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IN THIS
ON THE COVER 12
WHY GREAT LOSS RATIOS ARE NOT ALWAYS THE GOAL While many agency owners take great pride in generating low loss ratios year after year, some carriers are de-emphasizing low loss ratios in favor of fast growth.
ALSO 16
A CLOSER LOOK AT THE AGENCY/ COMPANY RELATIONSHIP The 2015 Company Satisfaction Index results are in. Now benchmark your carrier experiences.
18
WHAT IS YOUR CLOUD-COMPUTING STRATEGY? Your use of cloud-computing solutions is going to increase. Have a plan in place to get the most out of cloud technology and mitigate the associated risks.
IN EVERY ISSUE 2
Chairman of the Board’s Message
3
Ask Our Experts
4
Preventing Errors & Omissions
6
Coverage Corner
8
State News
11
IA&B Partners
IBC My Events IBC Advertiser’s Index IBC Classified Ads Periodical postage paid at Mechanicsburg, Pa. and at additional mailing offices. Ride-along enclosed. Postmaster: Send address changes to Insurance Agents & Brokers, 5050 Ritter Road, Mechanicsburg, PA 17055. Primary Agent (ISSN 1543-3110), Permit # 638-620, Issue # 2015-09, is published monthly by IA&B Service Group Inc., a subsidiary of IA&B.
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Copyright 2015. All rights reserved. No material may be reproduced in whole or in part without written consent of the publisher. The information in this publication is general in nature and not intended to serve as legal, accounting, financial, insurance, investment advisory or other professional advice as to any reader’s particular situation. Users are encouraged to consult with competent legal, financial, insurance, investment advisory and/or other professional advisors concerning specific matters before making any decisions. We disclaim any responsibility for any decisions or actions by readers. Statements of fact and opinion in Primary Agent are the responsibility of the authors alone and do not imply an opinion on the part of the officers or the members of IA&B. Participation in IA&B events, activities and/or publications is available on a non-discriminatory basis and does not reflect IA&B endorsement of the products and/or services.
1
CHAIRMAN OF THE BOARD’S MESSAGE
INSURANCE AGENTS & BROKERS
POWER IN NUMBERS
5050 Ritter Road | Mechanicsburg, PA 17055 800-998-9644 | IABforME.com
OFFICERS Chair of the Board
T
Robert S. Klinger, LUTCF, CPIA Vice Chair of the Board
he whole is greater than the sum of its parts,” wrote Stephen Covey in The Seven Habits of Highly Effective People. As a U.S. Army veteran, I wholeheartedly believe in the power of synergy, of collaboration, of many individual forces working toward a common objective. With its collective power of 1,400 independent agencies – all unique yet tied to shared experiences and goals – IA&B exemplifies this. September marks a changing of the guard at IA&B. On the boards of directors, new leaders – myself included – are assuming their posts. As I sit down to write this, my first magazine column as chairman, I feel a sense of gratitude toward the outgoing leadership (Diana, you’ve left big shoes to fill) and of enthusiasm for what’s to come. And there’s a great deal to look forward to. The IA&B leadership is energized. Our predecessors set us on a progressive, member-centric path, and we’re ready to continue their direction. Our organization is strong, responsive to agents’ needs, and a formidable presence in the industry. You can expect more of the same moving forward. In the year ahead, I encourage you to get involved with your association and to provide feedback on your struggles, needs and aspirations. Together, we have power in numbers, and we will persevere. n
Michael F. McGroarty Sr. Immediate Past Chair of the Board
Diana M. Hornung Hanby, ACSR
MEMBERS E. Stephen Burnett, CIC, ARM Wilmington, Del
Richard F. Corroon, CPCU Wilmington, Del
N. Lee Dotson, CIC, AAI Wilmington, Del
Michael P. Ertel+ Columbia, MD
John B. Hollister Milford, PA
Jocelyn R. Howard-Sinopoli, CIC, CISR Butler, PA
Douglas A. Loesel, CPCU Erie, PA
Crag S. Mader
Gambrills, MD
Ann Gallen Moll, CIC Reading, PA
Mark J. Monroe
West Chester, PA
Joseph R. Pastor, CPCU, AAI Oil City, PA
Richard M. Rankin, CIC Lancaster, PA
April E. Ressler, CIC Altoona, PA
Best,
Scott C. Rogers, CPIA* York, PA
Glenn R. Strachan
Ft. Washington, MD
Lawrence A. Wilson, CIC, CPIA, CPCU, ARM**
Robert S. Klinger, LUTCF, CPIA Chairman of the Board
New Castle, Del.
J. Marshall Wolff, CIC, CPCU Easton, PA
* Pa. IIABA National Director ** Del. IIABA National Director + Md. PIA National Director
2
SEPTEMBER 2015
Ask Our Experts Question: Our agency has been asking customers to sign off on their coverage declinations. Could we discontinue the sign-off?
Answer:
W
hile we can’t speak for all states, at this time, Delaware, Maryland and Pennsylvania do not mandate to have customers sign off on coverage they have declined. From an E&O standpoint, it is mostly a matter of offering the coverage and retaining a record or evidence that the offer was made. Agents sometimes like to see their customers commit to their declination with a signature. Others will simply annotate the file. A third option, which can be viewed as a compromise between a sign-off and a simple file annotation, is a confirmation email or letter to the customer. In it, you can reiterate the offer and the customer’s decision, as well as his option to contact you in the future if he changes his mind. This method is generally more efficient, since it does not require having the person sign the document, something that can be difficult to do and timeconsuming when the customer is not in the office and the agency tries to secure the signature by mail.
If this is a solution you’re considering, here is some more food for thought: Sending a quote along with the letter may be a good idea, for two main reasons: 1) The cost of the added coverage may be less than what your customer imagines, and providing a price may actually increase your take-up rate; and 2) When an issue arises, and a claim is denied, customers will sometimes argue that if they had known the price was so low, they “obviously” would have added the coverage, and that the agent should have pointed out the price difference. This is not to say that they will win the argument, but it can sometimes place the agent in an awkward position. Note: Keep in mind that in some states, including Maryland, certain coverage notifications are required. Some carriers may ask their agents to secure a policyholder’s signature to acknowledge that he or she received notification. This is a separate issue. n
This month’s answer was provided by Claire Pantaloni, CIC, CISR, our industry affairs director.
Have a question? Ask our experts! Rely on our experts to answer your most perplexing questions. Visit the Ask Our Experts section of IABforME.com (find the link in the website footer) to submit your question and review answers to other frequently asked questions. Or email your question to us at IAB@IABforME.com. We look forward to hearing from you.
3
PREVENTING ERRORS & OMISSIONS
WORKERS’ COMPENSATION: MORE OF AN E&O RISK THAN YOU MIGHT THINK Utica National E&O Program
I
f you asked most agents about the errors-and-omissions risk involving workers’ compensation, it is a good bet the vast majority would say it presents minimal, if any, real E&O claims potential. In reality, with a number of E&O carriers, E&O claims arising from the sales and service of workers’ compensation is in the top five, generating upwards of 10 percent of all E&O claims every year. This is a line of business to which agents should be sensitive. In most states, the legal standard of an agent is to provide the coverage the client specifically requests. In the early 1980s, the Massachusetts E&O case
4
Rae v. Air Speed put a slightly different spin on this. The case, which was eventually appealed to the Massachusetts Supreme Judicial Court, concluded that if the coverage at issue is compulsory, an injured third party can assert a negligence claim against the tortfeasor’s agent. As a result, it seems incumbent for agents to know the customers they are dealing with (or looking to deal with) and whether there is a workers’ compensation exposure that must be addressed. A POTENTIAL FRAUD ISSUE There are a variety of factors that go into calculating and determining the appropriate premium with workers’ compensation. These include job
SEPTEMBER 2015
classification codes, experience modifications, payroll, SIC codes, etc. Insurance carriers expect the application to reflect correct information. The determination of these factors (or the intentional misclassification of these factors) has been a central issue for fraud. It is generally believed that when business owners seek a lower premium through the misrepresentation of the nature or class of the business, employees’ specific duties, or under-reporting payroll, they are committing premium fraud. Agents must be aware of this to avoid becoming an unknowing participant in any fraud scenarios.
DOES THE SUBCONTRACTOR HAVE WORKERS’ COMPENSATION? Most agents insure a contractor or two. This class of business poses a number of E&O issues. When an agent writes workers’ compensation for a contractor, the agent may believe his or her job is done. However, there is significant potential for problems to develop. While the contractor needs workers’ compensation, it is important the client knows whether any subcontractors he or she hires has workers’ compensation, too. It’s probably best to verify this via a certificate. If an employee of the sub is injured on the job and the sub does not have workers’ compensation, the contractor that retained the sub could be deemed to be the employer and have to provide workers’ compensation benefits. This issue also presents auditing concerns because the payroll for the sub could now get factored in the development of the workers’ compensation audit, resulting in some significant additional premiums. CLIENTS WITH CURRENT/ EMERGING MULTI-STATE EXPOSURES It is not uncommon for a business to do business in other states. Many years ago, providing coverage for employees in these additional states was handled by the Broad Form All State Endorsement. This form no longer exists, and the industry has developed a new method for handling this exposure. For states in which an employer actively conducts business operations, at the effective or renewal date of the policy the state must be listed in Item 3A of the policy. The remaining states where the employer may, at some time in the future, conduct business operations must be listed in Item 3C of the policy. If an employer begins operations in a 3C-listed state, the standard policy requires the employer to notify the insurance company as soon as work begins. That state should now be listed in Item 3A.
There are a handful of states, called “monopolistic fund states,” that require that workers’ compensation coverage be purchased from the state fund. Monopolistic fund states typically do not have a provision for providing an “all states” provision. Agents must communicate this information to their clients and have a means to identify a change in the business operation, such as an expansion of states. This information should also be included on proposals. SOLE PROPRIETOR/ PARTNERSHIP ISSUES If you have a client acting as a sole proprietor or partnership, oftentimes there have been issues as to whether the sole proprietor or partners are actually covered by their own workers’ compensation coverage. As the agent, you wrote a workers’ compensation policy for the business, but are the individual or partners covered by that policy? Unfortunately, the discovery of this matter seems to normally surface at claims time when it is difficult to do much about it. Agents must know how their state handles this issue. Some states exclude “this class of employees,” and they have to “opt in” if they want coverage. Other states include these employees and they have to “opt out.” Typically, such key decisions need to be made at the inception or renewal anniversary of the coverage. Bottom line, for those clients that you insure that operate as a sole proprietor or partnership, do the key executives know if they are covered?
Documentation of discussions centering on this issue should be detailed and memorialized back to the client. When certificates of insurance are completed and the objective is to show evidence of workers’ compensation coverage, there is a question on the certificate that agents must answer: Any proprietor/partner/executive officer/member excluded? Make sure it is answered correctly because the implications are significant. IS THE POLICY SUBJECT TO AUDIT? There have been situations where the customer buys a workers’ compensation policy and receives a significant “additional premium” upon audit. The customer brings an E&O action against the agent claiming he or she was unaware of the audit provision. Agents should ensure that proposals/offerings of coverage include statements detailing any audit provisions. All discussions regarding this issue should be well documented. Workers’ compensation presents more E&O issues than many agents think. Understand these issues, and put procedures in place to avoid any part of E&O litigation. n
The Utica National E&O Program supplied this article. Our sales center is the exclusive agent for the Utica E&O program in Delaware, Maryland and Pennsylvania. For questions regarding this article or your E&O coverage, contact IA&B at 800-998-9644 or IAB@IABforME.com.
MULTI-STATE EXPOSURES REVIEW OUR resources on requirements for out-of-state employers in New York and Ohio. IABforME.com/coverage_issues/WC
5
COVERAGE CORNER
SEPARATION OF INSUREDS – AN UPDATE Jerry M. Milton, CIC
S
everal months, or maybe a few months, ago* – don’t ask me which – I wrote an article entitled “Separation Of Insureds In Pennsylvania – Maybe, Maybe Not!” The article concentrated on a case in Lancaster County - Mutual Benefit Insurance Company v. Politpoulos, et al. Mutual Benefit issued a Commercial Umbrella policy to a restaurant that conferred additional status to the restaurant’s landlords by virtue of the policy’s blanket additional insured endorsement and the corresponding insurance requirements of the lease agreement.
6
An employee of the restaurant was injured when she fell down a flight of stairs and sued the landlords for her injuries. Mutual Benefit denied the landlords’ request for coverage based on the employer’s liability exclusion. That exclusion barred coverage for an injury to “an employee of the insured arising out of and in the course of employment by the insured.” Mutual Benefit then filed a declaratory judgment action in the Lancaster County Court of Common Pleas.
SEPTEMBER 2015
Mutual Benefit contended that the phrase “the insured” meant that coverage was excluded for all insureds for injuries to the employees of the named insured. The landlords contended that the exclusion should be applied separately to each insured, and since the injured employee was not the landlords’ employee, the exclusion should not apply. The trial court granted summary judgment in favor of Mutual Benefit explaining that it was bound by the Supreme Court of Pennsylvania’s ruling in Pennsylvania Manufacturers’ Association
(PMA) Insurance Company v. Aetna Casualty and Surety Insurance Company. In that case the court held that the phrase “the insured” had not been interpreted to mean “an insured” or “any insured.” It has merely been interpreted to mean “the named insured.” In reaching its decision, the trial court was highly critical of the PMA decision and invited appellate review. On appeal, the Superior Court reversed the trial court’s ruling on the basis of the policy’s severability (separation of insureds) clause. The Superior Court reasoned that, when treating the landlords as the only insureds in the policy, the employer’s liability exclusion did not apply since the landlords were not the employers of the injured restaurant employee. Obviously, this ruling by the Superior Court did not reverse the Supreme Court of Pennsylvania’s decision in PMA. Therefore, the case of Mutual Benefit Insurance Company v. Politpoulos, et al. was appealed to the Supreme Court of Pennsylvania
The Supreme Court affirmed the Superior Court’s decision, but disagreed with its reasoning. Though it did not overrule PMA, which involved an auto liability claim, the court declined to extend PMA’s expansive construction of the term “the insured” to a commercial general liability policy that at various times uses “the insured” or “any insured.”
The debate over “the insured” versus “any insured” will probably continue since the Supreme Court’s decision in Mutual Benefit did not overrule their decision in PMA. Incidentally, the Mutual Benefit case was decided in 2015 and the PMA case was decided in 1967.
Instead the court held that the term “the insured” was ambiguous. In its decision, the court stated, “At least where a commercial general liability policy makes varied use of the definite and indefinite articles, this, as a general rule, creates an ambiguity relative to the former, such that ‘the insured’ may be reasonably taken as signifying the particular insured against whom a claim is asserted.”
Y’all take care! n
Under Pennsylvania law, ambiguous exclusionary language is construed against the insurer. Therefore, the court held that the employer’s liability exclusion, which was ambiguous, did not apply to the landlords since the exclusion applies only to claims asserted by employees of “the insured.”
To compete, you work harder. EMC helps you work smarter.
The fun continues.
Jerry M. Milton, CIC, teaches and consults on industry issues. The legal profession recognizes him as an expert on insurance coverages. He also serves as our education consultant, working with our CISR, CIC and continuing education programs. Catch him at one of our upcoming seminars: IABforME.com/MyTraining. * Editor’s note: The article ran in the November 2013 Primary Agent magazine. Time flies when you’re having fun!
Topics Include:
• The digital journey to buying insurance • LinkedIn – leveraging profiles, searches & shares • Your website – is it visible? Viable? • Big E&O issues for small agencies • AMS upgrade – a big deal for small agencies • Remedies for big HR headaches in a small staff • Managing and keeping talent • Women in the agency workforce • Perpetuation for small agencies • E-signatures – compliance & getting started Full agenda and registration at IABforME.com/EMC2015
OCTOBER 27-28
Lead Sponsors:
BEAR CREEK MTN. RESORT ■ ALLENTOWN, PA Read more at IABforME.com/EMC2015
7
STATE NEWS
GET UP TO SPEED ON RIDESHARING Usage of transportation network companies (TNCs) is picking up speed worldwide. As of December 2014, the two largest companies, Uber and Lyft, boasted over 213,000 active drivers – a number that is on the rise as city governments, state regulators and the general public gain comfort with ridesharing.
NEW DELAWARE PRIVACY LAWS IN EFFECT Effective Jan. 1, 2015, the Delaware General Assembly enacted two new laws addressing proper disposal of records. The laws aim to curb the risk of unauthorized access to employee and customer records by requiring the development and implementation of reasonable steps for the safe destruction of records. The two laws work hand in hand: • One applies to employers and has to do with employee records (HB 294). • The other one (HB 295) applies to businesses in general and has to do with customers’ and prospective customers’ records. Under both HB 294 and 295, the requirement does not distinguish between paper and electronic records: Properly vetted procedures must be in place for both. While insurance agencies are exempt from the requirement contained in HB 295, it is likely they were exempt because they are already subject to strict requirements regarding information safeguarding standards and proper disposal of records under other federal and state laws and regulations. Our website includes more information on HB 294 and HB 295, such as practical tips for safer disposal of records, best practices for replication devices and shredding vendors, and our updated Privacy “cheat sheet” (a list of applicable federal and state privacy laws and regulations in a condensed format). IABforME.com/resource_center/breach/de_disposal
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STATE LEGISLATION Uber and carrier groups agreed on a model law last spring. The model establishes minimum insurance coverage limits during the various phases of the ridesharing process. As a bonus, it does not include several “anti-agent” provisions that TNC lobbyists pushed for in some states. However, in Delaware the General Assembly addressed ridesharing only through background-check legislation, while the state and Uber agreed to a memorandum of understanding. POLICY FORM ENDORSEMENTS ISO this spring made two countrywide filings that clarify coverage – or exclusion of coverage – for TNC drivers. The filings carry effective dates of Oct. 1, 2015, but actual implementation will vary by state and by carrier adoption. The filings include: PAP Forms Filing PP-2015-OTNFR “Introduction of a Reinforced Public or Livery Conveyance Exclusion and Related Optional Coverage Endorsements” • PP 23 40 10 15 – Public Or Livery Conveyance Exclusion Endorsement • PP 23 41 10 15 – Transportation Network Driver Coverage (No Passenger)
SEPTEMBER 2015
• PP 23 45 10 15 – Limited Transportation Network Driver Coverage (No Passenger) PUP Forms Filing DL-2015-OTNFR “Introduction of a Reinforced Public or Livery Conveyance Exclusion” • DL 99 12 10 15 – Personal Umbrella Liability Policy Public Or Livery Conveyance Exclusion Endorsement CONSUMER RESOURCES Our consumer education library includes two ridesharing pieces – one answering frequently asked questions about TNC drivers’ insurance coverage, the other about passengers’ insurance coverage. We recently updated both to reflect that, while insurance coverage needs and interpretations remain unsettled, some state legislatures are addressing the issue. As a reminder, the consumer content is available as raw data (to cut, copy and use as you see fit) and as fully designed, yet customizable flyers. IABforME.com/MyBrand
SURPLUS LINES BURDEN LIFTED The administrative headaches associated with placing business in the surplus lines market will be a little lighter thanks to Gov. Jack Markell on June 4 signing into law our legislative priority. The new law takes effect 90 days from the date of enactment – on Wednesday, Sept. 2. House Bill 40 (now Chapter 30 of the 148 General Assembly) removes once and for all the notarization requirement on the surplus lines diligent effort form (SL-1923), a requirement that placed undue burden on agents.
Late last year the Delaware Department of Insurance (DOI) took a literal stance of the law and began requiring notarization of all surplus lines affidavit forms. We immediately began to work with legislators and the DOI on legislation to provide a “fix” to this new notarization requirement. Rep. Bryon Short, chairman of the House Economic Development/ Banking/Insurance/Commerce Committee and long-time friend of our association, served as the primary bill sponsor. Additionally, the DOI was extremely receptive to our concerns and very helpful in supporting this legislation.
DOI ANNOUNCES NEW DEPUTY INSURANCE COMMISSIONER Insurance Commissioner Karen Weldin Stewart this summer named Hardy Drane as deputy commissioner for the Delaware Department of Insurance (DOI). He replaces Gene Reed who retired in June. Drane is no stranger to the DOI, having served as a deputy attorney general representing the department through July 2014. Drane is also a familiar face to our government affairs team, which worked with him to draft language for our legislative priority addressing certificates of insurance abuse, which was signed into law last year. Prior to working with the DOI, Drane was a lawyer with a major Wilmington law firm for almost 30 years, where his practice focused on insurance and environmental law.
LEGISLATION TO REQUIRE ELECTRONIC BILLING OF WC CLAIMS In the last hours of session before leaving Dover, state legislators passed House Bill 166 which incorporates changes to the workers’ compensation (WC) statute proposed by the state’s Workers’ Compensation Oversight Panel (of which our board member Lee Dotson is a member) and the Department of Labor. The bill removes the certification requirement for health care providers who are not licensed in Delaware but are licensed in another state, and it changes the allowable payment for these noncertified, out-of-state providers to the lesser of the usual and customary fee, the other state’s maximum reimbursement, Delaware’s maximum reimbursement, or a negotiated contract. The bill also allows the Workers’ Compensation Oversight Panel to realize the 2016 and 2017 mandated medical cost savings in the Delaware WC system through any component of the health care payment system and not just the fee schedule. This bill also gives the Workers’ Compensation Oversight Panel the authority to adopt rules to require electronic medical billing and payment processes, to standardize the necessary medical documentation for billing adjudication, and to provide for effective dates and compliance. The panel intends for the billing component to be in place by the end of the year and for it to be mandatory for all providers and doctors with an option for the smaller players to opt out. As this issue of Primary Agent went to print, the governor had yet to sign the bill into law. Watch Agent Headlines for updates, including an effective date.
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PLATINUM PROFILE
UFG’s mission is to provide simple solutions in complex times “Insurance” and “simple” are two words that normally don’t go together. Rather, when you think of insurance, what comes to mind are lengthy applications, complicated forms and confusing coverages. Far from simple, right? But even though insurance is an inherently complex business, processing policies and resolving claims doesn’t have to be, at least that’s how they feel at United Fire Group (UFG). Iowa-based insurer UFG has made it its mission to provide agents and policyholders with simple solutions in complex times. It’s a direction the company has been headed in for several years now – and judging by its continued growth – it seems to be working. “Simple doesn’t only mean easy, it means better,” said UFG President and CEO Randy Ramlo. “Why would an agent choose us for their best business or a policyholder choose us to protect them if we’re not giving them the simple, cost-effective solutions they need? We’ve been in this business long enough to know that they wouldn’t.” Founded in 1946, UFG sells personal insurance, commercial insurance, life insurance, annuities and surety bonds through more than 1,200 independent agents across the country. To serve its thousands of customers, the company employs approximately 1,025 people, with offices in California, Colorado, Iowa (home office), Louisiana, New Jersey, Pennsylvania and Texas. A publicly traded multibillion-dollar company, UFG holds a financial strength rating of “A” (Excellent) from A.M. Best Company. In 2014, UFG was named to Forbes Magazine’s “America’s 50 Most Trustworthy Financial Companies.” As part of its vision, UFG strives to be the clear company of choice for its independent agents and their customers. This means offering a diverse selection of
10
products and exceptional services, and balancing technology with personal relationships.
Insurance Agents & Brokers proudly recognizes UFG as one of its Platinum Partners. IA&B Platinum Partners dedicate the highest level of sponsorship to our organization.
“We strongly believe that you should always have the option to speak with one of our staff members whenever it’s necessary,” affirmed Ramlo, “because when dealing with a complex issue or question, there is no substitute for a real person.” Agents of UFG value the company’s extensive underwriting and loss control services, while policyholders appreciate the quick and attentive response they receive after a loss. A recent initiative the company has taken to better serve its agency force is the introduction of agency technology specialists: employees who travel to agencies to provide personalized face-to-face technology training sessions to agents and their staff members. UFG’s agency technology specialists make sure that agents not only know how to use the website to process policies and manage accounts, but that they can do it with ease and comfort. It’s all about helping agents make the most of the technology available to them to streamline work processes and improve the work flow. In other words, make things simpler. So, while the insurance world is becoming more and more complex by the day, UFG is simplifying — its products and services, its systems and procedures, its tools and technology — to give its agents and policyholders the solutions they need. “Our strong relationships with our agents and our policyholders continue to remind us why we are here — to help provide insurance protection during challenging times,” said Ramlo. “At UFG, we know we aren’t insuring nameless, faceless account numbers. We’re insuring families, lives, homes and businesses that serve customers, employ people and make a difference in their communities.” n
SEPTEMBER 2015
FOCUSED ON RESULTS FEATURED PARTNER
UFG PRESIDENT & CHIEF EXECUTIVE OFFICER
Randy Ramlo HOME OFFICE LOCATION
Cedar Rapids, Iowa A.M. BEST RATING
“A” (Excellent) WEBSITE
www.ufgins.com
PARTNERS PROGRAM
Listed below are those companies that strongly support the independent agency system and Insurance Agents & Brokers. Thank you for your continued sponsorship.
WHAT IS IA&B PARTNERS? The IA&B Partners program gives company and allied businesses the opportunity to demonstrate their commitment of support to independent agents and receive maximum market exposure. As an IA&B Partner, you will also realize the benefits of IA&B membership to help you succeed in the insurance industry.
PLATINUM LEVEL
BRONZE LEVEL
ACUITY
Aegis Security Insurance Co
Berkley Mid-Atlantic Group
Agency Insurance Company
Donegal Insurance Group
AmWINS Program Underwriters Inc
Erie Insurance Group
ARI Insurance Companies
Harleysville Insurance
Auto-Owners Insurance Company
Insurance Agents & Brokers Service Group Inc
Bailey Special Risks Inc
Liberty Mutual Insurance
Briar Creek Mutual Insurance Company
MMG Insurance Company
Conemaugh Valley Mutual Insurance Co
Millers Mutual Group
Countryway Insurance Company
Mutual Benefit Group
Encompass Insurance
Penn National Insurance
Foremost Insurance Group
Swiss Re
GMI Insurance
The Main Street America Group
Goodville Mutual Casualty Company
United Fire Group
Guard Insurance Group
Utica National Insurance Group
HM Workers’ Compensation
Brethren Mutual Insurance Company
Insurance Alliance of Central PA Inc
DO YOU SEE YOUR NAME? To become an IA&B Partner, choose the sponsorship package that matches your commitment of support. Contact the Member Sales Center at 800-998-9644, 717-795-9100 or visit us online at IABforME.com to get started.
Insurance House GOLD LEVEL
Insurance Placement Facility of PA
Progressive
Keystone Insurers Group Inc
Westfield Insurance
Lackawanna Insurance Group Lebanon Valley Insurance Company Merchants Insurance Group
SILVER LEVEL
Mercury Casualty
Access Insurance Company
Millville Mutual Insurance Co
American Mining Insurance Co
PennPRIME Municipal Insurance
Cumberland Insurance Group
Reamstown Mutual Insurance Company
Farmers Mutual Insurance Company of Western Pennsylvania
Rockwood Casualty Insurance
Frederick Mutual Insurance Co
TAPCO Underwriters Inc
Juniata Mutual Insurance Co
The Motorists Insurance Group
MAPFRE Insurance
The Mutual Service Office Inc
PSBA Insurance Trust
Travelers
Selective
Tuscarora Wayne Group of Companies
The Philadelphia Contributionship
Zenith Insurance
State Auto Mutual Insurance Company
11
WHY
GREAT LOSS RATIOS
ARE NOT THE GOAL
OF ALL INSURANCE COMPANIES By Chris Burand
12
SEPTEMBER 2015
Many agency owners take great pride in generating low loss ratios year after year. Maybe without even knowing it, this group has created a unique business model because my experience has been their growth is painfully slow, often their agencies are not managed closely otherwise, and they are often small. However, they are often very, very profitable. They are often the perfect cash cow in business school parlance.
T
hese agency owners are not happy with many carriers who have de-emphasized loss ratios. They cannot fathom why any carrier would not love their good loss ratios. The result has become stressed and fractured agency/company relationships. These agency owners do not understand that loss ratios that are too low (and each company will define “too low” differently) are not in some companies’ best interests. How can too high of a profit margin be bad? 1. When loss ratios are too good, it may mean rates are too high resulting in too little growth. Companies, particularly stock companies, need to show growth especially after the softest market in industry history. 2. Similarly, if growth is too slow, they may lose market share. Or their market share may be too low and they need to grow faster and capture more market share. Company management often has considerable pressure to attain specific market share. 3. Loss ratios too low may also mean that profit is not being maximized. Maximizing profit is obviously important. Maximizing profit is not the same thing as achieving a high profit margin. The former is in dollars, and the latter is in percentages. This is a crucial difference between running a company and an agency. Agency owners are well served to understand the difference. If a company wants to maximize
profit, it must balance revenue generated by lower rates with higher loss ratios. For example, if a company has a 35 percent loss ratio and $100,000,000 premiums, its gross profit (excluding expenses) might be $65,000,000. However, if it decreased its rates and subsequently increased premiums to $125,000,000 at a 45 percent loss ratio, it makes $68,750,000 in gross profit. Many agency owners would like to increase their books 25 percent and go from a 35 percent loss ratio to a 45 percent loss ratio too, but for agency owners focused on slow growth and low loss ratios, they probably will not get their share of that 25 percent growth, but their loss ratios will still increase resulting in much lower contingency income.
[Some] agency owners do not understand that loss ratios that are too low … are not in some companies’ best interests.
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Frustration greatly increases when companies price to a 55 percent, or higher, loss ratio. This is because profit sharing declines precipitously at these inflection points. The company still makes plenty of profit at a 55 percent loss ratio (and if it does not, then the company has very serious expense issues that go far beyond the points of this article), especially if profit sharing expense declines. However, this group of owners makes most of their money in contingencies so their profit is eliminated. Their lifestyle is curtailed. The value of their agencies is impaired. Their business model goes to shambles.
If a company is truly pricing to a loss ratio in the mid-50s or even higher, this group of agency owners might consider doing business with different carriers which have philosophies more closely matching their own. Easier said than done, obviously, so maybe a better solution is updating their business model. Growth is more important today to many carriers. Sitting on a cash cow annuity for a decade or more is not as feasible as it once was, and wishing otherwise will not help. Not all companies want to grow faster for market share or profit. They desire fast growth because: 1. Some key executive(s) bonus is tied to fast growth. 2. The company is being set up to sell.
CHIME IN SHARE YOUR experiences with carriers’ expectations. Is generating growth more important than low loss ratios? Look for the discussion in our LinkedIn group. IABforME.com/contact_us/social_media
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3. The company has reserving issues, and it needs the extra premium to dilute the effect of a reserve increase. It is only a temporary solution, but companies have done this forever. These companies are often the ones pushing growth most vigorously. Not only does fast growth temporarily hide their problem, it also makes the executive look heroic. The fast growth is almost always created by low, unsustainable rates eventually resulting in higher loss ratios. The smartest executives are gone by then leaving their successors with their mess to repair. Nonetheless, growth is initially far more important than profit. SEPTEMBER 2015
Maximizing profit is not the same thing as achieving a high profit margin. Agents doing business with these companies may want to evaluate whether these situations create risks to the agency and its clients. If so, creating a plan to offset these risks can create excellent opportunities. Agents can fight these realities, and fighting will feel good for masochists. An agency owner might have the luxury of only doing business with profit-minded carriers, but very few won’t be forced to do business with at least a few growth-focused carriers. Don’t keep telling carriers how short-sighted they are. Capitalize instead by understanding their perspective and using your resources to with the carriers you choose. n
The article reflects the views of the author and should not be construed as an official statement by IA&B. Chris Burand is president of Burand & Associates, LLC, an insurance agency consulting firm. Readers may contact Chris at (719) 485-3868 or chris@burand-associates.com. NOTE: None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules and regulations.
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A CLOSER LOOK at the AGENCY-COMPANY
RELATIONSHIP The 2015 Company Satisfaction Index results are in. Now benchmark your experiences with carriers’ pricing, underwriting, claims service and technology through our online, interactive tool.
REVIEW THE 2015 CSI results online, using our interactive comparison tool. IABforME.com/CSI
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I
n a time where agency-company relationships are strained by mounting pressures, shifting workflows, rapidly advancing technology, growing competition and a fluctuating market, opening lines of communication is more important than ever. Our Company Satisfaction Index (CSI) accomplishes just that. First launched in 2004 as part of our ongoing work on agencycompany relations, the now annual CSI gauges member agents’ experiences with their carriers. Participants rate their carriers on a series of statements – statements that fall within the categories of products, pricing and underwriting; policy service and claims; agency/company relationship; and technology. The results provide a tool to facilitate dialogue between agents and their carriers, and between us and our carrier partners. For agents, the CSI is primarily a benchmarking tool to use as part of the interview process when seeking a new carrier or to analyze a current carrier relationship. The 2015 CSI focused on commercial lines carriers. Results from this year’s survey (as well as the 2014 personal lines survey) are available on our website. Log in to access our interactive tool that shares an overview of the results, a comparison among carriers, and an in-depth look at each carrier’s individual results by question. n
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TECHNOLOGY UPDATE
WHAT IS YOUR CLOUD-COMPUTING
STRATEGY? By Steve Anderson, CIC
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SEPTEMBER 2015
Chances are that your staff is relying on cloud-computing solutions – regardless of your awareness or approval. And chances are that your agency’s reliance on the cloud is going to increase. Now is the time to create a strategy for getting the most out of cloud technology while mitigating the associated risks.
C
loud computing and storage have sneaked into insurance agencies in the form of Google Apps and Office 365, along with quite a few file-sharing and storage sites like Dropbox, Box.com, Google Drive and OneDrive.
• Scalability: Cloud solutions allow the agency to grow more easily just by adding another user. No longer do you have to make big investments in hardware when you need to expand.
These “shadow IT” solutions are being used by agency staff on a small ad hoc basis to answer specific business needs – like delivering large files to another party. Regardless of size, all firms are using the cloud whether that use is sanctioned by management or not.
For many insurance agencies, their experience with cloud computing is their hosted agency management system. There are now solutions available that will allow the agency to host their individual desktop computers in the cloud – eliminating the requirement for in-house computer servers. This process is called Desktop as a Service (DaaS).
Does your agency require a cloud strategy? In short, the answer is yes. The “2015 State of the Cloud Report” from RightScale shows that around 88 percent of businesses are utilizing public cloud, 63 percent are using a private cloud, and 82 percent of the companies have a hybrid cloud strategy, up from 74 percent in just the last year. Following are the benefits of using cloud solutions:
Last year, I wrote an article on LinkedIn, “Back to the Future: The Revival of the Virtual Desktop” (Find the article at linkedin. com/in/taareport), that details this new type of service. My point? Your use of cloud computing solutions is going to increase. There are benefits, and there are possible risks. Agency management should have a plan in place to get the most out of cloud technology and mitigate the associated risks.
• Speed: Business needs often require quick solutions, without waiting for major company initiatives to be approved. • Finances: Changing old infrastructure can be costly. Cloud computing can be a less expensive alternative to building your data center. • Competence: Most agency IT staff do an excellent job of keeping things running. However, they often don’t have the deep technical expertise that is sometimes required. Outsourcing the very technical needs to a cloud provider can be a good business decision.
Your use of cloud-computing solutions is going to increase…. Have a plan in place to get the most out of cloud technology and mitigate the associated risks.
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PROPER CLOUD TECHNOLOGY PLANNING A good plan will not hinder your existing IT department’s responsiveness or selfsufficiency. It will improve the ability of the organization to respond faster to business needs. Whether your cloud solution is public, private or hybrid, you should aim for the following: • Create a standardized operating environment (SOE), which focuses on security and makes the upgrade process more stress-free. • Use one SOE Management Platform throughout your entire organization so that handling, supervising and maintaining your technology infrastructure is easier.
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• Make sure the solution you use provides better efficiency, improved data management, higher security and system authentication. Overall, your solution should reduce your total cost of ownership. This may seem like an academic exercise. However, your use of cloud computing solutions will increase. Take a few minutes to think about how your organization should respond to this growing trend. n
Steve Anderson, CIC, authored this piece, which originally appeared as one of his TechTips. Steve is an authority on insurance agency technology, productivity and profitability – and a frequent presenter at our annual Executive Management Conference. Check out his free weekly newsletter, “TechTips,” and other resources for the insurance industry at steveanderson.com.
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