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Contents February 5, 2018 • Vol. 96 No. 3 • West
West
National
W1 Report Calls out California Wildfires Among 2017 U.S. Hazards
8 Top 10 Employment Discrimination Charges in 2017 9 January Reinsurance Renewals Saw Hikes of Up to 5%, with More Expected: S&P
W2 Coalition of Businesses Challenges Fee on Montana Workers’ Comp Assets
14 Cyber Risk Ranks as Most Feared BI Trigger for Global Firms: Allianz
W2 Registration for California Seismic Retrofit Grants Open
W1 REPORT CALLS OUT CALIFORNIA WILDFIRES
AMONG 2017 U.S. HAZARDS
15 Bermuda’s Re/Insurance Model to Be Tested Following U.S. Tax Reforms: Fitch 16 Closer Look: Insurance Agency M&As Soared 31% in 2017: OPTIS
Idea Exchange
17 Closer Look: Still Hot… M&As to Date in 2018
26 Understanding Cyber Security in Health & Human Services Sector 28 Why Independent Agents Remain Alive and Well
18 Special Report: Still an Uphill Climb for Commercial Auto
32 The Competitive Advantage: The Value of an Employee Handbook
22 M&A Review: 2017 Yields Highest Recorded Number of Announced Deals
34 Closing Quote: Bringing the Next Generation into the Fold
8
TOP 10 EMPLOYMENT DISCRIMINATION CHARGES IN 2017
26 COMPLIANCE OR OPPORTUNITY?
UNDERSTANDING CYBER SECURITY IN HEALTH AND HUMAN SERVICES SECTOR
Departments W4 People 10 Declarations 10 Figures 11 Business Moves 30 MyNewMarkets 4 | INSURANCE JOURNAL | WEST FEBRUARY 5, 2018
INSURANCEJOURNAL.COM
OPENING NOTE
Write the Editor: awells@insurancejournal.com
Americans and Autonomous Cars
T
‘Americans are starting to feel more comfortable with the idea of selfdriving vehicles.’
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 Contributing Writers
Jeff Amy, Jason Ernest, Sam Friedman, Sarah Lucas, Brad Storeyr IJ ACADEMY OF INSURANCE Director Patrick Wraight pwraight@ijacademy.com
Chief Marketing Officer Julie Tinney (800) 897-9965 X148 jtinney@insurancejournal.com
South Central Sales Mindy Trammell (800) 897-9965 X149 mtrammell@insurancejournal.com Southeast and East Sales (except for NY, PA and CT) Howard Simkin (800) 897-9965 X162 hsimkin@insurancejournal.com Midwest Sales Lisa Whalen (800) 897-9965 X180 lwhalen@insurancejournal.com East Sales (NY, PA and CT only) Dave Molchan (800) 897-9965 X145 dmolchan@insurancejournal.com Advertising Coordinator Erin Burns (619) 584-1100 X120 eburns@insurancejournal.com Insurance Markets Manager Kristine Honey (619) 584-1100 X132 khoney@insurancejournal.com Social Media Manager Ly Short (619) 890-7735 Lshort@insurancejournal.com
Associate Director Barbara Whiffen bwhiffen@ijacademy.com
Classifieds, Jobs, Agencies Wanted/For Sale Sr. Sales & Marketing Coordinator Kelly De La Mora (800) 897-9965 X125 kdelamora@insurancejournal.com
ADMINISTRATION
DESIGN/WEB
Chief Financial Officer Mark Wooster mwooster@wellsmedia.com
MARKETING
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
imes are changing when it comes to how U.S. drivers feel about autonomous vehicles. According to a new study from AAA, 63 percent of U.S. drivers report feeling afraid to ride in a fully self-driving vehicle. That sounds like a lot of drivers, but it’s actually a significant decrease from the 78 percent of drivers who reported feeling afraid in early 2017. Millennial and male drivers are the most trusting of autonomous technologies, with only half reporting they would be afraid to ride in a self-driving car. “Americans are starting to feel more comfortable with the idea of self-driving vehicles,” AAA Automotive Engineering and Industry Relations Director Greg Brannon said. “Compared to just a year ago, AAA found that 20 million more U.S. drivers would trust a self-driving vehicle.” While riding in a fully self-driving vehicle is a futuristic concept for most, testing of these vehicles means that sharing the road with an automated vehicle is an increasing near-term possibility. Still, drivers remain leery of self-driving cars. AAA’s survey found only 13 percent of U.S. drivers report that they would feel safer sharing the road with a self-driving vehicle while nearly half (46 percent) would feel less safe. Others say they are indifferent (37 percent) or unsure (4 percent). Gender seems to make a difference when it comes to trusting self-driving cars. Women (73 percent) are more likely than men (52 percent) to be afraid to ride in a self-driving vehicle, and are more likely to feel less safe sharing the road with a self-driving car (55 percent versus 36 percent). Millennials are the most trusting, with only 49 percent (down from 73 percent) reporting that they would be afraid to ride in a self-driving car. While the majority of baby boomers (68 percent) still report being afraid to ride in a self-driving car, this generation is significantly more comfortable with the idea than they were a year ago, when 85 percent reported being afraid. Baby boomers (54 percent) and Generation X (47 percent) drivers are more likely than millennial drivers (34 percent) to feel less safe with a self-driving car. One thing appears to be true - U.S. drivers are highly confident in their own driving abiliFOR QUESTIONS ties. Three-quarters (73 percent) of U.S. drivers REGARDING SUBSCRIPTIONS: Call: 855-814-9547 consider themselves better-than-average Outside the U.S., call 847-400-5951 or you may subscribe or change your address online at: drivers. Men are the most confident in their insurancejournal.com/subscribe driving skills with eight-in-10 believing their Insurance Journal, The National Property/Casualty Magazine (ISSN: 00204714) is published semi-monthly by Wells Media driving skills are better than average. But perGroup, 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 haps their confidence is a bit of a fallacy conper special issue copy, $195 per year in the U.S., $295 per year all other countries. DISCLAIMER: While the information in this pubsidering more than 90 percent of automobile lication is derived from sources believed reliable and is subject to reasonable care in preparation and editing, it is not intended accidents are the result of human error. to be legal, accounting, tax, technical or other professional
Web Developer Terrance Woest twoest@wellsmedia.com
CIRCULATION
Circulation Manager Elizabeth Duffy eduffy@wellsmedia.com
Andrea Wells Editor-in-Chief
advice. Readers are advised to consult competent professionals for application to their particular situation. Copyright 2016 Wells Media Group, Inc. All Rights Reserved. Content may not be photocopied, reproduced or redistributed without written permission. Insurance Journal is a publication of Wells Media Group, Inc. POSTMASTER: Send change of address form to Insurance Journal, Circulation Department, PO Box 708, Northbrook, IL 60065-9967 ARTICLE REPRINTS: For reprints of articles in this issue, contact: Kelly De La Mora at 1-800-897-9965 ext. 125 or kdelamora@wellsmedia.com Visit insurancejournal.com/reprints/ for more information.
6 | INSURANCE JOURNAL | NATIONAL FEBRUARY 5, 2018
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MILLIONS OF PEOPLE SERVED. 1 SHARED RESPONSE.
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Call 855.411.0797 Or visit ThinkPHLY.com/HumanService Non-Profit /For Profit Human Services I Mental Health I Substance Abuse I Home Health Care I Home Medical Equipment Philadelphia Insurance Companies is the marketing name for the property and casualty insurance operations of Philadelphia Consolidated Holding Corp., a member of Tokio Marine Group. All admitted coverages are written by Philadelphia Indemnity Insurance Company. Coverages are subject to actual policy language.
National
Top 10 Employment Discrimination Charges in 2017
A
total of 84,254 workplace discrimination charges were filed with the Equal Employment Opportunity Commission (EEOC) nationwide during fiscal year (FY) 2017, according to the federal agency. The EEOC said it secured $398 million for victims in the private sector and state and local government workplaces through voluntary resolutions and litigation. The enforcement and litigation statistics are for FY 2017, which ended Sept. 30, 2017. The FY 2017 data shows that retaliation was the most frequently filed charge, followed by race and disability. The EEOC also received 6,696 sexual harassment charges and obtained $46.3 million in monetary benefits for victims of sexual harassment.
Specifically, the charge numbers show the following breakdowns by bases alleged, in descending order. The percentages add up to more than 100 because some charges allege multiple bases: • Retaliation: 41,097 (48.8 percent of all charges filed) • Race: 28,528 (33.9 percent) • Disability: 26,838 (31.9 percent) • Sex: 25,605 (30.4 percent) • Age: 18,376 (21.8 percent) • National Origin: 8,299 (9.8 percent) • Religion: 3,436 (4.1 percent) • Color: 3,240 (3.8 percent) • Equal Pay Act: 996 (1.2 percent) • Genetic Information: 206 (.2 percent) The EEOC resolved 99,109 charges in FY 2017 and reduced the charge workload
8 | INSURANCE JOURNAL | NATIONAL FEBRUARY 5, 2018
by 16.2 percent to 61,621, the lowest level of inventory in 10 years. The agency said it achieved this by more efficiently prioritizing charges with merit, more quickly resolving investigations, and improving the agency’s digital systems. The agency handled 540,000 calls to its toll-free number and more than 155,000 inquiries in field offices. EEOC legal staff filed 184 merits lawsuits alleging discrimination in FY 2017. The lawsuits filed by the EEOC included 124 individual suits and 30 suits involving multiple victims or discriminatory policies, and 30 systemic discrimination cases. At the end of the FY, the EEOC had 242 cases on its active docket. The EEOC said it has achieved a successful outcome in 90.8 percent of all suit resolutions. INSURANCEJOURNAL.COM
News & Markets | NATIONAL
January Reinsurance Renewals Saw Hikes of Up to 5%, with More Expected: S&P
G
lobal reinsurance pricing in aggregate was flat to up about 5 percent during the January 2018 renewals, and more price hikes can be expected in loss-affected areas during the year, according to S&P Global Ratings. After last year’s spate of natural catastrophes with global insured losses of roughly $130 billion, the question S&P asked in a report published late last month is whether the pricing hikes seen during the January renewals will persist. Last year’s insured losses “will likely wipe out the reinsurance sector’s 2017 annual earnings and erode the capital of certain reinsurers,” said S&P in its report titled, “Reinsurance Pricing Was Up At The January Renewals, But Will The Momentum Continue Or Fizzle Out?” As a result, “reinsurers stuck to their underwriting discipline — helped by stable capacity and the difficulty in displacing existing reinsurers, as cedents showed some loyalty,” S&P’s report said. It noted that specific rate increases varied by line of business, whether the policy had experienced any losses, and by region. “In terms of the spillover effect, outside of loss-affected lines and regions, the experience was somewhat mixed, but the sentiment in general had a slight positive bias, as reinsurers gave little away,” S&P said. “We believe that without the cushion of earnings from [the] property catastrophe line, which benefited from the recent mild catastrophe years, reinsurers would have been unwilling to accommodate any further slippage in rates and terms and conditions.” “We continue to maintain a stable outlook on the global reinsurance sector for the next 12 months and on the majority of the reinsurers we rate,” noted S&P Global Ratings Credit Analyst Taoufik Gharib. “In general, it seems that during the 2018 January renewal season, reinsurance INSURANCEJOURNAL.COM
pricing stopped its downward trajectory, reaching an inflection point in the underwriting cycle. Directionally, the trend is positive.”
‘In general, it seems that during the 2018 January renewal season, reinsurance pricing stopped its downward trajectory, reaching an inflection point in the underwriting cycle. Directionally, the trend is positive.’ Reinsurers are putting a positive spin on the January renewals because “rates are at least heading up or stabilizing with improving terms and conditions,” S&P said. This is a dramatic change from their sentiments expressed about last year’s first half.
Some Casualty Rates Inadequate
S&P noted that there were small to moderate rate increases in certain casualty lines, such as U.S. medical malpractice and
professional liability. The ceding commissions in these lines improved slightly — by 1-3 percentage points — and price increases were in flatto-low single digits, with more in lines that experienced adverse loss/claims trends, S&P explained. The report cautioned, however, that rates are still inadequate in certain casualty lines, such as general liability and directors and officers liability, “with deteriorating attritional loss ratios.”
What’s Ahead?
S&P predicted that rate increases will continue for the remainder of the year. Pointing to Florida and Puerto Rico, which are up for renewal in the first half of the year, S&P said that those markets are likely to experience “double-digit rate increases given the magnitude of the losses they suffered in 2017.” S&P added: “rate increases by cedents in their primary lines will help the pro rata insurance, as will the rate increases on renewals of portions of multi-year programs (especially in loss-affected lines).” There is plenty of traditional and alternative capital available, the report affirmed, which might hold back further rate increases during the next 12 months. “However, the reinsurance sector pricing has found its nadir — at least for now,” S&P said.
FEBRUARY 5, 2018 INSURANCE JOURNAL | NATIONAL | 9
Figures
460
The approximate number of businesses — out of about 1,300 — that reopened in the Texas coastal towns of Rockport and Fulton, nearly five months after Hurricane Harvey made landfall on Aug. 25, 2017. It’s estimated there were up to $134 million in business losses in Aransas County.
$2 MILLION
Declarations School District Ransom
“I don’t know legally if a school district can pay a ransom.”
— Brian Bridwell, business manager for the Jerome School
District in Idaho, talked about the Dec. 2017 predicament when district officials found much of its data encrypted. Affected files included a message from the cybercriminal: “If you want your data in a usable form again, you must pay us four bitcoin.”
Staying Put
“We have no plans to relocate Aetna’s operations from Hartford and, in fact, view Hartford as the future location of our center of excellence for the insurance business.”
— Carolyn Castel, vice president of corporate communications for CVS Health Corp., affirmed that Aetna would stay put, despite its previous announcement that it would move to another state after nearly two centuries in Hartford, Conn. The statement was made after CVS officials met with Hartford Mayor Luke Bronin and Gov. Dannel P. Malloy and after New York City halted a $9.6 million incentive package to lure Aetna.
Natural Remedy
“Kentuckians are begging for an alternative to opioids and prescriptions. The natural remedy is what they are asking for to help with their illness and ailments.”
— Kentucky Secretary of State Alison Lundergan Grimes, sup-
770
The number of highway fatalities on Kentucky roadways in 2017. The number of highway-related deaths dropped from 834 in 2016 and marks the first time there has been a decrease since 2013.
The amount in liability insurance Michigan State University is requiring in a deal to let white nationalist Richard Spencer speak on campus during spring break. The university last summer refused to rent space for Spencer. The new deal says he can speak on March 5, but he’ll be away from the heart of the campus in the livestock pavilion auditorium.
$3 MILLION
$90,000 How much Universal Protection Services will pay to settle a religious discrimination lawsuit filed in California by the U.S. Equal Employment Opportunity Commission. According to an EEOC lawsuit, the security company refused to accommodate the request of a Muslim security guard who sought a modification to the company’s grooming standard.
porting a bill introduced in the state House to legalize medical marijuana in the state. The bill was the result of work by a task force that Grimes led. Kentucky had more than 1,400 drug overdose deaths in 2016, an increase of 39 percent from 2013.
Harmful Toy
“There’s somebody out there who has a toy, and it could cause us harm. … It could have killed those guys.” — Lt. Col. Eric Schmidt, who works at Vance Air Force Base
in Oklahoma, says an aircraft on a Jan. 9 training flight came within about 50 feet of a drone flying at an altitude of approximately 1,000 feet. Drone operators need permission to fly within five miles of an airport or military airfield, and drones are limited to a maximum height of 400 feet when flying under aircraft training routes.
Self-Inflicted Problem
“Give me a break on this pivot … The problem we’re trying to fix was self-inflicted by Governor Walker.” — Wisconsin Democratic Assembly Minority Leader Gordon
Hintz commented on Republican Gov. Scott Walker’s intention to seek a state law to bar insurers from denying a person health coverage due to a pre-existing condition.
InsuranceJournal.com The amount Uber Technologies Inc. agreed to pay to settle a proposed class-action lawsuit brought on behalf of 2,421 drivers in New York who accused the ride sharing company of docking excessive fees from their fares. Drivers accused Uber of breach of contract for including sales tax and a “Black Car Fund” fee, which relates to workers’ compensation, in fares when calculating service fees, increasing the amounts owed.
10 | INSURANCE JOURNAL | NATIONAL FEBRUARY 5, 2018
Poll Does your firm plan to hire additional staff in 2018? Yes 56.34% (120 votes) No 28.17% (60 votes) Uncertain 14.08% (30 votes) Other: 1.41% (3 votes) Total Votes: 213
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West
Report Calls out California Wildfires Among 2017 U.S. Hazards
C
oreLogic’s annual Natural Hazard Risk Summary and Analysis released in late January shows that 2017 was a year of relatively average activity for most U.S. natural hazards with the exception of wildfires in California and flooding from Hurricanes Harvey and Irma. The annual report reviews hazard activity in the U.S. including events for flooding, earthquake, wildfire, wind, hail, tornado and hurricanes, as well as several international events including Hurricane Maria in Puerto Rico, a magnitude 7.1 earthquake in Mexico and Cyclone Debbie in Australia. Wildfires were also called out in the report. The total number of acres burned (9,791,062, acres) in 2017 is the third highest in U.S. history, preceded by 2015 INSURANCEJOURNAL.COM
(10,125,149 acres) and 2006 (9,873,745 acres), the report shows. The 10 most destructive wildfires in 2017, in terms of structures destroyed, were in California and include: • The Tubbs Fire in northern California which burned 36,807 acres and 5,643 structures • Until the Tubbs Fire, the two worst wildfires in California history — Tunnel in 1991 and Cedar in 2003 — destroyed 5,720 structures combined • The Nuns Fire in northern California which burned 54,382 acres and 1,355 structures • The Thomas Fire in southern California which burned 281,893 acres and 1,063 structures • The Atlas Fire in northern California which burned 51,624 acres and 781
structures • The Redwood Valley Fire in southern California which burned 36,523 acres and 544 structures • The Cascade Fire in northern California which burned 9,989 acres and 398 structures • The Lilac Fire in southern California which burned 4,100 acres and 157 structures • The Detwiler Fire in Mariposa County, California which burned 81,826 acres and 131 structures • The Creek Fire in southern California which burned 15,619 acres and 123 structures • The Helena Fire in Trinity County, California which burned 21,846 acres and 123 structures
FEBRUARY 5, 2018 INSURANCE JOURNAL | WEST | W1
WEST | News & Markets
Coalition of Businesses Challenges Fee on Montana Workers’ Comp Assets
A
business coalition is asking a judge to stop state officials from imposing a fee on assets of Montana’s workers’ compensation fund to plug a budget gap.
The suit filed in late January in state District Court in Lake County says employers pay into the fund to make sure injured workers get medical coverage and state officials can’t take the money for
Montana’s general fund. Plaintiffs include several small businesses, the Montana Roofing Contractors Association and the National Federation of Independent Businesses, Lawmakers recently approved a 3 percent management fee on state fund assets above $1 billion. The fee is intended to raise nearly $30 million over two years to help address a projected $227 million budget deficit. Copyright 2017 Associated Press.
Registration for California Seismic Retrofit Grants Open
R
egistration opened in January for eligible homeowners to receive grants of up to $3,000 for seismic retrofits of their older homes. Homeowners have until Feb. 23 to apply for a grant from California’s Earthquake Brace + Bolt program.
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W2 | INSURANCE JOURNAL | WEST FEBRUARY 5, 2018
EBB is expanding eligibility this year to 17 additional California cities in high hazard areas, bringing the total to 51. The California Earthquake Authority has provided $6 million in funding for the grants this year, which the organization says is enough to support an additional 2,000 or more code-compliant seismic retrofits. Homes with qualifying retrofits are eligible for discounts of up to 20 percent on CEA earthquake insurance premiums. Through Feb. 23, eligible homeowners can apply for retrofit funding at EarthquakeBraceBolt.com, where they can also find program information, select a licensed contractor and view the full list of eligible ZIP Codes.
1/19/18 4:35 PM
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WEST | PEOPLE
Elian Boukhalil
Cynthia Morales
CAL Insurance & Associates Inc. has added Elian Boukhalil as an account manager. Boukhalil will work within CAL’s affluent families division. She was previously an intern with Publiscreen Online. Before that she was an intern for Booksmart Inc. CAL Insurance is an independent insurance agency in San Francisco. Bellevue, Wash.-based FIT Insurance has named Cynthia Morales a personal account manager. Morales has more than five years of experience in the private client insurance industry. She comes to FIT from Pacific Northwest Insurance. FIT Insurance is a boutique insurance broker that specializes in designing insurance and represents CHUBB and Safeco Insurance portfolio products. Paragon Insurance Holdings LLC has named Andrew Petersen regional president and executive vice president of reinsurance operations. Petersen will be launching Paragon’s San Diego, Calif., presence Petersen was previously chief corporate development officer of Atlas General Holdings LLC, a San Diego-based general agency. Earlier in his career, Petersen held senior positions at Guy Carpenter & Company LLC, and Collins. Paragon is a national multi-line specialty managing general agent. Alliant Insurance Services Inc. has named Joe Cafferelli executive vice president. Cafferelli will be based in Phoenix, Ariz., and provide insurance and risk management solutions to clients throughout the region. Prior to joining Alliant, Cafferelli was managing director with Aon. He was a senior vice president with Willis before that. Newport Beach, Calif.-based Alliant provides property/casualty, workers’ compensation, employee benefits, surety, and financial products and services. Lockton has added David Ring to its Sacramento, Calif., office as a vice president. Ring will be responsible for client consulting and business development for employee benefits and commercial insurance. Ring has specialized in advising clients in the banking, financial services, manufacturing and
W4 | INSURANCE JOURNAL | WEST FEBRUARY 5, 2018
agriculture sector. He was previously with Woodruff-Sawyer & Co. Before that he led his own golf industry business for 24 years and also worked for RJR Nabisco. Lockton is a global professional services firm. NFP has named Clint Wadsworth vice president for corporate benefits. Wadsworth will oversee the corporate benefits strategy within NFP’s existing large employer segment. Wadsworth will also help support NFP’s relationships in the Utah market. Prior to NFP, he was the director of sales for Kaiser Permanente in Hawaii. He also spent almost 14 years as a benefits consultant in the Utah market. NFP is an insurance broker and consultant that provides employee benefits, property/casualty, retirement and individual private client solutions. Pioneer Underwriters has named Dave Sarnoski senior underwriter in its miscellaneous, technology and cyber liability division. Sarnoski will be responsible for errors and omissions liability business within the West Coast region. Sarnoski has more than a decade of experience in the industry, most recently as an executive risk specialist and team lead for the professional liability division at Vela Insurance. He started his career as an underwriter at USLI. Pioneer is focused upon specialty risk solutions including E&S property/casualty, financial products, diversified financial services, allied healthcare, environmental liability and specialty contractors. EPIC Insurance Brokers and Consultants has added Philip Westphal to its commercial property/casualty team in Sacramento, Calif., as a risk advisor/ broker in the healthcare practice. Westphal will be responsible for new business development and the design and management of risk management and property/casualty insurance programs for clients in a range of industries. Prior to joining EPIC, Westphal was director of employee safety for BETA Healthcare Group. Westphal began his insurance career at Fireman’s Fund Insurance Co., where he held a number of positions providing loss control and marketing services to middle-market commercial insurance clients. EPIC is a retail property/casualty and employee benefits insurance brokerage and consulting firm.
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Business Moves | NATIONAL Insurance Center of New England, Eastman & Davis Insurance Agency
Insurance Center of New England, based in Agawam, Mass., has added Eastman & Davis Insurance Agency of West Springfield, Mass., to its company. ICNE is a privately owned and independent insurance agency with three offices in Agawam, Gardner and Westford, Mass. Eastman & Davis clients may experience a few minor changes in process and procedures following the acquisition, according to ICNE. As part of the transition, Eastman & Davis’ West Springfield office will be closing. However, for the convenience of its clients, Eastman & Davis’ Marilyn Loudon will move to ICNE’s main office in Agawam, Mass.
Clermont Specialty Managers, Berkley Luxury Group
Clermont Specialty Managers, a Berkley Company, is expanding its service offerings nationwide and rebranding as Berkley Luxury Group with two divisions, Berkley Luxury Real Estate Specialists and Berkley Fine Dining Specialists. The change took effect February 1. President Bill Johnston said the rebrand is the most visible component of the company’s state-by-state U.S. rollout. The new name is designed to clearly identify the company as an operating unit of Berkley, a national commercial lines writer, and what Berkley Luxury Group offers: tailored, all-inclusive insurance for luxury condo, coop and rental properties and fine dining restaurants. INSURANCEJOURNAL.COM
The company, headquartered in Rutherford, N.J., with offices in New York City and Chicago, writes luxury habitational business in New York, New Jersey, Illinois, Pennsylvania, Maryland, Virginia, the District of Columbia, Minnesota and Massachusetts. Berkley Luxury Group also writes fine dining business in those states, as it does in California, Connecticut, Missouri and Nevada. The company plans to file in remaining jurisdictions as it expands its restaurant division nationwide. The rebrand will assist the company in moving into new territories, Johnston said. As part of the rebrand, the company will also be reworking its website and social media presence.
Alera Group, FIRM Inc.
Alera Group, a national employee benefits, property and casualty, risk management and wealth management firm, has acquired FIRM Inc., an insurance agency located in Mahwah, N.J. Terms of the transaction were not disclosed. FIRM Inc. provides clients with tailored property and casualty insurance. It specializes in comprehensive insurance protection for marinas and boatyards through its Marina Insurance Program, as well as commercial insurance for all lines of business. This acquisition will serve to strengthen Alera Group’s presence in the Northeast, expanding its locations into New Jersey. Based in Deerfield, Ill., Alera Group serves clients nationally in employee benefits, property and casualty, risk management and wealth management. It
was created by merging 24 firms across the U.S., and the firm has continued to grow organically and through acquisitions since its formation in December 2016.
Arthur J. Gallagher & Co., The Daniels Group Inc.
Arthur J. Gallagher & Co. has acquired New Providence, N.J.based The Daniels Group Inc. Terms of the transaction were not disclosed. Founded in 1991, The Daniels Group is a full-service employee benefits consultant and broker serving corporations, schools, hospitals, municipalities, religious and nonprofit organizations from plan design and implementation to ongoing plan administration. The Daniels Group President and CEO Kathleen Passantino and her associates will be relocating to Gallagher’s Whippany, N.J., office under the direction of Kent Lonsdale, head of Gallagher’s Northeast employee benefit consulting and brokerage operations. Arthur J. Gallagher & Co., an international insurance bro-
kerage and risk management services firm, is headquartered in Rolling Meadows, Ill., and has operations in 34 countries. It offers client service capabilities in more than 150 countries through a network of correspondent brokers and consultants.
Capitol Indemnity Corp., Rockhill Insurance Group
Capitol Indemnity Corp., a wholly-owned subsidiary of CapSpecialty Inc., said it has acquired the renewal rights to Rockhill Insurance Group’s excess and surplus environmental insurance book of business. Rockhill is a member of the State Auto Insurance Group, which has been looking to exit the excess and surplus lines business. CapSpecialty is a subsidiary of Alleghany Corp. CapSpecialty, through its specialty carrier, Capitol Specialty Insurance Corp., will begin quoting all new business submissions made to Rockhill as well as renewals sometime in the first quarter of 2018.
continued on page 12
FEBRUARY 5, 2018 INSURANCE JOURNAL | NATIONAL | 11
NATIONAL | Business Moves continued from page 11 Financial terms of the transaction were not disclosed. In 2016, State Auto stopped writing program business and realigned its excess and surplus lines unit, Rockhill. Last year State Auto CEO Mike LaRocco said the compa-
ny decided to exit the excess and surplus business completely. The move is part of State Auto’s continuing turnaround effort following disappointing results in 2015. State Auto acquired Rockhill in 2009 to enter the excess and surplus lines business.
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LaRocco has been stressing a digital transformation at State Auto, according to a report by Carrier Management in which he said the E&S business was not a good strategic fit with State Auto’s core products of home, auto, personal umbrella, and on the commercial side, commercial auto, BOP, commercial umbrella, middle-market commercial, workers’ compensation and farm and ranch business. Stephen Sills, CEO of CapSpecialty, said that adding Rockhill’s environmental book to CapSpecialty’s existing environmental book will strengthen his company’s presence in this segment for small to mid-sized businesses. Sills said CapSpecialty will be keeping Rockhill employees currently working on this book. Keefe, Bruyette & Woods served as financial advisor to State Auto in the transaction. In addition to Capitol Indemnity Corp. and Capitol Specialty Insurance Corp., CapSpecialty’s affiliates include Platte River Insurance Co. In addition to CapSpecialty, holding company Alleghany’s property/casualty subsidiaries include Transatlantic Holdings and RSUI Group. Last year Alleghany sold Pacific Compensation Insurance Co., an underwriter of workers’ compensation insurance primarily in California, to CopperPoint Mutual Insurance Co. for $150 million.
JLT Specialty USA
JLT Specialty USA, a U.S. subsidiary of Jardine Lloyd Thompson Group plc (JLT), the global specialist risk advisor and broker, has chosen Chicago as its U.S headquarters. The company said it has seen impressive growth in the past three years and that Chicago has been a critical part of that growth and expansion. JLT Specialty USA will continue its investment in the city as the Chicago location is expected to become its flagship office and largest location in the U.S. The company plans to double the size of its workforce in Chicago in the next few years.
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NATIONAL | News & Markets
Cyber Risk Ranks as Most Feared BI Trigger for Global Firms: Allianz By. L.S. Howard
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usiness interruption (BI) and cyber incidents interlink as the major threat facing companies, according to a report published by Allianz Global Corporate & Specialty (AGCS). Allianz revealed that BI — including supply chain disruption — ranks as the most important global risk for the sixth year in a row (listed by 42 percent of respondents). BI scenarios include the physical damage impact of natural catastrophes and fires on facilities and the supply chain. They also include new triggers stemming from digitalization and interconnectedness, which have a high financial cost, but usually do not cause physical damage, explained the company’s seventh annual risk report, “Allianz Risk Barometer 2018.” The report surveyed 1,911
respondents in 80 countries, including Allianz’ customers, brokers, risk consultants, underwriters, senior managers and claims experts. The report found that BI and cyber are considered a joint threat because cyber incidents are viewed as the most feared BI trigger, while BI is the main cause of economic loss after a cyber incident. Although cyber BI incidents are rising from hacker attacks, the report noted they are more frequently caused by technical failures and employee error. The causes of BI that respondents most fear include: • Cyber incidents (listed as the top concern by 42 percent of respondents) • Fire, explosion (40 percent) • Natural catastrophes (39 percent) • Supplier failure (30 percent) • Machinery breakdown (23 percent).
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“BI can have a tremendous effect on a company’s revenues,” said the report, noting that BI losses can often be much higher than the cost of any physical damage. “The average large BI property insurance claim is now in excess of $2 million,” which is more than a third higher than the average direct property damage loss of $1.75 million, the report said. Increasingly, BI losses are triggered by nontraditional risk exposures, which don’t cause physical damage but result in lost income, or non-damage business interruption (NDBI), Allianz said. Businesses still have to deal with traditional exposures, such as natural catastrophes, but they also are challenged by many new triggers, said Volker Muench, global practice group leader, Property, AGCS. New BI triggers include digitalization (as data becomes a critical asset), supplier interdependencies, product quality incidents and indirect impacts from terrorism and political events or strikes, when people stay away from affected areas, Muench said. “BI impact is easy to underestimate,” said Thomas Varney, regional manager Americas, Allianz Risk Consulting, AGCS. “Risks can be extremely complex. In many cases, it is difficult to know what the actual exposure is, how to calculate the loss or even where the actual disruption in the supply chain occurred.” Companies often underestimate the length of time it takes to get back in business after a business interruption, particularly when they must use alternative suppliers, Muench said.
‘Risks can be extremely complex. In many cases, it is difficult to know what the actual exposure is, how to calculate the loss or even where the actual disruption in the supply chain occurred.’ For example, companies may have their own cyber-attack continuity plan but might have failed to assess the impact of a cyber incident on their suppliers, which prevents them from delivering products or services.
Top Business Risks
Although business interruption and cyber are at the top of Allianz global business risks, survey respondents listed eight additional concerns. Here are all the global risks included in Allianz’ risk barometer for 2018 with the accompanying percentage of respondents: • Business interruption (42 percent) • Cyber incidents (40 percent) • Natural catastrophes (30 percent) • Market developments (22 percent) • Changes in legislation and regulation (21 percent) • Fire explosion (20 percent) • New technologies (15 percent) • Loss of reputation or brand value (13 percent) • Political risks and violence (11 percent) • Climate change/increasing volatility of weather (10 percent). INSURANCEJOURNAL.COM
News & Markets | NATIONAL
Bermuda’s Re/Insurance Model to Be Tested Following U.S. Tax Reforms: Fitch
‘U.S. tax reforms will shrink the profitability gap between Bermuda and U.S. companies ... ’ By L.S. Howard
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he Bermuda re/insurance model will be tested following U.S. tax reforms and the continuing challenges of competitive market conditions, according to a report by Fitch Ratings. The cut in the U.S. corporate tax rate to 21 percent from 35 percent, along with the new base erosion and anti-abuse tax (BEAT), will “significantly reduce the long-standing Bermuda tax advantage over the U.S.,” said the report, “Bermuda 2018 Market Update – U.S. Tax Reforms Cut into Bermuda’s Advantage as Market Remains Competitive.” “U.S. tax reforms will shrink the profitability gap between Bermuda and U.S. companies that has already been narrowing over the last several years as competitive market conditions have reduced Bermuda’s historical ROAE [return on average equity] advantage,” said the report. The report emphasized, however, that the overall benefit of Bermuda as a domicile will likely endure, although at INSURANCEJOURNAL.COM
a decreased level. Fitch has not planned any immediate rating actions in response to the U.S. tax changes.
BEAT to Alter Ceded Strategy
One major aspect of the tax changes — BEAT — will affect the tax benefit that Bermuda re/insurers have previously derived from quota share treaties when U.S. business is transferred to Bermuda and other offshore affiliates through intercompany reinsurance, Fitch said. Companies traditionally paid a U.S. excise tax of 4 percent on direct premiums and 1 percent on reinsurance premiums. “Following various unsuccessful attempts in the U.S. Congress since 2000 to discourage these offshore reinsurance transactions by limiting the deductibility of reinsurance premiums paid by insurers to their foreign affiliates, the recent tax reforms included meaningful changes in the related excise tax,” Fitch said. “The added BEAT increases the excise tax on a step-up basis to 5 percent in 2018, 10 percent in 2019 and 12.5 per-
cent in 2026 and substantially reduces the economic incentive to internally cede business from the U.S. to Bermuda.” Fitch said most of these reinsurance arrangements will be eliminated or significantly altered, with Bermuda re/insurers “retaining more business and capital in their U.S. subsidiaries, taxed at U.S. rates.” This shift in capital to the U.S. will also reduce Bermuda re/insurers’ dividend flexibility.
Hedge Fund Re/Insurers Receive Clarity
In the new tax law, the U.S. government was addressing concerns that hedge funds had set up re/insurance companies primarily to avoid taxes by getting an exemption from passive foreign investment (PFIC) rules, Fitch indicated. “The new tax law amends the PFIC exception for qualifying insurance companies by adding a ‘bright-line’ test that should help to remove uncertainty and add needed clarity to the industry.” Fitch noted that the test may force some hedge fund reinsurers to make strategic changes
to avoid being deemed a PFIC, which would have adverse tax implications for their U.S. shareholders. “The new test requires applicable insurance liabilities — excluding unearned premium reserves — to constitute more than 25 percent of assets to be considered a legitimate insurance company,” Fitch said. There also is an alternative, qualitative test for some established, traditional short-tail re/ insurers that might not pass the bright-line test. If these companies can show they are predominantly engaged in insurance, they can still qualify as insurance entities, “provided insurance liabilities make up at least 10 percent of assets,” the report said.
Pricing Short-Lived
Fitch predicted that improved pricing would be short-lived given the abundance of alternative capital that competes directly with traditional capital. It remains to be seen, said Fitch, whether additional rate increases will be attained during the mid-year renewals.
FEBRUARY 5, 2018 INSURANCE JOURNAL | NATIONAL | 15
NATIONAL | Closer Look | Mergers & Acquisitions
Insurance Agency M&As Soared 31% in 2017: OPTIS
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ergers and acquisitions of insurance agencies last year broke all records in 2017, according to OPTIS Partners’ annual report. The OPTIS database recorded 604 deals in the United States and Canada in 2017, a 31 percent jump from 461 in 2016. “This whopping increase exceeded expectations,” said Timothy J. Cunningham, managing director of OPTIS, an investment banking and financial consulting firm specializing in the insurance industry. “We expect the beat to go on in 2018.” The report covers agencies selling primarily property/casualty insurance, agencies selling both P/C and employee benefits, and employee benefits agencies.
In 2017, private equity/hybrid buyers accounted for 382 transactions, 63 percent of the total, compared with 56 percent in 2016. “The concentration of PE /hybrid buyers has grown steadily since we began tracking deals in 2008 when only four of the top 10 buyers had private equity backing,” he said. The 2017 report lists PE/ hybrid as a new buyer category. It includes all private equity-backed buyers plus certain privately owned buyers with material internal or external financial support for acquisitions. The top five buyers were Acrisure (92 acquisitions), Hub International (49), Alera Group (38), Broadstreet Partners (32) and Gallagher (30). All
16 | INSURANCE JOURNAL | NATIONAL FEBRUARY 5, 2018
were in in the PE/hybrid category except publicly owned Gallagher. Privately owned brokerages completed 128 transactions from 105 unique buyers in 2017, up from 114 acquisitions from 87 separate buyers in 2016. This was a record number both of deals and unique buyers. By seller type, property/casualty-focused agencies dominat-
ed the list. They accounted for 301 of the 2017 transactions, 49.8 percent of the total. Employee benefits brokers accounted for 174 transactions, 28.8 percent of the total, nearly a 90 percent increase from 2016. “The explosion in employee benefits agency sales was fueled by Alera, Acrisure and several other active acquirers,” Cunningham said. Agencies selling both property/casualty and employee benefits coverages were sold in 86 deals last year. There were 43 sales in the “other” category, which includes managing general agents, third-party administrators and other types of sellers. The statistics pointed to these lessons, according to Daniel P. Menzer, partner: • •
The inventory of interested sellers remains high. It’s hard to perpetuate agencies internally. Third parties are willing to pay much more than internal buyers. Few agency owners will leave that much money on the table.
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• A strong economy, a stable insurance market and easy access to relatively inexpensive capital for buyers all spurred activity. • There are plenty of investors and lenders willing to fund PE/hybrid buyers. • Buyers should pay attention to cash flow and be careful not to overpay. • Sellers should identify the best cultural and operational fit and take advantage of strong pricing before things change. The actual number of sales was greater than the number
reported, as many buyers and sellers do not report transactions, and some acquirers do not report small transactions, Cunningham said. However, he said, the OPTIS database tracks a consistent pool of the most active acquirers, including other announced deals, to provide a “reasonably accurate indication of deal activity in the sector.” Focused exclusively on the insurance distribution marketplace, Chicago-based OPTIS offers merger and acquisition representation for buyers and sellers, including due-diligence reviews.
Still Hot… M&As to Date in 2018
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&A activity in the insurance industry was hot in 2017, and thus far in 2018, it shows no signs of cooling, with 30 deals announced in the month of January alone. The following are reports from the InsuranceJournal.com news archives of M&As in the U.S. for January 2018. Aon Acquires Real Estate Investment Advisor Townsend Group RightSure Acquires Auto & Property Insurance Solutions in California Seeman Holtz Acquires Houston’s Dash Insurance Agency Seeman Holtz Property & Casualty Acquires J&A Insurance of Florida Oklahoma’s Howell-Stone Insurance Joins Rich & Cartmill AmWINS to Acquire Seacoast Brokers, Trident Claims Management Ryan Specialty Group to Acquire New York’s Kerwick & Curran Oklahoma’s Mid-Continent to Acquire Tank Owners Renewal Rights American Enterprise Acquires Utah-Based Great Western Insurance Wintaai Holdings Acquires Louisiana’s Stonetrust Commercial Insurance Independent Agents of Plainview, Texas, Merges with Higginbotham UK Broker Beach & Associates to Be Acquired by Michigan’s Acrisure Hub Acquires P/C Book from
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Montreal’s Daniel Picard Arthur J. Gallagher Acquires Houston’s AquaSurance State Auto’s Rockhill Sells Environmental Renewals to CapSpecialty Alera Group Acquires New Jersey’s FIRM Inc. JenCap Holdings to Acquire Genesee General of Georgia Arthur J. Gallagher Acquires New Jersey’s The Daniels Group Kaplansky Acquires Massachusetts’ Anthony and Malcolm Agency AIG to Buy Bermuda Reinsurer Validus for $5.6B in Cash Leavitt Central Coast Insurance Acquires Pulford in California Liberty Mutual Sells Off Life Insurance Unit, Realigns P/C Business InsuranceHub Acquires Insley Insurance of Georgia Ryan Specialty to Acquire New York’s Irwin Siegel Agency Oklahoma City Agencies, Universal Insurance and Ledbetter, Merge MGA Ascent Underwriting Acquired by Preservation Capital Partners Arthur J. Gallagher Acquires Market Financial Group, Austin Consulting Eastern Insurance Acquires Massachusetts’ Southeastern Agency Seeman Holtz Acquires Arizona’s Xponent Employer Solutions Paragon in Connecticut Gains Equity Investment from EPIC and Oak Hill
FEBRUARY 5, 2018 INSURANCE JOURNAL | NATIONAL | 17
NATIONAL | Special Report | Commercial Auto
18 | INSURANCE JOURNAL | NATIONAL FEBRUARY 5, 2018
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a home,” Landess said. But if true,” said Ed Havermann, haven’t been enough to aid the distressed line overall, at least there’s any kind of “hair” on a vice president, transportation he difficult job of movnot yet. risk, especially in challenging division, at Keating, a national ing commercial auto Adverse reserve developwholesale brokerage. Even classes such as trucking for ment has contributed to coninsurance to a profitable if the rumors aren’t true, hire, tow trucks, non-emerSegment Report U.S. Commercial Auto gency medical transportation sistent increases in net underplace has not gotten any easier.Market Havermann says everyday he and even charter buses, agents writing losses over the past six More vehicles on the road sees rates going up, underwriting getting tougher, certain thanks to a rebounding econwill find it difficult to find an years, according Exhibit to 5 A.M. Best. Commercial Liability – One-Year Development omy, more miles driven, dis“InsurersU.S. initially appeared Autoclasses of business becomeReserve available market. “Those hairs tracted drivers and “nuclear” eliminate so much of the marmore distressed and carriers slow to react as loss trends 2.0 8 ketplace, immediately, which verdicts are all adding to trououtpaced rate increases, and are pulling back. has to be frustrating for retail “Overall I see it tightening bling performance trends in the commercial auto underwrit1.5 6 ing losses grew from $744.8 ers,” he said. up. Average accounts to more commercial auto segment. Progressive’s Miller agrees. That’s not all. million in 2011 to slightly over distressed accounts will see 4 $2.9 billion in1.02016,” the report “A couple segments remain “At an industry level, we rates going up.” Only the better continue to see some adverse said. Insurers have been left to hard to place, specifically new than average accounts will see 0.5 as profitability 2 play “catch up” ventures and towing operaloss development from prior rates holding steady. tions,” he said. Miller added remains pressured, and, as loss AY (assessment) years, further 0.0 0 that Market Disruption courier and expediter costs continue to rise. contributing to poor results,” It’s not all bad — good or classes can also be challenging. But according to Rose, many Mike Miller, Progressive’s commercial marketing business “hairless” risks can do well, “However, there’s still-2a good carriers have-0.5 taken steps to leader, told Insurance Journal. market for more tenured, clean says Cal Landess, president, reverse the trends. In his view, Many carriers are restricting risks.” Pacific Gateway Insurance it will be those -1.0 carriers that will -4 2009 2010 2011 2012 2013 2015 2016 an owned generbusiness, getting out of certain clean risks could 2014 Even the see more positive 2006 results2007 soon- 2008Agency, One Year Development from Prior Year trouble ahead, al agency of the National % Change have er than later. segments altogether, or taking some Indemnity seems bedata a split group of insurance rate to cover trends. “Generally, “ThereSource: according to Landess. A.M.to Best and research between carriers that have takcompanies, a subsidiary of there’s also a higher degree of “If they are continuing to inadequaterate pricing remains anBerkshire issue. TheHathaway most recent accident years to be en the necessary increases Inc. review on renewals, impacting beappear renewed bybenefitting their current from the large rate increases. From 2010 to 2014, the yearly commercial auto liability accident and underwriting changes to terms and rate, and some carcarrier, are a really good risk, year loss & LAE ratio was less favorable than the calendar year ratio. However, the 2015 andoffered riers are increasing non-renewkeep up with the loss trends they will probably be 2016 accident year loss ratios are 4.6 points and 8.8 points more favorable than their calendar als,” Miller added. versus those who haven’t,” reasonable terms,” he said. year counterparts. Price increases in today’s Rose said. “Those who haven’t However, if the current carrier for whatever reason has commercial auto market are made changes and are choosing Average rates increased by 5.4%, 6.1%, and 7.3% in the first three quarters of 2017—the largest the policy, even nonrenewed the norm, says Greg Rose, to ignore the signs and look increases—as at quarterly consecutive insurers worked to offset the rise in losses and improve product director in commerif it’s because that carrier has the overall package,but arewhether going the increases will be enough to reverse the profitability, trend in underwriting cial lines, who is responsible decided to retire from a specific to get hurt in is the long-term.” losses still too early to tell. for State Auto Insurance class of business, things will be There is lots of discussion What’s Driving Companies’ commercial auto rough. about carriers exitingFrequency the com- and Severity? are best equipped to price their products when they can accurately estimate potential mercialInsurers auto market in some business. Rates are up single to Landess For example, losses (in terms of frequency and severity of losses). In the case of commercial auto, actual form or another. low double-digits, he added. explained, if “ABC insurance frequency and severity last ten years. “We are constantly hearinghave deviated far from expectations over the Insurers have posted net company is retiring from gas “Obviously, the great risks oline haulers, they are retiring rumors of carriers exiting but underwriting losses in comcontinued on page 20 mercial auto over the past six in any class can usually find I’m not really sure if they are years in the line, according Exhibit 6 to a recent A.M. Best market U.S. Commercial Automobile – Combined Ratio Components, 2007-2016 segment report, “Commercial 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Automobile Sector Struggling Net Premiums Written ($ Millions) 25,766 23,782 22,083 21,172 21,224 22,245 24,066 25,832 27,625 28,327 to Keep Pace.” Pure Net Loss Ratio 52.7 54.6 54.5 54.9 59.8 63.2 62.9 62.6 65.2 68.2 Net Loss Adjustment Expense Ratio 11.1 11.6 11.4 11.6 11.8 12.3 12.7 12.4 13.3 12.6 While commercial auto Loss & LAE Ratio 63.8 66.2 65.9 66.6 71.6 75.5 75.7 75.0 78.5 80.7 insurers have tried to address Underwriting Expense Ratio 30.2 30.4 33.2 31.2 31.7 31.3 31.0 28.2 30.1 29.6 unfavorable results by tightenCalendar Year Combined Ratio 94.0 96.6 99.0 97.7 103.3 106.8 106.6 103.2 108.7 110.4 ing underwriting and improvThe data in this exhibit is based on companies in the U.S. Total P/C Industry Composite (AMB# 99200) that filed the Insurance Expense Exhibit (IEE) for 2016 and represents all Commercial Automobile business written. ing rate adequacy, the changes
By Andrea Wells
Change from Prior Year (%)
One Year Development ($ Billions)
T
‘There seems to be a split between carriers that have taken the necessary rate increases and underwriting changes to keep up with the loss trends versus those who haven’t.’
Source: A.M. Best data and research
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4FEBRUARY 5, 2018
INSURANCE JOURNAL | NATIONAL | 19
NATIONAL | Special Report | Commercial Auto continued from page 19
could have a great risk that a large book commercial T’S M ARKET SinEGMENT RofEPORT from that book of business, you
18
nt uate ses ging
miles driven; and an increase in U.S.driving,” Commercial Auto distracted A.M. Best said in its recent report. class of business that is being auto business on the streets in Rising vehicle repair and nonrenewed. That impacts the a tough environment, tough marketplace because simply medical costs are also driving marketplace to begin with, because it’s being nonreup claims severity. where there’s limited capacity, newed.” “After lagging by several some of it becomes distressed A good broker will explain quarters, insurers have made immediately.” The more difficult automobile risks within that book has of lagged that it’s not the fault thecommercial concerted to raise rates, The performance ofofthe segment that of efforts other P/C industry have a hard time third business insured for – and perhaps thatand willcontinued butquarter have been unable to stop sectors several years towill deteriorate through 2017. Commercial open insurers the doorshave for atried few marfinding a home.results by enhancing theunderwriting bleeding,” the measures report said. auto to address unfavorable kets.aggressively “But again, now you’ve While there is a lot of market Reversing the unfavorable and raising rates to improve rate adequacy. got a book of business, for capacity in the overall properresults in commercial auto ty/casualty market, commercial this particular risk, that’s beenof rate will be a challenge for insurers After six straight quarters decreases, insurers began responding to the negative auto has been a loss leader for placed on the streets, it’s a for years. A.M. Best the underwriting pressure with rate increases in the third quarter of 2011. Stung by says, adverse reasonable risk but it’s a tough the standard market insurers industry will have to be more reserve development at the end of 2011 (after five years of favorable development), class, tough marketplace, it will for many years, Landess said. discriminating when it comes companies recognized that the pricing levels were inadequate and began pushing average Those standard companies probably have a hard time findto risk selection, prudent rates in the sector upward at a growing pace, which continued through third quarter ing a home if it doesn’t fall into right now are trying to get rid reserving, and pricing. 2017 (Exhibit 1). a program – and programs are of some commercial auto, he “On the positive side, the falling apart left and right,” he said. results of the aggressive rate Commercial automobile lags the overall commercial lines group and continues to said. increases — particularly over underperform the P/C market asClaims a whole (Exhibit 2). Adverse the reserve development has This scenario could play last two years — should contributed to consistent increases in net underwriting losses over the past sixover years, “The difficulties of underout again and again as more start manifesting the near but insurers initially appeared slow to commercial react as lossauto trends increases, writing are outpaced carriers limit their offerings term,”rate the report said. and commercial losses grew from $744.8 million inAverage 2011 torates slightly overby by rising being compounded in commercialauto auto,underwriting Landess increased $2.9 billion in 2016. In addition, owing to the lag before results fully recognize premium claims frequency owing to said. “For example, recently 5.4 percent, 6.1 percent, and price increases, profi tability remains pressured, vehicles and, as loss costs rise, insurers are three stuck more commercial our home office was advised 7.3 percent in the first playing catch-up. being on the road as the econthat Zurich is getting out of quarters of 2017—the largest omy rebounded following the a lot of commercial auto,” he quarterly consecutive increasrecession; the record growth in es—as insurers worked to offset said. “You take a company the size of Zurich and if they dump
Commercial Automobile Sector Struggling to Keep Pace
Exhibit 1
U.S. Commercial Automobile – Quarterly Rate Change 8
the rise in losses and improve profitability. The calendar year combined ratio in commercial auto increased sizably, to 110.4 percent in 2016 from 94 percent in 2007, according to A.M. Best. The loss and loss adjustment expense ratio, which rose 27 percent in 10 years, due to both adverse reserve development and inadequate pricing, has been the main contributor to the deterioration in the combined ratio. A.M. Best noted that “whether the increases will be enough to reverse the trend in underwriting losses is still too early to tell.” “Frequency and severity may continue to rise in line with economic growth, which the use of more detail-focused underwriting (using effective loss control and risk management techniques), in addition to continued rate increases, could help mitigate,” Best noted. “However, there will be more pain — owing to factors such as distracted driving and attorney involvement — before insurers realize any long-term gains from focused underwriting and pricing efforts.”
6
Oldwick t. 5683
2
(%)
k t. 5422 st.com
ck t. 5792 st.com
0 -2 -4 -6 -8
wick
18-010
Turnaround
4
cts:
2010
2011
2012
2013 1Q
2014 2Q
3Q
2015
2016
2017
4Q
Source: Council of Insurance Agents & Brokers (CIAB)
INSURANCE JOURNAL | NATIONAL FEBRUARY 5, 2018 ALL RIGHTS RESERVED. No part of this report or document Copyright20© |2018 A.M. Best Company, Inc. and/or its affiliates. may be distributed in any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of A.M. Best. For additional details, refer to our Terms of Use available at A.M. Best website: www.ambest.com/terms.
One thing transportation experts agree on is that something’s got to change for the commercial auto market to make a turnaround. Aside from rate adequacy for the line, there’s hope in better managing safety. State Auto’s Rose said he encourages agents to get involved and embrace the telematics and fleet management movement. State Auto launched its Fleet Safety 360 telematics product, free to INSURANCEJOURNAL.COM
commercial auto fleets, last September. “The adoption rate for telematics is very low across the U.S. and as an industry we need to do a better job of educating insureds,” Rose said. While adoption rates are rising some, Rose believes agents can play a role in helping commercial auto clients to understand the importance of telematic tools. “I think a lot of agents tend to not understand or see telematics as big brother versus the benefit gained from using telematic products,” Rose said. “It’s the key to bringing down both frequency and severity in commercial auto.”
If there’s any kind of “hair” on a risk, especially in challenging classes. Rose said some telematics devices offer much more than “big brother” value. “For State Auto, it’s a key tool we are using as we go digital.” State Auto offers commercial auto insureds an automatic 10 percent premium discount just for signing up during the first year. If the policyholder keeps the devices after renewal, they can be eligible for up to a 25 percent policy discount based on how the fleet performed during that first year. While the Fleet Safety 360 product is still evolving, Rose sees great benefits for the sector going forward. “With telematics there’s the capability in the very near future to actually monitor an accident in real time,” he said. “There’s unlimited potential.” Rose said State Auto curINSURANCEJOURNAL.COM
rently doesn’t “surcharge” for negative behaviors discovered under its Fleet Safety 360 tool, but the insurer does utilize the data for underwriting. Right now, the program is gaining the most traction in the medium size fleet category, those with greater than 10 vehicles but less than 50 vehicles. According to Rose, there aren’t many companies playing with telematics in commercial auto. But he believes more will jump in. “When that happens, you will see more that it’s not just about price — it will be about what tools can insurers offer them.” Progressive, which has utilized its own usage-based telematic tool — Snapshot — in personal auto for years, is “very excited about the use of telematics data in the commercial space,” Miller said. “In addition to leveraging our learnings about driving behavior from our personal lines organization, we see a lot of opportunity to understand more about commercial vehicle usage for underwriting applications.” Late last year, just as the federal mandate for electronic logging devices (ELDs) went into effect, Progressive launched its Smart Haul usage-based insurance program for truckers in most states. “With this program, we utilize information collected from ELDs and offer qualified trucking risks savings on their commercial auto policy premium for sharing their ELD-generated driving data with us,” Miller said. “Early market response to our Smart Haul program has been encouraging, and we expect it to continue to grow as market utilization of ELD
devices increases with stricter enforcement of the ELD law in 2018 and truckers develop richer telematics driving histories.” Dan Guveiyian, vice president, product and platform, business insurance – auto, at Travelers, agrees telematics has a rightful place in commercial auto. “Proper use of telematic devices can have a favorable impact on fleet operations,” he said. But he says the effectiveness of telematics tools in a fleet operation has a lot to do with good communication from managers to drivers. “One key area that we identified was communication between the fleet manager and the drivers,” Guveiyaian said. “A good, open relationship is really important to coach safe driving behaviors.” Sometimes a driver may have had to take an action on the road and without good dialogue with their fleet manager, drivers can feel like “big brother” is watching. “That’s a big focus for fleet managers to position it [telematics implementation] properly,” he said. Even before fleet managers fully engage with a telematics program they should have a good foundation on the in-and-outs of its usage established with drivers.
Human Element
Not everyone is convinced that telematics offers the best relief to the troubled commercial auto line. Keating’s Havermann worries more about the “human element” that’s driving claims today. “One thing I’m afraid of is that the industry is going to think that we can throw in telematics and everything will be hunky-dory but we will still have that human element,” he
said. Telematics will help loss trends. “They are helping.” Frequency of claims are going to go down and now truckers are able to protect themselves a bit more with things like drive cams. “Now we can show that the trucker is in the right and didn’t do anything wrong,” he said. “So, yes, your safety scores are going to drop.” However, sometimes the devices, whether GPS tools or dash cams, don’t always work in the driver’s favor, said Bob Reardon, president of Keating’s tKg Brokerage. “Sometimes those devices can prevent a claim, but they can also add to severity by proving negligence of the driver in court,” he said. “They can go against the risk as much as it helps the risk.” From Havermann’s view, old-school training is the best way to combat poor results in commercial auto. “I don’t think people are paying attention to straight-up training, especially in trucking,” he said. In years past, driver training was more of a focus for insurers. “Training was mandatory, and insurers were sending out people to do safety meetings, and all that. I believe the industry was running a bit better.” But as costs had to be cut, those services fell by the wayside, Havermann said. “People just need to focus more on safety,” he said. The livelihood of truck drivers needs to get better, too. If that happens, the industry will see a better pool of quality truck drivers in the market. “Truckers should have better accommodations on the road and then you will get a better Share driver. It will help.”
this article with a colleague. IJMAG.COM/205SP
FEBRUARY 5, 2018 INSURANCE JOURNAL | NATIONAL | 21
NATIONAL | M&A Review
2017 Yields Highest Recorded Number of Announced Deals
By Sarah Lucas
T
he number of announced U.S. insurance broker deals in 2017 was the highest in recorded history, at 536. This year also had the highest number of deals closed in the fourth quarter since 2012 (when the capital gain tax rates were set to change after yearend, spurring significant fourth quarter (Q4) deal activity). The tax legislation signed into law in December 2017 possibly
encouraged some additional activity in 2017, specifically in geographic areas that are negatively affected by the loss of the state income tax deduction by waiting until 2018. Nevertheless, the merger and acquisition (M&A) market continues to be very active across the United States, with a steady supply of agency owners looking to sell, and demand by firms looking to acquire. Private equity (PE)-backed buyers continued to dominate M&A activity, with 57 percent of all announced transactions, compared with 55 percent in 2016 and 47 percent in 2015. Other classes of buyers in 2017 included independent insurance brokers (completed 24 percent of the announced deals), public insurance brokers (7 percent of deals), banks and thrifts (4 percent), insurance carriers (3 percent), and “other” (5 percent), which includes
private equity groups, underwriters, specialty lenders, and insurtech.
Top 10
The top 10 acquirers closed 50 percent of the announced deals in 2017. The top four were Acrisure LLC, HUB International Ltd., BroadStreet Partners Inc., and Arthur J. Gallagher & Co. (AJG). AssuredPartners Inc. and Seeman Holtz Property and Casualty Inc. tied as the fifthmost-active acquirers. Acrisure had 67 announced deals in 2017 and the firm, generally, does not announce all its deals, so the total is likely higher. Acrisure is private equity-backed, but majority owned by management and former agency principals. HUB was the second-most active acquirer, with 42 announced deals in the United States. The firm has a broad
network across the U.S. and Canada, where its acquisition activity is generally focused. BroadStreet closed 29 deals in 2017. BroadStreet has a unique ownership structure with a longer term primary investor, the Ontario Teachers’ Pension Plan. AJG was the fourth-mostactive and the only public broker to make the top 10 list of acquirers. The firm is acquisitive globally and announced 25 deals in the United States in 2017. Assured had 23 announced transactions. The Floridabased firm is PE-backed and is an active acquirer across the United States. Assured has averaged 25 deals per year over the past five years. Seeman Holtz, a newer entrant, also had 23 announced deals in 2017. The firm has been aggressively acquiring
continued on page 25
Announced Deals (U.S. Transactions)
Note: Past performance is not necessarily indicative of future results. Source: S&P Global Market Intelligence, Insurance Journal, and other publicly available sources 22 | INSURANCE JOURNAL | NATIONAL FEBRUARY 5, 2018
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Merger Announced and Acquisition Activity Date Buyer Announced Date
10/1/17 10/1/17 10/1/17 10/1/17 10/1/17 10/1/17 10/1/17 10/1/17 10/1/17 10/2/17 10/2/17 10/2/17 10/3/17 10/3/17 10/4/17 10/5/17 10/6/17 10/6/17 10/7/17 10/9/17 10/10/17 10/11/17 10/11/17 10/11/17 10/16/17 10/16/17 10/16/17 10/17/17 10/17/17 10/17/17 10/18/17 10/18/17 10/20/17 10/23/17 10/23/17 10/24/17 10/24/17 10/25/17 10/25/17 10/26/17 10/26/17 10/26/17 10/30/17 10/31/17 10/31/17 10/31/17 10/31/17 10/31/17 10/31/17 10/31/17 11/1/17 11/1/17 11/1/17 11/1/17 11/1/17 11/1/17 11/1/17 11/1/17 11/1/17 11/1/17 11/1/17 11/1/17 11/1/17
Buyer
Acrisure LLC Alera Group Inc. Alera Group Inc. Alera Group Inc. Alera Group Inc. Community Insurance LLC Hilb Group LLC NFP Corp. Peoples Bancorp Inc. Hub International Ltd. Mel Foster Co. Inc. Paragon Insurance Holdings LLC Higginbotham & Associates Inc. Hub International Ltd. Hub International Ltd. Hub International Ltd. Hub International Ltd. Wauna Federal Credit Union General Indemnity Group LLC Hub International Ltd. Acrisure LLC Cross Insurance Hub International Ltd. Leavitt Group Enterprises Inc. Arthur J. Gallagher & Co. Brown & Brown Inc. AmWINS Group Hub International Ltd. AssuredPartners Inc. AssuredPartners Inc. AssuredPartners Inc. Brown & Brown Inc. KMRD Partners Inc. Teachers Credit Union Ryan Specialty Group LLC Hilb Group LLC Levinson & Associates Inc. EPIC (Edgewood Partners Insurance Center) Seeman Holtz Property and Casualty Inc. Seeman Holtz Property and Casualty Inc. Coastal Wealth LLC Prime Risk Partners Inc. NFP Corp. HealthMarkets Inc. BroadStreet Partners Inc. BroadStreet Partners Inc. Quincy Mutual Fire Insurance Co. Cross Insurance Risk Strategies Company LLC B.P. Marsh North America Ltd. Alera Group Inc. Alera Group Inc. Alera Group Inc. Hub International Ltd. NFP Corp. NFP Corp. BroadStreet Partners Inc. BroadStreet Partners Inc. BroadStreet Partners Inc. BroadStreet Partners Inc. Risk Strategies Company LLC Acrisure LLC AssuredPartners Inc.
Source: S&P Global Market Intelligence, Insurance Journal, other publicly available sources and MarshBerry proprietary databases Disclosure: All deal count metrics are inclusive of completed deals with U.S. targets only.
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October 1, 2017 to December 31, 2017 Seller Seller
Jim Mooradian and Associates Inc. Axis Benefits Consultants Inc. Employer Concepts Insurance Services Inc. Jack Jeatran & Associates Inc. Simpson McCrady Benefits LLC Greeneville office of Price and Ramey Inc. CNC Insurance Associates Inc. EverGuard Insurance Services Inc. Eastern, Boger & Gower Insurance Services Inc. Rural Alaska Insurance Agency Inc. Frazier & Associates Inc. Alteris/specialty lines of business M.J. Kilpatrick Insurance Agency, Inc Baker & Associates Inc. Capitol Special Risks Inc. Costello & Sons Insurance Brokers Inc. Banyan Consulting Group Inc. Tri City Insurance Inc. South Coast Surety Insurance Services Inc. Kenneth A. Murray Insurance Inc. TJB Agencies LLC McCrillis & Eldredge Insurance Inc. Marwil & Associates LLC Group Services Northwest Reynolds & Rodar Insurance Group Inc Universal Benefit Solutions LLC MountainGuard and DealerGuard Graffam Insurance Group Synergy Professional Associates Inc. Risk management specialty agency Hope Aviation Insurance Inc. Alford Staples Lapeyre & Robichaux LLC R & E Martin Insurance Associates Inc./dba Kueny Insurance C W Winey Inc. Oxford Insurance Services LLC Barnich, Kavanaugh & Cooper Inc. Creekmore Insurance Group Inc. Frenkel & Company Inc. Williams & Associates Insurance Inc. Confimex Services Insurance Arven Financial LLC Gunn, Steers & Company LLC Benefits Network Inc. Teamup Insurance Services Inc. Benton and Parker Company Inc. Cord & Wilburn Inc. Brendon Potter Insurance Agency Holden Agency/Employee Benefits Solutions Inc. Delmarva Surety Associates Inc. Western Security Surplus Insurance Brokers Inc. Flagship Healthcare Healthfirst Benefits Inc. Undisclosed insurance agency Undisclosed Insurance Agency Equias Alliance LLC TC Insurance Services Certain Insurance Assets Certain Insurance Assets Certain Insurance Assets Certain Insurance Assets Benefits Network Insurance Agency Inc. Undisclosed insurance agency The Hartfield Company, Inc
chart continued on page 24 FEBRUARY 5, 2018 INSURANCE JOURNAL | NATIONAL | 23
NATIONAL | M&A Review chart continued from page 23
Merger Announced and Acquisition Activity Date Buyer Announced Date
11/2/17 11/2/17 11/2/17 11/2/17 11/3/17 11/6/17 11/7/17 11/8/17 11/9/17 11/10/17 11/10/17 11/10/17 11/13/17 11/13/17 11/13/17 11/14/17 11/14/17 11/15/17 11/17/17 11/18/17 11/20/17 11/20/17 11/21/17 11/27/17 11/28/17 11/28/17 11/30/17 12/1/17 12/1/17 12/1/17 12/1/17 12/1/17 12/1/17 12/1/17 12/1/17 12/1/17 12/1/17 12/1/17 12/1/17 12/1/17 12/4/17 12/4/17 12/5/17 12/5/17 12/5/17 12/5/17 12/6/17 12/6/17 12/7/17 12/7/17 12/7/17 12/12/17 12/15/17 12/15/17 12/17/17 12/19/17 12/19/17 12/21/17 12/28/17 12/29/17
Buyer
Acrisure LLC Acrisure LLC Hub International Ltd. Vanbridge LLC Evergreen P&C Insurance Agency Inc. Madison Dearborn Partners LLC Sokol Insurance Agency LLC Armada Risk Partners LLC Hub International Ltd. Seeman Holtz Property and Casualty Inc. Red Hill Insurance Agency LLC Spencer Capital Holdings JenCap Holdings JenCap Holdings Arthur J. Gallagher & Co. AssuredPartners Inc. Hilb Group LLC Hilb Group LLC Boston Insurance Brokerage Inc. Gary Thompson Agency Inc. The Carlyle Group NFP Corp. NFP Corp. Hub International Ltd. Evergreen P&C Insurance Agency Inc. Prime Risk Partners Inc. Prime Risk Partners Inc. Acrisure LLC Acrisure LLC Acrisure LLC Acrisure LLC Acrisure LLC Acrisure LLC Alera Group Inc. Alera Group Inc. Alera Group Inc. Arthur J. Gallagher & Co. General Indemnity Group LLC Daniel & Henry Co. Hilb Group LLC Distinguished Programs Holdings LLC Hub International Ltd. AssuredPartners Inc. Hub International Ltd. Hub International Ltd. PDX Partners Inc. AssuredPartners Inc. Gunn Mowery LLC Acrisure LLC Arthur J. Gallagher & Co. AssuredPartners Inc. Digital Insurance Inc. Galveston Insurance Associates U.S.I. Holdings Corporation Seeman Holtz Property and Casualty Inc. Hanson Insurance Group Hanson Insurance Group Risk Strategies Company LLC Aebly & Associates Inc. Seeman Holtz Property and Casualty Inc.
October 1, 2017 to December 31, 2017 Seller Seller
Demetriou General Agency Inc. Triple Crown Insurance Brokerage Inc. Axella Insurance Services Inc. Universal Insurance Services Inc. Pro Surety Bond Inc. AmTrust Financial Services (transfer of 51% equity to MDP) Eisenberg Insurance Reaume Company Wells Fargo Crop Insurance Agency Check Out Insurance LLC Byse Agency, Inc McDub Enterprise Inc. Agency Intermediaries A.I.I. Insurance Brokerage Associated Insurance Services Inc. Odom Scruggs David Hill & Associates Inc. IOA Northeast NY Inc. Protx Risk Management LLC Franklin Insurance Agency Inc. BenefitMall Inc. Financial Benefit Services LLC KGS Insurance Services LLC Summit Financial Corp./Summit Financial Insurance Agency Inc. MSN Insurance Brokers LLC HBG Insurance & Bonds McDermott & Thomas Associates LLC Undisclosed insurance agency Undisclosed insurance agency Undisclosed insurance agency Undisclosed insurance agency Undisclosed insurance agency Undisclosed insurance agency Armstrong/Robitaille/Riegle Business and Insurance Solutions Employee benefits division of Walker, Higgins & Assoc. LLC Hallberg Commercial Insurors Inc. Weiss Insurance Agencies Inc. Freestate Bonds Inc. E.H. Nolkemper Insurance Agency Inc. Insurance Trustees Inc. American Hole 'N One Inc. Desert Empire Insurance Services Inc. English Insurance Group LLC Contractor's Services Inc. Surety Services LLC. Atoma Advisors Sachs Walsh Insurance Doug Wallick Insurance Agency Undisclosed insurance agency SouthCap Brokerage Group LLC Owen-Dunn Insurance Services Ruggieri Consulting Group LLC Truman Taylor Insurance Agency Inc. Insurance Services Group Inc. J&A Insurance Agency Corvallis Insurance Services Inc. Stineff Insurance Services Tikia Consulting Group Inc. Alfred W. Dye Agency & F.J. Marshall Dash Insurance Agency
All transactions in this presentation are announced deals involving public companies, private equity backed brokers, private companies, banks, insurtech companies (2017 only) as well as others including private equity groups, underwriters, specialty lenders, etc. All targets are U.S. only. This data displays a snapshot at a point in time and has not been updated to reflect subsequent changes in prior years, if any. MarshBerry estimates that only 15-30 percent of all transactions are made public. Past performance is not necessarily indicative of future results. Source: S&P Global Market Intelligence, Insurance Journal, and other publicly available sources The data and stats noted above are from S&P Global Market Intelligence as of Jan. 7, 2018. Such data and stats may have changed since the publication of this article. Marsh, Berry & Co. Inc. and MarshBerry Capital Inc. do not provide tax or legal advice. These professionals should be consulted separately before implementing changes to tax or legal matters. Securities offered through MarshBerry Capital Inc., member FINRA, SIPC, and an affiliate of Marsh, Berry & Co. Inc. 28601 Chagrin Blvd., Suite 400, Woodmere, Ohio 44122 (440-354-3230)
24 | INSURANCE JOURNAL | NATIONAL FEBRUARY 5, 2018
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continued from page 22 across the U.S. and is backed by Hudson Structured Capital Management. The next four most active acquirers in 2017 were all private equity-backed firms. NFP Corp. had 20 announced deals in 2017, and has been an active acquirer of employee benefit and consulting firms, as well as property/casualty (P/C) focused firms. Alera Group Inc., formed in late 2016 by a group of 24 insurance advisory firms that joined together as one firm, backed by Genstar Capital LLC, completed 15 deals in its first year. Hilb Group LLC, which has a large presence on the east coast and is working to expand west, closed 12 deals in 2017. Risk Strategies Co. Inc., based on the east coast and backed by Kelso & Co., closed 11 deals.
producing new business, a focus in niches that enable scalable growth, compensation structures in line with the market and a base of operations in an attractive area, with significant population density. (This is not necessarily the average agency.)
“
I’m not ready to retire.”
You have built significant value in your agency through years of hard work. InsurBanc can help you to unlock the value to grow your agency to the next level, independently. InsurBanc can provide funding for acquisitions, perpetuations
In 2017, a significant amount of the deal activity (37 percent) occurred in the most populous states: California, New York, Texas, Florida, and New Jersey. The next five most active were: Pennsylvania, Massachusetts, Illinois, Ohio, and North Carolina, which held 19 percent of all announced deals. The majority of 2017 deals were with P/C firms (52 percent), which is slightly higher than in prior years. Employee benefit firms comprised 22 percent of deals, and 26 percent were multiline firms, which advise on both P/C and employee benefits insurance.
and producer development.
Control your own legacy.
High-Quality Agents
Acquisition & Perpetuation Loans | Working Capital | Equipment Leasing Cash Management | Online Banking
866.467.2262 | Visit InsurBanc.com INSBAA16729.indd INSBAA16738.indd 1
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Lucas is vice president at Marsh, Berry & Co. Inc. Phone: 616-723-8375. Email: Sarah.Lucas@ MarshBerry.com.
Do I need to sell my agency because everyone else is?”
Demographics
Overall, 2017 was a very active year for M&A and another year where we saw the entrance of new private equity-backed firms quickly looking to make a mark the industry. We are seeing more acquirers continue to be attracted to the space, keeping the level of competition strong for high-quality agents and brokers looking to liquidate or diversify their holdings through selling some or all ownership to another firm. High-quality agencies are those that would generally be characterized by younger, vibrant leadership, a strong track record of
Share this article with a colleague. IJMAG.COM/213MI
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FEBRUARY 5, 2018 INSURANCE JOURNAL | NATIONAL | 25
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NATIONAL | Spotlight | Nonprofits/Social Services
Compliance or Opportunity? Understanding Cyber Security in Health and Human Services Sector By Brad Storey
I
f you live outside of New York State and haven’t heard of the New York State Department of Financial Services 23 NYCRR Part 500 (DFS 500), you should pay very close attention. Earlier this year, New York implemented the most comprehensive cyber security law in the nation, impacting the financial services and insurance industries. While for the average insurance agent, this may appear as an arduous process and a “box to check,” we implore agents to evaluate the process through a different lens. Not one of security for the sake of compliance, but security for the sake of security. As the journey of implementation
of the regulation continues, we’d like to share some experiences and potential things to consider if you are insuring the health and human services industry.
The Regulation and Challenges Ahead
The introduction of the New York state regulation came in late 2016 with an effective date of March 1, 2017. There are several key dates along the way. However, final implementation of the full regulation will come on March 1, 2019, proving that these comprehensive cyber security programs are not built overnight. Some key challenges that organizations will face regarding anticipated future regulations like DFS 500 will be
26 | INSURANCE JOURNAL | NATIONAL FEBRUARY 5, 2018
getting the key people in place to manage the cybersecurity program. Most, if not all agencies, have the basic security measures in place. These basic measures might include firewalls, antivirus protection, minimum password standards and automatic updates of critical patches to all systems. However, having dedicated IT staff and expertise in areas outlined in the regulation for conducting risk assessments, vulnerability and penetration testing, multifactor authentication and encryption of data will most likely require the engagement of third-party vendors to meet the requirements. It is no secret that human error is the No. 1 cause of data breaches. While ongoing data security training and awareness are important, having data access privileges according to an employee’s corresponding job duties is a critical control in managing the “human error” exposure. If data security is not
currently a top priority for your agency, it certainly should be in 2018. For those insuring the health and human services industry, chances are your clients are covered entities as it pertains to HIPAA and the iterations it has gone through over the years (HITECH ACT, Omnibus Final Rule). For this reason, we recommend ensuring the appropriate HIPAA assessment is conducted in conjunction with any required cybersecurity risk assessment. With a large majority of health and human service providers already having moved to an electronic health record, you as an agent are far more likely to possess ePHI (electronic protected health information) than any hard copy data (although physical controls of hardcopy PHI are also required). By conducting both cyber security and HIPAA assessments simultaneously, you’ll find that much of what is required in INSURANCEJOURNAL.COM
For those insuring the health and human services industry, chances are, your clients are covered entities as it pertains to HIPAA and the iterations it has gone through over the years. For this reason, we recommend ensuring the appropriate HIPAA assessment is conducted in conjunction with any required cybersecurity risk assessment.
one assessment is also covered in the other. For example, part of having a HIPAA-compliant program is implementing procedures as to who can access certain information. This again can be controlled through technical control discussed previously, limiting data access privileges according to an employee’s job duties. In October 2017, the Identity Theft Resource Center reported that there had already been 4.8 million med-
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ical records stolen. This is not an exposure that is going away, and it is reaching epidemic proportions.
While there are challenges in enhancing your cyber security program, there are plenty of benefits from undergoing a risk assessment of this magnitude. First, becoming intimately familiar with your organization’s processes will allow you to implement efficiencies and safeguards to strengthen business processes. Perhaps the biggest benefit is obtaining a far better understanding of the cyber exposure and necessary controls. This allows agents to engage in conversations with their clients about the exposure in a thoughtful and intelligent way. The added value that agents can show through their intel-
lectual capital and the comfort that a client receives knowing the information they provide you is protected is priceless. This truly epitomizes the concept of selling cyber insurance from the inside out. To learn more about New York’s Cybersecurity 23 NYCRR Part 500, visit: www.dfs.ny.gov/ about/cybersecurity.htm
Share this article with a colleague. IJMAG.COM/205CH Storey, MSW, is vice president, risk management division, at Irwin Siegel Agency Inc. Email: brad.storey@siegelagency.com. Phone: 800-622-8272 ext. 5214. Website: www.siegelagency. com.
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FEBRUARY 5, 2018 INSURANCE JOURNAL | NATIONAL | 27
Idea Exchange
Distribution
Why Independent Agents Remain Alive and Well
By Sam Friedman
W
hen I began my career as a journalist covering the insurance industry back in 1981, many of my early stories reported on dire warnings in a series of studies and expert pronouncements predicting the imminent demise of the independent agent. Over the past 36 years, I’ve heard the same apocalyptic buzz from time to time about the precarious viability of insurance intermediaries, most recently premised on the notion that the proliferation of digitization, comparison quote sites, direct selling by insurers, artificial intelligence and a host of other technological innovations may pose an existential threat to agents. In January 2015, for example, The New York Times ran a story about how the Internet was likely to be “squeezing” as many as one quarter of agents out of existence, while a research report issued a couple of years earlier warned that the era of the local agent may be coming to an end. I didn’t buy this doomsday scenario back in 1981, and
despite the flood of insurtechs, apps, online platforms, bots, virtual assistants and the like entering the insurance space lately, I stand by the famous response attributed to Mark Twain when he learned that his obituary had been published while he was still very much alive: “Reports of the death of the independent agent have been greatly exaggerated.” That doesn’t mean agents can take their long-term existence for granted. They need to keep stepping up their game to add value in an increasingly self-service, web-driven age. They are quite capable of accomplishing that, as the old-school agents I covered back in 1981 bear little to no resemblance to the far more sophisticated players helping clients large and small navigate today’s diverse and dynamic insurance marketplace. The connection to a profes-
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sional agent remains strong, especially in commercial lines, where independent agents and brokers command 83 percent of premiums written, according to the 2017 Market Share Report from the Independent Insurance Agents & Brokers of America (IIABA). A study by the Deloitte Center for Financial Services, “Small Business Insurance in Transition: Agents Difficult to Displace, but Direct Sellers Challenge Status Quo,” found that about half of buyers surveyed would not purchase coverage from an insurer without an agent or broker to shop for and advise them. Even those who expressed interest in the direct purchase option cited concerns.
Lingering Attachments
There were a number of reasons for this lingering attachment to intermediaries, according to small business insurance
buyers in Deloitte’s surveys and focus groups. Many indicated that they: • Feel incapable of understanding the subtle differences in policies being offered by competing carriers, exactly what kind of coverage they need, how much insurance they should purchase and whether the price is right for what they’re getting. • Fear leaving a gap in coverage if they go it alone, whether resulting from inadequate limits, unclear exclusions and/ or exposures they weren’t even aware they had to insure. • Prefer to have an advocate argue their case if a claims dispute arises with their insurer. • Lack time and patience for the due diligence required to shop for and compare policies in multiple lines of coverage from different sources. • Want someone to hold responsible if a major exposure is overlooked, leaving open the possibility of an errors and omissions claim or a lawsuit against their agent. Perhaps these fundamental obstacles to direct sales will be overcome by emerging cognitive technologies and advanced robo advisers, but truly consultative agents and brokers are unlikely to be automated away anytime soon, if ever. A substantial percentage of small commercial buyers are probably going to stick with an agent, if only so they can sleep soundly, confident their most valuable assets are covered. The challenge to remain relevant will perhaps be more pressing in personal lines. But even in this rapidly commodINSURANCEJOURNAL.COM
itizing market, shaken up by online comparison shopping platforms and direct-to-consumer sales via an app on mobile phones, independent agents still write 35.5 percent of premiums, IIABA reported. Carriers with exclusive agency channels (many of which also sell through independent agents) write 48.3 percent. Direct-to-consumer sellers only had a 16.2 percent share.
InsureTech Connect
Distribution was a critical issue raised during the recent InsureTech Connect conference, where some 3,800 leaders from the legacy and emerging ecosystem discussed the Ad.pdf future.1-2pg While some 1 industry’sNegley
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panelists cited the potential of enhanced self-service leading to limited disintermediation, many emphasized that insurers aren’t the only ones that could benefit from a tech transformation. They noted there is still a valuable place for consultative agents in a digital world — for those able to upgrade their own insurtech capabilities and reimagine how they might more effectively serve customers. Cognitive technologies, for example, were cited as a potential savior rather than a threat for an aging agency force, in an industry where talent can be difficult to recruit. It can take months to train and license a new agent or customer service 1/16/18 2:01 PMmaking turnrepresentative,
over a prime concern for many agencies. That problem could be alleviated by integrating virtual assistants fueled by artificial intelligence into an agency’s customer service system. By digesting and retaining policy, rating and underwriting manuals that agents are unlikely to recall off the top of their heads, such systems might help reduce an agency’s mistake rate and E&O exposure.
Agents Thrive
Agents will likely thrive if they leverage their experience and interpersonal skills effectively. Robo advisers, which are common in retirement and investment, might be deployed by carriers to handle personal
and small commercial lines. But only a live agent can relate to customers on a human level and vice versa. That can make all the difference. Most business owners and a significant number of personal lines consumers will likely still rely on intermediaries to put together their insurance portfolios while addressing broader risk management and loss control needs. Agents that upgrade their digital capabilities to parallel the initiatives of their carriers can be the key to making insurance an easier and more engaging experience. Friedman is Insurance Research Leader with Deloitte’s Center for Financial Services in New York.
1/17/18 1:21 PM
FEBRUARY 5, 2018 INSURANCE JOURNAL | NATIONAL | 29
NATIONAL | MyNewMarkets Contact: Lisa Vogt at 240-4822239 or email: lvogt@ue.org
Registered Investment Advisors
Excess Liability Commercial
Market Detail: R-T Specialty, LLC (www.rtspecialty.com) has experience with a host of industries and the ability, the expertise, and the industry relationships to find answers for difficult casualty risks. Available limits: As needed Carrier: Unable to disclose States: All states Contact: Customer service at 1-888-884-1900
Inland Marine
Market Detail: Western Security Surplus Insurance Brokers, Inc. (www.wssib.com) offers EDP coverage on a package basis for transit, floaters (all types), motor truck cargo and short-term coverage. Available limits: As needed Carrier: Unable to disclose, nonadmitted States: Ariz., Calif., Colo., Nev., Ore., Texas and Wash. Contact: Kyle Stevens at 972702-0500 or email: kstevens@ wssib.com
Educational Institutions General Liability
Market Detail: United Educators’ (www.ue.org) gen-
eral liability policies insure the institution, its trustees, directors, officers, faculty, and employees (at the option of the educational institution) against liability arising out of bodily injury, personal injury, and third-party property damage occurring because of wrongful or negligent acts attributable to the insured. The broad coverage protects against a wide range of potential claims, including traumatic brain injury, campus crime, unmanned aerial vehicles (UAVs) or drones, alcohol-related claims, and sexual misconduct and molestation. Coverage applies to: allied health professionals and counselors in campus infirmary; armed and unarmed security guards; athletics; excess auto liability (GLX/GLU only); excess employers liability (GLX/GLU only); foreign travel; student transportation (excess of primary auto liability coverage). UAV (drone) coverage is a standard part of the policy, covering institutions for damages sustained by use of drones (weighing less than 55 pounds) for purposes beyond research and education, such as roof inspections and aerial promotional videos, as well as
30 | INSURANCE JOURNAL | NATIONAL FEBRUARY 5, 2018
for research and education purposes for UAVs weighing up to 100 pounds. EduRisk risk management services and resources are included with each policy, such as multimedia learning programs, an extensive risk management library, and personalized advisory services via telephone and email. When UE writes both the primary GL and ELL coverage, endorsements are available to provide broader, coordinated coverage, referred to as seamless coverage. Upon policy issuance, the seamless coverage endorsement provided to all qualifying members specifically addresses these protections for actions of police or security staff: wrongful acts; allegations of unreasonable/excessive use of force; violation of property rights; allegations of discrimination; use of mace or pepper spray; defense costs for allegation of dishonest and fraudulent acts. UE offers a Risk Management Premium Credit (RMPC) to institutions that take advantage of EduRisk following the RMPC guidelines. Available limits: As needed Carrier: Unable to disclose States: All states
Market Detail: Markel (www. markelinvestmentadvisors. com) provides errors and omission insurance to several classes of investment advisors. Coverage is available in all 50 states on a surplus lines basis. Available limits: As needed Carrier: Markel, admitted and nonadmitted available States: All states Contact: Greg Severinghaus at 804-527-7925 or email: gseveringhaus@markelcorp. com
Specific MatterClient- Project Excess
Market Detail: Excess Liability Managers Insurance Services, (www.e-o.com) offers a following form excess policy for professional and business entities. Available limits: Minimum $1 million, maximum $5 million Carrier: Unable to disclose, nonadmitted States: All states Contact: Frederick Fisher at 310-426-2105 or email: ffisher@e-o.com
This section brought to you by Insurance Journal’s sister website: www.mynewmarkets.com
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The Competitive Advantage
The Value of an Employee Handbook your time is best spent there or out selling. In a small agency especially, the agency owner is usually the key salesperson, and sales do need to be made for an agency to thrive. However, maybe giving up the extra time you enjoy training people so you can increase revenues is a trade-off you are willing to make.
Reduces Regulatory Exposures
By Chris Burand
M
ost small agencies, and quite a few middle-to-large agencies, lack a current employee handbook or at least one of quality. Honestly, day-to-day, an employee handbook really is not that important, especially with just a few employees. More importantly, employee handbooks are boring subjects for agency owners to address. These manuals do not involve customers or sales, so they get ignored. I get it. Employee handbooks are important though, because these manuals, when well-written and designed purposefully, minimize many of the time sucking responsibilities agency owners dislike so much. These are the issues that cause owners to cringe. They procrastinate whenever possible dealing with these human resource issues. I have yet to meet an agency owner who became an agency owner so they could become an HR manager. Here then is why, not how, a quality employee handbook is worth your while.
A quality employee handbook decreases the probability of Department of Labor (DOL) and employment practices liability (EPL) exposures. I know you relish the opportunity to make your EPL insurance premiums back by causing your EPLI carrier to pay out on your behalf. Maybe you even dream of the opportunity to go toe-to-toe with the DOL and prove them wrong. Is this truly a good business strategy? I am not neglecting the importance of stroking your ego, but sometimes an ego-boosting strategy does not reconcile with a quality business strategy.
Saves Time
Employee handbooks decrease training time. I know you will miss spending time training. It is your decision whether 32 | INSURANCE JOURNAL | NATIONAL FEBRUARY 5, 2018
Reduces E&O Exposures
These handbooks decrease errors and omissions (E&O) exposures, believe it or not. This benefit is more difficult to see, because employee handbooks do not address coverages or procedures. However, a well-written handbook does address two really important E&O exposures. • Job Descriptions. It will contain job descriptions (or reference an addendum that contains the job descriptions). These job descriptions will describe who is to do what and when. If designed in collaboration with agency procedures, the odds of a gap existing is greatly diminished. For example, I commonly come across the situation when I ask, “Who exactly is responsible for checking that the surplus lines policy contains all the coverages promised?” Often the producer points to the CSR, and the CSR points to the producer. Maybe you have that base covered, but give some consideration to whether you have all your bases covered because this is an important reason why E&O claims occur.
• Procedures. It will contain a requirement that everyone will fol- low procedures. What is one of the top causes of E&O claims? Someone not following procedures. Who is most likely to not follow procedures? A pro- ducer. Why? Because most agencies do not actually have a requirement that producers follow procedures.
High-Quality Manuals
Agency owners are optimistic. They wish producers would follow procedures, but they do not want to talk about having to follow procedures (or be fired), especially when the employee handbook does not require that producers follow procedures. Of course, this is assuming that the handbook has a job description for producers. INSURANCEJOURNAL.COM
your EPLI insurance company may assist you. Another option is Don Phin, or you may know someone local. Getting it done now and then staying on top with an annual review will save you more time and money over time. Like so much in life, you have a choice of concentrating more effort upfront in turn for less overall work and money or vice Share this article with versa.
a colleague. IJMAG.COM/î”´213LI
Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. Email: chris@burand-associates.com.
One of the key methods of turning a high-quality employee handbook into fireplace fodder is to buy one, never read it, never customize it and never review it to learn if it reconciles with your procedures and job descriptions. Honestly, many owners may not include these requirements because they know the producers will not willingly follow procedures. Owners abhor the idea of having to talk to producers about following procedures, so they leave the requirement about following procedures out of the handbook. Also, because they so enjoy listening to CSRs complain about how someone does not follow procedures, they get the best of both worlds. It is interesting to me how in agencies that have switched to environments that ensure producers follow procedures, morale always increases for the entire INSURANCEJOURNAL.COM
agency (sure, some producers mope around for a while). Also, in my experience, sales usually increase. Believe it or not, quality manuals that are up-to-date and followed enable agencies to hire higher quality people. This is a great collateral effect because higher quality people want to work in higher quality organizations. Higher quality employee handbooks, in my experience, create a subliminal environment that just raises everyone’s performance, and when people interview, they feel it. Where does an agency get a high-quality manual? Many sources exist. One of the key methods of turning a high-quality employee handbook into fireplace fodder is to buy one, never read it, never customize it and never review it to learn if it reconciles with your procedures and job descriptions. Every organization is different, so plug and play does not realistically exist. Purchase a high-quality manual and then methodically go through it even though it is boring. Parts you will be able to use in sales to help your customers in their organizations. If you need an outside consultant to write it or help you implement it,
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FEBRUARY 5, 2018 INSURANCE JOURNAL | NATIONAL | 33
Closing Quote Bringing the Next Generation into the Fold
By Jason Ernest
T
ime and again, I hear that our industry lacks young talent. I read that millennials are entitled, and I watch people characterize insurance agencies as dull. I beg to differ with it all. I wasn’t always as optimistic about the future of the industry. When I took a job with Insurance Agents & Brokers (IA&B) more than a decade ago, I didn’t see many young people interacting with their agents’ association. I was as skeptical as the next 30-something of the generation on my heels. And,
yes, I assumed there was some merit to the industry stereotypes. Then things changed. I met young agents at conferences and was blown away by their dedication and drive. I visited our member agencies and saw vibrant workplaces that are keystones of their communities. I began to envision the future of the industry based on who I met and what I saw, and that future looked promising. Three years ago, the IA&B team made a commitment to the next generation of agents. We held focus groups and asked young agents how we could support them, how we could help them succeed and, in turn, keep them in the industry. They were honest and talked about their desire to collaborate and network with other young agents. They shared their wish for mentors and spoke of training needs. In 2016, we dipped our toes into the water. IA&B formed a Facebook group exclusively for the under-40 independent agent community and followed
it up with an inaugural young agents’ conference outside of Philadelphia. The response was electric. Young agents came to the conference eager and left with relationships that spurred dialog in the online community. Need a market? Studying for an industry exam? Want to compare notes on marketing strategies? Found a humorous industry meme? The Facebook group activity grew and continues to do so. In spring 2017, we took our investment a step further. We formed a task force of 12 young agents who spent six months providing feedback on IA&B’s young agent outreach, conference and priorities. In the fall, they presented their findings to our board of directors, and we added two young agents to the board. Much like their counterparts on the task force, these board members brought (and continue to bring) a fresh perspective and a contagious energy to our meetings and, in turn, to IA&B’s strategic direction. Rather than assuming we
knew what drives millennials and what they needed to succeed in our industry, we started asking them. We stopped looking at them as “others” and began considering them part of our industry and our community. This year marks my first as president and CEO of IA&B. One of my personal goals for the organization is to maintain — and even expand — this commitment to the next generation of independent agents. Already, we formed another task force of young agents — this group charged with advising our staff in the planning of what will be our third annual young agents’ conference. The future of our industry is not in dire straits. The talent is there, and the young agents are committed. But they need our promise to engage and support them. The independent agency system undoubtedly is facing monumental changes, some of them challenging. But the industry is made up of smart, committed and energetic professionals, from the baby boomer agency principals eyeing retirement to the incoming producers still learning the ropes. Join me in pledging to bridge our generational gaps — to listen more, engage more and support more — to sustain this great industry. Together, we can succeed. Ernest, Esq., is president/CEO of Insurance Agents & Brokers, the partnership of independent insurance agents’ associations in Pennsylvania, Maryland and Delaware.
34 | INSURANCE JOURNAL | NATIONAL FEBRUARY 5, 2018
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