Specialty Insurance Blog

Free Online Content

Should online content from insurance industry publishers be open and accessible, or restricted in some way to subscribers?  We would all like the content we are most interested in to be open (and free), but the reality is that the publishers have to generate some revenue.  The question is whether they can generate more revenue using an open, ad-based revenue model or a closed, subscriber revenue model. 

It is not yet clear which model will win in the insurance industry, but the battle is being fought by some of the largest publishers.  The Wall Street Journal is mostly closed, and has developed an effective online subscription business.  Taking a different approach, The New York Times announced that it was making all of its content available free of charge and committing to an ad-based model (see here).  The reason is fascinating – there has been a shift in how people are accessing the information on their site:

What changed, The Times said, was that many more readers started coming to the site from search engines and links on other sites instead of coming directly to NYTimes.com. These indirect readers, unable to get access to articles behind the pay wall and less likely to pay subscription fees than the more loyal direct users, were seen as opportunities for more page views and increased advertising revenue.

In most cases the information these indirect linking users are looking for is not current. 

In our insurance world we have both models.  Some of the largest publishers, such as Business Insurance (see here) and Independent Agent, use closed, subscriber based models.  While some of their content is available free of charge, the bulk is available only to subscribers. 

You may have noticed that we link to Insurance Journal frequently.  They have taken an open, ad based approach and have built an effective and successful online business.  I understand that National Underwriter has recently opened most of its content.  It would be great for our industry if the other insurance publishers followed suit and decided that an ad-based model is more lucrative.

Brought to you by Tennant Risk Services.

Insurance Agents E&O – What Limit?

What limit is adequate for insurance agents professional liability (E&O)?  As all insurance agents know, recommending limits is a difficult endeavor.  For commercial accounts a lot of variables go into the decision, such as the size of the organization, the probability of being sued, the characteristics of lawsuits, what the client can afford, and your own E&O.  Insurance agents and brokers E&O is not much different.

Insurance agents E&O lawsuits are not the same as most commercial suits.  Suits brought against insurance agents are typically brought against the insurer providing coverage to their client as well, and the agent or broker has little control over the litigation.  The amounts at risk can be large, often running into the millions.  In addition, many of the suits filed against agents and brokers have little or no merit, but the agent or broker is required to prove it. 

Adequate E&O limits are essential for insurance agents.  The most common limit that small and some medium sized insurance agents purchase is $1.0 million.  Large agents obviously purchase larger limits, but there is no rule of thumb to provide guidance.  There is some suggestion that a $1.0 million limit is not adequate in the current environment (see here), particularly in California.

Maybe $1 million was adequate in 1980, but not anymore

Many factors can impact the severity of insurance agents E&O claims, including catastrophes (see prior post).  Utica has a discussion of agents E&O limits on its web site (see here), but even this does not help much.

Here is what we are seeing in the market today:

• $1.0 million is a minimum for virtually all agents and brokers
• Cost is a significant factor
• Deductibles (or retentions) can and are increased, and any savings applied to higher limits
• Savings from the softening market are often used to increase limits
• Medium sized firms buy $3.0 million to $10.0 million in limits

We don’t have a rule of thumb to provide guidance, but the same advice you might give to a commercial client apply to your insurance agents E&O buying decision.  Here are some factors you might consider when determining limits:

• What is the size of your organization?
• Will concentration by line or class of business impact severity?
• Catastrophe exposure – is it a factor in your book?
• What can you afford?

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Healthcare Mangement

As all of us in insurance know (particularly those of us in sales), a good customer experience is important in retaining the customer.  Many businesses spend significant time and effort in managing customer outcomes, but for some businesses adverse outcomes impact a lot more than customer retention.  In healthcare, adverse outcomes impact customer health and the organization’s liability.  According to a New York Times article (see here), Cincinnati Children’s Hospital has gained a reputation for high quality healthcare through a focus on specialization and patient outcomes.

Reasons for the hospital’s national renown include its market-niche focus on certain rare or complex conditions. A medical-team approach coordinates the efforts of the various specialists who handle each child’s case.
These days, Cincinnati Children’s devotes its energy to narrow specialties where it can develop a true expertise — like Fanconi anemia, a rare genetic disease that leads to bone marrow failure.

Tracking outcomes is difficult and expensive, and most organizations either don’t do it or don’t do it well.  Cincinnati Children’s takes it one step further.

Cincinnati Children’s is among the relatively few medical centers that meticulously collect a wide range of data, to let the hospital see whether patients are getting good, effective care — and to look for ways to improve.
Cincinnati Children’s Hospital rigorously tracks how its patients fare, both in the hospital and after they leave.

What the article does not talk about is the impact this approach has on its medical malpractice insurance costs.  It is likely that better patient outcomes, which the patients appreciate, has led to lower claim frequency and lower insurance costs.  If so, this is another example of customer quality and risk management going hand in hand.  (see prior post)

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The Wisdom of the Crowds

The Wisdom of Crowds (WOTC) is a theory that groups of independent people often make better collective decisions than individuals (see here), and is also the name of a book (see here) by James Surowiecki.

Beaumont Vance provides an excellent summary of the theory (see here), how it can be used to predict future events, and how it might apply to the risk management world. 

If one gathers a large number of guesses about some unknown, those guesses will come very close to the correct answer.  For example, if you ask 500 people to guess the number of jellybeans in a jar, the average of the guesses will typically be within about 1 percent to 3 percent of the actual number of jellybeans. The more guesses, and the more diverse the crowd, the more accurate the average estimate will be.

This is an interesting concept that has application to insurance and risk management, but it is not infallible.  While only mentioned tangentially in Mr. Vance’s article, crowds can sometimes be very wrong (bubbles in the financial world).  Some factors that can create failures in this approach (noted here) include lack of diversity, lack of independent decision making, and emotion.

Mr. Vance suggests this approach might be used for predicting probability distributions without data.  Highly sophisticated modeling techniques widely used to analyze future loss probabilities are only as good as the historical data used (as the cat modelers have recently learned).  This approach might be a viable substitute for identifying exposures that are not represented in historical data.

One example of using groups of independent experts to predict the future was a proposed DARPA experiment call the Policy Analysis Market (see here & here).  The concept was to set up a “futures market” to predict political developments in the Middle East.  The project was canceled because of negative political reaction.

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The Agents E&O Market

A recent article in Insurance Journal provides a summary of the current insurance agent’s and broker’s professional liability (E&O) market (see here & also here).  The article’s key theme is the softening market.  However, the article does not discuss the significant segmentation that exists in the agents E&O market.

The article notes the general softening of the approximately $500 million premium professional liability segment, and a few new entrants.  Also noted was the need for limits greater than $1.0 million, particularly in California, and the practice of spending the lower premiums on increased limits.

Some of our prior comments on catastrophe exposures (see here, and here) were reiterated:

Litigation from hurricane, flood and other weather-related claims will clog up insurance company claims offices and courts on a long-term basis. Katrina claim cases will go on for years and years. It's a flood of litigation, it's here to stay and it's only going to get bigger.

While some of the interviewees referred to industry segmentation, little time was spent on this subject.  As most insurance agents know, the insurance agents E&O market is extremely segmented.  The two major agents associations provide programs for mainstream retail insurance agents, and a number of markets compete directly in this segment.  An agent or broker might fall outside of this segment for a variety of reasons, including business or line concentrations, location, claim experience, or size.  There are many market alternatives for these agents and brokers, but they may be hard to find.

The overall message is correct: the market is softening – no surprise there.  The keys to getting good value have not changed, however.  They are the same that you provide to your clients:  search out markets and provide a quality presentation.

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Insureds Need to Read the Policy

Insurance agents are responsible for providing coverage as requested by clients, and could face insurance agents E&O claims if they do not.  But what happens if a client requests the wrong coverage?  This happened in Wyoming, and a recent court case provides the answer:  A client is required to read the policy in order to determine whether coverage is correct (see here, and here for a summary).

A client provided incorrect values on two buildings to their agent, and the agent provided builders risk coverage on the buildings in the amount requested.  The client never read the certificates or policies when they were provided and therefore never caught the error.  A loss occurred, and the insurer applied the coinsurance clause after determining that the client was significantly underinsured.  When the client disputed the proceeds, and brought a claim against the agent, the court decided that the client could have prevented the situation by providing correct information to the agent, and by reviewing the policy or certificate information when it was provided.  The client admitted they never reviewed the policy or certificates.

Note that this case is one with a clear error on the part of the client, and little or no counsel required from the agent.  The situation would be quite different if the client was relying on the agent for advice, such as the appropriate amount of coverage, and liability would surely be shifted back to the agent.

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Captive Trends

Captive insurance companies are typically utilized by large corporations or groups of very difficult risks as a method of retaining and financing risk (see here, here & here for captive basics).  Captives, both single parent and group, have been around for many years, and are used effectively by many insureds.

While captives can be effective in any market condition, much of the captive formation takes place in the midst of hard market conditions.  It was therefore surprising to see a short piece on CNN Headline News recently, and an article on CNNMoney.com (see here), promoting captives as a solution to the insurance crisis.  What insurance crisis?  Florida homeowners, created by coastal development, marginal building practices and governmental intervention?  They must not know that the hard market is over, and that captives are not a solution for the overregulated homeowners insurance market.

What group captives do well is reward small groups of risk management oriented insureds with premiums that reflect their lower loss costs.  What captives do not do well is allow groups of poor risks to pay premiums below their ultimate loss costs, at least not for very long.  Captives are not for everybody, but they are a very effective tool for the right side of companies.

Which is why a more informative and balanced article in Risk & Insurance caught our eye.  This article talks about the application of single-parent captives for middle-market companies, and is written by individuals with significant captive experience (see here).  The article is an excellent introductory summary for companies considering participation in captive.

Brought to you by Tennant Risk Services.