Surplus Lines: State of the Market / NAPSLO Issue by Insurance Journal

October 8, 2012 | Vol. 90, No. 19

WEst REGION Report Points to Insurance Industryâ&#x20AC;&#x2122;s Vulnerability to Climate Change Using Social Media Responsibly Unpredictable Time for Marine Insurance

Mike Miller, President and Chief Operating Officer, Max Williamson, former President, Rollie Wiegers, Scottsdale Insurance Company founder

The secret to our success The smart direction and solid relationships fostered by our leaders are the hallmark of our 30-year legacy. From the trust established by founder Rollie Wiegers, to the growth Scottsdale Insurance Company and design is a federally registered service mark of Scottsdale Insurance Company.

created by Max Williamson, to the opportunities engineered by Mike Miller, Scottsdale Insurance has prospered under the guidance of these visionaries. Their strategy and leadership have built a unique Scottsdale experience that will carry the company far into the future.

And thatâ&#x20AC;&#x2122;s pretty remarkable.

a Nationwide InsuranceÂŽ company

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WEST

Inside This Issue October 8, 2012 • Vol. 90, No. 19 • West Region

N16 On The Cover

Special Report: Nelson in Charge at Lloyd’s

N34

N42

NATIONAL COVERAGE

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Idea exchange

N16 Special Report: Chairman Nelson Charts Future Course for Lloyd’s

8 Colorado Officials Take Sides in Fracking Dispute

28 Social Media: Using Social Media Responsibly

8 Coloradoan Wins $7 Million in Popcorn Lung Lawsuit

N1 International Insider: Chubb’s Ellis & Goldstein

16 Studies: 2 M Calif. Homes Exposed to Wildfires; Hundreds of Thousands in West at Risk

N5 Minding Your Business: Oak & Schoeffler

N22 Spotlight: Lloyd’s Syndicate ANV N28 Closer Look: State of the Surplus Lines Market N34 Will Regulatory Reform Trigger Doomsday for Captives? N39 Academy of Insurance: Success Stories

18 IUMI Conference: Unpredictable Time for Marine Insurance

N41 Is Long-Term Care Insurance Dying?

30 Calif. Workers’ Comp Reform Law at ‘Halftime’

N42 Satisfaction with Home Insurers at 12-Year High

36 Report Points to Insurance Industry’s Vulnerability to Climate Change

N44 Employees Staying Put Even If Unhappy: Survey N46 2012 Agency Financial Products Directory

4 | INSURANCE JOURNAL-WEST REGION October 8, 2012

N8 What Makes a Marginal Producer? N12 Selling Your Agency Before Year-End N48 Closing Quote: Richerson

DEPARTMENTS 6 Opening Note 10 People 12 Declarations 12 Figures 14 Business Moves N7 MyNewMarkets

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Successful companies typically find 1 or 2 things and do them very well. We found 5.

Up to 30 rental units $1 million excess UM/UIM Combine personal and commercial policies LLCs, DBAs, estates and trusts Youthful and senior drivers

PersonalUmbrella.com. We do.

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Available nationally. Underwriting criteria varies by state. October 8, 2012 INSURANCE JOURNAL-WEST REGION |5 Visit us online for guidelines. California Insurance License 0D08438

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Opening Note Calling Workers’ Comp Experts

orkers’ compensation reform has arrived — or is arriving to be more accurate — in California. When Gov. Jerry Brown last month signed Senate Bill 863, which is designed to increase disability benefits for injured workers while taking a bite out of the rising cost of workers’ compensation insurance premiums, it put the long sought after system revamp at “halftime,” according one workers’ comp industry watcher. With the law green lighted, several more steps are needed to make the reforms possible. “Now that SB 863 has been signed into law, we are basically at halftime. The second half of the game will be imple¬mentation of the regulations,” said Mark Sektnan, president of the Association of California Insurance Companies, which served as an advisor to both sides in the negotiations that hammered out the bill. “We may be ahead going into the locker room at the half but the game can change quickly and in the wrong direction if the regulatory process does not garner the necessary balances and controls expected from this bill. The Brown Administration understands a timely and effective imple¬mentation of the regulations must be a top priority.” For more on that story see “Calif. Workers’ Comp Reform Law at ‘Halftime’” on page 30. The story is part of an ongoing series I’m writing on the new workers’ comp law, and the reforms that must be implemented. So far several experts have seized on a sudden need for more information on the new law that is going to kick in on Jan. 1 and have launched webinars to inform clientele of the changes. The California Department of Industrial Relations is holding a series of meetings to get input from stakeholders on the reforms that need to be implemented along with the law, but meanwhile many people still don’t know exactly how the law will work or just how much the system will change. Will the reforms truly generate the cost savings promised by those who pushed them? Will injured workers really fare better, or will they be left hanging, as applicants’ attorneys opposed to the new law have said? Will the workers’ comp system be better off? Or will it need fixing again in another seven or 10 years as has seemed the case over the last three decades? These are questions the series seeks to answer. If you are a workers’ comp expert, or you have a colleague whom you think has some insights to offer, contact me. Even if you’re not an expert, but you have some opinions on the system, or you know someone who is affected by the changes, please feel free to reach out to me. You can email me at djergler@insurancejournal.com, or call me at (619) 584-1100, ext. 147.

Don Jergler West Editor

EDITORIAL

Editor-in-Chief Andrea Ortega-Wells | awells@insurancejournal V.P. Content Andrew Simpson | asimpson@insurancejournal.com East Editor Young Ha | yha@insurancejournal.com Southeast Editor Michael Adams | madams@insurancejournal.com South Central Editor/Midwest Editor Stephanie K. Jones | sjones@insurancejournal.com West Editor Don Jergler | djergler@insurancejournal.com International Editor Charles E. Boyle | cboyle@insurancejournal.com ClaimsJournal.com Editor Denise Johnson | djohnson@claimsjournal.com MyNewMarkets.com Associate Editor Amy O’Connor | aoconnor@mynewmarkets.com Columnists Kathleen Ellis, Catherine Oak, Bill Schoeffler Contributing Writers Ken Goldstein, Herbert Greenberg, Robert Pettinicchi, Steve Richerson, Patrick Sweeney, Terry Tadlock, Sidney Williams

SALES

V.P. Sales & Marketing Julie Tinney (800) 897-9965 x148 jtinney@insurancejournal.com West Dena Kaplan (800) 897-9965 x115 dkaplan@insurancejournal.com South Central Mindy Trammell (800) 897-9965 x149 mtrammell@insurancejournal.com Midwest Lauren Knapp (800) 897-9965 x161 lknapp@insurancejournal.com Southeast Howard Simkin (800) 897-9965 x162 hsimkin@insurancejournal.com East Dave Molchan (800) 897-9965 x145 dmolchan@insurancejournal.com New Markets Sales Manager Kristine Honey | khoney@insurancejournal.com Classifieds, Jobs, Agencies Wanted/For Sale (800) 897-9965 x125 Ly Nguyen | lnguyen@insurancejournal.com

MARKETING/NEW MEDIA

Marketing Administrator Gayle Wells | gwells@insurancejournal.com Advertising Coordinator Erin Burns | eburns@insurancejournal.com (619) 584-1100 x120 New Media Producer Bobbie Dodge | bdodge@insurancejournal.com Videographer/Editor Matt Tolk | mtolk@insurancejournal.com

DESIGN/WEB

Vice President/Design Guy Boccia | gboccia@insurancejournal.com Vice President/Technology Joshua Carlson | jcarlson@insurancejournal.com Design and Marketing Executive Derence Walk | dwalk@insurancejournal.com Web Developer Jeff Cardrant | jcardrant@insurancejournal.com Web Developer Chris Thompson | cthompson@insurancejournal.com

IJ ACADEMY OF INSURANCE

Director of Education Christopher J. Boggs | cboggs@ijacademy.com Online Training Coordinator Barbara Whiffen | bwhiffen@ijacademy.com

A D M I N I ST R A T I O N

Chairman Mark Wells Chief Executive Officer Mitch Dunford Accounting Manager Megan Sinclair | msinclair@insurancejournal.com

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insurancejournal.com/subscribe Insurance Journal, The National Property/Casualty Magazine (ISSN: 00204714) is published semimonthly by Wells Publishing, 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 2012 Wells Publishing, Inc. All Rights Reserved. Content may not be photocopied, reproduced or redistributed without written permission. Insurance Journal is a publication of Wells Publishing, Inc. POSTMASTER: Send change of address form to Insurance Journal, Circulation Department, PO Box 9049, Maple Shade, NJ 08052

6 | INSURANCE JOURNAL-WEST REGION October 8, 2012

ARTICLE REPRINTS: For reprints of articles in this issue, contact Rhonda Brown at 1-866-879-9144 ext. 194 or rhondab@fosterprinting.com. Visit insurancejournal. com/reprints for more information.

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News & Markets EEOC Sues Colorado Company for Axing Employee with Bipolar Disorder

Coloradoan Wins $7 Million In Popcorn Lung Lawsuit

A suburban Denver man who was diagnosed with “popcorn lung,” possibly from inhaling the artificial butter smell of the microwave popcorn he regularly ate, has won a $7.2 million verdict against various food companies. Wayne Watson’s attorney, Ken McClain, said a federal jury granted the award against GilsterMary Lee Corp., The Kroger Co. and Dillon Companies Inc. after he developed respiratory problems in 2007. Watson previously settled claims against the flavor developer FONA International Inc., formerly Flavors of North America Inc. Watson argued the companies failed to warn consumers that inhaling the buttery aroma could put them at risk of lung injury. KCNC-TV in Denver reported defense attorneys had argued Watson’s health problems stemmed not from popcorn but from his years of working with carpet-cleaning chemicals. @2012 Associated Press. All Rights Reserved.

illon Cos., which does business in Colorado as King Soopers Inc., a large retail food company, refused to accommodate and unlawfully fired a receptionist at its company headquarters because of her bipolar condition, according to a lawsuit filed by the U.S. Equal Employment Opportunity Commission in federal court in Denver. According to suit, EEOC v. Dillon Companies, Inc., d/b/a King Soopers, Inc., King Soopers refused to accommodate Kelly

Ferris’s need for sufficient time off to manage her bipolarism. Hired as a receptionist in 2003, Ferris worked at King Soopers’ headquarters on Tejon Street in Denver for five years before she was discharged while on medical leave. Ferris requested use of the company’s 18-month medical leave policy saying she needed the time to manage a flare-up in her disability. During her fifth month of company leave, King Soopers fired her for failing to

report to work without permission, according to the EEOC suit. Disability discrimination violates the Americans with Disabilities Act, which requires employers to engage in an interactive process with employees in good faith, exploring what accommodations for a disability are possible. The EEOC suit seeks monetary damages on behalf of Ferris, training on anti-discrimination laws, an injunction, posting of anti-discrimination notices at the work site and other injunctive relief.

Union Study Recommends Changes at N.M. Fire Agencies

study concludes that firefighters aren’t capable of responding to calls within nationally recommended time frames in certain parts of Albuquerque and Bernalillo County in New Mexico. The Albuquerque Journal reported the International Association of Firefighters study points to limited manpower, not enough fire trucks and a lack of real-time communication between the Albuquerque and Bernalillo County fire departments as primary reasons for gaps in service. The report recommends new ladder

trucks for each of the departments, additional pumper trucks and three new battalion commander positions. Albuquerque Fire Chief James Breen disputed parts of the union study, saying the department is meeting national safety standards but agreed with other aspects, such as a finding that fire and rescue

responses would improve if the city and county merged their dispatch centers. Breen said AFD is meeting the national standards by creatively dispatching the resources it has. National Fire Protection Association standards say ladder trucks should have at least four firefighters aboard and be able to respond to 90 percent of calls within eight minutes. @2012 Associated Press. All Rights Reserved.

Colorado Officials Take Sides in Fracking Dispute

ome 60 mayors and city council members from 17 communities have asked Colorado Gov. John Hickenlooper to

8 | INSURANCE JOURNAL-WEST REGION October 8, 2012

have the state drop a lawsuit over fracking that challenges oil and gas drilling rules adopted by the city of Longmont. At issue is whether the state alone has the power to regulate oil and gas drilling, or whether local communities can add stipulations to how and where drilling can be performed. Hickenlooper and the energy producers argue that a patchwork of regulations is unworkable. Hydraulic fracturing, or fracking, is a technique for extracting oil and gas from shale formations by blasting water, sand

and chemicals into the ground. Opponents have expressed environmental and health concerns over the process, but supporters say companies have been fracking safely for years. Longmont’s measures limit surface oil and gas operations and facilities to nonresidential zones, encourage companies to consolidate operations in fewer overall facilities, and fast-track the city’s review process for companies meeting voluntary standards. Other local governments across Colorado are rallying to Longmont’s side. @2012 Associated Press. All Rights Reserved. www.insurancejournal.com

PROFESSIONAL LIABILITY COVERAGE IS IN THE DETAILS At Burns & Wilcox, no detail is too small to go unnoticed. To ensure we match your clients with the proper professional liability coverage, we look at every possible scenario. From data privacy to miscellaneous errors and omissions, medical malpractice to architects and engineers, our expertise across a wide breadth of categories makes certain nothing is missed. As an international company, our relationships provide us unlimited access to the broadest range of markets. So if you need to find the right policy in a flash, work with the largest independent wholesale broker – Burns & Wilcox. • Commercial • Brokerage

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October 8, 2012 INSURANCE JOURNAL-WEST REGION | 9

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People Tim Troester

Timothy Nielsen

Alice Cameron

Susan Ott

U.S. Risk Insurance Group Inc. named Tim Troester vice president and branch manager for the newly formed Portland, Ore., branch of U.S. Risk Brokers Inc. Troester’s focus at U.S. Risk will be to develop relationships and expand all lines of business in the Northwest region of the country. Troester has more than 10 years of experience in insurance, and he specializes in real estate, entertainment, manufacturing, and program business. U. S. Risk Insurance Group is a specialty lines underwriting manager and wholesale broker headquartered in Dallas, Texas. Walnut Creek, Calif.-based Heffernan Insurance Brokers named Timothy Nielsen to its Portland, Ore. office as senior vice president and branch manager, focusing on new business development and sales management. Nielsen has had nearly two decades of executive experience, including experience in selling and servicing commercial and employee benefits insurance. Nielsen was formerly the president and CEO of a Portland-based insurance brokerage and also he the expansion of the firm’s risk management practice. Heffernan has California offices in San Francisco, Petaluma, Menlo Park, Los Angeles and Orange County, as well as in Portland, Ore., St. Louis, Mo. and New York, N.Y. Marsh named Alice Cameron as west zone leader of Marsh Private Client Services and Susan Ott as San Francisco PCS office leader. Cameron is responsible for overseeing all aspects of Marsh PCS operations in its Los Angeles, San Francisco, and Seattle offices. Ott, who is responsible for the San Francisco PCS office, reports to Cameron. Cameron has 22 years of insurance industry experience as a broker, high net worth client advisor, and underwriter.

ASTISH15197.indd 11 10 ASTISH14873.indd |ASTISH5333.indd INSURANCE JOURNAL-WEST REGION October 8, 2012

She rejoins Marsh PCS from Fireman’s Fund Insurance, where she was a vice president responsible for marketing and corporate communications. Cameron began her career at Safeco Insurance in 1990 as an personal lines underwriter. Ott has 25 years of experience as an insurance broker and high-net worth client advisor. Before rejoining Marsh in 2011, she led the personal insurance divisions dedicated to affluent individuals and family offices at both MacCorkle Insurance and Frank Crystal & Company. She previously managed the West Coast offices for PLI. She began her career in 1987 as a client advisor in Marsh’s San Francisco office. Woodland Hills, Calif.-based Poms & Associates Insurance Brokers Inc. named Scott Boore vice president in the employee benefits and risk services groups in its Northern California office. Poms & Associates also named Jerry Windom vice president in the risk management group of the firm’s Woodland Hills office. Boore has more than 20 years’ experience in the insurance industry, primarily working in the public sector and with nonprofits. Prior to Poms & Associates, Boore was a regional director with Combined Insurance for Northern California and Hawaii. He has worked with a variety of industries in a range of group sizes, and also has experience assisting unions. Windom advises clients on personnel and commercial line property and casualty insurance program design and placement, including CGL, property, workers’ compensation, commercial auto, D&O and professional liability lines of coverage. Prior to joining Poms Windom was founder of Windom Risk & Insurance Services. continued on page 24

1/27/11 9:42 AM www.insurancejournal.com 6/11/11 9/6/11 2:54 8:30 PM

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October 8, 2012 INSURANCE JOURNAL-WEST REGION | 11

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Declarations It’s Congress “It certainly raises some interesting issues. Of course, there’s a huge presumption that when Congress passes a law, it’s constitutional.” — Timothy McTaggart, a partner at law firm Pepper Hamilton, who focuses on financial regulatory issues talking about a lawsuit that challenges the constitutionality of the 2010 Dodd-Frank law that overhauled U.S. financial oversight and created the Consumer Financial Protection Bureau.

No Class

And I Quote

“The lowest rate quotes are in California because it regulates insurance premiums more effectively than any other state.” — J. Robert Hunter, Consumer Federation of America’s director of insurance, noting in a CFA survey that California limits insurers’ use of nondriving factors to set premium levels.

“The purported statewide class the plaintiffs allege is no more appropriate today than the nationwide class the Supreme Court has already rejected.” — Walmart attorney Theodore Boutrous Jr. said discrimination claims against the company are unsuitable for a class action.

Do or Don’t “I hope this isn’t one of those situations where we won’t do what we need to do until we get slammed.” — Deputy U.S. Defense Secretary Ashton Carter told an annual Air Force Association conference that privately-owned U.S. computer networks remain vulnerable to cyber attacks.

Figures $

1.2 Million

Is what state insurance officials say Montana Justice Foundation, a non-profit group that helps people who can’t afford an attorney, will receive from a law firm that represented plaintiffs in a class-action lawsuit over insurance fees.

316K

Is how much federal regulators say Kinder Morgan Upstream LLC has agreed to pay for violating risk management plan provisions at its natural gas plants in Casper and Douglas, Wyo. 12 | INSURANCE JOURNAL-WEST REGION October 8, 2012

Million

The number of Americans, significantly more than first estimated, who will face a tax penalty under President Barack Obama’s health overhaul for not getting insurance, congressional analysts said. Most would be in the middle class.

$25,000

Is how much a Nevada judge has fined Las Vegas Sands Corp., citing its failure to disclose important information in a lawsuit filed by a fired executive against the casino company because the company failed to disclose that the information had been transferred from China to the U.S. www.insurancejournal.com

A Cup of Tea? Briana’s first goal is to warm the heart and settle the mind. After that, it’s nothing but quick quotes and rapid fire service for this Novato underwriter. Briana spent time on the retail side and understands how a cup of tea and good service can create harmony in your day. Try her specialties: • Contractors - Artisan & General • Apartments • Restaurants • Professional Liability • Inland Marine • Excess Liability • Products Liability • Special Events • Mercantile Risks • Monoline Property & General Liability The royal treatment and peace of mind. It doesn’t get any better than this. Go ahead, sip your tea while Briana does the rest. One Who Serves Briana Griffin - Underwriter Novato Office x103 brianag@monarchexcess.com

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October 8, 2012 INSURANCE JOURNAL-WEST REGION | 13

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Business Moves partner BGI Agency Network has signed its 50th member agency. BGI signed Matt Armstrong Insurance Agency of Coeur d’Alene, Idaho BGI Agency Network has been a partner Master Agency of SIAA since 2000. With territory covering Washington, northern Oregon, and northern Idaho, they are one of the largest independent agency groups in the Pacific Northwest. Since its inception in 1995, SIAA has signed over 4,200 new members. SIAA members reported more than $780 million in new premium growth in 2011. InsureZone, MSI Fort Worth, Texas-based InsureZone announced it has acquired Denverbased MSI Group, with agencies in 20 states. The purchase adds 63 agencies to InsureZone’s network/cluster program. MSI Group provides agency members with access to major carriers for personal lines and commercial lines of business, as well as life and health lines, and investments if desired, according to information posted on its website. The InsureZone Direct model will be expanded to other states by adding zone managers that have ownership rights in defined geographic areas. SIAA Hampton, N.H.-based Strategic Insurance Agency Alliance added three members in the West in August. SIAA added 30 total for the month. Of the signed members, 18 are new to the independent agency system, many of them former captive agents. SIAA helped create 299 new agencies in 2011 from a total of 412 newly signed members; 194 have been created so far in 2012. August’s new West members include: Northwestern Insurance Group of Bend, Ore.; Bonnie Risse Insurance Agency of Fountain Valley, Calif.; andPacker Insurance Services of Rancho Mirage, Calif. SIAA also announced master agency 14 | INSURANCE JOURNAL-WEST REGION October 8, 2012

Leavitt The Leavitt Group is combining the capabilities of six of their top California agencies along with their Las Vegas, Salt Lake and Atlanta offices. The agencies will re-brand collectively as the Leavitt Group. The California agencies include Jenkins Insurance Services, PridemarkEverest Insurance Services, Valley Insurance Service, Leavitt Benefits Insurance Services of Southern California, Leavitt Insurance Services of L.A., and Leavitt Insurance Agency of San Diego. Other participating agencies include Leavitt Group of Atlanta in Georgia, Leavitt Group Insurance Advisors in Utah, along with Leavitt Insurance Agency and Leavitt Group Benefits Services in Nevada. The Leavitt Group provides insurance, risk management, and employee benefits solutions to their clients. The Leavitt Group has 115 offices across the nation. Coastal Risk Underwriters Coastal Risk Underwriter, a member company of Insight Catastrophe Group, has launched a preferred homeowners program for properties in Alaska. The program, underwritten by Occidental Fire & Casualty Co. of North Carolina, provides coverage in the following boroughs: Anchorage, Fairbanks North

Star, Kenai Peninsula and Matanuska Susitna. The Alaska Preferred Homeowners program provides coverage for a broad spectrum of residential properties. Policy limits for homes range from $110,000 to $1 million. Earthquake coverage is also available in most areas. Appointed agents and brokers also have access to CRU’s agent portal. This program marks the sixth homeowners product CRU has launched with Occidental and its affiliate Wilshire Insurance Co. Products are also available in N.Y., La., S.C., Va. and Ala. CRU plans to increase its reach by expanding into several additional states during the next 12 months. CRU is a program manager providing specialty personal and commercial property and casualty insurance products on an admitted and surplus lines basis. General Star Management Co. General Star Management Co. has made its admitted professional liability coverage for real estate agents available in California. Underwritten by General Star’s Professional E&O Division, the new offering is provided by General Star National Insurance Co. General Star also upgraded the admitted policy with new coverage features designed especially for a real estate agent’s area of practice. Applicants eligible for the “EASY” program can access the new admitted product via a web-based application option. The traditional submission process remains available. As part of the announcement, General Star also increased EASY Program eligibility from $100,000 in gross revenue to $200,000. The protection offers over a dozen enhancements at no additional cost. Marsh U.S. Consumer is the exclusive program administrator for General Star’s real estate agents and brokers and real estate appraisers programs. www.insurancejournal.com

Tough, high-hazard property, casualty, transportation and professional and management liability risks require detailed expertise and specific industry experience. At RT Specialty, our brokers draw on the most comprehensive resources worldwide to provide better, faster, smarter insurance solutions. We do whatever it takes to find the solution that meets your clients’ complex coverage needs. When it comes to tough risks, experience the difference a tough broker can make. Tough risks demand tough brokers.

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News & Markets

Studies: More Than 2 M California Homes Exposed To Wildfires; Hundreds of Thousands in West at ‘Very High Risk’ By Don Jergler

ore than 2 million homes in California face “extreme wildfire hazards,” over 400,000 of which are in Los Angeles County, according to a study from an insurance industry group. A separate study shows at least threequarters of a million homes in the Western U.S. have a high risk of wildfire damage, and hundreds of thousands or homes are at “very high risk.” Both reports were issued in September by separate groups amid one of the worst fire seasons for the Western Region in recent memory. CoreLogic’s Wildfire Hazard Risk Report identifies more than 740,000 residences across 13 states in the Western U.S. with high levels of risk for wildfire damage.

Those homes represent a combined property value of more than $136 billion. Nearly 168,000 homes fall into the “very high risk” category, with a projected aggregated value of more than $32 billion, the report states. The ongoing drought and several recordsetting wildfires this year put the reports in an especially poignant light. Colorado and New Mexico experienced record wildfires, and some experts are predicting a severe wildfire season for California. California, Colorado and Texas contain the largest number of properties categorized as “very high risk” in the CoreLogic report. Numeric Scores The report assigns a numeric score ranging from 1-100 to indicate the level wildfire risk. Those levels account for risk within

a property itself, as well as risk in close proximity to the property boundary. When considering the surrounding area, more than 900,000 homes in the Western U.S. can be assigned the highest wildfire risk score, considered 81 and higher. Those properties represent a combined value of more than $161 billion, the report states. The report examines 13 western states: Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oklahoma, Oregon, Texas, Utah, Wyoming and Washington. It also keys in on six cities: Los Angeles, Calif; San Diego, Calif; Boulder, Colo; Austin, Texas; Albuquerque, N.M. and Salt Lake City, Utah, as well as the top ZIP Codes at risk within each metro area. A study by the Insurance Information Network of California and Verisk Insurance Solutions – Underwriting shows a majority of high-risk homes are located in Southern California. However, rural Northern California regions have the highest percentage of homes exposed to extreme fire dangers. “Nearly 15 percent of the 13.5 million homes in California face severe wildfire risk. That’s nearly as many homes as are in the entire state of Colorado,” Candysse Miller, executive director of the Insurance Information Network of California, said in a statement. “Wildfire risk is not exclusive to mountain or rural communities. Many of these homes are in densely-populated suburban neighborhoods.” More than 417,000 of these high-risk homes are located in Los Angeles County. Southern California counties represent 53 percent of the high-risk homes statewide. Northern California has a higher percentage of high-risk homes. The counties of Alpine, Mariposa, Tuolumne and Nevada account for more than 95,000 homes. More than 77 percent of these, or nearly 74,000, are considered high-risk. The study uses three primary factors that contribute to wildfire risk: Fuels — trees, grasses and brush that feed wildfires were continued on page 20

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News & Markets

IUMI Conference: Unpredictable Time for Marine Insurance By Don Jergler

tanding in front of a crowd of several hundred members of the insurance community, San Diego Mayor Jerry Sanders must have hit the nail on the head during a speech to the industry in late September, because agreeable nods could be seen rippling through the audience – and many speakers that followed him at uttered similar references. “This is an unpredictable time for your industry,” Sanders said at the annual International Union of Marine Insurance conference at the Manchester Grand Hyatt, a convention and hotel spot that looks out toward the city’s port, to which Sanders noted 42,000 jobs are tied. Sanders kicked off sessions on that focused on industry trends, facts and figures, eversagging hull rates, piracy and the Costa Concordia IJ cruise ship grounding early this Professions ad.pdf 1 7/10/12 year.

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The annual conference was themed “Seamanship to me is still the answer.” “Marine Insurance – Charting the Course He added that insurers must do due through Economic Uncertainty.” Last year diligence by insisting on good seamanit was held last year in Paris. Next year’s ship and shipping management, which IUMI conference is slated for London. he said, is “where the rubber meets the Other than a few bright spots, which road.” include liquid natural gas and offshore Eric Smith, CEO of Swiss Re Americas drilling, “the rest of the industry is a Corp., talked about the resilience of the disaster,” industry. said Richard “We have just ‘We have just endured one of Du Moulin, endured one of with Intrepid the worst natuthe worst natural catastrophe Shipping LLC, ral catastrophe years on record and paid every years on record who discussed risk manageand paid every valid claim.’ ment in shipvalid claim,” he ping. said. “We seem to take all of the risk and And while low interest rates and none of the management,” he said, referdepleted resources are “putting a lot of 4:17 PM ring to improving safety on the seas. pressure on underwriters,” he said the industry is left with two choices: “Wring our hands or roll up our sleeves.” Smith, who also talked about marine safety and urged the marine insurance industry to embrace technology, warned about the threat of commoditization. “Commoditization costs us relationships,” he said, adding that it forces companies to compete on low rates alone. He urged resistance to commoditization through superior service and offering a broad array of products rather than just delving deeper into subspecialties. “Survival should not be the only goad of surviving this recession,” he said. Another member of Swiss Re’s ranks, Patricia Kern, who chairs IUMI’s Facts & Figures Committee, offered a look at the macroeconomic environment in which the U.S. is slowly recovering from the recession, but where recession forces in Europe have intensified. Those forces and a tight lending environment have impacted shipping, she said. “Cost of borrowing money is growing massively,” she said, adding that has impacted shippers. continued on page 22

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News & Markets Wildfires, continued from page 16

analyzed; slope — the grade of the surrounding land was measured as terrain can influence the speed and intensity of a wildfire; access — a determination was made on the condition and network of roads leading to each individual property. All properties in California were classified as “low,” “moderate” or “high-risk” for wildfire loss potential. Statewide, insurers protected more than $3 trillion worth of residential property in 2011, according to the California Department of Insurance. The California FAIR Plan, the insurer of last resort for high-risk properties, insured less than 1.25 percent of it. As a result, private insurers cover nearly 99 percent of the insured residential properties in the state, the study shows. IINC has available an interactive map on its website, www.iinc.org, that provides a county-by-county breakdown of the number and percentage of homes at risk. By dollar amount Colorado leads the list

‘Nearly 15 percent of the 13.5 million homes in California face severe wildfire risk. That’s nearly as many homes as are in the entire state of Colorado.’ for “very high risk” exposure, the CoreLogic report shows. The report shows nearly $12.5 billion in properties in that category. The state was plagued with wildfires over the summer, with two of the most expensive wildfires in state history striking one after the other. The two most destructive wildfires in Colorado’s history will cost insurers roughly $450 million, according to a regional insurer association. The massive figure for insured losses comes from the total 600 homes destroyed and other damages by the two fires, which raged in June and July. There is nearly $9.5 billion worth of exposure in California in the “very high risk” category, according to the CoreLogic report. There are 195,149 residences in Texas in the “high risk” category, and 28,490 in the

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“very high risk” category, the report shows. New Mexico (9,732), Oregon (9,291), Montana (7,668) and Arizona (7,637) are other western states with a large number of “very high risk” properties. High Risk L.A. Of the six cities analyzed in the report, Los Angeles is home to the most single-family residences exposed to wildfire risk, with more than 29,000 properties in the “high” or “very high risk” categories. The total value of the homes in the two categories combined is estimated to be nearly $10 billion, with Malibu at the top of the list of ZIP Code areas with more than $900 million in potential residential property exposure to wildfire risk, according to the report. Beverly Hills ($578 million), Los Angeles ($447 million) and Topanga ($361 million) were other Los Angeles area cities at the top of the list. San Diego’s exposure for “very high risk” properties is $284 million, and $2.7 billion for “high risk” properties, the report states. For Colorado, Boulder tops the list for exposure with $1.8 billion in the “very high risk” category and $462 million in the “high risk” category. Austin tops the list in Texas with $232 million in the “very high risk” category and $4.8 billion in the “high risk” category. A portion of the CoreLogic report includes a Wildland Urban Interface, which identifies the intersection of potentially high-risk fire areas and large numbers of homes. The report states that just between the years of 1990 to 2008, there were nearly 17 million new homes built in the U.S., of which 10 million were located in the WUI and therefore potentially located near high wildfire risk zones. CoreLogic’s report was developed to provide the insurance industry, financial services companies, homeowners and others impacted by wildfire outbreaks with a better understanding of wildfire risk in the U.S. www.insurancejournal.com

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News & Markets gish worldwide economy. She offered an overall outlook for marine “The correlation between less cargo volinsurance as well. ume and less premium is immediate,” she “The situation is rather unstable,” she said, said. adding that for insurance she expects “weak Kern and other members of the Facts & to negative growth.” Figures Committee, which include Astrid 9854 An overriding reason for9/13/11 the negative out-PageSeltmann, TRADITIONSAD2_. 7:37 AM 1 an actuary for Cefor, and Erika look is lack of cargo volume due to the slugSchoch, painted a bleak picture for hull

Marine Insurance, continued from page 18

‘The correlation between less cargo volume and less premium is immediate.’

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“There is still capacity and a lack of discipline in the market and we are becoming a little concerned.” He added, “The market seems to have shrugged off the Concordia loss, but we are also concerned over the approach of the reinsurers and whether they will look to revise their approach to global hull risks at renewal.” In fact, Seltmann noted that the Facts & Figure’s Committee’s ability to deliver a full picture of the hull market’s performance was made extremely difficult by the loss of the Costa Concordia when it ran aground off Italy on Jan. 13. Richard Neylon, with law firm Holman Fenwick Willan LLP, talked about piracy, and stated the number of attacks is on the decline – dropping from 159 in 2011 to 28 so far this year. He attributed that to increased best management practices, more armed guards aboard ships and increased actions by naval authorities against pirate mother ships. “There’s a chance we’re actually starting to beat this thing,” he said. Speakers even covered global warming – both from the optimistic and pessimistic side of things. Melting of polar ace and warming has longer sailing seasons in the northern route around the globe, said David Bellamy, with the Norwegian Hull Club. “The overall picture of the ice situation looks promising or alarming depending on your point of view,” he said.

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insurance, which they said has seen an underwriting loss for 16 consecutive years. In fact, delegates attending the conference’s Ocean Hull Workshop were told the market needed to see a turn in rates as soft pricing continued. Harry Yerkes, the committee’s chairman, called on brokers to prepare their clients for a change in rates and terms as the insurers faced concerns over rising total losses in the year so far and the reaction of the reinsurers at renewal.

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People People, continued from page 10

Barney & Barney LLC named Scott Foster as a sales executive in its San Francisco, Calif., office. Foster is an insurance brokerage executive with eight years of experience. He joined Barney & Barney from Arthur J. Gallagher & Co., where he was area vice president. Prior to that he worked for Chubb as a senior underwriter, and Argo Insurance Group as a broker. San Diego, Calif.-based Barney & Barney is a risk management and insurance brokerage providing commercial property and casualty insurance, employee benefits, workers’ compensation, compensation consulting, executive liability, personal lines and surety services. BB&T Insurance named Andrea Robinson agency operations manager for its Pleasanton office. Robinson brings 20 years of experience in the insurance industry to her new role. She has experience at both carrier and brokerage companies. Raleigh, N.C.-based BB&T Insurance is made up of a group of subsidiaries of BB&T.

BB&T Insurance operates 118 retail insurance agencies across the United States. BB&T Corp. has $178.5 billion in assets and a market capitalization of $21.6 billion as of June 30. Deashawn Goddard has joined Tustin, Calif.-based managing general agent Yates and Associates as a broker. Goddard spent the past eight years at working out of the Orange County office and managing the western region of the United States for an insurance company specializing in various small business insurance products. Yates has also added two new producers and has opened a new office in Westlake Village. Caleb Whitehouse is a senior underwriter/broker and Esteban Lopes is an associate broker working out of that office. Whitehouse has spent over 10 years in insurance working as an underwriter and broker for other wholesalers in California. Lopez has spent the last 10 years underwriting for several large MGA’s in California.

Volunteer • Give • Make an Impact Join IICF Week of Giving Oct. 13-20, 2012

Bring your talent and energy Help your community • Join other insurance professionals Sign up your volunteer team at IICF.org/volunteer. New for 2012: A giving campaign supporting St. Baldrick’s Foundation, Starlight Children’s Foundation, and Wounded Warrior Project. * Text INSURANCE to 50555 to donate $5 or donate at IICF.org. *Standard message and mail rates apply. For full terms visit www.mGive.org/T. The Insurance Industry Charitable Foundation is a registered not-for-profit organization under section 501(c)(3) of the IRS code. Federal Tax ID #20-1240972.

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Lexington Insurance Company, a Chartis company, is the leading U.S.-based surplus lines insurer. Chartis is the marketing name for the worldwide property-casualty and general insurance operations of Chartis Inc. For additional information, please visit www.chartisinsurance.com. All products are written by insurance company subsidiaries or affiliates of Chartis Inc. Coverage may not be available in all jurisdictions and is subject to actual policy language. Non-insurance products and services may be provided by independent third parties. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. 2012 © Chartis Inc. All rights reserved.

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News & Markets Poll: Americans Do Not Expect Total Repeal of Health Care Law By Ricardo Alonso-Zaldivar & Jennifer Agiesta

hey may not like it, but they don’t see it going away. About 7 in 10 Americans think President Barack Obama’s health care law will go fully into effect with some changes, ranging from minor to major alterations, an Associated Press-GfK poll finds. Just 12 percent say they expect the Affordable Care Act — “Obamacare” to dismissive opponents — to be repealed completely. The law — covering 30 million uninsured, requiring virtually every legal U.S. resident to carry health insurance and forbidding insurers from turning away the sick — remains as divisive as the day Forty-one percent said they expect it to it passed more than two years ago. After be fully implemented with minor changsurviving a Supreme Court challenge in es, while 31 percent said they expect to June, its fate will probably be settled by see it take effect with major changes. the November election, with Republican Only 11 percent said they think it will Mitt Romney vowbe implemented as ing to begin repealpassed. ‘People are sort of avering it on Day One Americans and Obama pledgaging out the candidates’ also prefer that ing to diligently states have a strong positions.” carry it out. say in carrying out That’s what the overhaul. The the candidates say. But the poll found poll found that 63 percent want states to Americans are converging on the idea that run new health insurance markets called the overhaul will be part of their lives in “exchanges.” They would open for busisome form, although probably not down ness in 2014, signing up individuals and to its last clause and comma. small businesses for taxpayer-subsidized

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private coverage. With many GOP governors still on the sidelines, the federal government may wind up operating the exchanges in half or more of the states, an outcome only 32 percent of Americans want to see, according to the poll. Finally, the poll found an enduring generation gap, with people 65 and older most likely to oppose the bill and those younger than 45 less likely to be against it. “People are sort of averaging out the candidates’ positions,” said Harvard School of Public Health professor Robert Blendon, who tracks polling on health care issues. “The presidential candidates continued on page 34

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IDEA EXCHANGE

Social Media Using Social Media Responsibly By Richard J. Fidei, and Erin Siska

S By Richard J Fidei

By Erin Siska

ocial media are changing the way insurance professionals do business. How can these forms of media, such as Pinterest, Twitter, Facebook and LinkedIn, help make your business more successful? And how can you protect yourself from the risks these media can create? Using some best practices for ensuring compliance with existing law, the right tools, and proper planning, social media can make your company more productive, more consumer-friendly and more successful.

Current Trends The National Association of Insurance Commissioners has defined the term “social media” as Internet-based applications that allow for the use and exchange of user-generated content. They provide a company the platform to tell its story and speak directly to the consumer’s needs and concerns by breaking down communication barriers and improving accessibility. For example, companies can educate consumers and spread information about their products and services through interactive Facebook pages. At the same time, consumers can read about products and services and find local agents on Facebook. Twitter can be used to engage in direct conversations with customers and stay informed on the latest insurance trends. LinkedIn, a more businessoriented social networking site, allows users to network with other professionals. Pinterest is a good outlet for photos and other visual content. New smartphone applications allow customers to make payments, report and track claims and buy a policy through their phones. How can social media work for you? While the popularity of most social media outlets ebb and flow, there are certain principles that apply regardless of the medium used. Social media raise a diverse set of busi-

‘The consumer’s right to privacy in internet activity is a serious issue for insurance companies and other professionals who are subject to the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act and other privacy laws.’ ness risks, including privacy and intellectual property issues; advertising and marketing risks; and employment-related concerns. The consumer’s right to privacy in Internet activity is a serious issue for insurance companies and other professionals who are subject to the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act and other privacy laws. It is important that protocols and policies be implemented to ensure that all non-public personally identifiable consumer information will be properly safeguarded and protected. In a web-based, dynamic environment involving the free flow of information, this presents unique challenges that must be addressed. It is important that these issues are addressed in advance, that companies adopt procedures that can be easily followed and implemented and that the companies establish appropriate internal controls and maintain risk-based oversight of their social media presence. It is also critical to recognize that social media have blurred the lines between professional and personal communication, leading to an increase in employment-related legal disputes. For instance, if a supervisor “friends” an employee, the information that is available on the employee’s social media site may be used as evidence of the supervisor’s knowledge of harassment or other impermissible practices in the workplace. Also, under certain circumstances an employee’s use of social media may be a protected activity under applicable labor law.

• Companies should designate the employees who are authorized to represent them on social media. These employees may need to be licensed insurance agents if they will be soliciting or transacting insurance business under applicable state law. • All other employees should be informed that they are not authorized to speak on behalf of the company on social media. • The employees designated to speak on behalf of the company should be trained to avoid social media pitfalls, including issues related to defamation, libel, unattributed testimonials and impermissible or unapproved advertisements. They should also be advised that anything they post may be used against the company later in a regulatory proceeding or court of law. • The policy should prohibit the designated employees from engaging in official business communications on social media where these communications are not subject to the company’s oversight. • Designated employees should have separate business and personal social media pages and/or accounts.

Best Practices Establishing a defined, yet somewhat flexible, policy will help mitigate against myriad risks associated with the use of social media. Issues to consider in the development of a social media policy include:

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Social Media • Employees should be informed that if they decide to engage in social media on their personal time, they should make it clear that the opinions they express are their own and do not represent the views of their employer. • Employees should be instructed not to endorse company products until the message has been reviewed and approved. • They should be reminded that all posts are public and permanent. • The policy needs to be crafted to carefully balance employees’ free speech rights against the company’s right to manage its operations and corporate communications. • Identify the types of information that require prior legal review, including press releases; comparisons to competitors or their products; and information about the company’s own products, personnel, ownership and finances. • The policy should include prohibitions against revealing private consumer information and confidential or propriety company information. It should also provide guidance on the use of company photos, logos, trademarks and other intellectual property. • Adequate safeguards need to be implemented for the proprietary or trade secret information that belongs to third parties to whom the company owes confidentiality protection. • Insurers and producers should ensure that all social media content adheres to state insurance and advertising laws and submit material for prior regulatory approval when required. • A carrier’s social media policy should be distributed, and be accessible, to all

Tweeted subject to insurance complaint handling regulations? • Will regulators expect insurers and agencies to maintain a copy of every Tweet under record retention rules? • If a “fan” on a carrier’s web page posts a false or derogatory comment about another insurance company, will regulators attribute that comment to the carrier hosting the web page? • Will the use of social media increase Emerging Issues errors and omissions and/or directors’ and NAIC recently adopted a white paper officers’ liability exposure? that provides guidance on several key • What are the consumer privacy nuances regulatory issues related to the use of social that will develop in a public, dynamic and media in the insurevolving social media ance industry. This environment? ‘There are a number of open white paper is not questions on the proper use of • What are the best regulation or state practices for monitorsocial media, particularly in a law. It is intended ing employee and to provide guidance agent postings and highly regulated industry like on particular social ensuring the security insurance.’ media issues, such of PDAs? as the potential Social media conexposure to an insurance licensee that adopts tinue to change the insurance industry’s third party content and protocols related to marketing environment. The industry’s use the use and regulation of interactive social of social media to interact with the public media content. It is expected that standards can be a good first step in broadly shaping related to social media usage in insurance public opinion and brand loyalty. However will further evolve over time based on state it is critical that companies proceed under action taken in market conduct and targeted a thoroughly vetted and well defined plan examinations, as well as investigations to ensure social media activities are not only resulting from consumer complaints. effective and efficient, but compliant with There are a number of open questions on the laws applicable to this highly regulated the proper use of social media, particularly industry. in a highly regulated industry like insurance. Insurance companies and producers develop- Richard J. Fidei is a partner and Erin T. Siska ing their policies on social media should con- is an associate at the law firm of Colodny, Fass, sider some of the nuances that could arise, Talenfeld, Karlinsky, Abate & Webb. Email: rfidei@ cftlaw.com, or esiska@cftlaw.com. Phone: 954- 332such as the following: 1758, or 954-332-1774. • Are consumer complaints that are employees, producers and third party vendors, as needed or appropriate. • A protocol should be implemented to ensure retention of any necessary information. • A robust data security policy needs to address the protection of personal consumer information at all sources of vulnerability, including employee and producer personal electronic devices.

As members of Argo Group, both Colony Specialty and Argo Pro are committed to providing the best possible customer experience. In addition to our steadfast focus on customer service and speedy response times, we are constantly monitoring our clients’ and the market’s requirements and developing innovative products to meet those evolving needs. To find out more, contact us today.

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News & Markets

Calif. Workers’ Comp Reform Law at ‘Halftime’ By Don Jergler

Editor’s Note: This is the first in a series of articles to look at California’s workers’ compensation reform law in detail and what must be done to implement that law by Jan. 1, 2013. More articles in the series can be read at www.insurancejournal.com.

hen Gov. Jerry Brown last month signed a bill to reform California’s workers’ compensation system, it was far from the final step to revamp an unwieldy system for injured workers that seems to need fixing every seven or so years. Just what Senate Bill 863 will do, how it will do it, and how well it will be done are all very much open to interpretation: from the courts, from regulators and from those operating within the system. And there are many who say the complexity of the new law makes it even harder to comprehend than Senate Bill 899, which was part of the workers’ comp overhaul passed during Gov. Arnold Schwarzenegger’s administration in 2003 and 2004. Drawing on an American football reference, one industry expert said the new law is merely at “halftime.” California Department of Industrial Relations Director Christine Baker, one of the architects of the compromise between labor and a handful of large, self-insured employers, even acknowledges there’s a great deal of work yet to be done. Baker led a team who, at the direction of Brown, worked with the two parties in secret since October to create a workers’ compensation reform package. “Regulations are needed to actually help the parties implement the bill,” Baker told Insurance Journal. Those regulations will require public input, and buy-in from workers’ comp stakeholders in a fairly short amount of time, and forums are already underway to get stakeholder input. DIR has teams outlining regulatory

areas in which they will be developing emergency regulations due on Jan. 1 to give the new reform law some teeth. While she said there will likely be “different tweaks that will happen” during the discussions that will ensue, they will be democratic and in accordance with California’s laws. “We’re going to be following the letter of the law,” she added. However there are those who were indirectly involved with the bill who want the regulations weighed appropriately, but most importantly, want them drafted expediently. “Now that SB 863 has been signed into law, we are basically at halftime. The second half of the game will be implementation of the regulations,” said Mark Sektnan, president of the Association of California Insurance Companies, which served as an advisor to both sides in the negotiations that hammered out the bill. “We may be ahead going into the locker room at the half but the game can change quickly and in the wrong direction if the regulatory process does not garner the necessary balances and controls expected from this bill. The Brown Administration understands a timely and effective imple-

30 | INSURANCE JOURNAL-WEST REGION October 8, 2012

mentation of the regulations must be a top priority.” Negotiations and forums aside, there appears to be a large body of people involved in workers’ comp in need of more information, and a great deal of explanation, of what is a highly complex law. Michael Sullivan, principal of Michael Sullivan & Associates, which provides defense in workers’ comp claims, was at the California Workers’ Compensation & Risk Conference recently to promote his services and a new guide he was giving away, “Sullivan on Comp: Special Report: A First Look at SB 863.” The 90-page guide briefly explains the nearly 50 statutory provisions that are set to automatically take effect Jan. 1, over a half-dozen more than will take effect through administrative action first and another 16 that take effect after Jan. 1 and the following year. Sullivan, and others at the conference, said one of the biggest reactions from their clients and colleagues following Brown’s signing of SB 863 has been “what now?” — a common theme at the four-day conference in Dana Point in September. www.insurancejournal.com

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News & Markets Attendees at the conference referred to efforts to reform California’s workers’ comp system as part of a cycle. “This is the seven-year storm,” Sullivan said, using a rough but poignant reference to reforms undertaken in 1990, 1994, 2003 and in 2012. Sullivan said his clients have been clamoring for more information about SB 863. He’s been conducting a series of webinars to instruct people on the new law, with webinar topics like “Liens & Independent Bill Review,” “Permanent Disability, the Voucher & Death Benefits,” and “It’s Go Time – What to Change Now.” His last webinar had over 1,700 attendees and was rebroadcast to a wider audience via YouTube, he said. “I’m doing five more in the next two months,” he added. Another law firm that’s heavily involved in workers’ comp and is promoting its own webinar blasted out an email recently advertising it: “The biggest legislative revolution since SB 899 has hit California. SB 863 creates significant changes in the arenas of permanent disability, psychological/sleep/sexual claims, medical treatment, liens, vouchers, selfinsurance, fee schedules and carve out. Do you know how to prepare?” Don Barthel, with Bradford and Barthel LLP in Sacramento, said minutes after the email was sent out people began signing up. “Within 10 minutes we had 32 people sign up, and we had 250 within less than 24 hours,” he said.

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Barthel said people are clamoring for information “given the fact that, one, most of this goes into effect Jan. 1 2013, and two, we won’t have regulations very long before then that are absolutely essential.” His advice: start forming a game plan now. “By the time the emergency regulations come out, if they wait till then it may be too late,” he said. And even experts like Barthel are struggling to digest specifics of the law, which is more than 100 pages and roughly 60,000 words, and touches several aspects of the workers’ comp system — from liens to medical review to treatment limitations to medical provider networks. “It’s incredibly overwhelming,” Barthel said. “I put a PowerPoint presentation together and it took me 30 to 40 hours to get through the major sections.” And for his clients, the law has provisions that if not understood could prove costly. One aspect of SB 863 reforms an independent medical review process that in that past went through several steps, including utilization review and eventually a workers’ comp judge. The process is now expedited, but under the new review process employer failing to authorize treatment within 10 days can get smacked with a fine of $5,000 per day. “This is complicated stuff,” Barthel said. “This impacts more areas than did SB 899.” Despite strong bipartisan support for the bill following a personal plea from

Brown, not everyone is on board with the new law. Attorneys for injured workers have been dead set against it from the time it was a proposal. Baker said she has been working with the California Applicants’ Attorneys Association to work through their issues. “They are concerned about the regulations,” Baker said. “We’ll be working through that.” However, she called the bill an opportunity for labor and management to come together and come to agreement, and develop the framework and decide on various tings, and certain “tradeoffs” were made, she said. A representative for CAAA did not return a query requesting a comment for this story. In a law that remains in parts a mystery as it awaits accompanying regulations, there are questions including just how much the new law will produce in system-wide savings. Some studies have put the number at $1 billion or more, and others have said the savings are likely to be much less. “I think a good number is up to $1 billion or more we expect to be saved by employers in this first year,” Baker said. In following years it could be more, however benefits following the first year for injured workers do rise to their full level, she noted. “It’s hard to predict,” Baker said. “I would say that we expect good savings on an ongoing basis because we’ve closed a lot of loopholes. This is a paradigm shift.”

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News & Markets

Study: Homeowners Insurance Claims Cost Rising Rapidly

he cost of homeowners insurance claims has been rising rapidly because of the combined effects of rising claim severity and increases in claim frequency, according to an insurance industry report. A new Insurance Research Council study of homeowners insurance claim trends found that from 1997 to 2011, the average claim payment per insured home countrywide rose 173 percent, from $229 to $626. In 2011 alone, homeowners insurance claim costs per insured home increased 27 percent. Over the entire study period, the annualized rate of increase was 7.4 percent. IRC is supported by property/casualty insurance companies and organizations. In the study, “Trends in Homeowners Insurance Claims,” IRC examined separately claim trends for claims that were not related to catastrophic events and those that were related to catastrophic events. Trends in average claim severity (the average claim payment per paid

claim) for both groups were similar in some respects. For both groups of claims, countrywide claim severity increased almost 200 percent and ended the 15-year period in 2011 with similar values — $8,077 for noncatastropherelated claims and $7,553 for catastrophe-related claims. Significantly, however, the trend in catastrophe-related claim severity was much more volatile from year-to-year, with dramatic increases and decreases over the study period. Trends in homeowners insurance claim frequency (the number of paid claims per 100 insured homes) were very different for the two groups of claims over the 15-year study period. The frequency of claims unrelated to catastrophic events fell substantially from 1997 to 2005 because of a variety of factors. Since 2005, however, noncatastrophe-related claim frequency has increased at an annualized rate of 2.9 percent. Catastrophe-related claim frequency, while much more volatile, remained fairly flat

through much of the period. The study also examined the relative importance of catastrophe-related claims as a factor in overall homeowners insurance claim trends and found that catastrophe-related claims played a significantly greater role in overall claim trends in the second half of the 15-year period. Catastrophe-related claims accounted for 25 percent of overall claim costs countrywide from 1997 to 2003, on average, but 39 percent of overall claim costs from 2004 to 2011. “Insurance companies face significant challenges in responding effectively to rapid growth in claim severity and increases in claim frequency, and in managing the volatility attributable to catastrophe-related claims,” said Elizabeth Sprinkel, senior vice president of IRC. For the study, the IRC analyzed data from the Fast Track Monitoring System, representing approximately 50 percent of the homeowners insurance market countrywide. Source: The Insurance Research Council

Drivers May Be Unaware of Texting Habit: Study

exting while driving is considered a serious public safety concern, but a new University of Michigan study suggests that drivers might not be aware of their actions. U-M researchers found that texting while driving is predicted by a person’s level of “habit” — more so than how much someone texts. When people check their cell phones without thinking about it, the habit represents a type of automatic behavior, or automaticity, the researchers say. Automaticity, which was the key variable in the study, is triggered by situational cues and lacks control, awareness, intention and attention. “In other words, some individuals automatically feel compelled to check for, read and respond to new messages, and may not even realize they have done so while driving until after the fact,” says Joseph Bayer, the study’s lead author. This first-of-its-kind study, which identifies the role of unconscious thought processes in texting and driving, is different from other research that has focused on the effects of this

behavior. Thus, the current study investigates the role of habit in texting while driving, with a focus on how, rather than how much, the behavior is carried out. Scott Campbell, associate professor of communication studies and Pohs Professor of Telecommunications, says that understanding this behavior is not just about knowing how much people text — it’s about understanding how they process it. “A texting cue, for instance, could manifest as a vibration, a ‘new message’ symbol, a peripheral glance at a phone, an internal ‘alarm clock,’ a specific context or perhaps a mental state,” Campbell says. In the study, several hundred undergraduate

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students responded to a questionnaire asking about their perceptions and uses of various aspects of mobile communication technology. They were asked about the level of automaticity and frequency of texting, as well as norms and attitudes toward texting and driving. The findings show that automatic tendencies are a significant and positive predictor of both sending and reading texts behind the wheel, even when accounting for how much individuals text overall, norms and attitudes. Bayer says the implications of the study may help provide solutions to texting and driving. “Campaigns to change attitudes about texting while driving can only do so much if individuals don’t realize the level at which they are doing it,” Bayer says. “By targeting these automatic mechanisms, we can design specific self-control strategies for drivers.” Despite these findings, the researchers say more work is needed to determine if the results are consistent across age groups rather than young adults. The findings appear in the journal Computers in Human Behavior. www.insurancejournal.com

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News & Markets problems and that provisions such as are saying there’s a stark choice, but when broader coverage for birth control will help younger women such as her. you ask the voters, they don’t believe that “I kind of see a day-to-day way where the whole bill will be repealed or implethis law could benefit me,” she said. mented as it is today in law.” Englert says Republicans remain overwhelmingly the health opposed to the overhaul and in favor of repeal. But only 21 percent said they think care law dovetails that will actually come about. with a trend Romney supporter Toni Gardner, toward con69, a retired school system nurse from Louisville, Ky., said that until a few weeks sumerism in her generaago she was sure her candidate fully suption. Older ported repeal, as she does. Americans But then Romney said in an interview “don’t have there are a number of things he likes in the context the law that he would put into practice, of the young people,” she added. “They are including making sure that people with looking more at the theoretical impact on pre-existing medical problems can get the budget and the country.” coverage. The Romney campaign quickly Overall, the poll found Americans dividqualified that, but the candidate’s stateed on the question of repeal, with neither ment still resonates. side able to claim a majority. Forty-nine “If Romney gets in, he’ll go with parts percent said the health care law should of it,” Gardner said, “and there are parts of be repealed completely, while 44 percent that he won’t go with.” Gardner thinks expanding coverage will said it should be implemented as written. The notion that the law will be implemented with changes, ‘If Romney gets in, he’ll go with captured in the poll, mirrors a discussion going on behind the parts of it, and there are parts scenes in Washington, particularly of that he won’t go with.’ among some Republicans. “Whoever wins the election, the cost too much and may make it harder to (health care law) is going to be modified,” get an appointment with a doctor. Besides, Mark McClellan, who ran Medicare under she doesn’t believe the government can former President George W. Bush, said in handle the job. She’s covered by Medicare a recent interview. — a government-run health system — but Congressional Republicans say if tax says “that wasn’t a choice that I had.” increases are on the table in a budget At 26, Santa Monica, Calif., web develnegotiation with a re-elected Obama next oper Vyki Englert has only bare-bones year, changes to the health care law — health insurance coverage. Her parents, including possible delays in implementaa preschool teacher and a self-employed tion — also must be considered. For now, photographer, are uninsured. Englert says White House officials refuse to be drawn she thinks the law will largely go into in on that question. effect as passed. (Among 18- to 29-year Some parts of the law already are in olds, 60 percent think it will be impleeffect; its big coverage expansion for the mented with only minor changes or none uninsured doesn’t come until 2014. at all.) Public opinion about the law itself Englert says that she supports guarhas barely budged since the summer of anteeing coverage to people with health 2010, soon after it passed. At the time, 30 Health Care Law, continued from page 27

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percent supported the law. It’s now 32 percent. And 40 percent opposed the overhaul. That’s now 36 percent. And misconceptions about the law that reigned two years ago continue to live on, including former Alaska Gov. Sarah Palin’s widely debunked charge that it would create “death panels” to decide on care for the elderly and disabled. In 2010, 39 percent believed the law would set up committees to review individual medical records and decide who gets care paid for by the government. Forty-one percent currently hold that view, according to the poll. The poll asked people to say whether 18 different items were in the law or not and to rate how certain they were about their answers. Just 14 percent were right most of the time and sure of it. Still, knowledge about what the law actually does is growing. More people are aware of provisions that allow adult children to stay on their parents’ coverage until age 26, impose insurance mandates on individuals and businesses, and protect those with pre-existing medical conditions. The poll was conducted Aug. 3-13 and involved interviews with 1,334 randomly chosen adults nationwide. It has a margin of sampling error of plus or minus 3.4 percentage points. The survey was conducted online by GfK using its KnowledgePanel sample, which first chose people for the study using randomly generated telephone numbers and home addresses. Once people were selected to participate, they were interviewed online. Participants without Internet access were provided it for free. AP News Survey Specialist Dennis Junius contributed to this report. @2012 Associated Press. All Rights Reserved www.insurancejournal.com

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News & Markets

Report Points to Insurance Industry’s Vulnerability to Climate Change By Don Jergler

‘Insurance is the oxygen that keeps our economy alive. Despite the significant risk that climate change represents, the insurance industry’s response is still well short of what we need.’

report out late last month urges the insurance industry to act to protect itself and the community against the increasing frequency of extreme weather due to climate change. In short, the report, its authors and those endorsing it want more efforts made to calculate climate change into risk management. Washington Insurance Commissioner Mike Kreidler was among those who endorsed the report’s recommendations, and Kreidler spoke during a conference call with the press on behalf of the report, urging a change by the industry and his fellow regulators. The report, “Stormy Future for U.S. Property/ Casualty Insurers: The Growing Costs and Risks of Extreme Weather Events,” provides tools for insurance regulators and investors to engage industry and protect consumers, its authors say. Ceres, the nonprofit that advocates for environmental leadership, authored the report,

which builds on this summer’s devastating drought and record high temperatures. It notes that extreme weather events pose a great risk to U.S. property/casualty insurers, which were hard hit by last year’s $32 billion in insured losses. The analysis is based on a review of U.S. property/casualty insurance industry financial results as reported by A.M. Best Company earlier this year, and it highlights how local governments and taxpayers face growing financial risks as insurers withdraw from high-risk regions. “As an insurance commissioner, I care deeply about making sure that insurance companies are able to fulfill their promises,” said Kreidler, who’s running for his fourth term in office,

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which would make him the U.S.’ longest serving commissioner. “Climate change represents some significant challenges for the insurance industry.” Kreidler noted that “improving the forecasting and modeling by the insurance industry will improve value for the companies.” He lauded the report for urging the insurance industry to look at improving land use practices and creating stricter building codes because of the changing climate and the threat that it represents to the industry. Kreidler, a Democrat, equated this push for new standards with the push to require seatbelts and seatbelt usage in automobiles. “We need to make sure that this is consistent in the American insurance industry,” he said. www.insurancejournal.com

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News & Markets One of his concerns was what happens when insurers begin to withdraw from areas considered too high risk, leaving states to create insurers of last resort, a situation that ultimately could lead to undercapitalization and force taxpayers to pay for losses. “It can have a very dramatic impact,” Kreidler said. Considerations California Insurance Commissioner Dave Jones said the Department of Insurance would consider the report’s findings. “Ceres should be commended for its hard work in this area and a thoughtful report which highlights some of the potential risks climate change and extreme weather events present to the insurance industry,” Jones said in a statement. “We will evaluate this report and consider its findings and recommendations in conjunction with our Climate Risk Survey results. Data of this nature can be very useful in ongoing risk analysis to help insurers and regulators identify areas of concern posed by climate change.” Like Jones, there are those in the industry who are reviewing the report. The American Insurance Association was eager to note the industry is well-capitalized and ready to respond to natural catastrophes. “AIA is currently reviewing the Ceres report and its recommendations,” said AIA spokesman Willem Rijksen. “Whether it’s reducing their own carbon footprints or meeting consumer demand by offering ‘green’ products, insurers have a strong public record on this issue. The insurance sector remains well-capitalized, financially stable and ready to respond to policyholders’ natural catastrophe claims.” Also endorsing the study was Jack Ehnes, CEO of the California State Teachers’ Retirement System and former Colorado insurance commissioner. Ehnes, who is on Ceres’ board, noted that he looks to insurance investments for the pension fund for CalSTRS, which is at about $153 billion, and he noted that as an investor CalSTRS analyzes the portfolio of companies it invests in by looking at exposure to climate change. “The insurance sector has broader importance because of the role it plays in the broader economy,” Ehnes said. “Insurance is the oxygen that keeps our economy alive. Despite the significant risk that climate change represents, the www.insurancejournal.com

insurance industry’s response is still well short of what we need.” He urged greater efforts to calculate climate change into risk management, such as impacts from a rise in sea levels, intensified storms, drought and wildfires. The report shows that there are more frequent extreme weather events, and those, along with increasing populations in coastal areas and other exposed regions, are having profound impacts on the P/C insurance sector. The value of insured losses due to weather

future out to 2030, where global average land and ocean temperatures have increased and extremely hot summers becoming more the norm. “Within the United States, average temperatures have risen over the past half-century, while extreme weather events, including heat waves, droughts and floods, have become more frequent and intense,” the report states, citing climate data from the National Oceanic and Atmospheric Administration. “More than 25,000 new record highs have been set in 2012 alone across the U.S.” The report cautions insurers to work to better

‘It is notable that while the property/casualty industry remains strongly capitalized, shock events can push more vulnerable companies into the red and even insolvency.’ perils has been trending upward over the past 30 years, with 2011 exacting an especially heavy toll, the report states, citing a report released earlier this year by Munich Re, 2011 “Natural Catastrophe Year in Review.” The estimated $44 billion of insured catastrophe and extreme weather losses in 2011 was second only to 2005, which is when hurricanes Katrina, Rita and Wilma hit the Gulf Coast, the report states. That year was also marked by a record 99 disaster declarations by the government. “It is notable that while the property/casualty industry remains strongly capitalized, shock events can push more vulnerable companies into the red and even insolvency,” the report states. 2012 While 2012 has been relatively tame compared with 2011 in terms of insured losses, extreme weather losses have still had an impact, including extreme drought conditions that have devastated crops, according to the report. A string of record heat days was experienced this summer, as well as a severe and intensified drought, which made many states vulnerable to raging wildfires that are expected to cost $25 billion, with most of that being paid by federal crop insurance, according to Mindy Lubber, president of Ceres. “Losses due to weather perils have been moving upward over a 30-year period,” she said. And the report paints a bleak picture of the

understand such data and adapt pricing accordingly, as well as promote effective risk management strategies. “However, recent loss data suggests that many property/casualty insurers may not currently be well equipped to address the uncertainty of increasingly unpredictable and severe extreme weather events,” the report notes. “Connecting the linkages and impacts between rising temperatures and extreme events remains a highly technical exercise fraught with uncertainty. As a result, many insurers now and increasingly in the future will be underwriting business without fully comprehending the probability and severity of the losses they may sustain.” There are other exposures as well from the current economic doldrums the global market continues to try and work its way through. According to the report those risks include low interest rates and weak capital market performance that have narrowed insurer investment returns, and the overall economic growth is dragging on new premium production. ROE The report backs its claims up with a report earlier this year from Insurance Information Institute President Robert Hartwig, who reported that the P/C sector return on equity has substantially lagged behind all Fortune 500 companies every year since 1994. Those earnings added to other factors, such as the increase in extreme weather, are impact-

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News & Markets ing the affordability and availability of property insurance, the report states. The report draws on Risk Management Solutions’ recognition that its 100-year database of historical Atlantic hurricane activity is no longer a good predictor of future risk, and RMS’s new catastrophe model’s projections for the next five years that include a 20 percent higher likelihood of a category 3 storm making landfall on the U.S. coast than previously modeled. That report also

Among the recommendations in the report for insurers and reinsurers are: Evaluate and price risk exposure on new patterns – insurers need to look at their risk exposure and evaluate losses to insured property based on new and emerging weather patterns, not on past experience. Research on national and regional forecasting of future weather and cat patterns – there

‘With 40 percent of industrial insurance claims that Allianz now pays out being due to natural catastrophes, climate change represents a threat to our business.’ shows modeled losses increasing by 40 percent on average for the Gulf Coast, Florida and Southeast and model losses increasing by 25 to 30 percent on average for mid-Atlantic and Northeast coastal regions. “Changes introduced by the new RMS model, combined with last year’s record losses, are already creating cost ripples for commercial insurance buyers,” the report states. “The Willis Group and Marsh & McLennan have both seen property insurance rates for catastrophe-exposed risks increase in the range of 10 to 20 percent during first-quarter 2012.” Insurer Role Thus the role for insurers, according to the report, is clear. “There is evidence from all around the world that society is increasingly vulnerable to the impacts of weather related natural catastrophes,” the report states. “In even the best-case scenarios, this will increase due to climate change. Building resiliency, while reducing future greenhouse gas emissions, are necessary and complementary strategies for dealing with climate change. Insurers have historically been influential in motivating society to reduce risks, whether by advocating for smoke detectors in buildings or safety restraints in vehicles. Insurers have much to offer, and much at stake, in helping governments and private markets to further understand and develop solutions to better predict and prevent losses from extreme weather events. For instance, stronger resiliency to extreme weather is of great importance to the insurance sector as it reduces property risks, and promotes future insurability.”

is a particular need to advance the understanding of the likely impacts of warming temperatures on the frequency and severity of thunderstorms, hailstorms and tornadoes, of which little is known. Develop cat models that anticipate the probable effects of climate change on extreme weather events — insurers with deep scientific resources should partner directly with climate scientists to develop new modeling capabilities. Update insurance pricing and underwriting to reflect changes in extreme weather impacts — insurers need to ensure that rates and loss reserves adequately cover damages from higher frequency and severity of catastrophic events. Insurers will also need to increase their ability to offer preferential pricing to property owners who have increased the resiliency of their structures. Inform planning, infrastructure design and building codes in exposed — the potential for damages from extreme weather events is a threat to society, including critical infrastructure. Insurers can lend their expertise directly to planners and work collaboratively with nongovernmental organizations with on-the-ground capacity in critical population centers. Promote reduction of carbon emissions — reducing greenhouse gas emissions can limit the severity of climate change impacts. Insurers must also help enable transition to a low-carbon economy by offering new products and services that promote scaling clean and efficient uses of energy.

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The report states that heat, drought and wildfires took a heavy toll on the industry in 2011, New Mexico, Texas, Arizona and Minnesota all seeing record-breaking wildfires. And the first half of 2012 saw more of the same, with record wildfires in Colorado. Droughts are also wreaking havoc on crops. The report cites a 2012 report by crop risk insurance experts at the University of Illinois that shows publicly owned crop insurers are expected to pay losses of about $18 billion due to droughts that plagued crops. Bottom Line This has bitten into the industry’s bottom line. The U.S. property/casualty insurance industry’s reported combined ratio in 2011 was 107.5 percent, of which 10.1 percent was due to cat losses, the report states. In 2011 the number of P/C insurer impairments rose 33 percent to 28 from the prior year, the report notes. It refers to a 2012 Industry Outlook report from A.M. Best that states the industry’s reserve cushion was approaching exhaustion “primarily as a result of significant reserve releases and the extent to which rate levels have been inadequate as a result of predominating soft-market conditions in recent years.” The report also draws on reports and assessments made available by insurers themselves. One from Allianz states: “With 40 percent of industrial insurance claims that Allianz now pays out being due to natural catastrophes, climate change represents a threat to our business. … Insurance companies need to adapt their products and services to take climate change risks into account. Already, insurance payments relating to climatic events are increasing rapidly, with a 15-fold increase in weather-related claims over the past 30 years.” That report agrees that as scientific understanding advances it will offer a greater understanding of the relationships between global warming and extreme weather events, but “in the meantime, insurers and reinsurers alike must make capital allocation and business decisions in light of changing extreme event trends.” The report continues: “The problem is that while scientific assessments are punctuated by years, insurers must constantly assess pricing and exposure controls. And for insurers, inaccurate projections of changing risk may spell the difference between a profitable year and insolvency.” www.insurancejournal.com

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International Insider The Spy Who Robbed Me Mobile Device Explosion Creates Need for Heightened Security

ogy trends of the past few years has been a transition away from traditional desktops and laptops to mobile technology. Sales of obile devices have taken smartphones, for instance, came the workplace by storm, in ahead of sales of personal combut the proliferation of these puters in 2011 and will be nearly devices has created a new set of twice the PC sales this year, security challenges. After a number of high-profile according to a “Business Insider Intelligence” report. data breaches and “hacktivist” incidents last year, many compa- As more people buy mobile devices like smartphones and nies have focused on protecting tablets for personal use, they their corporate networks. But want to use that same device attacks on mobile devices have at work. Companies have been quietly accelerating during responded with “bring your own the past year as cyber criminals device” (BYOD) policies. This have begun to turn their attenhas led many companies to open tion to mobile technology. corporate networks and data to Smartphones and tablets hold a trove of information, storing not consumer mobile technology. A Dimensional Research global only phone numbers and email survey of IT professionals sponaddresses, but meeting dates, sored by Check Point found that documents and text messages. 65 percent of 768 IT pros polled That information is valuable in allowed personal its own right, Mobile devices devices to connect to but it also can corporate networks, be used to give represent a criminals even growing security and 78 percent said there are more than more leverage risk for twice as many personin their efforts businesses. al devices connecting to break into to corporate networks corporate netnow than there were two years works. Mobile devices also can ago. be turned into high-tech spying This puts corporate data at devices, sending confidential risk. In the survey, 47 percent of photos and recordings back to IT professionals said customer hacker-controlled websites. Security measures, meanwhile, data was stored on mobile devices, and 71 percent said mobile often are inadequate. As the risk to mobile technolo- devices have contributed to gy grows, businesses need strong increased security incidents. defenses to keep the devices and Generational shifts in the their corporate networks secure. workplace mean that younger workers often expect to be able to use their own mobile device The Mobile Explosion on the job. One of the biggest technolBy Kathleen Ellis and Ken Goldstein

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A global survey by network security company Fortinet in May and June asked more than 3,000 employees in their 20s about their attitudes about BYOD policies and found that slightly more than half view it as their “right” to use their own mobile devices as work, rather than it being just a “privilege.” One-inthree said they would gladly break any anti-BYOD rules and contravene a company’s security policy that forbids them to use their personal devices at work or for work purposes. Before companies began allowing employees to use their own devices, the corporate market often gave preference to BlackBerrys because of their enterprise-level security features. In the consumer market, however, BlackBerrys have lost ground to Android smartphones, iPhones

and iPads. Android commanded 59 percent of the worldwide smartphone operating system market share in the first three months of 2012, according to IDC. The iOS platform used by the iPhone had 23 percent of the market, while BlackBerry had only 6.4 percent. In its survey of IT professionals, Dimensional Research found that Apple’s iOS was the most common platform used, with Google’s Android-based platform coming in third, behind Research in Motion’s BlackBerry. As mobile devices have proliferated, hackers have begun to increase their attacks. In its “2011 Mobile Threats Report,” Juniper Networks found that mobile malware attacks reached record levels in 2011 — especially attacks focused on the continued on page N4

October 8, 2012 INSURANCE JOURNAL-NATIONAL REGION | N1

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International Insider continued from page N1

len, or come under attack from malware, mobile devices represent a growing security risk for businesses. Yet many businesses do not have adequate security policies and practices in place.

Android platform. The Juniper Networks Mobile Threat Center identified a 155 percent increase in mobile malware across all mobile device Managing the Risk platforms from 2010 to 2011. In To protect mobile devices from the last seven months of 2011, malware and spyware, businesses malware targeting the Android should have a comprehensive netplatform jumped 3,325 percent. work security and privacy policy Other security firms have that specifically addresses threats also reported a sharp increase in from mobile devices. mobile malware. Companies also should have Security and anti-spam firm a chief information officer who McAfee said it collected about oversees the security policy 8,000 mobile malware samples and ensures its implementation in the first quarter of 2012, most throughout the organization. of them targeted at the Android platform. Threats that saw major When it comes to the devices themselves, businesses should increases included mobile backtake the following steps: door malware and the popular Encrypt Data. One way premium-rate sending malware. to protect smartphone data is In one recent example, with encryption. Most Android Google’s Android platform was phones, however, do not have the target of a new variant of a data encryption built into the widely used malware capable of hardware, which stealing personal means users will information, Mobile devices have to rely on according to operating on the third-party applicaa CSO report. Android platform tions. BlackBerrys, The latest on the other hand, Zeus malware are particularly are known for their masquerades vulnerable. encryption capabilias a premium ties. security app to lure people into downloading the Improve Password Strength. Many people do not Trojan, according to Kaspersky bother to use a password to Lab. The malware steals incoming text messages and sends them protect their devices, or they use one that is too weak. Syrian to command-and-control servers President Bashar al-Assad made operated by the attackers. news earlier this year when Meanwhile, consumers and his personal email account was enterprises are also susceptible hacked. His password was one to a much more mundane risk of the most commonly-used: — the risk of lost or stolen 12345. The string of consecutive mobile devices. In 2011, Juniper Networks said nearly one-in-five numbers is the second-weakest password, according to password users of its Junos Pulse Mobile management application provider Security Suite required a locate SplashData. “Password” ranked command to identify the wherefirst on SplashData’s list of worst abouts of a mobile device. Internet passwords. To improve Whether they are lost or stoN4 | INSURANCE JOURNAL-NATIONAL REGION October 8, 2012

security, passwords should use a combination of letters, numbers and other characters. Use Remote Wipe Capabilities. If a device is lost or stolen, businesses need to be able to wipe the contents of the device clean. All major smartphones have some kind of remote erase capability. Use Network Intrusion Software. It can help businesses identify unauthorized intrusions. Mangers should check logs regularly for unusual activities. Insurance Solutions While security measures can reduce the risk of a loss, insurance can help to defray the cost of a data breach or intrusion arising from mobile devices, and a company’s internal network. Insurance companies offer third-party liability coverage for lawsuits that arise as a result of a data breach or network intrusion. Coverage also is available for first-party expenses, such as privacy notification expenses, the cost to change account numbers, crisis management and public relations expenses, as well as losses from business interruption. When looking for a cyber insurance policy, look for an

insurer that has expertise in handling such risks. Policies vary by insurer, and insurers also offer a range of services to assist businesses in managing cyber risks. Some insurers, for instance, have panels of legal counsel that can offer guidance in case of a cyber attack. Loss control endorsements that cover preventive measures also are available under some cyber risk policies. As always, work with a financially strong insurer that has strong claims servicing. As companies open their corporate networks to consumer mobile devices, they face a risk that the devices might be compromised and be used to gain access to the corporate network. Mobile devices operating on the Android platform are particularly vulnerable. A comprehensive security policy that includes mobile devices and by taking other steps to protect the devices from malware and to wipe them clean if they are lost, businesses can reduce the risk of a loss. Ellis is a senior vice president of Chubb & Son, and worldwide manager of Chubb Multinational Solutions. Goldstein is vice president of Chubb Group of Insurance Cos. www.insurancejournal.com

IDEA EXCHANGE

Minding Your Business Pay Owners for What They Do! By Catherine Oak and Bill Schoeffler

methodology and logic to doing the plan correctly. The relationship between the owners is often the difference between a well-run firm and just an average agency. When one owner feels that there is inequality among the owners, then cooperation is limited and the agencyâ&#x20AC;&#x2122;s performance will suffer. Owner compensation is a very sensitive subject and it can often be the unspoken thorn in the sides of many business partners. Disputes arise when the original compensation plan is never revised, despite changes in the effort given and the roles played by the partners. Agency owners should review their compensation plans annually.

wners are the firmâ&#x20AC;&#x2122;s leaders and need to set the right example and tone for the rest of the people in the firm. If they do not set their compensation based on what they are each doing, resentment can occur between partners. Also, others in the firm will have a pretty good idea of which owners pull their weight, are respected and are good role models. It is not always easy Owner compensation is to know a very sensitive subject. how to properly reward owners for their produc- Compensation Plan Options tion and management roles. This There are several common is especially true if they perform ways that agency owners compensate themselves, each with different functions in the manpros and cons. For example, some agement arena. However, there business partners may choose to are ways to do this and some

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pay themselves the same salary, especially if they have the same amount of stock, such as 50/50 partners, or partners that have 25 percent or 33 percent each. This is a simple solution that may foster teamwork in the beginning. However, resentment may occur if any one partner slows down, yet still draws the same salary. Some agencies may pay the owners strictly for production. This method becomes unfair if one person is spending more time

on management than the other owners, and his or her production is impacted. Consider performance-based compensation plans. The best plan has three components: a fee for management, a production component and a share in the profits (return on investment). How Performance Based Comp Works A strategic management fee continued on page N6

October 8, 2012 INSURANCE JOURNAL-NATIONAL REGION | N5

IDEA EXCHANGE

Minding Your Business continued from page N5

agement of affairs. For example, should be created to pay owners the owner in charge of financial affairs does not handle the dayfor their strategic management to-day accounting for the firm. functions and range from 4 percent to 8 percent of total rev- Strategic management for finanenues, capping at about $250,000. cial affairs would include reviewTo determine the correct percent- ing monthly financial statements and initiating the firm’s budget. age, think about what it would Any major financial decisions cost to hire an agency manger who would perform all the man- still should be approved by all owners. agement duties that the owners currently perform. The larger the firm, the smaller Assigning Management Roles the percentage of revenue for the Management roles can be assigned based on individual talfee. Larger firms tend to have ent and preferences, or in some middle management to assist agencies are simply rotated annuthe owners with the strategic management of the firm. In these ally among the owners. Some functions can be shared. firms, managers are often doing For example, there should be more of a strategic function for one lead person for the marketthe owners, so the compensaing/placement function. The relation should not be duplicated. Owners of smaller firms need to tions for the individual compabe more active, because they have nies, however, should be assigned fewer or no managers and fewer to the owner or producer with people to manage. This strategic the best relationship. The owner in charge of the markets coordimanagement fee is then split to nates the overall marketing plan pay the owners for their contriusing the individuals as their bution to management. arms and legs. The following split of the Large agencies or firms with a strategic management fee pie is recommended based on the typi- large portion of revenues outside cal average amount of time spent of P/C commissions can develop the management fee based on managing these functions, relaeach profit center rather than tive to all of management: • 25 percent for management of a single fee based on total revethe service function (PL, CL nues. A profit center could be the employee benefits department, & L&H), commercial lines department, • 25 percent for sales management, 15 percent for admin- programs, etc. This takes into consideration the wider variety istration and operations, • 15 percent for financial affairs, of management roles that may exist in a larger firm or firms 15 percent for market relawith diverse sources of revenue. tions and placement, and • 5 percent for automation. Because each agency is unique, The Production Piece the specific formula used should Almost all agency owners are be tailored to match the amount involved in production. The secof time spent, efforts needed and ond component of the compensation plan ideally would be based expended by management. The fees are for strategic man- on each owner’s production. agement, not the day-to-day man- The formula is recommended to N6 | INSURANCE JOURNAL-NATIONAL REGION October 8, 2012

be the same as that for the nonowner producers in the firm. In a typical astute independent agency, the commission paid for production often averages 40 percent for new business and 30 percent for renewal. This includes both commercial and employee benefit lines of business. To encourage sales of larger, more profitable business, there should be no commission paid for personal lines or small commercial accounts, unless the producer/owner has an active involvement or service role for those accounts. An agency cannot afford to pay two people to do the work of one. In smaller or rural firms, however, the producer is often involved with the actual servicing of these accounts and should be compensated. Splitting Up the Profits When the first two components (management and production) are incorporated into an agency, and if the agency has average control over other expenses, the firm should post a profit. The true profitability of a typical agency today is usually between 10 percent to 35 percent. Additional perquisites that the owners receive (such as auto and T&E) will lower this profit. First the firm should retain some of the profits for capital investments and perhaps pension plans, or bonuses to employees. The balance left over should then be allocated based on the contribution of each owner to the firm. The recommended split would be 25 percent for new production, 25 percent for size of the book of business, 25 percent for management and 25 percent for equity. This formula allows those who generate the profit to gain from their efforts.

Summary Owners that choose to slow down and not work on management will receive less compensation for that component. The owners that have to pick up the slack will be compensated for their additional effort. Owners who excel in production will be compensated accordingly. It is a simple and equitable methodology that rewards owners for the work they perform. Owner compensation plans need to be flexible to allow for the natural change in owners’ contributions to the firm over time. The plan needs to be fair, yet rewarding to the major contributors. While compensation is often a sensitive subject to discuss, establishing a well-thought out plan that can automatically adjust to the owner’s contribution will remove the potential for disputes or difficult feelings between owners. When the key owners are satisfied with their compensation, they tend to be cooperative, thereby improving the overall health of the firm. Oak & Associates has worksheets that are modeled after this article, with an agency example with all the calculations. If you would like to obtain a copy of these two tools, email catoak@gmail.com and reference this article. Oak is the founder of the international consulting firm, and Schoeffler is an independent contractor with Oak & Associates, based in Northern California. The firm specializes in financial and management consulting for national and international insurance agencies, including valuations, mergers, acquisitions, sales and marketing planning, as well as perpetuation planning. Phone: 707-935-6565. Email: catoak@gmail. com. www.insurancejournal.com

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Medical Staffing Firms Market Detail: Manchester Specialty Programs Inc. (www. manchesterspecialty.com) covers home care, hospice and medical staffing firms. All lines with A+ rated carrier available on a national basis. Coverage includes professional liability, workers’ compensation, business package (general liability, products, property, inland marine, and auto), thirdparty fidelity bond, and directors and officers(D&O)/employment practices liability insurance (EPLI). Professional liability limits of $1 million/$3 million with excess are available. Minimum premiums start at $5,000. Available limits: As needed Carrier: Unable to disclose, admitted States: All states Contact: Bill Thompson at 603-264-5486 or email: wthompson@manchesterspecialty.com October 8, 2012 INSURANCE JOURNAL-NATIONAL REGION | N7

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Sales Management What Makes a Marginal Producer?

alespeople, broadly speaking, fall into three categories. First, there are those elusive few, typically the 20 percent of the firm’s salespeople, who are highly productive, who sell most of what is sold. These individuals have precisely what it takes to sell in their particular situation. They can sense the desires of a prospect, are driven by a need to persuade, and can bounce back from the rejection that is an inevitable part of their work. These top performers sell effectively and need only to be managed in a way related to their key motivations, and not manBy Herbert aged in a way that would Greenberg demotivate them. These and Patrick are the superstars, about Sweeney whom managers will say, “I just point them in the right direction.” The truth of the matter, however, is that you should not leave them alone. You should spend most of your time with them. Let them know how important they are to your organization, how valuable they are to your future. Learn from them. Share what you learn with people who have the potential to be your next top performers. And most important, celebrate your top performers. They are what will keep you one step ahead of your competition. At the other end of the spectrum are the bottom 20 percent; those individuals who fundamentally lack the dynamics to sell or lack the particular personality attributes required to sell their product or their service. In all likelihood, these people derive very little pleasure from closing a sale. Or if they do, they lack the qualities needed in their specific sales situation. Because you cannot make someone want to sell or feel the gratification that a real salesperson would obtain from closing a sale success-

Brazil’s largest training companies, told us: “Be quick in dismissing those who do not wish to work to their potential. If someone is not working out, create a clear performance Occupational Motivations plan, with clearly defined objectives. Have Our advice is to determine the real basic the timing be short but realistic, and the occupational motivations of each of these goals measurable but attainable. Let them individuals and, if possible, place them in know that you are willing to work with more appropriate positions within the comthem, if they put in the hard work. Then, if pany. The benefit of this approach is that they don’t have the skills or desire, you are they do, after all, know the company and its better off separating your ways. That way, products or services. If they have a positive when you have to let somebody go, you and attitude and fit in with your culture, and if they will know you’ve given it your all, and there is an appropriate position, it is preferthere was nothing else you could have done. able to salvage the company’s investment You cannot give somebody in such individuals by Share what you learn that skill set. The best placing them in more from top performers. you can do is to make sure productive positions. that the person you hire to In addition, there is a replace that individual truly has the potenvaluable morale factor if this kind of job crossover can occur. If, however, there is not tial to succeed.” an appropriate opening in the company for Motivation Strategies these misemployed salespeople, the need is At some point or another, every manclear: You have to replace members of this ager looks at the math and says, “Imagine group as quickly as possible with appropriif I could get this group to produce just 5 ate and productive new hires. percent more. Imagine 10 percent.” We have Not holding onto your poor performers found that many of these individuals are is something that Edilson Lopes feels very capable of producing much more. What is strongly about. The founder and general manager of KLA Business Education, one of continued on page N10 fully, it is very unlikely that much can be done to develop this group.

N8 | INSURANCE JOURNAL-NATIONAL REGION October 8, 2012

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Sales Management continued from page N8

needed is to know which specific strategy should be designed for each individual. How can you motivate him or her to produce at a higher level? How can you tap into his or her true potential? There is obviously no single solution or formula. Analyzing each person’s strengths and limitations within a group, and separating the overall group into subgroups with similar dynamics is the first step in determining management’s strategies to overcome these limitations. What we typically have found is that one group will need assistance in closing techniques. More often than not, this group can benefit greatly from coaching and training that build on their competence and their confidence. We saw this occur with one salesman who was hesitant to ask for the order because he knew the price was high. As he became more familiar with the benefits of the solution his company was providing, he recognized that the value far exceeded the price, and his ability to close

improved with his confidence level. Another group may possess adequate amounts of empathy but be extremely impatient. Such individuals could benefit from coaching and training that focuses on improving listening skills. Another group may be lacking in the area of personal organization. Acquiring tools that assist these individuals in time management might be all they need to function more productively. Marginal Marginal, as you will see, turns out to be a very big word. The key factor is to determine whether an individual’s modest performance relates to his or her fundamental lack of appropriate dynamics, or is limited by some particular personality factor that can be changed. You also must determine whether outside factors might be working to lower productivity in relation to the individual’s real potential. By understanding the unique qualities of each marginal producer, a sales manager can

1 N10MARSHALL16087.indd | INSURANCE JOURNAL-NATIONAL REGION October 8, 2012

upgrade individual performance by making simple yet targeted modifications. There have been situations in which merely attending the right one-day planning workshop or having a manager slightly modify a coaching approach made all the difference in the world. Sometimes these small modifications literally can convert a salesperson skating on the edge of termination into a highly productive contributor. The key in all these situations is gaining a clear understanding of whether the individual’s performance is marginal because he or she is basically not suited to the position, or whether there is a specific concern that can be addressed by making the right changes. This article is an excerpt from Chapter 23 of “How to Hire and Develop Your Next Top Performer,” by Herbert Greenberg and Patrick Sweeney, 2nd edition: The Qualities That Make Salespeople Great, ©2012, McGraw-Hill Professional. Reprinted with permission from the publisher.

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Agency Management End of the Year Financing Options to Consider

By Robert J. Pettinicchi

t is approximately four weeks before the Presidential election. There is a very good chance that an insurance agency principal will wake up on Wednesday, November 7, and suddenly realize that it is time to sell or perpetuate the agency this year, before tax changes take place. Bush-era tax rates are set to expire at the end of this year, and reality has hit harder than your morning Starbucks. You may have procrastinated or been busy attending to your client’s risk management needs, but your lack of planning has left you in a risky bind. Countless articles and newsletters from accounting firms warning of tax changes are still on the far corner of your desk. And, time is running out. Realistically, unless you have been planning a sale or perpetuation of your agency for some time, the likelihood of successfully

completing either in the short time remaining in this year is slim. As a refresher, following is what you can expect to become law in the new year. The sunset of Bush-era tax provisions in 2013 will impact your business and should be planned for now. The 10 percent income tax bracket will disappear, and all remaining tax brackets will increase, notably the top ordinary income tax rates, which will go from 35 percent to 39.6 percent. The timing of the receipt of income definitely will matter. Simplistically, it would be wise to realize greater income in the current year while deferring losses into ensuing years. In 2013, taxpayers in the lowest brackets will not be able to avoid paying long-term capital gains taxes, and those in higher brackets will see the long-

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term capital gains rate increase from 15 percent to 20 percent. In addition, as a result of health care reform legislation, higher income taxpayers also will see an additional Medicare tax hit of 3.8 percent. Business owners and investors will need to realize the right time to sell a business or an appreciated asset will slip by. Qualified dividends, currently taxed at existing long term capital gains rates, will be taxed as ordinary income in 2013. This means that business owners and investors who have the ability to take a qualified dividend in the current year will greatly benefit. At the end of 2010, tax relief provisions were extended. You might ask whether congress could vote to extend them once again. If President Obama is reelected, that may be interpreted as a voter mandate to allow the tax provisions to expire, because income tax ideology, particularly related to higher earners, has been a heated and polarizing campaign issue. While President Obama has stated some support for extending the current rates, it may only be for the lowest brackets, as there is a push to more heavily tax the “millionaires and billionaires,” continued on page N14 www.insurancejournal.com

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Agency Management continued from page N12

also known as agency principals, in the top brackets. So, with less than two months left in this year, what can you do? Consider a bold move to take some money off the table. Obtain financing and determine a proper

amount to withdraw from your business, perhaps 30 percent of the value of the agency, in exchange for a portion of the shares in the business owned by you. This withdrawal can take the form of a qualified dividend and can obtain the most favorable capital gains treatment. In this manner, you will have

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sold a portion of your business, in essence to yourself; locked in a gain; added to your liquidity; and started a process that you otherwise had been hesitant to undertake. To get started, speak to your banker and discuss the possibility of borrowing a large sum and removing it from the business, while making your agency’s balance sheet leveraged by the new loan and a sizable position of redeemed, or treasury stock. If you get less than a warm response, seek out a bank or finance company that has expertise lending to insurance agencies. There is not enough time left to teach a bank how to lend to an agency and upon what the value of your business is based. You also will want to obtain an indication of the value of the agency. An experienced lender may be able to point you in the right direction to seek a value. A senior term loan of five years or less should be sufficient to accomplish this goal and not constrain a well-run, low-debt agency from taking care of this and other strategic missions, such as seeking smaller acquisitions of books of business or producers. You then can consider what to do with the redeemed shares and newfound wealth. You may consider broadening the ownership of the agency by empowering some of your best and most worthy performers to purchase (yes, purchase) stock in the agency. A good step may be to produce a new class of shares or remove voting rights from the shares in question. You also may consider lending some money back to your business, perhaps to fund the purchase of a competitor, and pay yourself a reasonable rate of interest. This is a way to leverage the funds and give you a decent return on the money invested. You also may consider funding a Roth IRA or other productive use of the money. As with any transaction involving business planning or taxes, seek expert advice. This is a good first step, incremental, low-risk and reversible, if you suddenly don’t like having more debt. But go ahead — research this, and perhaps put such a transaction in place, because you really wanted to do something this year.

Pettinicchi is executive vice president of InsurBanc. Website: www.insurbanc.com. Phone: 866-467-2262. N14VANTIVN16132.indd | INSURANCE JOURNAL-NATIONAL REGION October 8, 2012 1

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By Charles Boyle

loyd’s of London Chairman John Nelson knew when he acceded to his post one year ago that his predecessor, Lord Peter Levene, would be a hard act to follow. Levene served for nine years and oversaw significant changes at Lloyd’s — notably the introduction of a franchise system with tighter controls over the risks the syndicates write, and a long needed embrace of technology to handle data transfer, policy issuance and claims. In the mold of his namesake — Admiral Horatio Lord Nelson, whose memorabilia and other objects are on display in Lloyd’s underwriting room — the new chairman isn’t only focused on preserving past accomplishments. He’s put forth an ambitious plan —Vision 2025 — to take Lloyd’s and the London market into the future. In an interview at the recent Reinsurance Rendezvous in Monte Carlo, Nelson told Insurance Journal about some of those plans, and how it feels to be leading Lloyd’s. “The corporation of Lloyd’s does three things,” Nelson said. “It regulates the market through the underwriting process. Secondly it enables the market, which is fundamental to any market, to process premiums, policies and claims. And the third thing we do is to help promote the market.” Like Levene, Nelson’s experience isn’t in the insurance sector. He worked for many years in the financial sector, becoming chairman of Credit Suisse First Boston Europe in 1999. When he retired in 2002, he held a number of board and advisory positions, including deputy chairman of Kingfisher plc from 2002 to 2011. As a former businessman, he said he sometimes has to remind himself that he’s not actually running a business. “I’m chairman of a market. It’s the participants who actually run the business, not me or Richard [Ward, Lloyd’s CEO].” Good underwriting performance is Lloyd’s most critical goal. Without that goal there wouldn’t be a market, Nelson said, as the industry discovered in the ’80s and ’90s when Lloyd’s nearly collapsed. The new franchise www.insurancejournal.com

For example, distribution costs are very high, system has worked well, Nelson said. but he also recognizes that “it’s something, “But, if you look back over the period which the brokers I know, are addressing.” before I became chairman, it was a fairly In Nelson’s view, Lloyd’s is a bit behind benign number of years, in terms of the when it comes to processing as well. cycle,” he said. “Consequently it made it difHowever, he acknowledged that great ficult to tell how well our performance manprogress has been made in claims handling, aging was really operating.” including reducing the time it takes to make The catastrophic events of 2011 were the payments to insureds. “In most cases, [the first real test, and Nelson said Lloyd’s came time has] been cut by 40 percent, which is out of it very well, in part, due to the dispretty extraordinary,” he said. The improvecipline that the market had been subjected ment is important from a cash flow viewto in the years preceding 2011. Nelson said point and for Lloyd’s reputation, Nelson said. he has been focusing on that discipline ever He also said Lloyd’s has been exploring since he arrived — making sure that the how to better use technology in premium right systems are in place. Lloyd’s has also and policy processing and will continue to adjusted some of those systems, and has seek greater efficiencies in that area. called upon outside experts to assist Tom Bolt, Lloyd’s performance director. Vision 2025 Despite 2011’s catastrophic events, Lloyd’s The major project Nelson has put on the capital stands relatively unimpaired, and its table remains “Vision 2025,” which is essen“A” ratings have held steady (the outlook on tially a blue print for expanding Lloyd’s busithem has even been raised to positive). Even ness reach between now and 2025, and an so, Nelson said now is not the time for cominstrumental component in his decision to placency. “We’re in a high risk business, and accept the job of Lloyd’s chairman. Lloyd’s is at the top of the curve.” The market for specialist general insur While Lloyd’s made great strides in ance is big, Nelson said, but up until now, technological progress during Levene’s that market has largely been in the develtenure, Nelson said more could be done. “I oped world. Lloyd’s has long been a leader in think we need to get renewed momentum that sector. Some 80 percent of its business is toward modernization, and indeed further outside of the United Kingdom, with around cost reductions,” he said. Although costs 40 percent of that in the United States, 16 have been reduced by 8 percent overall, he percent in Europe, and the rest elsewhere. believes further reductions are necessary. “If you look at the “I believe that demand for specialist genbusinesses, which ‘We need to get renewed eral insurance worldwide have good cost momentum toward in the next 15 to 20 years, controls, tend to modernization, and indeed as other parts of the world provide better industrialize, it’s creating performance, any- further cost reductions.’ a vast ‘gob’ of new busiway — in terms of ness opportunities for general insurers and looking after customers, the attitude of the people like Lloyd’s. We have to address that.” employees — they are more professional,” Under Lord Levene, Lloyd’s did expand Nelson said. — into China, Japan, Southeast Asia, with a Nelson said the cost of doing business in major hub in Singapore, and South America, insurance is high compared to other industries he is familiar with. “I’d give them [insur- where Mexico is Lloyd’s biggest market. But Nelson pointed out that 80 percent of ers] credit for a lot of things, but I wouldn’t give them credit for cost control,” he said. continued on page N18 October 8, 2012 INSURANCE JOURNAL-NATIONAL REGION | N17

SPECIAL REPORT

Surplus Lines continued from page N17

Lloyd’s capital comes from the United States, Bermuda and the United Kingdom, while the brokers and underwriters come from a restricted nationality gene pool. “Now, if we are to be the global hub for specialist insurance and reinsurance, we’ve got to diversify the capital and the nationality,” Nelson said. “That means that we have to attract high-quality carrier capital from those territories with people, [along] with business franchises into Lloyd’s directly.” Nelson likened some aspects of this necessity to the experience of the banking industry, which he knows well. “In the 1980s, it transformed itself … it went from being a British banking industry

to a truly global banking industry, with people and capital coming, the best people, from all around the world, which created the hub for capital intermediation worldwide,” he said. Although general insurance is a much smaller market, Nelson sees an opportunity for expansion. In the highly important U.S. market, his goal is to maintain an already strong presence, and to ensure that Lloyd’s reputation remains highly regarded. He described Lloyd’s relationships with U.S. insurers and brokers as “very strong and trusted,” adding that opportunities still exist for further growth in the United States. He also noted the dedication of Lloyd’s U.S. president,

Top 10 Largest Lloyd’s Syndicates Based on 2011 Gross Premiums Written

Top 10 Largest Managing Agencies at Lloyd’s

Hank Watkins, and the enthusiastic response he sees from coverholders when he visits the United States. The United States may be here and now, but Nelson is aware that the opportunities in developing markets are long-term. “If we don’t take advantage of them, we will gradually become less powerful in the market,” he said. The competition will be fierce, but “we have to address it, along with keeping up our interests in existing markets in the U.S. and Europe, especially France [where premiums have grown by 8 to 9 percent] and Germany.” Competing against Europe’s big insurers, Allianz, AXA, Generali, etc., will be difficult he acknowledged; therefore Lloyd’s strategy is to inform potential clients of its special structure and its ability to assess and take on large, complicated and unusual risks, making full use of the specialized knowledge of its brokers and underwriters. The current economic crisis in Europe remains a concern, and low interest rates have continued to sap insurers’ returns, which have two effects. It has caused an inflow of capital into the insurance industry, and it has focused the industry’s collective mind on making profits from underwriting, “because if they don’t, they don’t have the income from investments to make it up,” Nelson explained. As a result “it’s keeping the re/insurance market relatively stable.” Nelson said: “The best thing that could happen to the insurance industry is to get a little, not too much, uptick in interest rates that would tighten up capital a bit.” But he doesn’t see this happening in the near future. Emerging Markets Lloyd’s activities in emerging markets are beginning to grow, Nelson said. Lloyd’s wrote around $800 million in premiums in Mexico last year. Business in Brazil is smaller, but it’s growing. But Nelson said Brazil’s recent law requiring that a certain amount of reinsurance must be placed with local carriers will slow that growth. Emerging markets, such as Brazil, can be difficult to work in because of laws that hincontinued on page N20

N18 | INSURANCE JOURNAL-NATIONAL REGION October 8, 2012

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Surplus Lines continued from page N19

der growth. “In every territory, there are sort of ‘niggles’ on regulations, national interests, all of that,” Nelson said. The worst is probably India, he added, but that may change. “People are beginning to see that having

open economies, particularly on things like risk transfer, actually helps those economies, and if you protect it, it has exactly the reverse of the impact that you want. I hope that view will begin to permeate around the

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world,” Nelson said. The euro zone crisis is a good example. “The euro zone from a narrow Lloyd’s perspective, obviously any financial business, insurance included, is going to be affected by a breakdown in the euro zone,” he said. “But in direct terms, [we] only have roughly 15 or 16 percent of our market in the euro zone.” Plus most of that business won’t go away because insurance is compulsory in euro zone countries, he said. He also explained that Lloyd’s, along with other international businesses, is prepared for a possible euro zone break up. “We have the systems in place, because we kept, our ‘legacy’ systems In the United States, in place, ‘there are areas where and we we can improve our can adapt to a major penetration base.’ crisis,” if the euro zone were to break up. Lloyd’s assets, Nelson said “are not really exposed to the euro zone.” Yet he added that “if you’re going to have a common currency like the euro, you’ve actually got to have a “United States of Europe, and you have to have integrated economies, fiscally, monetarily and every other way. We don’t have that, and I don’t think the euro crisis will be solved unless there is a political will to actually unite Europe.” A few months ago Nelson thought this might happen. “But I think we’ve gone away from that now, and so I’m sort of moderately pessimistic.” He described it as a “great vision,” but also said it “needed to have economic unity,” which it didn’t have. So far 2012 has been pretty calm as far as natural catastrophes are concerned; the biggest loss was the sinking of the Costa Concordia, which “in Lloyd’s terms is not enormous,” Nelson said. However, he acknowledged “it’s too early to make any predictions as to how well Lloyd’s will do in 2012. “While the first half of the year would be ‘claims light,’ you just don’t know about the second,” Nelson said. www.insurancejournal.com

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SPOTLIGHT

Lloyd’s Syndicate ANV Settles in as Lloyd’s MGA, as Capacity and Syndicates Grow By Charles Boyle

There are now 78 operating syndicates at Lloyd’s; 88, including Special Purpose and RITC syndicates. Although no new ones have so far joined Lloyd’s this year; three syndicates have transferred ownership: Hardy, acquired by CNA; Omega, acquired by Canopius, and Flagstone (Lloyd’s business only), acquired by ANV. A combination of low interest rates, the economic crisis and the stability of Lloyd’s management have made investing in the venerable institution more attractive. A Lloyd’s syndicate is now usually part of a larger corporate strategy, rather than a standalone vehicle. Companies, large or small, public or private, see Lloyd’s as a worthwhile capital investment, and as an adjunct to separate operating divisions outside of Lloyd’s. The trend has been growing since Catlin moved its domicile to Bermuda in 1995. It has been joined by other “Lloyd’s insurers,” including most of the larger syndicate operators. Beazley, Hiscox, Amlin, as well as most of the

Bermuda and U.S. companies that have syndicates at Lloyd’s are also international carriers. The newest entrant is Netherlands-based ANV. The company concluded the acquisition of Flagstone Re’s Lloyd’s Syndicate 1861 in August, and is dedicated to building the business, as well as continuing with operations outside of Lloyd’s. ANV has about £150 million to £200 million [$243 million to $324 million] of premium, operating from the Netherlands, London, Hong Kong, Rio de Janeiro, Barcelona and New York. “ANV sees Syndicate 1861 as one of the three key pillars of its integrated approach to operate as an underwriting syndicate within Lloyd’s, in combination with operations as a risk bearing (re)insurer and as a global MGA,” according to a description on its website. “We see the spirit

of innovation and strength that has defined the Lloyd’s and London market for more than 300 years as more important today than ever before.” Commenting on the acquisition, ANV’s Founder and CEO R. Matthew Fairfield said, “We believe in Lloyd’s,” as well as in underwriter Richard Housley, who heads Syndicate 1861. Fairfield described him as an added attraction to closing the deal. ANV’s profile and business philosophy fits with Lloyd’s. The acronym ANV is Latin for acta non verba, or deeds (actions) not words; in modern phraseology, “walk the walk.” From a business perspective, Fairfield said, ANV is trying to keep best practices learned throughout the history of insurance, and apply those to the new venture. “On the human side we’re trying to make a difference.” Fairfield said the global specialty insurance market has presented an extraordinary opportunity since 2008 when the world changed. The date is significant as it marks the decline in “buying brands,” rather than evaluating re/insurers, including startups on their merits. “You have to get down into the depths of what the fundamentals of a company are,” he said. “If they truly are long-term, you’ll find that there, but you have to look.” ANV’s dedication to “best practices” assures investors, stakeholders or employees who learn continued on page N24

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Spotlight

Lloyd’s Syndicate continued from page N22

about the company and its products that they will find quality, Fairfield said. That includes a number of business lines, including “accident and health care in South America, financial lines business in Europe, surety on the east IJ 1/2 OCT / NAPSLO issue:Layout 1 coast of the United States. “Wherever there is

an opportunity to underwrite specialty products, that’s where we’ll be,” Fairfield said. He described ANV’s “three pillars” as being the Lloyd’s business; MGA business, where it writes on behalf of other insurers; and the future acquisition of a “balance sheet” business. 9/5/12 12:56 PM Page 1 “Those are the different tools that we believe

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will enable us to serve our clients, rather than dictate to our clients how they have to access us,” Fairfield said. Commenting on becoming part of the Lloyd’s market, Fairfield said he was “very pleased.” He recognized that Lloyd’s has had its “ups and downs,” but said that going through those “inflection points” in the past 15 years has made it a very strong marketplace.”It’s the largest [wholesale] specialty marketplace in the world,” he said, and therefore provides opportunities. A Lloyd’s presence “rekindles the entrepreneurial spirit in insurance.” It also provides the “ability to have the licenses and the size that Lloyd’s as a society represents,” he said. High Risk Capacity ANV will bring added capacity to some of the lines that are deemed “high risk,” notably in the financial sector for professional liability, and directors and officers liability. “Everybody talks about selection, but if you really do practice it, and you do have discipline, you can make money and define your business,” Fairfield said. “You can underwrite anything; it’s a question of terms, conditions and price.” He described financial institutions as being “in a very difficult climate,” which requires looking at those kinds of risks “extremely carefully ... Who knows if those kinds of risks are going to be willing to pay, or accept the terms and conditions we offer.” He also explained that “C-side” coverage on D&O policies — the type that provides coverage directly to financial institutions — as opposed to “A” and “B” type coverage that indemnifies personnel, who are charged with malfeasance, was “a product of the soft market, which crept into” policies at that time. ANV is in the business for the long-term, Fairfield said, with no intentions of building up the value of an asset it has acquired and then selling it off. “We’re not looking to do a flip … we’re building this thing for the next 30 or 40 years of our lives, and hopefully it’s longer than that.” Since 1994, when Lloyd’s permitted its syndicates to be funded by corporations, most of the capital has been supplied by re/insurers and related financial institutions. ANV may signal a continued on page N26

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www.insurancejournal.com

SPotlight

Lloyd’s Syndicate continued from page N24

change in that pattern. Its main investor is the Toronto-based Ontario Teachers’ Pension Plan, which Fairfield said accords with his long-term plans, as they also are interested in making plans and supplying capital for the long term. “That’s one of the things I really love about

working with them; their capital requirements match the opportunities of our business plan.” ANV is focused on building up the Lloyd’s platform. “We’d like to get to around 500 million pounds [app. $810 million] of stamp capacity,” Fairfield said. A larger operation is able to not only write more business, but also if faced

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with additional costs, such as Solvency II compliance, “it’s nicer to be able to absorb those kinds of costs.” Expansion Plans ANV is planning on further expansion in the United States and in Europe, which, Fairfield said he is approaching with some trepidation in light of the current economic slowdown in Europe and the problems of the euro zone countries. However, he said that would not prevent further expansion. “We’re in it for the long term, and this is actually one of the best times to start building a business,” Fairfield said. “It’s not the best time to aggressively underwrite every risk you can find, but it’s the best time to build a business selectively, establish relationships and bring innovative solutions that you can maintain through market cycles, so that people realize, especially now that when they need it, that you can be there.” He described ANV’s future strategy as “build and buy, or buy and build;” explaining there are assets available that are attractive. “There are some very quality operations, that could be available at good prices, which I would call a fair price, and which is not often the case.” Some of that expansion will eventually occur in emerging markets. ANV has small operations in Hong Kong and in Rio de Janeiro, but they will develop them slowly, where they see opportunities, and usually in conjunction with local partners. He pointed out that the Asia Pacific region now accounts for around one-sixth of global GDP, while Europe is around one-third. “Over the next 20 years, that will flip; there’s no doubt those economies and those markets will be larger parts of what we want to do,” he said. Fairfield is also aware that to achieve anything in those markets, one cannot wait until the last minute, but needs to develop them from the beginning. Fairfield has a wealth of experience in the business, both in the United States and Europe. He recognizes the value of sharing the business with employees, and has made it a cornerstone of ANV’s culture. “By having these underpinnings, we’re able to be sustainable and scalable in a very forthright manner,” he said. www.insurancejournal.com

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Closer Look

State of the Market Slow and Steady: Surplus Lines Industry Reverses Downward Trend; Optimism Good for 2012 By Andrea Wells

espite catastrophic events in 2011, low investment yields and competitive pressures, surplus lines specialists — especially market leaders — generated healthy operating profits and returns on both revenue and surplus. And once again, the surplus lines sector outpaced the results of the entire property/ casualty industry by a wide margin, according to the “2012 U.S. Surplus Lines Market Review” by A.M. Best, and sponsored by the Derek Hughes/NAPSLO Educational Foundation. In 2011, domestic surplus lines insurers’ (DSLI) composite net income rose by 11.3 percent compared with the 46.8 percent decrease for the entire P/C industry, the report said. The DPSL composite represents about 58 percent of the total U.S. DSLI market, or some $13.2 billion in direct premium written (DPW) in 2011. DSL insurers write some 72.5 percent of the total surplus lines

market. “Consistent with past performance, the surplus lines composite continued to outperform the total industry across several key metrics,” the report said. “The surplus lines composite’s reported combined ratio was 103.9 in 2011, 4.3 percentage points lower than the P/C industry’s 108.2.” “2011 was an extraordinary and historic year from a loss standpoint,” said David Bresnahan, president of Lexington Insurance Co., in a webinar hosted by A.M. Best and the National Association of Professional Surplus Lines Offices (NAPSLO). “2011 was the year that blew out the traditional prop-

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Specialty Human Services Surplus Lines 1/6/12 10:43 AM

erty strategy, which is that you should have great diversification of risk.” The diversification rule of thumb didn’t help insurers writing accounts in the United States in 2011, he said. “Last year, the bigger you were, the more diversified you were, the more losses you took.” So far in 2012, losses seem to be more manageable; however, Bresnahan says the jury is still out. “For Lexington in the first 6 months of this year we saw just under $300 million of cat property loss. That was exactly as we had anticipated,” he said. But with Hurricane Isaac bringing in an esti- ‘We’re in that mated $2 billion in middle ground.’ losses in the third quarter of 2012, and two months remaining in the hurricane season, things could change quickly. A.M. Best believes the surplus lines market has a good chance at producing better underwriting results in 2012 than 2011 thanks to the decrease in catastrophe losses through mid-June 2012 and rate increases on certain lines of coverage. Those two trends are generating “guarded optimism amongst surplus lines insurers,” the report said. “Through the first half of 2012, general market conditions have continued the momentum that began during the second continued on page N30 www.insurancejournal.com

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Closer Look

State of the Market continued from page N28

half of 2011, with prices firming and coverage terms and conditions showing more signs of tightening,” the report said. “With interest rates remaining depressed and financial market volatility the current reality, underwriting performance will again be the key driver for operating performance. It remains to be

seen for how long, and to what degree the current price firming will last.” Slow and Steady Growth The DSLI market also managed to increase their DPW by 3.2 percent in 2011, reversing a four-year trend of declining premiums for the industry.

Top 10 U.S. Surplus Lines Groups (2011) Ranked by direct premiums written Rank Group

DPW ($ thousands) Market share (%)

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That trend seems to be strengthening throughout the first quarter of 2012 as well, according to the A.M. Best report. DPW increased by about 7 percent during the first quarter of 2012 compared with the first quarter 2011. While rates are moving up, competition in the market is still plentiful, said Robert Sargent, president and CEO of Tennant Risk Services and the current president NAPSLO, who also participated in the webinar. “We are in that middle ground,” Sargent said. “There is competition and there’s a great deal of interest in maintaining market share from underwriters.” Underwriting is more thorough, he says, and rates are inching up but competition in the market remains. Sargent says there continues to be “a lot of participants, a lot of underwriters, a lot of people still competing for business.” But the change in market conditions is not drastic, he says. “It’s fragmented, not hard, but moderate increases.” continued on page N32

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Closer Look

State of the Market continued from page N30

There are pockets of business which seem to be under more stress than others, says Lexington’s Bresnahan. He describes New York’s construction market as stressed, but also views national account umbrella, energy, railroad, and life science business as areas experiencing a little more change than others. In his view, there are a number of factors driving increase in rates, but availability is not one of those factors. “Capacity is plentiful,” Bresnahan said. “It’s real- ‘Capacity is ly not the balance sheets that are driving the pricing change. I think of it more as the income statements are driving the rate changes.” He sees carrier management changing strategies when it comes to how low of a combined ratio is acceptable to underwrite at a satisfactory return. “There are many underwriters that aren’t too excited about the pricing levels in the

business and that what’s driving a lot of the rate change.” Despite 2011 being a historically difficult year, Lexington’s balance sheet added to its surplus level by about $300 million, he said. “We suffered roughly $1 billion of net cat property loss,” Bresnahan said. “But what helped offset that loss was the diversification of our business. At the end of the day, we had a 102 combined for the year. Not too bad given the magnitude of the losses. … and while the investment yield is low, when you have $25 billion to $26 plentiful.’ billion of invested assets, which we have, and you get 4 percent to 5 percent return, that makes up for an awful lot of underwriting loss.” In the end, the losses for 2011 were reasonably spread around amongst the insurance and reinsurance community, he said. “So while everyone got hurt there was only a few that got hurt very badly.” Sargent says that he sees more underwrit-

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ers realizing the need for increased rates and tighter underwriting controls. What’s different in this market cycle is that the change is occurring in a slow and steady manner. Insurers are making the transition in moderation and with very healthy balance sheets, he says. It’s a fascinating time in the market, he says. “There’s not any kind of severity in pricing except maybe in a couple of different segments. Overall the market change is moderation in rates. Tightened underwriting and stiff competition; it’s not being driven by capacity problems.” Sargent says that a great example of the market change can be found in errors and omission liability for the real estate sector. “That business has been very tough and there have been a lot of withdrawals,” he says. “But there is some level of competition and a number of markets willing to participate in that segment. … But detailed underwriting and availability continues.” Market Leaders Lloyd’s held on to the top spot as the leading surplus lines writer in terms of DPW in 2011, generating just under $5.8 billion and representing 18.6 percent of the total surplus lines market share. Second place American International Group wrote more than $5.3 billion in DPW in 2011, representing 17.2 percent of the market. Rounding out the top five leaders were: Nationwide Group ($1.3 billion, 4 percent), Zurich Financial Services Group ($1.1 billion, 3.4 percent) and W.R. Berkley Group ($978 million, 3.1 percent). The top 25 surplus lines writers generated a 1.4 percent increase in overall DPW in 2011. “Many surplus lines insurers have reported lessening competitive pressure from standard market companies,” the A.M. Best report said. “While this trend has not signaled a decisive shift in the market, it was enough to help reverse the four-year decline in premium produced by DPSL writers, the heart of the surplus lines market.” The report also noted that for the eighth year in a row, the surplus lines industry reported no financially impaired companies, while in the admitted P/C industry, some 34 insurers reported financial impairments in 2011. www.insurancejournal.com

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News&Markets Will Regulatory Reform Trigger Doomsday for Captives?

f you’re startled by this headline, you’re not alone. Until recently, the words “reform” and “captive” were rarely used in the By Sidney Williams same sentence. That’s because captive insurance companies have long been immune to traditional insurance company regulation because of their special characteristics. Should captives be more heavily regulated? Many argue that captive insurance companies deserve a special place in regulatory regimes because they: • Are specialist underwriters primarily limited to writing the risks of their owners. • Have limited investment assets com-

pared to traditional insurers. • Are often operated and managed by outsourced experts, with fewer resources to devote to compliance. • Use policy language related to owner concerns. • Perform uniquely, not following typical insurance cycles. • Are not subject to the law of large numbers like traditional insurers. These are compelling arguments — especially for those who understand that regulatory flexibility has been one of the primary advantages to domiciling a captive insurance company offshore. However, the formerly benign regulation of the captive segment is about to change. For the first time, captive owners and

managers must contemplate the likelihood that regulatory flexibility may be sharply curtailed by regulations put into place in the wake of the most recent financial crisis. For the first time, traditional insurance and captive regulation are converging. While it can be argued that regulations spawned by Sarbanes-Oxley and FINRA have had little effect on the captive market, that reasoning ignores three unintended consequences of these legislative efforts: • The cost of compliance has caused financial officers to critically evaluate captive effectiveness in detail. • The general desire to achieve greater capital efficiency has caused senior management to drill down into areas of operations previously ignored. Many existing captives will not fare well when exposed to intense management scrutiny. • In anticipation of possible captive exits, there is already a substantial amount of insurance company surplus earmarked for potential captive runoff. The United States legislative acts pale in significance when compared to Solvency II, the European Union effort to regulate insurers. Solvency II is intended to reform insurance regulation, provide a safety net for policyholders and support market stability. It is scheduled to take effect June 2013, with full implementation by January 2014. Solvency II will place increased demands for complicontinued on page N36

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News&Markets States, with separate state jurisdictions and limited federal regulation of insurance, will have significant political and practical problems complying with Solvency II — essentially seen as a “continental regulatory issue.” In Every Challenge Lies Opportunity There’s no question that Solvency II will present both a challenge and an opportunity for U.S. captive regulators. Naturally, the opportunity will come in the form of offshore captives fleeing domiciles that choose to meet Solvency continued from page N34 II equivalence tests for captive insurBermuda being the most notable. Such ance on the entire insurance industry, ers. This quasi-forced re-domestication certification means that the EU regulaincluding captives. It is a risk-based will present a new and fresh pool of tors agree to accept the non-EU appliregulatory effort with a high-level applicants for licensing by new and cants’ regulations as acceptable under focus on the scale and complexity of mature U.S. domiciles. As with any Solvency II, or “equivalent.” risks. As such, it is driven more by risk Just as important, significant change management than by modeling. several competing Should captives be more in a regulated envi While Solvency II pertains to ronment, challenges (offshore) domiciles, heavily regulated? European Union members only, will accompany presumably seeking several major offshore captive domiopportunities. For competitive advanciles have made significant progress example: tage, have announced that they will toward obtaining equivalence under • If re-domestication occurs from a neither comply with the requirements the proposed Solvency II regulations, Solvency II-affected domicile, nor seek equivalence. The United what will be the attitude of the regulator toward the captive, the fronting carrier and the reinsurer(s)? • Is there a likelihood that only captives with compliance issues “Unique coverage, intelligently designed.” will re-domicile, and if so, what safeguards need to be in place Broaden your relationship with your lender and to ensure that the state’s captive real estate clients through comprehensive and insurance department is not simcompetitive insurance programs. ply licensing companies that are likely to incur future impairment? • Should the captive licensing and Additional Agency Revenue. regulatory capital requirements of Support of the entire sales and servicing process. companies seeking re-domesticaWeb Based Insurance Administration. tion be considered in a different light than new applications? No Minimum Earned Premium. Although captive formations have Simplistic Underwriting - No photos or inspection. slowed in recent years due to the soft insurance market, that trend is likely to reverse as the economy recovToll Free: 877 744 3660 ers and the market hardens. When www.arcanainsurance.com alternative risk management becomes 1 N36 ARCANA16123.indd | INSURANCE JOURNAL-NATIONAL REGION October 8, 2012

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popular again, new captive formations and re- domiciliation requests could swamp the existing captive insurance divisions of state regulatory departments. If this occurs, which class of new applicants will take precedence — those with a performance history returning to the U.S. to avoid Solvency II or new captive formations? These are questions that each regulator and state insurance department must consider. Whatever regulatory methodology is eventually adopted, the challenges ahead for all captives will hinge on whether regulations are geared for captive complexity, the cost of compliance, minimum solvency requirements and the methodology used to meet regulatory approval. These are different and more sophisticated issues than many captive leaders have dealt with in the past.

two years will represent a new day, but not necessarily doomsday. Smart captive leaders will proactively prepare now to position their organizations for a brighter, albeit more regulated, future.

Sidney “Woody” Williams is vice chairman of Strategic Risk Solutions (SRS), a large, independent captive management company that provides strategic advisory services. Email: woody.williams@srsmail.com.

Back to the Future While the future is difficult to predict, the results of new regulations will likely be: • The cost of compliance will increase for domestic captives, as well as those subject to Solvency II. • Some captive insurance companies will be unable or unwilling to access resources to pay for compliance. • Formerly inattentive financial officers will apply a new, high-level focus to captive operations to meet capital efficiency requirements and to contain reputational risk. • Some offshore captives, especially those in Bermuda, may look to re-domicile to the United States to avoid Solvency II requirements. Others, especially highperforming captives, may be delighted to remain in a domicile with high-compliance requirements. • There will be a significant runoff and/or sale of captive liabilities as companies cease funding for marginal operations. New Day, Not Doomsday The current regulatory changes are so remarkable and profound that the entire face of the captive risk transfer market may be altered by the results of their implementation. For captives around the globe, the next www.insurancejournal.com

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October 8, 2012 INSURANCE JOURNAL-NATIONAL REGION | N37 9/25/12 11:05 AM

There Must Be Coverage Somewhere

our client, a tenant in a local strip mall, signs a five-year lease with an option to renew. The lease contains the following language: Lessor shall pay property insurance premiums on the leased premBy Terry L. ises including the personal Tadlock property in a sufficient manner to cover the entire property. Lessee will provide insurance on any personal property that the Lessee moves to the leased premises. In a perfect world, every lease would read like this. The landlord is responsible for the building and the tenant is responsible for their business personal property and any improvements they make. But even this isn’t

a perfect lease. Three years into the lease, a section of the roof collapses and does damage to the structure and your insured’s business personal property. The claim is reported to both insurance carriers. The landlord’s policy pays for the damage to the structure, and the tenant’s policy covers its personal property. Is it starting to sound a little too good to be true? Well it is! Several months after the claims have been settled and the insured has resumed operations, she receives a notice from the landlord’s insurance company indicating their intent to subrogate against your insured for the real property damages they paid. As it turns out the roof collapse occurred because the storm gutters were never cleaned. The lease, much to your insureds surprise, con-

tains a clause that requires the premises be “maintained,” which includes the regular cleaning of the storm gutters. Had they been cleaned properly, water would not have backed up on the roof, and no collapse would have occurred. Your client’s next call is to you, her insurance agent. What is your advice? You report the claim to the property insurance carrier. They deny the claim, stating that the policy only covers business personal property — no building coverage was purchased. Likewise, the general liability carrier denies the claim because the building is in the insured’s care. Obviously had you known about this exposure, you could have properly insured your client. But now that the claim has happened, what do you do?

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October 18, 2012 OCIP’s (1 of 2), Bob Titus, Academic Risk Resources & Insurances LLC

November 8, 2012 Leases / Contracts (Part 2 of 2), Terry Tadlock, Coastal Plains Insurance

October 24, 2012 E&O for Staffing Firms, Chris Christian, US Risk Brokers

November 15, 2012 How to Read and Understand ANY Insurance Policy, Christopher J. Boggs, IJ Academy of Insurance

October 25, 2012 OCIP’s (2 of 2), Bob Titus, Academic Risk Resources & Insurances LLC November 1, 2012 Leases / Contracts (Part 1 of 2), Terry Tadlock, Coastal Plains Insurance

November 28, 2012 What EVERY Agent Needs to Know about D&O, Fred Fisher, E.L.M. Insurance Brokers

December 5, 2012 What to Expect from Specialty Lines Claims, Fred Fisher, E.L.M. Insurance Brokers December 6, 2012 Fraud Detection / E&O (Part 1 of 2), Bob Titus, Academic Risk Resources & Insurances LLC December 12, 2012 What Makes a Good (or Bad) Acquisition Candidate, Ron Fry, Sherman and Company December 13, 2012 Fraud Detection / E&O (Part 2 of 2), Bob Titus, Academic Risk Resources & Insurances, LLC December 19, 2012 State of the Art EPL, Chris Christian, US Risk Brokers

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Let’s look at a couple options. Option 1 Review the insured’s lease for a mutual waiver of subrogation. You might assume that because the carrier is seeking subrogation, they reviewed the lease and didn’t find a mutual waiver. But stranger things have happened –— so look. Such language may read as follows: In the event of fire or other loss to the premises, Lessor and Lessee mutually waive their rights of subrogation and recovery against each other, their officers, agents, employees, sublessee, or other persons under their control. ... to the extent they are insured or are required to carry insurance. ... to the extent said loss is paid by insurance. Most mutual waiver of subrogation clauses found in leases apply to “the extent” that an insurance policy paid the claim. This wording allows subrogation for losses outside of the scope of coverage. If this type of language is in the lease, your insured may have an “out.”

ing owner may, in fact, waive subrogation against the tenant after a loss. The property owner can waive its rights against the tenant, thus removing any obligation for damages that may be assignable to the tenant. Your next question must be, “who in their right mind would do this?” Any landlord that is interested in keeping a good tenant; remember this is a five year lease with an option to renew. The landlord has a vested financial interest in keeping this tenant. It will come

down to the leverage the tenant has with the landlord — it is worth a try if all else fails. Moral: Review your client’s leases to assure proper coverage is provided or proper risk management is utilized! Tadlock CIC, CPCU, CRIS is a 31-year veteran of the insurance industry. Tadlock recently joined the Correll Insurance Group of agencies as the president of Coastal Plains Insurance LLC (CPI). As part owner, Terry is responsible for the day-to-day operations of CPI..

Academy of Insurance Word Search

Option 2 Can the building owner waive subrogation after the loss has occurred? Before you think I have lost my mind, allow me to refer you to the Commercial Property Conditions. They read: Transfer of Rights of Recovery Against Others to Us If any person or organization to or for whom we make payment under this Coverage Part has rights to recover damages from another, those rights are transferred to us to the extent of our payment. That person or organization must do everything necessary to secure our rights, and must do nothing after loss to impair them. But you may waive your rights against another party in writing: 1. Prior to a loss to your Covered Property or Covered Income. 2. After a loss to your Covered Property or Covered Income only if, at time of loss, that party is one of the following: a) Someone insured by this insurance; b) A business firm: (i) Owned or controlled by you; or ii) That owns or controls you; or c) Your tenant. This will not restrict your insurance. Notice in section 2c that the insured buildwww.insurancejournal.com

October 8, 2012 INSURANCE JOURNAL-NATIONAL REGION | N39

Academy of Insurance Success Stories!

strongly believe the annual membership with Academy of Insurance is very beneficial for us as we design employee educational programs. Working in the insurance industry, you never stop learning; through the annual membership, we have access to great webinars throughout the year — especially the coverage-related webinars. The availability of presentation documents and a link to revisit the presentation provide great opportunity to learn and study the information further. Also, the available management training webinars give us access to great speakers providing effective training. Annual membership in the Academy is definitely worth it, and we plan to renew

this membership in upcoming years. — Jennifer, Leading Insurance Services Inc., member since 2011. Our firm signed up for the Academy of Insurance Membership program to supplement our office’s monthly education meetings. Each month, a member of our staff is selected to review a specific course, prepare a short quiz based on the material and then view the class again with our entire office in a classroom setting. There is a wide variety of course topics, which are all very thorough with excellent support material. The detailed review of the material in each class allows an individual, who may not be an expert on the subject, to learn enough

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to give an overview of the class and prepare a quiz. We then make the class available for anyone in our office who wishes to take the course again, as well as provide special encouragement for those who did not perform well on the quiz to retake the course. Our management team has taken advantage of several operational and sales management classes, which were a bonus to insurance technical curriculum. This is what initially drew us to the Academy of Insurance. We have found the membership program provides an excellent value that allows the courses to be taken multiple times by multiple individuals in our firm. — Travis, CMR Risk & Insurance Services Inc., member since 2012

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News&Markets

Is Long-Term Care Insurance Dying?

oor results in the long-term care insurance sector have led many providers to exit the market, leaving its future uncertain, Moody’s Investors Service says. Moody’s report, “Long-Term Care Insurance: Sector Profile,” says despite the need for non-medical coverage by an aging population, long-term care insurance’s future is in question because of persistent losses and a challenging operating environment. “Key credit considerations for the sector are the relative newness of long-term care insurance, and the long-tailed and complex product structure, which make it difficult to price the product profitably and to reserve for,” says Laura Bazer, Moody’s vice president and author of the report. The industry’s relatively limited claims experience, along with significant benefit options and long policy horizons, have been key challenges for providers since the introduction of the product in the 1980s, she says.

Mispriced blocks of older, legacy business have led to recent reserve increases, causing sizable losses for some providers in the past two years. The benefits under early policies were often too generous relative to factors such as actual benefit utilization rates and lapses, according to Moody’s. “While recent hefty reserve and rate increases could improve the profitability of legacy blocks, or at least stem losses, persistent low interest rates and anti-selection could confound the remediation process,” Bazer says. New, better designed and priced products seek to reduce risks for insurers, with changes including more restricted benefits and payout periods, as well as “combination” policies that offer long-term care with a life insurance policy or an annuity contract. Nevertheless, Moody’s believes potential buyers may balk at fewer benefits and higher rates, and sales could go down.

Bazer thinks current price hikes will help insurers for the time being, but senior citizens on fixed incomes form a highly sensitive constituency, and regulators could therefore reject or limit new rate requests. Additionally, the exit or retreat of five firms from the market since 2010 leaves only one dominant player. Thus, the sustainability of sales volumes and the viability of the market overall, is in question, Moody’s says. MetLife and CUNA Mutual stopped selling LTC in 2010. In 2011, CNA and Berkshire pulled out. This year, Prudential stopped selling individual to focus on group; Unum stopped selling group and had previously pulled out of individual sales.

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News&Markets Bundlers of Joy: Satisfaction with Home Insurers at 12-Year High

verall customer satisfaction with homeowners insurance companies is the highest in the 12 years J.D. Power and Associates has measured it, driven in part by the bundling auto and homeowners policies. Overall satisfaction averaged 785 in 2012 (on a 1,000-point scale), up 16 points from 2011, according to the research firm. . Additionally, satisfaction has improved by 19 points among customers who bundle auto and homeowners policies with the same insurer, compared with an improvement of 10 points among customers who have their auto policy with another insurer, according to J.D. Power and Associates’ “2012 U.S. National Homeowners Insurance Study.” Now in its twelfth year, the study measures customer satisfaction by examining five factors: billing and payment; claims;

interaction; policy offerings; and price. Satisfaction is higher in all five factors year over year, with the greatest gains in policy offerings (+35 points) and billing and payment factors (+27 points). The gains in policy offerings are more pronounced among customers who bundle auto and homeowners policies (+39 points) than among those who have their auto policy with another insurer (+25 points). Competitiveness of discounts and variety of coverage options are key differentiators among customers who bundle insurance. “The increase in satisfaction with policy

N42 | INSURANCE JOURNAL-NATIONAL REGION October 8, 2012

offerings is directly related to perceptions that insurers are doing a better job in offering the right coverage options at competitive prices when policies are bundled,” said Jeremy Bowler, senior director of the insurance practice. Not only does bundling increase satisfaction with homeowners insurers, but it also increases customers’ intent to renew their policy. Among customers who have homeowners insurance only, 28 percent say they “definitely will” renew with their insurer, versus 46 percent of customers who bundle two policies, and 66 percent when four or more policies are bundled.

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News & Markets Employees Staying Put Even If Unhappy: Talent Survey

s high unemployment persists and the global economic recovery remains halting and uneven, the “resume tsunami” seems to have subsided to a “resume riptide.” According to Deloitte’s latest global talent survey, “Talent 2020,” four out of five (80 percent) employees plan to stay with their organizations in the next year, an increase from 2011 when nearly 65 percent were planning to leave. Forty-six percent of survey respondents indicated they are less inclined to move because, in the past 12 months, they have changed jobs (9 percent), were promoted (22 percent), or have taken new positions (15 percent) with their current employers. Yet nearly one-third (31 percent) said they are not satisfied with their jobs. According to the report, companies may

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neglect their talent and retention strategies “out of a false sense of security” as more employees appear to be staying put. However, the Deloitte report warns that organizations’ top performers are also those with the most employment opportunities. “Instead of addressing broad concerns over high turnover rates, employers now face a more targeted challenge,” said Bill Pelster, principal and U.S. Talent Services co-leader at Deloitte Consulting LLP. “Companies must adjust their talent management initia-

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tives to focus on retaining employees with the critical skills required to advance their business in today’s turbulent marketplace, as they pose the biggest flight risk.” Deloitte teamed with Forbes Insights for its fourth report in the “Talent 2020” series, surveying employees across major industries and global regions. Based on the results and analysis of the talent market, Deloitte identified three emerging trends: •Engage employees with meaningful work or watch them walk out the door.

9/30/12 7:31 PM

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Employees value meaningful work over retention initiatives. A majority (42 percent) of respondents who have been seeking new employment believe their job doesn’t make good use of their skills and abilities. •Focus on “turnover red zones.” Employee segments at high risk of departure, or “turnover red zones,” are employees with less than two years on the job and Millennial employees (those aged 31 and younger). •When it comes to retention, leadership matters. More than six in 10 employees (62

percent) who plan to stay with their employers report high levels of trust in corporate leadership. “Retaining key employees is not simply a human resources function,” Pelster said. “Instead, retention starts with the C-suite and extends through virtually every level of management, down to line managers and supervisors. Strong leadership is one of the most important factors in differentiating between an employee who is committed to his current job and one who is constantly

searching for the next career opportunity.” Other factors such as trust in leadership, effective communication and a company’s ability to execute on its strategy can also differentiate between an employee who is committed to his or her current job or an employee who is searching for the next opportunity, according to Deloitte. Copyright 2012 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Advertisers Index Readers, browse, contact, or do product searches on any of our full page advertisers at: http://www.insurancejournal.com/adshowcase/ A.M. Best Company www.ambest.com N19 Abram Interstate www.abraminterstate.com W16 Agency Ideas www.agencyideas.com N22 Agent Support Network of America www.asnoa.com W3; M3 American Integrity Insurance Group www.aiicfl.com FL5 American Safety Insurance Service, Inc www.amsafety.com N2, N3 Anderson & Murison, Inc. www.andersonmurison.com W18 Applied Systems www.appliedsystems.com N31 Applied Underwriters www.applieduw.com W7; SC7; SE7; E7; M7 Arcana Insurance Services www.arcanainsurance.com N36 ARGO www.argoprous.com W27, W29, W31; SC15, SC17, SC19; SE15, SE17, SE19; E15, E17, E19; M15, M17, M19 Arrowhead General Insurance Agency www.arrowheadgrp.com W21 Assurant Specialty Property www.assurantspecialtyproperty.com N21 Astonish Results www.astonishresults.com W10; SC10; SE12; E8; M12 Atlass Insurance Group www.atlassinsurance.com FL16 Burnett & Company www.bcoinc.com SC22 Burns & Wilcox Ltd www.burnsandwilcox.com W9; SC13; SE3; E3; M14 Capitol Insurance Companies www.capitolindemnity.com N30 Catlin US www.catlinus.com W11; SC11; 13; E9; M13 Century National www.cnico.com W19 City of Hope www.cityofhope.org N35 CRC Insurance Services www.crcins.com N33 Driven Solutions www.driven-solutions.com N26 Engle, Martin, & Associates, Inc. www.englemartin.com N41 Epic Premier Insurance Services www.epic-premier.com N42

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Freberg Environmental www.feiinsurance.com N24 FSLSO www.fslso.com FL19 General Star www.generalstar.com W23; SE14; E16; M18 GIC Underwriters, Inc. www.gicunderwriters.com FL11 Gorst & Compass Insurance www.gorstcompass.com W17 Granada Insurance Company www.granadainsurance.com FL13 Great American- SHS Surplus www.specialtyhumanservices.com N28 Great American- Specialty Human Services Division www.specialtyhumanservices.com N12 Hallmark Specialty Insurance Company www.hallmarkgrp.com SC21 IICF www.iicf.org W24; SC12; SE10; E10; M10 Independent Insurance Agents of Texas www.iiat.org SC25 Lexington www.lexingtoninsurance.com W26; SC16; SE16; E14; M21 Liberty Mutual www.libertymutual.com W25; SC14; SE9; E11; M11 M.D. Jensvold & Company, Inc. www.mdjensvold.com SC18 M.J. Hall & Company, Inc. www.mjhallandcompany.com W20 MacNeill Group, Inc. www.macneillgroup.com FL9 McClelland & Hine www.mhi-tx.com SC20 Midlands Management Corporation www.midlandsmgmt.com N32 MJ Kelly Company www.mjkelly.com FL14 Monarch E & S Insurance Services www.monarchexcess.com W13 Morstan General Agency of Florida www.morstan.com FL7 MSB - Marshall & Swift/ Boeckh www.msbinfo.com N10 Nautilus Insurance Company www.nautilusinsgroup.com N25 Navigators Management Company, Inc. www.navg.com N23 Oak Street Funding www.oakstreetfunding.com N9

Pacific Gateway Insurance Services www.pgiainsurance.com W33 PersonalUmbrella.Com www.personalumbrella.com W5; SC5; SE5; E5; M5 Pilot www.pilotcat.com N15 R. E. Chaix www.rechaix.com W22 Regency Insurance Brokerage Services www.regencyinsurancebrokerage.com FL20 RistMeter.com www.riskmeter.com N20 RLI www.rlicorp.com N13 Ryan Specialty Group www.ryansg.com W15; SC9; SE11; E13; M9 Scottsdale Insurance Company www.scottsdaleins.com W2; SC2; SE2; E2; M2 Shelly Middlebrooks & Olearly Inc. www.shellyins.comq FL17 Specialty Insurance Managers www.simtexas.com SC23 St. James Insurance Group www.stjamesinsurance.com FL3 State Fund First www.statefundfirst.com W35 Sunderland Insurance Services, Inc. www.sunderlandins.com N34 TAPCO www.gotapco.com N27 Tejas American General Agency www.taga1.com SC3 Tower Hill Insurance www.thig.com FL15 U.S. Risk www.usrisk.com N37 United Contractors Insurance Agency www.ucisg.com N5 Vantiv www.vantiv N14 Western World Insurance Company www.westernworld.com N29 Westrope www.westrope.com W88; SC76; SE70; E70; M72 Worldwide Facilities, Inc. www.wwfi.com N11 Zurich Insurance Company www.zurichna.com W87; SC75; SE69; E69; M71

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Agency Financial Products Directory

elcome to Insurance Journal’s 2012 Agency Financial Products Directory. This directory is a listing of companies that provide financial services for independent agencies, including firms that can assist with mergers and acquisitions, valuations, agency compensation, owner/producer compensation plans, capital loans and more. All information contained in this directory was submitted by the financial services provider. Insurance Journal is not responsible for inaccurate information submitted by respondents. To be listed in future editions of Insurance Journal directory issues, contact Kristine Honey at: khoney@insurancejournal.com.

Agency Brokerage Consultants

Colonnade Securities, LLC

James O’Brien Associates

1600 Sarno Rd., Ste. 113, Melbourne, FL 32935 Phone: (321) 255-1309, Fax: (321) 600-2091 Email: louvescio@bellsouth.net www.agencybrokerageconsultants.com

125 S. Wacker Dr., Ste. 30202, Chicago, IL 60606 Phone: (312) 425-8145 Email: smiller@coladv.com www.coladv.com

1035 W. Lake St., Ste. 201, Chicago, IL 60607 Phone: (312) 382-7080, Fax: (312) 243-9677 Email: patrick@coface-midwest.com www.coface-midwest.com

· Insurance Agency Merger & Acquisition Specialists – We Know & Understand the Insurance Marketplace · Sell Side & Buy Side Intermediary Services · Valuations and Exit Planning Consulting

· M&A advisory and capital raising for brokers, carriers, premium finance, warranty finance · Senior bankers execute from start to finish · References from leading insurance brokers and carriers

· Credit Risk Management Strateies, Business Information, Collection Services & Factoring. · Provide credit insurance services to protect and meet trade recievable needs and goals. · Credit reports from over 200 countries & 50 million companies for credit risk management control.

Agency Funding, LLC

FIRST Insurance Funding

415 4th St. NE, Charlottesville, VA 22902 Phone: (877) 204-1275, Fax: (866) 716-8820 Email: Service@AgencyFundingLLC.com www.agencyfundingllc.com

450 Skokie Blvd., Ste. 1000, Northbrook, IL 60062 Phone: (800) 837-3707, Fax: (800) 837-3709 Email: marketing@firstinsurancefunding.com www.firstinsurancefunding.com

· Asset-based capital loans for insurance agencies · Collateralized insurance renewal commissions · 31M invested over 72 transactions with less than 1% total principle loss

· Financial solutions including and beyond premium finance designed specifically for P&C Agencies · Life Insurance Financing for High Net Worth Individuals · Banking, Treasury and Wealth Management Services for P&C Agencies

MacDonald Advisory Services 104 Flamingo Dr., Crossville, TN 38555 Phone: (931) 337-0208, Fax: (610) 884-2140 Email: tmacd47@charter.net · Agency Mergers and Acquisitions · Agency Valuations, Perpetuation consulting · Expert witness, litigation support on valuation and economic damages

Brady Financial Group, LLC MarshBerry

300 N. Pottstown Pike, Ste. 110, Exton, PA 19341 Phone: (484) 653-6280, Fax: (484) 631-0523 Email: mike@bradygrp.com www.bradygrp.com

InsurBanc · Agency Valuations, Merger & Acquisitions Support, Perpetuation Planning · Strategic Agency Planning, Financial/Operational Metrics Assessment · 20+ years industry experience as Top 50 Agency CFO and Consulting Practice

10 Executive Dr., Farmington, CT 06032 Phone: (866) 467-2262, Fax: (860) 677-9793 Email: agencyfinancing@insurbanc.com www.insurbanc.com · Federally-chartered bank, exclusively serving the financial needs of insurance agents and brokers. · Agency financing solutions for acquisition, perpetuation and refinance transactions. · Comprehensive cash management program for depository and investment needs. Member FDIC

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2012 Agency Financial Products Directory.indd 22

4420 Sherwin Rd., Willoughby, OH 44094 Phone: (440) 354-3230 Email: MarshBerry@MarshBerry.com www.MarshBerry.com · Mergers & Acquisitions, Valuations, Strategic Planning and Agency Compensation · Pre-Acquisition Planning services, Deal Execution services and Post-closing management services · Over 267 Transactions with Top 100 Brokers and 157 Bank Insurance M&A Transactions

www.insurancejournal.com

10/1/12 11:38 AM

Springtree Group 1504 Prairie Dr., Carrollton, TX 75007 Phone: (972) 395-8811, Fax: (972) 395-8811 Email: Springtree@aol.com www.SpringtreeGroup.biz

OPTIS Partners, LLC

Merger & Acquisition Services, Inc. 336 E. 53rd St., 2nd Fl, New York, NY 10022 Phone: (212) 750-0630, Fax: (917) 591-8998 Email: info@maservices.com www.maservices.com · Mergers & Acquisitions, Capital Raising, Valuations · Boutique Investment Bank exclusive to Insurance Industry · Over 100 Transactions in past 10 years

Mystic Capital Advisors Group, LLC 165 Madison Ave., Ste. 402, New York, NY 10016 Phone: (212) 251-0972, Fax: (212) 545-9045 www.mysticcapital.com · Mergers & Acquisitions, Due Diligence, Business Valuations · Perpetuation & Succession Planning, Lender Advisory Services, Owner and Producer Compensation Plans · Our clients: insurance agencies & brokerage firms, MGAs, program admins, insurance aggregators and wholesalers, banks, insurance companies & TPAs.

Oak Street Funding, LLC 11350 N. Meridian St., Ste. 600, Carmel, IN 46032 Phone: (866) 625-3863, Fax: (317) 428-3801 Email: marketing.box@oakstreetfunding.com www.oakstreetfunding.com · Commission-based commercial financing exclusively for insurance professionals · Grow your business, consolidate debt, purchase another book of business or have working capital · Loans from $10,000 to $10,000,000; we’ve loaned nearly $200 million to over 1200 agents in 46 states

53 W. Jackson Blvd., Chicago, IL 60604 Phone: (312) 235-0081 , Fax: (312) 312-235-0085 Email: Menzer@optisins.com www.optisins.com · Acquisition/Sale/Merger-Representation, Planning & Facilitation · Fair Market Valuation · Perpetuation Planning; Financial Consulting; Producer Compensation

· We offer a full spectrum of financial services & products to Agents, Brokers and insurance support companies. As a privately owned firm, we finance, invest, acquire, sell and consult in insurance-related businesses. · If owner’s goal is to buy out a partner, purchase a book of business or company, sell a portion of the company, take money off of the table or structure a perpetuation plan we have the financial facilities to make it happen.

Professional Growth Opportunities

TWG Capital, Inc.

17 Patton Dr., East Brunswick, NJ 08816 Phone: (732) 937-6500, Fax: (732) 545-9056 Email: johnm@progrowops.com www.progrowops.com

6666 E. 75th St., Ste. 500, Indianapolis, IN 46250 Phone: (877) TWG-CPTL Email: info@TWGcapital.com www.TWGcapital.com

· Merger & Acquisition, Strategic Alliance and Executive Search Consulting · Strategic Planning, Valuations, Capital for Growth · We strive to put together successful transactions that are to the long-term benefit of all of the parties involved.

· We specialize in providing capital for independent agents, agencies, and carriers to grow, reposition, or sell their business. · TWG Capital focuses primarily on agents and carriers writing long-term care, Medicare Supplement, critical illness, disability & other senior market products. · Purchase your commissions or Loan against them for immediate cash.

Rainmaker Advisory, LLC 6663 SW Beaverton-Hillsdale Hwy, Ste. 288 Portland, OR 97225 Phone: (503) 716-8449 , Fax: (503) 297-7838 Email: info@rainmakeradvisory.com www.rainmakeradvisory.com · Sales & operations consulting firm specializing in retail insurance broking sector for all practice disciplines nationwide. · Low monthly subscription, cloud based environment with tools, templates, best practice vendor resources, collaboration forums & ‘deal rooms’ with the ThunderCloud environment. · Enable producers of all practice disciplines to win more new business & successfully manage the growth of their book through our Sales Builder Programs.

Optimum Performance Solutions, LLC P.O. Box 13911, Tampa, FL 33681 Phone: (813) 835-7337, Fax: (813) 354-2595 Email: jon@optperform.com www.optperform.com · Agency valuations, mergers & acquisitions, perpetuation planning, compensation plans · Marketing & retention plans, workflow analysis, strategic planning, staff training · Providing insurance professionals with the information and advice they need to make informed, intelligent decisions. www.insurancejournal.com

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IDEA EXCHANGE

Closing Quote

Beyond ‘Profits-Only’: 3 Trends That Will Affect Your Bottom Line

G By Steve Richerson

lobal trends are like a river. Sometimes they are powerful, sometimes they are weak and sometimes they are so mellow a business can glide along like it’s on a leisurely, summer afternoon pontoon boat ride. But right now there are three big, scary trends that are not going to be leisurely. 1. Resource Roulette. The stress that global supply chains are under is making resource availability and access precarious and unpredictable. This, in turn, makes it difficult for businesses to set prices, determine shipment dates, establish baseline costs, or create just-in-time delivery timelines if those conditions exist. If energy costs fluctuate wildly, if product shipments are held up thanks to global unrest or catastrophic weather, or if resources needed for production dry up, this creates chaos and affects the bottom line. Coca-Cola is a soft drink; its predominant ingredient is clean water. If the company that makes it doesn’t have access to clean water, it can’t produce as single can of CocaCola. No clean water results in no Coke. Some southern states have had severe drought conditions for the past several years, a condition being echoed around the globe. Resource roulette, however, extends beyond clean water. Many global fisheries are depleted. Fishery depletion may not affect every business directly; many may never even think about global fisheries. But fishermen, restaurateurs, boat manufacturers, and those providing transportation to fish markets or any other global connection to that industry will be affected. The world has always been one globally connected biological ecosystem; it is now a globally con-

N48 | INSURANCE JOURNAL-NATIONAL REGION October 8, 2012

nected economic system as well. 2. Amped Expectations. Consumers want their products to be quality, affordable and readily available, but they have now extended product expectations to the actual company itself. They want the companies they do business with to be responsible for how they treat the environment, their local communities and their own employees. Consumers worldwide have a hunch that 7 billion people can’t survive and thrive doing business the way its been done in the past. As a result, they’re demanding changes in the products they buy and the companies they choose to do business with. ] 3. Global Connectivity. Communication in the 21st century is decentralized, personal, fast, cheap and capable of becoming exponentially viral. For businesses, this connectivi- Ask: Is a business decision ty is a blessing and a curse. good for profits, people The blessing: Businesses and the planet? can connect directly to customers all over the world quickly, easily and inexpensively. The curse: Those same customers can do the same thing if they’re not happy with a company’s performance, and their negative impact can grow exponentially and harm a company’s reputation. In the modern world, reputation harm can mean financial catastrophe for companies. If a company is doing a poor job according to the customer, in a matter of minutes the customer can shoot a complaint video, start a Facebook page, share a Tweet, and the bad news is everywhere. Navigating the Waters The best hope to navigate these treacherous waters is to reorient a business focus from a “profits only” bottom line approach (which no longer meets the needs of shareholders and stakeholders) to a “triple bottom line: a people, planet and profits” approach. Why? Because it meets these three trends head-on. Is this approach easy? No way. Is it important? Yes. Will it succeed? Probably, although there are no guarantees, but there’s no guarantee that any business strategy will be successful. To do nothing almost guarantees failure; the trends are too huge. Owners can get started by asking a simple question: “Is this business decision good for 1) profits, 2) people, 3) the planet?” Many companies have already begun moving in this direction and it’s paying off for their “bottom line” profits. If a business is going to ride the rough waters in the 21st century, it must integrate sustainability into the way it does business. It’s what consumers want, and it’s the path for long-term business success. Richerson is a speaker and consultant on the importance of sustainability and guidelines to enact eco-friendly practices in business. As a member of the U.S. Green Building Council, National Recycling Coalition and the North American Environmental Education Association, he is spearheading the campaign to reduce wasteful corporate procedures and promote environmentally sound business methods. Website: www.greenbizspeaker.com. Phone: 256-710-7216. Email: steve. richerson@gmail.com. www.insurancejournal.com

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ENSURING INSURANCE

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