Insurance Journal

02.23.09 SOUTH CENTRAL.qxd

2/22/09

CHANGING DEMOGRAPHICS Offer a World of Opportunity

4:20 PM

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2008 FARM BILL Creates New Insurance Categories

RETAIN TOP PERFORMERS With Budget-Friendly Ideas

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Insurance products are issued and underwritten by one of Universal North America’s insurance companies: Universal North America Insurance Company or Universal Insurance Company of North America. Issuance of coverage is subject to underwriting review and approval. Products may not be available in all states.

Texas Mutual Insurance Company © 2009

Chris Rooker M A NAGI NG D IRECTOR H IGGI NBOTHA M & A SSOCIATES

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Inside This Issue February 23, 2009 • Vol. 87, No. 4 • South Central Region

SOUTH CENTRAL 12

| Study Unveils Target Areas for Flood Policy Sales But More Subsidized Premiums Could Sink Program

IDEA EXCHANGE N10 | Budget-Friendly Ideas to Retain Your Top Performers Career Development, Mentors and Flexible Schedules Can Help

N6 SPECIAL REPORT: Agency Salary Survey Agencies Trim Payrolls and Raises

N26 | Valuing the Deal: It’s What You Keep that Matters Hard Costs, Holdbacks and Soft Costs Impact Every Deal

N12 Agribusiness/Farm and Ranch Top 5 Insurance Issues for Farmers in a Soft Economy

44 | Changing Demographics Offer a World of Opportunity to Enterprising Agents

NATIONAL COVERAGE N1

N2

| The Relative Calm Industry Insiders Credit Risk Management for Minimizing Recession’s Impact | Reinsurers Seem Ready to Flex Muscles Predict Prices Should Increase by DoubleDigits

N4 | International Coverage Hope, Straight Talk and Despair Amid the Ruins N6 | SPECIAL REPORT: Agency Salary Survey Agencies Trim Payrolls and Raises N12 | Spotlight: Agribusiness/Farm and Ranch Top 5 Insurance Issues for Farmers in a Soft Economy

46 | Operational Efficiency Should be Priority No. 3 for Agency Managers The Hartford’s Juan Andrade on Managing During Difficult Times

44

48 | Legal Beat: The Paradox of Flood Insurance You May Not Know What You Think You Know About the Coverage

Changing Demographics Offer a World of Opportunity to Enterprising Agents

54 | Closing Quote: Implications of the 2008 Farm Bill Could Reduce Agent Commissions

DEPARTMENTS 8 11 14 N16

| | | |

Opening Note Business Moves People MyNewMarkets

N19 | Closer Look: Boats and Marinas 5 Solutions for Marine Clients in Today’s Challenging Times N22 | Closer Look: Boats and Marinas Marine Broker, Carrier Share Views on the Market

6 | INSURANCE JOURNAL-SOUTH CENTRAL REGION February 23, 2009

48 The Paradox of Flood Insurance You May Not Know What You Think You Know

www.insurancejournal.com

Who insures you doesn’t matter.

Until it does.

Financial Strength and Exceptional Claim Service Property | Liability | Executive Protection | Workers Compensation | Marine | Surety Homeowners | Auto | Yacht | Jewelry | Antiques | Accident & Health Chubb Group of Insurance Companies ("Chubb") is the marketing name used to refer to the insurance subsidiaries of The Chubb Corporation. For a list of these subsidiaries, please visit our website at www.chubb.com. Actual coverage is subject to the language of the policies as issued. Chubb, Box 1615, Warren, NJ 07061-1615

Idea Exchange Opening Note Publisher Mark Wells Chief Executive Officer Mitch Dunford

‘Sometimes You Just Have to Ask’

Y

ou don’t have to be Hispanic to join the Hispanic Chamber of Commerce.”

George Saenz Sr., founder of Cielo Vista Insurance Agency in El Paso, Texas, made that comment when I spoke to him while researching an article on how agents can expand their revenues by tapping into diverse populations (“Changing Demographics Offer a World of Opportunity to Enterprising Agents,” page 44).

Saenz noted that joining special interest business organizations is a great way to meet and network with people outside of one’s typical sphere of influence. One doesn’t have to be African American to join the African American chamber, or Asian American to join the Asian American chamber, and so on and so forth, either. And as every agent worth his or her license knows, people like to do business with people they know. Or at least with someone their friend, nephew, colleague or cousin knows.

“The fact of the matter [is] the demographics of the country are changing pretty dramatically,” said William Pierson, assistant vice president for agent development for the Independent Insurance Agents and Brokers of America. And agents who wish to take advantage of that trend would do well to try and understand the diverse cultures that exist in their communities. “This is a business opportunity,” Pierson pointed out. “It’s all about productivity and profit and growing your business.”

Pierson is right.

The demographics ‘It’s all about of the United States are changing draproductivity matically, and rapidly. In a little more and profit and than 30 years nonHispanic growing your Caucasians will no longer comprise the majority in this country, according to the business.’ U.S. Census Bureau.

With absolutely no statistics to back up this notion, I have the feeling that many independent agents may be missing out on the business opportunities that exist in expanding minority, ethnic or culturally diverse communities. One reason, as Pierson pointed out, is that the independent insurance agency system in general is less widely known and understood than the likes of captive insurance networks such as State Farm and Allstate.

But, Pierson noted, if agents are willing work at understanding and tapping into a culture that may be different from their own, there’s a lot of opportunity out there.

Independent agents, he said, are local; they know their communities and they pride themselves on a superior level of service. Many “cultural groups are not going to buy insurance through the Internet,” Pierson said. “It’s a hand-holding type of service that is going to be more effective.”

While breaking into a new and different cultural community may seem intimidating, it may not be as difficult as it appears. Sometimes, George Saenz Sr. said, “You just have to ask.”

Stephanie Jones South Central Editor sjones@insurancejournal.com

EDITORIAL Editor-in-Chief Andrea Ortega-Wells | awells@insurancejournal Vice President/Content Andrew Simpson | asimpson@insurancejournal.com Midwest Editor Andrew Simpson | asimpson@insurancejournal.com East/Southeast Editor Andrew Simpson | asimpson@insurancejournal.com East/Associate Editor Kenneth J. St. Onge | kstonge@insurancejournal.com South Central Editor Stephanie K. Jones | sjones@insurancejournal.com West Editor Patricia-Anne Tom | ptom@insurancejournal.com MyNewMarkets Associate Editor Chris Boggs | cboggs@insurancejournal.com International Editor Charles E. Boyle | cboyle@insurancejournal.com Columnists Susan Henry Contributing Writers Jerry Hillard, Christopher Leliaert, Chris Ohrenich, Robert Redfearn Jr., Alfonso Ventoso

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 Eric Jeter (281) 655-0234 ejeter@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

MARKETING Marketing Administrator Gayle Wells | gwells@insurancejournal.com Marketing/Design Assistant Ryan Graef | rgraef@insurancejournal.com Advertising Coordinator Erin Burns | eburns@insurancejournal.com (619) 584-1100 x120 New Markets Sales Manager Kristine Honey | khoney@insurancejournal.com Classified and Ancillary Sales Manager Nicola Coghill | ncoghill@insurancejournal.com (619) 584-1100 x125 New Media Producer Chad Reese | creese@insurancejournal.com

DESIGN/WEB Vice President/Design Guy Boccia | gboccia@insurancejournal.com Vice President/Technology Joshua Carlson | jcarlson@insurancejournal.com Graphic Designer Jamie Bethell | jbethell@insurancejournal.com Web Developer Jeff Cardrant | jcardrant@insurancejournal.com

A D M I N I ST R AT I O N Accounting Manager Megan Sinclair | msinclair@insurancejournal.com Admin./ Marketing Asst.

Kristina Delavega | kdelavega@insurancejournal.com Cover designed by: Jamie Bethell

Insurance Journal, The National Property/Casualty Magazine (ISSN: 00204714) is published semi-monthly 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 2008 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

8 | INSURANCE JOURNAL-SOUTH CENTRAL REGION February 23, 2009

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m

South Central Coverage Snapshot

It Figures 17 In the wake of deadly tornadoes that swept through sections of Oklahoma on Feb. 10, Gov. Brad Henry declared a state of emergency for 17 Oklahoma counties. A tornado in the town of Lone Grove initially killed eight people and injured dozens more. A man who was injured in the storm and transferred to a Dallas hospital reportedly died later from his injuries. Twisters caused extensive damage in several Oklahoma communities, including Edmond, Oklahoma City, Pawnee, Wilson and Springer. The Lone Grove tornado is the deadliest in Oklahoma since 1999, according to the governor’s office. On May 3 of that year, tornadoes in the central part of the state resulted in more than 40 deaths. The counties included in the governor’s declaration are: Canadian, Carter, Cleveland, Garvin, Jefferson, Lincoln, Logan, Love, Murray, Oklahoma, Pawnee, Payne, Pontotoc, Pottawatomie, Nowata, Osage and Washington.

1 in 5 As many as one in five businesses in Louisiana may be breaking the law requiring them to insure their workers against accidents, according to Associated Press reports. The Louisiana Workforce Commission and the Attorney General’s Office announced a new fraud detection program on Feb. 6. The Office of Workers’ Compensation typically learns about potential employer noncompliance from its fraud hotline or directly from its Finance and Compliance Section. Noncompliance can be the result of misclassifying employees, failing to maintain workers’ compensation coverage for employees or operating in the underground economy by working individuals completely off the books. Violators will face penalties of $250 per employee, per incident. Employers who continue to violate or intentionally violate these provisions may face larger fines, an injunction from conducting business in the state or the possibility of jail, the Workforce Commission reported.

$ 6.4 Million The Louisiana Department of Insurance Property and Casualty Consumer Affairs Division helped insurance consumers in the state to receive approximately $6,400,000 in insurance payments from claim disputes last year. The department reported that it was able to work with insurance companies and consumers involved in claims disputes to recover funds above the amount the insurers originally offered the consumers to settle their claims.

10 | INSURANCE JOURNAL-SOUTH CENTRAL REGION February 23, 2009

Declarations God, not Guns “Let us keep the sanctity of churches and put our faith in God and not in guns.”

— Rep. Steven Breedlove, a minister at the Valley View (Ark.) Church of Christ. The Associated Press reported that Breedlove and fellow Arkansas legislator/pastor, Rep. Otis Davis, said they couldn’t, in good conscience, vote for a bill that passed the state House of Representatives, which would allow concealed handguns in churches.

The bill’s sponsor, Rep. Beverly Pyle, R-Cedarville, said she introduced the measure after a series of church shootings across the country. Each individual church would decide whether to allow the concealed guns.

Can’t Wait for the Feds “We need to be proactive when the next hurricane strikes and we can’t wait for the federal government to take care of our citizens after a disaster.”

— Rep. Sylvester Turner, D-Houston. Turner is the chairman of the Texas House of Representatives Select Committee on Hurricane Ike, which formed in October to study ways Texas could have responded better to the September hurricane. The panel recommended revamping the funding for the Texas Windstorm Insurance Association, stronger building codes, expanding the sales tax holiday to include emergency survival items and putting $250 million in the state’s Disaster Contingency Fund, among other things.

A Good Bill “This is a good bill that provides an important safeguard for Oklahoma homeowners. … If something goes wrong, the contractors insurance will take care of it, not the homeowner’s.

That’s the way it should be.”

— Mike Means, executive vice president of the Oklahoma Home Builders Association. Means was commenting on legislation passed by an Oklahoma Senate committee that would require contractors to have general liability and workers’ compensation insurance before they can be issued residential building permits. Senate Bill 306 is sponsored by Sen. Debbe Leftwich, an Oklahoma City Democrat.

Advocating for Small Business “I wish to begin my brief colloquy with a statement that might be surprising to some who are listening, that 40 percent of all the capital in the country for small business, basically, comes through or touches the Small Business Administration.”

— Louisiana Sen. Mary Landrieu. Landrieu, a Democrat and chair of Senate Committee on Small Business and Entrepreneurship, and Ranking Member Olympia J. Snowe, R-Maine, have advocated for key small business provisions in the U.S. Economic Recovery Package, including provisions to increase access to capital for small firms and temporarily eliminate fees on flagship loan programs; key assistance to microbusinesses; funding for the SBA’s surety bond program; and $10 million for oversight of small business stimulus funds. www.insurancejournal.com

South Central Coverage Business Moves Burnett Holdings, QBE New Orleans-headquartered insurance wholesaler Burnett Holdings Inc. (Burnett) was acquired by QBE Holdings Inc. (QBE), part of Sydney, Australia-based QBE Insurance Group, effective Dec. 31, 2008.

The company will continue to operate under the name of Burnett & Co. Inc., and its management team will remain unchanged.

With immediate effect, Burnett will act solely on behalf of QBE Marine & Energy Syndicate 1036 at Lloyd’s as a full binding coverholder for all classes of business.

Burnett, with offices in New Orleans and Houston, is headed

by President John Burke. The firm specializes in underwriting marine and energy business, and its product offerings include control of well, oil and gas liabilities, and social services liabilities. Under the agreement, Burnett will have the ability to offer lead or follow subscription lines with its QBE facility, as well as the capability to place the remainder of the account with other markets on a facultative basis. The company will continue to consider both onand off-shore exposures.

Established in 1886, QBE Insurance Group is rated “A+” by Standard & Poor’s. Active in both insurance and reinsurance, QBE operates out of 45 countries, with a presence in all key insurance markets.

QBE Marine and Energy 1036, headed by Colin O’Farrell, managing director, has an underwriting capacity of £215m for 2009. The syndicate underwrites a worldwide account, specializing in hull, energy, liability, specie, cargo, political risks, war and allied risks.

Arthur J. Gallagher & Co., PartnerSource Illinois-based Arthur J. Gallagher & Co. acquired retail insurance broker and consultant PartnerSource Inc. in Dallas.

Organized in 1994, PartnerSource specializes in the design, implementation and ongoing support for nonsubscription programs, an alternative for Texas workers’ compensation, for their clients with operations in Texas.

PartnerSource also provides non-medical employee benefit programs. Its national and multi-national clients are generally in the retail, manufacturing, healthcare, transportation, food service and hospitality industries. www.insurancejournal.com

Bill Minick, Russell Huber, Richard Johnson and their associates will continue as a separate operating unit under the direction of Mike Henthorn, South Central regional manager of Gallagher’s retail property/ casualty brokerage operation.

G4S, National Unity North Carolina-based G4S Compliance & Investigations formed a partnership with National Unity Insurance Co., a Texasheadquartered company specializing in providing liability insurance for Mexican private and commercial auto while traveling in the United States and Canada.

Under the agreement, G4S will work with National Unity to proactively reduce fraud. By partnering with G4S to enhance its current services, National Unity has access to a Special Investigations Unit with a national scope, according to the companies’ announcement.

Working with National Unity, G4S has developed an integrated program to efficiently and effectively conduct their entire field SIU and suspect claim investigations, including surveillance and task-oriented assignments, using G4S’ CaseTrak technology to manage the entire process.

G4S Compliance & Investigations is the largest employer quoted on the London Stock Exchange and has a secondary stock exchange listing in Copenhagen. G4S has operations in more than 110 countries and more than 570,000 employees.

Powter Insurance, O’Neal Insurance Powter Insurance, based in McKinney, Texas, announced it acquired the O’Neal Insurance Agency of Burleson, Texas. O’Neal Insurance Agency owner Jerita O’Neal will join Powter, bringing many years of experience in property, casualty and group benefits insurance to Powter. The acquisition is Powter’s second in the Ft. Worth/Arlington market.

CEO John Powter said his firm is continuing to target agencies to acquire those that enhance his agency’s cross-selling abilities and provide value to the combined customer base.

Infinity Insurance Infinity Insurance announced it opened a

new 325 seat call center in McAllen, Texas.

The facility houses claims and customer service representatives who are trained to handle calls from Infinity’s large base of Spanishspeaking customers from across the United States.

The company estimates that more than half of its customers are Hispanic in targeted urban areas, and reports that many of those customers prefer to interact in Spanish.

Infinity broke ground on the project seven months ago and has been operating the call center from a temporary space in McAllen during construction.

Alabama-based Infinity Insurance is a national provider of personal automobile insurance and part of the Infinity Property and Casualty group of companies.

BancInsure Oklahoma-based BancInsure’s insurance and risk management products are now available to Texas bankers through their local independent insurance agents, the company announced. BancInsure is a full-line independent insurer specific to financial institutions.

The Texas Bankers Association (TBA) was a founding partner in BancInsure more than 22 years ago, and BancInsure and Texas Bankers Association continue a strong partnership, the company said.

Headquartered in Oklahoma City, BancInsure holds an “A-” (Excellent) with a stable outlook A.M. Best rating, is endorsed by 18 banking organizations and is licensed in 48 states.

CAA, Western Insurance Agency Austin, Texas-based Combined Agents of America LLC (CAA) welcomed Tom Boren Insurance Agency Inc., dba Western Insurance Agency of Copperas Cove, as its 38th member agency. Western Insurance Agency has served the Texas hill country for more than 30 years with a complete line of insurance products, including auto, home, business, life and health insurance.

CAA also congratulated member Mark Bridges, of Edmond, Deaton & Stephens of Amarillo (a division of Duncan, Fraser and Bridges Insurance Agency Inc.) and son of CAA Immediate Past President Bill Bridges, for being installed as president of the Independent Insurance Agents of the Panhandle. IJ

February 23, 2009 INSURANCE JOURNAL-SOUTH CENTRAL REGION | 11

South Central Coverage News & Markets

Study Unveils Target Areas for Flood Policy Sales But Selling More at Subsidized Premiums Could Sink Flood Program than half of the subsidized policies are currently concentrated here are a number of comin five states with relatively high munities across the country flood risk: California, Florida, where more flood Louisiana, New Jersey and Texas. insurance policies Current low participation rates should be sold — around 50 percent of singlegiven their populafamily homes in high-risk areas tions and flood — leave room for substantial risk. They include growth in the number of NFIP dozens of counties policies, many of which Areas with Flood Policy Sales Potential that have had mulwould be likely to receive The GAO compared the number of NFIP policies tiple flood disassubsidized rates. in a given area as of September 2006, with the total ters but are not The policies receiving subnumber of county flood declarations from January 1980 sidized rates have been a part of the federal to June 2008, cumulative flood claims payments from flood insurance financial burden on the proJanuary 1978 to April 2008, and population as of 2004 program. gram, with total claims for counties and 2005 for states. Among other things, The “catch-22” exceeding premiums by $962 the GAO found: for policymakers million from 1986 through • The five combined states of Iowa, Michigan, is that while the 2004, before the large losses Minnesota, Missouri and Wisconsin, when compared to Collier County, Fla., communities may need the from the 2005 hurricanes. had more county flood disaster declarations (2,092 versus 12), significantly coverage, selling more poliIn reforming NFIP, more flood claims payments ($704.6 million versus $12.5 million), and a much cies in these areas would Congress is expected to evallarger population (28.9 million versus 297,000), but a similar number of NFIP likely add to the losses that uate the impact of subsiundermine the financial sta- policies (80,572 versus 85,246). dized premium rates, while • The four combined states of Kansas, Nebraska, South Dakota and North bility of the national flood balancing the public policy Dakota, when compared to Oregon, had more county flood disaster declarainsurance program. That’s goals of charging actuarially tions (1,346 versus 124) and three times more in flood claims payments ($244.8 because the premiums honest premium rates, million versus $76.7 million), but a similar number of policies (30,683 versus charged would not reflect encouraging broad program the actual risk in these com- 29,780) for a much larger population (6 million versus 3.6 million). participation through affordmunities and would be sub- • Iowa, when compared to New Mexico, had almost 10 times more county able rates and limiting costs flood disaster declarations (558 versus 56), and about eight times more in flood to taxpayers. sidized, unless Congress changes the pricing formula. claims payments ($65.9 million versus $8 million) but almost 30 percent fewer GAO identified places (see policies (10,185 versus 14,455). Iowa’s population was larger than New Mexico’s The U.S. Government sidebar) where sales of flood Accountability Office (GAO), (2.9 million versus 2 million). policies appear to lag behind • 66 counties across the nation had flood disaster declarations but no comwhich researches issues at the need; that is, areas of the munities that had joined NFIP, including: Clay County, Ala., (population the request of members of country that appear to have Congress, recently reported 14,092) - seven flood declarations; San Francisco County, Calif. (744,230) higher populations and on the current subsidization three flood declarations; Henry County, Iowa (20,258) - six flood declaraflooding risks relative to tions; Winneshiek County, Iowa (21,188) - seven flood declarations; Adair of federal flood insurance their policy volumes when County, Ky. (17,575) - six flood declarations; and Dallas County, Mo. (16,328) - compared to other areas, and premiums and options for reducing this subsidization. eight flood declarations. thus have the potential for The GAO noted that while • 14 counties with populations of more than 100,000 had received one or more increases in the number of it constitutes a declining per- flood declarations but had very few NFIP policies. Those included: Potter NFIP policies. Of course, an centage of all National Flood County, Texas (118,000) - three flood disaster declarations but only six policies; increase in market penetraBibb County, Ga. (155,000) - four flood disaster declarations but only 13 policies; tion would likely bring an Insurance Program (NFIP) policies, the number of prop- and Carroll County, Ga. (102,000) - six flood disaster declarations but only 83 increase in the number of policies. IJ erties receiving subsidized subsidized policies, GAO premium rates has grown noted. IJ

By Andrew G. Simpson

T

since 1985; by 2007 it was at its highest point in almost 30 years.

The Federal Emergency Management Agency (FEMA) attributes this growth to several factors, including a growing

12 | INSURANCE JOURNAL-SOUTH CENTRAL REGION February 23, 2009

number of mortgages with mandatory flood insurance, the longer-than-expected life of the structures that are eligible for subsidies, increased awareness of the dangers of floods from several major recent disasters and increased NFIP marketing efforts.

According to the GAO, more

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South Central Coverage People

Stephen Stricklen

Chris Camero

Travis Bowles

Samar Aragon

Ashley Connolly

Lisa Sherman

America First Insurance, a Liberty Mutual Agency Markets regional company based in Richardson, Texas, appointed Stephen Stricklen assistant vice president, Specialty Products.

In this position Stricklen will manage the company’s new Farm & Ranch Division, as well as its rural agency appointment program County Seat.

Stricklen joined America First Insurance in May 2006 and was most recently regional vice president for the company’s business in Arkansas and Louisiana. A property and casualty specialist since 1972, Stricklen will manage a team of six agribusiness underwriters and assistants from the home office in Richardson.

Initially, America First Insurance is offering farm and ranch coverages in Kansas, Missouri, Oklahoma and Texas, with subsequent expansion into Arkansas and Louisiana.

Independent insurance and financial services firm Higginbotham & Associates added two brokers to its Austin, Texas, office. Higginbotham named Chris Camero an executive vice president for group benefits and Travis Bowles an account executive for commercial property/casualty.

Camero joined the Austin office from Madison Benefits Group, a Houston-based employee benefits brokerage and consulting firm that Higginbotham joined forces with in September 2008.

Higginbotham entered Austin’s property/casualty insurance market in 2004 and is looking to Camero to lead the growth of the office’s group benefits practice.

Camero has concentrated experience in benefit plan brokerage and underwriting, having worked for a number of benefits agencies and insurance carriers before joining Madison Benefits in 2004.

Higginbotham recruited Bowles, a recent college graduate, into its Producer Mentor Program to train him in commercial property/casualty insurance brokerage.

Bowles graduated with distinction from Texas Christian University in 2008 with a degree in communications.

Higginbotham’s Producer Mentor Program supports individuals who have demonstrated superior communication and entrepreneurial skills to build profitable books of business.

During the course of the program, Bowles will earn a property/casualty insurance license, study loss control strategies, train under a senior level broker and learn sales fundamentals. The firm credits its consistent organic growth in part to this program.

Towerstone Inc., a wholesale insurance broker and managing general agency headquartered in Dallas, has added three new employees.

Samar Aragon joined Towerstone as an account manager. She brings five years of experience as an assistant

14 | INSURANCE JOURNAL-SOUTH CENTRAL REGION February 23, 2009

underwriter with a local wholesale broker.

Ashley Connolly is a new account representative for Towerstone. Connolly has held a position as communications coordinator in Dallas and holds a bachelors degree in interdisciplinary studies with a concentration in business and psychology from the University of Texas.

Lisa Sherman was named office manager. Her experience includes two years with a large national broker as an executive/marketing assistant.

Dallas-based Apex Global Partners Inc. (AGP) expanded its Houston operations and appointed John Greig vice president of its Risk Management Division.

Greig has more than 15 years of experience in sales and risk management. In his new position, he will focus on contemporary risk management solutions to corporate clients in the greater Houston marketplace.

Prior to joining AGP, Greig was a risk management services broker for Aon. Apex Global Partners serves corporate clients in the areas of domestic and international brokerage and risk management consulting, as well as employee benefits and human resources consulting and outsourcing, and actuarial services. Apex works with more than 62 partners in 55 countries through its participation in WBN Ltd., the largest privately owned insurance broker network.

Quirk & Co., an insurance wholesaler headquartered in San Antonio, Texas, with branch offices in Austin, Dallas and Atlanta, recently named Merry Palmer manager of the Pacific Northwest Lines Team and Cheri Bahmanyar underwriter for the Oregon office.

Palmer’s focus will be on sales and marketing in Washington and Oregon. She has more than 25 years of experience in the insurance industry.

Bahmanyar will underwrite risks in Washington and Oregon. She also has more than 25 years of insurance experience.

Property/casualty insurance company Zenith National Insurance Corp. said board member Leon Panetta has resigned to become director of the U.S. Central Intelligence Agency.

President Barack Obama chose Panetta, a former chief of staff to President Bill Clinton and a former Democratic congressman from California, to head the agency.

Panetta had served as a member of Zenith’s audit committee and its nominating and corporate governance committee.

Zenith named Jerome L. Coben, a partner at Zeughauser Group, as Panetta’s replacement. Coben will serve on the audit committee and the health care committee. IJ www.insurancejournal.com

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National Coverage News & Markets

The Relative Calm At New York Forum, Industry Insiders Credit Risk Management for Minimizing Recession’s Impact

By Kenneth J. St. Onge

T

o many, the insurance world seems to operate on its own theory of physics. And to the hundreds of high-powered industry execs who gathered on the third floor of the Waldorf-Astoria in New York earlier this year, there is a new way to explain — or, at least, describe — how it’s all working: The theory of “relativity.”

“Property casualty did quite well last year on a relative basis, given the damage to balance sheets,” said Vincent (V.J.) Dowling, managing partner of Dowling & Partners, a Connecticut-based institutional stock brokerage specializing in P/C and other lines of insurance. “I think it comes out with its model unbroken.”

To put it another way: Not as bad as the other industries hammered by recession, namely retail, automotive, Wall Street, real estate and manufacturing, to name a few battered sectors which have seen massive layoffs, losses and consolidation. So despite a year that saw the collapse of a bellwether company (AIG) and huge financial strains damaging others (The Hartford, for example), the industry actually did not perform too badly.

Relatively.

Dowling was one of six speakers during the first afternoon panel of the Insurance Information Institute’s annual Joint Industry Forum, a half-day

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gathering featuring two panels of executives, regulators and other industry watchers who tried to distill a year’s worth of challenges into some meaningful insight to the future of the industry.

“Relative”-ity was a phrase oft-repeated.

“Surplus is down $80 billion, and while significant, it’s not catastrophic,” said Michael Pritula, a director of McKinsey & Co.’s global insurance practice. “Retail, securities (and others) are down. Relative to those other groups, this is a relative calm. It was an OK 2008, all things considered.”

For some, given the conditions, the industry’s performance in 2008 left a lot of reasons to applaud.

“We had the double whammy in 2008,” said Charles (Chuck) Kavitsky, chairman, president and CEO of Allianz

‘The business model of the P/C industry remains strong, vital and proven yet again,’ said Michael S. McGavick, chief executive officer of XL Capital Ltd. of America Corp. “Between the catastrophe issues that we had to deal with as well as what was happening in the financial

markets, we had a pretty significant test and the industry did great.”

Risky Business But why did the industry do great? According to panelists, the insurance world pulled through the storms of 2008 because of its

In the not too distant future, Connecticut Insurance Commissioner Thomas Sullivan predicted ‘we’ll see some systemic risk regulator in Washington.’ experience and insight into risk management.

“The industry has weathered the storm,” said Thomas Sullivan, commissioner of insurance in Connecticut. “(Insurers) seem to be very good risk managers.”

Pritula agreed, adding that the financial troubles faced by all insurers will create a new culture of back-to-basics risk management in a lot of companies — a move he applauded. “A crisis is a terrible thing to waste,” he joked.

Pierre L. Ozendo, CEO of the Americas Division at Swiss Re, said the P/C industry is resilient because it is conserva-

tive in its risk management and focused on a strong business model “that has been proven over hundreds of years and continues to be proven today.”

Michael S. McGavick, CEO of XL Capital Ltd. agreed.

“The business model of the P/C industry remains strong, vital and proven yet again.

We’re the survivor or beneficiary because we spend every moment focusing on the worst that can happen.

Whenever we don’t start from there we put ourselves at risk of being the alternative outcome.”

Changes Ahead?

But Connecticut Commissioner Sullivan also credited regulation with helping to ensure the industry — which despite economic troubles saw no P/C insolvencies — handled the downturn as well as it has. “State-based regulation works. This has proven it.”

But he also said that changes in the regulatory structure of insurance could be coming. In the not too distant future, Sullivan predicted “we’ll see some systemic risk regulator in Washington.”

McKinsey’s Pritula agreed that some regulatory changes would probably place a greater oversight role in Washington, although he’s unsure of exactly what remains to be seen. Still, he said, “two years from now we will have something.” IJ

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National Coverage News & Markets

Reinsurers Seem Ready to Flex Muscles, Raise Prices by Double-Digits

By Jonathan Gould

R

crisis meant no outside capital was available to take on reinsurance risks as in the past.

Reinsurers’ upbeat outlook has helped underpin their shares over the last six months, with Munich Re flat, world No. 5 player Scor down just 2 percent and No. 4 reinsurer Hannover Re down 8 percent, compared with a 43 percent drop in the DJ Stoxx European insurance index.

“From an investor point of view, you have the feeling that reinsurance is a genuinely defensive sector,” said Collins Stewart insurance analyst Ben Cohen.

Cohen pencilled in percentage price rises in the high single digits or low a price double digits in the next big reinsurance contract renewal in the talks in April and July.

einsurers’ tough talk about raising prices on the risk cover they sell to insurers may have rung hollow before, but this time the promise is credible.

Reinsurance companies such as global leader Munich Re have been flexing their muscles, predicting the damage to insurers’ investment income and capital base from the financial crisis means they have to pay more for cover.

“The turnaround has been achieved,” Torsten Jeworrek, Munich Re board member in charge of reinsurance, said this month, adding that the price fall of the last few years had been stopped.

‘I expect “There is a very strong increase expectation of further price increases during the course of teens in the Old Habits the year,” Jeworrek said. course of the Even so, there are still Munich Re was the first to some who doubt reinsurers’ predict a price surge, but other year. There are resolve in delivering a “hard reinsurers chimed in, with always excepmarket,” where reinsurers’ some forecasting double-digit prices and conditions percentage gains in premiums. tions, but this is improve relative to their Reinsurers have vowed discithe trend.’ insurance company clients. pline on pricing in the past, JP Morgan analyst Michael only to slide into competitive price wars to seize or defend market share, sac- Huttner said the damage to insurers’ balance sheets from the financial crisis might not be rificing profitability for volume. enough to allow for big price increases withThis time may be different, says industry out big natural catastrophes. observers. “Overall, we have seen very disci“We haven’t lost enough on large natural plined behaviour from reinsurers,” said Michael catastrophes to create the immediate surge in Handler, chairman for continental Europe at demand that you need to get into a full-blown reinsurance specialist Guy Carpenter, part of hard market cycle,” Huttner said. “Pricing will the world’s biggest insurance broker, Marsh. probably be flat for the next few months, until “I expect a price increase in the teens in the course of the year. There are always exceptions, we get a signal for more firming, and that signal would come from increased demand after but this is the trend.” a big nat. cat.”

And tighter budgets may mean insurers buy Weak Capital Bases The financial market meltdown has prompt- less reinsurance, muddying the impact of higher prices on reinsurers’ bottom line. ed writedowns and drained investment “There is not a lot of excess reinsurance preincome at insurers, siphoning off some of their mium around,” said Guy Carpenter’s Handler. equity capital base and limiting their ability to underwrite risks without help from reinsurers. “People are retaining more risk and buying less “The financial strength of companies is a major reinsurance at higher prices,” he said. IJ issue at this stage, which it has not been for a Copyright 2009 Reuters. very long time,” Handler said, adding that the N2 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009

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REVIEW YOUR RISK

Page 4

International Coverage News & Markets

Hope, Straight Talk and Despair Amid the Ruins Obama to the Rescue; Hartwig on the Banks; Davos Devotees Duck He’s got plenty of help, so he’s not the ‘Lone Ranger;’ even if the world’s press freBlame for instigating the current eco- quently treats him as if he were. Barack Obama’s inauguration as America’s 44th nomic mess starts with the banks.

President was greeted with an outpouring of Munich Re’s recent webinar gave Dr. Robert enthusiasm in the U.S. that was echoed P. Hartwig, president of the Insurance throughout the world. He is a symbol of Information Institute, a chance to point that hope in the mold of Roosevelt, Churchill and out and to describe the essential differences Kennedy. between banks and insurers, which put the Will he succeed in fulfilling the hopes that financial crisis in a much needed perspective. his election has created? Probably not, as he Hartwig ticked off a number of points as has acknowledged. That’s not the point, howproof that the insurance industry differs ever. Obama embodies the greatly from the banks. This ideal of equality, a better life means that insurers continue ‘Insurers in a better world, which to: 1) Pay claims — whereas always encouraged millions of 25 banks have gone under; 2) Europeans to emigrate to Renew existing policies — maintain a America. as banks are reducing and stake in the He’s not a scion of wealth eliminating lines of credit; 3) and privilege, but an outsider Write new policies — while business they of mixed race, who succeeded banks are turning away peounderwrite ...’ by dint of his intellect and his ple who want or need to borpassion. For those reasons row; 4) Develop new prodalone Europe and the world rejoiced at his ucts — while banks are scaling back the election. The fact that he might actually be products they offer. the right man for the almost impossible job He gave the following reasons: superior he’s taken on is an added bonus. (See IJ Web risk management model; low leverage; consite: www.insurancejournal.com/news/ servative investment philosophy; strong relainternational/2009/01/20/97084.htm). tionship between underwriting and risk bearing; tight regulation and greater transThen there’s the diminished Davos parency. debate, from which many of those remain“Insurers always maintain a stake in the ing masters of the universe are strangely business they underwrite, keeping ‘skin in absent. As reported by Reuters, the worst the game’ at all times,” Hartwig said, adding financial crisis since the Great Depression that “Insurers are more stringently regulated served to mute the enthusiasm of previous than banks, investment banks and hedge years as some 2,500 business and political funds.” leaders met in the Swiss Alps on Jan. 28 for Although he didn’t mention it, it’s fairly the World Economic Forum. certain Hartwig would agree that whenever Economist Stephen Roach gave a grim forethe world’s politicians get around to tackling cast for the global economic outlook, saying the problem of preventing the next generagrowth worldwide in 2009 was only likely to tion of “Masters of the Universe” from trashbe about 2.5 percent — what the Morgan ing the global economy with their innovative Stanley Asia chairman and longtime Davos products, they could do worse than follow attendee — termed a “near recession.” the trail already blazed by the insurance Underscoring the sober mood, some of the industry. glitz has been scaled back and previous (See IJ Web site: www.insurancejournal. celebrity guests such as Angelina Jolie, com/news/international/2009/01/16/97036.

Sharon Stone and Bono are not attending. IJ htm).

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N4 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009

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SPECIAL REPORT Agency Salary Survey

By Andrea Wells

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ndependent insurance agencies remain reliable employers even in these rocky economic times, but even they have to cut back occasionally.

Whether due to efficiencies from technology, the lingering soft market, the continuing economic downturn or all three of these, the number of agencies cutting staff rose in 2008 — and still more have plans to cut payroll in 2009. A quarter (25 percent) of all agencies reduced staff size in 2008, while 11 percent indicated they would downsize in 2009, according to the annual Insurance Journal Agency Salary Survey.

The good news is that overall, far more agency jobs and paychecks are being spared than eliminated. More than half (54 percent) of all agencies’ staff sizes remained the same in 2008 and two-thirds (67 percent) plan to remain the same in 2009. (See charts on this page.)

The IJ Agency Salary Survey generated 1,453 responses from independent insurance agencies nationwide, providing insight into who’s worth what in the independent agency system. Demotech Inc., IJ’s official research partner, provided analysis and input again on this year’s survey results.

Julie Brown, founder and talent manager of San Diego Insurance Staffing (SDIS), has witnessed the effects of staff downsizing up close.

“There are a lot more unemployed people than I have ever seen,” Brown said. “There’s been a lot of changes, some mergers and acquisitions in the industry, and so when you used to have one candidate for six openings, you now have six candidates for one job opening.”

Service staff — including customer service

or even gone out of business. representatives (CSRs) and account executives The IIABA’s Agency Universe Study 2008 — appear to be bearing the brunt of staff reported that more agencies are experiencing reductions, according to Brown, who founded revenue reductions than in the past. More than SDIS 14 years ago to provide staff to southern half (57 percent) of agencies saw revenue California insurance organizations. increase from 2006 to 2007, while 23 percent As recently as a year ago, there were plenty reported decreases. That’s a big shift in reportof jobs and not enough candidates. Account ed revenue changes from 2004 to 2005, when executives were able to negotiate better com73 percent reported revenue increases and just pensation packages, including bonus options.

10 percent reported decreases, the study said.

But that’s not always the case today, according to Brown. “Agencies still have some kind of continued on page N8 bonus or profit sharing in place, but CSRs are not demanding wages as Staff Size in 2008 high as they used to be because right now there are a lot of them unem54% 25% ployed,” she said “We’ve seen the Decreased 21% salaries come down a little bit Increased Stayed the Same because of the marketplace changes.

Clients [employers] are feeling that they have a lot more choices today so they might be able to pay less.”

Staff Size in 2009 The downsizing in 2008 comes as no surprise to Madelyn Flannagan, 67% 22% Plan to Stay the Same Independent Insurance Agents & 11% Plan to Decrease Brokers of America’s vice president Plan to Increase of education and research.

Flannagan says agencies are feeling the effects of the economic Average CSR Salaries by Region recession and Personal Personal Commercial Commercial the soft marLines Lines Lines Lines ket, and some Region CSR High CSR Low CSR High CSR Low of their comEast $49,708 $32,331 $55,084 $41,939 mercial Midwest $38,861 $29,497 $44,053 $33,971 clients have South Central $38,540 $26,754 $47,285 $34,011 reduced their Southeast $40,877 $29,555 $53,494 $35,816 own payrolls West $43,716 $31,503 $53,895 $40,131

Average Agency Salaries by Region Average Agency Income President/CEO - Salary Office Manager - Salary Sales Manager - Salary Accounting Manager - Salary Personal Lines Manager - Salary Commercial Lines Manager - Salary Marketing Manager - Salary Average Years Experience - Personal Lines CSR Average Years Experience - Commercial Lines CSR Average Agency Raise - Management Average Agency Raise - Sales Average Agency Raise - Support Average Agency Size - Employees % believe recession has affected agency

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East $4,543,253 $250,425 $77,305 $112,941 $73,431 $62,949 $78,410 $89,375 9.6 10.7 2.6% 2.2% 2.8% 5.7 80.6%

Midwest $3,425,506 $186,294 $56,660 $110,913 $63,731 $48,235 $68,750 $74,872 9.0 9.3 2.6% 2.6% 2.8% 5.9 72.6%

South Central $4,438,567 $189,926 $61,572 $93,988 $62,123 $50,563 $64,053 $86,094 8.7 10.2 2.4% 2.8% 3.0% 5.1 65.0%

Southeast $3,303,283 $231,701 $63,827 $113,385 $58,333 $55,563 $76,620 $79,239 8.6 9.7 1.8% 2.5% 2.3% 6.0 90.3%

West $2,943,188 $192,083 $78,875 $94,578 $64,780 $55,081 $72,008 $71,563 8.5 9.4 1.6% 1.7% 2.5% 5.5 84.5%

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SPECIAL REPORT Agency Salary Survey Who’s Worth What?, continued from page N7

According to Flannagan, while smaller service staffs might suggest more work for each staff person, and higher salaries due to that workload, technology may be keeping this from happening.

“We haven’t seen support staff salaries increase according to what is being perceived as an increase in workload because many agencies are really using technology to offset the decrease in staff sizes,” she said. “The workloads per employee, if you look at the number of accounts they are handling, they are going up but they are also able to use technology to service those clients, as well as [carrier] customer service centers, which have taken some of that everyday burden off support staff.”

To Raise or Not to Raise Given declining commissions and the stark economic conditions, holding down costs is a top priority for agency managers. Since personnel is one of the biggest agency expenses, payroll is where agents are doing what they can to contain costs, the IJ Salary Survey shows.

Nearly half (47 percent) of agencies postponed hiring in 2008 and 48 percent said they would postpone hiring in 2009. (See charts on page N9.)

Salary raises also suffered. Some 42 percent of agencies postponed salary raises in 2008 and 47 percent plan to postpone salary raises in 2009, the survey revealed.

According to the IJ survey, more than half of agency employees in management (51 percent) and sales staff (52 percent) received no salary increase in 2008, while 30 percent of support staff received no salary increase last year.

One survey respondent wrote, “Due to economic conditions, management has basically reduced staff and commissions. No raises but most salaries remain unchanged.”

Another wrote that his agency “will give no raises in 2009” and will not replace lost positions or add new staff in 2009.

IIABA’s Flannagan believes agencies are doing what they must to stay afloat. “I think a lot of people are making concessions to keep their employees, like asking them to take a smaller cut in order to keep their job,” she said.

“Especially in small town America, where many of our members are, we’ll begin to see agencies looking for ways that they can keep their great support staff but maybe find ways to more creatively work with them. Everybody wants to keep their job,” she said.

Flannagan said the Agency Universe Study

2008, which is produced by IIABA every two years, did not show a correlation in decreased revenues and decreased staff size, but she thinks 2010’s study may tell a different story.

“I think in the 2010 study we will see a decrease in agency revenues, and probably a corresponding decrease in employees, and probably a decrease in their pay,” she said.

Stagnant Salaries Not surprisingly, average salary increases in 2008 were minimal, according to this year’s IJ Agency Salary Survey. Average salary increases for those lucky enough to receive them were: 2.2 percent (management); 2.3 percent (sales staff); and 2.7 percent (support staff). (See chart on page N9.)

Most salaries stayed the same in 2008 compared to 2007 (48 percent), while 26 percent reported lower salary increases and another 26 percent reported higher increases than the previous year. (See charts on N7 and N8 for average salaries by region and agency size.)

Marty Murphy, senior vice president of The Jacobson Group, an insurance staffing and executive search firm, says salary increases will not be much better in 2009. “I am not sensing that companies are planning on giving

Average Salaries by Agency Premium Volume (Management) P/C Premium Volume

President/ CEO

Office Manager

Sales Manager

Accounting Manager

Personal Lines Mgr.

Commercial Lines Mgr.

Marketing Manager

Avg. Comm. and Fee Income

Under $1 million $1 million - $5 million $5 million - $10 million $10 million - $25 million $26 million - $50 million $50 million - $100 million $100 million or more

$102,646 $109,910 $180,431 $267,449 $398,333 $401,269 $643,367

$36,333 $46,334 $62,389 $76,285 $95,742 $106,009 $139,894

$131,029 $51,280 $81,758 $118,152 $135,982 $126,184 $224,342

$44,231 $38,356 $51,424 $60,546 $73,537 $86,094 $100,735

$33,088 $38,109 $51,658 $57,195 $68,100 $72,182 $94,679

$53,000 $50,064 $59,121 $70,736 $88,500 $89,461 $145,150

$60,556 $40,583 $71,442 $71,102 $90,975 $93,073 $123,295

$550,350 $500,410 $1,822,128 $3,403,229 $5,437,109 $9,872,423 $27,833,333

Average Salaries by Agency Premium Volume (Support Staff)

P/C Premium Volume

Personal Lines CSR Salary - High

Personal Lines CSR Salary - Low

Personal Lines Years of Experience

Commercial Lines CSR High

Commercial Lines CSR Low

Commercial Lines Years of Experience

Under $1 million $1 million - $5 million $5 million - $10 million $10 million - $25 million $26 million - $50 million $50 million - $100 million $100 million or more

$31,869 $37,906 $40,918 $43,881 $47,182 $62,103 $57,056

$22,100 $27,089 $30,865 $31,998 $33,739 $33,803 $36,606

7.6 8.2 9.5 10.2 8.8 8.6 8.3

$34,161 $43,392 $50,223 $54,610 $61,083 $67,581 $80,660

$17,134 $33,883 $42,030 $40,421 $41,125 $43,532 $44,146

6.4 9.0 11.4 11.2 10.3 10.4 8.6

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huge increases to individuals,” he said. “I think that what they are hoping for is that the general overall increase — whether it is incentive comps or other perks — will keep people happy at their positions. I think a lot of people are concerned about their jobs and whether or not they are going to have one in one, two or five months.”

Murphy’s prediction is supported by the IJ survey, in which 48 percent of agents said they would postpone hiring in 2009 and 47 percent plan to postpone raises in 2009.

Sales Staff Even when they may be reducing staff or postponing hiring in the service sector, agencies are always looking for good sales professionals.

The Jacobson Group’s Murphy says there has been an uptick in firms looking for sales professionals. “We’re getting a lot of requests for that,” he said. “I would say we’ve probably had an increase in agencies in distribution organizations that are trying to find sales people.”

Murphy suspects the uptick has to do with current market competition and the possibility of a firmer market in the near future. “They feel they need to grow because they are hoping the market is going to turn and in anticipation of firming they are able to capture up more market share,” Murphy predicts.

On the west coast, SDIS’s Brown sees a similar trend. “There are a lot of agencies looking to hire people in the producer role because they are trying to build up a bigger book because the agency needs to grow,” Brown said.

The tough marketplace may also be forcing agencies to reevaluate how non-owner producers are being compensated, at least in California, says Brown.

A year and half ago, newer producers placed

by SDIS could pick through offers that compensated via base pay for a few years. Now, Brown sees few agencies willing to offer new producers base pay at all.

“I have one particular candidate where a year ago he was made an offer from one of my clients and they were looking to develop new producers in the agency, so they were willing to do a base pay for three years and eventually go full commission,” Brown. Such a structure afforded the new producer ample time to www.insurancejournal.com

build up a book of business. “But today that same client is saying, ‘I can’t. It’s got to be 100 Management 2.2% percent full commisSales Staff 2.3% sion. We’re not paying Support Staff 2.7% any bases because times are tough.’”

IJ’s Agency Salary Strategies Agencies Implemented in 2008 Survey differs slightly from Brown’s perspective Cut Benefits 15% on non-owner producer compensation strucIncreased Benefits 5% tures. According to the Postponed Hiring 47% survey, 77 percent of Postponed Raises 42% agencies did not change Increased Hiring 10% their commission strucIncreased Compensation 14% ture, however 8 percent reported a change and 16 percent said they plan to Strategies Agencies Plan to Implement in 2009 change commission structures in 2009.

Cut Benefits 13% Some 31 percent of agencies reported offerIncrease Benefits 3% ing salary plus commisPostpon Hiring 48% sion in the IJ survey, Postpon Raises 47% while 24 percent paid Increase Hiring 15% commission only; 12 perIncrease Compensation 13% cent paid a draw against commission and 15 perStrategies for the Future cent paid only a salary in 2008.

The Jacobson Group’s Murphy said in times Premiums are down so commissions are down, Brown said. “Most of my clients looking like these, communication is critical.

“What I think agencies need to do for their for producers right now are looking for somecurrent staff is to make sure that they’re comone who already has a book of business to municating very clearly with everybody inside bring over, or they are looking at commission only candidates. They are not looking at bases. the organization as to what is going on,” Murphy advised.

They are even trying not to pay a draw if they The IIABA’s Flannagan advises agencies to don’t have to pay a draw,” she said. be creative in their cost-cutting efforts and to Murphy is somewhat surprised that despite rising unemployment, there has not been a sig- make sure to maximize the use of technologies. “Technology has done so much for agennificant increase in job applicants from the property/casualty industry. “I know there are a cies to help them be more efficient,” she said.

While new hires will probably be few and lot of candidates on the street looking and far between and pay raises might be smaller, actively searching but I don’t think that has or non-existent, Flannagan feels confident dramatically increased over the last eight to 12 agencies will rebound once the market stabimonths,” he said. “I think we are getting more lizes again . calls from outside the P/C industry, on the life And even though times are tough right now, side and from the investment side.”

Murphy says agents should remember “this P/C candidates could be taking a wait-andisn’t the first time we’ve gone through cycles see approach, even for those not pleased in like this” and as most agencies know, it will their current position. “Maybe they want to probably not be the last. IJ wait to see what happens next,” he added.

Average Salary Raise in 2008

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Idea Exchange HR Management

Budget-Friendly Ideas to Retain Your Top Performers Career Development, Mentors and Flexible Schedules Help Keep A-Level Talent Henry

By Susan Henry

T

he current economy is causing many changes within the employment marketplace. Increased employee concerns and lowered morale are just a few reasons organizations should place greater focus on their retention strategies.

Even at a time when many companies are facing lay-offs, retaining top talent should still be an essential part of your business plan.

Increase your chances of retaining A-level performers with stand-out compensation packages. While you do not have to offer salaries at the highest end of the spectrum, monetary compensation is by no means irrelevant.

Complement a competitive salary with exceptional non-monetary compensation to attract and retain the best talent available. Keep employees engaged through great benefits, company culture and development opportunities. With that in mind, below are a few budget-conscious ideas to explore.

Career Development Programs Your top performers will not be satisfied in roles that lack advancement opportunities.

Remain committed to career development pro-

grams, even if your organization is not growing. This allows employees to maintain control over their career paths despite difficult circumstances. Employees must understand how their personal goals and responsibilities roll up into the enterprise-wide objectives.

In addition, offer corporate or division-wide learning opportunities. This may include lunch and learns, external speakers or webinars. Encourage employees to become involved in the industry and promote attendance at association luncheons, meetings and networking events. If you cannot increase monetary compensation, provide them with special projects, along with greater responsibility and autonomy.

Even at Encourage Mentorships Mentoring is a great way for less experienced employees to connect with company leaders who are not their immediate managers and to gain valuable insight into their fields and careers.

Whether you introduce a formal program or encourage independent mentoring, these relationships provide employees with career direction in an open, friendly and encouraging environment.

a time when many companies are facing lay-offs, retaining top talent should still be an essential part of your business plan.

Offer Flexible Work Schedules It is likely that most of your employees have busy lives outside of the office. Whether they have a family, participate in volunteer programs or attend graduate courses, consider offering flexible work schedules. This could include telecommuting opportunities, the ability to work four 10-hour days in exchange for Friday off, or job sharing. If you are hesitant about offering unusual work hours, consider starting small. Offer an early release on Fridays for those who make up the hours Monday through Thursday. Alternatively, you could offer flexible work hours as a reward for employees who have surpassed set goals.

Increase Recognition and Rewards In today’s economy, it is vital to depart from the traditional “no news is good news” approach. Do not let good work go unnoticed.

N10 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009

Create a culture that embraces positive feedback. Show employees your appreciation at the time it is deserved, not just at the holidays or quarter-end. This may include simple dayto-day recognition or even formal rewards programs. Let employees know they are valued by celebrating career milestones.

Promote Team Building Historically, employee morale plummets along with the economy. Many companies are cutting morale programs from their budgets. It may make sense on paper, but employee morale programs are vital to withstanding an economic crisis. In fact, now is the time to improve your corporate culture.

Use the Hidden Paycheck Are there additional perks you can include in your employees’ compensation plans? Work with your human resources team to ensure you are offering the best health benefits possible. Focus on retirement plans and if your company is able, match your employees’ contributions to their 401(k). Offer casual Fridays, gym memberships or corporate sports teams. Additionally, support your employees’ commutes by offering reduced costs on parking and public transportation, or even setting up carpool programs.

A-level employees are always in demand, no matter the state of the economy. Focus on your human capital investment. Keeping employees engaged, challenged and well-compensated will ensure your organization is best-positioned to come out ahead when the economy turns. IJ

Henry is senior vice president of Jacobson Solutions, the temporary staffing division of The Jacobson Group. Phone: 800-466-1578. E-mail: shenry@jacobsononline.com. www.insurancejournal.com

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We insure the printing industry from A to Z. Not to mention C, M, Y and K. Technology in the printing industry is constantly evolving. And so are the risks your clients face. From the breakdown of sophisticated equipment to errors and omissions in a customer’s order, the economic implications can be huge. That’s why Travelers has developed insightful insurance solutions that stay in-synch with printers’ needs, including a product that addresses the expense of replacing or recreating a customer’s lost files. Which is something we think you will find is well worth the paper it’s printed on. To find out more information, contact your local Travelers Commercial Accounts Representative. ©2009 The Travelers Companies, Inc. All rights reserved. The Travelers Indemnity Company and its property casualty affiliates. One Tower Square, Hartford, CT 06183

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Spotlight Agribusiness/Farm and Ranch

Top 5 Insurance Issues for Farmers in a Soft Economy Review Exposures, Values and Maximize Insurance Value to Ensure Satisfied Farm Customers

By Jerry Hillard

Hillard

rebuild a storage barn because of today’s higher cost of materials. When is the last time you walked through the property and recalculated values for the farm’s or ranch’s assets? If the farm operation holds inventory, is that inventory insured to its true value considering commodity prices are still relatively high? Does the farmer have or need peak season coverage? If your farm policyholder has a loss and doesn’t have enough insurance coverage, it could be an unwelcome surprise weakening your credibility and effectiveness.

T

hanks in part to commodity prices that are still higher than average and, thankfully, less volatile than in 2008, the agricultural economy has not yet felt the same contractions the general economy is reeling from today. That’s not to say there haven’t been some challenges, including rising costs for equipment, fuel and fertilizer. As the U.S. economy continues to struggle — along with watching the stock market and other investment results — it’s a good idea for farmers to review their insurance policies with their agents. Here are the top five items agents may want to consider.

1. How well do you understand the exposures of the farm operations?

As a farm’s profit margins are squeezed, farmers may look for ways to diversify farm income. This leads to farmers implementing new business ventures — retail, processing or agritourism — each with its own set of risks and liabilities.

Each time you visit the farm, ask about any changes — new buildings or structures, new machinery and new activities. The more information an agent has about a farm’s operations, the more he or she can enhance their role as a trusted adviser.

On the other side of that coin — how well do you understand farming and agriculture? If you insure farms or ranches of any size, you know how complex they can be. Is this an area in which you’ve developed some expertise? Do you know what to look for, or what to ask about to ensure your farm policyholders are adequately protected?

The relationship between agent and farm owner should be a partnership built on mutual trust. That’s the best way to ensure the security of the farms you insure for the long-term.

Nationwide Agribusiness will roll out a new “Certified Farm Agent” training program in 2009. The program provides indepth education for agents who make a commitment to farms as part of their overall portfolio of protection.

3. Help farmers maximize their insurance investment.

Farmers are always looking to lower input costs, including the costs of insurance.

Agents should consider providing guidance on the use of deductibles, cause of loss selection, valuations and other means to control costs while still ensuring proper coverages.

Helping a farmer save money on his insurance investments is a great way to gain a loyal customer, who could also become an advocate for you and your agency. Helping to prevent losses in the first place is the best way to save on insurance costs, as well as benefit your policyholders’ overall bottom lines.

4. Is the insurance company committed to the agriculture industry?

Not all insurance companies that provide farm policies take the time or make the commitment to truly understand the unique risks and exposures the agricultural industry inherently faces.

Nationwide Agribusiness and other insurance companies have roots in agriculture and don’t provide farm coverage as a division of an overall commercial or personal lines focus. A dedicated farm underwriting team

As a farm’s profit margins are squeezed, farmers may look for ways to diversify farm income.

2. Is the farm’s insurance up-to-date for today’s values?

It may cost more to replace steel bins or

N12 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009

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Spotlight Agribusiness Soft Economy, continued from page N12

can provide the expertise and knowledge to augment your own. According to Doug Becker, associate director of farm underwriting for Nationwide Agribusiness, “It’s highly beneficial for farm customers if agents work with a team of trained underwriters who have developed expertise with specific aspects of farming.”

Becker points out that a team approach allows an insurance company to spend time and resources understanding what’s involved, and can bring farmers innovative protection.

“With knowledgeable people who know enough to ask about custom spraying or what to bring to the table when the operation hires outside employees, you have the basis for a real partnership and can get the best protection for each operation,” Becker added.

Helping a farmer save money on his insurance investments is a great way to gain a loyal customer, who could also become an advocate for you and your agency.

Insurance Programs for Security, Investigation and Electronic Security Companies Marc Katz I Principal mkatz@mechanicgroup.com 800 -214- 0207 Ext.105

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If your book of business includes private security, investigation, background screening or electronic security firms, we hope you will give us a chance to work for your business. We offer Broad Form programs with a wide range of coverage options: Commercial Liability Workers Compensation Commercial Umbrella/Excess Liability Third Party Fidelity (Employee Dishonesty) Contact us today to learn why hundreds of retail agencies already depend on us for comprehensive insurance products, expertise and competitive pricing. WE WORK FOR IT. Our exclusive programs utilize “A” or better A.M. Best rated insurers and are available in all 50 states.

www.mechanicgroup.com N14 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009

5. Is the insurance company growing, stagnant or declining?

Just as farmers should examine the financial health of their suppliers, they should take a good look at their insurance companies’ health too. If the farm experienced a large loss — for example, a $1 million tornado or animal collision liability loss — would the farm’s insurance company have the capital to stand by the policy? Insurance companies’ financial ratings should be checked by various rating agencies.

Although the farm economy may not be experiencing some of the same stresses as the national economy yet, now is a great time to get closer to your farm customers. It may be especially appropriate now to ensure you’re helping your farm customers protect the things that matter most to them! IJ Hillard is farm sales director with Nationwide Agribusiness Insurance in Des Moines, Iowa. Nationwide Agribusiness provides coverage for farms, commercial agribusinesses and related businesses. Web site: www.NationwideAgribusiness.com. www.insurancejournal.com

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New Markets The following markets were selected from the MyNewMarkets database of 25,000 coverages and programs. To find additional markets, or to submit markets, go to www.MyNewMarkets.com.

Fire Protection Contractors Market Detail: McNeil & Co. (www.mcneil andcompany.com) brings agents the FireWatch Program. This is a comprehensive insurance and risk management program offering high quality, specialty insurance products to the complete fire protection market including firms that engage in the sales, service and installation of fire suppression systems, fire extinguishers, burglar and fire alarm systems, and those involved in selling or distributing fire equipment or emergency apparatus.

Available Limits: As needed.

Carriers: Arch Insurance Co. “A” rated by A.M. Best. Admitted.

States: Alaska, Ariz., Ark., Calif., Colo., Conn., Del., Fla., Ga., Idaho, Ill., Ind., Iowa, Kan., Ky., La., Maine, Md., Mich., Minn., Miss., Mo., Mont., Neb., Nev., N.H., N.J., N.M., N.Y.,

N.C., N.D., Ohio, Okla., Ore., Pa., R.I., S.C., S.D., Tenn., Texas, Utah, Vt., Va., Wash., W. Va. and Wis. Contact: Shawn Yingling at 717-646-8886 or email syingling@mcneilandcompany.com.

Hard-to-Place Commercial Market Detail: Camford National Insurance Brokers LLC (www.camford national.com) offers a commercial package program for hard-to-place risks. Some target classes include: amusement park and device operators, apartments buildings, Chapter 11 risks, chemical manufacturing and storage operations, new ventures, student housing, manufacturing operations, water parks, resorts, restaurants, bars and taverns just to name a few. A deductible buyback program for wind, hail and earthquake is also available.

N16 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009

Minimum premiums begin at $50,000.

Available Limits: As needed.

Carriers: Multiple. Rated “A-” or better by A.M. Best. Admitted and non-admitted.

States: All except N.D., S.D. and Wyo. Contact: David OKeeffe at 908 647-4900 or e-mail d.okeeffe@camfordnational.com.

Truckers Occupational Accident Market Detail: US Specialty Insurance Co. (www.ussic.com) provides occupational accident, contract and employers liability for independent owner operator truck drivers.

Available Limits: As needed.

Carriers: US Specialty Insurance Co. “A+” rated by A.M. Best. Admitted.

States: Ala., Ariz., Ark., Calif., Del., Fla., Ga., Idaho, Ill., Ind., Iowa, Ky., Md., Mich., Miss., continued on page N18

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Get Results...

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Announce a new product, award, appointment, acquisition, partnership etc.

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My New Markets, continued from page N16

Mo., Mont., Neb., N.M., N.D., Ohio, Okla., Pa., S.C., S.D., Tenn., Texas, Utah, Va. and Wis. Contact: Ruth Young at 713-996-1204 or e-mail ryoung@ussic.com.

Environmental Consultants Market Detail: Victor O. Schinnerer & Co.

Inc. (www.PlanetENV.com) offers environmental consultants a broad range of coverages to meet the complex exposures faced by environmental engineers and consultants.

Directors and officers, fiduciary liability, employment practices liability and commercial package coverage are all available for eligible

firms. Risk management educational service is included in coverage. Minimum premiums and minimum deductibles begin at $1,000.

Available Limits: Up to $20 million.

Carriers: CNA. “A” rated by A.M. Best.

Admitted.

States: All. Contact: Matt McWilliams at 301-961-9833 or e-mail matthew.mcwilliams@schinnerer.com.

Hard-to-Place Marine Risks Market Detail: Capacity Marine Corp. (www.capacitymarine.com) specializes in hard-to-place marine business. Eligible classes range from complete port operations to single vessel owners. The safety and loss control division will work independently as a loss control and safety program design, management and survey report provider to insurance carriers, insurance brokers and marine clients.

Minimum premiums begin at $2,500.

Available Limits: As required.

Carriers: Not disclosed. “A” rated by A.M. Best. Admitted and non-admitted.

States: All. Contact: Walter Wynne at 800-222-2425 or email wwynne@capacitymarine.com.

Marine Cargo Market Detail: Chopra Insurance Brokerage Inc. (www.choprainsurance.com) offers coverage for ocean-going domestic transit for many types of commodities. Policy provides all risk including war coverage. Coverage can extend to cover domestic air, rail, truck and warehouse to warehouse coverage with an extension to cover goods stored in warehouses.

Minimum premiums begin at $1,500 and the minimum deductible is $500.

Available Limits: $1 million to $15 million.

Carriers: Unable to disclose. “A” rated by A.M. Best. Admitted.

States: Ala., Ariz., Ark., Calif., Colo., Ga., Idaho, Ill., Ind., Iowa, Kan., Ky., La., Maine, Md., Mass., Mich., Mo., Mont., Neb., Nev., N.H., N.M., N.C., N.D., Ohio, Okla., Ore., S.C., S.D., Tenn., Utah, Vt., Va., Wash., W.Va. and Wis. Contact: John Upchurch at 818-551-4588 or email Jupchurch@choprainsurance.com. IJ Submit your company’s property/casualty markets to the industry’s leading searchable database at www.mynewmarkets.com.

N18 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009

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Closer Look Boats and Marinas

Retail Marine Business Meet Darwinism in 2009 – The Strong Do Survive 5 Possible Solutions to Today’s Challenging Times

By Chris Ohrenich

T

he year 2009 has begun and our nation’s business communities have their backs against the wall. No segment of the economy is without its worries and perils. Daily the mass populous decides how to spend their hard earned dollars. Specific retail segments are hardest hit. One standout is the recreation industry and one even more targeted — the retail boating or marine industry.

With fuel prices “the gremlin” of the marine industry in 2008, precious lessons were learned. Those lessons have helped wary, prudent and entrepreneurially minded marinas and boat dealers For all agents out cope with what there with marine is poised to be businesses as clients, another challenging year. use this time of Marinas, boat hardship to promote dealers and a stronger undermarine service companies come standing of your in many shapes client’s business. and sizes, from small “mom and pops” to multi-location boating businesses owned and run by national organizations.

These organizational differences are the predicate upon which their business plans have been established.

Irrespective of these differences, certain trends, both negative and positive, continue to pervade the declining and most successful marine businesses. Here is a short list of five current economic realities faced by marine businesses and what may be possible solutions that some business leaders can utilizing to combat recessionary pressures.

Ohrenich

businesses. It is no different in the marine industry. However, businesses that find opportunity in crisis also develop processes that lead to increasing sales. For example, treating every customer as if they are your only customer — while maybe not the reality — the effort helps promote a true solutionoriented focus. Discovering new ways to uniquely set your business apart from the rest is simple, tried and truly results-oriented.

2. Boat Service Requests Decline.

Negative mindsets transcend to customers during repair conversations. This can be in the form of verbal communication as well as attitudinal demeanors, resulting in decreased numbers of service requests by

clients, and reductions in the size of the service ticket requested. The best professional service managers explain necessary service needs in detail. This most often results in positive discussions, up-selling and increased service receipts. Training is paramount to continue this form of discussion at all levels of business.

3. Layoffs Top the List of Solutions.

Layoffs become one of the first reactions a business owner considers, when a business’ receipts take a significant tumble. While seemingly obvious, it is relatively impossible to increase business revenue, when there are not enough employees to complete the continued on page N20

1. Scarcity Mentality Prevails.

A scarcity mentality is prevalent in those businesses with declining sales. We hear it and feel it in our discussions with most www.insurancejournal.com

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Closer Look Boats and Marinas Retail Marine, continued from page N19

necessary tasks required by customers. When an average service or warranty request turnaround time increases, from two days to four days, not only does a boat owner become irritated, future income decreases and customers can be lost forever. Locating, hiring and developing the most talented sales professionals and service technicians, especially in an economic downturn, is the reaction most successful marine businesses turn to as a best practices tool to increase sales or service ticket size.

When the economy turns, these businesses are poised for immediate growth.

4. Budget Cuts and Expense Sharpening.

Tight budgets and realistic expenses are the hallmark of a successful marine business.

Often as a result of scarcity, broad sweeping cuts dig into business development areas such as marketing and business protection areas, such as insurance. It is a simple known fact that marketing produces sales and sales produces income. Yet marketing is the frequently jettisoned, seemingly unnecessary piece of luggage. Marketing should be considered as important as your carry-on — always by your side, available for emergencies and an ace in the hole when crisis rears its ugly recessionary head.

5. Endangered Loss Leaders.

Loss leaders when used correctly bring buyers to your business. Fueling at marinas, albeit an expensive loss leader, has often been used to draw boaters to a marina, and promote others sales, whether in the form of boating supplies, bait, tackle, service or others. To stop offering this service and reduce its related expenses may show an immediate response to a bottom line. Before this or any final decision, think twice, and at least once get creative, very creative! For example, offering a raffle or drawing to customers, up playing higher fuel prices, and providing a particular amount of free fuel can be the creative draw that adds to a business’s positive mindN20 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009

ed culture, leading to better and greater business results and happy return customers.

Transfer of Risk Many marine business owners are turning to their insurance agents for advice as to how to decrease insurance premiums to lower that expense line item. We as agents know as

sales and payrolls decrease, premiums correspondingly decrease, yet never enough to the liking of a sinking business. This is when a marine business can appreciate the work of an insurance professional specializing in the marine industry. Knowing policy forms, manuscripting capabilities, which carriers offer the strongest remedies, etc., demonstrates a marine insurance agent’s true worth.

For all agents out there with marine businesses as clients, use this time of hardship to promote a stronger understanding of your client’s business. Relationship building is crucial and knowing the ins and outs of a niche business, in the end, results in a trusting business relationship. Use this article, pass it out to your clients, engage them in business building provoking thought. They will appreciate your service all the more at the end of the day and at renewal time. IJ Ohrenich is an insurance broker with the John B Wright Agency, in Manasquan N.J., specializing in the marine industry since 1987. He also participates as a board director for the Marine Trades Association/N.J. Phone: 609-513-0355.

E-mail: cohrenich@johnbwright.com. www.insurancejournal.com

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Closer Look Boats and Marinas

Eye on Boats and Marinas Marine Broker Shares Views on the Current State of the Market marine insurance as the agency’s primary niche market. “We had many boat owners as he marina and boat industry is a clients and started attending all of the boat natural fit for John Harvey, founder shows in Texas and the surrounding states,” and president of Harvey said. “We decided Voyager to start marketing nationInsurance Services in ally and are now licensed Frisco, Texas. Harvey has in 40 states.” been in the insurance The marine insurance business for 50 years and industry has changed like has been a boat enthusiast many other insurance since his childhood. markets. Even so, Harvey says it continues to be an “I grew up enjoying excellent niche for his boating as a child with my agency. family and have had a boat “We have a full brokerage since I was in high department to help retail school,” Harvey said. agents looking for boat Since 1958, Voyager has John Harvey markets for their clients. served its community as a We also work closely with boat dealers and full-lines independent insurance agency, but provide insurance binders for their new made the decision in the late 1980s to target

By Andrea Wells

T

N22 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009

clients purchasing a boat,” he added.

Insurance Journal asked Harvey his views on the current state of the market for marinas and boats. Here’s what the marine specialist and life-long boater had to say.

How is the economy affecting the marine industry?

Harvey: We work with many new boat dealers who report that their industry has been severely impacted. There have been a number of boat dealers that have filed for bankruptcy and left a very large inventory of mostly 2008 boats sitting unsold. Many dealers are buying this inventory rather than ordering new boats because the inventory is deeply discounted.

Another issue affecting their sales is their floor plan financing companies’ refusal to lend the full amount of their credit line and controlling how much inventory they can buy. Dealers report that getting a customer

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approved for financing has become quite difficult with several national banks exiting the boat financing market. Those left have severely curtailed their lending except to the very highest credit scores.

Boat dealers advise that this is an excellent time for the consumer to buy due to the deep discounts being offered; however, many consumers cannot qualify. Boat dealers also advise that their customers who usually pay cash are holding back to see what happens with the economy.

Attendance at the winter boat shows was down dramatically. The Dallas Boat Show actually closed for Monday, Tuesday and Wednesday nights due to poor attendance.

However, dealers reported the people who did attend the show were there to purchase.

Our marina clients report much of the same. They find slip rentals have dropped significantly and many see people canceling their slip rental and taking their boats into dry storage or putting the boat back on a trailer. While fuel has dropped significantly, the consumer is too fearful of returning to $6 to $7 per gallon gas [prices], so many large boats are on the market. Again, credit is very tight with almost no movement in financing for large boats, even with excellent credit.

Are you a boater as well?

Harvey: I have been boating since childhood with my family. I built my first boat in my high school woodshop class. My mother always used to shudder as she talked about watching her entire family pull away from the dock in that homemade boat, hoping and praying everyone returned to her safe. My wife and I have owned a number of boats but we have

developed a passion for old wooden boats. I purchased my first wooden boat in 1985 and still have that boat, a 1952 Chris Craft Custom Sedan named “Unforgettable” (Golden Pond boat with a hardtop). ... My wife and I have become very involved in the “International Antique and Classic Boat Society” where I served as president in 1999 and 2000. continued on page N24

Today’s Economy Tough on Boat Owners, Marinas

R

obert Merluza, underwriting consultant for CNA’s marine division, says times are tough for the marina and boat industry.

Merluza, an expert in marine coverage for boat dealers cover, marine operators and boat owners, says many boat owners are getting rid of their boats or not using them as frequently, which is hurting marina operators and the boat industry nationwide. Below, Merluza offers some key underwriting considerations brokers should be aware of in today’s market.

How is the economy affecting the marina and boat industry?

The economy definitely is impacting boat owners. It’s expensive to keep a boat. For people that can’t fit their boats on their drive ways, they keep their boats at marinas but to keep a boat there — to store it, to fuel it, to keep it in shape — it definitely costs money. continued on page N24 www.insurancejournal.com

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Closer Look Boats and Marinas Today’s Economy, continued from page N23

Eye on Boats, continued from page N23

What’s your best claims story?

Unfortunately, there have been many claims stories. I don’t have a best, but I will say that Hurricane Ike was absolutely devastating to our boating clients on the Texas coast and very little has been reported. We have many people who have still not found their boats and are trying to get their claims settled. Our marine

companies responded quickly and were able to get most claims handled within a week to 10 days. Considering the circumstances, we were very pleased with our insurance companies’ responses. IJ Voyager offers full online quoting for any size boat for insurance brokers at: http://agent.voyagermarine.com.

Boats are luxury items. If someone is going to cut something out it’s going to be their boat.

So boat owners are looking for an insurance market where they can lower their insurance costs. Price is a big issue these days.

A lot of boat owners are getting rid of their boats; asking boat dealers to help sell them.

There’s still a number of people that do go out and buy boats, but it is a much shorter list.

From an insurance standpoint we are not seeing a lot of new business come our way.

Dealers are not selling as many boats as they did in the past. In addition, if boaters aren’t fueling their boats because they are not using them that often, that impacts the marina and the bottom line.

What are the key things you consider when underwriting marinas and boats in today’s market?

Most obviously is the maintenance of the facility. Is the marina keeping everything in good working condition? We want to make sure that they are not cutting corners with safety or housekeeping.

Another concern is storage. Depending on where the boats are located you will find a lot of boats out of the water, either on racks or even indoors. If rack storage is not done properly you could have boats topple over or collapse inside a building damaging the boats.

We also look at the other operations the marina does in addition to slip rentals. Do they provide fueling? With fueling operations, obviously fire would be a concern. …

In addition, some marinas provide other related services — restaurants, parties, entertainment. That can be a concern especially if you are talking about liquor, so safety would be a big issue.

When marina operators aren’t getting the income from gasoline sales and rent slippage then they are going to promote their entertainment, restaurants and bars more, which therefore could increase that exposure.

Another thing, if marinas are not selling boats then they are going to try to sell other things — maybe ATVs, fire arms or sporting goods. They might even sell motorcycles or other things that are not as expensive as boats just to keep their businesses running.

Those are again things we look at from an underwriting standpoint. IJ

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Idea Exchange Agency Management

Valuing the Deal: It’s What You Keep That Matters

By Alfonso Ventoso

W

e talk with clients all the time about the mergers and acquisitions (M&A) marketplace, advising owners on positioning their businesses for the best exit whether they are three months or three years away from transitioning out. Once fit has been determined and price is settled, clients may think the work is over. It is true that once the timing is right for a client to go to market, we spend much of our energy analyzing and negotiating deal pricing to get the best results.

We haggle with buyers over pro forma earnings before interest, taxes, depreciation and amortization (EBITDA), and we go back to them to make the case for why higher EBITDA multiples are justified. We negotiate structure: guaranteed proceeds versus earn-out, stock sale versus asset sale, and many other facets.

Ultimately, three components must align in order for a deal to close: culture, pricing/structure and terms. As advisors, we will typically justify our fee several times over through our impact on pricing and structure alone. However, more deals unravel over terms than anything else.

We will focus on the terms that generate various kinds of hard costs, holdbacks and soft costs that are the frictional costs of selling a private business and impact every deal.

These often come as surprises to our clients who are selling their businesses. Getting our minds around these issues early in the process avoids loss of momentum later. As clients get comfortable with these costs, the resulting net number they should expect is revised to a realistic level.

Let’s use an example of an agency with $10 million in net commission revenues, and pro forma EBITDA of $3 million or 30 percent. After negotiations, the parties agree on pricing of 7.0 times EBITDA guaranteed (most now, some later), plus an earn-out potential of another 1.0 times EBITDA. The many ways earn-outs can be structured have been the subject of many an article, and will not be repeated here. This example implies a potential gross value to the seller of $24 million. While there is some kind of target to be hit over a two- to four-year timeframe to achieve the $3 million earnout component, it is the maximum number, in this case $24 million, that typically becomes the “anchor” number in the seller’s head. It is important to note this will be the gross amount the buyer is willing to pay for the earnings power N26 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009

of the business represented on the income statement.

Now for a walk through the hard and soft costs that will erode this number significantly.

Hard Cost 1: Balance Sheet and Working Capital Balance sheet adjustments can include the removal of intangible assets resulting from acquisitions (the buyer can’t count them twice, as the earnings power represented by these assets is already being paid for as a multiple of the income stream). Producer vesting or deferred compensation liabilities can also be significant and often leave balance sheets neutral or even negative. Let’s say our agency has the following simplified balance sheet: All amounts in Cash Receivables Intangibles Total Assets

$000 $200 $300 $1,000 $1,500

Payables Equity

$300 $1,200

Since the buyer is paying for the earnings power of intangibles that are already flowing through the income statement, these are removed and the pro forma equity (tangible net worth) is now $200,000.

Our agency’s pro forma expenses of $7 million per year imply average operating expenditures of $580,000 a month.

A buyer does not want to pay you $24 million for your business and then have to inject more money into the business during the first month in order to keep the lights on and make payroll. This is why a working capital holdback is customary. A 30-day working capital requirement in this case would result in a $580,000 deduction from proceeds.

Some buyers start by asking for 60 days, which would be almost $1.2 million. The seasonality of revenues, the margins, and the likeliness that revenues will recur all drive a buyer’s comfort level as to how low a requirement they will accept. We find that 30 to 45 days is reasonable in most cases.

Using 30 days in this example, recall there is $200,000 of tangible equity in the business and a working capital requirement of $580,000. Though the mechanics are different in a purchase of stock versus a purchase of assets, in continued on page N28 www.insurancejournal.com

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Idea Exchange Agency Management

Valuing the Deal, continued from page N26

price as a range, though prior to our negotiations it might be more like 5 percent to 15 percent. Twelve to 18 months is a typical timeframe. In 99 percent of cases, the seller recovers this, with interest. Buyers need this cushHard Cost 2: E&O Tail Insurance ion to true-up the working capital Sellers are responsible for securing their own errors and Ultimately, three and make sure they’ve bought the asset that was represented. Still, omissions liability for incicomponents there is a small risk some or all of dents taking place after closthis amount could be forfeited. ing. A typical coverage period must align in would be three years. A preorder for a deal Soft Cost 2: Indemnification, mium in the range of $50,000 to close: culture, Representations, Warranties to $100,000 for this size busipricing/structure Seller clients often ask us why ness is a small price to pay the buyer wants more than just rather than suffer a claim that and terms. their word that the accounts, relacould jeopardize the entire tionships, and the entire business pot. being transferred are above board. Anyone paying $24 million for someone’s business would Hard Cost 3: Other Closing Costs want reassurance that Hiring competent advisors for the transacpotential skeletons in tion along with legal and tax representation the closet were vetwill provide instant return on investment ted. Buyers put themwhile also dramatically increasing the likeliselves at the highest hood that a deal gets done at all. A working risk when they buy assumption might be 3 percent to 7 percent of the stock of the sellthe total purchase price, depending on the ing corporation. Since complexity of the transaction and the way the most agencies are Sagreements are structured. corporations, most deals are transacted as Hard Cost 4: Capital Gains Tax Most deals are structured so that sellers cap- asset purchases which mitigates these risks ture capital gains rates above their cost basis. for buyers.

In an asset deal, a buyer will allocate this Wrongful terminaamount between intangible assets (which are tion claims, sexual amortizable and provide a tax shield) and harassment claims, goodwill, which is not. Capital gains taxes are currently at an all time low of 15 percent at the ERISA non-compliance, tax liabilities, and slip and fall claims are federal level. The best case is that the rate stays at its current level, with the fallback that just some examples of time bombs that can come back to bite a buyer. What if an error is it reverts back to 20 percent in 2011. With the discovered by accountants or tax authorities new administration, it is a good bet the rate post deal? Consider knowledge in the legal will increase to as much as 25 percent or even 28 percent. No matter where it ends up, it will context: what if it is alleged the seller knew at always be the biggest item reducing the seller’s the time of sale that two or three of the top accounts would be non-renewing? Whether take-home proceeds. groundless or not, costs would be incurred in defending these claims. If action were to be Soft Cost 1: Escrow This holdback is one of the least understood taken just after a transaction, the buyer and seller would likely both be named. by sellers. In fact, many become personally What is normal as far as indemnification? offended at the implications of this customary For more than one of the public buyers, it is inconvenience. Our favorite answer to the 100 percent of purchase price paid, jointly and question of “what is normal?” is “it depends.” severally shared among all shareholders. An Let’s use 2.5 percent to 7.5 percent of purchase either case the buyer will reduce the purchase price received by the seller by a net of $380,000 to have sufficient working capital.

N28 | INSURANCE JOURNAL-NATIONAL REGION February 23, 2009

honest seller negotiating in good faith should be able to sleep at night with these terms.

However, soft costs can keep even the most ethical seller awake at night until everything is collected and all related agreements have expired.

So, what is left for shareholder(s) after this sample transaction?

In this example below, 20 percent of the total purchase price is lost to adjustments.

Obviously the vast majority is lost to taxes, but even so these other items in this example clip several percentage points and several hundred thousand dollars from the deal proceeds.

Bear in mind when you hear “so and so sold for 8 times EBITDA” that perhaps 6 times or 7 times of that was guaranteed, and the rest had to be earned after the closing. Further, realize that every seller incurs some combination and

magnitude of the above costs and holdbacks which make up the accumulated frictional costs of selling a privately-held business. Being informed about all of these components will help you set a more accurate and realistic goal when you try to decide what your net number is. Terms are at least as important as price.

Good advisors can easily pay for themselves yet again by negotiating the most favorable terms once price has been settled. IJ Ventoso is a vice president with Hales & Co., located in Hales’ Hartford, Conn., office. He advises agents and brokers on valuation, perpetuation and transaction matters. Email: aventoso@halesgroup.com. Phone: 860-487-9722.

Web site: www.halesgroup.com. www.insurancejournal.com

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Idea Exchange Marketing to Diverse Groups

Changing Demographics Offer a World of Opportunity for Enterprising Agents Minorities Destined to Become Majority by Mid-Century to become the majority in 2042. up and went down there the next day at 4 Clearly, independent agents who wish to a.m.,” Pierson said. The Korean man was so efore the 21st century reaches the halfcompete in this changing demographic enviimpressed that he gave the young agent his way mark, more than 50 percent of the ronment would be wise to tap into cultural business and told all his friends and peers. population of the United States will be repand ethnic markets that are The young agent ended up resented by a vast cultural mix of people perhaps different than their writing the insurance for ‘If you want your all of the Korean fish venconsidered to be “minorities,” according to own. And a lot of agents are agency to grow the U.S. Census Bureau. Minorities, which doing just that. dors. … look at the the Bureau defines as everyone except nonWilliam Pierson, assistant That kind of initiative is Hispanic, single-race whites, are expected vice president of agent devel- populations that a great way to break into a opment at are growing.’ cultural group, Pierson the Indesaid. “The most effective pendent Insurance way to expand into a cultural group is Agents and Brokers of through word of mouth. It’s not through he U.S. Census Bureau reports that by mid-century, the nation America and a member advertising.” will be far more racially and ethnically diverse than it is today. of the association’s diverRon Patterson of Ron Patterson Insurance Minorities currently represent about one-third of the U.S. population sity task force, related Agency in Richardson, Texas, would agree and are expected to become the majority in 2042. By 2023, minorities the story of an enterpriswith that. will comprise more than half of all children, according to a report ing young agent who One released by the Bureau in August 2008. Other projections include: reached out to a group of • By 2050, the minority population — everyone except for nonKorean fish vendors in Hispanic, single-race whites — is projected to be 235.7 million out of Washington, D.C., with a total U.S. population of 439 million. great success. y July 2007, Hispanics were the nation’s largest • The non-Hispanic, single-race white population is projected to be The young man, a minority group (45.5 million or 15.1 percent of the only slightly larger in 2050 (203.3 million) than in 2008 (199.8 million). Caucasian, was trying estimated total U.S. population of 301.6 million) and the In fact, this group is projected to lose population in the 2030s and to drum-up business, fastest growing community. Blacks (single race or multira2040s, and comprise 46 percent of the total population in 2050, down Pierson said, so he cial) were the second largest at 40.7 million in 2007. Blacks from 66 percent in 2008. went to the fish marwere followed by Asians, who totaled 15.2 million; • The Hispanic population is projected to nearly triple, from 46.7 ket area of D.C., where American Indians and Alaska Natives, who totaled 4.5 million to 132.8 million during the 2008-2050 period. Its share of the the vendors are mostly million; and Native Hawaiians and Other Pacific nation’s total population is projected to double, from 15 percent to 30 of Korean descent. He Islanders, with 1 million. The population of whites percent. Thus, nearly one-in-three U.S. residents would be Hispanic. approached one of the (single race and not of Hispanic origin) • The black population is projected to increase from 41.1 million, or vendors, who said he totaled 199.1 million.

14 percent of the population in 2008, to 65.7 million, or 15 percent in didn’t have time to talk (U.S. Census Bureau) 2050. with the agent just then. of the • The Asian population is projected to climb from 15.5 million to 40.6 If the agent wanted to niches million. Its share of the nation’s population is expected to rise from talk about insurance, he Patterson’s agency specializes in is writing 5.1 percent to 9.2 percent. would have to come insurance for churches, which he said was a • The American Indian and Alaska Native populations are projected back at 4 o’clock in the gateway for him into African American and to rise from 4.9 million to 8.6 million (or from 1.6 percent to 2 percent morning when the venHispanic communities. of the total population). dor did his bookkeeping “We write a lot of churches,” Patterson • The Native Hawaiian and Other Pacific Islander population is and other management said. “That opened the door to black expected to more than double, from 1.1 million to 2.6 million. IJ tasks. churches. [And] we’ve even got Spanish con“So this young guy got

By Stephanie K. Jones

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A More Diverse Nation

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The Largest Minority Group

B

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gregations that we embracing the change in ownerUnited States and is expected to triple durinsure that are part ship that’s occurring in our ing the period between 2008 and 2050, of a larger country, then they’re miss- according to the Census Bureau. But church, an ing out on a lot of these Hispanics already represent around 80 perAnglo accounts.” cent of the population of El Paso, Texas, so it t least one-in-five residents of Arizona, church. It’s would seem that tapping into the growing California, New Mexico and Texas spoke amazing Understanding amounts of business there would be a natuSpanish at home in 2007, according to American how you the Culture ral, whether one is of Hispanic descent or Community Survey data released by the U.S. Census can cross It’s an impressive not. racial bar- Bureau. Nationwide, an estimated 35 million, or about 12.3 effort to show up at But it still takes a lot of work, according to percent, speak Spanish at home. About 19.7 percent of riers and a local fish market at George Saenz Sr., owner and founder of Cielo the population age 5 and older spoke a language other 4 a.m. in order to lines when Vista Insurance in El Paso. In the commercial than English at home in 2007. That figure was 17.9 you get write a piece of busiside of his agency, which represents 70 perpercent in 2000 and 13.8 percent in 1990. involved with ness. But initiative only cent of his total premium volume, Saenz English is the only language spoken in people that are goes so far. Agents who works with a lot of small businesses and a 80.3 percent of households. involved with hope to the capture lot of start-ups, which he says are (U.S. Census Bureau) churches. It’s been a business of a diverse plentiful in El Paso. While wonderful opportunity to community also need most of his business for us.” to try to understand the culcomes from referrals, Brad Berrong with Ed Berrong Insurance ture of the group they aim Saenz says he does a Agency in Weatherford, Okla., also sees big to serve. lot of marketing by larger percentage of foreign-born than potential in ethnic markets. Speaking at a We are encouraging way of joining native-born residents in the United presentation at the Independent Insurance agents “to look at what professional States had a master’s degree or higher in 2007. organizations Agents of Texas conference last June, Berrong they don’t know,” the Nationally, 11 percent of foreign-born — peo- such as chambers said 15 percent to 20 percent of the total preIIABA’s Pierson said. ple from another country now living in the of commerce, both mium volume of his agency — which is “Look at your operation United States — and 10 percent of U.S.located in Western Oklahoma — comes from from the eyes of diverse the regular chamborn residents had an advanced the Asian Indian community. The agency people. … There are clearber and the Hispanic degree. writes a lot of business with Pakistani and ly large numbers out there to chamber. Customers, (U.S. Census Bureau) Hispanic communities, as well. go after. If you want your agency he said, want to know “It’s a very big market,” Berrong said. to grow, you need to look at the popyou’re part of the community.

Minority groups own large numbers “of busiulations that are growing.”

For example, he said, he does a good nesses in the United States, and that’s going For instance, the Hispanic population is amount of business with used car dealers, to expand. I think if people are missing the fastest-growing minority group in the continued on page 52

Languages Spoken

A

Higher Education

A

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www.insurancejournal.com February 23, 2009 INSURANCE JOURNAL-SOUTH CENTRAL REGION | 45

Idea Exchange Managing an Agency in a Troubled Economy

Operational Efficiency Should Be Priority No. 3 for Agency Managers there’s got to be some better deals out there. Asking yourself questions: Do you really need to be in a Class A space, or is it OK to be Andrade: It really depends in a Class B space? Those are decion, again, where you are from sions the principal will have to an agency perspective. If you make based on the image he are at a place where your top wants to represent for his particuline may be shrinking and lar agency. you’re seeing costs continue to But vendors — whether it’s Andrade increase, you may ultimately office supplies, staples, etc.— this be forced with having to make is a great time to be looking at those decisions, because again it goes back your costs with a great level of detail. If you to 60 percent of your cost will be people haven’t done that, you ought to start right related. now in making sure that you have a lot of But I think there are a number of things transparency as to where your money is that you can do before you get going. there: changing the way you do things within the agency; changHow does an agency know it’s operating ing processes; making sure that efficiently? What are the metrics that it you’re more focused on the art of might look to in order to feel good selling, on the science of selling, if about how it is doing?

Juan Andrade: This really is you will; that you are bringing in an opportunity to look at your leads; you are actively working the Andrade: There are a number of metrics margins, particularly with a portfolio; managing your retenthat [you] can look at. Revenue per employee top line that may be declining tion. is one. Commissions per employee; new or may be flat. …

Those are all the things I would business commissions per producer; these It’s always important to realize that 55 be looking at to increase productivity before are all productivity measures that [you] percent to 60 percent of all the cost within I would go down the line of a layoff or an could look at and say, “OK, am I really maxiany given agency is going to be personnel impact of that sort on the employees. mizing the use of my personnel? Are we realcost. The key here is making sure that your ly focusing them on the right thing?”

How about renegotiating leases or suppeople, your employees, are being as producThose type of flow metrics, whether it’s plier contracts from vendors? tive as they can, particularly given the marnew commission, new production, I think ket situation right now. So, that’s back to the those are very important things to be lookAndrade: That’s actually another huge area focus on sales, which is really making sure ing at. of opportunity. Because I would think that that they are taking every single minute that second after personnel costs … are fixed they can to be as sales-oriented as possible.

We talked about efficiencies and how costs. It’s a great time to be negotiating with It’s a great time to be looking at your that sometimes does involve layoffs as your vendors at this point in time. processes within the agency, streamlining well as changing relationships with I know certhings that you do and, frankly, vendors or suppliers. Do you have any tainly as a combeing very introspective in ask- Web Resource advice for communicating these decipany we do ing yourself questions about — This is the third installment in an Insurance sions to what, in some cases, are probJournal interview with The Hartford’s Juan that. should [you] continue to do ably either long-time employees or Leasing parthese types of things and mak- Andrade. View the entire Insurance Journal maybe long-time suppliers? ticularly your ing your own business plan and video series, “Managing an Agency in a Troubled Economy,” at www.insurancejournal.tv. space … decisions based on that.

Andrade: Absolutely. My approach has anaging an independent insurance agency in the current hard economy and soft market requires agents to set priorities. In the Jan. 28, 2009, issue of Insurance Journal, Juan Andrade, executive vice-president for sales and distribution at The Hartford, identified customer retention as agency priority No. 1. Next, in the Feb. 9, 2009, issue he described priority No. 2 as maintaining a disciplined and systematic approach to sales.

Of course, there is more to successful management in difficult times than managing and growing revenues. It’s also a time to take a hard look at costs. Operational efficiency is priority No. 3.

Andrade said that while agents right now are wise to take a holistic approach to management, the expense picture has to be brought into clear focus.

In this final installment of an interview with Insurance Journal’s Andrew Simpson, Andrade explained where agencies might look for operational efficiencies.

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Insurance Journal: Are hiring freezes or salary freezes a good idea?

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always been open and honest, and I think planning to manage all of this. So, laying it frankly that’s the best way to be with anyone out; have a business plan for 2009 that … who has to manage people in these times. says, “If I can reach these goals from a top The most important thing is making sure line perspective, if I can reach these revpeople are well-grounded in the context that enue goals from a commission standpoint, the business is operating in, making sure this is where I need to keep my expenses people understand the current economic sitat. And in order to do that, we need to do uation, making sure that people understand the following things on the commission the business margins that side, maybe working with our [you] are trying to opercompany partners. I need to do ate with, that they under- After personnel the following things to generstand what the company, costs are fixed ate new business or keep busicosts. It’s a great ness that I already have in the the business, the agency time to be is focused on doing at books, and these are the followrenegotiating this particular time to ing things that we are doing make sure that [you] keep with vendors. with the bookkeeper, the a viable enterprise within accountant, etc. within the that agency. agency to make sure that we But if it comes to making tough decisions, manage those costs.”

I think the open and honest philosophy is Being able to lay all of that plainly to peoalways the best, which is really letting people so they understand is very important. ple understand why the action has to take The other thing that enables you to do is it place. So if it is because the agency is not engages them in the plan. It engages them meeting particular profit margins that need from the perspective that if they know what to be met, that the top line is not growing as targets you need to hit to stay viable, to confast as it needs to be met, I think it is importinue to grow. People can be very motivated tant to be very open and honest with people by that. at that time.

But part of that is also sharing with folks This is a time when insurance agents what your strategy is and how you are must be monitoring their financial www.insurancejournal.com

situation very closely. What are some indicators they should be looking for?

Andrade: There are a number of things that they ought to be looking at. Their pro forma earnings before tax I think is going to be a critical measure. … They ought to be looking at their liquidity ratios, how much cash on hand do they have? They ought to be looking at and assessing their debt. How leveraged is the agency at this point in time?

I assume the suggestions you have now are the same ones that you might have even in a good economy, but I wonder if agents are listening more now?

Andrade: I think so. I think everyone is listening more these days. … A lot of what we have been talking about, whether it is a focus on retention, a focus on sales, a focus on your operating efficiencies, that just applies across the board and that’s just a good way to run a business regardless.

But right now, boy, we have to be a lot more vigilant, because the stakes have been raised and it is dangerous out there from an economic perspective. So I do find that the people that I am talking to across the country … are listening and they are acting. IJ

February 23, 2009 INSURANCE JOURNAL-SOUTH CENTRAL REGION | 47

Idea Exchange Legal Beat

The Paradox of Flood Insurance Coverage You May Not Know What You Think You Know About Flood Insurance Claims Redfearn

By Robert Redfearn Jr.

W

gation are whether all claims related to recovery under flood insurance policies — including claims against insurance agents — are preempted by federal law or whether they are otherwise subject to limitations imposed by federal law. The number of opinions issued since 2005 addressing these two issues illustrates the uncertainty in the answer to these questions. While the judicial decisions have since begun to reach a consensus, the application of that consensus to individual cases still requires some fleshing out.

hether you are an attorney, an insurance agent, adjuster or broker, or an individual insured, when dealing with claims under flood insurance policies, you may be surprised to discover that many things you think you know are wrong, and, particularly for insureds, many things you think you don’t know, you are deemed to know. This is a paradox of flood insurance coverage.

In this litigious day and age, lawsuits Government as Primary Insurer alleging breach of the insurance policies, bad What makes a flood insurance policy faith, unfair claims handling, unfair settleunique from homeowners or commercial ment practices or negligence by an insurance property insurance policies is that flood agent are so common that they are not coninsurance is underwritten sidered particularly unique or by the federal government. as requiring specialized The Fifth Circuit In 1968, Congress enacted knowledge by most attorneys the National Flood Insurpracticing in the area of insur- has held that insureds have a ance Act (NFIA) as a means ance defense. But, until duty to read to provide affordable flood recently, the amount of litigaand understand insurance to the general pubtion involving claims under the terms of lic because premiums charged flood insurance policies was by private insurers had risen fairly insignificant, particular- their SFIP. dramatically following signifily compared to litigation cant flood losses from hurriinvolving general liability and canes and other catastrophes. non-flood related property As a result of the NFIA, the insurance.

U.S. government became the primary insurer However, the widespread flooding recentagainst damage from flooding. ly experienced in the United States beginThe U.S. flood insurance program is ning with Hurricane Katrina in 2005 administered by the Federal Emergency through Hurricane Ike in 2008 led to a relaManagement Association (FEMA). As admintive explosion of litigation in which recovery istrator of the program, FEMA promulgated under flood insurance policies or the alleged the Standard Flood Insurance Policy (SFIP) negligence of insurance agents in procuring through regulations published in the Code or failing to procure flood insurance was a of Federal Regulations. FEMA regulations central issue. As a result, attorneys, insurers, also set the terms of the SFIP, its rate strucinsureds and the courts have confronted ture and premium costs. issues unique and peculiar to flood insurThe SFIPs are issued to the public either ance claims which had not been fully directly by FEMA or through private insuraddressed in the past or which were not ers operating as “Write Your Own” (WYO) widely understood. companies. WYO companies issue the SFIPs Two of the more significant issues in their own names and handle the adjustaddressed in the flood insurance related liti48 | INSURANCE JOURNAL-SOUTH CENTRAL REGION February 23, 2009

ment, settlement, payment and defense of all claims arising under the flood insurance policies, but the policies remain underwritten by the U.S. government and claims are paid out of the U.S. Treasury.

Preemption of Flood Insurance Claims Following Hurricanes Katrina and Rita, many of the thousands of lawsuits filed by insureds included claims asserting various state law causes of action for bad faith claims handling and adjustment of flood insurance claims, and also claims for misrepresentation or negligence by insurance agents in connection with the procurement or failure to procure flood insurance.

Accordingly, a predicate issue which the courts had to decide was whether these state law claims were preempted by federal law.

Because Louisiana, Mississippi and Texas incurred some of the most significant flooding due to hurricanes in the past few years, the Federal Fifth Circuit Court of Appeals and the Federal District Courts within that circuit have issued a number of opinions addressing the issue of federal preemption.

In the 1993 case of Spence v. Omaha Indemnity Insurance Co., the Fifth Circuit held that federal common law governed claims under flood insurance policies, but state law provided the statute of limitations for misrepresentation claims brought against the WYO companies that issued SFIPs. [Spence v.

Omaha Indemnity Ins. Co., 996 F.2d 793, 796 (5th Cir. 1993)] Subsequent courts interpreted Spence as holding that the SFIP and FEMA regulations did not preempt state law tort claims against WYO companies.

However, effective Dec. 31, 2000, FEMA amended the SFIP to provide that “all disputes arising from the handling of any claim under the [flood insurance] policy are governed exclusively by the flood insurance regcontinued on page 50 www.insurancejournal.com

Idea Exchange Legal Beat continued from page 48

ulations issued by FEMA, the National Flood Insurance Act of 1968 as amended (42 U.S.C. §4001, et seq.) and Federal Common Law.” [44 C.F.R. Pt. 61, App. A(1) art. 9 (2001)] Subsequently, the Fifth Circuit issued an opinion clarifying that Spence did not hold that none of the available state law claims against WYO companies were preempted by

federal law, but only that extracontractual state law claims against WYO companies were not preempted. But, for cases filed after the Dec. 31, 2000, effective date of FEMA’s amendment to the SFIP, the Fifth Circuit held that all state law tort claims, including extracontractual claims, arising out of claims handling by a WYO company under a flood

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insurance policy were preempted by federal law. [Richmond Printing, L.L.C. v. Director Federal Emergency Management Agency, 72 Fed. App. X. 92 (5th Cir. 2003); Gallup v. Omaha Property & Casualty Ins. Co., 434 F.3d 341 (5th Fir. 2005).]

Since these pronouncements by the Fifth Circuit, courts have drawn a distinction between state law causes of action arising from claims handling of flood insurance and those arising out of procurement of flood insurance coverage, holding that the latter are preempted but the former are not.

One court has noted that “procurement” cases, which are not preempted, “include claims that the insurance agent failed to procure coverage having been asked to do so, or where the agent failed to increase the coverage over time, where the agent failed to recommend flood coverage, and where the coverage had lapsed and the agent had failed to inform the plaintiff of the loss of coverage.”

[Valerie v. Fidelity & Deposit Co. of Maryland, 2007 WL 2446100, n. 4 (W.D. La. 2007)] What the Right Hand Giveth, the Left Hand Taketh Away Although these rulings permit state law causes of action to be brought against insurance agents or WYO companies in connection with their procurement of or failure to procure flood insurance policies, at the same time, many courts have issued rulings suggesting that it will be impossible to prevail on most procurement related causes of action.

Specifically, most procurement claims allege misrepresentations by the insurance agent or the WYO company about an insured’s need for flood insurance or the amount of flood insurance coverage available.

The Fifth Circuit has held that insureds have a duty to read and understand the terms of their SFIP, and, even if they do not have a copy of the SFIP, they are charged with constructive knowledge of the terms of the SFIP because it is published in the Code of Federal Regulations. This knowledge is imputed to the insured “regardless of actual knowledge of what is in the regulations or of the hardwww.insurancejournal.com

ship resulting from innocent ignorant.�

[Richmond Printing, L.L.C. v. Director of Federal Emergency Management Agency, 72 Fed. App. X. 92 (5th Cir. 2003)] As a result, numerous district courts in the Fifth Circuit have concluded that even if an insurance agent or WYO company makes a representation that is contrary to the provisions of the SFIP as contained in the Code of Federal Regulations, it is unreasonable as a matter of law for the insured to rely on such representation, notwithstanding that the insured may look to the insurance agent as an expert or how confusing the regulations may be.

At least one district court outside of the Fifth Circuit has suggested that while constructive knowledge of the SFIP may prevent an insured from asserting misrepresentation as the basis of a contract or estoppel claim against the U.S. government, it should not apply in the context of whether an insured’s reliance on the misrepresentation was reasonable for purposes of a misrepresentation claim against the insurance agent or WYO company themselves. [Padalino v. Standard Fire Ins. Co., 2008 WL 4630585 (E.D. Pa. 2008)] However, thus far, courts in the Fifth Circuit do not appear inclined to follow this view.

Governed by Federal Law While further refinement will undoubtedly be forthcoming as additional decisions are issued, when confronted with a lawsuit asserting claims involving a flood insurance policy, insurance agents, WYO companies and their respective attorneys should be aware that other than possibly those claims involving the procurement of flood insurance coverage, all such claims are governed exclusively by federal law and that any claims, even procurement claims, alleging misrepresentations that are contrary to provisions of the SFIP as contained in the Code of Federal Regulations may be deemed unreasonable as a matter of law. IJ Robert Redfearn, Jr. (Redfearnjr@spsr-law.com) is a partner in Simon, Peragine, Smith & Redfearn, a regional law firm with offices in New Orleans, La., and Mississippi. www.insurancejournal.com

February 23, 2009 INSURANCE JOURNAL-SOUTH CENTRAL REGION | 51

Idea Exchange Marketing to Diverse Groups

continued from page 45

Business by the Numbers

many of whom are Hispanics, so he joined an association of independent car dealers.

1.6 million - Number of Hispanic-owned businesses in 2002 “You’ve got to be involved, (the latest year for which statistics are available). The rate of you’ve got to be there,” he growth of Hispanic-owned businesses between 1997 and 2002 was said. Potential customers 31 percent, compared with the national average of 10 percent for all want to know, “Do you businesses. know what you’re talking 1.2 million - Number of black-owned businesses in 2002. Blackabout? Do you belong to my owned firms accounted for 5 percent of all nonfarm businesses in the organization?” Saenz said.

United States.

“It’s got to be one on one.”

1.1 million - Number of businesses owned by Asian-Americans in Anyone can come here 2002; up 24 percent from 1997. The rate of increase in the number and tap the market, he said, of Asian-owned businesses was about twice that of the nationand while they don’t need to al average for all businesses. be Hispanic to do so, it does 201,387 - Number of American Indian- and Alaska help to speak Spanish. While Native-owned businesses in 2002. most people are bilingual, if (U.S. Census Bureau) Spanish is their first language, it’s the one they want to use when it comes to client, business. “people that “You have to know the culture,” advised know us and know we Luis Rico, vice president of Desert West do a good job.”

Insurance Agency, which is headquartered in Patterson, who’s been in the insurance El Paso but also has an office in San Antonio. business for nearly 30 years, also says most of “It’s one thing to know the product that you his business comes through referrals. are selling, and it’s another thing to know “When you treat people with respect and who you are going to selling it to.” honor, they honor you with their business,” He says his agency, which has a specialty Patterson said. “They return that and they in trucking and transportation, does advershare with their friends. When they are treattise that employees speak Spanish. “A lot of ed well … it comes back to you tenfold.” folks here in El Paso feel more comfortable Pierson agreed. “Cultural groups that are with that. They are bilingual but they feel outside the mainstream, that maybe don’t more comfortable speaking with somebody speak English that well, are truly going to in their own language.” rely on referrals of people similar to themSometimes, IIABA’s Pierson said, it’s just a selves,” he said. “Referral, word of mouth, is matter of being interested. Even if an agent the way to do it. It’s that classic thing, if you says to a group, “‘I don’t understand your culdo something good, they’ll tell people.” ture, help me understand it.’ That goes a long Ethnic communities in many ways are way,” Pierson said. “You don’t know unless closed communities, Berrong explained. you ask.”

“What I mean by that is they’re talking to each other more than they’re speaking to Referrals, Referrals, Referrals their banker. They talk to each other.

When it comes to expanding an agency’s [They’re saying] who can I get that will solve market share in a particular community, my problems, and hopefully that’s where a Patterson, Berrong, Saenz, Rico and Pierson lot of our referrals come from.” all agreed: It’s all about referrals.

Pierson warned, however, if you do a bad Rico’s transportation clients are mostly job, “they will tell even more people.” long-haul truckers, and they are “99.9 perPatterson concurred. “People will go where cent” Hispanic. they are invited but they return to places “They have trucking companies and they where they are well-treated. And the conare working at it hard,” he said. When a new trary is the same. If you mistreat somebody client comes to them, it’s almost always the … they’re going to tell an awful lot of folks,” case where they were referred by another he said. IJ 52 | INSURANCE JOURNAL-SOUTH CENTRAL REGION February 23, 2009

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51 49 43 51 50 3 2

Idea Exchange Closing Quote

Implications of the 2008 Farm Bill Could Reduce Agent Commissions, But Create New Insurance Categories

By Christopher Leliaert Leliaert

T

he Food, Conservation and Energy Act of 2008 (the Farm Bill) authorizes farm programs for the next five years. The Act’s provisions encompass a range of issues, including commodity price supports, conservation, trade, bio-energy, rural development, crop insurance and commodity futures regulation. Title XII of the Act also has important implications for crop insurers and agents.

Title XII was introduced, at least in part, because of pressure to find cost savings that could be used to fund other provisions of the Act. Key provisions of the Act will result in direct taxpayer savings and mandate development of new insurance products and enhancements to existing products.

Multiple Peril Crop Insurance (MPCI) programs are administered by private insurance companies that are regulated by the Risk Management Agency (RMA) of the U.S. Department of Agriculture. These insurers are authorized to conduct MPCI sales and servicing through the Standard Reinsurance Agreement (SRA). To ensure the SRA’s contractual stability, the Act extends the SRA for the next five years. RMA will only be allowed to renegotiate the SRA under extraordinary circumstances as outlined in the provision.

The private crop insurance industry has grown significantly in the past several years. Gross written premium grew to $9.856 billion in 2008, driven by record commodity prices and farmers’ increased participation and coverage.

The Act reduces the rate that insurers’ administrative and operating (A&O) expenses are reimbursed by the RMA by 2.3 percent. A&O covers the administrative cost of the providing crop insurance to farmers.

Agents’ commissions are a significant part of the expense. The reduction will result in the loss of about $225 million in annual income for private crop insurers, which will put pressure on insurance company operating expenses. It could also result in reduced agent commissions, particularly in locations where underwriting profits are limited.

Another important provision of the Act is the introduction of the Average Crop Revenue Election (ACRE) program, an alternative to the current price counter-cyclical program. The ACRE program is not an insurance policy; however, payments under this program are triggered if a state’s realized revenue is less than the target revenue. To be eligible for an ACRE payment, 54 | INSURANCE JOURNAL-SOUTH CENTRAL REGION February 23, 2009

a farmer’s actual revenue for a crop must be less than the farm’s ACRE benchmark revenue for the crop. The ACRE program may be complementary to MPCI programs. Selection of the proper MPCI insurance program by the agent and farmers is key to the farmer’s overall risk management program.

The Act introduces the implementation of the Supplemental Revenue Assistance Program (SURE), a whole farm disaster assistance program. If the whole farm actual revenue is less than the SURE guarantees, the farm receives a SURE payment equal to 60 percent of the difference. SURE requires a declared disaster in the farmer’s county or contiguous county and mandates the farmer purchase MPCI or NAP (Noninsured Crop Disaster Assistance Program) policies for all crops. This program, like ACRE, is another farm management tool intended to work in conjunction with crop insurance. The biggest change is farmers must insure and sign up all crops, including minor crops such as hay that were previously uninsured.

The Act also mandates the FCIC to offer or improve coverage for organic crops, dedicated energy crops, aquaculture, poultry, beekeeper and nursery crops. Many of these crops or crop categories enjoy growing consumer demand, and expansion of coverage for them could benefit the insurance industry.

The Act has a new provision that prohibits farmers from setting up insurance agencies to collect commissions and payments on their own policies, except when less than 30 percent of commissions derive from their own policies, family policies or policies they otherwise control. This ensures the program will be administered by professional crop insurance agents.

MPCI insurance policies and rates are the same for all private crop insurers. Although the Federal Crop Insurance Act allowed insurers, with FCIC approval, to sell crop insurance at a reduced premium, that provision has been eliminated. This change offers protection for insurance agents and allows companies to compete only on service and commissions to agents.

The Act also authorizes changes in government premium subsidy to farmers that will likely change the mix of business in insurers’ portfolios. A reduction in the subsidy in the Group Risk Plan and an increase in the Enterprise Unit discount will cause a shift toward individual crop insurance products.

It’s important to understand the changing crop farm management products. Their implication won’t be known until later in 2009, as the Act is fully implemented. IJ Leliaert is vice president at Towers Perrin (www.towersperrin.com) based in Chicago, responsible for the firm’s Agricultural Reinsurance business. He will discuss this topic at the 22nd Annual Agribusiness Conference. www.AgribusinessConference.com. www.insurancejournal.com

Joe Santini, Master Mechanic.

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