insurance journal west 2014.07.07

Youth Boom in American Energy States

Perils of Health Insurance Price Controls

Airbnb Alters San Francisco Rentals

Building trust starts here.

Post TRIA, most insurers see terrorism as a risk that is uninsurable.

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Trust. It’s built into every policy. TRIA may soon expire and stand-alone coverage is an absolute necessity. Yet most insurers will not be willing to take on the exposure for property damage, builder’s risk and business interruption. At Ironshore, we always try to find a solution. With capacity of $300 million and backing from Lloyd’s, we can provide integrated coverage now for a wider range of risks that go well beyond TRIA coverage. When faced with the catastrophic threat of an act of terror, you need an experienced partner with in-depth solutions who’s willing to commit for the long term. For more information, please go to www.ironshore.com.

The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service.

IRONSH16763.indd 1 6/20/14 2:39 PM

Building trust starts here.

Post TRIA, most insurers see terrorism as a risk that is uninsurable.

We saw a problem that needed to be solved.

Trust. It’s built into every policy. TRIA may soon expire and stand-alone coverage is an absolute necessity. Yet most insurers will not be willing to take on the exposure for property damage, builder’s risk and business interruption. At Ironshore, we always try to find a solution. With capacity of $300 million and backing from Lloyd’s, we can provide integrated coverage now for a wider range of risks that go well beyond TRIA coverage. When faced with the catastrophic threat of an act of terror, you need an experienced partner with in-depth solutions who’s willing to commit for the long term. For more information, please go to www.ironshore.com.

The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service.

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6 | INSURANCE JOURNAL-WEST July 7, 2014 www.insurancejournal.com

Inside This Issue

July 7, 2014 • Vol. 92 No. 13 • West

10 Climate Change Bottom-Line Talk Grows, S&P Director Says

14 How New Capital Is Changing P/C Industry and What to Do About It

16 Spotlight: 10 Things to Know About Earthquakes

18 Closer Look: Disaster Mitigation — How Incentives Can Help

20 Special Report: Getting a Grip on Ridesharing Coverage

30 2014 Digital Product Guide

NATIONAL COVERAGE

W8 The Hidden Perils of California’s Proposed Health Insurance Price Controls

24 The PPACA: What Employers Don’t Understand About Emerging Exposures

26 Staffing for Your Organization’s Term Projects

28 The Competitive Advantage: Chris Burand

34 Closing Quote: The Use and Abuse of Insurance Ratings

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DEPARTMENTS8 Opening Note11 Declarations11 Figures12 Business Moves32 MyNewMarkets

W2 Data Breach of 20K Young Patients at California Hospital

W2 California Agency Failing to Ensure Limo Safety, Audit Shows

W4 Airbnb Alters San Francisco Rental Market, Report Shows

W6 As America Overall Ages with Boomers, Energy States See Youth Boom

WEST COVERAGE

On The CoverSpecial Report:

Getting a Grip on Ridesharing Coverage

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8 | INSURANCE JOURNAL-NATIONAL July 7, 2014 www.insurancejournal.com

NATIONAL COVERAGE

Opening Note

Andrea WellsEditor-in-Chief

FOR QUESTIONS REGARDING SUBSCRIPTIONS: Call: 855-814-9547 or you may subscribe or change your address online at:

insurancejournal.com/subscribeInsurance Journal, The National Property/Casualty Magazine (ISSN: 00204714) is published semi-monthly by Wells Media Group, Inc., 3570 Camino del Rio North, Suite 200, San Diego, CA 92108-1747. Periodicals Postage Paid at San Diego, CA and at additional mailing offices. SUBSCRIPTION RATES: $7.95 per copy, $12.95 per special issue copy, $195 per year in the U.S., $295 per year all other countries. DISCLAIMER: While the information in this publication is derived from sources believed reliable and is subject to reasonable care in preparation and editing, it is not intended to be legal, accounting, tax, technical or other professional advice. Readers are advised to consult competent professionals for application to their particular situation. Copyright 2014 Wells Media Group, Inc. All Rights Reserved. Content may not be photocopied, reproduced or redistributed without written permission. Insurance Journal is a publication of Wells Media Group, Inc.

POSTMASTER: Send change of address form to Insurance Journal, Circulation Department, PO Box 708, Northbrook, IL 60065-0708

ARTICLE REPRINTS: For reprints of articles in this issue, contact: Ly Nguyen at 1-800-897-9965 ext. 125 or lnguyen@insurancejournal.com Visit insurancejournal.com/reprints/ for more information.

Publisher Mark Wells | mwells@wellsmedia.com

EDITORIALEditor-in-ChiefAndrea Wells | awells@insurancejournal.comV.P. ContentAndrew Simpson | asimpson@insurancejournal.comEast EditorYoung Ha | yha@insurancejournal.comSoutheast EditorMichael Adams | madams@insurancejournal.comSouth Central Editor/Midwest EditorStephanie K. Jones | sjones@insurancejournal.comWest EditorDon Jergler | djergler@insurancejournal.comInternational EditorCharles E. Boyle | cboyle@insurancejournal.comSenior EditorSusanne Sclafane | ssclafane@insurancejournal.comClaims Journal EditorDenise Johnson | djohnson@claimsjournal.comMyNewMarkets.com Associate EditorAmy O’Connor | aoconnor@mynewmarkets.comColumnists Chris BurandContributing Writers Seth Borenstein, Dave Coons, Andrew DeMillo, Josh Funk, Bill Gausewitz, David Pitt, Stuart Shipperlee, Christopher Williams

SALESV.P. Sales & Marketing Julie Tinney (800) 897-9965 x148 | jtinney@insurancejournal.comWest Dena Kaplan (800) 897-9965 x115 | dkaplan@insurancejournal.comSouth Central Mindy Trammell (800) 897-9965 x149 | mtrammell@insurancejournal.comMidwest Lauren Knapp (800) 897-9965 x161 | lknapp@insurancejournal.comSoutheast Howard Simkin (800) 897-9965 x162 | hsimkin@insurancejournal.comEast Dave Molchan (800) 897-9965 x145 | dmolchan@insurancejournal.comNew Markets Sales Manager Kristine Honey | khoney@insurancejournal.comClassifieds, Jobs, Agencies Wanted/For SaleLy Nguyen (800) 897-9965 x125 | lnguyen@insurancejournal.com

MARKETING/NEW MEDIAMarketing Administrator Gayle Wells | gwells@insurancejournal.comAdvertising Coordinator Erin Burns (619) 584-1100 x120 | eburns@insurancejournal.comNew Media ProducerBobbie Dodge | bdodge@insurancejournal.com

DESIGN/WEBV.P. of Design Guy Boccia | gboccia@insurancejournal.comV.P of Technology Joshua Carlson | jcarlson@insurancejournal.comAudience Development Elizabeth Duffy | eduffy@wellsmedia.comMarketing Director Derence Walk | dwalk@insurancejournal.comWeb Developer Jeff Cardrant | jcardrant@insurancejournal.comWeb Developer Chris Thompson | cthompson@insurancejournal.com

IJ ACADEMY OF INSURANCEOnline Training CoordinatorBarbara Whiffen | bwhiffen@ijacademy.com

ADMINISTRATION Chief Executive OfficerMitch DunfordChief Financial Officer Mark Wooster | mwooster@wellsmedia.com

Concerns about being fired were associated with a four-week increase in the average duration of disability.

Firing Fears

Injured workers who suffer from anxiety over fears of being fired exhibit poorer return-to-work outcomes than those that trust their employers not

to fire them. Trust in the workplace is one of the more important predictors of workers’ comp outcomes, according to the Workers Compensation Research Institute (WCRI), which conducted eight state-specific studies on the issue. To describe the level of trust or mistrust in the work relationship, the stud-ies’ interviewers asked workers if they were concerned about being fired as a result of injury. Workers who were strongly concerned about being fired after the injury experienced poorer return-to-work outcomes than workers without those concerns. One in five workers who were concerned about being fired reported that they were not working at the time of the interview. This was double the rate that was observed for workers without such concerns. Among workers who were not concerned about being fired, one in 10 workers was not working at the time of the interview. Concerns about being fired were associated with a four-week increase in the average disability duration. The studies also identi-fied workers with co-mor-bid medical conditions (existing simultaneously with and usually inde-pendently of another med-ical condition) by asking whether the worker had received treatment for hypertension, diabetes and heart problems. The condition may have been present at the time of the injury or may have manifested during the recovery period. Among those findings: •Workers with hypertension (when compared with workers without hyper-tension) had a 3 percentage point higher rate of not working at the time of the

interview, predominantly due to injury. •Workers with heart problems reported an 8 percentage point higher rate of not working at the time of interview, pre-dominantly due to injury, and had disability duration that was four weeks longer. •Workers with diabetes had a 4 percentage point higher rate of not working at the time of the interview, predominant-ly due to injury than workers without diabetes. The studies were based on telephone interviews with 3,200 injured workers across Indiana, Massachusetts, Michigan, Minnesota, North Carolina, Pennsylvania, Virginia and Wisconsin. The studies interviewed workers who suffered a

workplace injury in 2010 and received workers’ compensation income benefits. The surveys were conducted February through June 2013 — about three years after the workers sustained their injuries. WCRI is a not-for-profit research organization based in Cambridge, Mass.

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W2 | INSURANCE JOURNAL-WEST July 7, 2014 www.insurancejournal.com

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which was a charter carrier regulated by the commission,” the auditor’s report said, referring to the San Mateo Bridge incident. The fire trapped nine women celebrating a friend’s recent wedding, killing five of them. The limousine’s driver survived, but no criminal charges were filed. The California Highway Patrol has said the blaze was caused by a catastrophic failure of the rear suspension system. The air suspension failure allowed the spinning driveshaft to contact the floor pan, causing friction that ignited carpets and set the vehicle on fire, authorities have said. “Four women who escaped the fire apparently climbed through the limousine’s divider window and out the driver’s section of the vehicle because the rear passenger doors were blocked by smoke,” the auditor’s report said. After the deaths, a law was passed in January requiring certain modified limou-sines to have additional window and door emergency exits beginning in July 2015. The commission has acknowledged the auditor’s findings and has said it plans to take action to resolve the problems.

California Agency Failing to Ensure Limo Safety, Audit Shows

Citing incidents like the 2013 limousine fire that killed five women on the San

Mateo Bridge, California’s state auditor has said that the commission responsible for overseeing passenger carriers has failed to ensure consumer safety. State Auditor Elaine M. Howle said the main reason for the deficiencies was a lack of effective leadership at the Transportation Enforcement Branch of the California Public Utilities Commission, with current management failing to establish goals or measures to guide its oversight efforts. The commission’s investigators routinely fail to collect the fees they are entitled to and do not ensure complaints are resolved in an adequate or timely manner, Howle said. They also don’t ensure that carriers have permits, undergo inspections, hold insurance and participate in driver safety programs, she said. “In May 2013 in the San Francisco Bay

Area, a fire killed five

women in a limousine,

Ex-Insurance Broker Arrested in California for Embezzlement

John Monreal, 45, of Santa Clarita, Calif. was arrested on May 30 by Los Angeles

County Sheriff’s Department deputies on 11 felony counts of embezzlement and insurance code violations after he allegedly duped multiple consumers into believing they were insured while he collected their premiums. In March of 2010, the California Department of Insurance revoked Monreal’s insurance license, listing 10 causes for dis-cipline that included allegations Monreal was lacking integrity, conducting business in a dishonest manner, incompetency and diversion of fiduciary funds. A subsequent investigation found that Monreal continued to act as a broker at his business, the John Monreal Insurance Agency, and issued checks to insurance carriers for the insurance policies that were eventually cancelled due to insuffi-cient funds or partial payment, according to CDI. Monreal would allegedly convince his clients to pay the full annual premium on an insurance policy in exchange for receiving a reduced rate, and he would insist that checks for the policies be made payable to him, according to CDI. He allegedly provided victims with a certificate of insurance, but only a portion of the premium was remitted to the insur-ance carrier, according to CDI. Monreal allegedly collected $10,703 in premiums from his victims. His Bail was set at $120,000. “While the majority of agents and bro-kers are honest, it is a sad fact that there are a few bad apples that are dishonest and violate the public trust,” Insurance Commissioner Dave Jones said in a state-ment.

Data Breach of 20K Young Patients at California Hospital

Southern California’s Rady Children’s Hospital says the private health data

of more than 20,000 young patients was mistakenly shared with a handful of job applicants. In one breach in June a Rady employee emailed a spreadsheet that contained protected information to four applicants for data management jobs. The applicants subsequently forwarded the doc-ument on to two other people. The hospital says the spreadsheet con-

tained names, dates of birth, diag-noses and other data including

insurance claim information. It did not include street

addresses or Social Security, insurance or credit card numbers.

In a previous breach, a different employee emailed a training exercise to

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gest they have “heavy or constant visitor traf-fic.” Similarly, while the vast majority of peo-ple placing rentals — 86.4 percent — had only one room, apartment or house listed, 513 were connected to more than one property. Some of the multiple-listers were property managers handling Airbnb rentals on behalf of hosts who want to avoid the hassle; some were people offering two different rooms in their homes. “From a policy perspective, the real issue is whether there are a lot of units that have been removed from the housing market because of short-term rentals,” Gabriel Metcalf, executive director of SPUR, an urban design think tank, told the Chronicle. “It looks like that’s not a big number yet, but that’s what we need regulation to con-trol so it doesn’t become big.” The cheapest listing was for a shared bedroom costing $18 a night, while the most expensive was a house going for $6,000 a night. The citywide average for all listings was $226 a night. San Francisco lawmakers are discussing ways to bring Airbnb and its competitors into compliance with city law. One supervi-sor has introduced a bill that would legalize short-term rentals but require the renting party to pay the city’s 14 percent occupancy tax, which Airbnb says it would do starting this summer. Copyright2014AssociatedPress.

Airbnb Alters San Francisco Rental Market, Report Shows

Lodging sharing service Airbnb has taken a bite out of San Francisco’s already

limited stock of rental housing as some landlords and housing activists contend, a newspaper reported. The San Francisco Chronicle commis-sioned a data harvesting company to analyze a day’s worth of Airbnb’s local listings to see what kind of places were available on the website and if the accommodations were being rented for short or long periods. The analysis by Connotate Inc. found that almost two-thirds of the 4,798 listings were for whole apartments or houses, 160 of which appeared to be occupied full time. That is significant, according to the Chronicle, because Airbnb has been promoted as a humble service that allows people with spare rooms or those going away for a few days to generate some extra cash by partici-pating in the “sharing economy.” The figures suggest some property owners and managers are using the service to get around San Francisco’s strict rent control and other tenant protection laws, the news-paper said. Rentals under 30 days are illegal in the city. “In a city that has chronic housing shortag-es, the number of Airbnb homes that appear

to not be available on the rental mar-ket is significant,” Connotate Chief Strategy Officer Laura Teller said. Airbnb insists the majority of its hosts are residents who occasionally share the home in which they live, and that the service has boosted the city’s economy in direct and indirect ways. “We know Airbnb has made San Francisco more affordable for more families who use the money they earn to pay the rent and make ends meet,” the company said in a statement. “And because Airbnb listings are in every neighborhood, travelers get to see parts of the city and patronize local busi-nesses they would have missed if they stayed in a hotel.” Connotate could not determine from its analysis if the listed properties were rented out occasionally or all the time. More than 300 listings had enough user reviews to sug-

Jury Rules Disneyland Negligent in Ride Injury, No Damages Awarded

A jury has found that Disneyland

was negligent in an accident on its Splash Mountain ride four years ago but says that didn’t contribute to a rider’s injury. The federal jury in Los Angeles didn’t award any damages to Steve Wilson of Anaheim in the decision. His attorney, Barry Novack, says he’ll seek a new trial. Novack says in 2010 Splash Mountain

staff overloaded a log boat, causing it to get stuck, then didn’t tie it off before unloading riders. Wilson, who weighed 415 pounds, claimed that as he got up, the boat moved, he fell back and hit a seat, seriously

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Hispanics, age groups and both sexes at the national, state and county levels follow. For Hispanics and each of the race groups listed below (except for American Indians and Alaska Natives), their populations rose at a faster rate from 2012 to 2013 in North Dakota than in any other state.

Hispanics California had the largest Hispanic pop-ulation of any state on July 1, 2013 (14.7 mil-lion). However, Texas had the largest numer-ic increase within the Hispanic population since July 1, 2012 (213,000). New Mexico had the highest percentage of Hispanics at 47.3 percent. Los Angeles County had the largest Hispanic population of any county (4.8 mil-lion) in 2013.

Blacks New York had the largest black or African-American population of any state or equiv-alent as of July 1, 2013 (3.7 million); Texas had the largest numeric increase since 2012 (78,000). The District of Columbia had the highest percentage of blacks (51.0 percent), followed by Mississippi (38.1 percent). Cook County, Ill. (Chicago) had the largest

As America Overall Ages with Boomers, Energy States See Youth Boom

Seven states, including five in the Great Plains, saw their median age decline

between 2012 and 2013, according to U.S. Census Bureau estimates. At the same time, the median age for the U.S. as a whole ticked up from 37. 5 years to 37.6 years. These latest census reports examine pop-ulation changes among groups by age, sex, race and Hispanic origin nationally, as well as all states and counties, between April 1, 2010, and July 1, 2013. “We’re seeing the demographic impact of two booms,” Census Bureau Director John Thompson said. “The population in the Great Plains energy boom states is becoming younger and more male as workers move in seeking employment in the oil and gas industry, while the U.S. as a whole continues to age as the youngest of the baby boom gen-eration enters their 50s.” The largest decline in the nation was in North Dakota, with a decline of 0.6 years between 2012 and 2013. The median age in four other Great Plains states — Montana, Wyoming, South Dakota and Oklahoma — also dropped. Alaska and Hawaii also saw a decline in median age. In addition, the median age fell in 403 of the nation’s 3,143 counties, many of which were in the Great Plains. Williams, N.D., the center of the Bakken shale energy boom, led the nation with a decline of 1.6 years. Next to Alaska, North Dakota had a heavier con-centration of males (51.1 percent of the total population) than any other state. The nation as a whole grew older as the oldest baby boomers became seniors. The nation’s 65-and-older population surged to 44.7 million in 2013, up 3.6 percent from 2012. By comparison, the population younger than 65 grew by only 0.3 percent. These statistics also include population estimates for Puerto Rico by age and sex. The nation is a study in contrasts when it comes to local age structure. There was a more than 42-year difference in the median ages of the county with the highest medi-an age — Sumter, Fla., at 65.5 — and the county with the youngest median age —

Madison, Idaho, at 23.1.

More Diverse Non-Hispanic, single-race whites remained the nation’s largest group with a population of 197.8 million. The total of all other groups was 118.3 million, or 37.4 percent of the popula-tion. Non-Hispanic single-race whites made up 52.4 percent of the population under 18. Asians were the fastest-growing group from 2012 to 2013, though that distinction has alternated between Asians and Hispanics over the years. The Asian population increased by almost 2.9 percent to 19.4 million, an increase of about 554,000 people. Hispanics remained the second largest group overall, growing by 2.1 percent (or more than 1.1 million) to slightly more than 54 million. Hispanics were 17.1 percent of the total population in 2013, up about 0.2 per-centage points from 2012. The primary driver of Asian population growth in 2013 was international migration, accounting for 61 percent of the total Asian population change in the last year. Hispanic population growth, on the other hand, was fueled primarily by natural increase (births minus deaths), which accounted for about 78 percent of the total Hispanic population change. Following Asians in rate of growth were Native Hawaiians and Other Pacific Islanders (increasing 2.3 percent to just over 1.4 mil-lion), American Indians and Alaska Natives (increasing 1.5 percent to slightly more than 6.4 million) and blacks or African-Americans (increasing 1.2 percent to 45 million). The non-Hispanic white alone population was the only group to have natural decrease (more deaths than births) from 2012 to 2013. However, due to migration, its population rose 0.1 percent from 2012 to 2013, reaching 197.8 million. Because of its slow rate of growth relative to other groups, its share of the total population declined from 63.0 per-cent to 62.6 percent over the period. Highlights for each race group and continued on page W12

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the house and the insurance company sub-sequently pays the contractor. While the insurer may monitor the reconstruction to make sure that the prices are reasonable, and that the work is done honestly and competently, no pre-existing relationship between the insurer and the contractor was developed prior to the claim.

P/C insurance rates are based upon gen-eral market prices for services

such as home or automobile repair. All P/C insurers

face the same basic market prices for the services that they must pay for in insurance claims. These price statistics are available both to

the insurers deter-mining what their

prices ought to be, and to the CDI in evaluating

an insurer’s application to change its rates.

Unlike P/C insurance, with traditional health insurance, there is usually a contract between the insurer and the health care providers to whom they make payments. The insurer may have many provider groups it has contracted with in advance for spe-cific prices, and any individual healthcare provider may have multiple contracts with different insurers. Each contract will usual-ly have different rates for services provided under different insurance plans. CDI has very little experience dealing with this type of a pricing system, and it is unrealistic to think it can simply take its current rate review system and successfully apply it to the economic system used in health insur-ance. Even though CDI has no experience with regulating HMOs, the measure would require it to regulate the prices charged by a class of health insurer over which it has no regulatory experience.

mits a claim to an insurance company to pay for the service that was provided. The more common system in California, howev-er, is the health maintenance organization, in which the insurer organizes a group of doctors and hospitals, and then pays them a flat amount for every insured person. The November ballot measure does not distin-guish between these two very dif-ferent pricing systems, and would apply the same law to each. CDI has no expe-rience whatsoever with regulating HMOs. In California, HMOs are reg-ulated by the Department of Managed Health Care. Thus, the measure would require CDI to regu-late the prices charged by a class of health insurer over which it has never had any regulatory authority. The November ballot measure would take a law designed originally to regulate P/C insurance, and apply it to both tra-ditional health insurance and to HMO plans. It is impossible to predict how this would work, but it is obvious that a law to set prices for health insurance should be designed with health insurance in mind: to

do anything con-trary guarantees that major unnec-essary problems

will likely occur. Even in the case of traditional health insurance, importing the P/C price control system into the health insurance market will cause havoc. Health insurers and P/C insurers have completely different rela-tionships with the people to whom they make payments. If a house burns down, the homeowner hires a contractor to rebuild

Hidden Perils of California’s Proposed Health Insurance Price Controls

In November, California voters will decide whether to implement state government

price controls on health insurance. Insurance agents and brokers are certain to be asked by their clients whether this

ballot measure merits support. Some clients will be naturally skepti-cal of government health care price controls, while others will be open to the idea, but still have questions regarding the specifics of the proposal. Even clients who are

receptive to government price controls should be deeply concerned about the hidden bureaucratic dangers buried in the proposed measure. California has had government price controls on property/casualty insurance for roughly 25 years. P/C insurance com-panies are prohibited from changing prices for auto insurance, homeowners insurance and most business insurance without first receiving the approval of the California Department of Insurance. The measure on the November ballot is superficially simple: It would subject health insurance to the same price control system that has been applied for a quarter of a century in P/C insurance. Supporters of the measure reason that California has devel-oped a strong P/C insurance market under the price control system; hence it makes perfect sense to employ the same system in the health insur-ance market. Health insurance is fundamentally different from P/C insurance, and imposing a system designed for P/C insurance into the health insurance market is certain to create major problems. To begin with, the very concept of health insurance involves two completely different systems for paying for health care. In traditional health insurance, a patient, or more often a healthcare provider, sub-

Regulation Watch

By Bill Gausewitz

‘The measure on the November ballot is superficially simple…”

continued on page W10

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extensive federal system mandating how participating insurers must operate. The November ballot measure does not require any coordination between California state price regulation and the federal ACA requirements. Under the measure, insurers governed by the ACA would be subject to two inconsistent regulatory systems without any obligation that CDI review prices in a manner that accommodates the federal ACA requirements. The measure has the potential to seriously disrupt California’s implementation of the ACA. Regardless of whether an insurance pro-fessional’s clients are inclined to support health insurance price controls in concept, everyone agrees that if price controls are imposed they should make sound regulato-ry sense for the health insurance industry. The proposed November ballot measure merely takes a system designed for P/C insurance and forces it on the health insur-ance market. This convoluted and disorganized sys-tem proposed on the November California ballot would cause dramatic disruption in California’s market. This simple-minded, one-size-fits-all proposal is a recipe for disaster.

Bill Gausewitz is a Partner in the Law Firm of Michelman & Robinson, LLP and a member of the firm’s regulatory and administrative department. Phone: (916) 447-4044. Email: bgausewitz@mrllp.com.

Giving one state bureaucracy (CDI) the power and desire to keep prices low while expecting another bureaucracy (DMHC) to make sure that prices are high enough would be a bureaucratic nightmare. Roughly three quarters of health insurers in California are now regulated by DMHC. Under the proposed ballot mea-sure, all of these insurers would have two state regulators; one responsible for price levels but with no responsibility for price adequacy, the other responsible for insur-er solvency but with no power to make

certain that prices are adequate to guarantee that insurers are able to pay claims. Complicating this even further is the fact that most health insurers are now subject to the federal

Patient Protection and Affordable Care Act, “Obamacare”. The ACA provides an elaborate and

The fallout from this will be significant. Because CDI currently has no regulatory power over HMOs, under the proposed measure it would have no responsibility for the financial soundness of the HMO busi-nesses whose prices it would regulate. Sound insurance regulation requires reg-ulators to ensure that insurers have enough money to pay claims. Regulators cannot only pay attention to keeping insurance prices low, but must also make certain that the prices are high enough to provide adequate funds to pay for the services that policyholders need. Under this measure, CDI would have a strong political incentive to keep health insurance rates low, but no incentive to ensure that prices are high enough to pay all claims. Responsibility for safeguard-ing insurer solvency — that prices are adequate to pay claims — would remain with DMHC, who would have no power to influence prices.

Regulation Watch

‘The proposed November ballot measure merely takes a system designed for P/C insurance, and forces it on the health insurance market.’

continued from page W8

CENTER FOR INSURANCE STUDIES centerforinsurancestudies.com

Dr. Weili Lu, Director(657) 278-3679

C E N T E R for

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California State University, Fullerton

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CIS is completely self-supported by industry contributions. Your sponsorship provides scholarships, speaker series, industry networking events and faculty endowments.

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News & Marketspercentage (26.1 per-cent). California had the largest numeric increase since 2012 (7,000). Non-Hispanic White Alone California had the largest non-Hispan-ic white alone population of any state in 2013 (15.0 million). Texas had the largest numeric increase in this population group since 2012 (51,000). Maine had the highest percentage of the non-Hispanic white alone population (94.0 percent). Los Angeles had the largest non-Hispanic white alone population of any county (2.7 million) in 2013.

Age Groups: Nation The 85-and-older population grew by about 3 percent between 2012 and 2013 to 6 million. The number of people age 100 and over reached 67,000 in 2013. The total number of children under age 5 was just under 20 million in 2013 or 6.3 percent of the population. The number of children age 5 to 13 was just over 37 million in 2013 (11.7 percent of the population). In 2013, there were about 198 million work-

black or African-American population of any county in 2013 (1.3 million).

Asians California had both the largest Asian pop-ulation of any state (6.1 million) in July 2013 and the largest numeric increase of Asians since July 1, 2012 (142,000). Hawaii was the nation’s only majority-Asian state, with peo-ple of this group comprising 56.3 percent of the total population. Los Angeles had the largest Asian popu-lation of any county (1.6 million) in 2013 and the largest numeric increase (26,000) since 2012.

American Indians and Alaska Natives California had the largest American Indian and Alaska Native population of any state in 2013 (1.1 million) and the largest numeric increase since 2012 (13,000). Alaska had the highest percentage (19.4 percent).

Native Hawaiians and Other Pacific Islanders Hawaii had the largest population of Native Hawaiians and Other Pacific Islanders of any state (366,000) in 2013 and the highest

ing-age adults (age 18 to 64), representing 62.6 percent of the total population. In 2013, the median age of the minori-ty population was 30.5 years.

Age Groups: States Florida had the highest percentage of its total population age 65 and older (18.7 percent), followed by Maine (17.7 percent). Alaska had the lowest percentage of its pop-ulation 65 and older (9.0 percent), followed by Utah (9.8 percent). Utah had the highest percentage of its total population under age 5 at 8.8 percent, followed by Alaska (7.5 percent). The two states with the lowest percentage of their total population under age 5 were Vermont (4.9 percent) and Maine (4.9 percent).

Age Groups: Counties There were 60 counties where the median age was greater than 50, and 61 counties where the median age was less than 30. Las Animas, Colo., experienced the largest increase in median age, 1.2 years, from 44.5 to 45.7. Sumter, Fla., had the highest proportion of its population age 65 and older (51.6 percent), and also had the lowest proportion of its population under age 5 (2.1 percent) on July 1, 2013. Chattahoochee., Ga., had the lowest pro-portion of its population age 65 and older (3.8 percent).

Sex Males made up the majority of the popu-lation in only 10 states on July 1, 2013. Alaska had the highest percentage of men at 52.4 percent, followed by North Dakota (51.1 percent), Wyoming (51.0 percent), Hawaii (50.5 percent), Nevada (50.4 percent), Utah (50.3 percent), Colorado (50.2 percent), South Dakota (50.2 percent), Montana (50.2 per-cent) and Idaho (50.1 percent). The District of Columbia had a higher percentage of females than any state at 52.6 percent, followed by Delaware (51.6 percent), Rhode Island (51.6 percent), Massachusetts (51.5 percent) and Maryland (51.5 percent).

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News & Markets

Mitigate Risks Despite the fears over regulation, S&P has noticed more companies looking at their exposures, Dreyer said. “We always are looking at the potential impact of these kinds of things on the abil-ity of companies and governments to repay their debt obligations,” Dreyer said. Among the thousands of companies and governments S&P rates, many are beginning to look at ways to mitigate risks and protect their bottom-lines, according to Dreyer. A good template for such practices may already exist. When Hurricane Andrew struck the Southeast U.S. in 1992, it sent nearly a dozen carriers under. However, a decade later when Katrina struck and decimated New Orleans and surrounding areas, no insurers declared insolvency, Dreyer noted. The industry has learned to better model for catastrophe. Following Andrew, carri-ers better structured their risks so as not

Climate Change Bottom-Line Talk Grows, S&P Director SaysBy Don Jergler

Companies and governments world-wide are changing their behaviors and

examining their risks in the face of climate change, a managing director for Standard & Poor’s said, holding up the insurance industry as a good example of how to adapt to a world with greater natural risks. Steve Dreyer, managing director of Standard & Poor’s U.S. utilities and infra-structure ratings, and Dan Utech, special assistant to President Barack Obama on energy and climate change, during a con-ference call on June 16, talked about how insurers and investors are including climate change and severe weather in their risk assessments and decision-making processes. The discussion was hosted by Business Forward, a nonprofit group that works with businesses and government, and it happened just two weeks after the U.S. Environmental Protection Agency released new carbon standards for power plants. There has been some backlash against the new regulations, which call for existing U.S. power plants to reduce their green-house gas emissions at least 30 percent below 2005 levels by 2030. A report by the U.S. Chamber of Commerce shows that as a result of the regulations the economy will take an $859 billion hit by 2030 and Americans will pay more for electricity, see slower economic growth and experience fewer jobs created.

Carbon Emissions Footprint Utech said the new regulations, expected to be finalized next June, are tailored for each state, putting each in charge of how it reduces its own emissions. “States are really in the driver’s seat,” he said. By June 2016, states will be required to submit initial plans to comply with the new standards, and states participating in multi-state efforts have until 2018. States can meet these reduction standards by a combination of measures, Utech said.

to be taken down by any one large catastrophe, Dryer said. “The insurance industry demon-strated that the effects of extreme weather can be managed,” he added.

Green Bond Market Other sectors are catching on. Several industrial companies, for example, are turning to bond inves-tors to finance ways to mitigate risk, including turning to the green bond market, which is taking off in Europe, according to Dreyer. “We see that market being very attractive to investors,” he said. The green bond market, which is now worth roughly $10 billion annu-ally, is expected to continue to see fast growth as pensioners, sovereign wealth funds and other investors view these bonds as a diversification play from their typical investments, as well as a way to make a certain percentage of their portfolio green, Dreyer said.

“Our projection is that this year it will double to $20 billion,” he added. In a follow-up interview with Insurance Journal Dreyer said the takeaway from his talk isn’t that S&P is looking at portfolios in different ways due to climate change to conduct ratings, but that the companies themselves are acting differently in the face of threats such as more frequent severe storms, rising sea levels and drought. “I wouldn’t say that we are doing any-thing radically different,” Dreyer said. “What we are saying is the behaviors are changing among the companies that we rate. They’re looking at risk in a different way.” Just how worst case scenarios may play out, forming contingency plans, looking at regulations and how to adapt to future regulations, examining the way natural catastrophe exposures are affecting the bot-tom-line, those are part of the evaluations a growing cadre of companies are now under-taking, Dreyer said.

July 7, 2014 INSURANCE JOURNAL-NATIONAL | 11www.insurancejournal.com

NATIONAL COVERAGE

FIGURES DECLARATIONS

350The number of additional workers auto

insurer GEICO plans to hire at its regional office in Stafford County, Va., by the end of 2014, according to an announcement

in June from company officials. GEICO’s Stafford office opened in 1994 with 700

associates. It currently employs more than 3,500 workers.

$700,000The estimated value of a luxury home on

Lake Whitney in Texas that was set on fire after the cliff it was built on gave way, threatening to send the 4,000-square-foot

home tumbling into the water below. It took less than an hour on June 13 for the fire to level the home above Lake Whitney, about 60 miles south of Fort Worth. Authorities had condemned the home and the owners, Robert and Denise Webb, consented to the burn, which was considered less costly than trying to retrieve the house from the lake if

it had been allowed to fall.

$27 MillionThe asking price on a lawsuit filed by an

Oregon electrician who claimed he was fired by Nike because he complained about safety

violations at the Beaverton, Ore., campus. He lost the lawsuit against the company.

$240 MillionThe amount in punitive damages awarded to 16 eastern Missouri residents who sued

over health problems from the Herculaneum lead smelter, later thrown out by a state appeals court. It is a portion of the $320

million in punitive damages awarded by a jury against former smelter owners Fluor

Corp., A.T. Massey Coal and Doe Run Investment Holding Co. after a three-month trial in 2011. The Missouri Court of Appeals

Eastern District ruled that an error in jury instructions requires fresh consideration of

Fluor’s portion of the damages award.

Road Safety Projects“Strengthening vital infrastructure across the state is critically important to ensuring the safety of our communities, both today

and for future generations.”— New York Gov. Andrew Cuomo on road safety projects. Cuomo announced on June 10

that New York is receiving more than $75 million in federal transportation funds for 33 projects

around the state, including work to widen roads, and to install turn lanes, sidewalks, crosswalks,

bike lanes and rumble strips.

Absolutely Gone“More than half of the town is gone — abso-lutely gone. … The co-op is gone, the grain

bins are gone, and it looks like almost every house in town has some damage. It’s a

complete mess.” — Stanton County Commissioner Jerry

Weatherholt after a storm packing rare dual tor-nadoes tore through Pilger, a tiny farming town in northeast Nebraska. Two people were killed and at least 19 were taken to hospitals. Pilger’s 350 residents evacuated their homes after the

powerful twisters slammed the area on June 16.

Something Else“We just can’t take on the responsibility

anymore. … It used to be a little parade; now it’s hundreds of people and boats. It’s not

necessarily a parade anymore. It has evolved into something else.”

— Attorney Marc Barker of Jarreau, La., a member of the family who organizes the popu-lar False River Fourth of July Boat Parade in

Louisiana’s Pointe Coupee Parish, says the family will no longer sponsor the parade because of new pressure from the state to obtain liability insur-ance and provide adequate security patrols. The boat parade has been a local tradition for more

than 30 years.

Significant Burden“We are currently reviewing the proposed legislation in detail, but it’s clear that the

bill timeline is much more aggressive than our plan. … [E]xcavation at one of our larg-

est sites could take up to 30 years.”— Duke Energy spokesman Jeff Brooks said

complying with a 15-year deadline in proposed state legislation to close all of its North Carolina coal ash dumps would place a significant burden on the $50 billion company. The measure would require Duke to remove its 100 million tons of

coal ash now stored in 33 unlined pits across the state or seal it in place by 2029.

$37 MillionThe amount of a jury award against a Charleston, W.Va., nursing home in

connection with a former resident’s death after the West Virginia Supreme Court

reduced the amount from the original $91 million. Attorneys for the nursing home

had called the $91 million award excessive and unfair. They said the claims against the nursing home and its employees should have been subject to the state’s $500,000 cap on

non-economic damages in medical malpractice lawsuits.

NATIONAL COVERAGE

Business Moves Tri-State General’s Edward Dickerson and his team will continue to operate from their Salisbury location also under the direction of Cavaness. Headquartered in Itasca, Ill., Arthur J. Gallagher & Co. is an international insurance brokerage and risk management services firm. Brown & Brown, Gaston & Associates Brown & Brown of New York Inc., a subsidiary of Brown & Brown Inc., acquired certain assets of Gaston & Associates Inc. in Mount Kisco, N.Y. Terms were not disclosed. With origins dating back to 1895, Gaston & Associates offers

property/casualty and employee benefits insurance products and services to clients in New York and throughout the Northeast. The firm, through its InsureHedge division, has specialized in the private fund space since 1992. The firm has annual revenues of approximately $2.4 million. As part of the transaction, Fred Gaston and his team will operate from Brown & Brown of New York’s existing Rye Brook, N.Y., location under the leadership of Markham F. Rollins III. Florida-based Brown & Brown Inc., through its subsidiaries, offers a range of insurance and reinsurance products and related services.

Capacity Coverage, Mt. Pleasant Capacity Coverage Co. of New Jersey Inc. said its New York City-based affili-ate, ARM-Capacity of New York LLC, has acquired assets of Thornwood, N.Y.-based Mt. Pleasant Agency Inc. This transaction was completed through a newly formed entity called Mt. Pleasant Capacity Agency LLC, which is jointly owned by ARM-Capacity of New York and by Joseph Picharallo and Keith Shaland, the managing partners of Mt. Pleasant Agency. Mt. Pleasant sells a broad array of person-al and commercial lines of insurance prod-ucts from its offices in Westchester County

Arthur J. Gallagher, The Plus Cos., Tri-State General Arthur J. Gallagher & Co. has acquired The Plus Cos. Inc. (TPC) in Bridgewater, N.J. Terms were not disclosed. Established in 1985, TPC is a managing general agent and program manager that provides non-medical, professional liabil-ity and umbrella insurance products and services to independent agent and broker clients throughout the United States. TPC specializes in liability programs for lawyers, architects, engineers, insurance agents and brokers, surplus lines brokers, managing general agents, and title insur-ance and escrow agents. TPC’s Robert Ciuffreda and his associates will continue to operate from their current location under the direction of Joel Cavaness, president of Risk Placement Services Inc., a subsidiary of Arthur J. Gallagher & Co. Arthur J. Gallagher & Co. also announced it has acquired Tri-State General in Salisbury, Md. Terms were not disclosed. Established in 1979, Tri-State General is a specialty wholesale and managing general agency operation that places transportation, garage, professional liability, special events and property/casualty insurance for its retail insurance broker clients throughout Maryland, Pennsylvania, Delaware, New Jersey, Virginia, Ohio and Washington, D.C.

in New York. The agency will continue to be located in its current offices. Capacity Coverage said the transaction would allow the firm to expand its business operations into Westchester County. Capacity Coverage is an insurance and financial services organization headquar-tered in Mahwah, N.J., with more than 280 employees in 14 retail and wholesale offices. Broad Insurance Group, Hartselle Agency Broad Insurance Group (BIG) has acquired Art Hartselle Agency Inc., a Seminole, Fla.-based commercial and personal lines prop-erty/casualty insurance agency. The company said that Robert Southard, a Florida native and insurance executive, is being brought on as president. The agency will continue to operate with its current staff out of its Seminole location. Monsey, N.Y.-based Broad Insurance Group is a recently formed subsidiary of Broad Financial. BIG was developed with the goal of acquiring small- to mid-size property/casualty insurance agencies.

TWFG The Woodlands Financial Group (TWFG) has added 10 more branch agencies in its home state of Texas. TWFG now operates with more than 200 branch offices in Texas along with its headquarters in The Woodlands, just north of Houston. It now has 309 branches in 21 states reporting more than $337 million in premiums. The company has close to 3,300 agents in 30 states, which includes both affiliated and wholesale agents, and TWFG’s headquarters office offers policies in 49 of the 50 states. The company also announced that five new branches in California and one in Minnesota are joining the national roster. TWFG added the following 10 branch operations in Texas: Keith Tilghman, Denison; Michael Sanchez, Houston; Mark Wilson, The Woodlands; Robert Ortiz, The Woodlands; Jim Woods, Onalaska; Ryan Guillory, Humble; Leon Ly, Dallas; Connie Andrews, Plano; Don Oh, Lewisville; and Jerell Dycus, Coppell.

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Lexington Insurance Company, an AIG company, is the leading U.S.-based surplus lines insurer. AIG is the marketing name for the worldwide property-casualty, life and retirement, and general insurance operations of American International Group, Inc. For additional information, please visit www.aig.com. Products and services are written or provided by subsidiaries or affiliates of American International Group, Inc. Not all products and services are available in every jurisdiction, and insurance coverage is governed by actual policy language. Certain products and services may be provided by independent third parties. Insurance products may be distributed through affiliated or unaffiliated entities. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds.

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News & Markets

As waves of capital reshape reinsurer’s business model, the property/casualty

(P/C) insurance industry needs to change, although how remains a matter of debate. Reinsurers face a growing threat from the capital markets — hedge funds, pen-sions and others that have found innovative ways to replicate what reinsurers do. This so-called alternative capital is driving rein-surance prices lower, especially the cost of reinsuring losses from Florida hurricanes. There are signs alternative capital will seep into other areas of P/C insurance and reinsurance. How reinsurers can respond was discussed by analysts at the Casualty Actuarial Society’s (CAS) Seminar on Reinsurance in New York. Alan Zimmermann, managing director of Assured Research, and Matthew C. Mosher, senior vice president of rating services for A.M. Best Co. and a fellow of the CAS, believe the industry needs to move on to new opportunities. “If you are not willing to change with society, you are going to lose your rele-vance,” Mosher said. Meyer Shields, managing director at Keefe, Bruyette and Woods and CAS fellow, counseled a modest approach, such as prob-ing carefully to find profitable niches. “We’re not in the business of solving the world’s problems, we’re in the business of increas-ing the value for shareholders,” he said.

Not New The new capital has emerged in recent years, but its start harkens back at least two decades to Hurricane Andrew in 1992. Today, Zimmermann said, Andrew doesn’t seem like it would have been so important in its day. The insured losses from the storm, $23 billion in today’s dol-lars, pale compared to more recent events like the $47 billion in inflation-adjusted losses from Katrina. But Andrew’s losses were four times greater than anything that preceded it. The storm shook the industry. Perhaps the biggest change it brought was a new

How New Capital is Changing P/C and What To Do About It

degree of acceptance of com-puter modeling. The models made catastrophe risk, once the uber-specialty of insurers and reinsurers, easier for oth-ers to understand and price. Zimmermann recalled the powerhouse reinsurers from pre-Andrew days: awesome behemoths, whose size, cus-tomer base and underwriting depth made them seem like impregnable “castles surround-ed by the Hudson.” Those models have been honed, and today capital market investors rely heavily on them as they invest in the P/C space. The dominance of reinsurers has ebbed. “There are a lot more companies,” Zimmermann said. As new capital flows in, the price of reinsurance falls. Reinsurers have generally responded well to the immediate situation, writing less business as rates shriveled. Some even practice a sort of arbitrage, writ-ing risks then ceding them into the capital markets at a lower price. For the long run, reinsurers have responded slowly, Zimmermann said, as have most P/C insurers. Zimmermann and Mosher agreed that the industry needs to embrace new risks, like cyber liability. Shields said companies need to face the changes that are happening and find ways to benefit. It can take time, he said, to find underwriters who understand new lines of business. “Capital is fungible,” Shields said. “Underwriting discipline is not.”

Inflation The analysts discussed how the industry has benefited from low inflation. Standard reserving methods have an underlying rate of inflation built into them; low inflation has allowed companies to improve earnings by releasing reserves from older years as

they have proved redundant. Now, Mosher said, those reserving meth-ods have low inflation baked into them. An uptick could mean P/C company reserves could become inadequate. Low inflation also means company profits grow more volatile, Shields said. Companies rely less on investment income and more on underwriting income. Investment income mainly comes from bonds. Underwriting profits come from business a company underwrites, which is more volatile. Zimmermann agreed, recalling the steep price increases of the 1970s. “If you haven’t lived in a world of 10 percent inflation, you can’t realize how debilitating it is.” That experience taught Zimmerman how investors view insurance companies. During his career, insurers have returned 8 percent on equity. Stocks, measured by Standard & Poor’s, have returned 13 percent. The underwhelming returns have made P/C values consistently lower than the rest of the market. The new capital hasn’t made the situation easier, he said. “You can’t be in a business with growing competition and expect your stock to do well in the long term,” he said.

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10 Things to Know About CLOSER LOOK

Less than 12 percent of California homes have earthquake insurance. Of the California homes that do have earthquake insurance, most have

a “mini policy” with a 15 percent deductible. — California Department of Insurance

The largest recorded earthquake in the United States was an M9.2 in Prince William Sound, Alaska on March 28, 1964. — United States Geological Survey

The earth’s plates move at a rate of roughly 2 centimeters

per year. — National Aeronautics and Space Administration

Earthquakes

The world’s costliest earthquake was the one that struck Japan on March 11, 2011. The

quake caused more than $210 billion in overall dam-ages and $40 billion in insured losses. It also claimed 15,840 lives. — Insurance Information Institute

There are an estimated 500,000 detectable earthquakes in the world each year. — United States Geological Survey

California has two-thirds of the nation’s insurance risk, with roughly 2,000 known

faults running throughout the state. — California Earthquake Authority

The costliest U.S. earthquake was the 1994 Northridge quake, which resulted in $15.3 billion in insured losses at the time, or roughly $24 billion in today’s dollars. — Insurance Information Institute

The earth’s surface consists of 25 inter-locking plates. — National Aeronautics

and Space Administration

Three significant quakes hit on June 2, 2014: M7.8 in Indonesia in 1994 that killed

at least 250 people and damaged or destroyed roughly 1,500 homes; M6.4 in Australia in 1979 that created a 7.4-mile long north-south surface rupture east of Cadoux; M4.5 in South Dakota in 1911, the largest recorded quake in state history covering roughly 62,137 square kilometers. — United States Geological Survey

The world’s largest recorded quake was an M9.5 in Chile on May 22, 1960.

— United States Geological Survey

FEMAFL16788.indd 1 9/30/13 5:44 PM

SPECIAL REPORT

Pizzi says insurance companies also must do their part to motivate consumers to fortify homes and businesses by providing incentives of their own. “Insurance companies can offer discounts to consumers and business owners who fortify their structures. They also can offer insurance products that will help rebuild storm-damaged homes and businesses to fortified standards,” Pizzi said. IBHS studies show that homes and busi-nesses fortified by stronger building mate-rials and construction practices are more likely to survive extreme weather events that otherwise would severely damage or destroy them. “We know that mitigation works,” says Robert Detelfsen, vice president of pub-lic policy for the National Association of Mutual Insurance Cos. (NAMIC). “There's been any number of studies that show that losses from natural disasters are consider-ably reduced when you have effective miti-gation taking place.” Yet, the majority of disaster aid is spent on disaster response, and not mitigation. According to a joint report, funded by the Z Zurich Foundation, in the past two decades, nearly $9 out of every $10 of U.S. aid was spent on emergency response,

reconstruction and rehabilita-tion, with only $1 in $10 going toward mitigation. The report, part of a multi-year academic cooperation between Zurich, the Center for Risk Management at the Wharton School of the University of Pennsylvania and the International Institute of Applied Systems Analysis (IIAS), proposes a framework to measure the ability of communi-ties to withstand floods, quanti-fy the success of flood resilience efforts and demonstrate the

benefits of pre-event risk reduction as opposed to post-event disaster relief. “To help reduce flood losses and help

By Andrea Wells

The frequency and cost of natural disas-ters in the United States has increased

exponentially in the past two decades. The cost to property, life and the economy is pushing the issue to the top-of-minds for many in Washington, D.C., local govern-ments and the insurance industry. While the insurance industry plays an important role in disaster recovery such as hurricanes, storms, tornadoes and wildfires, on average, insurance covers just one-fifth of all disaster-related losses. Since 1983, the United States government has spent nearly $1 trillion on disaster recovery and rebuild-ing efforts. For decades, the federal government has been forced to increase disaster funding in the middle of fiscal years to meet the rising costs. Supplemental disaster funds were appropriated in 17 of the 22 budget years between fiscal year 1989 and 2010, according to the Congressional Research Service. The issue has become severe enough that some are advocating for an intervention of sorts. “We’re at a point in this country where the severity of the weather that’s occurring

and the cost — not just the financial cost but the emotional cost — have become too large to bear,” said Mark Pizzi, president and chief operating officer of Nationwide Insurance who also serves as the board chairman for the Insurance Institute for Business & Home Safety (IBHS). “There is a need for intervention.” The intervention must come through public and private partnerships that encourage disaster miti-gation efforts, as well as incentives that boost mit-igation tools among con-sumers, according to Pizzi. Action must be taken to make homes and busi-nesses stronger and more resilient, Pizzi says. Incentives like building permit rebates, state-level tax incentives, and state and federal grants could lead to more resilient communities that could lower costs. While government incentives are critical,

DisastersDisaster Mitigation: How Incentives Can Help

‘We’re at a point in this country

where the severity of the weather that’s

occurring and the cost — not just the financial cost but

the emotional cost — have become

too large to bear.’

continued on page 33

communities in both developed and devel-oping countries improve flood resilience, it is imperative that we focus more on miti-gating risks and preparing for floods, rather than simply dealing with the consequences after a flood occurs,” said Dan Riordan, CEO of Zurich Global Corporate in North America. Like Nationwide, Zurich and others in the industry are boosting efforts to improve sustainability and resiliency to natural catastrophes and encouraging the govern-ment to implement legislation that would incentivize states to comply.

Government in Mitigation Most mitigation occurs at the local level but funding for municipal mitigation projects often comes from federal dollars. FEMA oversees and manages programs including the Hazard Mitigation Grant Program, Pre-Disaster Mitigation and Flood Mitigation Assistance programs. But more could be done especially when it comes to encouraging stronger and more resilient buildings, the experts say. Detelfsen, who represented NAMIC as a member of The BuildStrong Coalition in a recent Senate hearing on “The Role of Mitigation in Reducing Federal Expenditures for Disaster Response,” says model building codes and superior con-struction standards can play a huge role in reducing the costs of natural disasters. That’s why BuildStrong — a group of national business and consumer organiza-tions, firefighters, emergency managers, building professionals and insurance groups — strongly advocates incentive-based approaches to spur more states to adopt statewide model building codes. “The purpose of model building codes is to ensure that minimum standards are used in the design, construction, and main-tenance of the places where people live. Building codes are intended to increase the safety and integrity of structures, thereby reducing deaths, injuries and property dam-age from a wide range of hazards,” Detelfsen said. BuildStrong has made S. 924, The Safe

Building Code Incentive Act, its signature priority. The goal of this legislation is to increase the number of states with mini-mum construction standards. BuildStrong is also a strong supporter of S. 1991, The Disaster Savings Account of 2014, which provides an incentive for homeowners to make their homes more resilient through a tax-free savings account to be used on mitigation activities, and supports H.R. 2241, The Disaster Savings and Resilient Construction Act of 2013, which provides a tax credit to businesses or home-owners who rebuild to resilient construction standards in declared federal disaster areas.

Model Codes Model building codes help ensure safety and soundness of homes but also allow for economies of scale in the production of build-ing materials and construction, as well as create a level of safety for first responders during and after fires and other disasters. The Safe Building Code Incentive Act is a mecha-nism by which states are incentivized, not mandated, to adopt and enforce model building codes. The proposed legislation would provide an additional 4 percent of post-disaster recovery funds to all states that adopt and enforce model codes. The incentive is meant to encourage more states to rebuild to higher standards in order to eventually reduce the need for more disas-ter recovery money. In recent years, there have been several significant studies that support the conclu-sion that enforcing model statewide build-ing codes saves lives and greatly reduces property damage and the subsequent need

for federal disaster aid. Uniform, statewide codes also promote a level, predictable playing field for designers, builders and suppliers, says Julie Rochman, president and CEO, IBHS. But Rochman says it’s important for peo-ple to understand that building codes are a

minimum standard. “It is literally life safety code. It’s the minimum threshold at which you

can occupy a building,” she said. “It’s not meant to protect against natural hazards, although in coastal areas and in some seismic areas like the West Coast there are

provisions in code that address nat-ural hazards, but overwhelmingly they

provide only a minimum threshold of safety.” Rochman says IBHS’ stronger, safer Fortified stan-

dards offer better hazard and safety protection. But achieving

fortified building code standards in some states is almost impossible

because even today some states do not have minimum building code require-

ments. “We still have about a dozen states in this

country that don’t have a statewide building code,” she said. Several

other states have building codes but do not universally enforce those codes. People always find

that surprising, she says. “How can a state like Illinois, not

have a building code? They don’t. Oklahoma doesn’t. Arkansas doesn’t. And

if you look at the states where you’ve had a lot of tornadoes recently, there’s no code.” Even in some states where there is a code, that code doesn’t address natural haz-ards, Rochman explained. “States and localities have a responsi-bility to help keep their citizens safe,” she said. That’s what codes and standards like Fortified do. They help keep people safer and they make their homes stronger. They’re not disaster proof, but they are

SPECIAL REPORT

“A lot of drivers think they are covered under their personal auto coverage, which they aren’t because it is excluded, so they realize they need commercial coverage and come to us for insurance,” Maucere says. “The problem is it is so new that you really have to ask the questions ‘What are you doing?’ and ‘Are you using a dispatch service?’ We aren’t saying it’s not a good risk, but it’s a risk we can’t get our hands around yet.” Maucere says the differences between transportation network companies (TNCs) and a taxicab is the taxi has earned a medal-lion or paid for one from its municipality. Medallions are not easy to acquire. Taxi and

By Amy O’Connor

Ridesharing services are becoming increasingly popular among consumers

looking for a more convenient alternative to taxis or other forms of public transpor-tation, and startup ridesharing companies have been cropping up everywhere trying to ride the heels of the success experienced by the three major transportation networking companies: Uber, Lyft and Sidecar. But insurers have been a little slower to hop in the backseat on this journey. Insuring this class isn’t easy because it is difficult to address the different expo-sures and get adequate rate, says Mark Maucere, senior vice president for AmWins

Transportation Underwriters Inc. in the Indianapolis office. “Our rate [for transportation classes] is based on a point A to point B mechanism, and the problem with these operations is we don’t know when the car is out or in the garage, we don’t know the experience of the driver, car maintenance or in what other ways it is used,” Maucere says. AmWins Transportation Underwriters insures limousines, taxicabs and public auto transportation like vans and private passen-ger services, but has enacted a moratorium on new ventures because of the ridesharing trend.

Commercial Auto

other private passenger auto drivers also have experience transporting passengers in their vehicle and dealing with distractions that can come along with that. Taxi compa-nies also make sure drivers maintain their vehicles. Maucere says until his company gets a better handle on how to best insure startup ridesharing companies, which will require state legislation that will hold all TNCs accountable for vetting their drivers and ensuring passenger safety, AmWins will avoid the business. “There is an opportunity here, and we would be interested in potentially looking at these classes of business if we could properly underwrite and put the rate around it,” Maucere says. “But it’s very diffi-cult until you can grab that data and verify some of the things we can’t verify now.” Excess and surplus lines insurer James River has insured two big TNC’s: Uber and Lyft. According to John Clarke, vice presi-dent of marketing for James River, the car-rier was approached by a wholesale broker to write very specific coverages for the new industry. Despite the fact that James River is not an auto market and doesn’t write taxi or trucking classes, as it learned about the companies and how they track miles and vet drivers, and the technology behind them, the carrier became accepting of the risk, Clarke says. He says there were no rules or prece-dents to follow when James River began to structure the policies, because this type of business had never been done before. But James River was able to accommodate the insurance structure the TNCs requested and has responded with different compo-nent features as the industry has evolved. The three major parts of coverage for TNC’s includes: • Core policy with $1 million limit that drops down and covers the driver when the driver has accepted a rider and is en-route to pickup a passenger; then take the rider to his or her destination and drop him or her off. The core policy also covers Uber

and its parent company, Rasier. This “ride” policy is a contingent excess commercial auto policy with Rasier (and specified sub-sidiaries like Uber) named as insureds. It is contingent in that the driver’s primary cov-erage is the private passenger auto policy, the policy that also satisfies any financial responsibility requirement in the driver’s state. In the event that coverage is declined by a driver’s PPA insurer, the Rasier (Uber) ride policy will step in to provide coverage to the driver. This policy carries a $1 million CSL limit and applies from when a ride request is accepted until the rider is deliv-ered to the destination. • Coverage with a lower limit for when the driver is logged on with the TNC and is sitting or driving around waiting to be dis-patched to pickup a rider. Structured like a typical auto policy with a per person limit, per event limit and a property damage limit. • Separate coverage purchased by the TNC for physical damage to the driver’s vehicle if damage occurs while the driver is using the vehicle for commercial (rideshar-ing) and not personal purposes. Gus Fuldner, head of insurance for San Francisco-based Uber, says his company has developed a partnership with James River in building its insurance program to also address the peculiarities in each state and nationally. “The overall principle that we target is fairly straightforward: While a driver is on a trip or there is a passenger in the car, we want the passenger, driver and any other party to be pro-tected by insurance that is as good or better than a limo or taxi in that same jurisdiction,” Fuldner says. While the aforementioned policy has been the insurance model Uber has used so far, Clarke says this class is constantly evolving with new technology and legisla-tive requirements, so no one really knows what model will be the most effective down the road. For the foreseeable future, this business

is definitely a surplus lines risk, he says. “This is a classic example of the non-admitted market doing exactly what it is supposed to do – write a new business that cannot get insurance in the standard mar-ket,” he says. “Private passenger auto com-panies won’t do it, so where do they go to

get insured? They come to us because that’s what we do. Then when it becomes main-stream, the admitted market will come in and take the business. That’s the natural lifespan, but right now it has to be in the surplus lines market.” Fuldner says working with a surplus lines insurer has benefited Uber. “We have a very collaborative relationship with the

The idea of ridesharing has taken off and propelled transportation net-work companies into an emerging billion-dollar transportation market.

continued on page 22

insurer, and that is one of the big advantag-es of working with a surplus lines market. They have the flexibility on both the chang-ing markets and the feedback we get from constituents,” he says. “The surplus lines industry is going to play an important role in the development of this market.” The major TNCs that have been success-ful so far are growing larger every day, says Clarke, making it difficult for startups and smaller competitors to keep up — especial-ly those that don’t follow the same strict business practices. The leading TNCs take safety and the vetting of their drivers very seriously, he says, which includes making sure drivers have a valid driver’s license and insurance, performing background checks, and monitoring feedback and ratings of drivers. Drivers can also only pickup riders through the app and are prohibited from picking up people hailing a cab. Clarke says if drivers violates this condition, their insur-

ance coverage does not apply and they are in violation of their agreement with the TNC. They also have to identify themselves as TNC drivers when they pickup a pas-senger, and Uber and Lyft have identifying features on their vehi-cles so riders know they are getting into an approved vehicle. “These transporta-

tion network companies are very concerned about doing this properly, and it is in their self-interest to make sure their drivers do it right,” Clarke says. “These guys are extreme-ly well-capitalized and financed, and they are building a business for the long haul.” With that in mind, Clarke doesn’t see a lot of opportunity for startups in this space because of the barrier to entry set by these big TNCs. That leaves scant opportunity for agents and brokers, Clarke says, because the successful TNCs have already partnered with large brokers. There is also the uncer-

tainty of what will happen with legislation and how that will affect the development of the industry. He expects taxi and limo companies will have to adapt to this new “social” way of doing business if they want to compete with TNCs, and that will create challenges and opportunities for the insur-ance industry as well. “Nobody wants to stand in the way of innovation, but we have to figure out how it’s all going to work together,” Clarke says. “It’s a really interesting industry that we

have watched be completely created in the last two years. Someday I think our chil-dren will laugh at us for waving our arms on the corner for a taxi.” Uber has worked closely with personal lines carriers that sell commercial insurance to educate them on how the ridesharing business works with the hope that insurers will embrace this emerging market. “Oftentimes carriers are selling a very

SPECIAL REPORT

Commercial Auto

By Don Jergler

The share-and-share-alike attitude considered a virtue by some has

become fighting words between ride-sharing companies and the insurance industry. “We try not to make it a battle,” says Robert Passmore, senior director of personal lines for the Property Casualty Insurers Association of America (PCI). Steering away from giving a winner- loser perspective, he adds: “We’re not against anybody’s business model.” But it is a battle, and it’s unfolding state-by-state cross the country as PCI, along with a handful of other powerful insurance groups, spends considerable time and resources to make sure person-al automobile insurance isn’t footing the bill for ridesharing activities. The idea of ridesharing has taken off and propelled transportation network companies like Uber, Lyft and Sidecar into an emerging billion-dollar transpor-tation market. And local and state governments must now figure out how to deal with all of this. Regulation, insurance and safety concerns are among the issues they are grappling with, while angry taxi operators who feel put upon or

about to be put out are also coming into play through protests and rancorous political action. A perceived gap in insurance coverage — between when a TNC’s commercial insurance policy is in effect and when

‘We aren’t saying it’s not a good risk, but it’s a risk we can’t get our hands around yet.’

continued from page 21

Uber, Lyft, Sidecar Toe-to-Toe With Insurers State-by-State

similar commercial lines product and deal with covering the exposure of people using their personal auto in the course of their business, whether it be food delivery or real estate agents,” Fuldner says. “Once [insur-ers] understand that, the conversation really changes to talking about business opportu-nities for those carriers to build products that embrace ridesharing as a concept.” The biggest change that is necessary for the insurance industry to price this risk accordingly, which seems to be the toughest hurdle, Fuldner says, is to look at usage-based pricing as opposed to unit-based.

The demand and need for part-time drivers is there, he says, and the sooner insurers change their mindset on pricing, the more opportunity will be available to them. “[Ridesharing] is a really outstanding example of how usage-based insurance has created a large economic opportunity for the industry,” he says. “And the insurers who say, ‘How can we price it?’ instead of ‘We don’t know how to price it’ will create a new product for this market.” AmWins’ Maucere says that in the mean-time, agents and brokers need to make sure they ask their taxi and limo clients

a driver’s personal auto policy will be expected to cover any unplanned inci-dents — has the insurance industry standing its ground. The industry’s stance is that TNC driv-ers are providing a commercial service

any time they are logged into a ridesharing smartphone app and looking for a ride. The battle has escalated to the legislative level, with PCI and other large insurers’ groups putting in regular appearances at rulemak-ing and legislative hearings on ridesharing throughout the nation for more than a year. TNC operators have agreed in several states to provide $1 million in commercial coverage for whenever a ridesharing driver has a ride. And while TNCs have offered various solutions to deal with the insurance gap, they haven’t agreed to provide the level of commercial coverage insurers have pushed for. TNCs have argued that requiring $1 mil-lion coverage for the period when drivers have their app on but no match will kill their business model, as well as scare off insurance companies currently developing TNC products. They have also accused the taxi and limo industry of stirring things up across the nation to thwart their emerging competition, as is apparent in a statement from Sidecar given in response to a request for comment for this article. “Established and powerful interests like the taxi industry are threatened and using their political muscle to try and stop or slow services like Sidecar, Lyft and UberX. But people want transportation choice. We hope to continue to work with leaders

the important questions to make sure clients are not participating in these ven-tures without proper insurance coverage or expecting to be covered for an excluded service. “Ask all the questions and don’t just assume when they say they have a limo it’s just a limo service. Or when they say they are starting up a new business, ask what the car is going to be used for,” he says. “Any good retail producer does these things. If they understand what they are looking at and can understand the underwriting pro-cess, that will help us.”

nationwide to create policies that strike the right balance between protecting public safety and allowing for more con-sumer choice in the marketplace.” In a statement from Lyft, the company noted that despite broad publicity over the battles, there has been cooperation between TNCs and some governments and regulators. “In April, we entered into an operating agreement with the city of Detroit for two years (or until new regulations are introduced), which is a great example of a city seeing the value in community-pow-ered transportation and adapting to allow that model to thrive. While we have faced challenges in certain municipalities, we are hopeful that we can work together with local leaders to come to a perma-nent solution that puts the people first.” Uber spokeswoman Eva Behrend said the company is optimistic about finding middle ground. “We believe there is a solution to be found,” she said. “We think there is a solution, and we do support insurance regulation.”

Web ResourceTo read full coverage on what states are doing to address ridesharing concerns visit: www.InsuranceJournal.com.

IDEA EXCHANGE

Fiduciary Liability

the liability-related exposures created by the healthcare mandates. Agents who understand these exposures can properly guide clients on their risks and ensure that they have the right fiducia-ry liability coverage in place. Fiduciary liability insurance protects benefit plans, the sponsor organization and individuals acting as fiduciaries or administrators of the plans from costly defense expenses, settlements or verdicts when there is a breach of fiduciary duty as it relates to the Employment Retirement Income Security Act (ERISA). Below is an outline of some of the costs and exposures employers face in light of the PPACA:

Key Employer Obligations For 2015, the PPACA mandates that employers with 100 or more full-time equivalent (FTE) employees offer health insurance to at least 70 percent of employ-ees working more than 30 hours a week. FTE employees are calculated by adding the number of employees who work more than 30 hours per week and the total number of hours worked by part-time employees in a month, divided by 120. If those employers fail to provide health insurance and one of their employees obtains coverage and a tax subsidy on a state or federally run healthcare exchange,

By Christopher Williams

The Patient Protection and Affordable Care Act (PPACA) and the emerging

regulatory environment present difficult challenges to employers. As employers, regulators, administrators and courts begin to struggle with under-standing the scope and requirements of the PPACA, employers also may be faced with the added issue of new management liabili-ty exposures. Travelers Bond & Financial Products recently released a Nielsen Research poll offering insight into potential liability risks employers could face based on their unfa-miliarity with key provisions of the PPACA. The poll collected responses from more than 800 corporate decision-makers to bet-ter gauge their understanding of healthcare reform and assist them as they prepare for the new mandates. According to the survey, 36 percent are not at all familiar with PPACA’s overall requirements, and another 31 percent are only somewhat familiar with the law’s requirements. About a quarter reported they have not yet begun preparing for PPACA compliance. Employers, as well as agents who advise them, should be mindful of the exposures created by the nearly 10,000 pages of PPACA regulations. Not only are employ-ers subject to penalties for failing to file the necessary reports, but they also could be sued by plan participants for failure to comply with the PPACA. Interestingly, respondents in the Travelers Nielsen survey that report being extremely familiar with PPACA (35 percent) are three times more likely to be concerned about potential lawsuits, illustrat-ing that the more familiar an orga-nization is with the law’s require-ments, the more it understands

The PPACA: What Employers Don’t Understand About Emerging Exposures

the employer may be subject to a penalty. For 2015, the penalty is equal to the number of full-time employees, less 80, multiplied by $2,000. In addition, for 2015 only, employers with 50 or more but fewer than 100 employees do not need to provide health insurance if they meet all of the following conditions: •The employer cannot reduce the size of its workforce or the overall hours of service of its employees to avoid providing health-care benefits to its employees. Employers may still reduce their workforce or their workforce’s hours for a bona fide business reason. •The employer cannot eliminate or mate-rially reduce health coverage offered as of Feb. 9, 2014. •The employer must certify statements regarding the above on a prescribed form that must be delivered to the IRS. In 2016, the requirements change, and employers with 50 or more full-time equiva-lent employees must offer health insurance to 95 percent of their employees working more than 30 hours per week or potentially incur a penalty. The penalty calculation also changes. Rather than subtracting 80 from the number of full-time employees, the penalty will be calculated by subtract-ing 30 from the number of full-time employ-ees, and multiplying that figure by $2,000.

Reducing Hours or Terminating Employees In addition to risks associated with IRS certification statements, employers who terminate employ-ees or who reduce their hours below 30 hours per week to avoid providing health insurance may be exposed to individual and class action claims for violating Section 510 of ERISA. Section 510 prohibits employers from discharging or discriminating against plan participants for the

ATLASFIN16636.indd 1 6/6/14 2:16 PM

purpose of interfering with the attainment of any right to which they are entitled under a benefit plan. Terminating employ-ees or reducing their hours could result in allegations of Section 510 violations. Organizations that violate Section 510 face exposure not only to defense expenses, but also claims for lost wages, the value of the benefits and plaintiff attorney fees. Where such claims allege an ERISA breach of fiduciary duty, which they generally do, they are likely to implicate fiduciary cover-age. Employment practices liability policies will most likely not cover these claims, as they contain an ERISA exclusion.

Not Meeting PPACA Compliance Plan participants may also sue if the health plan provided by their employer does not comply with the PPACA’s benefit mandates. For example, the PPACA man-

dates that health insurance plans cannot have an annual or lifetime limit on benefits provided. According to the Travelers Nielsen sur-vey, 39 percent of employers are not familiar with that requirement. If an employer spon-sor provides a health plan with a coverage dollar limit, a participant may sue the plan, its employer sponsor, and plan fiduciaries to obtain coverage for the cost of the medi-cal claim in excess of the amount permitted under the plan. The PPACA also requires certain employ-ers to provide coverage for essential health benefits. Essential health benefits include, among other things, mental health and sub-stance use disorder services; preventive and wellness services; and pediatric services, including oral and vision care. If a plan does not provide coverage for essential health benefits, participants could sue to obtain

coverage for those benefits. Under ERISA, such claims will likely be permitted and plaintiffs also would be entitled to their attorney fees if they prevail.

Education Is Key With employers facing a number of PPACA-related challenges, agents and other insurance professionals must raise awareness, promote education and provide the right insurance solutions. Fiduciary coverage can help employers transfer cer-tain PPACA-related liability risk, protecting them from costly defense expenses as well as settlements and verdicts. By shedding light on an area that’s often poorly under-stood, agents can solidify their role as trust-ed advisors and gain a competitive edge.

Williams is fiduciary liability product manager for Travelers.

IDEA EXCHANGE

Human Resourcesness model. But just what are the benefits of bringing these contract professionals into your workplace?

The Growing Need During the recent “Great Recession,” many within the insurance industry made a commitment to doing more with less. As staff and budgets were cut, countless busi-ness projects were shelved to focus on more immediate and pressing concerns. Now that the economy is starting to look up — with insurance unemployment at a low and revenue growth projections on the rise — companies are taking a second look at these suspended projects and the manpower needed to successfully undertake them. In addition, recent changes industry-wide are creating a number of new mandates to address. From the Affordable Care Act, reg-ulatory updates, new filing and reporting requirements, and ICD-10 (International Classification of Diseases – 10th Revision), organizations are facing pressure to stay on top of a large number of new requirements. With companies still understaffed from

Staffing for Your Organization’s Term Projects

Natural disasters are unforeseen and unpredictable: an unexpected hurri-

cane that devastates a coastal area, a tor-nado that cuts across a city leaving broken buildings and homes in its path, a wildfire that sweeps across states, or a flood that

destroys crops and washes away resi-dences. It is typically these sort of disaster situ-ations that cause an insurance company to turn to interim staff for support and assistance. However,

that is not the only instance where contract employees can make a difference. In fact, interim support can have an immediate and lasting positive impact on companies look-ing to fill a gap during a set time span. Still unsure as to how interim talent can help your organization in your time of need? You might be surprised to learn that many of today’s organizations are incorpo-rating contract staff into their current busi-

the hiring freezes and personnel cuts of past years, undertaking these tasks is daunting. Together, the delayed projects and pressing industry changes have combined to highlight a need for short-term talent. In response, these organizations are turning to interim professionals to get the job done.

The Benefits of Contract Staff For companies looking for an individual who can quickly step in, roll up his or her sleeves and get started, interim employees are great talent solution. In fact, a large number of highly qualified industry profes-sionals have chosen to build their careers as interim staff. They specialize in handling short- and long-term projects, and are adept at stepping in to an organization and hitting the ground running. These skilled professionals require shorter ramp-up time for a project, are very adaptable and can integrate quickly into any workplace envi-ronment. Bringing on full-time professionals can be costly for any organization, with recruiting costs, training costs, benefit payments and any costs asso-ciated with employee turnover (severance pay, unemployment benefits, etc.). For a project that has a set start and end date, many companies may be reluctant to incur such large expenses. With interim talent, insurance organizations are able to bring in an experienced individual for a term proj-ect without paying the cost of a full-time

OAK001.indd 1 3/1/14 9:19 PM

By David E. Coons

A large number of highly-qual-

ified industry professionals have chosen

to build their careers as

interim staff.

employee. Not only are interim professionals a cost-effective solution for project-based work, but they can add significant value to an organization in a short amount of time.

VISTACO002.indd 1 5/19/14 10:23 AM

The key to finding an impactful interim hire is to work with a talent provider who staffs a broad landscape of inter-im professionals from entry level all the way up to subject matter experts and executives. It may be surprising for many organizations to learn that there is talent available to fill levels as complex as a

CFO or CEO. By offering a deep bench of qualified talent, organizations can easily find an employee that can fill the roles that fall between the lines of standard insurance functions.

Disasters are not the only time when an insurance company should turn to interim talent for support. Contract employees provide a great opportunity for companies to bring on highly qualified professionals for very specific and time-sensitive projects. These professionals can assist your organi-zation in completing backlogged projects, preparing for changing industry rules and regulations, and providing assistance during a leave of absence. Their valuable contribu-tions can certainly make an important and lasting impact on your organization’s suc-cess in a short period of time.

Coons is senior vice president of The Jacobson Group, a provider of talent to the insurance industry. Phone: 800-466-1578. Email: dcoons@jacobsononline.com.

IDEA EXCHANGE

many agency owners underestimate the control some CSRs have over clients. Their client relationships are often far stronger than the relationships producers have. The second example is also mostly obvi-ous and that is an agency’s carrier taking the expiration list. I am not too terribly concerned about a company brazenly taking ownership of expirations. Usually when this happens, it happens because the agency has failed to pay its premiums on time or has lost a license. The third example involves companies and is bold but not as obvious. Owning an expiration list in the old days was good pro-tection, but in today’s information age, own-ing data is far more important. The agency may own the list but does the agency own all the pertinent data? I have seen compa-nies effectively cause agencies to lose mate-rial business by using client information, in my opinion, nefariously but permissible per the contract. Check your contracts. The fourth example involves companies

Agency Ownership of Expirations

Agency ownership of its expirations is core to agency culture, core to the

agency’s value, and core to the owners’ livelihoods. Yet today, the ownership and even more important, the value of the

expirations, is being threatened, and most agency owners do not see it happening. The analogy to the old story of the frog enjoying the warm water until the instance before death is possibly apropos. Consider the fol-

lowing examples. The first example is the most obvious. Producers — and often far more important, CSRs — taking clients. Most agency own-ers recognize this threat, but their producer contracts are entirely inadequate and their contracts with CSRs are even worse. What is possibly even more damaging is how so

who simply give client information to agents and brokers they like better than you, once you move a policy to a compet-itor. I do not understand some insurance companies’ fixation that clients only move because agents facilitate their moving. This is why companies give policy information to other agents. It is why companies secretly buy agencies and then prevent the staff from moving accounts. It is why companies like service centers. Some companies seri-ously believe customers will not shop if an agency does not remind them to shop. Protect yourself in these situations, including the use of service centers. Always read your contracts, not only for what they say, but what they do not say, too.

Data, Programs and More The fifth example is relatively new. Now that many companies are writing directly, what happens to the data they have regard-ing your clients? Just asking. The sixth example is actually old, and

The Competitive Advantage

By Chris Burand

that involves programs. A famous case involving a program for softball leagues where a company stole the program from the agency was resolved in favor of the agency. If you have a program or even the thought of a program, make sure your company, or companies, sign non-disclo-sure agreements and even non-compete agreements before you share the details. I know your companies are special and they are your friends, and they would never take a program from you, so it should be no problem for them to sign these reasonable agreements. The seventh example is maybe the scariest, as I look from the outside in. In the past five years, the largest brokers have purchased many wholesale brokerages. These brokers’ wholesale businesses now contribute 10 per-cent to 30 percent of the brokers’ commis-sion revenues. These are large sums. I continually find most agencies have not adjusted to this new reality. Their broker relationships are lax. Sometimes they do not even have a contract with their brokers. If you do not have a contract, what is to prevent a broker from sharing your expira-tions, your data, with their retail branch? Maybe I have become too jaded over time or maybe I have just seen too many instances of Chinese walls that were imaginary at most, but I would err on the presumption that data gets shared. A related issue is how I have seen many programs develop on a handshake basis, and these programs have run well for years, sometimes decades. All parties have com-plete confidence in each other and maybe rightly so. However, all agencies and brokers are eventually sold. The appetite for purchasing wholesalers and certain program business does not seem to be slowing. Given the inevitable sale and the potential purchasers, doesn’t it make sense to build protection www.agencyideas.com/instant • 1-800-724-1435

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while you still have a friendly face on the other side of the deal?

Aggregators The eighth example involves clusters and aggregators. The question here varies considerably depending on how the cluster contract is written. In general, when an agency joins a cluster, it may not retain 100 percent ownership. I recently saw a situa-tion in which a com-

pany claimed own-ership of a cluster

member’s expirations — and it was correct! I have seen other situations

where an aggressive cluster operator took advantage of more trusting “partners” and took control of the expirations. An interesting example is some agency owners join a cluster designed as a service center. The cluster services the business alleviating much woe for small agency owners. This is fine on paper and fine if the agency owner stays in touch with clients. Some agency

Always read your con-tracts, not only for what they say, but what they do not say, too.

owners are lazy though, and they quit sell-ing much and they let the cluster’s service center build relationships. Then, if the cluster contract is not designed well, the owner can be kicked out. Sure the owner can claim ownership, but exactly where are they going to go? Ownership of expirations has been so

inculcated into agen-cy culture that many agency owners take it for granted. They have not stayed in-tune with the times. They do not understand that other

entities controlling data and relationships can severely damage the value, possibly eliminate the value, traditionally associated with owning the expirations. The solutions are fairly simple, but work is involved. Is protecting your agency’s value, your wealth, worth the work and investment?

Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. Email: chris@burand-associates.com.

30 | INSURANCE JOURNAL-NATIONAL REGION July 7, 2014 www.insurancejournal.com

Digital Marketing

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2014 Digital Product Guide

Accounting / Billing / Financial Agency Management Systems

INSURESOFT2500 Bond StreetUniversity Park, IL 60484 Contact: Virginia FeminisOffice: 708-534-1775Mobile: 708-351-9225www.insuresoft.comsales@insuresoft.com

Insuresoft - The Diamond System

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TERRACE SOFTWARE, INC.150 Spear St., Ste. 700San Francisco, CA 94105Phone: 888-269-6200www.terrace.com

Powerful Software for Agents & Brokers

Terrace Agent & Broker System (ABS) is simple, powerful and extensible management and accounting software for specialty retail agencies, wholesale brokers and MGA’s. Unified search, graphical navigation, and ribbon bar actions make ABS simple. Marketing, policy management, billing, accounting, claims, certificates, forms & document generation make ABS powerful. Open architecture make ABS easy to extend. ABS is different - visit our web site to learn more.

contact.terrace@terrace.com

SHIFT INSURANCE APPLICATIONSP.O. Box 233Solana Beach, CA 92075www.modgic.cominfo@modgic.com

Modgic

Modgic is a software application used by insurance agents, brokers, carriers, risk managers and consultants. Modgic accurately calculates and predicts workers comp X-mods (experience modifications) nationwide while provid-ing an in-depth analysis of a businesses workers compensation insurance. Modgic provides many tools that turn agents into highly educated and powerful consultants. MODGIC is a product of SHIFT Insurance Applications llc. Providing the future technology for the commercial insurance industry.

The Agents Tool for Workers Comp

Agency Management Systems

DEMOTECH, INC.2715 Tuller Pkwy. Dublin, OH 43017Contact: Joseph PetrelliPhone: 614-761-8602Fax: 614-761-0906www.demotech.comjpetrelli@demotech.com

Demotech, Inc. Demotech, Inc. is a Columbus, Ohio based financial analysis and actuarial services firm providing a wide range of services including pricing analysis, state filings assistance, Financial Stability Ratings® and support for other required regulatory reporting. Having worked with insurers of all sizes, Demotech possesses broad experience addressing actuarial and financial analysis issues, whether the issue is unique to a particular insurer or faced throughout the industry.

Decision Management

NEXUS LINX, LLC2601 N. 3rd St., Ste. 109 Phoenix, AZ 85004Contact: Jason RuelPhone: 888-744-9998 X-1Fax: 888-846-8650 www.nexuslinx.comjruel@nexuslinx.com

Policylinx™Increase performance, profitability, and create peace of mind. Policylinx™ is a secure, user-friendly Management System for Agents, MGA’s, and Claim Administrators. Gain all the benefits of a single entry system with access to your data anytime, anywhere. Experience the convenience of a full Accounting module, Reports, Policy and Claims Tracking, Document Management, and much more. Need a customized rater, policy issuance, or data feed for a company? We can build that. The possibilities are endless. Check us out today, and let us help you grow your business. Profitability Performance Peace of mind

2014 Digital Products.indd 2 6/27/14 5:28 PM

Document Management

FUJITSU COMPUTER PRODUCTS OF AMERICA, INC.

1250 E. Arques Ave. Sunnyvale, CA 94085Phone: 888-425-8228http://us.fujitsu.com/scanners

Fujitsu

Fujitsu Computer Products of America, Inc., is an established leader in the document imaging market, featuring state-of-the-art scanning solutions and services in the workgroup, departmental, and production-level scanner categories. Fujitsu offers the industry’s most comprehensive and competitive product offering. With scanning solutions from 15-120 pages per minute (ppm), Fujitsu possesses an extensive scanner lineup to meet the functional needs of customers at affordable price points.

July 7, 2014 INSURANCE JOURNAL-NATIONAL REGION | 31www.insurancejournal.com

Claims

2014 Digital Product Guide 2014 Digital Product Guide

Claims

QUALCORP, INC.PO Box 803280 Santa Clarita, CA 91380Contact: Allen BeggsPhone: 661-799-0033Fax: 661-799-0020 www.QualCorp.comabeggs@QualCorp.com

QualCorp, Inc. Since 1992, we have been providing software for MGA’s/Carriers that afford them with the ability to:

RATE and ISSUE POLICIES in all 50 statesISO and Non-ISO Programs and LOB

Commercial / Personal and Workers’ CompAll Microsoft-based - latest technology

www.QualCorp.com

MGA / Wholesaler Website

BURNS & WILCOX120 Kaufman Financial Ctr.30833 Northwestern Hwy.Farmington Hills, MI 48334Phone: 248-932-9000www.burnsandwilcox.com

Burns & Wilcox

Internationally recognized for its expertise, Burns & Wilcox is North America’s leading and most capable independently owned insurance wholesale broker and underwriting manager. Burns & Wilcox provides property, casualty and other specialty business lines of insurance for more than 14,000 retail brokers and agents. In addition to adhering to the highest standards of service, the depth and acumen of its underwriting and management talent is unsurpassed in the industry.

www.burnsandwilcox.com

INSUREZONE1612 Summit Ave., Ste. 100Fort Worth, TX 76102Phone: 817-704-2287www.agentsecure.commembership@insurezone.com

AgentSecure

The AgentSecure technology platform provides producers with the industry’s best sales workflow management tool. Our comparative rating tool, for personal and commercial lines, features a secure single-entry multi-carrier quoting platform. The result is that we return real-time quotes from national and specialty carriers, in order to save you time while making the sale. With AgentSecure, independent insurance agents are able to provide the coverage and carrier options in a time frame that your clients have come to expect.

www.agentsecure.com

E-CLAIM.COM, LLC, DBA CLICKCLAIMS1901 Manhattan Blvd., Bldg C, Ste. 202Harvey, LA 70058Contact: Thomas J BrownPhone: 877-694-8375Fax: 877-694-8375www.clickclaims.comthomasb@e-claim.com

ClickClaimsClickClaims is for small to mid-size PC carriers and claim service providers who need advanced technologies that drive a competitive market. ClickClaims’ SaaS model allows for rapid deployment, unlimited scalability, performance, security and versatility that legacy systems cannot match, at a fraction of the cost.

Recipient of the AM Best eFusion Award for Claims Technology, our products have driven claims innovation since 1999. Call for a demonstration today to see how ClickClaims can optimize your claims department and deliver operational effeciencies. --- AM Best eFusion Award Winner ---

Document Management

FUJITSU COMPUTER PRODUCTS OF AMERICA, INC.

1250 E. Arques Ave. Sunnyvale, CA 94085Phone: 888-425-8228http://us.fujitsu.com/scanners

Fujitsu

Fujitsu Computer Products of America, Inc., is an established leader in the document imaging market, featuring state-of-the-art scanning solutions and services in the workgroup, departmental, and production-level scanner categories. Fujitsu offers the industry’s most comprehensive and competitive product offering. With scanning solutions from 15-120 pages per minute (ppm), Fujitsu possesses an extensive scanner lineup to meet the functional needs of customers at affordable price points.

July 7, 2014 INSURANCE JOURNAL-NATIONAL REGION | 31www.insurancejournal.com

Claims

2014 Digital Product Guide 2014 Digital Product Guide

Claims

www.QualCorp.com

MGA / Wholesaler Website

BURNS & WILCOX120 Kaufman Financial Ctr.30833 Northwestern Hwy.Farmington Hills, MI 48334Phone: 248-932-9000www.burnsandwilcox.com

Burns & Wilcox

Internationally recognized for its expertise, Burns & Wilcox is North America’s leading and most capable independently owned insurance wholesale broker and underwriting manager. Burns & Wilcox provides property, casualty and other specialty business lines of insurance for more than 14,000 retail brokers and agents. In addition to adhering to the highest standards of service, the depth and acumen of its underwriting and management talent is unsurpassed in the industry.

www.burnsandwilcox.com

INSUREZONE1612 Summit Ave., Ste. 100Fort Worth, TX 76102Phone: 817-704-2287www.agentsecure.commembership@insurezone.com

AgentSecure

The AgentSecure technology platform provides producers with the industry’s best sales workflow management tool. Our comparative rating tool, for personal and commercial lines, features a secure single-entry multi-carrier quoting platform. The result is that we return real-time quotes from national and specialty carriers, in order to save you time while making the sale. With AgentSecure, independent insurance agents are able to provide the coverage and carrier options in a time frame that your clients have come to expect.

www.agentsecure.com

E-CLAIM.COM, LLC, DBA CLICKCLAIMS1901 Manhattan Blvd., Bldg C, Ste. 202Harvey, LA 70058Contact: Thomas J BrownPhone: 877-694-8375Fax: 877-694-8375www.clickclaims.comthomasb@e-claim.com

ClickClaimsClickClaims is for small to mid-size PC carriers and claim service providers who need advanced technologies that drive a competitive market. ClickClaims’ SaaS model allows for rapid deployment, unlimited scalability, performance, security and versatility that legacy systems cannot match, at a fraction of the cost.

Recipient of the AM Best eFusion Award for Claims Technology, our products have driven claims innovation since 1999. Call for a demonstration today to see how ClickClaims can optimize your claims department and deliver operational effeciencies. --- AM Best eFusion Award Winner ---

Workers’ Compensation

32 | INSURANCE JOURNAL-NATIONAL REGION July 7, 2014 www.insurancejournal.com

www.QualCorp.com

Policy Administration / Processing

Rating Software

INSUREZONE1612 Summit Ave., Ste. 100Fort Worth, TX 76102Phone: 866-243-5934www.insurerater.com membership@insurezone.com

InsureRater

By using InsureZone’s commercial and personal lines comparative rating tools, your agency can streamline the way it handles the small account which will allow your producers to focus on larger accounts. This is the only comparative rating platform in the industry that works for BOTH commercial lines (23 carriers) and personal lines (100 carriers) using the same interface.

SHIFT INSURANCE APPLICATIONSP.O. Box 233Solana Beach, CA 92075www.modgic.cominfo@modgic.com

Modgic

Modgic is a software application used by insurance agents, brokers, carriers, risk managers and consultants. Modgic accurately calculates and predicts workers comp X-mods (experience modifications) nationwide while provid-ing an in-depth analysis of a businesses workers compensation insurance. Modgic provides many tools that turn agents into highly educated and powerful consultants. MODGIC is a product of SHIFT Insurance Applications llc. Providing the future technology for the commercial insurance industry.

The Agents Tool for Workers Comp

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Advertisers IndexReaders, browse, contact, or do product searches on any of our full page advertisers at: www.insurancejournal.com/adshowcase/

Access Home Insurance www.accesshomeinsurance.com SC11; SE11Agency Ideas www.agencyideas.com 29Applied Underwriters www.applieduw.com 4, 5, 36Arrowhead General Insurance Agency www.arrowheadgrp.com W5Atlas Financial Holdings www.atlas-fin.com 25Burnett & Company www.bcoinc.com SC7California Earthquake Authority www.earthquakeauthority.com/mvp 3Catlin US www.catlinus.com 15Century National www.cnico.com W3City of Hope www.cityofhope.org 33CSUF Center for Insurance Studies www.centerforinsurancestudies.com W11FEMA www.agents.floodsmart.gov/ij 17Golden Bear Insurance Company www.goldenbear.com W10Ironshore www.ironshore.com 2JM Wilson www.jmwilson.com SE5; M3Latin American Assoiation of Insurance Agencies www.laaia.com SE3

Lexington www.lexingtoninsurance.com 13Liberty Mutual www.libertymutual.com 35Lighthouse Holdings, LLC www.lighthousepropertyins.com SC1; SE1M.J. Hall & Company, Inc. www.mjhallandcompany.com W12McClelland & Hine www.mhi-tx.com SC5; SE1Monarch E & S Insurance Services www.monarchexcess.com W7Oak & Associates www.oakandassociates.com 26Pacific Gateway Insurance Services www.pgiainsurance.com W9PersonalUmbrella.Com www.personalumbrella.com 7PSIC - Pacific Specialty Insurance Company www.psic-onespot.com 9South & Western www.southandwestern.com SC9; SE9The Institutes www.theinstitutes.org 3; W1Vista College www.statece.com/ins 27Western Surplus Lines Agency, Inc. www.westernsurplus.com SC3

continued from page 19

stronger and safer.”

Congressional Support Detelfsen says that so far support from Congressional leaders has been positive. “We certainly got a very favorable response from the Chairman of the Senate Committee who presided over that hearing, and I think that everything we’ve heard from members of Congress is pretty positive,” he said. There is some concern over the addition-al disaster assistance states would receive in exchange for adopting strong building codes, he said, and whether the incentive would drive a net increase in federal outlays for disaster assistance. But the industry and other BuildStrong supporters say improving building codes nationwide would result in net savings to the federal government. “Any additional amounts of money that were promised to the states in exchange for them adopting stronger building codes would be offset by the effect that the build-ing codes would have on disaster loss reduc-tion,” he said.

Disasters

IDEA EXCHANGE

Closing Quote

Ratings are merely forecasts. They are opinions about the future.

By Stuart Shipperlee

Ratings, and rating agencies, occupy a contradictory place in many markets — not least in commercial

lines insurance and reinsurance. They are very heavily relied on by both buyers and bro-kers, yet subject to a great deal of cynicism. However, while the agencies certainly don’t always get it right, we would contend that much of the controversy derives from the way many re/insurance practitioners apply ratings within their own decision-making processes. This stems from a fundamental but all too often ignored reality: Ratings are merely forecasts. They are opinions about the future (the future creditworthiness of the rated re/insurer) based on historical information and for-ward-looking expectations (both about the re/insurer itself and the markets it trades in). The use of expert forecasts is central to business life. Indeed, much of the technical side of underwriting itself reflects exactly that. Yet that use normally comes hand-in-hand with a healthy awareness that a forecast is merely an opinion, not a fact. And opinions about the future will, by definition, sometime prove to be wrong. Both A.M. Best and S&P currently rate well over 2,000 re/insurers globally. One thing we can say with confidence is that not all of those ratings will prove to be correct.

The Strange Case of the Use and Abuse of Insurance Ratings

Moreover, as with any forecast, when an agency assigns a rating it is not suggesting the rating represents the only outcome for the rated re/insurer’s financial health that it can perceive, merely the one it thinks is most probable. And yet, many buyers and brokers use ratings as a “‘binary’” selection criteria (acceptable above a certain level of rating and unacceptable below). This is often done without even a review of the historical default or impair-ment rates associated with each rating level and a related perspective on how long the “exposure” to the re/insurer will be (i.e., the “tail” on the business being placed).

Binary Problems The binary selection approach has three problems. First, it ignores the fact that the detailed statistics on historic rating performance over different time periods published by the agencies allow for a much more rational approach to assessing the degree of credit risk. Second, it tends to miss important leading indicators from the agencies about potential rating trends (individual rating or sector outlooks, for example). But most important in our view, it leads to a sense that somehow a rating is a fact. The implied assumption is that “if a carrier is ‘A-’ it must be all right; if its ‘BBB+/B++’ is must be questionable.” This last aspect of rating in part leads to the degree of angst seen when a rating proves to have been too high. Buyers and brokers looking for certainty when using ratings in this arbitrary way inevitably feel more bitterly about things if an “A”-rated carrier then sub-sequently fails.

How to Use Ratings There are many unknowns in the buying and under-writing of commercial lines and reinsurance risks. Professional buyers and brokers invariably invest the time to understand these properly (e.g., the exact nature of required coverage; lost cost trends; economic, political and legal developments; climate changes; emerging risks). Re/insurance professionals using ratings should invest the time to understand what analytical factors ratings reflect; the leading indicators on their ratings that the agencies provide; the observed credit risk any given rating level has displayed historically; and the impact the dura-tion of the exposure has on that credit risk.

Shipperlee is senior partner at Litmus Analysis, a partnership of analysts offering a broad range of products and services designed to create increased transparency and clarity in the insurance and reinsurance markets. Website: www.litmusanalysis.com.

THERE ARE SOME RISKS ONLY A SPECIALIST CAN HANDLE.We’re LIU, the global specialty lines division of Liberty Mutual Insurance. To meet our underwriters and learn more about how they can help you and your clients handle unique risks, visit www.LIU-USA.com.

riel R

riel N

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insurance journal west 2014.07.07

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