Insurance Journal West 2014.07.07

WEST Youth Boom in American Energy States Perils of Health Insurance Price Controls Airbnb Alters San Francisco Rentals

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The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service.

© 2014 American Institute For Chartered Property Casualty Underwriters

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WEST

Inside This Issue

On The Cover

Special Report:

Getting a Grip on Ridesharing Coverage

July 7, 2014 • Vol. 92 No. 13 • West

W4

W8

14

20

NATIONAL COVERAGE

WEST COVERAGE

IDEA EXCHANGE

10 Climate Change Bottom-Line Talk

Grows, S&P Director Says

W2 Data Breach of 20K Young

Patients at California Hospital

W8 The Hidden Perils of California’s

Proposed Health Insurance Price

Controls

14 How New Capital Is Changing P/C

Industry and What to Do About It

W2 California Agency Failing to

Ensure Limo Safety, Audit Shows

16 Spotlight: 10 Things to Know

About Earthquakes

W4 Airbnb Alters San Francisco

Rental Market, Report Shows

18 Closer Look: Disaster Mitigation —

How Incentives Can Help

W6 As America Overall Ages with

Boomers, Energy States See Youth

Boom

20 Special Report: Getting a Grip

on Ridesharing Coverage 30 2014 Digital Product Guide

24 The PPACA: What Employers Don’t

Understand About Emerging

Exposures 26 Staffing for Your Organization’s

Term Projects 28 The Competitive Advantage:

Chris Burand 34 Closing Quote: The Use and Abuse

of Insurance Ratings

DEPARTMENTS 8 11 11 12 32

6 | INSURANCE JOURNAL-WEST July 7, 2014

Opening Note Declarations Figures Business Moves MyNewMarkets

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NATIONAL COVERAGE

Opening Note Firing Fears

I

njured workers who suffer from anxiety over fears of being fired exhibit poorer return-to-work outcomes than those that trust their employers not to fire them. Trust in the workplace is one of the more important predictors of workers’ comp outcomes, according to the Workers Compensation Research Institute (WCRI), which conducted eight state-specific studies on the issue.

To describe the level of trust or mistrust in the work relationship, the studies’ interviewers asked workers if they were concerned about being fired as a result of injury. Workers who were strongly concerned about being fired after the injury experienced poorer return-to-work outcomes than workers without those concerns.

One in five workers who were concerned about being fired reported that they were not working at the time of the interview. This was double the rate that was observed for workers without such concerns. Among workers who were not concerned about being fired, one in 10 workers was not working at the time of the interview.

Concerns about being fired were associated with a four-week increase in the average disability duration.

The studies also identified workers with co-morConcerns about being fired bid medical conditions were associated with a four(existing simultaneously week increase in the average with and usually independently of another medduration of disability. ical condition) by asking whether the worker had received treatment for hypertension, diabetes and heart problems. The condition may have been present at the time of the injury or may have manifested during the recovery period. Among those findings: •Workers with hypertension (when compared with workers without hypertension) had a 3 percentage point higher rate of not working at the time of the interview, predominantly due to injury.

•Workers with heart problems reported an 8 percentage point higher rate of not working at the time of interview, predominantly due to injury, and had disability duration that was four weeks longer.

•Workers with diabetes had a 4 percentage point higher rate of not working at the time of the interview, predominantly due to injury than workers without diabetes.

The studies were based on telephone interviews with 3,200 injured workers across Indiana, Massachusetts, Michigan, Minnesota, North Carolina, Pennsylvania, Virginia and Wisconsin. The studies interviewed workers who suffered a workplace injury in 2010 and received workers’ compensation income benefits.

The surveys were conducted February through June 2013 — about three years after the workers sustained their injuries.

WCRI is a not-forAndrea Wells profit research organization based in Editor-in-Chief Cambridge, Mass.

8 | INSURANCE JOURNAL-NATIONAL July 7, 2014

Publisher Mark Wells | mwells@wellsmedia.com EDITORIAL Editor-in-Chief Andrea Wells | awells@insurancejournal.com V.P. Content Andrew Simpson | asimpson@insurancejournal.com East Editor Young Ha | yha@insurancejournal.com Southeast Editor Michael Adams | madams@insurancejournal.com South Central Editor/Midwest Editor Stephanie K. Jones | sjones@insurancejournal.com West Editor Don Jergler | djergler@insurancejournal.com International Editor Charles E. Boyle | cboyle@insurancejournal.com Senior Editor Susanne Sclafane | ssclafane@insurancejournal.com Claims Journal Editor Denise Johnson | djohnson@claimsjournal.com MyNewMarkets.com Associate Editor Amy O’Connor | aoconnor@mynewmarkets.com Columnists Chris Burand Contributing Writers Seth Borenstein, Dave Coons, Andrew DeMillo, Josh Funk, Bill Gausewitz, David Pitt, Stuart Shipperlee, Christopher Williams SALES V.P. Sales & Marketing Julie Tinney (800) 897-9965 x148 | jtinney@insurancejournal.com West Dena Kaplan (800) 897-9965 x115 | dkaplan@insurancejournal.com South Central Mindy Trammell (800) 897-9965 x149 | mtrammell@insurancejournal.com Midwest Lauren Knapp (800) 897-9965 x161 | lknapp@insurancejournal.com Southeast Howard Simkin (800) 897-9965 x162 | hsimkin@insurancejournal.com East Dave Molchan (800) 897-9965 x145 | dmolchan@insurancejournal.com New Markets Sales Manager Kristine Honey | khoney@insurancejournal.com Classifieds, Jobs, Agencies Wanted/For Sale Ly Nguyen (800) 897-9965 x125 | lnguyen@insurancejournal.com MARKETING/NEW MEDIA Marketing Administrator Gayle Wells | gwells@insurancejournal.com Advertising Coordinator Erin Burns (619) 584-1100 x120 | eburns@insurancejournal.com New Media Producer Bobbie Dodge | bdodge@insurancejournal.com DESIGN/WEB V.P. of Design Guy Boccia | gboccia@insurancejournal.com V.P of Technology Joshua Carlson | jcarlson@insurancejournal.com Audience Development Elizabeth Duffy | eduffy@wellsmedia.com Marketing Director Derence Walk | dwalk@insurancejournal.com Web Developer Jeff Cardrant | jcardrant@insurancejournal.com Web Developer Chris Thompson | cthompson@insurancejournal.com IJ ACADEMY OF INSURANCE Online Training Coordinator Barbara Whiffen | bwhiffen@ijacademy.com ADMINISTRATION Chief Executive Officer Mitch Dunford Chief Financial Officer Mark Wooster | mwooster@wellsmedia.com

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

Copyright 2014 Wells Media Group, Inc. All Rights Reserved. Content may not be photocopied, reproduced or redistributed without written permission. Insurance Journal is a publication of Wells Media Group, Inc. POSTMASTER: Send change of address form to Insurance Journal, Circulation Department, PO Box 708, Northbrook, IL 60065-0708 ARTICLE REPRINTS: For reprints of articles in this issue, contact: Ly Nguyen at 1-800-897-9965 ext. 125 or lnguyen@insurancejournal.com Visit insurancejournal.com/reprints/ for more information.

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News & Markets Data Breach of 20K Young Patients at California Hospital

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outhern California’s Rady Children’s Hospital says the private health data of more than 20,000 young patients was mistakenly shared with a handful of job applicants.

In one breach in June a Rady employee emailed a spreadsheet that contained protected information to four applicants for data management jobs. The applicants subsequently forwarded the document on to two other people.

The hospital says the spreadsheet con-

tained names, dates of birth, diagnoses and other data including insurance claim information.

It did not include street addresses or Social Security, insurance or credit card numbers.

In a previous breach, a different employee emailed a training exercise to three job candidates.

The hospital is notifying the parents of the patients whose information was shared.

Copyright 2014 Associated Press.

California Agency Failing to Ensure Limo Safety, Audit Shows

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iting incidents like the 2013 limousine fire that killed five women on the San Mateo Bridge, California’s state auditor has said that the commission responsible for overseeing passenger carriers has failed to ensure consumer safety.

State Auditor Elaine M. Howle said the main reason for the deficiencies was a lack of effective leadership at the Transportation Enforcement Branch of the California Public Utilities Commission, with current management failing to establish goals or measures to guide its oversight efforts.

The commission’s investigators routinely fail to collect the fees they are entitled to and do not ensure complaints are resolved in an adequate or timely manner, Howle said. They also don’t ensure that carriers have permits, undergo inspections, hold insurance and participate in driver safety programs, she said.

“In May 2013 in the San Francisco Bay Area, a fire killed five women in a limousine,

W2 | INSURANCE JOURNAL-WEST July 7, 2014

which was a charter carrier regulated by the commission,” the auditor’s report said, referring to the San Mateo Bridge incident.

The fire trapped nine women celebrating a friend’s recent wedding, killing five of them. The limousine’s driver survived, but no criminal charges were filed.

The California Highway Patrol has said the blaze was caused by a catastrophic failure of the rear suspension system. The air suspension failure allowed the spinning driveshaft to contact the floor pan, causing friction that ignited carpets and set the vehicle on fire, authorities have said.

“Four women who escaped the fire apparently climbed through the limousine’s divider window and out the driver’s section of the vehicle because the rear passenger doors were blocked by smoke,” the auditor’s report said.

After the deaths, a law was passed in January requiring certain modified limousines to have additional window and door emergency exits beginning in July 2015.

The commission has acknowledged the auditor’s findings and has said it plans to take action to resolve the problems.

Copyright 2014 Associated Press.

Ex-Insurance Broker Arrested in California for Embezzlement

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ohn Monreal, 45, of Santa Clarita, Calif. was arrested on May 30 by Los Angeles County Sheriff’s Department deputies on 11 felony counts of embezzlement and insurance code violations after he allegedly duped multiple consumers into believing they were insured while he collected their premiums.

In March of 2010, the California Department of Insurance revoked Monreal’s insurance license, listing 10 causes for discipline that included allegations Monreal was lacking integrity, conducting business in a dishonest manner, incompetency and diversion of fiduciary funds.

A subsequent investigation found that Monreal continued to act as a broker at his business, the John Monreal Insurance Agency, and issued checks to insurance carriers for the insurance policies that were eventually cancelled due to insufficient funds or partial payment, according to CDI. Monreal would allegedly convince his clients to pay the full annual premium on an insurance policy in exchange for receiving a reduced rate, and he would insist that checks for the policies be made payable to him, according to CDI. He allegedly provided victims with a certificate of insurance, but only a portion of the premium was remitted to the insurance carrier, according to CDI. Monreal allegedly collected $10,703 in premiums from his victims.

His Bail was set at $120,000.

“While the majority of agents and brokers are honest, it is a sad fact that there are a few bad apples that are dishonest and violate the public trust,” Insurance Commissioner Dave Jones said in a statement.

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News & Markets Airbnb Alters San Francisco Rental Market, Report Shows

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odging sharing service Airbnb has taken a bite out of San Francisco’s already limited stock of rental housing as some landlords and housing activists contend, a newspaper reported.

The San Francisco Chronicle commissioned a data harvesting company to analyze a day’s worth of Airbnb’s local listings to see what kind of places were available on the website and if the accommodations were being rented for short or long periods.

The analysis by Connotate Inc. found that almost two-thirds of the 4,798 listings were for whole apartments or houses, 160 of which appeared to be occupied full time. That is significant, according to the Chronicle, because Airbnb has been promoted as a humble service that allows people with spare rooms or those going away for a few days to generate some extra cash by participating in the “sharing economy.”

The figures suggest some property owners and managers are using the service to get around San Francisco’s strict rent control and other tenant protection laws, the newspaper said. Rentals under 30 days are illegal in the city.

“In a city that has chronic housing shortages, the number of Airbnb homes that appear

to not be available on the rental market is significant,” Connotate Chief Strategy Officer Laura Teller said.

Airbnb insists the majority of its hosts are residents who occasionally share the home in which they live, and that the service has boosted the city’s economy in direct and indirect ways.

“We know Airbnb has made San Francisco more affordable for more families who use the money they earn to pay the rent and make ends meet,” the company said in a statement. “And because Airbnb listings are in every neighborhood, travelers get to see parts of the city and patronize local businesses they would have missed if they stayed in a hotel.”

Connotate could not determine from its analysis if the listed properties were rented out occasionally or all the time. More than 300 listings had enough user reviews to sug-

Jury Rules Disneyland Negligent in Ride Injury, No Damages Awarded

A

jury has found that Disneyland was negligent in an accident on its Splash Mountain ride four years ago but says that didn’t contribute to a rider’s injury.

The federal jury in Los Angeles didn’t award any damages to Steve Wilson of Anaheim in the decision.

His attorney, Barry Novack, says he’ll seek a new trial.

Novack says in 2010 Splash Mountain

W4 | INSURANCE JOURNAL-WEST July 7, 2014

staff overloaded a log boat, causing it to get stuck, then didn’t tie it off before unloading riders.

Wilson, who weighed 415 pounds, claimed that as he got up, the boat moved, he fell back and hit a seat, seriously aggravating an existing back problem. He sought about $1.3 million in compensation.

Spokeswoman Suzi Brown said Disneyland is pleased with the verdict.

Copyright 2014 Associated Press.

gest they have “heavy or constant visitor traffic.” Similarly, while the vast majority of people placing rentals — 86.4 percent — had only one room, apartment or house listed, 513 were connected to more than one property.

Some of the multiple-listers were property managers handling Airbnb rentals on behalf of hosts who want to avoid the hassle; some were people offering two different rooms in their homes.

“From a policy perspective, the real issue is whether there are a lot of units that have been removed from the housing market because of short-term rentals,” Gabriel Metcalf, executive director of SPUR, an urban design think tank, told the Chronicle.

“It looks like that’s not a big number yet, but that’s what we need regulation to control so it doesn’t become big.”

The cheapest listing was for a shared bedroom costing $18 a night, while the most expensive was a house going for $6,000 a night. The citywide average for all listings was $226 a night.

San Francisco lawmakers are discussing ways to bring Airbnb and its competitors into compliance with city law. One supervisor has introduced a bill that would legalize short-term rentals but require the renting party to pay the city’s 14 percent occupancy tax, which Airbnb says it would do starting this summer.

Copyright 2014 Associated Press. www.insurancejournal.com

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News & Markets As America Overall Ages with Boomers, Energy States See Youth Boom

S

even states, including five in the Great Plains, saw their median age decline between 2012 and 2013, according to U.S. Census Bureau estimates. At the same time, the median age for the U.S. as a whole ticked up from 37. 5 years to 37.6 years.

These latest census reports examine population changes among groups by age, sex, race and Hispanic origin nationally, as well as all states and counties, between April 1, 2010, and July 1, 2013.

“We’re seeing the demographic impact of two booms,” Census Bureau Director John Thompson said. “The population in the Great Plains energy boom states is becoming younger and more male as workers move in seeking employment in the oil and gas industry, while the U.S. as a whole continues to age as the youngest of the baby boom generation enters their 50s.”

The largest decline in the nation was in North Dakota, with a decline of 0.6 years between 2012 and 2013. The median age in four other Great Plains states — Montana, Wyoming, South Dakota and Oklahoma — also dropped. Alaska and Hawaii also saw a decline in median age.

In addition, the median age fell in 403 of the nation’s 3,143 counties, many of which were in the Great Plains. Williams, N.D., the center of the Bakken shale energy boom, led the nation with a decline of 1.6 years. Next to Alaska, North Dakota had a heavier concentration of males (51.1 percent of the total population) than any other state.

The nation as a whole grew older as the oldest baby boomers became seniors. The nation’s 65-and-older population surged to 44.7 million in 2013, up 3.6 percent from 2012.

By comparison, the population younger than 65 grew by only 0.3 percent.

These statistics also include population estimates for Puerto Rico by age and sex.

The nation is a study in contrasts when it comes to local age structure. There was a more than 42-year difference in the median ages of the county with the highest median age — Sumter, Fla., at 65.5 — and the county with the youngest median age — W6 | INSURANCE JOURNAL-WEST July 7, 2014

Madison, Idaho, at 23.1.

More Diverse Non-Hispanic, single-race whites remained the nation’s largest group with a population of 197.8 million.

The total of all other groups was 118.3 million, or 37.4 percent of the population. Non-Hispanic single-race whites made up 52.4 percent of the population under 18.

Asians were the fastest-growing group from 2012 to 2013, though that distinction has alternated between Asians and Hispanics over the years.

The Asian population increased by almost 2.9 percent to 19.4 million, an increase of about 554,000 people.

Hispanics remained the second largest group overall, growing by 2.1 percent (or more than 1.1 million) to slightly more than 54 million. Hispanics were 17.1 percent of the total population in 2013, up about 0.2 percentage points from 2012. The primary driver of Asian population growth in 2013 was international migration, accounting for 61 percent of the total Asian population change in the last year. Hispanic population growth, on the other hand, was fueled primarily by natural increase (births minus deaths), which accounted for about 78 percent of the total Hispanic population change.

Following Asians in rate of growth were Native Hawaiians and Other Pacific Islanders (increasing 2.3 percent to just over 1.4 million), American Indians and Alaska Natives (increasing 1.5 percent to slightly more than 6.4 million) and blacks or African-Americans (increasing 1.2 percent to 45 million).

The non-Hispanic white alone population was the only group to have natural decrease (more deaths than births) from 2012 to 2013.

However, due to migration, its population rose 0.1 percent from 2012 to 2013, reaching 197.8 million. Because of its slow rate of growth relative to other groups, its share of the total population declined from 63.0 percent to 62.6 percent over the period.

Highlights for each race group and

Hispanics, age groups and both sexes at the national, state and county levels follow. For Hispanics and each of the race groups listed below (except for American Indians and Alaska Natives), their populations rose at a faster rate from 2012 to 2013 in North Dakota than in any other state.

Hispanics California had the largest Hispanic population of any state on July 1, 2013 (14.7 million). However, Texas had the largest numeric increase within the Hispanic population since July 1, 2012 (213,000). New Mexico had the highest percentage of Hispanics at 47.3 percent.

Los Angeles County had the largest Hispanic population of any county (4.8 million) in 2013.

Blacks New York had the largest black or AfricanAmerican population of any state or equivalent as of July 1, 2013 (3.7 million); Texas had the largest numeric increase since 2012 (78,000). The District of Columbia had the highest percentage of blacks (51.0 percent), followed by Mississippi (38.1 percent).

Cook County, Ill. (Chicago) had the largest continued on page W12 www.insurancejournal.com

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Regulation Watch Hidden Perils of California’s Proposed Health Insurance Price Controls

I

mits a claim to an insurance company to n November, California voters will decide pay for the service that was provided. The whether to implement state government more common system in California, howevprice controls on health insurance. er, is the health maintenance organization, Insurance agents and brokers are certain in which the insurer organizes a group of to be asked by their clients whether this doctors and hospitals, and then pays them ballot measure merits a flat amount for every insured person. The support. Some clients November ballot measure does not distinwill be naturally skeptiguish between these two very difcal of government health ferent pricing systems, and care price controls, while would apply the same others will be open to law to each. the idea, but still have CDI has no expequestions regarding the rience whatsoever specifics of the proposal.

By Bill Gausewitz with regulating Even clients who are HMOs. In receptive to government price controls California, should be deeply concerned about the HMOs are reghidden bureaucratic dangers buried in the ulated by the proposed measure.

Department of California has had government price Managed Health controls on property/casualty insurance Care. Thus, the for roughly 25 years. P/C insurance commeasure would panies are prohibited from changing prices require CDI to regufor auto insurance, homeowners insurance late the prices charged and most business insurance without first by a class of health insurer receiving the approval of the California over which it has never had any regulatory Department of Insurance. authority.

The measure on the November ballot is The November ballot measure would superficially simple: It would subject health take a law designed originally to regulate insurance to the same price control system P/C insurance, and apply it to both trathat has been applied for a quarter of a ditional health insurance and to HMO century in P/C insurance. Supporters of the plans. It is impossible to predict how this measure reason that California has develwould work, but it is obvious that a law to oped a strong P/C insurance market under set prices for health insurance should be the price control system; hence it makes designed with health insurance in mind: to perfect sense to employ the same system do anything conin the health insur‘The measure on the November trary guarantees ance market. that major unnec Health insurance ballot is superficially simple…” essary problems is fundamentally will likely occur. different from P/C insurance, and imposing Even in the case of traditional health a system designed for P/C insurance into insurance, importing the P/C price control the health insurance market is certain to system into the health insurance market create major problems. To begin with, the will cause havoc. Health insurers and P/C very concept of health insurance involves insurers have completely different relatwo completely different systems for paying tionships with the people to whom they for health care. make payments. If a house burns down, the In traditional health insurance, a patient, homeowner hires a contractor to rebuild or more often a healthcare provider, subW8 | INSURANCE JOURNAL-WEST July 7, 2014

the house and the insurance company subsequently pays the contractor. While the insurer may monitor the reconstruction to make sure that the prices are reasonable, and that the work is done honestly and competently, no pre-existing relationship between the insurer and the contractor was developed prior to the claim.

P/C insurance rates are based upon general market prices for services such as home or automobile repair. All P/C insurers face the same basic market prices for the services that they must pay for in insurance claims. These price statistics are available both to the insurers determining what their prices ought to be, and to the CDI in evaluating an insurer’s application to change its rates.

Unlike P/C insurance, with traditional health insurance, there is usually a contract between the insurer and the health care providers to whom they make payments.

The insurer may have many provider groups it has contracted with in advance for specific prices, and any individual healthcare provider may have multiple contracts with different insurers. Each contract will usually have different rates for services provided under different insurance plans. CDI has very little experience dealing with this type of a pricing system, and it is unrealistic to think it can simply take its current rate review system and successfully apply it to the economic system used in health insurance.

Even though CDI has no experience with regulating HMOs, the measure would require it to regulate the prices charged by a class of health insurer over which it has no regulatory experience. continued on page W10 www.insurancejournal.com

IDEA EXCHANGE

Regulation Watch continued from page W8 The fallout from this will be significant.

Giving one state bureaucracy Because CDI currently has no regulatory (CDI) the power and desire to power over HMOs, under the proposed keep prices low while expecting measure it would have no responsibility for another bureaucracy (DMHC) to the financial soundness of the HMO busimake sure that prices are high nesses whose prices it would regulate. enough would be a bureaucratic Sound insurance regulation requires regnightmare. ulators to ensure that insurers have enough Roughly three quarters of money to pay claims. Regulators cannot health insurers in California only pay attention to keeping insurance are now regulated by DMHC. prices low, but must also make certain Under the proposed ballot meathat the prices are high enough to provide sure, all of these insurers would adequate funds to pay for the services that have two state regulators; one policyholders need. responsible for price levels but Under this measure, CDI would have a with no responsibility for price strong political incentive to keep health adequacy, the other responsible for insurinsurance rates low, but no incentive to er solvency but with no power to make ensure that certain that prices are prices are adequate to guarantee that ‘The proposed November high enough ballot measure merely takes insurers are able to pay to pay all claims. a system designed for P/C claims.

Complicating this even Responsibility insurance, and forces it on further is the fact that for safeguard- the health insurance market.’ most health insurers are ing insurer now subject to the federal solvency — that prices are adequate to pay Patient Protection and Affordable Care Act, claims — would remain with DMHC, who “Obamacare”. would have no power to influence prices.

The ACA provides an elaborate and

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extensive federal system mandating how participating insurers must operate. The November ballot measure does not require any coordination between California state price regulation and the federal ACA requirements.

Under the measure, insurers governed by the ACA would be subject to two inconsistent regulatory systems without any obligation that CDI review prices in a manner that accommodates the federal ACA requirements. The measure has the potential to seriously disrupt California’s implementation of the ACA. Regardless of whether an insurance professional’s clients are inclined to support health insurance price controls in concept, everyone agrees that if price controls are imposed they should make sound regulatory sense for the health insurance industry.

The proposed November ballot measure merely takes a system designed for P/C insurance and forces it on the health insurance market.

This convoluted and disorganized system proposed on the November California ballot would cause dramatic disruption in California’s market. This simple-minded, one-size-fits-all proposal is a recipe for disaster.

Bill Gausewitz is a Partner in the Law Firm of Michelman & Robinson, LLP and a member of the firm’s regulatory and administrative department.

Phone: (916) 447-4044. Email: bgausewitz@mrllp. com. www.insurancejournal.com

CENTER for

INSUR A NCE STUDIES California State University, Fullerton

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With a cutting edge insurance and risk management curriculum, CIS provides the industry with top quality candidates. Pacific Specialty is proud to have supported these students with scholarships and donations to CIS. The students graduating from the risk management and insurance program at CSUF have the business skills, technical competence and specialized training to be the insurance leaders of the future.

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WEST COVERAGE

News & Markets continued from page W6 black or African-American population of any county in 2013 (1.3 million).

Asians California had both the largest Asian population of any state (6.1 million) in July 2013 and the largest numeric increase of Asians since July 1, 2012 (142,000). Hawaii was the nation’s only majority-Asian state, with people of this group comprising 56.3 percent of the total population.

Los Angeles had the largest Asian population of any county (1.6 million) in 2013 and the largest numeric increase (26,000) since 2012.

American Indians and Alaska Natives California had the largest American Indian and Alaska Native population of any state in 2013 (1.1 million) and the largest numeric increase since 2012 (13,000). Alaska had the highest percentage (19.4 percent).

Native Hawaiians and Other Pacific Islanders Hawaii had the largest population of Native Hawaiians and Other Pacific Islanders of any state (366,000) in 2013 and the highest

percentage (26.1 percent). California had the largest numeric increase since 2012 (7,000).

Non-Hispanic White Alone California had the largest non-Hispanic white alone population of any state in 2013 (15.0 million). Texas had the largest numeric increase in this population group since 2012 (51,000). Maine had the highest percentage of the non-Hispanic white alone population (94.0 percent).

Los Angeles had the largest non-Hispanic white alone population of any county (2.7 million) in 2013.

Age Groups: Nation The 85-and-older population grew by about 3 percent between 2012 and 2013 to 6 million. The number of people age 100 and over reached 67,000 in 2013.

The total number of children under age 5 was just under 20 million in 2013 or 6.3 percent of the population. The number of children age 5 to 13 was just over 37 million in 2013 (11.7 percent of the population).

In 2013, there were about 198 million work-

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ing-age adults (age 18 to 64), representing 62.6 percent of the total population. In 2013, the median age of the minority population was 30.5 years.

Age Groups: States Florida had the highest percentage of its total population age 65 and older (18.7 percent), followed by Maine (17.7 percent).

Alaska had the lowest percentage of its population 65 and older (9.0 percent), followed

by Utah (9.8 percent).

Utah had the highest percentage of its total population under age 5 at 8.8 percent, followed by Alaska (7.5 percent). The two states with the lowest percentage of their total population under age 5 were Vermont (4.9 percent) and Maine (4.9 percent).

Age Groups: Counties There were 60 counties where the median age was greater than 50, and 61 counties where the median age was less than 30.

Las Animas, Colo., experienced the largest increase in median age, 1.2 years, from 44.5 to 45.7.

Sumter, Fla., had the highest proportion of its population age 65 and older (51.6 percent), and also had the lowest proportion of its population under age 5 (2.1 percent) on July 1, 2013.

Chattahoochee., Ga., had the lowest proportion of its population age 65 and older (3.8 percent).  Sex Males made up the majority of the population in only 10 states on July 1, 2013. Alaska had the highest percentage of men at 52.4 percent, followed by North Dakota (51.1 percent), Wyoming (51.0 percent), Hawaii (50.5 percent), Nevada (50.4 percent), Utah (50.3 percent), Colorado (50.2 percent), South Dakota (50.2 percent), Montana (50.2 percent) and Idaho (50.1 percent).

The District of Columbia had a higher percentage of females than any state at 52.6 percent, followed by Delaware (51.6 percent), Rhode Island (51.6 percent), Massachusetts (51.5 percent) and Maryland (51.5 percent). www.insurancejournal.com

NATIONAL COVERAGE

News & Markets Climate Change Bottom-Line Talk Grows, S&P Director Says

By Don Jergler

to be taken down by any one large catastrophe, Dryer said.

“The insurance industry demonstrated that the effects of extreme weather can be managed,” he added.

C

ompanies and governments worldwide are changing their behaviors and examining their risks in the face of climate change, a managing director for Standard & Poor’s said, holding up the insurance industry as a good example of how to adapt to a world with greater natural risks.

Steve Dreyer, managing director of Standard & Poor’s U.S. utilities and infrastructure ratings, and Dan Utech, special assistant to President Barack Obama on energy and climate change, during a conference call on June 16, talked about how insurers and investors are including climate change and severe weather in their risk assessments and decision-making processes.

The discussion was hosted by Business Forward, a nonprofit group that works with businesses and government, and it happened just two weeks after the U.S. Environmental Protection Agency released new carbon standards for power plants.

There has been some backlash against the new regulations, which call for existing U.S. power plants to reduce their greenhouse gas emissions at least 30 percent below 2005 levels by 2030. A report by the U.S. Chamber of Commerce shows that as a result of the regulations the economy will take an $859 billion hit by 2030 and Americans will pay more for electricity, see slower economic growth and experience fewer jobs created.

Carbon Emissions Footprint Utech said the new regulations, expected to be finalized next June, are tailored for each state, putting each in charge of how it reduces its own emissions.

“States are really in the driver’s seat,” he said.

By June 2016, states will be required to submit initial plans to comply with the new standards, and states participating in multi-state efforts have until 2018. States can meet these reduction standards by a combination of measures, Utech said.

10 | INSURANCE JOURNAL-NATIONAL July 7, 2014

Mitigate Risks Despite the fears over regulation, S&P has noticed more companies looking at their exposures, Dreyer said.

“We always are looking at the potential impact of these kinds of things on the ability of companies and governments to repay their debt obligations,” Dreyer said.

Among the thousands of companies and governments S&P rates, many are beginning to look at ways to mitigate risks and protect their bottom-lines, according to Dreyer.

A good template for such practices may already exist.

When Hurricane Andrew struck the Southeast U.S. in 1992, it sent nearly a dozen carriers under. However, a decade later when Katrina struck and decimated New Orleans and surrounding areas, no insurers declared insolvency, Dreyer noted.

The industry has learned to better model for catastrophe. Following Andrew, carriers better structured their risks so as not

Green Bond Market Other sectors are catching on.

Several industrial companies, for example, are turning to bond investors to finance ways to mitigate risk, including turning to the green bond market, which is taking off in Europe, according to Dreyer.

“We see that market being very attractive to investors,” he said.

The green bond market, which is now worth roughly $10 billion annually, is expected to continue to see fast growth as pensioners, sovereign wealth funds and other investors view these bonds as a diversification play from their typical investments, as well as a way to make a certain percentage of their portfolio green, Dreyer said.

“Our projection is that this year it will double to $20 billion,” he added.

In a follow-up interview with Insurance Journal Dreyer said the takeaway from his talk isn’t that S&P is looking at portfolios in different ways due to climate change to conduct ratings, but that the companies themselves are acting differently in the face of threats such as more frequent severe storms, rising sea levels and drought.

“I wouldn’t say that we are doing anything radically different,” Dreyer said. “What we are saying is the behaviors are changing among the companies that we rate. They’re looking at risk in a different way.”

Just how worst case scenarios may play out, forming contingency plans, looking at regulations and how to adapt to future regulations, examining the way natural catastrophe exposures are affecting the bottom-line, those are part of the evaluations a growing cadre of companies are now undertaking, Dreyer said. www.insurancejournal.com

NATIONAL COVERAGE

FIGURES

$27 Million

The asking price on a lawsuit filed by an Oregon electrician who claimed he was fired

by Nike because he complained about safety violations at the Beaverton, Ore., campus.

He lost the lawsuit against the company.

DECLARATIONS

$240 Million

The amount in punitive damages awarded to 16 eastern Missouri residents who sued over health problems from the Herculaneum lead smelter, later thrown out by a state appeals court. It is a portion of the $320 million in punitive damages awarded by a jury against former smelter owners Fluor Corp., A.T. Massey Coal and Doe Run Investment Holding Co. after a three-month trial in 2011. The Missouri Court of Appeals Eastern District ruled that an error in jury instructions requires fresh consideration of Fluor’s portion of the damages award.

350

$700,000

The estimated value of a luxury home on Lake Whitney in Texas that was set on fire after the cliff it was built on gave way, threatening to send the 4,000-square-foot home tumbling into the water below. It took less than an hour on June 13 for the fire to level the home above Lake Whitney, about 60 miles south of Fort Worth. Authorities had condemned the home and the owners, Robert and Denise Webb, consented to the burn, which was considered less costly than trying to retrieve the house from the lake if it had been allowed to fall.

The number of additional workers auto insurer GEICO plans to hire at its regional office in Stafford County, Va., by the end of 2014, according to an announcement in June from company officials. GEICO’s Stafford office opened in 1994 with 700 associates. It currently employs more than 3,500 workers.

“Strengthening vital infrastructure across the state is critically important to ensuring the safety of our communities, both today and for future generations.”

— New York Gov. Andrew Cuomo on road safety projects. Cuomo announced on June 10 that New York is receiving more than $75 million in federal transportation funds for 33 projects around the state, including work to widen roads, and to install turn lanes, sidewalks, crosswalks, bike lanes and rumble strips.

Absolutely Gone “More than half of the town is gone — absolutely gone. … The co-op is gone, the grain bins are gone, and it looks like almost every house in town has some damage. It’s a complete mess.”

— Stanton County Commissioner Jerry Weatherholt after a storm packing rare dual tornadoes tore through Pilger, a tiny farming town in northeast Nebraska. Two people were killed and at least 19 were taken to hospitals. Pilger’s 350 residents evacuated their homes after the powerful twisters slammed the area on June 16.

Something Else “We just can’t take on the responsibility anymore. … It used to be a little parade; now it’s hundreds of people and boats. It’s not necessarily a parade anymore. It has evolved into something else.”

— Attorney Marc Barker of Jarreau, La., a member of the family who organizes the popular False River Fourth of July Boat Parade in Louisiana’s Pointe Coupee Parish, says the family will no longer sponsor the parade because of new pressure from the state to obtain liability insurance and provide adequate security patrols. The boat parade has been a local tradition for more than 30 years.

$37 Million

The amount of a jury award against a Charleston, W.Va., nursing home in connection with a former resident’s death after the West Virginia Supreme Court reduced the amount from the original $91 million. Attorneys for the nursing home had called the $91 million award excessive and unfair. They said the claims against the nursing home and its employees should have been subject to the state’s $500,000 cap on non-economic damages in medical malpractice lawsuits. www.insurancejournal.com

Road Safety Projects

Significant Burden “We are currently reviewing the proposed legislation in detail, but it’s clear that the bill timeline is much more aggressive than our plan. … [E]xcavation at one of our largest sites could take up to 30 years.”

— Duke Energy spokesman Jeff Brooks said complying with a 15-year deadline in proposed state legislation to close all of its North Carolina coal ash dumps would place a significant burden on the $50 billion company. The measure would require Duke to remove its 100 million tons of coal ash now stored in 33 unlined pits across the state or seal it in place by 2029.

July 7, 2014 INSURANCE JOURNAL-NATIONAL | 11

NATIONAL COVERAGE

Business Moves

Arthur J. Gallagher, The Plus Cos., Tri-State General Arthur J. Gallagher & Co. has acquired The Plus Cos. Inc. (TPC) in Bridgewater, N.J. Terms were not disclosed.

Established in 1985, TPC is a managing general agent and program manager that provides non-medical, professional liability and umbrella insurance products and services to independent agent and broker clients throughout the United States.

TPC specializes in liability programs for lawyers, architects, engineers, insurance agents and brokers, surplus lines brokers, managing general agents, and title insurance and escrow agents. TPC’s Robert Ciuffreda and his associates will continue to operate from their current location under the direction of Joel Cavaness, president of Risk Placement Services Inc., a subsidiary of Arthur J. Gallagher & Co. Arthur J. Gallagher & Co. also announced it has acquired Tri-State General in Salisbury, Md. Terms were not disclosed.

Established in 1979, Tri-State General is a specialty wholesale and managing general agency operation that places transportation, garage, professional liability, special events and property/casualty insurance for its retail insurance broker clients throughout Maryland, Pennsylvania, Delaware, New Jersey, Virginia, Ohio and Washington, D.C. 12 | INSURANCE JOURNAL-NATIONAL July 7, 2014

Tri-State General’s Edward Dickerson and his team will continue to operate from their Salisbury location also under the direction of Cavaness.

Headquartered in Itasca, Ill., Arthur J. Gallagher & Co. is an international insurance brokerage and risk management services firm.

Brown & Brown, Gaston & Associates Brown & Brown of New York Inc., a subsidiary of Brown & Brown Inc., acquired certain assets of Gaston & Associates Inc. in Mount Kisco, N.Y. Terms were not disclosed.

With origins dating back to 1895, Gaston & Associates offers property/casualty and employee benefits insurance products and services to clients in New York and throughout the Northeast.

The firm, through its InsureHedge division, has specialized in the private fund space since 1992. The firm has annual revenues of approximately $2.4 million.

As part of the transaction, Fred Gaston and his team will operate from Brown & Brown of New York’s existing Rye Brook, N.Y., location under the leadership of Markham F. Rollins III. Florida-based Brown & Brown Inc., through its subsidiaries, offers a range of insurance and reinsurance products and related services.

Capacity Coverage, Mt. Pleasant Capacity Coverage Co. of New Jersey Inc. said its New York City-based affiliate, ARM-Capacity of New York LLC, has acquired assets of Thornwood, N.Y.-based Mt. Pleasant Agency Inc. This transaction was completed through a newly formed entity called Mt. Pleasant Capacity Agency LLC, which is jointly owned by ARM-Capacity of New York and

by Joseph Picharallo and Keith Shaland, the managing partners of Mt. Pleasant Agency.

Mt. Pleasant sells a broad array of personal and commercial lines of insurance products from its offices in Westchester County

in New York. The agency will continue to be located in its current offices.

Capacity Coverage said the transaction would allow the firm to expand its business operations into Westchester County.

Capacity Coverage is an insurance and financial services organization headquartered in Mahwah, N.J., with more than 280 employees in 14 retail and wholesale offices.

Broad Insurance Group, Hartselle Agency Broad Insurance Group (BIG) has acquired Art Hartselle Agency Inc., a Seminole, Fla.based commercial and personal lines property/casualty insurance agency.

The company said that Robert Southard, a Florida native and insurance executive, is being brought on as president.

The agency will continue to operate with its current staff out of its Seminole location.

Monsey, N.Y.-based Broad Insurance Group is a recently formed subsidiary of Broad Financial. BIG was developed with the goal of acquiring small- to mid-size property/casualty insurance agencies.

TWFG The Woodlands Financial Group (TWFG) has added 10 more branch agencies in its home state of Texas.

TWFG now operates with more than 200 branch offices in Texas along with its headquarters in The Woodlands, just north of Houston. It now has 309 branches in 21 states reporting more than $337 million in premiums.

The company has close to 3,300 agents in 30 states, which includes both affiliated and wholesale agents, and TWFG’s headquarters office offers policies in 49 of the 50 states.

The company also announced that five new branches in California and one in Minnesota are joining the national roster.

TWFG added the following 10 branch operations in Texas: Keith Tilghman, Denison; Michael Sanchez, Houston; Mark Wilson, The Woodlands; Robert Ortiz, The Woodlands; Jim Woods, Onalaska; Ryan Guillory, Humble; Leon Ly, Dallas; Connie Andrews, Plano; Don Oh, Lewisville; and Jerell Dycus, Coppell. www.insurancejournal.com

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NATIONAL COVERAGE

News & Markets How New Capital is Changing P/C and What To Do About It

A

s waves of capital reshape reinsurer’s business model, the property/casualty (P/C) insurance industry needs to change, although how remains a matter of debate.

Reinsurers face a growing threat from the capital markets — hedge funds, pensions and others that have found innovative ways to replicate what reinsurers do. This so-called alternative capital is driving reinsurance prices lower, especially the cost of reinsuring losses from Florida hurricanes.

There are signs alternative capital will seep into other areas of P/C insurance and reinsurance. How reinsurers can respond was discussed by analysts at the Casualty Actuarial Society’s (CAS) Seminar on Reinsurance in New York.

Alan Zimmermann, managing director of Assured Research, and Matthew C. Mosher, senior vice president of rating services for A.M. Best Co. and a fellow of the CAS, believe the industry needs to move on to new opportunities.

“If you are not willing to change with society, you are going to lose your relevance,” Mosher said.

Meyer Shields, managing director at Keefe, Bruyette and Woods and CAS fellow, counseled a modest approach, such as probing carefully to find profitable niches. “We’re not in the business of solving the world’s problems, we’re in the business of increasing the value for shareholders,” he said.

Not New The new capital has emerged in recent years, but its start harkens back at least two decades to Hurricane Andrew in 1992.

Today, Zimmermann said, Andrew doesn’t seem like it would have been so important in its day. The insured losses from the storm, $23 billion in today’s dollars, pale compared to more recent events like the $47 billion in inflation-adjusted losses from Katrina. But Andrew’s losses were four times greater than anything that preceded it.

The storm shook the industry. Perhaps the biggest change it brought was a new 14 | INSURANCE JOURNAL-NATIONAL July 7, 2014

degree of acceptance of computer modeling. The models made catastrophe risk, once the uber-specialty of insurers and reinsurers, easier for others to understand and price.

Zimmermann recalled the powerhouse reinsurers from pre-Andrew days: awesome behemoths, whose size, customer base and underwriting depth made them seem like impregnable “castles surrounded by the Hudson.”

Those models have been honed, and today capital market investors rely heavily on them as they invest in the P/C space. The dominance of reinsurers has ebbed. “There are a lot more companies,” Zimmermann said.

As new capital flows in, the price of reinsurance falls. Reinsurers have generally responded well to the immediate situation, writing less business as rates shriveled.

Some even practice a sort of arbitrage, writing risks then ceding them into the capital markets at a lower price.

For the long run, reinsurers have responded slowly, Zimmermann said, as have most P/C insurers.

Zimmermann and Mosher agreed that the industry needs to embrace new risks, like cyber liability.

Shields said companies need to face the changes that are happening and find ways to benefit. It can take time, he said, to find underwriters who understand new lines of business. “Capital is fungible,” Shields said.

“Underwriting discipline is not.”

Inflation The analysts discussed how the industry has benefited from low inflation. Standard reserving methods have an underlying rate of inflation built into them; low inflation has allowed companies to improve earnings by releasing reserves from older years as

they have proved redundant.

Now, Mosher said, those reserving methods have low inflation baked into them. An uptick could mean P/C company reserves could become inadequate.

Low inflation also means company profits grow more volatile, Shields said. Companies rely less on investment income and more on underwriting income. Investment income mainly comes from bonds. Underwriting profits come from business a company underwrites, which is more volatile.

Zimmermann agreed, recalling the steep price increases of the 1970s. “If you haven’t lived in a world of 10 percent inflation, you can’t realize how debilitating it is.”

That experience taught Zimmerman how investors view insurance companies. During his career, insurers have returned 8 percent on equity. Stocks, measured by Standard & Poor’s, have returned 13 percent.

The underwhelming returns have made P/C values consistently lower than the rest of the market. The new capital hasn’t made the situation easier, he said.

“You can’t be in a business with growing competition and expect your stock to do well in the long term,” he said. www.insurancejournal.com

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CLOSER LOOK

10 Things to Know About Earthquakes The earth’s surface consists of 25 interlocking plates. — National Aeronautics and Space Administration

The costliest U.S. earthquake was the 1994 Northridge quake, which resulted in $15.3 billion in insured losses at the time, or roughly $24 billion in today’s dollars. — Insurance Information Institute

The world’s costliest earthquake was the one that struck Japan on March 11, 2011. The quake caused more than $210 billion in overall damages and $40 billion in insured losses. It also claimed 15,840 lives. — Insurance Information Institute

There are an estimated 500,000 detectable earthquakes in the world each year. — United States Geological Survey California has two-thirds of the nation’s insurance risk, with roughly 2,000 known faults running throughout the state. — California Earthquake Authority

The earth’s plates move at a rate of roughly 2 centimeters per year. — National Aeronautics and Space Administration

Less than 12 percent of California homes have earthquake insurance. Of the California homes that do have earthquake insurance, most have a “mini policy” with a 15 percent deductible.

— California Department of Insurance The world’s largest recorded quake was an M9.5 in Chile on May 22, 1960.

— United States Geological Survey

The largest recorded earthquake in the United States was an M9.2 in Prince William Sound, Alaska on March 28, 1964. — United States Geological Survey

16 | INSURANCE JOURNAL-NATIONAL July 7, 2014

Three significant quakes hit on June 2, 2014: M7.8 in Indonesia in 1994 that killed at least 250 people and damaged or destroyed roughly 1,500 homes; M6.4 in Australia in 1979 that created a 7.4-mile long north-south surface rupture east of Cadoux; M4.5 in South Dakota in 1911, the largest recorded quake in state history covering roughly 62,137 square kilometers. — United States Geological Survey

www.insurancejournal.com

SPECIAL REPORT

Disasters Disaster Mitigation: How Incentives Can Help

By Andrea Wells

T

he frequency and cost of natural disasters in the United States has increased exponentially in the past two decades. The cost to property, life and the economy is pushing the issue to the top-of-minds for many in Washington, D.C., local governments and the insurance industry.

While the insurance industry plays an important role in disaster recovery such as hurricanes, storms, tornadoes and wildfires, on average, insurance covers just one-fifth of all disaster-related losses. Since 1983, the United States government has spent nearly $1 trillion on disaster recovery and rebuilding efforts.

For decades, the federal government has been forced to increase disaster funding in the middle of fiscal years to meet the rising costs. Supplemental disaster funds were appropriated in 17 of the 22 budget years between fiscal year 1989 and 2010, according to the Congressional Research Service.

The issue has become severe enough that some are advocating for an intervention of sorts.

“We’re at a point in this country where the severity of the weather that’s occurring 18 | INSURANCE JOURNAL-NATIONAL July 7, 2014

Pizzi says insurance companies also must do their part to motivate consumers to fortify homes and businesses by providing incentives of their own.

“Insurance companies can offer discounts to consumers and business owners who fortify their structures. They also can offer insurance products that will help rebuild storm-damaged homes and businesses to fortified standards,” Pizzi said.

IBHS studies show that homes and businesses fortified by stronger building materials and construction practices are more likely to survive extreme weather events that otherwise would severely damage or destroy them.

“We know that mitigation works,” says Robert Detelfsen, vice president of public policy for the National Association of Mutual Insurance Cos. (NAMIC). “There's been any number of studies that show that losses from natural disasters are considerand the cost — not just the financial cost ably reduced when you have effective mitibut the emotional cost — have become too gation taking place.” large to bear,” said Mark Pizzi, president Yet, the majority of disaster aid is spent and chief operating officer of Nationwide on disaster response, and not mitigation.

Insurance who also serves as the board According to a joint report, funded by chairman for the Insurance Institute for the Z Zurich Foundation, in the past two Business & Home Safety (IBHS). “There is a decades, nearly $9 out of every $10 of U.S. need for intervention.” aid was spent on emergency response, The intervention must reconstruction and rehabilitacome through public and ‘We’re at a point tion, with only $1 in $10 going private partnerships that mitigation. in this country toward encourage disaster mitiThe report, part of a multiwhere the gation efforts, as well as year academic cooperation severity of the between Zurich, the Center incentives that boost mitigation tools among conweather that’s for Risk Management at sumers, according to Pizzi.

Wharton School of the occurring and the the Action must be taken University of Pennsylvania cost — not just the and the International Institute to make homes and busifinancial cost but of Applied Systems Analysis nesses stronger and more resilient, Pizzi says. the emotional cost (IIAS), proposes a framework to Incentives like building the ability of communi— have become measure permit rebates, state-level ties to withstand floods, quantitoo large to bear.’ fy the success of flood resilience tax incentives, and state and federal grants could efforts and demonstrate the lead to more resilient communities that benefits of pre-event risk reduction as could lower costs. opposed to post-event disaster relief.

While government incentives are critical, “To help reduce flood losses and help www.insurancejournal.com

communities in both developed and developing countries improve flood resilience, it is imperative that we focus more on mitigating risks and preparing for floods, rather than simply dealing with the consequences after a flood occurs,” said Dan Riordan, CEO of Zurich Global Corporate in North America.

Like Nationwide, Zurich and others in the industry are boosting efforts to improve sustainability and resiliency to natural catastrophes and encouraging the government to implement legislation that would incentivize states to comply.

Government in Mitigation Most mitigation occurs at the local level but funding for municipal mitigation projects often comes from federal dollars.

FEMA oversees and manages programs including the Hazard Mitigation Grant Program, Pre-Disaster Mitigation and Flood Mitigation Assistance programs. But more could be done especially when it comes to encouraging stronger and more resilient buildings, the experts say.

Detelfsen, who represented NAMIC as a member of The BuildStrong Coalition in a recent Senate hearing on “The Role of Mitigation in Reducing Federal Expenditures for Disaster Response,” says model building codes and superior construction standards can play a huge role in reducing the costs of natural disasters.

That’s why BuildStrong — a group of national business and consumer organizations, firefighters, emergency managers, building professionals and insurance groups — strongly advocates incentive-based approaches to spur more states to adopt statewide model building codes.

“The purpose of model building codes is to ensure that minimum standards are used in the design, construction, and maintenance of the places where people live.

Building codes are intended to increase the safety and integrity of structures, thereby reducing deaths, injuries and property damage from a wide range of hazards,” Detelfsen said.

BuildStrong has made S. 924, The Safe www.insurancejournal.com

Building Code Incentive Act, its signature priority. The goal of this legislation is to increase the number of states with minimum construction standards.

BuildStrong is also a strong supporter of S. 1991, The Disaster Savings Account of 2014, which provides an incentive for homeowners to make their homes more resilient through a tax-free savings account to be used on mitigation activities, and supports H.R. 2241, The Disaster Savings and Resilient Construction Act of 2013, which provides a tax credit to businesses or homeowners who rebuild to resilient construction standards in declared federal disaster areas.

Model Codes Model building codes help ensure safety and soundness of homes but also allow for economies of scale in the production of building materials and construction, as well as create a level of safety for first responders during and after fires and other disasters.

The Safe Building Code Incentive Act is a mechanism by which states are incentivized, not mandated, to adopt and enforce model building codes. The proposed legislation would provide an additional 4 percent of post-disaster recovery funds to all states that adopt and enforce model codes. The incentive is meant to encourage more states to rebuild to higher standards in order to eventually reduce the need for more disaster recovery money.

In recent years, there have been several significant studies that support the conclusion that enforcing model statewide building codes saves lives and greatly reduces property damage and the subsequent need

for federal disaster aid.

Uniform, statewide codes also promote a level, predictable playing field for designers, builders and suppliers, says Julie Rochman, president and CEO, IBHS. But Rochman says it’s important for people to understand that building codes are a minimum standard.

“It is literally life safety code. It’s the minimum threshold at which you can occupy a building,” she said.

“It’s not meant to protect against natural hazards, although in coastal areas and in some seismic areas like the West Coast there are provisions in code that address natural hazards, but overwhelmingly they provide only a minimum threshold of safety.”

Rochman says IBHS’ stronger, safer Fortified standards offer better hazard and safety protection. But achieving fortified building code standards in some states is almost impossible because even today some states do not have minimum building code requirements.

“We still have about a dozen states in this country that don’t have a statewide building code,” she said. Several other states have building codes but do not universally enforce those codes.

People always find that surprising, she says.

“How can a state like Illinois, not have a building code? They don’t.

Oklahoma doesn’t. Arkansas doesn’t. And if you look at the states where you’ve had a lot of tornadoes recently, there’s no code.”

Even in some states where there is a code, that code doesn’t address natural hazards, Rochman explained.

“States and localities have a responsibility to help keep their citizens safe,” she said. That’s what codes and standards like Fortified do. They help keep people safer and they make their homes stronger.

They’re not disaster proof, but they are continued on page 33 July 7, 2014 INSURANCE JOURNAL-NATIONAL | 19

SPECIAL REPORT

Commercial Auto

By Amy O’Connor

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idesharing services are becoming increasingly popular among consumers looking for a more convenient alternative to taxis or other forms of public transportation, and startup ridesharing companies have been cropping up everywhere trying to ride the heels of the success experienced by the three major transportation networking companies: Uber, Lyft and Sidecar.

But insurers have been a little slower to hop in the backseat on this journey.

Insuring this class isn’t easy because it is difficult to address the different exposures and get adequate rate, says Mark Maucere, senior vice president for AmWins

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Transportation Underwriters Inc. in the Indianapolis office.

“Our rate [for transportation classes] is based on a point A to point B mechanism, and the problem with these operations is we don’t know when the car is out or in the garage, we don’t know the experience of the driver, car maintenance or in what other ways it is used,” Maucere says.

AmWins Transportation Underwriters insures limousines, taxicabs and public auto transportation like vans and private passenger services, but has enacted a moratorium on new ventures because of the ridesharing trend.

“A lot of drivers think they are covered under their personal auto coverage, which they aren’t because it is excluded, so they realize they need commercial coverage and come to us for insurance,” Maucere says. “The problem is it is so new that you really have to ask the questions ‘What are you doing?’ and ‘Are you using a dispatch service?’ We aren’t saying it’s not a good risk, but it’s a risk we can’t get our hands around yet.”

Maucere says the differences between transportation network companies (TNCs) and a taxicab is the taxi has earned a medallion or paid for one from its municipality.

Medallions are not easy to acquire. Taxi and www.insurancejournal.com

other private passenger auto drivers also have experience transporting passengers in their vehicle and dealing with distractions that can come along with that. Taxi companies also make sure drivers maintain their vehicles.

Maucere says until his company gets a better handle on how to best insure startup ridesharing companies, which will require state legislation that will hold all TNCs accountable for vetting their drivers and ensuring passenger safety, AmWins will avoid the business.

“There is an opportunity here, and we would be interested in potentially looking at these classes of business if we could properly underwrite and put the rate around it,” Maucere says. “But it’s very difficult until you can grab that data and verify some of the things we can’t verify now.”

Excess and surplus lines insurer James River has insured two big TNC’s: Uber and Lyft. According to John Clarke, vice president of marketing for James River, the carrier was approached by a wholesale broker to write very specific coverages for the new industry.

Despite the fact that James River is not an auto market and doesn’t write taxi or trucking classes, as it learned about the companies and how they track miles and vet drivers, and the technology behind them, the carrier became accepting of the risk, Clarke says.

He says there were no rules or precedents to follow when James River began to structure the policies, because this type of business had never been done before. But James River was able to accommodate the insurance structure the TNCs requested and has responded with different component features as the industry has evolved.

The three major parts of coverage for TNC’s includes: • Core policy with $1 million limit that drops down and covers the driver when the driver has accepted a rider and is en-route to pickup a passenger; then take the rider to his or her destination and drop him or her off. The core policy also covers Uber www.insurancejournal.com

and its parent company, Rasier. This “ride” policy is a contingent excess commercial auto policy with Rasier (and specified subsidiaries like Uber) named as insureds. It is contingent in that the driver’s primary coverage is the private passenger auto policy, the policy that also satisfies any financial responsibility requirement in the driver’s state. In the event that coverage is declined by a driver’s PPA insurer, the Rasier (Uber) ride policy will step in to provide coverage to the driver. This policy carries a $1 million CSL limit and applies from when a ride request is accepted until the rider is delivered to the destination.

• Coverage with a lower limit for when the driver is logged on with the TNC and is sitting or driving around waiting to be dispatched to pickup a rider. Structured like a typical auto policy with a per person limit, per event limit and a property damage limit.

• Separate coverage purchased by the TNC for physical damage to the driver’s vehicle if damage occurs while the driver is using the vehicle for commercial (ridesharis definitely a surplus lines risk, he says. ing) and not personal purposes.

“This is a classic example of the non Gus Fuldner, head of insurance for San admitted market doing exactly what it is Francisco-based Uber, says his company has supposed to do – write a new business that developed a partnership with James River cannot get insurance in the standard marin building its insurance program to also ket,” he says. “Private passenger auto comaddress the peculiarities in each state and panies won’t do it, so where do they go to nationally.

“The overall principle that we target is fairly straightforward: The idea of ridesharing has taken off While a driver is on a trip or and propelled transportation netthere is a passenger in the car, work companies into an emerging we want the passenger, driver billion-dollar transportation market. and any other party to be protected by insurance that is as get insured? They come to us because that’s good or better than a limo or taxi in that what we do. Then when it becomes mainsame jurisdiction,” Fuldner says. stream, the admitted market will come in While the aforementioned policy has and take the business. That’s the natural been the insurance model Uber has used lifespan, but right now it has to be in the so far, Clarke says this class is constantly surplus lines market.” evolving with new technology and legisla Fuldner says working with a surplus tive requirements, so no one really knows lines insurer has benefited Uber. “We have what model will be the most effective a very collaborative relationship with the down the road.

For the foreseeable future, this business continued on page 22 July 7, 2014 INSURANCE JOURNAL-NATIONAL | 21

SPECIAL REPORT

Commercial Auto continued from page 21 insurer, and that is one of the big advantages of working with a surplus lines market.

They have the flexibility on both the changing markets and the feedback we get from constituents,” he says. “The surplus lines industry is going to play an important role in the development of this market.”

The major TNCs that have been successful so far are growing larger every day, says Clarke, making it difficult for startups and smaller competitors to keep up — especially those that don’t follow the same strict business practices. The leading TNCs take safety and the vetting of their drivers very seriously, he says, which includes making sure drivers have a valid driver’s license and insurance, performing background checks, and monitoring feedback and ratings of drivers.

Drivers can also only pickup riders through the app and are prohibited from picking up people hailing a cab. Clarke says if drivers violates this condition, their insurance coverage does not apply and they are in violation of their agreement with the TNC. They also have to identify themselves as TNC drivers when they pickup a passenger, and Uber and Lyft have identifying features on their vehicles so riders know they are getting into an approved vehicle.

“These transportation network companies are very concerned about doing this properly, and it is in their self-interest to make sure their drivers do it right,” Clarke says. “These guys are extremely well-capitalized and financed, and they are building a business for the long haul.”

With that in mind, Clarke doesn’t see a lot of opportunity for startups in this space because of the barrier to entry set by these big TNCs. That leaves scant opportunity for agents and brokers, Clarke says, because the successful TNCs have already partnered with large brokers. There is also the uncer22 | INSURANCE JOURNAL-NATIONAL July 7, 2014

tainty of what will happen with ‘We aren’t saying it’s not a good legislation and how that will risk, but it’s a risk we can’t get our affect the development of the hands around yet.’ industry. have watched be completely created in the He expects taxi and limo last two years. Someday I think our chilcompanies will have to adapt to this new dren will laugh at us for waving our arms “social” way of doing business if they want on the corner for a taxi.” to compete with TNCs, and that will create Uber has worked closely with personal challenges and opportunities for the insurlines carriers that sell commercial insurance ance industry as well. to educate them on how the ridesharing “Nobody wants to stand in the way of business works with the hope that insurers innovation, but we have to figure out how will embrace this emerging market. it’s all going to work together,” Clarke says.

“Oftentimes carriers are selling a very “It’s a really interesting industry that we

Uber, Lyft, Sidecar Toe-to-Toe With Insurers State-by-State

By Don Jergler

T

he share-and-share-alike attitude considered a virtue by some has become fighting words between ridesharing companies and the insurance industry.

“We try not to make it a battle,” says Robert Passmore, senior director of personal lines for the Property Casualty Insurers Association of America (PCI).

Steering away from giving a winnerloser perspective, he adds: “We’re not against anybody’s business model.”

But it is a battle, and it’s unfolding state-by-state cross the country as PCI, along with a handful of other powerful insurance groups, spends considerable time and resources to make sure personal automobile insurance isn’t footing the bill for ridesharing activities.

The idea of ridesharing has taken off and propelled transportation network companies like Uber, Lyft and Sidecar into an emerging billion-dollar transportation market.

And local and state governments must now figure out how to deal with all of this. Regulation, insurance and safety concerns are among the issues they are grappling with, while angry taxi operators who feel put upon or

about to be put out are also coming into play through protests and rancorous political action.

A perceived gap in insurance coverage — between when a TNC’s commercial insurance policy is in effect and when

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similar commercial lines product and deal with covering the exposure of people using their personal auto in the course of their business, whether it be food delivery or real estate agents,” Fuldner says. “Once [insurers] understand that, the conversation really changes to talking about business opportunities for those carriers to build products that embrace ridesharing as a concept.”

The biggest change that is necessary for the insurance industry to price this risk accordingly, which seems to be the toughest hurdle, Fuldner says, is to look at usagebased pricing as opposed to unit-based.

The demand and need for part-time drivers is there, he says, and the sooner insurers change their mindset on pricing, the more opportunity will be available to them. “[Ridesharing] is a really outstanding example of how usage-based insurance has created a large economic opportunity for the industry,” he says. “And the insurers who say, ‘How can we price it?’ instead of ‘We don’t know how to price it’ will create a new product for this market.”

AmWins’ Maucere says that in the meantime, agents and brokers need to make sure they ask their taxi and limo clients

a driver’s personal auto policy will be expected to cover any unplanned incidents — has the insurance industry standing its ground.

The industry’s stance is that TNC drivers are providing a commercial service

any time they are logged into a ridesharing smartphone app and looking for a ride. The battle has escalated to the legislative level, with PCI and other large insurers’ groups putting in regular appearances at rulemaking and legislative hearings on ridesharing throughout the nation for more than a year.

TNC operators have agreed in several states to provide $1 million in commercial coverage for whenever a ridesharing driver has a ride. And while TNCs have offered various solutions to deal with the insurance gap, they haven’t agreed to provide the level of commercial coverage insurers have pushed for.

TNCs have argued that requiring $1 million coverage for the period when drivers have their app on but no match will kill their business model, as well as scare off insurance companies currently developing TNC products. They have also accused the taxi and limo industry of stirring things up across the nation to thwart their emerging competition, as is apparent in a statement from Sidecar given in response to a request for comment for this article.

“Established and powerful interests like the taxi industry are threatened and using their political muscle to try and stop or slow services like Sidecar, Lyft and UberX. But people want transportation choice.

We hope to continue to work with leaders

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the important questions to make sure clients are not participating in these ventures without proper insurance coverage or expecting to be covered for an excluded service.

“Ask all the questions and don’t just assume when they say they have a limo it’s just a limo service. Or when they say they are starting up a new business, ask what the car is going to be used for,” he says. “Any good retail producer does these things. If they understand what they are looking at and can understand the underwriting process, that will help us.”

nationwide to create policies that strike the right balance between protecting public safety and allowing for more consumer choice in the marketplace.”

In a statement from Lyft, the company noted that despite broad publicity over the battles, there has been cooperation between TNCs and some governments and regulators.

“In April, we entered into an operating agreement with the city of Detroit for two years (or until new regulations are introduced), which is a great example of a city seeing the value in community-powered transportation and adapting to allow that model to thrive. While we have faced challenges in certain municipalities, we are hopeful that we can work together with local leaders to come to a permanent solution that puts the people first.”

Uber spokeswoman Eva Behrend said the company is optimistic about finding middle ground.

“We believe there is a solution to be found,” she said. “We think there is a solution, and we do support insurance regulation.”

Web Resource To read full coverage on what states are doing to address ridesharing concerns visit: www.InsuranceJournal.com.

July 7, 2014 INSURANCE JOURNAL-NATIONAL | 23

IDEA EXCHANGE

Fiduciary Liability The PPACA: What Employers Don’t Understand About Emerging Exposures

By Christopher Williams

T

he Patient Protection and Affordable Care Act (PPACA) and the emerging regulatory environment present difficult challenges to employers.

As employers, regulators, administrators and courts begin to struggle with understanding the scope and requirements of the PPACA, employers also may be faced with the added issue of new management liability exposures.

Travelers Bond & Financial Products recently released a Nielsen Research poll offering insight into potential liability risks employers could face based on their unfamiliarity with key provisions of the PPACA. The poll collected responses from more than 800 corporate decision-makers to better gauge their understanding of healthcare reform and assist them as they prepare for the new mandates.

According to the survey, 36 percent are not at all familiar with PPACA’s overall requirements, and another 31 percent are only somewhat familiar with the law’s requirements. About a quarter reported they have not yet begun preparing for PPACA compliance.

Employers, as well as agents who advise them, should be mindful of the exposures created by the nearly 10,000 pages of PPACA regulations. Not only are employers subject to penalties for failing to file the necessary reports, but they also could be sued by plan participants for failure to comply with the PPACA. Interestingly, respondents in the Travelers Nielsen survey that report being extremely familiar with PPACA (35 percent) are three times more likely to be concerned about potential lawsuits, illustrating that the more familiar an organization is with the law’s requirements, the more it understands 24 | INSURANCE JOURNAL-NATIONAL July 7, 2014

the liability-related exposures created by the healthcare mandates.

Agents who understand these exposures can properly guide clients on their risks and ensure that they have the right fiduciary liability coverage in place.

Fiduciary liability insurance protects benefit plans, the sponsor organization and individuals acting as fiduciaries or administrators of the plans from costly defense expenses, settlements or verdicts when there is a breach of fiduciary duty as it relates to the Employment Retirement Income Security Act (ERISA). Below is an outline of some of the costs and exposures employers face in light of the PPACA: Key Employer Obligations For 2015, the PPACA mandates that employers with 100 or more full-time equivalent (FTE) employees offer health insurance to at least 70 percent of employees working more than 30 hours a week.

FTE employees are calculated by adding the number of employees who work more than 30 hours per week and the total number of hours worked by part-time employees in a month, divided by 120.

If those employers fail to provide health insurance and one of their employees obtains coverage and a tax subsidy on a state or federally run healthcare exchange,

the employer may be subject to a penalty.

For 2015, the penalty is equal to the number of full-time employees, less 80, multiplied by $2,000.

In addition, for 2015 only, employers with 50 or more but fewer than 100 employees do not need to provide health insurance if they meet all of the following conditions: •The employer cannot reduce the size of its workforce or the overall hours of service of its employees to avoid providing healthcare benefits to its employees. Employers may still reduce their workforce or their workforce’s hours for a bona fide business reason.

•The employer cannot eliminate or materially reduce health coverage offered as of Feb. 9, 2014.

•The employer must certify statements regarding the above on a prescribed form that must be delivered to the IRS. In 2016, the requirements change, and employers with 50 or more full-time equivalent employees must offer health insurance to 95 percent of their employees working more than 30 hours per week or potentially incur a penalty. The penalty calculation also changes. Rather than subtracting 80 from the number of full-time employees, the penalty will be calculated by subtracting 30 from the number of full-time employees, and multiplying that figure by $2,000.

Reducing Hours or Terminating Employees In addition to risks associated with IRS certification statements, employers who terminate employees or who reduce their hours below 30 hours per week to avoid providing health insurance may be exposed to individual and class action claims for violating Section 510 of ERISA. Section 510 prohibits employers from discharging or discriminating against plan participants for the www.insurancejournal.com

purpose of interfering with the attainment of any right to which they are entitled under a benefit plan. Terminating employees or reducing their hours could result in allegations of Section 510 violations.

Organizations that violate Section 510 face exposure not only to defense expenses, but also claims for lost wages, the value of the benefits and plaintiff attorney fees.

Where such claims allege an ERISA breach of fiduciary duty, which they generally do, they are likely to implicate fiduciary coverage. Employment practices liability policies will most likely not cover these claims, as they contain an ERISA exclusion.

Not Meeting PPACA Compliance Plan participants may also sue if the health plan provided by their employer does not comply with the PPACA’s benefit mandates. For example, the PPACA man-

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dates that health insurance plans cannot have an annual or lifetime limit on benefits provided.

According to the Travelers Nielsen survey, 39 percent of employers are not familiar with that requirement. If an employer sponsor provides a health plan with a coverage dollar limit, a participant may sue the plan, its employer sponsor, and plan fiduciaries to obtain coverage for the cost of the medical claim in excess of the amount permitted under the plan.

The PPACA also requires certain employers to provide coverage for essential health benefits. Essential health benefits include, among other things, mental health and substance use disorder services; preventive and wellness services; and pediatric services, including oral and vision care. If a plan does not provide coverage for essential health benefits, participants could sue to obtain

coverage for those benefits. Under ERISA, such claims will likely be permitted and plaintiffs also would be entitled to their attorney fees if they prevail.

Education Is Key With employers facing a number of PPACA-related challenges, agents and other insurance professionals must raise awareness, promote education and provide the right insurance solutions. Fiduciary coverage can help employers transfer certain PPACA-related liability risk, protecting them from costly defense expenses as well as settlements and verdicts. By shedding light on an area that’s often poorly understood, agents can solidify their role as trusted advisors and gain a competitive edge.

Williams is fiduciary liability product manager for Travelers.

6/6/14 2:16 PM

July 7, 2014 INSURANCE JOURNAL-NATIONAL | 25

IDEA EXCHANGE

Human Resources Staffing for Your Organization’s Term Projects

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atural disasters are unforeseen and unpredictable: an unexpected hurricane that devastates a coastal area, a tornado that cuts across a city leaving broken buildings and homes in its path, a wildfire that sweeps across states, or a flood that destroys crops and washes away residences.

It is typically these sort of disaster situations that cause an insurance company to turn to interim

By David E. Coons staff for support and assistance. However, that is not the only instance where contract employees can make a difference. In fact, interim support can have an immediate and lasting positive impact on companies looking to fill a gap during a set time span.

Still unsure as to how interim talent can help your organization in your time of need?

You might be surprised to learn that many of today’s organizations are incorporating contract staff into their current busi-

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ness model. But just what are the benefits of bringing these contract professionals into your workplace?

The Growing Need During the recent “Great Recession,” many within the insurance industry made a commitment to doing more with less. As staff and budgets were cut, countless business projects were shelved to focus on more immediate and pressing concerns. Now that the economy is starting to look up — with insurance unemployment at a low and revenue growth projections on the rise — companies are taking a second look at these suspended projects and the manpower needed to successfully undertake them.

In addition, recent changes industry-wide are creating a number of new mandates to address. From the Affordable Care Act, regulatory updates, new filing and reporting requirements, and ICD-10 (International Classification of Diseases – 10th Revision), organizations are facing pressure to stay on top of a large number of new requirements.

With companies still understaffed from

the hiring freezes and personnel cuts of past years, undertaking these tasks is daunting.

Together, the delayed projects and pressing industry changes have combined to highlight a need for short-term talent.

In response, these organizations are turning to interim professionals to get the job done.

The Benefits of Contract Staff For companies looking for an individual who can quickly step in, roll up his or her sleeves and get started, interim employees are great talent solution. In fact, a large number of highly qualified industry professionals have chosen to build their careers as interim staff. They specialize in handling short- and long-term projects, and are adept at stepping in to an organization and hitting the ground running. These skilled A large number professionals require of highly-qualshorter ramp-up time ified industry for a project, are very professionals adaptable and can integrate quickly into have chosen any workplace envito build their ronment. careers as Bringing on fullinterim staff. time professionals can be costly for any organization, with recruiting costs, training costs, benefit payments and any costs associated with employee turnover (severance pay, unemployment benefits, etc.). For a project that has a set start and end date, many companies may be reluctant to incur such large expenses. With interim talent, insurance organizations are able to bring in an experienced individual for a term project without paying the cost of a full-time

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employee.

Not only are interim professionals a cost-effective solution for project-based work, but they can add significant value to an organization in a short amount of time.

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The key to finding an impactful interim hire is to work with a talent provider who staffs a broad landscape of interim professionals from entry level all the way up to subject matter experts and executives.

It may be surprising for many organizations to learn that there is talent available to fill levels as complex as a CFO or CEO. By offering a deep bench of qualified talent, organizations can easily find an employee that can fill the roles that fall between the lines of standard insurance functions.

Disasters are not the only time when an insurance company should turn to interim talent for support. Contract employees provide a great opportunity for companies to bring on highly qualified professionals for very specific and time-sensitive projects.

These professionals can assist your organization in completing backlogged projects, preparing for changing industry rules and regulations, and providing assistance during a leave of absence. Their valuable contributions can certainly make an important and lasting impact on your organization’s success in a short period of time.

Coons is senior vice president of The Jacobson Group, a provider of talent to the insurance industry. Phone: 800-466-1578. Email: dcoons@ jacobsononline.com.

5/19/14 10:23 AM

July 7, 2014 INSURANCE JOURNAL-NATIONAL | 27

IDEA EXCHANGE

The Competitive Advantage Agency Ownership of Expirations

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gency ownership of its expirations is core to agency culture, core to the agency’s value, and core to the owners’ livelihoods. Yet today, the ownership and even more important, the value of the expirations, is being threatened, and most agency owners do not see it happening.

The analogy to the old story of the frog enjoying the warm water until the instance before death

By Chris Burand is possibly apropos.

Consider the following examples.

The first example is the most obvious.

Producers — and often far more important, CSRs — taking clients. Most agency owners recognize this threat, but their producer contracts are entirely inadequate and their contracts with CSRs are even worse. What is possibly even more damaging is how so

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many agency owners underestimate the control some CSRs have over clients. Their client relationships are often far stronger than the relationships producers have.

The second example is also mostly obvious and that is an agency’s carrier taking the expiration list. I am not too terribly concerned about a company brazenly taking ownership of expirations. Usually when this happens, it happens because the agency has failed to pay its premiums on time or has lost a license.

The third example involves companies and is bold but not as obvious. Owning an expiration list in the old days was good protection, but in today’s information age, owning data is far more important. The agency may own the list but does the agency own all the pertinent data? I have seen companies effectively cause agencies to lose material business by using client information, in my opinion, nefariously but permissible per the contract. Check your contracts.

The fourth example involves companies

who simply give client information to agents and brokers they like better than you, once you move a policy to a competitor. I do not understand some insurance companies’ fixation that clients only move because agents facilitate their moving. This is why companies give policy information to other agents. It is why companies secretly buy agencies and then prevent the staff from moving accounts. It is why companies like service centers. Some companies seriously believe customers will not shop if an agency does not remind them to shop.

Protect yourself in these situations, including the use of service centers. Always read your contracts, not only for what they say, but what they do not say, too.

Data, Programs and More The fifth example is relatively new. Now that many companies are writing directly, what happens to the data they have regarding your clients? Just asking.

The sixth example is actually old, and

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that involves programs. A famous case involving a program for softball leagues where a company stole the program from the agency was resolved in favor of the agency. If you have a program or even the thought of a program, make sure your company, or companies, sign non-disclosure agreements and even non-compete agreements before you share the details. I know your companies are special and they are your friends, and they would never take a program from you, so it should be no problem for them to sign these reasonable agreements.

The seventh example is maybe the scariest, as I look from the outside in. In the past five years, the largest brokers have purchased many wholesale brokerages. These brokers’ wholesale businesses now contribute 10 percent to 30 percent of the brokers’ commission revenues. These are large sums.

I continually find most agencies have not adjusted to this new reality. Their broker relationships are lax. Sometimes they do not even have a contract with their brokers.

If you do not have a contract, what is to prevent a broker from sharing your expirations, your data, with their retail branch?

Maybe I have become too jaded over time or maybe I have just seen too many instances of Chinese walls that were imaginary at most, but I would err on the presumption that data gets shared.

A related issue is how I have seen many programs develop on a handshake basis, and these programs have run well for years, sometimes decades. All parties have complete confidence in each other and maybe rightly so.

However, all agencies and brokers are eventually sold. The appetite for purchasing wholesalers and certain program business does not seem to be slowing. Given the inevitable sale and the potential purchasers, doesn’t it make sense to build protection www.insurancejournal.com

while you still have a friendly face on the other side of the deal?

owners are lazy though, and they quit selling much and they let the cluster’s service center build relationships. Then, if the Aggregators cluster contract is not designed well, the The eighth example involves clusters owner can be kicked out. Sure the owner and aggregators. The question here varies can claim ownership, but exactly where are considerably depending on how the cluster they going to go? contract is written. In general, when an Ownership of expirations has been so agency joins a cluster, inculcated into agenit may not retain 100 cy culture that many Always read your conpercent ownership. I agency owners take it tracts, not only for what recently saw a situafor granted. They have tion in which a com- they say, but what they do not stayed in-tune with pany claimed own- not say, too. the times. They do not ership of a cluster understand that other member’s expirations — and it was entities controlling data and relationships correct! I have seen other situations can severely damage the value, possibly where an aggressive cluster operator eliminate the value, traditionally associated took advantage of more trusting “partners” with owning the expirations. The solutions and took control of the expirations. An are fairly simple, but work is involved. Is interesting example is some agency owners protecting your agency’s value, your wealth, join a cluster designed as a service center. worth the work and investment?

The cluster services the business alleviating much woe for small agency owners. This is Burand is the founder and owner of Burand & fine on paper and fine if the agency owner Associates LLC based in Pueblo, Colo. Phone: 719stays in touch with clients. Some agency 485-3868. Email: chris@burand-associates.com.

Agency Ideas

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SALES & MARKETING IDEAS FOR P&C PROFESSIONALS

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July 7, 2014 INSURANCE JOURNAL-NATIONAL | 29

2014 Digital Product Guide ** The following are paid advertisements.

Accounting / Billing / Financial

Agency Management Systems

INSURESOFT

NEXUS LINX, LLC

2500 Bond Street University Park, IL 60484 Contact: Virginia Feminis Office: 708-534-1775 Mobile: 708-351-9225 www.insuresoft.com sales@insuresoft.com

2601 N. 3rd St., Ste. 109 Phoenix, AZ 85004 Contact: Jason Ruel Phone: 888-744-9998 X-1 Fax: 888-846-8650 www.nexuslinx.com jruel@nexuslinx.com

Insuresoft - The Diamond System

Policylinx™

Insuresoft offers the Diamond System Suite, an innovative solution for property and casualty insurers. Both exceptionally configurable and scalable, the Diamond system extends functionality for policy processing, rating, underwriting, billing, claims, analytics and other business-critical functions.

Increase performance, profitability, and create peace of mind. Policylinx™ is a secure, user-friendly Management System for Agents, MGA’s, and Claim Administrators. Gain all the benefits of a single entry system with access to your data anytime, anywhere. Experience the convenience of a full Accounting module, Reports, Policy and Claims Tracking, Document Management, and much more. Need a customized rater, policy issuance, or data feed for a company? We can build that. The possibilities are endless. Check us out today, and let us help you grow your business. Profitability Performance Peace of mind

Innovative. Intuitive. Insurance

Agency Management Systems SHIFT INSURANCE APPLICATIONS

TERRACE SOFTWARE, INC.

P.O. Box 233 Solana Beach, CA 92075 www.modgic.com info@modgic.com

150 Spear St., Ste. 700 San Francisco, CA 94105 Phone: 888-269-6200 www.terrace.com

Modgic Modgic is a software application used by insurance agents, brokers, carriers, risk managers and consultants. Modgic accurately calculates and predicts workers comp X-mods (experience modifications) nationwide while providing an in-depth analysis of a businesses workers compensation insurance.

Modgic provides many tools that turn agents into highly educated and powerful consultants. MODGIC is a product of SHIFT Insurance Applications llc. Providing the future technology for the commercial insurance industry.

Powerful Software for Agents & Brokers Terrace Agent & Broker System (ABS) is simple, powerful and extensible management and accounting software for specialty retail agencies, wholesale brokers and MGA’s. Unified search, graphical navigation, and ribbon bar actions make ABS simple. Marketing, policy management, billing, accounting, claims, certificates, forms & document generation make ABS powerful. Open architecture make ABS easy to extend. ABS is different - visit our web site to learn more.

The Agents Tool for Workers Comp

contact.terrace@terrace.com

Decision Management

Digital Marketing

DEMOTECH, INC.

ASTONISH

2715 Tuller Pkwy.

Dublin, OH 43017 Contact: Joseph Petrelli Phone: 614-761-8602 Fax: 614-761-0906 www.demotech.com jpetrelli@demotech.com

300 Centerville Rd., Ste. 200E Warwick, RI 02886 Phone: 888-899-1243 www.astonish.com sales@astonish.com

Demotech, Inc. Demotech, Inc. is a Columbus, Ohio based financial analysis and actuarial services firm providing a wide range of services including pricing analysis, state filings assistance, Financial Stability Ratings® and support for other required regulatory reporting. Having worked with insurers of all sizes, Demotech possesses broad experience addressing actuarial and financial analysis issues, whether the issue is unique to a particular insurer or faced throughout the industry.

30 | INSURANCE JOURNAL-NATIONAL REGION July 7, 2014

Insurance Marketing In The Digital Age Astonish is on a mission to change the way insurance is sold in America. They firmly believe the local distribution channel is the greatest asset of the insurance industry. They are dedicated to helping this channel (including the agencies, firms, and individuals) adapt to the modern landscape of Internet consumers in order to thrive and not get left behind.

The Astonish “FIND - SELL - KEEP” system has been successfully installed in over 3,500 businesses across the country in 3 different industries. In 2007, while looking for a new market, Astonish found incredible success in the insurance industry.

Since that time, Astonish has moved exclusively into insurance and has acquired over 750 clients that range in all types, shapes, sizes, and product specialties.

Astonish is currently one of the fastest growing technology companies in America. www.insurancejournal.com

2014 Digital Product Guide ** The following are paid advertisements.

Document Management

Claims

FUJITSU COMPUTER PRODUCTS OF AMERICA, INC.

E-CLAIM.COM, LLC, DBA CLICKCLAIMS

1250 E. Arques Ave. Sunnyvale, CA 94085 Phone: 888-425-8228 http://us.fujitsu.com/scanners

1901 Manhattan Blvd., Bldg C, Ste. 202 Harvey, LA 70058 Contact: Thomas J Brown Phone: 877-694-8375 Fax: 877-694-8375 www.clickclaims.com thomasb@e-claim.com

Fujitsu

ClickClaims

Fujitsu Computer Products of America, Inc., is an established leader in the document imaging market, featuring state-of-the-art scanning solutions and services in the workgroup, departmental, and production-level scanner categories. Fujitsu offers the industry’s most comprehensive and competitive product offering. With scanning solutions from 15-120 pages per minute (ppm), Fujitsu possesses an extensive scanner lineup to meet the functional needs of customers at affordable price points.

ClickClaims is for small to mid-size PC carriers and claim service providers who need advanced technologies that drive a competitive market. ClickClaims’ SaaS model allows for rapid deployment, unlimited scalability, performance, security and versatility that legacy systems cannot match, at a fraction of the cost.

Recipient of the AM Best eFusion Award for Claims Technology, our products have driven claims innovation since 1999. Call for a demonstration today to see how ClickClaims can optimize your claims department and deliver operational effeciencies.

--- AM Best eFusion Award Winner ---

Claims

MGA / Wholesaler Website

INSURESOFT

BURNS & WILCOX

2500 Bond Street University Park, IL 60484 Contact: Virginia Feminis Office: 708-534-1775 Mobile: 708-351-9225 www.insuresoft.com sales@insuresoft.com

120 Kaufman Financial Ctr. 30833 Northwestern Hwy. Farmington Hills, MI 48334 Phone: 248-932-9000 www.burnsandwilcox.com

Insuresoft - The Diamond System Insuresoft offers the Diamond System Suite, an innovative solution for property and casualty insurers. Both exceptionally configurable and scalable, the Diamond system extends functionality for policy processing, rating, underwriting, billing, claims, analytics and other business-critical functions.

Internationally recognized for its expertise, Burns & Wilcox is North America’s leading and most capable independently owned insurance wholesale broker and underwriting manager. Burns & Wilcox provides property, casualty and other specialty business lines of insurance for more than 14,000 retail brokers and agents. In addition to adhering to the highest standards of service, the depth and acumen of its underwriting and management talent is unsurpassed in the industry.

Innovative. Intuitive. Insurance

www.burnsandwilcox.com

Burns & Wilcox

MGA / Wholesaler Website INSUREZONE

QUALCORP, INC.

1612 Summit Ave., Ste. 100 Fort Worth, TX 76102 Phone: 817-704-2287 www.agentsecure.com membership@insurezone.com

PO Box 803280 Santa Clarita, CA 91380 Contact: Allen Beggs Phone: 661-799-0033 Fax: 661-799-0020 www.QualCorp.com abeggs@QualCorp.com

AgentSecure The AgentSecure technology platform provides producers with the industry’s best sales workflow management tool. Our comparative rating tool, for personal and commercial lines, features a secure single-entry multi-carrier quoting platform. The result is that we return real-time quotes from national and specialty carriers, in order to save you time while making the sale. With AgentSecure, independent insurance agents are able to provide the coverage and carrier options in a time frame that your clients have come to expect.

www.agentsecure.com www.insurancejournal.com

QualCorp, Inc. Since 1992, we have been providing software for MGA’s/Carriers that afford them with the ability to: RATE and ISSUE POLICIES in all 50 states ISO and Non-ISO Programs and LOB Commercial / Personal and Workers’ Comp All Microsoft-based - latest technology

www.QualCorp.com July 7, 2014 INSURANCE JOURNAL-NATIONAL REGION | 31

2014 Digital Product Guide ** The following are paid advertisements.

Policy Administration / Processing INSURESOFT

QUALCORP, INC.

2500 Bond Street University Park, IL 60484 Contact: Virginia Feminis Office: 708-534-1775 Mobile: 708-351-9225 www.insuresoft.com sales@insuresoft.com

PO Box 803280 Santa Clarita, CA 91380 Contact: Allen Beggs Phone: 661-799-0033 Fax: 661-799-0020 www.QualCorp.com abeggs@QualCorp.com

Insuresoft - The Diamond System

QualCorp, Inc.

Insuresoft offers the Diamond System Suite, an innovative solution for property and casualty insurers. Both exceptionally configurable and scalable, the Diamond system extends functionality for policy processing, rating, underwriting, billing, claims, analytics and other business-critical functions.

Since 1992, we have been providing software for MGA’s/Carriers that afford them with the ability to: RATE and ISSUE POLICIES in all 50 states ISO and Non-ISO Programs and LOB Commercial / Personal and Workers’ Comp All Microsoft-based - latest technology

Innovative. Intuitive. Insurance

www.QualCorp.com

Rating Software

Workers’ Compensation

INSUREZONE

SHIFT INSURANCE APPLICATIONS

1612 Summit Ave., Ste. 100 Fort Worth, TX 76102 Phone: 866-243-5934 www.insurerater.com membership@insurezone.com

P.O. Box 233 Solana Beach, CA 92075 www.modgic.com info@modgic.com

InsureRater

Modgic is a software application used by insurance agents, brokers, carriers, risk managers and consultants. Modgic accurately calculates and predicts workers comp X-mods (experience modifications) nationwide while providing an in-depth analysis of a businesses workers compensation insurance.

Modgic provides many tools that turn agents into highly educated and powerful consultants. MODGIC is a product of SHIFT Insurance Applications llc. Providing the future technology for the commercial insurance industry.

By using InsureZone’s commercial and personal lines comparative rating tools, your agency can streamline the way it handles the small account which will allow your producers to focus on larger accounts.

This is the only comparative rating platform in the industry that works for BOTH commercial lines (23 carriers) and personal lines (100 carriers) using the same interface.

32 | INSURANCE JOURNAL-NATIONAL REGION July 7, 2014

Modgic

The Agents Tool for Workers Comp

www.insurancejournal.com

Disasters

Advertisers Index

continued from page 19

Readers, browse, contact, or do product searches on any of our full page advertisers at:

stronger and safer.”

www.insurancejournal.com/adshowcase/

Congressional Support Detelfsen says that so far support from Congressional leaders has been positive.

“We certainly got a very favorable response from the Chairman of the Senate Committee who presided over that hearing, and I think that everything we’ve heard from members of Congress is pretty positive,” he said.

There is some concern over the additional disaster assistance states would receive in exchange for adopting strong building codes, he said, and whether the incentive would drive a net increase in federal outlays for disaster assistance. But the industry and other BuildStrong supporters say improving building codes nationwide would result in net savings to the federal government.

“Any additional amounts of money that were promised to the states in exchange for them adopting stronger building codes would be offset by the effect that the building codes would have on disaster loss reduction,” he said.

Access Home Insurance www.accesshomeinsurance.com SC11; SE11 Agency Ideas www.agencyideas.com 29 Applied Underwriters www.applieduw.com 4, 5, 36 Arrowhead General Insurance Agency www.arrowheadgrp.com W5 Atlas Financial Holdings www.atlas-fin.com 25 Burnett & Company www.bcoinc.com SC7 California Earthquake Authority www.earthquakeauthority.com/mvp 3 Catlin US www.catlinus.com 15 Century National www.cnico.com W3 City of Hope www.cityofhope.org 33 CSUF Center for Insurance Studies www.centerforinsurancestudies.com W11 FEMA www.agents.floodsmart.gov/ij 17 Golden Bear Insurance Company www.goldenbear.com W10 Ironshore www.ironshore.com 2 JM Wilson www.jmwilson.com SE5; M3 Latin American Assoiation of Insurance Agencies www.laaia.com SE3

Lexington www.lexingtoninsurance.com 13 Liberty Mutual www.libertymutual.com 35 Lighthouse Holdings, LLC www.lighthousepropertyins.com SC1; SE1 M.J. Hall & Company, Inc. www.mjhallandcompany.com W12 McClelland & Hine www.mhi-tx.com SC5; SE1 Monarch E & S Insurance Services www.monarchexcess.com W7 Oak & Associates www.oakandassociates.com 26 Pacific Gateway Insurance Services www.pgiainsurance.com W9 PersonalUmbrella.Com www.personalumbrella.com 7 PSIC - Pacific Specialty Insurance Company www.psic-onespot.com 9 South & Western www.southandwestern.com SC9; SE9 The Institutes www.theinstitutes.org 3; W1 Vista College www.statece.com/ins 27 Western Surplus Lines Agency, Inc. www.westernsurplus.com SC3

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6/23/14 9:48 AM

July 7, 2014 INSURANCE JOURNAL-NATIONAL | 33

IDEA EXCHANGE

Closing Quote Moreover, as with any forecast, when an agency assigns a rating it is not suggesting the rating represents the only outcome for the rated re/insurer’s financial health that it can perceive, merely the one it thinks is most probable.

And yet, many buyers and brokers use ratings as a “‘binary’” selection criteria (acceptable above a certain level of rating and unacceptable below). This is often done without even a review of the historical default or impairment rates associated with each rating level and a related perspective on how long the “exposure” to the re/insurer will be (i.e., the “tail” on the business being placed).

The Strange Case of the Use and Abuse of Insurance Ratings

R

By Stuart Shipperlee

atings, and rating agencies, occupy a contradictory place in many markets — not least in commercial lines insurance and reinsurance.

They are very heavily relied on by both buyers and brokers, yet subject to a great deal of cynicism.

However, while the agencies certainly don’t always get it right, we would contend that much of the controversy derives from the way many re/insurance practitioners apply ratings within their own decision-making processes.

This stems from a fundamental but all too often ignored reality: Ratings are merely forecasts. They are opinions about the future (the future creditworthiness of the rated re/insurer) based on historical information and forward-looking expectations (both about the re/insurer itself and the markets it trades in).

The use of expert forecasts is central to business life.

Indeed, much of the technical side of underwriting itself reflects exactly that. Yet that use normally comes hand-inhand with a healthy awareness that a forecast is merely an opinion, not a fact. And opinions about the future will, by definition, sometime prove to be wrong.

Both A.M. Best and S&P currently rate well over 2,000 re/insurers globally. One thing we can say with confidence is that not all of those ratings will prove to be correct.

34 | INSURANCE JOURNAL-NATIONAL July 7, 2014

Binary Problems The binary selection approach has three problems.

First, it ignores the fact that the detailed statistics on historic rating performance over different time periods published by the agencies allow for a much more rational approach to assessing the degree of credit risk. Second, it tends to miss important leading indicators from the agencies about potential rating trends (individual rating or sector outlooks, for example). But most important in our view, it leads to a sense that somehow a rating is a fact.

The implied assumption is that “if a carrier is ‘A-’ it must be all right; if its ‘BBB+/B++’ is must be questionable.”

This last aspect of rating in part leads to the degree of angst seen when a rating proves to have been too high.

Buyers and brokers looking for certainty when using ratings in this arbitrary way inevitably feel more Ratings are merely bitterly about things if an “A”-rated carrier then sub- forecasts. They are opinions about the sequently fails.

future.

How to Use Ratings There are many unknowns in the buying and underwriting of commercial lines and reinsurance risks.

Professional buyers and brokers invariably invest the time to understand these properly (e.g., the exact nature of required coverage; lost cost trends; economic, political and legal developments; climate changes; emerging risks).

Re/insurance professionals using ratings should invest the time to understand what analytical factors ratings reflect; the leading indicators on their ratings that the agencies provide; the observed credit risk any given rating level has displayed historically; and the impact the duration of the exposure has on that credit risk.

Shipperlee is senior partner at Litmus Analysis, a partnership of analysts offering a broad range of products and services designed to create increased transparency and clarity in the insurance and reinsurance markets. Website: www.litmusanalysis.com.

www.insurancejournal.com

THERE ARE SOME RISKS ONLY A SPECIALIST CAN HANDLE. We’re LIU, the global specialty lines division of Liberty Mutual Insurance. To meet our underwriters and learn more about how they can help you and your clients handle unique risks, visit www.LIU-USA.com.

Boston | New York | Chicago | Atlanta | Dallas | Houston | Denver | Los Angeles | San Francisco | Miami | Baltimore | London | Europe | Asia | Australia | Canada | Latin America | Middle East Certain coverage may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. Š 2012 Liberty Mutual Insurance.

Expect big things in workers’ compensation. Expect to save a third of your clients 30% or more. Most classes approved, nationwide.

For information call (877) 234-4450 or visit auw.com/us. Š2014 Applied Underwriters, Inc. A Berkshire Hathaway company. Rated A+ (Superior) by A.M. Best.

Insurance plans protected under U.S. Patent No. 7,908,157.