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CPCU Society

A Technical Insurance Journal

Corporate Governance and Ownership Structure of Property-Liability Insurers

Inside the Issue... Tech Bits and Bytes—Business and Technology Trends Achievement of the CPCU Designation and Beyond—Gail Bundy The New Paradigm of Risk


From

Inside this Issue June 2012 | Vol. 1 Issue 1

the President and Chairman

In a property-casualty insurance marketplace that continues to undergo exponential change, now more than ever, professional development to advance your career is critical. Jobs are hard to find, and promotions within companies are few and far between. Individuals successfully compete in this market by setting themselves apart from others — and CPCU is key to this accomplishment.

You will tap into 40 property-casualty insurance, leadership development and career management seminars representing the most advanced and varied thinking on an extraordinary array of specialized topics. And through dynamic general sessions, you will explore ways insurers can take advantage of the explosion in new technology and discover the risk management tools and strategies used by some of today’s industry giants.

CPCUs demonstrate a commitment to our industry others do not, and at the same time, they display a willingness to do more than what is expected because circumstances require the effort. In short, their winning strategy is to commit to staying abreast of change as it occurs and to position themselves to respond to challenges when they arise.

Take control of your career success by widening your professional network to include top property-casualty insurance practitioners and foremost scholars who can connect you with critical tools and information. The theme of this year’s event is “CPCU: A Winning Strategy.” By participating, you will see firsthand why this theme is so accurate.

If you’re serious about advancing your career, you can’t afford not to attend the insurance industry’s leading property-casualty event of 2011 — the CPCU Society Annual Meeting and Seminars at Caesars Palace in Las Vegas, Oct. 22–25. The result will be an unrivaled opportunity to get ahead through cutting-edge learning and expanded industry contacts.

All the best,

Steve McElhiney, CPCU, MBA, ARe, AIAF 2011–2012 CPCU Society President and Chairman

FEATURE 12|Corporate Governance and Ownership Structure of Property-Liability Insurers

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2 | CPCU Society Insurance Technical Journal | Vol. 1 Issue 1

CPCU Society 720 Providence Road Malvern, PA 19355 (800) 932-CPCU (2728) www.cpcusociety.org Statements of fact and opinion are the responsibility of the authors alone and do not imply an opinion on the part of officers, individual members, or staff of the CPCU Society. © 2012 CPCU Society

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Five Steps to Take After Your Next Claims Audit

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 Tech Bits and Bytes 22| Business and Technology Trends

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 Achievement of the CPCU Designation 24| and Beyond—Gail Bundy

A Report to the Judicial Conference Committee on Court Administration and Case Management

The CPCU Society Technical Journal Agent Broker Interest Group http://agentbroker.cpcusociety.org

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 Key Insights on Saudi Arabia’s Insurance Sector

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 The New Paradigm of Risk 28|

The The Chartered Chartered Property Property Casualty Casualty Underwriters Underwriters (CPCU) (CPCU) Society Society is is aa community community of of credentialed credentialed property property and and casualty insurance professionals who promote excellence through ethical behavior and continuing education. casualty insurance professionals who promote excellence through ethical behavior and continuing education. The The Society’s Society’s more more than than 22,000 22,000 members members hold hold the the Chartered Chartered Property Property Casualty Casualty Underwriter Underwriter (CPCU) (CPCU) designation, which requires passing rigorous undergraduateand graduate-level examinations, designation, which requires passing rigorous undergraduate- and graduate-level examinations, meeting meeting experience experience requirements, requirements, and and agreeing agreeing to to be be bound bound by by aa strict strict code code of of professional professional ethics. ethics. To To find find out out more more about about the the CPCU CPCU Society, Society, go go to to www.cpcusociety.org. www.cpcusociety.org.

CPCU Society Insurance Technical Journal | Vol. 1 Issue 1 | 3


Claims Tech Bits and Bytes written reports. Presumably, the aim of a wrap-up meeting is to avoid surprises, but they can still happen. People are often more willing to put criticisms on paper than to confront them awkwardly in a conversation. This is not necessarily due to auditor duplicity. In fairness to the auditors, they may sometimes have observations and recommendations that come to them later, upon reflection and after crunching numbers related to the audit. Still, as a best practice, a wise claim manager will ask the auditors at the end of the wrap-up meeting, “Will we be surprised by anything in your report?” and “Are there any other findings, observations, or recommendations that we haven’t discussed?”

Five Steps to Take After Your Next Claims Audit by Kevin Quinley, CPCU, AIC, ARM Handshakes and smiles abound as you bid adieu to the claim audit team leaving your office after a four-day stint. “Have a smooth flight back,” you add, privately thinking, “Don’t let the door hit you on the way out!” Ah, claim audits. Can’t live with them, can’t live without them. At times, it seems that everyone wants to put your operation and its claim files under the magnifying glass: reinsurers, excess carriers, state insurance departments, agents and brokers, and the home office. Claim audits can be a huge distraction— sort of like trying to compete in the Indy 500 while having to pull off to the side of the track periodically for a mandatory state motor vehicle inspection. Love them or loathe them, they are a necessary part of life in any claim operation. You can’t wish them away (though you might want to). After auditors leave, many react by breathing a sigh of relief. There is an understandable and a natural tendency to think, “Well, glad that’s over. Now we can get back to our real jobs, our real work!” Although

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Kevin Quinley, CPCU, AIC, ARM, is a claims consultant, trainer, and expert witness in the Washington, D.C., area. The author of ten books, including Time Management for Claim Professionals, he can be reached at kquinley@cox.net.

that thought is understandable, claim management must not close the mental books so soon. Savvy claim managers and supervisors should adopt follow-up action items that come after any claims audit. Here are five recommended steps: 1. R  equest a copy of the audit report. Given all the time the auditors spent on site, you should be curious about their findings. Granted, you may g et some hint or flavor of that in a “wrap-up” meeting. Sometimes, though, in face-to-face exchanges, auditors will exercise restraint or tone down criticisms that may surface more emphatically in

Moral: ask for a copy of whatever report the auditor writes. Caution: some (many) auditors will not honor this request, but there is no harm in asking. The reasons for their declining are varied. Some companies simply have a policy not to release such a work product. Perhaps the audit is for internal use only. Reinsurers may use the claim audit to make decisions on underwriting or renewing treaty business with a ceding company or to price a reinsurance quote. Other companies may feel uncomfortable releasing unvarnished findings or believe that if they have to share the report, the auditors will use discretion and not be as candid. For whatever reason, the party doing the audit may balk at releasing a copy of its findings. Fortune favors the bold; do not let the possibility of being rebuffed deter you from asking. The worst that can happen is that the auditors say no, and you may be pleasantly surprised by

the auditors’ saying yes. If they agree to provide a copy, follow up promptly with a letter or an e-mail, which will serve as a friendly reminder.

or findings that you feel are significantly off base. If the report is going to be shared with key constituencies—such as the department head, the board of directors, the home office, the audit committee, or senior management—a written response may be important. Before investing the time, though, speak with the boss about the advisability of a written rebuttal. Sometimes a rebuttal only “adds fuel to the fire,” especially if it’s possible that no one will take much notice of the audit recommendations. It is a natural impulse for any claims person to want to set the record straight if he or she feels an injustice has been done. Nevertheless, avoid drawing more attention to adverse findings by virtue of a heated response.

2. T  hank the auditors for their time and effort during the visit. Wish them smooth travels on their flight or drive back home. If the auditors were from a business partner (such as a reinsurer or broker), tell them how you value the business partnership. Acknowledge that no claims operation is perfect and that any claims unit is open to improvement. Remind them in a friendly way of any promise they made to share a copy of the audit report with you. Indicate a willingness to listen to all improvement suggestions constructively and with an open mind. 3. C  alendar or diary the audit report request for follow-up in a reasonable number of days, say, thirty to forty-five. Keep this as a recurring or an open action item on your diary or to-do list until you receive a copy of the audit report. You may need to follow up, perhaps more than once. 4. O  nce you get the audit report, read it closely. Do not treat it as mere “credenza decoration.” Compare the audit report with the notes you took during the wrap-up meeting. Are there any inconsistencies? Does the report contain any new criticisms that did not surface in the wrapup meeting? Depending on the audit report’s findings and conclusions, you may also wish to write a response or a rebuttal. This may be especially true if there are damaging observations

5. U  se the claim audit as an opportunity to learn and to improve your claim operation. Turn a negative into a positive— an opportunity for growth, improvement, and learning. That really should be the point of any audit. Admittedly, it’s tough to be impartial about your own claim operation. Often, it takes an outsider to give objective observations and advice. Your professional capacity to grow and to take your claims unit to the next level will suffer if you adopt a closed-minded attitude toward every claim audit. So cut the cynicism about claim audits, take a deep breath, and view them as opportunities to get better. Who knows, as you become more adept in navigating the receiving end of claim audits, you may one day find yourself in a new role: that of claims auditor! 

CPCU Society Insurance Technical Journal | Vol. 1 Issue 1 | 5


Tech Bits and Bytes CLEW questionnaire, 508 responded, for an overall response rate of 53 percent. The respondents represent all 94 districts and have a mean of 14.6 years on the bench, ranging from a few months to 49 years of service as a federal judge. Appendix A provides a breakdown of responding judges by district.

Jurors’ Use of Social Media During Trials and Deliberations by Meghan Dunn

Executive Summary

At the request of the Committee on Court Administration and Case Management (CACM), the Federal Judicial Center conducted a survey of district courts to assess the frequency with which jurors use social media to communicate during trials and deliberations, and to identify effective strategies for curbing this behavior. The results, based on the responses of 508 responding judges, indicate that detected social media use by jurors is infrequent, and that most judges have taken steps to ensure jurors do not use social media in the courtroom. The most common strategy is incorporating social media use into jury instructions—either the model jury instructions provided by CACM or judges’ own personal jury instructions. Also common are the practice of reminding jurors on a regular basis not to use social media to communicate during trial or deliberations, explaining the reasons behind the ban on social media, and confiscating electronic devices in the courtroom. Judges admit that it is difficult to police jurors. Only 30

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judges reported instances of detected social media use by jurors during trials or deliberations.

Jurors’ Use of Social Media During Trials and Deliberations

The Judicial Conference Committee on Court Administration and Case Management (CACM) asked the Federal Judicial Center to develop and administer a short survey of district court judges to assess the frequency with which jurors use social media to communicate about cases during trial and deliberation. The survey also sought to identify strategies judges have found to be effective and appropriate in curbing this behavior. This report presents the findings from the survey.

Study Methods and Response Rate

In October 2011, we sent an electronic questionnaire to all active and senior federal district judges. Two weeks later we sent an email reminder to judges who had not yet responded. Of the 952 judges who received the

The computerized questionnaire allowed respondents to be routed automatically around questions that were not relevant to their situations; thus, judges answered different questions depending on their experiences. Because some judges were asked questions that other judges were not (e.g., about previous experience with social media use), and because not all judges responded to every question presented to them, the number of respondents varies across the questions. A copy of the questionnaire can be found in Appendix B. Please keep in mind that the data from the survey represent judges’ reported experiences and perceptions of jurors’ use of social media to communicate about proceedings in which they are involved. The data are not actual empirical measures of such behavior.

Incidence of Social Media Use by Jurors During Trials and Deliberations The use of social media by jurors during trials and deliberations is not a common occurrence. Of the 508 judges who responded to the survey, only 30 judges

(6 percent) reported any detected instances of jurors using social media during trial and deliberation, as seen in Table 1. Of the 30 judges who have detected juror use of social media during trials

Table 1 Judges’ Experience with Jurors Using Social Media to Communicate During a Trial or Deliberation (n=508) Have Jurors Used Social Media During This Option Trial or Deliberation?

Judges Selecting This Option Number Percentage

Yes 30

5.9%

No 478

94.1%

and deliberations, the majority (28 judges, or 93 percent) have seen social media use by a juror in only one or two trials. The instances of social media use were more commonly reported during trials (23 judges reported at least one instance) than during deliberations (12 judges reported at least one instance), and were more commonly reported during criminal trials (22 judges with experience) than during civil trials (5 judges). Three judges encountered jurors using social media during both criminal and civil trials.

Ways in Which Jurors Use Social Media

The forms of detected social media use by jurors include Facebook (nine responses), and instant messaging services (seven responses). Twitter and internet chat rooms were reported by three judges. Table 2 contains a complete list of the social media forms judges encountered during trials and delib erations. Of the 17 judges who described the type of social media use jurors engaged in during trials and deliberations, three judges reported that a juror “friended” or attempted to “friend” one or more participants in the case, and three reported that a juror communicated or attempted to communicate directly with participants in the case (see Table 3).While three judges reported that jurors used social media to post

information about a deliberation, none of the responding judges reported any instance in which a juror used social media to divulge confidential information about a case. One judge did report, however, that a juror revealed identifying information about other jurors. Judges could select “other” as an option for identifying additional ways in which jurors inappropriately used social media; the eleven who did listed caserelated research (five judges), sharing general trial information such as the progress of the case (four judges), allowing another person to listen to live testimony (one judge) and conducting personal business (one judge). In an open-ended follow-up question, judges could describe more fully the ways in which jurors have used social media during trials and deliberations. Overall, the 13 judges who responded to this question reported that jurors share both case-specific information and more generic information about jury service in general during the progress of the trial. Two judges reported jurors sharing nonconfidential information about a case (one in a personal blog), and two judges reported jurors sharing information about their jury service in general. Three judges reported cell-phone use by jurors, but were unsure of the specifics of that use. Continued on page 9

CPCU Society Insurance Technical Journal | Vol. 1 Issue 1 | 7


CLEW

A Report to the Judicial Conference Committee on Court Administration and Case Management Continued on page 8

Table 2 Forms of Social Media Used During Trials and Deliberations (n = 30)a

Judges Selecting This Option Social Media Forms Number Percentage

Facebook

9

30.0%

Google +

9b

30.0%

Instant messaging service (such as AIM)

7

23.3%

Twitter

3

10.0%

Internet chat room

3

10.0%

Internet bulletin board

1

3.3%

MySpace

1 3.3%

a. Judges could select more than one item; thus, the number of media forms identified is greater than the number of respondents. b. The new social media service Google + was included as an option; nine judges indicated that jurors used Google + in their courtroom. Later comments in those responses strongly suggest that the judges were referring to the Internet search engine Google, and not the social networking site Google +.

Table 3 Ways in Which Jurors Used Social Media During a Trial or Deliberation (n = 17)a

Judges Selecting This Option Juror Behavior Number Percentage “Friended” or attempted to “friend” participants in the case

3

Communicated or attempted to communicate directly with participants in the case

3 17.6%

Revealed aspects of the deliberation process

3 17.6%

Revealed identifying information about other jurors

1 5.9%

Divulged confidential information about the case

0 0.0%

Other

11

17.6%

64.7%

a. Judges could select more than one item; thus, the number of juror behaviors selected is greater than the number of respondents.

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Though the incidence appears to be small, the judges’ responses reveal that at least some jurors have revealed case-specific information through social media. Two judges described situations in which a juror contacted a party with casespecific information. In one, the juror contacted the plaintiff’s former employee to reveal likely verdict; in the other, an “alternate juror contacted an attorney via Facebook during juror deliberations to provide feedback and [the] likely outcome.”

Identifying Jurors’ Social Media Use During Trials and Deliberations

Judges acknowledge that it is difficult to detect jurors’ inappropriate use of social media. Of the 28 judges who indicated how they learned of the incident, most said another juror had reported it (13 judges). Five judges said an attorney had reported it and five said a juror’s use of social media came up in post-trial motions or interviews. Three judges indicated that jurors’ social media use was reported by court staff or a party. Only two judges reported observing jurors using electronic devices in the courtroom. When judges have learned of jurors using social media in their courtrooms, reactions have differed. Nine judges (30 percent of the 30 judges with experience) removed the juror from the jury, and eight judges (27 percent) chose to caution the juror but allowed him or her to remain on the jury. Four judges declared a mistrial in cases in which jurors used social media during trials and deliberations.

Strategies for Preventing Jurors’ Use of Social Media During Trials and Deliberations

The great majority of judges who responded have taken preventive measures to ensure that jurors do not use social media in their courtrooms (478 judges), with only 6 percent, or 30 judges, indicating that they have not specifically addressed jurors’ use of social media.

Use of Model Jury Instructions

In January 2010, the Committee on Court Administration and Case Management distributed model jury instructions regarding the use of electronic technologies to research or communicate about a case. Almost all of the judges who responded to this questionnaire know of the existence of those model jury instructions; only 32 of the 508 responding judges reported that they were not aware of the model jury instructions regarding social media use. Further, 60 percent (304 judges) have actually used the model jury instructions during a trial. Most judges (82 percent, or 246 judges) who used the model jury instructions have done so in both civil and criminal trials, and almost two-thirds (65 percent, or 195 judges) have instructed the jury on the issue both before trial begins and again before deliberations, as shown in Tables 5 and 6. To the extent that the judges who responded could determine, the model jury instructions appear to successfully affect jurors’ use of social media during a trial or deliberation. Over half the 303 judges who responded to this question (162 judges) indicated Continued on page 10

Table 4 Actions Taken by Judges When Social Media Use by a Juror Was Discovered (n = 30)

Judges Selecting This Option Action Taken Number Percentage Removed juror from jury

9

30.0%

Cautioned juror, but allowed him or her to remain on jury

8 26.7%

Declared a mistrial

4 13.3%

Held juror in contempt of court

1 3.3%

Fined juror

1 3.3%

Other

7 23.3%

Table 5 Judges’ Use of Model Jury Instructions (n = 301)

Judges Selecting This Option Trial Type Number Percentage Civil trials only

20

Criminal trials only

35 11.6%

Both civil and criminal trials

6.6%

246 81.7%

Table 6 Timing of Model Jury Instructions (n = 302)

Point at Which Judge Used Model Jury Instruction

Judges Selecting This Option Number Percentage

Instructed the jury before the trial

67

Instructed the jury before deliberations Instructed the jury both before the trial and before deliberations Other

22.2%

6 1.9% 195 64.6% 34 11.3%

Table 7 Success of Model Jury Instructions (n = 303)

Did Jurors Use Social Media After the Model Jury Instructions Yes

Judges Selecting This Option Number Percentage 4

1.3%

No

162 53.5%

I have no way of knowing

137 45.2%

CPCU Society Insurance Technical Journal | Vol. 1 Issue 1 | 9


CLEW

A Report to the Judicial Conference Committee on Court Administration and Case Management Continued on page 9

Table 8 Measures Taken, in Addition to or Other Than Use of the Model Jury Instructions, to Ensure Jurors Do Not Use Social Media to Communicate During Trials and Deliberations (n = 508)a

Judges Selecting This Option Preventive Measure Number Percentage Explained, in plain language, the reason behind the social media ban

317

62.4%

Instructed jurors at multiple points throughout the trial

271

53.3%

Used other jury instructions before trial

227

44.7%

Reminded jurors at voir dire to refrain from using social media while serving as a juror

199

39.2%

Used other jury instructions before deliberation

176

34.6%

Confiscated phones and other electronic devices during deliberation

147

28.9%

Confiscated phones and other electronic devices at the start of each day of trial

113

22.2%

Alerted the jury about the personal consequences

103

20.3%

I have not specifically addressed jurors’ use of social media

30b

5.9%

Required jurors to sign a statement of compliance, similar to one suggested by the American College of Trial Lawyers

3

0.6%

Required jurors to sign a written pledge agreeing to refrain from using social media while serving as a juror

3

0.6%

a. Judges could select more than one item; thus, the number of preventive measures identified is greater than the number of respondents. b. Of the 30 judges who indicated they have not specifically addressed jurors’ use of social media, two (or 6.6 percent) reported detected instances of social media use by jurors.

Table 9 Success of Additional Preventive Measures for Social Media Use During Trials and Deliberations (n = 457) Judges Selecting This Option Action Taken Number Percentage Very successful Somewhat successful Not at all successful I don’t know

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239

52.3%

16

3.5%

0 0.0% 202

44.2%

that jurors did not use social media in cases in which the model instructions were read (see Table 7). However, judges acknowledge that it is difficult to assess the success of the instructions: an additional 45 percent said they had no way to know whether jurors were using social media. Only four judges reported that jurors did use social media after being instructed; three of those instances were during deliberations. Of the 202 judges who have not used the model jury instructions, the majority used a different set of instructions (67 percent), and another 8 percent used a different strategy for preventing jurors from using social media, such as prohibiting electronic devices in the courtroom. Almost 10 percent of judges indicated they have not had a case that required the use of the model instructions. The remainder was unaware of the model jury instructions. Forty-eight judges elaborated on why they did not use the model jury instructions. Three quarters of those judges (36 of the 48) indicated that they used a different set of instructions, either instructions provided by their circuit (8 judges), their court (1 judge), or instructions they had written themselves (27 judges). The others had either not presided over a trial since the introduction of the model instructions (9 judges) or found the model instructions to be too formal (3 judges).

Additional Measures Taken to Prevent Jurors from Using Social Media During Trials and Deliberations

Judges were asked to identify steps they had taken, in addition to or other than use of the model jury instructions, to ensure that jurors did not use social media to communicate about a case. Table 8 shows the responses. An additional 39 percent of judges (199 judges) remind jurors at voir dire to refrain from using social media while serving as a juror, and 20 percent (103 judges) alert the jury about the personal consequences of inappropriate social media use (i.e., personal fines or being held in contempt of court). Approximately one quarter of the responding judges reported confiscating cell phones and other electronic devices, with 22 percent (113 judges) doing so at the start of each day of trial and 29 percent (147 judges) doing so during deliberations. Few judges ask jurors to sign formal statements of compliance; only 3 judges indicated they required jurors to sign a statement of compliance, and 3 indicated they required jurors to sign a written pledge. As Table 9 shows, more than half of the responding judges (239, or 52 percent) reported their actions regarding social media to have been “very successful”; 44 percent said they did not know how successful their preventive measures have been. In an open-ended follow-up question that asked judges to explain the success of their preventive measures, the majority of responding judges (79 percent of the 187 judges who answered the question) indicated that they had no way of knowing if jurors have violated the social media

prohibition, but assume they had not. Twelve judges highlighted the importance of jurors understanding the reason behind the prohibition, and ten judges stated that jurors take their jobs seriously and comply with the restrictions on social media use. Seven judges conduct post-verdict interviews with jurors to assess, among other things, the extent to which jurors comply with the social media instructions. Six judges reiterated the importance of instructing the jury at multiple points throughout the trial, and five stated that prohibiting electronic devices in the courtroom makes it more difficult for jurors to use social media.

Additional Suggestions Regarding Social Media Use During Trials and Deliberations The final question of the survey asked judges to suggest any ways in which courts could prevent inappropriate use of social media by jurors during trial and deliberation. The most commonly cited suggestion was to give frequent reminders to jurors throughout the trial, cited by 33.5 percent of the 200 judges who answered this question. There were nearly as many suggestions­—31 percent of the 200 responding judges—to give a detailed explanation of how refraining from social media use can promote a fair trial. Other suggestions included explaining the consequences of violations during trial, such as mistrial and wasted time and money (mentioned by 15 percent of judges); using plain English instructions (mentioned by 12 percent of the responding judges); and prohibiting cell phones and other electronic devices in the courtroom (mentioned by 12 percent of responding judges). Twenty-one judges (11 percent of those who responded) specifically

mentioned that the model jury instructions provided by CACM were a good idea.

Summary

The detected use of social media by jurors during trials and deliberations is not common, but it does occur. Thirty of the 508 responding judges reported instances in which jurors were detected using social media during trial or deliberation, most often in criminal cases. This social media use most often took the form of posts about the progress of the case or the juror’s service in general. There were several instances of jurors attempting to contact participants in the case via social media. When social media use was detected, it was most likely to be reported by a fellow juror. Although the use of social media is a relatively new phenomenon, judges have responded in timely fashion to address its use in the courtroom. The vast majority of judges (94 percent) say they have taken at least some form of precautionary steps to ensure that jurors do not use social media in their courtrooms. The most common strategy is incorporating social media use into their jury instructions, either by using the model jury instructions provided by CACM or using their own personal jury instructions. Also common are the practice of reminding jurors on a regular basis not to use social media to communicate during trial or deliberations, explaining the reasons behind the ban on social media, and confiscating electronic devices in the courtroom. Judges admit that it is difficult to police jurors, and therefore use of social media is difficult to detect. Only 30 judges reported instances of detected social media use by jurors during trials or deliberations. 

CPCU Society Insurance Technical Journal | Vol. 1 Issue 1 | 11


Feature Article

Corporate Governance and Ownership Structure of Property-Liability Insurers1 By Enya He, David W. Sommer, and L. Lee Colquitt

Enya He, Ph.D., is an assistant professor of risk management and insurance in the College of Business at the University of North Texas. Dr. He received her MBA from the University of Miami and her Ph.D. from the University of Georgia and has published articles in the Journal of Risk and Insurance, Risk Management and Insurance Review, the Journal of Insurance Issues and Risk Management. She is a member of the American Risk and Insurance Association (ARIA) and Southern Risk and Insurance Association (SRIA). She is also a fellow of the Chartered Insurance Institute of Britain.

David W. Sommer, Ph.D., is the Charles E. Cheever Chair of Risk Management in the Bill Greehey School of Business at St. Mary’s University. Dr. Sommer received his M.A. and Ph.D. from the Wharton School of the University of Pennsylvania. He has published articles in a wide variety of journals, including the CPCU Journal, the Journal of Risk and Insurance, the Journal of Insurance Regulation and the Journal of Insurance Issues. He is currently president-elect of the American Risk and Insurance Association.

Introduction

The topic of corporate governance has generated extensive research in the academic world as well as much heated debate among politicians, regulators, the media and the general public. The series of corporate and accounting scandals of the past decade, including Enron, Tyco International, Adelphia and Worldcom, brought renewed attention to corporate governance, and the recent financial crisis has greatly intensified such research and debate. Despite such extensive research and discussions, a number of “misguided beliefs” about corporate governance remain among academics, politicians and the media, according to a recent study by Brickley and Zimmerman, two leading researchers in the field.2 One particular misguided belief pinpointed by the authors is the common practice by academics, consultants or regulators to “unconditionally classify a particular governance practice as ‘good’ vs. ‘bad,’ or ‘weak’ vs. ‘strong.’” For example, firms with certain characteristics of boards of directors (i.e., more independent boards, smaller boards, etc.) are often identified as having good/strong governance

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ABSTRACT A separation exists between the ownership and control of most firms, and this separation creates potential incentive conflicts, with managers acting in their own interests rather than in the interests of the owners (resulting in what is referred to as “agency costs”). There are varying degrees of this separation, depending upon the organizational form and ownership structure of the firm. An effective way in which to monitor management’s behavior and to reduce agency costs is with outside board members, those members who are not themselves in management positions with the company. An analysis of approximately 1,130 property- liability insurers over nine years suggests that insurers use varying degrees of participation from outside directors, depending upon the firm’s ownership structure, to effectively monitor management behavior. Results show that the greatest use of outside board members is found with ownership structures that have the greatest need for monitoring management. In addition, those structures with the least separation of ownership and control employ the fewest outside board members.

L. Lee Colquitt, Ph.D., is the Woodruff Professor of Risk and Insurance in the Finance Department at Auburn University. Dr. Colquitt received his MBA and Ph.D. from the University of Georgia and has published articles in leading risk and insurance journals, including the CPCU Journal, the Journal of Risk and Insurance, the Journal of Insurance Issues, the Journal of Insurance Regulation and the North American Actuarial Journal. He is a member of the American Risk and Insurance Association (ARIA), Southern Risk and Insurance Association (SRIA), Western Risk and Insurance Association (WRIA), and the Risk Theory Society.

practice. This type of belief has contributed to such uniform requirements on board structure as those imposed by the NYSE and NASDAQ and by the Sarbanes– Oxley Act (SOX) in 2002. Yet, often ignored by regulators, practitioners and academics alike is the interdependence among different elements of the corporate governance system. In this study, we explore the interdependence of firm ownership and board structure in the United States property-liability insurance industry. What we find is that boards of property-liability insurance firms

generally appear to be structured in a very systematic manner that appears consistent with firm value maximization. This has significant implications. For example, it implies that external regulations imposing uniform rules on how insurers structure their boards may be counterproductive. In addition, the results of the study may be of use to insurers in making decisions regarding the structures of their own boards, or to regulators, consumers or other outsiders who are evaluating the appropriateness of an insurer’s board structure.

An Overview of Corporate Governance

In many business organizations, the people who own the organization are distinct from the people who manage the daily affairs of the organization. In other words, a separation exists between the ownership of the organization and the control of the organization. This creates potential incentive conflicts, with managers acting in their own interests rather than in the interests of the owners. Rather than seeking to maximize the value of the firm for its owners, managers may pursue activities with the goal of maximizing their power and the amount of assets under their control. They may engage in excessive perquisite consumption and build lavish office buildings for themselves. They may behave in an excessively risk-averse fashion, to minimize the chance that they will lose their jobs rather than maximize owner wealth. Or, they may simply not work as hard as they would if they were the owners of the firm, and enjoy more leisure time. All of these incentive conflicts are potential consequences of the separation of ownership and control. The structures, systems and processes designed to control these incentive conflicts are generally described under the heading of corporate governance. A variety of internal and external corporate governance mechanisms exist in modern business organizations. Externally, the hostile takeover market serves as a check on managerial behavior; if managers fail to maximize the potential of a firm, outsiders may buy the firm and replace the existing managers with new ones. Internally, corporate governance schemes include executive compensation and boards of directors. First, compensation Continued on page 14

CPCU Society Insurance Technical Journal | Vol. 1 Issue 1 | 13


Feature Article

Corporate Governance and Ownership Structure of Property-Liability Insurers1

Figure 1 ­— Ownership Structure of Stock Insurers

Continued from page 13

4% systems can be designed to align the interests of owners and managers, such as paying managers in part with shares of stock or stock options, so that their personal wealth is enhanced when the value of the firm is increased. Then, of course, there is arguably the single most important corporate governance mechanism: the board of directors.

Role of Board of Directors

The presence of a board of directors is nearly universal among complex organizations. In business organizations, boards of directors are selected by the owners of the organization to represent them in overseeing the organization. Boards of directors serve two primary purposes. First, they play an advisory role, lending their expertise to management of the firm. Second, they play a monitoring role, in which they monitor the actions of management to assure that managers are providing accurate information about the firm and acting in the best interests of the firm’s owners. The board of directors has been called “the ultimate internal monitor.” (Fama, 1980) Membership on a board of directors can be divided into two broad categories: inside directors and outside directors. First are inside directors, who, in addition to serving on the board, also serve as managers within the firm. Inside directors clearly bring to the board significant expertise and detailed knowledge of the firm’s operations. However, they may have conflicts of interest in terms of serving as monitors of management, since they are part of management themselves.

The second type of board member is an outside director, who does not serve as a manager within the firm. Outside directors may bring expertise to the board that does not otherwise exist within the firm. In addition, outside board members are arguably more effective monitors of management than inside board members. First, since they do not serve as managers of the firm, they do not have the incentive conflicts involved with monitoring themselves. Further, outside board members have incentives to perform their monitoring role well, because their reputation as good monitors will increase their likelihood of being asked to serve on the boards of other firms. Despite the value of outside directors in providing monitoring services, adding outside members to the board also imposes costs. Outsiders will not likely have the intimate, detailed knowledge of the day-today operations that an insider has. Educating outside board members about the operations of the firm, and keeping them appropriately updated on what is happening within the firm, may be expensive and timeconsuming. This is likely especially true for firms experiencing rapid growth or for those that have very complex operations. Thus, it is not obvious that having more outside directors is always superior to having fewer outside directors. In practice, firms vary widely in terms of the composition of their boards of directors, ranging from those with a small proportion of outsiders to those with a large majority of outsiders on the board. Why is this? It is

14 | CPCU Society Insurance Technical Journal | Vol. 1 Issue 1

possible that boards are structured haphazardly, and thus no clear rationale can be provided for why board composition varies by firm. Alternatively, however, it seems more plausible that boards are generally structured in a more systematic manner, in ways that further the goal of maximizing the wealth of the owners who ultimately appoint the board members. If this is true, then we should find systematic differences in board composition across firms with different characteristics. For example, if some firms are likely to be particularly susceptible to incentive conflicts between owners and managers, we would expect boards of those firms to have a higher proportion of outside board members, all else being equal. An interesting place to investigate this issue is the property-liability insurance industry, which has firms with widely differing levels of potential conflicts between managers and owners.

Ownership Structures Within the Property-Liability Insurance Industry Broadly speaking, the two most predominant organizational forms in the property-liability insurance industry are stock insurers and mutual insurers. Of course, the primary difference between the two is that stock insurers are owned by the stockholders of the firm and mutual insurers are owned by the policyholders. In each case, the owners (stockholders or insureds) vote to elect members of the board of directors, who then appoint executives to manage the company. Clearly, a separation of ownership and control can exist with both

15%

no shareholders. The closest thing to an external takeover of a mutual firm is a proxy fight waged by the policyholders, a relatively expensive and difficult proposition, given that each policyholder has only one vote. As a result, the corporate control mechanisms in the mutual company are much more restricted than those for the stock insurer.

66%

15%

Widely-held

Wholly-owned by a mutual

Closely-held by others

Closely-held by management

organizational forms and result in agency costs to the owners. However, the degree of such separation varies, and such variation leads to differing agency costs, which requires varying approaches to confront these potential costs. Such differences in separation of ownership and control are not only found between stock and mutual insurers, but are also present among stock insurers with varying types of ownership. First, how widely held ownership of a firm is can make a difference in the degree to which management needs to be monitored. Second, who owns the company is also meaningful when considering the issue of separation of ownership and control. Figure 1 breaks down stock insurers with regard to how widely held the firm is and to the type of owner (inside vs. outside ownership).3 As shown in Figure 1, the sample stock insurers are mostly widely held (the company itself or its ultimate parent is publicly traded, and ownership ultimately rests with numerous individual stockholders), with this classification making up approximately 66.5 percent of all sample stock insurers. Of the remaining sample stock insurers, 14.9 percent are wholly owned by a mutual company, and 18.6

percent are closely held (a majority ownership rests with one or several individuals, or with a single family). Of the closely held insurers, roughly 80 percent (14.9 percent of all stock insurers) are closely held by the firm’s management, and approximately 20 percent (3.7 percent of all stock insurers) are closely held by parties other than management.

The Implications of Ownership Structure on the Need for Monitoring Management

The greater the separation between ownership and management, the more likely it is that management will be able to effectively serve its own interests over the owners’. Among the various ownership structures described above, the one with the most significant separation between ownership and control is the mutual firm, where certain corporate governance mechanisms are not available. For example, stock-based compensation packages that directly align the interests of management with those of the owners are not feasible in mutual firms. In addition, the possibility of a hostile takeover does not exist, given that there are

With stock companies, there are varying degrees of separation of ownership and control, depending on the makeup of the current ownership. In most stock companies, management is disciplined by the possibility of their replacement through a hostile takeover. In the event that management operates inefficiently, investors in the market can identify this inefficiency, gain a controlling interest in the company, and change the management. Again, this threat varies, depending on the ownership. In some situations, the takeover threat is more pronounced than in others. As shown in Figure 1, stock firms are wholly owned by a mutual company, widely held, closely held by outside investors, or closely held by the management of the firm. While still a stock company, a stock company that is wholly owned by a mutual lacks the effective monitoring mechanism of an outside takeover. This is because the stock of a mutualowned stock company is not publicly traded and is ultimately owned by the mutual parent’s policyholders, making the possibility of an outside takeover or a successful proxy fight remote. With this type of ownership, the threat of an outside takeover effectively resembles that of a mutual company. As a result, the agency costs with this form of ownership structure are higher than those with other stock firms. Continued on page 16

CPCU Society Insurance Technical Journal | Vol. 1 Issue 1 | 15


Feature Article

Corporate Governance and Ownership Structure of Property-Liability Insurers1

Table 2 Stock Ownership Structure and Board Composition

Continued from page 15 For stock companies that are either widely held or closely held by outsiders, the threat of a management shakeup either by way of a hostile takeover or by action initiated by current ownership becoming frustrated is very real and can be an effective monitoring mechanism. The investing public can observe the untapped potential of a widely held company operated by unproductive management. In a case such as this, the costs of an external takeover are relatively low. In the case of the firm that is closely held by outsiders, the threat of current ownership ousting ineffective management is even greater. These controlling outside owners have tremendous power to make whatever changes in management they deem to be necessary. In the case of a stock company that is closely held by management, separation of ownership and control is significantly less than with any other ownership structure. Although it is still possible that the management may have some incentive to extract rents from the firm, such benefits are offset by the fact that they are also shareholders who benefit financially from an effectively run company. In effect, if the company does well financially, then the management does as well. As a result, the need for the monitoring of management behavior by owners is very low with this form of ownership, since owners and managers are one and the same. Based on the above discussion, the ranking, from greatest to least separation of ownership and control among the differing ownership structures, is mutual firms, mutualowned stocks, widely held stocks,

stocks closely held by others (not management), and stocks closely held by management. That is, the greatest separation is with the mutual firm and the least is with the stock firm that is closely held by management. In addition, the corresponding need for effective monitoring by a board of directors is similarly ranked, with the greatest need for monitoring existing with the mutual firm and the least need existing with the firm that is closely held by management.

How Boards Can Be Structured to Address the Varying Needs for Monitoring Management

As mentioned earlier, one way in which the management of a firm can be effectively monitored internally is through the oversight provided by a board of directors. The management answers to and can be changed by the board. We also have seen that differing ownership structures lend themselves to varying needs for oversight by board members. Again, this is due to the availability (or lack thereof) of other internal and external monitoring mechanisms.

Although the specific firm and industry expertise of the internal board member is helpful to the firm, there exists a conflict of interest with regard to the internal board member’s ability to monitor management; the conflict being that the internal board member, by definition, is a part of the firm management. In situations where there exists a need for additional monitoring beyond that provided by other mechanisms (for example, the mutual firm), an external board member is helpful. In addition, the greater the percentage of outside board members, the greater the degree of monitoring that is provided by the board. Finally, if a majority of the board is made up of outsiders, voting control is also with the outsiders, providing an even more effective monitoring mechanism. In fact, a board made up largely of outsiders might be one of the only effective ways in which the management of a mutual or mutual-owned stock firm can be monitored. With the continuum that exists between the separation of ownership and control with regard to ownership structure, we should expect to

Table 1 Mutual and Stock Board Composition Mutual

Stock

Mean

Median

Mean

Median

10.10

9.00

7.84

7.00

% of outside directors*

0.74

0.78

0.47

0.50

% of firms with outsider-dominated boards**

0.88

1.00

0.47

0.00

Board size

*Outside directors are non-officer, non-family directors, where family members are those having the same last name as the firm’s officers. **Outsider-dominated boards are boards whose proportion of outside directors is more than 50 percent.

16 | CPCU Society Insurance Technical Journal | Vol. 1 Issue 1

Mutual-owned

Widely held

Mean

Median

Mean

Median

Board size

9.26

9.00

7.87

7.00

% of outside directors*

0.64

0.70

0.46

% of firms with outsiderdominated boards**

0.72

1.00

0.45

Closely held by others Mean

Closely held by management

Median

Mean

Median

6.40

6.00

6.63

6.00

0.46

0.57

0.57

0.35

0.33

0.00

0.56

1.00

0.28

0.00

*Outside directors are non-officer, non-family directors, where family members are those having the same last name as the firm’s officers. **Outsider-dominated boards are boards whose proportion of outside directors is more than 50 percent.

see differing degrees of external board member participation with the various ownership structures mentioned above. Given a sample of over a thousand property-liability insurers spanning a period of nine years, we are able to determine if, in fact, boards appear to be haphazardly constructed or whether there is some systematic structuring of boards in ways we would presume to be most helpful in terms of monitoring of management. Using the data set described earlier, Table 1 provides a breakdown of the sample insurers by the broader organizational form categories of stock and mutual insurers. As stated above, we note that there is a greater need for internal monitoring of mutual insurers as compared to stock insurers, given the lack of effective external monitoring that exists with mutual insurers. As shown in Table 1, the mean (median) percent of outside directors for the sample mutual insurers is 74 percent (78 percent) and for stock insurers it is 47 percent (50 percent). This finding supports the notion that firms do not organize their boards haphazardly, but rather with the monitoring needs of the firm in mind. Additionally, we find that

the 88 percent of mutual insurers have outsider-dominated boards as compared to 47 percent of stock insurers. This is also consistent with the hypothesis that mutual insurers need greater monitoring by board members who are not otherwise affiliated with the company. As discussed earlier, the role of the inside director is an important one; the inside director brings significant expertise and a detailed knowledge of the firm’s operations to the board. Of course, in the event that outside directors are added to monitor management, the outside directors’ participation would dilute the board of the insiders’ expertise, assuming that the board size remains the same. Given the need for a company to preserve the contribution that the inside director makes to the board, we expect that a board with a greater percentage of outside board members might also have a larger number of board members. This would allow the outside board members to be added without removing an equal number of insiders from the board. Consistent with this hypothesis, we find that the mean (median) board size of the mutual insurers, those who tend to have greater numbers

of outside directors, is 10.10 (9.00), as compared to 7.84 (7.00) for stock insurers. Table 2 breaks down the sample stock insurers into four categories of ownership; mutual-owned, widely held, closely held by others, and closely held by management. The table reports the board composition of each with regard to mean and median outside versus inside board membership. The previously described continuum of the separation of ownership and control suggests that we should see differing board compositions with the various categories of stock ownership. The results that we find are largely consistent with our expectations. As shown in Table 2, the category with both the greatest percentage of outside directors and the greatest percentage of firms with outsiderdominated boards is the mutualowned stock company, with 64 percent and 72 percent, respectively. This is expected, given this category’s strong need for monitoring by the board. In addition, these firms also have the largest boards, with an average of 9.26 members. Firms closely held by management, the Continued on page 18

CPCU Society Insurance Technical Journal | Vol. 1 Issue 1 | 17


International

Feature Article

Corporate Governance and Ownership Structure of Property-Liability Insurers1 Continued from page 17 stock insurer category with the least need for board monitoring, is also the category with the lowest percentage of outside board members and the lowest percentage of insurers with outsider-dominated boards, with 35 percent and 28 percent, respectively. Consistent with expectations, these firms also have the smallest boards, with an average of 6.63 members. In Table 2, the two stock categories that are between mutual-owned and closely held by management with regard to monitoring by the board are widely held and closely held by others. We find the percentages of outside directors and outsider-dominated boards of the two categories to be between the categories of mutual-owned stock and closely held by management. However, the positions are switched; we find that the boards of widely held insurers are less heavily populated by outside board members than are those of the closely held by others category. This result could be explained, in part, by the relatively small sample of insurers in the closely held by others category, making conclusions potentially unreliable for this category.4

Conclusion

Using a rich dataset from the property-liability insurance industry, we show that board structure of property-liability insurers is not haphazardly determined as some have suspected. Instead, we show that boards in this industry are generally structured in a more systematic manner, in ways that appear to further the goal of maximizing firm value. Such findings have important

policy implications in the postfinancial crisis era. While some are calling for more stringent regulation of financial services industry, our results seem to indicate that firms are not as inefficient as some might have expected. The imposition of uniform rules for the structure and composition of corporate boards may therefore be counterproductive. The findings may also prove useful to both those inside and outside a propertyliability insurer who are evaluating the appropriateness of the firm’s board structure. A clear implication of our results is that one cannot look at the characteristics of a board in isolation and determine whether or not the board structure and composition are “good” or “strong.” 

2. See Brickley and Zimmerman (2011) for a complete discussion of these misguided beliefs about corporate governance.

References

4. He and Sommer (2010) perform more sophisticated regression analysis, and the results described here are upheld in that more rigorous analysis.

Brickley, James A. and Jerold L. Zimmerman (2010). “Corporate Governance Myths: Comments on Armstrong, Guay, and Weber.” Simon School Working Paper No. FR 1029. Available at SSRN: http://ssrn.com/ abstract=1681030. Fama, E. F. (1980). “Agency problems and the theory of the firm.” The Journal of Political Economy 88(2): 288-307. He, E. and D. W. Sommer (2010). “Separation of Ownership and Control: Implications for Board Composition.” Journal of Risk and Insurance 77(2): 265-295.

Endnotes

1. This article is based on an academic research paper. Readers interested in deeper analysis of the topics discussed here are referred to He and Sommer (2010).

3. The information on corporate management and boards is collected from the Best’s Insurance Reports Property/ Casualty 1996 through 2005 editions. The ownership information on mutual vs. stock is from the NAIC database, 1995 to 2004. The detailed stock ownership information is hand-collected from various sources, including Best’s Insurance Reports, LexisNexis Academic Database, Dun & Bradstreet Million Dollar Database and company websites. See He and Sommer (2010) for a complete description of sample selection criteria. All firms are categorized in terms of ultimate ownership. For example, any insurer that is part of a publicly traded insurer group is categorized as publicly traded.

Key Insights on Saudi Arabia’s Insurance Sector by Sahesh Rafeeque, CPCU, AIC, AIS The insurance industry in Saudi Arabia has been flourishing for the past few years and effectively resisted the after-impacts of recession. This was mainly due to the strong domestic funding and high level of investments. Strict regulation on the part of Saudi Arabian Monetary Agency (SAMA) facilitated the market developments, and better laws further improved the structure. From the point of view of multinational insurers that are looking to expand into Gulf Cooperation Council (GCC) countries, Saudi Arabia represents an attractive prospect. Its economy was remarkably resilient in the downturn of oil prices in 2009 and will benefit from the strength of oil prices again in 2011. The market has also been opened up for foreigners. Other trends are also favorable in the insurance markets, with the main exception being the underdevelopment of the life segment. The Saudi insurance sector differs from others in the Middle East in that it includes at least one indigenous insurer, Tawuniya, which would rank as a large company

Sahesh Rafeeque, CPCU, AIC, AIS, is underwriting manager of Saudi IAIC Cooperative Insurance Company (Saudi Arabia), a division of SALAMA Group. SALAMA provides complete conventional insurance products for a diverse customer base. Rafeeque began his insurance career in early 2000 and has worked with Norwich Union Insurance/AXA/Solidarity Takaful in different levels. He holds a master’s degree in marketing, along with the CPCU, Associate in Claims (AIC), and Associate in Insurance Services (AIS) designations, and the Senior Associate CIP (Snr Assoc CIP) from the Australian and New Zealand Institute of Insurance & Finance.

in most countries. Figures released by Tawuniya to the Tadawul (Saudi Stock Exchange), on which it is listed, indicate that its premium nearly doubled over the course. According to new research, health insurance has emerged as one of the fastest-growing segments in the Saudi Arabian insurance sector. With 53 percent share Continued on page 20

18 | CPCU Society Insurance Technical Journal | Vol. 1 Issue 1

CPCU Society Insurance Technical Journal | Vol. 1 Issue 1 | 19


International

CPCU Society Annual Meeting and Seminars: Reflections of Progress

Key Insights on Saudi Arabia’s Insurance Sector Continued from page 19 of the total insurance premium during 2010, health insurance has become a key growth driver for the overall market. Moreover, as health insurance has become compulsory for expatriates, the country is on its way to witnessing a significant surge in the number of insured people. The share of gross health insurance is likely to reach around 59 percent by the end of 2014.

The future outlook of the Saudi Arabia insurance sector is highly positive, with a strong, inherent growth potential in the market. Factors such as low penetration, strong government support, and rising awareness levels are likely to propel the number of persons opting for insurance plans. Takaful insurance, in such a scenario, will play a vital role.

Under the general insurance sector, subsegments, such as engineering insurance, aviation insurance, and motor insurance, will contribute towards the growth of the overall industry. Impressive performance by these segments is likely to propel the general insurance sector, which, in turn, is expected to grow at a compound annual growth rate of around 12 percent during 2011–2014.

Under the general insurance sector, subsegments, such as engineering insurance, aviation insurance, and motor insurance, will contribute towards the growth of the overall industry. Impressive performance by these segments is likely to propel the general insurance sector, which, in turn, is expected to grow at a compound annual growth rate of around 12 percent during 2011–2014.

The future outlook of the Saudi Arabia insurance sector is highly positive, with a strong, inherent growth potential in the market. Factors such as low penetration, strong government support, and rising awareness levels are likely to propel the number of persons opting for insurance plans. Takaful insurance, in such a scenario, will play a vital role.

The future outlook of the Saudi Arabia insurance sector is highly positive, with a strong, inherent growth potential in the market. Factors such as low penetration, strong government support, and rising awareness levels are likely to propel the number of persons opting for insurance plans. Takaful insurance, in such a scenario, will play a vital role.

The future outlook of the Saudi Arabia insurance sector is highly positive, with a strong, inherent growth potential in the market. Factors such as low penetration, strong government support, and rising awareness levels are likely to propel the number of persons opting for insurance plans. Takaful insurance, in such a scenario, will play a vital role.

Under the general insurance sector, subsegments, such as engineering insurance, aviation insurance, and motor insurance, will contribute towards the growth of the overall industry. Impressive performance by these segments is likely to propel the general insurance sector, which, in turn, is expected to grow at a compound annual growth rate of around 12 percent during 2011–2014.

Under the general insurance sector, subsegments, such as engineering insurance, aviation insurance, and motor insurance, will contribute towards the growth of the overall industry. Impressive performance by these segments is likely to propel the general insurance sector, which, in turn, is expected to grow at a compound annual growth rate of around 12 percent during 2011–2014.

The future outlook of the Saudi Arabia insurance sector is highly positive, with a strong, inherent growth potential in the market. Factors such as low penetration, strong government support, and rising awareness levels are likely to propel the number of persons opting for insurance plans. Takaful insurance, in such a scenario, will play a vital role.

In conclusion, the insurance sector is playing an increasingly significant role in Saudi Arabia’s economy, with far greater funds at its disposal as more businesses and individuals recognize the importance of having coverage. Data issued earlier this year by the Saudi Arabian Monetary Agency (SAMA), the regulator of the kingdom’s financial services sector, including the insurance industry, estimated the total value of premiums written in 2010 rose by 12.4 percent over the previous year’s performance––a rise from $3.9 billion to $4.3 billion. This strong growth helped push the insurance sector’s contribution to GDP to the equivalent of 1 percent. 

20 | CPCU Society Insurance Technical Journal | Vol. 1 Issue 1

September 8-12, 2012 | Marriott Wardman Park, Washington, D.C. Take advantage of career-building resources to help you fast-track success, including: • Relevant, practical educational programs • Stimulating leadership experiences • Thought-provoking industry trends and news • Exciting networking and social opportunities • A wide-ranging expo of relevant insurance products and services Plus, earn up to 16 continuing education (CE) credits for attending educational programs. Don’t miss out on the industry’s premier professional development event —

Register today at www.cpcusociety.org!

CPCU Society Insurance Technical Journal | Vol. 1 Issue 1 | 21


Tech Bits and Bytes because of integrated architectures. Larger companies tend to replace different components of major systems because of challenges related to complexity of systems. New administration systems are purchased more often to support a new line of business than to serve as a platform for conversion of existing business. Josefowicz believes that mobility and social media topics are hyped and represent inexpensive strategies that will consume less of the IT spend. Primary investments from a web perspective occurred over a span of fifteen years to move insurers onto the web. The trend now is to undergo the evolution from web to mobile solutions.

Business and Technology Trends by Celeste Allen, CPCU Several studies are referenced that outline a number of new technologies and interesting trends for 2012. There are a number of similarities in terms of focusing on how we improve our businesses’ processes in light of demands from regulatory agencies and laws, consumer preferences for use of technology, and needed internal operations improvements. A Celent study on P&C industry technologies with high adoption rates includes predictive modeling for underwriting, contact and customer management, business rules management, virtualization, portal technology, business process management, and fraud scoring. Matthew Josefowicz, a partner at Novarica, a New York-based research and consulting firm, shared key insurance industry trends for 2012 in a conversation with Pat Speer, Insurance Networking News editor-inchief. Josefowicz advised that many insurers are in the process of implementing known (versus brand new) solutions and observed an unprecedented focus on improvements and enhancements to core systems such 22 | CPCU Society Insurance Technical Journal | Vol. 1 Issue 1

Celeste Allen, CPCU, CLU, ChFC, FLMI, has 28 years’ experience in the insurance industry, having worked in claims, underwriting, business analysis and informationm technology. She currently is a manager with State Farm. Celeste’s leadership experiences led her to strengthen her community service participation and make a difference in the lives of young people in her community, including those at-risk. Celeste also is a member of two major public service organizations. She earned a bachelor’s degree in psychology from Temple University, a master’s of business administration degree from Illinois State University and a master’s degree in executive leadership from the University of Nebraska–Lincoln.

as policy administration systems, agency portal systems, business intelligence, and use of third-party data (heavy reliance on BI and third-party companies for claims and underwriting for better data analysis). Smaller companies are more apt to replace systems with preferences for integrated suite products for policy, claims, and billing

Sunguard developed a list of trends for 2012, and it is evident that technology plays an integral part in terms of streamlining of processing, delivery of products, and consolidation of data. Trends entail using enhanced tools and frameworks to assess and manage risk, consolidating financial and business data to meet regulatory reporting requirements, and using new administrative processes to deliver new products more efficiently. Trends and drivers for this study mesh well with top technologies referenced in the Celent study. Josefowicz believes that mobility and social media topics are hyped and represent inexpensive strategies that will consume less of the IT spend. Primary investments from a web perspective occurred over a span of fifteen years to move insurers onto the web. The trend now is to undergo the evolution from web to mobile solutions. Sunguard developed a list of trends for 2012, and it is evident that technology plays an integral

part in terms of streamlining of processing, delivery of products, and consolidation of data. Trends entail using enhanced tools and frameworks to assess and manage risk, consolidating financial and business data to meet regulatory reporting requirements, and using new administrative processes to deliver new products more efficiently. Trends and drivers for this study mesh well with top technologies referenced in the Celent study. Josefowicz believes that mobility and social media topics are hyped and represent inexpensive strategies that will consume less of the IT spend. Primary investments from a web perspective occurred over a span of fifteen years to move insurers onto the web. The trend now is to undergo the evolution from web to mobile solutions.

will be showcased in upcoming issues. We hope you are keeping your skills and knowledge current regarding IT and business changes and developments in order to further your personal development and allow you to add value to efforts regarding how your company delivers products and technology to its customers and internal business partners. 

Sunguard developed a list of trends for 2012, and it is evident that technology plays an integral part in terms of streamlining of processing, delivery of products, and consolidation of data. Trends entail using enhanced tools and frameworks to assess and manage risk, consolidating financial and business data to meet regulatory reporting requirements, and using new administrative processes to deliver new products more efficiently. Trends and drivers for this study mesh well with top technologies referenced in the Celent study. Josefowicz believes that mobility and social media topics are hyped and represent inexpensive strategies that will consume less of the IT spend. Primary investments from a web perspective occurred over a span of fifteen years to move insurers onto the web. The trend now is to undergo the evolution from web to mobile solutions.

Insurance Networking News, “10 Trends in Insurance for 2012”, www. insurancenetworking.com/gallery/sungard2012-insurance-trends-29926-1.html, (accessed February 17, 2012).

References Justin Stephani, “Top P&C Technologies Named,” www.insurancenetworking. com/news/celent-technology-adoptionrates-29649-1.html (accessed December 29, 2011). Insurance Networking News, “Industry Trends in Technology for 2012” video, Matthew Josefowicz and Pat Speer, January 19, 2012.

Several of the aforementioned technologies and business drivers

CPCU Society Insurance Technical Journal | Vol. 1 Issue 1 | 23


Retirement Resource

Achievement of the CPCU Designation and Beyond— Gail Bundy By Irwin Lengel, CPCU, ARM, AAM, AIT As evidenced by a fairly substantial presence of our younger generation attending the Annual Meeting and Conferment Ceremony in Las Vegas this past October, quite a few college graduates find the field of risk management and insurance to be both interesting and challenging. While there is concern over who will replace the baby boomers as well as older individuals retiring within the next few years, there is hope for the industry, and it shows in our younger generation. However, that does not mean we can sit back and relax, thinking everything is going to be hunky dory, so to speak. The knowledge and experience we as retirees, as well as those wannabe retirees, have are overwhelming and need to be shared with our successors. Thus, future articles will be written about a wider variety of CPCUs, such as individuals in their 50s who are still working, those in their mid- to late 50s who are still working but hoping to retire soon, and—since ours is basically a newsletter slanted toward retirees—our retired CPCUs whom we are finding, that while a bit older than the first

24 | CPCU Society Insurance Technical Journal | Vol. 1 Issue 1

Irwin Lengel, CPCU, ARM, AAM, AIT, enjoyed a lengthy insurance career, which began after high school in the personal lines department of American Casualty Company in Reading, Pa. He then moved on to the commercial side with INA, which became known as Cigna Property and Casualty until its acquisition by ACE. He retired as an underwriting manager after 25 years. During his career, Lengel also worked as an independent agent in Arizona. He currently teaches CPCU 551 and CPCU 552 classes online and is the Retirement Resource Interest Group’s assistant newsletter editor.

two groups mentioned, are still quite active within the industry. As a matter of fact, many of these individuals are still working as brokers, consultants, expert witnesses or even volunteers in some capacity within the insurance industry.

By the way, if you haven’t already noticed, many volunteer positions are available throughout the CPCU Society. Why not contact the Society to see whether there is a position that might serve your needs to remain active within the industry but not take up all of your retirement time? Having said that, articles such as the one that follows this commentary will no longer be titled CPCUs of the Past—Then and Now, but instead will be referred to as “Achievement of the CPCU Designation and Beyond!”

also within the territory where Wild Bill Hickock began his infamous gun-slinging career. As the story goes, Wild Bill Hickock shot a man over a money dispute. As we all know, the story became legend and, as a result, wild tales of murder and intrigue along the Trail became fodder for what were then known as dime novels.

For the last several issues I have been telling you stories about “CPCUs of the Past—Then and Now.” The primary reason for this was to share with you what CPCUs who attained their designation many years ago were doing today, while at the same time picking their brains as to how they see the insurance industry changing, in terms of technology, quality and amount of people entering it.

A common thread that seems to entice many individuals entering the insurance industry is that, in order to advance within the company one is Bundy associated with, one has to pursue the CPCU designation. Such was the case with Gail. Gail decided After college, Gail joined Travelers to become a CPCU while with Insurance Company in Denver. Over Travelers, as he deemed it a necessity the next six years, Gail spent three for advancement within Travelers. years as a marketing representative, Pursuing both self- and group study servicing agents in northern for the CPCU program made it clear Colorado, Wyoming, and western to Gail that the knowledge gained Nebraska, followed by a three year from the program became a reward stint as a casualty-property manager in itself. Five others were involved for Travelers in New Mexico. In with the CPCU program while Gail 1968, Gail decided to become an was pursuing his designation, and independent agent by purchasing the six of them plus their mentor, a small property-casualty agency Peter Digangi, CPCU, who was in Albuquerque, N.M. That small then manager of the USF&G branch agency was subsequently developed office, became the New Mexico into a regional firm with 75 chapter of CPCU. It is interesting to employees in New Mexico, Colorado note that Frank E. Raab, CPCU, and Arizona. ARM, who was highlighted in our June 2011 issue, presented the As life tends to be full of surprises charter for the chapter to the six of when we least expect them, in 1992, them in a ceremony in Albuquerque. a life-threatening illness caused

Now, if I may, allow me to talk with you a bit about a very active CPCU, Gail D. Bundy. As evidenced by prior articles about CPCUs of the Past, individuals from many different states of our great country have been interviewed—namely, Iowa, Pennsylvania, Illinois, California, Arizona and now Nebraska. While some of these individuals are still residing in the area where they were born, several have moved to other parts of the country. Such is the case with Gail D. Bundy. Gail was born in his grandfather’s farm house near Powell, Neb. Later he moved to Fairbury, Neb., where he lived until he was 18 years of age. For those of you unfamiliar with Fairbury, allow me to share a bit of trivia with you: Fairbury is considered to be at the heart of the Oregon Trail and was

Gail graduated from Fairbury, Nebraska High School and later went on to obtain his bachelor’s degree in business administration and banking from Colorado College. Before college, Gail spent two years in the United States Marine Corps, followed by six years in the reserves.

Gail to sell all his interests, with the exception of his personal book of business. After recovering from that illness, Gail developed that

book of business to a marketable size and subsequently sold it to the First National Bank of Santa Fe in 2006. Gail continued to manage the bank-owned agencies in Santa Fe and Albuquerque until July 1, 2010. However, as was the case with many of the individuals interviewed before him, Gail D. Bundy is not one to sit back and retire. Gail continues to provide agent services for his clients and is still writing new business today.

Gail is the first to admit that being a CPCU has opened many opportunities for him over the Continued on page 26

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Retirement Resource

Achievement of the CPCU Designation and Beyond—Gail Bundy Continued from page 25 years. Opportunities have included writing the insurance on National Corporation, setting up two off-shore captives for clients, holding officer positions in independent agent organizations in Albuquerque, and serving as a director for IIA (which includes brokers now). Other work has included officer positions in the New Mexico chapter, chairman of two committees for the CPCU Society, chapter governor for the Society, and a director for the Society from 2010 to the present. When asked about the biggest change he has seen in the industry over the years, Gail responded thatit is the speed of communication. Gail cited an example of when he was in Travelers’ Denver office: by the time the home office realized that it had a claims problem or a catastrophe of some sort, local management had already taken corrective action, and it was no longer a problem. Gail’s advice to young people starting careers in insurance today is this: get involved in insurance education early in your career while you still have some good study habits from your formal schooling. If possible, obtain your CPCU designation before you start having children, because your time available for study becomes more difficult as your children grow and your responsibilities at work increase.

a senior at college. That individual was Norman “Bulldog” Coleman, CPCU. Norman was a friend of Gail’s counselor in school and was the person who recommended Gail to the management of Travelers’ Denver office. Norman was very professional: a rear admiral in the Navy Reserve; the mayor of Colorado Springs; president of the American Chamber of Commerce; a great insurance agent: and, until his death, a good friend and adviser to Gail. According to Gail, a large part of his success in the insurance business is related to his continual career-long insurance education, starting with obtaining the CPCU designation, making many good contacts through the Society’s networking opportunities, and having great CPCU mentors along the way. Thank you, Gail D. Bundy, for sharing with us your lifelong commitment to the CPCU program, what it has done for you both personally and professionally, and your views as to what it can do for our up-and-coming insurance persons of tomorrow. 

Gail has already mentioned that Peter Digangi, CPCU, of Albuquerque, was one of the individuals who contributed to Gail’s effort to become a CPCU. However, he would be remiss if he failed to mention the first CPCU he met while

26 | CPCU Society Insurance Technical Journal | Vol. 1 Issue 1

Attend a CPCU ­Society Webinar! Keeping Current: The 2010 ISO Businessowners Policy Changes When Weds., June 20, 2012 1-2 p.m. EST Where At your computer! Cost Individual Pricing: CPCU Society members: $39 Nonmembers: $79 New designees: $19 Group Pricing (Unlimited­­Participants at One Location): CPCU Society members: $99 Nonmembers: $189 Continuing Professional ­Development Program for CPCUs CPCUs attending this webinar will be awarded one point.

What’s It About? This webinar will review the expanded eligibility of the ISO Businessowners program and the changes in the Businessowners Coverage Form (BP 00 01) and related endorsements. Who’s It For? This course is designed for individuals who would like to discover what’s new and different in the ISO Businessowners program and form. Learning Objectives At the conclusion of this webinar, the attentive learner will be able to: • Describe the types of risks eligible for an ISO Businessowners Policy • Identify key areas of coverage change in the 2010 ISO Businessowners Coverage Form revision • Identify new endorsements and revised endorsements used with the ISO 2010 Businessowners Coverage Form

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Risk Management manages its underwriting and investment risks together as a portfolio. These sources of risk are independent, so there are likely to be offsets—when one results in negative consequences, the other may result in positive consequences to offset it. Key tools for implementing this integrated approach are a framework to embed risk management within the organization, a risk management process to guide risk-related decisions, and a common vocabulary that facilitates risk communication across the organization.

The New Paradigm of Risk by Michael W. Elliott, CPCU, AIAF The term “risk” has several meanings in an insurance context. It is used to refer to the subject matter of an insurance policy, such as a building or an airplane. It is also used when describing an insurable event, such as a lawsuit. For analysis purposes, it is synonymous with the probability of a loss occurrence. When viewed from these various insurance-related perspectives, risk is characterized as something that can result only in negative consequences, referred to as “losses” among insurance professionals. Insurable risk, however, usually constitutes only a small portion of the overall risk faced by an organization. Strategic and financial risks, which can result in positive or negative consequences, tend to be much more significant in terms of their impact on the organization. Furthermore, the level of these risks is positively correlated with potential return—the greater the strategic or financial risk accepted by the organization, the greater its expected return.

28 | CPCU Society Insurance Technical Journal | Vol. 1 Issue 1

Michael W. Elliott, CPCU, AIAF, is senior director of knowledge resources for The Institutes in Malvern, Pennsylvania. The Institutes are the leader in delivering proven knowledge solutions that drive powerful business results for the risk management and property-casualty insurance industry. Michael can be reached at elliott@TheInstitutes.org.

A New Approach to Managing Risk

Organizations that manage all their risks, both insurable and noninsurable, on a holistic, or enterprise-wide, basis enjoy efficiencies over those that manage them separately by unit. An integrated approach to risk management allows an organization to consider risk interdependencies and offsets when examining its corporate-level risk profile and when choosing risk treatments. Consider an insurance company that

In 2009, the International Organization for Standardization (ISO) published an international standard for risk management that includes a framework and a process,1 as well as a vocabulary2 that defines risk and risk-related terms and relates them to organizational objectives. This was preceded by an enterprise risk management framework published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2004.3 It is similar to the ISO standard in that it defines risk and risk-related terms and provides a framework for achieving an entity’s objectives. Many organizations adapt one or both of these frameworks to suit their specific needs.

they should substitute common risk-related terms for insurance terms. For example, a risk manager could refer to an insurable loss as “the negative consequence of an event,” implying that there are many types of events, both insurable and noninsurable, and that events can have positive consequences, negative consequences, or both. This new way of viewing and managing risks taps risk managers’ skills of assessing and treating risk and is a natural evolution of the management of risk across the organization. 

Endnotes (1) International Organization for Standardization, ISO 31000; Risk Management—Principles and Guidelines (Geneva, Switzerland: International Organization for Standardization), 2009. (2) International Organization for Standardization, Guide 73; Risk Management—Vocabulary (Geneva, Switzerland: International Organization for Standardization), 2009. (3) Committee of Sponsoring Organizations of the Treadway Commission, Enterprise Risk Management–Integrated Framework, (Durham, N.C.: Committee of Sponsoring Organizations of the Treadway Commission), 2004.

A Paradigm Shift

This enterprise-wide approach to managing an organization’s risks has taken hold in many organizations. It presents a paradigm shift for risk managers who have traditi onally focused on insurable risks. They must adapt by participating in the development of an organizationwide risk management framework and process and by using these tools to manage both insurable and noninsurable risks. Where possible,

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Reinsurance contributing value to the formation of a trust in the form of potential badfaith claims against U.S.F.&G. for U.S.F.&G.’s previous long-standing refusal to either indemnify, defend, settle, or otherwise pay Western MacArthur’s asbestos claims. Following the settlement between U.S.F.&G. and Western MacArthur, U.S.F.&G. allocated all of the losses tied to the underlying asbestos claims to the 1959 policy year despite having 13 years of coverage at issue. U.S.F.&G. justified its allocation in two main ways: (1) the 1959 policy year provided the injured claimants with the highest payout structure based on policy limits, and (2) the 1959 policy year was the only policy year that covered all potential claims for anyone exposed to asbestos during the period subject to the settlement.

The Continued Conflict Between Challenging the Billing and “Follow-the-Fortunes” by Andrew S. Boris, J.D. The scenario plays itself out virtually every day. A claim representative at a reinsurer is presented with a billing related to a long-tail loss. As part of the claim process, the representative reviews the information submitted by the insurer and the applicable insurance contract. The contract contains very clear “follow-the-fortunes” language, but the claim representative decides to raise questions about the billing because he or she thinks that the allocation of the loss in the billing may be improper and that the billing impermissibly seeks indemnification of money paid to the underlying insured relating to the insurer’s alleged bad faith in handling the underlying claim. Importantly, a recent case from an appellate court in New York found that a reinsurer’s ability to raise questions in a similar circumstance was limited. In U.S.F.&G., et al. v. Excess and Treaty Management Corp., et al., the appellate court was confronted with questions about potential reinsurance cover for billings submitted by the insurer for asbestos claims involving 30 | CPCU Society Insurance Technical Journal | Vol. 1 Issue 1

Andrew S. Boris, J.D., is a partner in the Chicago office of Tressler, LLP. His practice focuses on litigation and arbitration of insurance coverage and reinsurance matters throughout the United States, including general coverage, professional liability, environmental, and asbestos cases. Questions and responses to this article are welcome at aboris@tresslerllp.com.

Western MacArthur. Following protracted coverage litigation between U.S.F.&G. (and other insurers) and Western MacArthur, the insurers agreed to pay $975 million in satisfaction of all asbestos-related claims. As part of (and required by) the settlement, Western MacArthur was obligated to seek bankruptcy protection. During the subsequent bankruptcy proceedings, the bankruptcy court found that Western MacArthur was

After the presentation of the billing, the reinsurers refused to pay the billing for two central reasons. First, the reinsurers contended that the reinsurance retention for the applicable treaty years was increased from $100,000 to $3,000,000— significantly changing (or eliminating) any liability for the reinsurers. Second, the reinsurers maintained that U.S.F.&G.’s bad faith, beginning with the refusal to pay Western MacArthur’s claims as recognized by the bankruptcy court through the process of submitting reinsurance billings, was a breach of the duty of utmost good faith owed to the reinsurers. The parties subsequently engaged in litigation, with the trial court granting summary judgment in U.S.F.&G.’s favor. The appellate court affirmed the judgment in U.S.F.&G.’s favor. As an initial matter, the appellate court agreed with the trial court that the reinsurance retention for

the treaty year at issue had not been changed (and remained at $100,000). In addition, the court ruled that the follow-the-fortunes doctrine required the reinsurers to accept the reinsurance billings. Based on the follow-the-fortunes language in the reinsurance contract, the court viewed several issues as being beyond review, including: (1) whether the settlement amount included bad-faith claims, (2) the decision to allocate the losses to only one year and corresponding failure to spread the loss over thirteen policy years, and (3) the valuation of the settled asbestos claims. Of note, the court did comment that if the court was able to independently examine the questions in dispute, none of the questions raised by the reinsurers would excuse the reinsurers’ obligation to pay the billing. A dissenting opinion in the case found that there were genuine issues of fact as to whether the underlying coverage action included payment of bad-faith damages and whether the reinsurers should be obligated to pay for same. In short, the case provides guidance on three larger points. First, the decision recognizes a very broad application of the follow-thefortunes doctrine. Thus, insurers will undoubtedly rely on the decision to support their allocation decisions and the argument that reinsurers have limited latitude to review billings. Second, in many ways, the case could lead to additional disputes between reinsurers and insurers. Insurers may use the ammunition provided by the case to support what might be viewed as questionable allocation decisions. Finally, with many reinsurance disputes decided in private arbitration (as opposed to being decided in the court system), the case will likely not curtail the questions raised every day by reinsurers about a cedent’s allocation decisions. 

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Volume 1 • Number 1 • June 2012

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