IBAMAG.COM ISSUE 1.1
ON BUSINESS How to turn your business into an empire the Virgin way
SMALL IS BEAUTIFUL THE BIG LIABILITIES FOR SMALL COMPANIES
WIRED WORLD INSURING AGAINST CYBER RISKS
FIRE ALARMS HOW PRODUCERS REBUILT A STRICKEN COMMUNITY
CONTENTS / 1.1
Virgin territory Sir Richard Branson sets out how to turn a business into an empire
FEATURES 10 | The shape of brokers to come What will tomorrow’s producer look like?
Finding business value in data How to surf the tidal wave of information
16| The big 3: Small-business insurances Small is beautiful – especially where insurance opportunities are concerned
Repairing the damage How insurance professionals banded together to save a community from wildfire
SPECIAL REPORT 26 | Decoding cyber risk Logging into the next big growth area 34| Insure as you drive How usage-based insurance is transforming auto insurance – and what it means for your business
BUSINESS STRATEGY 38 | Statistics Health Insurance: America’s most underinsured states 46 | Stop being busy, start working The seven busy activities that destroy productivity
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INSURANCE INSIDERS 40 | Martin Hughes The Hub boss man talks private equity independence & consolidation 48 | Favorite things Mark Kaufman from Monarch E&S Insurance Services on being a modern Iron Man
DAILY INVESTIGATIONS NOW ONLINE: Flood insurance Obamacare workers’ comp ibamag.com
EDITOR’S LETTER / 1.1
A CHANGING WORLD
Hello and welcome to Insurance Business—America’s newest insurance publication. We hope you like the first issue of the magazine and emerge from reading it full of ideas to help you take your business to the next level. The insurance industry is going through seismic changes at present—changes that mean producers need to review their business models to ensure they survive the next few years. The days of relying on personal lines to bolster profitability are dying as carriers more aggressively target the end customer directly; instead, producers must find new ways to reach clients, personal and commercial, as well as different clients altogether. It’s with that in mind that Insurance Business strives to be the “commercial magazine for the commercial producer,” offering insights into industry trends alongside cutting-edge business strategy advice to help you gain an edge on your competitors. We kick off our coverage with an exclusive chat with one of the greatest entrepreneurs in the world, Sir Richard Branson. On page 10, we also take a look at how the industry is changing and what you need to do to thrive. Our special report on technology, meanwhile, provides a sneak peek into the innovations that will shape the world of insurance for years to come. Tie that all up with analysis of the biggest news, behind-thescenes profiles of producers and agents, and a plethora of stats and business development advice, and we’re sure that Insurance Business will become your essential guide to a changing world. Kevin Eddy, managing editor, Insurance Business
COPY & FEATURES MANAGING EDITOR Kevin Eddy JOURNALISTS Caitlin Bronson, Stewart Huntington CONTRIBUTORS Tim Phillipps, Therese S Kinal, Jeremy Galbreath PRODUCTION EDITOR Roslyn Meredith
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NEWS / ANALYSIS
WATER DAMAGE FORT COLLINS
Extensive flooding in Colorado may have raised the profile of flood insurance in the mountains, but issues around water damage extend beyond the state’s borders to the very heart of government
new residents in New England and Louisiana paying higher, full-market rates as congressional subsidies expire in 2014. While industry bodies have called on FEMA to delay these increases for businesses and homeowners, these have fallen on deaf ears. Michael Hecht, president and CEO of Greater New Orleans Inc, has been distinctly unimpressed with assertions by FEMA administrator Craig Fugate before the Senate Banking Committee’s Economic Policy Subcommittee that he doesn’t have the authority to delay or provide exemptions to impending flood insurance premium hikes. “It’s a frankly Kafka-esque interpretation of the legislation,” says Hecht. “That interpretation of the law is an interpretation of the letter, not the spirit.” However, the debate has brought Biggert-Waters into the national dialogue, says Hecht. “The flood insurance issue is beginning to be appreciated nationally. This hearing was a milestone because it was the first time NFIP was talked about as a national, coast-to-coast issue,” he says. “Before, people thought it was a Louisiana issue, or a New York or New Jersey issue. Now the entire country realizes this is an issue everyone needs to try to understand and solve together.” With that level of political will, Hecht says a solution will be quick in the making. What remains to be seen is the route that solution takes.
The controversial legislation—intended to dig the National Flood Insurance Program (NFIP) out of a $24bn hole—will not only see existing customers experience rate hikes but also result in 1.1 million
Insurance producers are somewhat caught in the melee. This isn’t always easy with just one flood
BROOMFIELD ARVADA IDAHO SPRINGS
DENVER AURORA LAKEWOOD LITTLETON
ANNUAL EXCEEDANCE PROBABILITIES FOR THE WORST-CASE 24-HOUR RAINFALL > 1/10 1/50–1/10 1/100–1/50 1/200–1/100 1/500–1/200 1/1000–1/500 < 1/1000 Source: NOAA
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On September 9, it started to rain in Boulder, Colorado. Not unusual for this time of year; however, what was unusual was that it carried on raining harder, and harder, and harder. The torrential downpour resulted in massive flooding in the state, with Boulder and Larimer the hardest-hit locations. Official estimates suggest that the floods destroyed at least 1,500 homes and caused property losses estimated at nearly $2bn statewide. Seven people have died as a result of the floods, with 200 others still unaccounted for over a week after the disaster. The Colorado floods have brought the question of flood insurance into sharp relief—and heightened criticism of 2012’s Biggert-Waters Act, which threatens to send premiums through the roof.
WHAT PRODUCERS CAN DO
insurance provider and an iron-clad map of highrisk flood zones. “The map is the map. You don’t have a lot of control over it,” says Geoff Gordon, president of Andrew G. Gordon, Inc. insurance agency in Norwell, Mass. In New York and New Jersey, businesses and homeowners are facing rates that could reach $20,000 if they don’t elevate their homes to meet new guidelines. “Elevation certificates are going to be valuable
In New York and New Jersey, businesses and homeowners are facing rates that could reach $20,000
$2 BILLION The estimated cost of the Colorado floods Source: Eqecat
The number of people still unaccounted for as of 19 September Source: Colorado Office of Emergency Management
for anyone who wants to put things back in their own control,” says Gordon, whose agency borders several towns affected by NFIP’s rate hikes. “Getting homes elevated runs between $600 and $800, but if you can save yourself money on flood insurance now, you’ve saved yourself a lot more two years down the road.” Back in Colorado, rate hikes are less of an issue due to the relative rarity of floods. However, the recent disaster has highlighted holes in coverage. Carole Walker, executive director of the Rocky Mountain Insurance Information Association, suggests that producers could save clients a lot of heartache by suggesting an upgrade to more comprehensive policies. That’s where insurance producers need to step up. Walker adds that extended flood insurance in Colorado comes with relatively low premiums, even when purchased from NFIP, making full coverage a real option for many businesses and homeowners. Producers could promote these lowcost, high-coverage policies more vigorously. “Up to 25% of flood claims come from low- to moderate-risk areas like ours. It’s an important policy, and agents and brokers need to know what flood insurance offers,” said Walker. “The big message here is, yes, we live in Colorado but we do get flash floods. It’s our most common natural disaster, and we really urge agents to offer flood insurance to everyone.” NOVEMBER/DECEMBER 2013 | 5
COVER STAR / BRANSON ON BUSINESS
Like him or loathe him, Sir Richard Branson is one of the most successful entrepreneurs in the world. In this exclusive interview, IB probed the Virgin mastermind about the secrets to his success Insurance Business: Many of our readers run small- to medium-sized businesses. What’s the difference between a business that chugs along at a happy medium and one that develops into a world-leading, global empire? How do you go about building an empire rather than just a business? Sir Richard Branson: Big or small, I believe that all successful and innovative companies need to have an excellent product or service, they need strong management to execute the plan and a good brand to give it the edge over competitors. Often entrepreneurs can create a good product and a brand but lack the management to help expand and create a truly great company—people are the core differentiator between a business that just chugs along and one that grows into an empire. An entrepreneur needs to build up a very strong and capable management team and delegate out the responsibility to run the existing companies to them, so that he or she can focus on new ideas and finding the next business to start up. Just remember that it is impossible to run a business without taking risks. Virgin would not be the company it is today if we had not taken risks. I couldn’t tell you which was the riskiest —there has been quite a few!
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IB: Both Virgin and Sir Richard Branson are names that are known the world over. How important is a strategic approach to branding—personal and/or corporate? Can they be separated? What are the must-do’s when building a brand? RB: Brands ultimately belong to the consumer. While a business can influence its brand by what it does and how it behaves, it is what the customer thinks at the end of the day that is the only important thing. With this in mind, I think that it is important to try and identify early on what attitude you would like your brand to convey, and then go about building it! Brands need to be constantly nurtured, to be kept fresh and be seen. When I was thinking about setting up my own airline, the late Freddie Laker said to me: “You’ll never have the advertising power to outsell British Airways. You are going to have to get out there and use yourself. Make a fool of yourself. Otherwise you won’t survive.” I’ve been following his advice ever since and used myself to get the Virgin brand in the headlines and become more visible.
“People are the core differentiator between a business that just chugs along and one that grows into an empire”
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COVER STAR / BRANSON ON BUSINESS
BRANSON ON… RELAXING IB: It’s all too easy for an entrepreneur to get stuck dealing with the daily workings of a business. How important is it for an entrepreneur to get out of the office and do other things? What helps you refresh yourself mentally and physically? RB: I do try to keep fit—anytime I’m near a Virgin Active club I make sure I get in there and work out. I love tennis and kite-surfing and pretty much do some sort of exercise every day, without making it too rigid, as that just doesn’t work for me. I enjoy being outside and being active—keeping fit as a result is almost a by-product of doing something I enjoy! I recently completed the Pick n Pay Cape Argus Cycle Tour, a wonderful 67-mile ride with 36,000 cyclists, and an extraordinary atmosphere with breathtaking views. I have always believed that I needed to find good people to run my businesses, and to delegate day-to-day management to others. I did this from a very early age and, importantly, that has allowed me to go and set up new ventures, sometimes in a new sector or country.
IB: Our readers’ businesses deal with intangible services in the insurance sector. What are your tips for effectively marketing and selling intangibles? What have you learned from ventures such as the Virgin Money companies? RB: Even today, the Virgin brand is not a product like Coca-Cola or McDonald’s; it’s an attitude and a way of life to many. At Virgin Money, we’re building a better kind of bank. A bank that genuinely cares about the customer and provides a better experience and better-value financial products in a straightforward, transparent way. I think that it is important to build up a strong brand when selling an intangible service as it makes your service distinct and different from anyone else’s.
IB: You’re famous for your ‘Screw it, let’s do it’ approach, which has led to missteps as well as successes. What is your biggest business failure, and why? How do you pick yourself up from mistakes —both personally and financially? RB: Whenever I experience any kind of setbacks, I always pick myself up and try again. I prepare myself to have another stab at things with the knowledge I have gained from the previous failure. My parents always taught me never to look back in regret but to move on to the next thing. The amount of time people waste on failures rather than putting that energy into another project always amazes me. I have fun heading the Virgin group of businesses, so a setback is never a bad experience, just a learning curve.
IB: Part of the skill of a successful entrepreneur is identifying tomorrow’s growth sectors and opportunities—Virgin Galactic being one of the most high-profile examples of this. How do you discover tomorrow’s opportunities today? RB: There are many different reasons for entering new businesses. It can be as simple as a business sector really interests me or one of our directors at Virgin, and we see areas in that sector where our brand can make a real difference to the consumer. Sometimes it is as simple as the fact that an existing service has frustrated us and we believe we could do it better. Having the will to say ‘screw it, let’s do it’ and make things happen is what sets entrepreneurs apart. It takes bravery to start a business, but 8 | NOVEMBER/DECEMBER 2013
people with enterprising spirit who seize chances when they come along will be the ones who drive the economy and make a difference in the future.
IB: Another aspect of business that every entrepreneur understands is getting the right people around you. How do you find the best talent for your businesses—and how do you keep them interested and engaged? RB: We don’t really have a general recruiting process at Virgin—it depends on the type of business and the position we are looking to fill. However, as a rule we tend to pick out employees who are inquisitive about the bigger picture, and have a ‘can do’ attitude, are positive and enthusiastic and, most importantly, have a strong sense of fun! I have found that choosing enthusiastic, talented and positive people has helped to shape a positive character for our businesses.
IB: Innovation is clearly something that is central to the Virgin ethos. How do you unlock this, both personally and in your business teams? Can you create a culture of innovation and, if so, how? RB: I believe our culture of innovation is a result of our ability to adapt to changes quickly. We run our companies small; there is very little red tape and certainly no bureaucracy—we make decisions quickly and implement them, before our competitors in the market have held their fifth meeting on the same issue. Additionally, Virgin has many, many entrepreneurs within the organization. In business, the picture is constantly moving and changing so I try to employ people who enjoy thinking outside the box and are constantly creative and inspiring. Our people don’t just think about the numbers but think about how a deal will enhance the whole brand.
IB: You’re a globally recognized philanthropist and supporter of charities. How important is it to devote time and capital to not-for-profit work as a business person? Does it matter what size your business is? Is it more important to donate time or capital? RB: I believe that today’s businesses—regardless of their size—must be prepared to do good in societies around the globe. I am optimistic that we
BRANSON ON… TECHNOLOGY IB: From big data to social media, the digital revolution is disrupting industries across the world, with business models being forced to change, whether they want to or not. As an entrepreneur with a history of disrupting established industries, does the potential of digital excite you? What’s your advice on how to make the most of emerging technologies? RB: The mobile revolution has allowed entrepreneurs to better talk to their customers, suppliers and staff in real time to determine exactly how each one is responding to particular situations, and determine exactly what they want and need. An entrepreneur who takes full advantage of this is well on the way to making himself a success, because he knows how to approach his consumers and how to deliver his offer in just the right way. I know it’s a cliché, but knowledge is power. Virgin is a major advocate of social media and the power it can hold for companies. My advice to the businesses of the future would be to improve their social media presence and use it as a way of knowing their customers more intimately. It can act as a wonderful warning system for businesses as well as a cost-effective way to get your message out. can make the world a far better, safer and more equitable place, but business and enterprise must sit at the heart of this process. We need government, business and the social sector to work together for the benefit of everyone. It should no longer be just about typical ‘corporate social responsibility’ where the ‘responsibility’ bit is usually the realm of a small team buried in a basement office—now it should be about every single person in a business taking responsibility to make a difference in everything they do, at work and in their personal lives. Virgin Unite, the non-profit arm of the Virgin Group, call this approach ‘Capitalism 24902’ because it’s focused on getting business leaders all over the world—all 24,902 miles of it—to look at how we can do what is right for people and the planet. Virgin Unite also helped incubate a recently launched not-for-profit organization called ‘The B Team,’ which is framing a new approach to business where people and planet are priorities alongside profit. NOVEMBER/DECEMBER 2013 | 9
FEATURE / THE CHANGING WORLD
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THE SHAPE OF AGENTS TO COME
The world of insurance agents and brokers is about to radically transform. Insurance Business investigates what you need to do to thrive in a changing world Producers at WHA Insurance Agency are saying goodbye to their comfort zones. The agency, based in Eugene, Ore., is expanding its focus on commercial lines and developing new areas of specialization within those lines: transportation insurance for taxis and buses, for example. “Historically, we have had agents who were very used to their areas of specialization and they stayed there,” says Vince Ada, information technology director at WHA, which employs approximately 50 people. “But you can’t just sit comfortably in what you have done in the last five or eight years. You have to learn multiple industries.” WHA recently hired eight additional employees and is implementing technologies that will help the company interact more effectively with customers. The agency is also stepping up its marketing efforts in order to grow sales in personal and commercial lines, and is taking measures to boost efficiency. WHA’s experience is emblematic of what is happening at many small and mid-size insurance agencies and brokerages across the US. Many are becoming more efficient, technology-driven, focused on commercial lines and specialized. They are also developing new approaches to marketing. They may have little choice. “There are signs that the economics of the traditional agent model are beginning to unravel,” according to a recent McKinsey & Co. report, Agents
of the Future: The Evolution of Property and Casualty Insurance Distribution. “The role that agents are playing today is not the role they played 20 to 30 years ago, specifically in risk selection and pricing,” says Rob Hartman, co-author of the report. “The agent used to be on the front line of underwriting and pricing of a policy, had underwriting authority, did inspections of homes, knew the customer, knew the business,” says Hartman. “There’s a lot less need for that today, given that in all personal lines—and increasingly in small commercial—carriers are moving to more of a black-box underwriting model, where the task is to accurately fill out an application and answer 50 to 60 questions about the business or 10 to 20 questions about you and the car and how you drive it—and that’s it.” Multichannel or direct sales by carriers are increasing steadily, and auto insurance, which accounts for 70% of premiums, is becoming commoditized, Hartman says. Carriers are also marketing more aggressively, with the industry spending more than $6bn a year on advertising. In some lines, notably personal auto, carriers are competing with agents and brokers.
THE DIRECT CHANNEL Direct sales have punched a noticeable hole in personal auto, and the hole is growing larger
of all P&C premiums were written by independent agents Source: Market Share Report 2013, A.M. Best/Independent Insurance Agents & Brokers of America
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FEATURE / THE CHANGING WORLD
EMBRACING NEW TECHNOLOGY
Before Jason Cass launched JDC Insurance Group in 2010 in Centralia, Ill., he was working for an insurance agency that was “still putting out ID cards using a typewriter,” he says. “Do you know how many times we had a client in the office who would make a smart comment about that? Some of my buddies have never seen a typewriter in their lives,” says Cass, whose own agency has embraced new technology. JDC Insurance and many small agencies across the US are rapidly adopting technologies that improve the customer experience, increase efficiency and support targeted marketing. This summer, Cass implemented a new management system that enables JDC Insurance to provide customers with online and mobile access to their policies. Most of JDC’s marketing is done online via Facebook. “I believe that one of the reasons clients are leaving the independent channel and buying direct is that some agents still do insurance the way they did in 1978. Customers need 24/7 service,” says Cass. Katie Kochenower, president of Insurance by Katie, a branch of The Writer Agency, has “completely embraced changing technologies.” Kochenower works in Gering, Neb.; The Writer Agency is based in Ogallala. “The ability to access information on a mobile device such as an iPad, tablet, or smartphone has dramatically enhanced my ability to serve the needs of my clients, whenever, wherever and however they desire to contact and transact business,” she says. New technologies are also driving efficiency. The Writer Agency processes documents electronically in order to speed dissemination of information among its multiple office locations. “Mail is delivered electronically and data is transferred to our agency management system through policy download,” says Kochenower. “We have streamlined workflows to eliminate delays, which translates into more productivity as well as excellent customer service.”
Amount spent by carriers on advertising annually Source: McKinsey & Co.
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each year. In 2003, sales via the direct channel accounted for 20% of auto premiums. By 2011 that figure had grown to 27%, according to A.M. Best and the Independent Insurance Agents & Brokers of America. As direct sales grow, personal auto is being commoditized. It has become the lowest-margin line offered by most typical large agents, the McKinsey report noted. Direct sales also have torn a hole, albeit a smaller one, in agent/broker sales of homeowners insurance, absorbing 4% of homeowners premiums in 2003 and 6% in 2011. Penetration of commercial lines hasn’t been significant, but that will change in the coming decade, says Donna Schlegel, a director in Deloitte Consulting’s strategy and operations practice. Schlegel has studied the readiness of small businesses to buy insurance through the direct channel. If brokers and agents are to remain profitable in the coming five to 10 years, it is imperative that they make major changes, say researchers at both
Deloitte Consulting and McKinsey & Co. “They have to find a very efficient way to get services to their client base at a very low cost, because the margins aren’t there for them to do anything above a low cost,” Schlegel says. “New technologies will prove critical in that endeavor, not only because new technologies can increase efficiency and customer convenience but also because they can help producers improve marketing.”
HIGHLY TARGETED MARKETING Marketing is a key area in which small and mid-size agencies and brokers will need to think and act differently, Schlegel says. Traditionally, producers have focused on local markets—meeting clients and prospects through local associations, advertising in local media, and achieving organic growth as local clients’ children have become adults and bought insurance, she says. “As you see younger people take over agencies and people who are really willing to invest and grow agencies, they will be looking at online tools that will help them expand their customer base and get to more customers than they do today.” WHA uses Facebook, LinkedIn and Twitter as well as traditional media outlets to reach prospects. And with licenses to operate in 19 states, WHA is marketing well beyond Oregon. WHA has made other important changes to its marketing programs as well. “One of the issues we noticed is that, in the past, we would target-market a department such as trucking or personal lines,” Ada says. “But we would never market the whole company. We started changing that and, therefore, started changing the type of customer we are getting. We want to do more cross-selling, and it’s working.” The marketing program at JDC Insurance Group, a small agency in Centralia, Ill., is similar to what many small agencies will do in the future, owner Jason Cass says. JDC carries out targeted marketing campaigns that leverage social media. Cass typically spends $100 a month on Facebook advertising; advertisements in the newspaper can cost $300 each, he says. “In my four years in business, I have run two ads in the paper, none on the radio and none on television,” Cass said. “I run all my stuff through Facebook, because that’s where the people are who are going to buy from me.”
‘IF YOU ARE A LOCAL AGENT STILL WINGING IT, WE WILL CRUSH YOU’ The issues and trends that are driving change at larger agencies and brokerages tend to be somewhat different from those that are shaping smaller organizations. J. Patrick Gallagher, Jr., president, chairman and CEO of Arthur J. Gallagher & Co., says three major trends have shaped his business in recent years and will continue to do so.
BEST GROWTH STATES FOR COMMERCIAL INSURANCE PRODUCERS…
Utah Kansas Arkansas
Best Worst Source: A.M. Best/Independent Insurance Agents & Brokers of America
FOCUSING ON COMMERCIAL LINES Increasing sales in commercial lines, where the threat of direct sales has been muted, will also be essential. In part, direct sales haven’t taken a larger share of commercial premiums because the policies are more complex and the insured assets larger. Moreover, as the recent McKinsey report noted, no widely adopted technologies supplement underwriting for small-business insurance and no robust data set enables full automation of the underwriting process. That leaves agents and brokers to play a continuing role in risk selection and pricing within small-commercial lines. That might seem to make small-commercial lines more attractive, but shifting one’s business focus from personal to commercial isn’t easy, says McKinsey’s Hartman. “Unlike learning auto, home and life and maybe some boat and motorcycle specialty stuff, learning small commercial and middle market takes expertise and time,” he says. “It’s not something you can just take a course in and do.” Some agencies may add new commercial lines by acquiring other agencies that already have a desirable book of commercial business. Others may recruit agents/brokers with experience in desired lines.
“We got very focused on our verticals about 15 years ago,” Gallagher says, adding that, in those areas in which the company possessed expertise, it found that it was able to “hang on to clients forever.” “We have now put ourselves in a position, on a global basis, where we believe that for any account, any size, anywhere, we can be of service,” he says. Increasingly, small- and middle-market accounts, and not just large accounts, expect industry expertise from producers. When Arthur J. Gallagher approaches such accounts, “we talk about how we can help them grow their business,” and not simply about pricing insurance, he says. Looking ahead, Gallagher says the “landscape is going to change over the next 20 years in a dramatic way. People are going to have to be very specialized. They are going to have to know the industry they are prospecting in. If you’re a generalist, and relationships are holding your business together, it’s going to be a hard road.”
“We have spent an awful lot on technology over the last few years,” Gallagher says, adding that one such investment involved the implementation of Salesforce.com and an internal social media channel. Through the internal social media channel, Arthur J. Gallagher professionals anywhere in the world can reach out to other professionals within the company and find someone who has expertise in any area of interest. “If you are a local agent, still winging it, still doing business off a relationship, looking up things online, we are going to crush you,” he says.
As agents and brokers of the baby-boom generation reach retirement age, many are looking to monetize their investments. Last year alone, Arthur J. Gallagher completed 60 acquisitions, many of them involving aging boomers. Although acquisitions increase the depth and breadth of the company’s expertise in specialized areas of commercial insurance, what Gallagher primarily looks for is whether the target will be a good fit with the culture. In 2012, a record 320 insurance-brokerage M&A deals closed industry-wide, up 19.4% from 2011 levels, according to MarshBerry. Gallagher doesn’t expect the consolidation trend to ease. “The pipeline (of potential acquisitions) is from here to the moon,” he says.
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FEATURE / THE CHANGING WORLD
NICHE VS GENERAL AGENCY: ORGANIC GROWTH
18 16 14 12 10 8 6 4 2 0
Average Niche agency
Top 25% General agency Source: MarshBerry Perspectives for High Performance
Amount by which commercial lines grew over 12 months
Source: Market Share Report 2013, A.M. Best/Independent Insurance Agents & Brokers of America
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As agencies take on increased commercial business, they also are becoming more specialized, focusing on industry niches and market segments. That trend will persist for the longer term, according to Deloitte Consulting and McKinsey & Co. Deloitte Consulting is “seeing units, particularly in the large brokers, start to form around particular segments of the business,” Schlegel says. “They could be industry-specific such as construction specialty or health care specialty. Or they could be around particular products, like environmental. “The problem in small commercial is that while small-commercial customers’ needs are not as great, there are some segments that require those risk-management services and they aren’t getting anything,” she says. “While it’s not affordable to deliver the kind of risk engineering services that middle-market accounts get, looking at virtual risk engineering that can be delivered through a portal to a customer would definitely endear them to that [smallmarket] segment.” A recent report by MarshBerry noted that agencies that focus on niche industries have a more efficient staffing model, as measured by total commissions and fees per employee. Such agencies also experience greater organic growth than agencies that don’t focus on niches. WHA recently began serving niches within the
transportation industry and offering commercial lines to the casino industry. But specialization needn’t occur only within commercial lines, says Richard Clarke of McKinsey & Co. Agents and brokers also can serve niches within personal lines. “Find specific pockets of customer segments who would still value the advice of an agent or broker, be it high-net-worth customers, specific ethnicities, and so on,” he says. “In any case, the journey has to be one where the agent or broker actually develops real expertise, because that is what is valued and required to succeed in some of those other areas.”
WHAT LIES AHEAD? If any single factor is likely to characterize the successful agent/broker of the next decade, it will be the ability to add value. “Producers who are not adding significant value with their advice and attentiveness are much more easily replaced or trumped by an audience-friendly website or a carrier going direct,” says Richard Berry, director of Deloitte Consulting’s financial services industry practice. “Those producers who are now or who can evolve their practice into what I would term more of a value-added consulting service will continue to have an attractive market to work in. The producer who is just going through the mechanics or who offers really rudimentary service probably doesn’t have as bright a future,” he says. McKinsey’s Rob Hartman says that agents and brokers who hope to remain profitable in the coming five years will need to do three things. “One is focus on a specific target market,” he says. “Two is expertise. You will have to know something. You will have to be a real expert to justify a customer’s coming and spending two hours in your office versus just getting a quote online. And the third is efficiency or scale. There is margin pressure and commission pressure on agents, and if they don’t figure out how to do the same work for less cost, it’s going to be hard sailing in the next decade.” Cass, the owner of JDC Insurance, says that many small agencies will take the path he has taken, implementing technologies and business practices that make the operation efficient and customerfriendly and pursuing marketing strategies that are targeted and cost-effective. “That’s the agency of the future,” he says.
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FEATURE / SMALL BUSINESS
THE BIG 3 SMALL-BUSINESS INSURANCE NEEDS
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A recovering economy means the future is bright for small businesses—but what risks threaten to derail their growth? Caitlin Bronson identifies the big three danger zones, and how producers can help Five years after the financial crisis, the US economy is on the path to recovery. Businesses are picking up the pieces and economic forecasts indicate better times ahead. Most encouragingly, small businesses are re-entering the marketplace. The Small Business Association estimates that there are currently 28 million small businesses in the US, with nearly 543,000 new businesses starting each month. Almost all will rely on the advice of an engaged and knowledgeable producer to weather the risks and challenges of the first few years of business. Existing small businesses are also expanding and will inevitably require guidance around their changing insurance needs. This shift in the economic landscape means increased opportunities for insurance producers. To be successful, however, they’ll need to understand the current psyche of the American small business and the three macro trends driving their insurance needs: natural disasters and catastrophes, workers’ compensation concerns, and a growing array of liability risks. NOVEMBER/DECEMBER 2013 | 17
FEATURE / SMALL BUSINESS
S E H P O R T S A T A C D N A S R E T S A S I D 1. NATURAL The disastrous financial effects of recent events such as Hurricane Katrina, Superstorm Sandy and September’s floods keep the danger of natural disasters and catastrophes fresh in the business sector’s consciousness. However, many smallbusiness owners mistakenly assume that their property insurance covers damages inflicted by natural disasters. In reality, damage from events such as earthquakes, floods, landslides, hurricanes and nuclear accidents are commonly excluded from property insurance. Even if these are covered, most basic insurance policies don’t provide payouts for things like business interruption. Catastrophe insurance is the solution. With figures on natural disaster risk available from groups like the Federal Emergency Management Agency (FEMA), it’s simple for producers to recommend appropriate coverage. “You’ve got access to FEMA maps and you’re
MOST DISASTER-PRONE STATES 67 53
86 1. Texas 2. California 3. Oklahoma 4. New York 5. Florida 6. Louisiana 7. Alabama 8. Kentucky 9. Arkansas 10. Missouri
18 | NOVEMBER/DECEMBER 2013
Number of natural disasters Source: Federal declarations since 1953
predisposed to understand your own weather problems,” says Dave Howell, an insurance veteran of 21 years. “You know what a company needs in terms of policy.” The real trick is knowing when to advise small businesses to spend money. “In Massachusetts, the new flood plan from FEMA is going to double and triple rates,” says Boston-based Francis DeYoung, an insurance professional and counselor at the Small Business Association. “Some folks will be looking at flood premiums of $20,000 to $30,000. At that point, you’d have to roll the dice, depending on the location of the building and whether or not the area has flooded before.” Producers also need to understand what they’re selling. While offering flood insurance from the National Flood Insurance Program may seem like a cinch, for example, many producers don’t realize they’re selling insurance policies that don’t cover personal possessions. “That’s why you’ve got to read a policy, starting with exclusions,” says Howell. “Read backwards and find out what they don’t cover. The language is different in each one of them, and that’s a legalese problem for agents.”
“In Massachusetts, the new flood plan from FEMA is going to double and triple rates. Some folks will be looking at flood premiums of $20,000 to $30,000” Francis DeYoung, Small Business Association
Small businesses also run into problems when the immediate threat subsides and they’re faced with rebuilding. The producer should anticipate these thorny patches. “Insurance pays for buildings and their contents, but there are other costs associated with replacing property that many people don’t think about,” says John Putnam, a Colorado insurance professional who recently assisted victims of a series of damaging wildfires. Those other costs include things like the higher rates for limited labor and supplies following a natural disaster, or changes in building codes that have been enacted since the building was originally constructed. These costs could be devastating to a small business already struggling to absorb property and business interruption losses. To anticipate and mitigate such circumstances, producers could recommend law and ordinance (L&O) insurance. Putnam characterizes L&O coverage as “an extra bucket of money” that helps small businesses cope in the wake of a natural
KEY CONSIDERATIONS FOR PRODUCERS ■ Recent severe natural disasters mean a lot of small businesses are thinking about catastrophe insurance ■ Producers should utilize government resources like FEMA maps to identify risk and recommend quality coverage ■ L&O coverage helps ensure small businesses can rebuild following a natural disaster
disaster. While L&O is a relatively uncommon line, it’s an important one to consider for producers operating in disaster-prone areas. “It would be very foolish for a business not to be insured for at least 10%, if not a little bit more,” says Putnam.
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FEATURE / SMALL BUSINESS
2. WORKERS’ COM P Just last year, the idea that workers’ compensation could be an area of growth would have been laughable. After all, the workers’ comp segment of commercial insurance lines has produced a profit just once in the past 15 years, according to business intelligence firm SNL Financial. However, things are changing. The economic recovery, coupled with stable claims levels and an overall increase in premiums, has led to an upsurge in rates for the last nine consecutive quarters. With workers’ comp required for nearly every business in the US, merely seeking out a standard policy won’t help producers get an edge on competition. Instead, producers can get ahead by carefully selecting policies from reliable, specialized carriers. The carriers turning the most consistent profits in workers’ comp include Chubb Corp, Hartford Fire Group, National Indemnity Company, and Travelers Companies Inc. However, producers may also find success with companies like PMC Insurance, a Boston-based carrier that exclusively sells workers’ comp for specific industries. PMC Insurance owner and former broker David Malloy says producers appreciate his expertise because it saves both them and their clients significant time and money. “Agents like partnering with experts. They like to know that they’re calling someone who knows what the exposures are, whether it’s for a hospital or a steel mill,” says Malloy. “We know the workers’ comp exposures for all kinds of businesses because we live and breathe it. We have a very focused niche, and agents like that kind of partnership.” Mike Tolland, an insurance professional of more than 35 years, says working with specialized carriers also benefits producers and clients when it comes to recommending group health providers to injured workers. “I would definitely lean more towards carriers that specialize in the client’s line of business,” says Tolland, who has worked both as a broker and 20 | NOVEMBER/DECEMBER 2013
as a workers’ comp claims manager. “When the time comes to form a panel of doctors and specialists for employees, the broker and the employer should seize the opportunity to work with a carrier who knows where to go for doctors that will give you the best bang for your buck.” Specialized carriers are also more apt to stick with small businesses that experience unusual accidents in the first two or three years of business, without raising premiums through the roof. “Some carriers will drop an accounting firm, for example, if an employee trips and bumps their head, when otherwise the account has performed well. This doesn’t make life easy for an agent, because they’ll have to find a new carrier with a 25% or 35% increase in premium,” says Malloy. “Instead, you need to find a carrier who understands that a one-time large loss event doesn’t mean the account is poorly run or that it reflects a reoccurring loss issue.” Another way producers can gain an advantage is by tapping into markets that are currently underrepresented in the workers’ comp sector, or that are having trouble getting insured. Two
Workers’ comp premium totals 40
Source: National Council on Compensation Insurance Holdings
business sectors particularly ripe for growth include home health care and temporary staffing. According to the Bureau of Labor Statistics, the home health care industry will see a 70% increase by 2020, largely due to the ageing baby boomer population. For producers, the real news is that most small in-home health care services struggle to find compatible workers’ comp plans as many carriers shy away from the inherent risks. Whatever the industry, Tolland says the number one role a producer should fill when working with a small client is risk management. “Small businesses aren’t large enough to dedicate one person to the role of risk management, so they’re going to be pretty reliant on the broker,” Tolland says. “Conduct educational seminars and assign employers a customer service representative in the event of a claim or question. You may never be contacted, but you’ll leave an impression of providing superior client service.”
KEY CONSIDERATIONS FOR PRODUCERS ■ Without a human resources department or risk management team, small businesses rely on producers to provide risk management training and materials ■ If possible, producers should seek out specialized carriers that can provide knowledge of specific industries and local needs ■ Two business sectors most poised for growth in workers’ comp include the home health care industry and temporary staffing
Rate of growth of the temp employment sector in 2013 to date Source: Bureau of Labor Statistics
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FEATURE / SMALL BUSINESS
S K S I R Y T I L I B A I L . 3 Most entrepreneurs celebrate the moment they move into their first office, hire their first employee, or sell their first product. Few realize that doing so also puts them at risk of legal action until the day they close their doors. Indeed, as more lawsuits arise from both inside and outside of companies, most small-business owners remain unaware of the importance of quality liability policies.
BUSINESS OWNERS POLICY (BOP) The majority of small businesses manage risk with a business owners policy (BOP). The BOP is a package plan that assembles basic coverages, including property, business interruption, crime, liability and flood insurance. This all-in-one deal provides about $1m in coverage in exchange for a $750 to $900 premium, estimates Francis DeYoung. All told, insurance research group MarketStance estimates BOPs account for an average of $20bn in premiums. It also doesn’t hurt that it’s generally easy work for producers, providing a quick turnaround for businesses anxious to get started. “Most carriers can underwrite a BOP with their eyes closed,” says Howell. “The real trick is finding a BOP with all the right variables. No two carriers have the same idea.”
EXCESS AND SURPLUS (E&S) LINES
of US businesses are covered by D&O, including just 8% of small businesses Source: MarketStance
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While BOPs work well for clients in sectors like real estate and personal services, businesses that carry a bit more risk, such as construction or trucking firms, do better with a BOP that offers an excess and surplus (E&S) endorsement. Despite poor performances in the past, E&S lines are on the rebound. SNL Financial reported premiums rose for the second consecutive year in 2012 to a total of $25.44bn. However, producers must be careful when recommending E&S policies. According to Curtis Pearsall, president of risk consultancy firm Pearsall Associates Inc., E&S carriers are more likely to include strict exclusionary clauses.
The classification limitation endorsement is especially common. Under policies with this exclusion, a business that operates even slightly outside of its defined practice forfeits coverage for that exposure. For example, if a plumber was covered for plumbing, but also did drain cleaning work, drain cleaning work would not be covered. Pearsall recommends reviewing the policy carefully for these exclusions and communicating them in writing. This should take place before binding the coverage; if a producer signs off on a policy and the client later decides against the coverage, the producer could be faced with a ‘minimum earned premium’ of 25% to 100%.
EMPLOYEE PRACTICES LIABILITY (EPL) A line to look out for as clients expand is employment practices liability (EPL) insurance. These policies cover damages for which an employer is legally
Total annual written premiums 25
Sources: MarketStance, SNL Financial
liable for violating civil and other legal rights of its employees. With nearly 100,000 job bias lawsuits filed in 2012 and an increasingly active Equal Employment Opportunity Commission, going uninsured may be costly. “Smaller companies do have to worry about one big, bad case taking them down. A single individual could do it,” says Willis executive vice president Ann Longmore. “That’s why you’ve got such a large chunk of companies purchasing these policies.” DeYoung recommends looking into EPL insurance once a company’s profits reach the $100,000 mark or when the business grows to a mid-size company. “Visit policyholders each year and check on their sales and their payroll and their inventory, and then make recommendations for additional coverage,” DeYoung advises. EPL policies currently total $1.4bn and cover just 2.5% of operating businesses, according to MarketStance. Markets particularly ripe for EPL coverage include service industries and construction firms, which are expected to grow as the economic recovery continues.
DIRECTORS AND OFFICERS (D&O) LIABILITY Not all risk comes from inside the company. The number of lawsuits filed directly against business owners has risen sharply, with a recent Towers Watson report revealing that 36% of publicly traded companies reported at least one lawsuit filed against their head officers in the last 10 years. To mitigate such concerns, producers should consider recommending directors and officers (D&O) insurance. Just 35% of small to mid-size businesses in the US are covered by this line of insurance, according to MarketStance. The greatest opportunity for producers lies in the Southwest, where just 15% of 1.25 million businesses are covered. Industry expert Ty Sagalow says producers should start recommending D&O lines to small businesses when their staff size grows to 10 to 25 employees. The D&O market is notoriously difficult to penetrate, however. Sagalow, who previously worked in D&O at AIG and Zurich, now operates a consultancy firm that advises producers and carriers on successfully selling and servicing these lines. From where he sits, lack of knowledge on
KEY CONSIDERATIONS FOR PRODUCERS ■ BOPs cover most small-business concerns in the majority of industries, until profits exceed $100,000 per year ■ E&S lines are important for small businesses carrying extra risk, but policies are more likely to contain exclusionary clauses that may cause financial and legal ramifications for clients and producers ■ Opportunities in EPL insurance abound, as relatively few businesses are covered and job bias lawsuits continue to increase. The service and construction industries are especially likely to yield profits for producers ■ Producers should consider D&O insurance for clients with more than 10 employees, but should also consider partnering with a consultancy firm or wholesaler as policies are notoriously complicated
As more lawsuits arise from both inside and outside of US companies, most small-business owners remain unaware of the importance of quality liability policies the part of both small businesses and producers is the biggest obstacle. “D&O is distributed primarily through highly specialized brokers, so many brokers may not be aware of all the details of a D&O policy,” says Sagalow. “Others may not be comfortable distributing D&O. All that contributes to small, privately held companies not being as educated as they should be.” NOVEMBER/DECEMBER 2013 | 23
FEATURE / WILDFIRES
REPAIRING THE The wildfires that ripped through Colorado in 2012 caused millions of dollars of damage and threatened entire communities. Insurance Business finds out how a gathering of insurance professionals has been instrumental in getting the region back on its feet When it comes to doing business in an area prone to natural disasters, prevention is the name of the game for the insurance industry. The latest example of this occurred just last month, as devastating flash floods deluged mountain towns in Colorado. However, flooding isn’t the only natural disaster to affect the area in recent years. Colorado Springs, Colo., is a booming Rocky Mountain city, with a population of 416,000, revered for its picturesque beauty and industrious work ethic. However, the town has been reeling from a series of some of the most destructive wildfires in the state’s history. When last year’s Waldo Canyon and High Park fires finally died down, insurance carriers paid out nearly $450m in claims, a figure that far exceeded estimates. Since then, this summer’s Black Forest 24 | NOVEMBER/DECEMBER 2013
Fire has already caused an additional $300m in losses for both homeowners and businesses. In the meantime, acres upon acres of land, forest, and homes were destroyed and their inhabitants left homeless. The outlook was bleak. Hope rose, however, when a group of public and private professionals banded together to address the city’s immediate needs as well as its long-term recovery. Created by Colorado Springs mayor Steve Bach and branded ‘Colorado Springs Together,’ the group aimed to “restore the lives, homes, and neighborhoods impacted by the Waldo Canyon Fire.” Among the individuals spearheading Colorado Springs Together is John Putnam. “I attended weekly meetings to coordinate any insurance issues
with other team members and met ...to this, thanks to the work of with individual policy holders to Colorado Springs Together address questions about their claims,” says Putnam, who has logged between 800 and 1,000 volunteer hours since joining Colorado Springs Together last year. Putnam advised more than 200 people who had experienced total or partial losses to their homes. He is now this... ent from Springs w o d ra lo o performing the same function for Black fforts: C ecovery e Forest Together, a group formed in the R aftermath of June’s Black Forest Fire. Putnam is particularly proud of the work he has done to bring the insurance industry closer to the people of Colorado Springs. After the Waldo Canyon Fire, he worked with the Rocky Mountain Insurance Information Association to coordinate meetings between insurance companies and their policyholders. At these meetings, insurance agency representatives responded to questions and concerns from people who had lost part or all of their properties. “Insurance adjusters are not here on the ground, so they don’t have a sense of the climate,” explains John Putnam Putnam. “We find that, in these times, the insurance companies come across as the bad guy, but by trusting their insurance companies, and bringing them to face their clients—not necessarily were reaching out to find someone to as an adjuster—it can change the dynamic in help them through the process,” Putnam conversation.” shares. Mellinger, who had about 30 clients LEARNING LESSONS lose their homes during the Black Dave Mellinger, a Colorado Springs insurance Forest Fire, says brokers should be first broker, has already seen that positive dynamic in line to offer this kind of comfort Getting stuck in: Ever yone chipped among local insurance professionals. amidst confusion. in to help th e reconstru ction “All the insurance companies have been there to “Be caring and understanding, and know help their clients,” says Mellinger, who owns and that the people who are taking these losses just lost runs Springs Insurance Brokers with his wife, everything,” he advises. “They just want someone Heather. “Most of the companies opened up to talk to, and brokers are the first person to listen catastrophic claims centers and were part of the to them.” resources people turned to for community help. I More practical issues have also sprung up in saw a lot of good going on in the insurance industry.” the quest to pay claims and control future costs. There are also lessons to be learned after a Insurance premiums for homeowner’s insurance disaster like the Colorado Springs wildfires. have leapt by nearly $600 in Colorado Springs—the According to both Putnam and Mellinger, local largest increase in 20 years. For people who are insurance professionals learned that developing starting to rebuild, this is a bitter pill to swallow. sensitivity and a bond of trust with policyholders “Everybody is taking rate increases,” Mellinger is a vital part of running an effective business. says, mentioning State Farm Insurance, Colorado’s Without it, the insurance industry is facing a big largest insurance provider, which increased homepublic image problem. owners’ rates by an average of 8%. “Luckily, as a “Many of the people I advised were widows and broker, I’m able to shop around for my clients so single moms. They were told they shouldn’t be they don’t have to do that themselves.”
“Insurance adjusters are not here on the ground, so they don’t have a sense of the climate”
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SPECIAL REPORT / CYBER RISK
DECODING CYBER RISK It’s a big and burgeoning sector in insurance, but what is cyber risk and how can brokers profit? Stuart Huntington investigates The Syrian Electronic Army’s hack that shuttered the New York Times website, and the recent deluge of denial of service attacks on major US banks— including JPMorgan Chase, Wells Fargo, Citigroup and Bank of America—highlight the growing risk of cyber attacks to businesses of all stripes. Underscoring that risk, the FBI’s top cyber sleuth, Austin Berglas, said that corporate America could be broken down into two groups: “those companies that have been hacked, and those that are going to be hacked again.” Enter cyber risk insurance: an indispensable armament in the digital age—and a booming market.
WHO’S AT RISK? The short answer is everyone. The digital revolution has affected almost every industry, meaning that firms in every sector are at risk. Verizon’s latest Data Breach Investigations Report suggests that 47,000 security incidents have taken place across the globe in the past year, which have compromised at least 44 million records. And that’s just the breaches we know about. Both large and small organizations are being targeted by cyber criminals, but smaller firms are showing less urgency when it comes to minimizing 26 | NOVEMBER/DECEMBER 2013
cyber risk, Willis North America says. According to a Willis report, 22% of Fortune 501–1,000 companies have taken no stance, issued no public statement, on cyber risk. By comparison, only 12% of Fortune 500 companies remain silent. “This is concerning because the view that firms may see themselves as less likely targets of an attack runs contrary to our experience. In fact, many of these firms are sitting at the center of the bullseye,” says Ann Longmore, Willis’s executive vice president of FINEX. The average cost of a data breach is $188 per compromised record, according to the Ponemon Institute. To a small business, that price could be a death sentence. To insurers, helping reduce that potential per-record exposure could be an avenue for attracting business. Some, like Chubb Corp, are offering cyber liability insurance customers an incident response plan to help control the costs of a data breach. Chubb’s plan helps clients collect and maintain important employee and customer information, including health care records, social security numbers, debit and credit card numbers, and financial information. In the event of a breach, clients have a reliable resource for retrieving lost data.
BY THE NUMBERS
A snapshot of online breaches last year
security incidents in the past year
were attacks from external parties
7% perpetrated by multiple parties
tied to business partners
involved insiders—more than 10% up year-over-year
19% of data theft was attributed to state-affiliated actors (Chinese thieves accounted for 25% of this subset) Source: Verizon Data Breach Investigations Report 2013
Ken Goldstein, vice president and worldwide cyber security manager at Chubb, says this incident response plan will especially aid small businesses. “Many small businesses may not have the resources or expertise to develop such a plan, leaving them exposed to the disruption of a data breach, and costly first-party expenses, legal ramifications, and regulatory fines and penalties,” Goldstein says. Incident response plans like Chubb’s are believed to help reduce per-record costs of data breaches by up to $42 per record, the Ponemon Institute study estimates.
COVERAGE The first area of confusion that emerges around cyber insurance is what it covers—and what it should cover. Cyber insurance policies have historically been triggered primarily by data breaches and hacking attacks, but policies now can cover a much wider range of risk exposures. Companies must “figure out what’s important and understand what they think their risks or exposures may be,” says Jake Kouns, chief information security officer at Risk Based Security, a Virginia-based risk management firm. Typically, a cyber policy covers clients against a range of first-party and third-party liabilities, including the costs of notifying customers that their data may have been compromised, as well as legal fees and costs associated with any third-party action as a result of a cyber incident (see box above for more information). Policies don’t typically cover reputational damage, nor do they cover the cost of software and system damage. Another important aspect of cyber coverage is
business interruption, says Allianz global head of fidelity Nigel Pearson. “Traditional business interruption coverage needs to be triggered by physical damage,” he says. “With cyber, there is no physical damage—it’s more likely that a system’s been affected by a virus or employee error. Cyber extends business interruption to cover this too.”
“This market has nowhere to go but up” Betterley Risk Consultants PART OF THE SOLUTION However, while insurance is increasingly employed, it needs to be twinned with an aggressive data protection policy. While 94% of the breaches identified by Verizon stemmed from outside sources, the vast majority of those could have been avoided by instituting simple or intermediate controls. The Marsh cyber risk report recommends that risk managers take steps to steel themselves against cyber attacks, including determining the criticality of various IT systems to ongoing operations, and developing and testing business continuity and crisis management plans. “The purchase of cyber insurance should be just one part of a well-planned and effective risk management program that also includes policies and protocols to prevent and mitigate technology risks,” the report states. This approach could provide an opening for brokers who play a critical role in educating NOVEMBER/DECEMBER 2013 | 27
SPECIAL REPORT / CYBER RISK
BY THE NUMBERS 40
organizations about the parts of their businesses that are in need of the strictest IT security, and how to implement best practices—all part of a value-added service designed to attract and maintain clients. Brokers can talk to insureds—or potential insureds—about the importance of encrypting data, and securing servers and hardware, among other steps, but experts also stress the importance of training the front line of cyber defense: the insured’s employees. “You shouldn’t be the only one vigilant about protecting your and your customers’ information,” says Steve Cullen, senior vice president of worldwide marketing at the digital security firm Symantec. “Your employees should all be on the lookout, and [the] business owner should be there to give them some guidelines.” Following are some tips—from the National Cyber Security Alliance—that brokers can offer clients or potential clients on employee education: ■ Establish social guidelines: maintain concise and strict rules on use of social media sites and tools. ■ Keep machines clean: set clear rules on what can and can’t be put on company computers or devices. ■ Keep passwords strong and long—and make sure to change them routinely. ■ Set the tone to be skeptical: with emails and attachments, when in doubt, throw ’em out. ■ Keep communication lines open: encourage employees to be vigilant and report any strange behavior on their computers or devices. ■ Said one industry observer: “A security plan without active participation by your employees is like an alarm system that’s never switched on.”
MARKET SIZE Total domestic cyber security insurance premiums in 2013 are estimated to be $1.3bn—up from $1bn in 2012. And that figure is projected to continue growing at a brisk pace, according to Betterley Risk Consultants, which noted in its 2013 Cyber/Privacy Market Survey that “most carriers report strong growth in premium in the 10% to 25% range although some reported premium growth of over 100%.” Betterley reports that new players are entering the market, and predicts this will cause competitiondriven downward pressure on premium pricing, but doesn’t expect it to be very significant. “We think that this market has nowhere to go but up,” the report concludes. That’s good news for nimble US brokers and 28 | NOVEMBER/DECEMBER 2013
Who are the victims?
35 30 25
20 15 10 5 0
37% of breaches involved financial organizations 24% of incursions affected retail and restaurants 20% of intrusions involved the manufacturing, industrial, utility and transportation sectors 20% of attacks struck professional and information services Source: Verizon Data Breach Investigations Report 2013
23% 49% opportunism 23% industrial espionage, financial crime, terrorism, data theft 15% dissatisfaction with employer/job 7% social activism, civil disobedience 6% other
Source: 2013 IBM Security Services Cyber Security Intelligence Index
carriers—who operate in by far the world’s largest cyber security insurance market—but the outlook gets even rosier offshore. While the cyber insurance market overseas is less than a tenth the size of the US market, “it’s growing rapidly,” says Allianz’s Pearson. “The threat will not go away. It’s here to stay. In five years, the cyber risk market could be worth hundreds of billions of dollars worldwide.”
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TECHNOLOGY SPECIAL REPORT / BIG DATA
Data artistry: finding business value in data Data science is the new ‘rock star’ business profession that picks up where big data and analytics leave off. Tim Phillipps argues that, to become more predictive, organizations should recruit those who see the future and others who can visualize it for the rest of us
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The ‘data scientist’ is a new breed of analytics professional who takes an experimental approach to analyzing data. Professor Thomas H. Davenport, visiting professor at Harvard Business School, is one of the world’s foremost authorities on data science and a senior adviser to the Deloitte Analytics Institute. He says a data scientist is “part hacker, part quantitative analyst, part trusted adviser and part scientist.” Organizations are interested in data science because it has the potential to transform business models and create new ones. It also replaces gut instinct with datadriven decision-making and is the basis of a new form of competitive advantage that is difficult to replicate. Consider the following examples. LinkedIn owes much of its success to the ‘people you may know’ function, an experiment instituted by its former chief data scientist, DJ Patil, who also coined the term that applies to the new profession. GE realized that the growing amount of data produced by sensors in the firm’s gas turbines, jet engines and other industrial products could be collected and analyzed in real time to improve machine performance and operations, turning unscheduled
Insurance and data science The insurance industry is just beginning to take advantage of this new discipline to improve the way it operates in several ways, particularly around pricing risk:
By using GIS information and services like
Google Earth alongside information in other databases, insurers are increasingly able to map properties to an individual level, allowing for more effective pricing of risk, especially in areas prone to flood or bushfire.
Monitoring equipment—‘black boxes’—can
now record every aspect of how a vehicle is driven, from distance traveled to how hard a driver hits the brakes. This information could be used to price risk and assess claims. This technology is not limited to motor insurance either: as common devices such as phones, TVs and even ovens become ‘smart’ and connected to each other, the ensuing tsunami of information could be used for other types of coverage too.
Loyalty cards and other data from partner
and sister businesses (such as supermarkets) can be used by insurance companies to garner more information about lifestyle choices and to more effectively price risk. This should be carried out with individuals’ permission, however.
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TECHNOLOGY SPECIAL REPORT / BIG DATA
maintenance into scheduled maintenance and identifying potential operational disruptions before they occurred. The insights it has drawn from its devices are already improving the efficiency of customers’ businesses, saving them anywhere from tens of thousands of dollars to millions for each analyticsbased service. Worldwide gaming, resorts and hotel empire Caesars Entertainment analyzes data from slot machines to present real-time offers and marketing promotions to its patrons. While organizations are building their in-house ability to use data to peer into the future, Kaggle, a platform that allows organizations to crowdsource data scientists, has attracted the backing of Silicon Valley high-flyers who were behind the online payments platform PayPal. Kaggle allows organizations to farm out complex business problems to data scientists around the world in return for cash prizes. Although data science is the future of decisionmaking, organizations must hurdle two obstacles. First, they must bridge a skills gap and, second, understand and act on the predictive business insights that data scientists produce.
A SHORTAGE OF SCIENTISTS A survey carried out last year by EMC revealed that two thirds of data science practitioners expect demand to outpace supply over the next five years. Even first-year business students know what happens when demand exceeds supply: prices go up. We’re already seeing this, with organizations willing to 32 | NOVEMBER/DECEMBER 2013
pay top dollar for data scientists. But this is a risky strategy involving considerable expense and with no guarantee that an individual will be a good cultural fit. So where can organizations find the data scientists of tomorrow? Mark Grabb, analytics technology leader at GE’s Global Research Center in New York, suggests PhD graduates are likely to remain a major source of data scientists in coming years. The private sector, universities and industry bodies like INFORM are also developing tailored data science courses. However, there’s a question around whether these courses are teaching the right skills. Most courses that are currently being developed focus on the data cleaning, mining and analysis skills necessary for data scientists to do their job. But less attention is paid to the ability to communicate those insights, says Davenport. “Communication still doesn’t have the importance it should in most programs,” he says.
Data artists need to be able to tell stories with data, understanding the most effective way to communicate results MARRYING ART WITH SCIENCE Bridging the communication gap is of paramount importance. It’s great to have a team of big brains that can crunch data, but their efforts are useless if they can’t explain what they find to decision-makers. Communicating the message hidden within data requires a rare capability to combine the right-brain analysis with the left-brain creativity needed to communicate with non-specialists. This isn’t just about running experiments with data; it’s about being
Debunking the myths Data science is a term subject to confusion and misinformation, partly due to its fast-moving and emerging nature. Here we debunk the most common myths.
able to paint a picture with the results. In many respects, this skill is more art than science, namely ‘data artistry.’ There are two key elements to data artistry. First, the data artist must be able to speak both the language of data and the language of business. Second, data artists need to be able to tell stories with data, understanding the most effective way to communicate results, and being able to work with different media to deliver those insights. This typically involves using data visualization tools. In the past, these might have been static reports, PowerPoint presentations, heat maps and charts. Now, data artists are increasingly turning to new and more creative ways of telling stories with data. They are using audio-visual presentations, dynamic charts, interactive games, 3D models and apps to convey meaning.
WHAT CAN ORGANIZATIONS DO? In the short term, organizations will struggle to find a professional who embodies a data scientist and data artist in the one ‘rock star’ package. A better approach is to create rock bands: data science teams with a breadth of expertise. By focusing on forming teams, organizations can blend a mix of top skills without staking everything on a single risky hire. It also enables organizations to fish in a wider ocean of talent, rather than the existing pool of data professionals. You can hire in specialists in particular areas: data scientists to run experiments, industry specialists who can apply analytical insights to their work, or even computer games programmers and animators to devise data visualizations. Finally, tapping into external sources of expertise can bridge skills gaps, benchmark your own approaches against the latest advances in techniques and technology, and source talent in specific analytical areas. The Deloitte Analytics Institute is one such center of excellence; alternatively, organizations like Kaggle offer affordable access to data scientists around the world on a project-by-project basis.
Myth #1: Data science is just about big data Data science is often linked to big data, partly because data scientists often work with extremely large and complex datasets. But there is much more to it than that. Data science uses scientific methods to create experiments that test hypotheses based on any available data. These concepts may glean unique insights from smaller datasets as well as large ones. Myth #2: Data science is just a trendy rebrand of business intelligence Data science and business intelligence are very different. Business intelligence and its associated analysis is typically a backwards-looking exercise, intended explicitly for reporting purposes. Data science, meanwhile, involves running experiments on data, rather than seeking particular outcomes. It’s a forward-looking approach that relies on asking “what might happen in future?” rather than stating “this happened in the past.” Myth #3: You can buy software that will do the hard work for you At its core, data analysis involves people. It requires skilled professionals who can speak the language of business as well as the language of data. It requires critical thought, scientific judgment, creativity, pragmatism and common sense. This is very difficult to outsource to software (for now at least). Myth #4: Data science is too complex for ‘normal’ business people Data science is only successful if the insight it uncovers can be articulated to non-specialists and key decision-makers. This element of the analytics chain—which we at the Deloitte Analytics Institute call ‘data artistry’—requires a particular set of skills and is one of the most crucial aspects of data science. Myth #5: Data scientists work best alone Yes, there are some people who can do it all, but these people are rare and expensive. It is clear that the most successful data science is done by teams of people—scientists, communicators, other analytical professionals, those with domain expertise, and consultants—combining their expertise to derive real insights that businesses can use.
Tim Phillipps is the DTTL global leader of Deloitte Analytics and is responsible for Deloitte Analytics Institute Asia. He is an authoritative voice on the application of analytics as a source of managerial insight and competitive advantage.
NOVEMBER/DECEMBER 2013 | 33
SPECIAL REPORT / USAGE-BASED INSURANCE
INSURE AS YOU
DRIVE Black boxes in vehicles are revolutionizing auto and fleet insurance – how will it affect your business?
34 | NOVEMBER/DECEMBER 2013
IMPLICATIONS FOR PRODUCERS For the past two decades, the fleet of 200 trucks at RAC Transport Co. Inc., based in Commerce City, Colo., has been outfitted with digital technology that monitors and records vehicle speed, braking, and engine revolutions per minute. The information helps the company evaluate driver safety and improve efficiency. But RAC Transport has yet to throw its data collection program into overdrive and adopt the next logical step for this data: usage-based insurance.
USAGE-BASED INSURANCE AND TELEMATICS Usage-based insurance, increasingly popular in personal auto, is gaining traction in the commercial market but is not yet advancing at full speed. Usage-based insurance enables insurers to base premium rates on actual driver behaviors and vehicle usage rather than solely on traditional indicators such as past claims and infractions. Data reflecting driver behaviors and vehicle usage are recorded and transmitted via in-vehicle telecommunication devices, referred to as telematics devices, to a central location. There, the insurer—or a vendor working on behalf of the insurer—assesses the data in order to gauge risk and establish pricing. As driver behaviors and vehicle usage reach agreedupon thresholds, premium rates can be adjusted accordingly. Industry experts predict that usage-based insurance is “poised for rapid growth,” with 20% of all vehicle insurance in the US expected to incorporate some form of usage-based insurance within five years, according to the National Association of Insurance Commissioners. “The commercial sector and usage-based insurance are an absolute natural for each other,” says Frederick Blumer, CEO of Vehcon Inc., which is developing smartphone technology for usagebased insurance. Beyond the potential to reduce premium rates, commercial usage-based insurance makes sense for other reasons as well, Blumer says. For example, the telematics devices that collect and transmit data for insurance purposes can also be used to help owner-operators improve routes, save fuel, locate vehicles and reduce idle time. “The ROI for telematics hardware in the commercial sector is very short,” Blumer says. “It might take three to six months for such systems to pay for themselves. And if you have another valueadded feature such as insurance on top of that, then
For insurance producers, perhaps the most pressing issue associated with commercial usage-based insurance is becoming educated about how usage-based add-ons work. “In personal lines, one thing we know for sure is that if people spend some time educating their own agents, they usually see much better results than predicted,” says Mike Carroll, vice president of sales at telematics device manufacturer Danlaw Inc. That also holds true in commercial lines, says Jeff Stempora, CEO of Advanced Insurance Products & Services, which offers telematics devices and predictive analytics. “For the most part, in the commercial space, the relationship is with the broker or agent,” Stempora says. “That relationship is critical to the health of the business. If the agent is not educated on what usage-based insurance is and what it can do, then your sales will lag, without a doubt. And that has been the story for the past few years. Insurance companies really have not invested a whole lot in training and educating their agents. “The last thing agents or brokers want to do is be embarrassed in front of a customer because they really don’t have a good handle on what usage-based insurance is and what it does for the customer. So they aren’t going to recommend it if they don’t feel comfortable with it,” he says.
the ROI is extremely attractive in the commercial setting.” Moreover, commercial owner-operators don’t have the same reservations about data collection and privacy that individual consumers tend to have, Blumer says. Studies have shown that monitoring and feedback programs can substantially lower risk within commercial fleets. Pepsi’s Iceland operation reduced crash rates by more than 80% after implementing a monitoring and feedback program, according to Towers Watson. The Iceland postal service reduced its crash rate by 56% after launching a similar program. Numerous large insurance carriers in the US now offer commercial usage-based programs, although information regarding the extent of market penetration isn’t readily available and carriers appear hesitant to discuss the details of their offerings publicly. Liberty Mutual’s OnBoard Advisor program has been one of the more visible commercial usagebased offerings, but Liberty Mutual declined interview requests. The Hartford’s FleetAhead program has been heavily publicized as well. When announcing the availability of FleetAhead two years ago, The
of all vehicle insurance in the US is expected to incorporate some form of UBI within five years Source: National Association of Insurance Commissioners
NOVEMBER/DECEMBER 2013 | 35
SPECIAL REPORT / USAGE-BASED INSURANCE
The Danlaw DataLogger coming to a vehicle near you?
Hartford reported that it had conducted a six-month market test in which FleetAhead helped a regional beverage distributor reduce risky driving behaviors by more than 75% in a fleet of more than 100 vehicles. That, in turn, helped increase fuel efficiency by nearly 7% and cut accident costs by 80%.
BUMPY RIDE Although commercial usage-based insurance carries promise, potential customers are concerned about the costs and headaches of installing telematics devices in large fleets. Insurers face their own concerns—chief among these is a series of patents held by Progressive Casualty Insurance Co. Progressive’s patents, the first of which was filed in 1996, have made it difficult for other insurers to develop usage-based insurance programs without apparently infringing on Progressive’s intellectual property rights. Progressive has filed lawsuits against numerous carriers that have launched usage-based offerings. In June, Progressive announced that it would make its intellectual property available to other companies; however, one of the terms is that licensees won’t be allowed to rate insurance based on customers’ driving habits until April 2015. Progressive offers usage-based insurance for personal auto; the extent to which its patents apply to commercial usagebased insurance isn’t clear. The situation is further complicated by the fact that the Patent Trial and Appeal Board may throw out Progressive’s patent claims entirely, although no resolution has been reached on this matter.
Legal questions are not the only obstacles that carriers face. A lack of industry-wide standards makes it difficult to compare data collected by the many different types of telematics devices/systems on the market today. That, in turn, makes it difficult to assess risk and price premiums confidently. Another concern is the sheer cost of the equipment that commercial fleets require. “It can be fairly expensive to set up infrastructure and have it installed in vehicles,” says Jeff Stempora, founder and CEO of Advanced Insurance Products & Services, which provides technology solutions to insurers that offer usage-based coverage. “For an owner-operator who doesn’t want to pay anything extra to have this happen, you have to have the insurer step up,” Stempora says. “And the trouble is, it’s a pretty hefty bill up front. The worry is that the insurer is going to dish out several thousand dollars, possibly, to equip vehicles for monitoring capabilities, and maybe the customer will just leave.” Nonetheless, Stempora is confident that over time the floodgates will open. “The insurance industry is always trying to find new ways to differentiate itself and provide more value, and one way is to underwrite risk more accurately,” says Stempora, a 28-year industry veteran. “In the past, we didn’t have good predictive factors or good data, especially on the commercial side, to do underwriting—or more sophisticated underwriting—and pricing. And now, with telematics, that has all changed.”
SECRET SAUCE Danlaw Inc. manufactures a small self-install telematics device that connects to the vehicle’s on-board diagnostics port, where it can monitor speed, engine RPM, fuel level, as well as position information (GPS data) and acceleration.
ROADBLOCKS AND LAWSUITS: TELEMATICS IN THE COURTROOM May 2000
Progressive receives US patent number 6,064,970, which covers a “motor-vehicle monitoring system for determining a cost of insurance”
36 | NOVEMBER/DECEMBER 2013
Progressive receives US patent number 7,124,088, which covers an “apparatus for Internet online insurance policy service”
Progressive files lawsuits against Allstate, Safeco and Liberty Mutual, alleging infringement of the ’088 and ’970 patents
Allstate and Progressive announce a settlement, with Progressive agreeing to license intellectual property to Allstate
Many users of the device, called the DataLogger, are small-fleet owners looking for ways to improve performance and safety, says Mike Carroll, vice president of sales, telematics, at Danlaw. “They also can get discounts from their insurance carriers,” he says, noting that many insurers offer such discounts even if users haven’t signed up for usage-based insurance add-ons. Danlaw also provides the device to numerous
“The commercial sector and usage-based insurance are an absolute natural for each other” Frederick Blumer, Vehcon insurance carriers that use the DataLogger in conjunction with personal usage-based insurance offerings. “Sales are definitely growing. In commercial telematics, there is a big interest in the self-install option,” Carroll says, adding that owners of small fleets would rather connect a small box to the on-board diagnostics port than install costly hardwired equipment. Advanced Insurance Products & Services offers multiple ways to collect and send data from commercial vehicles, such as: • a black box hard-wired into the vehicle
Progressive files lawsuits against The Hartford and State Farm, alleging infringement of the ’088 and ’0977 patents
Liberty petitions the US Patent and Trademark Office to review whether Progressive’s patents are valid
• a dongle connected to the vehicle’s on-board diagnostics port • smartphone technology But the company’s core product—what Stempora calls the “secret sauce”—is predictive analytics. “That is the math behind predicting outcomes,” Stempora says. “The business of insurance is all about predicting what you are going to have to pay out in the future, in terms of claims. The company that can do that more accurately has a strategic advantage, because it will achieve more stable financial results in the long run. So insurance companies put a lot of effort into developing mathematical models that predict the future as accurately as possible.” His company has developed a proprietary analytics platform that can analyze massive volumes of data, helping assess risk as driver behaviors and vehicle usage change. “Once the insurer has insight into my propensity to get into an accident, it can price the insurance policy appropriately and collect enough money over time to be able to pay out what it will have to pay out in the future,” Stempora says. At RAC Transport, Hyett, the safety director, says he would be happy to gain access to additional data reflecting vehicle usage and driver behaviors, not only to reduce insurance rates but also to improve safety. “We would like to get information on quick turns and lane changes,” he says. But the company’s fleet is scattered across three states, and installing telematics devices could prove time-consuming and costly. The trucking company would be interested, Hyett says, but only if usagebased insurance delivered good-driving discounts, and if the installation and costs of the necessary equipment were taken care of by the insurer. “They would have to be really competitive to get us to change,” he says.
Progressive announces plans to allow other insurers to license Progressive’s intellectual property in connection with usage-based auto insurance
Progressive’s lawsuits are stayed following preliminary determinations by the Patent Trial and Appeal Board that suggest Progressive’s patents are “unpatentable”
Data points that can be collected by in-vehicle telematics devices include: ■ Engine RPM ■ Engine-idle time ■ Fuel consumption ■ Hard braking ■ Miles driven ■ Rapid acceleration ■ Trip start and stop times ■ Trip start and stop locations ■ Seatbelt use ■ Streets taken ■ Time of crash ■ Velocity
Progressive agrees to a licensing agreement with United Services Automobile Association, which plans to offer usage-based auto insurance
NOVEMBER/DECEMBER 2013 | 37
WHERE ARE AMERICA’S MOST UNDERINSURED STATES?
The opening of the Obama administration’s health exchanges has put the spotlight on just how underinsured some states are. Here are the 20 most underinsured states
18.1% $46,816 12.7%
18.9% $43,341 11.2%
Percentage (%) uninsured
Average income ($)
23.8% $48,927 26.5%
Latino/Hispanic population (%)
20.2% $57,287 37.6%
21.7% $67,825 5.5% Most of the top 10 underinsured states have average incomes under the national average of $50,502 —except California and Alaska. While the infamously sky-high income of Hollywood and Orange County brought California over the mark to $57,287, Alaska’s average income of $67,825 dwarfs that figure. If greater wealth means greater coverage, why aren’t Alaskans leading the nation in coverage rates? According to AK Health Reform, a coalition of Alaskan health care associations, the problem lies with the state’s unique geography and a lack of local providers. “Alaska’s health care market [is] dominated by small, rural and independent providers,” AK Health Reform says. “Alaska lacks a centralized knowledge repository and unified communication channel.”
19.6% $46,709 29.6%
An interesting trend was the revelation that, out of the USA’s most underinsured states for health insurance, five featured a Hispanic population of more than 20% and four of these had an average annual income of less than $50,000. Data from the Census Bureau suggests Hispanics are less likely to be covered by health insurance than any other demographic. Pronounced cultural trends may be to blame, such as language differences, and a lower emphasis on insurance in Hispanic countries may also influence this trend. Affordability is also a major concern. “Minorities and small-minority businesses often don’t have the experience from their culture or even the language skills necessary to select health insurance,” says Jack Bernard, a retired health care insurance professional and consultant with the Small Business Association. “They need to bring in a good insurance agent to help them. That’s something I always recommend.” Hispanics are expected to comprise 30% of the US population by 2050; if producers can crack this nut, they may stand to profit big in the future. 8. MONTANA
21.6% $44,222 2.9% 19. WYOMING
17.3% $56,322 8.9% 17. WEST VIRGINIA
17% $55,387 20.7% 4. NEW MEXICO
18.1% $38,482 1.2%
16. NORTH CAROLINA
21.8% $43,225 8.9%
23% $41,963 46.3%
20.1% $38,758 6.4%
6. GEORGIA 9. MISSISSIPPI
25.7% $49,392 37.6%
20.1% $41,734 4.2%
20.6% $36,919 2.7%
21.7% $46,007 8.8%
18.7% $43,916 8.4% 14. SOUTH CAROLINA
19.4% $42,367 5.1% 2. FLORIDA
24.8% $44,299 22.5%
NOVEMBER/DECEMBER 2013 | 39
THE BIG INTERVIEW / MARTIN HUGHES
NOTHIN’ YET An exclusive interview with HUB head Martin Hughes, who shares his thoughts about the company’s future and the future of independents.
All eyes were on HUB International this summer, as the hunter became the hunted, and U.S. private equity firm Hellman & Friedman snatched up the insurance giant. But, eyes were also trained – and still are – on the head of HUB, Martin Hughes, in an attempt to track his plans for the company, and by extension, the industry. Insurance Business sat down for an extended conversation with this leading player: It’s clear he isn’t slowing down and has more plans for HUB, including expansion.
IB: What big changes do you see on the horizon for insurers, specifically? MH: There continues to be broker consolidation. We’re not the only company out there doing acquisitions. There is and will continue to be consolidation. The carriers have to recognize that their world is shrinking; they will be dealing with fewer but larger brokers, and it 40 | NOVEMBER / DECEMBER 2013
will cause them to shift their strategy a little bit. I think one of the things insurance companiess have missed is a seamless technology play. I know that it is coming. Some have made the investment but the ones that haven’t are still clinging to the investment they made in proprietary systems a few years ago. But insurers need to just get on with it to improve their modeling capabilities and how they do their P&Ls. You see what is going on in Colorado. They had all these massive wildfires in the summer that destroyed so many homes a while back, and now they’ve had 20 inches of rain. It has devastated that state. These catastrophic losses are causing insurance companies to recalculate their P&Ls as well as how they price their products.
Can you tell us how you got your start in the industry? My background was in accounting. The
“There is so much opportunity here in North America, you have to make a compelling case to reach out globally.”
NOVEMBER / DECEMBER 2013 | 41
THE BIG INTERVIEW / MARTIN HUGHES
DID YOU KNOW?
HUB value: $4.4 billion
Hellman & Friedman: raised & managed over $25 billion of committed capital since its founding HUB employs more than 6,500 people HUB estimated revenue for 2013: approximately $1.2 billion in 2013
accounting firm of Price Waterhouse had accepted my application and wanted to send me to Omaha. This was 1973; I had just gotten married and I told my wife “we’re not going to Omaha.” So I got an interview with another company, Mack & Parker; but once I settled in for the interview, I realized that the ad was supposed to have said “account executive position” and not accountant. We immediately concluded that we were both there for the wrong reasons. But the interviewer said to me, “We’ve got the hour set aside, do you want to go on with the interview?” I said sure. But I didn’t know anything about insurance. I did the interview, and I was intrigued. They invited me back for a second interview, and I was eventually hired on as a sales trainee. I went off to Hartford, Conn., to the Aetna Casualty & Surety home office for what they called the casualty and surety sales training program—but there was very little sales training. It was mostly technical training for two months: how to read rate, quote policies—I didn’t learn how to sell anything. But I did learn a lot of technical stuff. Then I came back and started making a lot of cold calls. I stayed with that company and I ended up buying Mack & Parker in 1984 along with one of the Mack family sons, Ed Mack, and he and I ran it and grew it – eventually merging that into HUB International in October of 1999.
What changes have you seen over the years? Obviously there has been a tremendous amount of consolidation within brokerages and insurance companies. If you look back at who the Top 10 brokers were 15 years ago, you’ll see a lot of change in that list. One thing that has changed is the dynamics around selling—clients are becoming much more valueproposition oriented. When I started in the business, it was completely a relationship business. People didn’t need to have a lot of skills; they just had to be likeable. Today, clients still want to do business with who they like, but you’d better have expertise. Selling insurance today is a proposition-driven strategy as opposed to just pure price or relationship. Here in the U.S. where we have the health care debate going on, what I think one of the big changes 42 | NOVEMBER / DECEMBER 2013
is that the CEOs and CFOs have in the past tended to exclusively deal with the property and casualty lines. But today they want to understand the cost drivers in employee benefits and they want to have a voice in how their program is put together, because it is a big line item.
What is the greatest threat facing the industry today? The coming threat that I see for insurance is how insurance companies have been very aggressive in buying brokers—they have been cannibalizing their own broker relationships by buying these brokerages—and for me, it is an inherent conflict. I just wonder how that strategy is going to play out. It is one that they need to be thoughtful about, and I just don’t see that ending any other way than badly for insurers.
Are they eating their own? No doubt about it. It causes problems with the good brokers they are doing business with, and it will cause problems for them internally. The business planning model is suspect, I think, on this one.
How about the mom and pops? Brokers will use that against them every day of the week. They will say to clients, “Wouldn’t you rather be with someone who owns, rather than being with a representative?”
What opportunities for success are out there for the taking? Is there any low-hanging fruit for the taking? No. This is a fiercely competitive business. But I will say this: companies that I see doing well outperforming everyone else are the ones that specialize. If you specialize in a segment, and speak intelligently about it, know the plusses and minuses – you have an advantage over others who can’t.
HUB has been known as the buyer of brokerages for many years. How did you come to the decision to sell to Hellman & Friedman? I spent quite a bit of time with them, they have a sterling reputation—the highest reputation in the private equity world, I think. They have a track record of buying elite teams, and I felt that for us, it was a chance to be with a company that has really stood
NOVEMBER / DECEMBER 2013 | 43
THE BIG INTERVIEW / MARTIN HUGHES
out. This gives us a chance to transform ourselves to go from being a really, really good company to a really, really great company.
What is the greatest challenge you’ve faced at HUB? What did you learn from it? In 1999 we started with $36 million in revenue. Today, we do well over a billion dollars in revenue. We’ve done that through growing the business and a lot of M&A (acquisitions). The thing that we’ve learned, the greatest challenge, is that if you do bad acquisitions, you put the whole culture of the company at risk. You can screw up the financials, you can screw up the company, the culture… you can do a lot of damage. I’ve found we’ve made mistakes when we fell in love with geography instead of falling in love with people. If you decide “I have to be in this specific geographic area” you may end up with something that will become a liability. You don’t buy businesses that you don’t understand. You don’t buy businesses that you can’t step in and run. We don’t make those mistakes any more. We’ve learned from them.
“If you are willing to specialize, in a particular niche, I think mom-andpop businesses can do great.” Martin Hughes
How is the relationship with H&F working out for you personally, and the employees at HUB? It has worked out great, absolutely. They are the kind of people who have lots of integrity. They have done what they said they would do. Everything they had done I have found to be constructive. In some quarters, private equity has a bad reputation, but our experience with Apax Partners for the past six years and now Hellman & Friedman has been constructive. This is not a hard-assets business—this is
44 | NOVEMBER / DECEMBER 2013
a people business. I am delighted with the relationship and to be working with these guys.
Does the sale to Hellman & Friedman signal your stepping back from HUB? I’m not stepping back; in fact I’ve made a five-year commitment. Our whole team is on board and excited about it. My commitment signals to the staff that it is business as usual, and it is a chance to take the company to a newer and higher level.
You mentioned mom-and-pop brokerages earlier. Is there still room for the mom and pops to succeed today? Yes, I think they can. They are going to have to deal with the smallest elements of the smaller lines of P&C, but if you are willing to specialize, in a particular niche, I think mom and pop businesses can do great. It is a wonderful business, and it is one that not many people understand. We’ve not done a good job in attracting the best people to it—they all want to be investment bankers—but this is a wonderful business. I’ve personally gone to college campuses to recruit kids, and I’ve wanted to know what they think and what their observations were about the industry — and they don’t have a clue. Their impression is that we are life insurance. They don’t know any more than I knew back then. It is important to introduce quality people to it. Once they understand that insurance is absolutely fundamental to the world, they get excited about it.
Where do you see HUB in the next 10 years? The next 20 years? We’re going to continue to execute on our fundamental business plan. Grow the business organically and do acquisitions in geographic areas where we don’t have a footprint and with brokerages who share our philosophy. Yes, it may lead us to global expansion. But truthfully, there is so much opportunity here in North America, you have to make a compelling case to reach out globally. We did buy a brokerage in Brazil in 2011. We are very cautious of expansion in other areas. Boots on the ground, leadership on the ground —people who have completely bought into our strategy—those things have to be consistent, because they are the ones running our local offices. We are
HUB’S 2013 HIGHLIGHTS:
and we need to be very methodical and cautious expanding the business, just to ensure there is compatibility.
If you could offer one piece of advice to a fresh face in the insurance game, what would it be? Funny you should ask that. We do a lot of recruiting of new people that we bring into the business, and it was while speaking to the latest group just a few weeks ago that I was asked that question by one young person. I’ll tell you what I told him. I’ll give you two pieces of advice: One—get comfortable talking in front of large groups, and learn to be articulate. If you can speak well, and you are comfortable in front of groups, you are more than halfway there. It is amazing to me the people out there who have no grasp of the English language and are not articulate enough to present their thoughts and express them to people in a coherent fashion. Not everybody is going to be a great speaker; I get that. And not everybody is comfortable speaking in front of a large group—I know I wasn’t. But you make yourself get good at it. Two—you need to specialize. Learn how to present your value proposition and the solutions you can provide. But again, that is part of being articulate.
Everyone knows the corporate side of Martin Hughes but what might people not know about the personal side – the man himself? Well, I like to practice what I preach. I exercise regularly, I diet and eat well; I like to play golf when I can. I don’t get out that often, but when I can, I get in about 12 rounds. I’ve been married to the same girl for 43 years—got married when I was 22 years old. I’ve got three kids (well, they aren’t kids anymore) and 10 grandkids, and the oldest is six. It can be a real handful when we get everyone together! My son is in the business; he is the president of our Midwest operations. One daughter is a Chicago public school teacher and the other is a stay-at-home mom.
The eternal golf question: Ever have a hole in one? Yes! I had my first hole in one on December
January HUB announces five U.S. acquisitions: Intercare Insurance Solutions Inc., a San Diego-based insurance brokerage; Benefit Concepts Inc., a Shreveport, Louisiana-based employee benefits brokerage; Maritime Insurance Group Inc., an insurance agency based in Sheboygan, Wisconsin; the assets of Premier Insurance, an Idaho-based insurance brokerage; and CFR Inc., an insurance brokerage based in Tulsa, Okla. March HUB announces a Canadian acquisition: Complete Brokerage Services (CBC) a Richmond, British Columbia-based life insurance managing general agency. May The company announces the acquisition of the property and casualty book of business of Advantage Insurance Services, Inc. (AIS), a Kirkland, Washington-based insurance brokerage. June HUB acquires the assets of Beartooth Insurance Inc., an insurance brokerage with offices in Red Lodge and Absarokee, Montana. August HUB announces two acquisitions: the assets of Vicencia and Buckley Insurance Services, Inc. (V&B), a La Palma, California-based insurance brokerage; and the assets of The Unity Group Inc., a Bellingham, Washington-based insurance brokerage. Hub also announces that it is the successful target of an acquisition attempt by funds advised by Hellman & Friedman. This is the largest takeover of a U.S. insurance broker on record. HUB announces that it has entered into an agreement to be acquired by funds advised by Hellman & Friedman. The transaction values HUB at approximately US$4.4 billion. Investment funds managed by Hellman & Friedman will hold a majority interest in the company, while members of Hub’s senior management team will retain a significant equity position. September HUB acquires Manuel Lujan Insurance, an insurance brokerage based in Albuquerque, N.M. October HUB acquires the assets of Connelly, Carlisle, Fields & Nichols, a Clearwater, Florida-based insurance brokerage.
28 in 2010. I hit a four iron; it was about 180 yards and it was fabulous. I never thought I was going to have one. Before that, there was one weekend I played both days, and it was a par 3 and I hit a 2 iron on the same hole on the Saturday and Sunday (there were no hybrid clubs then). I hit my iron and the ball rolled up and hit the pin and never went in – both times! I thought I would never have one. NOVEMBER / DECEMBER 2013 | 45
BUSINESS STRATEGY / PRODUCTIVITY
SEVEN BUSY ACTIVITIES THAT KILL PRODUCTIVITY Insurance professionals are busy people. But there are some types of ‘busy’ that do nothing more than sap your time. Business consultant Emma Gray identifies seven kinds of bad busy, and shares how you can go from ‘being busy’ to getting things done Everyone’s busy, but that doesn’t always equate to being productive. Identifying which kind of busy you are—and implementing some simple changes to your approach—can help stop the cycle of going nowhere fast.
BADGE OF HONOR
You believe that being busy equals being significant. Keeping your schedule jam-packed makes you as important as everyone else—it’s how you create your worth. This can be a trap for solo entrepreneurs, particularly if, early on, you feel you need to ‘justify’ your new business to VIPs such as partners, friends or family. Don’t fall for it. Instead, stand back and ask “what is the purpose of this task?” before taking it on. Be ruthless and only commit to activities that will propel your small business (or family) forward.
NOBODY DOES THIS AS WELL AS I DO
You’d like to cut things out of your schedule, but you’d probably end up doing them anyway, because nobody else does things ‘properly.’ You believe you’re the only one who can complete everything to your exact standards. One of your most-used phrases is “Here—let me do it!” Delegating parts of your business is vital to success. If someone else can do it more easily than you, better than you, or in a shorter timeframe than you can, let them. Free your time for the aspects of your work and family that really matter. 46 | NOVEMBER/DECEMBER 2013
There is something big that you really should attend to; something tricky in your work or personal life that you’ve been avoiding. Instead of tackling what should be first on your list, you fill your day with less necessary tasks so that you “don’t have time” to face the important stuff. It’s a trap! Stop running and start slashing through your top priorities.
You want to launch something ultra-exciting in your business, but it’s a big step and you’re scared. What if it doesn’t work out? Staying busy keeps you in your comfort zone and protects you from taking risks. The busier you are, the longer you’re ‘off the hook’ and safe from potential failure. The discomfort zone is where the action happens. It’s where you’ll meet success. It’s where your competitors hang out—so go and get uncomfortable.
You have a need to be liked. “Yes” comes out of your mouth before you even consider an alternative response. What if you say no and they don’t like you as much? What if there’s conflict? It’s easier and safer just to take the request on and say yes, you’ll do it, even if you’re exhausted. Whether it’s business networking, advertising, ‘coffee chats’ or meetings with potential affiliates, business owners need to become savvy about the
invitations they do and don’t accept. Be polite, honest and assertive in saying, “This is not for me right now.”
You’re disorganized. You spend a huge amount of time looking for things that you’ve misplaced. You’re regularly late for appointments. You leave everything till the last minute. The first thing you do when you’re overwhelmed is write a Facebook status about it. Your lack of organization creates chaos and manufactures extra work. It takes you much longer to accomplish things than it should, because you’re focused almost entirely on flapping. What is one task that you can do today to move you further ahead than you are now? Starting small is preferable to not starting at all.
SCARED TO ASK
You feel like a fraud. You’re not sure you understand what you’re really doing. Rather than seek clarification from a mentor or friend, you go to enormous lengths to try to work it out yourself. You’re scared of asking ‘silly questions’ and choose to complicate your life in an effort to avoid these. You’ll send emails rather than call, then waste time waiting for a response. Time. Is. Money. Successful business people dive into vulnerability and splash around in it, asking silly question after silly question. So strip off and jump in!
Successful business people dive into vulnerability and splash around in it, asking silly question after silly question
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PEOPLE / FAVORITE THINGS
Favorite things... Mark Kaufman, Monarch E&S Insurance Services Mark Kaufman brought with him 10 years of experience dealing with excess and surplus lines when he joined L.A.-based Monarch E&S in 1994. Nineteen years later, he divides his time between the medieval-themed insurance carrier and his wife and two children. When he’s not wielding Excalibur in the name of E&S, Kaufman enjoys playing basketball with his son and racing in triathlons throughout the year Place to be: “On a golf course with friends or clients. You learn a lot about yourself and even more about your playing partner when you’re on a golf course— sometimes good things and, most times, bad things.” Best thing about working in insurance: “The friendships I’ve made over the years are amazing and I wouldn’t trade it for anything. Not only that, but the E&S side of insurance is really fun. Yes, I said fun. Just check out our ‘Knights to Remember’ videos on our website for proof.” Mark Kaufman
Book: “Ultimate Marathon Man by Dean Karnazes. It’s a great book about Karnazes’ life and the challenges of being an extreme ultra marathon runner. It really shows what the body and mind is capable of under extreme conditions. This is the book that got me into triathlons.”
Music: “Music means a lot to me, especially when I’m training for a race or just getting in a regular workout. When training, there’s nothing like the Chemical Brothers or Crystal Method to get your heart rate up. When I’m just relaxing or on a long drive, Zero 7 adds just the right amount of chill to the moment. Zero 7’s When It Falls is one of the best albums of all time.” Sport: “I’m a sports fanatic and enjoy passing that passion along to my son, Jordan. I’m a huge basketball fan and Los Angeles Lakers season ticket holder. I root for the Lakers, Dodgers and any L.A.-based team. I also love to compete in and watch triathlons. I know the
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pain and suffering those athletes are going through to accomplish their goal. There was not any better feeling than when I crossed the finish line at Ironman Arizona.” Vacation spot: “I love my kids, but a ‘vacation spot’ is anywhere my wife and I can be together without them and just decompress from the day or long week. We love doing ‘daycations’ for the really quick getaway—a spa treatment, lunch and lying by the pool at a swanky Los Angeles hotel. Ultimately, any beach in Hawaii, where we honeymooned, is where we want to be!”
Food: “I love food! I’ve recently become a pescatarian, which was a big change for me. The good thing is that I love fish, and sushi is my favorite thing to eat. Oh, and the occasional tub of Trader Joe’s Chocolate Chip Cookies while lying on the couch and watching golf.”
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