Specialty Insurance Blog

Successful Hiring

As organizations change and grow, particularly in the insurance distribution business, having the right people, with the right mix of technical expertise and people skills, is critically important.  Hiring good people is a challenge in the best of times.  In a recent BusinessWeek article Jack & Suzy Welch have a great suggestion on a feedback mechanism for the hiring process (see here - reg. required).  Basically, they suggest measuring the effectiveness of interviewers’ recommendations based on the success of the candidate.  Note that they recommend that multiple people conduct the interviews, implicitly suggesting that this include operating people as well as HR.  While their exact formula might not be the best for every organization, the concept is an excellent one.

Brought to you by Tennant Risk Services.

Catastrophes & Financial Markets

As the primary contact point with customers, insurance agents continue to be responsible for communicating the results of underwriting and pricing volatility, including traditional market cycles.  In most cases the volatility is the result of catastrophes, and the fallout can be far reaching.  We have all had to communicate significant price increases to clients, or explain why a client’s coverage is being non-renewed.  Not pleasant.  The most recent cycle was triggered by a series of cats, including 9/11 and Katrina, and the severe impact was felt by virtually all clients and insurance agents across the country.

The industry has searched for solutions since then because the sheer magnitude of the catastrophe exposure may be more than the insurance industry can assume.  There has been significant discussion about governmental solutions to both man-made cats (terrorism, for example) and natural cats.  Governmental bodies have stepped in as well.  Florida has effectively taken over the homeowners market though Citizens and their cat pool.

Most of us in the industry would prefer a non-governmental solution to cat exposure, and any suggestion that there is a private, financial solution to catastrophe exposure should be met with serious consideration.  A recent article in The New York Times Magazine on August 26th describes one such solution, cat bonds, in a manner that is easy to understand (see here).  This should be required reading for anyone in the insurance business.  While the primary subject is catastrophe bonds, the article by Michael Lewis (Liar's Poker, Moneyball..., The New New Thing...), provides an excellent summary, from 10,000 feet, of how the insurance industry's assessment of catastrophe exposure has changed over time.

Central to the insurance business's ability to economically insure our society's risks is independence of exposure - independence provides predictability across a large population.  Cat exposure is not independent, and is different from the typical exposure commonly insured:

An insurance company could function only if it was able to control its exposure to loss. Geico sells auto insurance to more than seven million Americans. No individual car accident can be foreseen, obviously, but the total number of accidents over a large population is amazingly predictable. The company knows from past experience what percentage of the drivers it insures will file claims and how much those claims will cost. The logic of catastrophe is very different: either no one is affected or vast numbers of people are. After an earthquake flattens Tokyo, a Japanese earthquake insurer is in deep trouble: millions of customers file claims. If there were a great number of rich cities scattered across the planet that might plausibly be destroyed by an earthquake, the insurer could spread its exposure to the losses by selling earthquake insurance to all of them. The losses it suffered in Tokyo would be offset by the gains it made from the cities not destroyed by an earthquake. But the financial risk from earthquakes — and hurricanes — is highly concentrated in a few places.

Highly concentrated, correlated exposure is not something the insurance market, or even the reinsurance market, can retain in great amounts.

Cat exposures have become so large that experts doubt the insurance industry can sustain the largest even with the broad spread provided by global reinsurance markets.  However, financial markets can easily absorb the magnitude of large cat risks.

The article describes the efforts by John Seo of Fermat Capital Management to provide relief in the financial markets through cat bonds, which is possible because experts are finding that cat exposure is quantifiable, if not independent.

Catastrophe risk is fundamentally different from normal risk. It deals with events so rare that experience doesn’t help you much to predict them…You lack information. You don’t know what you don’t know. The further out into the tail you go — the less probable the event — the greater the uncertainty.

Insurance companies, John Seo says, are charging customers too much — or avoiding their customers altogether — instead of sharing their risk with others, like himself, who would be glad to take it.

If this sounds like a marketing piece for cat bonds, it is.  But cat bonds can be an effective way to move significant risk out of the insurance market to the financial markets.  The devil is in the details, and the article ignores the difficulty of matching cat bond triggers with exposure in an insurer’s portfolio of risk.  In this, reinsurance is a better developed risk transfer solution.  But a good, important read.

Additional information on the cat bond market can be found here, here, here & here.

Brought to you by Tennant Risk Services.

Death Bonds

Death bonds, also known as viatical settlements or life settlements, have been a small part of the insurance business for many years.  More recently, they have gained greater attention and have been pushed hard as interest from Wall Street has increased significantly.

A life settlement (viatical settlement) involves a third-party purchase of the right to the future proceeds of a life insurance policy (see here for an SEC description).  Since the date of death is, presumably, uncertain, the buyer pays a discount to the face value of the policy.  The benefit to the policyholder is receipt of a significant cash payment prior to death, and the risk/reward trade-off for the buyer is the timing of death.  Potential losers are the future beneficiaries of the policy, and, to a limited extent, insurers who suffer a lower lapse rate or adverse selection.

Wall Street has gotten involved in the business of bundling and securitizing life settlements, and interest from investors has risen sharply.  Business Week has published a summary on the business with a focus on Wall Street's involvement (see here).

While the concept may make sense, in theory, the incentives are questionable.  The opportunity for aggressive and deceptive sales tactics, adverse selection and manipulation are significant, and areas like this tend to attract the worst element.  One example:

Providers…are trying to lure people who don't even hold insurance. In this tail-wagging-the-dog scenario, speculators take out policies on the individuals' behalf, pay them something up front, cover the premiums, and then wait for the people to die so they can collect

Note that this scenario only works if the insured person dies sooner than the insurer expects.  Given these types of tactics, regulators have their hands full.

Brought to you by Tennant Risk Services.

Excess Insurer Not Required to Follow Primary

You might think that an excess insurer is bound by the settlement decision of the primary insurer, but a recent court case in Massachusetts suggests that an excess insurer is not bound by the primary insurer’s settlement decision.  The case, Allmerica Financial Corporation et al v. Certain Underwriters at Lloyd’s, was decided this month by the Massachusetts Supreme Judicial Court.  (See here & here for a summary, here for a copy of the decision, and here for a summary of the previous trial court decision.)

Allmerica Financial settled a class action lawsuit in 1999 that alleged improper business practices from the sale of life insurance and annuity products.  The firm had primary insurance of $20 million, excess of a $2.5 million retention, and following form excess insurance with Lloyds of $10 million. 

The excess insurer declined to provide coverage for the settlement due to exclusions in the policy even though the primary carrier had agreed to the settlement, and Allmerica sued the excess insurer.  The trial court ruled, confirmed by this recent decision, that the excess insurer was not bound by the primary insurer’s decision to settle.  Note that the trial court found that there was no coverage for the claim in the primary policy, but this was overturned in the Supreme Court ruling.

The Public D&O Market – A Summary

All types and sizes of organizations buy Directors & Officers liability insurance (D&O), and most insurance agents want to know what is going on in the market and where it might be headed.  AIG has an excellent and short summary of the public company D&O insurance environment based on events during 2006 (see here).  The summary is primarily focused on public company D&O.

• Shareholder class-action suits – but the number of filings declined in 2006, but the average settlement size increased 37% to $34 million
• Globalization of suits – European organizations have become increasingly involved in US lawsuits as both plaintiffs and defendants
• Increasing tag-along suits – plaintiff’s actions are increasingly involving multiple actions including administrative and criminal investigations
• Defense costs – defense costs continue to increase rapidly
• Stock option backdating – highly publicized an ongoing
• Increasing M&A – merger and acquisition activity was high, leading to increasing litigation

The article concludes:

Directors and officers can anticipate that claim severity will continue, that the volume drop-off will subside, and that new avenues of litigation will continue to arise in 2007 and beyond

Despite the negative tone, the D&O market continues to be highly competitive, terms are expanding and D&O rates continue to fall.

Online Insurance Sales

Insurance agents have been reading reports of their looming demise due to the Internet for a number of years, but the numbers are clearly showing that consumers are continuing to depend on expert advice from their insurance agents.  In 2002, Celent published a report that estimated that online insurance shoppers stood at 19 percent and would grow to 37 percent, or over US$200 billion, by 2005. The company indicated that the Web should be a critical component of marketing strategies for insurance sellers as the role of the agent would be diminished.

As early as 2001, Celent had reported that 38 percent of the top 100 property/casualty carriers and 54 percent of the top 100 life/health carriers had implemented some type of Web-based Agent Extranet. This report highlighted the importance of the effective use of the Web for customer and agent communications.  (See here & here)

Commenting on the phenomenon of online purchasing in the insurance industry, Deloitte Research went so far as to indicate that the role of the insurance agent would go the way of the travel agent over the next decade (see here). Essentially, online buying trends would force a cutting out of the middle man.

To assume that the insurance agent’s role is ineffectual is taking a simplistic approach to the fundamentals of insurance as a whole and ignoring current online trends. While it is true that consumers are increasingly turning to the web to make purchases and gain information, purchasing has consistently increased in areas of known variables. In areas of more complicated scenarios and virtual unknowns, such as insurance, consumers still rely heavily on expert advice, which we know is consistently provided by independent insurance agents.

Celent recently recently published an update to its 2002 study (see here & here). This report estimates that online insurance sales will double by 2011. However, online insurance sales, despite consistent growth, will still only account for 15 percent of all insurance sales. This estimation falls considerably short of the company’s initial projection of 37 percent by 2005.

As a whole, the technology that affords us the information highway provides an excellent tool for consumers and insurance agents alike to gain information and communicate. The Internet and the marketing campaigns that are implemented in this venue play a significant role in the influence of insurance purchases. However, at the end of the day, consumers want the comfort and security of knowing that their agent is there to provide the necessary advice when asked and solutions when needed.

Documentation Protects Insurance Agents

Insurance agents work and communicate with clients and insurers every day, and act on their client’s decisions.  Agents are typically armed with portfolios full of forms that must be signed in order to provide the client with proper coverage and to document what has transpired.  However, conversations take place where action may not be taken to document the exchange of information and it is in such a scenario that the agent and the company he or she represents assume significant liability exposure.  Ultimately, this is what insurance agents professional liability (E&O) is purchased for.

A California insurance agent recently discovered the importance of such documentation. Hilb, Rogal and Hamilton Insurance Services was recently ordered to pay their clients, John Williams and Steven Simon, joint owners of Rhino Linings Santa Fe Springs, $5.8 million because they did not notify the owners of their lack of coverage (see here, here & here).

The Rhino Linings owners discovered they lacked proper workers’ compensation coverage after a burned employee sued. In 2004, a jury ordered them to pay the employee $5.6 million for the suffering of second- and third-degree burns in an explosion. Up until this time, Williams and Simon assumed they had the proper coverage.

The Los Angeles Superior Court found that Hilb, Rogal and Hamilton Insurance Services had failed to inform Williams and Simon that their company was not properly covered. The insurance company claimed that their agent had informed Williams and Simon that they should get workers compensation insurance, but that they refused coverage.

Unfortunately this interaction was not documented.  The file did not contain proof that the insurance agent notified Williams and Simon of their lack of coverage and the declination to purchase coverage, and the agent was held liable.

This case highlights the importance of documentation, particularly where clients have decided to decline coverage such as workers compensation. Simply noting the alleged conversation regarding workers’ compensation coverage and the insured’s file could have prevented this liability exposure. However, because there was no documentation to prove the insurance agent’s claim the coverage was declined, the insurance agent was completely liable for the claim against Rhino Linings and its owners.

Take an Educated Approach to Your Education

Continuing education is a given for insurance agents, but perhaps it is time to take a fresh look at the benefits that education can provide to the professional, the company and the client. A recent commentary by John Pryor of Pryor Insurance Consulting, Inc., visited Dr. W. Edwards Deming’s point #13 from his book, Out of the Crisis and how it could apply to the Insurance Industry (see here).

Point #13 consists of four parts, with the first part highlighting that what the organization needs is not just good people, but people who are improving with education. The Bureau of Labor Statistics (see here) has emphasized the growing demand put forth by insurance companies for the continuing education of their agents. As agents focus on improving their knowledge base and expertise, the company collectively improves its total offering to the customer base.

The second part of point #13 is that there is no shortage of good people as shortage exists at the high levels of knowledge – and this is true in every field. This is where it is important to remember that settling for the training provided by an employer can prohibit career advancement. Agents should identify their own niche, examine their weaknesses and identify areas of education opportunity to create their own area of expertise.

The next element of point #13 states that one should not wait for a promise of reimbursement for a course of study. Moreover, study directed toward immediate need may not be the wisest course. When considering the growing complexity of the exposures that insurance companies insure and the importance the client places on expertise, the agent may be better served in the long run to determine what course of study is most beneficial to his or her career.

Finally, the last part of point #13 highlights that advances in competitive position will have their roots in knowledge. Customers do not always understand everything they should when it comes to their insurance policies. Instead, they trust their agents. This area can be tricky, however as customers are becoming more savvy, doing much of their research online and gaining more knowledge than ever before. This puts increased pressure on agents to be able to confidently answer questions and deliver the coverage the customer needs.

Advertising Liability

Publishers of advertising content have liability for the content of the advertisements in addition to their potential liability arising from their traditional content, and need media professional liability coverage to protect themselves.  Liability from advertisements can arise whether the publisher created the advertising content or just published it.  Publishers can also get sued for rejecting advertisements.  An article from OneBeacon (see here) highlights the exposures and provides some examples.  In addition to libel and slander, exposures include:

• Negligence
• Personal injury,  invasion of privacy
• Breach of contract
• Trademark or copyright infringement