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Contents February 6, 2017 • Vol. 95 No. 3 • West

West

National 8 P/C Insurers Could See Potholes in 2017 Earnings: S&P

W1 California Jury Awards $1.25M in School Bathroom Break Suit

10 Get Ready for Another Year of ‘Cautious Optimism’ Predict P/C Execs

W2 California-Based Sierra Nevada Issues 36-State Recall of Select Beers W2 Former Washington Corrections Officer Jailed over $100k Workers’ Comp Scam W4 IICF to Honor Wells Media Chief, Grant $400K to Nonprofits at Los Angeles Gala W6 Wells Fargo Market Outlook Offers Favorable News for Cyber Security

W7 IS PRIVATE EQUITY INVESTMENT IN

INSURANCE AGENCIES ALWAYS A GOOD THING?

20 INSURANCE CAREER MONTH: WHY INDUSTRY

MUST RETHINK RECRUITMENT STRATEGIES

W7 Is Private Equity Investment in Insurance Agencies Always a Good Thing?

12 P/C Execs Foresee Commercial Lines Growth Beating Personal Lines 16 E&S Market Continues to See Growth: Texas Stamping Office 18 Special Report: Tow Truck Market in Need of Repair 20 Spotlight: Insurance Career Month: Why Industry Must Rethink Recruitment 22 Closer Look: 5 Things to Consider When Writing Nonprofit Organizations 24 Spotlight: 2016 M&A Report

Idea Exchange

26 M&A Activity Continues at Industrious Pace

28 Minding Your Business: Catherine Oak & Bill Schoeffler 32 The Competitive Advantage: Chris Burand 34 Closing Quote: Super Rich: Key Targets in Cyber World

Departments 11 Declarations

THE IMPORTANCE OF PROPER ACCOUNTING IN INSURANCE AGENCIES

4 | INSURANCE JOURNAL | WEST FEBRUARY 6, 2017

11 Figures 14 Business Moves

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OPENING NOTE

Write the Editor: awells@insurancejournal.com

Connected Homes and Cyber Insurance

Home devices like smart TVs and appliances are often designed for easy use and not security.

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 Columnists Chris Burand, Catherine Oak, Bill Schoeffler

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 Erin Burns (619) 584-1100 X120 eburns@insurancejournal.com

Contributing Writers

Insurance Markets Manager Kristine Honey (619) 584-1100 X132 khoney@insurancejournal.com

IJ ACADEMY OF INSURANCE Director Patrick Wraight pwraight@ijacademy.com

Social Media Manager Ly Short (619) 890-7735 Lshort@insurancejournal.com

Lisa Lindsay, Sarah Lucasl

Associate Director Barbara Whiffen bwhiffen@ijacademy.com

ADMINISTRATION

Chief Financial Officer Mark Wooster mwooster@wellsmedia.com

MARKETING

Marketing Director Derence Walk dwalk@insurancejournal.com Marketing Administrator Gayle Wells gwells@insurancejournal.com

NEW MEDIA

ight out of 10 U.S. consumers have a home data network and more than onethird of them connect entertainment systems, gaming consoles and other smart devices to the Internet. According to a survey from The Hartford Steam Boiler Inspection and Insurance Co. (HSB). of the 81 percent of consumers who said they have a WiFi or other home data network, 38 percent had electronic devices other than personal computers, smartphones or tablets connected to the Internet, such as smart televisions, music systems, thermostats, security cameras, door locks, alarms, and lighting. This connectedness is increasing the risk of home cyber attacks. Although cyber attacks on non-computing home systems and smart appliances are so far relatively uncommon (10 percent of those responding were victims), the increase in connected devices is creating a new pathway for hackers and cyber thieves. “Cyber criminals are always looking for new targets,” said Timothy Zeilman, vice president and counsel for HSB. “And home devices like smart TVs and appliances are often designed for easy use and not security. Compounding the problem, many consumers don’t take even basic measures such as changing default passwords and updating security software.” The most common nonphysical damage experienced through attacks were viruses or other unwanted software on their systems (59 percent) and damage to software or operating systems (45 percent). Damage to home devices in a cyber-attack usually results in a financial loss, the survey showed, with 87 percent of the victims spending money to respond. The losses were often substantial — 42 percent of the victims in the survey spent between $1,000 and $5,000. A recent study for Assurant Inc., which sells coverage for mobile devices, revealed that consumers are excited by the progression toward connected living. However, they also showed growing concerns about the risks. More than 60 percent of respondents said they were either “terrified” or “very concerned” about identity theft and cyber attacks, while 42 percent expressed concerns over privacy. The problem will likely get worse as the number of connected home devices increases. FOR QUESTIONS Wealthy households are key targets as well. REGARDING SUBSCRIPTIONS: Call: 855-814-9547 (see this issue’s Closing Quote, page 34) Outside the U.S., call 847-400-5951 or you may subscribe or change your address online at: Insurers are developing new cyber insurinsurancejournal.com/subscribe ance coverages for individuals that can pay Insurance Journal, The National Property/Casualty Magazine (ISSN: 00204714) is published semi-monthly by Wells Media for expenses related to cyber attacks on home 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 computers, home systems, and appliances per special issue copy, $195 per year in the U.S., $295 per year all other countries. DISCLAIMER: While the information in this puband other connected devices, cyber extortion, lication is derived from sources believed reliable and is subject to reasonable care in preparation and editing, it is not intended data breach, and online fraud, which is good to 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 news. Media Group, Inc. All Rights Reserved. Content may not be photo-

Classifieds, Jobs, Agencies Wanted/For Sale Sr. Sales & Marketing Coordinator Kelly De La Mora (800) 897-9965 X125 kdelamora@insurancejournal.com

DESIGN/WEB

Chief Technology Officer/ Chief Innovation Officer Joshua Carlson jcarlson@insurancejournal.com V.P. of Design Guy Boccia gboccia@insurancejournal.com Senior Web Developer Chris Thompson cthompson@insurancejournal.com

New Media Producer Bobbie Dodge bdodge@insurancejournal.com

Web Developer Jeff Cardrant jcardrant@insurancejournal.com

Videographer/Editor Ashley Waldrop awaldrop@insurancejournal.com

Web Developer Terrance Woest twoest@wellsmedia.com

CIRCULATION

Circulation Manager Elizabeth Duffy eduffy@wellsmedia.com

copied, reproduced or redistributed without written permission. Insurance Journal is a publication of Wells Media Group, Inc.

Andrea Wells Editor-in-Chief

6 | INSURANCE JOURNAL | NATIONAL FEBRUARY 6, 2017

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

‘There are pockets of growth opportunities for societal risks but we expect insurers to keep these prospects at arm’s length for now.’

S&P: P/C Insurers Could See Potholes in 2017 as Earnings Outlook ‘Isn’t Too Pretty’

his year will be a turning point for the U.S. property/casualty (P/C) insurance sector, as rising claims outpace pricing and reserve releases materially decrease. But it will not be a “softer for longer” rate cycle for the sector, according to a report from S&P Global Ratings, titled, “Getting Over The Potholes: U.S. P/C Insurance Sector Outlook Remains Stable.” S&P analysts said they expect the combined ratio to top 100 in 2017 and interest rates to remain historically low. Yet the stable outlook is supported by insurers’ “continued underwriting discipline, prudent risk management, conservative investments, and very strong capital adequacy.”

S&P will be watching to see if nontraditional players enter the business and how Trump’s policies will play out. “There are pockets of growth opportunities for societal risks, but we expect insurers to keep these prospects at arm’s length for now. These orthodoxies promote capital preservation, which is good for credit, but leaves the door open for nontraditional players,” said S&P Global Ratings credit analyst Tracy Dolin. “Although we have not seen technological advances cause any ‘uberization of insurance’ yet, we believe that the next 10 years will make the sector look very different than what we saw in the prior 30.”

8 | INSURANCE JOURNAL | NATIONAL FEBRUARY 6, 2017

The report cites Trump’s potential effect on regulation, including the Dodd-Frank Act and the economy. “The prospects of looser fiscal policies in the shape of tax cuts and greater infrastructure spending may propel insurers to rethink their investment strategies as well as provide asymmetrical growth opportunities for surety writers,” according to S&P. The overall creditworthiness of the U.S P/C sector is not expected to change in 2017. Any shift to a negative outlook would most likely come from a “confluence of unforeseen events that ultimately changes the risk perception and capital adequacy.” INSURANCEJOURNAL.COM

NATIONAL | News & Markets

Get Ready for Another Year of ‘Cautious Optimism’ Predict P/C Executives By Elizabeth Blosfield

panel of financial experts discussed the opportunities and challenges they see ahead in 2017 at the Insurance Information Institute’s (III) 21st Annual Property and Casualty Insurance Joint Industry Forum. The general sense across the board during the financial

Gary Ransom, partner, Dowling & Partners experts panel seemed to be cautious optimism. Perhaps one of the biggest challenges seen in 2016 that is expected to be a focus for the property/casualty insurance industry in 2017 is a flood of excess capital, said Jay Gelb, managing director at Barclays. Based on Barclays research, Gelb said the property/casualty insurance industry in the U.S. alone currently holds $165 billion in excess capital, which he said translates to about 25 percent over-capitalization. “That is essentially the

equivalent of four Hurricane Katrinas happening at once,” he explained. “Obviously, we never want that to happen, and it’s highly unlikely, but I think it will be a tough road from a profitability standpoint for the next couple of years.” Going forward, he expects it will be difficult to avoid at least moderate underwriting losses. As catastrophe losses saw a relatively meaningful increase in 2016 compared to prior years, underwriting losses were negatively impacted, he said. Uncertainty surrounding the new Trump administration could also bring challenges related to profitability, said William E. Rotatori, chairman and CEO of New England Asset Management. “There’s a level of uncertainty that doesn’t necessarily correlate well to higher levels of activity,” he said during the panel discussion. “There are some trends already in place that are going to be tough to change, such as the levels of debt in the overall economy, the aging population and the labor force participation rates that are still in secular declines. These are things the new administration is

10 | INSURANCE JOURNAL | NATIONAL FEBRUARY 6, 2017

walking into, and I’m not sure it’s going to change that trajectory.” He added that one key strategy for property/casualty insurers in 2017’s potentially challenging environment will be the right preparation to take advantage of volatility. “It’s important to recognize the environment we’re stepping into in 2017 and mind your risk management,” Rotatori said. “Now is not the time to be 10 toes off the edge of the surfboard in terms of your risk position.” This is because the Federal Reserve is likely to continue its interest rate normalization process with several anticipated rate hikes this year, he stated, in addition to 2017 marking the end of a 35-year bull market for bonds. Some volatility can also be expected as changes are anticipated in taxes, healthcare and trade policies, he said. “It’s going to be a year more so than other years where it won’t be smooth, straightforward or easy,” he said. “Tactical positioning throughout the year will be a greater source of value-added than it has been in prior years.” Panelists did discuss some of the opportunities that could lie ahead in 2017 for the property/casualty insurance industry, such as a shift in the way mergers and acquisitions are carried out.

“One of the interesting things about the deals that have happened over the last few years is that there really haven’t been a lot of acquisitions of U.S. companies by U.S. companies of any significance,” said Gary Ransom, partner at Dowling & Partners. “Those outside the U.S. have an advantage coming in to purchase a U.S. company because of the inefficient tax structure of the U.S. today. With the new administration’s potential change in taxes, all of a sudden the U.S. can be back in the game. If there are a lot more companies competing for any given acquisition, then

Jay Gelb, managing director at Barclays Capital U.S. companies will have a better economic view to allow them to do deals … It sort of levels the playing field.” Panelists pointed to lower tax rates, in addition to regulatory reform and fiscal stimulus, as expected changes under the new administration that have the potential to raise the level of economic activity and positively affect the market. Another opportunity is the auto industry, as a result of autonomous vehicles. Despite efforts to test and introduce

continued on page 12

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West

California Jury Awards $1.25M in School Bathroom Break Suit

jury has awarded $1.25 million to a former San Diego, Calif., high schooler who was denied a bathroom break and forced to urinate in a bucket. The girl, then 14, used the bucket in a Patrick Henry High School supply room in INSURANCEJOURNAL.COM

2012. A teacher had denied her request to leave a 25-minute class, believing it was against school rules. Her lawyer said after the incident made headlines, the girl was mercilessly teased, traumatized and attempted suicide. She sued the teacher and the San Diego

Unified School District. District lawyers said the teacher, who no longer works on campus, never intended to embarrass the girl. The district will consider whether to appeal the decision. Copyright 2017 Associated Press. FEBRUARY 6, 2017 INSURANCE JOURNAL | WEST | W1

WEST | News & Markets

California-Based Sierra Nevada Issues 36-State Recall of Select Beers

alifornia-based Sierra Nevada Brewing Co. announced a recall on Jan. 22 of certain 12-ounce bottles of its pale ales, IPAs and other beers after detecting a packaging flaw that could cause a piece of glass to break off into the bottle. In a statement, it said the recall applies to eight different types of its craft beers, including its popular Sierra Nevada Pale Ale, purchased in 36 states across the Midwest, the South and East Coast of the United States. The company issued the voluntary recall after quality inspections at its Mills River, N.C., brewery detected a limited number of bottles made with a flaw “that may cause a small piece of glass to break off and possibly fall into the bottle, creating a risk of injury,” the statement said. The affected beer has a package date that falls between Dec. 5, 2016, and Jan. 13, 2017, and a brewery code of “M” — which stands of Mills River — printed directly on bottles and the packaging of

cardboard cases. “We have decided to take this precaution to ensure the safety of our customers,” Mike Bennett, chief supply chain officer, was quoted as saying. He said Sierra Nevada had not received any consumer reports of injuries, and it believed the concern could impact about 1 in every 10,000 — or .01 percent — of its bottles packaged during the five-week time period. Aside from its Pale Ale, the Sierra Nevada recall includes 12-ounce bottles of its Beer Camp Golden IPA, Sidecar Orange Pale Ale, Torpedo Extra IPA, Tropical Torpedo, Nooner, Hop Hunter and Otra Vez. The company has stopped distributing all affected beer and is working to have it removed from retails shelves, the state-

ment said. Consumers were urged to check the company’s website for details on the recall and not to drink any of the recalled beer, which would be fully refunded. The recall applies to the following states: Alabama, Arkansas, Connecticut, District of Columbia, Delaware, Florida, Georgia, Iowa, Illinois, Indiana, Kansas, Kentucky, Louisiana, Massachusetts, Maryland, Maine, Michigan, Minnesota, Missouri, Mississippi, North Carolina, New Hampshire, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Virginia, Vermont, Wisconsin and West Virginia. Copyright 2017 Associated Press.

Former Washington Corrections Officer Jailed over $100k Workers’ Comp Scam

former Washington state corrections officer accused of holding three jobs while claiming he was too disabled to work will serve seven days behind bars along with home detention. John J. Gruden, 44, late last month pleaded guilty to felony, first-degree theft in a scheme to illegally get thousands of dollars in workers’ comp benefits. The Washington Attorney General’s Office prosecuted the case based on a Department of Labor & Industries investigation. Investigators reportedly videotaped Gruden jogging, as well as driving to work at the Phoenix Police Department, all while receiving disability payments of more than W2 | INSURANCE JOURNAL | WEST FEBRUARY 6, 2017

$100,000 over five years. Snohomish County Superior Court Judge Ellen J. Fair ordered Gruden to serve 45 days of incarceration, seven of them in the Snohomish County Jail, and the remainder in electronic monitoring at home in Michigan, where he now lives. Gruden was also ordered to repay the state $100,544. If he fails to comply with any part of the sentence, he must return to Washington state to serve the remainder of his confinement. Gruden injured his ankle and foot during training in May 2011, while serving as a correctional officer at Monroe Correctional Complex. That August, he moved to Arizona, where he signed official forms and told L&I

vocational counselors that his on-the-job injury prevented him from working, and that he wasn’t employed. His declarations, coupled with physician confirmations, allowed Gruden to receive L&I payments to replace part of his wages. An L&I claim manager later requested surveillance to check on the extent of Gruden’s abilities and injuries. Investigators discovered Gruden had been working as a security professional in Arizona for nearly the entire time he told L&I he wasn’t employed. From the fall of 2011 to early 2016, Gruden worked at a private security firm, at Maricopa County Community College, and, finally, as a full-time police officer assistant/municipal security guard for the Phoenix Police Department. Gruden was taken into custody to begin serving his jail time. INSURANCEJOURNAL.COM

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WEST | News & Markets

IICF to Honor Wells Media Chief, Grant $400K to Nonprofits at Los Angeles Gala

undreds of insurance professionals and representatives from local nonprofits will convene on March 16 for the Insurance Industry Charitable Foundation’s annual Horizon Award Gala at the Natural History Museum of Los Angeles. The IICF Western division will announce more than $400,000 in grants to 44 charitable organizations during the “A Night at the Museum” themed Mark Wells event. Each year the IICF honors an individual or organization within the insurance community with its Golden Horizon Award. This year the IICF will honor Mark Wells, editor, publisher and CEO of Wells Media Group, home to Insurance Journal, Claims Journal, MyNewMarkets, Insurance Journal’s Academy of Insurance and Carrier Management. The group is honoring Wells for his industry leadership and philanthropic commitment. Under Wells’ leadership, Wells Media has been an ardent supporter of IICF and has served as a

platform to highlight industry-wide philanthropic contributions in helping communities and enriching lives. This year’s Horizon Award gala will also recognize 44 nonprofit organizations that champion the causes of education, child abuse prevention, disaster preparedness, and health and human services. As one of the Western Division’s Community Grant Award recipients and this year’s featured nonprofit, Make-A-Wish Greater Los Angeles will be in attendance at the gala, where attendees will hear the personal story of a “Wish Kid” whose wish was made possible by contributions like the IICF community grant. A portion of the funds raised during the evening’s festivities will also go toward granting additional wishes. “In its thirteen years, the Horizon Award Gala has brought together insurance professionals in celebrating the philanthropic commitment of our industry to the communities and nonprofit organizations that we support throughout the West,” said Jon Axel, IICF Western

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Division Board of Directors chairman and senior vice president at Hub International Insurance Services. “It is our privilege to be honoring Mr. Wells with our Horizon Award this year, in recognition and appreciation for his dedication to this industry and its aim of giving back and making a real difference in the communities where we live and work.” Through its community grants program, the IICF raises funds within a region and reinvests back into the same region and its communities. This year’s grantees includes nonprofits across IICF’s Western division that are dedicated to making a positive impact in their communities, focused in the areas of education, child abuse prevention, disaster preparedness, and health and human services. For more information on the gala, including registration and sponsorship opportunities, contact Melissa-Anne Duncan at (714) 870-1084 or maduncan@iicf.com.

‘It is our privilege to be honoring Mr. Wells with our Horizon Award this year, in recognition and appreciation for his dedication to this industry and its aim of giving back and making a real difference in the communities where we live and work.’

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Wells Fargo Market Outlook Offers Favorable News for Cyber Security

an Francisco, Calif.-based Wells Fargo Insurance released its 2017 Insurance Market Outlook and Employee Benefits Outlook report in late January, which shows this year’s property/casualty insurance market will again be favorable to buyers. According to the surveys, most sectors will see a flat to 10 percent decrease in pricing. On the contrary, more change is expected in the health insurance industry, raising concerns for employers about how potential new healthcare reform legislation may affect their employee benefits programs. The reports also highlight anticipated changes in the rate and pricing environment, including market capacity, cost of prescription drugs and the declining rates of cyber security liability. Additionally, both outlooks address how potential changes to the ACA may affect the insurance industry overall. According to the Employee Benefits Outlook, employers will continue to face rising medical and prescription drug costs.

Health insurance premiums have increased 213 percent since 1999 and will continue to rise. Spending on specialty drugs also continues to rise, with no immediate signs of decreases for medications commonly used to treat complex, chronic and rare conditions. The report shows 75 percent of employers are concerned about employment retention rates for millennials, while only 28 percent plan to make changes to benefit plans to be more attractive to the millennial population. “In the property and casualty segment, the market will continue to see rate reductions for the majority of customers, although slightly lower than prior years,” said Doug O’Brien, national practice leader for Wells Fargo Casualty and Alternative Risk Group. “Potential changes to the ACA could also impact workers’ liability, as

injured employees may file more workers’ compensation claims, in lieu of healthcare claims.” There’s some good news for cyber liability insurance. Insurance rates are declining due to the lack of recent large data privacy events as well as increased competition among insurance providers, according to the report. Still, cybersecurity concerns remain very high. The Insurance Market Outlook report also highlights trends within 18 sectors of the industry, including: Property: The sector remains extremely competitive from a pricing perspective. Liability: Automobile liability capacity remains adequate, but shrinking somewhat for larger fleet risks. Workers’ compensation: Deteriorating returns on investment will drive more stringent pricing and underwriting.

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level and top-of-mind for leaders in the risk space. Environmental: Threats, such as water pollution and environmental terrorism, propel the demand for this coverage, which is growing 30 percent year over year. Public company directors’ and officers’ liability: An increase in securities classaction filings continues to be a hot topic. Employment practices liability: The market remains flat, but timely notification of claims is critical. Medical malpractice: The industry is shifting from individual claims to “batch” claims. Kidnap, ransom and extortion: KRE will be indispensable for organizations with international travel exposure. Contract surety: Limited premium dollars are being chased by numerous markets.

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News & Markets | WEST

Is Private Equity Investment in Insurance Agencies Always a Good Thing? By Stephanie K. Jones

t takes a lot of capital for an insurance agency to grow, acquire, merge or partner with another agency, and increasingly, private equity firms are stepping up to the plate to supply that funding. Although the number of reported mergers and acquisitions in the insurance distribution system in the U.S. and Canada fell slightly last year — from 456 in 2015 to 449 in 2016 — both years represent an increase from 2014 when 359 agency/brokerage M&As were reported, according to Chicago-based Optis Partners, which specializes in investment banking and financial services. A report issued in January by Optis Partners, its “December 2016 Agent/ Broker Merger & Acquisition Update,” shows that more than half of the transactions in both 2015 and 2016 involved private equity investment. The report covers only agent/broker M&As that were publicly reported and recognizes that not all such transactions are reported. This widespread investment activity by PE firms has driven up both demand for agency acquisitions and the amount being paid for them. Whether or not that’s a good thing depends on whom you ask. “Recently private equity firms have driven the demand in the marketplace, which has had a positive effect on the multiples in the industry. Their involvement has contributed to the increase in the average multiple paid on deals over the last five years,” said Phil Trem, senior vice president at the Ohio-based consulting firm, MarshBerry. However, the higher multiples, which may run as high as three times revenue, can make it tough for agencies to compete if they are looking to expand through acquisitions and don’t opt for the private equity route, said Chris Burand, principal at Burand & Associates in Pueblo, Colo., and a faculty member of the Academy of Insurance, an Insurance Journal affiliate. INSURANCEJOURNAL.COM

“The amount that private equity is paying is so much higher than what a regular agency can cash flow if they were to buy an agency that it’s created a very disparate marketplace. And that’s really an issue in the industry on many levels,” Burand said. “Let’s say the agency down the street wants to do a merger with a friendly competitor. They cannot cash flow three times, so a dilemma is created there. Does somebody sell to private equity for three times or do they keep things friendly and local, and take care of all their employees and clients, but for a much, much lower price tag?” MarshBerry’s Trem also acknowledged the competitive stress that PE investment has placed on independent agencies. “Agencies are in a very tough spot right now. They cannot compete on price in the M&A environment and they are in the midst of a softening property and casualty

rate environment,” he said. Still, private equity firms bring a lot to the table. “Some of the equity players really do invest quality money in agencies that they buy in the sense that they invest in IT and they invest in high quality people and they invest in higher quality of services to the clients,” Burand said. The model works especially well for agencies seeking to expand through acquisitions or consolidation. Grand Rapids, Mich.-based Acrisure is one such company that has benefited from PE-backed funding. Genstar Capital acquired the firm in 2013 and worked with Acrisure’s management to expand the agency’s geographic footprint, along with its product and service offerings. Announcing a management-led buyout of the company from Genstar last year, Acrisure reported that under Genstar’s

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WEST | News & Markets continued from page W7

ownership, it acquired more than 138 retail insurance brokerages and generated industry-leading organic growth. Confie Seguros, a large, national personal lines and commercial insurance broker based in Huntington Beach, Calif., has worked with two private equity partners since its inception in 2008 and has completed more than 120 acquisitions so far. Co-Founder and Chairman Mordy Rothberg said Confie currently is partnering with Abry Partners in Boston, and has set the goal of completing 35 more acquisitions in 2017. “When a company is looking to raise capital there are various different forms of capital and the reason why we prefer private equity over going public, as an example, is that when you partner with private equity, instead of managing the business quarter to quarter they have a longer term approach to the business,” Rothberg said. Typically, private equity investors are not interested in operationally managing the business. Instead they partner with the agency’s senior management to add value, he said. “With the right partner, the private equity model works really well.” Ryan Clark, president and managing director of the private equity firm, San Francisco-based Genstar Capital, said the insurance distribution sector is attractive to private equity investors for a couple of reasons. Insurance agencies and brokerages “are fundamentally good businesses. By that, I mean they have high levels of recurring revenue. They have strong profitability and good cash flow characteristics. The credit markets like insurance brokerages as well, so there is ample debt available for growth.” Another thing that makes the market attractive is that it’s so fragmented. “Private equity firms seek out fragmented markets where there are consolidators,” he said. “With our capital and with a strong management team we can act as one of the consolidators or aggregators in the marketplace to build a market-leading business.” Private equity builds the financial relationships and capital structures that allow the firms in which they invest to make W8 | INSURANCE JOURNAL | WEST FEBRUARY 6, 2017

acquisitions they might not otherwise do if the money were to come out of the owners’ pockets, Clark said.

Not for Everybody

While PE investment in insurance distribution channels can result in a great outcome for many agency owners who want to grow their firm quickly or just cash out, it’s not appropriate in all cases, some say. Private equity “has its place but it’s certainly not for everybody,” said David Macknin, president and CEO of the Chicagobased brokerage Alper Services. “It makes sense in a lot of situations … those being if the agency principals are looking to generate the highest return on the investment they made in the business regardless if they’re a founder or a PE buyer who’s now a seller, or a consolidator who’s now a seller. If the motivation is maximizing return for whomever, the PE play makes perfect sense,” Macknin said. It works well for agencies like Confie Seguros that want to grow through consolidation, Rothberg said. But “an agency that’s doing two to three million dollars of EBITDA (earnings before interest, tax, depreciation and amortization), that might not be somebody that wants to start a private equity backed company,” he added. Macknin said there are agency operators, and he counts Alper Services’ management as one of them, who have no interest “in having outside money impact how we conduct our business.” He said an agency that seeks to grow without using private equity dollars should “should look at the medium and long term, not just at the short and medium term. One needs to have a focused strategy for your growth, and then explain it and live it.” A profitable agency would presumably have retained earnings that could be

“clearly deployed and reinvested” into the agency and the existing personnel, and to bring in new people, he said. When it comes to mergers and acquisitions between agencies, “I would say you absolutely need to have a strategic plan as to what you’re trying to do, who you’re trying to bring in. The characteristic that I believe should drive it is culture. Culture, culture, culture. … It cannot be overstated. … It’s got to be something you live. Your culture should be defining you, how you carry yourself as an individual as part of a firm,” Macknin said. For Burand, it’s not clear that private equity is the solution for achieving organic growth. “In the majority of cases that I’ve seen I don’t think private equity achieves organic growth,” he said. “If an agency wants to achieve organic growth it has to invest in a growth strategy. There’s a number of those out there. But they involve hiring quality people that can make sales and making those people accountable for that. That’s the real key. You’ve got to invest in people that can actually get out there and make sales. And hold them accountable for doing so.” Both Macknin and Burand advocate internal perpetuation plans for agencies that want to grow organically. “If they plan it out, if they use foresight, the owners can still make a lot of money upon retirement. And they can do so with the knowledge that their people and their clients and their legacy will live on,” Burand said. However, it takes a considerable amount of planning — operationally and strategically — to make it happen. “What I see occur way to often is that planning doesn’t happen until it’s way too late,” Burand said. Likewise, MarshBerry’s Trem said agencies should relentlessly focus on “predictable, profitable, organic growth.” That strategy will not only enhance the firm’s valuation, it will “position them to have a choice for their long-term perpetuation.”

‘You absolutely need to have a strategic plan as to what you’re trying to do, who you’re trying to bring in. The characteristic that I believe should drive it is culture.’

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Figures

Declarations

An Objective Review

The estimated number of tornadoes that hit the Southeast between Jan. 21 and Jan. 23. Residents in Mississippi, South Carolina, Florida and Georgia were impacted by the storms.

140

19,000

“The report will not be punitive in nature. It is an objective review so that we can look back and learn from it and apply that learning to other programs in our agency.” — Great Smoky Mountains National Park Superintendent

Cassius Cash. Park officials, along with representatives from the U.S. Forest Service and the U.S. Fish and Wildlife Service, have formed a team to investigate and report on how the massive fires that started in the Tennessee mountains spread to the nearby town of Gatlinburg. Officials have been criticized for their handling of the fires.

Healthy E&S Business

“The overall message points to a healthy excess and surplus lines industry that continues to maintain a strong presence across the U.S.”

— Norma Carabajal Essary, executive director of the Surplus

Lines Stamping Office of Texas (SLTX), which captures and analyzes insurance data from stamping offices across the country. Nearly $26 billion in surplus lines insurance premium was recorded nationally for end-of-year 2016 — a 3.27 percent rise from 2015. The number of filings recorded in 2016 — about 3.6 million — represents a 3.1 percent increase over that of 2015.

Retail Book Value

The number of pairs of collectible Nikebrand shoes connected to a case of insurance fraud that were found in an investigation into possible wildlife violations in Kansas. U.S. Fish and Wildlife Service officials found the shoes while conducting a search warrant in the home of Lawrence E. Payne. Payne filed an insurance claim alleging the shoes were stolen in a burglary in 2013. He has been convicted and sentenced for in the fraud.

1,248

The number of wildfires that burned in Arkansas last year. The Arkansas Forestry Commission said the fires burned nearly 30 square miles in the state. The busiest months were February, March and November. The top two causes were fires unintentionally started by outdoor burning and arson. INSURANCEJOURNAL.COM

“We note, however, that insurers would be well-advised to consider the retail book value of a vehicle early in the settlement process, and not to depend on insureds to bring such information to their attention.” — A Massachusetts appeals court, in lawsuit filed against

The number of customers affected by a recent security breach investigated by The Delaware Department of Insurance involving Summit Reinsurance Services Inc. and BCS Financial Corp., subcontractors of Highmark BlueCross BlueShield of Delaware. The breach affected 16 Highmark self-insured customers and approximately 19,000 members.

$25 MILLION The amount Montana has reached in settlements with more than 1,000 victims of asbestos-related disease over claims that health officials failed to bring the hazards of a contaminated mine to people’s attention. Nearly 100 lawsuits were brought against the state for failing to protect residents in the town of Libby.

defendant Massachusetts Homeland Insurance Co., warned auto insurers that it is important to take retail book value into consideration early in the settlement process. The plaintiff, whose vehicle was determined by Homeland to be a total loss after a January accident, alleged Homeland had violated regulatory requirements by not taking the retail book value of his car into consideration early in the settlement process.

Futureshocks

“As we commemorate the devastation from 23 years ago, we also need to listen to what is forecast for the future.” — Glenn Pomeroy, CEO of the California Earthquake

Authority, reminded people during the anniversary of the Northridge Earthquake that the U.S. Geological Survey says there is a 93 percent chance of a magnitude-7.0 earthquake occurring in California in the next 30 years — a massive quake that would be three times as strong as the Northridge catastrophe.

ACA Certainty

“Through the failures of the (Affordable Care Act), consumers in particular have faced enough hardships; please ensure that these are not compounded through hasty and/or incomplete action.” — Illinois Gov. Bruce Rauner’s administration in a letter to

GOP congressional leaders asking them to avoid “hasty” or “incomplete” action as they proceed with a planned repeal of the Affordable Care Act. The letter urges Congress to provide “certainty and stability” to people covered through the health care law.

FEBRUARY 6, 2017 INSURANCE JOURNAL | NATIONAL | 11

NATIONAL | News & Markets continued from page 10 driverless cars for consumers, autonomous vehicles could have a bigger impact on the commercial side, Gelb said. “Some insurance carriers have exited the commercial trucking market because underwriting results have been terri-

bly challenged,” he said. “If we could use technology to address some risk factors in a constructive format, maybe first on the commercial side, that would be extremely helpful.” Gelb said an element of automated control in commercial

trucking could contribute to less driver fatigue, and automated braking elements for trains could help reduce train crashes similar to those recently seen in the New York metro area. “It seems confusing how we don’t have some of these things

P/C Insurance Execs Foresee Commercial Lines Growth, Led by Cyber, Outpacing Personal Lines

eaders of the property/ casualty (P/C) insurance industry expect to see a considerable increase in the commercial lines of insurance for 2017, with cyber leading the way as a huge untapped market, according to an Industry Leader Trends survey, conducted by the Insurance Information Institute (I.I.I.) at its recent Property/Casualty Insurance Joint Industry Forum. Fifty-five percent of respondents said they expect that commercial lines will grow more in 2017 than personal lines. Moreover, 88 percent said that cyber would grow faster than the rest of the P/C industry. “This is not surprising given businesses within personal data-driven industries, such as healthcare, finance and banking, retail, and communications view cyber risk as a real threat,” said Steven Weisbart, senior vice president and chief economist with the I.I.I. “Growth in the cyber insurance market will also be driven by increasing demand for business interruption coverage.”

With Congress weighing various proposals to change the Dodd-Frank financial regulations, which was enacted in 2010, leaders were asked which proposals they would support. Forty-five percent said they would most likely support reform or elimination of regulations involving Systemically Important Financial Institutions (SIFIs). Other choices were to reform or eliminate the Federal Insurance Office (FIO); Financial Stability Oversight Council (FSOC); or Consumer Financial Protection Bureau (CFPB). Respondents were also asked which state-based regulatory or policy trends they were most concerned about. Thirty percent said increased restrictions on underwriting; 23 percent said solvency regulation; 23 percent said multiple/duplicative data calls; and 10 percent said workers’ compensation opt-out legislation. When asked what issues would be the most important to P/C insurers in 2017, 43 percent were focused on attracting the next generation of talent and skills to the

12 | INSURANCE JOURNAL | NATIONAL FEBRUARY 6, 2017

P/C industry. Twenty-three percent said technology is of concern, particularly showcasing the benefits of the digital era for insurance consumers. Another 23 percent said the regulation of insurance companies increasing the costs and the complexity of doing business. Leaders were also asked what they think will be the key cause of mergers and acquisition activity in 2017. Fifty percent said the need to achieve economies of scale. “Size can bring economies of scale when certain costs, such as regulatory costs, are increasing,” Weisbart said “Companies are also concerned about the need to diversify across product lines,” he said, noting 27 percent of leaders raised that issue. “Lack of diversification could result in highly volatile earnings and decreasing profitability for insurers.” The Property/Casualty Insurance Joint Industry Forum included nearly 200 representatives from P/C insurance and reinsurance companies and organizations.

already,” he said. “From a commercial aviation perspective, pilots take care of takeoffs and landings, and everything else is automated. It feels like modes of transportation on the ground need to catch up to that.”

‘It’s important to recognize the environment we’re stepping into in 2017 and mind your risk management. Now is not the time to be 10 toes off the edge of the surfboard in terms of your risk position.’ Ransom explained one major trend that is likely to be seen this year is a separation of companies that are employing the right strategies to manage risk and profitability, and those that are falling behind. “In the context of the overall industry, there are companies that always seem to do better than average — they’re the companies that have paid attention and worked to get that income,” he said. “The ones that have succeeded in the past tend to be the ones that keep doing well. It almost always has to do with either knowing more about loss costs and how to price risk, or having a very low-cost basis. Knowing how to price and how to select underwriting risk is essential, and successful companies tend to have the track record to make that judgement.” Share

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NATIONAL | Business Moves Service, a risk management and employee benefits firm headquartered in Elmore, Ohio. Founded in 1948, Diversified Insurance Service provides personal risk, commercial and employee benefits products throughout Ohio. Terms of the transaction were not disclosed. Thomas D. Cassady, USI Midwest regional chief executive officer, said the company has targeted Ohio as a strategic area of growth.

Robertson Ryan & Associates, Allied Insurance Centers Risk Strategies, University Health Plans

Risk Strategies Co., a privately held national insurance brokerage and risk management firm, has acquired University Health Plans (UHP), a Quincy, Mass., based brokerage firm specializing in student health insurance programs. This move serves to expand Risk Strategies’ Higher Education Practice group. Terms of the deal were not announced. Built on a proprietary, web-based platform, UHP allows students of client institutions to navigate the school-sponsored student health insurance program and make a decision on whether to waive or enroll in that program. Students also can select from a range of ancillary coverages such as vision, dental, and international health insurance plans when traveling. Risk Strategies’ Higher Education Practice is focused on the specialized needs of institutions of higher learning. The company offers risk management advice as well

as insurance and reinsurance placement for property & casualty, healthcare and employee benefits risks.

World Insurance Associates, A Berne Insurance

World Insurance Associates LLC, an independent insurance agency based in Tinton Falls, N.J., completed its 19th business acquisition on Jan. 1, 2017, of A Berne Insurance based in Old Bridge, N.J. A Berne Insurance, family owned and operated since 1955, provides insurance services to families, businesses, and individuals in New Jersey. World Insurance Associates LLC offers personal and business insurance solutions in 41 states and specializes in insurance for transportation companies, the hospitality industry, coastal properties, and high net worth individuals, in addition to general commercial clients in diverse industries.

USI Insurance Services, Diversified Insurance Service

USI Insurance Services has acquired Diversified Insurance

14 | INSURANCE JOURNAL | NATIONAL FEBRUARY 6, 2017

Robertson Ryan & Associates Inc., based Milwaukee, has acquired Allied Insurance Centers. Allied Insurance Centers President James Polaski will continue to own and service his client book and serve as a vice president at Robertson Ryan. Polaski’s father, Harry Polaski, founded the agency in the 1950s. James Polaski joined the firm in 1983 and took over as president in 1995. He has long supported the Professional Insurance Agents (PIA) organization and is a past president of the Wisconsin chapter. Nine team members are joining Robertson Ryan. Founded in 1960, Robertson Ryan & Associates offers products and services for business, benefits and personal insurance. The agency serves the entire U.S. from branches throughout Florida, Illinois, Minnesota, Tennessee and Wisconsin.

The Crichton Group, RLH Agency

The Crichton Group of Tennessee has acquired RLH Agency, LLC, a long-standing

middle Tennessee insurance agency focused on the construction industry. Robert L. Harris, insurance industry veteran and founder of RLH Agency, will join The Crichton Group as a partner. Based in Nashville, RLH Agency specializes in providing property and casualty insurance products and surety bonds to contractors and companies throughout the construction industry. The acquisition enables The Crichton Group to grow its construction division and expand resources provided to clients. Harris, RLH Agency Principal Pat Phipps and all full-time employees will join The Crichton Group.

Acentria Insurance, Huff Insurance Agency

Acentria Insurance has finalized its merger with Huff Insurance Agency of Southwest Florida, LLC. Established in 1979, Huff Insurance Agency specializes in personal and business insurance and will continue to operate under its existing corporation name with the same team members. Jason Huff, owner of Huff Insurance Agency, said the strategic and joint partnership will accomplish a number of key goals and shared outcomes, including a broader range of personal and commercial products and services. Huff Insurance Agency of Southwest Florida operates out of two Southwest Florida locations: Fort Myers and Sanibel. Acentria Insurance is based in Destin, Fla., and has more than 20 offices across tFlorida and southeast. INSURANCEJOURNAL.COM

NATIONAL | News & Markets

E&S Market Continues to See Growth in Premium: Texas Stamping Office

verall, 2016 ended on a positive note for the U.S. excess and surplus lines insurance industry, according to the Surplus Lines Stamping Office of Texas (SLTX). Nationally, nearly $26 billion in surplus lines insurance premium was recorded for end-of-year 2016, which is a 3.27 percent rise from 2015. In addition, the amount of filings recorded in 2016 represents a 3.1 percent increase from that of 2015, with about 3.6 million filings in total. SLTX captures insurance data from service offices across the United States. The data includes information on premium and filing totals from 14 offices across the country, which depict the landscape of the excess and surplus lines marketplace across four primary regions. The southern region, which

includes Florida, Mississippi and Texas, accounted for the highest amount of surplus lines insurance premium, at approximately $10.5 billion. This same region also recorded the most filings, with more than 2 million. Mississippi had the largest increase in filings overall, with an 11.28 percent rise from 117,000 filings in 2015 to 130,000 total filings in 2016. Three of the largest surplus lines markets — California, Texas and Florida — reported premium increases for 2016, even after mid-year data showed premium decreases in the first six months of the year. Premium in California increased by 4.6 percent, Florida incresed 0.55 percent, and Texas premium increased by 2.06 percent. Texas and Florida showed similar growth in filings, with Texa showing a 5.08 percent increase and

16 | INSURANCE JOURNAL | NATIONAL FEBRUARY 6, 2017

florida showing a 5.88 percent increase. California reported a decrease in the amount of filings for 2016 by 8.92 percent. New York, the fourth largest market with $3.7 billion in total 2016 premium, recorded a 1.98 percent increase in premium and a 6.12 percent increase in filings. Pennsylvania and Illinois also recorded more than $1 billion in premium. Eight other states brought in less than $1 billion in premium, with seven of them accounting for less than $500 million each. Of these states, Washington enjoyed a 10.64 percent year over year increase in total premium with a rise from $762.9 million in 2015 to $844.1 million in 2016. In addition, filings in Washington grew 7.17 percent in 2016 to approximately 112,000.

Three of the largest surplus lines markets – California, Texas and Florida – all reported increases in premium for 2016, even after midyear data showed decreases in premium over the first six months of the year. Bob Hope, executive director of the Surplus Line Association of Washington, said his state saw an increase of about $20 million in property premiums, mostly in difference-in-conditions insurance and standalone flood and earthquake areas. Hope said casualty premiums were also up by almost $60 million, with the largest increases found in errors and omissions,

directors and officers, construction, and cyber liability policies. Overall, Pennsylvania reported the highest increase in premium, with 30.53 percent, at $1.2 billion in 2016 premium. In addition to recorded premium numbers, Pennsylvania also finalized a $3.08 billion enforcement action involving 1,172 additional policies in early 2016. The second largest increase was recorded in Idaho, which experienced a 13.53 percent growth to $102 million in total premium. Over the course of 2016, four states’ stamping fees/assessment rates changed as follows: • Idaho’s rate from 0.25 percent to 0.50 percent, effective Jan. 1, 2016. • Texas’ rate from 0.06 percent to 0.15 percent, effective Jan. 1, 2016. • Florida’s rate from 0.175 percent to 0.15 percent, effective April 1, 2016. • Minnesota’s rate from 0.06 percent to 0.04 percent, effective Oct. 1, 2016. Of the states that implemented new stamping fees, Minnesota was the only to experience a decrease in premium, at 12.1 percent less than 2015. “Even with slight changes reported by all the peer offices,” Norma Carabajal Essary, SLTX executive director, said, “the overall message points to a healthy excess and surplus lines industry that continues to maintain a strong presence across the U.S.” Share this

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NATIONAL | Special Report | Garage & Repair

By Andrea Wells

ow truck drivers operate in a dangerous world. Every day they face angry drivers while repossessing vehicles, dangerous driving and road conditions, near misses while operating heavy equipment, and close calls on U.S. freeways while hitching up wrecked vehicles. These are just a few of the reasons why the tow truck market is in a state of emergency, says one broker specializing in this class. Another reason: a crumbling insurance market with fewer and fewer carriers willing to write the business. Chip Thompson, president and CEO of American

Transportation Insurance Group (ATIG), has never seen the insurance market for tow trucks this bad since opening the doors of his specialty agency in 2001. “I’ve never seen anything like what I’ve seen happen in the last six months,” said Thompson, whose book of towing and repossession business nears $20 million in premium. He’s been specializing in the higher risk transportation market, particularly in the garage, towing, trucking and repossession markets, on a nationwide basis since 2001. “Right now, we are working three times as hard just to keep the risks that we have on the books.” The P/C industry’s competitive environment is not the

18 | INSURANCE JOURNAL | NATIONAL FEBRUARY 6, 2017

problem, Thompson adds. The insurance market is so difficult for tow trucks some are forced to close shop. “We are losing one out of every four customers and we are not losing them to other agents. They are shutting down,” he said. Mike House, vice president, producer, broker for USG Insurance Services Inc. in Canonsburg, Pa., agrees. “Towing is a very difficult market right now,” House said. “None of my markets will write a towing operation and schedule a tow truck for auto liability or physical damage.” House said his markets will write the garage liability but won’t touch the scheduled auto for the tow truck. “It is a very difficult market and I’m hearing a lot of companies are pulling out.”

The tow truck insurance market has been hit with myriad factors leading to its current state of disrepair, according to Thompson. From reinsurance drying up to the commercial auto market exploding, combined with the ever-increasing costs of litigation and health care, tow truck firms are facing heavy obstacles and it’s only just begun. Most of the U.S. commercial auto insurance market has had a tough time in recent years and tow truck operators are no exception. The commercial auto market as a whole has posted underwriting losses for five consecutive years and has evolved into the most chronically underperforming product segment for U.S. property/casualty insurers, according to Fitch Ratings. “It’s the perfect storm for garage and commercial auto in the last six months and I don’t see it letting up anytime soon,” Thompson said.

Shock Wave

The biggest shock wave hit the industry in September 2016 when Progressive pulled the plug on the towing sector nationwide, Thompson said. “That was the bellwether for everything else that followed after that,” he said. “In the last 18 months, we’ve lost eight to

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nine carriers in this space and it’s a small field anyway.” Some carriers made a profit and exited, some carriers lost money and exited, and some decided they didn’t want to write the class of business anymore, Johnson said. “It’s gone all ends of the spectrum.” Progressive’s exit shut down any hope of new carriers coming into the space as well. “When Progressive shut it down that shut everybody else down,” Johnson said.

‘Right now, we are working three times as hard just to keep the risks that we have on the books.’ “It seemed as if the carriers that were entertaining coming into the market thought, ‘If Progressive is going the other way why are we going toward it?’ Progressive is very technologically savvy,” Johnson said. “They understand the rates per the ZIP code per the risk per the street. They are pretty good at what they do and if they can’t make money on towing who can?” Progressive hasn’t gone so far as to leave current policyholders empty-handed, but will not be taking on new accounts. “We’re not currently taking on new towing business, however, we continue to insure our existing customers,” Brett Stalnaker, Progressive’s commercial auto product manager told Insurance Journal. Stalnaker says the insurer will return to the towing segment in the future. “In order to be more accurately priced, we’re making some small changes to our program, INSURANCEJOURNAL.COM

including introducing new segmentation and fully expect to continue insuring new tow truck business at some point in the near future,” he said. The current state of the market for tow trucks hit very hard and very fast, Johnson said. “Normally I would think there would be 20 percent or 30 percent increases (in difficult times) but we are seeing 100 percent to 150 percent increases on accounts with no claims,” he said. “Anyone in the commercial auto space right now, if they haven’t gotten hit, they are going to be hit with a sledge hammer in the first two quarters of this year.”

Cost Drivers

Continuing challenges in commercial auto liability range from distracted driving to increased miles driven and vehicles on the road to higher vehicle repair costs and rising severity in liability claims. Tow trucks are no exception. “Commercial auto in general is not going to catch a break for the next several years,” Johnson said. Most everything that’s commercial auto from trucking to dump trucks to garage risks is difficult. “Any place now where there is a human being touching an auto is warfare.” For tow trucks, it’s rear-end collisions that are “bringing insurance companies to their knees,” Johnson said. “Drivers are going too fast and are distracted,” Johnson said. “When you are driving a heavy commercial vehicle, like a tow truck, and you hit a car with three or four people in it, all of those people have neck and back injuries, you total their car, you will have $30,000

worth of damage to your tow truck, and it’s just a rear-end collision, which theoretically is preventable.” Right now, Johnson and ATIG are doing damage control and just trying to keep their current clients insured. “We are working three times as hard to keep the risks that we have but there’s a lot of angry people right now. We are catching it from all sides.”

‘None of my markets will write a towing operation and schedule a tow truck for auto liability or physical damage.’ MGAs, other brokers, and the few insurers left in the space are swamped. “We are trying to hold our clients’ hands through this and explain what’s going on.” Johnson has even had to turn away new business. “People are calling up panicked, they are in tears because they are going to lose their business. They expire in two days and their premium tripled but you can’t help them,” he said. “I’m at the mercy of the MGAs/brokers/insurers and they only have so much manpower. Everyone is on edge.”

Managing Risk

The only thing towing companies can do is to manage their risk, Johnson said. “I’ve got guys that are now putting cameras inside the trucks both facing outward and inward and if they catch their drivers eating or talking on the phone or texting, there is zero

tolerance. They are fired,” he said. He doesn’t expect the insurance market for towing to bounce back anytime soon either. “It will be a long time before insurers react to improved risk management in firms.” For now, focus on driver training, he said. “I can’t specify that enough. And settle more claims out of pocket if you can legally. And if you have insurance right now, and it’s semi affordable, then protect it with your life.” Share this

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FEBRUARY 6, 2017 INSURANCE JOURNAL | NATIONAL | 19

NATIONAL | Spotlight | Human Resources

Insurance Career Month: Why Industry Must Rethink Recruitment Strategies By Denise Johnson

ith nearly 400,000 employees expected to retire from the insurance industry workforce within the next few years, according to the U.S. Bureau of Labor Statistics, it’s incumbent on carriers to consider the ways in which they communicate with and recruit job applicants. According to PwC’s top issues annual report 2016, “Commercial insurers — like many other kinds of insurers — have an aging workforce and are facing an impending talent crunch. Automation cannot replace the qualitative judgment that is necessary for effective underwriting. Therefore, it is vital for insurers to develop a performance-driven culture that enables the recruitment, development, and retention of younger underwriting talent.” This impending talent shortage, coupled with recent studies suggesting that the insurance industry isn’t widely appealing to millennials, is forcing insurers to rethink

their recruiting strategy, according to Dave Coons, senior vice president of Jacobson Group. “We’re facing a potential talent shortage unlike anything we’ve ever seen in the past,” Coons said. The insurance industry isn’t alone in this workforce revolution. The authors of the PwC report wrote, “Most U.S. employers are woefully unprepared for the business realities of an aging workforce and face a potentially massive loss of skilled, knowledgeable workers. Companies that effectively recruit, train and develop dedicated future staff and leaders will differentiate themselves and set themselves up for success into the future.” As a result of this

20 | INSURANCE JOURNAL | NATIONAL FEBRUARY 6, 2017

massive transformation, insurers must reexamine how potential employees are screened and interviewed, Coons explained. “In the past, we were always more inclined to screen candidates out,” Coons said. “However, this is quickly being replaced with a screening in mentality — meaning that we have to more actively or proactively engage candidates to consider long-term careers in the insurance industry.” In its 2016 property/casualty insurance outlook report, Ernst and Young noted that “Insurers must be proactive in recruiting and retaining next-generation innovators and leaders.” The role of one department in particular is highlighted in the PwC report: “Human resources recruiters are the scouting departments of the insurance industry. Insurance recruiters have two options — to hire experienced candidates or recruit and develop raw talent through effective training programs.” According to Chad Record, assistant vice president of The Jacobson Group, candidates may not know about the wide array of opportunities that exist within an insurance company. INSURANCEJOURNAL.COM

That’s because in the past, the focus on a potential employee might be just on the skills needed for a particular job. Now, carriers are widening their focus on all of an applicant’s abilities to zero in on where their skill set might best fit into the company. “It’s incumbent on the company to look at where their skills and competencies might transcend certain boundaries and actually help candidates explore options and alternatives within the organization,” Record said. Record said if a candidate is placed in a role that maximizes his or her strengths, it will lead to greater job satisfaction and engagement. The emphasis for insurers looking to increase staff size and replace employees is to cater to millennials, Coons said. With 66 percent of insurers looking to add staff, according to a Jacobson and The Ward Group study, and millennials expected to make up 50 percent of the workforce population, it’s a no-brainer.

‘We’re facing a potential talent shortage unlike anything we’ve ever seen in the past.’ Catering to millennials means offering job stability, providing meaningful work and rewards for the type of work they do, Record explained. In addition, advanced technology and providing millennials a voice in how they perform their jobs are important workplace qualities. “Leveraging energy, enthusiasm and creativity might advance a company’s growth and development,” Record said. Changes in employee recruitment calls for changes in the interview process as well, Record said. There has been an increase in the use of video conferencing for interviews, as well as video career fairs. In addition, the interview process may now include peer-to-peer interviews. “There’s a greater emphasis on peer-topeer interviews, which allows candidates to get a better sense of who they will be working with, rather than just who they will be working for,” Record said.

“Teamwork is very appealing to millennials, so this process is something we’re seeing a lot more of these days.” Coons provided examples of what some insurers are doing to revise their recruitment process. This includes an increased use of social media for a broader reach proactively and interactively with prospective employees. Carrier career websites have also been upgraded to offer options such as click to chat with a recruiter, employee videos and links to social media. The idea is to be able to interact 24/7, Coons said. Coons expressed his enthusiasm for all of the changes happening in the hiring process. “It’s an exciting time to be employed in the insurance industry,” Coons said. Insurance industry executives and groups working to attract millennials to the sector are now actively targeting their younger colleagues to help get the

league. IJMAG.COM/206GF

Different in a Good Way

Nonprofits Insurance Alliance Group Nonprofits

Insur ance Alliance Group

A Head for Insurance. A Heart for Nonprofits.

www.insurancefornonprofits.org

Outside California

In California

Nonprofits Insurance Alliance of California (NIAC) NONPRO16375.indd 1

INSURANCEJOURNAL.COM

word out through the Insurance Careers Movement initiative. Last December, the recruiting initiative held a webinar designed to appeal to younger property/casualty insurance employees to raise awareness of the industry and help recruit new applicants. According to organizers, close to 2,000 people took part in the webinar, with millennials and others logging in from the U.S., U.K., Turkey, Switzerland, Mexico, Ireland, India, France, Canada and Bermuda. The Insurance Careers Movement has designated February as its second annual insurance careers month. Overall, the Insurance Careers Movement includes more than 600 insurance carriers, agents/ brokers, trade associations and industry partners. Share this article with a col-

1/28/15 9:47 AM

FEBRUARY 6, 2017 INSURANCE JOURNAL | NATIONAL | 21

NATIONAL | Closer Look | Nonprofits

5 Things to Consider When Writing Nonprofit Social Service Organizations

By Andrea Wells

onprofit organizations come in all shapes and sizes. They are a loyal bunch, often sticking with their valued agents and brokers for years, say two insurance specialists. Sheila Shaw, senior vice president, and Brad Storey, vice president, risk management, both of Irwin Siegel Agency Inc., a program administrator for human and social services programs, say there are some areas where nonprofits need help filling in coverage gaps — which is where a new agent can help. While the current insurance market for nonprofits remains competitive, Shaw and Storey say there are trends on the horizon that could change the landscape for nonprofits in 2017.

P/C Market

For most of 2016, pricing in the property/casualty market for nonprofit sector remained soft. As the year progressed, 2016 got even softer, said Shaw. “By the end of the year it was pretty competitive in the nonprofit marketplace,” she said. “I expect that it will continue to be competitive in 2017.” Shaw said that so far, January 2017 has shown a slight change. “We’ve seen it tighten, harden a bit so that’s encouraging

news.” Part of that change has to do with a challenging commercial auto insurance market. “A big part of the social service/ nonprofit business is auto related so we are seeing rate increases on that part of the book across the industry,” Shaw noted. Even though commercial auto premiums are trending up, other lines are not. Unless the nonprofit organization is entirely transportation focused, such as peri-transit, rural, or emergency transportation, there’s still capacity, Shaw said. “Right now, property is really profitable, general liability is really profitable, so we just push rate into the auto line where it’s needed.”

Need for Cyber

One area where the nonprofit sector remains underinsured or not insured at all is cyber liability. “We are just starting to get insureds to see that they need this coverage,” Said Shaw. Like most businesses, nonprofits are realizing the growing need for cyber liability especially in today’s active online fundraising environment, said Storey. “There’s a much larger push in the sector for online presence particularly for fundraising and for organizations that have foundations,” he said. “That trend makes the call for cyber coverage even louder.”

22 | INSURANCE JOURNAL | NATIONAL FEBRUARY 6, 2017

Red Flags

When underwriting new business in the nonprofit segment, Shaw says it’s important to review the organization’s employee controls. “Are they doing the right background checks? Are drivers screened properly? Are they running MVRs and do they have controls for drivers such as driver training, etc.?” Funding issues are potential red flags in the nonprofit world. “How funding (or lack of funding) might be impacted has always been an issue,” she said. “When funding gets cut (nonprofits) have to cut programs, risk management practices, or even cut staff.” When federal funding dries up can be an especially dangerous time for nonprofit social service organizations, Storey adds. “Typically, when funding cuts occur, there’s a period of time when the organization is trying to manage through the cuts. In my experience that becomes the most dangerous time,” he said. “That’s when we start to see staff-to-patient ratios get off-kilter. If those ratios are not met it’s viewed by the legal systems as a breach of standard of care, which does not help in the defense of claims.” Since many social service nonprofit providers are reimbursed based on services delivered, ancillary roles such as training directors and safety directors can be some of the first positions to be cut. “These positions are not reimbursed (directly) for services. Those non-revenue generating positions are typically the first ones to be let go in the event of funding cuts,” noted Storey.

Federal Influences Ahead

Funding cuts could be a huge issue in 2017 as the Trump administration seeks changes to Medicaid, Storey said. Trump’s plan to replace the Affordable Care Act will include giving each state a fixed amount of federal money in the form of a block grant to provide health care to low-income people on Medicaid, according to Kellyanne Conway, White House counselor. “Block granting to organizations through Medicaid is basically handing over a large INSURANCEJOURNAL.COM

chunk of money to the states and allowing the states to apply those dollars how they see fit,” Storey said. That tactic has never been favorable to social service organizations in the past, Storey said. “In states where Medicaid expansion was offered (32 states, including the District of Columbia) I don’t think we will see as many ramifications in those states,” he said. “However, in states that did not opt for the Medicaid expansion, block granting may have far more ramifications for those service providers in states throughout the Midwest and the Southeast.” Traditionally human services nonprofits’ funding is heavily reliant upon Medicaid. “It’s never really seemed to go in their favor when Medicaid was block granted to the states so that is something that is going to have significant impact going forward,” Storey said.

NEGA16496.indd 1 INSURANCEJOURNAL.COM

The future of the Affordable Care Act could also have a substantial impact on addiction treatment nonprofits. “There is an abundance of money in ACA for addiction treatment and it is a segment rapidly on the increase with new startup addiction treatment organizations,” she said. If the new administration repeals the ACA’s coverage for addiction treatment, nonprofit organizations could be in trouble, Storey said. Storey also believes the uncertainty over implementation of the new Federal Labor Standards Act overtime rule is something to keep an eye on. The rule, which was blocked by a federal judge in November, would have doubled the maximum salary cap to $47,892 a year for full-time executive, administrative and professional workers to be exempt from overtime pay requirements. That could impact nonprofits in all sectors, Storey said.

Success in the Nonprofit World

To be successful in nonprofits, Shaw advises agents to get involved. “Focus on accounts in your area where you can volunteer or sit on boards,” she said. “You have to get in there and get to know them.” And specialize. “That brings real value to the table from a risk management perspective and that’s how to be successful with the nonprofit account,” she advises. Storey adds that many nonprofits, especially smaller organizations, need their agent or broker to guide them in managing operations as well. “The level of business acumen that a broker can bring to the table for those organizations who haven’t ‘professionalized’ some of their business operations is a huge asset,” he said. That’s where a good agent can help. Share this article with a col-

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2:14 PM FEBRUARY 6, 2017 INSURANCE JOURNAL |1/18/17 NATIONAL | 23

NATIONAL | Spotlight | M&A Report

Top Agency/Broker Acquirers of 2016

he following information from InsuranceJournal.com and other sources reflects only transactions reported publicly. One of the most active recent acquirers of agencies and brokerages is Michiganbased Acrisure. The firm, bought by Gen star Capital in 2013, bought up more than 138 retail brokerages over the next three years. Acrisure in November a completed a buyout from Genstar of the company for $2.9 billion.

Top P/C Agency/Broker Acquirers: Hub International

Tevis Insurance Solutions, Medley/ Turrentine, MDW Insurance Group and affiliates Agents Insurance Resources and AIR Insurance Marketing, Pinnacle Financial Group, MDA Inc., DFM Insurance Agency, Jamie Campbell Younger book of business, Riviera Insurance Services, Mayport Insurance & realty, Norton Insurance Agency and Financial Services, Hickey & Associates, Keenansuggs Insurance, Parq Advisors, Hsbi Benefits, Tenth Dot Benefit Solutions, Firstbank Insurance Agency, 1st Alaska Insurance, Santa Fe Insurance Services, Gonzalez and Goenaga, Pickett and Associates, BenefitsMart, Gwaltney and Associates, Gwatney & Associates, Greene-Hazel & Associates, Equity Risk Partners, Columbian Insurance Agency, RPG Solutions, Gathings Insurance Services and Cowan Benefit Services.

Southern Risk management, National Healthcare Access Agency. Centennial Surety Associates, Florida Insurance Specialists, Gerrity-Baker-Williams Inc., LJ Stein & Co., Legacy Texas Insurance Services, Armada Employer Services, MaximGroup, Daly Merritt Insurance, ELM Insurance Brokers, Pat Moore Insurance Services, Clark Associates, MRW Group, Michael J. Hall & Co., Encompass Risk Solutions, Suydam Insurance Agency, Van Zandt-Emrich & Cary, Roehrs & Co., Glenn Davis & Associates, Church Insurance and Financial Services, and Archer A. Associates.

A.J. Gallagher

Group Insurance Associates, National Ethics Association, The MW Bagnall Co., Argentis, Altman & Cronin Benefit Consultants, Regency Group, Victory Insurance Agency, Blue Horizon Insurance Services, Orb Financial Services, Gabor Insurance Services, The Buchholz Planning Corp., KRW Insurance Agency, Ashmore & Associates Insurance Agency, McNeary Inc., Hogan Insurance Services, Hagan Newkirk Financial Services, KDC Associates, Insurance Plans Agency, Charles Allen Agency, Capitol Benefits Group, Joseph Distel & Co., Kane’s Insurance Management Operations, Bomford-Couch & Wilson, Vincent L. Braband Insurance, and White & Company Insurance.

Confie Seguros

Absolute Insurance Agency, Most Insurance, Your Insurance Spot Inc., Wise Tucker-Johnston & Smelzer, Kentucky Insurance Agency, Bronkie Agency Inc., Insurance Group, Benefit Specialists, The Insurance Market Agency Inc., Fast Quote, Automobile Insurance Specialists Inc., Trinity Insurance, Whitehead Insurance Journal’s M&A Report Insurance Inc., Oasis Check out the new Insurance Journal searchable database Insurance, Alamo of insurance mergers and acquisitions news at Auto Insurance ij.com/mergers. of East Texas, First Stop Insurance,

AssuredPartners

Resource

24 | INSURANCE JOURNAL | NATIONAL FEBRUARY 6, 2017

CityWide Insurance, Lloyd D. Sprague & Son, J.N. Mason Agency Inc., ExpressLink Inc., Axiom Insurance, Duane Sammons Insurance Center, Salermo Insurance Agency, Lockwood Agency Inc. and Fair Price Insurance.

The Hilb Group

PriMed Consulting, Dowling & O’Neil of new England, Raley-Watts & O’Neill, Clark-Mortenson Insurance, P.A. Post Agency, Bill Grossman of Rhode Island, Group Insurance Concepts, NPB Insurance Services, Carrier Insurance Agency, Fundamental Insurance & Retirement, and Endeavor Insurance Services.

Risk Strategies Co.

Advanced Insurance Underwriters, TSG Financial, Kahn-Carlin, Private Client Group, McLaughlin Brunson, OakBridge Advisors, Atlass Insurance Brokerage, John Buttine Inc., Maggs & Associates and Lester Brokerage.

USI Holdings

Ball Peoples, Johnson and Bryan, MVB Insurance, Hanratty & Associates, Brooks Insurance, Forrest Sherer Insurance, Best Insurance, CBDI, and Healthcare Liability Solutions

Marsh McLennan Agencies

Benefits Resource Group, Presidio Benefits Group, Vero Insurance, Benefits Advisory Group, Corporate Consulting Services, Celedinas Insurance Group, and Aviation Solutions

NFP

The Coury Group, Malpractice Insurance Agency, SST Benefits, Kestra Financial, Benefits Solutions Plus, and ERISA Fiduciary Advisors

Alliant Insurance Services

Hecht Group, Farmin- Rothrock & Parrott, Mesirow Insurance Services, Western Carwash Insurance Program, Andre-Romberg Insurance Agency, INSURANCEJOURNAL.COM

and John F. Throne & Co.

Brown & Brown

Lumbermens Insurance and Risk

Insurers Look to M&As to Digitalize Distribution

Solutions, Social Security Advocates for the Disabled, Morstan General Agency, Kronholm Insurance Services

Insurance Agency M&As Reached Near Record in 2016: OPTIS

ergers and acquisitions of insurance agencies last year were the second-highest ever, according to OPTIS Partners’ annual report. The OPTIS database recorded 449 deals in the U.S. and Canada in 2016, a slight dip from the record of 456 in 2015. “It was a sellers’ market last year, and it will probably remain one in 2017. But the perfect storm’ benefiting sellers won’t last forever,” said Timothy J. Cunningham, managing director of OPTIS, an investment banking and financial consulting firm specializing in the insurance industry. The report covers reported transactions of agencies selling primarily property/casualty insurance, agencies selling both P/C and employee benefits, and employee benefits agencies. Private-equity backed agencies were 2016’s biggest buyers, making 237 pur-

chases, 53 percent of the total. The top two were Acrisure (63 deals) and Hub International (45). Privately owned insurance agencies came in second, buying 124 agencies. They were followed by public brokers (41), banks (25) and carriers/ other (22). The actual number of sales was greater than the 449 reported, as many buyers and sellers do not report transactions, and some acquirers do not report small transactions, OPTIS said. Looking at sellers, sales of P/C-focused agencies continue to dominate the list with 54 percent of all sales. Sales of employee benefits agencies rose to become the second most popular category (20 percent of sales), up from 17 percent in 2015. The full report is available online at: http://optisins.com/articles_and_thought_ pieces/read.php?id=32.

Credit: OPTIS Partners

INSURANCEJOURNAL.COM

lmost three-quarters of global insurers believe their sector has failed to show leadership in digital innovation and an increasing number now regard investment and acquisitions in digitalization a priority to improve distribution, according to a survey by Willis Towers Watson. “Insurers recognize the importance of building a sustainable digital infrastructure to improve customer engagement and as an essential distribution channel, which is likely to be addressed through a combination of internally driven innovation, joint ventures and M&A activity,” said Jack Gibson, global M&A lead, Willis Towers Watson M&A Risk Consulting. “Insurers that hesitate could very well get left behind and fail to capture future generations of younger policyholders, who are more likely to engage via digital distribution.” Almost half of the survey respondents expect to make an acquisition over the next three years, directly driven by the desire to acquire digital technologies, including 14 percent that intend to make more than one acquisition. Ninety-four percent of respondent expect distribution to be where digital technologies have the greatest impact over the next five years, according to the survey, which was conducted of 200 property/casualty and life insurance executives in conjunction with Mergermarket. “Distribution is a recurring theme for insurers surveying the digital landscape, as it offers opportunities to find new ways to market and to build closer, more engaged relationships with the consumers of their products and services,” said Gibson.

FEBRUARY 6, 2017 INSURANCE JOURNAL | NATIONAL | 25

NATIONAL | M&A Review

M&A Activity Continues at Industrious Pace

By Sarah Lucas

erger & acquisition activity in the insurance distribution space continued at an industrious pace throughout 2016, with 443 closed transactions. This was down from 456 in 2015, but still higher than previous years on record (most recently 322 in 2014, 224 in 2013 and 325 in 2012). The deal count for the fourth quarter of 2016 was the high-

est for Q4 activity since 2012. There were 109 announced transactions closed in Q4, up from 104 in 2015, 92 in 2014 and 78 in 2013. In December alone, 59 announced deals closed compared with 44 the year prior. Retail agencies accounted for 373 of the 443 agency transactions and the other 70 firms sold were specialty distributors. Roughly 38 percent of the firms that sold were multi-lines agencies, writing property/ casualty and employee benefits/consulting coverages. The next 44 percent of the selling firms were P/C only, and the remaining 18 percent were EB only. The most active segment of buyers in 2016 continued to be private equity-backed firms, completing 55 percent of the transactions. The next most active group was independent

brokers and agencies (24 percent), followed by other types of firms (9 percent), publicly traded insurance brokers (7.5 percent), and banks & thrifts (5 percent). The top five buyers in 2016 accounted for roughly onethird of the volume, and the top 10 buyers accounted for roughly 50 percent of the volume. The top five acquirers were Acrisure LLC, Hub International Ltd., BroadStreet Partners Inc., AssuredPartners Inc. and Alera Group Inc. All private equity-backed firms. Acrisure was the most active acquirer in 2016, with 38 announced transactions; 16 were in California. Most of the announced transactions were P/C firms. Acrisure does not publicly announce all of its transactions, so the actual number of Acrisureâ&#x20AC;&#x2122;s closed deals is likely greater. Hub was the second most acquisitive firm in the space, with 31 deals. These were spread throughout the U.S,

Sources: SNL Financial, Insurance Journal, other publicly available sources and MarshBerry proprietary databases All transactions in chart/table are announced deals involving public company acquirers, banks, and private equity groups as well as private company acquirers. All targets are U.S. only. This data displays a snapshot at a particular point in time and has not been updated to reflect subsequent changes in prior years, if any. MarshBerry estimates that only 15 to 30 percent of all transactions are actually made public. Past performance is not necessarily indicative of future results. 26 | INSURANCE JOURNAL | NATIONAL FEBRUARY 6, 2017

with just under half taking place in the Western U.S. and the other half occurring in the East and Midwest. Roughly half of the agencies acquired by Hub were multi-line agencies, one-fourth were P/C only, and the other quarter were EB only firms. BroadStreet Partners Inc. had 28 announced transactions in 2016. The firms acquired were primarily P/C agencies. AssuredPartners Inc. announced 26 deals in 2016, concentrated in the Eastern half of the U.S. Just over 53 percent of their acquisitions were multi-line agencies, 35 percent were P/C only, and the rest were employee benefit only firms. Alera Groupâ&#x20AC;&#x2122;s 24 individual transactions closed in late December made it one of the largest employee benefit firms in the country with a presence in 15 states and total revenue of roughly $158 million. The next five buyers, by number of deals closed were are all private equity backed firms: Arthur J. Gallagher & Co. closed 23 deals; Confie Serguros Holdings II Co. (17 transactions), The Hilb Group (15 transactions), USI Insurance Services LLC (10 transactions) and Risk Strategies Co. Inc. (9 transactions) Except where otherwise indicated, the information provided is based on matters as they exist as of the date of preparation. Past performance is not necessarily indicative of future results and individual results may vary. Lucas is vice president at MarshBerry. Email: Sarah.Lucas@MarshBerry.com Phone: 616-723-8375. INSURANCEJOURNAL.COM

Merger Announced and Acquisition Activity Date Buyer Announced Date

10/1/2016 10/1/2016 10/1/2016 10/1/2016 10/1/2016 10/1/2016 10/1/2016 10/1/2016 10/1/2016 10/1/2016 10/1/2016 10/1/2016 10/3/2016 10/3/2016 10/3/2016 10/4/2016 10/4/2016 10/5/2016 10/5/2016 10/6/2016 10/11/2016 10/12/2016 10/13/2016 10/17/2016 10/18/2016 10/19/2016 10/20/2016 10/21/2016 10/26/2016 10/26/2016 10/26/2016 10/26/2016 10/26/2016 10/31/2016 11/1/2016 11/1/2016 11/1/2016 11/1/2016 11/1/2016 11/1/2016 11/2/2016 11/3/2016 11/8/2016 11/9/2016 11/11/2016 11/15/2016 11/15/2016 11/17/2016 11/22/2016 11/30/2016 12/1/2016 12/1/2016 12/1/2016 12/1/2016 12/1/2016 12/1/2016 12/5/2016 12/5/2016 12/5/2016 12/6/2016 12/7/2016 12/7/2016 12/8/2016 12/12/2016 12/14/2016 12/15/2016 12/15/2016 12/16/2016 12/16/2016 12/19/2016 12/19/2016 12/19/2016 12/19/2016 12/20/2016 12/20/2016 12/20/2016 12/21/2016 12/28/2016 12/28/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/30/2016 12/31/2016 12/31/2016 12/31/2016

Buyer

Acrisure LLC Acrisure LLC Acrisure LLC Acrisure LLC Acrisure LLC Acrisure LLC Ascension Insurance Inc. BroadStreet Partners Inc. BroadStreet Partners Inc. BroadStreet Partners Inc. Hilb Group LLC WinStar Insurance Group LLC Alliant Insurance Services Crum & Forster Enterprise Hub International Limited Hub International Limited Maritime Program Group Inc. Hub International Limited Plexus Groupe LLC AssuredPartners Inc. Dragoneer Investment Group LCC Cross Insurance Northwest Bancshares Inc. PSA Holdings Inc Tarpey Insurance Group Inc. Independence Holding Company Venbrook Group LLC Management group Confie Seguros Insurance Services Confie Seguros Insurance Services Confie Seguros Insurance Services Frost-Klossner-Swan Inc. Leavitt Group Enterprises Inc. AssuredPartners Inc. A.N. Ansay & Associates Inc. Acrisure LLC Aspen Insurance Holdings Limited Blue Cross and Blue Shield of South Carolina Hub International Limited John L. Wortham & Son L.P. Leavitt Group Enterprises Inc. Hub International Limited Arthur J. Gallagher & Co. Hub International Limited Hub International Limited Cross Insurance Cross Insurance RightSure Insurance Group AssuredPartners Inc. Marsh & McLennan Companies Inc. Acrisure LLC Acrisure LLC Acrisure LLC Hilb Group LLC Hub International Limited Woodruff-Sawyer & Co. Hub International Limited Protector Holdings LLC Worldwide Facilities Inc. Hub International Limited Avery W. Hall Insurance Agency Inc. JenCap Holdings Hub International Limited Berends Hendricks Stuit Insurance Agency Inc. Arthur J. Gallagher & Co. Acrisure LLC INSURICA Insurance Management Network Acrisure LLC Arthur J. Gallagher & Co. BancorpSouth Inc. Confie Seguros Insurance Services Jardine Lloyd Thompson Group Plc Kaplansky Insurance Agency Inc. Arthur J. Gallagher & Co. Risk Strategies Company LLC USI Holdings Corp. Digital Insurance Inc. Seeman Holtz Property and Casualty Inc. Seeman Holtz Property and Casualty Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Hub International Limited NFP Corp. USI Holdings Corp. Acrisure LLC Evans Bancorp Inc. TrueNorth Cos. LLC

INSURANCEJOURNAL.COM

October 1, 2016 to December 31, 2016 Seller Seller

Undisclosed Insurance Agency (CA) Undisclosed Insurance Agency (CA) Undisclosed Insurance Agency (CA) Undisclosed Insurance Agency (PA) Undisclosed Insurance Agency (PA) Undisclosed Insurance Agency (PA) GreenPoint Insurance Group Inc. Book of business Certain Insurance Assets Certain Insurance Assets Fundamental Insurance And Retirement Planning Inc. Regnier & Associates Inc. Hecht Group Trinity Risk LLC Norton Insurance Agency Inc. Sweet & Baker Insurance Brokers Inc. Axiom Insurance Management, Ltd. Mayport Insurance & Realty Inc. Ingensa Partners LLC Kentucky Insurance Group LLC AmWINS Group Inc. Colt Insurance Agency Inc. Winans Insurance & Employee Benefits NextLogical Benefit Strategies LLC Tsb Insurance Service Inc. ABACUS Group LLC Brooks Insurance Group Acrisure LLC Hulme Corporation, dba Alamo Auto InsuranceÂ Lockwood Agency Inc. Salermo Insurance Agency LLC. Barbrick Properties Inc. Murray and Murray Insurance Agency Inc. Insurance Resource Consultants Thomas Insurance Group Undisclosed Insurance Agency (PA) Blue Waters Insurers Corp. Spectrum Underwriting Managers Inc. Riviera Insurance Services LLC John R. Ray & Sons Inc. BB&H Benefit Designs Inc. Book of business Regency Insurance Group Inc. Luk-Sal LLC MDA Inc. Brown, Thayer, Shedd Inc. J.P. Henderson American Cornerstone Insurance LLC TJ&S Inc. Benefits Resource Group Inc. Undisclosed Insurance Agency (CA) Undisclosed Insurance Agency (CA) Undisclosed Insurance Agency (CT) Endeavor Insurance Services Inc. Pinnacle Financial Group Inc./ Pinnacle Insurance Agency Inc. Neovia Integrated Insurance Services MDW Insurance Group Inc. Big Savings Insurance Agency Inc. Trinity Underwriting Managers Inc. Medley/Turrentine & Associates LLC Gordy Insurance Agency Inc. NIF Group Global Marine Insurance Agency Strategic Employee Benefit Services of Western Michigan LLC MW Bagnall Company Undisclosed Insurance Agency (AK) DFB Insurance Group LLC Commercial insurance and employee benefits books of business National Ethics Bureau Inc. Waguespack & Associates Insurance Inc. Goodman and Rolnick Inc. StoneHill Reinsurance Partners LLC R. P. Ahearn Insurance Agency Inc. Group Insurance Associates Inc. Advanced Insurance Underwriters Ball Peoples Designing Benefits Inc. JMD Insurance National Insurance Solutions Inc. A&B Insurance and Financial Inc. American Insurance Administrators Inc. Beacon Retiree Benefits Group LLC Benefit Advisors Network Benico Ltd. Brown and Noyes LLC C.M. Smith Agency Inc. Centennial Group Benefits and Insurance Services Inc. Corporate Plans Inc. Coury Health Services Inc. Forum Benefits Inc. GCG Financial Inc. Hampson-Mowrer Agency Inc. HP Planning LLC INGROUP Associates Inc. J.A. Counter & Associates Inc. K.B. Group Services Inc. Pentra Inc. PWA Insurance Services Robert G. Relph Agency Inc. Shirazi-Miller Benefits LLC Silberstein Insurance Group LLC TRUEbenefits LLC Virtus Benefits LLC Tevis Insurance Solutions LLC City Securities Insurance LLC Diversified Insurance Service Undisclosed Insurance Agency (PA) A.M. Smith Group Inc. CSB Insurance Group Inc.

FEBRUARY 6, 2017 INSURANCE JOURNAL | NATIONAL | 27

Idea Exchange

Minding Your Business

Trends to Exploit in 2017

By Catherine Oak and

Bill Schoeffler

t is a new era for our country, with President Donald Trump coming into power with the theme to “Make America Great Again.” Perhaps it is also the time to do the same for agency planning. Are there things in the works with our nation’s new leader that will affect the agency and the clients that we insure? One would think so, with his platforms and first 100-day agenda. There are too many moving pieces and unknowns to predict what a Trump presidency means. Most likely, regulations will be scaled back. Carl Icahn was named as a special adviser to the president on overhauling federal regulations. The Affordable Care Act also will be overhauled. Trade deals will be revised with the intent to be more favorable to the United States. Tax

laws and incentives will be re-written. It is not clear how the Trump administration will act toward federal oversight of the financial sector, but an increase in control is remote. So, this seems like it should be favorable to business. But, there will be counteracting reactions that will affect any changes made by the federal government. Assuming the economy grows, the Federal Reserve will increase interest rates, as it already did in December 2016. Life insurance companies will directly benefit from the hike in interest. Property/casualty firms are less sensitive to interest rates and will benefit from a growing economy. However, changes in technology will have a bigger impact on the insurance industry than anything related to the government. As the Trump administration promotes business through less regulation, revised trade deals and re-writing tax laws, “Blue” states like California, New York and Massachusetts will respond with more regulations and large-scale legal actions by Attorneys General. California just retained former Attorney General Eric Holder to fight against any moves by the Trump Administration that they disagree with. So, what does all this mean to the typical insurance agency owner? It’s time to be proactive and think about how the industry and economic scene affects the firm. Those that don’t plan will easily be overtaken and will not attain maximum growth. Below are other industry trends to exploit for the coming year.

The Market Continues to Soften

The current trend is that rates are softening in commercial and personal lines. The last soft market has been in various lines in various regions for a number of years, from about 2007

28 | INSURANCE JOURNAL | NATIONAL FEBRUARY 6, 2017

through 2016. In commercial lines, Richard Kerr, MarketScout CEO, noted that while the composite average rate was down 2 percent last month, rate changes vary by line and industry. “Insureds and brokers should carefully examine the rates for coverage and/or industry classifications that are germane to their placements,” he said. Commercial property and general liability have dropped 2 percent recently, with all other lines having dropped about 1 percent in commissions. The only exception is commercial auto, which had been dropping by 3 percent and now slowed to only a 2 percent decline. Because rates are softening, in order to keep revenues up, agencies will need to sell more — either cross sell or sell additional coverages to new customers. Valueadded services should be offered and a fee charged, to increase revenue. Many agencies have been giving away these value-added services away for free for years. The producer needs to show that they are needed services for the client and worthwhile. If successful, the client should be willing to pay. By industry class, rates have been flat or have decreased as follows since February: Manufacturing continues to decline 1 percent, while both Contracting and Service class rates have declined 2 percent. In personal lines, Kerr said, “Hurricane season is over. Hurricane Matthew was a scare and the net effect to insurers was minimal. With another year of relatively benign wind events, insurers are quoting more competitive rates.”

Profit Margins Shrink in Soft Markets

In a soft market, owners should remember that financial measurements are worse. Agency owners should be able INSURANCEJOURNAL.COM

to increase productivity if management needs are proactive, account rounding is performed, there is better use of automation and clerical work is delegated from the account managers to the least costly, qualified employee. This is called staff stratification. Revenue per employee should be $125,000 to $150,000 or higher.

National and Regional Brokers Aggressively Buying Independents

We expect the mergers and acquisitions pace to continue unchanged during 2017. Baby boomers are retiring at a rate of 10,000 per day, and they own more than 60 percent of small businesses. There are estimates that 60 percent to 75 percent of these business will be sold in the next 10 to 15 years. As long as insurance agencies remain profitable, there will be buyers. The current prices paid by publicly traded brokers and private equity firms are already extremely high and will not increase on average. Local peer buyers and internal buyers cannot compete at those rates becausee they need to pay out of cash flow. So, there will continue to be a price differential between those that receive offers from the “well-funded” buyers and those that sell internally or to local competitors.

independent agencies that are dynamic and are struggling with their perpetuation plan. They are, however, being more selective as they round out their current platforms. The main reason that the national bro-

“

continued on page 30

Do I need to sell my agency because everyone else is?”

I’m not ready to retire.”

You have built significant value in your agency through years of hard work. InsurBanc can help you to unlock the value to grow your agency to the next level, independently. InsurBanc can provide funding for acquisitions, perpetuations and producer development.

Agency owners should be able to increase productivity if management needs are proactive, account rounding is performed, there is better use of automation and clerical work is delegated. National brokers are still putting resources into the middle market arena and have specific capital to do so. There continues to be the following players in the middle market arena, including equity firms and venture capitalists, such as BroadStreet Partners (with teacher union funding), Madison Partners, Hellman & Friedman and Kohlberg & Co. and Assured Partners. These entities continue to aggressively solicit and buy independent agencies and have large amounts of capital to attract

kers are in this mid-market arena is that many of the larger independent agencies have already been bought up or do not intend to sell. Some of these national brokers that are major acquirers still include

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Idea Exchange

Minding Your Business

continued from page 29 Brown & Brown, Marsh, AJ Gallagher and Integro Group.

Value for Good to Great Firms Still High

To command top values, independent agencies, have to be profitable, growing and targeting larger commercial lines accounts, high value personal lines accounts and employee benefits accounts. With today’s improved economy and the ability to get credit lines from banks, the value of agencies is still good, especially because there are so many acquirers. There is often misunderstanding about what the “real prices” being offered are. Many of the deals have a sizable portion of the “price” based on earn-outs for future performance. This confuses the understanding of “value” in the marketplace, because “value” in the past was usually based primarily on revenue that was already on the books. Sellers today get prices from other peer independents in the 1.25 to 1.50 times range as a high, if there is at least close to a 25 percent to 30 percent profit margin. As a multiple of EBIDA (earnings before interest, depreciation and amortization) are in the 6 to 6.5 range. In the earn-out portion of the “price,” the seller is expected to grow the business, not just maintain it. Terms based on future growth should be discounted when determining value based on cash today. So, if an agency “gets” 1.75 to 2.25 times revenue today, this is actually a “price” closer to 1.3 to 1.6 times revenue, projected three years out. Some new stronger brokerages have the goal to become a local or regional force against the national brokers. The infusion of these well-capitalized buyers is affecting the ability of smaller agencies to do acquisitions. The prices being paid yesterday and today do not always cash flow, which would be hard for smaller firms to match. National and regional brokers seem to have a huge amount of capital to acquire so prices paid are usually much higher

than peer independents can match, like in the 1.5 to 2 range as commission multiples or seven to even eight times EBITDA (earnings before interest, taxes, depreciation and amortization). However, many independents prefer not to sell to a much larger, often publicly traded firm. The existing firm is often unrecognizable a few years later if the larger entity does the acquiring, and pressure to produce and write larger and larger accounts often is not a good fit for many small to medium size service-oriented independent agencies. In addition producers in these acquired agencies usually do not get paid for commercial lines accounts under $2,500 to even over $5,000 in commission.

Internal Perpetuation is Difficult and Expensive

Owners often sell internally for less than an external sale, especially if family members are involved. There is also additional risk as those internal family members or key employees usually don’t have monies to put down a down-payment. However, consultants recommend to owners that these candidates show dedication and have skin in the game. The perpetuation candidates often then sign an agreement to

30 | INSURANCE JOURNAL | NATIONAL FEBRUARY 6, 2017

guarantee payments to the retiring majority owner using their skills at maintaining the owners’ key accounts, continuing sales growth and the same or a good level of cash flow. If the owners don’t feel comfortable enough with these candidates to retire and let these candidates take over, they likely will sell to a third party.

From the insurance agency owner perspective, there will likely be less taxes and an ability of the owners to have capital freed up for agency improvements. It appears to be getting more difficult for smaller agencies to perpetuate internally. Often, it seems that the next generation does not have both the management and financials skills to pull it off. These are the firms that will have to bring in a good additions to the team, merge with a peer agency or sell to a larger firm that has capital to acquire. Also, as owners reach retirement age, many competitors approach them with great offers, so the retiring principals are guaranteed their money versus the chance INSURANCEJOURNAL.COM

that internal candidates may not be able to perpetuate the firm and the customers.

Capital Gains & Ordinary Income Taxes Will Likely Decrease

In January 2013, Congress and President Obama raised federal capital gains rates from 15 percent to 20 percent. There are also some rate tiers in between. Personal income taxes also went up to 39.6 percent for the higher income brackets. If Trump had not won the election, it was likely that with soaring debt, a Clinton administration likely would have raised taxes again to help pay down the national debt that has occurred over the past several years. Under a President Trump, it is predicted that the tax rate for corporations will go back to 15 percent and be a much more simplified system so that all Americans file their taxes and there is uniformity. It is more likely that there will be more revenue because of this to help lower the national debt, based on the concept of the Laffer curve. From the insurance agency owner perspective, there will likely be less taxes and an ability of the owners to have capital freed up for agency improvements.

omy. These entities can also be a way for new people opening their own agencies to own their own firms.

$1,000 in commission per account. The bar continues to be raised.

Producer Dilemma Continues

The key trends in this article are important for owners to pay attention to for the coming year. Having good communication within the firm and planning sessions are a good way to keep everyone on track. Also, establishing business and marketing plans, which incorporate exploiting these trends, is important. Proactive owners knowing how current trends will affect the firm is the first step. Managing the agency in a way that exploits these trends will then allow the firm to succeed. Share this article

A common complaint of most agency owners is that it isvery difficut to find good, loyal, hard-working insurance producers. Producers that are available often don’t produce and can be problems. Every year, this continues to be a problem for independent agencies. Also, if certain growth percentages are not attained, some owners may consider lowering the overall commission on the existing book by a few to even 5 percent commission points. Some agencies are encouraging producers to produce more new business so higher new and lower renewal commissions are becoming more popular. To improve profit, most agencies are also limiting the size of account the producer will be paid for. There are very few agencies today paying producers for commercial accounts under

Summary

with a colleague. IJMAG.COM/206HG Oak is the founder of the consulting firm, Oak & Associates. Schoeffler is an associate of the firm. Oak & Associates specializes in financial and management consulting for independent insurance agencies, including valuations, mergers acquisitions, sales and marketing planning as well as perpetuation planning. Phone: 707-935-6565. Email: catoak@gmail.com. Website: www.oakandassociates.com

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Cluster Options Smaller Agencies

Many small to medium sized firms cannot individually maintain the number of quality markets they need to compete today with larger firms. Consolidators, networks and clusters provide that service, so the agency can compete on equal footing with the “big boys.” The most common ones that seem to be great for some of our agency clients are Keystone, ISU, PIIB, United Valley, Iroquois Group, Insurance Office of America and SIAA. Clusters vary in size, style, capability and appearance. Every area of the client has different clusters to choose from. Generally speaking, the individual agency can maintain some, if not all their auton-

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Idea Exchange

The Competitive Advantage

The Importance of Proper Accounting in Insurance Agencies

By Chris Burand

ndependent insurance agencies’ accounting methods and contractual and legal requirements are unique, especially considering how lax enforcement is when all 50 states and the federal government have long-standing accounting rules that apply to 100 percent of all agencies. No exceptions exist. None. No such thing exists as a “non-trust” state (there are commingling and non-commingling states, but all states are trust states). Therefore, it does not matter what advice your certified public accountant (CPA) gives if he or she does not know the statutes and necessary accounting conventions specific to insurance agencies. The special characteristics of independent insurance agencies are also why the use of generic accounting software not specific to the insurance industry often creates large accounting problems. These systems do not work for agencies because they do not track what needs to be tracked. Some agency-specific software does a poor job, too. When you’re looking for a system, be sure to test the accounting portion before committing a large amount of dollars.

generally accepted accounting principles (GAAP) accounting rules. This affects agencies through the earned premium/earned commission angle. Agencies cannot really be cash or accrual in the normal sense, because their commissions are earned or not earned regardless of whether an agency is on a cash or accrual basis. Another factor is contingency income. This is always cash because it is too unpredictable to accrue, although it is 100 percent accrued months prior to payment. Don’t try to accrue contingency income. Keep it separate on the agency’s financials because it is not the same, especially for valuation purposes, as commission income. Bad debt is unique because even if an agency is on a cash basis, it can incur bad debt. Most other types of businesses using cash accounting cannot incur bad debt. Agencies can incur bad debt because they have to pay insurance companies/brokers even if the client does not pay them. If the client incurs earned premium but does not pay, the agency must pay (unless their contract permits them to turn the debt back to the company/broker and they do so in

time, but not all contracts permit this). If an agency is on a cash basis and the client does not pay, it would not incur bad debt if not for the fact that the debt is mostly premiums and those premiums are owned by the carrier. These premiums have been entrusted to the agency. When the agency fails to collect, the bad debt is really a third party’s money. The agency has de facto guaranteed that third party’s money, which is why an agency on cash accounting can still incur bad debt. Typical businesses are not entrusted with large sums of third party’s monies.

Trust Monies

These third-party monies — company premiums — are by far the biggest issue making a difference in agency accounting. These monies are trust monies, and all states require all agencies to hold trust monies in trust all the time, every day, even if it means not being able to drain the cash balance at year-end. The states’ and federal government’s statutes are largely criminal. Choosing to ignore or pleading ignorance is not an excuse. If your CPA

Unique Accounting for Agencies

The uniqueness is due to multiple factors. One factor is the relationship to insurance company accounting, which follows statutory accounting rules rather than 32 | INSURANCE JOURNAL | NATIONAL FEBRUARY 6, 2017

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does not know these facts, educate him or her as soon as possible. Furthermore, all company contracts automatically, or nearly so, take title to an agent’s book of business when an agency is out of trust. The trigger is when the agency is out of trust. The trigger is not when the agency misses a payment. Missing a payment is an alert but not usually the contractual trigger. This means an agency that is out of trust and wants to sell does not have clear title to its book of business, and therefore may not legally be able to sell. Here are two excerpts from common carrier contracts that prove this fact:

Contract #1: “All premiums are our

property and are held as trust funds by you. You have no interest in the premiums and, except for the amount of commissions authorized by us to be deducted by you, will make no deductions from or personal use of such funds nor retain any such premiums as an offset against any disputed claim you may have against us before paying the same to us. You will establish a premium trust account and maintain same. You may retain the interest income earned on such payments during the period between receipt of such

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payments from insureds and the time such payments are paid to us. You may disclose to your clients, our insureds, that you will retain such interest income. You may commingle these premiums with other premium trust funds in such account.”

Contract #2: “Premiums/Service Fees

Are Our Property. All premiums/service fees are our property and are held in trust by you; however, unless we notify you otherwise in writing, you may earn interest on the premium/service fees while held by you as provided for in this agreement. Except as provided for here in, you have no interest in the premium/ service fees and, except for the amount of commissions authorized by us to be deducted by you, will make no deductions from or personal use of such funds nor retain any such premium/service fees as an offset against any disputed claim you have against us before paying the same to us. You will not be relieved of your liability to pay premium/service fees except as provided for in …”

If an agency is out of trust when it goes to sell, a solution is not to make up the cash shortage by holding onto clients’ credits. I have seen agency owners do this. Regulators tend to frown upon this practice, and knowledgeable buyers won’t fall for it. Ignorant buyers might, but not buyers who know what they’re doing. Writing this in 2017 seems surreal given that so much business is direct bill (which has its own set of accounting issues mostly related to specific agency management systems’ limitations combined with inadequate knowledge by agency personnel of the accounting settings required). One reason we have this serious problem is many new and small agencies are not using insurance agency-specific accounting systems. Popular software packages are great, but not for insurance agency accounting. Some young agency owners are vocal in how poorly some agency management systems have been designed and how they are 20 years out of date. I do not disagree, but

the alternatives lack the proper accounting modules. If I had to choose between a system that is 20 years out of date but has a quality accounting module specific to insurance agencies and a modern system that has inadequate accounting, the accounting has to take precedence, because agencies have the fiduciary responsibility of accounting for third parties’ monies. Agencies can survive, even do well, with inadequate accounting for decades. But a reckoning day always arrives, and so will the day of accountability and consequence for bad accounting. That day is usually the day of a sale, whether a voluntary sale or upon a death your family has to deal with. A good business appraiser will not value the agency at full value, and a knowing buyer will not pay full value if they do not have confidence the seller has clear title to the assets being sold and/or if the agency is not in full compliance with the applicable laws. Period. Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868.

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Closing Quote Super Rich: Key Targets in Cyber World against cyber attacks, 42 percent said they would like help.

How Hackers Gain Access

By Lisa Lindsay

wenty years ago, we locked our doors and windows and had a good level of confidence that our homes were safe. If a burglar wanted in, he had to stake out a home and physically break into windows and doors to gain access. But times have changed, and technology has given cyber criminals the virtual key to our homes and every part of our lives with critical information right at their fingertips. What’s worse, they can access just about anything they want to right from their own devices. It’s disturbing, but as technology continues to develop, the risks grow exponentially, especially for the affluent. According to R.A. Prince and Associates, an authority in the private wealth sector, “more than 60 percent of the wealthy are highly concerned about their identity getting stolen.” Hartford Steam Boiler (HSB) Inspection and Insurance, in its own online surveys with more than 25,000 responses, found that with respect to protection

Hackers typically gain access into a smart home one of two ways. The traditional route is to trick a person into downloading a file onto his or her computer. Once the file is downloaded, the hacker runs a code that gives them access to the device and any information linked to it. The second way is for hackers to target the smart home device directly. When security cameras, smart TVs, thermostat apps, and other smart home technology was created, security was not considered top of mind. These devices and programs don’t have virus protection like a computer or tablet, making them easy targets. In fact, a professional hacker “broke” into the first smart thermostat in less than 15 seconds. While a thermostat may not seem very threatening, a temperature schedule can reveal a lot of personal information. A hacker can tell when people leave in the morning, get home in the afternoon and even go to sleep. Hackers can also use their skills to move from the thermostat, to the app on a target’s phone, and then into a home computer.

Cyber Exposures

When targeting the masses, cyber criminals send out thousands of emails hoping for a response, but their tactics change and become much more sophisticated when they

34 | INSURANCE JOURNAL | NATIONAL FEBRUARY 6, 2017

target the super-wealthy. Many companies are aware and have measures to protect their clients from traditional burglary and even identify theft, but nowadays hackers are focusing on cyber extortion. Hackers gain access to a device using the easiest pathway possible be it thermostat, home Wi-Fi with the default password or even through the smart television with no security program. From there, hackers jump from device to device until they can control the home computer. At this point, hackers will lock the user out of the device and threaten to do major damage to data and software unless they are paid a large sum of money. Some hackers will even do the damage first, using ransomware, and then demand money to fix the issue and restore the computer back to normal.

Insurance Response

Traditional insurance policies will protect a client from physical damage and even identity theft, but fall short

when it comes to cyber extortion and data damage. More than 20 percent of victims of these types of attacks spend between $1,000 and $5,000 to restore lost data on their devices. HSB is the first to offer personal cyber coverage and services for computer attacks, cyber extortion, online fraud and the breach of personal information involving smart phones, computers and connected home devices. Other insurers and cyber agencies offer other security measures, such as an audit and monitoring service of home networks, but the industry must do more to protect consumers. Insurers should educate their clients on how to protect themselves in a digital world and create policies that not only cover hardware, but software and data as well. Clients will remain vulnerable as technology continues to give cyber criminals the key to their lives. Lindsay is the executive director with Private Risk Management Association (PRMA). INSURANCEJOURNAL.COM

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