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Contents September 4, 2017 • Vol. 95 No. 17 • West
West W1 Official Blames Humans for Utah’s Wildfire Cost Doubling
W1 OFFICIAL BLAMES HUMANS FOR UTAH’S
WILDFIRE COST DOUBLING
National 10 P/C Insurers Lost $5.1 Billion on Underwriting in First Half of 2017: A.M. Best
W2 Appeals Court Rules L.A. Lakers Not Entitled to Coverage in TCPA Suit
12 Why and How P/C Insurance Carriers Should Work with Insurtechs
W6 Middle Market Growth Spells Opportunity for California’s Insurance Community
24 Special Report: Brokers Bucking Disruption – How Wholesalers Hang On Through Change
W8 Report: Written Premiums for California Comp Insurers to Be Flat Through 2017 W10 Nevada Gambling Regulators Don’t Want Marijuana in Casinos
28 Closer Look: Cyber Physical Cat Models Emerge
12
WHY AND HOW P/C INSURANCE CARRIERS SHOULD WORK WITH INSURTECHS
37 Spotlight: Climate Change May Pose Threat to Electric Grid
W10 Judge Won’t Allow Challenge to Seattle’s Rideshare Driver Union Law
Idea Exchange 40 Lessons Learned from Hurricane Andrew 42 Politicians in Robes: Why Judicial Activism Is a Threat 48 Claims: Whether to File a Lien or Intervene
Departments
52 The Competitive Advantage: Let’s Eradicate Incompetency
W4 People
54 Closing Quote: WSIA – Past, Present and Future
11 Declarations 11 Figures
37 REPORT: CLIMATE CHANGE MAY POSE
THREAT TO NATION’S ELECTRIC GRID
6 | INSURANCE JOURNAL | WEST SEPTEMBER 4, 2017
20 Business Moves 46 MyNewMarkets INSURANCEJOURNAL.COM
Put partners first.
We do. Collaboration with partners to take their business to the next level. Partnerships that span 35 years. nationwide.com/wedo
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Nationwide and the Nationwide N and Eagle are service marks of Nationwide Mutual Insurance Company. Š 2017 Nationwide
OPENING NOTE
Write the Editor: awells@insurancejournal.com
Harvey Hits Home
A 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
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 Tom Karol, Brady Kelley, Jonathon Kristine Honey (619) 584-1100 X132 Sayre, Susanne Sclafane, Simon khoney@insurancejournal.com Tuck, Stef Zielezienski Social Media Manager IJ ACADEMY OF INSURANCE Ly Short (619) 890-7735 Director Lshort@insurancejournal.com Patrick Wraight pwraight@ijacademy.com Classifieds, Jobs, Agencies Wanted/For Sale Associate Director Sr. Sales & Marketing Coordinator Barbara Whiffen Kelly De La Mora (800) 897-9965 X125 bwhiffen@ijacademy.com kdelamora@insurancejournal.com
ADMINISTRATION
Chief Financial Officer Mark Wooster mwooster@wellsmedia.com
MARKETING
DESIGN/WEB
Chief Technology Officer/ Chief Innovation Officer Joshua Carlson jcarlson@insurancejournal.com
Marketing Director Derence Walk dwalk@insurancejournal.com
V.P. of Design Guy Boccia gboccia@insurancejournal.com
Marketing Administrator Gayle Wells gwells@insurancejournal.com
Senior Web Developer Chris Thompson cthompson@insurancejournal.com
NEW MEDIA
Web Developer Jeff Cardrant jcardrant@insurancejournal.com
New Media Producer Bobbie Dodge bdodge@insurancejournal.com Videographer/Editor Ashley Waldrop awaldrop@insurancejournal.com
Web Developer Terrance Woest twoest@wellsmedia.com
CIRCULATION
Circulation Manager Elizabeth Duffy eduffy@wellsmedia.com
s a native Texan, my heart hurts for the thousands of people and business owners affected by Hurricane Harvey. Family, friends and business associates in the Lonestar State will be dealing with the aftermath for years to come. And so too will the insurance industry. Harvey’s cost could add-up to more than $24 billion when including the impact of relentless flooding on the labor force, power grid, transportation and other elements that support the region’s energy sector, Chuck Watson, a disaster modeler with Enki Research, told Bloomberg. That would place it among the top eight hurricanes to ever strike the United States. While it’s too early to accurately quantify the insured losses related to Hurricane Harvey, primary insurance carriers — as opposed to reinsurers — would retain the majority of losses, according to analysts at S&P Global Ratings. Regional and local primary insurers could be hurt most by the storm. According to an article by S&P, early estimates from catastrophe modeling firms indicate Harvey’s insured losses could total up to $6 billion, the bulk of which will be paid by primary insurers. Based on these early estimates, S&P said it believes that Harvey will likely be an “earnings event rather than a capital event” for property/casualty insurers and reinsurers. S&P analysts do not expect to take many negative ratings actions in these sectors, although there could be ones on a few outliers. “Primary insurers – as opposed to reinsurers – will bear the brunt of the covered losses from Hurricane Harvey,” said S&P analyst Taoufik Gharib. “However, the effect on individual companies will vary. While the large, national primary players have sufficient geographic and product diversification to absorb the losses, some of the regional and local players could face significant hits to their earnings and possibly their capital.” With the earnings of certain personal lines players already stretched, the hurricane-relatFOR QUESTIONS ed losses could wipe out their earnings for the REGARDING SUBSCRIPTIONS: Call: 855-814-9547 year, S&P noted. Outside the U.S., call 847-400-5951 or you may subscribe or change your address online at: S&P said it expects more detailed informainsurancejournal.com/subscribe tion about personal and commercial insurance Insurance Journal, The National Property/Casualty Magazine (ISSN: 00204714) is published semi-monthly by Wells Media losses to emerge in the days and weeks ahead. 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 It expects losses to be spread among many per special issue copy, $195 per year in the U.S., $295 per year all other countries. DISCLAIMER: While the information in this pubnational and regional carriers as well as their lication is derived from sources believed reliable and is subject to reasonable care in preparation and editing, it is not intended reinsurers. While estimates for total insured 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 losses are still preliminary, economic damages Media Group, Inc. All Rights Reserved. Content may not be photocopied, reproduced or redistributed without written permission. from Harvey will certainly overwhelm those Insurance Journal is a publication of Wells Media Group, Inc. POSTMASTER: Send change of address form to Insurance Journal, of insured losses. Circulation Department, PO Box 708, Northbrook, IL 60065-9967
‘Primary insurers – as opposed to reinsurers – will bear the brunt of the covered losses from Hurricane Harvey.’
Andrea Wells Editor-in-Chief
8 | INSURANCE JOURNAL | NATIONAL SEPTEMBER 4, 2017
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.
INSURANCEJOURNAL.COM
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At Lexington Insurance, our solutions have to be as original—and daring—as the ideas we insure. After all, for over 50 years we’ve taken on the risks that others won’t. Introducing insurance innovations that make the world safer for people. And for companies. To see our innovation timeline, go to www.lexingtoninsurance.com/50years
Lexington Insurance Company, an AIG company, is the leading U.S.-based surplus lines insurer. AIG is the marketing name for the worldwide property-casualty, life and retirement, and general insurance operations of American International Group, Inc. For additional information, please visit www.aig.com. Products and services are written or provided by subsidiaries or affiliates of American International Group, Inc. Not all products and services are available in every jurisdiction, and insurance coverage is governed by actual policy language. Certain products and services may be provided by independent third parties. Insurance products may be distributed through affiliated or unaffiliated entities. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds.
National
P/C Insurers Lost $5.1B on Underwriting in First Half of 2017
T
he U.S. property/casualty (P/C) industry recorded a net underwriting loss of $5.1 billion for the first six months of 2017, according to preliminary results, compared with a $2.0 billion loss in the same period a year ago. This financial review is detailed in a Best’s Special Report, titled, “A.M. Best First Look—2Qtr 2017 U.S. Property/ Casualty Financial Results,” and the data is derived from companies’ six-month 2017 interim statutory statements that were received as of Aug. 21, 2017, representing an estimated 96 percent of the total property/ casualty industry’s net premiums written. The report notes that the deterioration in underwriting losses comes as pressure on operating results continues to persist,
underscored by the positive underwriting income of $3.1 billion the industry recorded for the same period just two years ago. In first-half 2017, 6.1 percent increase in incurred losses and loss adjustment expenses and a 1.8 percent rise in underwriting expenses outpaced the 3.7 percent growth in net premiums earned. The reported combined ratio deteriorated by 0.9 points to 100.9 in first-half 2017 compared to the same period in 2016, representing the worst of the last five years’ first six-month periods. Excluding the $7.2 billion of favorable reserve development in the first half of 2017, the accident year combined ratio for the industry was 103.7. Net income for the period year over year fell by 29 percent to $15.4 billion
10 | INSURANCE JOURNAL | NATIONAL SEPTEMBER 4, 2017
compared to $21.6 billion in 2016, in part due to the impact of a retroactive reinsurance contract entered into in Feb. 2017 by American International Group, Inc. (AIG) and National Indemnity, in which National Indemnity agreed to provide $20 billion of aggregate cover on much of AIG’s commercial book, covering losses unpaid as of Jan. 1, 2016. Despite the significant decline in net income, industry surplus reached a record $703.4 billion at the end of June 2017, driven by a $14.0 billion increase in unrealized gains (certain Berkshire Hathaway companies were responsible for more than 75 percent of the increase), an increase in other surplus gains and a reduction in stockholder dividends. INSURANCEJOURNAL.COM
West
Official Blames Humans for Utah’s Wildfire Cost Doubling
U
tah State Forester Brian Cottam said “stupid human tricks” have led to the states’ wildfire bill being double what it usually is. Cottam says the cost to Utah for this year’s wildfires is projected to be $18 million, while the state’s yearly average is $9 million. Cottam presented INSURANCEJOURNAL.COM
the total to the Legislature’s Executive Appropriations Committee in late August, saying the fire that is believed to have been started by someone burning weeds in Brian Head cost $10 million alone. Cottam says 548 Utah wildfires this year were caused by humans, while 304
were started naturally. For comparison, Cottam says Nevada has had three human-caused wildfires this year. Cottam says 192 square miles of land have been burned this year by the human-caused fires. Copyright 2017 Associated Press.
SEPTEMBER 4, 2017 INSURANCE JOURNAL | WEST | W1
WEST | News & Markets
Appeals Court Rules L.A. Lakers Not Entitled to Coverage in TCPA Suit By Don Jergler
T
he U.S. Ninth Circuit court of Appeals affirmed in late August that the Los Angeles Lakers are not entitled to insurance coverage for class action allegations that the team violated the Telephone Consumer Protection Act. During a game the team evidently invited attendees to text a specific number and then sent a response text message using an automatic telephone dialing system in violation of the TCPA. A class action suit was filed and the team’s insurer, Federal Insurance Co., denied coverage and declined to defend the Lakers because the lawsuit was an invasion of privacy suit, which was specifically excluded from coverage. “The panel held that because a Telephone Consumer Protection Act claim is inherently an invasion of privacy claim, Federal Insurance Company correctly concluded
that the underlying Telephone Consumer Protection Act claims fell under the Policy’s broad exclusionary clause,” the decision from the court states. “Accordingly, Federal Insurance Company did not breach the insurance policy, or the implied covenant of good faith and fair dealing, under any cognizable legal theory, when it declined to defend against or cover the underlying complaint.” The decision should be good news for insurers, according to Karin Aldama, a partner at Perkins Coie. “The appeals court opinion is very favorable for insurers. It basically interprets the TCPA to be a privacy based claim,” said Aldama, who focuses on complex insurance recovery matters. However, it wasn’t a unanimous opinion. A dissenting judge in the split decision argued that because the underlying action sought recovery based on an alleged violation
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of the TCPA and not based on invasion of privacy, he would reverse a district court’s order dismissing the Lakers’ claims. Aldama said that TCPA suits are becoming more and more common, and they of course typically involved insureds. “I’ve seen a number of decisions come down recently that address TCPA issues,” she said. With this decision, policyholders are essentially relegated to seeking coverage under commercial general liability policies, according to Aldama. “But even there, courts have split on whether there is coverage, and some policies now specifically exempt TCPA claims,” Aldama said. Federal Insurance Co. is part of Chubb. Spokespersons for Chubb didn’t respond to requests for comment, nor did spokespersons for the Lakers organization. According to the Ninth Circuit decision, on Oct. 13, 2012, David M. Emanuel attended a Lakers basketball home game and observed a message on the scoreboard inviting attendees to send a text a message to a specific number. Emanuel sent a text message to the number hoping to get the message displayed on the scoreboard, but received the following text message: “Thnx! Txt as many times as u like. Not all msgs go on screen. Txt ALERTS for Lakers News alerts. Msg&Data Rates May Apply. Txt STOP to quit. Txt INFO for info.” On Nov. 20, 2012, Emanuel and others brought a class action lawsuit against the team. Emanuel alleged that the Lakers sent the response text message using an automatic telephone dialing system,
which is a violation of the TCPA. He asserted that the message was an invasion of his privacy. Emanuel brought two claims for relief: negligent violation of the TCPA, and knowing and/or willful violation of the TCPA. Following the filing of the suit, the Lakers asked Federal Insurance Co. to defend them in the suit. Federal insured the Lakers from Jan. 1, 2012, to Jan. 1, 2013, under a “ForeFront Portfolio” insurance policy, which contained a directors and officers liability coverage section that provided corporate liability coverage that would require Federal to pay for losses suffered by the Lakers “resulting from any Insured Organization Claim . . . for Wrongful Acts,” according to the Ninth Circuit decision. The policy defined “Wrongful Acts” as any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted by the team, and it contained numerous exclusions from corporate liability coverage, including that no coverage will be available for a claim arising from libel, slander, oral or written publication of defamatory or disparaging material, invasion of privacy, wrongful entry, eviction, false arrest, false imprisonment, malicious prosecution, malicious use or abuse of process, assault, battery or loss of consortium. The Lakers filed suit in Los Angeles Superior Court on Sept. 2, 2014. The suit was later moved to federal court, and the insurer filed a motion to dismiss, which was eventually granted. INSURANCEJOURNAL.COM
Beyond Security®
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Marty Hacala Fitness Enthusiast General Star President & CEO
“Rolling out of bed at 5am every morning to work out requires discipline. It’s my way of getting the very most out of my busy day. “At General Star, we strive to get the very most out of our wholesale broker relationships. As a member of the Berkshire Hathaway family of companies, our financial strength is unsurpassed. But it’s our disciplined approach to building and maintaining profitable partnerships with a select group of brokers that drives us. “Discipline: Whether sticking with an early morning exercise regimen or standing firm with a limited number of valuable wholesale broker relationships, it remains the cornerstone of our success.” To locate the General Star broker nearest you, visit our website at www.generalstar.com.
© 2015 General Star National Insurance Company is licensed in the District of Columbia, Puerto Rico and all states. General Star National Insurance Company has its principal place of business in Stamford, CT and operates under NAIC Number 0031-11967. Insurance is placed with General Star National Insurance Company by licensed producers. General Star Indemnity Company is an eligible surplus lines insurer in all states, the District of Columbia, Puerto Rico, and the Virgin Islands. It has the status as an unlicensed insurer in California and operates under NAIC Number 0031-37362. Insurance is placed with the General Star Indemnity Company by licensed producers and, for risk that qualify, by licensed surplus lines brokers. Atlanta 404 239 6777
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WEST | PEOPLE
John Sebastinelli
Dave Roy
Greenberg Traurig LLP has added insurance regulatory attorney John A. Sebastinelli as shareholder to its policy and insurance regulatory and transactions practices in the firm’s San Francisco, Calif., office. Sebastinelli’s practice focuses primarily on California insurance regulatory law matters. He represents more than 100 property/casualty and life and health insurers and other insurance-related organizations. Sebastinelli was previously at Michelman & Robinson as a partner for more than 11 years. Greenberg Traurig is an international law firm with roughly 2,000 attorneys serving clients from 38 offices. GoodWorks Insurance has named Bryan W. Russo regional president and head of its new office in Walnut Creek, Calif. Russo specializes in employee benefits plans for mid-sized and large employers. Russo was most recently a benefits broker in San Francisco. He previously served as a benefits consultant with Lincoln Financial and UNUM. Connecticut-based GoodWorks gives half of its profits to local charities. GoodWorks offers group medical, dental, vision and disability insurance, 401(k) plans and voluntary benefits.
USG has named Dave Roy a producer/broker in its
Irvine, Calif., office. Roy will continue building his book of business and agency retail network. Roy formerly held the title associate producer/ broker. He joined USG in 2016. He was previously a senior underwriting assistant at Bass Underwriters. USG has 21 locations and four subsidiaries. Brown & Riding has named Mike Boseman chief operating officer. Boseman is based out of the company’s Los Angeles, Calif., headquarters and will be responsible for strategic operations, including client and carrier development, enhancing information technology service offerings, and enforcing the company’s service standards and regulatory compliance. Boseman joined B&R’s casualty division in 2007 before transitioning to property broker. Boseman became vice president of operations in 2015, and senior vice president in 2016. Brown & Riding is a wholesaler and specialty insurance brokerage. Allianz Global Corporate & Specialty has named W4 | INSURANCE JOURNAL | WEST SEPTEMBER 4, 2017
Gary Mann North America head of errors and omissions. He is based in San Francisco, Calif. He reports to Paul Schiavone, North America regional head of financial lines. Mann was previously deputy regional head of professional indemnity. Mann has been with AGCS family since 2002, when he joined Fireman’s Fund Insurance Co. as director of industry development.
JLT Re has named Andrew Ferrier executive vice
president to lead the Western region with a focus on global, regional and MGA business. Ferrier is expected to join in September and will be based in JLT Re’s San Francisco office, Ferrier has more than 25 years of industry experience. He was a senior broker at Aon Benfield in San Francisco for the last 18 years. JLT Re is part of the Jardine Lloyd Thompson Group plc. Dan McElvany has been named head of reinsurance for Farmers Group Inc. He will begin Sept. 5 and will report to Scott Lindquist, chief financial officer of Farmers Group. McElvany has had a 21-year career in insurance, most recently with Swiss Re as a senior vice president. He was a vice president at Underwriters Re before that. Farmers Insurance and Farmers are trade names for a group of affiliated insurers providing insurance for automobiles, homes and small businesses and a wide range of other insurance and financial services and products. HUB International of California has named Amanda Martinez an employee benefits account executive and Timothy Conlon a commercial markets consultant and risk management advisor in the San Francisco, Calif., office. Martinez was previously with Alliant Insurance Services as an employee benefits account executive and Woodruff-Sawyer as an employee benefits senior account manager. Conlon was most recently a senior vice president at Lockton Companies Inc. He was with LeaseTerm Insurance Solutions as Western regional director and as a a vice president with All Risks Ltd before that. Chicago, Ill.-based HUB provides property/casualty, life and health, employee benefits, investment and risk management products and services. INSURANCEJOURNAL.COM
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WEST | News & Markets
Middle Market Growth Spells Opportunity for California’s Insurance Community By Don Jergler
T
he insurance community has at least two reasons to be interested in a new report on middle market companies, particularly those who are doing business in California. According to a report from American Express and Dun & Bradstreet released in late August, the middle market is becoming an increasingly important sector in the nation’s economy. The 179,782 companies that make up the middle market in the U.S. generate a combined $9.3 trillion in revenues, and employ roughly 52.7 million workers in total, the report shows. California alone has roughly 21,716 middle market companies — defined as between $10 million and $1 billion in annual revenues — which make up slightly less than 1 percent of all firms in the state, according to the report. That’s a small percentage in a state that’s loaded with $1 billion-plus corporations, but those middle market firms pack an economic punch. The report shows they contribute more than one-in-four dollars and employ more than a quarter of U.S. workers in the private sector. Overall, middle market firms were also responsible for more than half of the 51.8 million new jobs that have been created in the U.S. since 2011, according to the report. Geri Stengel, a research advisor for American Express, believes the insurance industry should pay close attention to the report. The industry over a six-year period studied ranked in the top 5 among all industries in growth rate at 109 percent, she said. And there’s a flipside to take note of. The
growth in the middle market equates to selling opportunities for those interested in focusing on that segment. “Given the fact that middle market firms are responsible for over half of the net new jobs, if I were an insurance provider, I would be going after those middle market firms,” Stengel said. She said the research shows that middle market firms weathered the recession better and recovered from the recession better than small and large businesses. According to the report, the overall number of firms declined between 2011 and 2017, but the number of middle market firms nearly doubled, as did revenues at those firms. “Those companies thrived, not just survived, the period after the recession,” Stengel said. The recession may be a reason for California’s 13th ranking in overall growth of middle market firms in the report. Rust Belt states, such as Michigan and Ohio, lost more middle market companies during recession than did California, so those states had a longer way to go toward recovery, Stengel said. Middle market growth in Michigan and Ohio experienced a triple-digit percentage increase since 2011, putting them in the report’s top 10 for highest growth. Texas, Indiana, Delaware, Illinois, Missouri, Louisiana, North Carolina, and Utah were the others in the top 10. “I think it’s a reflection
‘Given the fact that middle market firms are responsible for over half of the net new jobs, if I were an insurance provider, I would be going after those middle market firms.’
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of California’s economy and also California has a thriving small business economy,” Stengel said. “They’re still the No. 1 state in terms of overall number of middle market companies, so they are very important to the overall California economy.” California is among the 10 states where middle market firms have the most headquarters. Others are: Texas; New York; Florida; Illinois; Pennsylvania; Ohio; New Jersey; Michigan; and Georgia. Those are the largest states in terms of population and number of businesses, which may explain the high number of middle market firms. Nearly one-third of all middle market firms were in manufacturing and wholesale trade, while the growth rate among middle market firms in these two industries more than doubled in the last six years, the report shows. Middle market firms are also increasingly owned by women. The number of women-owned middle market firms rose more than 119 percent between 2011 and 2017, according to the report.
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WEST | News & Markets
Report: Written Premiums for California Comp Insurers to Be Flat Through 2017 By Don Jergler
W
ritten premiums from workers’ compensation insurers in California for the year are expected to be flat at $18.1 billion compared with 2016 thanks largely to rate decreases, according to analysts with the Workers’ Compensation Insurance Rating Bureau. Premiums doubled from 2009 to 2015 along with increasing rates and a growing economy. The rates continued to grow in 2016, but at slower than the double-digit rates of growth experienced in 2010 through 2014, according to the analysts. Slow to flat growth of written premiums are expected to continue throughout the year. “Our expectation for ’17 is that growth in the economy will tend to offset lower rates and we’re expecting premiums to come in pretty flat for 2017,” Dave Bellusci, executive vice president and chief actuary of the WCIRB, said on a conference call to discuss a new report out from the bureau. The WCIRB issued a report late last month that summarizes the state of the California workers’ comp system as of mid-2017. The report highlights the cost of workers’ comp based on premium paid by California employers and how those costs are distributed. The report also summarizes cost drivers in the system, such as the frequency and cost of claims, and provides a summary of insurer combined loss and expense ratios and returns on equity over time. While increases in workforce and average wages were the primary drivers of premium growth in 2015 and 2016, recent rate decreases have begun to reduce premium growth, according to the report. The report states that savings from the state’s workers’ comp reform law, Senate Bill 863, have driven down average insurer
rates 15 percent since the first half of 2015. It notes that the insurance commissioner has approved five reductions in advisory pure premium rates since 2015, totaling 27 percent from the Jan. 1, 2015, level. The WCIRB’s governing committee has voted to authorize the WCIRB to submit a Jan. 1, 2018, Advisory Pure Premium Rate Filing to the commissioner with rates that average $2.01 per $100 of payroll. That is 14.3 percent less than the industry average filed pure premium rate of $2.34 as of July 1. Current charged rates are lower on average than those charged in the late 1970s as long-term declining claim frequency has largely offset rising medical costs, according to the report. The report states that California continues to have the highest rates in the country due largely to the following: high frequency of permanent disability claims; high medical costs per claim; a more prolonged pattern of medical treatments; higher than average costs of handling claims and delivering benefits. The report draws on a biannual report issued by the Oregon Department of Consumer and Business Services. The last report showed California and New Jersey had the nation’s most expensive workers’ comp rates, while North
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Dakota had the lowest rates in the nation. California’s rates were 188 percent above the national median, according to that report. The state may fare better in the next report out of Oregon, as rates have been on the decline, Bellusci noted. “Since 2015, we’ve seen rates gradually decline,” he said. He said rates are nearly 15 percent below the rate during first half of 2015, which was $3.04 per $100 of payroll. They are now $2.58. That may improve California’s standing in the Oregon report, but Bellusci expects the state to continue to have the nation’s highest rate. “Even at that level (of decline), our expectation is that California is probably the highest cost state in the country,” he said. The report calls out claims frequency as among the most significant cost drivers in the system, and much of that pressure is coming from the Los Angeles County area, according to Tony Milano, vice president and chief actuary of the WCIRB, who was on the conference call with Bellusci to discuss the report. “Since 2010, the L.A. county area … has continued to increase in terms of claims frequency while other areas have been flat or declining,” Milano said.
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WEST | News & Markets
Nevada Gambling Regulators Don’t Want Marijuana in Casinos
N
evada’s gambling regulators are grappling with how to deal with the state’s latest legal vice — recreational marijuana — and they’ve made it clear that pot doesn’t belong in casinos. In the first of a series of policy discussions, the Nevada Gaming Commission reiterated that as long as marijuana consumption and possession is viewed as a felony by federal authorities, it will have no place in Nevada casinos. Commissioners said the reputation of the gaming industry is at stake and there needs to be clear separation. “On one hand you have the gaming industry and on the other hand you have the marijuana industry. … The two shall not meet,” Commission Chairman Tony Alamo said. Commissioners did, however, discuss what Alamo said would be the least con-
troversial aspects of potentially bringing marijuana into casino resorts — third-party and business associations between licensees and individuals and companies involved in the marijuana industry. No votes were taken, but commissioners unanimously concluded that licensees should be discouraged from hosting shows or conferences that promote the use, sale, cultivation or distribution of marijuana. Licensees also shouldn’t maintain business relationships with marijuana companies. Commissioners also said licensees should not receive financing from or provide financing to anyone that sells, cultivates or distributes marijuana. In that discussion, commissioners agreed that there is not enough separation in spousal relationships for a gaming company to be allowed to conduct business with the wife or husband of anyone involved in the marijuana business. Copyright 2017 Associated Press.
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Judge Won’t Allow Challenge to Seattle’s Rideshare Driver Union Law
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federal judge has rejected a challenge to Seattle’s first-in-the-nation law allowing drivers of ridesharing companies such as Uber and Lyft to unionize over pay and working conditions. U.S. District Judge Robert Lasnik in late August rejected a challenge brought by 11 drivers, saying that their claims against the law were premature or too speculative. He earlier rejected a challenge brought by the U.S. Chamber of Commerce on behalf of the companies. The organization is appealing that decision. The National Right to Work Legal Defense Foundation, which represents the drivers, said that it too would appeal. But the judge declined to keep Seattle’s law on hold pending the appeals, clearing the way for the Teamsters to try to begin unionizing the drivers unless the 9th U.S. Circuit Court of Appeals says otherwise. The 2015 law requires companies that hire or contract with drivers of taxis, for-hire transportation companies and app-based services to bargain with them if a majority show they want to be represented. The companies say a collective bargaining agreement could undermine the flexibility of how often and for how long drivers work, some of the things that make the companies attractive to drivers and passengers alike. But unionization supporters say it could help fix practices that have included unjust terminations and deceptive payment structures. The drivers who sued to challenge the law argued that it conflicted with federal labor law as well as their right to free association. Lasnik disagreed, suggesting that any collective bargaining agreement could comport with labor law and the Constitution, and that their claims were thus premature. Copyright 2017 Associated Press.
4/5/16 3:05 PM
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Figures
Declarations
8
Campus Guns
The number of traffic fatalities at the 77th annual Sturgis Motorcycle Rally this year in Sturgis, S.D. That’s up from last year’s the three traffic fatalities. This year, there were also 68 injury crashes, 18 more than last year.
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“College campuses as gun-free zones present an environment where murderers, rapists and other criminals may commit crimes without fear of being harmed by their victims.”
— An NRA lobbyist who supported a new Tennessee law to allow state college faculty members to carry guns on campus, with certain restrictions.
Blasted Rocks
“I’m nervous. … Who’s to know whether you’ll come walking out the door one day and get blasted, or have a rock come through the window?” — David Kreiselmeier, a Southern Minnesota resident whose
house was hit by a large rock after a quarry blast from a nearby mining operation sent a barrage of rocks through his neighborhood. The quarry is owned by Jordan Sands, which produces frack sand for oil and gas extraction.
$11 MILLION
Oklahoma’s Earthquakes
“Although they were correct in saying that small earthquakes seemed to be decreasing, the moderate earthquakes are not decreasing. The problem has not been resolved to where we can stop worrying about it.” — Emily Brodsky, professor of Earth and planetary sciences
at UC Santa Cruz, and coauthor of a study recently published in Science Advances that found that smaller earthquakes have been reduced but not moderate ones.
Black Market Reversion The percentage that vehicle burglaries have dropped in Montgomery, Ala., since last year thanks to the cities “Remove it, Lock it, or Lose it” campaign. Police say responsiveness from the public to pay attention, lock their vehicles, and remove their valuables from them, has helped combat the rise in reports of vehicle burglaries that was taking place several years ago.
$4.9 MILLION That’s how much the U.S. Geological Survey has given to six universities and a nonprofit to help advance an early warning system for earthquakes along the West Coast. The federal agency says the ShakeAlert system could give people seconds or up to a minute of warning before strong shaking begins. on.
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The approximate amount that the city of Dallas has spent in the past five years settling more than 20 lawsuits against police, a huge increase compared to the previous five years. The city spent less than $400,000 to settle fewer than 10 cases from 2006 to 2011. Nearby, Arlington spent less than $2 million settling lawsuits involving excessive police force claims in the past five years; Fort Worth paid $12,000 in law enforcement liability claims during the period.
$207,000 The amount in proposed penalties that a Massachusetts behavioral health facility faces from the U.S. Department of Labor’s OSHA. On June 29, 2017, OSHA issued UHS of Westwood Pembroke Inc. – dba Lowell Treatment Center – a notification of failure to abate a violation involving workplace violence.
“Without the ability to license, marijuana distributors to continue the flow of product to the retail store, a high likelihood exists that consumers will revert to the black market.” Deonne Contine, executive director of Nevada’s tax department, explained why Nevada marijuana regulators decided to start issuing pot distribution licenses to businesses other than liquor wholesalers to keep up with overwhelming demand since legal recreational sales began July 1.
Hurricane Season
“As we enter the height of hurricane season it’s important for everyone to know who issues evacuation orders in their community, heed the warnings, update their insurance and have a preparedness plan.” — Brock Long, administrator for the Federal Emergency
Management Agency. Peak hurricane season has arrived in the Atlantic and recent forecasts have upgraded the number of potential storms that could impact the Southeast coast.
Pregnant Workers
“No expecting mother should have to choose between a healthy pregnancy and a paycheck.”
— Senate President Stan Rosenberg (D-Amherst) said in a press
release issued by the Commonwealth of Massachusetts press office announcing that Massachusetts Governor Charlie Baker in July signed legislation, An Act Establishing the Massachusetts Pregnant Workers Fairness Act, that will prohibit workplace and hiring discrimination related to pregnancy and nursing, as well as require employers to provide reasonable accommodations for expectant and new mothers in the workplace.
SEPTEMBER 4, 2017 INSURANCE JOURNAL | NATIONAL | 11
NATIONAL | Closer Look | Insurtech
Why and How P/C Insurance Carriers Should Work with Insurtechs By Andrew Simpson
S
tartup insurtechs need partnerships more than they need money from insurance carriers, according to one leading venture capitalist actively funding insurance technology firms. Venture firm XL Innovate’s Martha Notaras told Super Regional property/casualty insurer executives looking to get involved in the insurtech movement that there is plenty of venture capital available already for insurtechs, noting that they got $2 billion in 2016. “I would really focus on partnering. Part of the reason is, investment is a different set of decisions. There are some very large funds available. I don’t think that’s what the insurtech ecosystem needs most from you,” Notaras advised Super Regional executives at the 2017 Super Regional P/C Insurer Conference in July.
“To me it feels like that’s a lot harder to defend to your board of directors but when you go down to really becoming a partner to a startup, which you can do on a case‑by‑case basis — you find an interesting startup, they’re solving a problem that is a problem that you have.” Notaras was one of the insurtech panelists at the conference that was sponsored by actuarial services firm Demotech Inc. and Wells Media Group’s Insurance Journal and Carrier Management. According to Notaras, startups are beginning to gain some traction and the interest from venture capitalists (VCs) shows no sign of waning. “There’s VC money from traditional VCs. There are very large funds from insurers and reinsurers. There’s a lot of money still going in,” she said “There has started to be some exits. When you see some
12 | INSURANCE JOURNAL | NATIONAL SEPTEMBER 4, 2017
exits, that is an indication that there will be a continuation of money going in, so I don’t see any slowdown from the front end, in terms of the investments.”
Open to Partnerships
Notaras, who in 1998 led the DMGT acquisition of RMS, which some consider the first insurtech, has invested in Lemonade, Cape Analytics and Notion among other startups at XL Innovate. She suggested that insurtechs are open to partnering, having come to the realization that they don’t know everything about the industry they are entering. “A year ago, the insurtechs were saying, ‘Well, maybe I can go this on my own, and I’m going to be like the fintechs that launched 10 years ago, where they told us that all banks were idiots and they weren’t going to exist anymore,” she recalled. But she says the new crop of fintechs is singing a different tune that goes, “‘Hey, I can cooperate with banks. This is cool.’ That’s what we’re seeing with the insurtechs. The ecosystem is turning out to be a lot
more intertwined than what we expected.” Robert Mozeika, Munich Re’s Innovation Executive, also an early Lemonade investor, said carriers should recognize that there are many more startups than the ones that get media attention and not all are out to replace carriers. According to Mozeika, it’s unfortunate that attention has focused on a few direct models like Lemonade while there are hundreds of other types of insurtech companies out there looking to help the industry. “They’re not looking to be a carrier. They don’t have paper. They really want to come in and it’s a great opportunity for a partner,” Mozeika said. “There are many, many more of those type of companies to work with, rather than one or two that seem to be getting all the press.” Mozeika got Munich Re involved in investing in insurtechs including Trov, Lemonade, Root and Slice. He now works with the reinsurance division to match up Munich Re’s client needs with startups in technology,
continued on page 14 INSURANCEJOURNAL.COM
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NATIONAL | Closer Look | Insurtech continued from page 12 and helps them integrate the insurtech into their operations. For pioneer Mozeika, insurtech is more about solving real problems than it is about disruption. “Even my board of managers, when I was out in Silicon Valley said, ‘Bob, try to find the truly disruptive things.’ To be quite honest …I don’t believe in just total disruption. If anything, disruption is little incremental things that change over time. Then you look back over the five years, whatever, it morphed into something totally disruptive,” he said. “You have to work on those little things that improve your process, improve the connection to the customer, make it easier, make it more accessible, make it better to understand and transparent.” Mozeika told the carriers it’s not too late for them to get involved but that they should start sooner rather than later. “That’s part of the reason why I’m in my new position, is to help our clients get moving in this innovation market and hopefully we can find something we can co‑create, co‑collaborate together with our clients. That’s why we specifically made this. It doesn’t take much to get started but you really have to get yourself into this.” He said joining an accelerator is also an option. His firm is part of the Plug and Play Tech Center accelerator in Silicon Valley.
Start with Data
The panelists offered some advice for partnering with insurtechs, pointing to data as a good place to start coming to terms with the role of new technologies.
“Data is the new oil in this world right now and you need to start accumulating your data,” Mozeika said. “One of the things I see, many carriers, they don’t even have these new forms of data yet. You’ve got to build a history of these datasets.”
‘They’re not looking to be a carrier. They don’t have paper. They really want to come in and it’s a great opportunity for a partner.’ Notaras cautioned that sometimes a discussion around data between traditional carriers and new technologists can get bogged down on what data a carrier is willing to or capable of sharing. “What we’ve often seen is that startups will come and say, ‘What I need is your claims data,’ and there’s a huge deep breath. But very often what they need is something quite pinpointed within that and there is often a common ground that you can reach.” That can be one of the language issues that bear watching in partnerships, she said. “There are multiple ways in which people speak different languages. Absolutely one of the biggest ones is the concept of time,” she said. “I can’t overemphasis this. For an entrepreneur, if I call you and I want to talk to you, I meant maybe we could talk tomorrow if you’re not available today. Within the insurance world it definitely feels to me like, ‘So how is three weeks out next Tuesday? Does that kind of work for
14 | INSURANCE JOURNAL | NATIONAL SEPTEMBER 4, 2017
you?’ I think that has been a real mismatch.” It also helps for the carrier to understand where the startup really is in its development. “Not what they tell you but where are they in terms of their problem definition?” Notaras said. “You can help them with the problem definition because they are very often super smart people, great experience in technology, not very much knowledge about insurance. So they really do need a depth of understanding about what’s the problem?” Notaras agreed with Mozeika that data is key but she maintained that some of the upstarts in this area are indeed disruptive. She cited two of her portfolio companies, property data firm Cape Analytic and home telematics firm Notion, both of which provide insurers with better underwriting data. Cape Analytics is disruptive in how it derives its data— through machine learning from imagery. “You tell me that’s not disruptive? That feels pretty disruptive to me because it’s absolutely a new channel, but it is the same type of information you’ve used before and, amazingly enough, when you get better property data, you can make a better analysis of your risk management,” she said. Notion offers insurers information they have not had before. Using telematics it captures activities in the home and lets insurers look inside the home. “When you are a homeowner insurer, you have no idea. From the day that I sign you up, all I know is where you live and, depending on the state, your credit rating, very little else.
Now there are a whole bunch of things that I can know and I can understand whether this person is an appropriate risk and a risk I might put in a different bucket,” Notaras added.
Need to Know Insurance
Insurtechs want the industry’s help to improve their technology, agreed Laird Rixford, president of agency technology firm Insurance Technology Corp., or ITC. “A lot of these technology startups, they don’t understand insurance,” he said. He cited an example of a startup looking at homeowners’ insurance. “[T]hey were like, ‘We can do it just off the address.’ I’m like, ‘No you can’t.’ Dogs, pools, trampolines — things you can go buy tomorrow and install — drastically affect rate,” he said. “They’re deer in the headlights for a moment and I’m like, ‘There are ways to get around this,’ telling them about services that view Google Maps and find pools and as well as supplementary data that is available from companies like CoreLogic. He also said carriers can educate startups on how insurance laws and regulations fit in.
Opportunity or Threat?
Panelists agreed that insurtech is mostly an opportunity rather than threat for agents. “Consumers are demanding a new way to purchase their insurance. There are new ways to do things. That’s what really I see as insurtech as really doing. The real disruption is the disruption of your lead channel. Traditionally, agencies have been the lead channel for
continued on page 16
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NATIONAL | Closer Look | Insurtech continued from page 14
carriers, agreed? That’s where a lot of carriers get their customers, is from the agents,” Rixford said. “Now these alternative channels are creating a way for those leads to be distributed, either to new ways of selling insurance, or to carriers who have chosen to invest in insurtech, or invest in their future to make sure they’re meeting the needs of when and where a consumer wants to reach them.” Brian Cohen, an operating partner at Altamont Capital, was bullish on what insurtech means for agents and brokers: “What I’d say is insurtech for the agent and for the agent‑based distribution channel, this is the golden age,” said Cohen, who is also chairman of an MGA, Arden Insurance, sits on the board of Access Insurance Co. and previously served as CEO of Pacific Specialty. “There are things that are coming down the pike that are already here, that are going to allow an agent to be able to do everything that they thought that they couldn’t do before. That is be able to engage with their local customer immediately.” Cohen cited the example of a startup named Engage that simplifies putting online buyers in touch with an agent
right from the results of their Google, Bing or other search. “What Engage does is, if somebody goes online and they search insurance, auto insurance or commercial insurance, an agent’s face pops up and, if the customer clicks on that agent’s face, they’re immediately connected to that agent,” he said. “It’s been done in the travel business, and it’s being done right now starting in the insurance space.” Mozeika noted that the early hype around insurtech was that insurers had to be “digital and direct” and the agent was in the way. But that’s not the way it is turning out. “What clearly you saw over the last two years is that the agent’s not going really away anytime soon at all, but you still need to be digital. You still need that better access. If agents want to work with something digital, easier, or less questions, whatever makes their job easier, it’s still going to be worthwhile today,” Mozeika said. Rixford said much of the insurtech that’s available to carriers is also available to agencies and maintained that agencies that adopt new technologies grow because they have more time to sell. The ITC executive referred to his own company experience
16 | INSURANCE JOURNAL | NATIONAL SEPTEMBER 4, 2017
with Google, which dropped its insurance sales venture. “One of the things we really pushed for them is that we wanted them to have agents in the mix because single carriers don’t have the pivot. Whenever they’re doing self‑fulfillment, they can’t pivot to a different product, can’t pivot, but agents can,” Rixford said. “Google went down, and when they walked away from, and one thing they said, ‘We looked at wrong,’ is that having the ability to pivot and have multiple markets and choice for them to sell insurance was really a key benefit of it. I was going, ‘Well, that’s what agents are.’” While insurtech may not be a threat to agents, what it means for carrier employees is less clear. It depends on the line of insurance, according to Mozeika. “Some of the simpler commodity type, everyone’s looking at auto‑underwriting,” he told the carriers. “But I believe that more complex risks, commercial properties, once you get into that, I think a lot of this is only going to help your employees.” He said carriers are always going to need underwriters but their skill set may need to change. “Think about it, in today’s day and age, it’s not just insurtech that’s changing, our industry — our world is changing. There are new forms of data out there all over the place. If you’re not looking to get that new data in through like Cape Analytics and so on, you’re going to be falling behind the eight ball. But you’re still going to need the underwriting skill there at the
end of the day.” Cohen agreed underwriters will still be needed. “I don’t think the human underwriter’s going away. I think the tools the human underwriter is going to use are going to be based on AI [artificial intelligence] and machine learning, but they’re going to have a different role. The different role is going to be, they’re going to be an arbiter of last resort. They’re not going to be doing the front-end underwriting for risks that are fairly easy to be able to be done,” according to Cohen. “Humans have a way of screwing things up,” Rixford said. “We’re forever changing. We’re changing at a rapid pace. You’ve got to keep up.”
Future Insurers
In the end, they see insurtech making insurers better in the future. Mozeika sees insurtechs helping insurers develop new products to address new risks. “There’s still a lot more to go in product development. I think partly, with all the new data sets available. Our world is changing,” he said. “Our risk is actually going to change and you have to be at that forefront on that change.” Notaras sees insurers of the future becoming focused more on risk reduction. “I would say actually one of the things is they’ll become better insurance companies, where they literally are identifying risks that can be taken out of the system, sharing with the insured knowledge about how to reduce that risk. That could end with lower premiums in certain areas, and yet better loss ratios,” she said. INSURANCEJOURNAL.COM
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NATIONAL | Business Moves
Widerman & Company, Smith Brothers Insurance
Widerman & Company Insurance of Haddonfield, N.J., has merged its business with Smith Brothers Insurance of Glastonbury, Conn. This combination allows Widerman & Company the opportunity to maintain its local presence while leveraging the resources of Smith Brothers, according to a joint press release. Widerman has 20 employees. Smith Brothers has more than 150 employees and offices in Connecticut and Massachusetts. Following the merger, Widerman & Company will continue to operate at its current location in New Jersey and under the name Widerman & Company as an affiliate of Smith Brothers Insurance. Bob Widerman will stay in client service, business development and expansion through Widerman & Company’s merger and acquisition strategy. Shawn Knechtel will be responsible for the executive leadership and strategic direction of growth as head of the New Jersey region. Widerman
& Company’s service team will remain in its present location in New Jersey.
Heritage Insurance Holdings, NBIC Holdings Inc.
Heritage Insurance Holdings Inc., a Clearwater, Fla.headquartered property/casualty insurance holding company, has signed a definitive agreement to acquire NBIC Holdings Inc., the parent company of Narragansett Bay Insurance Company (NBIC). NBIC is a Rhode Island-headquartered specialty underwriter of personal residential insurance products and services in states along the Eastern seaboard. The purchase price for the acquisition will be $250 million, subject to post-closing adjustments. The acquisition will be financed with $210 million in cash and $40 million of Heritage’s common stock. The cash component of the consideration will be financed, in part, with cash on hand, including proceeds from Heritage’s senior secured notes issued in December 2016. Heritage also intends to under-
20 | INSURANCE JOURNAL | NATIONAL SEPTEMBER 4, 2017
take, subject to market and other conditions, an offering of convertible senior notes coupled with a concurrent share repurchase. The transaction has been unanimously approved by the boards of directors of both Heritage and NBIC. The parties expect the transaction to close as soon as the fourth quarter of 2017, subject to customary closing conditions including required regulatory approvals. “Completing this acquisition is the next critical step in executing our geographic diversification strategy,” said Heritage Chairman and CEO Bruce Lucas in a company press release. “Post-transaction, we expect approximately 45 percent of our revenue to be generated outside of Florida, and Florida Tri-County personal lines policies will represent only approximately 7 percent of all total insured value, further hedging against assignment of benefits volatility.”
Seeman Holtz P&C, Primera Capital, Agency Acquisitions
Boca Raton, Fla.-based Seeman Holtz Property & Casualty Inc. (Seeman Holtz P&C) has acquired Primera Capital, headquartered in Dallas, Texas. Primera’s Anthony Davis and team have been offering both auto insurance and tax services to the Dallas area for over seven years. Seeman Holtz P&C also acquired Agency Acquisitions LLC, headquartered in Arlington, Texas. Agency Acquisitions specializes in trucking insurance. Seeman Holtz said the acquisition will add a niche service to its port-
folio and broaden its client reach throughout Texas. With the addition of Agency Acquisitions, Seeman Holtz closed its 12th agency acquisition for 2017. The Seeman Holtz family of companies provides comprehensive financial and insurance advice to clients across the country.
U.S. Risk, B&H Risk Services
Property/casualty insurance wholesaler U.S. Risk Insurance Group LLC has acquired B&H Risk Services Inc., a Dallas, Texas-based managing general agency and wholesale broker. In the company’s announcement U.S. Risk CEO Randall Goss said “B&H has built a solid niche and proven their value to both their customers and their carriers for hard-to-write classes of business. This transaction is a further demonstration of our strategic focus on acquiring companies whose experience, resources and values complement our own.” U.S. Risk Insurance Group operates 16 domestic and international branches.
RightSure Insurance, Arizona Economy Insurance
RightSure Insurance Group has acquired Tucson, Ariz.based Arizona Economy Insurance. Terms of the deal were not disclosed. Arizona Economy Insurance is an independent insurance agency. Tucson, Ariz.-based RightSure is licensed to sell personal, commercial and life insurance products in 42 states. Arizona Economy is the firm’s 13th book of business acquisition. INSURANCEJOURNAL.COM
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NATIONAL | Special Report | Wholesale
By Andrea Wells
A
s long as there is an insurance industry, wholesaler brokers believe they will have a role to play. “We will continue to be an important sector – a small sector – but still a very important sector of how insurance is 24 | INSURANCE JOURNAL | NATIONAL SEPTEMBER 4, 2017
transacted worldwide,” according to Neil Kessler, chief operating officer for CRC Group. Today’s wholesale brokers expect to continue to thrive despite trends of more carriers including Berkshire Hathaway, Travelers and Allstate going direct to customers in small commercial lines and insurtech startups such as Lemonade,
Trov, Slice Labs and Next Insurance, also looking to disrupt, or at least compete, in commercial lines. Also, today’s excess and surplus (E&S) specialists, many of them having grown due to mergers, take strength from knowing they have thrived in the face of what has been the biggest challenge to their INSURANCEJOURNAL.COM
business already, namely the consolidation by retail agents of the number of wholesalers they use. Wholesale brokers say they are positioned to continue to grow in the future. For a second consecutive year, underwriters of surplus lines in the United States generated modest growth in direct premium of 2.8 percent in 2016, up from 2.5 percent in 2015, according to A.M. Best’s 2017 review of the industry. “We are having our best year ever,” said Jeffrey J. Rodriguez, CEO of Los Angeles-based Brown & Riding Insurance Service, one of nation’s largest wholesalers, where organic growth is up 19 percent this year. “If you look at the amount of business that is being transacted in the wholesale industry right now – wholesalers have grown substantially over the past decade,” he said. “The future for MGAs (managing general agencies) and wholesalers as distribution mechanisms is very bright.” Alan Jay Kaufman, chairman, president and CEO, H.W. Kaufman Financial Group/ Burns & Wilcox, notes that the prolonged soft market has not slowed his firm’s growth. “We are growing organically despite the market conditions,” said Kaufman, who maintains the wholesale business is now “robust and healthy” and will continue to be. “I’m very confident there will always be a place for wholesalers in the market,” Kaufman said. “There’s always room for expertise. Wholesalers bring value to the table through expertise, ease of doing business, speed to marINSURANCEJOURNAL.COM
ket, and relationships. These are the things that are relevant today and will be as relevant 20 years from now. That’s what we are driven to do.” CRC’s Kessler is also “very bullish” about the future of the wholesale broker because the need for expertise is stronger than ever. “We’ve really seen dramatic growth in the wholesale distribution channel over the last decade,” Kessler said. “Every segment of the channel has grown, whether it’s the large open market traditional stuff, or the MGA stuff, or the program stuff. And from where I sit, I don’t really see that demand slowing down." Wholesaler brokers can help to provide retailers with access to specialty lines insurance products and add value by providing technical expertise on difficult or complex risks. Consolidation has brought change as well, according to Kessler and others. “We see a lot of consolidation of firms in our space, which has led to larger and stronger firms,” he said. The consolidation in the space has allowed the wholesale sector to focus on improving the customer experience. “The customer is expecting easier, faster and more efficient ways to solve problems,” Kessler added. Steven DeCarlo, chief executive officer of giant AmWINS, thinks wholesalers are in a position to provide retail agencies with more expertise and technology. “Because the reality is as an aggregator or wholesaler, we just have vast resources to solve retail agency problems and help them deliver solutions
for their clients,” De Carlo said. Kessler agrees. “I think we’re now in a spot where we, as an industry, can make bigger investments in our future, technology and otherwise,” he said. “You’re starting to see firms do more of that.”
Not Immune to Disruption
While times are good, the wholesale industry is not immune to disruption. As retail agents themselves adopt more technology, and as insurtech retail agencies become more important, wholesalers must keep pace. “In that regard, I really think that the some of the changes (consolidation of wholesale firms) that have happened in the wholesale industry over the past decade have really left us in a better place,” Kessler said. Kessler sees opportunities for wholesalers with insurtech firms, as well. “It’s no secret that there’s a lot of investment in the insurtech space right now, looking to disrupt insurance distribution but most have been focused on the retail distribution space,” he said. “I’ve personally spent time over the last year or two with many new insurtech ventures, and each one that I’ve spent time with so far has really ended up with a need for a wholesale insurance broker.” Insurtechs need the help of a wholesaler when it comes to placing tough risks. “They get to the end of the market, hard to place, and need a specialty expert, ultimately the help of a wholesale broker. We’ve seen some of these insurtech startups become clients of ours.” While insurtech startups have not targeted the whole-
sale business, Kessler warns that the industry shouldn’t become complacent. “I don’t think that should give wholesalers a false sense of comfort," he said. "We really need to be innovating and pushing ourselves to deliver a better client experience.” Kessler thinks smart wholesalers today are looking at things like access to markets and delivering better service. “Smart firms are really pushing to focus on adding value to the transaction and finding ways to make their retail clients better, and ultimately delivering a better product to the insured.” AmWINS’s DeCarlo is not afraid of competition, whether it be from insurtechs or carriers going direct to small businesses. “Bring it on,” he told the audience at the S&P Global Ratings Insurance Conference in June. Thinking back to the launch of AmWINS over a decade ago, DeCarlo said he heard from many folks, ‘You will be disintermediated.’” His response: “‘Maybe.’ Here we are [today] with a billion dollars in revenue, up from when we started when we had $20 million in revenue.” To avoid disintermediation, a broker has to bring value, he said. “I sure as hell am not worried about insurtech firms disintermediating what we do for a living. They’d better be good at their jobs because we are damn good at sales,” he continued. Insurtechs may be good at technology, but DeCarlo says wholesalers are good at everything else. “I’m a believer in retail cli-
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SEPTEMBER 4, 2017 INSURANCE JOURNAL | NATIONAL | 25
NATIONAL | Special Report | Wholesale continued from page 25 ents. I’m a believer in local relationships. I’m a believer in people, and I’m a believer that technology can change the way we do business.” The people trying to disrupt the insurance industry by what DeCarlo refers to as “trying to sell insurance to the 10 p.m. guy in his underwear” doesn’t bother him one bit. “They want to sell insurance to that guy and I wish them luck. I’m not focused on that. I exist to help retail brokers solve their clients’ problems,” he said. “When I hear about disruption to that 10 p.m. underwear guy, I’m cheering for them. I don’t want to be involved. I’m sure there’s a market there. It’s just not a big market.” Insurtech will have an impact on the P/C market, but Tim Turner, chairman and CEO of R-T Specialty, doesn’t see it changing most of the breadand-butter wholesale industry business. “A relatively small percentage of the $70 billion in premium that goes into the E&S market will be vulnerable to electronic trading,” such as insurtech, Turner said. It’s the nature of E&S accounts that insulate most of the business from insurtech, he said. “Business goes into the E&S market because it needs some kind of special attention; it’s not easy to automate that business. It’s nonadmitted business so there are manuscripted endorsements even on the smallest accounts. Someone has to be looking at
it, applying professional expertise and handcrafting endorsements.” What will be disrupted by insurtech providers is the small business sector or accounts under $25,000 in premium, Turner said. “Insurtech will affect small commercial P/C in the retail world; there’s no question,” he added. “It will allow small businesses to buy P/C solutions in a high-speed, direct fashion and that will be a disruptor. “When you go north of $25,000, the business is usually more sophisticated, which needs more broking and handcrafting which makes it very difficult to be electronically traded. That’s where the disruption will stop, for the most part.” Insurtechs could, however, have an impact in one segment: the MGA-binding authority world. “On the wholesale side, generally speaking, business under $25,000 and part of the binding authority world, which is a big part of E&S, will be disrupted. “Currently, the
binding business is all manually done but technology is coming at a high rate of speed. Wholesalers , including R-T Specialty, are spending a lot of money on technology to trade that business electronically, and it will
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have an impact, but just with small business, not the larger, complicated business.” Even so, Turner isn’t worried about technology disruption when it comes to E&S. “All this about high-speed technology disrupting the nonadmitted marketplace, I think is a little overstated,” he said. “I think it will have an impact. I’m not denying that there will be billions of dollars that will go through that channel, but I still believe you have to have manual operators looking at these policies.” Accounts that generate over $25,000 in premium have to be brokered and marketed to several insurance companies. “You have to create market competition and there’s a special expertise that has to be applied to make sure that coverage forms and terms and conditions are adequate and satisfy the exposure. That’s not going to be done by a machine in my opinion.”
Biggest Disruptor
The biggest disruption to the wholesale industry has already happened, according to Turner. “That’s the aggregation and consolidation of the use of intermediaries by the retail customer,” according to Turner. “What caused this aggregation was the availability of data and analytics as it relates to the cost of inefficiency – that’s the driver that caused this massive roll up and consolidation of wholesalers by the retail community starting with the global brokers. …" The big global retail brokers pared their list of hundreds of intermediaries/wholesale partners down to just three or four
and that changed the industry forever, he said. “The size and the scale of wholesalers are at an historical high” compared to just five to 10 years ago, he said, maintaining that this disrupted the E&S world. The reason: the buying habits of retail brokers have changed, Turner said. “They are buying more from fewer intermediaries because they know how costly it is to buy from hundreds of intermediaries. They don’t need to buy from hundreds anymore. It’s kind of the Walmart theory; now you can go to one place instead of many and they have every product and lots of services. It’s a bigger store. So that philosophy has hit our industry and is well on its way to creating the size and breath of these (wholesale) stores. AmWINS, CRC and us are two, three, four, five times bigger than we were 10 years ago because of that.” In Turner’s view, the top 100 retailers have already changed their buying habits and others will follow. “That type of behavior will trickle into tier two or tier three (retailers) as well because they know it’s more efficient and saves money,” he said. “It’s very expensive to use multiple intermediaries.” However, a 2016 Conning Inc. Insurance Research analysis found that the wholesale distribution channel adds no cost to the insurance transaction. Conning analyzed distribution around cost structure and ratios between the wholesale and retail channels in a study commissioned Wholesale & Specialty Insurance Association (WSIA), formerly known as the National Association of Professional INSURANCEJOURNAL.COM
Offices. The study did not address cost as it relates to the use of multiple intermediaries by a retailer. In the end, the wholesale broker world is no different than the retail world, according to Rodriguez, who spent more than half of his career working as a retail broker. “It’s going to change. … If you look at the emergence of very powerful independent firms ,they are there for a reason.” As successful as the larger wholesalers are today, their future success is not guaranteed. There can be a downside to wholesalers and retailers getting larger and larger, warns Rodriquez. “With scale comes inefficiency, comes complacency, the
inability to change course.” For that reason, he believes that the future wholesale world will have a relatively small number of national firms and a lot of specialty firms. “Those specialty firms – say environmental or transportation firms – they are not on the national list but they are utilized because they provide specialized expertise,” he said. It will become more and more difficult to be a national wholesaler in the future, Rodriguez added. “Look at what’s happened to the top 10 (wholesale) list. How many have disappeared in the past seven years?” Like in the retail world, varied ownership models, including firms owned by private
equity and other alternative models, will also continue to affect wholesale brokers. “I think there’s a major issue with sustainability with some of the ownership models. If you look at even existing top 10 and their ownership, there’s only my firm and one other that are fully private without any outside ownership – private equity, bank ownership, or public.” Some of those firms have changed hands and management to the benefit of Brown & Riding, he said. “Part of our growth – we are five times the size we were six years ago – has come from consolidation (in the industry) and by acquiring individuals within those firms seeking alternatives. I’ve been there for
M&As – two of the largest firms in the retail space – they don’t always go well and people leave, including myself.” Rodriguez believes there will always be a place for independent, specialty firms and for firms that can focus on the customer. DeCarlo agrees. “I think the industry needs small entrepreneurs. I think it needs regional players that are successful at the scale they’re willing to take. But clearly the industry also needs a handful, not defined by me, of national scaled players. In order to have a successful industry going forward, you’ve got to have all three.” Share
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NATIONAL | Closer Look | Emerging Risks
Breaking the Silence: Cyber Physical Cat Models Emerging By Susanne Sclafane
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frightened truck driver dodging a barrage of bullets fired from the assault rifles of a drug-smuggling criminal gang doesn’t seem like the obvious description of the final stages of a cyber attack. But the real-life scenario that played out after the driver unwittingly picked up a cargo container that should have been filled with fruit or construction materials but instead had cocaine and heroin is one of the events sparking the growing interest of property, marine, energy and industrial insurers in “cyber physical” losses, a risk modeler revealed recently. During a Cyber Risk seminar held by RMS in May, Christos Mitas, vice president of model development, clued attendees in on what in the world the shooting had to do with cyber hacking as he detailed a new “port interruption” scenario in Version 2.0 of RMS’s Cyber Accumulation Management System (CAM). The scenario is one of five new cyber physical loss scenarios now included in the RMS system. According to Mitas, the real-life event was a cyber attack on the port of Antwerp that lasted two years. It started with crimi-
nals — “just plain old criminals that wanted to bring arms and drugs into Europe”—who hired hackers to break into the port management system of the Belgian port. “They didn’t use anything extremely sophisticated. They did that via spear-phishing,” he said, referring to a technique where hackers send out emails that trick recipients into clicking links that give them access to target company networks. “Once they had access into the port, they manipulated the cargo details and they hid cocaine, heroin and weapons in cargo containers that otherwise had trivial stuff like bananas or timber,” Mitas said, noting that the operation went on for many months. The truck driver was an unplanned participant who caused the plot to unravel. He mistakenly got one of the containers that had the illegal material. “One of the criminals that was supposed to pick up the cargo container really freaked out and started shooting.” The ensuing police investigation uncovered the entire operation and shut it down. But it’s still a worrisome scenario for marine and property insurers, which may or may not include coverage for cyber-related cargo theft and business interruption in their non-cyber policies.
Throughout the half-day conference, speakers referred to cyber physical loss accumulation scenarios now included in CAMS — port interruption, cyber-induced fires in commercial buildings, business blackouts (regional power outages stemming from cyber attacks on power grids) and hacks into control systems that could trigger oil rig explosions or fires at industrial processing plants — using the term “silent cyber” risks. The “silent” descriptor refers to the fact that many traditional insurance policies covering property damage, theft and business interruption do not have specific exclusions for situations where cyber attacks on operational technology (OT) cause losses, nor do they have clear grants of coverage. Insurance policies that specifically cover cyber events or attacks on information technology (IT) — sometimes referred to as network, security and privacy policies and other times as standalone cyber or “affirmative cyber” — typically have carried an absolute bodily injury and property damage exclusion.
Tianjin-Type Losses
As both traditional and affirmative cyber players examine their ability to take on or exclude cyber physical risk, RMS aims to provide a tool to help them assess their current exposures with the new cyber physical scenarios in CAMS. For the port-interruption scenario, cargo losses in excess of those recorded for one of the most impactful recent non-cyber events for insurers — the August 2015 Tianjin explosion — are possible, Mitas said. Before counting up potential loss damage figures, Mitas described the imagined port-interruption scenario in CAMS, which starts with a criminal gang seeking financial gain. Outlining each phase of the attack, the scenario envisions that hackers are hired by the criminals to take advantage of vulnerabilities of the port management system that were discovered and published in hacker chat rooms. The criminals target two or three major ports and four specific types of cargo contents: consumables, electronics, pharmaceuti-
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NATIONAL | Closer Look | Emerging Risks continued from page 28 cals and jewelry. Once into the system, the hacking group can scramble shipping orders and mislabel cargo containers, allowing the criminals to take possession of the ones they want. A year into the process, the Port
Authority catches on to the fact that rates of mislabeling have been much higher than in a typical year. The gang, realizing it has been discovered, wreaks havoc in the port, increasing the level of mislabeling and falsification of
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NATIONAL | Closer Look | Emerging Risks continued from page 30 up an oil rig or trigger an industrial facility explosion and “how to set fire to a thousand buildings.” In each case, the key is malicious manipulation of information or logic — temperature and pressure values on sensors or logic that tells switches and
valves when to open and shut in industrial processes, for example. In the case of the office fires, manipulation of firmware in common brands of laptops makes it possible “to create a thermal runaway on lithium batteries,” Leverett said. When an
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attack is coordinated to occur on a specific night, even small numbers of overheated laptops can create an accumulation problem for insurers if the charging laptops are unattended in multiple buildings. Part of Leverett’s presentation was ripped from the headlines, and part came from his prior experience working as a penetration tester for IOActive doing ethical hacking into the systems of oil, gas, electrical and water facilities. One of the headline risks Leverett described involved a disgruntled employee who disabled the leak detection alarms for three offshore oil platforms. The hacker, Mario Azar, worked as a consultant in what’s called a network operation center (NOC). When he lost the position and wasn’t offered a permanent one, he still had access rights to the control systems, allowing him to shut the alarms. “This could have indeed ended up killing all of the people on the rig had they been poisoned, had they had a leak at the same time,” Leverett said.
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At a separate session of the RMS conference, insurer and broker representatives addressed questions about traditional property insurers that might potentially be on the hook for cyber physical losses. Moderator Peter Ulrich, an RMS senior vice president, wondered whether these insurers will try to put exclusions on their non-cyber policies. “On paper, absolutely,” said Lori Bailey, global head of special lines for Zurich Insurance Group. “If there’s something you don’t want to cover in a policy, you put an exclusion in and make it very clear that you don’t intend to cover that.” But there are challenges in trying to do that “in practice” for older forms out in the market, she continued. “You haven’t historically excluded it, but now [you] go in to exclude it [and] you are essentially implying that you were covering it at some point in time. You’re going to get a lot of pushback from [insureds] who say, ‘Wait a second. You’re taking something out of my policy, or you’re now going to offer me a
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NATIONAL | Closer Look | Emerging Risks continued from page 32 new product that I have to pay extra for to “So, there’s a lot of flux really in the affirmatively cover this.’” market right now. And I think where you’ll She noted that affirmative cyber prodstart to see the market really diverge is ucts have always historically had an absothose that stay in that more traditional lute bodily injury and property damage security/privacy traditional affirmative exclusion. “Because it came out of the procyber vs. more of an all-risk type approach, fessional liability world, it was always very which is where I think ultimately you’ll see much designed for financial loss and very the market start to go, or certain markets to specific named peril network security and go, over the longer term,” Bailey said. privacy events.” Bailey said the market is in the early stages of cyber emerging in other products besides an affirmative policy. “We are starting to see it [cyber coverage] emerge now in marine policies, property policies, liability policies. There’s still a lot of work to be done on that side in terms of quanti From a customer perspective, Anthony fying how much is actually there, and what Shapella, risk officer for liability and finanexactly. In some cases, it’s a purely defencial lines at American International Group, sive mechanism; in other cases, they’re said clients are pushing for affirmative covbeing a bit more proactive around actually erage in each and every policy. Basing his giving affirmative cyber cover, but usually assessment A&M IJ Personal Umbrella.pdf 1 12/28/15 10:22 on AM conversations he’s had with it’s limited to certain perils. AIG cyber underwriters, he said clients are
‘We are starting to see it [cyber coverage] emerge now in marine policies, property policies, liability policies.’
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demanding this “because they don’t know exactly what the ultimate cause of loss will be and they want assurance that they’re going to get coverage.” Shapella gave the example of car manufacturer Renault suffering a business interruption loss during the WannaCry event. “This peril [cyber] can hit companies at so many different angles, and companies want assurance that no matter what angle they get hit, they’re going to have coverage,” he said, noting that an auto manufacturer that makes self-driving cars will want assurance that if the mechanism they use to make that car drive by itself fails and someone is injured, then there’s going to be coverage. The impact of WannaCry and other cyber attacks on IT systems on the affirmative cyber market and RMS’s existing IT risk scenarios in CAMS were the main topics of the panel discussion. Addressing cyber physical, however, Alice Underwood, an executive vice president of Willis Re, said that “every manufacturing company is an IT company these days because there are very few sophisticated products that don’t have some relationship to the Internet of Things.” “As far as what the [non-cyber] insurers are doing, there’s a spectrum. There are insurers who are sort of not thinking about it. They think because they’re not writing specific cyber insurance policies that they don’t have cyber exposure, which is totally not true, especially if they’re using old forms” without exclusions. There are [others] that are putting endorsements on but are neglecting to add those new exposures to their aggregation calculations, she said. Bailey believes a culture shift is taking place. “Historically, we’ve got property underwriters that underwrite property, casualty underwriters that write casualty and professional liability underwriters writing professional. Cyber is the first peril we’ve seen really transcend itself across all these different lines of business. This article was first published in Carrier Management, a Wells Media Group publication.
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Energy | Spotlight | NATIONAL
Report: Climate Change May Pose Threat to Nation’s Electric Grid By Don Jergler
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limate change may pose a serious risk to the nation’s electric grid, according to a new report. The report was prepared by Johns Hopkins University with help from Swiss Re. “Lights out: The risks of climate and natural disaster related disruption to the electric grid” is the fourth report on which the university and international reinsurer have partnered. Last year the collaborative produced a report on the impact of climate change on the spread of pandemics, which was covered by Insurance Journal. Previous
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reports produced by Johns Hopkins and Swiss Re were on climate and wildfire risk in the U.S., and on resiliency in the Columbia River basin. The latest report calls attention to the risk of climate change creating more frequent extreme weather events. The report states that climate change “presents epistemic risks beyond predictable, ordinary weather-related risks to the electric grid,” which could put the structural integrity of the nation’s ageing electric infrastructure under greater strain. “A combination of higher average temperatures, more destructive storms and hurricanes, and increased risk of wildfire will ultimately worsen risk exposure for
utilities,” the report states. The insurance industry takeaway from the report should be that there’s a massive protection gap in the nation’s electric grid, said Alex Kaplan, head of global partnerships in North America for Swiss Re. Kaplan, who served as the senior advisor for the report, wasn’t referring to electric plants and the homes and businesses to which they supply power, but the oodles of transmission units, power poles and power lines that keep our country abuzz. “It is entirely uninsured,” Kaplan said. “You have literally all these power lines, all these poles that support these powerlines, are totally uninsured.” An example of what extreme weather can do to a power system that’s outlined in the report is Hurricane Iniki in 1992, which destroyed much of Kauai’s distribution and transmission infrastructure, knocking down 5,000 utility poles and wiping out a large chunk of the island’s distribution wire system. Electricity was disrupted on the entire island for weeks to months in some areas. Full restoration of power took three months. “They didn’t have any way to get that transmission moving again,” Kaplan said. The report also draws upon exposure in the Pacific Northwest, which supplies the nation a large portion of its hydroelectric power, as an example that should raise concerns about the impact of climate change on the electric grid. “In Washington State, where hydropow-
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Energy | Spotlight | NATIONAL continued from page 37 er accounts for nearly 70 percent of total electricity generation, diversification of energy sources is of growing importance,” the report states. Washington is the leading source hydroelectric power production in the U.S., followed by Oregon, according to the U.S. Department of Energy. “Oregon and Washington are both surplus power producers, generating more electricity than they consume and supplying Canadian and U.S. markets with significant electricity,” the report states. According to the report, fluctuations in precipitation and runoff, both indirectly associated with temperature, have a more direct impact on expected hydropower generation. “In most cases, higher average temperatures as a result of climate change may increase the amount of precipitation that falls as rain instead of snow, leading to earlier snowmelt in the spring and overall reduced snowpack,” the report states. While air temperature is projected to increase annually and seasonally for the near term to 2030 in the Pacific Northwest, the increase in temperature may not have a strong direct influence on annual water runoff, but it will cause significant changes in seasonality. “While higher temperatures are projected to lead to increased winter rainfall that could be used to generate more power, this additional precipitation increases the probability of dam spilling, mostly in April and May,” the report states. “This poses challenges to hydropower operation and
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maintenance, in terms of managing the various other uses of dams, ranging from flood control, navigation, fishery and ecosystem restoration.” Additionally, higher average temperatures can reduce the efficiency and capacity of electric lines and other grid components, such as transformers. A a rise in temperature, for example, can cause conductors to physically expand, making it more likely for power lines to shut off and result in automatic power outages, according to the report. Map of hydropower projects in the Pacific Northwest using data This is all evidence, in from the Northwest Power and Conservation Council. Kaplan’s view, that the Source: Swiss Re insurance industry has an opportunity to step in and provide prodimportant,” he said. ucts to help deal with this risk instead of Data from the North American Electric relying on utilities foot the bill – and ultiReliability Corporation shows that of 2,428 mately pass the buck on to rate payers – or total unplanned electric grid outages in for the government to step in. the Western U.S. in 2015, nearly one-fourth “There is the capability of transferring were caused by extreme weather events that risk off of private citizens into private and variability in environment. market,” he said. “Moreover, the U.S. insurance industry He is referring to mechanisms like parahas identified a $20 to $55 billion annual metric products and index-based solutions, financial loss from power outages caused which he said have been developing at a by flooding, hurricanes and extreme temrate that’s “absolutely encouraging.” peratures,” the report states. Share this “If we can avoid sending these costs article with a colleague. though to populations, and particularly low-income populations, that’s pretty IJMAG.COM/904HY
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Idea Exchange
Emerging Risks
Lessons Learned from Hurricane Andrew
How the Insurance Industry Can Mitigate the Next Big Natural Disaster
By Simon Tuck
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s an industry, we knew there could be large and costly hurricanes. We witnessed the destruction that Category 5 Hugo wrought on the Carolinas in 1989. At the time, however, this $4 billion event, which doubled the previously-seen maximum insured loss for the industry, looked like a black swan. We might have considered it a test of the industry — and one which we passed given that only a dozen or so small regional carriers went under. Fast forward three years to Aug. 24, 1992. For those of us in the natural catastrophe risk management field, the day Andrew struck Florida marked the birth of our profession. When the winds died down and the water receded from Florida and Louisiana, we were left with $15.5 billion of insurance claims, eight legally insolvent insurers, and several more technically insolvent subsidiaries which required bailouts from their parent companies. Our industry and its regulators woke up to the risk, and tools came online to help us manage the risk more effectively. Twenty-five years later, Andrew’s damage has been dwarfed by Katrina, Sandy, Ike and Wilma. Because of the steps we took following the event, the industry was able to easily withstand these events and serve its intended purpose. I began my journey in the insurance
industry in 2003 quantifying damage and responding to regulators on the Gulf Coast following the tumultuous 2003 and 2004 seasons. I have spent most of my career managing natural and man-made catastrophes, including setting up formal catastrophe risk analytics departments at two leading commercial lines carriers. As I scan the horizon of emerging risk, I find myself awestruck that we have so much information readily available to us and yet we still need a catastrophic event to wake us up to risk. Of particular concern to me is the risk posed by infectious disease events. If we use the past to help us learn about the future, as we are usually so good at doing, there are three primary lessons we can learn from the experience of Hurricane Andrew to build resilience to the inevitable pandemic equivalent: • A big event is not required to take action. • The insurance industry plays an important role in resiliency. • Innovators will be rewarded.
A Big Event is Not Required
In 1992, we knew how to add up limits and use probable maximum loss (PML) approaches to estimating losses to potential events. Andrew gave us a tangible lesson that more sophisticated methods were required to adequately manage weather risk. Over the next 25 years, catastrophe risk models have grown in complexity and accuracy. Every major insurance company has a catastrophe risk management function which regularly quantifies the potential costs of weather events. Most do this at the point of underwriting and have built this into the way they price policies. While every company has its own view of risk, all point to reference views of the major modeling vendors when quantifying risk for internal or regulatory purposes and when offloading risk to reinsurers and increasingly the capital markets. As a result, the market for offering, trading, and offloading hurricane risk is extremely liquid and efficient.
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The life insurance equivalent to a hurricane or earthquake is a deadly epidemic or pandemic. According to the Gates foundation, a fast-moving airborne pathogen could kill more than 30 million people in less than a year, and there is a reasonable probability that type of event will occur in the next 10 to 15 years. In the United States alone, life insurance accounts for slightly more than 50 percent of the over $1 trillion in annual net premiums written. We should take the lessons we have learned and skills we have collectively developed in managing property natural catastrophes and focus equal — if not greater — time and energy on managing natural catastrophe risk as it relates to the much larger life insurance industry. We don’t need to wait for an event to occur. The tools and models already exist, and we have a robust framework for understanding the risk.
Important Role in Resiliency
No insurance company can stop a hurricane, but collectively, we have made the world more resilient to these events by offering financial incentives for homeowners and businesses to appropriately build and prepare for the events. Most modern personal and commercial property policies offer discounts for things like storm shutters and up-to-date roofs. Similarly, for earthquakes, good luck finding affordable property insurance for a masonry building in an earthquake-prone zone like California. In taking steps like these, through our pricing algorithms, we play an important role in not only managing and INSURANCEJOURNAL.COM
These same concepts hold for epidemic outbreaks. What is really exciting, though, is that unlike a hurricane, properly timed and placed insurance can actually stop an event from getting worse. Imagine an insurance mechanism that kicked in following a small regional outbreak. The funds from the insurance policy are used to fund preventative measures and to bring doctors and supplies in to help prevent a larger epidemic and ultimately a pandemic. Exactly these types of policies are currently being developed by the World Bank and Africa Risk Capacity with support and guidance from the reinsurance industry and technical partners.
Innovators Will Be Rewarded
pricing risk, but also educating our customers on measures they can employ to protect themselves and collectively make the world more resilient.
It has been said that the insurance industry is good at managing risk, but not necessarily at taking it. It is through this lens which we might understand why technological adoption has been so slow in this space. If we again look back to post-Andrew at those companies — Renaissance Reinsurance comes to mind — those who embraced technology and came up with new ways of doing things were rewarded. Munich Re recently announced that they are setting up a dedicated infectious disease insurance business unit and others are beginning to further explore opportunities in the space. Who will join them as the innovative early movers in this space? We are not always the fastest moving industry, but over the course of my career, I personally have witnessed dramatic shifts towards proactive and effective manage-
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No insurance company can stop a hurricane, but collectively, we have made the world more resilient to these events by offering financial incentives for homeowners and businesses to appropriately build and prepare for the events. ment of catastrophic risk on more than one occasion. Thankfully the tools we need have already been developed and we can look to our catastrophe risk management departments as a guide for managing risk to infectious disease events. Doing so will not only make our companies and our world more resilient, but will also provide a new vehicle for growth both for our existing customers and into new markets. Share this article with a col-
league. IJMAG.COM/904AN Tuck is head of product for Metabiota, an organization that provides comprehensive risk analytics to help organizations and countries build resilience to epidemics and protect global public health. He joined Metabiota in April 2015 to lead development of Metabiota’s products and services for the insurance industry. In this capacity, he helped several global insurance and reinsurance carriers develop new infectious disease risk products and programs; and establish strategies for managing risk.
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Idea Exchange
Legal
Politicians in Robes: Why Judicial Activism Is a Threat
By Stef Zielezienski and
Tom Karol
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t his confirmation hearing, now Supreme Court Justice Neil Gorsuch promised to be a fair and nonpartisan jurist, saying, “These days, we sometimes hear judges cynically described as politicians in robes, but I just don’t think that’s what a life in the law is about.” Most Americans expect that a judge will not be an activist and read their own views into the law, but they will apply the law according to plain meaning and documented legislative history. But even judges need some help keeping up with the volume and complexity of cases. Largely unknown to the public, the American Law Institute (ALI), a private group of lawyers and legal scholars, provides judges and lawyers with “Restatements,” written documents that “aim at clear formulations of common law… as it presently stands or might appropriately be stated by a court.” For nearly a century,
these documents have been looked upon as authoritative summaries and continue to be regularly cited by judges– almost like a trusted court-side companion for staying within the boundaries of the common law. In recent years, however, the ALI has begun drafting Restatements that are neither clear nor reflective of the actual law. To the contrary, these Restatements have been more aspirational – not neutrally describing the current state of the law, but instead directing where the authors think it ought to go. We have seen this trend in a number of legal areas where the ALI restatement process is underway, and where the authors – called “Reporters” – have actually created new law, without the public accountability of duly elected government officials. The problem with the ALI’s creeping judicial activism is that it’s not open to public scrutiny and control is largely in the hands of the Reporters chosen to “restate” an area of the law. In 2010, the ALI tasked two law professors with developing “the Principles of the Law of Liability Insurance.” Later converted into a Restatement of the Law of Liability Insurance, these two ideologically-driven academics
have chosen to ignore what the legislatures and the majority of courts have determined and substitute ideas they think are better. For example, the bedrock principle of insurance contract interpretation is that the terms will be enforced as written. Called the “plain meaning rule” – when courts give words their ordinary meaning, this principle helps guarantee the reliability and certainty we expect from the law when it is applied to the obligations in an insurance policy. It is recognition that legal disputes must be resolved with the highest degree of objectivity and certainty. But the Reporters decided it was time to discard this longstanding insurance law rule when “extrinsic evidence shows that a reasonable person in the policyholder’s position would give the
term a different meaning.” The Reporters also jettisoned the longstanding common law American rule that each party to a lawsuit pays its own fees, unless the legislature has enacted a law providing otherwise. The Reporters have overridden this common law rule with their own rule imposing the litigation fees of both sides on the insurer if it does not prevail in litigation. The Supreme Court has recognized departures from the American rule only when the legislature has provided “specific and explicit provisions.” Without giving deference to legislative judgments, these two law professors have unilaterally decided to make the change anyway. What does it say about the reliability, stability, and certainty of law across the country - not just within the liability insurance space - if two legal scholars, behind closed doors and without an open drafting process, are able to substitute their theories and opinions for the court decisions and statutory provisions that have formed the basis of the ALI’s so-called “restatements” for a century? While this might be a victory for these Reporters’ new brand of judicial activism, it would come at everyone else’s expense, including the reputation of the ALI as the trusted record keeper of the common law. Zielezienski is the American Insurance Association’s General Counsel. Karol is the National Association of Mutual Insurance Companies’ General Counsel. INSURANCEJOURNAL.COM
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Homeowners
Market Detail: Myron Steves
(www.myronsteves.com) specialize in the following risks: primary and secondary occupancies; business name; duplex; townhouse; single family dwelling; risks with prior losses; risks with no prior insurance; risks with swimming pools, trampolines and domestic animals (exclusions or limitations apply); log homes; risks on stilts, pier and beam, blocks and crawl spaces. Product features include: direct bill available; age of risk credit (10 years or newer); 50+ credit (insured age 50 and over); alarm discountptional RCV on dwelling and contents for
HOA; optional RCV on contents for HOB; accidental discharge of water for full policy limit included on HOB & available on HOA (HO-170); additional extended coverage including $10,000 aggregate limit for accidental discharge of water available on HOA (MFS-170) available; HO-160 available. Available Limits: As Needed Carrier: Unable to Disclose States: Texas only Contact: Claudia May at 713351-8227 or e-mail: cmay@ myronsteves.com
Grain Growers
Market Detail: Agricultural
Insurance Management Service (AIMS) (www.aimscentral.com) mission is to provide retail insurance brokers with help in placing their agricultural risks. Brokers are matched with a carrier to provide a broad range of farm and farm-related coverage for the homes, property, auto, business and operational assets of America’s farmers and ranchers. Available limits: As needed Carrier: Various States: Ariz., Ark., Calif., Colo., Dela., Fla., Ga., Iowa, Ill., Ind., Ky., La., Maine, Mich., Mass., Md., Miss., Mo., N.C., N.H.,
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Personal Trainer
Market Detail: Sports & Fitness Insurance Corporation (SFIC) (www.sportsfitness.com/ij) offers general liability insurance including professional liability, property insurance, umbrellas, workers' compensation and surety bonds for large and small fitness centers, as well as, dance, yoga, Pilates and martial arts studios and personal trainers. The underlying general liability policies provide limits from $1 million occurrence with a $2 million aggregate to $2 million occurrence with $4 million aggregate. Available limits: As needed Carrier: Liberty Mutual States: All states Contact: Kate Martello at 601898-8464 or e-mail: kmartello@sportsfitness.com
Contractors
Market Detail: Sullivan Brokers Wholesale Insurance Solutions (www.sbwis.com) has coverage
Market Detail: Sun Coast
General Insurance (www. SunCoastInsurance.com) offers auto, motorcycle, RV & motorhome Iinsurance coverage for tourists traveling into Mexico. Daily or annual rates available online 24/7 (quote, bind and print certificates at the point of sale). Competitive rates and many coverage options available. Sun Coast has been providing independent agents with reliable products since 1980, including personal lines, commercial lines, and ocean marine. Available limits: Minimum $30,000, maximum $150,000 Carrier: Various, non-admitted available States: All states Contact: Rosie Garcia at 949768-1132 or e-mail: rgarcia@ suncoastinsurance.com
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Idea Exchange
Claims
Whether to File a Lien or Intervene
Practical Considerations to Maximize Subrogation Recovery
By Jonathon D. Sayre
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onsider this scenario: You have a strong case for subrogation arising from an employment-related acci-
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dent. The injured employee’s attorney files suit, but refuses to move the case forward. Out of necessity you intervene and successfully negotiate the recovery of $35,000 of your $50,000 lien. Unfortunately, you spent $45,000 to recover $35,000. Do not let this happen to you! Even the best subrogation cases can hurt the bottom line. The purpose of subrogation is to maximize your recovery through pre-litigation negotiations or a lawsuit. Failure to closely monitor the prosecutorial strategy may result in a net loss; the amount of expended fees and costs will be weighed against the amount recovered. This article provides an overview of recovery practices to maximize the net recovery. There are three ways the insurance com-
48 | INSURANCE JOURNAL | NATIONAL SEPTEMBER 4, 2017
pany can pursue the responsible third party: 1) file a complaint against the third party; 2) join as a party plaintiff or intervene in an action brought by the employee against the third party; or 3) allow the employee to prosecute such action and apply for a lien upon the net amount of the employee’s judgment. (Gilford v. State Compensation Ins. Fund (1974) 41 Cal.App.3d 828, 831 [116 Cal.Rptr. 615]). The employer’s rights in respect to settlement of the employee’s claims against the third party are set forth in Labor Code §§ 3859 and 3860. (Marrujo v. Hunt (1977) 71 Cal.App.3d 972, 976.) To determine the best, most practical avenue to maximize recovery the considerations are manifold. Experienced counsel
continued on page 50
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Idea Exchange
Claims
continued from page 48 take a holistic look at the entire picture and know how to weigh mutually competing factors against each other. Four key tips to help you maximize subrogation recovery are as follows:
1. Managing the adjuster/attorney relationship.
In an ideal world, the responsible party would pay 100 percent of what the insurance company pays the insured - especially when liability is clear. Even in situations where all sides agree the insured was free of fault, there is a cost associated with recovery. Open lines of communication and in-line expectations are crucial elements for successful subrogation claims.
2. Filing a notice of lien.
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Once you’ve decided to pursue cost recovery, and you have a good attorney/ adjuster relationship, the next step is to prepare to take action. Increasingly, filing a notice of lien is an en vogue solution.
‘Experienced counsel take a holistic look at the entire picture and know how to weigh mutually competing factors against each other.’ When you file a notice of lien, you are putting all parties and the court on notice of your lien against any recovery to plaintiff. Once a notice of lien is filed, it is best to let the plaintiff prosecute and get out of their way. Insurers can still participate in the process behind the scenes with
settlement discussions, or provide information to plaintiff’s counsel. Keep in mind that when filing a notice of lien, your lien is subject to the common fund doctrine. The common fund doctrine is an equitable principle that stands to reduce the lien by the insured’s reasonable attorneys’ fees and a pro-rata share of litigation costs.
3. When should you NOT file a notice of lien.
The purpose of subrogation is to actually recover a portion of the lien from the third party. If plaintiff’s counsel is asleep at the wheel, or consumed by a malicious and destructive cycle of spite including discovery battles and law and motion, you may want to consider the alternative: intervene into the action.
4. Deciding to intervene.
Plaintiff’s counsel may be responsive and competent, but the defense has decided to fight liability, or the particulars of the insured’s suffering has defendant fighting scared. Intervening allows the insurance company to regain control of the case. There are several factors to consider when determining whether and how to pursue subrogation - these are only a few. The most important factors are a good working relationship with counsel and clear communication.
Share this article with a colleague. IJMAG. COM/904WH
Sayre is senior counsel at Manning & Kass, Ellrod, Ramirez, Trester LLP. Phone: (949) 440-6690, ext. 4024. Email: jds@manningllp.com. Jonathan C. Terry, a partner at Menter & Witkin LLP, and Michele Greene, a senior claims examiner for AmTrust Group, contributed to this article.
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Idea Exchange
The Competitive Advantage
Let’s Eradicate Incompetency ing rate. Not only was the 400 percent increase over what I was paying, but it was four times the rate new carriers were offering me. They used scare tactics in an attempt to convince me to not shop and to just renew at quadruple the rate. No matter how one slices it, looks at it, or analyzes it, assuming honest and thoughtful consideration is employed, this is egregious.
Industry’s Reputation
By Chris Burand
I
recently wrote an article describing my horrendous experience purchasing a new life insurance policy. I criticized the industry for employing incompetent people and egregious renewal offers. Several readers rose to defend the industry and carriers. I love that passion. When passion reaches the point of causing people to defend unconscionable behavior, incompetency, or just plain bad actions (and my experience could not be absolutely the only such experience), a person is usually well served to check their emotions. Defending incompetency and defending disingenuous sales activities never makes sense. As I encouraged those who responded, take a step back. See the forest for the trees and instead of defending incompetency, work to eradicate it. Quite often people who respond to my articles in defense of whatever they feel I am attacking, are people who actually operate at higher levels than most of their peers. They feel injured by my article and they are, but not by my articles. They are tarnished by their poorer competitors. Where one company or agency does a lousy job, the industry in its entirety is tarnished. One of the criticisms of my article referenced an expiring life carrier’s offer to renew my policy for four times the expir-
Actions such as this are one reason why the insurance industry’s reputation is poor and every time it happens, we give consumers and regulators one more reason to not trust us. The industry is built on trust. Insurance is about the purchaser giving the carrier thousands of dollars every year trusting they will eventually pay in the event of a claim. The relationship between buyer and seller, excluding sophisticated buyers, is not close to an evenly matched relationship either. The seller knows a lot more than the buyer. The seller writes the contract. The buyer quite often does not know enough about insurance to truly understand the contract, especially when they do not read it and given the lengths of insurance contracts, we’re not far from all the ridiculous software contracts everyone agrees to with a click of a button. The seller is far larger with far more resources than the buyer. When the seller then is more knowledgeable, writes the contract, is orders of magnitude larger, and controls the money in the event of a claim, the buyer reasonably feels disadvantaged. They are truly acting on trust, but it is a tenuous trust. When a carrier’s or an agent’s actions cause a normal person to wonder further if they’re being taken advantage of, the entire industry suffers. Agents wrote me advising that a renewal offer at four times was
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not egregious because if I had had Stage IV cancer (knock on wood), the renewal offer would be great for me. The insurance company would be doing me a favor. Thank goodness I did not have stage IV cancer and therefore, the logic of their argument is completely missing. However, even if they were willing to renew me at four times taking the risk I had stage IV cancer, this is an absolutely stupid underwriting model. This is the problem with the ACA’s exchanges. Healthy people who are not persuaded by the carrier’s scare tactics to renew at an increase of 400 percent go elsewhere or let the coverage drop. Unhealthy people likely to die soon pay the extra money. That 400 percent extra is not going to cover the loss. So, either the company successfully scares enough healthy people to pay far more than is likely actuarially supportable or the company is run by morons. How does either scenario improve the trust the public has in the industry? This is the role high quality agents play to ameliorate such situations. A high quality agent will intervene and move the conversation to a better outcome for their client (as my agent did for me). High quality agents are honest in a professional man-
ner that 400 percent more makes no sense and one should go to Company ABC who will rate you and provide the coverages you need for a much more reasonable sum. Agents who have too much passion sometimes have displaced passion in the sense that they forget their true role.
Predictive Modeling
I love numbers and statistics, and I really appreciate the value high quality predictive modeling algorithms bring and will bring to the marketplace. Predictive modeling is most often thought about as a way to get the right rate for any given client. This means everyone can be insured, for a price, and predictive modeling will be so accurate that the price offered will be the “right” price. Maybe I am too old school, but week one of underwriting used to be, “You can’t charge enough for a bad risk.” I do not see how that reality has changed. When I listen to company people, analysts and regulators, it seems a religion has developed that such pinpoint accuracy exists or is possible. They have become passionate, and misguided passion eventually damages the industry’s reputation regardless of passion’s aim. Predictive modeling, make no mistake about it, is about maximizing a company’s growth rate relative to a chosen loss ratio. In other words, if the chosen loss ratio is 55 percent, the company wants to maximize its growth rate using predictive modeling while achieving whatever their profit margin is at a 55 percent loss ratio. Understand what this really means. It means maximizing what a company can charge a client that still entices the customer to buy a policy from that company while maintaining, hopefully, a 55 percent loss ratio. On renewal, it means maximizing what the company can charge without causing the client to leave. Some companies believe that by using this model, they increase their rate increases upon renewal further increasing their growth rate and maybe slightly their profit margin but
to do so, they need agents to not shop the clients’ renewals. Make no bones about it, this is all part and parcel of some predictive modeling models. What does it do for the industry’s reputation if customers learn companies are treating their insurance like a magazine subscription? It is one thing to pay $14.99 the first year for a magazine and $29.99 upon renewal. Magazines cost much less and are usually discretionary. When one is paying thousands and the purchase is not discretionary, but the renewal goes way up, the industry is again cutting off its nose to spite its face. At the agency level, passion is great but please be rational. Take the steps you can to see insurance from the consumer’s per-
spective and then take actions that protect your customers sometimes from your own carriers. Then work hard to align yourself with the carriers that are better for the consumer and who listen when you explain the importance of reputation. Somehow I do not think the actuaries, software developers and name brand consulting firms have built into their models the value of a good reputation. This creates opportunity for agents. Will you take advantage of this opportunity? Share
this article with a colleague. IJMAG.COM/904ER Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. E-mail: chris@burand-associates.com
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Amwins Group, Inc. www.amwins.com 18, 19 Anderson & Murison www.andersonmurison.com 34 Aon Affinity www.affinityhcp.com 30 Applied Underwriters www.auw.com 4, 5, 56 Aspen Insurance www.aspen-insurance.com 33 Atlas General Ins. Services www.atlas.us.com 27 Burns & Wilcox Ltd. www.burnsandwilcox.com 36 Chubb www.chubb.com 13 City of Hope www.cityofhope.org 51 Colony Specialty www.argolimited.com/casualty 37, 39, 41 CRC Group www.crcins.com 34 CTC Transportation Insurance Services https://insurancetruck.com 15 Cypress P&C www.cypressig.com S5 EZLynx www.ezlynx.com 44, 45 FSLSO www.fslso.com S5 General Star www.generalstar.com W3, S3, E3, M4 GeoVera Insurance Company www.geovera.com SC3, S7 Golden Bear Insurance Company www.goldenbear.com W9 Gorst & Compass Insurance www.gorstcompass.com W7 Great American Insurance Group www.gaig.com 17 Hallmark Financial Services www.hallmarkgrp.com 47 Hiscox USA www.hiscoxbroker.com 3, W12, SC7, S8 JenCap Holding LLC www.jencapholdings.com 43 JM Wilson www.jmwilson.com S6, M3
Lexington www.lexingtoninsurance.com 9 Louisiana Commerce & Trade Assoc. www.lctacomp.com SC9 M.J. Hall & Company www.mjhallandcompany.com W10 Midlands Management Corporation www.midlandsmgmt.com SC8 Monarch E&S Insurance Services www.monarchexcess.com W5 Nationwide E&S www.wearenownationwide.com 7 Nautilus Insurance Company www.nautilusinsgroup.com 35 NIF Group www.nifgroup.com 48 Pacific Gateway Insurance Services www.pgiainsurance.com W11 PersonalUmbrella.Com www.personalumbrella.com 55 Quirk & Company www.quirkco.com SC4 ReSource Pro www.resourcepro.com 50 RT Specialty www.rtspecialty.com 31 Ryan Specialty Group www.ryansg.com 22, 23 South & Western www.southandwestern.com SC5 Take1 Insurance www.take1insurance.com 29 Tejas American General Agency www.taga1.com 3 Texas Mutual www.texasmutual.com SC2 tKg Wholesale Brokerage www.tkgins.com 2 Topa Insurance Company www.topa-ins.com 3 United Fire Group www.ufgsolutions.com E5 Worldwide Facilities www.wwfi.com 21 WSIA- Wholesale & Specialty Insurance Association www.wsia.org 32
SEPTEMBER 4, 2017 INSURANCE JOURNAL | NATIONAL | 53
Closing Quote WSIA: Past, Present and Future
By Brady Kelley
T
he wholesale, specialty and surplus lines market is healthy and stable with a bright future. Proof of this can be found in recent quantitative analysis like A.M. Best’s 2017 Special Report on U.S. Surplus Lines, as well as observable evidence, like record attendance at the 2017 Wholesale & Specialty Insurance Association (WSIA) Annual Marketplace. The segment has also demonstrated resilience over time, with no financially impaired surplus lines companies in the last 13 years. We believe this stability is driven by the value of the wholesale distribution system and demand for specialized solutions to complex and emerging risks. To begin, Kansas City, Mo.based WSIA is a membership organization of insurance brokers, managing general agents, underwriters and service providers committed to the wholesale distribution system. It was formed in
August 2017 from the merger of the American Association of Managing General Agents and the National Association of Professional Surplus Lines Offices. WSIA serves more than 775 member firms, representing roughly 1,700 offices and thousands of professionals. WSIA members offer retail agents, risk managers and their insureds, access to markets and specialized and customized coverages that are not available in the standard market. It is the wholesaler’s valuable technical expertise and knowledge of the specialty markets that helps retail agents solve problems and identify the right option for their clients. These are products and markets that retailers don’t work in every day, but wholesalers do. Wholesalers offer cost-effective options for insurance buyers. A 2016 analysis by Conning Inc.’s Insurance Research Division found that median distribution costs from 2010 to 2015 for 10 commercial lines of business represented 32.1 percent of direct written premium for a composite of 266 insurance companies with predominately retail distribution networks and 31.1 percent of direct written premium for a composite of 83 insurance companies with predominately wholesale distribution networks. The 1.0 percent favorable variance is evidence that wholesale distribution does not increase the cost of the transaction to the insured. The value that wholesalers offer to retail agents and insurance brokers – technical
54 | INSURANCE JOURNAL | NATIONAL SEPTEMBER 4, 2017
Wholesalers offer cost-effective options for insurance buyers. expertise, innovative solutions to complex risks, access to strong and stable surplus lines insurers – adds no cost to the transaction. Leveraging a wholesale partner to seek the best and most cost-effective solution for the insured is the best way to serve the end customer. While there has never been a price for seeking a wholesale quote, we now know there is no additional cost in leveraging a wholesaler. We believe these attributes are driving the top line growth we are experiencing in the segment, demonstrated by the 2.8 percent increase in surplus lines premium from 2015 to 2016, a new record level at $42.2 billion in surplus lines premium, and the 6.6 percent growth reported by the 15 states with stamping offices through mid-year 2017. WSIA strongly supports the state-based system of insurance regulation, and our advocacy at the state level is focused on promoting the market and its uniform taxation and regulation pursuant to the Nonadmitted and Reinsurance Reform Act.
At the federal level, our advocacy is focused on the passage of the Flood Insurance Market Parity and Modernization Act of 2017. Privatization of flood insurance became a reality by way of the 2012 Biggert-Waters Act (BW12), but there are several legislative improvements underway in this Congress with much needed reform of the National Flood Insurance Program (NFIP) that further promote the private market. Our advocacy of the Ross-Castor/Heller-Tester legislation continues to focus on the need for BW12’s clarification of the definition of private flood insurance. The improved definition provides lenders with clarity in accepting private market solutions to fulfill the mandatory purchase requirement of the federal law. While we have a new name, a new brand and a renewed energy and purpose, we remain focused on our core values. I am confident the future for WSIA is very bright. Kelley is the executive director of the Wholesale & Specialty Insurance Association (WSIA). INSURANCEJOURNAL.COM
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