June 2015 by Independent Insurance Agents of NM

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“La Voz” is the official monthly e-publication of the

Independent Insurance Agents of NM 1511 University Blvd. NE Albuquerque, NM 87102. (505) 843-7231. Fax (505) 243-3367. Web site www.iianm.org.

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This publication is intended to provide accurate and authoritative information on the subject matter covered, but is distributed with the understanding that neither IIANM, nor any contributing author, publisher, contributor or advertiser is rendering legal, accounting or any other professional service and assume no liability whatsoever in connection with its use. Further, the electronic links to our advertisers and/ or contributors found in this publication are provided as a courtesy to our readers and do not necessarily indicate an endorsement by IIANM.

IIANM Events

News items from members of Independent Insurance Agents of New Mexico and the general insurance industry are encouraged. The advertising deadline is the fifteenth day of the month, preceding publication.

Please contact Rachel Sheffield at rachel@iianm.org for details

IIANM Staff President/CEO Thom Turbett COO Consuelo Trujillo Member Services Associate Renee Trujillo Business Strategist Mia Logan Communications Director Rachel Sheffield Reception Terra Shelton

Chair Gabe Portillo

CE Seminar in Roswell

E&O Loss Control Credit Seminar

June’s “What’s Happening” Clickable Calendar

Professional Development Webcasts

IIANM’s Convention Exhibitor Form

Features

Advertising rates are available upon request.

2014-2015 Officers

VoZ

PRODUCER - State of the P&C Market: Shallower Markets Coming?

CSR - Insurance Agencies are Failing to Meet Customer Expectations

PRINCIPAL - Beware of Geeks Bearing Formulas (Thom’s Blog)

Profit & Overhead When Insureds Repair Their Own Damage

PRINCIPAL - All Work and No Play

PRODUCER - Cyber Crimes Rise 23%

ISO Files Most Important Homeowners Change in 40 Years

In Every Issue IIANM 2015 Company Partners!

Tech Talk 18 Snap Stats 21 IIANM Benefits @ a Glance

Odds n Ends

Advertiser Index Acuity Burns & Wilcox

Back Cover

Litchfield Special Risks

Market Finders, Inc.

MHI General Agency

Secretary/Treasurer Mike Parisi

Mountain States Insurance Group

National Director Sam Conlee

Union Standard

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Immediate Past Chair Diana Hobbs www.iianm.org

New Mexico Mutual 02 08

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These carriers have partnered with our association to support the vitality of the independent agent system in New Mexico. Take a moment to visit their new page on our site and take advantage of their varied products and services. Independent agents have the freedom to choose!

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ATTENTION Roswell Agents! Come and get your 15 hours of Continuing Education in a classroom setting

July 28th & 29th, 2015 Roswell Convention Center Class List: July 28th Morning Class 8:00 - 12:00pm / Homeowners Afternoon Class 1:00 - 4:00pm / Commercial Crime

Full Seminar (15 CE hrs): Member: $200 / Nonmember: $240 One Full Day (8 CE hrs): Member: $105 / Nonmember: $140 One Half Day (AM 4 CE hrs / PM 3 CE hrs): Member: $70 / Nonmember: $75 Half Day with Ethics Member: $90 / Nonmember: $100

4:00 - 5:00pm / Ethics Hour

Ethics Only (1 CE hrs): Member: $35 / Nonmember: $45

July 29th

NextGen Registration (15 CE hrs): Member: $150

Morning Class 8:00 - 12:00pm / Liability for Contractors Afternoon Class 1:00 - 4:00pm / Personal Lines Related Coverages

E&O Loss Control Credit Seminar July 22, 2015

FREE!

8 CE Hours IIANM Building

Loss Control Credit Through completion of this course by appropriate agency staff members, IIANM members with E&O coverage through Swiss Re/Westport or Firemanâ&#x20AC;&#x2122;s Fund may qualify for a 10% premium credit upon renewal, good for three policy periods assuming the agency remains claim-free. Click here to register or for more information. For details, contact Renee Trujillo at (505) 999-5802 or renee@iianm.org.

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Business Body Language CSR Essentials - Personal Time Management

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State of the P&C Market:

Shallower Cycles Coming Soon?

Property-casualty underwriting and operating results were weaker in 2014 than in 2013 but remain above historical averages by most measures, according to a new report from ALIRT Insurance Research, LLC.

by Jacquelyn Connelly

And despite significant reliance on redundant reserves and 5) Investment environment. “Because of the lower interest excess capital, the industry is well-poised for continued suc- rates, we’ve seen a shift of assets toward some of these cess moving forward—especially because the market cycle alternative asset classes,” Paul explains. “It’s not massive. may be less prone to extreme highs and lows in the future. If folks continue to underwrite conservatively, it’s not a probNet premium leverage, or net premiums divided by surplus, lem—they just make up for it with strong underwriting.” remained at a 15-year low of .75 for all lines of business, Low interest rates have persisted since the economic according to the report. “Traditionally that would indicate recession in 2007—putting pressure on investment income that market rates would continue to soften or at least firming as a source of profit and forcing insurers to depend more on prices would start to fall,” says David Paul, principal at underwriting gains to drive returns. ALIRT. “That’s what we’ve expected to see. But interestingly we’re seeing that underwriters are being more disciplined What It Means For Your Agency this time, almost regardless of capacity.” Commercial trends are more volatile than personal lines, which means personal lines-heavy agencies won’t see as The Only Constant is Change much of an impact from a leveling of market cycles. But for Why? ALIRT’s “Year End 2014 P&C Industry Review” out“people writing commercial lines insurance, it’s a net positive,” lines five different reasons why the underwriting cycle might Paul says. “You don’t get sidelined waiting for a hard market be dramatically different moving forward: so that you can get a pay raise by doing the same thing.” And because soft markets tend to last longer than hard ones, “having that even out would be a benefit just in terms of smoothing the top line for agencies, and by extension the bottom line,” Paul points out. “If we do go into this environment where the underwriting cycle is less severe, you’ll see stability in pricing—which is a net positive for buyers and enables agents to be much more predictive of what their revenue stream’s going to look like.”

2) Specialty focus. The trend of focusing on specialty p-c

Rates have continued to firm, but the year-over-year rate of increase is declining—another positive for customers, Paul says. “I don’t think we’re going to see any very large increases,” he says. “If anything, we’re likely see a continued softening of prices over the next couple of years.”

offerings gives companies a way to insulate themselves from the broad sway of pricing cycles—giving them what the report calls “greater pricing power.”

3) Professional management. ALIRT reports that market

leaders in the p-c market have experienced significant professional growth that reflects greater expectations from institutional investors “as the competition for profitable investments becomes more globalized.”

4) Consolidation and scale. Demand for insurance “is picking up as the economy gets somewhat stronger, but surplus development is outstripping demand,” Paul says. “That’s one of the reasons we see the net premium leverage continuing to fall or be very low.” In addition to excess capacity, the necessity of scale and diversification, inexpensive sources of capital and aggressive investors continue to drive mergers and acquisitions in the insurance industry. A smaller of number of insurers will translate into “fewer cats to herd when trying to gain an unofficial consensus on price adequacy,” the report says. www.iianm.org

PRODUCER

1) Data analytics and data mining. Sophisticated capabilities in gathering, ordering and deriving actionable information from massive amounts of data has revolutionary implications for p-c insurance. Securing a more accurate sense of the ultimate cost of risk will foster greater risk discrimination among insurance companies, enabling them to “pull back underwriting reins well before losses get out of control,” the report says.

Overall, the results point to carrier stability and a strong p-c balance sheet. ALIRT’s composite scores “are still above the long-term average,” Paul points out. “That’s indicative of the financial strength of the industry.” And with help from the predictive capabilities of data analytics and data mining, pricing strategies will only continue to improve. “If you price correctly in this industry, you shouldn’t have a problem— you’ll continue to make profits and your capital will continue to grow,” Paul says. But in the face of deteriorating investment income, underwriting discipline must remain in place, “and at some point the industry, especially publicly traded companies, will have to address overcapitalization because the returns won’t be adequate for private investors,” Paul says. “As long as underwriting is done well, investment income is just the cherry on top of the sundae.” 9

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Insurance Agencies are Failing to Meet Customer Expectations: Report by Caitlin Bronson Independent agents and brokers are falling behind in providing their clients with the kind of customer experience many insurance shoppers now expect, a joint report from Market Insight Group and Applied Systems reveals.

Market Insight Group graph, customer are starting to show dependency on platforms offered in Phases 3 and 4.

The report, “Adaptability: The insurance customer experience imperative in an online digital mobile society,” is based on a recent survey of 1,200 North American and UK agency/brokerage owners and customer service representatives (CSRs). According to the results, independents both fail to understand the expectations of today’s consumer and do not have the resources to bring those expectations into reality. Nearly 90% of North American agents, for example, identified email and face-to-face meetings (F2F) as the primary methods they plan to use in interacting with clients in the next two to four years. Researchers at Market Insight Group aren’t certain this is the best strategy. “Insurance firms believe that email and faceto-face communications will reign supreme in the next two to four years. Possibly,” the report said. “But we believe that this will depend on the line of insurance, the nature of the interaction, and the desires of the customers concerning the interaction options they want to use.” Researchers said they are “doubtful” F2F will still be important for personal life property/casualty insurance, and are similarly unconvinced that F2F will satisfy the increasingly important small business customer.

CSR

Given the time crunch facing small business owners, researchers do not believe such customers will be satisfied with F2F “for administrative transactions or even investing their time in email threads to get service interaction resolved.” Instead, consumers are much more likely to look for click-tochat or click-to-call options for interacting with their insurance agent. Indeed, while most agencies seem to rely on communication platforms in Phase 1 or Phase 2 of the following

Unfortunately, agency owners say providing customers with these technologies is difficult thanks to time and budget constraints, as well as a lack of appropriately skilled staff. These kinds of mismatches could come back to hurt agencies in the very near future, the report authors say. “Technology advances are ratcheting up customers’ expectations of immediacy, ease of use, and accessibility of people and information, regardless of where they are or the time of day,” the report says. “Insurance firms and their teams have to become adept at using these technologies in order to offer strong [customer experience].” The report authors suggest insurance agencies create a “practical vision” of how clients will want to interact in the next two to four years, prioritize those strategies - particularly client self-service portals and mobile capabilities - and consider reaching out to technology vendors to create solutions.

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For All That Matters

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Beware of Geeks Bearing Formulas Warren Buffet once uttered that famous admonition to his shareholders after a particularly disastrous year for Berkshire Hathaway. Although he was chiding himself for following the counsel of investment advisors, the quip seems just as relevant to a developing practice in the insurance industry called ‘price optimization’. What is it? Although there is no widely accepted definition, it’s basically a sophisticated predictive modeling tool intended to assist insurance companies in setting prices. Mind you, were not talking about the basic rate-setting process whereby actuaries determine expected losses, expenses and add a profit loading to determine a rate in a particular class. We’re talking about what most insurance professionals call ‘judgment rating’, which allows companies to make adjustments in the final rate to reflect other business considerations such as marketing and underwriting. In reality, insurance carriers have long used both components in their rate making process. However, ‘judgment rating’ became ‘price optimization’ with the introduction of data mining. In lieu of anecdotal evidence that they previously relied on, actuaries now have the ability to collect detailed data from a multitude of Internet sources.

by Thom Turbett

adapted from Thom’s Blog “Off the Record” (To read the current NAIC draft of their White Paper on price optimization, please click here) This is all turning into a serious conundrum for insurance regulators, who are concerned with the shift from lossbased ratemaking principles to those that encompass subjective market driven ratemaking. They question how price optimization would not conflict with state rating laws that require rates not to be excessive, inadequate or unfairly discriminatory.

The NAIC currently has a task force developing a white paper on the topic, and so far four states have banned the practice. The Ohio department in its denial pointed out that It’s unbelievable how much information is collected about us by its nature price optimization can result in two insureds daily via on-line sources. Like companies in most industries with similar risk profiles being charged different premiums, these days, insurance carriers have become like the creepy thereby making it unfairly discriminatory. Santa in Santa Claus II… Of course this gets into a very slippery slope because by nature, insurance rating is essentially regulated discriminaThey know when you are sleeping tion. It must drive insurance carriers crazy dealing with fifty They know when you’re awake different state definitions of what is ‘unfairly discriminatory’. They know where you have been on-line So beware for goodness sake!

So why is this creating such a stir in our industry? As with many new technologies, price optimization can be used for good or evil. Supporters argue that it’s a valuable new tool that can more efficiently and accurately help carriers price their policies, even down to the individual level. For example, it could be used to identify profitable customers and reward them with lower rates, thereby improving rate stability while reducing an insurer’s long-term costs. On the other hand consumer advocates assert that like the use of credit scores, price optimization is a departure from cost-based pricing in that it uses measures unrelated to risk of loss to determine premiums. It is described by the Consumer Federation of American as a practice whereby premiums are set based on the maximum amount a consumer is likely willing, or able, to pay. They also contend that it will result in higher rates for lower income consumers. www.iianm.org

On the other hand, just because we can use this technology doesn’t mean we should. Let’s face it…there is an ethical consideration at play here. Wearing my consumer hat, it just seems wrong to increase rates on a loyal policyholder just because you know that they are unlikely to move their policy if you keep the rate increases below a certain level. (After all, isn’t that the same technique used to boil a live frog?!)

PRINCIPAL

Companies such as Towers Watson and Earnix are working with carriers to collect such data and then create computer algorithms that guide rate judgments. One of the more controversial ways that insurers are using price optimization is to analyze patterns of policyholder behavior. Such customized ‘black box’ software technology is currently being used by 45% of large North American insurance companies, with an additional 29% reporting that they will adopt this technique in the near future.

So while the arguments for and against price optimization rage on, I find myself conflicted about the practice. When I put on my insurance industry hat, I lean to the side of innovation. Just because we’ve relied on the risk/cost model to derive rates up until now doesn’t mean it should always be that way.

I also worry about the effect such a practice will have on our industry’s not-so stellar image. As the saying goes, ‘perception is the reality’, and I have no doubt that when this practice becomes well known it will be another reason for consumers to mistrust the greedy insurance industry. Finally, I would note that there is a silver lining in all of this for independent agents: we are the obvious defense for insurance consumers against price optimization. As consumers become more aware of the use of this tool by carriers, they are perhaps more likely to comparison shop. And who can they turn to for trusted comparisons and advice? That’s right…their local Trusted Choice agent. Caveat emptor, baby! 15

Virtual Universityâ&#x20AC;&#x2122;s Ask an Expert

ulty

VU Fac

Profit & overhead when insureds repair their own damage

Your insured is a contractor. He wants to repair insured damage to his own building to ensure that the job is done right. Or, let's say he negligently causes damage to a customer's property that is covered by his CGL policy and wants to make repairs himself. Is the insurer obligated to pay an amount that includes profit and overhead for the work done by its insured? "This question seems to come up every three to four years. I have a customer who had a lightning loss to his premises. Damage was done to the building and contents. Since my customer is in the construction business, he repaired the building and contents with the blessing of the adjuster and submitted a bill for repayment. This included an amount for materials, labor, and overhead and profit. "The adjuster is okay on materials, labor, and overhead, and but will not pay profit because it is against 'public policy.' Question: Does the insurance company owe profit? The adjuster admits that, if the customer had hired someone else to do work, he would pay them profit." "My insured is a drywall contractor. He improperly insulated a wall near a water pipe which subsequently froze, causing water damage to the owner's building. Part of the repair work is being done by my contractor, including the reinstallation of the other drywall. The insurance carrier has agreed that the cost of the drywall is part of the covered completed operations liability claim. However, we are back to the age-old issue of profit and overhead. "This problem seems to keep re-occurring every decade. It is my belief that the contractor is allowed to add overhead costs and a reasonable profit to his labor and material costs for the repair work. If another contractor was hired to do the work, their bill would include profit and overhead. Do you agree or is the insurance company correct?" "Our insured just experienced an equipment breakdown claim when a control valve locked up on a boiler in his hardware store. The insured is a hardware store/plumbing contractor. Since this is his trade, his employee made the repairs himself. The adjuster says she will only pay his plumber some 'net' hourly rate and not the rate he charges when the plumber works somewhere else. "She also wants the invoice from the supplier as she will not pay any mark-up on the part. The insured is upset. He says he'd be nuts to ever fix his own loss again. He states that if an outside repairman were brought in, the bill would have been a lot higher. "He questions why there is no mark-up allowed with all the time involved to obtain this out-dated part or something that could substitute since he had to call eight wholesalers and one of them first delivered the wrong part. He also says he could have had his plumber out working at the gross wage he gets everyday. Why should he have to lose money on the time the plumber spent repairing the loss? "I can't find anything that really addresses this in any policy, i.e. insured can not charge his normal fees when repairing his own loss. I believe there is a clause somewhere indicating the insured cannot profit from a loss, although I can't find that either. It seems in this case the insured is required to lose from a loss. This isn't the first time this has come up. It happens pretty often and it's not unusual for a company to INITIALLY balk at paying profit and overhead. However, absent fraud, we question whether this is a legitimate claim denial. The main reason against paying for profit is that it theoretically violates the principle of indemnity...that an insured should be indemnified for actual loss sustained and not profit from a loss. But, as our faculty responses indicate, the insured does not technically profit since he would otherwise suffer an opportunity cost.

Click here to view faculty responses and also other related articles. You will need to log-in to view, so if you do not know your log-in info, send Rachel an email.

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Check out our new website! www.market-finders.com

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ANDERSON.com by, Steve Anderson (Always feel free to email me with comments, new ideas or products that have worked for you. I will check them out and spread the word!)

Single Sign-on: Easily Managing Passwords Managing the plethora of passwords that agency staff have to maintain continues to be challenging. I last wrote about password management options in 2009. Based on the number of questions I am receiving about managing passwords, I decided it was time to revisit the topic.

Password Management Options There are a number of options available to an agency of any size to help staff secure and manage password information. Transformation Station is a service provided by Applied Systems to their users (as well as a few other vendors that have licensed this service) that helps manage and store password information within the agency management system. TransactNow is a service provided by Vertafore to their users that helps manage and store password information within the agency management system platforms. A few other agency management system vendors have their own versions of password management built into their systems. These systems, when set up correctly, provide an easy way for agency staff to access a carrier's agency portal website by storing the website address, as well as the user ID and password. Access to the carrier site is then simply a click away. If the insurance companies you represent support either of these real-time processes then you should absolutely make sure your agency is using this functionality. You can receive a customized report from IVANS on the capability available to your agency by requesting a Personalized Agency Download Report. This will help you identify download connections that are inactive or not turned on at your agency.

What I Use While the services are a great way to streamline password management, they are not a universal solution. As you well know, your agency maintains passwords for many other websites that you and your staff need to access. For management of these user ID and passwords, I recommend a password management software program. There are quite a few programs available. I use RoboForm as my password management program. This program installs as part of your web browser (it supports all browsers) and manages login and passwords for you. When you log into a website, RoboForm offers to save the login information into a Passcard. This card is kept in a fully encrypted file that requires a master password to access. Once the login information is safe, true one-click login is available by clicking on the website name in the Passcard list. The program automatically navigates to the website’s login page, fills the stored login information into the form, and clicks the submit button for you. RoboForm is available as an individual standalone program as well as an enterprise version that provides additional administrator capabilities for larger organizations. One agency with over 300 users uses the RoboForm Enterprise version to allow all users to manage passwords. Another option I’ve been testing is LastPass. It provides similar functionality to RoboForm but may have a few features that are valuable. For example, LastPass allows you to provide access to a third-party (a virtual assistant in my case) but doesn’t allow them to see or change the passwords. There are many reasons to make sure your agencies are managing passwords well. If you currently don’t have a password management process in place, then the above services are a good place to start your research.

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All Work And No Play? by Dave Evans

Many Baby Boomers, Gen Xers and even millennials can

1983), the Elks (18% since 1979), the Shriners (27% since

remember when their parents belonged to golf, softball and

1979), the Jaycees (44% since 1979) and the Masons (39%

bowling leagues.

since 1959). By almost every measure, Americans' direct

Often, employers helped sponsor these activities as a way

engagement in politics and government has fallen steadi-

for employees to spend time together and get to know their colleagues from different parts of the company, posting results on the bulletin board in the lunch room and generating

ly and sharply over the last generation, despite the fact that average levels of education—the best individual-level predictor of political participation—have risen sharply

good-natured competition in the workplace.

throughout this period. Every year over the last decade or

But nobody has time for the company softball league any-

communities.

more. Participation in these leagues has dropped significant-

After expanding steadily throughout most of this century,

ly: For example, the number of Americans participating in bowling leagues declined 40% from 1980-1993 as reported by political scientist Robert Putnam, whose 2000 book “Bowl-

PRINCIPAL

ing Alone” tracks American’s dwindling civic engagement. Fewer Americans are playing golf, too: The National Golf Foundation reports 25.3 million golfers in the U.S. in 2012, down from 25.7 million in 2011 and 26.1 million in 2010.

two, millions more have withdrawn from the affairs of their

many major civic organizations have experienced a sudden, substantial and nearly simultaneous decline in membership over the last decade or two. What’s responsible? According to The Center for American Progress, more than 85.5% of males and 66.5% of females work more than 40 hours per week (not counting an hour for lunch). Americans

work 270 hours more than British workers, 300 hours more The biggest drop-off in players is among the younger gener- than Australian workers and nearly 500 hours more than ation, with 200,000 players under the age of 35 leaving French workers each year. the game last year. As a result, 12-hole golf courses have become a hot topic, especially after Jack Nicklaus told Golf Digest in 2007: "We should consider the possibility of making 12 holes the standard round. Eventually it would be accepted because it makes sense in people's lives."

What’s the lesson for independent insurance agents, who typically serve in a number of volunteer capacities in their communities? Community involvement and networking will always have a place in introducing people to the agency’s services. But agencies must also complement those

It’s not just sports participation that is suffering declines.

avenues with digital marketing, providing consumers with

Fraternal organizations also witnessed a substantial drop in

relevant content about insurance topics and a focused

membership during the 1980s and 1990s: Membership was

outreach. To reach people who spend more time online and

down significantly in such groups as the Lions (12% since

less in activities, agents must adapt.

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Personal Auto Market Share: 1995 - 2013 Share of 2013 Personal Auto Production

While no group gained or lost a full percentage point of market share, one must remember that even 10 basis points of share are worth almost $200 million in annual premiums. Direct response once again increased its share, this time by 0.9 percentage points, climbing form 18.3% to 19.1% of the personal auto market. If this trend continues in 2014, direct response will break the 20% market share threshold and will be writing $1 of every $5 in premiums.

Direct Response 19.1% National IA 5.4%

Captive Regional IA

5.4%

25.9%

49.6% 49.6%

25.9%

Regional IA carriers also increased share, by one-half of 1 percentage point, to 25.9% of the market. By contrast national IA carriers as a group lost 0.8 percentage points and are on the verge of dipping below 5% of the market. While captive agents did increase production in 2013 by an impressive $2.5 billion over 2012, as a percentage of their dominant 50% market share, it calculated to a 2.9% portfolio expansion, which was below the direct response and regional IA performance on a percentage basis. However, when we take a longer perspective and analyze of this year’s results in a 19-year context shows, we see much more significant changes in share. While captive carriers still dominate the market, this is far less true than in 1995, when their share was a full 10 percentage points higher than it is now. This shift was characterized by four distinct periods: • • • •

A steep 4 percentage point drop in 2000. A gradual drop from 54.4% in 2000 down to 52.5% in 2009. Another significant drop to just below 50% in 2010. Bouncing around the 50% market for three years from 2011 to 2013.

Personal Auto Share: 1995 ‐ 2013 Data Labels for 95, '00, '05, '10, '13

National IA 60% 59.8%

Regional IA 54.4%

Exclusive Agency 52.8%

50%

40% 20% 18.4% 30% 10% 14.1% 0% ‐10%

7.7%

22.2%

23.9%

13.7%

12.5%

9.8%

11.8%

Direct Response 49.1%

49.6%

26.4%

25.9%

16.4% 7.0%

19.1% 5.4%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

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Regional IAs have climbed by nearly 7% percentage points during those 19 years, with a significant jump in 2000 followed by a gradual climb from 22% in 2000 to 24% in 2009, and then a jump of nearly 2.5 percentage points in 2010, before starting to move down slightly between 24.9% and 25.9% over the last four years. By contrast, national IAs as a group have lost closer to two-thirds of the 14.1% market share they enjoyed in 1995, closing 2013 with 5.4%. Their share remained fairly stable from 1995 to 2000, taking a significant dip in 2001, but stabilizing through 2005, when they began a steady, but slow decline from 2006 through 2013.

CYBERRISE CRIMES 23%

the must-know sectors for new business

by Caitlin Bronson

The frequency, sophistication and severity of data breaches is set to explode, according to a new industry report. For the savvy insurance producer, that means an increased opportunity to pitch cyber security insurance to clients—provided you know which ones to target.

PRODUCER

Data breaches are a threat to every business, and a study from PriceWaterhouseCoopers finds that cyber crime increased 23% last year over the previous year. Yet, only one-third of companies have coverage that would protect them from the potential financial fallout.

“The attacks aren’t going to be one size fits all. [Hackers] will increasingly customize those attacks, and target places that hold large amounts of sensitive data,” Marciano said. “Those will be the top targets for hackers.” Marciano expects the cyber insurance market to grow next year as attacks increase and businesses both large and small start to appreciate their own risk. “Companies are starting to become more aware of cyber insurance—that it exists and what it covers,” she said. “It’s going to be about when a [cyber attack] is going to happen, no longer if. I think my business will continue to grow because organizations will realize the risk is always going to be here, and they should have coverage for it.” However, producers need to have more than just a marginal understanding of cyber risks in order to be successful. In an era of sophisticated risk, producers will need to function as the absolute authority on cyber security. “Brokers should start looking at the [cyber insurance] product, taking a look at the coverages that are offered and bringing the topic into conversation with their clients,” she said. “A lot of brokers still don’t understand the product, and the broker mentality is that if they don’t understand the product, they won’t talk about it with their client.”

Big“I”Tip Check out our Partner Philadelphia’s Cyber Security product! Benefits of the Program Our Cyber Security Liability program provides

While businesses in all industries carry some degree of cyber risk, some areas are more ripe for producer opportunities than others. Healthcare, the firm security firm Experian said, will be the prime sector to target next year.

both First and Third Party coverage for numer-

“When combined with new Health Insurance Portability and Accountability Act data breach compliance rules that require more notification, the healthcare industry is likely to make the most breach headlines within the year,” Experian said.

exposures are addressed. Coverage is available

All of this tallies with the practical experience of producers. Christine Marciano, president of the specialized independent agency Cyber Data Risk Managers, said she sees healthcare and other sectors with mass amounts of personal data at increased risk of attacks that are "more sophisticated and targeted."

ous classes of business. Through eight Insuring Agreements, a wide range of cyber liability nationwide on either an admitted or non-admitted basis. Click here to see more and to learn more by viewing the First and Third Party Protection lists and by watching posted videos.

Marciano anticipated that law firms and large financial institutes like banks will also be increasingly at risk for cyber attacks and, therefore, prime targets for those selling cyber insurance.

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ISO Files Most Important Homeowners Change in 40 Years by Bill Wilson, CPCU, ARM Assoc. VP, Education & Research

Background

Fourteen years ago, in the March 16, 2001 edition of our Virtual University VUpoint newsletter (Vol. 2, No. 6), we published what I believe was our first article on what would later become known as the “Where You Reside” homeowners insurance issue. That article was followed by several more related articles emphasizing the importance of a potentially catastrophic coverage gap in most homeowners policies we reviewed. In order to bring the issue to focus, in October 2009 we combined all of the articles into a white paper and presented a countrywide webinar on December 3, 2009. Both the white paper and webinar are linked from the “Where You Reside” page in the “Featured Resources” area of the VU. In the meantime, in 2005, our national Technical Affairs Committee presented this issue to ISO in our annual meeting with them. For 10 years, we pursued a remedy for ISO HO forms in this forum and at the Mid-America Insurance Conference via a series of points and counterpoints until, in November 2014, we were able to reach a negotiated agreement on changes to ISO’s Homeowners program that we all could live with. Neither viewpoint “won” but we believe the resolution is workable and a starting point for further evolution and tempering of this homeowners issue. The countrywide ISO filings effecting this change have been made with an effective date in most states of October 1, 2015. The forms changes include a new mandatory endorsement, an optional broadening endorsement, and a nonfiled notice/questionnaire form. The purpose of this article is to provide an overview of the issue and the purpose of the ISO filings. We will also identify several caveats and preview several initiatives we plan to undertake this year.

The Problem: Consider the following scenarios: • A homeowner is confined to a nursing home and then learns she will never be able to return home. Her home is fully furnished and full of her personal property, but she no longer lives there and will not be able to return. According to one interpretation by a number of adjusters and courts, at the instant she learns that she will not be able to return to her home, her residency ends and so does the coverage on her dwelling. If it is destroyed overnight by a covered peril, she has no coverage for the damage to her home, the largest asset she owns and one she would probably need to sell in order to afford the costs of long term nursing home care. • You sell your existing home and buy or build another home. Your new home is ready and the purchasers of your old home have qualified for a loan that will be 24

closed in 5 days. In the meantime, you move to your new residence which you have insured on a new HO policy and you allow the purchasers to begin painting, replacing carpeting, etc. in your old home. Your existing HO policy remains in force on your old house until the closing. Unfortunately, a tornado strikes the day before the closing and the adjuster denies the claim because you no longer reside in the home. • You purchase a “fixer-upper” and place homeowners coverage effective on the date of closing. You plan to move into the home in 28 days after your contractor son completes some renovations (hardwood floors, new kitchen countertops and appliances, bathroom remodeling, etc.). Three days after the closing, a fire breaks out overnight causing $186,000 in damage to the dwelling. When the adjuster learns that you have not yet moved into the home, he denies the claim based on a lack of residency, citing three court cases in your state upholding such claim denials. These are not hypothetical situations. In our original white paper on this issue, we identify over a dozen scenarios where residency may end during the policy term. We also cite a similar number of court cases that have considered this coverage scenario. Some courts overruled the claim denials, but a slight majority of decisions that we have identified have agreed with the interpretation that the end of residency ends the coverage on the dwelling. In addition, based on real-life claims submitted through the VU “Ask an Expert” service or directly by member agents, we are aware of at least a dozen claim denials: •Total loss while insured was in a nursing home (KY) •$100,000+ condo rental claim (FL) •5-figure loss while home was being remodeled (AZ) •$186,000 renovation claim (GA) •$150,000 ten-month house rental (FL) •$135,000 four-year house rental (FL) •$123,000 two-year house rental (FL) •$300,000 “nonclaim” with daughter occupancy (NY) •$229,000 total loss with niece occupancy (MN) •Small fire loss (NC) •Fire loss with daughter’s temporary occupancy (PA) •Fire loss while house was undergoing renovation (RI) Using the ISO HO-3 policy as a model form, this is the language being cited in the claim denials we’ve heard about and most of those in the court cases we’ve reviewed: HO Insuring Agreement: “We cover…The dwelling on the ‘residence premises’ www.iianm.org

shown in the Declarations….” HO Definitions: “’Residence premises’ means…The one family dwelling where ‘you’ reside….” The basis for these denials is that, according to the policy definition of “residence premises,” if “you” (named insured or resident spouse) don’t reside in the dwelling at the time of loss, the dwelling is not a “residence premises” and, if it’s not a “residence premises,” then the insurer does not cover, under the insuring agreement, the dwelling because it’s not on the “residence premises.” The “where you reside” language was not in ISO’s 1976 HO policies, nor was its addition in the 1984 edition mentioned in that filing. The language has been in subsequent ISO HO forms in 1991, 2000, and 2011. Our research also indicates that this language is common in most non-ISO HO forms in the marketplace, though not all policies.

compromised on a mandatory conditional “grace period” endorsement and an optional endorsement that does eliminate the “where you reside” language. While, from our perspective, this is not a perfect nor ideal solution, it is one that is workable if certain caveats are followed by all parties, as discussed later in this article. In the meantime, let’s examine the changes being made in two new ISO filings – forms and rules – that have a proposed effective date in most states of October 1, 2015, along with a nonfiled notice/ questionnaire form. ISO Filings • Forms Filing HO-2015-ORPFR Homeowners Residence Premises Definition Revised; Optional Endorsements Introduced • Rules Filing HO-2015-RRPRU Homeowners Manual Rules Revised

Forms Filing HO-2015-ORPFR For the record, OUR interpretation does not agree with that The forms filing includes the following new endorsements: of a number of adjusters and courts. Numerous courts have • HO 06 48 10 15 – Residence Premises Definition held that, to be enforceable, an “exclusion” must be “clear Endorsement and conspicuous.” We believe that coverage for the primary asset owned by a family should not hinge on three words in • HO 06 49 10 15 – Broadened Residence Premises a definition referenced from an insuring agreement. There Definition Endorsement is nothing “clear and conspicuous” about this language • HO 17 47 10 15 – Broadened Residence Premises that would lead an insured to believe that an interruption of Definition Endorsement – Unit-Owners residency would suspend coverage on the dwelling. From • HO 17 48 10 15 – Residence Premises Definition the standpoint of public policy, it makes little sense that, if Endorsement – Unit-Owners the insured is operating a meth lab and blows up his home, there is coverage under his HO policy, while there is no cov• MH 04 26 10 15– Residence Premises Definition erage for a tornado destroying her home the Friday evening Endorsement – Mobilehome an 80-year-old homeowner learns that she will be confined • MH 04 27 10 15 – Broadened Residence Premises to a nursing home henceforth. Definition Endorsement – Mobilehome Courts that have found FOR coverage have generally interpreted the “where you reside” language to be “words of The three “Residence Premises Definition Endorsements” description,” not a warranty of occupancy or a condition for are mandatory forms…the HO 17 48 is used with the coverage. Additional rationales for our continued position HO 00 06 condo form while the HO 06 48 is used with all on this are outlined in our original white paper. And, for what other HO forms. The three “Broadened” endorsements are it’s worth, in a past Property Loss Research Bureau publioptional forms…the HO 17 47 is used with the HO 00 06 cation, PLRB also took the position that this language does condo form while the HO 06 49 is used with all other HO not preclude coverage for damage to a dwelling. forms. There are two complementary Mobilehome program endorsements. You can review the endorsements by clicking on the links above. IIABA/ISO Negotiations The Big “I” national Technical Affairs Committee meets annually with ISO to discuss changes in, or additions to, ISO policy form portfolios that we believe are beneficial to consumers and businesses. Our agendas are typically 150-200 pages. Some of our recommended changes are accepted fairly quickly by ISO, others are declined, and many others are discussed over a period of years before being accepted by ISO or dropped by our committee. In the case of the “where you reside” issue, we considered a number of options over a ten-year period before we reached a compromise with ISO for changes in their HO forms. The preference of our committee would be the complete elimination of the “where you reside” language, but that was not a resolution ISO could accept. So, unlike Congress, we www.iianm.org

Mandatory Endorsements Using an excerpt from the above forms, the mandatory endorsements redefine “residence premises” to mean the “dwelling where you reside…on the inception date of the policy period shown in the Declarations and which is shown as the ‘residence premises’ in the Declarations.” The highlighted language is new and is explained by ISO in the filing as follows [emphasis added]: These endorsements introduce revised language to more explicitly describe that the residency requirement, when determining coverage applicability, will be satiscontinued...

fied as long as the insured resides at the residence premises on the inception date of the policy period. Currently, depending on insurer claims practices, a policyholder may or may not have coverage when they cease to reside at the residence premises mid-term or at renewal. These revisions will provide coverage through the end of the policy period despite mid-term changes in residency while allowing an insurer the opportunity to confirm residency as part of the renewal underwriting process. In other words, if the insured resides in the dwelling at the inception of the (new or renewal) policy period, coverage remains in force even if the insured should discontinue residency later in the policy period. This “grace” period lasts throughout the policy term but should be reaffirmed by the carrier on each renewal.

Optional Endorsements The optional endorsements completely remove the “where you reside” language from the “residence premises” definition for a specified period of time in indicated on the endorsement. As we read these new endorsements, they can be used in two ways. First, the inception and termination dates on the endorsement can be identical to the policy’s inception and termination dates. This is the solution IIABA sought from the beginning. Our position has always been that residency is an eligibility issue, not a coverage issue, and should be dealt with as an underwriting consideration, as it was in the pre-1984 HO forms. Second, these endorsements can be used to temporarily remove the “where you reside” language during a specified portion of the entire policy term. The best example of this use is when a policy if first issued on a newly built or purchased home. Residency in the home may not take place for several days or a week or more following the closing of a loan. Or, as presented as a scenario at the beginning of this article, the homeowner may wish to spend a month or longer renovating the home…this endorsement could serve to clarify that there is no residency until the renovations are complete.

This form can be used by carriers on new and renewal business to provide notice to insureds of the importance of residency and, based on the insured’s responses, identify whether the Broadened endorsement is appropriate. We suspect that carriers might prefer a “stronger” notice of the importance of residency and notification of the insurer when residency is discontinued. We plan to work with ACORD in the coming months to draft an ACORD notice/questionnaire form and to determine what changes might be indicated in other ACORD forms such as the ACORD 80 Homeowner Application.

Caveats As indicated earlier, this resolution is not perfect or exactly what we believe is in the best interest of consumers, agents, and the industry at large. Still, there are caveats to this change that must be acknowledged. First, even with a mandatory endorsement, there is still a potential for a coverage gap at policy inception for carriers who interpret the “where you reside” language to be a residency requirement for coverage. For example, on new business it is customary to provide a policy (or, more likely, a binder) effective on the date of the loan closing. However, as is often the case, the insured may not move into the home and begin residency on the date of closing. As a result, for carriers with a restrictive interpretation of “where you reside,” a Broadened endorsement should likely be used at policy inception and the insured made to understand the importance of revising the termination date on the form if move-in takes longer than expected. Second, since renewals are usually processed a month or two in advance, even with a notice form, it’s possible that an insured might unexpectedly discontinue residency (e.g., medical conditions, unanticipated work relocation, military deployment, etc.) between completing the renewal paperwork and renewal policy inception. Again, it is critical when placing or renewing insureds with carriers that hold to a restrictive interpretation of “where you reside” that the insured fully understand the importance of providing notice of nonresidency. In such instances, then Broadened endorsement may be used until (if necessary), the account needs to move from a Homeowners to a Dwelling Fire policy.

Third, when we originally presented this issue to ISO for consideration, one of the points we made with regard to our The rules filing primarily addresses the use of the Broadbelief that this is an eligibility, not a coverage, issue is that ened endorsements on a “temporary” nonresidency basis, ISO’s own eligibility rules permit the use of an HO policy on though there’s nothing that appears to preclude that pea home under construction. Obviously, no one can reside in riod encompassing the entire policy period if the carrier’s a home under construction, so our argument is that a literal eligibility and underwriting guidelines permit. This filing reading of the “where you reside” language couldn’t preindicates that the Broadened endorsements, under ISO clude coverage because evert unoccupied home under conrules, are premium bearing so that the Base Premium can struction would have illusory coverage, something courts be increased, for example, by up to 12% (2% per month) for have uniformly found to be prohibitive. But, for insurers who a six-month nonresidency period. hold the restrictive interpretation of “where you reside,” the Broadened endorsement should be attached at inception Nonfiled Notice/Questionnaire Form for the duration of construction. ISO has also developed the following nonfiled form:

Rules Filing HO-2015-ORPFR

• HO N 009 10 15 – Residence Premises Questionnaire 26

What now? www.iianm.org

an d

Odds ends ‘New’ solar system is the oldest ever found The oldest solar system in our galaxy is 11.2 billion years old, according to data from NASA’s Kepler space telescope. By comparison, our home solar system is about 4.5 billion years old. The new find is about 117 light-years from Earth, with five Earth-sized planets in an orbit too close to their star to allow for life. But the discovery of a solar system’s formation only a few billion years after the Big Bang some 13.8 billion years ago suggests that life could have proliferated throughout the cosmos much earlier than scientists previously believed.

Keep kids safe from bugs during summer months As summer comes, so do the bugs. And some of those bugs can bite. Follow these guidelines from the American Academy of Pediatrics to protect your children from getting stung or bitten: • Avoid using scented soaps, hair sprays, and perfumes on your child. The scents can draw insects and bugs and increase your child’s risk of being bitten. • Stay away from nests or places bugs might congregate. This includes stagnant pools of water, areas where uncovered foods are abundant, and gardens where flowers are blooming. • Don’t dress your child in brightly colored clothing or flowery prints. They can draw insects to them. • Insect repellents containing DEET are the most effective. However, DEET should not be used on children under 2 months old. The benefits of DEET are best when it is at a 30 percent concentration—the maximum concentration recommended for infants older than 2 months.

Here’s to you, dad: The start of Father’s Day Father’s Day started with a dedicated woman: Sonora Smart Dodd, the daughter of a widowed Civil War veteran who had raised her on his own. Dodd came up with the idea for a special day celebrating fathers when listening to a Mother’s Day sermon in 1909. She held her own special tribute for her father on June 19, 1910, in Spokane, Wash., and began a campaign for an official celebration thereafter. The idea of Father’s Day initially met with some skepticism, but in 1919, President Calvin Coolidge expressed support for the holiday, and in 1926 a National Father’s Day Committee was formed in New York City. In 1966 President Lyndon B. Johnson signed a proclamation designating the third Sunday in June as Father’s Day, but it wasn’t until 1972 that President Richard Nixon officially recognized it as a national holiday.

20 Grilling Tips from the Pros from Better Homes & Gardens Grilling pros and cookbook authors Jamie Purviance and Elizabeth Karmel know a thing or two about great grilling. Don't miss their 20 top grilling tips for excellent results every time.

June is National Zoo and Aquarium Month A good time to explore your local zoo and aquarium. Many have excellent educational resources—photographs, videos, lesson plans, and other activities. Visit Albuquerque’s Biopark website here.

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“Biggest Homeowners Change in 40 Years Explained” July 8, 2015 1pm - 2pm MT Click here to learn more and register

ATTENTION: if you don't have plans this weekend, we live in a beautiful state. Get out and enjoy it! Why not start with a hike?

Top 5 New Mexico Hikes www.iianm.org

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