Insurance Journal

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FLORIDA SURPLUS LINES Scary Scenario Now Playing

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D&O PRICING AHEAD Effects of Securities Suits

FARM BILL FACTS What Agents Should Know

Also:

A Scary Surplus Lines Scenario

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

SOUTHEAST COVERAGE 8

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S47 Florida Surplus Lines A Scary Scenario, Soft Market Opportunities, What Retail Agents Value & More

NATIONAL COVERAGE N1 | The Relative Calm Industry Insiders Credit Risk Management for Minimizing Recession’s Impact N2 | Reinsurers Seem Ready to Flex Muscles Prices Could Increase by Double-Digits 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 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

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| Florida, Georgia Among States Showing Declines in Auto Deaths Among 40 States With Improved Roadway Safety Records | ‘Death Map’ of Natural Event Fatalities U. of South Carolina Geographers Identify Fatality ‘Hot Spots’ | Kentucky Ice Storm Death Toll at 35; Losses at $130 Million About 50,000 Still Without Power Two Weeks After Storm | Judge Orders Mine Rescue Safety Teams Rescue Teams Must Train More Often | Defense Act Bars Suits Against Blackwater North Carolina’s Blackwater in Legal Win Over Contractors’ Survivors | Florida Attaches Major Conditions to State Farm Withdrawal State Farm Agents to Work with Other Insurers; No Policies in Citizens | Exclusive Survey: Florida Agents React to State Farm Exit What Will Happen to State Farm Business? | Now Playing in Florida: A Scary Surplus Lines Scenario Essex, CNL Hotels Court Rulings Strike Fear in Heart of Florida’s Surplus Lines Industry | Soft Market Opportunities in State Farm Exit, Medical Mal, EPLI FSLA President Finver Looks Beyond Regulatory Issues | What Retail Agents Value in Surplus Agents 10 Things Retail Agents Value About Surplus Lines Agents | Top 24 Surplus Lines Coverages in Florida Inland Marine On Top in Policy Count | House Sponsors Sign Onto Surplus Lines Bill House to Get Industry Supported Reform Bill

IDEA EXCHANGE N10 | Budget-Friendly Ideas to Retain Your Top Performers Career Development, Mentors and Flexible Schedules Can Help N26 | Valuing the Deal: It’s What You Keep That Matters Hard Costs, Holdbacks and Soft Costs Impact Every Deal 54 | Closing Quote: Christopher Leliaert Implications for Agents of 2008 Farm Bill

DEPARTMENTS N16 6 44 54

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MyNewMarkets Opening Note People Closing Quote

8 ‘Death Map’ of Natural Events South Carolina Researchers’ Morbid Curiosity

52 | Directory: Florida Surplus Lines Association Members

50 Soft Market Surplus Opportunities FSLA President Steve Finver on State Farm, Med Mal, EPLI and More

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

EDITORIAL

Attitude Adjustment

T

he tiff between State Farm Florida and the Office of Insurance Regulation that has culminated in the insurer’s withdrawal from the state’s property market is disturbing.

It’s not disturbing because an insurance company is leaving—that’s happened before, often for competitive or economic reasons having nothing to do with regulation, and other carriers seem to take their place.

It’s not disturbing because consumers will be hurt— this is unlikely to happen. They may be inconvenienced but they’ll get replacement coverage and in some cases, a better deal. The state has plenty of consumer protections in place, too.

Rather the tiff is disturbing because it represents a failure of responsible parties to do their jobs. It’s so easy to get caught up in all the history and drama between these two adversaries and the other serious insurance challenges in this state but, very simply, the bottom line in this controversy is money. State Farm needed more of it and state regulators told State Farm it couldn’t raise as much as it wanted. This isn’t the first or last disagreement over rates between insurers and regulators but let’s hope it’s the last time they can’t come to a compromise.

Nobody knows which side to blame or trust. At times, State It’s hard to Farm has seemed intent on not cooperating with state regulators, who in turn sometimes seemed more intent on getting even know which rather than getting it right for consumers.

According to a recent Insurance Journal survey of 133 Florida side to blame agents, they blame the state regulators (50.4 percent) more than State Farm (16.8 percent). Another 32.8 percent say they both are or trust. equally to blame.

As one agent put it: “We need to get personal agendas, politics and personal egos out of the insurance business in Florida.”

That goes for private agendas, politics and egos as well as public.

Another agent wrote: “Instead of having a contest on who has the most power, how about really trying to resolve the issues?”

Had State Farm Florida been granted the rate increase it sought, or settled for some of it, through the miracle of free enterprise many of its customers would have likely switched to other carriers with better prices. Now about 1.2 million policyholders are being denied a choice and will be forced into leaving State Farm. Who is better off now?

State Farm Florida agents aren’t better off. These 826 contract agents will lose almost 40 percent of their income when they lose their property market. This is thanks to the irresponsibility of their executives and state officials, not because of competition. Sure, this represents an opportunity for other carriers and agents but it’s hard not to feel sympathy for the State Farm Florida agents.

Florida faces bigger insurance problems than the pullout of a single carrier. Chief among them is an under-funded hurricane fund. To paraphrase Richard Nixon, neither OIR nor State Farm will have the other to “kick around” anymore. But if the same attitudes and egos that kept State Farm executives and OIR officials from settling on something as simple as a rate increase continue to poison the atmosphere, it’s difficult to see how they can resolve these bigger issues. Changing these attitudes could be as big Andrew Simpson a test for Florida’s insurance market as the next East/Southeast Editor asimpson@insurancejournal.com hurricane.

Editor-in-Chief Andrea Ortega-Wells | awells@insurancejournal Vice President/Content Andrew Simpson | asimpson@insurancejournal.com Midwest Editor Sue Mckenna | smckenna@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 Reporter Brian Kern | bkern@insurancejournal.com Columnists Susan Henry Contributing Writers Jerry Hillard, Kevin La Croix, Christopher Leliaert, Chris Ohrenich, 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 CClassified 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 Graphic Designer Chris Johnson | cjohnson@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: Guy Boccia

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

6 | INSURANCE JOURNAL-SOUTHEAST REGION February 23, 2009

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Southeast Coverage News & Markets

Florida, Georgia Among States Showing Declines in Auto Deaths the District of Columbia out of 44 states they surveyed. The average utomobile fatalities declined decline was 10.7 percent, the safein 40 states in 2008, a sign ty group said. that traffic deaths could dip to “Clearly, the high gas prices in their lowest levels in four decades. the first part of the year and the The Governors Highway Safety difficult economy in the second Association said that vehicle half caused people to drive less, deaths dropped in 40 states and thus reducing fatalities. However, there’s more occurring here than just economic factors,’’ said Barbara Harsha, executive director.

Harsha said the declines could also be Web resource attributed to seat belt Governors Highway Safety Association: use reaching a record http://www.ghsa.org/ high of 83 percent in 2008 and increased

By Ken Thomas

A

enforcement of traffic laws. Many states also reported drivers reducing speed to boost fuel efficiency.

Among large states, Florida’s highway fatalities dropped 6.8 percent, Illinois’ fell by 16 percent, Ohio’s declined by 4 percent and Michigan’s fell by 7.7 percent.

Georgia saw decreases of 12 percent and New Jersey’s fatalities dropped 18 percent. Alaska, Hawaii, Massachusetts, Virginia, Wisconsin and the District of Columbia all saw declines of 20 percent or more.

Fatalities increased inVermont, Wyoming, Delaware and New Hampshire.

Several states, including New York, California, Pennsylvania and

Texas were not in the survey.

The preliminary results were consistent with a report from the National Highway Traffic Safety Administration in December that found auto fatalities dropped 10 percent in 2008 from the months of January though October. If the trend held up during the year’s last two months, deaths could reach their lowest level in 42 years.

The Federal Highway Administration has reported steep declines in the number of miles Americans are driving . IJ Copyright 2009 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

USC Geographers Create U.S. ‘Death Map’ of Natural Event Fatalities

U

niversity of South Carolina geographers have produced a map of natural-hazard mortality that gives a county-level representation of the likelihood of dying as the result of natural events such as floods, earthquakes or extreme weather.

The map, recently featured in the International Journal of Health Geographics, gives a countylevel representation of the likelihood of dying as the result of natural events such as floods, earthquakes or extreme weather.

Dr. Susan Cutter, a Carolina Distinguished Professor of Geography, and Kevin Borden, a doctoral candidate in geography, used nationwide data dating back to 1970 to create the map.

Cutter said the map will be a valuable planning and policy tool.

“This work will enable research and emergency-management practitioners to examine hazard deaths through a geographic lens,” said Cutter, a leading authority in the field of hazards and vulnerability research.

“Using this as a tool to identify areas with higher-than-average deaths can justify allocation of resources to these areas with the goal of reducing loss of life.”

Hazard mortality is most prominent in the South, where most people are killed by severe weather, such as tornadoes. Other areas identified as having elevated risks include the northern Great Plains Region, where heat and drought are the biggest killers, and in the moun-

8 | INSURANCE JOURNAL-SOUTHEAST REGION February 23, 2009

tainous areas of the West, where responsible for relatively few deaths are attributed to winter deaths when compared to the weather and flooding. The greatmore frequent, less catastrophic est threats to the south central events such as heat waves and United States are floods and torsevere weather (summer and winnadoes. ter),” Cutter Heat/drought said.

Hazard mortality The ranked highest among the hazard is most promiresearchers said categories, causing nent in the that while these South, where 19.6 percent of findings may total deaths, close- most people are not be entirely killed by severe surprising, they ly followed by weather, such as provide a valusevere summer tornadoes. weather (18.8 perable blueprint cent) and winter for identifying weather (18.1 perhazard mortalicent). ty “hot spots” that merit in-depth Geophysical events such as study so that emergency-manageearthquakes, wildfires and hurriment officials can make plans to canes were responsible for less reduce the number of future than 5 percent of total hazard deaths. IJ deaths combined.

Web resource “What is noteworthy is that Death Map: Cutter and Borden’s article over time, highly destructive, and map in the International Journal of highly publicized, often cataHealth Geographics can be accessed at strophic singular events such as www.ij-healthgeographics.com/ hurricanes and earthquakes are www.insurancejournal.com

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Southeast Coverage News & Markets

Kentucky Ice Storm Death Toll at 35; Early Losses at $130 Million

By Andrew G. Simpson

K

entucky officials say the Jan. 27 storm that blanketed the region with ice and snow took 35 lives. About 769,000 customers lost power at its peak, and almost 50,000 were still without power two weeks later.

More than 100 counties and 75 cities have declared states of emergency.

As power is restored and the damage is uncovered, property owners are beginning to file insurance claims. According to Gary

Kerney, assistant vice president for Property Claim Services at ISO, the preliminary estimated damage for Kentucky is $130 million.

“There are still many areas that do not have power restored and it is anticipated that this figure will increase after the power is restored and people are able to return to their homes and assess the damages. In addition to damages caused by the weight of the ice and snow, it is anticipated that ‘power outage’ claims will represent a significant portion of the losses,” Kerney stated.

Judge Orders Small Mine Rescue Training

By Tim Huber

A

judge has ordered the federal agency that regulates coal mining to strengthen rules designed to make the nation’s 38,000 underground coal miners safer by creating better-trained rescue teams.

U.S. Circuit Court of Appeals for the District of Columbia Judge Stephen Williams ordered the federal Mine Safety and Health Administration to reconsider rescue team rules covering small coal mines. Current rules allow teams at mines with fewer than 36 employees to train just once a year.

Williams ruled that violates a federal law passed after the deaths of 12 West Virginia coal miners following a January 2006 methane gas explosion and two other high-profile underground mining accidents that killed seven workers in West Virginia and Kentucky later that year.

Williams also ordered MSHA to eliminate a rule allowing teams of state inspectors to substitute work for rescue practice.

MSHA said it would make the necessary changes, which will require state employee teams to train twice a year at small mines and participate in two contests for mine rescue teams, the agency said in a statement. Teams at small mines will be required to train twice a year as well, MSHA said. IJ Copyright 2009 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

10 | INSURANCE JOURNAL-SOUTHEAST REGION February 23, 2009

Ronda Sloan, of the Kentucky Department of Insurance, said it’s too early to have total figures.

“Many of the companies were reporting 1,000 to 2,000 claims each while some of the larger insurers had over 10,000 each.

However, we don’t have any firm totals at this time,” she told Insurance Journal.

Some Kentuckians may find their damage is not insured, she noted.

“We are hearing that most claims at this point are relatively minor. Many will not be insured

losses. We’ve heard of some roof damage from ice dams, damage from frozen pipes, damage from the weight of ice and snow, trees falling on covered structures or cars, etc.

Also, things like food spoilage that may not be covered,” Sloan said.

Thus far, the DOI has only had two complaints about ice storm claims. IJ

Defense Act Bars Suits Against Blackwater

By Mike Baker

T

he survivors of four Blackwater Worldwide contractors killed in a grisly ambush in Iraq five years ago have suffered another setback in their legal battle with the company.

A federal administrative law judge in North Carolina ruled the children of one of the slain contractors should receive compensation through a government insurance program known as the Defense Base Act. It prohibits those eligible for benefits from filing lawsuits against companies covered by the insurance.

The families of the four dead contractors have received payments through the program for several years. Seeking to keep their right to sue, the mother of contractor Scott Helvenston’s two children asked the judge to rule they never were entitled to the benefits they’ve been receiving. They argued the Defense Base Act does not apply to Blackwater’s work as a subcon-

tractor, the insurance doesn’t apply to independent contractors, and the family should be able to sue because Blackwater committed willful misconduct in how the company handled Scott Helvenston and his fateful mission. Helvenston was one of four contractors killed in the attack in Fallujah in 2004.

William Dorsey, a U.S. Labor Department administrative law judge in San Francisco, disagreed on each point in a ruling.

The decision appears to further complicate the chances of the four families winning a wrongful death lawsuit against North Carolina-based Blackwater.

Marc Miles, an attorney for the families, said in an interview that they plan to appeal Dorsey’s ruling. He said he didn’t think it would have any impact on the wrongful death case, which is set to go to arbitration in June. IJ Copyright 2009 Associated Press.

All rights reserved. This material may not be published, broadcast, rewritten or redistributed. www.insurancejournal.com

It Figures

Declarations Devastating

6.4% The workers’ compensation rate increase approved by Florida Insurance Commissioner Kevin McCarty effective April 1. The increase reflects the impact from the Oct. 23 Florida Supreme Court opinion in the case of Emma Murray v. Mariner Health Inc. That decision eliminated the statutory caps on attorney fees.

“From what I saw today, it was incredible, and we only saw a very small portion today. If you extrapolate that over the entire geographic area that is impacted by Kentucky, it’s a devastating situation for the state.’’

— Acting FEMA Director Nancy Ward after visiting western Kentucky and witnessing the damage caused by a fierce winter ice storm.

Long Goodbye

The auto insurance rate increase request from insurers that is under consideration by North Carolina Commissioner Wayne Goodwin. The filing comes at a time when the industry is appealing the state’s denial of a 16.1 percent increase for last year; the state allowed only 9.4 percent.

“He was such a tremendous public servant. He was so looking forward to this part of his life ... it makes you realize that you’ve got to enjoy every day and live it to the fullest because nobody expected this.’’

— North Carolina Gov. Beverly Perdue remembering Jim Long, who died at age 68 after suffering a stroke and who served 24 years as insurance commissioner retiring in January.

30,000

AIG Probe

The number of State Farm property insurance policies a Florida domestic insurance says it wants to write. John Jerger, president of American Traditions Insurance Co. and Modern USA Insurance Co., said his companies can not only take on that many new customers but save a lot of them some money, about $1,300 a year on average for a $200,000 home.

Jerger’s companies now write about $60 million in business in the state.

“They (AIG) are not under the same controls that other organizations that got (government) money are; but under a new bill that has been passed it will be more involved, what they can and can’t do, and we can look back.”

— Rep. Paul Kanjorski, D-Pa., chairman of the House subcommittee on capital markets and insurance, who said he is concerned that American International Group Inc.’s $150 billion federal bailout could be undermining the U.S. insurance market and he is digging into claims that the insurer is driving down prices to win business. Kanjorski also told Reuters that AIG’s pay practices could come under scrutiny.

1.4%

0.08% The blood alcohol level at which a new penalty system for drunk drivers in South Carolina kicks in. A new law creates a tiered penalty system based on how many times drivers are convicted and how much alcohol they have in their system. The penalties get harsher at 0.10 percent and again at 0.16 percent.

$3.9 Million The amount awarded to the Alabama family of a woman who died as a result of carbon monoxide poisoning that is now to be reconsidered. The jury in 2007 found that Mobile Gas Service Corp. had supplied gas to a furnace even though company inspectors had tagged the furnace as being defective.

The state’s high court said in a 6-0 ruling that errors in the trial required the judgment to be set aside.

9.9 Million The number of Americans ensnared by identity theft in 2008, a 22 percent rise from 2007. The good news, however, is that the cost per incident — including unrecovered losses and legal fees — fell 31 percent to $496, according to Javelin Strategy & Research.

www.insurancejournal.com

Florida Nightmare “This is a day that we hoped would never come for State Farm.

This is the nightmare I’ve been waking up to each day since I assumed this responsibility.’’

— Jim Thompson, president of State Farm Florida, which is exiting property markets in Florida, telling the House Insurance, Business & Financial Affairs Policy Committee that the company must stop its financial bleeding to ensure it can pay off future claims.

More Done “We think there is more that State Farm could do if they wanted to stay in Florida.’’

— Deputy Insurance Commissioner Belinda Miller answering legislators’ questions on State Farm’s withdrawal, noting that regulators approved a 52.8 percent rate increase for State Farm two years ago while maintaining that a more recent 47.1 percent request by the insurer was not justified.

February 23, 2009 INSURANCE JOURNAL-SOUTHEAST REGION | 11

Southeast Coverage News & Markets

Florida Attaches Major Conditions to State Farm Withdrawal

By Andrew Simpson

F

lorida Insurance Commissioner Kevin McCarty has offered his own plan for State Farm Florida Insurance Co.’s withdrawal from the state that includes conditions not in the insurers’ own plan.

McCarty wants State Farm Florida to permit its 826 contracted agents to place some of the 1.2 million policies it is dropping with other carriers and he wants to prohibit the insurer from placing any of the business in statebacked Citizens Insurance.

The insurer would have to issue pro-rata refunds to those seeking to voluntarily cancel and would not be allowed to short-rate any policy including auto.

Also, the Office of Insurance Regulation would pull State Farm

Florida’s authority to write business in 30 days, rather than waiting until the end of the two-year plan as State Farm proposed.

State Farm’s own timetable calls for it to nonrenew about 470,000 property policies over the next year, policies it describes as presenting “the highest contribution to the company’s probable maximum loss.” It promises its agents would help insureds obtain coverage with Citizens, but McCarty wants to block this option.

State Farm also wants to nonrenew all of its 58,000 boatowners policies in the first year. All other policies would be nonrenewed in the second year.

State Farm has previously rejected a call to let its agents place customers with other insurers. But it did not close the door on working with OIR on a solution to the

agent situation. “It is our sincere sector and believe most policyholdhope that we can work with the ers will be able to be placed at rates OIR to establish a way for State as good as State Farm’s or better,” he Farm agents to service policies said. directly out of State Farm Florida State Farm has several weeks to into OIR-approved companies,” review the plan and the right to Chris Neal, State Farm Florida’s appeal it. IJ public affairs manager, said.

McCarty believes there are private carriers Business Being Dropped by State Farm Florida “ready, willing and able” Line Premium #Policies to take up the business Apartment $5,585,820 2,631 $33,497,854 57,982 and said he would not Boatowners Business $76,909,075 30,855 have approved a withChurch $13,582,501 1,989 drawal if he did not Cmcl. Inland Marine $875,224 2,661 Cmcl. Liab. Umbrella $2,741,154 3,749 have confidence that Condo Unit Owners 55,810,587 79,833 private insurers could Homeowners $1,054,918,245 703,357 cover the risks. He said Manufactured Home $15,186,032 14,533 $27,326,747 97,719 he has spoken with 15 Personal Inland Marine Personal Liab. Umbrella $49,459,887 93,874 carriers interested in Premises/Personal Liab. $657,180 5,890 from 50,000 up to as Rental Condo Unit $2,638,728 6,110 $45,535,805 64,902 many as 500,000 policies Rental Dwelling Policy Renters $13,135,733 61,774 each. “We have ample Source: Withdrawal Plan for State Farm Florida Insurance Co. capacity in the private

Exclusive Survey: Agents React to State Farm Florida Pullout

I

nsurance Journal surveyed 130 Florida insurance agents on the expected exit of State Farm Florida. Here’s some of what they said: • 62% expect State Farm will exit while 32% think it could still stay.

Comments: —“This is a high-stakes game of chicken. State Farm is trying to force the state’s hand, while leaving their customers hanging.”

—“I do not think it is a bluff on either part.”

—“[F]rom what I have seen they are only purging their book of the older homes and less desirable risk homes and expect to reach an agreement with DFS and stay and they will have cleaned their book of property business up as all companies wish they could do.”

—“I think rates will increase and everybody will be happy but the insureds.”

• 84.6% are already receiving calls from State Farm customers.

• 93% are interested in writing some of the State Farm business.

• 52.8% believe they will be able to save most State Farmers money.

• To attract State Farm business: 59.8% are increasing their marketing and 25% are seeking additional carrier appointments.

Other steps they’re taking: adding sales staff (9.8%), adding support staff (13%), partnering with a State Farm agent (22.8%) and making surplus lines contacts (8.7%).

• What will happen to State Farm Florida’s business?

• 37.7% believe the state’s private insurers

12 | INSURANCE JOURNAL-SOUTHEAST REGION February 23, 2009

will handle the bulk.

• 44.6% believe the majority will end up in state-backed Citizens.

• 36.2% think State Farm agents will represent other carriers.

• 37.7% believe the state’s surplus lines market will gain business.

Comments: —“I have a real problem recommending that people leave State Farm, an A-rated company, and going with Citizens, a bankrupt company that would not be allowed to operate if they were not a state run company. I also have a problem recommending an Excess and Surplus company or a non-rated company instead of State Farm.”

—“This will put an added burden

on a property market that will not be able to handle the claims that will come if we get hit by a large Cat 3 or above storm.”

—“The biggest issue with State Farm’s book of business is the loyalty that its clients have to them. While they have written very little new business in the last 17 years (since Andrew) the book has continued to age. Many of these homes are 50 years old or more and the admitted markets do not look at these favorably, so they may not fight for it.

Meanwhile, Citizens is wide open for it with an inspection.”

—“I think we may see some new companies coming in to take over some of the State Farm business.”

—“State Farm agents will try to re-write into Citizens to further anger the state.”

—“My concern is how much capacity do the smaller companies have and can they absorb the majority of the business?” IJ www.insurancejournal.com

Beyond Security®

“It takes confidence and agility.”

Jeff Coles Vice President Swett & Crawford, LA Downhill Skier General Star Broker

“I’m no expert, but I can finally make it down a Black Diamond slope. Confidence and agility are key.

“Confidence and agility are also key to my relationship with General Star. Confidence in their financial strength is a given, but it’s their agility that matters most to me; it gets us around the occasional obstacle in creating optimal solutions for my clients.

“Whether I’m struggling to stay upright on a tough slope, or managing an unusual risk, I remind myself to stay agile. With General Star behind me that’s guaranteed.”

To find the General Star broker nearest you, visit our website at www.generalstar.com. © 2007 General Star Management Company, Stamford, Connecticut. Certain coverages may be written on a nonadmitted basis. Specialty underwriting through designated surplus lines brokers.

Atlanta 404 239 6777 Chicago 312 267 8600 Los Angeles 213 630 1930 New York 212 341 8200 Stamford 203 328 5700

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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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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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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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Insurance Industry Charitable Foundation presents the

5th Annual

Club100 Dinner The Club100 Dinner is an intimate gathering of the top 100 insurance professionals and their guests from California and the West Coast. Enjoy a social evening of fine wine and food in a unique setting that reflects the beauty of the Southern California region.

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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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Juan Andrade

Neil Wolin

John A. Turner

Mike Crowley

Juan Andrade and Jonathan Bennett have been named as interim co-leads of the Property and Casualty Operations of The Hartford.

Their appointment to those interim positions follows the departure of Neil Wolin, president and chief operating officer of the The Hartford’s Property and Casualty Operations, who has accepted a position in the White House as Deputy Counsel to the President for Economic Policy and Deputy Assistant to the President.

Andrade is currently executive vice president of sales and distribution for Property and Casualty. He joined The Hartford in 2006 when he assumed leadership of the P/C claims organization. Prior to joining The Hartford, Andrade held several leadership positions with The Progressive Corp., and also held management positions with American International Group.

Bennett is currently executive vice president of personal lines and small business insurance. Bennett joined The Hartford in 1999 as staff assistant to Ayer. He has since served in several leadership roles at the company, including vice president of corporate development, head of the eBusiness Ventures Team, and senior vice president of product management for the personal lines division. He was promoted to his current role in 2005.

Lassiter Ware Insurance in Florida has added John A. Turner to its staff as executive vice president of the Employee Benefits Division. Turner most recently served as president of J. Rolfe Davis Insurance Co., headquartered in Orlando. Prior to his tenure with J. Rolfe Davis, Turner worked in executive positions with Blue Cross Blue Shield of Florida and United Healthcare.

Richmond, Virginia-based Markel Corp. has promoted Britt Glisson to chief administrative officer. In this role, he will be responsible for assuring efficient, cost effective operations for Markel Corp. in North America.

Glisson joined Markel in1990, first as chief financial officer and later as president and chief operating officer of Essex Insurance Co. In 1996, he became president and chief operating officer of Markel Insurance Co., the positions he held just prior to his promotion.

Markel also named Mike Crowley as president of Markel Corp.’s Specialty Division. In his new position, Crowley will be responsible for specialty insurance business, which includes Markel Insurance Co. and Markel American Insurance Co. Prior to joining Markel, Crowley was president of Willis HRH North America, and has previously held senior positions with Johnson & Higgins and Palmer Cay. Thomas V. Flaherty has been named chairman West Virginia’s BrickStreet Mutual Insurance Co.’s board of directors. In addition, BrickStreet Senior Vice President and General Counsel Thomas J. “T.J.” Obrokta Jr. was named to the board in his role as an officer of the company. Flaherty,

44 | INSURANCE JOURNAL-SOUTHEAST REGION February 23, 2009

a lawyer with Flaherty, Sensabaugh and Bonass, succeeds H. Skip Tarasuk Jr. of Davis and Tarasuk Insurance of Fairmont.

Tarasuk, BrickStreet’s chairman during the workers’ compensation insurance carrier’s first three years, chose not to seek re-election to the board last October.

Kathleen Haskell and Christopher Smyth have joined Venture Insurance Programs’ Preferred Club Program’s team of underwriters. In their new positions, Haskell and Smyth will write new business and renewals, market and sell Preferred Club products and services as well as maintain relationships with carrier and broker partners.

Haskell most recently served as a senior underwriter for AIG Specialty Excess. She and has also held previous positions with Patriot Underwriting Managers, Commonwealth Risk Services and Marsh & McLennan Inc. Smyth most recently served as underwriter at C&R Insurance Services where he generated new business with a focus on lawyers’ professional liability.

The National Association of Mutual Insurance Companies (NAMIC) has hired two Capitol Hill veterans with financial services backgrounds. Kathy Mitchell and Dylan Jones have joined NAMIC’s Federal Affairs team as its new Democratic lobbyists.

While working in the offices of Florida Rep. Tim Mahoney and Oklahoma Rep. Dan Boren, Mitchell worked with the House Financial Services Committee on property/ casualty insurance issues.

Jones gained experience in the financial services industry as a staff member for Reps. Paul Kanjorski, chairman of the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, and Carolyn McCarthy. He also served as tax and budget counsel for Nevada Rep. Shelley Berkley, chair of the Democratic Caucus Tax and Budget Task Force and member of the Transportation and Infrastructure Committee.

Mitchell will be the lead lobbyist on all natural disaster issues, including the extension and reform of the National Flood Insurance Program and statewide building codes.

Jones will focus on issues related to protecting the use of underwriting tools, such as credit-based insurance scoring.

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

Idea Exchange Directors & Officers Liability

How Securities Lawsuits Will Affect D&O Pricing Litigation May Result in Higher D&O Prices But Not Right Away LaCroix

By Kevin LaCroix

T

he pace of securities lawsuit filings increased significantly in 2008 compared to recent years. There were 226 new securities lawsuits filed in 2008, which represents a 31 percent increase over 2007, and nearly a 90 percent increase over 2006.

The 2008 filing total also represents the highest annual filing total since 2004. All signs seem to indicate that the heightened filing levels will continue into 2009.

Will this increased litigation result in higher directors and officers (D&O) insurance prices?

It may eventually, but not right away.

The most significant factor in 2008’s heightened securities litigation activity was the number of subprime and credit crisis-related lawsuits — of the 226 new cases, 101 were subprime or credit crisis-related. A total of 141 of these cases were filed during 2007 and 2008 combined. Another factor was the influx of lawsuits related to the Barnard Madoff fraud.

The predominance of the subprime and credit crisis-related litigation during 2008 is borne out in the profile of the companies sued.

Although the companies targeted represent more than 90 different categories in the Standard Industrial Classification (SIC) Codes, 99 of the lawsuits affected companies with SIC Codes in the 6000 series (Finance, Insurance and Real Estate), including 19 in SIC Code 6021 www.insurancejournal.com

(National Commercial Banks) and 20 in SIC Code 6211 (Security Brokers and Dealers).

There were other categories that also saw significant litigation activity, including Semiconductors (10 filings); Pharmaceutical Preparations (9); and Electromedical and Electrotherapeutic Apparatus (5).

The concentration in the financial sector also affected the geographic distribution of the 2008 filings. Although securities lawsuits were filed in 48 different federal district courts (as well as several state courts), 97 of the 226 securities filings were in the Southern District of New York. The federal district with the second-highest number (12) was the Northern District of California. Other districts with a significant number include Massachusetts (10), and the Central District of California (9).

The pace of new lawsuit filings increased as the year progressed, with 105 during the first half and 121 in the second half. The fourth quarter, with 69, was the most active quarter during the year, suggesting that the trend will continue into 2009.

The uptick in securities lawsuit filings in 2008 might well be expected to have an upward impact on D&O pricing, and indeed it may yet have that effect. But particular features of the 2008 filings might moderate that expected effect, at least in the near term.

First, the concentration of the filings in the financial sector means that the impact is not widespread throughout the D&O industry.

D&O carriers are not yet experiencing the impact across their entire portfolio, and carriers that do not have significant financial industry exposure may not yet be experiencing elevated claims activity, although that likely will change as the credit crisis litigation wave spreads outside the financial sector.

Second, the impact is muted somewhat by the multiple different lawsuit filings against the same companies. The D&O impact from the third, fourth or fifth new lawsuit against the same company may not increase the aggregate losses to which insurance applies.

Third, many of the defendant entities are not publicly traded companies; they are mutual funds, investment partnerships, hedge funds or other investment vehicles. Litigation against these entities would have only an indirect impact on public company D&O insurance.

Fourth, a significant amount of the securities litigation activity in 2008 is more likely to create errors and omissions (E&O) insurance losses, rather than D&O losses. Examples include the Madoff-related litigation and the auction rate securities litigation. The spread of losses to other insurance lines could dilute the impact from 2008 litigation on D&O carriers.

Fifth, most of these cases are still in their earliest stages, and it will be some time before losses begin to accrue. Until then, There are multiple D&O pricing is unlikely to make dramatic changes (at different lawsuits least as a result of against the same securities filings).

The increase in litcompanies and igation activity in 2008, together with many of the the disruption involving market defendants are leader AIG and other leading carrinot publicly ers, as well as the prospect for continued significant litiga- traded companies. tion activity in 2009, are likely to create uncertain conditions in the D&O marketplace and could lead to increased carrier caution as 2009 progresses. Indeed, Advisen is predicting that a hard market will develop toward the end of 2009. IJ LaCroix is an attorney and partner in OakBridge Insurance Services’ Beachwood, Ohio, office. An unedited version of this article appeared on LaCroix’s Internet Web blog, the D&O Diary: www.dandodiary.com. E-mail: klacroix@oakbridgeins.com.

February 23, 2009 INSURANCE JOURNAL-SOUTHEAST REGION | 45

Now Playing in Florida:

A Scary Surplus Lines Scenario Court Rulings Strike Fear That Surplus Lines Could Lose Freedom • Opportunities in a Stubborn Soft Market • What Retail Agents Look for in Surplus Lines Agents • 25 Top E&S Coverages for 2008 ... And More

www.insurancejournal.com

February 23, 2009 INSURANCE JOURNAL-SOUTHEAST REGION | 47

Now Playing in Florida:

A Scary Surplus Lines Scenario

By Andrew Simpson

By Andrew Simpson Have you ever seen anything like this in Florida?

Never. I haven’t seen anything like this anywhere in the country.

I

f it were a horror flick it might be titled, Surplus Fear Strikes Florida.

The opening scene shows roving bands of mobile park residents, condo dwellers, contractors, manufacturers, short order cooks, retailers, doctors, nurses and boat owners in communities across Florida naked and in a panic.

There is a riot and then a deadly explosion at the Citizens Property Insurance building after desperate homeowners are turned away because the building can’t hold any more.

In Tallahassee, the governor is furloughing thousands of employees because the state has lost millions in premium tax revenue.

Then the action shifts to London, where dark-suited men sit in silence on the trading floor at Lloyd’s.

This isn’t a new scary movie and there has not been any explosion at Citizens. People aren’t really running around naked in Florida — except perhaps at Haulover Beach in Miami.

But a scary scenario of what Florida would be like without its surplus lines insurance industry is keeping insurance executives, agents and even regulators awake at night. It’s the courts versus carriers, versus regulators, and versus tradition and, as usual, agents and brokers are caught in the middle.

One of the agents in the middle is Steven Finver, president of the surplus lines agency Continental Agency of Florida in Boca Raton.

He is among those trying to change the current script in his role as president of the

Florida Surplus Lines Association, a group of more than 70 surplus lines agencies.

“It’s a serious situation for everyone included. Surplus lines agents; retail agents, who rely on surplus lines policies; the consumer relies on the policies to protect themselves; and the state for the funds it brings in. It should never have gotten to this point,” Finver told Insurance Journal.

atively free to do their thing to meet the needs of new, emerging, unusual and high risks that might otherwise go bare.

The state’s surplus lines industry is now scared because of two recent court decisions, referred to as the Essex and CNL Hotels decisions, which combined have cast doubt on surplus insurers continuing to enjoy relative freedom from regulation. If the court decisions stand, the insurers could be required to get state approval for their policies, something that would so drastically alter the nature of their business that carriers could decide to leave the state rather than comply.

The Essex Insurance Co. v. Mercedes Zota opinion handed down in June involved whether delivery of a surplus lines policy to the customer’s retail agent constituted delivery to the customer. The opinion actually found that delivery was achieved but it delved further to discuss Chapter 627, Part II of the Florida Insurance Code that sets forth requirements for policy delivery, policy forms, the payment of attorneys fees and other matters. Essex argued that another statute, Chapter 626 governing surplus lines, exempted it and all surplus lines insurers from the provisions in Part II. But the Florida Supreme Court upset this traditional reading of the law when it found that surplus lines insurers were not exempt from provisions of Part II but only from those in Part I, which concerns rates and rating organizations.

Big Stakes The stakes are big. Florida ranks as the fourth largest state in terms of surplus lines business, behind only California, Texas and New York. In 2008, it generated more than $4 billion in surplus lines premium, according to the Florida Surplus Lines Service Office. It handles more than 700,000 excess and surplus lines policies a year — about 40 percent of them personal lines contracts for homes, condos, mobile homes and boats. The rest cover commercial entities, big and small, that could not obtain insurance they need in the standard marketplace. That’s a lot of insurance coverage and a lot of businesses and homeowners.

In addition, this industry generates premium taxes of $200 million a year for the state.

The surplus lines business has traditionally operated relatively free from the regulation of rates, forms and practices compared with standard insurers. That’s what helps make surplus lines unique — it has freedom and flexibility to design soluFlorida Surplus Lines Business- Billions/Policy Count tions and price them that the standard market does2008 2007 2006 n’t have. Surplus lines Total Premium $4.09 $4.73 $4.72 insurers and agents are # Policies 719,206 745,207 788,829 not totally exempt from regulation but they are rel- Source: Florida Surplus Lines Service Office

48 | INSURANCE JOURNAL-SOUTHEAST REGION February 23, 2009

www.insurancejournal.com

The court came to its opinion despite the fact that Chapter 626 specifically exempts surplus lines from Part II and despite the fact that the Office of Insurance Regulation has never interpreted the law to require surplus carriers to get its approval or even file their forms with the state.

The Essex opinion by the state’s highest court raised doubts about what the state law really is.

Then in August, the U.S. Court of Appeals for the 11th Circuit dropped the second bombshell with CNL Hotels & Resorts Inc. v. Twin City Fire Insurance Co. This case involved whether Twin City was right to deny a $5.5 million claim in legal fees under a policy endorsement exempting certain loss payments. The case raised again the applicability to surplus lines insurers of the Part II provision requiring filing of forms with the state.

As in Essex, the insurer for CNL Hotels argued that it was exempt from Part II. But the federal court, relying upon Essex, found that the exemption for surplus lines insurers did not extend to Part II. This in turn meant that the surplus lines policy endorsement Twin City used to deny the claim for legal fees was unenforceable because it had not been filed with and approved by the state.

The federal court denied requests for a rehearing from the insurer and the OIR and ignored an amicus brief from OIR stating that Florida law does not require OIR to approve surplus lines forms.

The two cases have sewn great confusion about what the law requires. It is now unclear where the surplus lines industry’s exemption from regulation begins and ends.

To compound the frustration for the industry, surplus lines carriers could not comply with the court opinions even if they tried. The OIR has no process for handling surplus filings.

“You cannot send them in by mail; they don’t accept form filings by mail. And there is no way to send them electronically because you cannot get an electronic filing number since you are a surplus line company. There is really no way to file your forms. So it has become a real issue because of that,” said Finver.

Carriers have concerns about whether existing policies will be enforced by courts and about what the state law requires going forward. No insurance executive wants to wake www.insurancejournal.com

up some morning facing liability for an exposure clearly excluded in a policy but ruled unenforceable because the exclusion was never approved by state regulators.

Are surplus carriers really nervous enough to leave? “There has been talk. There have been a couple of carriers in a couple different classes, like an umbrella class, they stopped writing.

There are some syndicates that don’t want to write any new contracts yet until they know what is going to happen,” Finver said.

“Then in London, there are some carriers who are saying, if this does not get fixed by March, they will pull out of the state of Florida.

All you need is one or two to do that and you will see many do that. Once someone takes the bull by the horns and makes a decision —

which is a pretty heavy decision to do that — you could see a mass exodus, which would be very, very bad for the consumer of the state of Florida, because surplus lines is where a lot of their policies are written, and very bad for the state of Florida from a revenue standpoint because surplus lines policies put in $190 million in taxes into the general fund of the state.”

OIR has indicated it may issue an order to provide some clarity for surplus lines carriers but eight months after Essex, that still hasn’t happened. According to spokesperson Ed Domansky, “OIR is considering a possible order, but there is no timetable yet.”

The industry is turning to Tallahassee for a solution. The Florida Legislature reconvenes in continued on page 50

FSLA Leader Sees Soft Market Opportunities in State Farm Exit, Med Mal, EPLI

By Andrew Simpson

T

he Florida surplus lines industry may be challenged right now by regulatory uncertainty stemming from the Essex and CNL Hotels rulings but it is not letting that blind it to opportunities.

One opportunity is the pending pullout by State Farm, according to Steven Finver, president of the surplus lines agency Continental Agency of Florida in Boca Raton and president of the Florida Surplus Lines Association.

“I think the state is very happy to see them go. There are places for that business,“ said Finver of the 1.2 million home, boat and small business policies State Farm will be nonrenewing. Finver says the surplus lines industry is “absolutely, absolutely” capable of absorbing some of the business. “We all do what we do every day anyway,” he said.

Finver would like to think there will be opportunity in medical malpractice because the prices have come down and he thinks all doctors should be covered. But old habits die hard. “They’re self-insuring. They’ve not had to buy insurance for so many years they’re used to not buying it now,” he said. “[E]very year they don’t buy malpractice insurance, but they can buy a Porsche.”

If medical malpractice isn’t the surest bet,

employment practices liability insurance (EPLI) comes close to being one. Finver says it’s becoming increasingly popular. “They Finver have made it very inexpensive to have the small companies add it to their policy or write a separate policy for it,” he said. “To me, every company that is in business should have an EPLI policy because they are inexpensive and it is a major way to protect yourselves, especially in this economy.”

In an age when everyone pulls credit reports, Finver thinks anyone who rents apartments to tenants should be buying tenant discrimination coverage. If a person is denied a rental because of poor credit then “there is the risk of a discrimination lawsuit.”

New opportunities are especially in demand because the market is still soft. The market “should” be hard, according to Finver, but it isn’t yet. “I think the market’s still soft. I can see pockets of hardening, with certain carriers, certain things in London. I see them trying to harden the market,” he said.

Finver does think there will be a hardening eventually, starting at the end of the second continued on page 50

February 23, 2009 INSURANCE JOURNAL-SOUTHEAST REGION | 49

continued from page 49

quarter. It won’t be a normal hard market and Florida may not benefit as much as other parts of the country, but these aren’t normal times. “In a normal world, in a right world, the market should be hard today. But the economy is so bad that there’s no sense having a hard market right this moment today ... if consumers can’t pay for it,” he said.

Finver says that in today’s economy it makes no sense for insurers to raise rates to $200 when buyers can’t afford $100.

He’s hopeful things will get better.

“I think things are bad, but they may not be as bad as they seem. If we can get some consumer confidence back into this country and people start spending again and opening businesses again, at that same time if the market tightens a little bit, everyone will be in a much better shape a year from now.”

The condition of the market and the economy can influence what a retail agent looks for when selecting a surplus lines agent, according to Finver.

“Sometimes it’s price, which I think it is right now, and sometimes it’s service. I think a good combination of both is what you should look for. But if you want my feeling on what a retail agent should look for, and it’s really one word, and it’s quality.”

He means quality in carriers, quotes, pricing and service. “[I]f you deal with quality you will end up with quantity. The better your quotes are, the quicker you get them out, the more business you can get in your door,” he said.

Sometimes a surplus lines agent can’t write what a retail agent needs. In these instances, quality service can mean being willing to give a extra effort.

“Maybe it’s a risk that I have no market whatsoever for, needs some limits, whatever the case may be. But I may have a friend who’s our competitor and who has a market.

We will refer to them. That solves the retail agent’s problem and that’s what you care about doing,” Finver said. IJ

Top 25 Surplus Lines Coverage in Florida - 2008 Ranked By Policy Count Coverage Inland Marine (Personal) Commercial General Liability Commercial Property Commercial Package (P&C) Homeowners (HO3) Condo Unit-Owners (HO6) Dwelling Property Homeowners (HO8) Accident & Health Personal/Pleasure Boats & Yachts Inland Marine (Commercial) Miscellaneous E&O Liability Excess Flood-Residential Garage Liability Mobile Homeowners Excess CGL (Not Umbrella) Personal Liability Motor Truck Cargo Commercial Umbrella Liability Miscellaneous Medical Professional Builders Risk Commercial Auto Physical Damage Difference In Conditions Personal Umbrella Terrorism Source: Florida Surplus Lines Service Office

Premium $25,232,485 $571,644,547 $1,929,855,449 $273,747,233 $$142,865,697 $24,343,418 $38,372,281 $12,136,804 $9,984,543 $30,431,200 $21,209,625 $65,802,355 $16,826,240 $15,742,838 $3,702,467 $64,849,221 $3,213,059 $11,147,311 $68,075,182 $69,972,311 $55,340,471 $16,316,363 $21,530,437 $3,176,040 $9,018,814

50 | INSURANCE JOURNAL-SOUTHEAST REGION February 23, 2009

# Policies 197,325 138,315 103,974 72,709 58,327 22,986 20,121 10,182 6,401 6,169 5,465 5,458 5,324 4,783 4,475 4,191 3,988 3,937 3,604 3,390 3,307 2,993 2,581 2,536 2,180

March. FSLA’s attorney and lobbyist, Doug Mang, along with a group of interested parties, has drafted a bill (HB 853) that could fix the problems created by the courts. Rep. Pat Patterson introduced the measure in the House on Feb. 12.

It specifies which provisions of Chapter 627 do not apply to surplus lines and provides for a retroactive effective date to Oct. 1, 1988.

Patterson, a Republican, is chair of the Insurance, Business and Financial Affairs Policy Committee.

FSLA President Finver is optimistic the Legislature will act: “We do feel very confident as a group that this will get fixed, not without opposition, I’m sure, by the trial bar. But we feel we will be able to prevail on this. We are still waiting for an order or a rule to come out in the department saying that forms will have to be filed, but the concern is that the companies are getting nervous.”

Of course, this is the Florida Legislature — where nothing is guaranteed when it comes to insurance. Then Gov. Charlie Crist, no friend of the industry, must sign it. The last thing the industry wants to see is a sequel to the other Florida insurance blockbuster that is still playing out across the state, The State Farm Farewell. IJ

What Retail Agents Value in Surplus Agents Insurance Journal asked a select group of 130 Florida retail agents what they look for when selecting surplus lines agencies to do business with. They placed access to markets as the most valued consideration, followed by knowledge and expertise. Here’s the list with rating averages showing how Florida retail agents value 10 attributes: Factor Average 1. Access to Markets 2. Knowledge and Expertise 3. Pricing 4. Ease of Doing Business 5. Customer Service 6. Commissions 7. Previous Relationship or Experience with Surplus Agent 8. Availability of Online Applications 9. Surplus Agency Years in Business 10. Referrals from Other Retailers

Rating 8.47 8.02 7.23 7.20 6.80 6.01 4.58 3.25 3.16 2.39

www.insurancejournal.com

House Sponsors Sign Onto Surplus Lines Bill

T

wo members of the U.S. House of Representatives’ Committee on Financial Services said they would introduce legislation to create national standards for how states regulate the surplus lines market and reinsurance as well as a uniform system of surplus lines premium tax allocation and remittance.

The Non-Admitted and Reinsurance Reform Act of 2009, to be introduced by Rep. Scott Garrett (R-NJ) and Rep. Dennis Moore (D-Kan.), will be introduced in the U.S. House of Representatives and both legislators stated they hoped the Senate would follow suit.

“We believe that the bill would make the surplus lines marketplace more efficient by facilitating the payment of surplus lines premium taxes and eliminating unnecessary duplicative compliance requirements on surplus lines multi-state risks,” said John Wood, president of the National Association of Professional Surplus Lines Offices Ltd. The Non-Admitted and Reinsurance Reform Act is, in part, aimed at making access to the surplus lines market more efficient. In addition the bill could help standardize state regulations facing the industry.

The bill would establish national standards for how states regulate the surplus lines market and reinsurance and would create a uniform system of surplus lines premium tax allocation and remittance, one-state compliance on multi-state surplus lines risks, and direct access to the surplus lines market for sophisticated commercial purchasers.

The House passed similar versions of the bill in the last two sessions of Congress and the Senate took up a similar bill in 2007 but no action was taken in the Senate prior to the end of the 110th Congress, requiring that the bill be reintroduced in the 111th Congress in order to be considered.

“We have been meeting with members of the House and Senate and hope the bill will be introduced in the Senate and that both houses will pass the bill,” said NAPSLO’s Washington D.C. representative, Maria Berthoud of B&D Consulting. IJ www.insurancejournal.com

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Southeast Coverage Surplus Lines

Florida Surplus Lines Association Member Agencies ABCO Insurance Underwriters www.abcoins.com

Irvin B. Green & Associates, Inc. www.ibgreen.com

Agency Marketing Services, Inc. www.agencymarketing.com

John Handel & Associates, Inc. www.jhassoc.com

All Risks of the Southeast, LTD. www.allrisks.com

Kahn Carlin & Co., Inc. www.kahn-carlin.com

American Shield Group www.ameliaunderwriters.com

MacDuff Underwriters, Inc. www.macduff-fla.com

Amwins Brokerage of Florida www.amwins.com

MacNeill Group www.macneillgroup.com

AON Risk Services Inc. of FL www.ars.aon.com

Morstan General Agency of FLORIDA www.morstan.com

Arthur J. Gallagher Risk Management www.ajg.com

NSM Insurance, Inc. www.nsminc.com

Atlantic Specialty Lines of FL, Inc. www.atlanticspecial.com

National Specialty Underwriters, Inc. www.nsui.com

Bass Underwriters www.bassunderwriters.com

N-Sure Outlets of Florida, Inc. www.nsoins.com

Bliss & Glennon, Inc. www.bgsurplusse.com

Program Underwriters, Inc. www.puginc.com

Braishfield Associates, Inc. www.braishfield.com

RCA Insurance Group www.rca-insurance.com

Burns & Wilcox, Ltd. www.burns-wilcox.com

Risk Concepts Corp.

Chelsea Surplus Underwriting www.chelseasurplus.com Clearwater Underwriters, Inc. www.cuifla.com Continental Agency of Florida www.ca-group.com CRC Insurance Services, Inc. www.crcins.com Crump Insurance Services of Florida, Inc. www.crump.com Crump Specialty Programs www.bisus.com Enright & Wilson, Inc. www.enrightwilson.com

Risk Placement Services, Inc. www.rpsins.com Seacoast Brokers www.seacoastbrokers.com SeaCoast Underwriters, Inc. www.seacoastunderwriters.com Shelly Middlebrooks & O’Leary www.shellyins.com Socius Insurance www.sociusinsurance.com Southern Cross Underwriters www.scui.com Specialty Insurance Services, Inc. www.specialtyflorida.com

Fidelity & Marine

St. James Insurance Group www.sjig.com

Firestone Agency of Florida, Inc. www.firestoneagency.com

Strickland General Agency of FL, Inc. www.sgainfl.com

Fisher-Brown Inc. www.itpays.com

Swett Crawford www.swett.com

Florida Risk Specialists / AIG www.aig.com

Tapco Underwriters www.gotapco.com

Gabor Insurance Services, Inc. www.gaborinsurance.com

Travis-Pedersen and Associates of Florida www.travped.com

Gresham-Associates www.greshaminc.com

Wexler Insurance Agency www.wexlerinsurance.com

Hull & Company, Inc. www.hullco.com

Westrope Insurance Mgrs. Of Florida www.westrope.com

52 | INSURANCE JOURNAL-SOUTHEAST REGION February 23, 2009

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February 23, 2009 INSURANCE JOURNAL-SOUTHEAST REGION | 53

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Idea Exchange Closing Quote

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

By Christopher Leliaert Leliaert

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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-SOUTHEAST 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.

Joe Santini, Master Mechanic.

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