Insurance Journal West 2015-11-02

WEST EDITION Wildfire Losses May Exceed $1.75B Best Agency in West: Der Manouel Hands-Free Tech ‘Surprisingly’ Risky

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WEST

Inside This Issue

On The Cover

Special Report:

‘Misfit Doctors, Lawyers Find a Friend in E&S Market

November 2, 2015 • Vol. 93 No. 21 • West

W2

W6

38

42

NATIONAL COVERAGE

WEST COVERAGE

IDEA EXCHANGE

10 New Insurance Policy Protects

Homebuyers’ Down Payment

W2

99.9 Percent Probability of L.A.-Area Earthquake: Study

34 The Competitive Advantage:

Chris Burand

10 Outlook for Homeowners

Insurance Market Improves: Aon

W2

California Commissioner Approves Reduced 2016 Pure Premium Rate Filing

38 Tech Talk: Pay Attention

to Smartphone Security

W6

Farmers Insurance Facing Possible Class Action by ‘Hundreds’ of Female Attorneys

W8

Guy Carpenter Says Wildfire Losses May Exceed $1.75B

14 Spotlight: Living on the Edge

of the Big City 18 Special Report: E&S Befriends

‘Misfit’ Doctors, Lawyers 22 Special Report: 2015 Agency

E&O Survey

42 Minding Your Business: Catherine

Oak & Bill Schoeffler 46 Closing Quote: Mutual vs. Stock

Insurers

W10 Best Agency in West: Der

Manouel, Where Improvement

Is Key W12 Estate of Oregon Man Files Suit

Against Home Care Agency

in Death W14 AAA: Using Hands-Free

Technology While Driving Is

‘Surprisingly’ Risky

DEPARTMENTS W4 People 12 Declarations 12 Figures 15 Business Moves 40 MyNewMarkets

W16 Southern California Utility Gets

$400M Insurance Settlement

over Closed Nuke

6 | INSURANCE JOURNAL-WEST November 2, 2015

www.insurancejournal.com

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NATIONAL COVERAGE

Opening Note

Publisher Mark Wells | mwells@wellsmedia.com

Flipped Upside Down

A

rise in on-demand car services and the adoption of autonomous vehicles will be contributing factors to a huge reduction in the size of the auto insurance market, according to a report by the consulting firm KPMG. In its report, “Marketplace of Change: Automobile Insurance in the Era of Autonomous Vehicles,” KPMG says that within 25 years, the private passenger auto insurance industry will shrink by as much as 60 percent.

Accident frequency could also decline by 80 percent by 2040 — when millennials will be ages 44 to 58— mainly due to safer cars and more human-free driving.

While cost per accident may rise substantially because new cars and their parts will be more expensive, frequency decline will result in sizable reductions in loss costs and premiums, the report says. More than 90 percent of accidents each year are caused by driver error, according to the report.

Combining the accident frequency and severity assumptions, the personal auto sector will cover less than $50 billion in loss costs by 2040, a 60 percent drop from its current $125 billion in loss costs, says the KPMG report.

Also, according to the report, the downward Autonomous vehicles are frequency trend already poised to completely transunderway with safer cars form the auto insurance will accelerate sooner industry. than many in the industry expect with the growth in on-demand and car-sharing services and the introduction of driverless cars.

“Autonomous vehicles are poised to completely transform the auto insurance industry, and underlying market forces, including technology enablement, consumer adoption, and regulatory permission, are already aligning to enable mass change,” said Jerry Albright, principal in KPMG’s Actuarial and Insurance Risk practice. Albright said the drop in industry loss costs would trigger consolidation in the personal lines space, attract new competitors, and force operational changes within carriers.

As the auto losses fall by as much as 60 percent, Chris Nyce, principal in KPMG’s Actuarial and Insurance Risk practice, sees personal auto premiums shrinking proportionally.

“The shrinkage in real terms may be even greater,” he says.

KPMG anticipates “severe implications” of an environment of shrinking personal auto premiums, especially given that the insurance industry as a whole has not generated an underwriting profit in personal or commercial auto for several years in a “normal” market environment.

Joe Schneider, managing director at KPMG Corporate Finance, believes the proliferation of automated vehicles will strain carriers. “Many insurers don’t have a profitability cushion to erode and lack the structural agility to shed costs quickly in an environment of rapid change,” Schneider said, adding that he expects “sigAndrea Wells nificant turmoil.”

Editor-in-Chief

8 | INSURANCE JOURNAL-NATIONAL November 2, 2015

EDITORIAL Chief Content Officer Andrew Simpson | asimpson@insurancejournal.com Editor-in-Chief Andrea Wells | awells@insurancejournal.com East Editor Young Ha | yha@insurancejournal.com Southeast Editor Amy O’Connor | aoconnor@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 ClaimsJournal.com Editor Denise Johnson | djohnson@claimsjournal.com Columnists Chris Burand, Catherine Oak, Bill Schoeffler, Tom Wetzel Contributing Writers Bonnie Cavanaugh, Charles Chamness, Tim Henderson SALES Chief Marketing Officer Julie Tinney (800) 897-9965 x148 | jtinney@insurancejournal.com Sales Manager Lauren Knapp (800) 897-9965 x161 | lknapp@insurancejournal.com West Dena Kaplan (800) 897-9965 x115 | dkaplan@insurancejournal.com Allison Steinkamp (800) 897-9965 x172 | asteinkamp@insurancejournal.com Midwest Lisa Whalen (800) 897-9965 x180 | lwhalen@insurancejournal.com South Central Mindy Trammell (800) 897-9965 x149 | mtrammell@insurancejournal.com East (NY, PA and CT only) Dave Molchan (800) 897-9965 x145 | dmolchan@insurancejournal.com Southeast & East (except for NY, PA and CT) Howard Simkin (800) 897-9965 x162 | hsimkin@insurancejournal.com New Markets Sales Manager Kristine Honey | khoney@insurancejournal.com Classifieds, Jobs, Agencies Wanted/For Sale Kelly De La Mora (800) 897-9965 x125 | kdelamora@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 Chief Technology Officer/Chief Innovation Officer Joshua Carlson | jcarlson@insurancejournal.com V.P. of Design Guy Boccia | gboccia@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 Tim Layer | tlayer@wellsmedia.com IJ ACADEMY OF INSURANCE V.P. of Education Chris Boggs | cboggs@ijacademy.com Sales Executive Romeo Valdez | rvaldez@ijacademy.com Online Training Coordinator Barbara Whiffen | bwhiffen@ijacademy.com ADMINISTRATION Chief Executive Officer Mitch Dunford | mdunford@wellsmedia.com Chief Financial Officer Mark Wooster | mwooster@wellsmedia.com

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Business Insurance Employee Benefits Auto Home

NATIONAL COVERAGE

News & Markets New Insurance Policy Protects Homebuyers’ Down Payment

By Andrew Simpson

H

omebuyers may soon be able to buy insurance to protect their down payments in the event they sell their home at a loss.

Much like title insurance protects the lender, this product promises to reimburse homebuyers for their full down payment should they want to sell their new home for any reason between two and seven years after they buy and end up suffering a loss on the sale.

Dallas-based ValueInsured says it will begin offering the new product, which it named +Plus, in January of next year.

“When the down payment is protected, the modern American homebuyer experiences more control, confidence and flexibility, even in a volatile real estate market,” Joseph Melendez, founder and CEO of ValueInsured, said in the

announcement. The company said it has worked with specialty insurer Houston International Insurance Group and reinsurer Everest Re in developing +Plus.

The maximum down payment that can be protected is $200,000. There is no deductible and there is no minimum.

The policyholder will be paid if the value of the house goes down and the owner ends up selling at a loss. The claimant gets less than the original down payment if either the sale price or the home value (as measured by the Federal Housing Finance Agency’s Home Price Index) fell only modestly but the claimant gets a full refund of the down payment if the sale price and the HPI fell by at least 20 percent.

The premium is based on the amount of the down payment and the location of the home.

For example, ValueInsured says that for

the average $200,000 home with 10 percent down payment, the cost would be about $1,000. This cost can be paid for through a lender credit and included in the mortgage payment for “less than a lunch a month,” according to Cleve Bellar, chief marketing officer for ValueInsured. +Plus policyholders cannot file a claim during the first two years after purchasing the policy or after seven years.

The product was created for people who expect to live in their home for a long time but find their plans change.

“We found that most people that stay in a home after seven years will stay for much longer and given other variable like the average tenure at a job (less than three years), many will opt to move in under seven years.

We also wanted to avoid flippers that can impact premiums,” Bellar said.

The home must be owner-occupied during the entire coverage period.

Bellar said ValueInsured is currently reaching out to real estate agents, mortgage lenders and others in the homebuying process to develop its sales and distribution strategy.

Outlook for Homeowners Insurance Market Improves: Report

T

he outlook for the U.S. homeowners market has improved over last year thanks in part to rate increases and lower reinsurance costs, according to reinsurance intermediary Aon Benfield.

A new report by Aon Benfield Analytics reveals that insurers’ expected after-tax return-on-equity (ROE) for U.S. homeowners insurance business is 8.6 percent on a countrywide average, and 12.6 percent excluding the state of Florida, both of which are a 70 basis point improvement over last year.

In its 2015 Homeowners ROE Outlook report, Aon identifies 36 states where the expected return will exceed 10 percent, enabling carriers to cover their cost of capital. The 36 states projected to have ROE 10 | INSURANCE JOURNAL-NATIONAL November 2, 2015

in excess of 10 percent include all in the Northeast, Mid-Atlantic, West and most in the Midwest. Minnesota, Texas and North Carolina are projected to have a low ROE, from 0 to 3 percent, while several Midwest states are projected to return from 4 to 6 percent. The Southeast poses the biggest challenge for home insurers, with Florida, Georgia, Alabama and Mississippi expected to have returns below 10 percent. Florida’s expected return is less than 0.

According to the report, rate increases averaged 4.0 percent in U.S. homeowners lines during the 18 months to August 2015.

However, in Florida rate decreases are offsetting the positive effects of reduced reinsurance costs, limiting the improvement in the prospective ROE outlook for the state.

As overall rate levels improve, the focus is shifting to increased sophistication in risk segmentation, according to the report.

“The footprint of profitable growth opportunities continues to expand for the homeowners line of business, with positive rate momentum being maintained,” said Greg Heerde, head of Aon Benfield Analytics Americas. “We continue to see increased utilization of risk-adjusted pricing methods and the development of by-peril rating plans.”

Updated annually, the report is based on industry aggregate state level statutory financial filing data including reported direct losses, expenses, payout pattern, and investment yield for the 20 top U.S. homeowners insurance groups by state. www.insurancejournal.com

INSURANCE AGAINST REGRET TALK TO YOUR CLIENTS ABOUT CHUBB. PROPERTY / LIABILITY / EXECUTIVE PROTECTION / WORKERS COMPENSATION / MARINE SURETY / HOMEOWNERS / AUTO / YACHT / JEWELRY / ANTIQUES / ACCIDENT & HEALTH

www.chubb.com Chubb Group of Insurance Companies (“Chubb”) is the marketing name used to refer to the insurance subsidiaries of The Chubb Corporation.

For a list of subsidiaries, please visit our website at www.chubb.com. Actual coverage is subject to the language of the policies as issued.

Chubb, Box 1615, Warren, NJ 07061-1615. © 2015 Chubb & Son, a division of Federal Insurance Company.

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NATIONAL COVERAGE

FIGURES

DECLARATIONS

$107 Million

$234 Million

The amount that repairs in Pasco County, Fla., will cost after summer flood damage. Hundreds of roads are in need of repairs and stormwater drainage work would take 74 years to repair without additional funding, the county said.

The amount in damages a U.S. jury has ordered Apple Inc. to pay the University of Wisconsin-Madison’s patent licensing arm for incorporating its microchip technology into some of the company’s iPhones and iPads without permission. The amount was less than the $400 million the Wisconsin Alumni Research Foundation (WARF) was claiming in damages after the jury on Oct. 13 said Apple infringed its patent for improving the performance of computer processors.

Sex Abuse Concerns

“More concern is given to the pedophile abuser within the church than the innocent child who is sexually, physically and psychologically abused for life.”

— A former student at Chaminade, a prep school in Creve Coeur, Mo., sponsored by the Marianist Province of the United States, in a statement regarding a settlement over sex abuse allegations. The Roman Catholic religious order agreed to pay $300,000 to the former student to settle claims that a teacher at the school sexually abused him.

Not-at-Fault Accident

“I want to remind drivers that under state law, a crash involving a deer is considered a not-at-fault accident, and insurers cannot add a surcharge to your premium for an accident with a deer.”

— Pennsylvania Insurance Commissioner Teresa Miller on the state law prohibiting surcharges for deer-related crashes. In her Oct. 19 consumer advisory, Miller also urged drivers to be alert for deer as this is the time of year when auto crashes with deer are most likely to happen.

Lingering Oil

200,000 The estimated number of fast-breeding, highly destructive feral hogs spread across Arkansas’ 75 counties. A report by the Arkansas Game and Fish Commission and the U.S. Department of Agriculture says feral hogs are causing up to $30 million in damages to Arkansas agriculture, forestry and livestock. The wild pigs have lived in the area since Spanish explorer Hernando DeSoto introduced them to southern Arkansas in 1541, according to USDA district supervisor Mike Hoy.

$2.2 Million

“Although we will not be pursuing Exxon for additional damages, our decision today does not close the book on lingering oil.”

The size of a wrongful death suit filed in October against an Oregon clinic by the family of an Oregon woman who died four days after a procedure meant to relieve her migraine headaches.

— Alaska Attorney General Craig Richards said U.S. and Alaska state officials will no longer seek an additional $92 million from Exxon Mobil Corp. to pay for environmental cleanup and restoration stemming from the massive Exxon Valdez oil spill nearly three decades ago

728

We firmly believe that the current regulatory environment only exacerbates the toxic litigation environment in Kentucky.”

The number of heroin and opioid-related fatalities in Virginia in 2014, representing a 10 percent increase from 661 drug-related deaths reported in the state in 2013. Last year marked the first time that deaths from heroin and opioid use outnumbered traffic fatalities in Virginia, officials said. The state reported 700 traffic fatalities in 2014, a 5 percent decline from 741 in 2013.

Toxic Litigation

— Betsy Johnson, executive director of the Kentucky Association of Health Care Facilities.

Johnson appeared before a state legislative committee in September to complain about what the nursing-home industry believes is overly strict enforcement of rules meant to ensure the safety of residents in the state.

Much Worse

“This is much worse.”

— Patricia Addison, marketing manager for The Mountain, an old-west themed complex in northeast Texas, which partially burned in mid-October. The fire occurred almost two years after a blaze in November 2013 destroyed 20 of its buildings. According to Addison, about 60 buildings were damaged in the recent fire, including a theater, several bed and breakfasts, and shops and restaurants.

12 | INSURANCE JOURNAL-NATIONAL November 2, 2015

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SPOTLIGHT

Habitational Millennials: Living on the Edge of the Big City

By Tim Henderson

C

ory Piirto is a newlywed living in New York City, but the prospect of starting a family is prompting her to plan a move across the Hudson River to Hoboken.

“Everything’s just easier here,” said Piirto, 27, as she lounged on the Hoboken waterfront, where Manhattan skyscrapers form a vivid backdrop. “It’s easier to live, easier to afford a two-bedroom. You can have a car and take [your children] places.”

Millennials like Piirto, the generation born after 1980 and the first to come of age in the new millennium, still love urban areas but are finding they want more space, affordability, cars and the parking spaces for them as they gain more wealth and get ready to settle down and have children.

Many millennials see close-in suburbs like Hoboken, with its youthful vibe and picture-window views of Manhattan’s skyline, as a likely compromise. The average rent for a two-bedroom apartment in Hoboken is $2,900 compared with $5,000 for nondoorman buildings in Chelsea, a neighborhood in Manhattan.

As the leading edge of the generation reaches its child-rearing age, choosing where to live is increasingly urgent. And it’s one many local governments are responding to in a desire to attract or retain the economic activity and tax dollars cre-

14 | INSURANCE JOURNAL-NATIONAL November 2, 2015

ated by what’s now the largest generation in the U.S. workforce.

Communities are making way for more dense and affordable development, with retail stores within walking distance and public transportation, for an age group that has shunned cars out of economic necessity or preference. The payoff is great if communities can attract or retain millennials, as they tend to be highly educated and to bring about greater economic productivity, according to research published last year by the Stanford Institute for Economic Policy Research.

What Attracts Millennials?

That a close-in suburb like Hoboken can be attractive to a large number of millennials does not come as a surprise to Neil Howe, the economist and demographer who coined the term millennial.

“We have always believed that millennials are not going to stay in these core urban areas when they get married and have kids.

They won’t want to bring their kids up there,” said Howe, co-author of Millennials Rising: The Next Great Generation. “But they want to be close. They want to be where the action is and they want to be with each other.”

And that can offer hope to flagging suburbs close to urban centers, Howe said. “I think you’re going to find that a big new area is going to be inner suburbs.”

According to a Rutgers University report released last year, Hoboken had a declining population for 60 years before its youthful boom started in 2000. The suburb has grown exponentially since then — partly because, as Howe said, millennials want to be with each other.

Aaron Kloke, a city planner who wrote about the sometimes conflicting priorities of millennials in Omaha for the University of Nebraska, has come to the same conclusion as Howe: Closein suburbs can be the beneficia-

ries of millennials’ tastes when it comes to their choosing where they wish to live.

In his research, Kloke showed photos of neighborhoods to millennials and asked their impressions. The ones they liked most were urban and described as “dense,” “close-knit,” “lively” and “vibrant.” The least appealing were suburbs they called “uniform,” “faceless” and “cookie-cutter.”

Yet many still saw the appeal of single-family homes and abundant parking, leading Kloke to determine that some outlying city neighborhoods and close-in suburbs could be the wave of the future — places like the historic Benson area in north Omaha, the Hyde Park district in inner Austin, Texas, or the Mississippi Avenue district in north Portland.

Winners and Losers One hope for repopulating the outer suburbs with millennials may be found in the growing popularity of the inner burbs, as millennials confront rising housing costs.

As more in the age group seek to move in and their wealth increases along with their age, so do their desires for single-family homes and good schools for their children.

Consider, for example, Arlington County, Virginia. The suburb of Washington had the highest median rent of any county in the country at $1,820, according to Census estimates for 2013, the latest available.

Some close-in suburbs like Arlington are “a victim of their own success” because prices for single-family homes have skyrocketed beyond the means of the typical millennial, said Lisa Sturtevant, who wrote a 2013 study of demographic changes in the Washington area. “A single family house in Arlington is a million dollars, and they’re not building any more,” said Sturtevant.

The exurbs are responding by building more urban-looking, youth-oriented housing and retail developments with walking and public transportation in mind, she said.

This story has been reprinted from Stateline, an initiative of The Pew Charitable Trusts. www.insurancejournal.com

WEST COVERAGE

News & Markets 99.9 Percent Probability of L.A.-Area Earthquake: Study

T

here is a 99.9 percent chance of a magnitude-5 or greater earthquake striking within three years in the greater Los Angeles area, where a similar sized temblor caused more the $12 million in damage last year, according to a study by NASA and university researchers.

The study released in October was based on Global Positioning System and airborne radar measurements of how the Earth’s crust was deformed by the magnitude-5.1 quake on March 28, 2014, in La Habra, about 20 miles southeast of downtown Los Angeles. Damage included broken water mains and cracked pavement.

By comparison, in 1994 the magnitude-6.7 Northridge earthquake left $25 billion in damage, caused dozens of deaths and injured 9,000 people.

The study looked at a 62-mile radius around the La Habra epicenter. Researchers observed shallow movements of the ground, took into account a deficit in the number of earthquakes expected there and calculated how much strain may remain in deeper faults that are still locked.

While the magnitude-5 quake was found to be extremely likely by April 1, 2018, one of magnitude-6 or higher was pegged at just 35 percent and the largest potential quake was estimated at 6.3.

The U.S. Geological Survey took issue with the study, asserting that it was unclear how the study derived its numbers and that the accepted probability is 85 percent.

According to the most recent Uniform California Earthquake Rupture Forecast, which was published in March and is the basis for the agency’s National Seismic Hazard Maps, the Southern California region has a 100 percent chance of one or

California Commissioner Approves Reduced 2016 Pure Premium Rate Filing

C

alifornia Insurance Commissioner Dave Jones approved workers’ compensation rates for 2016 that are 2 percent below the average approved in July.

The Workers’ Compensation Insurance Rating Bureau submitted its Jan. 1, 2016, pure premium rate filing to the California Department of Insurance on Aug. 19. A public hearing regarding the filing was held on Sept. 22, 2015.

Jones approved advisory pure premium

W2 | INSURANCE JOURNAL-WEST November 2, 2015

rates that average $2.42 per $100 of payroll.

The approved pure premium rates are on average 9.0 percent less than the industry average filed pure premium rate as of July 1, 2015, of $2.66 and 2 percent less than the average of the approved July 1, 2015, advisory pure premium rates of $2.47, according to the WCIRB. The approved advisory pure premium rates are effective Jan. 1, 2016, for new and renewal policies.

more magnitude-5 or larger quakes and a 93 percent chance of a 6.7 jolt during the next 30 years.

Also participating in the NASAled study were researchers from the University of California, Irvine; Indiana University, Bloomington; UC Davis; and the University of Nevada, Reno.

Copyright 2015 Associated Press.

California Woman Blinded in Eye by Flying Disc Settles Suit for $3M

A

woman who was blinded in one eye by a flying golf disc at a Southern California park has settled a lawsuit for $3 million.

The Daily Breeze of Torrance reported that the settlement involves Noreen Goodbody.

She was struck by a fast-moving disc three years ago at Polliwog Park in Manhattan Beach, which has a disc golf course.

Her attorney says Goodbody suffered a detached retina and a cataract. Four surgeries failed to save the vision in one eye.

City Attorney Quinn Barrow says officials were saddened by the accident but pleased to have settled the suit. The city will pay about $500,000, with its insurer covering the rest.

The city indefinitely closed the disc golf course last year.

Copyright 2015 Associated Press. www.insurancejournal.com

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UMBRELLA

WEST COVERAGE

People James Moorhead

San Francisco, Calif.-based Metromile has named James Moorhead, a former Dish Network executive, its chief marketing officer.

Moorhead will report to Metromile CEO Dan Preston.

He will be responsible for overseeing marketing, digital acquisition, public relations, content, social media and email communications.

He was most recently CMO for pay-TV provider Dish Network, where he led marketing and market research, advertising and public relations. Before Dish Network he held senior marketing roles at Procter & Gamble.

Metromile is best known for its pay-per-mile insurance model.

JLT Specialty USA has named Charity O’Sullivan senior vice president in its Los Angeles, Calif., office.

O’Sullivan’s primary focus will be on client development and leading JLT teams.

O’Sullivan has more than 18 years of experience in the insurance industry. He most recently was senior vice president at Marsh. Before that O’Sullivan was with Chubb as an underwriter and loss control representative.

JLT Specialty is a U.S. subsidiary of Jardine Lloyd Thompson Group plc.

Newport Beach, Calif.-based Alliant Insurance Services has named Ilene Anders chief financial officer.

Anders, formerly the firm’s chief information officer, will lead Alliant’s finance team. Anders will retain her position as CIO until a permanent successor is named.

Anders previously was Alliant’s vice president of financial planning and analysis following prior positions in investment banking and financial consulting.

Anders takes the CFO role from Greg Zimmer, who has had dual responsibilities as both president and CFO for years.

Alliant is an insurance brokerage providing property/ casualty, workers’ compensation, employee benefits, surety and financial products and services.

Integro Ltd. has named Peter Holley a principal in its San Francisco, Calif., office.

Holley is responsible for Integro’s surety operations on the West Coast, and will coordinate with surety colleagues throughout the U.S. and manage surety market relations.

Holley has more than 27 years of experience in commercial and contract surety. He spent more than a decade at BB&T Insurance, where he was surety vice president. He was also at USF&G Insurance and Gallagher Construction Services.

Integro is an insurance brokerage and risk management

W4 | INSURANCE JOURNAL-WEST November 2, 2015

firm headquartered in New York.

The Insurance Center for Building Materials has hired Rick Zorman and Phil McCown in Los Angeles.

Both Zorman and McCown are experienced lumber underwriters.

Zorman has experience in heavy manufacturing and mill operations. He joins ICBM from Pennsylvania Lumbermen’s Mutual, where he was a lead underwriter for its heavy manufacturing division. Zorman was previously a senior underwriter at Indiana Lumbermen’s Mutual and was an underwriter at Lumbermen’s Underwriting Alliance.

McCown has 27 years of underwriting experience. He was at Fireman’s Fund, CNA Insurance, St. Paul Travelers and Chubb before joining Indiana Lumbermen’s Mutual.

McCown was the ILM western region underwriter up until 2014, where he went on hiatus until joining ICBM. ICBM is a Swett & Crawford managing general agency.

EPIC Insurance Brokers and Consultants has named DeAnna Slater a principal and property/casualty insurance broker/producer in the firm’s Fresno, Calif., office.

Slater will report to Terri Parreira, managing principal. Her duties include new business production, the development and management of risk management and insurance programs.

Slater was vice president of the Central California region of Arthur J. Gallagher before joining EPIC. She began her career as an insurance broker with Johnsey Insurance Agency, which was later acquired by Arthur J. Gallagher.

San Francisco-based EPIC is a broker specializing in commercial property/casualty, employee benefits, specialty program insurance and private client services.

Irvine, Calif.-based R. E. Chaix & Associates has named Kevin Crombie to its property/casualty team.

Crombie will be an independent advisor to Chaix’s P/C teams, and he will assist in securing new business opportunities.

He began his career in the insurance industry at Hartford more than 40 years ago and has since worked on both the carrier and brokerage sides. Crombie was most recently vice president of sales and new business development at American Safety Insurance. Prior to ASI, he operated his own excess and surplus brokerage in Southern California and previously managed a national program for construction business.

R. E. Chaix & Associates also has offices in Napa, San Diego and Rancho Cucamonga. www.insurancejournal.com

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News & Markets Farmers Insurance Facing Possible Class Action by ‘Hundreds’ of Female Attorneys

By Don Jergler

“In general, Farmers advances the careers of its male attorneys more quickly while treating its female attorneys more like supn attorney representing a woman suing port staff,” the suit states.

Farmers Insurance for discriminatory A Farmers spokesman reached for a practices filed a motion in mid-October response to the allegations made in the suit seeking class action status in a suit she says declined to comment. could potentially encompass 300 female This is not the first time a carrier has attorneys. been sued by female employees. A settle The attorney also added five new women ment in 1992 was made in a broad ranging, to the suit, bringing the total to nine former and long-fought a sex discrimination case or current Farmers attorneys involved in the against State Farm Insurance Co. for a case. reported $157 million.

Lori Andrus of Andrus Anderson LLP The lone plaintiff on the Farmers suit and Lori Costanzo of the Costanzo Law was originally Lynne Coates, who Andrus Firm are representing the plaintiffs. said was paid less than male counterparts Andrus is seeking to notify all female who had “decades less” experience that her. attorneys who worked for the Los Angeles Three women opted-in on the suit in based carrier from June 8, 2012, until now of late summer. They are Angela Storey, who the option to opt-in to the class action suit. worked at Farmers for eight years, and “If we win that motion we’re going to current employees Keever Rhodes, who has send notice out to all the female attorneys worked at Farmers for 13 years, and Sandra across the country to opt-in,” Andrus said.

Carter, a Farmers’ employee for 17 years.

According to Andrus, Farmers has Former employed more than 800 attorneys over the ‘If we win that motion we’re employees also added to the last few years, roughly going to send notice out suit are: Michele 300 of whom have been to all the female attorneys Morgan, Chiquita women.

“We think it’ll be hun- across the country to opt-in.’ Hartman, Serena Neves, Karen dreds of women,” she Wasson and Stephanie Torigian. said.

“Companies that pay women less than The suit accuses Farmers of unlawfully male counterparts are basically getting paying its female attorney-employees sigcheap labor,” Andrus said. nificantly lower wages than male attorneys Andrus argued that not only have those doing the same work. women been cheated out of years of wages, The suit states: “Farmers does not reward but other benefits that are wage-based, such its female attorneys equally compared to as yearly bonuses, retirement and Social their male counterparts performing equal Security. work. Instead, Farmers systematically pays “So it really can build up,” Andrus said. female attorneys less than similarly-situated The case was filed as a proposed class male attorneys.” action in April, and the filing of the recent Not only are male attorneys paid more, motion seeks to have U.S. District Judge but they are also routinely given higher Lucy Koh certify the plaintiffs’ Equal Pay profile work assignments, more frequent Act claims. raises and promotions and are recognized Andrus said she plans to call in a labor for their accomplishments while female economist to perform what she called attorneys are not, according to the suit.

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a multiple regression analysis, which she said will isolate all compensation factors besides gender — education, geographic location, years on job — to figure out what gap remains and calculate the damages that will be sought.

“According to our statistics, the only reason is gender,” Andrus said of the alleged pay discrepancy.

A protective order in the case prevents the pay of those involved from being made public.

According to the suit, paying female attorneys less than male counterparts has been the practice of Farmers since the 1970s.

The suit cites a previous lawsuit, this one brought by the Secretary of Labor against Farmers for unequal pay in the mid1970s in Marshall v. Farmers Ins. Co., Civil Action No. 75-63-C2, in the U.S. District Court of Kansas.

That suit found Farmers’ salary policy to be discriminatory by excluding women from promotion, among other things.

According to the April suit, on Aug. 17, 2014, Coates filed a discrimination complaint with the California Department of Fair Employment and Housing, and on Aug. 21 the DFEH issued a right to sue notice.

On Sept. 10, 2014, Coates filed a charge of discrimination with the U.S. Equal Employment Opportunity Commission alleging discrimination and retaliation on the basis of sex. She received a right to sue notice from the EEOC on April 15.

The lawsuit is Coates v. Farmers Group, Inc., et al., Case No. 5:15-cv-01913 (N.D. Cal.). www.insurancejournal.com

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News & Markets Guy Carpenter Says Wildfire Losses May Exceed $1.75B

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briefing from Guy Carpenter & Company, LLC in late October shows more than 9 million acres were burned by wildfires so far this year, most of that occurring in the Western U.S, and that insured losses from wildfires could approach or exceed $1.75 billion.

A report out from Aon earlier this month forecasts claims from the two California wildfires in September to exceed $1 billion.

The Guy Carpenter briefing, “U.S. Wildfire: An Ever Present Hazard,” states that the wildfire threat in the summer of 2015 was amplified by a strong ridge of high pressure that created very hot and dry conditions in the western U.S. The report cites data from the National Interagency Fire Center that shows more than 9.27 million acres were burned by

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wildfires through Oct. 8 compared with 10-year average of roughly 6.3 million.

“Wildfire is a significant peril impacting insurers in the United States each year,” Tim Gardner, CEO of U.S. Operations, stated in the brief.

Charlie Liethen, right, embraces Sharon Dawson, who lost her home in a wildfire, “Preliminary data in Middletown, Calif. More than 2,000 homes had been confirmed destroyed, with indicates that 2015 the number likely to go higher as assessment continues. (AP Photo/Noah Berger) insured losses from wildfires may comprehensive wildfire risk management approach or exceed $1.75 billion. Guy solution.”

Carpenter works with our clients to Guy Carpenter is a wholly owned subevaluate their exposure and to deliver a sidiary of Marsh & McLennan Cos.

10/20/15 10:16 AM

www.insurancejournal.com

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“At General Star, we strive to get the very most out of our wholesale broker relationships. As a member of the Berkshire Hathaway family of companies, our financial strength is unsurpassed. But it’s our disciplined approach to building and maintaining profitable partnerships with a select group of brokers that drives us.

“Discipline: Whether sticking with an early morning exercise regimen or standing firm with a limited number of valuable wholesale broker relationships, it remains the cornerstone of our success.”

To locate the General Star broker nearest you, visit our website at www.generalstar.com.

© 2015 General Star National Insurance Company is licensed in the District of Columbia, Puerto Rico and all states. General Star National Insurance Company has its principal place of business in Stamford, CT and operates under NAIC Number 0031-11967. Insurance is placed with General Star National Insurance Company by licensed producers. General Star Indemnity Company is an eligible surplus lines insurer in all states, the District of Columbia, Puerto Rico, and the Virgin Islands. It has the status as an unlicensed insurer in California and operates under NAIC Number 0031-37362. Insurance is placed with the General Star Indemnity Company by licensed producers and, for risk that qualify, by licensed surplus lines brokers.

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Best Agency to Work For - West FRESNO, CALIFORNIA

Der Manouel

place to work. Continuing education is important and encouraged. God and family come first, community service is given paid time off, we all share in successes, and we are like a family.”

Der Manouel said he was exposed to the industry by his father, then became fascinated by risk management and insurance while serving as the chief financial officer and risk manager for a large men’s college Der Manouel Insurance Group employees show their appreciation for agency fraternity headquarters in the late 1980s.

President Mike Der Manouel.

“Coming into the agency business with my father was a strong start, after acquiring that business, then hiring my younger brother to oversee day to day operations has helped make this journey a fantastic experience,” he said. “What really brought our purpose into focus, however, was learning from peer agencies at Marsh Berry’s APPEX egories like flex time, education, vacation,

By Don Jergler group. Since 2005, we’ve been borrowing insurance knowledge and overall manageand working to perfect many great ideas ment skills. uilding a great agency starts with buildfrom smart people in our industry. That has Mike Der Manouel, Jr., the agency’s presiing great people. given us life and energy.” dent, said having an attitude that embraces That should be the slogan for Der High ratings and the quality of employee a continual effort to improve oneself and Manouel Insurance Group in Fresno, Calif. responses was what helped one’s workplace makes the Employees think highly of the agency, and a propel Der Manouel to agency more competitive. common theme they expressed about their ‘Our core values “The competitive landemployer was the importance that is placed are held high and Bronze status in the poll.

One employee listed a scape is full of great insuron improving oneself personally and profesfollowed in all we variety of reasons for givance agencies led by very sionally. do. Our agency is ing the agency such high smart people,” Der Manouel “The agency stresses personal developmarks. said. “Differentiating from ment and looks for ways to recognize all very fast-paced competitors is hard work, individuals who make an effort to advance and hard-working.’ “Michael Der Manouel, Jr.! He thinks of the staff as requiring a relentless focus their learning within the agency, both part of his family. He looks out for each of on improvement, an open mind to new financially and through other recognition us and doesn’t hesitate to help where the ideas, and strong execution of a difference and awards,” wrote one employee. need is,” the employee wrote. making and relevant service platform for That is one reason why DMIG is the The employee touched on community clients. That’s what we work on every day.

Bronze Winner for Insurance Journal’s Best involvement and volunteering, technology, It is an absolute blast.”

Agency in the West award. values and food.

Numerous employees echoed those senti DMIG rated high in the annual Insurance “Technology offers our agency the ability ments in the survey.

Journal survey, earning an overall “excellent” to fulfill the purpose of our core values,” the “In my nine years of employment I have rating from most who took the survey. Most employee wrote. “Our core values are held been given amazing opportunities to grow employees rated the firm “excellent” in cathigh and followed in all we do. Our agency within the company and been witis very fast-paced and hard-working. That ness to some amazing growth to being said, the executive team sees to it others as well,” was one employee’s that we also have some well-deserved fun, response. which almost always involves food.”

Wrote another: “DMIG is a great

Best Agency in West: Der Manouel, Where Improvement Is Key

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News & Markets Estate of Oregon Man Files Suit Against Home Care Agency in Death

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he estate of a La Pine, Ore., man who was paralyzed from the chest down has filed a lawsuit seeking $7.5 million in damages from a Bend home health care agency over his death.

The estate of Mitchell Cox filed the lawsuit in Deschutes County Circuit

Court in October, claiming At Home Care LLC is liable for his death, according to The Bulletin.

Cox died in 2012 after he fell out of a hospital-style bed and landed with his legs stretched over his head. As a quadriplegic, he was unable to move and died because he could not breathe, according to the lawsuit.

The lawsuit claims an At Home Care employee should have known Cox was at risk of falling because he’d help him consume alcohol and medications including the prescription narcotic oxycodone. The home-health aide had already left for the evening.

A toxicology report after his death shows Cox’s

blood-alcohol level was .21 and he had oxycodone, an over-the-counter antihistamine and an anti-seizure medication in his system.

Brian Whitehead, the Salem attorney who represents Cox’s estate, said the man’s drinking habits don’t make his caretakers any less responsible.

“I am ready for that argument because where’s the safest place to be drunk? At home, in bed, in a hospital bed with rails,” Whitehead said. “Can you think of a safer place?”

Cox had some use of his hands and arms.

The lawsuit says the employee failed to raise and lock Cox’s bedrail into place. The bedrail was part of Cox’s treatment plan.

The employee told investigators that Cox did not like to have the bedrail up and that he believed the man could lower it himself.

At Home Care executive Kevin Cox did not respond to requests for comment.

Copyright 2015 Associated Press.

Owners of Home Destroyed by Wyoming Landslide File Suit Against Contractor

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he owners of a home destroyed in a landslide in Jackson, Wyo., have filed a lawsuit saying construction work made the hillside below their house unstable.

Jeremy and Sara Budge are seeking compensation from construction and engineering companies and previous owners of a lot near their home on which a Walgreens drugstore was built. Their lawsuit names more than a dozen defendants, the Jackson Hole News & Guide reported.

The slow-moving landslide last year ripped in two the Budges’ home partway up the hillside. Authorities evacuated dozens of other homes and apartments for several weeks.

Eventually, emergency earthwork all but stopped the landslide and residents returned.

Development associated with the Walgreens at the base of East Gros Ventre Butte made the slope unstable and ultimately led to the landslide, the Budges say W12 | INSURANCE JOURNAL-WEST November 2, 2015

in the lawsuit. “The defendants failed to obtain information, ignored information or otherwise disregarded the instability and potential instability of the hillside,” the Budges say in court documents.

A landslide previously occurred on the hillside in the 1950s, and those involved with the Walgreens development either ignored or missed that fact, the lawsuit alleges.

Those involved in the case either declined to comment or did not return calls.

The Walgreens is permanently closed.

Walgreens reached a $150,000 settlement with the Budges in September and is not

directly part of the litigation.

The Town of Jackson also was a party to the settlement and isn’t named in the lawsuit. Jackson officials have been investigating how to cover the estimated $10 million cost of permanently shoring up the area where the slide took place.

Copyright 2015 Associated Press. www.insurancejournal.com

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News & Markets AAA: Using Hands-Free Technology While Driving Is ‘Surprisingly’ Risky

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ental distractions can persist for as long as 27 seconds after dialing, changing music or sending a text using voice commands, according to new research on distracted driving.

Drivers using phones and vehicle information systems while driving may miss stop signs, pedestrians and other vehicles while their minds are readjusting to the task of driving, according to the AAA Foundation for Traffic Safety, which says its research raises “new and unexpected concerns” regarding mental distractions.

“The lasting effects of mental distraction pose a hidden and pervasive danger that would likely come as a surprise to most drivers,” said Peter Kissinger, president and CEO of the safety group.

Researchers found that potentially unsafe levels of cognitive distraction can last for as long as 27 seconds after completing a distracting task in the worst-performing systems studied. At the 25 m.p.h. speed limit in the study, drivers traveled the length of nearly three football fields during this time.

When using the least distracting systems, drivers remained impaired for more than 15 seconds after completing a task.

The research indicates that the use of voice-activated systems can be a distraction even at seemingly safe moments when there is a lull in traffic or the car is stopped at an intersection.

The researchers discovered the residual effects of mental distraction while comparing new hands-free technologies in 10 2015 vehicles and three types of smartphones (Google Now, Apple Siri and Microsoft Cortana). The analysis found that all systems studied increased mental distraction to potentially unsafe levels. The systems that performed best generally had fewer errors, required less time on task and were relatively easy to use.

The researchers rated mental distraction on a five-point scale. Category one represents a mild level of distraction and category five represents the maximum. AAA considers a mental distraction rating of two and higher W14 | INSURANCE JOURNAL-WEST November 2, 2015

to be potentially dangerous.

The best performing system was the Chevy Equinox with a cognitive distraction rating of 2.4, while the worst performing system was the Mazda 6 with a cognitive distraction rating of 4.6.

Among phone systems, Google Now performed best as the least distracting with a distraction rating of 3.0, while Apple Siri and Microsoft Cortana earned ratings of 3.4 and 3.8. Using the phones to send texts significantly increased the level of mental distraction. While sending voice-activated texts, Google Now rated as a category 3.3 distraction, while Apple Siri and Microsoft Cortana rated as category 3.7 and category 4.1 distractions.

This latest research is in line with previous AAA Foundation reports on the dangers of verbal texting while driving and with calls by the National Transportation Safety Board to ban all phone conversations behind the wheel, even with hands-free devices.

The National Safety Council says there are dozens of studies showing that hands-free devices are no safer than handheld because the brain remains distracted by the cell phone conversation. A 2014 poll by the safety group found that 80 percent believe using hands-free phones in cars is safer than using hand-held phones, while 53 percent believe hands-free devices must be safe to use if they are built into vehicles.

A study conducted by the Virginia Tech

Transportation Institute and the National Institutes of Child Health and Human Development in the New England Journal of Medicine found that teen drivers may be more at risk for distracted driving than experienced drivers.

AAA Foundation researchers say that a category 1 mental distraction is about the same as listening to the radio or an audio book. A category 2 distraction is about the same as talking on the phone, while category 3 is equivalent to sending voice-activated texts on a perfect, error-free system.

Category 4 is similar to updating social media while driving, while category 5 corresponds to a highly-challenging, scientific test designed to overload a driver’s attention.

“Developers should aim to reduce mental distractions by designing systems that are no more demanding than listening to the radio or an audiobook,” said Marshall Doney, president and CEO of the auto services organization for AAA. “Given that the impairing effects of distraction may last much longer than people realize, AAA advises consumers to use caution when interacting with these technologies while behind the wheel.”

Dr. David Strayer and Dr. Joel Cooper of the University of Utah conducted the research. A total of 257 drivers ages 21-70 participated in the study of 2015 model-year vehicles, while 65 additional drivers ages 21-68 tested the three phone systems.

Copyright 2015 Reuters. www.insurancejournal.com

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News & Markets Number of Deaths from Drunken Driving Nearly Doubled in Utah

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he number of people who have died in Utah as a result of drunken driving nearly doubled last year, hitting the highest number in more than a decade.

Alcohol-related traffic deaths increased from 23 to 45, according to an annual report presented to the state legislature by the Utah Commission on Criminal and Juvenile Justice in late October. Those 45 deaths amounted to nearly 18 percent of all highway fatalities in 2014, also the highest share in the past 10 years.

Presenters Mary Lou Emerson, director of the Utah Substance Abuse Advisory Council, and Ron Gordon, executive director of the Justice Commission, did not offer an explanation for the increase. They

did, however, call for a campaign to curb drunken driving using education, increased enforcement and treatment for people with drinking problems.

The statistics raise “massive red flags,” Rep. David Lifferth, an Eagle Mountain Republican, told the Transportation Interim Committee.

“These should get our attention. We should be aware of these and have policies to address them.”

Of the 45 deaths, 22 were the drunken driver, eight were passengers in the drunk driver’s car, nine were occupants of other

Southern California Utility Gets $400M Insurance Settlement over Closed Nuke

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he operator of the defunct San Onofre nuclear power plant in Southern California announced that it reached a $400 million insurance settlement covering power outages caused by failed equipment, most of which will go to customers.

The deal between Southern California Edison and Nuclear Electric Insurance Limited comes more than two years after the plant between San Diego and Los Angeles was closed for good.

Under the settlement, majority owner Edison will receive $313 million. Minority owners would get smaller slices: San Diego Gas & Electric gets $80 million and the city of Riverside, $7 million.

For typical Edison residential customers, it was expected to result in about a 2 percent to 2.5 percent cut in monthly bills beginning next year.

San Onofre was shut down in January 2012 after a small radiation leak led to the discovery of extensive damage to tubing inside virtually new steam generators.

W16 | INSURANCE JOURNAL-WEST November 2, 2015

The plant never produced electricity again. Edison closed San Onofre permanently in June 2013 amid a fight with environmentalists over whether the plant could be restarted safely.

Meanwhile, consumer advocates have called on state regulators to reopen a nearly $5 billion settlement that divided costs tied to the shuttered plant, under which the owners would pay $1.4 billion and consumers would pay $3.3 billion. Edison opposes reopening that agreement.

Edison is also locked in a long-running dispute over possible damages with the company that manufactured the flawed generators, Mitsubishi Heavy Industries.

Earlier this year Mitsubishi disclosed that Edison had nearly doubled its damage claim to $7.57 billion in a proceeding before the International Chamber of Commerce.

Mitsubishi says its liability is limited to $137 million by contract.

Copyright 2015 Associated Press.

vehicles, five were pedestrians and one was a bicyclist. Seven of the 37 drivers in those accidents were convicted of a DUI within the previous five years.

Meanwhile, the DUI arrest rate has declined steadily. There has been a nearly 37 percent decrease since 2009.

About 70 percent of people arrested for DUI are first-time offenders, said Emerson, who suggested public awareness campaigns would help prevent the crime.

Drug-related DUI deaths have been the state’s focus in recent years and had been almost twice as common as alcohol DUIs, according to Emerson.

But those deaths have actually decreased, according to the report: from 45 in 2013 to 38 in 2014.

Copyright 2015 Associated Press.

Colorado Woman Trapped for Days After Crash Sues G.M.

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woman who was trapped in her car for nearly a week after crashing off a Colorado highway is suing General Motors over alleged defects in her 2009 Chevy Malibu.

The Denver Post reported the lawsuit filed last month by Kristin Hopkins says that GM learned of the malfunctions that caused her vehicle to crash six years before the April 2014 accident near Fairplay.

Hopkins’ attorney says the problems with her Malibu were addressed in two recall notices, both issued after the crash.

GM General Motors LogoGM said in a statement it would work to determine what caused the crash.

Hopkins was trapped in the overturned car for several days before being spotted by passers-by. She lost the lower half of her legs.

Copyright 2015 Associated Press. www.insurancejournal.com

NATIONAL COVERAGE

Business Moves Kelso, Risk Strategies Risk Strategies Co., a Boston-Based insurance and benefits brokerage, and Kelso & Co., a New York-based private equity firm, have signed a definitive agreement whereby Kelso will acquire a majority stake in Risk Strategies from Kohlberg & Co. Terms of the transaction, which is subject to customary closing conditions, were not disclosed.

Kohlberg & Co. a private equity firm based in Mount Kisco, N.Y., had first acquired a majority stake in Risk Strategies in June 2013.

Kelso & Co. will invest “substantial additional equity capital” to support Risk Strategies’ growth initiatives. The transaction will help Risk Strategies enhance its client resources, add new teams of professionals in several segments and continue its strategic mergers and acquisitions activities to create additional growth opportunities, the announcement said As part of the transaction, industry veteran Vic Krauze, who previously served as chair of Willis North America until earlier this year, will join Risk Strategies’ board of directors.

Risk Strategies’ leadership team — led

by CEO and Founder Michael Christian — will remain intact. Risk Strategies management and employees will retain significant ownership, the announcement said.

People’s United, Kesten-Brown People’s United Bank N.A., a Bridgeport, Conn.-based regional bank with nearly 400 retail locations, announced that its subsidiary, People’s United Insurance Agency, has acquired Kesten-Brown Insurance, a Bridgeport-based insurance brokerage.

People’s United Bank said the acquisition will diversify revenues through additional noninterest income, as well as bolster its insurance business.

People’s United Insurance Agency provides personal insurance, employee benefits and commercial insurance through a team of approximately 155 professionals. It has offices in Bridgeport and Hartford, Conn.; Boston and Springfield, Mass.; Portsmouth, N.H.; Smithtown, N.Y.; and Burlington and Rutland, Vt. www.insurancejournal.com

Church Mutual, Penn. School Boards Association Church Mutual Insurance Co., a Merrill, Wis.-based insurer of religious organizations, has agreed to acquire the insurance operations of the Pennsylvania School Boards Association, including School Boards Insurance Company of Pennsylvania Inc. and School Claims Services LLC. Terms of the transaction were not disclosed.

School Boards Insurance Company of Pennsylvania, based in Mechanicsburg, Pa., writes tailored property, general liability, boiler and machinery, commercial auto, errors and omissions (school leaders legal liability), excess liability and workers’ compensation coverages to meet the needs of its Pennsylvania public schools policyholder base.

School Claims Services, based in New Cumberland, Pa., provides third-party claims administration, risk management services, employee benefits programs and marketing.

The acquisition is expected to close during the second quarter of 2016.

TowneBank, Invincia Insurance, Total Insurance, B.H. Baird TowneBank, a Portsmouth, Va.-based community banking and financial services company, has acquired three insurance agencies in Virginia: Invincia Insurance Solutions in Chesterfield; Total Insurance Planning in Midlothian; and B.H. Baird Insurance in Warsaw. Terms of the transactions were not disclosed.

The three acquired agencies will become part of Towne Insurance in Virginia Beach, Va., a wholly owned subsidiary of TowneBank. The agencies will continue to operate under their present names, leadership, and locations.

TowneBank said these new additions will help with its expansion to Richmond and central Virginia. Towne Insurance’s team will grow to more than 300 professionals and 25 offices providing service throughout Virginia and North Carolina.

Invincia Insurance Solutions in Chesterfield is an independent insurance agency established in 2006 by Frank Beale, president. Total Insurance Planning in Midlothian is an independent agency established in 2004 by Jeff Swanson, president.

B.H. Baird Insurance, led by Rick Farmar, president, was founded in 1895 and serves the central Virginia and northern Neck communities.

Hub, Oxford Coverage Hub International Ltd., a global insurance brokerage, has acquired the operations of Oxford Coverage in Brooklyn, N.Y. Terms of the acquisition were not disclosed.

Oxford Coverage specializes in providing commercial lines insurance services for the nursing home and assisted living industry.

Joining Hub International will allow the firm to offer clients more robust coverage options, access to additional markets, and additional value-added services. Oxford President Joseph Schwartz and his staff will join Hub as part of the transaction.

AssuredPartners, Wilson H. Flock AssuredPartners Inc. announced that its subsidiary, AssuredPartners of New Jersey, has acquired Wilson H. Flock Insurance Inc., an independent agency based in continued on page 16 November 2, 2015 INSURANCE JOURNAL-NATIONAL | 15

NATIONAL COVERAGE

Business Moves

continued from page 15 Wyoming, Pa. Terms of the transaction were not disclosed.

Established in 1937, Wilson H. Flock specializes in coverage for individuals, businesses, and life insurance products. The agency reports approximately $1.4 million in revenue.

As part of the acquisition, 14 Wilson H. Flock employees will join AssuredPartners.

Bailey Place, Cotterill Agency Bailey Place Insurance, an independent agency with offices in Cortland, Dryden and Ithaca, N.Y., announced that it will acquire the Cotterill Agency Inc., an independent agency based in Dryden, N.Y., effective Dec. 31, 2015. Terms of the transaction were not disclosed.

As part of the acquisition, Bailey Place Insurance has purchased Cotterill Agency’s office building, and Bailey Place’s current Dryden branch office will relocate to the Cotterill building after completing renovation work in early 2016. Cotterill Agency Principals Doug and Brad Cotterill will remain involved during the transition, and two of their long-time employees, Veronica Hall and ChrystleTerwilliger, will be joining the Bailey Place team.

Bailey Place Insurance has 25 employees.

With roots tracing back to the late 1850s, Bailey Place provides insurance and risk management services for families, businesses, municipalities, and nonprofit organizations across the central New York region.

M3Insurance, unisonBrokers Madison, Wis.-based M3 Insurance has joined unisonBrokers, a global broker network offering multinational insurance and risk management services.

M3 said the partnership will enable it to provide internationally operating companies with independent insurance products and services through a network of more than 350 brokers in more than 130 countries.

UnisonBrokers, headquartered in Hamburg, Germany, with a subsidiary in Chicago, partners with select growth-oriented regional brokers such as M3 based on their market position, strength of services,

16 | INSURANCE JOURNAL-NATIONAL November 2, 2015

understanding of multinational business, and commitment to high-quality standards.

Capacity Group, Shriver Insurance The Capacity Group of Companies (Capacity) has acquired an ownership stake in Shriver Insurance Agency, headquartered in Elmhurst, Ill. As a result, Shriver has been renamed Shriver-Capacity Insurance Agency LLC (Shriver-Capacity).

Shriver-Capacity, led by Charlie Shriver, specializes in insurance for public transportation companies. Since its founding in 1963, the firm has distributed insurance products to entities involved in a broad range of public transportation, including buses, motorcoaches, limousines and vans.

The Capacity Group of Companies, based in Mahwah, N.J., is a full-service specialty insurance and financial services organization with approximately 380 employees in 19 retail and wholesale offices.

Parsons Insurance, Alpha Insurance Parsons Insurance Services, a veteran owned national insurance MGA, has acquired the operations of Alpha Insurance Agency (AIA) in Dallas. Terms of the acquisition were not disclosed.

Alpha Insurance Agency is a brokerage that specializes in providing commercial and personal lines insurance services for small-business owners throughout the Southwest.

AIA President James Sellers and the AIA staff will join Parsons as part of the transaction.

Headquartered in Dallas, Parsons provides property/casualty, life and health, employee benefits products and services.

InsureZone Fort Worth, Texas-based InsureZone is expanding operations into the Houston metropolitan area.

The new office will be headed by Vice President of Business Development Renee Hooker, who joined InsureZone in April.

Other key personnel include commercial underwriters Amy Boyer and Robin Revell; lead customer service representative Sara Groce; and director of Agency Relations

Rachel DePue. InsureZone has two programs available to property/casualty agents. AgentSecure is a wholesaler that provides access to national and regional carriers. It operates in all 50 states, focusing on agencies that are seeking an online suite of tools that will help them be more efficient in growing their agency.

InsureZone Direct is a nationwide alliance of agents. This partnership allows each agency to leverage the benefits of a large, national operation while being able to maintain their agency identity.

York Risk Services, Quick Cat York Risk Services Group, a provider of claims management, managed care and risk management services, has acquired Brandon, Miss.- based Quick Cat LLC. Quick Cat provides commercial daily and catastrophe claims services on a national basis and can expand its response capabilities to include international catastrophes when needed. The acquisition will enhance the services and resources York offers to its middle market accounts, expand the bench strength of its specialized loss adjusting services, offering catastrophe support for York’s TPA operations and providing a national catastrophic response option.

Mike Boleware will continue as president of Quick Cat and senior vice president of the York Field Services unit. In these roles, he will be responsible for expanding the Quick Cat organization.

York provides risk management and managed care solutions to a variety of strategic partners, including insurance carriers, self-insureds, brokers, wholesalers, MGAs, programs, risk pools and public entities.

York delivers customized claims programs for all lines of business, including property, liability, products liability, ocean and inland marine, environmental, transportation and logistics, construction and workers’ compensation. Based in Parsippany, N.J., York has more than 90 offices in the U.S., as well as an international presence.

Quick Cat provides catastrophic claims management solutions on a national and as-needed international basis.

www.insurancejournal.com

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SPECIAL REPORT

Professional Liability E&S Befriends

E&S experts see a stable market for medical and legal professional liability, as market segmentation provides them a steady client base

By Bonnie Cavanaugh

D

octors and lawyers are taking up more space in the surplus lines professional liability (PL) markets, with growth and consolidation in the healthcare industry and real estate concerns among the legal field fostering hard-to-place clients.

It’s definitely a different world than when Rick J. Lindsey, CEO and chairman of Prime Insurance Co., took over the company reins in 1996. Based in Salt Lake City, Prime covers “everything” from small law firms to large; midwives, emergency crews, and assisted living facilities; and whatever it is that standard lines won’t cover on a given day.

He likens Prime’s services to the Island of Misfit Toys in the classic children’s program, Rudolf the Red-Nosed Reindeer: picking up medical and legal clients that are difficult to place and that the standard lines won’t or can’t accommodate, whether it’s because the market has turned for certain clients, or they experience a large claim and their standard insurer cancels coverage.

“But that’s when insurance should help,” Lindsey says. Often, he finds these clients are a better risk once they come to surplus 18 | INSURANCE JOURNAL-NATIONAL November 2, 2015

lines. “Sometimes we write a whole policy or a portion of the coverage alongside their normal policy,” he says. Policy limits range from $500,000 to $5 million.

One long-term Prime client is an emergency room doctor who serves as a river guide in her off hours, using her medical skills to provide and train first aid on the river. When both her hospital employer and the river guide company were not able to provide coverage for her off-duty services, Prime stepped in.

“I see it as a very good risk. She improves safety on the river,” Lindsey says. “For 18 years now, I’ve written her this customized coverage she can’t get anywhere else.”

ProAssurance of Birmingham, Ala., is seeing about 15 percent of the company’s nationwide business in surplus lines: medical professional liability, products liability for medical technology and life sciences, and legal professional liability, says Howard H. Friedman, president of the company’s healthcare professional liability group.

Healthcare insurance in general is evolving “into something larger and more diverse,” and more dependent on technology, creating risk exposures that can’t easily

be handled in the standard market. A healthcare system that is made up of a consolidation of several hospitals, employed physicians, and outpatient facilities doesn’t have the flexibility to contemplate every unique risk that comes its way, as opposed to a single hospital without diverse operations, he says.

Clients can include “larger hospitals that have self-insured retentions or a risk-sharing agreement that doesn’t fit into the standard lines market,” Friedman says. He cites as an example a nationwide not-forprofit organization that is looking for a way to indemnify some of its affiliates. “It really www.insurancejournal.com

is all about customization of those emerging risks.”

Mergers and Acquisitions Industry analytics show a continual rise in hospital mergers and acquisitions in the past eight years.

A 2013 commissioned report from the American Hospital Association disclosed that there were 551 hospitals involved in a merger or acquisition between 2007 and 2012. More recently, Atlanta-based firm Billian’s Health Data in March reported 134 hospitals involved in a merger and acquisition (M&A) in 2013; 193 hospitals in 2014;

and 34 hospitals as of mid-March 2015. says. Traditional, medium-sized law firms “There is probably no market of American are seeing a “very competitive market” life that is changing more than American while smaller firms and those dealing in healthcare,” Friedman says. The market is real estate are “very hard to place.” evolving rapidly, with risk structures so “They’re a target area of the surplus lines varied that “you could underwrite one a day market,” he says. “We see attorneys that and never see that same kind of risk.” may have had a couple of claims from real The dynamics within the PL medical surestate [clients] or that are a closing firm.” In plus lines market are constantly evolving: Connecticut, he says, lawyers handle real electronic health records, better coordinaestate closings; there are no title, closing or tion of care, and better follow-up are attracescrow agencies. tive to medical professionals because they Depending on the area of practice, a law can reduce liability, but they also create firm could wind up in either the traditional new exposures, he says. market or surplus, if they have tougher-to Excess and Surplus (E&S) insurplace risks. That would include real estate ers are more frequently dealing attorneys, startups, law firms undergoing with clients that have merged major changes, or firms in financial distress to create a conglomerate with a or seeing a lot of claims activity, he says. much wider geographical footprint, The medical surplus market meanwhile is creating more new risk structures. very competitive, depending on location Losses have been “pretty stable,” much and claims activity. Allied healthcare is also different from 10 to 15 years ago, Friedman becoming highly competitive. says. “The frequency of claims has been quite stable for a number of years now.

Pricing Costs are increasing at a moderate rate as Pricing in the E&S PL market overall overall inflation has been down.” tends to be flat, say both Sargent and The marketplace for medical proFriedman. “But there are variations in both fessionals in E&S PL is competitive, directions,” Sargent adds. although not very alluring for newcom Some of the new operating structures ers because of its complex nature, he coming out of the medical E&S field says. Carriers that try to enter the space are “fascinating,” Sargent says. “We have without a nationwide E&S capability will service-providers adding a tech element be “at an increasing disadvantage,” he says. to what they’re doing. We’re seeing a lot “This is a very complicated area. It’s not like of outsourcing of medical services. We you can develop the experience and experhave a facility management company that tise overnight.” joint-ventures with phy Bob Sargent, president ‘There is probably no sician groups,” he says. at Tennant Risk Services market of American He’s also seen physicians of West Hartford, Conn., for new sources of life that is changing looking says the E&S PL markets income through consulting more than American or working with medispas. for doctors and lawyers healthcare.’ is segmented, but bal“It’s changing quite a bit. It’s anced. “We have a healthy very interesting.” level of competition and a high degree of The strength of surplus lines lies in being underwriting discipline,” he says. “It takes creative and handling exposures and risks some work because there are a lot of particthat are different or unique, says Sargent. ipants.”

“It could be high risk, but it could just be There are more than 25 law firms in different.”

Tennant’s hard-to-place category. The PL “We spend a lot of time customizing market for attorneys is segmented based on coverage. It’s interesting because you have size, location and area of practice, Sargent continued on page 20 November 2, 2015 INSURANCE JOURNAL-NATIONAL | 19

SPECIAL REPORT

Professional Liability continued from page 19 a client who has a unique exposure, and a tions that deliver healthcare to find new standard policy is not going to do the job. more cost-effective ways to do it. “It’s forcing You have to talk to the underwriter and say, groups to find their way into the E&S mar‘How do we customize something or change ket,” Friedman says. to what the client needs?’”

For example, Tennant has a financial serEmerging Business vices client that is outsourcing by providing The E&S market will continue to a professional service and a technology increase “dramatically,” not because complatform to another party. They need cuspanies are renewing business but because tomized coverage to emerging business has no wrap it all in a package ‘We have a healthy level place else to go, Friedman that can be flexible of competition and a says. and innovative. Other Sargent, who is a high degree of under- past president of the clients have more interesting risk structures.

National Association of writing discipline.’

“We have a consultProfessional Surplus Lines ing firm using drones as part of their work,” Offices Ltd. (NAPSLO), says that from the Sargent says. association’s point of view, the value of The company’s website lists other hardwholesale brokers operating in the E&S to-place clients: an attorney specializing in area is also changing the game. “They bring real estate transactions, with prior claims the expertise to help both the client and history, who was non-renewed; a physician the underwriter come up with solutions.” providing specialty medical advice over the Stephen Sills, CEO and chairman of Internet, who needed medical malpractice CapSpecialty Inc. of Middleton, Wis., is also coverage; and a plaintiff’s attorney firm speseeing more retail brokers for doctors and cializing in securities class actions that was lawyers taking that business to wholesalers. declined by the standard attorney errors Part of it is a nationwide change toward serand omissions (E&O) markets. vice-based businesses.

While the Affordable Care Act has had “As the country becomes more professome effect on the medical industry by sional — as you will, a service economy — driving a lot of the consolidation efforts, it’s people are held to a professional standard,” not the main game-changer in the medical Sills says. Many professionals in medical PL market, Friedman says. and law are buying E&O because more of “The ACA is really a sideshow to what’s them have their own business, or are congoing on at the ground level for healthcare,” sulting.

Friedman says. “At the bottom is the fact A lot of the E&S market growth is also that America can deliver far more healthdue to a marked move by retail brokers and care than it can afford. We don’t have to independent retail agents going to wholebend the cost curve — we have to break it.” sale brokers for their surplus lines business.

Part of that is bringing the delivery of That’s both due to the wholesalers’ specialhealthcare down to lower-cost providers. ization in all types of PL, particularly E&O, As medical insureds get bigger and more as well as a general move among professiontechnically involved, the industry is evolvals toward service-based business. ing to find the most cost-effective solutions, Meanwhile, the consolidation of doctors’ like allied healthcare. private practices into healthcare organiza “We spend more on healthcare than any tions is also fueling competition. other industrialized country as a percent The company’s miscellaneous medical age of GDP,” Friedman says. “As the Baby insurance for small- and mid-sized businessBoomers get into full retirement age, we’re es starts with premiums as low as $2,000 going to spend 22 percent of our GDP on and boasts up to $11 million in capacity, healthcare.” That alone is forcing organizaaccording to its website.

20 | INSURANCE JOURNAL-NATIONAL November 2, 2015

As more doctors give up their offices to become part of a large organization, they’re opting in to corporate coverage and giving up those individual policies. Contributing to that is the movement of patients toward allied healthcare and accountable care organizations, he says.

“There’s kind of a scramble,” Sills says.

“They’re not buying less, but the question is where it’s being bought; the large conglomerate is footing the bill.”

The loss of those smaller policies is hurting mutual insurance companies, he says.

On the other hand, E&O policies in general are getting more popular as the country moves toward a service economy, and more people are looking for personal coverage, particularly cyber protection, Sills says.

It’s different in the legal realm, where lawyers are still buying individual and small-group PL. “The small-practice attorneys are not going away,” he says.

Historically hard-to-place attorneys include those with big claims and certain practice areas, like real estate, securities law and plaintiff’s lawyers.

“There will always be certain niches of lawyers in the surplus lines professional liability business; there are more independent practitioners. But in the medical world there’s more consolidation,” Sills says.

PL for mental health practitioners is one of CapSpecialty’s biggest lines. Sills says the company is the “largest” writer of psychiatric malpractice nationwide — a highly competitive field for E&S insurers as there’s a dearth of psychiatrists in the country, creating a fairly tight playing field. Still the company is holding its own in the niche.

Enough psychiatrists still seek individual PL policies to keep the segment profitable, whether they’re in private practice or semiretired and working in mental health clinics or university settings. “Psychiatrists are still very much independent practitioners.

There are some that practice in groups, but there are mainly independent doctors of psychiatry,” he says.

Cavanaugh is a freelance journalist specializing in insurance. Email: boncav95@gmail.com.

www.insurancejournal.com

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SPECIAL REPORT

Agency E&O Survey

Time Is Right to Review Agency E&O Limits

By Andrea Wells

F

ewer independent agencies are facing increased premiums for their agency errors and omissions (E&O) coverage and some experts say that is one reason they should consider upping coverage limits at 22 | INSURANCE JOURNAL-NATIONAL November 2, 2015

their next renewal.

Insurance Journal’s exclusive 2015 Agency E&O Survey found that less than half of all agencies (48.2 percent) saw an E&O premium increase in 2014 compared to 2013, while 37.1 percent reported their premiums stayed the same. Only 14.6 percent reported an E&O premium decrease during that same period.

The percentage facing increases is down from the last survey, which found 56 percent of agencies reported premium increases in 2013. Only 32 percent reported premiums staying the same in 2013 and just

12 percent saw decreases.

That stability in pricing is a strong sign of a competitive market, say agency E&O experts, and agencies should be taking advantage of current market conditions.

“There is a lot of competition in the agency E&O market,” says Curtis Pearsall, president of Pearsall Associates Inc., a risk management consulting firm specializing agency E&O, and a special consultant to the Utica National Agents E&O program.

Sabrena Sally, head of Swiss Re Corporate Solution’s U.S. Agents E&O program, which continued on page 24 www.insurancejournal.com

SPECIAL REPORT

Agency E&O Survey continued from page 22 serves as an underwriting carrier for the Big “I’s” Professional Liability Program, says with the competitive nature of the E&O market today, now is the time for agencies to secure higher E&O limits at a good price.

Pearsall agrees now is a good time to review E&O limits. In his view, limits for agencies of all sizes can be insufficient in today’s litigious environment if they have not been updated.

Are agents listening to this advice?

‘Larger operations definitely want significant E&O limits, but the overall percentage of clients that actually want to increase their agency E&O limits is low.’

The vast majority of agencies (88.9 percent) did not increase their E&O limits at their last renewal, according to Insurance Journal’s exclusive 2015 Agency E&O Survey for which nearly 600 agency owners shared their view on the market.

Bob Sargent, president and CEO Tennant Risk Services, has not seen many agencies wanting to increase agency E&O limits. “We see some interest but it is clearly driven by size,” he said. “Larger operations definitely want significant E&O limits, but the overall percentage of clients that actually want to increase their agency E&O limits is low.”

Misconception on Limits E&O experts say that smaller agencies often believe that higher E&O limits are unnecessary, but that’s a huge misconception.

It’s a fallacy to believe that small agencies can’t cause big E&O claims, Pearsall said.

“I’ve seen some very small agencies be the cause of multi-million dollar E&O claims.

Size is not a predictor of what your E&O limit should be,” he said.

According to the Insurance Journal survey, slightly more than half of respondents (57.0 percent) revealed purchasing $2 million or less per claim in E&O limits. Another 17.5

No. 1 Reason Agencies Carrry E&O Coverage

0.4% 15.2%

Protect the assets of the agency Required by my carriers Access to risk management information

Agency E&O Premium Change in 2014 Compared to 2013

84.4%

37.1%

Increased Decreased Stayed the same

Agency E&O Premium Change in the Past Three Years

48.2%

14.6%

21.5% 15.6%

62.8%

Increased Decreased Stayed the same

Prediction on E&O Premium mium m Change at Next Renewall 45.7% Increase Decrease Remain the same

47.4%

6.9%

continued on page 26 24 | INSURANCE JOURNAL-NATIONAL November 2, 2015

www.insurancejournal.com

1.6%

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E&O

SPECIAL REPORT

s

ars ago

14.0% 16.0%

50.5% 44.0%

Agency E&O Survey Why Change in E&O Carriers 1.6%

9.5%

what agents need to be very cautious of — particularly when it comes to professional Lower price liability and in agency E&O — is that no two policies are the same,” Pearsall said.

Nonrenewed due to claims Pearsall advised an agency six months ago and found gapin in its E&O Nonrenewed due toa significant change underwriting coverage. After reviewing the agency’s E&O

Annual Cost of Agency E&O Coverage 88.9% $1,000 or less

4.5%

$1,001 to $2,500

19.1%

$2,501 to $5,000

22.7%

$5,001 to $10,000

gency cy $10,001 to $15,000 ons $15,001 to $25,000 23.5%

y

Southeast West

6.9%

17.6% 8.3%

Carrier withdrew from agency E&O market ‘Naturalcoverage catastrophes Needed broader almost serve as unplanned Other reasons audits of agency E&O practices and also of disaster recovery procedures.’

9.3%

policy, he noticed there was an exclusion on “surplus lines placements.” The agency $25,001 to $50,000 9.3% owner said: “‘You are kidding me?’ And I 7.3% 69.2% said no, it’s excluded under your policy. He More than $50,000 9.3% had never read his E&O policy.”

Pearsall encourages agency owners to 0% 5% 10% 15% 20% 25% 30% read their E&O policies to see if they cover Attended an E&O class the activities they are doing on a day-to-day continued from page 24 basis.

“You achieved could get a policy that is cheaper design Agency staff has additional percent said they purchased $5 million per market, although he cautions that’s not but if it doesn’t cover what you do, what More actively claim. always a good idea. good isutilized it?” he said. an exposure analysis Comparison Pearsall counsels that $2 million perin E&O Premium Insurance Journal’s survey found that most Swiss Re’s Sally agents should of Changes Hired a third-party tosays perform anexamagency au claim should be considered the bare minagencies (59.2 percent) have had the same ine their own insurance policies in the same By Region agency on imum and11.9% in his view this is “on the low E&O carrier for at least the pastEnhanced five years, manner that focus they would for internal any of their quality c side” for coverage. Decreased but that 36.7 percent have had two carriers clients’ policies.

Region Increased Same Developed/updated agency procedural man Midwest Even small agencies should be considerin the43.4% past five years. Of those agencies that “Review your operations,” she said. “Has 14.0% 42.5% 14.0% ing limits within the14.0% $3 million to $5 milshopped their E&O coverage, 25.5 percent your agency grown? Have you changed the East 50.0% 36.0% 52.1% South 58.0% 26.1% lion limitCentral range per 16.0% claim, he said. However said the reason they shopped was for a kind of customers that you are serving? Has 50.5% 22.1%is heavy14.0% if Southeast an agency in commercial lines lower35.2% price. Some 8.8 percent shopped for there been a change in ownership structure West they should 16.0% 44.0% 40.5% accounts, up their E&O limits broader coverage. of your agency? All those things should be even further, he added.

“When you talk about pricing, agents look at.”

Pearsall urges agents to look at the cost tend to gravitate toward lower pricing but continued on page 28 to add higher limits when E&O policies come upChange for renewal.in In E&O today’s Carriers competitive Why market, raising limits may be easier than 1.2% Lower price 25.5% expected.

Nonrenewed due to claims 2.7% “I encourage to talk to their 3%agents Nonrenewed due to change in underwriting criteria 1.9% underwriter for some options,” he said. “If Carrier withdrew from agency E&O market 6.6% they have $2 million/$6 million, ask what it Needed broader coverage 8.8% would cost for $3 million/$6 million, or $4 37.7% Other reasons 7.2% 36.7% million/$6 million and then they can make 59.2% a determination. Most tend to renew as is 62.3% and I think that may not be enough quite Yes frankly.”

No Risk Pearsall thinks the competition in the Management Steps Implemented E&O market may also be leading some in Past Three Years agents to consider changing their E&O

Risk Management Steps Implem in Past Three Years

E&O Yearss

New E&O Risk Management ent Steps in the Past Year

Attended an E&O class Agency staff has achieved additional designations 26 | INSURANCE JOURNAL-NATIONAL November 2, 2015 More actively utilized an exposure analysis checklist Hired a third-party to perform an agency audit

78.3% 35.7% 33.9% 7.1%

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$15,001 to $25,000 $15,001to to$25,000 $25,000 $15,001

9.3% 9.3% 9.3%

SPECIAL REPORT $25,001 to $50,000 $25,001 $25,001to to$50,000 $50,000

9.3% 9.3% 9.3%

Agency E&O Survey More than $50,000 More More than than$50,000 $50,000

continued from page 26

0% 0% 0%

A Look at E&O Claims A slight majority (52.1 percent) of respondents to the Insurance Journal survey reported never having an E&O claim, but nearly a quarter (22.1 percent) of respondents said

9.3% 9.3% 9.3%

5% 10% 15% 20% 25% 30% 5% 10% 15% 20% 25% 30% 5% 10% 15% 20% 25% 30% they have had an E&O claim in the past five trend he attributes to a focus on solid risk years.

Pearsall says that overall claims activity for the E&O market continues to be “fairly low” compared with 10 to 20 years ago, a

Comparison of Changes in E&O Premium Comparison of Changes in E&O Premium Comparison By Region of Changes in E&O Premium By Region By Region Decreased Increased Same Region Region

Midwest Region Midwest East Midwest East South East Central South Central Southeast South Central Southeast West Southeast West West

Decreased

14.0% Decreased 14.0% 14.0% 14.0% 14.0% 16.0% 14.0% 16.0% 14.0% 16.0% 14.0% 16.0% 14.0% 16.0% 16.0%

Increased Same

42.5% Increased 43.4% Same 42.5% 43.4% 50.0% 36.0% 42.5% 43.4% 50.0% 36.0% 58.0% 26.1% 50.0% 36.0% 58.0% 26.1% 50.5% 35.2% 58.0% 26.1% 50.5% 35.2% 44.0% 40.5% 50.5% 35.2% 44.0% 40.5% 44.0% 40.5%

Why Change in E&O Carriers Why Change in E&O Carriers Why Change in E&O Carriers Lower price

25.5% Lower price 25.5% Nonrenewed due to claims 2.7% Nonrenewed due to claims 2.7% Lower price due 25.5% Nonrenewed to change in underwriting criteria 1.9% Nonrenewed due to in underwriting criteria 1.9% Nonrenewed duefrom tochange claims 2.7% Carrier withdrew agency E&O market 6.6% Carrier withdrew from agencyinE&O market 6.6% Nonrenewed due to change underwriting criteria8.8% 1.9% Needed broader coverage Needed broader coverage 8.8% Carrier withdrew from agency E&O market 6.6% Other reasons 7.2% Other reasons 7.2% Needed broader coverage 8.8% Other reasons 7.2%

Risk Management Steps Implemented Risk Management Steps Implemented in Past Three Years in Past Three Years Steps Implemented Risk Management Attended E&O class 78.3% in Past an Three Years Attended an E&O class 78.3%

Agency staff has achieved additional designations 35.7% Agency staff has achieved additional designations 35.7% More actively utilized an exposure analysis checklist 33.9% Attended an E&O class 78.3% More actively utilized an exposure analysis checklist 33.9% Hired a third-party to perform an agency audit 7.1% Agency staff has achieved additional designations 35.7% Hired a third-party to perform an agency audit 7.1% Enhanced agency focusan onexposure internal quality control More actively utilized analysis checklist56.5% 33.9% Enhanced agency focus on internal quality control 56.5% Developed/updated agency procedural manual 38.4% Hired a third-party to perform an agency audit 7.1% Developed/updated agency procedural manual 38.4% Enhanced agency focus on internal quality control 56.5% Developed/updated agency procedural manual 38.4%

28 | INSURANCE JOURNAL-NATIONAL November 2, 2015

management practices by agencies to reduce their E&O exposures.

When claims do arise commercial lines tend to generate the most E&O incidents, he says. “In commercial liability the industry is still talking about additional insured issues. In commercial property, valuation continues to be an issue.”

Workers’ compensation generates around 8 percent to 10 percent of E&O claims, Pearsall said, while professional liability brings in around 6 percent to 8 percent of E&O claims — but those claims tend to be the “really big claims.”

Sally says the leading cause of agency E&O claims for the past two decades has continued to be failure to place coverage.

Sargent adds that it’s important to remember that that includes failure to place the coverage the insured thinks they requested.

“A lot of times it’s not failure to place the coverage; it’s that the policy doesn’t cover a claim,” Sargent said. This is where it “gets

‘You want to be an expert — just be careful on how you put that into words.’ sticky.” The client may have had an expectation after the fact that the policy would have covered the claim but there was no discussion of that type of coverage before the claim occurred, he said. “It’s not that the policy wasn’t in place.”

Sally sees another concerning trend in agency E&O claims — natural catastrophe related claims.

“Natural catastrophes almost serve as unplanned audits of agency E&O practices and also of disaster recovery procedures,” she said. “When a catastrophe occurs underlying issues might be quickly uncovered because clients are experiencing claims.”

Catastrophes also give plaintiff attorneys an opportunity to “stir the pot” and encourage insureds to look for recovery — and that often includes recovery from their continued on page 30 www.insurancejournal.com

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Change at Next Renewall SPECIAL REPORT

Increase Increase Increase Decrease Decrease Increase Decrease Remain Remain the the same same Decrease Remain the same Remain the same

45.7% 45.7% 45.7% 45.7%

Agency E&O Survey continued from page 28 insurance agents, she said. It has become almost commonplace to see a rise in agency E&O claims following natural catastrophe events, she said.

Even when agencies do nothing wrong, the cost to defend an E&O allegation can be a huge burden.

“In insurance agency E&O a very large percentage of total incurred losses are defense costs,” Sargent said. “It’s not just loss dollars and claims due to error; it’s that expectations may not have been met and the carriers declined the claim for some reason and then everybody gets dragged in — including the agent even though they didn’t make a mistake.”

Sargent says it’s important for agency owners to understand that they don’t buy E&O just for an error. “You also buy it for defense costs and the protection and resources it provides for the agency.”

Buying agency E&O is not to be taken lightly, Pearsall said. “To me it’s one of the most important decisions an agent will make over the course of a year.”

To Specialize or Not The trend to specialize is nothing new but it is one that has produced a bit of heartache, the experts say.

According to the Insurance Journal survey, more than a third (38.8 percent) of the agencies responding said their agency is a specialist in a particular market sector/ industry. But publicizing that specialization or expertise might serve as a “double-edged sword” should an E&O claim arise, Sally said.

“If we have an insured that’s specializing in an area and they have a good claims history and we review their agency processes and procedures, it tells us they are very good at what they do and that gives us a comfort level,” she said. “At the same time if they are facing an E&O claim the fact that they are a specialist, particularly if they advertise that way, can be quickly become a wedge used by the plaintiffs in an attempt to hold the agency to a higher standard of care.” continued on page 32 30 | INSURANCE JOURNAL-NATIONAL November 2, 2015

6.9% 6.9% 6.9% 6.9%

1.6% 1.6% 1.6% 1.6% 9.5% 9.5% 9.5% 9.5%

Increased Agency E&O Increased Increased Agency Agency E&O E&O Increased Agency E&O Limit at Last Policy Limit Limit at at Last Last Policy Policy Limit at Last Policy Renewal Renewal Renewal Renewal No

88.9% 88.9% 88.9% 88.9%

No No Yes Yes No Yes Sure Not Not Sure Yes Not Sure Not Sure

Satisfaction with Agency cy Satisfaction cy Satisfaction with with Agency Agency cy Satisfaction with Agency cy E&O Terms, Conditions E&O 23.5% E&O Terms, Terms, Conditions Conditions 23.5% 23.5% E&O Terms, Conditions and Limits and Limits 23.5% and Limits 7.3% 7.3% and 7.3% Yes YesLimits Yes No No Yes No Somewhat satisfied Somewhat satisfied No Somewhat satisfied Somewhat satisfied

E&O Claims History E&O E&O Claims Claims History History E&O Claims History of Respondents of of Respondents Respondents of Respondents

Never Never had had aa claim claim Never had ain claim Had a claim the Had a claim in the past past 55 years years Never had a claim Had a claim in the past 5 years Had a claim 6 to 10 years ago Had aa claim 10past years ago Had claim 6 into the 5 years Had a claim 6 to 10 years ago Had aa claim more than 10 years Had claim more than 10 years ago ago Had a claim 6 to 10 years Had a claim more than 10ago years ago Had a claim more than 10 years ago

Number of Agency E&O Number Number of of Agency Agency E&O E&O Number of Agency E&Oss Carriers in Past Five Years Carriers Carriers in in Past Past Five Five Years Yearss Carriers in Past Five Yearss One One carrier carrier One carriers carrier Two Two carriers One carrier Two carriers Three carriers Threecarriers carriers Two Threethan carriers More three More than three carriers carriers Three carriers More than three carriers More than three carriers

47.4% 47.4% 47.4% 47.4%

7.3%

11.9% 11.9% 11.9% 11.9% 14.0% 14.0% 14.0% 14.0% 22.1% 22.1% 22.1% 22.1%

69.2% 69.2% 69.2% 69.2%

52.1% 52.1% 52.1% 52.1%

1.2% 1.2% 1.2% 3% 3% 1.2% 3% 3% 36.7% 36.7% 36.7% 36.7%

59.2% 59.2% 59.2% 59.2%

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5 Most Important Issues When Selecting E&O

Purchased E&O from Agent ent Trade Association SPECIAL REPORT

1. Claims handling experience 2. Longevity of the E&O carrier in providing this coverage 3. Extended reporting period (tail) options 4. Direct access to underwriting and claims personnel 5. Availability of risk management information/advice

Agency E&O Survey 48.3%

51.7%

Yes No

continued from page 30

Agency Requires Continuing Education

Purchased E&O from Agent ent Trade Association

2.1% 25.1%

48.3%

51.7% Yes No Not Sure

Sally sees plaintiffs’ counsel reviewing agency websites more often, “taking verbatim language that agencies have used” to tout their expertise. Websites claiming to “get you the best coverage or no risk uncovered” could wind up hurting an agency during an E&O case, she said.

Pearsall has also witnessed this trend.

“When you start putting yourself out there as a specialist or as an expert on your website, you have now put yourself out there that that’s the task you will perform,” Pearsall said. “I have noticed numerous times with my expert witness work where the agency’s website will come into play and could significantly alter the degree of legal liability that the agent is held to.”

Agents need to be careful how they advertise themselves to the public, he added, and should avoid words like expert, specialist or phrases such as “we’ll make sure you are properly covered.”

“Those can be very dangerous words or phrases that could come into play when determining whether an agency is held to be legally liable in a claim,” according to Pearsall.

Agencies should feel good about advertising what they are good at providing but should avoid language that could hold them to a higher standard of care, says Sally. She advises agents to involve an attorney who is qualified in agency E&O to review the agency’s website language. “No reason to increase your exposure when you don’t need to,” she said.

“You want to be an expert — just be careful on how you put that into words,” Pearsall adds.

Insurance Journal wishes to thank Demotech Inc. for providing analysis once again for this year’s Agency E&O Survey.

32 | INSURANCE JOURNAL-NATIONAL November 2, 2015

72.9%

Yes No

Agency Requires 2.1% Areas Considered Most Vulnerable to Continuing Education E&O by Survey Respondents 25.1% Advising Insureds about Coverages Yes Consistency No Not Sure Documentation Commercial Lines Personal Lines Certificates of Insurance Changes in Established Policies - Carriers Improper Information Renewals

72.9%

E&O Limits Purchased $2 million or less per claim $3 million per claim $4 million per claim $5 million per claim $6 million to $10 million per claim $11 million-plus per claim

57.0% 11.2% 4.1% 17.5% 6.1% 2.0%

5 Most Important Issues When Selecting E&O 1. Claims handling experience 2. Longevity of the E&O carrier in providing this coverage 3. Extended reporting period (tail) options 4. Direct access to underwriting and claims personnel 5. Availability of risk management information/advice

Purchased E&O from Agent ent

www.insurancejournal.com

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The Competitive Advantage Agency Prices Are Awfully High

Acquisition prices unaffordable for many agencies without Wall Street or private equity backing

A

gency prices are likely at all-time highs, albeit only a handful of very specific buyers are paying such high prices.

They are setting the mark, making acquisitions unaffordable for many regular agencies that do not have Wall Street money or private equity/hedge fund backing. What

By Chris Burand can an agency do to counter this trend?

First, recognize and accept reality, because by doing so, you’ll see more opportunity. The prices these buyers are paying defy gravity. For the most part, these buyers are not terribly concerned about a return in the traditional sense. They are simply looking to buy assets at one price that someone else, i.e. Wall Street or another private equity firm, values even more regardless of whether the fundamentals justify a higher valuation. A shift has occurred, just like the shift always happens in speculative bubbles — that true, verifiable, tangible profit and tangible organic growth is no longer important. All that is important is that as a buyer, you know someone else is will-

ing to pay even more than you will pay.

One flip strategy these buyers use is to acquire $x billion and then do an initial public offering (IPO), assuming the markets stabilize at a high number. It is a bet as much as anything else, but it is a good bet because they are usually betting with someone else’s money. It’s a good gig if you can get it.

Justification for these prices, and denying they are betting, exists. However, regular agency owners should not be fooled by the funny metrics used. One of the recent metrics being used is a new form of earnings before interest, taxes, depreciation and amortization (EBITDA). The new method basically states, in U.S. Securities and Exchange Commission (SEC) filings nonetheless, that the buyer’s calculation of profit is best-defined not by any normal standard — such as a generally accepted accounting principles (GAAP)approved standard or EBITDA (which the SEC advised investors to avoid many years ago) — but by a new version of EBITDA that states profit should be measured by EBITDA and “anything that didn’t go quite the way we wanted after we bought X agency.” I couldn’t make something up like that even if I tried.

Regardless, it is a seller’s market. If for whatever reasons you want an acquisition but you are using your own money and therefore need to make it actually cash flow, how do you compete with the astronomical prices being offered?

34 | INSURANCE JOURNAL-NATIONAL November 2, 2015

Not Every Seller Wants to Sell Not every seller wants to sell only to become a cog in a big company that is going to be sold again. Keep in mind that paying this kind of high acquisition prices requires there be another buyer, and who knows what changes that buyer will make.

Furthermore, with prices that high, expenses always have to be cut. Quite often, that means valuable people are cut, little investment is made relative to new sales and working conditions are unpleasant.

What is the price for this scenario?

I am not suggesting this is always the case, but it is the case for some.

Not Everyone Wants to Cash Out Some sellers just want to be part of a bigger but locally owned organization. Take advantage of these situations.

Changing the Rules Try changing the rules of the game.

Buy producers instead. One of the issues that some big buyers are facing is the fact that the best producers need support staff and they do not need their commissions cut to 20 percent. When this happens, the best producers are understandably disgruntled.

The other producers may be disgruntled, too, but they’re not good enough for their concerns to really matter. It’s the really good producers that create an opportunity.

How can you compete with the astronomical prices being offered?

When taking good producers from these organizations, agencies have to play by the rules, observe all the noncompete/ confidentiality language in those producers’ contracts. It may mean parking the producers for a long time to honor their contracts, but doing so is likely much less expensive than paying top price for the agency.

Furthermore, you might get the best withcontinued on page 36 www.insurancejournal.com

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IDEA EXCHANGE

The Competitive Advantage continued from page 34 out all the junk and problems, so paying a ence, however, is that enforcing true nonlittle more makes sense. competes on CSRs is a lot more difficult Buy customer service representatives (CSRs) than enforcing them with producers. Yet and account managers. I’m not an attorney high-quality CSRs have solid relationships orNAPSLO_IJ_halfv_print1.qxp_Layout employment law expert. My experi-1 3/4/15 1:33 with clients. like top producPM Page Additionally, 1

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ers, top CSRs often don’t like the spending cuts and culture of the “wealthier” buyers.

Observe their contracts and don’t do anything that would place CSRs in a bad position, but it’s OK to go after these people.

Attract customers. When an agency is purchased at such a high price that expenses are cut to the bone, employees are never happy. Their lack of satisfaction is conveyed to clients if by nothing else other than their lack of engagement. If the cuts are deep enough, their dissatisfaction will be more apparent.

Customers will feel this. Customers will see the quality of service diluted. They will notice if the best people leave. Customers will be much more vulnerable to being

Insurance is a very small world and some of the buyers, or at least the money behind the buyers, do not understand just how small the insurance world is. snagged. You know many of these customers. Make a special effort to solicit them.

Insurance is a very, very small world and some of the buyers, or at least the money behind the buyers, do not understand just how small the insurance world is.

Information may not be officially public, but it is well known. Take advantage of their lack of comprehension and possibly their excessive confidence that they will be able to keep all employees and all clients, regardless of how unhappy the employees, clients, and even carriers may be. It is an opportunity.

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IDEA EXCHANGE

Tech Talk Pay Attention to Smartphone Security

By Tom Wetzel

D

igital security concerns related to the safety of computer systems and use of the Internet are a much discussed topic in this Tech Talk column.

But what about the security of smartphones?

Now the go-to communications device for most of us, smartphone risks gets less play for a reason — hacking incidents and breakdowns are infrequent. They do happen, however.

And as agents rely on them to do business just as insurance buyers demand, the risks will increase.

Agents should be concerned with three security issues when it comes to smartphones. The first involves the security of the device, the second covers the app’s security and the third deals with the security of the app’s code.

“Device security is more of a matter of personal choice,” says Matt Aaron, founder of a mobile app for agents, https:// goinsuranceagent.com. “Some people lock their phones, others do not. If one does not lock the device, there is the potential that any data on the device can be accessed.”

Mike Howe, senior vice president of product management at Applied Systems, stresses that in many cases, the smartphone does not store data so much as it accesses data that is stored elsewhere.

“It’s important to know the difference,” Howe says. “In our case, we are not storing and delivering information on the phone itself. There is not a database of policy or private information on the device.

We are able to securely draw and transmit that 38 | INSURANCE JOURNAL-NATIONAL November 2, 2015

call back to CSRs in the office.”

With regard to security of apps, Aaron says that “if a device is locked, all apps have an additional layer of security in addition to the login an app may require. But many apps do not have a forced or timed logout because it would make accessing the app in a time of need more difficult. But logout and signin capabilities are there if a user wants to take advantage of the features. It all comes down to personal choice.”

The last area of concern is security and reliability of an app’s code. In other words, how can you know for sure if an app contains malicious code, whether or not it is intentional?

Apple device users trust Apple to protect them. Android users must information from a Agents should be rely on third-party software such secure server and “Lookout” to scan the apps as concerned with as then render it on the they are being downloaded from security issues the Google Play Store to provide phone or tablet. The when it comes to that additional level of protection. data is only viewed locally — not stored smartphones. A serious app threat surfaced locally.” earlier this year from flashlight Howe says it’s important for agency manapps. Many versions request more personal agement to know which staff members have information than necessary. One such app access to what information through their tries, without warning, to take control of smartphones. the phone by requesting “superuser access.”

“System governance is determining inforOnce installed, the flashlight app places mation access and safeguarding on who shortcuts on the home screen, and when should see what,” he continues. “For examtapped, the app triggers prompts to install ple, an agency can provide access to prosother apps, which was not good, experts pect and client information for producers say. through a mobile app while away from the When considering an app to install, office. The agency has the option to show Aaron suggests doing simple research to just client and prospect information — find out the name of the developer and client policy details, contact information, their physical location. If you can’t find that documentation, recent activities — that is information, consider the app suspicious. transferred directly from the agency management system. The intent is you want Wetzel heads his own insurance marketing firm that person to be armed with the exact that specializes in social media programs for agents. information that they need in that moment, Website: www.wetzelandassociates.com. Email: removing the need to carry paper files or twetzel@wetzelandassociates.com www.insurancejournal.com

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Available limits: As needed Carrier: Unable to disclose, admitted and nonadmitted available States: All states Contact: Bill Thompson at 802-472-1500 or email: wthompson@ manchesterspecialty.com

Vacant Buildings Market Detail: Insurance Noodle (www.insurancenoodle.com) offers access to a comprehensive vacant building product for vacant buildings with or without renovations, vacant tenant spaces, vacant condominiums and business personal property in a vacant building. Ideal risk criteria includes: buildings that are completely constructed; vacant buildings with or without renovations; vacant tenant space; vacant condominiums; business personal property in a vacant building; buildings on a plot of land up to 5 acres; no losses or claims incurred in the past three years. Product highlights: business personal property coverage available for most risks; no restrictions on the length of vacancy; ability to consider locations having

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Paratransit Programs Market Detail: Irwin Siegel Agency Inc. (ISA) (www.siegelagency.com) offers a package policy for paratransit and rural transit providers. Program highlights include: comprehensive package with general liability, auto and umbrella; abuse coverage available; garage liability available; for-profit and not-for-profit agencies are eligible; employees as insured’s endorsement; hired car physical damage up to $50,000; fleet and driver risk management services available; and no driver exclusions. ISA does not require production minimums or agency appointment.

Available limits: As needed Carrier: Unable to disclose, admitted States: All states except Ala., La., and Miss.

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IDEA EXCHANGE

Minding Your Business How to Perpetuate the Family Agency

I

n the past year, we have completed or are still in the middle of at least six business valuation and perpetuation cases involving family members or key employees (one party as buyer and one as seller). These cases and the dozens we have worked on over the years typically have the following issues that need to be addressed: • Lack of planning and preparation by the founder;

By Catherine Oak & • Financial expectations for the buyer or seller, or both; • Estate and tax issues’ • Transfer of control over the business; • Fairness to the children involved with Bill Schoeffler the business; and • Fairness to the chilSelf Serve.pdf 1 1/6/15 11:41

dren not involved with the business.

AM

A Roadmap The first step to transferring the family agency to the next generation is to clarify what everyone’s intent is and develop a specific timetable for key milestones.

In theory, this should be easy. However, some agency owners require a lot of soul-searching to actually commit to a plan.

A lack of clarity for the direction of the family business can lead to personal strife and family rifts. Many of the people we have worked with have said they had been talking about it for years before we were brought in. Some perpetuation candidates have offered to pay for it themselves. Some have had to threaten to quit. It doesn’t have to be this way.

Resentment can also set in with perpetuation candidates when there are no specific plans for ownership transfer. This is especially true for the children or key employees that do an excellent job managing and growing the business. They might get to a

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point where they don’t want to build it further, without credit for their own personal production and business success. In other situations, the children or key employees might languish under the control of a strong parent or owner and not find their own path for business success and leadership.

Express Intent in the Will If the candidate(s) are family, the owners need to indicate in their will that this particular family member or members are “intended” to be the perpetuation plan for the seller/owner. The estate executor needs to be clear if there are other siblings that are not candidates and will not be part of the ownership of the business. Then, the non-candidate family members cannot insist the firm be sold if the owner dies, for example.

At first glance, some parents do not want to do this approach, as they are afraid their other children will not feel this is fair, especially if the agency’s value is a major part of the owner’s estate. This can be dangerous and totally unfair, and we often see this situation turn into a real mess when it did not have to be. Sometimes, even the other siblings’ spouses might still force a sale to occur, even if the siblings understand that their brother or sister deserved to own and run the business.

However, with proper planning and open communication there are many solutions.

One such approach is for the perpetuation candidates to pay the estate a fair value for the agency to make the estate whole again. If the estate is large enough, the children that were not perpetuation candidates can be left an equivalent value in other assets.

Part of the planning needs to be a valuation of all the assets in the estate, including a business valuation of the agency.

Sweat Equity For those children that work in the agency, it helps to encourage their success by

1/14/15 10:07 PM

www.insurancejournal.com

letting them build up “sweat equity.”

Transfer Ownership Now One approach is for the perpetuation can For those owners that have reached the point where they are ready to pass the didates to own the books of business that reigns to the next generation now, there are they have produced, or to create a vesting/ deferred compensation plan. The overall a variety of options to consider. Usually, the agency value is then adjusted down to first question is, “How much money do the account for the book ownowners need to take out of A lack of clarity for the agency?” This helps in ership or deferred compensation liability. the direction of the narrowing down the vari This technique will family business can ous options. let them build their own Most of the time, the lead to personal personal equity while not sellers are taking out a strife and family making them pay for their large salary, a bonus, car own effort. expenses, entertainment, rifts.

It is important to have a personal supplies, personal producer agreement or some agreement in accounting costs, cell phones, health insurwriting that details the plan. Keep in mind ance, and sometimes health supplements, that accounts that have been passed down life insurance, travel expenses, tickets to are usually excluded from these plans. sporting events, and the like.

Pay attention to the tax implications of Often, some people have not saved creating a vesting/deferred compensation enough for their retirement. They might plan for the producer. already be more than 65 years old, somewww.insurancejournal.com

times even in their 70s. These people need to maintain a certain level of income from the business for years to come in addition to the sales value.

For others, they are financially secure because they saved money and invested in other assets outside of the business. They might not need much or any income from the business.

Regardless of the circumstances, it is important to create a financial pro forma to understand the business’ cash flow, as well as the value of the business.

Pro Forma Work is the Key The cash used for an internal buyout of an owner for a small business is more often than not generated from the income they normally pull out of the business. Any salary or perquisites paid by the firm decreases the profits or EBITDA (defined as earnings continued on page 44 November 2, 2015 INSURANCE JOURNAL-NATIONAL | 43

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Minding Your Business

continued from page 43 before interest, taxes, depreciation and amortization), which lowers the agency’s value and lowers the cash flow the buyers are able to use to buy them out.

If they do want to keep taking some of these expenses for a number of years, then those expenses are left in and negotiated, then the value of the agency and the owner’s stock value becomes less.

A good mergers and acquisitions (M&A) consultant can show the owner and the buyer, how the seller can’t have their cake and eat it, too. It is a give and take. There is only so much cash flow in the business.

Terms for Success For internal buyouts, the sellers need to

be flexible with the terms and realize they the tax burden and create a win-win for the will not get top dollar for the business. buyer and seller.

Because of the limited cash flow from the business, it will typically take the buyer How to Make it Fair five to 10 years to pay off the seller.

If there are multiple children and some Taxes become a major part of the equanot in the business, the sibling buying tion. For each $1 the the business should seller is paid for the Internal perpetuation make payments to the business, the buyer based on can be very rewarding seller/owner needs to generate $1.67 a fair market valuation. from a family standpoint, This would have the before tax dollars, if properly planned and same effect as if the assuming a 40 percent tax rate. seller/owner is selling communicated.

Again, a good M&A to an outside party. consultant can work Otherwise, any diswith the buyer and seller to structure the counts or gifting should be accounted for in deal with certain techniques to help lower the will or by some other means, to equally distribute the inheritance.

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Summary Internal perpetuation can be very rewarding from a family standpoint, if properly planned and communicated.

Even though external sales can often give the owner a higher value, the intention of the owner and those that have paid their dues (time and sweat equity) to keep the business in the family can override the difference in equity.

If the owner(s) continue to vacillate and not come to terms on timing, value and terms, then some discontent could arise among the family members or key employees that have been waiting a long, long time.

The key is to start it now, especially if the owner is older than 62 years old. Bring in some trusted advisers, determine the overall estate value and the agency value.

Estimate the future income needed from the business. Review the available options.

Then, sit down with the family/owners to create a roadmap to perpetuate the business.

Oak is the founder of the consulting firm, Oak & Associates, based in northern California. Schoeffler is an associate of the firm. Oak & Associates specializes in financial and management consulting for independent insurance agencies, including valuations, mergers acquisitions, sales and marketing planning as well as perpetuation planning. Phone: 707-936-6565. Email: catoak@gmail.com.

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Closing Quote

Mutual vs. Stock Insurers

A

By Charles Chamness

.M. Best’s recently released 2015 “Mutuals at a Glance” report is an interesting report on differences between mutual and stock companies in key areas of performance.

In its pages is a depiction of a mutual insurance industry that is strong, stable and continuing to successfully serve policyholders as mutual insurers have been doing in the U.S. since 1752.

The report is encouraging and presents the mutual model, including apparent advantages as well as some purported challenges, based on differences due to “strategic scope” when compared to that of other organizational structures in insurance.

Among the more notable findings is the continued strong mutual segment performance based on Best’s own standard, the Best Capital Adequacy Ratio (BCAR). Using the BCAR, the report notes that “mutual companies maintain a solid level of capitalization as reflected by more than 75 percent of the rated companies that reported BCAR scores of 250 or higher, which is well in excess of published guidelines.”

The report acknowledges that “Mutual companies are highly rated with 10 percent in the exceptional and superior category, 66 percent in excellent, 21 percent in good and only 3 percent falling into the fair and below category.”

46 | INSURANCE JOURNAL-NATIONAL November 2, 2015

With regard to purported challenges, the Best report notes that mutual companies tend to have conservative investment portfolios with relatively little in equity investments, which could impede investment gains. But racking up outsized profits has never been a priority of the mutual insurance model.

Mutuals do not have shareholders and therefore operate without the motivation for short-term financial returns to maximize quarterly earnings. Because shareholder returns and short-term profits are not predominant goals, a mutual insurer can invest to seek solid returns while keeping the company portfolios less vulnerable to the whims of the stock market. Describing mutual insurance companies as underperforming in comparison to stock insurance companies in this and other areas can be like saying that marathon runners “underperform” sprinters. Just as the objectives for both are different, so are the attributes of performance and the definitions of success.

Historically, mutual companies have exhibited financial stability that allows them to maintain their focus Describing mutual on policyholders. This insurance companies singular focus has kept as underperforming two-thirds of U.S. mutual insurers — a vast majoriin comparison to ty of whom are National stock insurance comAssociation of Mutual panies can be like Insurance Companies saying that marathon (NAMIC) members — in business for more than a runners ‘underpercentury, helping them to form’ sprinters. outperform the rest of the industry in customer satisfaction and retention.

In short, the A.M. Best report does a good job of identifying variations in mutual versus stock company performance in the industry. It also does a good job of rightly acknowledging the differences in strategy, scope, and management focus that often drive those differences.

Chamness is president and CEO of NAMIC.

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