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February 10, 2020 • Vol. 98 No. 3

Contents

News & Markets

Idea Exchange

Special Report

Data Driven Business Models to Affect Entire Insurance Value Chain: Swiss Re Report

Spotlight: ‘Powerful Predictiveness’ May Be Key to Reversing Commercial Auto Losses

Insurtech Investments and Valuations Keep Rising Even As Some Startups Fail Fast

Special Report: ‘Deep Dive’ Into the Nonprofit Sector

24 29

11 Hiring Momentum May

Insurance CEO Takes Fight for Nonprofit Coverage to Congress

18 Many Global Firms Face

Special Report: Private Equity Still Driving Agency M&As

Be Slowing Overall But Not in Insurance

High Coronavirus Costs Due to Insurance Exclusions

19 Workers’ Compensation

30 34

20 Noteworthy Agency Merger Stories of 2019

Is Doing Well. Is It Time to Worry?

Departments 8 Opening Note 6 | INSURANCE JOURNAL | FEBRUARY 10, 2020

12 Declarations

12 Figures

14 People

Insurance Law: To Stack or Not to Stack

Report Reveals Perception Gaps, Improvement Opportunities in Sales & Service Roles

Minding Your Business: Things to Consider When Using Agency Partnership Groups

20 Things to Know About Surplus Lines Insurance in 2020

Closing Quote: How Brokers Stay Relevant? Be Nimble With Your Value Props

16 Business Moves

42 My New Markets

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Opening Note Write the Editor: awells@insurancejournal.com

Top Workplace Discrimination Claims

etaliation is again the number one discrimination charge filed with the Equal Employment Opportunity Commission (EEOC), followed by disability, race, sex and age. Each year the EEOC breaks down charges and last year the agency received 72,675 charges of workplace discrimination for fiscal year 2019. The FY 2019 data show that retaliation continued to be the most frequently filed charge filed with the agency. The enforcement and litigation statistics are for FY 2019, which ended Sept. 30, 2019. The total 72,675 charges received by EEOC was down from 76,418 in 2018 and 84,254 in 2017. In 2019, the agency determined that 69.5% of the charges filed lacked a reasonable cause. The agency reported a total of $346.6 million paid in monetary settlements. A total of 39,110 retaliation claims were filed with the agency in FY2019 — about the same as the prior year. In 2019, EEOC ruled that about 70% lacked reasonable cause. More than $205 million was paid in monetary settlements of retaliation claims. The agency received 7,514 sexual harassment charges — 10.3% of all charges, and a 1.2% decrease from FY 2018. Of that 2019 total, EEOC found that about 54.6% lacked reasonable cause. Overall, sexual harassment charges resulted on monetary settlements of $68.2 million, up from $56.6 million in 2018. Of the total charges alleging sexual harassment, 16.8% were brought by males in 2019. The agency filed 157 enforcement lawsuits in 2019, down from 217 in 2018. The EEOC charge numbers show the following breakdowns by bases alleged, in descending order:

A total of 39,110 retaliation claims were filed with the agency in FY2019 — about the same as the prior year.

1. Retaliation: 39,110 (53.8 percent of all charges filed) 2. Disability: 24,238 (33.4 percent) 3. Race: 23,976 (33.0 percent) 4. Sex: 23,532 (32.4 percent) 5. Age: 15,573 (21.4 percent) 6. National Origin: 7,009 (9.6 percent) 7. Color: 3,415 (4.7 percent) 8. Religion: 2,725 (3.7 percent) 9. Equal Pay Act: 1,117 (1.5 percent) 10. Genetic Information: 209 (0.3 percent)

Publisher Mark Wells | mwells@wellsmedia.com Chief Executive Officer Joshua Carlson | jcarlson@insurancejournal.com

ADMINISTRATION / CIRCULATION

Chief Financial Officer Mark Wooster | mwooster@wellsmedia.com Circulation Manager Elizabeth Duffy | eduffy@wellsmedia.com Staff Accountant Sarah Kersbergen | skersbergen@wellsmedia.com

EDITORIAL

Chief Content Officer Andrew Simpson | asimpson@insurancejournal.com Editor-in-Chief Andrea Wells | awells@insurancejournal.com East Editor Elizabeth Blosfield | eblosfield@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 & Contributors

Contributors: Kent Bevan, Gerritt Graham, Kyle Hardner, Zach Lerner Columnists: Catherine Oak, Bill Schoeffler

SALES / MARKETING

Chief Marketing Officer Julie Tinney | jtinney@insurancejournal.com West Sales Dena Kaplan | dkaplan@insurancejournal.com Romeo Valdez rvaldez@insurancejournal.com South Central Sales Mindy Trammell | mtrammell@insurancejournal.com Southeast and East Sales (except for NY, PA, CT) Howard Simkin | hsimkin@insurancejournal.com Midwest Sales Lisa Whalen | (800) 897-9965 x180 East Sales (NY, PA and CT only) Dave Molchan | (800) 897-9965 x145 Sales & Marketing Coordinator Ashley Berg | aberg@insurancejournal.com Advertising Coordinator Erin Burns | eburns@insurancejournal.com Insurance Markets Manager Kristine Honey | khoney@insurancejournal.com Senior Strategist Pam Simpson | psimpson@insurancejournal.com Social Media Manager Ly Short | Lshort@insurancejournal.com Marketing Administrator Gayle Wells | gwells@insurancejournal.com Marketing Director Derence Walk | dwalk@insurancejournal.com

DESIGN / WEB / VIDEO

V.P. of Design Guy Boccia | gboccia@insurancejournal.com V.P. of Technology Chris Thompson | cthompson@insurancejournal.com Ad Ops Specialist Jeff Cardrant | jcardrant@insurancejournal.com Web Developer Terrance Woest | twoest@wellsmedia.com Web Developer Ryan Kleshinski | rkleshinski@wellsmedia.com New Media Producer Bobbie Dodge | bdodge@insurancejournal.com Videographer/Editor Ashley Waldrop | awaldrop@insurancejournal.com

ACADEMY OF INSURANCE

Director Patrick Wraight | pwraight@ijacademy.com Online Training Coordinator Nathan Granitz | ngranitz@ijacademy.com

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Note: The percentages add up to more than 100% because some charges allege multiple bases.

Andrea Wells Editor-in-Chief 8 | INSURANCE JOURNAL | FEBRUARY 10, 2020

Outside the US, call (847) 400-5951 Insurance Journal, The National Property/Casualty Magazine (ISSN: 00204714) is published semi-monthly by Wells Media Group, Inc., 3570 Camino del Rio North, Suite 200, San Diego, CA 92108-1747. Periodicals Postage Paid at San Diego, CA and at additional mailing offices. SUBSCRIPTION RATES: $7.95 per copy, $12.95 per special issue copy, $195 per year in the U.S., $295 per year all other countries. DISCLAIMER: While the information in this publication is derived from sources believed reliable and is subject to reasonable care in preparation and editing, it is not intended to be legal, accounting, tax, technical or other professional advice. Readers are advised to consult competent professionals for application to their particular situation. Copyright 2020 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 Dept, PO Box 708, Northbrook, IL 60065-9967 ARTICLE REPRINTS: Contact (800) 897-9965 x125 or visit insurancejournal.com/reprints

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News & Markets Data Driven Business Models to Affect Entire Insurance Value Chain: Swiss Re Report

igital transformation empowers consumers to be more informed and independent, and equips insurers with the tools to develop new tailored products and services and refine existing ones, according to Swiss Re's latest sigma report. This is leading to the development of new data-driven business models, which will affect the entire insurance value chain, said the report titled “Data-driven insurance: ready for the next frontier?” “True leverage will come from partnerships with key data suppliers.” Insurers increasingly will

operate in an environment where they have continuous access to different data sources

including from connected objects and platform providers. They also will gain behavioral

insights from consumer and environmental data, the report indicated.

Insurtech Investments and Valuations Soar Even As Some Startups Fail Fast

nsurtech investments reached an historic high in 2019 but last year also capped a three-year period where a good number of insurtech startups called it quits. According to a new briefing on the sector from Willis Towers Watson, dozens of tech startups have quietly closed up shop. “While insurtech news is awash with the huge valuations and postulations of the art of the possible, there is also a very real story that is not so positive – individual insurtech cessations,” noted Andrew Johnston, global head of Insurtech at Willis Re. He said the number is “very difficult to calculate” but

his firm’s data indicates that during the past three years, approximately 184 funded insurtechs appear to have closed their doors. The Willis Towers Watson report suggests that the number of insurtechs that have closed up shop might actually be much larger than its 184-company estimate. The reason: tracking a company is possible only after it raises money, and many don’t raise investment funds. Total new global funding commitments to the insurtech sector hit $6.37 billion for the year, with approximately $2 billion coming in for 75 projects during the 2019 fourth quarter alone, the Willis Towers Watson Quarterly InsurTech

10 | INSURANCE JOURNAL | FEBRUARY 10, 2020

Briefing noted. Johnston said that 2019 was the year that many insurtechs began to take leadership positions in certain parts of the market, either in certain lines of business or in the use of certain technologies. “For example, UK-based Concirrus is now clearly the forerunner in behavioral-based analytics for the specialty markets,” Johnston claimed. Willis Towers Watson cites a number of related insurtech investment milestones for the year, such as eight “unicorn making” rounds of investment that led to five new unicorns – privately held startups valued at over $1 billion. That’s out of a total of only 10 insurtechs around the world that have

reached this threshold. Other insurtech investment trends Willis Towers Watson noted from 2019: There was a 90 percent jump in investment rounds that exceeded $40 million. For the fourth quarter, insurtechs raised $244 million in early stage funding. P/C star-ups continued to win more insurtech investment than their life and health counterparts, a trend in play since the 2016 third quarter. Early stage funding to P/C companies grew to 69 of the total, up slightly compared with the previous quarter. Of the insurtech and investment totals, distribution and MGAfocused insurtechs accounted for 57 percent. INSURANCEJOURNAL.COM

“This will see the evolution of new-data driven business models taking insurers beyond their existing value chain,” sigma continued. “The availability of internet-enabled devices and universal connectivity has changed consumer behaviors and expectations, particularly among younger generations,” said the report. Although consumer-supplier touchpoints will become predominantly digital, human interaction will continue to play a role, said the report. The report explained that consumer feedback and analysis will help insurers identify where in-person engagement is most effective.

Digital and Targeted Human Touch

“With the growing granularity of insights into customer behaviors,” the report said, “the role of insurance is evolving from indemnification of losses to a broader consultative service on risk prevention and mitigation covering both private and commercial clients’ changing needs over time.” The sigma report cited the example of changes in an individual’s life circumstances such as marriage or a new home, signaled by digital data sources. “In response, insurers can direct personalized guidance to the client on predictive and prescriptive next-step risk mitigation actions,” it continued. “The direct relationship with customers will evolve as new touchpoints and channels become normalized, and back-office processes like marketing/sales, underwriting and claims administration are increasingly automated.” INSURANCEJOURNAL.COM

Insurers will be able to target human engagement to circumstances where consumers expect an empathetic response, such as a health crisis, according to the report.

Emerging Markets Lead the Way

At this point, insurers in emerging markets lead the way in optimizing the potential offered by digitalization because the starting point is digital rather than analogue in many of these markets, the report added. “[Emerging market insurers] are partnering with established digital platforms and ecosystems to combine features typically offered by standalone incumbent firms into a onestop-shop service,” said sigma. “Insurers bring underwriting expertise, while platforms and ecosystems offer access to customers through their ability to target specific segments and mine user behavior, as well as offer multiple touchpoints to capture user attention.”

Successful Insurers

Successful insurers in the long term will be those that leverage insights from their investments and partnerships in data and analytics, while developing risk protection products aligned with evolving regulations, sigma said. “Regulation will play an important role in supporting the integration of new technology and data into insurance business across different jurisdictions,” the report noted. It added:“In monetizing the potential of digitalization, insurers will need to manage local data protection and privacy requirements.”

Hiring Momentum May Be Slowing Overall But Not in Insurance

here is an even balance in the share of U.S. businesses reporting decreases and increases in employment for the first time in a decade, a new survey showed, the latest suggestion that the labor market has likely peaked and job growth could slow this year. The findings of the National Association for Business Economics’ fourth-quarter business conditions survey followed a government report last month showing job openings falling by the most in more than four years in November. “For the first time in a decade, there are as many respondents reporting decreases as increases in employment at their firms than in the previous three months,” said NABE Business Conditions Survey Chair Megan Greene. “However, this may have been due to difficulty finding workers rather than a pullback in demand.” The survey is based on the responses of NABE members on business conditions in their companies or industries. According to the survey, the declines in employment were in the services, goods-producing and transportation, utilities, information, and communications industries. There were gains in employment in the finance, insurance, and real estate sectors. Though job growth remains solid and more than enough to keep the unemployment rate low, momentum has slowed from the brisk pace

at the end of 2018 and the beginning of 2019. The government last August estimated that the economy created 501,000 fewer jobs in the 12 months through March 2019 than previously reported, the biggest downward revision in the level of employment in a decade. That suggests job growth over that period averaged around 170,000 per month instead of 210,000. Economists expect job gains beyond March 2019 could also be revised lower. The slowdown in employment gains has been blamed on worker shortages and trade tensions, especially the U.S-China trade war. The NABE survey showed a significant increase in the percentage of companies reporting shortages of unskilled labor, while nearly half reported shortages of skilled workers. The survey also offered clues on why wages have not increased significantly despite worker shortages. Forty-seven percent of respondents reported raising wages, while 44% said they were training internal staff for promotion. Businesses were also investing in labor-saving processes. Overall, businesses were more upbeat about the economy over the next 12 months than in October, with 30% of respondents expecting the economy to grow between 2.1% and 3.0% this year. That compared with a share of 20% in October.

FEBRUARY 10, 2020 INSURANCE JOURNAL | 11

Figures $291,716

The amount of a penalty imposed by OSHA on The Andersons Inc., an Ohio-based grain handling company, over alleged safety violations that led to the deaths of two employees last year. The company came under fire following the deaths of Joshua Stone, 29, of Rossford, and James Heilman, 56, of Perrysburg. The two men suffocated after becoming trapped inside a grain storage tank owned by the local agribusiness.

$46.46 MILLION

The amount in surplus lines flood insurance recorded by the Surplus Lines Stamping Office of Texas (SLTX) in 2019, up from the $36.07 million recorded in 2018. SLTX said surplus lines flood insurance premium has increased annually over the past few years, growing from $19.13 million in 2016 to $46.46 million last year.

Declarations Protecting Small Business

“The Mississippi Gulf Coast is a precious natural beauty, and the small businesses that call it home must be protected. Because what’s good for the Gulf Coast – and for small businesses – is good for all of Mississippi.” — Mississippi Governor Tate Reeves in a news release announcing that low-interest disaster loans are available for small Mississippi businesses along the Gulf Coast that were hurt by toxic bacteria over the summer. The cyanobacteria closed every mainland in the state between June 22 until early July. The loans available from the Small Business Administration covers damage from June 22 through Oct. 5, 2019.

12 | INSURANCE JOURNAL | FEBRUARY 10, 2020

Archaic Principles

“GEICO in this situation was relying on very archaic principles that a wife has a duty to serve her husband, but that is just not sound reasoning and the Kansas Supreme Court agreed.” — Dustin DeVaughn, an attorney whose firm represented Royce Williams in a lawsuit against GEICO General Insurance Co. Williams sued after the insurer refused to reimburse his wife for the personal care she provided after he was injured in an automobile accident. GEICO argued that the wife was obligated to help her husband due to the marital relationship. The Kansas Supreme Court rejected that argument and reinstated the benefits the district court had initially awarded.

Not Ancient Rome

“American horseracing is addicted to drugs, and it’s time for an intervention. … Our modern-day society will no longer tolerate the deaths of these iconic American equines for entertainment – this isn’t ancient Rome, it’s 2020.” — Marty Irby executive director for the advocacy group, Animal Wellness Action, said in a statement after the deaths of four thoroughbred racehorses over a 10-day period at the New Orleans Fair Grounds Race Course. Animal Wellness Action supports proposed federal legislation to regulate widespread “doping” in the horse racing industry. The reform bill would set national standards for drugging racehorses and place oversight with an independent body under the U.S. Anti-Doping Agency.

INSURANCEJOURNAL.COM

$281 MILLION

The amount the Army Corps of Engineers will award to a North Carolina city and county heavily impacted by Hurricanes Matthew and Florence. Surf City/North Topsail Beach will receive $237 million and Cartaret County will get $44.5 million for damage reduction projects. The state is still recovering from Hurricane Florence, which made landfall in September 2018, and 2016’s Hurricane Matthew that caused record flooding and killed more than 20 people in the state.

Legally Responsible

“Employers are legally responsible for complying with workplace health and safety requirements and ensuring workers’ safety and health.” — Loren Sweatt, principal deputy assistant secretary of Labor for Occupational Safety and Health, said in a press release regarding The U.S. Department of Labor’s Occupational Safety and Health Administration’s settlement with Thomas Foods International after issuing citations for workplace safety and health violations at the company’s meat processing facility in Swedesboro, N.J. As part of the settlement, Thomas Foods International will pay $213,000 in penalties for violations involving noise and bloodborne pathogens hazards, and ineffective machine guarding, following a May 2019 OSHA investigation. INSURANCEJOURNAL.COM

97,000 GALLONS

That’s how many gallons of red wine spilled from a tank at a vineyard in Sonoma County, Calif., and eventually leaked into the Russian River, an accident officials said could hurt water quality in the 110-mile tributary flowing into the Pacific Ocean. The cabernet sauvignon, enough to fill eight large tanker trucks, spilled at the Rodney Strong Vineyards in Healdsburg after a door near the bottom of a large blending tank popped open, spilling all of the wine it was holding into a sanitary sewer system on the property.

Common Carcinogen?

“It’s a difficult issue because it’s a very commonly used drug. But that doesn’t make any difference. That’s not what our mandate is.” — Thomas Mack, chairman of the Carcinogen Identification Committee, explained why a government-appointed panel is reviewing the commonly used drug acetaminophen, used to treat pain and fevers, for possible inclusion on a list of chemicals for which the state requires potential cancer-causing warnings.

Concealed Facts

“They knew then that these products had life-threatening complications. … This case turns on the fact that the defendants concealed and misrepresented facts to California women and California doctors.” — In closing arguments in case over Johnson & Johnson’s vaginal mesh implants, California Deputy Attorney General Jinsook Ohta said J&J officials aggressively marketed mesh even though they knew it could have long-term and devastating side effects. The company was ordered to pay $344 million for misrepresenting the risks of the implants to California consumers.

FEBRUARY 10, 2020 INSURANCE JOURNAL | 13

People National

AmTrust Financial Services has promoted Adam Karkowsky to president

of AmTrust, reporting to Chairman and CEO Barry Zyskind. Karkowsky joined the company in March 2011, serving as executive vice president of Strategic Development and Mergers & Acquisitions, and has been AmTrust’s CFO since June 2017. Previously, Karkowsky worked in various finance and strategy roles in the private equity and insurance industries, including as vice president of the Mergers & Acquisitions Insurance Group at American International Group. Karkowsky began his career as a corporate associate at the law firm of Katten Muchin Rosenman. In his new role, Karkowsky will focus on leading the entire organization and further developing relationships with agents, brokers, partners and clients.

East

Concord Specialty Risk

has hired Matthew Edgette as vice president of Tax Insurance Underwriting, where he will take on a leading role in Concord’s Tax Insurance practice. Edgette will be based in New York, N.Y. For the last two years, Edgette has led tax insurance underwriting for Allied World Insurance Company. Prior to that, he served as a manager in the M&A Tax Services division at KPMG. Concord Specialty Risk is a series of RSG Underwriting Managers LLC.

EPIC Insurance Brokers and Consultants, a retail property and casualty insurance brokerage and employee benefits

consultant, has hired Matthew Presutti to its EPIC New York operations as managing principal on the employee benefits team. Presutti will be based in New York City as part of Frenkel Benefits, an EPIC Company, and report to Co-President Adam Okun and EPIC New York Co-President Larry Kirshner. In his new position, Presutti will be responsible for the strategic oversight, new business development and the design, placement and management of employee benefits insurance programs and solutions. Presutti joins the firm from HM Insurance Group. He has also held positions with MagnaCare, Brown & Brown Metro, Horizon Blue Cross Blue Shield of New Jersey and Prudential.

Southeast

XS Brokers (XSB), an independent insurance underwriting and wholesale brokerage group, is continuing its expansion in the Southeast region with the hiring of Brent Johnson as VP and Carrie Sheen as AVP, CIC. XSB has also hired Patrick Siwick as a casualty broker and Griffin Jennings as underwriter. These new hires come on the heels of the recent announcement of Jim Epting, executive vice president, who will build and lead the XSB brand presence among retail agents throughout the Southeast region. Johnson has more than 15 years of experience, most recently as associate managing director at Burns & Wilcox. Sheen also comes to XSB from Burns & Wilcox, bringing more than 20 years of experience, most recently as director of Commercial Underwriting.

14 | INSURANCE JOURNAL | FEBRUARY 10, 2020

Epting said both Johnson and Sheen will help the company’s expansion efforts in Georgia and the Southeast states and play a role in growing and maintaining the XSB brand presence among retail agents. Siwick has previous experience as a casualty underwriter at IFG Companies, and Jennings’ most recent experience was as a commercial lines underwriter at Burns & Wilcox.

Harden, an insurance, risk

management and employee benefits firm in the Southeast, has expanded its South Florida market with the addition of Corey Mershon as Employee Benefits account director in its Fort Lauderdale office. Previously, Mershon was the president of CMC where he specialized in insurance and financial products. Prior to that, he was a new business manager with Cigna Healthcare.

George Kattermann

Insurance adjusting firm

CNC Catastrophe & National Claims has added George Kattermann as senior vice

president of Claims Operations. Kattermann began his catastrophe claims adjusting career with Allied Group in 1986. In 1993, he became vice president at Mid-America Adjustment Co. where he managed the catastrophe division. In 2000, he joined American Family Insurance as Catastrophe Claim director. During his tenure at American Family, he also held

the positions of Property Claim director and Commercial Farm/ Ranch Operations director. Kattermann joined BrightClaim in 2009 and assumed the role of senior vice president. He was a long-standing member of both the PLRB Education Advisory Committee and the IBHS Response and Recovery Committee. Kattermann will spearhead new development and bolster the overall claims process in his new role.

South Central

Catapult Insurance Solutions, a privately held

managing general insurance agency and wholesale brokerage based in Dallas, promoted Becky King to vice president of Underwriting and product manager and added Steve Fisher as vice president of Business Development. King has been with Catapult since 2009 and has held positions of increasing responsibility over the last 10 years, most recently serving as underwriting manager. In her new role, King will oversee underwriting, product management and compliance. Fisher brings more than 20 years of industry experience, most recently serving as assistant vice president of Target Markets at the Cincinnati Insurance Companies. Fisher has experience in underwriting and program development with a focus on the construction and healthcare segments. He will be responsible for growing Catapult’s current program portfolio while expanding programs and distribution sources throughout the U.S.

IMA Inc., a national

insurance brokerage firm with INSURANCEJOURNAL.COM

offices in Dallas, has expanded to Fort Worth with the addition of two insurance veterans, Trey Schuler and Gavin Wallace. Schuler and Wallace serve as senior vice presidents for the employee-owned insurance broker specializing in property/ casualty insurance, employee benefits and surety bonds. In addition to work in the energy sector, Schuler serves clients in construction and commercial real estate. Wallace has spent his 12-year career managing risk for clients in a range of industries, with a focus on energy and food and beverage. He served as a director of the Independent Insurance Agents of Tarrant County and currently serves on the Ben Hogan Foundation Advisory Board.

Jessica Bergeman

DWC also has named Jessica Bergeman as a new prosecutor with the Fraud Unit. She is a seasoned litigator, having spent nearly a decade in Chicago prosecuting criminal cases throughout Cook County. After relocating to Texas in 2012, Bergeman spent six years as director of the Client Attorney Assistance Program in the Attorney Compliance Division at the State Bar of Texas.

added Jake Huber as territory sales manager for Minnesota. Based in Minnesota, Huber will be responsible for developing and implementing sales action plans with agency partners to drive new business while supporting retention and profitability, as well as increasing Integrity’s presence in that state. Prior to joining Integrity, Huber was a field sales specialist with CNA Insurance in Minneapolis. Huber has more than 10 years of experience in the insurance industry from both the carrier and agent aspect.

Jamie Wright Nick Canaday

Kara Mace

Kara Mace has been tapped as deputy commissioner for the newly created Legal Services program at the Texas

Department of Insurance, Division of Workers’ Compensation. Legal Services

will handle rule development, open records, litigation, contracts, subpoenas and other legal issues for DWC. Mace rejoins TDI after serving as the deputy counsel for the Office of Public Insurance Counsel. She spent several years with TDI’s Policy Development Counsel. She also served as both senior counsel for External Litigation and senior counsel for Enforcement for the New York City Department of Homeless Services.

INSURANCEJOURNAL.COM

Additionally, the division named Nick Canaday as special counsel for DWC. In this role, Canaday will focus on litigation impacting the Texas workers’ compensation system, serve as the DWC liaison to the Office of the Attorney General, and provide counsel to executive management and staff on legal issues within the system. He has served as DWC’s general counsel since March of 2016.

Jake Huber

Midwest

Integrity Insurance, a property and casualty carrier headquartered in Appleton, Wisc.,

focus on providing growth and income opportunities for existing MIAA member agencies. Previously with Farmers Insurance, she was responsible for many sales training and management positions.

West

Phoenix, Ariz.-based

CopperPoint Insurance Cos. has named Brad Lontz as

senior vice president and chief information officer. Lontz will be responsible for overseeing the day-to-day IT operations for CopperPoint’s group of insurance companies. He was most recently chief information officer for the California Dental Association. He was chief information officer for Nautilus Insurance before that. He also spent eight years at Liberty Mutual Insurance Co. in IT management and development.

Rebekah Siegfried

The Midwest Insurance Agency Alliance (MIAA), a

regional insurance agency network based in Lincoln, Nebraska, added Jamie Wright and Rebekah Siegfried to support the organization’s growth in Iowa. Wright joined MIAA as regional vice president for Iowa, responsible for membership recruitment, development and insurance company relations for all member agencies in Iowa. Her most recent position during her 15 years with Farmers Insurance was as a recruitment manager. Siegfried joined MIAA as agency development field specialist for Iowa and will

Peter Gilbertson

USI Insurance Services has named Peter Gilbertson

as commercial lines practice leader for the Greater San Francisco Bay Area. Gilbertson, based in San Francisco, will be responsible for leading a team of P/C professionals in the delivery of risk management and insurance advice. Gilbertson previously led USI’s national private equity practice and served as a member of the firm’s corporate development and carrier relations teams. Prior to its acquisition by USI in 2017, Gilbertson worked for Wells Fargo Insurance Services as a managing director.

FEBRUARY 10, 2020 INSURANCE JOURNAL | 15

Business Moves in more than 150 countries around the world through a network of correspondent brokers and consultants.

Midwest

AssuredPartners, Corkill Insurance Agency

East

The Hilb Group, Kerr-Boswell, Wickford Insurance Agency

The Hilb Group LLC has acquired Virginia-based Kerr-Boswell Inc. For more than 60 years, KB has provided employee benefits, property/casualty, life, health and financial services to businesses and individuals throughout the Tri-Cities and Mid-Atlantic region. KB associates will continue to operate out of its existing Bristol, Va., location under the management of THG’s Abingdon, Va., operations following the acquisition. In a separate transaction, THG has acquired Rhode Island-based Wickford Insurance Agency Inc. WIA is a full-service property/casualty insurance agency for businesses and individuals throughout Rhode Island. WIA’s associates will join THG’s Rhode Island operations under the management of WIA Agency Leaders Chris Schneider and Derek Schneider. THG is a middle market insurance agency headquartered in Richmond, Va., and is a portfolio company of global investment firm, The Carlyle Group. THG seeks to grow through targeted acquisitions in the middle market insurance brokerage space. The company now has more than 90 offices in 21 states.

The Northern United Agents Alliance, The Davis Agency

The Northern United Agents Alliance has announced that The Davis Agency joined the NUAA as a participating member. 16 | INSURANCE JOURNAL | FEBRUARY 10, 2020

The Davis Agency, located in Concord, N.H., is a full-service agency founded in 2019 by Andy Davis. The team of agents at The Davis Agency has been providing customer service and insurance to individuals and businesses for more than 25 years. Headquartered in Concord, N.H., the Northern United Agents Alliance is an alliance of independent insurance agents in New Hampshire, Massachusetts and Vermont dedicated to providing client service through the group’s relationships with its insurance carrier partners. The NUAA partnership was formed in 2011 by four independent insurance agencies and has grown to include 35 agencies.

Arthur J. Gallagher & Co., Walsdorf Agency

Arthur J. Gallagher & Co. has acquired Huntington, N.Y.-based Walsdorf Agency Inc. Founded in 1926, Walsdorf Agency is a third generation, family owned commercial and personal lines insurance agency with real estate niche expertise. David L. Walsdorf, Louis J. Walsdorf and their associates will be relocating to Gallagher’s Jericho, N.Y., office under the direction of Patrick Kennedy, head of Gallagher’s Northeast region retail property and casualty brokerage operations. Arthur J. Gallagher & Co., a global insurance brokerage, risk management and consulting services firm, is headquartered in Rolling Meadows, Ill. The company has operations in 48 countries and offers client service capabilities

AssuredPartners Inc. has acquired Corkill Insurance Agency Inc. of Elk Grove Village, Illinois. The Corkill staff of 104 will remain under the operational leadership of Luke Praxmarer and Paul Praxmarer. The agency currently reports $23 million in annualized revenues. Headquartered in Lake Mary, Florida and led by Jim Henderson and Tom Riley, AssuredPartners Inc. acquires and invests in insurance brokerage businesses (property and casualty, employee benefits, surety and MGU’s) across the United States and in London.

AssuredPartners, Lundstrom Insurance Agency

AssuredPartners Inc. has acquired Lundstrom Insurance Agency Inc. located in Elgin, Illinois. Led by Brett Lundstrom, the agency currently reports $7.3 million in annualized revenues. Founded in 1953 by E. John Lundstrom, the agency is third-generation family owned and operated. According to information on Lundstrom’s website it offers personal, commercial, life/health and employee benefits insurance products and services. Headquartered in Lake Mary, Florida and led by Jim Henderson and Tom Riley, AssuredPartners Inc. acquires and invests in insurance brokerage businesses (property and casualty, employee benefits, surety and MGU’s) across the United States and in London.

Southeast

Coastal Insurance Underwriters, Cybercom

Coastal Insurance Underwriters Inc., a Ponte Vedra Beach Florida based MGU and program administrator, acquired the assets INSURANCEJOURNAL.COM

of Cybercom International Corp. on Jan. 2. Cybercom International Corporation, Inc. was established in 1997 as a custom software development company in Ponte Vedra Beach, FL. During the past 23 years, Cybercom has been building enterprise-level applications for a number of vertical markets, including insurance, e-commerce, industrial, medical, and manufacturing. Cybercom’s capabilities include new product development, existing product support, analytical reporting, document generation, third-party integration and workflow automation. In the insurance marketplace, Cybercom has built tools for a number of coverage lines, including property, general liability, crime, directors & officers, umbrella, commercial auto liability, and more. Cybercom has maintained a strong relationship with Coastal for over 15 years. Coast said what started out as a simplified rating engine has transformed into a full lifecycle policy system for both personal and commercial lines products. The companies work together to continue to advance in automation and enhance Coastal’s proprietary policy lifecycle management system. Erez Wolf, president and founder of Cybercom International Corporation Wolf will become Coastal’s chief technology officer and president of Cybercom Technology, LLC. Coastal Insurance Underwriters, Inc., founded in 2007, is a program administrator specializing in designing, creating, and managing insurance products for a variety of business classes, including condominium associations, homeowner associations and golf and country clubs. Coastal focuses on community association products with over 8,000 homeowners and condominium associations currently insured.

Marsh & McLennan, Ironwood Insurance Services

Marsh & McLennan Agency, the middle market agency subsidiary of Marsh, has acquired Ironwood Insurance Services, LLC, an independent broker in the Southeast.

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Founded in 2007 and based in Atlanta, Ironwood provides commercial property/ casualty insurance, employee benefits, and private client solutions to midsize businesses and individuals throughout the US. Ironwood specializes in pre-close due diligence, transactional solutions, and risk management services to private equity funds and their portfolio companies. It also has dedicated expertise in serving the real estate, construction, energy, manufacturing, professional services, and health care industries. Ironwood’s 85 colleagues will continue to operate out of the firm’s existing Atlanta and Charlotte, N.C., offices. Will Underwood, founder and CEO of Ironwood, will continue to serve as CEO and will take on the additional role of Private Equity Center of Excellence leader for MMA, nationally. Partners Matt Lovein and Matt Hene will become co-Presidents of Ironwood. Marsh & McLennan Agency LLC is a subsidiary of Marsh established in 2008 to serve as a platform for the middle market. MMA offers commercial property, casualty, personal lines, and employee benefits to midsize businesses and individuals across North America.

South Central

Brown & Brown, Texas All Risk

Brown & Brown Inc. through its subsidiary, Hull & Company LLC, has acquired substantially all of the assets of Dallas-based Texas All Risk, a managing general agent placing a wide range of property/ casualty insurance for businesses and individuals in Texas, Louisiana, and Oklahoma. The transaction includes the asset acquisition of the All Risk companies: All Risk General Agency Inc.; Select General Agency LLC; TARGA Investment Corporation; TARGA Premium Finance Company Inc.; and Texas All Risk General Agency Inc. Following the acquisition, the Texas All Risk team will continue operating from its Dallas location as a new stand-alone office within Brown & Brown’s Wholesale Brokerage Segment under the leadership

of Kelly Davis, president/CEO of Texas All Risk for the past 15 years. Brown & Brown Inc., based in Daytona Beach, Florida, is an insurance brokerage firm, providing risk management solutions to individuals and businesses.

Galiot Insurance Services, Higginbotham

Houston-based Galiot Insurance Services, with a specialty in the life sciences sector, and insurance broker Higginbotham, headquartered in Fort Worth, Texas, have merged operations. Galiot President and CEO Brian Toglia, with 14 years of experience in the insurance industry, focuses on the life science market, serving pharmaceutical, biotechnology, medical device, software and instrument companies in 22 states as well as foreign companies with U.S. subsidiaries. At Higginbotham, he will serve as life science practice leader and assumes direction of Higginbotham’s existing life science group. Higginbotham has more than 20 industry practice groups that cater to companies with specialized risks. Uniting with Toglia gives Higginbotham additional expertise to serve the life science industry while expanding risk management service to his existing clients in the areas of loss control, claims support and risk management technology. Toglia is based in Higginbotham’s office in Houston in the Energy Corridor.

West

NFP, Koty-Leavitt Insurance Agency

NFP has acquired Koty-Leavitt Insurance Agency Inc. in Tucson, Ariz. Lloyd Koty, a former co-owner of the firm, will join NFP as senior vice president, reporting to Ed Kurowski, NFP West region managing director. Koty-Leavitt specializes in offering tailored insurance solutions to medical device distributors. NFP is an insurance broker and consultant providing specialized property/ casualty, corporate benefits, retirement and individual solutions through its licensed subsidiaries and affiliates. FEBRUARY 10, 2020 INSURANCE JOURNAL | 17

News & Markets Many Global Firms Face High Coronavirus Costs Due to Insurance Exclusions By Noor Zainab Hussain, Carolyn Cohn and Sumeet Chatterjee

any global companies from hotels and airlines to industrial houses are expected to have to foot the bill for disruptions caused by a new coronavirus in China, with epidemics usually excluded from insurance cover, experts said. With new cases being reported around the world, companies are set to face billions of dollars in losses linked to events and travel cancellations and closure of businesses, they said. The virus originated in the city of Wuhan, forcing airlines to cancel flights and companies to suspend travel to China. “For insurers, the bulk of the claims from this outbreak will come from businesses, mainly travel, hospitality and event firms, followed by mortality and healthcare costs,” said a Hong Kongbased insurance lawyer. Risk modeling firm RMS said it was too early to estimate insured losses. While some large global firms buy coverage for communicable diseases, most “standard insurance policies” exclude such outbreaks to keep costs low, said the lawyer, declining to be identified. Global insurers typically cover risks such as earthquakes and plane crashes, but have been paring back exposure to certain risks, such as shipping, to avoid huge losses. Previous viruses, such as SARS, Ebola and Zika, have also led insurers to be more cautious about exposure, with specific virus exclusions added to most basic coverage policies, industry insiders said. The Severe Acute Respiratory Syndrome pandemic that spread to 37 countries in 2003 caused $4 billion worth of economic 18 | INSURANCE JOURNAL | FEBRUARY 10, 2020

losses in Hong Kong, $3-$6 billion in Canada, and $5 billion in Singapore, according to insurance broker Marsh. Insurance experts also told Reuters that most event cancellation policies would not cover the new virus. “A lot of these airlines and hotels are offering refunds to their customers,” said Richard Coyle, London-based head of risk financing and non-standard solutions at Miller Insurance. “Without adequate insurance in place, the airlines and hotels are absorbing the financial losses themselves.” A standard event cancellation policy issued by firms in the 99-member Lloyd’s of London insurance market and elsewhere has a “communicable disease” exclusion, two underwriters said.

Exclusion

Companies buy business interruption policies with their property insurance to cover loss of revenue if they are forced to close temporarily, but those policies are also likely to exclude communicable diseases, an underwriter in London and insurance executives said. “The Asian hospitality industry is an obvious example of an industry already affected. For many lines of business … it is common market practice to have epidemic outbreak risk excluded,” a Munich Re

spokesman said. While some firms including Munich Re have developed specific insurance products and policies for infectious diseases, not many firms have bought them, insurers said. The impact on tourism and transport is also likely to hit supply chains in Asia, Narges Dorratoltaj, senior scientist at risk modeling firm AIR, said. Starbucks Corp became the first major U.S. company to warn of a financial hit from the virus. The Shanghai government announcement that all companies in the city would not be allowed to start work before Feb. 9 will affect companies including Tesla Inc., General Motors and Volkswagen. While most travel insurers are likely to reimburse costs associated with trip cancellations and medical expenses for policies bought before the spread of the virus, some are excluding the coverage for select destinations now, industry officials said. Insurers Aviva, Allianz and AXA said individual policyholders would be covered if they are impacted by the virus, provided they follow travel advisories from governments.

A passenger is checked for a fever by a health worker at a Beijing railway station on Jan. 23, 2020 in Beijing, China. Photo credit: Kevin Frayer/Getty Images.

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News & Markets California Commissioner Spearheading National Cannabis Insurance Framework By Don Jergler

alifornia Insurance Commissioner Ricardo Lara is at the forefront of shaping how state insurance regulators all over the U.S. will deal with the legal cannabis market. Lara is not only the chief insurance regulator of the nation’s largest cannabis market – one that other states with legal and medicinal programs coming online are using as an example – but he also chairs the National Association of Insurance Commissioners’ Cannabis Insurance Working Group, which in December approved a white paper outlining a framework for other states regulating insurance for the cannabis industry to follow. The white paper, “REGULATORY GUIDE: UNDERSTANDING THE MARKET FOR CANNABIS INSURANCE,” outlines the challenges for the insurance industry in regulating cannabis and it establishes a guideline, or a starting point, for state insurance regulations. If there’s one take home from the paper for regulators to consider, it’s that there’s much to be done, according to Lara. “It also points out that we’re not there yet,” Lara said, describing the intent of the paper. After just a year in office, it’s easy to identify in what areas Lara is positioning himself to take the lead among state insurance regulators.

Ricardo Lara Climate change is one issue on which he’s been out in front. Among the numerous climate-related steps he’s taken in the past year was the launch of a yearlong effort to develop a “Sustainable Insurance Roadmap” to confront California’s climate risks. Cannabis and insurance is another hot topic for Lara. Lara has continued an existing practice of encouraging insurers in the admitted market to offer more products and

Insurance Most Needed by Cannabis Businesses The NAIC’S Cannabis Insurance Working Group in a recently approved white paper identified some of the most pressing insurance needs of cannabis businesses. Insurance most frequently needed by the cannabis industry includes: • Automobile, including Distribution (auto and cargo) • Commercial General Liability • Crop (Indoor/Outdoor) • Crime Insurance W2 | INSURANCE JOURNAL | FEBRUARY 10, 2020

• • • • • • • • • • • •

Disaster Coverage Director and Officer Liability Employment Practices Liability Equipment Breakdown Errors and Omissions Excess/Umbrella General Liability Product Liability Premises Liability Property Surety Bonds Workers’ Compensation

services to what he believes is an underserved cannabis industry, an effort that was started by Insurance Commissioner Dave Jones back in 2017. Lara in January paved the way for people with cannabis-related convictions to become licensed insurance producers. Lara said the California Department of Insurance will use its discretion in deciding whether to issue licenses to those with cannabis-related convictions in support of Proposition 64, the Adult Use of Marijuana Act, approved by voters in 2016. The action clears obstacles to becoming an agent, broker, or other licensee for those whose past convictions are eligible to be dismissed or reduced under the current law. “When voters passed Prop 64, it was in line with our changing attitudes,” Lara said, explaining his reasoning for the step. Lara said after the decision that one question he’s gotten is how the California Department of insurance will make sure consumers are protected. “The same way we’ve always protect

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there yet,” comment, Lara noted that one of the key findings of the NAIC white paper is that more insurance products are needed for the cannabis industry. “Insurance availability continues to lag behind the needs of the cannabis industry,” Lara said. The white paper calls attention to “sub-

consumers,” Lara answered, adding that the decision doesn’t change the vetting process for people to become licensed to sell insurance in California. “We’re still going to vet every license,” Lara said. Elaborating on his earlier “we’re not

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stantial gaps in insurance coverage for the cannabis industry,” with glaring needs for all cannabis segments – cultivation, manufacturers, testing labs, distribution and retail. Lara believes the best way to address the gaps are for states to engage admitted insurance carriers and encourage them to offer more products for cannabis businesses. “That is key to getting the admitted cannabis product onto the market,” Lara said. Even in California, where seven admitted carriers are now offering comprehensive coverage, up from just one when Golden Bear’s filing to sell cannabis business insurance was approved in 2017, there still isn’t enough coverage available in Lara’s opinion. “No doubt that does not meet the demand of our businesses in California,” Lara said. “We’re behind.” He added: “I think we are unfortunately behind the curve in this emerging market.” The paper also recommends that each state’s insurance department have a dedicated cannabis industry expert to improve communications. Perhaps the biggest challenge to getting cannabis businesses more access to insurance is that marijuana continues to be treated by the federal government as a Schedule 1 drug, making it difficult for these businesses to access essential services, such as banking, Lara said. Asked if he supports the SAFE Banking Act, which would enable cannabis businesses access to regular banking services – the bill has been in limbo for some time in the Senate – he responded: “Absolutely.” But until something big happens at the federal level, Lara believes that state insurance regulators must do what they can to encourage more products and innovation, and believes the NACI white paper is a good start. “I think the bones of the white paper really give you a framework by which states can start making the changes necessary to be successful with their own cannabis industries within their own states,” Lara said.

2/15/19 12:57 PM

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News & Markets Workers’ Compensation Is Doing Well. Is It Time to Worry? By Susanne Sclafane

lthough workers’ compensation results remain strong — and the line continues to outperform all other commercial insurance lines — worries about continued soft pricing and loss reserve levels for workers’ comp specialists prompted a rating agency warning recently. “As rate levels continue to decline, competitive pressure could mount on [workers’ comp] specialists to the point that will adversely affect not only company income statements, but balance sheets as well, especially if companies are unable to set aside adequate capital for loss reserves,” A.M. Best analysts wrote in Best’s Market Segment Report, “Declining Rates Could Threaten Profitability of U.S. Workers’ Compensation Line,” published in late December. The report sets forth historical workers’ comp results through 2018 with some estimates for 2019, and also for workers’ comp specialists (including and excluding state funds) and for state funds alone. There has been continued good news for the line. Not only is the line profitable — with a combined ratio of 86.1 for the latest full year available, 2018 — but also that as the biggest component of commercial lines segment insurance overall, workers’ comp is fueling a continued stable outlook for the entire segment. A.M. Best’s outlook for workers’ comp is stable and the “line’s favorable underwriting performance has helped offset the negative effects of other lines on the commercial lines’ overall performance,” the report says. The 86.1 combined ratio was down nearly 6.0 points from 2017 and 15.5 points from 2014, the earliest year shown in the report. That 2018 result compares more favorably to results going back further than 2014, the report says, without projecting any estimates for 2019 or 2020. In spite of declining INSURANCEJOURNAL.COM

premium rates in recent years, workers’ comp net premiums written rose 7.4 percent across the industry in 2018 — marking the highest growth rate in the five years through 2018. A robust jobs market and higher payrolls offset the insurance price drops, according to A.M. Best analysts. The opposing forces of competitive insurance prices and higher payrolls just about offset each other, keeping direct premiums relatively flat in 2018 (with a 0.4% decline recorded). Net premiums still rose, however, because, A.M. Best said, carriers retained more of their workers’ comp premium rather than ceding it to external reinsurers. In addition to the good U.S. jobs market, the report identifies key factors contributing to favorable underwriting results include: • Low reported claims frequency • Legislative reforms • More effective use of data and predictive analytics • Enhanced workplace safety measures. Potential negatives for the years ahead include:

• • •

Medical cost inflation Diminishing prior accident-year loss reserve redundancies Higher average settlements.

According to the report, medical cost inflation has yet to boost loss severity to the point where it more than offsets declining claims frequency. The report also notes that “any material weakening in the U.S. economy could lead to an adverse turn in loss frequency and further pressure underwriting profits.”

Specialists at Risk?

A.M. Best analysts look beyond the results to analyze all-lines results for workers’ comp writers, suggesting that more problems might creep into the otherwise stable picture. Focusing on a group of U.S. private carriers and state funds for which workers’ comp net premiums (including excess comp) constitute at least half of their total net property/casualty insurance premiums — A.M. Best’s Workers Compensation Composite — the report notes that the WCC insurers have taken on some of the business shed by larger insurers that have refined their risk appetites, tightened underwriting guidelines, and decreased exposure to the line in recent years. In fact, the WCC increased its market share of all U.S. workers comp net premiums from 33.8% in 2010 to 51.7% in 2018. In 2018, the WCC wrote $26.4 billion of the $51.0 billion of U.S. workers comp net premiums. The report suggests that the recent growth may fuel some negative consequences in years to come. In particular, A.M. Best analysts note that recent underwriting profits were partly attributable to takedowns in loss reserves for prior accident years, which may not be available going forward. The WCC reported $4.6 billion in net income in 2018, driven by $940 million in underwriting profit. But the WCC had nearly $2.3 billion in favorable reserve development—the highest level in 10 years.

Spotlight: Commercial Auto

‘Powerful Predictiveness’ May Be Key to Reversing Commercial Auto Losses

By Jim Sams

he future cannot come too soon for commercial auto. Despite growing premiums, the commercial auto line hasn’t turned an underwriting profit for the past nine years as both the number and cost of claims exceeded expectations. Tech companies are pitching self-driving trucks to vastly improve safety. But while the industry awaits a robot revolution, a more subtle technical revolution has

already taken root. In December, a long-awaited federal rule that requires motor carriers to use electronic logging devices to track drivers’ hours took effect, addressing one major safety issue. But that’s not the end of it. Electronic logging device vendors are offering a myriad of fleet-management programs, promising data collection as a form of loss control. Progressive Group, the nation’s largest commercial auto insurer, piggybacked onto the newly mandated

20 | INSURANCE JOURNAL | FEBRUARY 10, 2020

electronic logging technology to offer a telematics program that promises discounts for safe driving habits. The carrier says in earnings reports that electronic logging devices promise to usher in a new era of usage-based insurance to the commercial auto line. “And what we see is that the predictiveness of the telematics data is very powerful,” said Karen Bailo, senior controller for commercial lines, during Progressive’s second-quarter earnings presentation last August. “And there’s a lot more

we can do with that data.”

Social Inflation

Predictiveness appears to be exactly what the commercial auto line needs right now. According to the Insurance Information Institute, the net combined loss ratio for commercial auto topped 100% in each year from 2011 to 2018, peaking at 111% in 2017. According to an analysis published by the Swiss Re Institute in the fall of 2019, the line has also suffered from adverse reserve development INSURANCEJOURNAL.COM

each year since 2012. Increasing claims costs were driven by general inflation and health care expenses, but more worrisome is a trend that Swiss Re and others label “social inflation.” Swiss Re said defendants face more aggressive plaintiff’s awards and more consumer-friendly juries. The reinsurer points to research by the Shaub, Ahmuty, Citrin & Spratt law firm that found the median of the top 50 single-plaintiff bodily injury verdicts in the United States climbed from $27.7 million in 2014 to $54.3 million in 2018. In a market update published last October, Lockton Companies said that commercial auto rates have increased for 32 straight quarters. Those price increases averaged 7% to 8% in 2018 and 2019, the brokerage said. The Lockton report echoes Swiss Re’s concerns about social inflation. “Catastrophic jury verdicts and settlements continue to occur at an unprecedented rate,” the report said. “High excess carriers are dealing with multiple occurrences in layers where little to no activity was expected.” Third-party litigation funding may be part of the problem, according to Lockton. When claimants are able to turn to third parties to fund litigation, they are able to continue cases that otherwise may have been dropped. In a telephone interview, Lockton Senior Risk Analyst Scott Johnson said commercial auto’s troubles are really a “three-headed monster.” Insurers are suffering from increasing accident frequency, increasing bodily injury INSURANCEJOURNAL.COM

losses and increasing property damage repair costs. The size of jury awards is a part of the reason for the increase in claim severity, he said. Johnson said insurers have increased premium by raising rates, but continue to post adverse development notices — meaning expenses continue to come in higher than originally anticipated. “Those jury awards are getting bigger and bigger recently,” Johnson said. “I think juries, if you’re a big company, they are kind of pushing the cost on to them.” Liberty Mutual also lamented the rise in “nuclear” jury verdicts. The carrier said in a viewpoint column posted on its website that public mistrust of corporations is likely leading juries to feel more sympathy toward plaintiffs and causing jurors to want to punish offenders. Also, pollsters have detected widespread public pessimism — a belief by many that “the system” isn’t working for them. Travelers noted the impact of jury verdicts in its annual financial report for 2018. “Recently, the company has seen more of an increase in the rate of attorney involvement than it had anticipated and a lengthening of the claim development pattern,” the report said. “As a consequence, the company has experienced a higher level of bodily injury severity than it had anticipated.” Johnson said in today’s environment, a solid litigation management strategy is more important than ever.

More Crashes

If juries cannot be controlled, maybe the number of accidents

can be reduced. Accident rates causing death or injury have been on the upswing since the beginning of the last decade as both the number of miles driven and the number of vehicles on the road increased. Data gathered by the Federal Motor Carrier Safety Administration shows that the number deaths in crashes involving large trucks and buses rose to 5,005 in 2017 from 3,957 in 2010. Three quarters of those were caused by multi-vehicle crashes. Even more concerning: The number of people injured in large truck and bus crashes rose to 170,000 in 2017 from 106,000 in 2010.

‘And what we see is that the predictiveness of the telematics data is very powerful. And there’s a lot more we can do with that data.’ Increased congestion may be part of the problem. According to the Insurance Information Institute, the number of vehicle miles driven in the U.S. has more than doubled in the past decade. The FMCSA says the number of registered large trucks and buses increased by about 30% from 2010 to 2017. But the fatal accident rate for large trucks measured by the number of miles driven has also increased: From 0.16 deaths per 100 million miles in 2009 to 0.22 in 2019, according to the National Highway Traffic Safety Administration. In other words, truck drivers are more likely to be involved

in a fatal accident during each mile driven than they were 10 years ago. A lack of experience could be part of the problem. In March, the Bureau of Labor Statistics reported that the American Trucking Association has been complaining about a labor shortage in the trucking industry since at least 2005. So the bureau tasked its economists to study the issue. They concluded that the perceived shortage is more nuanced. Overall, that migration of truck drivers to other occupations is similar to other

blue-collar occupations, the BLS report says. But the market does appear to be “tight” for long-haul truck drivers, which makes up between one-sixth to one-fourth of employment for truck drivers. The long-haul sector experienced a 94% turnover rate for large motor carriers and 79.2% for small ones, the bureau said. By comparison, the turnover rate for local trucking companies was 12.7%. That means, each driver hired by a large long-haul trucking company will likely move on in a little more than a year. Local delivery truck drivers (more technically, those who deliver less than a full

continued on page 22

FEBRUARY 10, 2020 INSURANCE JOURNAL | 21

Spotlight: Commercial Auto continued from page 21 truck load at a time) tend to last about eight years. The BLS report said those high turnover rates doesn't translate into a shortage of drivers. Instead, the numbers show that long-haul trucking is unattractive to many potential employees. Employers do not have the flexibility to increase prices to spend more on labor, the economists said. “These characteristics result in labor market conditions in which individual firms are forced to accept high turnover as a cost-minimizing response to their competitive position in the market for their outputs,” the report said.

‘Meaningful Predictions’

Traditional loss-control measures, such as safety and training programs, may not be a great fit for companies that replace their entire labor force every year or two. That leaves an opening for technology. The Federal Motor Carrier Safety Administration projected that the new rules requiring electronic logging devices will lead to 1,844 avoided crashes annually, with 562 fewer injuries and 26 lives saved each year. But an even bigger savings might be from

monitoring driver behavior. Progressive was an early adopter of telematics in commercial auto. During the second-quarter earnings conference call in August, Progressive controller Karen Bailo said the carrier was “well-positioned” in 2017 when the federal government announced final rules to require electronic logging devices because it had already invested in telematics through Snapshot. The insurer offers discounts of up to 18% to commercial accounts that participate in

22 | INSURANCE JOURNAL | FEBRUARY 10, 2020

its Smart Haul telematics program, which was built off the Snapshot program that it uses in the personal auto space. Progressive said in financial statements that it has expanded the Smart Haul program to 46 states. Smart Haul is an “early generation” telematics program, but even so the data that it collects leads to more meaningful predictions than predictions made from personal auto data, she said. The variance in driving habits among commercial drivers are greater than the variance among personal auto customers. Bailo said telematics provides geo-location data that could improve risk ratings by underwriters compared to less reliable conventional approaches such as radius of operation. “Results are also really terrific,” Bailo said. “We’re seeing that Smart Haul quotes are converting at a rate of more than double our normal trucking business and the savings is substantial at around $1,400.” Progressive reported that

its net written premium from commercial auto has increased from 10% to 25% annually from 2014 to 2019, rising from $1.9 billion to $4.4 billion in 2019. During that time Progressive made its mark as the largest commercial auto writer in the nation, with 10.9% of the market.

Insurers are suffering from increasing accident frequency, increasing bodily injury losses and increasing property damage repair costs. Progressive’s loss ratios show the power of big data. Its combined ratio was 86.7% in 2018, “an impressive result given record growth in premium and an influx of much new business,” the carrier said. Those results are also impressive when compared to Progressive’s competitors. Fitch Ratings reported in INSURANCEJOURNAL.COM

August that the average loss ratio for commercial auto was 108% for U.S. carriers in 2018, the ninth year in a row that the line delivered an underwriting loss. And Progressive is just getting started. The company said its hoping to dominate the $4 billion small fleet market through a Smart Trip program that will offer value-added benefits to policyholders such as alerts when drivers speed and digital maps that show fleet owners the location of every truck. Others are investing, as well. CB Insights reported that investors had made 27 deals with trucking tech startups in the first five months of 2019, amounting to a total investment of $2 billion, according to Transport Topics. That follows $4.6 billion in investment in the sector in 2018.

Reptile Theory

Big data may be part of the solution for commercial auto. Some say it is certainly a part of the problem. Tommy Ruke, founder of the Motor Carrier Insurance Education Foundation, said after the Federal Motor Carrier Safety Administration started assigning Compliance, Safety and Accountability scores to trucking companies in 2010, trial lawyers started using the data to argue that the corporate owners should be held accountable for their pattern of ignoring safety rules. The so-called CSA scores — the mainstay of the agency’s safety compliance program — are built off data from roadside inspections, including driver and vehicle violations, crash reports from the last two years, and investigation results. INSURANCEJOURNAL.COM

Ruke said trial attorneys aren’t always able to enter CSA scores into evidence after a crash, but they almost always try to. When they succeed, they are able to generate juror sympathy and generate big awards. He said its basic reptile theory: jurors who fear something adverse may happen to them react by punishing the entity that poses that risk. “Who hasn’t been out on the road and scared by a big rig?” Sizable awards lead to more sizable settlement offers as insurers get nervous. Ruke said a crash that once would merit a $100,000 settlement offer now brings $300,000. Ruke said technology can bring some protection for truck owners at a relatively small cost. He said event recorders that switch on when sudden movement is detected can shorten lengthy investigations by claims adjusters and also save money by avoiding

litigation in claims that clearly should be settled. Ruke said some insurers have begun to require devices such as event recorders and telematics to track driver habits as a condition of writing coverage. Some even subsidize the cost of installation. Ruke said most large motor carriers have installed technology such as driver assistance devices, event recorders and telematics because they have large deductibles on their policies and see the savings. He said small trucking companies can at least make small investments. “All (motor) carriers should have forward-facing cameras,” he said. “I have no idea why they are not installing them. They are relatively inexpensive — $400 or $500 — and they record what happened.” Greg Baumgartner, a Houston personal injury attorney, said it seems to him that

most large trucking companies have installed video on their big rigs, an investment that benefits the public by increasing safety and at least some of the time benefits defendants by recording what happened. He said similarly, electronic data logs can help eliminate questionable claims by providing proof that drivers operated according to regulations. Baumgartner said personal injury suits are built from data. “It’s pretty much rulesbased: If the driver took a risk that the driver shouldn’t have taken, if the company took a risk that it shouldn’t have,” he said. “It seems that the professional drivers are kind of held to the standards of a professional. When companies cut corners or drivers take risks that they shouldn’t have, that makes for a compelling case.”

Sams is the editor of ClaimsJournal.com

FEBRUARY 10, 2020 INSURANCE JOURNAL | 23

Special Report: Nonprofits

Take a

‘DEEP DIVE’ INTO THE NONPROFIT SECTOR: Nonprofits Treading Water as Market Hardens

24 | INSURANCE JOURNAL | FEBRUARY 10, 2020

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By Stephanie Jones & Amy O’Connor

he task of insuring nonprofit organizations is a complex one and agents, brokers, underwriters and carrier representatives say that in order to fully serve those entities that serve our communities in myriad ways, it’s vital to take the time to understand what they do and how they do it. Specialists in this segment are more important than ever as the commercial market has tightened and property and liability coverage rates continue to rise, challenging the slim budgets of most nonprofits. Headlines from the #MeToo movement and large jury awards for sexual abuse cases have also spooked carriers who write nonprofit business into offering smaller limits or pulling out of the space altogether, nonprofit insurance experts say. As the third largest employment sector in the United States — behind retail and manufacturing — the nonprofit world, made up of 501(c)(3) tax exempt organizations largely focused on contributing to their communities, faces the types of operational challenges that exist in the for-profit universe but also issues that are unique to the charitable sector. Funding is one such challenge, as nonprofits typically have smaller budgets than for-profit entities with funding coming from donations as well as from contracts with larger nonprofits or local, state and federal governments. Finding the proper insurance coverage can be another challenge for nonprofit organizations in light of the different factors that affect the organization, such as its funding sources, liabilities that stem from its mission, its property, clients, staffing and a heavy reliance on volunteer participation. The class requires specialists who take the time to really understand a nonprofit's different challenges and exposures, experts say, particularly considering the changing market. “We spend a lot of time on doing what INSURANCEJOURNAL.COM

somebody might call a deep dive into what they do,” said Polly Kosyla, president of S. Wolf and Associates, a Chicago-based independent agency focused solely on the nonprofit sector. She said that includes developing an understanding of the nonprofit’s mission, their activities, the responsibilities of their volunteers and staff, their funding sources and the other entities with which they work. “I think the front-end work of what we do is very labor-intensive to really get a full understanding of what an organization is not only doing now, but also trying to accomplish in the future,” added Charlie Kosyla, vice president at S. Wolf and

Associates. Because of the variety of nonprofit risks, there’s no one carrier that can provide the coverage needs for all of them, Charlie Kosyla added. In crafting solutions for their clients, it’s a matter of finding a fit with “the collection of carriers and MGAs we work with. It’s fitting all the policies because there’s no one carrier to cover them all. It’s a vast market.” Peter Andrew, president and CEO of Council Services Plus in New York, an agency that only writes nonprofits, said there are few carriers that regularly and comprehensively work with nonprofit organizations because of their exposures,

which can make it difficult for the smaller nonprofits to get all the coverage they need. “There are certain coverage features that nonprofits like to have that maybe for-profit businesses don’t, like coverage for volunteers, coverage for special events, fundraisers, the ability to name additional insured, funding sources, municipalities, conference, location hosts, things of that nature,” he said. “There’s only a handful of insurance companies who are really writing a policy that’s comprehensive for the nonprofit world in that way.”

Hardening Market

In a space that is already limited in terms of carriers that specialize in it, nonprofit insurance experts say exiting capacity is a huge risk to the segment that could make nonprofits vulnerable to being underinsured or without the coverage they need to operate. Andrew and other specialists say there are signs of a tightening market with higher rates and lower capacity for both liability and property insurance after many years of a very soft market. “In addition to a shrinking capacity, some of the for-profits [carriers] are completely withdrawing from the nonprofit market or certain sectors of the nonprofit market, especially sectors that have high exposure to the molestation abuse — so nonprofits serving children, vulnerable adults,” said Brian Johnson, chief underwriting officer for the Nonprofit Insurance Alliance, a nonprofit-focused RRG based in California writing business in 32 states. “Carriers are getting out of foster care, they’re getting out of camps, they’re pulling back limits on misconduct, on D&O; they’re even taking it out of the umbrella in some cases. They’re non-renewing or maybe extending [coverage] for a month,” said Peter Persuitti, managing director of the Nonprofit Practice at Arthur J. Gallagher. Nicole Jolley, director of Nonprofit at Church Mutual Insurance Co. in Merrill, Wis., noted there has been “some tightening in the property space and we’re

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Special Report: Nonprofits continued from page 25 looking at liability as a potential next line of business that will be hardening.” She added that the #MeToo movement and changes in sexual misconduct reviver statutes across the country, where many states are suspending the statutes of limitations for abuse and molestation, are having an impact on liability rates for both nonprofit and for-profit businesses. Certain segments, particularly those that have exposure to minors or vulnerable adults, are seeing the biggest shift due to a swell in plaintiff attorneys going after nonprofits. Mike Liguzinski, division president, Specialty Human Services at Great American Insurance Group in Cincinnati, Ohio, said the social inflation caused by a very proactive plaintiff bar, which is pursuing and winning more verdicts and high jury awards, is impacting rates. It’s not a new phenomenon, rather a trend that seems to cycle around about every 10 years, he said. “We’re going to see rising rates for the next two to three years because of social inflation,” Liguzinski said. Brad Baumgartner, executive vice president with IMA Inc. in Denver, said liability and property coverages in the nonprofit space are mirroring what is happening in the P&C market in general. “Comp prices are coming down, which is great, because that has historically been a big spend for them. But just like anywhere else in health and human services, professional liability has been going up,” he said. Nonprofit insurance broker Jordann Coleman with Heffernan Insurance Brokers in Walnut Creek, Calif., said a soft workers’ comp market has been a “silver lining” for many nonprofits as property and liability rates rise. “Workers’ compensation has been the one area that we’ve been able to — at least rate-wise — provide some relief,” she said. 26 | INSURANCE JOURNAL | FEBRUARY 10, 2020

Carriers that specialize in nonprofits are taking note of the market changes. Liguzinski wouldn’t go so far as to say that the market is in a crisis mode, but he acknowledged his company is “getting a ton of calls” from brokers trying to place business. “Let’s put it this way: Our phone is ringing. We don’t have to go looking for it,” he said. Johnson of the Nonprofit Insurance Alliance tells a similar story. “Our submission account for 2019 was up overall 25% year-over-year, and a lot of that is because some of the for-profits [carriers] are saying, ‘Yep, we’re out. We’re not doing it anymore.’” he said. While the market is changing, Polly Kosyla says coverage is still available for most of her clients. She said she has been in insurance long enough to remember a time when there were no carriers that would insure a shelter or provide a sexual abuse liability policy. “There certainly are carriers that are willing to write a bulk of what our clients do,” she said.

Kosyla said her agency has succeeded in weathering the ups and downs in carrier capacity by working with a core group of carriers that “we can go to for more standard risks and … more unusual risks.” For accounts that aren’t in the religious sector and haven’t been hit with lawsuits, Heffernan’s Coleman says coverage is still available, and she hasn’t seen much change from the specialized carriers that write the business. “I think the ones that are in it have been in it for the long haul and will continue to stay in it for the long haul,” Coleman said. Council Services Plus’ Andrew said he doesn’t think the nonprofit market is in crisis — yet. “There’s only a handful of insurance companies who are really writing a policy that’s comprehensive for the nonprofit world, and when they start to go away or they start to firm up, then there’s even less options in the marketplace,” he said. “I don’t think it’s reached crisis level, but does it have to reach crisis level for us to get ahead of something?” He said the landscape is shifting, and, “if we’re not careful, we’re going to have hundreds and hundreds, if not thousands of nonprofit organizations wasting resources to pay for more premiums or being outright canceled and not being able to get insurance. Then we really have a crisis.”

Impact of Funding

A nonprofit’s revenue sources are highly influential not only to how the organization is managed and its ability to complete its mission, but to the development of an insurance program for the risk, the experts say. Many nonprofits receive funding from grants or contracts from municipalities, states or the federal government, and that funding dictates the level of limits or coverages that nonprofits must have. Charlie Kosyla said brokers need to INSURANCEJOURNAL.COM

pay attention to those details, so that nonprofits have all the proper insurance in place and carriers feel comfortable writing the risk. “The funding difference between a nonprofit and a for-profit is a for-profit might have a product that they’re selling or might have a revenue stream that’s coming in and supporting the business, whereas a nonprofit, they’re going to rely on multiple revenue streams,” Charlie Kosyla said. “Nonprofit organizations are under obligation contractually to have certain insurances in place, and if that insurance isn’t available or it’s only available at a cost prohibitive price, then it threatens the nonprofit sector unlike it threatens any other sector,” Andrew said. Andrew noted he has had clients with $8,000 budgets that have to spend $2,000 on insurance; dedicating such a big portion of their budget to insurance takes away their ability to help their local community. “Every dollar that goes to insurance is one less dollar to its mission,” said Andrew. “We can’t do that to communities.”

to work with commercial accounts but not necessarily with nonprofits. “We get a lot of clients who are with insurance that doesn’t fit them or had premiums that are way too low or way too high because it doesn’t fit what they do. I can understand why a commercial agent would be frustrated trying to figure out how to insure a group that they really don’t understand,” she said. An agent’s expertise and deep understanding of the client’s operation is not only essential to the client, it’s a big factor in how underwriters look at the risk, as well, said Penny Parisoff, non-profit product management director at GuideOne Insurance in West Des Moines, Iowa. She said agents need to understand the types of clients the nonprofits serve and clearly articulate their story to the underwriter. “I think that’s true on all of the nonprofits — because the nonprofit space has such variety to it — is that agent really learning

the risks?” she said. Agents and brokers can help their clients by working with them on their processes and procedures, their safety culture and preventative measures, and help them establish a risk management plan with steps in place, Great American’s Liguzinski said. “Help them wear that hat or co-wear the hat with them, the risk manager hat,” he said. “A number of the carriers have risk management tools and portals and online training, and sending out a loss control person to work with them on their processes, procedures, background checks.” Nonprofit Insurance Alliance’s Johnson says he tells his brokers one of the most important things to do is understand what contracts nonprofits are signing “because it’s the broker’s job to help the nonprofits figure out what coverages they need, what limits they need, and an important factor of that is what contracts are they signing,

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Helping Nonprofits During Uncertain Times

Nonprofit experts agree this segment needs agents and underwriters who specialize in it and can help their clients understand their exposures and what coverages they need. That knowledge will be especially important to helping nonprofits navigate a firmer market with limited coverage availability. “Insurance isn’t the top of their list of things that they’re doing on a daily basis,” Baumgartner of IMA said of the nonprofits with which he works. Baumgartner said sometimes he sees exposures a previous broker hadn’t paid much attention to. Nonprofit brokers need to do a “thorough risk review, where you’re reading the terms and conditions of the various policies, discussing the limits, and benchmarking the pricing,” Baumgartner said. “I’ve run into a number of scenarios where there are a lot of coverage gaps.” Polly Kosyla said many clients who have transitioned to her agency previously worked with agents that had been trained INSURANCEJOURNAL.COM

Why brokers call us. We’re the nation’s leading insurer exclusively serving 501(c)(3) nonprofits and for good reason: 9.5 out of 10 members stay with us year after year. If you’re looking for a stable P&C market, with an excellent financial rating, visit us online to learn more. insurancefornonprofits.org/ins-journal

FEBRUARY 10, 2020 INSURANCE JOURNAL | 27

Special Report: Nonprofits continued from page 27 what liability we’re taking on.” He also noted that brokers need to understand the differences in policy forms that different carriers offer and “not just go where you get the most commission, not just go where you know the person best.” “Make sure you understand the policy so you’re going to get the nonprofit the best coverage available for the best price. Understand loss control services that the companies are offering,” he said. “Make sure you’re taking advantage of their employment risk management services. Make sure you’re taking advantage of their driver training.” He added brokers should be aware of different statute changes around the country and the changes in social inflation and he cautioned against brokers going with a policy that offers the highest limits because it may not be to the benefit of smaller nonprofits. “It’s easy for a broker to say to a nonprofit, ‘You need a $10 million umbrella. Get as much coverage as you can

get as possible,’ because they can never be accused of not offering to give them enough coverage — they’re protected,” he said. “Nowadays, what that does is it puts a target on their back, so the lawyers will say, ‘They got $10 million of coverage. I think I’m going to demand $10 million.’ It never fails.” Andrew says he wishes more brokers

The Nonprofit World at a Glance

he nearly 1.6 million tax-exempt entities with 501(c) designations in the United States run the gamut from churches and cultural centers to food banks and homeless shelters to disaster relief organizations, and they can be national, statewide and local in scope. The Charitable Sector, a report produced by the Independent Sector, a national member organization focused on the charitable community, shows that: • Nonprofits in the U.S. provide jobs to 11.4 million people, or 10% of the national workforce, making it the third largest employment sector in the U.S., behind retail and manufacturing. • In 2016 in the U.S., about $390 billion was raised in charitable contributions, representing a 2.7 percent increase from 2015. • Around 25% of the adult population in the U.S., around 63 million people, volunteer for nonprofit organizations annually. • At an hourly rate valued nationally at $24.24 per hour, Americans contributed $193 billion of their time to nonprofit organizations in 2016.

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would become specialists in the nonprofit sector and learn about it on a “grassroots level.” That intimate knowledge would help underwriters feel more comfortable offering coverage in the segment. “If more brokers got into the sector and took time to understand the sector, then yes, more companies would understand what nonprofits are and then understand that these organizations are not the risk that they might be perceived. No one’s taken the time to really talk through what this organization does with an underwriter,” he said. Nonprofits are evolving and working to address and manage their exposures, said Persuitti. “It’s a very dynamic sector that is in many ways at the edge of lots of risk, but very committed to screening its volunteers. It’s learned so much. It’s taken that knowledge and science and the advancements of technology.” Persuitti said despites its challenges, the nonprofit segment is a “remarkably growing space” that is very rewarding to work in. Andrew said he hopes the insurance market will work to ensure the availability and affordability of insurance for nonprofits before it becomes a crisis because that would be devastating for not just the nonprofits themselves, but the communities they help. “That worries me because I see what these small community-based organizations are doing on the local level,” he said. Insureds and insurers benefit from fair premiums being charged for the risk — not too high or too low, he said. The broker’s job is to “bring those two ends together” so both sides get a fair deal. “When those two things come together, the nonprofit’s expectations and the company’s understanding, boy, that’s a great thing,” Andrew said. “We don’t have enough of that right now.” INSURANCEJOURNAL.COM

Special Report: Nonprofits Insurance CEO Takes Fight for Nonprofit Coverage to Congress By Amy O’Connor

amela Davis, president, founder and CEO for the Nonprofits Insurance Alliance (NIA), Risk Retention Group, is on a mission to help nonprofits be successful at their mission by ensuring insurance is affordable and available. She started the Nonprofit Insurance Alliance RRG in 1988. Today it is comprised of four 501(c)(3) nonprofit organizations in 32 states serving more than 20,000 nonprofit organizations. The group is limited, however, to writing only liability insurance in most states because as an RRG it cannot write property or auto physical damage, which Davis says are “impossible to find on a standalone basis for small organizations.” NIA has been able to work with various carriers to provide a full businessowners policy for insureds, but, in recent years some of those insurers have decided not to continue offering other needed coverages. Davis said they sought other ways to offer the coverages, but when those didn’t pan out, she went to representatives of the U.S. Congress to develop a long-term solution. Through that process came H.R. 4523, the Nonprofit Property Protection Act, a bill to amend the Liability Risk Retention Act of 1986 to expand the types of commercial insurance authorized for risk retention groups serving nonprofit organizations. The bill allows nonprofit RRGs to form in states and offer property and auto physical damage insurance to members under strict limitations, including: • The RRG must serve 501 (c)(3) nonprofit organizations. • The RRG has been chartered or licensed as an insurance company under the laws of the state and authorized to write insurance. • The RRG has provided liability insurance for at least 10 years, has at least $10 million in capital, and insures any one member for INSURANCEJOURNAL.COM

a maximum total insured value of $50 millon. • No RRG may begin offering property insurance in a state if the insurance department for that state has posted on its website the names of three licensed, admitted carriers that are providing standalone property in BOP form and auto physical damage, and that coverage is readily available to 501(c)(3) nonprofit organizations. On Jan. 29, Davis testified before the U.S. House of Representatives Subcommittee on Housing, Community Development, and Insurance. She highlighted the tightening insurance market that nonprofits are beginning to face and why this bill is necessary, noting several commercial insurance companies that have competed for nonprofit business are shutting their nonprofit programs and/or drastically reducing their willingness to offer coverage — particularly to child-serving and animal rescue organizations. “Considering the headlines around sexual abuse and sexual harassment, many child-serving nonprofits are finding it difficult to obtain adequate amounts of sexual abuse liability insurance coverage. This is putting additional pressure on nonprofits’ own RRGs who are working to fill the gaps left by departing commercial insurance companies,” Davis told the House subcommittee. Proponents of the bill include the Consumer Federation of America, the Council of Insurance Agents and Brokers, and the Reinsurance Association of America. Opposition groups include the NAIC and the Independent Insurance Agents & Brokers of America (IIABA or Big “I”),

who argue that RRGs do not offer the same protections to policyholders in the case of insurer insolvency, and that RRGs operate with less oversight and regulatory requirements than admitted insurance companies. “Expanding the lines of coverage an RRG can write, as H.R. 4523 would do, expands the unlevel playing field and exposes nonprofits to greater risk with fewer regulatory protections,” testified Missouri Insurance Commissioner Chlora Lindley-Myers. In a statement to Insurance Journal, IIABA Senior VP of External, Industry & Government Affairs Charles Symington said IIABA supports state-based insurance regulation, adding that the Big “I” opposes H.R. 4523 because it erodes the state insurance regulatory system. “Even if targeted marketplace concerns exist, they are not to a degree that would warrant such a significant federal preemption of state law. Any remedy for insurance affordability can and should be sought at the state level,” he said. Davis said RRGs do, in fact, have the same solvency standards as commercial carriers. NIA’s goal is not to take away business from admitted carriers, she said, and noted the bill stipulates an RRG can only form if there is a market failure. “We’re not trying to corner the market here. We just know our members need this coverage,” she said. FEBRUARY 10, 2020 INSURANCE JOURNAL | 29

Special Report: M&A

Private Equity Still Driving Agency M&As

Digital Buys Getting Some Attention; Buyers Getting Bigger; Prices Going Higher; Eyes on Digital

By Andrew G. Simpson

he private equity bandwagon continued to roll through the insurance agency and brokerage mergers and acquisitions territory in 2019. As many as two-thirds of all deals involved private equity, according to experts. Most of the busiest buyers are private equity backed. While PE remains the major trend, there was also some nascent interest in acquisitions of digital and technology-oriented agencies or firms, along with investments in agency insurtechs, some of which could be the acquisitions of the future. Ironically, the top Insurance Journal acquisition story of the year was about a deal that never happened. On March 5, 2019, a marriage between two of the largest insurance brokers seemed to be in the works. Giant Aon was considering proposing to rival insurance broker Willis Towers Watson in what would be the industry’s largest mergers ever. A day later, Aon called off the courtship. (The other major agency acquisition story had to do with the one that was announced in 2018 but closed in 2019: Marsh closing on its acquisition of JLT.) While the huge Aon acquisition never 30 | INSURANCE JOURNAL | FEBRUARY 10, 2020

happened, 2019 was at least as busy as 2018. Based on data from major advisories in the field including Optis Partners, Sica Fletcher and MarshBerry, as well as Insurance Journal’s own reporting, the total number of transactions appears to have been up slightly but not dramatically in 2019 over 2018. Optis Partners counted 649 agency acquisitions in 2019, up from 643 in 2018. MarshBerry projected after the third quarter that in 2019, the number of publicly announced insurance brokerage deals will exceed 600. Sica Fletcher tracks an index of the 12 most active buyers; these 12 were involved in 449 deals or 8% more than 2018 and 73% of the 611 total deals in 2019. Sica Fletcher estimates the value of the agencies its index buyers bought at $2.3 billion. “As you look at the numbers and they appear to be slowing down a little bit, just our gut tells us it’s not slowing down because of anything going on in the marketplace or anybody pulling back. It’s just there’s only so many deals these top active buyers can do,” Daniel Menzer of Optis Partners told Insurance Journal. But back to Aon. Aon returned later in the year in November to pull off one of

the more interesting deals: scooping up digital insurance agency CoverWallet, a platform for small and medium-sized businesses that launched in 2015 and raised $40 million during its run. CoverWallet has partnerships with Chubb, CNA, Progressive, Starr, AIG, Zurich, The Hanover, Hiscox, Liberty Mutual and AmTrust, among others. Its digital competitors include Insureon and CoverHound in the small business market. The acquisition provides Aon with additional access to what it sees as a fast-growing, $200 billion-plus premium global digital insurance market for small and medium-sized businesses. It also provides Aon with the opportunity to leverage CoverWallet’s platform to develop and scale other digital client experiences. The Aon move was one of several hints that the digital space may be of burgeoning interest to agency acquirers, not to mention investors. These deals don’t INSURANCEJOURNAL.COM

necessarily show up in the totals because the buyers have not been among the most active. But combined, they may signal a trend. Last January, Nationwide acquired E-Risk Services, a New Jersey privately held program manager specializing in management liability lines. Nationwide says E-Riskâ&#x20AC;&#x2122;s platform and products will enhance its own excess and surplus lines offerings for small and medium-sized business owners and help it grow in both management lines and the program business space. In September, Prudential Financial said it would buy Silicon Valley online insurance startup Assurance IQ for $2.35 INSURANCEJOURNAL.COM

billion. Assurance uses machine learning to sell health, life, Medigap, home and auto policies from more than 20 providers. In June, Hub International, in one of its close to 60 acquisitions for the year, acquired In-Fi, a high-tech distribution platform for high volume insurance placements and renewals for the financial industry. Hub also hired insurance agent and In-Fi co-founder Jon Chasteen and acquired his book of business. In October, Arthur J. Gallagher acquired Florida-based The Doyle Group and its affiliates, collectively doing business as Direct To PolicyHolder (DTPH). DTPH is an e-commerce affinity platform focused on acquiring professional liability insurance policyholders in the allied healthcare and wellness fields. While not involving agencies, there

were a few transactions that reflected interest in agency-centered technologies. In December, the insurance technology

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Resource Box: Optis Partners

http://optisins.com/wp/services/ mergers-acquisitions/

Sica Fletcher

https://www.sicafletcher.com/

MarshBerry

https://www.marshberry.com/

Burand & Associates

https://www.burand-associates.com/

Oak & Associates

https://oak-associates.com/

FEBRUARY 10, 2020 INSURANCE JOURNAL | 31

Special Report: M&A continued from page 31 firm Applied Systems agreed to acquire digital insurance technology startup Indio Technologies. Applied Systems will now be able to offer Indio’s digitized commercial insurance application and renewal process to its 13,000 agency and brokerage customers and their business customers. In June, personal lines specialty insurer National General Holdings Corp. said it would buy Syndeste, which has technology for selling flood insurance. Insurance Technologies Corp., a marketing, comparative rating and management software firm, acquired Ohio-based Smart Harbor, which provides digital technology to insurance agents. In November, digital home insurance managing general agency Hippo Insurance acquired an early-stage startup, Sheltr, that provides home wellness checkups. Also, real estate software maker MRI Software acquired Ohio-based Multifamily Insurance Partners, which provides resident insurance programs for the U.S. multifamily rental market. These deals are separate from the record-setting investments being made,

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sometimes by carriers, in insurtech or technology-based startup agencies.

Industry reports reveal several trends: a handful of familiar buyers continue to lead the pack; private equity is driving the market; and prices being paid are higher than ever. While the digital space may be worth keeping an eye on going forward, the main action in the agency M&A space in 2019 remained, of course, with traditional agencies. (See sidebar of some of the year’s most noteworthy acquisitions.) Industry reports reveal several trends: a handful of familiar buyers continue to lead the pack; private equity is driving the market; and prices being paid are higher than ever. While their numbers vary slightly, Sica Fletcher and Optis Partners largely agree on the identities of the most active agency buyers in 2019: Acrisure; Hub International; AssuredPartners;

Broadstreet Partners; Arthur J. Gallagher; The Hilb Group; Alera Group; Risk Strategies and Brown & Brown. Optis also includes Patriot Growth, which burst onto the scene this year with 25 acquisitions, while Sica Fletcher includes its index members NFP, USI and Marsh McLennan. In 2019, large pubic brokers, typically among the most active buyers, were about even with their 2018 tallies. Arthur J. Gallagher (Optis counts 33 in 2019 vs. 36 in 2018; Sica Fletcher has 50 vs. 42) and Brown & Brown (Optis says 20 in 2019 vs. 23 in 2018; Sica Fletcher says 23 both years) remained busy. While the methodologies and numbers in industry reports vary somewhat, the cast of characters has been similar for several years, although each year one or two new players like Patriot Growth in 2019 or Risk Strategies in 2018 shows up and sticks around. The dominance of private equity is clear in that all of the most active buyers — except Gallagher, Brown & Brown and Marsh McLennan — are fueled by private equity. (See sidebar on the private equity behind the buyers.)

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Optis Partners found that private equity was involved in 69% of transactions in 2019, up from 67% in 2018. Sica Fletcher writes in its report that PE-backed firms were behind 83% of the transactions by the 12 firms in its active buyer index in 2019, compared to 79% in 2018.

Agency Sale Prices

According to Optis Partners’ Menzer, the prices agencies are getting are “higher than they’ve ever been” thanks to what private equity firms will pay. “Every quarter, every year, we say the same thing. It can’t stay where it is. We don’t know when, but at some point, it’s got to give,” Menzer said. But the Optis partner does not see that changing soon given how the private equity model works. “They know, or they believe, that every three to five years they can trade up their capital, if you will, and sell the firm for, call it 12 to 14 EBITDA. All right? So with that in the background, they don’t mind paying eight or nine or 10 times EBITDA because they’re always getting that two, three or four EBITDA arbitrage.” Meanwhile, privately owned buyers without PE behind them aren’t able or willing to match those prices. “I think it does create a different type or level of competition for the local agency,” Menzer said. Agency consultant Catherine Oak, of Oak & Associates, writing in Insurance Journal, notes that what private equity buyers are doing for their investors makes sense “because the return on investment is typically 20% to 30% plus, which is greater than most other available investments today.” According to Oak, private equity firms are paying typically eight to nine times EBITDA (earnings before interest and depreciation) as down payments, plus there are usually earn-out bonuses. “When the value is translated to a multiple of revenue this means 2.75 to 3.5 times revenue. Sometimes the down payments require at least 10% to 25% of the acquirer’s stock and can also be required on at least one of the large buyer’s earn-outs,” she wrote. INSURANCEJOURNAL.COM

Key Private Equity Partners in Agency M&As Agency

Private Equity

Acrisure

Blackstone, Harvest Partners, Partners Group Genstar Capital GTCR Canadian Pension Fund CDPQ, Century Equity Partners. Oak Hill Capital Partners Huron Capital The Carlyle Group Hellman & Friedman, Altas Partners. Summit Partners Aquiline Capital Partners Kelso & Co. KKR, Canadian Pension Fund CDPQ

Alera Group AssuredPartners Broadstreet Partners EPIC Insurance Brokers Hight Street Insurance The Hilb Group Hub International Patriot Growth Insurance Relation Insurance Risk Strategies USI

These are very different from the offers made to those not selling to private equity. Oak writes: “Sellers today still get prices from other peer independents in the 1.5 to 2.0 times range, if there is at least close to a 25% to 30% profit margin. As a multiple of EBITDA (earnings before interest and depreciation) these values are in the 6 to 7 range. In the earn-out portion of the 'price' the seller is expected to grow the business, not just maintain it.” According to information from MarshBerry’s proprietary database as reported in its recent publication, “Counterpoint: Think 2025,” valuations are up approximately 15% since 2016. For the 12 months ending Sept. 30, 2019, the average platform sold for 10.08 times EBITDA, with a potential for up to 13.13 times EBITDA if an earn-out was included. As a multiple of revenue, the average sale for the same last 12 months was for 3.09 times, with another .92 times where there was an earnout. Marsh notes that in addition to private equity, long-term low interest rates have also helped keep prices high. Oak agrees with Menzer that prices are unlikely to come down soon. “The current prices paid by publicly traded brokers, large regionals and agencies funded by private equity firms are already extremely high and will likely continue to be high for the valuable, desirable firms. Since the supply is dwindling, the prices may be

even higher for those that remain if they fit the profiles of the key buyers today,” she wrote. Sica Fletcher founders Michael Fletcher and Al Sica recently blogged on why and how even smaller agencies under $5 million might participate in private equity. “Private equity sponsored brokerages are growth vehicles and as a result, they are not simply looking for businesses to acquire and integrate. Often, they are looking for partners who want to reposition their businesses to grow faster,” they advise.

Sizing Up Insurtech

With acquisitions continuing to be concentrated among a small universe of buyers, the consolidation means local independent agencies now have to compete with the larger agencies created. “In many ways it’s all about size and scale. There’s just no way that that local independent agency, even if they’re 20, 30, 40 people, that they can offer the same depth and breadth of service that the larger firms can,” Menzer said. Other agencies are not the only ones concerned about the size of the firms being created through M&As. Agency consultant Chris Burand, in an April excerpt for Insurance Journal from his 2019 State of the P&C Insurance Industry Report, claims that property/

continued on page 35 FEBRUARY 10, 2020 INSURANCE JOURNAL | 33

Special Report: M&A 20 Noteworthy Agency Merger Stories of 2019 1. January Nationwide Acquires

that specializes in private market flood insurance as an alternative to the National Flood Insurance Program. The agency operates as a program administrator for Lexington Insurance Co.

financial institutions. Hub said In-Fi’s focus on streamlining customer engagement and providing customer service supports its strategy to connect with personal lines insurance customers.

colleagues based in its Clearwater, Fort Myers, Kissimmee, Maitland, Sarasota, and Tampa, Fla., locations.

7. March Aon Considers Bid to Buy Willis Towers Watson: Aon said it is considering a combination with rival insurance brokerage Willis Towers Watson in what could be the industry’s largest ever merger. Aon said the companies have held preliminary talks and Aon is preparing to submit a bid in the coming weeks. However, within days, Aon called off the talks.

12. July USI Insurance Services Finalizes Acquisition of U.S. Risk: USI Insurance Services ($1.1 billion in P/C revenues in 2018) finalized its purchase of Dallas-based specialty brokerage, U.S. Risk Insurance Group. U.S. Risk will continue to operate independently under the company’s various existing brands, U.S. Risk, Oxford, MGB, James Hampden International, Antarah and UNIS.

3. February Private Equity Firm GTCR Returns to Take Majority Stake in AssuredPartners: Apax Partners

8. March Cohen & Co. Insurance Acquisition Corp. Raises $150 Million in IPO: Insurance Acquisition Corp.,

13. September Prudential to Pay $2.35

Liability Insurance Program Manager E-Risk Services: Nationwide acquired

a New Jersey privately held program manager specializing in management liability lines. Nationwide said E-Risk will enhance its own excess and surplus lines offerings for small and medium-sized businesses.

2. January Marsh & McLennan Agency to Acquire Bouchard Insurance: Bouchard Insurance has 260

agreed to sell its entire stake in AssuredPartners to an investor group led by GTCR, a Chicago-based private equity firm. GTCR previously owned AssuredPartners in 2011 until its sale to Apax in 2015. This transaction valued AssuredPartners at about $5.1 billion.

formed by Cohen & Co. for the purpose of acquiring insurance firms, completed an initial public offering that raised $150 million. Insurance Acquisition Corp. is a “blank-check” company. It completed its IPO on the promise that it will complete a business combination within 18 months.

4. February AssuredPartners Adds

9. April Marsh & McLennan Completes $5.6 Billion Acquisition of JLT: Marsh & McLennan Cos. completed its $5.6 billion acquisition of Jardine Lloyd Thompson Group (JLT). The deal was first announced in September 2018. The acquisition advances Marsh & McLennan’s leadership position in insurance and reinsurance brokerage, health and retirement.

Tolman & Wiker Insurance Services.

AssuredPartners lands a top broker in California. Tolman & Wiker has 160 employees in the Central Coast region and reports $33 million in annualized revenues. 5. February Aquiline to Acquire

Relation Insurance Services in California: Aquiline Capital Partners,

which invests in financial services and technology, agreed to acquire Relation Insurance Services from private equity firms Parthenon Capital and Century Equity Partners.

6. March AmWINS Completes Acquisition of The Flood Insurance Agency of Florida: Global wholesaler

AmWINS Group completed the acquisition of The Flood Insurance Agency, a Florida-based managing general agency

34 | INSURANCE JOURNAL | FEBRUARY 10, 2020

10. June Gallagher Finalizes Acquisition

of JLT’s Global Aerospace Operations:

Arthur J. Gallagher bought Marsh/Jardine Lloyd Thompson Group’s global aerospace operations. The addition of JLT’s global aerospace retail and wholesale insurance broking operations will expand Gallagher’s aerospace team.

11. June Hub Acquires Assets of Atlanta-Based Insurtech In-Fi: Hub

International acquired the assets of In-Fi, an insurance distribution platform for

Billion for Insurtech Startup Assurance IQ: Prudential Financial is buying online

insurance startup Assurance IQ Inc. for $2.35 billion. The agency uses machine learning to sell life, auto and other lines of insurance. The deal is in keeping with the trend of large insurers increasingly betting on startups.

14. October Gallagher Acquires FloridaBased Direct to PolicyHolder (DTPH):

Arthur J. Gallagher acquired The Doyle Group Inc. and its affiliates, collectively doing business as Direct To PolicyHolder (DTPH). DTPH is an e-commerce affinity platform focused on professional liability insurance policyholders in the allied healthcare and wellness fields. 15. November EPIC Completes

Acquisition of Atlanta-Based Prime Risk Partners: Two fast-growing, private Top

100 Agencies get together. Prime Risk Partners ($86 million in revenues in 2018) in Atlanta and California’s EPIC Insurance Brokers & Consultants ($461 million revenues in 2018) join forces. The acquisition adds approximately 600 people in 20 locations and over $115 million in revenue for EPIC, which is backed by Oak Hill Capital Partners. Prime Risk Partners was backed by Thomas H. Lee partners. INSURANCEJOURNAL.COM

continued from page 33 16. December Applied Systems to

Acquire Indio to Digitize Commercial Lines Sales: Leading insurance

technology firm Applied Systems agreed to acquire technology startup Indio Technologies. Applied Systems will offer Indio’s digitized commercial insurance application and renewal process to its 13,000 agency and brokerage customers and their business customers.

17. December Risk Strategies Acquires New England-Based Subsidiaries of Gowrie Holdings:

Privately held Risk Strategies (a Top 100 Agency with $291 million in P/C revenues in 2018) acquired two subsidiaries of Gowrie Holdings, also a Top 100 Agency with $40 million in P/C revenues in 2018. This deal capped a busy year for Risk Strategies in which it was involved in more than 20 acquisitions. It has used the acquisitions to start a new Boston-based national specialty brokerage, One 80 Intermediaries.

18. December High Street Insurance Partners Acquires Michigan’s InPro Insurance Group: A buyer to watch? High Street Insurance Partners, an insurance broker owned by the private equity firm Huron Capital, acquired InPro Insurance Group in Troy, Michigan. InPro is the seventh acquisition for High Street since its formation by Huron Capital in mid-2018.

19. December BRP Group to Acquire Lanier Upshaw of Florida. Floridabased BRP (a Top 100 Agency with $62 million in P/C revenues in 2018) gets Lanier Upshaw, a Florida agency with 60 employees and $8 million revenue.

20. December World Insurance

Associates Acquires New York’s J & S Risk Planning Group: This New Jersey

broker has flown under the radar. This was its 15th acquisition in 2019 and 50th since 2012. INSURANCEJOURNAL.COM

casualty carriers are also worried about the behemoth brokers being built. “Not all are scared, of course. Some are big enough, some are smart enough, and others are ignorant enough to not be scared about the future of insurance distribution. The ones that are scared are scared because of scale,” Burand wrote. Carriers are scared because some of the brokers are now bigger than they are. According to Burand, based on 2017 10-k filings, Aon has almost $10 billion in revenue; Brown & Brown $1.9 billion; Willis $8.2 billion; Gallagher has $6.2 billion, and Marsh (before their huge acquisition of JLT) had $14 billion. Hub reported in 2018 that it had $2 billion in revenue. Burand explains the ramifications: “The 10th largest carrier on an NWP basis as of year-end 2017 is AIG with $14.2 billion. Marsh is larger now than 890 of 900 carriers. Of course, a large part of their revenue comes from outside the U.S. and I’m only citing U.S. carriers so this is not an apples-to-apples comparison, but the context provides an understanding of why carriers are so nervous.” Carriers are reacting, according to Burand, by creating partnerships of their own and investing billions of dollars in insurtech independent insurance agencies. “So their idea I think, I can’t speak for all of them, is to invest and partially own these new independent insurance agencies. It’s their counterweight to the consolidation that’s occurring. And if the consolidators, aggregators are too big, then they can maybe place more emphasis back on these insurtech insurance agencies they own,” he adds. In related news, insurtech investments reached a high in 2019 and do not appear to be slowing. According to a briefing from Willis Towers Watson, total new global funding commitments to insurtech hit $6.37 billion for the year, with approximately $2 billion coming in for 75 projects during the 2019 fourth quarter alone. Distribution and MGA-focused insurtechs accounted for 57%. As reported by Insurance Journal, the

tech-enabled, high-end home insurance provider Openly began selling in Illinois and Arizona at the same time it announced a $7.65M seed round of funding led by Gradient Ventures, Google’s AI-focused venture fund. Openly’s investors include Hanover Insurance Group. Digital property/casualty insurance platform CoverHound raised $58 million. Global specialist insurer Hiscox led the round, along with additional investors including Chubb. Insurtech Zeguro launched its platform designed to help small and midsize companies manage cyber threats in multiple ways. Zeguro raised $5 million in seed financing last November from insurance industry investors including Munich Re (HSB Ventures/Hartford Steam Boiler) and QBE.

‘Every quarter, every year, we say the same thing. It can’t stay where it is. We don’t know when, but at some point, it’s got to give.’ Insurtech Next Insurance pulled in a $250 million financing round from a single investor: Munich Re. Next has raised $381 million in three years since its launch, and the firm claims to have a valuation that surpasses $1 billion. In September, the MGA-turned-carrier launched Next for Agents, a portal to help independent agents quickly quote and sell its policies. These investments come with risks, of course. Last year also capped a three-year period in which a number of startups have called it quits, noted Andrew Johnston, global head of InsurTech at Willis Re. “While insurtech news is awash with the huge valuations and postulations of the art of the possible, there is also a very real story that is not so positive — individual insurtech cessations,” Johnston said in prepared remarks. “The number is very difficult to calculate, but our data indicates that during the past three years, approximately 184 funded insurtechs might have closed their doors.” FEBRUARY 10, 2020 INSURANCE JOURNAL | 35

Idea Exchange: Insurance Law To Stack or Not to Stack What happens when a contract term is not defined?

tacking of insurance policies is a topic that has provoked numerous appeals. In construing any contract, including By Kent Bevan an insurance policy, certain rules of construction are considered. A court will examine the policy as a whole and try to construe it harmoniously as to all provisions and as to the express intent of the document. If the terms are not ambiguous, not against public policy, and do not contravene existing law, then generally speaking, the terms of the contract will be construed as written. What happens when a term used in the contract is not defined? That does not in and of itself result in an ambiguity. Generally, a court will apply a meaning that the average person buying a policy would understand the term to mean. A 36 | INSURANCE JOURNAL | FEBRUARY 10, 2020

policy generally provides for coverage of certain risks or causes of loss, certain exclusions, and finally, may provide for exceptions to the exclusions. A court will carefully consider the facts presented, the policy provisions, and try to discern the intent as expressed in the policy. If a particular term is subject to more than one reasonable interpretation, then the court may determine that the policy is ambiguous, in which case it will most likely be construed in favor of coverage.

The following case is illustrative.

In Aguilar v. Geico Casualty Company, Richard Aguilar sustained serious injuries after a U-Haul truck driven by Patricia Hollandsworth ran into the motorcycle Aguilar was riding in Jackson County, Missouri. The claim was reported to Geico and the company disclaimed any liability. Geico had previously issued an auto liability policy to Mr. and Mrs. Clymens

for their vehicle and during the coverage period, Clymens signed paperwork to rent the U-Haul truck involved in the accident so Hollandsworth could move her belongings from the Clymens residence to a new home. Aguilar sued Hollandsworth for personal injuries and later filed a motion for default judgment. Geicoâ&#x20AC;&#x2122;s counsel then entered an appearance on Hollandsworth behalf about the time Geico offered to defend Hollandsworth subject to a reservation of rights, which Hollandsworth rejected. Hollandsworth and Aguilar then entered into a Section 537.065 agreement under which Hollandsworth assigned Aguilar all of her rights under the Geico policy. Geico filed a motion to intervene in the action as of right five days later under Section 537.065.2. Â Aguilar voluntarily dismissed his lawsuit eight days later, on the same day that Geico filed a declaratory judgment action in Federal Court, which dismissed INSURANCEJOURNAL.COM

the action without prejudice approximately a year later for abstention reasons in light of a State Court garnishment action filed by Aguilar against Hollandsworth and Geico that remains pending. Aguilar and Hollandsworth entered into an agreement thereafter to submit the dispute to binding arbitration. The arbitrator conducted a hearing and awarded Aguilar $35 million in compensatory and punitive damages, after which Aguilar filed a motion in Circuit Court to confirm the arbitration award. Geico filed a Motion and an amended motion to intervene, and the Circuit Court denied the motion to intervene without comment. The Circuit Court also issued a judgment confirming the arbitration award with statutory interest. Geico filed an Appeal from the judgment. The matter went up on appeal to the Missouri Court of Appeals, Western District with Geico arguing the trial court erred in denying its motions to intervene INSURANCEJOURNAL.COM

because substantial evidence did not support the ruling and the court misapplied Section 537.065, which it alleged conferred an unconditional right on Geico to intervene in a lawsuit before entry of a judgment where the parties have entered into Section 537.065 Agreement. Geico also alleged the denial of intervention deprived Geico of due process and access to the courts. The Appellate Court ruled that when a trial court denies a motion to intervene as of right, the Appellate Court will affirm unless there is no substantial evidence to support the ruling, it is against the weight of the evidence, or erroneously declares or applies the law. The court noted Geico focused on the first part of Section 537.065.2, which it claims gives it the right to intervene before a judgment may be entered. The Western District disagreed, holding that the meaning of the statute requires a tortfeasor and injured party

to give notice to the insurance company of a Section 537.065 contract before a judgment may be entered but there is no requirement that the insurance company must be allowed to intervene before judgment can be entered. The Western District went through a detailed analysis of the chronology involved in this action and cited prior Missouri case law litigating the 2017 amendment of Section 537.065 but ultimately held that the trial court did not abuse its discretion or misapply the law in denying Geico’s motions’ to intervene as a matter of right or permissibly in the proceeding. The judgment of the trial court was affirmed. Bevan, Of Counsel at the law firm Dysart Tayor, has significant experience creating successful results for clients regarding insurance matters, coverage analysis, liability claims and property damage cases. Phone: 816-714-3025. Email: kbevan@dysarttaylor. com. FEBRUARY 10, 2020 INSURANCE JOURNAL | 37

Idea Exchange: Sales & Service

Report Reveals Perception Gaps, Improvement Opportunities in Sales & Service Roles

hen properly aligned, sales and service teams can unlock massive revenue potential, improve working relationships and transform the customer experience. Unfortunately, gaps in processes, performance and customer outcomes exist, undermining that alignment and potentially resulting in lost revenue, underinsurance and By Kyle Hardner increased risk. The recently released Sales and Service Report, based on a survey conducted by ReSource Pro in partnership with Insurance Journal, quantifies the perception gaps among management, sales and service team members. This first-ofits-kind study aimed to uncover how well cross-functional teams collaborate, what client services might be falling through the cracks, and what revenue opportunities were being missed. To get the answers, researchers asked representatives of U.S. agencies about the alignment of their sales and service teams on new business and renewals. Participants answered questions about processes within their organizations and 38 | INSURANCE JOURNAL | FEBRUARY 10, 2020

attributes of the day-to-day work within their industries. “We discovered some significant gaps and friction that arise out of challenges between the production and operations teams,” said Dan Epstein, chief executive officer (CEO) of ReSource Pro. “We also uncovered a significant opportunity to improve risk management and service differentiation by improving the sales and service alignment, understanding and technical training.”

Renewals, Urgent Requests Among Top Disconnects

Some surprising gaps appeared when respondents answered questions about renewal policies. Almost two-thirds of producers surveyed said they rarely instruct service staff to renew as-is, but only 45% of service staff and 46% of management agreed. In addition, while 67% of producers said they rarely transact renewals without updated risk data, only 47% of service staff and 46% of management agreed. “That’s really problematic, because if you’re renewing an account and haven’t done any kind of risk assessment as to whether coverage limits, deductions or other conditions have changed, you’re

exposing the policyholder to considerable risks,” Epstein said. “Renewing a policy without updated risk data also means a client hasn’t been given the opportunity to make a decision about emerging risks, such as cyberliability, employment practices or employee dishonesty,” added Frank Pennachio, partner and co-founder of Oceanus Partners, a ReSource Pro company. Urgent producer requests also marked a large area of disconnect. A total of 55% of service staff said producers’ requests interrupted their workstreams and complicated their day-to-day work, but only 14% of producers agreed. “This tells us sales staff is having a negative impact on their service staffs’ day-to-day work but they may not realize it,” Epstein said. “This not only hurts the sales-service staff relationship, but also affects overall morale, employee engagement and retention.” The good news: Producers have an extremely high opinion of their service teams. A total of 76% of producers agree their service teams have the skill sets and experience to support client needs, while 73% agree their service teams understand the needs of their customers.

Concerns About Producers’ Core Functions

The widest perception gap came from respondents to the question, “How effective are your producers at facilitating cross-sell or account rounding opportunities?” A total of 80% of producers ranked themselves as very effective; however, only 18% of service staff agreed with that perception. Management responses, at 17%, aligned with those of service staff. In addition, the responses to two other questions raised concerns about whether producers have the tools they need to be most effective in their jobs. Only 38% of producers agreed they are effective in communicating the value of account manager services to clients. And while 50% of producers said they are effective at communicating client expectations to service staff when onboarding new accounts, only 24% of management and 21% of service staff respondents agreed INSURANCEJOURNAL.COM

with their assessment. “We’re in an environment where risks are increasing, business is more complex, our economy is more complex, the chance of loss is increasing, and at the same time, producers seem to be saying they’re not really up to the task,” Pennachio said. In particular, the onboarding concerns expressed by producers point to potential customer experience issues down the road. “Agencies want to differentiate themselves, but they can’t do so if they aren’t effective at communicating client expectations to service staff during the onboarding process,” Epstein said. “If your employees don’t really understand your client’s needs and expectations, they can’t be responsive to that client.”

Standardization Exists, But Isn’t Always Followed

Standardized sales and renewal processes bring the promise of improved customer service and reduced risk. However, such processes are not yet followed by all agencies. A total of 60% of managers say their agencies have standardized sales processes, while 58% of service staff and only 43% of sales staff agree. However, fewer respondents (29% of management, 27% of service staff and 22% of sales staff) say producers rarely deviate from that standardized process. Process deviations can lead to unnecessary losses, misunderstanding risk and approaching an account with incomplete information. When it comes to renewals, a majority of respondents in all three areas (84% in management, 80% in service and 65% in sales) agree their agencies have standardized renewal processes. However, fewer (56% in sales, 50% in management and 39% in service) say producers rarely deviate from those standardized renewal processes. “We believe these responses indicate that a lack of technology and technical knowledge could be a barrier to more structured onboarding or renewal processes for many agencies,” Pennachio said.

Gaps Among Lines of Business

To dig deeper, the survey broke down specific questions by lines of business. “We INSURANCEJOURNAL.COM

were intrigued to see whether there were bigger gaps on the Employee Benefits, Commercial Lines or Personal Lines, and these questions gave us that data,” Epstein said. For example, 72% of Employee Benefits respondents said their agencies had standardized sales processes, while only 57% of Commercial Lines respondents and 53% of Personal Lines respondents said the same. Respondents in Employee Benefits and Commercial Lines were near equal (64% and 63%, respectively) in disagreeing that urgent producer requests rarely interrupt service staff workflows, but only 48% of Personal Lines respondents disagreed with the same statement. When asked whether service staff meets face-to-face with sales staff before accounts are submitted to market, respondents in Employee Benefits (71%) and Commercial Lines (53%) disagreed in larger numbers than respondents in Personal Lines (35%).

Discussing Results With Individual Teams

“This survey gives us plenty of data to help find pain points within an agency, how that creates risks for the agency and its policy holders, and how it creates pain internally for people who are supposed to be collaborating to give the best customer experience,” Epstein said. He encourages agencies to review the survey results as a benchmark and discuss how they can partner and collaborate more effectively. “Ask managers and employees to what extent do they agree with the results, to what extent do you feel we have gaps in our operations, and to what extent do we follow standardized processes,” he said. Companies can also request an agency-specific survey by contacting survey@resourcepro.com. Hardner is a freelance writer and content strategist with expertise in the insurance, real estate, healthcare and tech industries. He can be reached at kyle@hardkorecontent.com.

STABILITY & CLAIMS EXPERTISE SINCE 1960

Our Exceptional Human and Social Service Programs are written with A+ Rated carriers, Berkshire Hathaway & Chubb. Contact us at 800.622.8272 siegelagency.com

FEBRUARY 10, 2020 INSURANCE JOURNAL | 39

Idea Exchange: Minding Your Business sometimes the brokering agency only charges a nominal 10% or 20% to place the business as an accommodation. When an agency regularly needs to have access to one or more markets on a regular basis there are other options to consider. These options provide different levels of commitment and benefits.

Using Aggregators

Things to Consider When Using Agency Partnership Groups

egardless of agency size, sometimes it is difficult to get access to all the markets that might be needed for the agenBy Catherine Oak cyâ&#x20AC;&#x2122;s clients. Most standard markets will have some sort of volume requirement and some might limit the number of appointments in a region. and Bill Schoeffler So, what are the options if the agency or producer really needs to place a piece of business with a specific market, but doesnâ&#x20AC;&#x2122;t have direct access to it? 40 | INSURANCE JOURNAL | FEBRUARY 10, 2020

Brokering Business

There are several ways that this dilemma can be resolved. If lacking a specific market is an infrequent situation, then the simplest approach is to either broker the business through another agency that has that specific market or find a managing general agency (MGA) or wholesaler that has an appointment. Using an MGA or wholesaler is fairly straightforward. The commissions paid will typically be about one-half to onethird less than what one would get paid with a direct appointment. The range is based on the contract that the MGA/ wholesaler has with the market. When a piece of business is brokered through another agency, the commission split is based on what the two agents negotiate. A 50/50 split is common, but

For agencies that prefer to remain independent and have minimal commitments, then using an aggregator is a great option. Although there is no formal definition of the term, the way we define an aggregator is that they are a type wholesale agency that is regional and has access to a limited number of standard markets. For example, a carrier might have a couple of hundred agencies appointed in an area with very low volume. An aggregator could step in to consolidate all that business under one appointment, streamlining the work required by the carrier. Typically, an aggregator will have a monthly membership fee and offer about two-thirds of the standard commission rates. For agencies that have a fair amount of business but donâ&#x20AC;&#x2122;t have enough to get a direct appointment, an aggregator could be a better option than a regular wholesaler because the commission rates would be higher on average. Examples of aggregators are WIAA Insurance Services and Networked Insurance Agents.

Clusters/Networks or Franchises

For agencies that would like to have regular access to a wide variety of markets, get higher commissions, earn contingent/ bonus income and perhaps have other support, then it might make sense to join a cluster/network or franchise. Networks/clusters are a group of independent agencies that band together to share resources. There are so many benefits of being in a network/cluster. The most important is to have more market clout, which takes the pressure off the individual members to meet volume commitments. In addition, it is easier to receive larger contingencies. There is also the ability to have cost savings because of sharing people and INSURANCEJOURNAL.COM

functions. A wonderful aspect is also the ability for the members to lean on each other and be each otherâ&#x20AC;&#x2122;s board members. Since there is power in being larger, the cluster also gives the members a bigger presence in the marketplace. Networks/ clusters can range from very large national groups to a handful of agents in a rural section of one state. Membership fees and how commissions and contingents are split will vary based on the network/cluster. Usually, members remain fairly independent and have full control over their accounts. This can be an excellent solution for the agency that wants assistance and power, yet autonomy. Examples on the West Coast are United Valley and Pacific Interstate Insurance Brokers. Examples that exist on the East Coast and elsewhere are Iroquois Group, Renaissance Alliance, Combined Agents of America and Insurorâ&#x20AC;&#x2122;s Group (Texas). Franchises can be considered a variation

INSURANCEJOURNAL.COM

For agencies that prefer to remain independent and have minimal commitments, then using an aggregator is a great option. of a network/cluster, except there will be standard branding and the intent to have similar operations. Franchises tend to have a sizable fee to join and a monthly royalty fee or split of commissions. Make sure the terms of leaving the franchise or selling the business are understood before entering into an agreement. ISU, Goosehead and Brightway are examples of franchises to look at.

What to Consider

When evaluating the options available, the key things to consider include: who has account ownership, what are the commissions paid, what are the costs to

gain access, what is the future commitment to keep the access, what is required to separate the affiliation, will this help grow the business, what are the errors and omissions (E&O) implications, and will this be in the best interest of the client. The good news is that today it is easier than ever to access needed markets and the options are broad. The playing field is reasonably level for small to medium sized agencies to compete with large firms on markets. Agents just need to find the option that provides the best overall value to their firm and their clients. Oak is the founder of the consulting firm, Oak & Associates, based in Northern California and Central Oregon. Schoeffler is an associate of the firm. Oak & Associates specializes in financial and management consulting for independent insurance agencies, including valuations, mergers acquisitions, sales and marketing planning as well as perpetuation planning. Phone: 707-935-6565. Email: catoak@gmail.com.

FEBRUARY 10, 2020 INSURANCE JOURNAL | 41

My New Markets Wood Products

Market Detail: Continental Underwriters

(www.contund.com) works with more than 30 carriers that specialize in forest products and is equipped to manage any placement for an agent or a broker. Coverage includes businesses involved in the manufacturing and distribution of forest products. These include: sawmills; veneer mills; pallet mills; plywood plants; wood preserving operations; drying operations; all types of woodworking/ millwork plants; manufacturers of timbers, cants, and railroad ties; lumber yards, and retail and wholesale building materials distributors. Available limits: As needed Carrier: Unable to disclose States: All states Contact: Melissa Berry at 804-643-7800 or e-mail: melissa@contund.com

Active Assailant

Market Detail: Midlands Management Corp. (www.midlandsmgt.com) is a wholesale broker, program administrator and insurance services provider with admitted and non-admitted carriers and exclusive programs. Midlands Active Shooter covers expenses incurred in the aftermath of a violent incident, including: legal liability coverage for damages and claim expenses an insured will become legally obligated to pay following an Active Assailant incident; physical damage coverage - indemnity for physical loss or damage to Insured Property caused by an active assailant incident; business interruption coverage indemnity for direct physical loss, damage, or destruction to insured property, denial of access to an insured location, threat to an insured location (provided it is substantiated by authorities). Insurers will indemnify the insured for specialist crisis response and consultant fees resulting solely and directly from an active assailant or threat event and pre-event consulting and risk assessments. Coverage available for weapons includes any handheld instrument, gun, tool, device or appliance, explosive devices, vehicles, corrosive substances. Extra expense coverage includes: costs of increased security in the aftermath; public relations expenses; funeral 42 | INSURANCE JOURNAL | FEBRUARY 10, 2020

expenses, burial and/or cremation costs for victims of incident; medical expenses for any insured present during the incident; and costs for psychiatric counseling for any person traumatized by an incident. Available limits: As needed Carrier: Unable to disclose, admitted States: All states Contact: Mandee Wilson at 800-800-4007 or e-mail: marketing@midman.com

Medical Spa

Market Detail: Calco Commercial Insurance (www.calcoinsurance.com) specializes in medical spa insurance. Coverage provides indemnity protection for the owners, officers, directors, doctors and nurses, for both licensed and non-licensed staff. Coverage provides protection against malpractice insurance claims arising out of the alleged or actual injuries sustained by their clients. Injuries include laser burns and botched procedures. Coverage features include: package (GL/ PL/property/cyber); free consent forms; 11% commission; Liability premiums starting at $900; property premiums from $500. Targeted markets from small to multi-state operations, new ventures to multi-state operators; medical spas, wellness centers, beauty related, cryotherapy. Available coverages include: general liability, professional liability, property, sexual abuse, cyber liability, license action reimbursement, defense outside of limits, HIPPA, hired/non-owned auto. Available limits: Minimum $1 million, $5 million maximum Carrier: Unable to disclose, non-admitted States: All states Contact: Sarkis Kaladzhyan at 877-2252699 or e-mail: sarkis@calcocommercialinsurance.com

Beauty Product

Market Detail: Insurance Canopy (www.

insurancecanopy.com) product liability insurance for beauty and cosmetic supplies protects companies who manufacture, import, or distribute makeup products from lawsuits and claims that arise from their products’ exposure on the market. For example, an allergic reaction from a beauty product could result in a claim that

costs the company thousands of dollars in fees and awards. Available limits: As needed Carrier: Great American States: All states except D.C. Contact: Jordan Wilcox at 844-520-6993 or e-mail: jordanw@veracityins.com

Coverages Customized for Fiduciaries

Market Detail: SES Risk Solutions (www. ses-ins.com) has been an insurance partner for financial institutions, private trust companies, and wealth management firms serving as fiduciaries for real estate portfolios for three decades. One policy is available for an entire portfolio. One expiration. One point of contact. One full year of coverage. The SES Master Trust Policy safeguards the entire portfolio under one policy and includes property ($5 million per location per occurrence); liability ($1 million/$2 million per location); personal property; time element; equipment breakdown; earthquake; flood; varied property types, including residential, commercial (lessor risk), land, farm and ranch, and personal property assets. Broader coverage than the homeowners’ market with higher limits available. Available limits: As needed Carrier: Unable to disclose, non-admitted available States: All states Contact: Kelly Cretti at 714-352-4928 or e-mail: kcretti@ses-ins.com.

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Idea Exchange: Surplus Lines

20 Things to Know About Surplus Lines Insurance in 2020

s we embark upon a new decade, the surplus lines insurance market has never been stronger. Growth in specialty products By Zach Lerner and demand for insurance protection in an increasingly dynamic, technological climate necessitates a new, fresh look at many of the statutory and regulatory standards applicable to surplus lines insureds, brokers and insurers alike. This article presents 20 “frequently asked questions” by insurance professionals who have a fundamental understanding of excess and surplus lines insurance but seek to understand the nuances of federal and state-specific surplus lines insurance laws.

LAWS APPLICABLE TO THE SURPLUS LINES INSURANCE INDUSTRY 1. What laws apply to the surplus lines insurance market?

While surplus lines insurers are excused 44 | INSURANCE JOURNAL | FEBRUARY 10, 2020

from filing rates and forms, surplus lines insurance policies are not completely exempt from state regulation. For example, many states expressly apply their cancellation and nonrenewal of insurance policy requirements to the surplus lines market. Some states that traditionally prohibit the insurance of punitive damages nevertheless allow surplus lines insurers to assume such risks. Jurisdictions also differ as to whether defense-within-limits clauses and claims-made policy standards apply to the surplus lines market, to name just a few.

2. Can personal and commercial automobile insurance be written with a surplus lines insurer?

It usually depends on the purpose of the insurance. Most states specifically require that any automobile insurance seeking to satisfy the “financial responsibility” requirements of the driver under a state’s applicable motor vehicle laws be offered only by an admitted (licensed) insurer in the state. Many jurisdictions allow for “excess” insurance beyond the financial responsibility layer to be satisfied through

the surplus lines market. Moreover, some (but not all) states allow cargo financial responsibility requirements, “Hired and Non-Owned Auto” (HNOA) and other forms of commercial automobile insurance policies to be satisfied through the surplus lines market. In the commercial market, some states permit financial responsibility requirements to be satisfied via a surplus lines policy for certain types of commercial vehicles. For example, many states have enacted legislation in the last few years allowing for the financial responsibility requirements of drivers for “transportation network companies” or “TNCs” such as Uber and Lyft to be satisfied through the surplus lines market. However, states differ as to whether commercial automobile programs may satisfy the financial responsibility requirements of their on-duty drivers outside of the TNC context.

3. Does the Terrorism Risk Insurance Act (TRIA) apply to surplus lines policies? TRIA applies to surplus lines insurance policies and, depending on the nature

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consent from the applicable policyholder. Some states are beginning to enact legislation to expressly allow for “insurance business transfers” of insurance policies between insurance companies applicable to both the admitted and surplus lines markets.

PERMISSIBLE TYPES OF SURPLUS LINES INSURANCE 5. What lines of insurance may be written by a surplus lines insurer? It depends on the state. While the Nonadmitted and Reinsurance Reform Act of 2010 (NRRA) authorizes the placement

continued on page 46

Research & Trends Center Search dozens of topics and trends like cyber risk, technology, energy, marketing, financial management, sales, and more. of the policy, TRIA can even capture insurance coverage issued to non-U.S. individuals with risks residing in the United States. Under TRIA, an insurer is required to “make available” terrorism coverage on certain lines of commercial property and casualty insurance policies. The term “insurer” is defined under TRIA to include all licensed insurers in the U.S. as well as surplus lines insurers. Under TRIA, whether or not an insurer must “make available” terrorism coverage hinges on whether the risk itself is located in the U.S. (or with respect to a U.S. air carrier, flag vessel or at the premises of a U.S. mission), not where the insured resides.

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4. Is policyholder consent required for an insurer to transfer a surplus lines policy to another insurance company? Most states do not expressly apply their policy transfer consent requirements to surplus lines policies. However, a number of states still require that the surplus lines insurer abide by the applicable policyholder notification requirements. Moreover, general principles of contract law could nevertheless prohibit the transfer absent

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Idea Exchange: Surplus Lines continued from page 45 of property and casualty insurance coverage on a surplus lines basis, a number of states, such as New York, expressly prohibit certain lines of insurance that are viewed as traditional lines of property and casualty insurance in other states from being exported to the nonadmitted market, such as financial guaranty insurance. Disability and workers’ compensation insurance are also permitted through the surplus lines market in some states. There has been an increased push by the National Association of Insurance Commissioners (NAIC) in recent years to enact model legislation allowing for limited forms of health insurance (including short term medical, international medical and excess disability) to be written on a surplus lines basis, which has been adopted by some states as well.

6. If a state only allows for surplus lines insurance policies to provide property and casualty coverage, can the policy provide “ancillary” non-P/C coverage under a multi-peril insurance product?

While a handful of such states in practice allow flexibility as to the issuance of non-property and casualty insurance coverage on a surplus lines basis, the general answer is no. For example, a travel insurance policy that offers to reimburse the insured for medical costs incurred while the insured is on a trip provides the insured a form of health insurance coverage that may not be offered through the surplus lines market in many states.

FILINGS, TAXES AND FEES 7. What policy filings are required?

While surplus lines insurers are generally exempt from the rate and form filing requirements, most states that have surplus lines associations require filing of the surplus lines policy, and some of these associations may decline to “stamp” the policy (i.e., collect a fee and acknowledge the policy is

acceptable under the state’s surplus lines laws) if it offers insurance coverage in contravention of applicable law. At least one jurisdiction (New York) also requires the filing of surplus lines producer agreements with insurance carriers that grant the surplus lines broker binding authority as well, and the Excess Line Association of New York encourages specific language be utilized in such agreements.

8. Who is responsible for the payment of surplus lines premium taxes?

Traditionally, the surplus lines broker is legally responsible for the payment of surplus lines premium taxes, but some states hold the insured and/or the surplus lines insurer also liable for such taxes if the broker does not satisfy its legal obligation. Most states allow the surplus lines broker to pass the tax on to the insured. However, some states treat the payment by the insured of the surplus lines premium tax as an additional “fee” levied on the insured, and consequently that the broker obtain a written acknowledgment from the insured that its payment of the tax is in addition to the premium under the insured’s insurance policy.

9. Where are surplus lines premium taxes paid on group insurance policies? The NRRA generally requires that all surplus lines premium taxes be paid to the “home state” of the insured. Under the NRRA, the home state of an affiliated group is the state of the member of the group that has the largest percentage of premiums attributed to it. An “affiliated group” is comprised of entities that are

under common control. However, as to nonaffiliated groups (including risk purchasing groups, or “RPGs”), many states take the position that every certificate issued is its own policy and the certificate holder/member’s domiciliary state is considered the “home state” for each such certificate and require surplus lines premium tax be remitted accordingly.

10. Can surplus lines brokers charge clients fees other than the premium set forth in the insurance policy?

It depends on the jurisdiction. Some states expressly prohibit all forms of broker fees, whether charged on admitted or surplus lines placements. Other states provide more leniency as to the surplus lines market in particular. For example, Florida prohibits most types of broker fees charged on admitted insurance policies but amended its surplus lines laws in 2019 to specifically allow for the charging of “reasonable” broker fees on surplus lines insurance policies. Nearly all states that allow for surplus lines broker fees require that the insured provide its written consent prior to being charged such a fee along with various disclosures about the broker’s compensation.

DILIGENT SEARCH REQUIREMENT 11. How is the diligent search requirement satisfied?

Assuming no exemption from the diligent search requirement is available, most states require three (3) declinations to be obtained from admitted insurance companies, but this is not uniform throughout the country. For example, in Maine, under Bulletin 439 (November 26, 2019) “doing a specific number of inquiries does not mean that the producer has fulfilled this requirement.” By contrast, a few states (e.g., Louisiana) have eliminated the diligent search requirement altogether. Some states require that evidence of the procurement of declinations simply be maintained

Idea Exchange: Surplus Lines continued from page 46 in the offices of the surplus lines broker; whereas, others require that affidavits be filed with the applicable insurance department or surplus lines stamping office. A number of states expressly require the diligent search to be repeated each time a particular policy is renewed.

12. Does the diligent search need to be performed on a per-risk basis?

Usually, yes. Some states have narrow exceptions for RPGs, allowing one search for all members of the RPG residing in that state during a given time period. By contrast, many states require that the diligent search be completed as to each certificate holder under a non-RPG group policy.

13. What qualifies as a permissible declination?

Many states do not allow price to be the sole factor for obtaining a declination. Moreover, some states do not recognize a declination with respect to a multi-peril policy where components of such policy could be written by the admitted market (and some states, like California, only allow exportation in such case if commissioner approval is granted). In addition, most states do not recognize multiple declinations obtained from both an insurer as well as an affiliate thereof.

ELIGIBILITY, MARKETING AND PERMISSIBLE ACTIVITIES 14. How does an alien (non-U.S.) insurance company become eligible to write surplus lines insurance in the United States?

Alien (non-U.S.) insurance companies can write surplus lines business across the United States if they are listed on the Quarterly Listing of Alien Insurers (Quarterly List) as maintained by the NAIC which requires, among other things, an application to be submitted thereto and the establishment of a trust fund as security for U.S. policyholders. The information as reported to the NAIC must be updated on an annual basis. In addition, most alien insurers obtain listing on the eligibility lists or “White Lists” of the states that continue to maintain such lists in order to signal to 48 | INSURANCE JOURNAL | FEBRUARY 10, 2020

the market that the insurance carrier is approved by the state. The Quarterly List and White List filings and associated U.S. trust obligations are often maintained for alien insurers by U.S. regulatory counsel or other U.S.-based representatives. Another increasingly-used method of entering the surplus lines market is through the establishment of a “domestic surplus lines insurer” that is formed in a state solely for the purpose of writing surplus lines coverage nationwide. Currently, 21 states have adopted domestic surplus lines legislation.

15. What activities can be conducted by a surplus lines insurer in a state?

While all states require surplus lines insurance to be placed through a surplus lines broker, some U.S. jurisdictions restrict even the presence of a surplus lines insurer or its employees within its borders. For example, California generally takes the view that only surplus lines brokers may have a physical presence in the state with respect to surplus lines transactions, although domestic insurance companies affiliated with the surplus lines insurer may perform certain administrative functions unrelated to underwriting. Other jurisdictions, such as New York, have adopted broader exceptions for licensed affiliates of surplus lines insurers to conduct certain functions on behalf thereof in the state. In addition, depending on the state, surplus lines insurers may not always take advantage of various exceptions to licensing laws that are often available to admitted insurance companies, such as exemptions from adjuster licensing requirements applicable to authorized insurers in many states.

16. What marketing activities can be conducted by surplus lines insurers and brokers?

A number of states place substantial restrictions on marketing unauthorized products. For example, California and New York generally prohibit the marketing of surplus lines products unless highly stringent standards are met, including the avoidance of targeted solicitation,

restrictions on dissemination of certain policy terms, not calling attention to unauthorized insurers (subject to exceptions), and the inclusion of disclaimers regarding the unavailability of certain products to insureds in the state. As online and app-based marketing tools become more prevalent, the surplus lines advertising laws are being revisited once again by insurers, brokers and legislatures alike.

17. Does an individual P&C insurance producer also need a surplus lines broker license to place insurance on behalf of a surplus lines agency? What if the individual acts as a retail producer for a wholesale surplus lines broker? When an individual places coverage on behalf of a surplus lines brokerage firm, the individual must hold a surplus lines broker license; a “regular” property and casualty license is not sufficient. However, most states allow a non-surplus lines producer to act in a retail broker capacity when facilitating a transaction through a licensed surplus lines broker. However, strict attention must be paid to the activities conducted by the appropriately licensed entities to make sure that no regulatory lines are crossed, including but not limited to making sure that the surplus

February 10, 2020 Nutmeg Insurance Company One Hartford Plaza Hartford, CT 06155 The above company has made application to the Division of Insurance to obtain a Foreign Company License to transact Property and Casualty Insurance in the Commonwealth of Massachusetts. Any person having any information regarding the company which relates to its suitability for the license or authority the applicant has requested is asked to notify the Division by personal letter to the Commissioner of Insurance, 1000 Washington Street, Suite 810, Boston, MA 02118-6200, Attn: Financial Surveillance and Company Licensing within 14 days of the date of this notice.

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lines broker is the only licensee that negotiates insurance with an unauthorized insurer. In addition, many states allow the retail broker to conduct the diligent search of the admitted market, although states differ as to whether the retail broker or the wholesale surplus lines broker must keep evidence of, and execute affidavits relating to, the satisfaction of the diligent search requirement.

18. Can surplus lines brokers place insurance policies with ineligible unauthorized insurers on a direct procurement basis?

is licensed. However, some states allow brokers to act on behalf of their insureds and physically leave the state to procure the desired insurance coverage, provided that the broker abides by the governing tenets of direct procurement as if it were itself the insured.

FINES AND PENALTIES; INDUSTRY TRENDS 19. Which individual or entity bears responsibility for violations of surplus lines law?

Surplus lines brokers in the home state of the insured are generally prohibited from assisting insureds with respect to the “direct procurement” (also known as “independent procurement” or “direct placement”) of insurance coverage with unauthorized insurers. Rather, most states require that a prospective insured leave its home state and obtain insurance coverage directly from the unauthorized insurance company (or through a non-domiciliary broker) in a jurisdiction where the insurance carrier

Traditionally, the surplus lines broker is most exposed to sanctions in the form of fines and penalties for breach of applicable surplus lines insurance law as the licensed insurance actor in the state. However, a number of states have enacted statutes allowing for the inspection of books and records of unauthorized insurers and the ability to levy fines in connection therewith. In addition, there have been a few instances in recent years where states have entered into consent orders levying penalties and fines against surplus lines producers, insurers, and even insureds (particularly in the group policy context where master policyholders, such as associations,

February 10, 2020

Shenandoah Life Insurance Company 4415 Pheasant Ridge Road, Suite 300 Roanoke, VA 24014

Munich RE US Life Corporation 56 Perimeter Center East, Ste 500 Atlanta, GA 30346

The above company has made application to the Division of Insurance to obtain a Foreign Company License to transact Life, Accident and Health Insurance in the Commonwealth of Massachusetts.

The above company has made application to the Division of Insurance to amend their Foreign Company License to transact Life, Accident and Health Insurance in the Commonwealth of Massachusetts.

Any person having any information regarding the company which relates to its suitability for the license or authority the applicant has requested is asked to notify the Division by personal letter to the Commissioner of Insurance, 1000 Washington Street, Suite 810, Boston, MA 02118-6200, Attn: Financial Surveillance and Company Licensing within 14 days of the date of this notice.

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market surplus lines insurance products).

20. What is insurtech and how does it impact the surplus lines industry?

The term insurtech refers to the wave of technological innovation impacting the insurance industry, from the way insurance is sold and administered to the types of risks for which insurance policies have evolved to provide coverage. The surplus lines industry both benefits and suffers from the emergence of insurtech. The utilization of dynamic pricing models and other algorithmic underwriting guidelines takes time to work its way through the admitted market process of rate and form approval, which is generally bypassed by surplus lines insurers. However, surplus lines products are required to be obtained through surplus lines brokers which restricts direct-to-consumer transactions. Moreover, surplus lines brokers must conduct a diligent search of the admitted market (absent an exception), which hinders the ability to quickly bind coverage through the internet or app-based products. Lerner is a partner in the New York office of Locke Lord and is a member of the firm’s Insurance and Reinsurance Department. Phone: 212-912-2927. Email: zachary.lerner@lockelord.com

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FEBRUARY 10, 2020 INSURANCE JOURNAL | 49

Closing Quote How Brokers Stay Relevant? Be Nimble With Your Value Props

ommercial brokers, the future is bright. As you contend with an increasingly automated, digitally-enhanced insurance industry, rest assured your expertise remains By Gerritt Graham valuable for your clients. That is, if you can adapt to their differing needs. And that’s not always easy. Better online experiences have made the process of selecting and buying insurance easier for individual consumers, and in some segments, made it wholly commoditized. But for most businesses, their risks and attendant questions around how to insure them are not getting simpler. In fact, as businesses face the growing peril that is cyber risk, policyholders are forced to contend with a new layer of complexity in their insurance programs. But they can also find information about their risk in a number of ways that weren’t

reliable or even available a few years ago. Business owners and risk managers will continue to look to brokers for advice. But this isn’t an invitation to do the same things for every client of every size. That’s because the value brokers provide isn’t evenly distributed. Brokers need to meet their clients where they are. Being nimble enough to cater to varying needs will become a critical trait for brokers. While there’s plenty of nuance in the broker’s strategy, the simplest way to break it down is within a framework of small, medium and large clients.

For Small Businesses, Be the Facilitator

For small businesses, it’s all about convenience and speed. The overworked, doing-it-all small business owner wants to get things done. They act more like individual consumers. For them, insurance is often a one-person decision-making process. They treat their business as an extension of their personal life—and, like everyone else, in their personal life they are accustomed to fast

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turnaround time, 24/7 access to documents, low costs and an intuitive online experience. Why should their business insurance be any different than car and home? But that doesn’t mean they want to be abandoned in favor of a tech solution. Small business clients will appreciate your help navigating the choice between tech-forward options. The ultimate in convenience— taking the hard lifting out of the insurance decision—will remain your role as a broker. The great digital experience they’ll have when it comes time to find documents or file a claim is part of the value you provide in pointing them to that solution. And, of course, make sure your market can get the policy done fast. They have the weekly payroll to do next.

For Midsize Businesses, Be the Educator

Unlike the small business owner, midsize businesses don’t just want to be pointed in the right direction and let free. They need hand-holding. Their business may have substantial risk, with hundreds or thousands of employees and large infrastructure. And yet, without a dedicated risk manager or in-house legal team, brokers are often their only source of risk management advice. That means providing tools and resources to help them understand their risk is an important aspect of the value you provide. In the case of our clients at Corvus, we see midsize clients in cyber, tech E&O, and cargo + cyber take interest in the

reporting we provide on their cyber and cargo risk. They are the most likely to take up recommendations we provide for cyber risk.

For Large Enterprises, Be the Master Communicator

In this echelon, the buyers need strong technology, but speed in turning around the policy is less important. Most importantly, you’re dealing with organizations where more than one person has expertise in the areas you work in, and the insurance buyer may not have the most information. The challenge is one of communicating the right information to the right people. For instance, a large company won’t be as reliant on an insurer’s report on its cyber risk. The CISO will have that covered. But the nature of that risk might not be communicated across the organization in a way that is understandable for the insurance buyer. You can step in to help the risk manager understand risk in a way that helps them make a decision about coverage, even if it’s with knowledge that exists elsewhere in the organization. As a plus, you can arm that risk manager with the tools they need to support the decision in front of other constituencies in the organization. Graham is the Chief Commercial Officer of Corvus Insurance, an insurtech MGA developing Smart Commercial Insurance policies. He has over 20 years of sales and marketing experience, primarily focused on technology and data solutions for the financial services industry. INSURANCEJOURNAL.COM

Expect big things in workers’ compensation. Most classes approved, nationwide. It pays to get a quote from Applied.® For information call (877) 234-4450 or visit auw.com. Follow us at bigdoghq.com.