Specialty Insurance Blog

Agent & Broker

George Wallace continues his terrific commentary with a post on the California Commissioner’s most recent regulatory proposal concerning agent/broker compensation and disclosure (see George Wallace and also here and here).

This discussion brings to mind a question concerning “agent” and “broker,” one which is particularly important in the specialty lines area.  In specialty lines, the relationship between an insurer and a "producer" (I will use “producer” when the agent/broker role is not clear) is often defined in a contract as a broker.  The purpose is to make it clear that the producer is not an agent of the insurer, and has no agency powers or rights that would normally be associated with an agency relationship.  Does this mean that the producer, when the relationship is defined as "broker," is therefore a representative of the insured?

To add more complexity, assume a producer typically acts as an agent on his business.  However, assume he is in need of a specialty lines product for one piece of a client's program and approaches a wholesaler for this coverage.  Not uncommon in the specialty lines business.  What role does the “agent” then have with his client?  Does it change for each of the coverages?  The producer is acting as an agent on most of his business, and all the rest of the business for that client, but the producer is defined by contract as a "broker" to the wholesaler, not an agent.

Lastly, the wholesaler is often a broker (as defined by contract), not an agent, but never communicates with the client.  Does the wholesaler have a "brokers" duty to the client?

George - can you shed some light on this?

VC Fair

I just returned from a venture capital fair in Connecticut.  Interesting and very well run, but a bit disappointing as well.  Not one insurance presentation.  It has always been oriented toward IT and life sciences, but not one insurance presentation out of 90.  Right down the road from the “insurance capital of the world.”  Is this a reflection on our industry?  Or just turning over the wrong rock?  I hope it is the latter.

Most presentations were well done, and there were quite a few very impressive plans.  Lots going on in the healthcare sector, including risk management and managed care organizations.  We do not consider the venture fair a primary source of deals, but worth the time.

Medical Malpractice & Regulation

Jim Garvin has a good post on the regulation of medical malpractice insurance (see here).  Our experience in the specialty lines market is that freedom from rate and form regulation (ie the surplus lines) provides significantly greater liquidity in the market than the segment of the market requiring rate and form filings (the admitted market). 

What we have found is that the availability (supply) of medical malpractice insurance is primarily a pricing issue (form is important as well, but price is the driver).  Our wholesale brokerage operation can place almost any healthcare risk, but the client may not like the pricing or terms.  Would less regulation of rate and form in the admitted market increase availability?

Another question: how much of the “crisis” is due to physicians’ inability to pass along medical malpractice price increases?  In conversations that we have had this seems to be a significant issue.

Use It and Lose It

The insurance Commissioner in California has been trying to institute “use it and lose it” regulations for the state’s homeowner insurers (see here) and has been meeting resistance and generating quite a bit of commentary.  Although this issue does not directly affect the specialty lines insurance market, I find this kind of controversy interesting because it gets to the fundamentals of the insurance business: discrimination on the basis of risk.

The practice of “use it and lose it” refers to an insurer refusing to renew a policy, or significantly increasing the renewal premium, when an insured has presented a claim.

George Wallace has a good description of where we are here and here.  The Commissioner attempted to ban the “use it and lose it” practice through regulation.  When insurers challenged his position in court, the court determined that he had exceeded his authority.  So the Commissioner has constructed another set of requirements, including disclosure and reporting requirements, intended to be so onerous as to effect his “use it and lose it” ban.  This has been met with resistance as well (see here and here).

Barry Zalma has a description of the legal aspects of this and need, or lack thereof (see here).  It also leads me to another post/article by Barry on the Law of Unintended Consequence (see here) regarding insurance and bad faith.  If the Commissioner is successful what are the possible unintended consequences of the “use it and lose it” regulations?  My guess would be higher premiums and tighter underwriting.

Martin Grace has a discussion of this issue (see here) and includes a theoretical scenario with a claim slightly higher than the deductible and how a buyer would or should consider the cancellation probability.  While this is a useful exercise, I think the reality is more complicated.  The customer should also consider the impact of a premium increase based on the claim, not just the probability of cancellation, any prior claims, and maybe even the specific circumstances related to the claim.  Also, most homeowner insurers have rate filings that include a partial description of their underwriting approach, but a customer would not typically have this information.  Even adding my comments to Martin’s, reality is still more complicated.

Since there appears to be many more claims than complaints, one would have to conclude that in most cases insurers are accepting claims and renewing.  What I have not seen, and I am sure exists, is convincing support that there is a problem that needs to be solved.

Indemnification Programs

Product or service indemnification programs use a combination of contracts and specialized insurance to provide protection to customers.  Medtronic, a major manufacturer of defibrillators (“automated external defibrillators or AEDs”), has introduced an indemnification program for its customers (here):

The biggest barrier to full-scale adoption of … AEDs has been a misguided fear that companies expose themselves to liability claims if they adopt the technology.

The purpose of the indemnification program is to protect companies from liability associated with the use of the defibrillators.  This type of an indemnification program can by used with a wide range of products and services.  An indemnification program is typically structured with both a contract and an insurance policy.  The contract is between the seller of the product or service and the customer.  The insurance policy runs to the seller, and covers claims under the indemnification program.  The customer is protected by and subject to the terms of the indemnification provision, and the seller is protected by the insurance policy.

The insurance backing up the indemnification program is not free, and is often not cheap.  The programs work best in situations where the impact of the indemnification program on sales of the product or service is significant, and the actual exposure is moderate.

Lloyd's Study

A study commissioned by Lloyds reveals underwriters think buyers are concerned about prices.  Not surprising – that buyers are concerned about pricing.  Good news - that this is what underwriters are thinking.

Also good news is that a significant percentage, although not the majority, believe that managing the insurance cycle is the most important challenge for the industry.  Additional information is available here.

D&O is Not E&O

D&O (Directors & Officers) coverage does not cover professional liability (E&O) or professional liability claims.  Therefore, D&O coverage provided to a company providing professional services will have a gap if no professional liability is purchased. 

This came up recently with a client who requested D&O.  They said that one of the Directors insisted on D&O when he came on the Board, and that therefore they needed it.  The organization provided professional services (a financial services company) and did not have E&O either.  We pointed out that if only D&O was purchased the new Directors would (wrongly) conclude that he was covered, when in fact he would not be covered for their most important exposure.  The solution – purchase both D&O and E&O (professional liability) coverage.

There are some insurers that provide combination policies which include both D&O and E&O.  These policies are essentially two coverage parts combined in one package, and in most cases do a good job of providing the needed coverage.

You can find additional information on this subject at our web site here.

Medical Malpractice Crisis

Tomorrow, April 20^th, is, apparently, National Doctors Day.  According to their web site, there is a rally scheduled in Washington, DC to address the dramatic rise in medical malpractice insurance premiums:

Join thousands of physicians in an opportunity to voice support for effective medical liability reform by engaging our House and Senate leaders to join in this battle. On Wednesday, April 20th - National Doctor's Day – the Coalition for Accessible Physicians (CAP) will sponsor an organized march on Washington, DC to educate lawmakers, the media, and the general public about the current crisis.

While tort reform is a legitimate goal, the issue is much more complex.  We recently attended a symposium on the Medical Malpractice Insurance crisis in Connecticut.  Although the specific discussion was focused on Connecticut, the issues are relevant to the national debate.  The symposium included a panel with representatives from the medical community, the legislative branch, plaintiff and defense attorneys and the President of a medical malpractice insurance company. 

The most important theme communicated is that there is no silver bullet for this crisis as the problem is complex.

We did have a few observations worth noting.  First, the attorneys (both plaintiff & defense) were very articulate in discussing the inherent problems in the system but were vocal in their criticism of the proposed changes.  Despite sitting on the opposite side of the table they were the two participants who are benefiting from the current crisis!  In addition, it appeared that they were good friends – surprising given that they “battle it out” in the courtroom for the benefit of their clients.

The doctor on the panel was not overly effective because she focused solely on the cost of insurance, not on developing a long term solution.  The insurer representative pointed out that premiums have been declining or flat for a number of years, and only recently increased.  He also pointed out that insurers cannot continue to lose money on this line.  The government representatives, who have been studying this issue in detail for two years, stated that there are no easy solutions and didn’t propose any.

To us, it sounds like more of the same for medical malpractice insurance – continued market fluctuations from the remaining insurers.

To be continued.

Moneyball

I recently finished a great book, Moneyball, which I have been recommending to my friends.  While it is a book about baseball, it is more about looking at an industry or an organization differently.  The theme is using numbers to overcome preconceived notions and traditional beliefs.

The prime example is using the on-base percentage rather than batting average as an indicator of a hitters contribution to winning.  As described in the book, the A’s manager, Bill Beane, takes it much further.  We are seeing many other organizations following the A’s lead, including the Red Sox.

The concepts applied to baseball as described in this book should have some interesting implications for the insurance business, where tradition plays a big role.  Because of the risks assumed, deviating from tradition can be costly, whether it is pricing, underwriting or coverage provisions.  For an underwriting organization, deviating from industry norms without destroying the organization is not an easy task.  This is particularly true in the specialty lines business where two key components to determining loss costs, homogeneity of risk and large populations, are often not present.  Our industry is littered with former insurers with a different approach.  Reliance comes to mind.

This is not intended to stifle innovation in our business – quite the contrary.  There are ways to innovate successfully – a key objective of our venture capital side.  We seek smaller organizations that are looking to build a competitive advantage through innovation in ways that support an underwriting profit.

A longer summary of the book with some discussion and questions about the application of the book’s lessons to entrepreneurship is here.

A great read, even for non-baseball fans.

Technology in Insurance

One of my interests is the impact of technology on the insurance business, particularly the specialty lines segment.  Despite my interest, I am always a little skeptical of the latest and greatest.  However, we made a decision a few months ago to go paperless and went live about four weeks ago.

We looked at a number of systems, but ended up choosing ImageRight.  Great decision.  The system is installed and running smoothly.  Most importantly, the integration with our business went very smoothly.  Four weeks out we are well up the learning curve and running more efficiently, which is significantly quicker than I expected.

We were/are certainly not pioneers here.  From my conversations with others in my end of the business (wholesale brokers) I estimate (WAG) that less than 20% of the market is paperless.  I would be interested in knowing what the percentage of retail agents & brokers operating on a paperless system is.