident occurs at their facility.
‘Sadly, active shooter incidents are the next cyber. This is the next wave that is going to happen.’ “It has become so common place that schools are now training for these situations. It’s a good thing. What they are doing is training people trapped inside to fight — because they know it will be over in seven minutes and average response from police is four minutes,” Powter said. In fact, the majority of active shooter incidents — 60 percent — actually ended before police arrived, according to FBI data of 63 incidents where the duration of the active shooter event was known. The FBI reported in its 2014 and 2015 analysis that citizens successfully acted to end an active shooter on six different occasions. “Even when law enforcement was present or able to respond within min-
utes, civilians often had to make life and death decisions, and therefore, should be engaged in training and discussions on decisions they may face,” the FBI report states. Powter said part of the risk management service includes putting an action plan in place of what to do during an active shooter incident. The crisis response service involves dealing with the aftermath — getting a PR and disaster team on the ground within 12 to 24 hours to respond, handle the media, and facilitate recovery. “Ninety-five percent of companies don’t have this [resource] and the ability to handle loss is sadly part of the incident response. It can significantly reduce the number of claims,” he said. Hugh Nelson, president of Southern Insurance Underwriters (SIU) in Alpharetta, Ga., said the key features of its new active shooter program for educational institutions are the risk and crisis management aspects. “Depending on how many people are injured or killed, from a claims standpoint that could equal a fairly significant dollar amount. The allegation of negligence is easy to make and the school would obviously have to defend itself as to what are reasonable or not reasonable steps it could have taken,” Nelson said. SIU’s policy provides an upfront risk assessment done by an independent risk management firm that specializes in preparing people for active shooter events. “They look at what plans are in place and things that can be done to improve those and make them less vulneraINSURANCEJOURNAL.COM
ble,” Nelson said. SIU’s primary policy will be expanded to other classes in the near future. It is available through a Lloyd’s Syndicate that Nelson said has “extensive expertise in the terrorism field,” with limits of $1 million to $20 million. “This is a primary liability policy under the GL policy that the school already has, but also gives them extra limits,” he said. The coverage's 24-hour crisis management service helps the educational institution respond immediately by setting up an emergency call center, advising on emergency communications, organizing a recovery plan and arranging counseling services. While Nelson says no
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amount of preparation can make a school administration completely ready for an active shooter incident, especially from an emotional standpoint, having the pieces in place to handle one of these devastating situations can help ease the burden if one occurs. “When you look at Sandy Hook, Virginia Tech — these can be very significant events and people need to be prepared,” Nelson said. “This policy brings a whole realm of experts to bear for the situation and provides an additional primary layer of insurance. It is prudent to add this coverage.”
Facing Reality
Marshall says he hopes this risk doesn’t become more prev-
alent and that it’s just a “sideline coverage.” However, McGowan has had significant interest already, which included interest from the Republican National Convention. Marshall says McGowan quoted the risk but that there was a “Trump exclusion because the underwriters consider him to be so litigious.” The coverage is a scary reminder of the world we live in, Marshall said, but the job of those who work in insurance is to take care of their clients and “help make people whole.” “Once we got past the denial factor that these incidents occur and made the coverage affordable for everyone, it was, ‘OK, how do we get it in the hands of everyone in the coun-
try?’” Marshall said. GDP has also had significant interest in its coverage, particularly in the wake of events like the June shooting in Orlando, and Powter said he expects the active shooter insurance segment will only grow in capacity and demand. Eventually, he said, the gap that currently exists on GL policies will go from a gray area to excluded, as was the case with cyber risks that led to a huge new insurance market. “There’s a problem in the industry no one is really talking about,” he said. “Sadly, active shooter incidents are the next cyber. This is the next wave that is going to happen.”
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9/1/16 5:39 PM SEPTEMBER 19, 2016 INSURANCE JOURNAL | NATIONAL | 35
NATIONAL | Special Report | Surplus Lines
How Competition Brings Out E&S Market’s Creativity Emerging risks or traditional lines, innovation makes the difference By Andrea Wells
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he surplus lines market is eyeing another year of solid results for 2015. At press time, the final figures for 2015 surplus lines had yet to be released but according to Brady Kelley, executive director of the National Association of Surplus Lines Offices, the financial stability of the industry remains strong and for the 12th year in a row, the annual U.S. Surplus Lines – Segment Review, produced by A.M. Best shows no financial impairments in the surplus lines segment in 2015. “We continue to see strong balance sheets and resulting secure ratings, so these quantitative signs all point to good conditions for surplus lines,” said Kelley. That doesn’t mean the industry is without challenges. An oversupply of capital in today’s market continues to pressures rates and heated competition is leading some excess and surplus (E&S) executives to question the future of E&S in certain sectors. According to Jeremy Johnson, president of U.S. Commercial, AIG, the current competitive situation may be too heated. “I think the property market, from an E&S standpoint, is becoming irresponsible in certain pockets,” Johnson said. “Generally speaking cat-driven E&S property is extremely competitive, with significant rate reductions still coming through in that space. And to me, it’s
challenging to see how those rate reductions are tenable in the long term.” Johnson says today’s pricing on catastrophe exposed property is simply unsustainable. In a market where interest rates remain “very depressed,” Johnson says, E&S insurers must “make sure that we continue to focus on underwriting discipline.” That means being able to underwrite to a profit. “And that’s a challenge in such a competitive market.” While the current market can make writing to a profit a challenge, one upside is that such competition breeds innovation and creativity. “There’s always opportunity,” Johnson said. “Innovation is absolutely in our DNA.”
Competition Gets Creative
Art Davis, president of Argo Group’s excess and surplus lines, agrees there is opportunity and that competition forces E&S players to get creative. “It’s a cyclical business and we are in that phase of the cycle where there’s more competition, more rate compression, more challenges, almost across the board,” Davis said. “But as we find ourselves in areas where there just aren’t many opportunities we have to go find new opportunities. And that spurs creativity.” Creativity doesn’t come simply from new and emerging risks, which the E&S market is particularly known for. Innovation often happens in traditional lines and classes of business, which is where
36 | INSURANCE JOURNAL | NATIONAL SEPTEMBER 19, 2016
some E&S carriers happen to be seeing significant premium growth. “When I think about the E&S specialty market, one of the things that stands out is the innovation in classes or sectors that have been around for some time,” said Joseph Cellura, president, North American Casualty at Allied World. “There is a significant amount of direct written premium in the North American E&S specialty market still found in the construction and real estate sectors of the insurance market. As construction has rebounded, as homebuilding has rebounded, funding for large complicated infrastructure projects continues, and those are areas in which the E&S market has thrived.” Cellura says the E&S industry continues to innovate coverages and approaches for these traditional exposures every day, he added. Allied World has seen significant growth in commercial construction projects, for example, Cellura said. Changes in this sector involving regulation, the definition of occurrence, and project funding have led E&S insurers like Allied
World to respond to changing risk exposures. For example, “there are public-private equity companies that are investing in giant portfolios of single family homes that they are turning around and then managing as rental properties, then packaging those properties as investment assets,” Cellura said. “That, on the face of it, is a rental/habitational/real estate risk exposure but it has significant additional risk associated with the way those portfolios are put together and managed. To me, that’s an evolving E&S exposure in a traditional class of business.”
Servicing
Innovation doesn’t have to be limited to a risk transfer insurance product, either. “It can also involve services that surround those products,” Cellura said. “Insurance companies are often in a unique position to have access to a lot of data and to understand different exposures that enable us to bring services and resources to the table for our customers. Those can be engineering, loss control, legal services, etc. That’s another area of innovation that sometimes gets lost.”
‘I think the property market, from an E&S standpoint, is becoming irresponsible in certain pockets. Generally speaking cat-driven E&S property is extremely competitive.’ – Jeremy Johnson, president, U.S. Commercial, AIG
INSURANCEJOURNAL.COM
Argo Group’s Colony Specialty has also found opportunity in a traditional class — small business. “We write a lot of startup ventures, new businesses,” Davis said. While there are plenty of markets trying to compete in this space, Davis said, his company has achieved some growth by targeting a specific niche within the small business space and “thinking differently” about their specific exposures. “There are a lot of people out there doing a lot of creative things so trying to capture this part of the market is a challenge,” Davis said. Argo, in another example continues to invest in new businesses that often operate as web-based only businesses. “These are entrepreneurial folks starting out very, very small and not in a traditional store front setting,” he said. To succeed in this competitive space, Argo has had to think about what works best to capture their attention. “How do we sell products that would be attractive to them? This
requires thinking differently about the risk while also trying to understand what that market will look like in the next five, 10 or even 20 years from now.” For AIG’s surplus lines company, Lexington Insurance, some areas of E&S have proven to be less profitable than hoped while others show potential for growth, Johnson said. “We are taking a pretty disciplined view of our book and our exposures,” he said. “There are areas of our portfolio, small niche areas, that we think the pricing has become unsupportable, so we are showing some additional restraint. And equally, there are parts of our portfolio that we want to continue to manage growth.”
Flood Insurance Program) space,” Johnson said. “I think as we at AIG, and the industry in general, becomes more sophisticated in terms of using data models we will continue to see really interesting opportunities for developing private market for flood.” Beyond just flood, providing improved data and analytics can also be a source of growth. “On the more commercial side, moving away from the NFIP space, I think for us the opportunity is around data and analytics — to be able to provide our customers with really sophisticated data modeling so they can understand their cat risk through better modeling, enhanced computer power and better understanding of data.”
Flood
Cyber
Flood insurance is one area of that could present opportunity for some E&S carriers, especially as data models advance. “There continues to be a considerable opportunity for private market solutions in the traditional NFIP (National
‘When I think about the E&S specialty market, one of the things that stands out is the innovation in classes or sectors that have been around for some time.’ - Joseph Cellura, president, North American Casualty, Allied World INSURANCEJOURNAL.COM
Lexington and other carriers continue to target the cyber market, which has been touted as the fastest-growing E&S market ever. However rapidly changing exposures have left some insurers questioning just how profitable the coverage will be going forward.
The ultimate profitability of the P/C industry’s cyber insurance efforts will take some time to assess as the market matures and future cyber-related loss events emerge, according to Fitch Ratings. Johnson says Lexington is willing to take that bet and remains committed to the cyber insurance space. “We continue to see tremendous opportunities in the cyber space but view the product shifting from product to peril, if you will,” Johnson said. “I think that the market will grow dramatically and significantly as the cyber peril continues to morph and emerge.” Argo Group’s Davis says everyone is eyeing cyber and looking for solutions to the many “gray” areas in coverage. “Standard is not a word I would use for cyber at all,” Davis said. “There are so many gray areas and questions about how it is going to evolve in the future. Is it really just an insurance solution or is it an overall product solution for how to help people get back on their feet?” Like Lexington, Argo Group and Allied World are heavily invested in developing cyber products.
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‘It’s a cyclical business and we are in that phase of the cycle where there’s more competition, more rate compression, more challenges, almost across the board.’ - Art Davis, president, Argo Group, Excess and Surplus Lines
SEPTEMBER 19, 2016 INSURANCE JOURNAL | NATIONAL | 37
NATIONAL | Surplus Lines
14 States Process $13.1B in Surplus Lines Premium in First Half 2016
D
ata from the 14 U.S. surplus lines service/ stamping offices show they have processed almost $13.1 billion in insurance premium filings in the first half of 2016, according to the Surplus Lines Stamping Office of Texas (SLSOT). This represents a slight uptick from 2015’s $13 billion for the same period, or a 0.2 percent increase. While the market continues to remain soft, the numbers are consistent with a competitive and stable wholesale market, according to the SLSOT, which gathers surplus lines premium and transactional policy data from the 14 service/stamping offices on a biannual basis. The data is evaluated and reported
to the excess and surplus lines industry to show trends and changes in the marketplace on a national, regional and state level. As seen in the regional depiction, the service/stamping offices in the South had the highest aggregate premium, at $5.6 billion. Additionally, the southern region led with 1.1 million filings. Three of the four largest surplus lines markets — California, Florida and Texas — each showed decreases in premium in the first half of 2016. Florida had a premium decrease of 2.2 percent, while Texas had a decrease of 1.6 percent. Texas did not experience a decrease in policy filings; the
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state saw a 3.1 percent increase in policy filings compared to 2015. California and Florida experienced a decrease in transactional business compared to the previous year. In 2015, California reported approximately $3 billion in premium and showed a slight increase in 2016 to $3.05 billion in surplus lines premium. The fourth-largest market, New York, had a slight increase in premium of 0.7 percent, and sustained an increase in transactional filings of 6.5 percent. Eight service/stamping offices reported premium totals of less than $500 million. Idaho was one of these states and experienced the largest percentage premium growth at 21.4 percent. Additionally, on Jan. 1, 2016, Idaho’s stamping fee increased from 0.25 percent to 0.50 percent. Minnesota experienced an 11.2 percent decrease in premium, reporting $222 million.
Minnesota will reduce its stamping fee from 0.06 percent to 0.04 percent on Oct. 1, 2016. Two states falling within premium range of $500 million to $1 billion, were Illinois and Pennsylvania. Initially, Pennsylvania reported a premium increase of $3.7 billion; however, the actual 2016 midyear was $620 million in premium, with the difference of $3.08 billion due to an enforcement action involving 1,172 policies. The reported changes purely reflect the first half year of 2016 premiums, in comparison to 2015. The numbers will be reevaluated at the end of 2016 with perhaps a clearer picture of market forces. There were approximately 1.8 million filings overall in the first half of 2016.
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THANK YOU. IT TAKES EXTRAORDINARY PARTNERS TO ACHIEVE EXTRAORDINARY GROW TH.
It’s because of your incredible support and discerning confidence in us that we are where we are today. We want to express our deepest appreciation to all our partners for helping us become a national leader since our founding in 2010. We sincerely thank you, and we look forward to many more successful years together. Learn more about RT Specialty at www.RTspecialty.com.
RTspecialty.com See related articles at: ij.com/riskmanagers R-T Specialty, LLC (RT), a subsidiary of Ryan Specialty Group, LLC, provides wholesale brokerage and other services to agents and brokers. RT is a Delaware limited liability company based in Illinois. As a wholesale broker, RT does not solicit insurance from the public. Some products may only be available in certain states, and some products may only be available from surplus lines insurers. In California: R-T Specialty Insurance Services, LLC License #0G97516. Š 2016 Ryan Specialty Group, LLC
Idea Exchange
Emerging Risk
New Technologies: A Double-Edged Sword for Insurance Companies
By Gregory Hoeg
T
he insurance industry is on the horns of a dilemma: how to use new technologies to improve operations and how to insure the risks these new technologies present to customers.
Situation
The pace of technology is changing at faster rates than ever before and continues unabated despite the associated risks. New technology startups constantly enter the field, using technologies that affect multiple industries and user groups. Additionally, new technologies are developed virtually every day and are released almost immediately. This means that rapid adoption and use of new technologies is happening ahead of the ability of insurers to understand and respond to potential risks, both as a user and as an insurer. For insurers, new technology is a double-edged sword. While new technology means new tools insurers can use to improve their operations and the services they provide to their customers, it also presents
two new risks. The first is the risk of using a new technology that, due to its newness, proves to be a source of unforeseen liability because of an innate flaw in the technology; a failure of the new technology to live up to its promise; the new technology’s susceptibility to misuse; or the development of lagging regulation that creates potential liability for “impermissible” use of the technology. The second risk is insuring new technologies. Without sufficient experience and data to properly understand the risks of emerging technologies, it can become very costly for insurers to accept new risks. An example is the use of drones. While this technology offers an improved method for insurers to inspect many cases of property damage, regulations restricting the use of drones make them much more costly to deploy in insurer operations. Because regulations on drones continue to evolve on a regular basis, that creates even more challenges. Additionally, the rise of smart home technologies has proven challenging and is creating new exposures for insurers. Smart home apps (i.e., remote control of temperature and lights) are susceptible to power surges and storms, which could lead to a whole house electricity failure. Traditional home coverages may not include this coverage, which could create a more costly and complicated claim. Smart home apps also lead the way to concerns of cybersecurity and privacy threats to the insured. In the
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“J.D. Power 2015 Household Insurance Study,” 31 percent of homeowners indicated their home used at least one smart technology product. In a 2016 August Home and Xfinity Home survey, nearly 18 percent of survey respondents indicated they would likely purchase a new smart home product in the next 12 months. (Study commissioned by August Home and Xfinity Home, produced by research firm NextMarket Insights and conducted as an online survey among a total of 1,293 U.S. consumers.) Insurers traditionally are not on the leading edge of new technology and, as a riskaverse group, they have historically been slow adopters of new tools and technologies. Likewise, insurers are also slow to terminate old technology, preferring instead not to create needless disruption in their operations. This lack of technological agility has now become more of an existential risk for insurers than it has historically been.
Complication
New technology risks are by definition immature and have not yet been fully evaluated as insurable risks. By virtue of the structure of insurance risk evaluation, a significant history of experience with any given risk is needed to properly and confidently evaluate it, which is true not only for risks that insurers want to under-
write but also for those they want to leverage to make their operations more efficient and effective. Think of artificial intelligence technology and the promise it has to improve insurer decision-making in the underwriting of risk and managing of claims, as well as being a new area of insurance need. The power of such a technology can potentially become the source of the next mass tort to hit the insurance industry in ways yet unknown.
Regulatory development appears to be too slow to match the pace of new technologies. As a heavily regulated industry, insurers are reluctant to incorporate technologies into their operations that might later incur a heavy regulatory burden, such as heightened reporting, fees, additional compliance activity or other costly impacts. Similarly, insuring new technology risks ahead of full regulatory development can lock an insurer into a class of risk that may prove to be unattractive due to subsequent regulatory developments designed to address originally unrecognized risk characteristics. Insurers need to move fast to
continued on page 43
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Idea Exchange continued from page 40 leverage and insure new technology risks. Despite the potential complications that guide insurers to move slowly in adopting or insuring new technology, the rapid rate of change of technologies demands that insurers embrace them quickly to benefit. To be seen as less than leading edge in leveraging technology creates a poor image for any company, including insurance companies. Insureds are becoming just as likely to compare an insurer’s service-responsiveness to that of companies such as Amazon as they are to another insurer. Further, being slow to provide coverage for emerging technology risks means forfeiting new profitable business to competitors.
Resolution
Insurers need to leverage new technologies to better evaluate and manage the risks they present. The irony is that new technologies may be part of the solution in evaluating new technology risks. The increased access to data and tools to manage and analyze that data may make it easier for insurers to create models of similar or surrogate risk for
Emerging Risk the new technology a carrier wants to insure. It is not that this approach to evaluating risk is new, but the speed at which it can now be done is well beyond what has traditionally existed. Insurers need to be better at sourcing, managing (organizing and cleaning) and evaluating data to model and understand new technology risks. Insurers also need to lead in the development of new technology risk regulation. To foster the development of new technologies, insurers need to be available to those who are developing and adopting the new technologies. John Drzik, president of global risks and specialties at Marsh & McLennan Cos., addressed this in his article, “The Genie Of Emerging Technology,” which was first published on the World Economic Forum’s blog. “National legal and regulatory frameworks are underdeveloped, so certain topics and techniques escape scrutiny by not being specified. Institutions that are meant to
provide oversight struggle to cope with advances that cross departmental jurisdictions and, short on resources, they are often unable to assess the risks with the rigor that they might wish,” he wrote. Insurers have the opportunity to lead in the development of appropriate regulations to govern the use and risk management of emerging technologies. To accept the risks presented by new technologies, carriers need to have regulations in place that are supportive of them, individually and as an industry, accepting such
risks based on limited experience history. The nightmare scenario that carriers need to be protected from most is accepting risks that could turn into the next mass tort. Carriers also need regulations that will allow them to more readily use new technologies to improve their ability to provide service and products to their insureds and claimants. Regulations need to provide reasonable freedom to foster and support technology development while ensuring reasonably needed limitations are established. Insurers need to establish contingency strategies to hedge new technology risks, which counterbalance the risks new technologies represent as a part of their overall risk portfolio and as a part of their operational structure.
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Hoeg is vice president of insurance operations at J.D. Power.
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Idea Exchange
Risk Management
Morale, Predatory Attorneys Keep El Pollo Loco Risk Director Busy
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aintaining a culture of safety is a company-wide initiative for California- based El Pollo Loco, according to Shaun Jackson, director of risk management for the restaurant chain. While employee morale and predatory attorneys pose roadblocks to improving claims frequency, the restaurant has managed to reduce its experience modifier despite employee turnover and new locations, Jackson said. Morale, an industry-wide problem that has increased as a result of more part-time workers, can lead to employees preemptively filing claims, said Jackson. In Southern California especially, applicant attorneys cold call the restaurants seeking employees to file workers’ compensation claims, he said. In addition, more workers’ comp claims are accompanied by a California Department of Fair Employment and Housing or harassment complaint. According to Jackson’s estimate, the company has 25 times the number of claims and the amount of financial exposure in California than anywhere else in the country.
The key to maintaining a safety culture is to engage everyone, from the top down and bottom up, he said. With upper management, it’s important to compare costs associated with claims frequency to a percentage of net sales. Publishing results — good and bad — as well average costs for certain injuries aids upper management in understanding how they may affect the bottom line. Safety incentive programs, such as one to incentivize employees who purchase slip-resistant safety shoes, helps keep employees and middle management engaged. Following is an excerpt from Insurance Journal’s interview with Jackson.
Why is safety culture so important to any business? Shaun Jackson: It’s really easy
to lose sight of safety because we’re trying to put money on the bottom line. We’re trying to manage labor and anything else that’s going on in the restaurant. It can become a back burner item, but because we’re able to show dollar figures to our operator and show
them safety affects profitability, it’s extremely important. Fortunately, we’ve got senior management engaged in safety now because one injury can wipe out four days of sales. We have specific tools, like safety incentive programs, where general managers and restaurant managers have a stake in maintaining that safety culture. We manage from the bottom up and the top down. We seem to have a whole organization-wide safety culture that we keep in place.
What role does the CEO and management play in safety? Jackson: We’re publishing …
the average cost of this type of injury. If I tell one specific area or divisional leader that they’re leading the company in this type of injury and each one costs this, and I’m copying other executives, it’s a good dialogue. This is a gigantic opportunity for us to really put it in perspective. You can go out today and increase your speed of service by four seconds and really get your stores focused on that, but if you had prevented this one injury from happening, that would have added 30 days’ worth of sales. We’re really big on publishing results whether they’re positive or negative, so everything we publish has the responsible person’s name attached to it.
What is a top challenge in keeping a culture of safety? Jackson: Being vigilant about continued on page 47
Redefining what’s possible. “Argo worked through the weekend so on Monday morning, right before our deadline, we were able to deliver a quote. It’s something you don’t see often in the corporate world.” —Thomas B. McGowan IV, President & CEO, The McGowan Companies Protecting businesses with hard-to-place risks, Colony Specialty has become one of the top 10 carriers of excess and surplus lines in the U.S.
Learn more at www.argolimited.com/midyearreport2016
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Idea Exchange continued from page 45 morale. I don’t think I’m speaking about El Pollo Loco specifically. I’m talking about our industry with ACA [Affordable Care Act] and everybody moving toward more part-timers. People aren’t trained as much. It’s definitely a challenge to keep people engaged. Morale can be a big driver of claims, whether it’s people about to lose their job for whatever reason and then they file or they just don’t like our company or they don’t like the industry.
What are some of the best practices for risk management in your industry? Jackson: One of the things that
works really well is having a safety chairperson in each location ... not a management person, because a lot of times when we put the managers in charge of safety, it’s just like a pencil whipping situation. But we have a safety chairperson who’s rewarded every quarter for performance in having safety meetings and training people when there’s an accident. They do the investigation. Another thing we’ve started doing recently is meeting with human resources on a weekly or biweekly basis, because we
Risk Management found there’s a lot of overlap with nonindustrial and industrial claims, and … civil claims that are accompanying workers’ compensation claims. We’ve had a much more open dialogue with HR to make sure we’re staying ahead of potential claims. If they say, ‘This store is having a lot of challenges,’ we may want to keep an eye on that store and really work a lot more closely with them with regard to safety.
What are the injuries that occur? What are the risk management solutions? Jackson: Slips and falls are probably our No. 1 opportunity. We’ve done a great job at limiting those, but they still exist and always involve multiple body parts. They’re still our most expensive injuries. We get a lot of continuous trauma and sprains and strains that end up going on forever.
What do you see as the biggest cost challenge in worker’s compensation? Jackson: There needs to be ... a
lot of reform in workers’ comp. We see, and a lot of my peers see, that applicants’ attorneys are able to basically run the show. They can keep as many
injured employees as they want in the hopper. They can essentially get whatever they need to get for a claim and are driving the cost of these claims. I don’t want to sound like we don’t have legitimate injuries. We certainly do, and we work with those employees. But it’s such a small fraction of the cost of our total workers’ comp exposure. Most of what we have is litigated, so we’re dealing with applicants’ attorneys for cases that, if they weren’t involved, we could settle and take care of the employee, get them back to work immediately. That’s a challenge for us … working with employees who see more advantage not coming back than returning to their job.
Are you concerned about the future of workers’ comp? Jackson: I am. I see states like
Texas and in the Midwest that seem to be doing okay, where there’s a longer waiting period for benefits, and some of that kind of stuff that makes it less appealing to attempt to prolong a claim. Even in Arizona and Nevada, we just don’t see what we’re seeing in California, Florida, New York or some of those states where it’s so easy to get benefits. Once you’re out, there’s not a lot of compelling reasons to return to work, especially if you’re a part-timer and have no loyalty to the organization. There’s certain states that definitely have a lot more work to do. El Pollo Loco is based in Costa Mesa, Calif.
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Fast, smart, eager. “A history with Argo is a history full of success and a lot of achievements.” —Maureen Caviston, President, Partners Specialty Group Protecting businesses with hard-to-place risks, Colony Specialty has become one of the top 10 carriers of excess and surplus lines in the U.S. Learn more at www.argolimited.com/midyearreport2016
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Idea Exchange
Tech Talk
Digital Transformation 2.0 By Tom Wetzel
T
he just released Insurance Digital Transformation Study (available at www. insurancedigitalrevolution. org) sheds light on why agents struggle with adapting to digital technology. As we have discussed extensively, agents must master digital tools to stay competitive, so we asked the study’s three sponsors to dig more deeply into the findings and pinpoint steps agents need to take immediately. Each of them agree that agents can no longer put off upgrading their websites, adding mobile apps and 24/7 availability. Just as important, they say, is that such actions must be based on a clear digital strategy that’s tailored to each agency. ACORD’s new president and CEO William Pieroni, said: “Apart from the explicit findings, I think there is a critical implicit conclusion that agents now recognize that the time for digitalizing is now, and that the focus needs to be on how to do it effectively,” he said. “The first step is to develop a true digital strategy, including objectives, measurable targets and the required resources. Half-measures do not work well. For example, just having
a Facebook page is not a social media strategy.” “The opportunities to use technology to serve customers are huge, however so are the consequences for not doing so,” said Ron Berg, executive director of the Agents Council for Technology (ACT). “Forty-three percent of agents told us they operate 24/7, but that leaves more than half who do not serve their clients” 24 hours a day. “Customers expect service when and how they want it. They get it now from banking, Amazon and many others.” The survey results are encouraging but cautionary said Mike Becker, executive vice president/CEO, National Association of Professional Insurance Agents (PIA). “Independent agents want to embrace digital technology, however the survey demonstrates they need guidance, especially in implementation,” he said. “One area greatly in need of improvement is agency websites. Only 8 percent of respondents rated their sites as excellent, and 60 percent of
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agents said their sites are average to poor.”
‘One area greatly in need of improvement is agency websites.’ Becker said independent agents “need to remain mindful of the value proposition that sets them apart from the direct writers. Technology tools will help independent agents deliver their unique value.” ACT’S Berg believes agents recognize the urgency of going digital, but for many smaller to mid-sized agents, the process appears so big and they don’t perceive a strong customer demand. “The tools are out there — mobile apps, agency website quoting, live chat assistance and eSignature,” he said. “Of more concern is the agent’s perception of the need. More than 90 percent of agents said customers are not asking for a client portal. But just because customers aren’t asking for a client portal does not mean they do not expect it.” PIA’s Becker is equally forceful: “Just because most agents
say their clients are not asking for a client portal or a mobile app, that doesn’t mean they don’t want them,” he said. “Agents can’t take the position that ‘no news is good news’ when it comes to their customers’ digital requirements, which will evolve and become more refined going forward. Consumer expectations are changing dramatically. It’s critical that agents are able to have functional websites, service their customers 24/7, and have the most up-to-date automation in place so that they are efficient.” The bottom line is that agents cannot afford to put off their own “digital transformation.” The stakes are too high to do otherwise.
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Longtime insurance communicator Tom Wetzel heads his own insurance marketing firm that specializes in website design and social media programs for agents. Website: www.wetzelandassociates.com. Email twetzel@wetzelandassociates.com
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Idea Exchange
The Wedge
Traditional Producer Hiring Process is Arcane & Should be Shot!
By Randy Schwantz
I
want to think of myself as a great father. If I’m not, I would never know until some kind friend pointed it out. It’s at that point I would get to tell him he’s wrong or accept his critique. If I accept it, then it’s my opportunity to make a change. The same is true with hiring new producers. Everyone wants to feel they do a really good job. When a new producer doesn’t work out, no one looks in the mirror and says, “I stink as a hiring professional.” What they say is, “It’s difficult to find good producers.” The fact is, it’s always been difficult to find good producers. What is a good producer? In the simplest of terms, a good producer is someone that will prospect frequently, sell proficiently and retain consistently. When you find someone that has all three, you found yourself a good producer. Some people say it’s more difficult today than it used to be to find people that want to work. I haven’t really experienced that. My experience — having worked in and with more than 300 agencies for 25 years — is that most agencies are and have been full of producers who don’t like to work. As proof, go to the obitu-
ary section of Insurance Journal and other industry publications. An agency seldom sells because it is growing too fast, has too many good producers, has amazing sales leadership and is making too much money. Those people generally remain independent. The ones that sell, for the most part, are the ones that have a stable of plow horses, plodding aimlessly in the pasture. My point is that it’s always been difficult to find good producers. What’s different is that in the “old” days of the wild west, when insurance carriers poured millions into hiring people as underwriters and marketing reps,
they would then train those people for you. After that, they would put them in a car and pay them to come see you and be friendly. When you had a partner that was retiring and someone needed to take over the book, you had a ready-made retainer. You would hire them pre-trained. Some of them turned out to be awesome producers, but most were plodders. What changed is that insurance carriers no longer have the gravy train, where they hire, train, then send producers out to you to hire.
If you want to know if a producer has what it takes, quit asking him. Make him do it and look for the evidence. For the past 15 years, you’ve had to do it yourself. No more plug and play. You actually have to find people that will prospect, sell and retain.
Hiring Process Should Be Shot
There is only one reason why I suggest that the hiring process is arcane and should be shot. It doesn’t work very well. According to Bobby Reagan of Reagan Consulting, 50 percent of new producers get fired or quit. How do you change that? Get rid of the old way and bring in the new way. But, don’t tell anyone that the new way is not that new. College coaches have done it for decades. The Navy Seals wouldn’t allow anyone to join them without doing this. It’s called an evidence-based hiring system. Let’s start with the obvious part ... evidence. Would a football coach
continued on page 52
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Idea Exchange continued from page 50 give a high school senior a $150,000 scholarship to play ball in his program without working the kid out? No, he wouldn’t. He’d make this kid lift to see how strong he is. He’d time him in a 40-yard sprint to see
The Wedge how fast he is. He’d diagram out a play or two and ask him how he’d handle that situation. Then, he’d send him to the physical trainer to make him stretch and see if he’s flexible enough. And the last stop would be to send him to the sports psychologist
to see if he’s a nut case ready to destroy the locker room or not. If the kid passes all of those tests, he’d get a scholarship. If he doesn’t, he’d be sent on down the road.
Seldom does an agency sell because it is growing too fast, has too many good producers, has amazing sales leadership and is making too much money. Those people generally remain independent. If you changed your hiring process from a meet and greet, to a meat and heat (just made that up), you’d find out fast what your candidate is made of. Put them through the grinder, and make them do stuff. Turn up the heat … put some pressure on the candidate and see if he or she can handle rejection. Give homework by making the person write a book report on your favorite sales book. My favorite sales book is “The Wedge.” We make candidates write executive summaries. We learn if they can write; if they can finish an assignment; if they have enough recall to have a discussion on what they read; and if yes, if they can apply it to the real world. This is just one of the five exercises we coach sales leaders on to prevent having to say those awful words, “you’re fired.” Ladies and gentlemen … if you are tired of a 50 percent failure rate, you have to do something different. If you want to know whether a producer has what it takes, quit asking him. Make him do it and look for the evidence.
Share this article with a colleague. IJMAG.COM/919TF Schwantz is founder of The Wedge Group, and developer of the iWin Agency Growth System. He recently published a new book, “Agency Growth Machine: Transform Producer Potential into Agency Growth & Profit.” Phone: 214-446-3209. Website: www. thewedge.net. NBISGA16657.indd 1
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Idea Exchange
Surplus Lines
New York's Attempt to Subject Surplus Lines Insurers to Insurance Franchise Tax
By Andrew Appleby
and Alla Raykin
N
ew York has increasingly asserted that unauthorized insurance companies — including surplus lines insurance companies — are subject to New York insurance franchise tax. However, there are several arguments against these broad impositions of tax. Unlike traditional premium taxes, New York’s insurance franchise tax operates like a corporate franchise tax. Under the insurance franchise tax, New York imposes tax on the insurance company’s entire net income or capital, not just on gross premiums. There is also a premium tax component for certain companies. When New York first enacted the insurance franchise tax in the 1970s, it applied similarly to all types of insurance companies: life and nonlife. In 2003, New York
amended its insurance tax regime. The newly enacted law, New York Tax Law § 1502-a, imposed a traditional premium tax in lieu of the insurance franchise tax for authorized nonlife insurance companies. The new law did not address unauthorized nonlife insurance companies, triggering uncertainty on its application. The New York State Department of Taxation and Finance’s (Department) resolution to this uncertainty was to subject unauthorized nonlife and unauthorized life insurance companies to the franchise tax. The insurance franchise tax law provided a “cap” on the total amount of tax due, which was based on authorized New York life insurance premiums. The Department reversed its position in a 2012 technical memorandum (TSB-M), which noted the “cap” did not apply to unauthorized life insurance companies. The tax base for insurance franchise tax is entire net income or capital apportioned to New York, based 90 percent on a ratio of the New York premiums over the everywhere premiums (the other 10 percent is a compensation ratio). The capital tax base often applies to insurance companies, which may have nominal taxable income but substantial capital.
New York Advisory Opinions
In two recent advisory opinions, the
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Department determined that unauthorized nonlife insurance corporations (surplus lines companies) are subject to the insurance franchise tax (under N.Y. Tax Law § 1502), and not the insurance premium tax (under N.Y. Tax Law § 1502-a). TSB-A-16(4) C; TSB-A-16(5)C (June 10, 2016). The Department also reiterated its view that these insurance companies’ franchise tax liability will not be capped by N.Y. Tax Law § 1505(a)(1), consistent with Service Lloyds Ins. Co., TSB-A-09-(2)C (Mar. 2, 2009). Insurance companies asserted that the insurance franchise tax does not apply to surplus lines companies because the direct placement tax or surplus lines tax is in lieu of the insurance franchise tax. The Department rejected this argument, concluding there was no double taxation. New York imposes a direct placement tax or a surplus lines tax on the insured or broker at a rate of 3.6 percent of premiums paid for unauthorized insurance. Thus, it is arguably improper and inequitable for New York to also impose insurance franchise tax based on those same premiums. The Department’s recent guidance is consistent with, though potentially much broader than, recent New York State Division of Tax Appeals administrative law judge (ALJ) determinations currently on appeal with the New York State Tax Appeals Tribunal. The ALJ determinations
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subjected unauthorized nonlife insurance companies (non-surplus lines insurance companies) to insurance franchise tax only on their distributive share of income and capital from limited partnerships doing business in New York, because the limited partnerships were the only connection the companies had with New York. However, the advisory opinions do not provide this limitation for surplus lines companies, which receive New York premiums.
Limiting New York’s Position
There are several arguments limiting New York’s position. As a threshold matter, insurance companies need to analyze whether they have sufficient contacts with New York for New York to statutorily and constitutionally impose a tax filing obligation on them. Recent ALJ determinations and advisory opinions do not address the nexus threshold, although some previous advisory opinions do. Although the recent advisory opinions note that the direct placement tax/surplus lines tax is not in lieu of the insurance franchise tax, there are arguments against the Department’s position. These opinions are not precedential. The federal Nonadmitted and Reinsurance Reform Act (NRRA) likely preempts New York from imposing insurance franchise tax on an unauthorized insurance company to the extent that the premiums are derived from insureds whose home state is not New York. The NRRA provides that no state other than the home state of an insured may require any premium tax payment for nonadmitted insurance. The NRRA defines “premium tax” as: (1) any charge; (2) imposed by a government entity; (3) directly or indirectly; (4) based on any payment made as consideration for nonadmitted insurance. New York’s franchise tax is a charge by a governmental entity that is, at least indirectly, based on a payment made as consideration for nonadmitted insurance. Therefore, New York’s position may be limited by the federal NRRA. Neither ALJ determinations nor New York advisory opinions have addressed this federal preemption issue. The state tax landscape for unauthorized
insurance companies is shifting rapidly, particularly in New York. Unauthorized insurance companies should pay careful attention to these developments and determine the extent to which they may be affected.
“
Appleby and Raykin are both with the law firm Sutherland Asbill & Brennan LLP in the New York and Atlanta offices, respectively.
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Idea Exchange
Agency Management
Signs of the Agency Financial Times tion and how they plan for the future.
Agencies Remain Attractive Targets for M&A
7 Key Trends Producers Should Watch to Keep from Being Left Behind By Danny Anderson and Bruce Berthelsen
I
n “Left Behind,” the first book in an apocalyptic series by Tim LaHaye and Jerry Jenkins, the main characters find themselves scrambling to adjust to the sudden loss of random people around them — thousands just disappear. In the wake of the confusion, people begin to recall that those very missing people told them what would happen. How did they know? Had someone warned them about what was ahead? While nowhere near as devastating, but
serious all the same, changes faced by the property/casualty insurance industry have financial implications that could leave top insurance producers behind wondering how they missed the signs. The industry has always seen fluctuations, but current indicators are harbingers that demand attention. If ignored, they might have unpleasant consequences, particularly for producers. There has been a barrage of articles covering mergers and acquisitions (M&A) activity and the rise in private equity firm buyers. Most of these articles serve to advise agency owners, but what about producers? Without equity in their book of business or stock ownership, their financial future could be at risk. The following seven trends should cause producers to reevaluate their current posi-
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With the high valuations, insurance agencies continue to be an attractive purchase when considering a merger or acquisition due to their consistent growth. A recent Leaders’ Edge executive report stated, “The average insurance firm has sold 12 percent to 14 percent new business as a percentage of their prior year’s book of business each year for the past 10 years.” In addition to strong valuations and growth, other reasons for the attraction include certain demand, low risk, high retention rates, and a quick return on investment. As evidenced over the past few years, the industry is resilient even amid a difficult economy.
New Players in the Game
While there have been the typical players in the game for years, e.g., public and private brokers and banks, private equity firms have taken the most aggressive growth position in recent years. As recently as 2006, private equity firms made up just 4 percent of buyers, according to a recent Reagan Consulting report. However, private equity firm deals accounted for 54 percent of last year’s activity, according to the “2015 Agency/Broker Merger & Acquisition Statistics” report by OPTIS Partners. Why the aggressive acquisition strategy? One explanation provided in the report is that there is an “abundance of private equity capital and limited options to investors to generate the returns they seek.” INSURANCEJOURNAL.COM
M&A Deal Activity in 2016 Will Remain Strong
Last year, analysts predicted that 2016 would continue the trend of accelerating M&A growth. While earlier reports this year looked like that would not the be case, it has proven to be true. OPTIS’ midyear report stated that insurance agency M&A activity ranked as the second most active six-month period since it began tracking in 2008 — the first half of 2015 ranked highest. “We anticipate the recent strong industry consolidation trend will continue for the near term as acquisitions are an important growth strategy for many firms, especially those backed by private-equity capital,” said Timothy J. Cunningham, managing director of OPTIS.
59, according to McKinsey & Co. As many struggles to entice millennials and get as 25 percent of the most experienced prothem up to speed as quickly as possible. ducers are eligible and expected to retire Millennials, while ambitious, likely within the next five years. That leaves the will not provide the answer in time. It’s remaining producers left ad 1.qxp_Layout good news that 69 percent 30357 Ins. top-performing Journal 2016 4.75x7.5 bridgegap 1 6/29/16 6:57 of AMmillennials Page 1 continued on page 58 behind to fill in the gap as the industry
There’s a safer way to bridge the gap.
Demand for ROI May Mean Lower Commissions
It’s not difficult to imagine that private equity firms, or any buyers for that matter, will want to turn around their investment in a short period of time to get returns quickly out of high-priced deals. For those deals that include an earn-out portion, which is based on future performance and typically a significant part of the sale price, the seller is responsible for not only maintaining the business but growing it as well. In a warning to buyers, Daniel P. Menzer, CPA, partner with OPTIS, said, “A premium price paid for acquisition can have significant adverse implications on the long-term viability of your agency. If the agency you buy does not perform up to snuff and you do not have the capital base to absorb the shortfalls, you can get in a lot of trouble.” Top producers may be left with increased pressure to perform by bringing in new business, their clients may be moved around, and their commissions may be decreased to meet accelerated goals. With no ownership in the business, they are left with no say in the matter, and their income potential and financial future lie in jeopardy.
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Experienced Producers Leave the Market
There is an astounding number of experienced pros about to leave the workforce. The average age for U.S. insurance agents is INSURANCEJOURNAL.COM
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Idea Exchange continued from page 57 aspire to be leaders in the next five years, according to The Hartford’s 2015 Millennial Leadership Survey. In the same study, however, those with an insurance career on their wish list were at only 4 percent, leaving the industry heavily reliant on more experienced employees not only to keep the industry afloat but also to train a reluctant generation. Additionally, when leadership cashes out upon completion of a deal and leaves an organization after a buyout, they take with them years of experience and leadership and leave added pressure on those producers who remain to perform.
Agency Management try-consolidation trend will continue for the near term, as acquisitions are an important growth strategy for many firms, especially those backed by private-equity capital,” Cunningham said. This decrease in the agency population likely will mean less opportunity for producers.
Changing Premium Rates
‘Changes faced by the property/casualty insurance industry have financial implications that, in the end, could leave top insurance producers behind wondering how they missed the signs.’
Decreasing Number of Agencies
Agency owners who did not prepare properly for the velocity of change the industry is experiencing have been caught unaware, and due to that fact, many are highly motivated to sell in the current favorable environment. A recent Agency Revolution survey sheds additional light on this. When asked the question, “Are you worried the world is changing faster than your agency?” an astounding 96 percent of the agent-broker marketplace said, “Yes.” Current agency valuations are high. Baby boomers — who own the lion’s share of the primary target agencies — are ready for retirement, and many agency owners are just plain unprepared for the future due to lack of experienced personnel in their pipeline, lagging technology, and a host of other reasons. The bottom line is that the temptation to sell is intense and conditions make selling a no-brainer for some owners because they do not have proper perpetuation plans in place and time has run out.
Premium rates are continuing a downward trend in many lines. Business interruption, businessowners policies (BOP), commercial property, professional liability, and workers’ compensation were among those lines that saw decreases in the first half of 2016, according to MarketScout. While commercial insurance rates have been marching downward since September 2015, a soft market and its accompanying rate changes are not always bad news. “This soft market presents both challenges and opportunities for brokers. Lower rates meant less revenue, but as the economy improved, policyholders were seeking increased limits and additional lines of coverage,” said Ken A. Crerar, president and CEO of The Council of Insurance Agents & Brokers (CIAB). “This gave our members a chance to be creative and provide added value to their clients beyond just negotiating lower rates.”
While there are conflicting figures on how many insurance agencies there are in the United States — some say as low as 26,000 while others say as high as 40,000 — growth is likely to contract. The most affected segment of the agency population is projected to be agencies under $1.25 million, according to Reagan Consulting, which projects this segment to go from 32,000 to 20,000 by 2024. “We anticipate the recent strong indus-
What Does This Mean for Top Producers?
Amid all these trends, top producers have a lot to think about when looking toward the future. They should consider these conditions: • Agency owners who sell and get out leave top producers with the pressure to perform and less support. • New buyers, such as private equity firms, will want to get a return on their
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investments as soon as possible. • The quality of a producer’s client relationships will be in someone else’s hands. • Clients may be moved around to use top producers to accelerate new business growth. • Commissions may be decreased to speed up return on investment. • High pressure in a new model after a purchase may mean increased time away from family. • Tight noncompetes restrict producers from determining their own level of success. • Without ownership or equity, producers are left with no control over their financial future. In the past, a producer’s goal of achieving double-digit growth each year was reasonably attainable. However, in the projected agency climate, producers may be left with stagnant or greatly diminished growth opportunities. Typical compensation models will be far too binding in the future agency climate, so savvy producers would be wise to research opportunities with agencies where they have the option to own equity in their book of business, own stock, have new and renewal commission levels the same, and have real control over their earning potential. As Jeff Balcombe said in his recent commentary for the International Risk Management Institute, “Recent Trends in the Valuation of Agents and Brokers,” “Companies that truly understand the critical risks and value drivers underlying their business or a potential acquisition target will be able to take advantage of the opportunities to capitalize on the recent industry trends.” It would be wise for insurance producers to do the same.
Share this article with a colleague. IJMAG.COM/919ZH Anderson is a regional president and Berthelsen is a vice chairman with Insurance Office of America (IOA). They can be reached at danny.anderson@ioausa. com and bruce.berthelesen@ioausa.com. For more information, visit IOA’s www.ioausa.com/inforum. INSURANCEJOURNAL.COM
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Mobile Home Parks Market Detail: M F Irvine
Corporate Solutions (www. mfirvine.com) is a program administrator for a national program providing commercial package and commercial automobile liability policies for manufactured home and mobile home park communities. CGL primary rating is based on number of spaces. INSURANCEJOURNAL.COM
Optional coverages available under the CPP include, but are not limited to: employee dishonesty, crime, inland marine, business interruption/extra expense, and hired/nonowned automobile liability. Available limits: Minimum $1 million, maximum $2 million Carrier: State National Insurance Co. States: All states except Alaska, Hawaii, Conn., Del., Maine, Mass., Md., N.D., Neb., N.H., Vt., Wis., and Wyo. Contact: Ed Johnston at 610862-4380 or email: ejohnston@ mfirvine.com
Kidnap, Ransom & Extortion Market Detail: Victor O.
Schinnerer (www.schinnerer. com) offers kidnap, ransom and extortion coverage. Guidance is provided on the prevention of such events along with access to Control Risks — an international crisis response firm — should an event occur. For more than 15 years Schinnerer has underwritten KR&E accounts. Available limits: Minimum $65 million Carrier: Great American States: All states
Contact: John O’Mara at
630-418-4423 or email: John. Omara@schinnerer.com
Motorcycle Market
Market Detail: Shoemaker &
Besser Associates, Inc. (www. shoemaker-besser.com) offers coverage to motorcycle, snowmobile, RV, mobile home, dwelling fire DP1 & DP3, vacant, HO10 homeowners, watercraft, and collector cars. Direct appointments available. Available limits: As needed Carrier: American Modern Insurance Group States: Del., Ind., Md., N.J., N.Y., Ohio, Pa., Va., and W.Va. Contact: Tanya Topper at 800632-9002 or email: ttopper@ shoemaker-besser.com
Unit-Owners / Condo Insurance (HO-6)
Market Detail: Pacific Specialty Insurance Company (PSIC) (www.psic-onespot.com) writes residential property and liability insurance for independent agents. Unit-owners (condo/townhome) insurance starts with a comprehensive HO-6 policy and supports preferred tier coverage and options. Available limits: As needed Carrier: Pacific Specialty
Underwriting Agency (www. iua.bz) offers coverage for allied health home health agencies, adult daycare, nursing/medical facilities, food bank, counseling center, YMCA and YWCA. Lines offered include: general liability, professional liability, property, commercial auto, workers compensation. Available limits: As needed Carrier: Various, admitted and nonadmitted available States: Conn., N.C., N.J., N.Y., Pa., and Va. Contact: Customer service at 718-461-8088
Workers Compensation
Market Detail: StateFund First
(www.statefundfirst.com) is an approved access partner for the California State Fund. Available limits: As needed Carrier: California State Compensation Insurance Fund States: Calif. only Contact: Riley Binford at 855784-4433 or email: riley_ binford@statefundfirst.com
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SEPTEMBER 19, 2016 INSURANCE JOURNAL | NATIONAL | 59
Idea Exchange
Minding Your Business
How to Create & Reward Exceptional Agency Leaders
By Catherine Oak and
William Schoeffler Jr.
I
t’s always difficult to admit not being good at something — especially when you are the agency owner and leader of an insurance agency. But knowing a person’s weaknesses is extremely important. Leaders who understand their own weaknesses can find employees to fill that talent void. Humans are best when they specialize. Look no further than to Henry Ford, who increased factory output dramatically by having workers who were trained to be exceptionally great in one facet of his company. Ford was never seen installing parts on his cars. This isn’t because he wasn’t capable, but because it was not the best use of his time. Besides, he had valuable
employees to do tasks he couldn’t or didn’t want to do. Knowing what is going on within a company is part of being a CEO, but you don’t actually have to be good or even capable of doing that task.
top-down control, efficiency is capped and stagnation can result. Growth only comes from the proper delegation of authority to the firm’s talent.
Play To and Identify Strengths
To foster leadership within, start by getting those recent excellent hires inspired with an optimistic and forward-looking vision. This can be based off of what is unique to the company, such as excellent customer service, special programs or things like valued services. Then using this vision as a template, and identify potential leaders that exemplify said traits. Be sure to occasionally test them through challenging tasks. Give them independence on these overwhelming tasks and see how they
Leaders of small companies often get too deep in more mundane parts of their business when a problem arises. While this can be acceptable for larger issues, small ones can easily distract the owner/ leader from more important work. When agency owners have issues with this, we tell them to write themselves a personal job description, considering areas of both their strengths and weaknesses. Putting pen to paper and evaluating personal weaknesses can be uncomfortable to look at — weaknesses such as analytical savvy, computer skills, training salespeople, etc. It is an important exercise because those weak traits can usually be found in new hires or in existing employees. The best-run company is one where the head owner could disappear for an extended period of time and come back to an agency that is still well-functioning. The first step in this is to hire and train the best employees one can find. New hires need to be viewed as future leadership replacements, not just task completers. Many owners will balk at the costs of hiring top talent, and instead settle for new, inexperienced or even marginal workers. This becomes a self-fulfilling cycle because then owners will lack trust in those employees. With lackluster staff, the agency owner will delegate tasks instead of independence, the latter being critical for growth. In businesses where owners continually micromanage with
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Steps to Improve Leadership
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respond to it and problems that steam from those decisions. Independence is huge when trying to create leaders. How can your work truly be your own if you are constantly being corrected or guided? Let employees have the power to take their own creative route, and be responsible for the results.
Those working to positively improve workflows and provide new ideas should be given rewards and credit for these improvements. If leaders have confidence in staff, this helps them take on new challenges. New employees must be reminded that it’s OK to improve long-standing company processes and procedures. Too often during mergers or acquisitions, Oak & Associates will see two different competing processes that both owners see as the best. A balance of these processes is needed with the best ideas winning. This same concept can also be applied to hires from other agencies who have been exposed to other ways of doing things. Their experience can be a possible gold mine of insider knowledge that can make a company much more refined and innovative, if new employees are tapped for better ways to do things.
Provide a Variety of Rewards
Sometimes leaders are blind to their own mistakes. What’s important is creating a work culture where new hires believe it’s OK to critique and improve the status quo. Those working to positively improve workflows and provide INSURANCEJOURNAL.COM
new ideas should be given rewards and credit for these improvements. There are lots of ways to reward employees. In addition to monetary rewards, many employees today are also focused on time off, providing increased authority, and offering health club memberships, childcare, working from home to save commuting time , four-day work weeks, insurance company trips, dinners out, etc. Asking employees what rewards most important to them, such as during performance reviews, can help management provide rewards that
individual employees feel are the most valuable or best for them. This can also improve morale.
Share this article with a colleague. IJMAG.COM/919PT Oak is the founder of the consulting firm, Oak & Associates, based in Northern California. Schoeffler Jr. is a financial analyst for 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:707-935-6565. Email: catoak@gmail.com.
Advertisers Index
Read, browse, contact, or do product searches on any of our full page advertisers at: www.insurancejournal.com/adshowcase/
Abram Interstate www.abraminterstate.com W12 Accident Fund www.accidentfund.com SE12 Ace Limited www.chubb.com 27, 29 American Reliable www.assurantspecialtyproperty.com 44 Anderson & Murison www.andersonmurison.com 20 Applied Underwriters www.auw.com 4, 5, 64 ARGO www.argolimited.com Cover, 43, 45, 47 Brecht & Associates www.brechtassoc.com SC9 Burnett & Company www.bcoinc.com SC6 Burns & Wilcox Ltd. www.burnsandwilcox.com 11 California Earthquake Authority mvp.earthquakeauthority.com W3 Crawford Contractor Connection www.crawfordandcompany.com 42 CRC Swett more.crcgroupins.com Cover EZLynx www.ezlynx.com 41 First Amer. Specialty Insur. Co. www.firstam.com W13 FSLSO www.fslso.com 53 Fujitsu FCPA budurl.me/insjo 17 General Star www.generalstar.com W5; SE3; E3; M3 Golden Bear Insurance Company www.goldenbear.com W9 Gorst & Compass Insurance www.gorstcompass.com W5 Great American Insurance Group www.gaig.com 31 IBA Kern www.ibakern.com W14 IICF www.weekofgiving.iicf.org 63 Insurance Technologies Corp. www.getitc.com 49 InsurBanc www.insurbanc.com 55 JM Wilson www.jmwilson.com SE5; M6
Lexington www.lexingtoninsurance.com 13 LifeScienceRisk www.lsrisk.com 30 M.J. Hall & Company www.mjhallandcompany.com W17 Midlands Management Corporation www.midlandsmgt.com SC8 Monarch E&S Insurance Services www.monarchexcess.com W3 MUSIC www.music-ins.com 25 NAPSLO www.napslo.org 57 Nationwide E&S www.nationwideexcessandsurplus.com 2 Nautilus Insurance Company www.nautilusinsgroup.com 3; W15 NBIS www.nbis.com/insurancejournal 52 Pacific Gateway Insurance Services www.pgiainsurance.com W11 PersonalUmbrella.Com www.personalumbrella.com 9 Quirk & Company www.quirkco.com W18; SC11 RSG Underwriting Managers www.ryansg.com/rsgum 6, 7 RT Specialty www.rtspecialty.com 39 SCOR SE www.scor.com 46 SNL Knowledge Center center.snl.com/ib-ij 35 South & Western www.southandwestern.com SC3 St. James Insurance Group www.stjamesinsurance.com SE10 Tejas American General Agency www.taga1.com SC7 Texas Mutual worksafetexas.com/recorddividend SC2, SC5 Tokio Marine www.tmsic.com 51 tKg Wholesale Brokerage www.tkgins.com 1 United Fire Group www.ufgsolutions.com W20 Westchester, A Chubb Company www.westchester.com 23 Worldwide Facilities www.wwfi.com 19
SEPTEMBER 19, 2016 INSURANCE JOURNAL | NATIONAL | 61
Closing Quote Health and Optimism in Surplus Lines
By Brady Kelley
T
he surplus lines industry continues to outperform the overall property/ casualty market, but that doesn’t mean it’s not without its own challenges. The annual U.S. Surplus Lines – Segment Review, produced by A.M. Best with support from the NAPSLO/ Derek Hughes Educational Foundation, confirmed the financial stability of the industry. For the 12th year in a row, there were no financial impairments in the surplus lines segment. We continue to see strong balance sheets and resulting secure ratings, so these quantitative signs all point to good conditions for surplus lines. Ample capital also obviously impacts the competitiveness of the market and pressures rates. However, rate seems to be offset by an organic growth in demand. Despite positive indicators, we do have ongoing challenges and NAPSLO continues to work on behalf of its members to help address them. We remain committed to educating stake-
holders about the mechanics of surplus lines and we work daily to address misconceptions about the surplus lines model and its regulation. In fact, the solvency and financial stability of the surplus lines market is stronger than ever and it is outperforming the standard market, as documented in the A.M. Best Report. A role of surplus lines insurers is to provide solutions for risks that the standard market is unable or willing to cover, serving as a safety valve. Misconceptions about surplus lines have arisen out of the private flood insurance debate in recent years, leading NAPSLO in cooperation with industry partners, to advocate for passage of The Flood Insurance Market Parity and Modernization Act. The Act has passed the U.S. House of Representatives and is awaiting action in the Senate. Existing flood legislation must be clarified to ensure that surplus lines insurers can continue to cover complex flood insurance risks, and to ensure that consumers have alternatives to the National Flood Insurance Program (NFIP) and the standard market. This Act will preserve and clarify the coverage the standard and surplus lines markets offer, and we are hopeful that the U.S. Senate will pass it. We also continue our ongoing effort to achieve full implementation of the Nonadmitted & Reinsurance Reform Act (NRRA). It is the model for uniformity in taxation and regulation of our market, which
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helps our members, and the industry, do business more efficiently, ultimately benefitting the consumer. We have had several important victories in achieving this uniformity this past year, including the dissolution of NIMA, which brought the industry much closer to the national home state tax approach envisioned by the NRRA.
New Talent Development
NAPSLO also remains committed to developing and recruiting new talent into the E&S industry. NAPSLO’s Career Development and Next Generation Committee has worked hard to inform prospective students around the country about careers in E&S and recruiting them to NAPSLO summer internships. Our member volunteers visited more than 25 different college campuses in the last year and talked to almost 2,000 students about careers in surplus lines.
This year, 17 NAPSLO interns spent five weeks with a NAPSLO member surplus lines insurance company and four weeks with a NAPSLO member wholesale brokerage firm learning about all aspects of the business. Education for professionals already in the industry also continues to be a priority. NAPSLO education programs for those brand new to the industry include the Excess & Surplus Lines Program and online programs. The Executive Leadership Summit, designed for senior-level team members, helps members improve their ability to think and act strategically. NAPSLO will continue to advocate for the surplus lines market, and we will continue to get out the message on the value of the wholesale distribution system. Kelley is the executive director of the National Association of Professional Surplus Lines Offices.
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