Making Sense of Something

Crazed Washington will keep us both jumping in 2018.

Each year we ask our intrepid lobbyists, Joel and Joel (that’s Wood and Kopperud to most of you), to take up their partisan cudgels and defend their passions, explain their political visions and give us some clarity about our industry’s political future (i.e., what the hell is Washington doing to us now). This is their latest salvo, via traceable emails, of course (this is Washington, after all). — Editor

New Health Benefit Option for Small Employers

Agencies issue guidance on QSEHRAS. Here’s what you need to know.

A somewhat overlooked provision in the 21st Century Cures Act allows some employers to offer a new kind of tax-preferred arrangement—qualified small employer health reimbursement arrangements (QSEHRAs)—to their eligible employees.

Bob Hope

A life insurance policy for a gunslinger? That’s the premise of Alias Jesse James.

“BOB HOPE as the Most Wanted TRIGGER in the West!
RHONDA FLEMING as the Most Wanted FIGGER in the West!”

Don’t Just Change in 2018. Improve.

We began the year with uncertainty, we wanted to end it with purpose.

One of the most creative and, quite honestly, fun parts of working on Leader’s Edge is the art process. We want our content to keep you engaged and interested over the long term, but we also want our art to delight and inspire you immediately. We want it to draw you in. And that’s no small task. 

Telematics Goes Mobile

Smart phone apps offer useful driving data.

Virtual Claims

Q&A with CJ Przybyl, Co-Founder and President, Snapsheet

Indianapolis, Indiana

James Roe, President of Arlington/Roe, shares his Indy.

On the Waterfront, Off the Grid

Three miles off of Key West is Stock Island, an emerging luxury destination.

Public Players Tested

Bring It

Your 2018 leadership challenge

I was thrust into the biggest career change of my life at the age of 34: CEO. It was exciting and there was much to accomplish but admittedly, I didn’t know anything about leadership. 

Follow the Money

While the losses from this fall’s catastrophic events were massive, financial diversification and innovation will ease some of the pain.

England’s 1603 Insurance Act declares: “The loss lighteth rather easily upon many, than heavily upon few.” In this tradition, claims from even the most damaging storms are divided and distributed around the world, to be spread over many pools of capital. Still, the recent spate of tempests will truly test the efficacy of a system in which major losses are shared among the many. 


The 2017 Atlantic hurricane season will erode the industry’s enormous capital base.

But the season might also drive a longed-for rise in market pricing, potentially reversing its fortunes.

Morgan Stanley analysts described the third quarter of 2017 as potentially the worst insured natural catastrophe experience on record for the period.


Read the Sidebars

Public Players Tested

James (Jim) J. Maguire

“Believe what you are and become what you believe.” —James J. Maguire

Robert (Bob) J. Newhouse Jr.

A transformative leader, an idea man and a true gentleman

Game Changers

Honoring a transformative leader and a true American spirit.

Each year The Council recognizes those who have made extraordinary contributions to the insurance industry and commercial insurance brokerage. We call them Game Changers. —Editor

Building on the Future Today

The Council Foundation awards 75 scholarships to future industry leaders.

In an effort to build our industry’s future, The Council Foundation’s scholarship program has awarded $375,000 in scholarships to 75 college juniors and seniors interested in pursuing a career in insurance brokerage. 

Dave Eckroth

CEO, Parker, Smith & Feek

We always say we don’t do easy very well.

Riding the Tech Wave

Risk management has a key role in our understanding of new technology and protecting against new exposures.

In the past decade, technology has changed significantly, transforming how businesses plan, execute, innovate and grow. Critical business tasks previously reliant on manual labor or paper processes are now completed by automated systems, connected machines and artificial intelligence. The “future” of business isn’t distant; it’s here.

A New Perspective

A summer internship at an insurance brokerage changed my view of what a broker really does.

I will admit I had a skewed misconception of the insurance brokerage business. I thought the only responsibilities of a broker were to obtain insurance at the cheapest price possible for the client and sell as much as possible. However, this summer, as I interned at Johnson, Kendall & Johnson (JKJ) in Newtown, Pennsylvania, it became clear that I was wrong. 


The market is flush with record activity.

The year-end push for deal closings is at full speed as sellers try to decide whether it is more advantageous to close their transactions on December 31 or January 1. 

Let’s Stop the Silliness

It’s long past time for agent appointments to go.

“I’m supposed to be the franchise player, and we’re in here talking about practice…Not a game…Not the game that I go out there and die for and play every game like it’s my last. Not the game, but we’re talking about practice, man. I mean, how silly is that?”
—Alan Iverson, May 2, 2002

Keep It Real

Local colleges are a great resource for young talent. But these recruits need a real experience.

The war for talent is escalating. More than 400 first-round interviews were recently conducted at the annual conference of Gamma Iota Sigma, the industry’s risk management, insurance and actuarial science fraternity. There were 50 insurance organizations onsite but very few insurance brokerages.

Finding Happiness, Even at Work

It’s a season of stress. Here’s how to find happiness in the chaos.

’Tis the season to be jolly…May your days be merry…It seems, no matter where you look, you’re being told that you should be happy this month.

Numbers Cruncher - Dec 17

The Great Cost-Shift

Q&A with author and healthcare futurist Ian Morrison

Ian Morrison specializes in long-term forecasting and planning with particular emphasis on healthcare and the changing business environment. He sat down with Leader’s Edge to discuss hospital bills from both the patient and provider perspective, the politics of repeal and replace, and how some providers are already preparing for a Medicare-for-all kind of world. He also addresses employers’ role in long-term change for our healthcare system. 


Numbers Cruncher

Developments in Puerto Rico

While much uncertainty remains, here’s an initial look at where losses might come from in Puerto Rico.

As we planned this month’s features on Hurricanes Harvey and Irma, we began to see the devastation caused by other, ongoing natural catastrophes, including Hurricane Maria. And while we didn’t want to leave the devastating effects of this storm out of our hurricane coverage, digging into the details of Hurricane Maria’s effects is going to take time. 

A Common Language

Q&A with Rod Cruickshank, President & CEO of The Partners Group

Reference-based pricing in health insurance creates incentives for patients to select providers who charge relatively low prices and still offer high quality of care. Insurers offer a maximum price for specific procedures and a network of providers who agree to it. 

It’s High Time We Deal with Pot

But conflicting federal and state law create unclear implications.

A total of 29 states, the District of Columbia, Guam and Puerto Rico have legalized marijuana for medical use. Eight of those states and D.C. have fully legalized marijuana for recreational use.


The U.S. marijuana market generated $6.7 billion in revenue in 2016, an increase of 34% over 2015, according to Business Insider.

According to Forbes, the marijuana industry will create more than 250,000 new jobs by 2020, more than the projections for manufacturing, utilities or government.

Engaging in any aspect of the marijuana business can trigger a whole host of federal violations.

The Road to Recovery

Answering the call.

Almost as soon as I submitted my last column on our industry’s response to Hurricanes Harvey and Irma, unforeseen disaster struck again, and again and again. 

Raising Arizona

Scottsdale, Arizona is an up-and-coming wine destination.

Prague, Czech Republic

Marek Kalbáč, Global Services Director at Renomia, shares the city’s history and new generation.

The Odd Couple

Harvey and Irma packed different types of punches, affecting different lines of insurance.

Arriving in such close proximity to each other, Harvey and Irma will likely be paired in the annals of hurricane history, much like the successive storms that hit the Gulf in 2005. But that doesn’t mean the damage they caused is the same. 

Industry Foundation Spearheading Relief Effort

The Last Mile Begins Many Steps Ahead

In the wake of a catastrophe, it takes painstaking planning to be there for clients.

The morning following Hurricane Irma, Kathy Richichi surveyed the damage to the Marina Bay Club in Naples, Florida, where she is the community association manager. There was a floor-to-ceiling glass wall that had been sucked out and smashed all over the pool deck. The roof of the gazebo had blown off, and more than 500 roof tiles were damaged or ripped from the condo roof. 


For many industry professionals, the post-hurricane response starts long before the storm hits.

Hub International provided daily storm-tracking reports on Hurricane Irma and recovery resources, among other services.

The questions left behind by every storm can become complicated because policies differ.


Read the Sidebars

Industry Foundation Spearheading Relief Effort

Spotting a Vehicle That Has Been Flooded

10 Things to Look For

Today’s modern vehicles have electronics throughout; in the doors, under the seats, behind the dashboard, in the engine and even in the trunk. With so much electronics susceptible to flood-related failure, most cars that took on water cannot be repaired.

Water Wheels

Harvey may have destroyed a million vehicles. Now what?

Besides inflicting immense losses on Houston-area homes and businesses, Hurricane Harvey may wind up destroying more automobiles than any storm in history. 


Initial estimates say Harvey destroyed between 500,000 and one million vehicles in the Houston area.

Several area automobile dealers took a direct hit.

Car sales are up, but many dealers are offering discounts for storm-totaled car replacement.


Read the Sidebars

Spotting a Vehicle That Has Been Flooded

Angels in My Lifetime

Putting aside their own challenges, insurance professionals answer the call in Houston.

Hurricane Harvey made landfall near the Texas towns of Port Aransas and Port O’Connor as a Category 4 hurricane on a Friday night and then slowly—dangerously too slowly—made its way up the coast to Houston and surrounding cities.


Harvey dropped a total 51.88 inches of rain near Mont Belvieu, just east of Houston, making it the biggest rain-producing storm in U.S. history.

Some 185,149 homes were damaged or destroyed, and an estimated eight million cubic yards of trash from flooded homes was generated by the storm in Houston alone.

Putting their own concerns aside, insurance professionals came in force, offering aid, answers and even their own homes.

Tim Prichard

President, Wells Fargo Insurance, San Francisco

Move quickly and adjust your approach based on how others react.

Tech Tackles Hurricane Claims

Drones, phones and more in cat claims.

The last time a major hurricane hit the U.S., phones weren’t “smart” and drones hadn’t taken off in civilian airspace. A lot has changed since Katrina, Rita and Wilma slammed the South in 2005. 

One Truth

Q&A with Jayant Khadilkar, Global Head of Analytics and Technology, TigerRisk Partners

Right Under Our Nose

We don’t always see the potential leaders in our own organization.

DON’T YOU HATE WHEN THIS HAPPENS?! … You search and search but can’t find the mustard in the refrigerator. Then your spouse grabs it off the shelf right in front of you and says, “If it had teeth, it would have bitten you!” 

Too Costly to Ignore

The Council has a new focus on the cost of health services.

In June, I became chair of the Council of Employee Benefits Executives; it has already proven to be a dynamic time to lead this group. 

Model Citizens

Nonprofit and for-profit cat modelers tackle global underinsurance.

You can’t manage what you can’t measure. Catastrophe exposure is no exception. Insurers’ ability to price cat risk depends on knowing who and what is exposed—people, property, businesses and infrastructure—and to what perils.

The Equifax Hack

An empire built on your personal information reveals flaws in its foundation that will be felt for decades.

Every now and then, there is a data breach that is such a watershed moment it changes peoples’ perspectives on cyber events. The first was ChoicePoint in 2005. One of the country’s first and largest data aggregation companies sold personal data on 163,000 people to an alleged crime ring engaging in identity theft.

What’s Your Value: Good or Great?

Even in this robust M&A market, the highest value appears to still be reserved for peak performers.

Is your agency good, or is it great? Are you focused on organic growth, driving new sales and adopting systems to keep your organization razor sharp? Or do you subscribe to the old “don’t fix what isn’t broken” mentality—riding on past successes and the stability of renewals? 

Walk the Talk

Q&A with Zenefits Vice President of Carrier Relations Colin Rogers

Zenefits and OneDigital recently announced that they are forging a new, unprecedented partnership that will give clients access to leading technology and advisory services. We chatted with Zenefits’ vice president of carrier relations Colin Rogers about what made Zenefits change its tune on brokers, how the company will continue to evolve and what makes OneDigital special.

Developments in Puerto Rico

While much uncertainty remains, here’s an initial look at where losses might come from in Puerto Rico.

As we planned this month’s features on Hurricanes Harvey and Irma, we began to see the devastation caused by other, ongoing natural catastrophes, including Hurricane Maria.

Hamburg, Germany

It’s a mix of cosmopolitan and neighborly charm, says Yorck Hillegaart, Executive Board Member/Partner, Funk Gruppe GmbH.

Vegas Will Shine On

Despite the horrible attack that just occurred, Las Vegas remains strong and vibrant.

Let’s Chat!

Insurers are increasing use of digital voice assistants and chatbots.

On Demand

Q&A with Scott Walchek, Chief Executive & Founder, Trov

Jason Smith

President TrueNorth Companies, Cedar Rapids, Iowa

The only thing I'd rather be doing-and I say this with a smile on my face-is be a racecar driver.

The IDF Alpha Team

Book Review

Risk & Reward: an inside view of the property/casualty insurance business
By Stephen Catlin with James Burke

IDF Calling

Stabilizing the World

Placing insurance where it has never been before.

An insurance man at a NATO meeting may sound as incongruous as a dogcatcher in an apiary. Still, Stephen Catlin, London luminary and founder of the eponymous Lloyd’s underwriting business (bought by XL Group for $4.1 billion in 2015), was called to address the West’s most powerful military alliance earlier this year. 


Industry icon Stephen Catlin, founder of Lloyd’s underwriting business, leads the Insurance Development Forum.

The IDF is a unique partnership between the global insurance industry, the United Nations and the World Bank.

The forum aims to cover 400 million uninsured people in the developing world against the effects of climate-related disasters.


Read the Sidebars

IDF Calling

Book Review

The IDF Alpha Team

Brokerages Shift Cautiously into Cognitive Computing

They are limited only by their imagination to help their business.

Meet Algorithm, Your New Partner

Brokers are investing in automation. Is cognitive computing next?

Imagine a future where fancy computers handle your tedious administrative tasks while you do better things, such as delving deeply into your clients’ risk exposures on a daily basis.


Software known as RPA, or robotic process automation, can perform simple repetitive tasks such as data entry.

Such technology can free brokers to provide value-added services.

Many large insurers are investing heavily in cognitive computing, building or purchasing state-of-the-art solutions.


Read the Sidebars

Brokerages Shift Cautiously into Cognitive Computing

What If?

The internet goes dark

The internet has gone down. How long can your business withstand the interruption? One day? Two days? One week? What if the outage were widespread? How long would it take for the financial impact to be ruinous?


No insurance policy absorbs the risk of the world wide web grinding to a sudden halt.

Last year, hackers launched an attack that shut down thousands of websites.

In 2016, 81 internet outages in 19 countries cost a combined $2.8 billion in interruption losses.

What’s Behind Your Client’s Decisions?

Behavioral science provides opportunities to understand and work past natural biases.

Imagine you work for a healthcare management company. You’ve been encouraged to complete a health risk assessment (HRA), and the traditional incentive is $25. (Meh.) Today, however, you’ve been promised an additional $25 grocery gift certificate. A co-worker, on the other hand, has been offered the chance to participate in an office lottery to win up to $125 more as part of a four- to eight-member team. Each week, one such team will be selected from the lottery as a winner; everyone on that team who completed an HRA will get $100—plus $25 more if at least 80% of the team completed assessments.


Behavioral economics considers how a variety of factors influence the way people make decisions.

Such studies could have critical implications for the insurance industry.

Understanding loss aversion, for example, means knowing premium increases upset customers more than reductions please them.

Harvey Insured Losses Are No Record

Flood Insurance

A Convoluted History

A Broken System of Special Interests

Entitlement means flood insurance will be difficult to change.

Under Water

Government thwarts private participation in flood insurance.

First Hurricane Harvey dumped unprecedented amounts of rain on Texas, causing massive flooding along the coast and in the Houston metro area. Then Hurricane Irma cut an unprecedented swath of destruction from one end of Florida to the next, causing flooding across and beyond state boundaries.


Federal flood insurance suffers from actuarial/rate dislocation.

Private insurers are not into repetitive-flooding risks.

Will Harvey and Irma force Congress to reform NFIP or mire us further in flood insurance dystopia?


Read the Sidebars

A Broken System of Special Interests

Flood Insurance

Harvey Insured Losses Are No Record

Security Matters

To keep your best brokers, give them peace of mind now and in the future.

High-performing brokers have seen their compensation packages gutted and their books of business chopped up or redistributed as the result of mergers and acquisitions. They’ve become increasingly vulnerable to losing control over their own financial and life trajectory. 

By the Numbers

Your clients can lower their risk by analyzing their own data.

As analytical tools and technology become more popular and easier to use, we’re beginning to see organizations model everything—from sales forecasts to which Netflix show you’re most likely to watch. Analytics is not new to the insurance industry. 

Motivationally Speaking

Examine others’ incentives when deciding your future.

The popular HBO series “Game of Thrones” recently ended its seventh season with a riveting finale. SPOILER ALERT: The plot took its usual twists and turns, and near the end we lost the character known as “Little Finger,” who had been a long-standing part of the series. 

Telematics Taken for a Ride

Data will be driving commercial auto claims.

Usage-based insurance (UBI) receives a great deal of attention, and with good reason. Within three years, roughly 70% of all auto insurers are expected to use telematics usage-based insurance—also known as pay as you drive (PAYD)—according to SMA Research. 

The Texan Way

Have a plan and execute it.

The very essence of insurance is designed to make you whole after a loss. I’ve talked before about claims management and shared my own personal experience after my house burned down earlier this year because how you are treated in the aftermath of a loss event is an important story to tell. 

Spreading Cyber Around

Cyber coverage is popping up in multiple places. Look widely to recover claims.

Cyber attacks are becoming increasingly complex, lengthening recovery times and taking a greater toll on business operations. Numerous attacks have zeroed out servers; corrupted, encrypted or exfiltrated data; or caused sustained denial of service to systems. Many of these consequences may occur in a single attack, and coverage under a cyber policy may not be the only avenue to recover losses.

Undoing Obama

Change made through regulation doesn’t seem to stick.

One of the priorities of the Obama administration was modifying the contours of the employer-employee relationship by expanding the scope of legally mandated employer obligations. The Affordable Care Act employer mandate was one example of this, of course.

The Human Connection

A successful negotiation engages your emotional intelligence.

A house, your salary, a car, insurance rates…

If we were playing the old game show “$100,000 Pyramid,” you would say “Things You Negotiate,” and you would be right.

Tale of a One (Trick) Unicorn

A close look at China’s Zhong An reveals the pitfalls and potential of insurtech startups.

China’s aspirations to move up the global value chain have shifted the country’s focus to greater consumer spending and a service-oriented economy, built on indigenous technology and innovation.

Stake in the Ground

Q&A with OneDigital Chief Growth Officer Mike Sullivan

OneDigital and Zenefits announced last week that they are forging a new, unprecedented partnership that will give clients access to leading technology and advisory services. 

Defining Leadership

It took nine drafts of this column before I finally surrendered to the printer.

I look forward to our leadership issue every year. It’s generally a time when I can give you my perspective about leadership in general or reflect on something positive that happened over the summer, like the impressive work of our 14 college interns who recently completed their time with us (and who may be knocking on your door in the near future).

Blind Ambition

Recognize your own weaknesses and cope with what you don’t do best.

As a CEO, passion for the business can be a beautiful thing. But when that passion extends to being engaged in every last detail, things can get ugly.

The Becker File


David Becker is the brains behind Cottingham & Butler’s 14 years of spectacular organic growth.

In a masterpiece of marketing, Dubuque, Iowa, now calls itself the “Masterpiece on the Mississippi.” Indeed, in recent years the city of 58,000 has been lauded for its lively, art-infused riverfront development, growing technology and financial services industries, and relaxed way of life.


As CEO at Cottingham & Butler, Becker has become a fixture in Dubuque, Iowa, the hometown he left behind for 20 years.

After nine years as a consultant with McKinsey & Co., Becker came to Cottingham & Butler with no experience in insurance.

Since Becker started in January 2004, the company’s annual revenues have more than quadrupled, to $146 million.


Read the Sidebars

The Becker File


Do activist investors force you to trim, squeeze and shed too much? Or do they make you a better company?

When hedge fund manager and activist investor William Ackman sent a letter to the board of directors of pharmaceutical giant Allergan three years ago, he didn’t leave anyone guessing about his intentions. “Your actions,” Ackman wrote, “have wasted corporate resources, delayed enormous potential value creation for shareholders and are professionally and personally embarrassing for you.”


Economist Milton Friedman, the father of activist investing, criticized calls for corporations to act for the public good.

In 2016, activist campaigns were directed at more than 750 companies.

The insurance industry has largely been protected from activists, thanks in part to tight regulatory oversight.

Broker Update

Data breaches, cyber captives and the silent risk.

St. Louis, Missouri

Robert Harrison, Chairman of the Board/President, The Daniel and Henry Co., shares his big little city.

Broker-Friendly Benefits

Q&A with Kevin Dunn, CEO, Decisely

100 Years!

The Broadmoor will be celebrating its 100th birthday in 2018.

Robert Kestenbaum

CEO, York International, Harrison, New York

My main goal was to control my destiny.

A True One-Stop Shop Nation-Wide

Nationwide is a true broker partner.

When it comes time for brokerages and independent agencies to partner with carriers to insure a client, more and more are choosing Nationwide because of its highly diversified portfolio and its expertise in helping to find the right mix of solutions to protect a client’s assets.


Nationwide offers a full breadth of products and services in its highly diversified portfolio.

Its 90-year history demonstrates that Nationwide will be here in the long term.

Reliability and deep industry expertise are two hallmarks of the organization.

Collaboration Transformation

It’s time to embrace the millennial advantage.

A tidal wave is headed our way in the insurance industry—one that will change our business forever and test our resolve as leaders and as companies. As the leader of one such affected company, I welcome this transformation. 

Blockchains, Cryptocurrencies and Smart Contracts—Oh My!

You don’t have to get bogged down in the technologies to understand what they can do for you.

In today’s fast paced, tech-driven world, consumers and organizations constantly keep a finger on the pulse of new technological advancements. For consumers, it may be due to FOMO (fear of missing out), but for organizations around the world and across industries, it’s the fear of being blown out of the water by their competitors. 

Talk Isn’t Cheap

Consistent, strategic communication delivered with purpose can make a good deal great.

The merger and acquisition process is ultimately driven by communication. Who communicates what—and when and how they do that—at every stage of the buy-sell journey could ultimately determine the success of a deal. 

Cyber Oversight

Cyber security now belongs to boards and executives. Read the owners manual.

Cyber attacks finally grabbed the attention of executives and board directors in 2014 when Institutional Shareholder Services recommended seven of the 10 board members at Target not be reelected because they failed to ensure the company’s digital assets were protected against a data breach.

Fair Presentation at Risk

Follow the rules or pay the price.

The U.K.’s Insurance Act of 2015 imposes a new legal framework that affects every business insurance policy placed in the London market (and every London policy renewed or amended) going forward. The act is good news/bad news for policyholders. 

Die Now, Live Later

It’s all in your mind.

Your mother told you to mind your manners. London commuters mind the gap, and sailors mind the rocks. You know you can mind your own business, but did you know you can mind your mind? Your mother told you to mind your manners. London commuters mind the gap, and sailors mind the rocks. You know you can mind your own business, but did you know you can mind your mind? 

Just a Bunch of Nerds with Jets

Don’t get left behind.

There’s been some chatter lately about an interesting insight published in a McKinsey 2015 report. It revealed that in 1990 the top three U.S. automakers had among them $250 billion in revenue and 1.2 million employees.

Kim Buckey on Healthcare Cost Transparency and Consumer Engagement

Where we are and where we still need to go

We want people to shop around for their healthcare, but we don’t necessarily arm them with all the tools to do so.

What’s New at The Broadmoor?

From pickleball to Christmas among the clouds, check out these new offerings from The Broadmoor.

Safety Push

Q&A with Peter Schermerhorn, COO, Triax Technologies

Melbourne, Australia

Take a look down under with Damien Honan, CEO of Honan Insurance Group.

Atlanta Rising Up

With a new stadium, new ballpark and several major sporting events on tap, Atlanta is taking off.

What is the dark net?

Guess Who’s Watching

A new cyber-security center aims to be the clearinghouse for cyber information, training and response.

In the war against cyber attacks, a major complication is the constant evolution in the scheming originality of the attackers. Last year more than 18 million new malware samples were conceived—an average of 200,000 viruses, spyware, worms and other insidious codes each day.


One study found the average annual cost of cyber attacks worldwide was more than $9.5 million per company.

Cyber thieves want different things, from inside information on a new product to personally identifiable information for credit card fraud.

The National Cybersecurity Center grew from the vision of Colorado Governor John Hickenlooper.


Read the Sidebars

What is the dark net?

Recent Government Action

Call It What You Want, It’s Not War…Yet

From: Joel Wood
To: Joel Kopperud
Sent: Wednesday, January 03, 2018 10:50 AM
Subject: Don’t Tell My Wife

So, Joel, what to say? It’s not the year that either of us expected. I always think back to election night. We had 75 or so brokers in town (for a MarshBerry conference), and we were hosting an election watch party in our offices overlooking Pennsylvania Avenue. I love you, but I don’t like being around Democrats on election night, as I feel it’s the one night every couple of years when you need to be with your own people. You started pacing early, after Florida and North Carolina and the early Rust Belt returns. I was very happy that the Senate races were looking really good for Republicans but serene in my knowledge that, when Detroit, Milwaukee and Philadelphia results came in, the race would be called for Hillary. When I left at 11, you had the look of that guy at the bottom of the human pyramid at Abu Ghraib, but I still felt like your party was going to win. Hell, I even laid down a thousand bucks on Hillary on some Vegas website from the back of my Uber on the way home (my wife still doesn’t know that). That all seems eons ago.

From: Joel Kopperud <>
Sent: Wednesday, January 03, 2018 4:48 PM
To: Joel Wood <>
Subject: Still Feeling the Pain
Ugh. Yeah. No offense, but last year sucked. I do my best to not relive that moment. I vividly remember waking up the next morning, turning on my shower, and thinking to myself, “Oh, I still have hot water. That’s good.” LOL. Those following weeks were hard, to say the least. Ever since the “All Dressed Up and Nowhere To Go” party that Blue Dog PAC Chair Kyrsten Sinema hosted for the few Democrats who stayed in town for the inauguration, most of the noise in my circles has been dark. And a lot of us have turned our angst and frustration inward within our own party ranks, looking for new energy and enthusiasm. I go back and forth on the blame, but a status quo approach for Democrats sure doesn’t feel right.

You know there wasn’t a stronger Hillary supporter than me. She lost by 79,000 votes in the states that matter. (138 million were cast. And, BTW, we need to get rid of the Electoral College. She won the popular vote by three million.) If only one of the MANY things didn’t go wrong in the campaign, she would be president—i.e., Russia, Comey letters to Congress days before the election, misogyny…But it should have never been that close to begin with. At the end of the day, it was the candidate and the campaign. Every election is about “the economy, stupid.” It’s always about kitchen table issues. I hope Democrats remember that in 2018. I don’t think Donald Trump and this Congress have done a lot on kitchen table issues for the average American. Yeah, I know, tax reform—that will be a flash in the pan—and the impact it’s gonna have on insurance premiums will negate any tax relief for the average American. Everyone supported tax reform before the election, and congressional Democrats and Republicans were gearing up for a comprehensive package for the Clinton administration to sign. It just would have looked very different from this one…That bill should be good fodder for Democrats, if we can message it right.

That said, our members didn’t do too bad in all of last year’s chaos, considering the threats to employer-sponsored insurance. But there were some questionable deals cut in tax reform on pass-throughs, and if the individual health insurance markets and policies careen off the edge here, we could be in trouble. Ya know, we should have another vote to replace the ACA. Ha ha ha. Just kidding. How about one to finally repeal the Cadillac tax???? Not kidding.

From: Joel Wood
Sent: Thursday, January 04, 2018 6:32 PM
To: Joel Kopperud <>
Subject: Losers and Winners

Wow, you certainly still have a lot of angst going. Sure, let’s give up the Electoral College so that New York and California can pick our presidents? Bad enough that we have a cold civil war on our hands right now…that would be more than cold.

But, there, you got it out of your system, now let’s talk about commercial insurance brokerage and what this presidency/Congress mean. Overshadowing everything, as you note, is the tax reform law. Where you stand depends on where you sit. On the big-picture, unifying issues of our association—preservation of the employer exclusion for group insurance from taxation and continued ability for our member firms to continue to amortize intangible assets—we had good wins, and I feel that we were able to move the dial in the process. Our non-foreign-domiciled C Corporations, too, were big winners, to the extent that many paid high marginal effective tax rates.

For the many firms of our association structured as pass-throughs, Congress did them no favors. The congressional tax writers—a really small, insular, non-transparent group of them working and reworking the entire tax code in the space of only a few weeks—consciously chose to pick winners and losers among the pass-through organizations. They granted significant relief to manufacturing firms and very small businesses, while segregating everyone else into a “services” category that got no relief.

On the one hand, politically, I get it. To give a new low rate to every pass-through would have required finding hundreds of billions of dollars elsewhere in the tax code to save. And politically, their purpose was always to lower the corporate rates, to get repatriation, to advantage American corporations. Part of the political calculus was aimed at manufacturing jobs, and small businesses had to get their slice of relief since major corporations certainly were. But intellectually and substantively, it was wrong to pick winners and losers in this way. This was especially underscored by the carve-out the architects and engineering firms got from the “services” definition by glomming on to the manufacturing sector. I’m sure this is what you’re referring to as “questionable deals” in the tax law. They may not have been dirty deals, but they’re not fair to everyone in the “services” world left in the lurch.

I talked to one of our executives today from a major pass-through-structured firm in the Midwest. The overwhelming majority of his clients are manufacturers, and most of them are pass-throughs. They get relief; he doesn’t. Why should that be? The result is that many firms are now facing the glaring and potentially jarring incentive to convert to corporate status to take advantage of the top corporate rate of 20%. On top of that, the limitations on entertainment expensing and other provisions wind up meaning that many of our member firms receive a net negative benefit from the law. (I’m betting the entertainment expensing is going to create a backlash that GOP leaders didn’t expect and may well regret.)

Said our Midwest exec to me as we completed our call: “I hope there’s a blizzard in Washington and you burn all my tax dollars to keep warm.” I don’t blame him.

Also, private-equity backed firms—an ever-increasing presence in commercial brokerage—got slapped with major new provisions limiting debt financing. The final provisions have a phase-in and aren’t as onerous as some promoted, but they’re still a challenge for those firms.

For me, a lowly House staffer 32 years ago when the last big tax bill was passed, I understand the politics, but I hated the process. After the epic ACA repeal/replace fail, GOP leaders had to pass tax reform. They had to do it, even though public approval for the package was low. The consequences of failure were unimaginable to all of the friends I have in the GOP leadership and rank and file.

I intellectually understand given the polarization of the country and the Congress, an open, bipartisan, extended process like 1986 would not have succeeded. I just think there’s going to be a lot of cleanup needed, and there are going to be a lot of unanticipated distortions in the economy.

From: Joel Kopperud
Sent: Thursday, January 04, 2018 7:14 PM
To: Joel Wood <>
Subject: Warms My Heart!

Thank you, professor. A lot of cleanup, indeed. I was reading an interesting blurb in one of the Hill rags that the real winners in tax reform were lobbyists like us, who would be stuck trying to fix the law for years. #draintheswamp

Hill staff warned me a few weeks ago that there’s going to be a lot of FATCA issues popping up because of this bill, too. Of course there are—and that really concerns me! I was hoping our next big victory would be finally clarifying that p-c premium payments are excluded from FATCA. Sen. Tim Scott, D-S.C., is following our champs in the House (Reps. John Larson, D-Conn., and Jason Smith, R-Mo.) and doing a lot of good work to get this clarification. We’ve been working on this for years, and we’re the closest we’ve ever been. Our challenge has always been the process, not the substance. And the last administration essentially said, “We don’t have enough resources” to fix your issue, considering our niche issue was at the bottom of their FATCA to-do list. We finally have their attention on it. Now, we just have to get it done and hope the barrage of other FATCA issues doesn’t smother us again.

You also forgot to mention the repeal of the individual mandate and the fate of the ACA taxes and employer mandate penalties. We all know the threat that repealing the mandate poses to premiums. It will be interesting to see if 13 million Americans throw up their hands on insurance, as the Joint Committee on Taxation predicts, and how that affects premiums on employer-sponsored coverage. There was also a move at the end of the year to delay enforcement of the mandate penalties. I’m hearing a lot of our members’ clients are getting some really steep penalties for some potentially inaccurate but innocuous reporting. We’ll be supporting congressional efforts to fix this problem.

Of course, our biggest beef here is still with the Cadillac tax. The $87 billion pay-for is still the major holdup, but they almost delayed the tax to 2021, which was a good move—even though 2022 would have been better. The momentum to repeal the health insurance tax is real. We need to get on that bandwagon. It is a demonstrable minority in Congress that support the Cadillac tax. We need to get our champions unified and rallied. It’s not easy for all kinds of reasons, but we’re coming down to the wire again.

The war on drug pricing and against PBMs is heating up again. I’m gonna keep my mouth shut on that right now, but it’s gonna be a battle I’ll be paying close attention to.

BTW, did you see that control of the Virginia General Assembly was determined by a random drawing? You guys won, but wow, what an election down ballot in a purple state. And we swore in a new Democratic Senator from Alabama this year. I think we’re all cautiously optimistic we might actually right this ship in November. I love hearing Sen. Mitch McConnell, R-Ky., make noise about how bipartisan we’re going to be. Warms my heart!

From: Joel Wood
Sent: Friday, January 05, 2018 8:32 AM
To: Joel Kopperud <>
Subject: Not Going to Happen

Somehow I knew you’d pivot from pass-through tax discrimination to the issue of an exurb/rural Virginia House district electing a transgender Democrat over a right-wing Republican incumbent. And sorry you lost that coin-toss, too.

Your political enthusiasm is justified according to history—parties out of power win in off-season elections, and Trump’s popularity wanes. But you’re looking at a map that’s not friendly to Democrats in either the House or the Senate; the Dow crossed 25,000; employment levels soared; and the corporate tax cut along with repatriation could give the economy some sizzle. What do we know?

What I DO know is this—Democrats’ retaking control of the House and Senate isn’t good on the benefits front. Bernie Sanders has been introducing his single-payer bill forever, and nobody paid attention. The day last fall he reintroduced it, ALL of your prospective senatorial Democrats who look in the mirror and see the president of the United States—Warren, Booker, Gillibrand, Harris—were original co-sponsors. I’m no Chicken Little on this, but “Medicare for all” is pretty much the mantra of your party these days, and your left-wing “Indivisible” nuts are increasingly driving your agenda.

So, even if you’re an establishment Republican deeply skeptical of this president and you’re pissed about the tax bill, you’re likely NOT pining for Rep. Nancy Pelosi, D-Calif., and Sen. Chuck Schumer, D-N.Y., driving the agenda (though, admittedly, I do have some good stuff to say parochially about Sen. Schumer; plus, he scares me).

Finally, as to the Cadillac tax, I think brokers are doing the right thing in counseling clients to assume the tax is going to be imposed. Like DACA, Cadillac is an issue where we’ve been taken hostage. Our support is miles and miles long and yet only inches deep. The latest suggestion from House GOP leadership is that Cadillac should be repealed only in exchange for scaling back the employer deduction for group health benefits. Not. Going. To. Happen.

From: Joel Kopperud
Sent: Friday, January 05, 2018 9:32 AM
To: Joel Wood <>
Subject: Not Feeling Great About Our Direction

Your party openly wants to tax benefits, and you’re scaring our members with single-payer alarms? Everyone knows that’s not going to happen. CBO scores the measure at $32 trillion, and every Dem I know that’s on that measure knows it will never happen. It’s messaging to the base. And my message to them is this: our focus should be on the ends, not the means. We ought to be focused on ensuring every American has good coverage. Not on how they got that coverage. That was the mantra going into the ACA, and the past eight years haven’t been nearly as disastrous as we thought. After all these repeal and replace efforts, we might wind up defending a lot of key pieces of the ACA because the employer-sponsored insurance market relies on them.

Sigh. Anyways, yes, you’re right. Taking back either chamber is still an uphill battle for Democrats. But I come back to what I said earlier about kitchen table issues. I think Trump/Bannon/Ryan/McConnell are actually doing a great job for Democrats. The challenge will be keeping candidates from getting distracted by issues that are good for their base but not the middle (Russia). Let The New York Times talk about that. We need to keep talking about healthcare and the economy. Sure, the stock market is doing great and there are jobs all over the place, but the scenario reminds me of an interview from the ’92 election, when one voter complained to a reporter, “Yeah, I know there are a lot of jobs. I’ve got three of them.” This is about economic inequality and a stagnant middle class. Wages. That was a major issue boosting Trump last year, and ironically could boomerang to help Democrats.

Democrats need 24 seats to take back the House and only two in the Senate. I could see it happening. I don’t think there are a lot of Americans feeling great about the direction of our country right now...

From: Joel Wood
Sent: Friday, January 05, 2018 9:45 AM
To: Joel Kopperud <>
Subject: Give Me a Break!

Everybody’s only talking to people who agree with them, and we increasingly live in a world where we both physically and virtually reside with those who agree with us. We agree on that. But the readers of Leaders Edge can hear our crap on a thousand cable channels. Let’s talk about a few things affecting brokers in public policy where accord can be found.

The National Flood Insurance Program, one way or another, is going to get reauthorized. By a vote of more than 400 (400!) in the House, a bill to incent the development of the private flood insurance marketplace was approved (by making regulators accept non-admitted paper). Some indigestion in the Senate on the private flood stuff (coming from both Ds and Rs), but there’s a good chance there.

You’re right that we’re getting close in eliminating the requirement that international p-c placements should be regulated under the Foreign Accounts Tax Compliance Act. But this isn’t horseshoes or hand grenades; close isn’t enough. The Trump administration Treasury Department has been receptive.

And the Trump administration looks prepared to finally advance a slate of directors for the National Association of Registered Agents and Brokers—a clearinghouse for nonresident agent/broker licensure that will be a boon to our members. It had bipartisan support, but the Obama administration couldn’t get a slate of directors together in two years.

You and I know many areas of bipartisan cooperation on insurance regulatory issues, and they’re not the things that get any headlines.

But give me a break on “your party openly wants to tax benefits.” Yes, Paul Ryan does, and I hate that. But when there was a provision to scale back the employer exception in the ACA debate, the overwhelming majority of rank-and-file Republicans revolted on that, and it died. It will continue to be whack-a-mole, but it’s wrong to say there’s consensus on taxing benefits among Republicans, when it’s a fact that single-payer healthcare—whether incrementally (greater threat) or all at once (less a threat)—is becoming the religion of your party.

You’ve been attending too many of those little liberal séances on Capitol Hill. Need to get out more to hear our members.

From: Joel Kopperud
Sent: Friday, January 05, 2018 1:44 PM
To: Joel Wood <>
Subject: Fox and Friends

Ha. I’m out there, and I hear a lot of anxiety over repealing without replacing, imploding health insurance markets that are directly tied to the GOP repeal of risk corridors, cost-sharing reduction (CSR) payments and now the individual mandate. The dismantling of the ACA in this fashion is a major threat to our business. Democrats might be making a lot of noise about healthcare for all, but their mission, if they get the majority back, will be to prop up the markets. You’ll see Medicare and Medicaid buy-in options, sure, but they’re ultimately going to work to preserve Obamacare and incidentally ESI. I actually think that notion of propping up the markets could be another area for potential bipartisan support if we can get leadership off the repeal train—and it looks like they’re getting there, particularly after losing the Alabama Senate seat. The bipartisan provisions pushed for by governors of both parties—led by Kasich and Hickenlooper—is a good path toward centrist solutions, and the will behind the Alexander Murray proposals to reestablish CSR payments and provide flexibility for 1332 waivers is a good start. I’m actually optimistic on this. If not this year, then next.

And you’re right about NARAB movement. This is all positive noise we’re getting from Treasury, but it is wrong to say the Obama administration couldn’t get a slate of directors together. The administration had enough directors together for a quorum and to get the board running, but a handful of nominees, ours included, were held hostage over one Republican senator’s insistence that his former staffer get Senate confirmation to a delicate and circumstantial SEC position. A completely unrelated issue that should have never hindered our nominee. But we are moving forward now, and that’s all that matters. This is an easy area for bipartisan cooperation.

Changing direction quickly while I have you, I wanna vent a little bit about this governance style. Every major piece of legislation written in this Congress has been written by five people (slight exaggeration but a shockingly few bodies around the table), and the doors have been locked. Members of Congress have been asking us what we are hearing about the latest repeal bills—what’s in the latest tax bill, what we are hearing about government funding bills. That’s offensive. The notion that a handful of people can rewrite the nation’s tax code and health laws and force votes on it within a week with limited input from stakeholders—a scenario that actually had legislative language handwritten into the margins of the bill—is absurd and irresponsible. Every headache in our industry and across the country caused by the short-sightedness of the pass-through deal on service industries could have easily been avoided if this massive tax bill went through regular order and we had a fair chance to discuss and amend it—the way our founding fathers intended.

Our leadership can’t even figure out a way to protect American DACA citizens or to fund the Children’s Health Insurance Program. And the leader of this mess in the White House cares more about “Fox and Friends” than any of these policy solutions. Michael Wolff contends he barely reads one-page memos put into the simplest terms. I mean, how can you defend this?

From: Joel Wood
Sent: Wednesday, January 03, 2018 4:04 PM
To: Joel Kopperud <>
Subject: Makes Sense to Me


QSEHRAs are not group health plans—and therefore are not regulated as such or subject to group market reform requirements (with some exceptions for wrongful disclosure of individually identifiable health information).

The Affordable Care Act implementing agencies have now released guidance on QSEHRAs (see FAQS about ACA Implementation (Part 35) Q&A-3 and IRS Notice 2017-67).  Notably, they clarify, QSEHRAs are not subject to the agencies’ prior guidance, which concluded that non-integrated HRAs violate various ACA requirements like the prohibition on annual dollar limits and provision of preventive services without cost-sharing.  Below is a run-down of the primary features of these new arrangements.

What are the benefits of QSEHRAs for eligible employees?

  • Payments from QSEHRAs to reimburse employees’ medical expenses are not included in those employees’ gross income if they have minimum essential coverage (MEC);
  • QSEHRA funds may be used to pay for premiums for other health coverage, along with other expenses related to medical care; and
  • Employees and their family members are still eligible for premium subsidies on an exchange if a QSEHRA does not constitute affordable coverage).

Who can take advantage of QSEHRAs?

Only employers that are not applicable large employers (ALEs) under the employer mandate definition/regulations (i.e., those with fewer than 50 full-time or full-time equivalent employees) and do not offer a group health plan to any of their employees may offer QSEHRAs. In this context, group health plans include traditional HRAs, health flexible spending arrangements (FSAs), and plans that provide only excepted benefits (e.g., vision or dental).  Generally, the guidance cautions, “if an employer endorses a particular policy, form, or issuer of individual health insurance, the coverage may constitute a group health plan.”  This would not, however, extend to providing information to employees about the exchanges or availability of the premium tax credit. 

Eligible employees generally include any employee of the employer, but the arrangement may exclude individuals who have not been with the employer for 90 days, seasonal or part-time workers, workers under the age of 25, and nonresident aliens.

What’s the fine print?

QSEHRAs must have the following features:

  • Be funded solely by an eligible employer with no salary reduction contributions;
  • After an employee provides proof of MEC, provide for payment or reimbursement of qualified medical expenses (defined as expenses for “medical care” as described in 26 U.S.C. 213(d)) for the employee or the employee’s family members up to $4,950 per year for single coverage or $10,000 for family coverage, indexed for inflation after 2016; and
  • Be provided on the same terms to all eligible employees.

Notably, if an arrangement fails to be a QSEHRA because one or more requirements are not satisfied, the arrangement becomes a group health plan and is subject to requirements and penalties associated with such plans.

As discussed in detail in IRS Notice 2017-67, there are several disqualifying acts/events of which employers should be aware under the QSEHRA rules, particularly with respect to maintaining “eligible employer” status and satisfying the basic parameters defining QSEHRAs.  Under the same terms requirement, for instance, the maximum payment/reimbursement amount under the arrangement may vary from employee to employee based only on the age or the number of covered individuals.  Moreover, the QSEHRA must be operated on a “uniform and consistent basis” and eligible employees may not be offered a choice between permitted benefit options (e.g., between a premium reimbursement option versus a reimbursement for non-premium medical expenses option).

There also are hefty administrative requirements associated with these arrangements. For instance, because the tax advantage of these arrangements hinges on an employee having MEC, employers may not provide QSEHRA reimbursements to employees who have not provided annual proof of MEC for all individuals taking advantage of the QSEHRA. Such proof may be in the form of third-party documentation or attestation by the employee. Following initial/annual proof of coverage, with each new request for reimbursement during the same plan year, at a minimum, the employee must attest that she or he still has MEC.  In addition, to ensure that all reimbursements are for “medical expenses,” all claims for payment from the QSEHRA must be substantiated (using the rules for FSAs).

The rules also entail employer reporting requirements. For example, employers who provide QSEHRAs are required to provide written notice to all eligible employees at least 90 days before the beginning of each year (or when an employee becomes eligible).  Failure to provide proper notice may result in a penalty of $50 per employee.  Also, an employee’s W-2 must reflect the amount an eligible employee is entitled to receive from the QSEHRA in the calendar year.

Back in 1959, that was the kind of tag line that would sell a movie. Alias Jesse James looked like a western, with sagebrush, guns, a swinging saloon door and a gold-hearted buxom gal. But it was, in fact, an insurance movie.

Hope, who produced the movie, plays an underperforming life insurance salesman, Milford Farnsworth. (Why don’t movie insurance salesmen have names like Biff or Spike?) Desperate, he sells a $100,000 policy to a guy in a bar. When the customer turns out to be the high-risk notorious gunslinger Jesse James, the president of Plymouth Rock Insurance sends Farnsworth west to buy back the policy or at least try to keep James from getting killed.

The plot thickens. James has been planning to fake his death so that he and the beneficiary, his girlfriend Cora Lee (Rhonda Fleming, whose real-life father sold insurance), can split the take. James makes a few attempts to kill Farnsworth while also bullying Cora Lee. Playing the bumbling hero as he so often did, Hope as Farnsworth seized his courage, a bunch of guns and some zippy one-liners and ran off with the girl. He later rose to be president of Plymouth Rock Insurance. (Not to be confused with the Massachusetts personal lines insurer.)

Already a tad complicated, the movie ends in a massive gunfight with surprise gun-slinging helpers: Roy Rogers and Trigger, Fess Parker as Davy Crockett, Jay Silverheels as Tonto, Gail Davis as Annie Oakley, Hugh O’Brian as Wyatt Earp, James Arness as Marshal Matt Dillon, Gary Cooper as Will Kane from High Noon, Ward Bond as Major Seth Adams from the “Wagon Train” television series in his last screen appearance, and finally Bing Crosby as, well, Bing Crosby playing a cowboy.

Hope had the clout to gather these stars for Alias Jesse James, but after the movie’s release, myriad lawyers descended to argue about issues with the rights. Today, some prints don’t include these cameos, but you can still see the star-studded climax on YouTube. And even in that little clip, Bob Hope’s TRIGGER and Rhonda Fleming’s FIGGER are in full form.

Each month, we sit down with a group of artists and designers to brainstorm. We’ve all read the stories we’re covering, and we’ve all brought our perspectives to the table. The conversation that ensues is an ebb and flow of ideas and visuals and opinion and tangents…and opinions and tangents….and opinions and tangents. Sometimes we end up right where we started. Other times we end up so far from our original vision that it would be nearly impossible to navigate our way back.

This month, we asked the team to look backward a bit, to remember how we began 2017 and think about where we’ve been since and where we want to go. We started with uncertainty, and a lot of uncertainty remains.

There have been challenges in between. But as an industry we are in an ever-emerging position to lead change and drive innovation. We recognize both the barriers and opportunities before us, and we will move forward.

It’s never easy to choose a cover. And while we settled on our concept at our art meeting, bringing this one to life took a very hands-on approach. Art director Madeline Darrell spent hours laser cutting letters—only to have us change the wording again and again—hand-cutting flowers and positioning each leaf and berry just so. She experimented with salt, sugar—even creamer—to find the perfect snow. It isn’t always this way—sometimes an existing image is perfect as is. But it isn’t always this much fun either.

Texting and talking on mobile phones while driving has been blamed for a rise in accidents, but smart phones are also set to play a key role in the next generation of telematics tools that enable insurers to price risk based on actual driving behavior rather than other factors. It turns out smart phones can tell insurers a lot more than current plug-in telematics devices.

To study how distracted driving and other behaviors can lead to auto collisions, consulting and actuarial firm Milliman teamed with driving analytics startup Zendrive to study more than 30 billion miles of driver data derived from smart phones to verify the behaviors that were strong indicators of collision frequency. The firm used the study data to create a driving risk score that it claims is up to six times more powerful than leading predictive models.

Smart phone apps provide some advantages over the plug-in devices that carriers offering usage-based auto insurance rely on. Those devices monitor things such as how fast the car is moving and cornering and how quickly it slows when the driver brakes. Mobile apps, however, provide data about a specific driver’s behavior rather than what the vehicle was doing.

“You can determine who the driver is,” says Sheri Scott, principal and consulting actuary at Milliman. “They will tell you if your phone isn’t in a hands-free mode and is being operated in a way that it probably shouldn’t be while you are driving.”

Mobile apps also make it easier and cheaper for insurers to get drivers involved in a telematics-driven usage-based insurance plan compared with plug-in devices.

“Plug-in telematics hardware is a huge barrier for entry for an insurance company,” Scott says. “If you have an app on your phone, it’s much more cost effective and instantaneous.”

Lowering that barrier to entry creates an opportunity for Arity, the telematics technology company founded by Allstate. Arity recently announced a deal to provide a mobile telematics app and services to National General Insurance.

“There definitely is a cost benefit from going to mobile,” says Arity chief data scientist Grady Irey. On top of that, mobile phones are ubiquitous today. “The opportunity to engage the end user in the experience of this telematics data is far larger with a mobile platform.”

Under the deal, Arity will help National General collect driver data using its mobile app as well as provide analytics capabilities for underwriting and pricing risk.

The deal marks Arity’s first with an insurer outside of Allstate, but the startup has been working with Allstate’s Esurance and Answer Financial. Arity has also launched a driver analytics product aimed at ride-share and shared mobility companies that uses predictive models to assess risk, driver behavior and other factors.

Going forward, telematics apps may help make driving safer, despite the distractions that smart phones can cause.

“There’s almost certainly a bit of self-selection in these [telematics] programs, but what we see is a clear sign that those who enter the programs do behave differently,” Irey says. “Some of this is being made aware of the relative risk of what your normal behavior represents.”

Compared to a lot of startups, you have a pretty long history. Tell us about Snapsheet.
We actually started in 2010 as a business-to-consumer company called Bodyshop Bids, and it was just trying to help consumers who got in car accidents to get bids from body shops. We built an app and a payment platform, allowed people to submit photos, and built a network of body shops. That’s where we started. Then we migrated in 2012 into the insurance space.

We realized that most of the cars getting repaired were going through auto insurance rather than paying out of pocket, so we started meeting with carriers and listening to the problems they had. We realized that our technology fit perfectly hand in hand with that. We proposed to a couple chief claims officers implanting a solution with us, and they jumped all over it. Back in 2012, the evolution of smart phones and smart phone adoption were still very early on. We’re much more advanced in smart phones today than we were back then.

We came in with a solution, and it really started gaining traction fast. And I caveat “fast” compared with other markets. That’s why we can still be considered a tech startup that is seven years old, because it takes an inordinate amount of time for technology to permeate through the insurance market.

How does the app work, and how does it benefit consumers and insurers?

We provide a full virtual solution for auto insurance carriers. Most auto insurance carriers run a combined ratio at or well above 100, which means, for every dollar they make, they lose more than a dollar, which seems a little crazy. The prices of repairing vehicles are going up. We provide insurance carriers with a technology platform that helps them reduce expenses today, increase customer satisfaction, and also sets them up for innovation in the future.

We pretty much plug straight into carriers’ existing processes. We allow the insurance carriers to assign us work to get estimates. We propose to the customer through our contact center to either use a self-service branded application for that carrier to take its own photos of the vehicle or a crowd-sourced photo inspection network, or we’ll work directly with any body shop. Our technology enables us to capture photos through different ways, but primarily it’s through the branded self-service app. The customers never really know that we exist.

Everything is white-labeled for that carrier, from the call scripting to the design of the application. We capture photos from that customer, and then the bulk of our Snapsheet employees write auto repair estimates. We have a bunch of checks and balances and technology to make sure that estimate is accurate and then provide the estimate back to the customer, back to the insurance carrier and then back to a shop. Then, we negotiate all the repairs with the shop if the car does end up getting repaired. We provide virtual touchless claims. The customer falls within the carrier’s brand, and the carrier doesn’t have to worry about anything. They let us and our technology take over the claim.

Why is the claims space for personal lines such as auto ready for change?
What has happened is that customers evolved a little bit faster than the insurance carriers’ claims departments. In the past, when the markets were hot, claims weren’t an issue, so insurance carriers didn’t invest a ton of infrastructure in that. They invested most of their money on capturing premiums and policy and underwriting and marketing. Claims were left to flounder a little bit.

By the time the carriers realized they had underinvested in claims, it became kind of a scramble. The customers were demanding virtual channels. The carrier infrastructure and processes simply couldn’t handle it. Insurance carriers were finally forced to come to the realization that the customer interacts with them during a claim and sometimes that’s the only time they interact with them for a long time. You have to do everything you can to make that experience good, because even if you control your expenses in that claim but you churn that customer out, you have to pay to get a new customer. You can see what the carriers are interested in—things like chatbots, visual recognition, anything that helps streamline the process and the cost of their operations while increasing customer satisfaction.

Where do you see the technology going?
From a claims perspective, we’re seeing a lot of interesting technology emerge out there. There has been telematics and the smart phone. There are a lot more sensors in the vehicles now and a lot more connected-car type functionality. People are trying to figure out how all of those pieces are going to work together. It’s a difficult task to tie everything together—and not everything has to be tied together.

What matters is to help optimize certain functions. From a technology perspective and claims, you’re going to see more adoption of virtual like we do. Probably less than 2% of the auto claims market is adjusted that way. The whole industry has to reset itself onto this new virtual infrastructure, and that’s going to take years to do in insurance. For years, carriers will be catching up to those kinds of platforms.

I don’t see a world where the insurance carriers—as much as they’re trying—tie all the pieces together. I think it’s much better for third parties to put everything together. Then, it can be distributed to everyone in the industry. It’s all going to come down to the application inside the carrier workflows.

How many claims are you handling now? Do you have a growth target?
This year, we’ll do between 400,000 and 450,000 claims, which is a pretty big number, and that probably puts us well in the top 15 in claims. If we were an insurance carrier, we’d be the No. 15 claims department. It’s a pretty big number. We’re trying to double each year for the next few years. We’ve been doing that successfully. We want to be processing millions of claims in the next few years. We’re marching toward that by locking in new customers and continually growing share within existing clients.

Will Snapsheet move beyond auto into other claims?
Right now, we’re focused primarily on auto. The penetration of virtual is still very low. There is a lot of growth to go. Auto is unique. There are different years, makes and models, but it’s still the same box with four wheels that you’re taking photos of. So you can control the customer experience. Things like home become a little bit more difficult, because not every home is the same. It makes this self-service model a little more difficult. I think for the foreseeable future we’re really focused on helping this auto market realize its potential and transform, and then we’ll be in a better position to look around once we have this one locked down.

What’s to love
What I love about “Indy,” as locals refer to the city, is its Midwestern values and diverse cultures. It is clean, friendly and family focused. Even though it is a midsize city, it offers big-city activity and opportunity (we are ranked fifth in fastest high-tech job growth areas in the U.S.). You can get anywhere in under 30 minutes.

Dining scene
There are fine and fun dining choices all over the city. We are a restaurant test-kitchen city for national chains and home to numerous locally owned farm-to-table restaurants.

Favorite new restaurant
Luciana’s Mexican Restaurant and Cantina. Like our company, it’s family owned and operated. The food is wonderful, and the family involvement is refreshing. The restaurant is named after their 3-year-old daughter.

Classic eats
St. Elmo Steak House, which opened in 1902, is well known for its “World Famous Shrimp Cocktail.” The James Beard Foundation honored St. Elmo in 2012 with an America’s Classic Award.

Our office is located in the Keystone Crossing complex. Complete with office buildings, hotels, a fashion mall and restaurants galore, there are any number of places to take a client for cocktails, and we try them all. However, for a view of Indy Downtown, we go to The Eagle’s Nest restaurant, which slowly rotates in a circle to give you a full panoramic view of the city.

The Indianapolis Marriott North at Keystone Crossing is a great place for people who want to stay near restaurants and shops. Downtown, I recommend the JW Marriott Indianapolis and the Conrad Indianapolis hotel.

Things to do
There is so much happening in Indy. The Children’s Museum of Indianapolis is the largest in the world. The Indianapolis Zoo is the largest privately funded zoo in the United States. We are known as the “Amateur Sports Capital of the World” and are the home of the NCAA. Of course, the Indy 500, the world’s largest sporting event, is not to be missed.

You can do it all in Indy. We have parks, trails, sporting events, bike rentals, golf courses galore, and sidewalks everywhere you look!

Hoosier hospitality
If you plan to visit Indy and have a question, we’ll do our best to answer or point you in the right direction.

Only three miles from Key West, but far from the maddening crowd on Duval Street, Stock Island is emerging as a new destination for people who want to stay and play by the gorgeous turquoise waters. The island of shrimpers and fishermen, where roosters roam free, is much like the sleepy town Key West was 50 years ago. But that’s changing. In 2014, developer Matthew Strunk opened Stock Island Marina, the largest deepwater marina in the Florida Keys. With 220 slips and state-of-the-art floating docks, it has been a port of call for billionaire Ronald Perelman’s yacht.

Like David Wolkowsky, the visionary who opened the Pier House hotel in Key West in 1968, Strunk and hotelier/developer Brad Weiser recently opened Stock Island’s oasis of chicness, The Perry Hotel. The hotel is transforming the former industrial boatyard into a community of restaurants (De Luna’s Cuban food truck will deliver Cubanos and café con leches to the hotel), bars, art studios and watersports, with a distillery in the works.

“From the moment we were introduced to the property and Stock Island, we asked ourselves what we could do to embrace the history of this place and its people,” Weiser says. “There is so much on Stock Island, from art to industry.” The use of wood and rustic metal in the construction of The Perry Hotel is a nod to the surrounding wharf buildings, giving an edgy maritime feel to the modern design. An art installation by local sculptor Daniel Siefert hangs over the expansive lobby. Fresh seafood, fished out of the sea in the hotel’s backyard, is featured in its restaurants.

Days at The Perry Hotel alternate between lazing in one of the cabanas, chaises or hammocks that line the pool and on-the-sea adventures like snorkeling, diving and sailing. Sue Cooper, founder of Lazy Dog Adventures, one of the watersports companies that have relocated their operations to the dock facing the pool, has been offering kayak eco-tours through the mangroves since 1989. Unlike the cattle boat tours you find in Key West, Lazy Dog limits the number of people on its excursions, minimizing the impact on the environment and offering a more pristine experience (you spot more fish when there aren’t dozens of snorkelers splashing around). Launching from the Stock Island Marina also reduces the time it takes to reach the reef and dive sites or to get under sail or start paddling.

The owners of The Perry are working with other new developments to catapult Stock Island forward, so it’s only a matter of time before the island is transformed. For now, though, it is an off-the-grid escape in the Florida Keys, where you can enjoy the sea—whether you’re playing in it or savoring its bounty—in style.

More than half the losses caused by this year’s unprecedented string of natural catastrophes are uninsured. In many cases, taxpayers and international aid will pick up part of the tab. To decrease this burden, many governments have become much more proactive, taking steps to ensure at least some loss funding is in place before catastrophes occur, whether through state-backed insurance plans, government insurance buying or other structures that aim to ease the costs of relief and reconstruction.

The dynamics of Florida’s homeowners insurance market have changed significantly over the 25 years since Hurricane Andrew battered Miami-Dade County. National insurers and many international reinsurers drew back their coverage. Citizens was created under state legislation in 2002 to provide competitively priced cover for consumers who were seeing insurance prices shoot upward, and the Florida Hurricane Catastrophe Fund (FHCF), another state-backed body, was launched to provide reinsurance to all carriers with homeowners wind exposure.

Citizens has released an initial estimate of Irma losses of $1.23 billion from 70,000 claims but has “ample resources to pay claims,” according to a company statement. If its estimate is correct, Citizens will retain a surplus of $6.4 billion after collecting $193 million in reinsurance from the FHCF. However, had Irma held to its original course, the story would be much different.

Some of Citizens’ losses are ceded. It is required to purchase reinsurance for 100-year events. Its disclosures show it has various reinsurance protections in the private market, alongside Everglades Re, a capital-markets catastrophe bond. Together they protect Citizens’ various risk portfolios with more than $3.6 billion of cover, but currently only the FHCF reinsurance is expected to be drawn down. A cautious approach and a lack of major events for many years has allowed Citizens to accumulate very healthy reserves.

Florida’s hurricane reinsurance facility covers 159 Florida insurers for hurricane wind losses, although it does not reinsure storm surge. Buying FHCF reinsurance for a fixed share of Florida homeowners premium income is mandatory for insurers with exposures there, although the level and structure of the cover purchased is flexible. Under statute, it pays claims when industry losses from a Florida hurricane exceed $7 billion and will pay up to $17 billion in total. After more than a decade without major hurricane claims in the state, the FHCF has $14.9 billion in cash and $2.7 billion in catastrophe bond cover.

It also has private-market reinsurance of $1 billion, which kicks in after claims against the fund exceed $11.5 billion. This is provided by leading reinsurers, including Bermuda’s Renaissance Re with $375 million, Swiss Re with $175 million, and numerous others with much smaller lines. For the program to be hit, total hurricane losses from Irma will have to reach $18.5 billion. Modelers put Irma losses in the United States as high as $35 billion, so FHCF’s reinsurers may be called upon.

Another government-backed insurance facility to take a beating—or, in this case, a drowning—is the National Flood Insurance Program, run by the Federal Emergency Management Agency. It is technically insolvent after the losses it incurred when Harvey poured four feet of rainwater into the homes and businesses of Texas. The final count is not yet in, but NFIP faces claims in the region of $11 billion from Harvey alone, which has so far pounded the program with more than 88,000 claims. Irma sent NFIP another 25,000-plus claims. With $24.6 billion in debts to the Treasury and only $1.5 billion in the bank, the organization—which has received widespread criticism for undercharging for its coverage—must seek Congressional permission to borrow even more from the federal government. Washington is already considering a new, private-market approach to flood insurance, but initial efforts have been blocked by Congress. No one doubts, however, that U.S. flood insurance needs a serious rethink.

NFIP is not entirely reliant on government largesse. It has some open-market reinsurance, a proportional layer of $1.024 billion, which attaches after its first $4 billion in claims and pays 26% up to $8 billion. The reinsurance is placed with 25 global reinsurers and looks set to be entirely exhausted (modeler RMS put the burn rate at 75% to 100%). However, that risk sharing will still leave the federal program with a $10 billion tab. And that’s just from Harvey.

For more on NFIP, see “Under Water: Government Thwarts Private Participation in Flood Insurance” in the October issue of Leader’s Edge.

Another quite different facility will ease some of the most drastic costs faced by hard-pressed governments. The Caribbean Catastrophe Risk Insurance Facility (now called CCRIF SPC) is a sovereign disaster risk financing vehicle (or “cat pool”) supported by 16 Caribbean and Central American states. The world’s first multi-country risk pool, it covers earthquakes, hurricanes and excess rainfall. Several of its member countries have been hit hard by the hurricanes. So far it has announced payments to six countries, including $13.6 million to Turks & Caicos, $6.8 million to Antigua & Barbuda, $6.5 million to Anguilla, $2.3 million to St. Kitts & Nevis, and $19.3 million to Dominica.
More payments are almost certain to follow. The indemnities can be announced very quickly because policies issued by CCRIF pay out when a parametric threshold is triggered, such as wind speed of a land-falling storm, so actual damage need not be measured. The cash CCRIF provides is intended to provide governments swift liquidity rather than cover all the losses.

Across the Atlantic, state-owned French catastrophe reinsurer Caisse Centrale de Réassurance (CCR) has said Irma, which pounded the French Caribbean islands of Saint Martin and Saint Barthélemy, will cost an estimated $1.4 billion. Homeowners, auto, commercial property and business interruption will be covered under the French catastrophe reinsurance facility. CCR says the loss is one of the most expensive natural catastrophe events for France in 35 years.


As I prepared to take on my new role, my father offered some sage advice: “Always be the dumbest person in the room,” he said. In other words, hire the best people and go from there. From that day forward, it’s been a proven formula for me and a hallmark of my leadership style.

I believe leadership is fairly simple: Look at things differently. Question everything. Embrace challenges. Hold yourself accountable. Have humility and integrity. Be generous. Take risks. Hire smart. Above all, be trustworthy. You simply cannot lead others if you don’t have their trust.

In my career, I’ve learned from a few successes, but I’ve learned a lot more from failures. We are fortunate to work in an industry where failure is viewed as a certain type of success, as it’s often a catalyst to new and innovative things. I’m sure you’re all familiar with the saying, “If at first you don't succeed, try, try again.” Embrace that sentiment. Learning from mistakes is very motivating. Once you find a weakness, you can attack it and turn it into a strength. That’s what the smartest among us do.

In the pages that follow, you’ll read about industry giants who came before us (see “Game Changers” on page 50), and industry hopefuls of the next generation (see “Building the Future” on page 52). As you peruse them, think about how we, as leaders, can use the examples and experiences of our past to better cultivate the best and the brightest waiting at our doorsteps. Rather than leaving these students wondering if they’re on the right career path, let’s work to make sure they make the most of this insurance brokerage track we’re leading them to find. With more than two million insurance industry jobs in the U.S. alone, and with a healthy number of individuals preparing for retirement, what are we doing—or what could we be doing—to bring them along in a more engaging and encouraging manner? It’s a great challenge and one I know we all have a sense of urgency around.

A recent New York Times article explored how CEOs lead their employees, highlighting differences (and some similarities) in management, human behavior and trust. It got me thinking all sorts of things. Namely, that there are all kinds of leaders in this world who can move you to be better—even bad ones!  But at the same time, the article brought me back to Dad’s advice—be true to who you are and hire smart. I finished the article and felt good knowing I surround myself with a team that learns from experience, sees things before they happen and moves us in the right direction day after day.

As we head into 2018 and beyond, I encourage all of you to “bring it” and work to make a lasting impact. Whether you’re 34 or 54, it’s the kind of life advice that translates in any generation.

In fact, Hurricanes Harvey, Irma and Maria are the first truly major storms to test the global risk transfer market in a dozen years.

For a global market that has been cutting prices for a decade, with competition so fierce that rates overall have been cut to (or even into) the bone, the catastrophes of the third quarter are seen by insurers as both good and bad. According to A.M. Best, some international risk carriers were not covering their cost of capital even before the storms lashed their P&L accounts. That means the 2017 Atlantic hurricane season will erode the industry’s enormous capital base. However, it may also drive a longed-for rise in market pricing, potentially reversing its fortunes.

The trio of hurricanes spread their damage widely and generously across the major lines of insurance business. Homeowners, auto and small commercial risks were obviously hit hard. Flood-proof retailers will claim business interruption losses if the area they serve was evacuated of customers. Travel insurers may indemnify throngs of Florida vacationers who never made it to the beaches of the Sunshine State. Yacht and energy insurers will be buffeted. Those with multiline exposures in the Caribbean, Texas and Florida—especially multistate carriers, E&S insurers and international reinsurers—have been stung particularly badly.

Harvey is manageable. Wayward Irma caused most to sigh with relief. And Maria remains a frightening unknown quantity, although it appears less severe than some early estimates. Together, though, the storms have dealt a painful blow to almost every international player.

The loss lighteth rather easily upon many, than heavily upon few.

From England’s 1603 Insurance Act

Florida is one of the windy threesome’s badly battered victims, but it could have been worse. With a slightly different track, Irma would have wiped out Miami and created a projected $131 billion loss, according to a Lloyd’s “realistic disaster scenario.” A.M. Best put insured value in the state at a massive $2.2 trillion. Florida-based insurers cover about three quarters of the exposure. State subsidiaries of national carriers carry $250 billion, and $111 billion is on the books of state-run Citizens Property Insurance. Above them, sharing the risk of catastrophic losses, are a variety of conventional and alternative capital reinsurers. Irma’s impact is big for many of them though well below worst-case scenarios, but Irma did not act alone. Add two more land-falling hurricanes, a pair of devastating Mexican earthquakes and October’s voracious inferno in California, and the sting of events begins to look much more serious.

Analysts at investment bank Morgan Stanley described the third quarter of 2017 as potentially the worst insured natural catastrophe experience on record for the period. If catastrophe modelers’ top-end estimates—which reach $35 billion for Harvey, $50 billion for Irma, $85 billion for Maria, up to $5 million for the earthquakes and $8 billion for the fires—translate to actual indemnities, the total will indeed be record-breaking.

It would come perilously close to the magical $200 billion threshold market pundits have been saying would be required to drive prices rocketing upward and create a new “hard market.” At $150 billion, the global reinsurance sector’s entire premium income for the year would be wiped out.

Already signs of rising prices have emerged, although with claims still being filed and damages being assessed, it is too soon to gauge the final impact. It seems impossible, however, that any broker will manage to negotiate what has come to be the expected annual discount at the next renewal for any major risk, and it’s likely that their customers will face at least a modest increase.

Round She Goes

The 2017 Atlantic hurricane season will erode the industry’s enormous capital base but might also drive a longed-for rise in market pricing.

Individual companies’ losses are difficult to nail down with certainty, even internally. Giant Munich Re revealed it expects to miss its 2017 profit target of $2.3 billion to $2.8 billion after taking a $3.1 billion hit from the storms, although it did not specify likely losses from specific catastrophes. It may collect some indemnity through its “Eden” sidecar facilities, which provide proportional retrocession (reinsurance for reinsurers), and its “Queen Street Re” cat bond, which has parametric triggers and covers some United States hurricanes. Both are funded by capital markets investors rather than Munich Re shareholders.

One big hit will come from Maria-mashed Puerto Rico, where Munich Re has a 13.7% market share, according to analysis from Keefe, Bruyette & Woods. It has by far the largest market exposure to the island of any single carrier—HDI is next with 7%—and is almost certain to deliver Munich Re a multibillion-dollar gross loss, even if actual Puerto Rican losses fall at the lowest end of modelers’ forecasts.

Swiss Re, the world’s second-largest reinsurer, predicts an even more eye-watering $3.4 billion net loss. Other major international reinsurers will also be bludgeoned. Warren Buffett’s reinsurance giant Berkshire Hathaway (which owns a strategic slice of Swiss Re) had not revealed a number at press time but at least will see a massive hit from QBE, the Australian international insurance group. QBE will reportedly burn through a $900 million aggregate reinsurance program provided by Berkshire Hathaway, which suggests QBE faces gross claims in excess of $2 billion, including from non-hurricane catastrophes.

Even before the storms, ratings agency S&P had placed Berkshire’s AA+ insurance rating on negative outlook, which affects subsidiaries including National Indemnity, General Re and Geico.

The reinsurance market is awash with excess capital after years of only minor catastrophe experiences and a veritable flood of investment into the business through alternative routes like catastrophe bonds and collateralized reinsurance by pension funds and others, but at least some of that excess has now been blown or washed out.

Fitch Ratings has warned that the industry’s total catastrophe losses in 2017 could reach nearly $190 billion.

Analysts at J.P. Morgan have reportedly calculated that the majority of reinsurers will see their full-year profits fall by at least 80% as a result of the storms. Ratings agency Fitch said the losses will erode some insurers’ and reinsurers’ capital base, which seems a certainty. Morgan Stanley said the losses are likely to halt reinsurers’ share buy-backs, although Munich Re said it will continue purchasing its own shares at least until the end of the year.

Lloyd’s—a market, not a company—said its carriers may face net claims, after reinsurance, of $3.9 billion for Harvey and Irma, down from an earlier forecast of $4.5 billion. It has made a preliminary forecast for Maria of $900 million. Keefe, Bruyette & Woods says the market in aggregate has an 8% market share in devastated Puerto Rico.

Much of Lloyd’s overseas business is underwritten through “delegated authority,” a system that allows local and regional underwriters to issue Lloyd’s policies according to relatively strict standards. Other exposures are through Lloyd’s per-risk, or “facultative,” reinsurance, a wholesale product whereby an insurer purchases cover for large losses to an individual risk.

Most of Lloyd’s exposures will be further reinsured in some way by international markets, and it is beginning to become clear which Lloyd’s players will bear the brunt of that pain. Much of Lloyd’s primary insurance loss in the U.S. will arise from its excess and surplus lines underwriting. The market is dominated by Lloyd’s and AIG, which together held more than 31% of this profitable, multifaceted market in 2016, yielding combined direct written premiums of more than $13 billion, according to A.M. Best. Together, Lloyd’s and AIG may face claims of up to $7 billion. Market sources say E&S prices for catastrophe-exposed risks are already starting to rise by as much as 30%.


Alternative Routes

Some forms of reinsurance, particularly instruments known as industry loss warranties (ILWs) and some catastrophe bonds, pay out to their policyholders (typically reinsurance companies themselves) when the industry’s total insured loss from a specific event or series of events exceeds a specified threshold. That makes the magnitude of the sector’s losses particularly important. It takes many months and sometimes years for the final cost of a catastrophe to be settled and calculated. Fitch Ratings has warned that the industry’s total catastrophe losses in 2017 could reach nearly $190 billion, though most put the total somewhat lower. Either way, it will be painful.

Losses at the “upper end,” Fitch said, “would be the highest on record in a single year.” The agency said those losses “could weaken capital at some (re)insurers and increase the risk of rating downgrades,” adding that “global reinsurers are likely the most exposed to these events.”

Catastrophe bonds, tradeable risk instruments funded primarily by pension and hedge funds, have seen volatility after the storms, and some will be triggered to pay their reinsureds. A.M. Best has estimated about $12.5 billion of catastrophe bonds are exposed to Florida windstorm losses, but Irma’s impact will be much less than that because these and other ILS instruments tend to cover only the highest layers of risk. ILS blog Artemis (with great caution, after Irma but before Maria) estimated the cat bond loss at $1 billion, but later estimates put the loss somewhat higher.

One sort of bond that is likely to be drawn down is the kind that responds to aggregate industry losses from named storms. Some bonds—such as XL Catlin’s Galileo Re 2015 issue—will pay out based on the industry’s combined loss from Harvey, Irma and Maria. XL Catlin’s drawdown will be up to $300 million. Meanwhile Fonden, Mexico’s state catastrophe insurer, expects to collect all of $150 million under a catastrophe bond issued through the International Bank for Reconstruction and Development and sold to private investors.


Most of the capital behind ILWs and cat bonds is considered “alternative.” It is provided by investors directly rather than through equity holdings in traditional reinsurers and is deposited up front in a special-purpose vehicle rather than simply promised, which almost entirely eliminates credit risk.

Most of the investors are pension funds. The volume of reinsurance capital invested in this way has skyrocketed in the past decade. It rose from $19 billion in 2008 to $89 billion at the end of June this year, according to Aon Benfield, or 15% of total global reinsurance capital. The reinsurance brokerage had noted a “renewed surge in alternative capital” just prior to the storms.

The way the providers of such capital react to losses—which has caused much navel-gazing in the traditional reinsurance market and has been a scapegoat for the perilously low level of catastrophe reinsurance pricing—will have an important bearing on the future of market pricing. Some believe the “once burned, twice shy” principle will apply, but others are less convinced. Should prices rise after alternative investors experience losses they always knew were possible, the reinsurance market may become even more attractive to them, causing the surge to swell. Since institutional investors tend to have lower return requirements for reinsurance capital than traditional reinsurers, they have a price-dampening effect. The medium-term impact remains unclear, although the first cat bond to be placed since the storms—a new “reloading” issue of XL Catlin’s Galileo Re issue—was priced above prevailing market rates for similar, earlier bonds.


What is now clear to all is that recent catastrophes will change the market. The long price decline is expected to halt and reverse, perhaps dramatically, for catastrophe-exposed U.S. risks and reinsurance business.

The events have also made clear that risk sharing works. The worst quarter on record for insured natural catastrophes has fallen lightly on the many and spared the few.

Leonard heads the foreign desk.


Jim Maguire has lived what he has preached. He embodies the American ethic of hard work, perseverance and giving back to the community.

Maguire was born during the Great Depression into a large family. His father’s job with Met Life kept the family moving from city to city, which also meant new schools for the young Maguire. He struggled with his studies, and it wasn’t until much later that he was diagnosed with dyslexia. The untimely death of his father almost put Maguire on the wrong path, but his strong mother intervened.

Maguire attended Niagara University on a baseball scholarship but soon fell behind academically because of his learning disability. He left school and was drafted into the Korean War. After the war, he enrolled in St. Joseph’s Universityy on the GI Bill. It was there that he met Reverend Hunter Guthrie, noted early pioneer in the study of dyslexia. After working with Guthrie, Maguire graduated from St. Joseph’s with a 3.0 GPA.

Following in his father’s footsteps, Maguire started his career with Met Life. He soon realized he was not cut out for a desk job as a collection agent. While at St. Joseph’s, he volunteered with the deaf (his father had been partially deaf) and became close to the community, so he asked Met Life to let him sell standard insurance to his friends. He was an overnight success as a salesman. Less than two years after the start of his career, he opened Maguire Insurance Agency, where he offered specialized insurance to the auto industry. Chevrolet was the agency’s first national client. That deal led to WHEELWAYS, an innovative and comprehensive program for auto dealers. The agency quickly expanded operations to 15 offices across the country.

In 1980, Maguire formed a holding company, which today includes several subsidiaries—the Maguire agency, surplus lines insurer Philadelphia Insurance Company, and Philadelphia Indemnity. Maguire Insurance Agency went public in 1993, and 15 years later it merged with the Tokio Marine Group. At $5 billion, it was one of the largest deals for financial firms in Japanese history.

Dedicated to helping others, in 2000 Maguire and his wife Frances created the Maguire Foundation, a nonprofit committed to improving the quality of life for people through investments in education, arts and humanities, and hunger and homelessness prevention.

“We saw an opportunity to create a continuum of education by educating kids in grade school to high school and into college,” Maguire says. “We wanted them to progress into a leadership role in society.”

Some of the programs include support for the Pennsylvania School for the Deaf, a mentoring program for underprivileged intercity high school students, a soup kitchen and a summer camp for children from low-income families.

Maguire has been honored for his work in the industry and his commitment to the community. He holds two honorary law degrees and an honorary degree in letters from St. Joseph’s University. Maguire received the Horatio Alger Medal for Philanthropy and the Shield of Loyola, St. Joseph’s highest honor. This year, he and his wife donated $50 million to St. Joseph’s, the largest gift in the school’s 166-year history.

Among his many achievements, Maguire authored the popular biography Just Show Up Every Day, about the history of Philadelphia Insurance Cos. and his struggles with dyslexia.

He and Frances have been married 55 years. They have nine children and 21 grandchildren.

The insurance industry lost an icon this year. Robert J. Newhouse Jr., former president and vice chairman of Marsh & McLennan, died August 26 after a brief illness.

“Bob was a transformative leader in our company’s history, an iconic executive in our industry and a true gentleman,” says Dan Glaser, current president and CEO of Marsh.

Newhouse’s achievements and business acumen were legendary. But he is perhaps best known for his remarkable foresight, which led to the creation of the Bermuda reinsurance market, which today is indispensible to the global insurance world. In 2003, the Bermuda Insurance Institute named Newhouse the “father of the Bermuda reinsurance market” and presented him with a Lifetime Achievement Award for his invaluable contributions.

Newhouse attended Princeton University but left to serve in World War II as a lieutenant JG in the U.S. Navy. After the war, he began his long and influential career at his father’s insurance agency, Newhouse & Sayne (N&S), which opened in the 1920s. This was the start of an insurance dynasty that continued through four generations of Newhouse leadership.

After eight years learning the ropes at N&S, Newhouse struck out in 1954 to mark his future in the industry, joining Guy Carpenter, and soon rose to chief operating officer.

“He had an idea a minute, more than any guy I knew,” Richard Blum, then chairman of Axis Specialty US Holdings, recalled in a 2004 interview. While at Guy Carpenter, Newhouse first dipped his toe in the Bermuda market, helping to create Intercontinental Re—an early Bermuda reinsurer—with $23 million in capital. Newhouse’s astuteness was noticed by Marsh & McLennan brass, and he was recruited to work with Jack Regan, who was stepping in as chairman and CEO.

Newhouse served as Marsh & McLennan president from 1976 to 1988 and then as vice chairman and a member of the office of the chairman until he retired. Under Newhouse’s leadership, Marsh & McLennan greatly expanded its international reach, fueled by the acquisition of C.T. Bowring & Co., a Lloyd’s of London brokerage. Then, at the height of the liability crisis in the 1980s, Newhouse recognized another golden opportunity, and the company invested millions to create Bermuda-based excess liability facilities Ace Insurance and Excel (now XL Group).

Brian O’Hara, former chairman and CEO of XL, of which Newhouse was a founder, once said, “Bob is one of the smoothest, most able negotiators…I’ve ever met. He would always make you feel like you got the best of him when you knew it was the opposite.”

Newhouse also was instrumental in building Bermuda multiline insurers Axis, Mid Ocean and Alterra, along with others. He served on several boards and as a consultant with Stone Point Capital (a Marsh spin-off) and Alterra Holdings.

Newhouse married his childhood sweetheart, Patricia (Patti) Gilbertson, in 1945. They had three sons, six grandchildren and seven great-grandchildren. All three sons have worked in the industry over the years. Robert Newhouse III was chairman and CEO of Marsh Americas. Stephen Newhouse served as a director of Alterra Holding Co., and Brit Newhouse is currently chairman of Guy Carpenter. Along with several grandchildren, they are keeping the family legacy alive.

Newhouse and Patti generously contributed to a number of charitable organizations, including St. John’s University in New York, New York, Presbyterian Hospital and the Nantucket Cottage Hospital Foundation.

Robert (Bob) J. Newhouse Jr.

James (Jim) J. Maguire

This year, recipients include 60 seniors and 15 juniors. Of the winners, 33 are women and 42 are men. Their majors range from accounting to selling to sales management, with some psychology and economics mixed in. Each receives a $5,000 grant.

The Foundation’s Scholarship Program works directly with Council member firms’ internship programs and is designed to expose college students from across the nation to the commercial insurance brokerage sector in hopes they will join the industry after graduation. Of the 50 students who received scholarships in the program’s pilot year in 2016, 68% were hired or repeated an internship with a Council firm.

“It is very gratifying to partner with our member firms in this way and to see the scholarship program’s early signs of success,” says Ken Crerar, president and CEO of The Council. “The program is, without a doubt, drawing more talented young folks to the entrepreneurial spirit of the brokerage business.”

Students must be formally nominated by the respective brokerages at which they interned, which also must be participating in the scholarship program. Awardees are then determined by an independent committee.

Meet our 2017 award winners!

You grew up in North Dakota. What’s a stereotype about North Dakota that does not stick?
A stereotype that does not stick? Most of them do stick. (Laughs.) When I lived in Alaska, people asked me about the biggest difference between Alaska and North Dakota. I told them that in Alaska the snow falls vertically.

What was it like growing up in North Dakota?
North Dakotans are honest, ethical people with a fantastic work ethic. It was a great place to grow up. We had access to all things outdoors. It was a different world back then. You carried your shotgun on the way to high school in case you saw a pheasant.

What did your parents do?
My father was a college professor and conductor of the Bismarck Symphony. He moved from Dickinson State College to the University of Mary. That’s why we moved to Bismarck, and that’s where I went to school. My mother was a medical secretary, for many years working in the business office of a church.

What did you hunt for?
It was deer and antelope and birds—pheasants and grouse and duck. I continued that in Alaska—primarily moose and caribou.

What brought you to Alaska?
My first trip to Alaska was on a fishing trip between my junior and senior year of college. My then-girlfriend—now my wife—and I moved to Alaska the week after I graduated college. We were 20 and 21 years old, and Alaska sounded like adventure and opportunity.

What’s something that people like me, who have never been to Alaska, would be surprised to learn about it?
You cannot see Russia from your house.

You mean Sarah Palin (that is, Tina Fey) lied to us?
Oh, I’m not going to go there. How do you like Seattle? The summers are absolutely fabulous. The winters, despite four feet of rain, are also a plus. After living where it’s cold for 50 years, it’s nice not to have to shovel snow.

How did you get into the insurance business?
When my wife and I moved to Alaska in 1985, I went to work for a large engineering company. Four years later, the price of oil plummeted, and the cyclical economy in Alaska followed. I went to work for a carrier as an auditor and then a workers comp underwriter. I soon realized the brokerage side of the business was much more entrepreneurial.

What’s kept you in the business for so long?
The appeal for me is in the opportunity to define what my career looks like every day.

Had you always wanted to be CEO?

What about this time? How come you said yes?
One of the things I find most satisfying in the latter parts of my career is not just the personal success but the ability to recruit, develop and mentor. It’s about ensuring that our organization continues to provide the same opportunities to the next generation of leaders that it afforded to me.

Tell me a little about your business.
We’re a roughly $55 million firm, with nearly two thirds of our business coming out of our four largest practice groups: construction, real estate, healthcare and food—all industries that have very specific and technically demanding risk-management issues. We always say we don’t do easy very well.

Ever think about what you would have done if you hadn’t gone into insurance?
Once I moved from the carrier side to the brokerage side, I never looked back. Most people who know me think I will become a fishing guide when I retire from insurance.

What is the best advice you ever got?
Efficiently allocate your time and energy to effectively work on the business, not just in the business.

What’s the most interesting thing in your office?
I would say the boxes of things that I’ve yet to unpack after moving from Anchorage. My home office is a little different.

What’s there?
The few animals that I’m allowed to have in our house—a springbok and two oryx from Namibia. The oryx is a member of the antelope family found in Africa.

If you could change one thing about the insurance industry, what would it be?
Insurance suffers from a reputation as a stagnant industry, and there is a lack of awareness among millennials of the opportunities that truly exist. Few jobs provide the personal and financial rewards, meaningful work and quality of life as the brokerage industry.

What gives you your leader’s edge?
Having been a producer, having been on the service side of the industry, my leader’s edge is understanding that we exist because of our clients. Everything we do as an organization is filtered through the lens of: how does this deliver value to our clients?



The Eckroth File

Age: 54

Family: Wife, Nancy (married 31 years); son, Bryce, 26 (project manager for an Alaskan construction company); daughter, Emily, 22 (recent graduate of Western Washington University)

Favorite vacation spot: The Big Island of Hawaii

Favorite TV series: “Band of Brothers”

Favorite author: Vince Flynn

Wheels: BMW 435 and Ford F-150

But computers aren’t infallible, and smart technologies can’t eliminate liability or injury.

Risk has evolved along with business, becoming more fast-moving and high stakes. To take full advantage of technology, businesses must incorporate it thoughtfully or else operations can be interrupted, affecting a company’s finances, business relationships and reputation.

Companies are quickly evolving their strategies to adapt to new competitors and changing consumer expectations. Two strategies that are increasingly being adopted across a variety of industries are the provision of sharing-economy services and the use of wearables. Both of these employ technology to expand or enhance business operations. But in the drive to compete, stay relevant and remain profitable, new risks embedded in these strategies might not be immediately apparent.

The Risks of Sharing

Sharing-economy services are no longer a novelty—they’ve become the norm for meeting consumer and business needs alike. In fact, according to PricewaterhouseCoopers, these services are projected to drive $335 billion in revenue by 2025. For traditional businesses, whether they want to deliver goods from one location to another or engage with vetted professional freelancers, these services introduce new ways to innovate and offer better, faster and more cost-effective service.

But they can inadvertently open the door to new risks. As an example, some retailers are partnering with sharing-economy service providers to make same-day deliveries to customers. While this strategy may help a retailer better meet customer expectations, it can come at a price. Unlike traditional shipping company models, the sharing-economy model relies on freelancers, not full-time employees, to provide services. Keeping service quality and the overall experience consistent can be challenging. If someone is hurt or property is damaged during the delivery, the retailer’s brand may be on the line.

To mitigate risk, the retailer should understand how the service provider screens, trains and assesses the quality of drivers. In addition, does the provider check the safety of vehicles and ensure safeguards are in place to address driver fatigue? It’s also important to ask what steps the service provider will take if it finds a driver is not following safe driving practices. Finally, are there any geographic or regulatory limitations that could impact service? For example, some states are considering putting caps on the length of time ride-sharing drivers can be on the road. As with any other third-party relationship, a contract should detail each party’s responsibilities and include indemnification agreements, insurance requirements and risk transfer language so liability is placed appropriately.

By having conversations with the sharing-economy provider up front, a company can proactively identify potential service and coverage gaps as well as solutions to address them.

Communication Key to Wearables

By 2018, two million employees in the United States will be required to wear health and fitness tracking devices as a condition of employment, according to Gartner, a research and advisory firm. While first responders like firefighters, police officers and paramedics make up the bulk of the estimated number, the construction, warehouse and manufacturing sectors are also increasingly exploring wearables. From monitoring an employee’s physical location, level of fatigue, or body movements while handling materials to alerting them to dangerous situations, wearable technology can help create safer, more efficient ways to work.

However, there are still challenges that could affect a business’s overall financial health. A key driver of success is employees’ willingness to use the technology in the way intended. Engaging employees in discussions about the reasons and desired outcomes for using the technology can help create buy-in and drive consistent and correct use. In addition, employees doing the work are often best equipped to identify the largest risks and opportunities to improve safety and productivity. By asking employees questions, a business may find that a particular wearable technology is a better fit for the operation than others.

It’s also important that wearables don’t detract from current processes and safety practices, for example by creating distractions or overdependence among workers. A review of current employee communications and training could be beneficial to reinforce not just the new technology but also the continued importance of overall safety. Without addressing these areas, a company could find a drop in productivity, more employee injuries and increased costs.

Both of these technologies show promise, but understanding the potential direct and indirect exposures—and how to best manage and mitigate them—is critical to actually gaining business value.

Stay on Top of Changing Risk

New technologies and shared assets are empowering businesses to operate in new and different ways. But even with these opportunities, a company can’t lose focus of the bigger picture and the importance of protecting itself, its employees and its customers. As insurance professionals, we can help our clients understand how new technologies could affect their operations and proactively engage them in discussions to minimize the potential downsides as they move forward, but it is a moving target. We can expect these new ways of doing business to ultimately impact legislation, regulation and liability assessments at the state and federal level. We have a long way to go before we know how this will affect jury awards and valuation, so being continuously informed is crucial to staying on top of potential adverse trends.

David Perez is executive VP and chief underwriting officer at Liberty Mutual Insurance’s National Insurance Specialty operation.

Sponsored content from Liberty Mutual, a Council Partner in Excellence

Shortly after my internship started, I found myself lying on the ground of a nursing home, role-playing as a patient who had fallen and couldn’t get up. Although it was a strange experience, I was on the front line of loss control and helping to educate a client on preventing workers comp claims. Prior to my internship, I thought loss control was strictly a service offered by carriers, but I quickly learned that brokers can bring a lot of value to their clients other than just placing their insurance.

I learned that, while brokers are responsible for obtaining the best coverage possible for their clients, they are also responsible for helping clients manage their risk. Oftentimes, this means sitting down with the executives of a company and having a discussion that leads them to improve their risk management practices.

I was fortunate enough to sit in on some of these meetings and observe this process firsthand. Being there with producers as they discussed proposals and renewals was the best part of my internship experience. These conversations were not about products but instead about the client’s business—how things were going, if there were any major changes that needed to be considered. Often these discussions would help clients realize what possible exposure they were facing and how they could mitigate their risk, especially if their exposure had changed. One major exposure I saw repeatedly during my internship was cyber risk, and many companies didn’t think it was an exposure they had to worry about. These conversations often led to an examination of their cyber risk management practices and purchase of a cyber policy.

Prior to my internship in JKJ’s commercial property-casualty department, I was unsure of which segment of the insurance industry I wanted to be in. But as the summer went on, my experiences helped me come to the conclusion that working for an insurance brokerage is where I need to begin my career. I was able to shadow professionals in claims, loss control, account management and sales. No matter where I was, everything we did was always about helping the client, and that is what solidified my choice to be on the brokerage side of the business.

I am from Damascus, Syria. I am the first generation here; my father came in 1982 and bought a small business on borrowed money. My family is a true testament to immigrants’ being able to live the American dream. We currently own a restaurant called Pita Chip Mediterranean Grill (stop in when you are in Philly next!), and I am one of the managers there. I do everything from payroll to scheduling. I work there 30 hours per week during the school year, which is a testament to the work ethic and time management skills my father instilled in me.

Growing up with a small business in the family has forced me to be client-focused and client-facing. I learned early on that, without happy clients, our small business would not be able to survive. And for this reason, I find working on the front lines, solving problems for clients, to be gratifying and meaningful work. But I didn’t make a connection with insurance until my junior year at Temple University, prior to which I had no desire to be a part of the industry. The top-notch risk management and insurance program at Temple showed me the potential for growth and success in the industry and presented me with many networking, professional development and job opportunities that few other schools would have been able to do.

At Temple I learned about the opportunities for success in this industry. And this summer, at JKJ, I learned how the role of the broker is a truly special position. Your success directly correlates with how hard you work for your clients. That is extremely appealing to me. During my internship, I saw insurance brokerage professionals take pride in what they do every day. Every interaction with the clients was about making their insurance experience better and enabling them to grow and succeed while having the protection they need.

With all of this in mind, I have accepted a position at Marsh as a TRAC associate. The TRAC Program offers structured and experiential learning in client management, client advisory and placement. Through this training, I will be able to improve my technical skills, risk management and client service.

The president of JKJ, Bruce White, taught me a major lesson this summer. He said, “Successful producers will always put their clients and the relationships they build first. Find out what you can do for others, not what they can do for you. Work hard and provide the best service you possibly can, and the rewards (commissions/compensation) will follow.”

Kabbani, a senior at Temple University’s Fox School of Business, was a Council Foundation scholarship award winner this year.

It is still too early to tell whether the tax plan President Trump and fellow Republicans are crafting will have a positive, negative or neutral impact on sellers. To date, there has been no mention of a change in capital gains tax rates, which typically apply to the majority of a seller’s proceeds.

We are fairly certain we are about to break new ground. The announced deal count is well on its way to surpassing the 2015 high of 456. We expect the number of deals will be closer to 475, depending on whether certain sellers close now or wait until 2018.

What is surprising is both deal activity and valuations are continuing to rage. The transactions within the industry continue to be dominated by private-equity backed brokerages, which make up nearly half of announced deal activity. Interestingly, Pitchbook says deal volume within the broader private equity marketplace is down 11% through the third quarter 2017. There also appears to be a trend of private equity exits slowing. It’s becoming clear that insurance distribution does not follow typical private equity trends.

We have had five PE exits so far this year, with USI, OneDigital Health and Benefits, NFP, Alliant, and EPIC all swapping out private equity partners in 2017.

Meanwhile, valuations slowly continue to rise. New buyers have entered the pool and appear to be helping drive EBITDA (earnings before interest, tax, depreciation and amortization) multiples up slightly. While specific details have not been compiled yet, we believe the average transaction is experiencing higher valuations than last year. The increase is not dramatic, but it’s significant because the market truly believed it had hit a high watermark on agency valuation.

As we enter the home stretch, a few trends continue to materialize. There continues to be a high level of desire in the industry as exhibited by the five private equity sponsor changes in 2017. Smart money is still chasing the industry and trying to capitalize on the recurring-revenue model that supports the strong financial returns within insurance distribution. As new entrants work to establish themselves as viable options for sellers entering the market, industry demand is helping propel valuations to a level slightly higher than 2016.

The tax code and rising interest rates could have an impact on future deal activity, but for now, we should all take a step back to appreciate the amazing value being created within the industry. How long will the rage continue? Your guess is as good as mine.

October Deals

Deal activity in October 2017 was relatively stable, with 35 announcements compared to 34 in September. Year to date through October, the count is up 9% from last year, at 402 compared to 368 in the same period in 2016. This is the earliest in the year since 2005, when MarshBerry started tracking deals, that we eclipsed the 400 mark.

Hub International announced eight acquisitions, the most of any buyer in any month this year. These pushed Hub into the most active buyer position this year with 35. Acrisure is second with 30 deals. BroadStreet Partners has 25, and Gallagher has 22. These buyers represent 112 of the 402 announcements so far this year.

Late in October, Edgewood Partners Insurance Center (EPIC) entered into a definitive agreement to acquire Frenkel Benefits, expected to close this year. Frenkel was ranked as the 48th largest U.S. insurance brokerage in 2016, with revenues exceeding $75 million. Frenkel was established in 1878. EPIC is 10 years old and transitioned ownership to private equity sponsor Oak Hill Capital Partners in July from The Carlyle Group. In 2017, EPIC was ranked as the 17th largest U.S.-based brokerage.

Trem is SVP at MarshBerry.

Securities offered through MarshBerry Capital, member FINRA and SIPC. Send M&A announcements to M&

Trying to start this column on appointments, that’s all that kept popping into my head. Appointments? Not risk mitigation or structuring insurance solutions for the risks that cannot be mitigated, but appointments? You go out there and you give it your all for your clients, but before you can get from here to there, you have to have an appointment in place? How silly is that? From where we sit in 2017, I would argue, very.

Nine states—Alaska, Arizona, Colorado, Illinois, Indiana, Maryland, Missouri, Oregon and Rhode Island—effectively have agreed. They have eliminated mandated appointment filing requirements (along with the associated fees).

Alaska, Colorado, Maryland, Missouri and Oregon require admitted insurers to maintain an internal list of contractually appointed producers that must be made available to regulators upon request. New Jersey has eliminated individual appointments and now requires appointments only at the firm level.

The rest of the states generally require both individual agents as well as their firms to be “appointed” by every insurer for which they sell policies in that state prior to an agent’s sale of any of their policies. Without an appointment, the agent cannot lawfully transact insurance in that state for that insurer.

The Backstory

On Dec. 7, 1807, the Insurance Company of North America, based in Philadelphia, appointed Thomas McCall to serve as its agent in Lexington, Kentucky. Prior to that time, insurers generally sold policies directly to their customers. In seeking to extend its territory beyond where the company itself was located, the Insurance Company of North America is widely credited with initiating the American agency system.

After the Civil War, many states began enacting statutes to regulate the business of insurance and to license agents and domestic insurers for the first time. They generally allowed “foreign” insurers—those not physically present in the state—to sell insurance in their state through appointed agents. The purpose of the appointment was to require a carrier representative to be present in the state to accept legal service of summonses and complaints to ensure policyholders had an effective right of action to pursue claims payments.

Now we come to the present. Two fundamental things have changed in the intervening 150+ years. First, out-of-state carriers selling on an admitted basis are licensed and required to submit to each state’s summons/complaint service-of-process protocols. (Only admitted carriers are subject to appointment requirements.) Second, states now license agencies in addition to individual producers, and carriers’ primary contractual relationships are at the firm level, not at the individual producer level. But in most states, carriers are still required to make the appointments and generally do so at both the firm and the producer level.

The Current Process

Although it sounds like a simple requirement, the appointment process and attendant requirements vary from state to state in terms of timing restrictions (e.g., pre-solicitation or concurrent submission), cost and content. In addition to the initial appointments, states require appointment renewals (on schedules that vary with each state) and the filing of termination notifications. Appointments are usually made on an operating company basis. Thus, large holding companies with multiple subsidiaries must process the appointments for each operating company for which an agent is authorized to act.

In response to a recent survey, Council firms reported having an average of 33,758 appointments per firm for an average of 1,020 carriers, with some firms maintaining hundreds of thousands of separate appointments for as many as 8,000 separately licensed carriers. The average Council member firm employs five staff members dedicated to ensuring appointments are in place. Some firms report having as many as 22 workers dedicated to that task.

The majority of respondents also reported the lack of an appointment has caused delays and failures in the placement of coverage for clients.

The irony here, of course, is the regulatory and appointment fee obligations are actually on the carriers, not the producers, and our compliance costs likely pale in comparison to theirs. In addition, many carriers have begun to take the position (erroneously in my view) that the individual agent appointments necessitate the performance of criminal background checks to ensure federal compliance. To the extent there is any such obligation, it should be on the employing agency and not on the appointing carrier.

Some producers are appointed by 20 carriers or more, and the idea that they may be subject to several dozen separate criminal background checks seems wholly inappropriate.

So where do we go from here? For all of these reasons, The Council’s board recently voted to initiate an effort to eliminate or rationalize the byzantine appointment requirements. The original carrier service-of-process rationale for creating appointment requirements has been superseded. Agents now are employed by agencies with which the carriers contract.

Continued maintenance of these requirements—which have lost their regulatory purpose (and no longer apply to the right parties in any event)—would be just silly, wouldn’t it?

Sinder is The Council’s chief legal officer and Steptoe & Johnson partner.
Fielding is CIAB general counsel.
Gold is a Steptoe & Johnson associate.

Many firms are missing the gold mine in their backyard. Local colleges stocked with budding talent are some of the best places to find awesome, entry-level candidates. And an internship is the most successful tool for recruiting college students. It’s no accident the 75 scholarship winners you’ll read about in this month’s feature “Building on the Future Today” all came from internship programs at insurance brokerages.

But finding a strong source for talent is only the beginning. How you approach promising candidates is critical to engaging them in an industry that often fails to reveal its true depth. To have a real shot at hiring the best, insurance brokerages have to be dedicated to keeping it real and creative in the recruitment process and beyond.

The status quo is no longer enough, because the status quo is not good. And the kicker is insurance brokerages are oftentimes competing against blue-chip employer brands in their community and/or the financial services arena. That means brokerages have to take their game way up. They need to create experiences that engage candidates in an inherently personal way and meet them where they are.

Leading with “The Why”

Gamma Iota Sigma is on 67 college campuses. It serves as the industry’s premier collegiate pipeline of students already interested in pursuing a career in insurance. Contrary to popular belief, students do not have to be majoring in risk management and insurance (RMI) or actuarial science to join Gamma. Actually, the fastest-growing student segment of Gamma is non-RMI and non-actuarial-science majors. This shows business school students are recognizing the different paths available in insurance and the growing diversification of roles needed inside insurance organizations.

Attending the Gamma conference were 19 of The Council Foundation’s scholarship winners. After speaking with many of them, along with others among the 75 winners, I found a common theme. They all said working at an insurance brokerage is surprisingly dynamic because the business focuses on problem solving for clients’ corporate risk, understanding risk transfer mechanisms, insurance products and much more they never expected. They felt the work used a great balance of creativity and technical skills and loved that it makes a difference in the local community. But you’d never know it going in. 

Arguably the most powerful void right now in insurance talent recruitment is created by employers not leading with the “the why.” That means speaking to the purpose of the work while at the same time showcasing the dynamic evolution of data, analytics and technology that is shaking the insurance industry up from the inside and out. This is such a missed opportunity. Experiences are the foundation, not just for the future growth of your company’s client base but for your existing and prospective employees as well.

Young people today are all about the gig economy—they focus on being in the moment, getting the most out of that gig. So employers have to provide killer experiences in a moment to hook them. A friend of mine works for a company that uses virtual reality goggles during recruitment events to immerse candidates in the day-to-day feel of working at the company. He said recruits were drooling on themselves over it. I get tactics like that aren’t realistic for everyone, but the message is employees want to “experience” the action and be part of an industry where there is a lot of it. The insurance industry is cool and edgy once you are in it, but as we all know, it is not cool and edgy when you are not in it.

The Gamma Student Recruiting Survey recently polled 710 students on how they view insurance industry recruiting. One student offered up this simple suggestion: “Give AWESOME presentations when you visit campus. Insurance is a business that literally saves the economy from collapsing. Many presentations from insurance company representatives I sit through are dull; speakers are not engaging. So send the right people to speak on your behalf, number one. And, two, talk about the innovation that is going to take place (i.e., smart contracts, data analytics, artificial intelligence, user experience, evolving and new risks like cyber, dramatic shifts in how risk is measured and evaluated, new tools).” Listening to 20-year-olds is key.

In addition to re-imagining the focus of the recruiting pitch, firms should pay attention to the experience interns have once onsite. There is no point in trying to build a strong employment brand on the back of a weak candidate experience, as it will never be truly effective.

One common theme cited in the survey as a top cause of bad candidate experience was frustration caused by the lack of communication and transparency during the recruitment process. When we think of recruitment, we instantly think about the process from the employer’s perspective, not the candidate’s. Employers have so much on their plate, they frequently leave job seekers wading through unclear application instructions, minimal job descriptions, and missing communications, including confirmation and rejection notices.

Unsurprisingly, students’ top request for improving the candidate experience is more communication throughout the interview process with an emphasis on knowing the timeline of the hiring process and notification if passed over.

Working with these students over the past few months has been both an enlightening and humbling experience. The future of the industry is out there. We just need to engage them by leading with the “why” right out of the gate.

Cheryl Matochik, SVP of Strategic Resources & Initiatives, administers The Council Foundation Intern Scholarship Program.

Most of us want to be happy, but happiness can be elusive, especially during this time of year, when it’s practically demanded. Often, this time of year means extra work and tight or rush deadlines. It can be difficult to find any cheer in juggling end-of-year budget work, renewals, client needs and strategic planning with family time, holiday parties and gift shopping. It can take the “Ho, Ho, Ho” out of the best of us!

So I did a little rooting to find out if there is a way to be happier this time of the year, both at work and in life in general. Let’s begin by debunking some popular myths about happiness.

Myth No. 1—Happiness is an end goal. We think of being happy as an end, not a means. But this is putting the cart before the horse. In a Harvard Business Review article, “Happiness Isn’t the Absence of Negative Feelings,” Jennifer Moss, founder of Plasticity Labs (which bills itself as a group of workplace culture and happiness experts), writes, “What’s really important is the journey; finding out what makes us the happiest and regularly engaging in those activities to help us lead a more fulfilling life.”

Myth No. 2—Happiness is about being cheerful, joyous and content all the time, always having a smile on your face. Not so, says Vanessa Buote, a postdoctoral fellow at the University of Western Ontario, whom Moss quotes in her article. Buote believes being happy is taking the good with the bad and learning how to reframe the bad. Moss builds on this idea, saying, “Happiness is not the absence of suffering; it’s the ability to rebound from it.”

Myth No. 3—You don’t have to be happy at work to succeed. Annie McKee, fellow at the University of Pennsylvania, calls this idea a lot of bunk in her Harvard Business Review article “Being Happy at Work Matters.” Research shows happy people are better workers, are more engaged, and work harder and smarter. Neurological science shows that strong negative emotions can cause us to shut down and can impede our ability to make sound decisions.

Myth No. 4—Our genetics and environment determine our ability to be happy. Not so, says Shawn Anchor, Harvard lecturer and author, in “Positive Intelligence.” He has found that “one’s general sense of well-being is surprisingly malleable.” Anchor believes our habits, interactions with co-workers and thoughts about stress can all be managed to increase happiness and our chances for success.

So let’s take a look at some tips on how to be happy, this time of the year and beyond!

In “5 Tips for Staying Happy During the Holidays,” journalist Kevin Daum writes that it’s important to bring order to the chaos. Make a list of everything that you are trying to do before the end of the month, then set priorities. Now check off the things you really can eliminate. Keep checking off until your list becomes reasonable. His logic is that it’s better to do fewer tasks well than to fail at a massive number of them. He cautions you must communicate and manage the expectations of the people involved. His other tips include having no regrets, maintaining your strength, stopping the stress and indulging yourself.

Anchor says it’s important to train your brain to be positive. He likens this to training any other muscle in your body. It’s about rewiring your brain. His ideas to help you increase your happiness include:

> Develop New Habits—Choose one of these five activities and do it every day for three weeks to create a lasting impact:

  • Jot down three things you are grateful for.
  • Write a positive message to someone in your social support network.
  • Meditate at your desk for two minutes.
  • Exercise for 10 minutes.
  • Take two minutes to describe in a journal the most meaningful experience of the past 24 hours.

> Help Your Co-workers—Anchor has found providing social support is an even greater predictor of sustained happiness than receiving it.

> Change Your Relationship with Stress—Your attitude toward stress can change how it affects you. Stress is part of everyone’s life and work. When you feel overwhelmed, make a list of the stresses that you are under. Now divide the list in two—things you can control and things you can’t. Choose one thing that you can control and come up with one small action you can take to reduce it. Doing this will nudge your brain back to a productive and positive mindset.

Does all of this have you wondering how happy are you at work? McKee has a little quiz on the Harvard Business Review site.  It can help you identify what you need to work on to be happier at work during this season of joy and beyond. If you need help with the link, just send me an email! It will make me very happy to help you and to know that someone has read this column!

Wishing you joy in this holiday season.

McDaid is The Council’s SVP of Leadership & Management Resources.

Per capita national health expenditures in 2015.

$3.2 trillion
Total national health expenditures in 2015.

Total national health expenditures as a percent of GDP in 2015.

The amount of growth in covered workers’ average out-of-pocket costs from 2005 to 2015.

The growth in wages from 2005 to 2015.

Sources: Centers for Disease Control and Prevention, Kaiser Family Foundation

Can you start by digging into the healthcare cost issue a little from the consumer side?

The basic problem with the consumer’s relationship with the bill is the bill is a fabrication that bears really no tie back to reality. Hospitals bill for things they can count, so you get a ridiculous equivalent of the $750 toilet seat. It’s basically a failure, in my view, of the whole way in which the industry accounts for cost and confuses cost and prices.

So things that are really expensive are, for example, a day in an ICU where you’ve got seven full-time equivalents per patient. It’s hard to charge what it really costs for that in a way that is defensible. So they end up creating these bills. …The lab test that nominally the marginal cost would be $80 is $800. It becomes a revenue-capturing vehicle that isn’t really tied to the true underlying cost of delivering the service. So that’s frustration number one.

Frustration number two is, you don’t know it in advance. And unfortunately, where the consumer is on the hook, particularly in the outpatient environment and particularly in the initial stages of deductibility, it comes as a complete shock, right? Nobody tells you in advance you’re going to write a check for $1,500.

So on the one hand, the industry does a poor job of actually measuring what things cost and attaching prices to the real thing. And then there’s a communications failure, which is basically that you don’t know in advance and you end up getting these enormous surprises at just the wrong time. It’s like a perfect storm of indignation.

Is there a lack of ability to measure among providers? Or is it more that they know what things cost but, as you alluded to, they can’t reasonably charge you what the real cost is to provide your intensive care service so they have to make up for it somewhere else?

I think that’s an accurate way of reflecting it. I call it the financial hydraulics of healthcare. If you do cardiovascular surgery in Oklahoma on an uninsured person and you sic a collections agency on him, you’ll get seven cents back on the dollar. Medicaid pays about 70 cents of the cost of care on average for inpatients across the country. Medicare pays about 90 to 95% of the cost.

So, basically, what all hospital systems do is charge private insurers at least 120%, sometimes 300%, of Medicare to make up for the difference. That’s the cost-shifting piece. Then you apply it…to a procedure, which as I explained at the beginning, is not accurately cost accounted, and it multiplies the error in some sense. And the consumer is left going, “Seriously? That can’t be right. How can an aspirin be that much?” There’s a certain lunacy to it.

But all they’re trying to do is get the revenue they need to cover the services they provide with some margin. And they back into charges out of that goal.

You mentioned there’s a range that happens here, on the private side. What are your thoughts on this model of creating a cap of Medicare cost plus a certain percentage, which would potentially create more transparency and insight and not that surprise cost for the consumer on the end?

I’m working with some colleagues at Leavitt Partners and Stanford CERC [to find] providers who actually can survive on Medicare-level reimbursement or at least have higher quality than average and below-average cost…Many of them aspire to learn to live on Medicare level of reimbursement because they can feel the winds of change and the pressure that the game of cost shifting may not be sustainable.

So they’re tightening their belts and seeing their margins erode, quite frankly. The first 2017 numbers are all horrible for most hospital systems I’ve seen the numbers for. And that’s part of this broader squeeze. You know, expenses are rising, people are being paid more. You’ve got to subsidize the docs. The technology is expensive. The drugs keep going up, and the people up the food chain are trying to dampen costs. So I think there’s real interest conceptually in trying to live in a field of level reimbursement.

But getting from here to there is a tough one to pull off because most hospitals in America are 15 to 20% away, minimum, from making money on Medicare and are reliant on that cost shift to stay afloat. So it is very threatening.

My work with Leavitt and Stanford is still in progress, but from our initial pass, I would say the hospitals [that met our cost/quality criteria]—and there were not many of them—tended to be ones that were passionate about cost management and had a long history of doing that. And they were in markets where they didn’t have the luxury of much cost shifting, whether because the population wasn’t growing or they just had a disproportionate share of their revenue coming from Medicare and Medicaid and not a lot of commercial.

And it’s appealing. The only downside I see on these rate settings things—well, there’s a lot downsides. How do you administer it? Suppose you had been a hospital that was doing all the hard work to reduce costs and all of a sudden somebody came in with an arbitrary price that was tied just to Medicare.…I always worry about the unevenness of the application with an arbitrary across-the-board scheme in that you create winners and losers and it may not be, quote-unquote, “fair.”

I think this is going to be floated as a policy proposal, especially because the more moderate Democrats are recognizing that only a third of Americans would go for single payer, but you could probably build a broader coalition for what they’re calling Medicare-X, which is allowing Medicare buy-ins and the use of Medicare fee schedules in a public option that is available to more Americans and to more employers.

Do you think this would pose a slippery slope to single payer?

I think that’s the fear that the more conservative thinkers would have. Because, let’s be honest, if you get access to Medicare prices, how could you lose as a plan, right? On average in America, commercials are paying 150% of Medicare to hospitals. In some states, like Wisconsin, it’s 200 to 300%. So if I can walk in and start a health plan with Medicare prices, I theoretically should be able to clean up. And I should have a bunch of employers knocking down my door because basically I’ve created an ability to do something the private sector can’t do currently, which is get enough clout to get the price down.

You have a presentation slide that says employers are most concerned with hospital prices, specialty pharmaceuticals, and cancer care, respectively. Given their skin in the game and how much they are forced to pay attention to all this stuff, do you feel that they have a responsibility for pushing payment reform forward? And, if so, do you think they have the will to do it?

The short answer is yes. If you think about two sides of the problem being either utilization or price, we often frame the problem as utilization. There’s overuse of this, or there’s too many of that. When you think about commercial insurance, and particularly self-insured employers, it’s about price. …They have trouble affecting price. And payment reform is a method to try and engage providers in doing things differently…the role of the private sector is incredibly important as a source of potential experiments in payment reform and as a kind of test bed and co-collaborator. But if you don’t get CMS [the Centers for Medicare & Medicaid Services] driving this in Medicare and, in turn, Medicaid, you don’t have enough critical mass to change the game. And that’s the basic dilemma here.

It’s a very different CMS under a Trump administration than it was with Obama. Andy Slavitt at CMS in the Obama administration was trying to push his team to imagine what’s possible in payment reform and go 10% faster than that. Sometimes they overreached. But Secretary Price and Seema Verma’s signal to the market was, “No, we’re not doing mandatory. We’re doing voluntary. Yeah, we’ll do that but maybe later. Well, MACRA [Medicare Access and CHIP Reauthorization Act of 2015] is good, yeah, but we’ll exempt even more people and slow the timetable down.” So that’s not gone unnoticed by the [field].

It’s not that people think payment reform is being undone. It’s just that the sense of urgency and speed is undone. And I don’t think employers are capable of driving it without that.

Do you believe the only way we get acceleration around this is with federal government intervention? And is that the only viable lever that will really change the paradigm?

I wish it were not true, but I think it is true. …The basic problem, and you guys know this better than anyone, is employers are very different in their needs. Disney is a perfect example of the blended problem. Disney has a billion in spend, half of the employees are working the theme parks making just above minimum wage, and the other half are Johnny Depp or on ESPN or work for Lucasfilm. And they’re all on the same health plan. That’s a tough gig to organize given you’ve got people who are making $20,000 a year and $20 million a year.

I think employers are coming to the payment reform issue. They are doing it with increased vigor and attention. Their problem is they can’t coordinate in a meaningful way to impact providers in given geographies because they have different strategic priorities and it’s hard for them to operationalize a kind of kumbaya strategy, just in the Bay Area, even, for example.

Look at a company like GE, which is massive, but it doesn’t have more than 12,000 or 15,000 lives in any one place. And the companies who do are public employers. So states, big governments, school boards and so forth, they’ve got more concentrated fire power but ironically they are the most brain dead with regard to employee benefit innovation—with the exception of CalPERS and a few others. The people with the most generous health benefits in America are school teachers and firefighters, probably, legitimately, but they’ve been less aggressive on the cost management side than almost anyone.

I think a lot of our members right now are extremely frustrated in the ACA repeal and replace exercise around there being no discussion above the committee level about cost and price. Is that just a manifestation of the politics and lawmakers ignoring that part for now, or do they just not understand it well enough. Or it is a blend?

It’s a very, very good question. The Democratic proposals that became Obamacare were very much about coverage expansion, not necessarily cost containment in the aggregate; although, there were significant pilot experiments, like CMMI [Center for Medicare & Medicaid Innovation] and [ACO] legislation and IPAB [Independent Payment Advisory Board] that were meant to provide some kind of intellectual support and policy support for cost in the aggregate.

But your point is right. Both [Republicans and Democrats] in their own way are ignoring the fundamental problem, which is the health system is too expensive. The Republicans made enormous political gains in the last seven years, and all they had was repeal and replace and cutting taxes. The goal was not to cover more people and reduce cost. The goal was repeal and replace, politically. It was to say you’ve done that. And to cut government spending. They were trying to get rid of something and cut what they saw as another entitlement that was badly crafted. And if you can’t deliver the first one, you know, come on. You’ve got all the leverage of government. So that’s where I think the frustration on the right is coming from.

Now, the Democrats would say, like in Massachusetts, once you get the coverage thing done you can manage cost. I was just in Massachusetts last week, you know, and they’ve got this commission and the commission basically says we’ll monitor if you go over whatever the number is—3.5% GDP healthcare growth per capita. And they came in at 2.8, and everyone was declaring victory.

Well, that’s fine and dandy, but Massachusetts has the highest per capita healthcare cost in the known universe. It’s fair enough to slow your costs when your costs are enormous. It doesn’t solve the problem that we all have, which is the stuff is too expensive. And the bottom line is healthcare cost equals healthcare incomes. If you start taking cost down, somebody’s income has to go down. Either fewer people or they make less money. That’s how it works in every other country. The reason it’s cheaper in other countries is people make less money doing the same thing. Way less money. The prices are much lower. It’s not that utilization is lower. It’s the prices are lower for the same thing. That is very threatening to everybody.

Recently, some modelers have issued notably different estimates for Maria insured losses. Reports show RMS estimates between $15 billion and $30 billion for total insured losses, and Karen Clark & Co.’s reported estimate is nearly $30 billion in insured losses, with roughly $28 billion coming from Puerto Rico. However, AIR Worldwide has estimated Maria insured losses from Puerto Rico alone could range from $35 billion to $75 billion.

Clearly, there is still a great deal of uncertainty around the effects of this storm, and we will continue to monitor the developments. However, in an effort to gain some initial insights into Maria and, in particular the effect on Puerto Rico, we spoke with Sean Kevelighan, CEO of the Insurance Information Institute, on-site at The Council’s annual Insurance Leadership Forum in October.

“We’re still in the middle of a very active hurricane season, and we are seeing the impacts of Hurricanes Harvey, Irma and now Maria,” he says. “And these are all different events in a lot of ways. You saw with Harvey a flood event, with Irma a wind event, and what’s most different for Maria and the insurance market is there was a significant amount of industry built in Puerto Rico, with the likes of pharmaceuticals and others. That’s why we’re seeing a pretty broad spectrum in terms of the amount of costs that the industry could incur—especially on the commercial side, you really saw a spike in those estimates.”

Kevelighan echoes some of the thoughts behind AIR’s estimate. The modeler notes that “roughly 60% of the AIR-modeled losses are generated by the industrial line of business. Unlike many islands in the Caribbean, whose economies rely heavily on tourism, the economy of Puerto Rico is largely driven by manufacturing—primarily by pharmaceuticals, petrochemicals, electronics, and textiles within that sector. (It is estimated, for example, that there are more than 80 pharmaceutical manufacturing plants in the territory.)”

AIR notes that some of the uncertainties that come into play in Puerto Rico have to do with the potential effects of things like demand surge—increases in the price of labor and materials following a natural catastrophe—business interruption losses and business continuity planning, and infrastructure challenges during recovery. “The slow and extended restoration can lead to higher levels of damage to insured properties as building envelopes remain open to the elements.”

Kevelighan noted that the possibility exists for increases in reinsurance and commercial rates coming out of Maria, but exactly what and how, remains to be seen. On a larger note, he says that the trend in extreme weather is on the rise but presents opportunity for the insurance industry.

“You can go back to 1980…and you’ll see a significant increase in terms of frequency and severity, most of which are in the meteorological or hydrological—storms and flood type events. What I think is important for the industry to focus on is less about…the politics of what’s going on and more about how we get to the solutions. And that’s a real opportunity for the insurance industry…let’s see how we can mitigate the risk and make our communities more resilient. This is what we do as an industry, and I think we’re well poised and have a really good opportunity to do that.”

He brings up reauthorization of the National Flood Insurance Program at this crucial time. Multiple experts have noted that there is the potential for large uninsured flood losses with all of these storms, as it’s often not covered in the policies people have. “Flood has impacted 90% of every major catastrophe. There’ s a flood issue in every one,” says Kevelighan. “We’ve got to increase our education about that. It’s unfortunate that our customers are not as educated [about flood] as they could be, and honestly the reason is the private market’s not there. If you think about what we could do with flood if the private market was in there and it was able to market itself like we see in other areas like auto insurance and home insurance, and we’re able to educate people…not just to help people appreciate why insurance helps but also appreciate what it’s going to take to mitigate the risk, because honestly the insurer and the customer don’t want to suffer the risk.

“We need to overcome and/or remove the politics from the program in order to make it more modern and actuarially sound. History shows the government does not know or appreciate underwriting, and that is in large part because politics gets involved. This is not going to be an easy issue to overcome, and that is going to be the biggest hindrance to the private market entering into more flood insurance offerings.”
Kevelighan also discussed the importance of rebuilding infrastructure with resilience in mind.

“We hear a lot about infrastructure spending—we’re going to spend a trillion dollars potentially on infrastructure. Can the industry help? And educate people? If we’re going to spend money on infrastructure, [let’s] make sure it is ready to withstand what we’re seeing in terms of natural catastrophes.

“I think there’s going to be a good a case study that comes out of the difference between Irma’s impact and Harvey’s impact. In the state of Florida, after Hurricane Andrew, you saw building codes go up and get more solid in a lot of ways…And then you look at Harvey, in that area of Houston where building codes are virtually nonexistent. So you’re going to see an illustration and a comparison of communities and what resilience does. And as an industry, we need to be helping our customers understand the value of that. If catastrophe strikes, how can you build forward instead of just building back to the way it was?”

For more of our conversation with Sean Kevelighan, listen to the podcast at

Patients who choose providers charging more than the max are required to pay the difference. Leader’s Edge sat down with Rod Cruickshank of The Partners Group to discuss the pros, the cons and what providers might think.

Let’s start with the basics of what we expect from reference-based pricing.

We’re trying to bring some normalcy or common language to something that has become complicated. The typical consumer, broker or consultant is lost in the effort of trying to determine what is truly being charged.

Most folks have a different understanding about reference-based pricing. Working toward a common language would be a great start. Look at it from the hospital standpoint where you use a fee schedule based upon what CMS [the Centers for Medicare and Medicaid Services] established. Then you negotiate with your payors on what fees are going to be. This negotiation results in a unique and proprietary fee schedule. Ultimately, this makes it nearly impossible to unpack the true cost of pricing on what you charge for a clinical encounter. This work over time has grown in complexity. No surprise, the result is significant variance from one side of a city to the other.

If we all agree on the language of what a reference-based price strategy is, that means the floor is CMS. The government dictates what’s allowable, based upon Medicare, and then everybody plays up from that floor.

The movement to reference-based pricing is like the holy grail in our industry. Could you please make it simple for everybody to understand what the price of a procedure or an encounter is going to be? Can we just have confidence that when we are going to engage in a contract with this delivery system we know we’re not going to be overcharged for any procedure?
Isn’t that the hope?

For consumers, yes. What about providers?

You must understand the forces at play. We have delivery systems across America that play with these numbers to support internal strategies; maybe they’re trying to grow in some areas and are deemphasizing in others. They may need more money in orthopedics. They may need more money in obstetrics. They might need more money in the surgery center. As a result, they’ll inflate those numbers because they think they’re going to get more encounters there, while they’ll lower others.

You might take a huge tool, a huge differentiator, out of the equation of American healthcare if you remove negotiation on fee schedules. From a provider side of things, and from a payor side of things, you’re changing the game to nullify some of their strategy and their proprietary work.

And therein lies the pushback. If I’m a large, regionally developed facility, I’m going to probably argue that, if I do cardiology better than anyone else, that’s probably because I’ve attracted the best talent. We might be doing R&D or trying to push the envelope on procedures. And I would be able to build an argument that I might be able to charge more for that.

Wouldn’t you want an organization that is dedicated to a specialty to be able to play that game? We allow that game to be played everywhere else in America, right? It may not be attractive depending upon your thought of healthcare as a public service. Yet we want hospitals, clinics, doctor and facilities to just continue to improve and get better and get specialized. So, if they’re developing a center of excellence around a certain procedure, they’re probably going to want to demand a higher reimbursement for everything that goes into that. There might be 300 codes associated with that work, and they want all those to be at a premium to support their work.

If you understand business from their perspective, you start to see that there’s a reason for charging different fees for different specialties or procedures. It’s a business strategy. It’s not because they’re trying to pull one over on us. It’s not because they’re trying to gouge us, though there are cases where I’m sure that does happen.

What are the implications of reference-based pricing in the specialty business?

Here in the Northwest, which encompasses many rural areas, every hospital system has only so many areas of specialty it can afford to fund and build their entire identity around as they try to attract the very best talent. Then, they want those guys to have as many cases under their belt as they can get because, in the specialty business, it’s how many cases do you do a year? Not, can you do a case?

Do you want a surgeon operating on you who does 200 of those a year or 10? It’s a very simple answer: I want the doctor that’s doing 200.
So, this concept of reference-based pricing, it has a place and we need to support it. But it also needs to be flexible enough to afford more advanced strategies. We need to allow for major delivery systems to build centers of excellence and expanded programs to have the freedom to charge a premium because they’re just doing great work. And we ought to demand that there’s evidence-based outcomes that support it.

If we go in with the hammer and we pummel the delivery system universally to get reimbursement down, that may mean that, in your local marketplace, you can’t afford the talented specialist who can make a difference in the surgery room. It becomes real very quickly. Undoubtedly, one of the downsides of reference-based pricing controls might be that some systems wouldn’t have the dollars to invest in higher-quality talent to come in and do specialty work. That would be detrimental to your community and a local economy.

Maybe the government would allow hospitals to submit an application to build a center of excellence and get higher reimbursement through CMS. If you qualify by these criteria, they will allow you to charge more because they’re going to be following outcomes and encounters. I think that’s what it forces and would be a step in the right direction.

So, reference-based pricing might be the floor that we must set for all care and then CMS gets control over additional money based on quality, volumes of encounters, etc., and ultimately, this is why doctors won’t like it—you’re giving control back to CMS to determine when they pay more and when they don’t.

Do you worry that that opens the trajectory to a single-payer, Medicare-for-all model?

Sure. In a way, from a reimbursement standpoint, it is Medicare for all. That’s the other cautionary tale here, do we want to encourage that?

If CMS says why don’t we dictate that, in healthcare reform, it’s reference-based pricing for all, that would be a scary place to be. Large regional systems with scale will dominate, and the rural marketplace will fail. Can’t we all agree we need healthy rural delivery systems? Would any state be wise to accept a strategy that underfunds a rural hospital to the extent it fails and closes? Most rural hospitals are running close to the edge on profitability, and reducing commercial reimbursement would be the tipping point for their failure. This is happening as we speak in some markets.

What I would love to see is federal oversight on allowing communities to have more freedom to do what they need to do to improve the health of their population. In Oregon, we have experienced the success of community health delivery with Coordinated Care Organizations (CCOs). They are legislated systems to deliver for Medicaid populations, and they have managed the hardest populations by doing the right thing and being creative with funding.

What percentage of brokers do you think are actually deploying these types of programs?

I would say it’s a minority still. My guess is that not more than 10% are deploying. I would say maybe 20% to 25% are actively talking and using it as a wedge. And I’d say 75% are not doing it and are probably wary of it and avoiding it.

How have you seen reference-based pricing programs work in the market?

One of the hottest spots in the country around reference-based pricing might be Montana. The term reference-based pricing is pretty much well known to the hospital systems in Montana and to even some of the larger employers. This can be attributed to some area TPAs using it as a sales wedge. The upside of the movement is it opens a more sophisticated dialogue. Most hospitals and provider groups will argue against it. There is much more to cost than just reimbursement. The delivery system can educate us all that “cost” has other important elements beyond fee schedules, like outcomes, severity and recurrence rates, and ultimately quality.

Now if you bring a reference-based pricing model into a metro area, that’s where you end up with most of the drama…because there are a lot more options and a lot more variations in price. Providers will say, “You came in and received service from me. I need to charge you what my normal rate is, and you’re telling me that you’re not going to pay the difference between what your insurance company is paying and what I want to earn for this procedure?” And your answer to your doctor (who you love), is, “Yeah, I’m not paying it, and, if you push me on this one, talk to my attorney.”

When a marketplace hasn’t achieved enough volume in reference-based pricing, drama ensues, and the HR leader and the senior executives of that employer better be ready for the public relations work ahead. If you start to put the member in between the doctor, the health plan and the lawyers, you’re going to pay a deep price in terms of culture and relationship with your employees. And if you’re not really ready for that, brokers will get fired, and employers will move back to a non-reference-based pricing model. There are stories like that out there.

Do you think in these situations the providers just aren’t aware of the agreement or they just don’t care? Or maybe both?

A little bit of both. When you have a variation of reimbursement, some people get paid more and some people don’t get paid as much. But most docs know it’s out there, and if you’re part of large groups you’ve probably been educated on it. But none of them are welcoming it. So there’s going to be a burden of drama that’s going to have to take place to get to the tipping point.

I think reference-based pricing doesn’t become a usable language for us with our customers until a lot of people go before us and end up taking the pain. There’s going to have to be some people who really get their noses bloodied, and there’s going to be brokers that get fired and there’s going to have to be some drama in the marketplace before all of a sudden it’s the rule of the day.

In the end, reference-based pricing is the village that we must walk through to the destination of improving the health of the member. It’s not the destination. It’s just a point along the way.

Twenty states currently have legislation or ballot initiatives pending to fully legalize its use, 14 of which already have legalized marijuana for medical purposes. If all those efforts succeed, as many as 28 states and D.C. could have full legalization regimes in place by the end of 2018, and 34 states, D.C., Guam and Puerto Rico would allow medical use.

And business is booming. The U.S. marijuana market generated $6.7 billion in revenue in 2016, an increase of 34% over 2015, according to Business Insider. Forbes reported in February the industry will create more than 250,000 new jobs by 2020, more new jobs than the Bureau of Labor Statistics projects for manufacturing, utilities or government during the same period. Bloomberg, citing a 2016 report from Cowen & Co., stated that revenue could grow to $50 billion by 2026.

There is only one problem: under federal law, it’s illegal to grow, manufacture, sell, possess or use marijuana.

So what does that mean for those seeking to insure marijuana businesses in the United States?

Under the federal Controlled Substances Act, a Schedule I drug, substance or other chemical is one that:

  • Has a high potential for abuse
  • Has no currently accepted medical use in treatment in the United States
  • Has a lack of accepted safety of use under medical supervision.

The U.S. Drug Enforcement Administration classifies drugs. It’s generally illegal under federal law to possess, distribute or dispense a Schedule I drug for any purpose. Since the statute was enacted in 1970, the DEA has classified marijuana as a Schedule I drug. It shares this status with heroin, LSD and peyote. In contrast, cocaine and methamphetamines are classified as Schedule II drugs, permitting their sale and use under specified conditions.

The DEA has the authority to reclassify a drug to a different schedule if new evidence arises. To do so, it is required to obtain a scientific and medical evaluation and a recommendation from the U.S. Food and Drug Administration on whether the drug should be rescheduled. The FDA considers eight factors, including the addictive effects and the current scientific knowledge related to the drug under review.

Even though so many jurisdictions have legalized marijuana for medical purposes, and physicians in most of those states are prescribing it for various maladies, as recently as 2016 the DEA refused to reclassify it. It recommended marijuana remain in Schedule I, finding “no currently accepted medical use in the United States,” even though it will soon be used for just that purpose in a majority of states.

The ramifications of the FDA’s inaction are far ranging. Engaging in any aspect of the marijuana business can trigger a host of federal violations. A “legal” marijuana business can be prosecuted under federal drug and money-laundering criminal statutes. Those who assist those businesses can be prosecuted as co-conspirators or as aiders and abettors.

It is a separate federal crime to manage or control any place for the purpose of manufacturing, distributing, storing or using marijuana. Landlords who lease space to marijuana businesses are liable for that violation. Receipt of more than $10,000 from a marijuana business is a felony. Engaging in any financial transaction with a known marijuana business for the purpose of promoting a known marijuana business is a felony.

In 2009, the Obama Justice Department issued its now-infamous Cole Memorandum—named for its author, Deputy Attorney General James M. Cole, and titled “Guidance Regarding Marijuana Enforcement.” The memorandum instructed federal prosecutors not to target medical marijuana dispensaries and users for federal law violations if they are in compliance with their respective state laws. As the memorandum put it:   

The enactment of state laws that endeavor to authorize marijuana production, distribution, and possession by establishing a regulatory scheme for these purposes affects [the] traditional joint federal-state approach to narcotics enforcement. The Department’s guidance in this memorandum rests on its expectation that states and local governments that have enacted laws authorizing marijuana-related conduct will implement strong and effective regulatory enforcement mechanisms that will address the threat those state laws could pose to public safety, public health, and other law enforcement interests.

There are two important qualifications to the guidance. It focuses only on state legalized medical marijuana and does not extend to recreational use. It also does not bar prosecution. Instead, it outlines a list of priorities to determine whether prosecution may be warranted, including preventing:

  • The distribution of marijuana to minors
  • Marijuana sales from supporting criminal enterprises, gangs and cartels
  • The diversion of marijuana from states where it is legal under state law to other states
  • State-authorized marijuana activity from being used as a cover or pretext for trafficking of other illegal drugs or other illegal activity
  • Violence and the use of firearms in the cultivation and distribution of marijuana
  • Drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use
  • The growing of marijuana on public lands.

Congress also has weighed in. It included the Rohrabacher-Blumenauer Amendment in a 2014 spending bill. That amendment prohibited using federal funds to arrest or prosecute patients, caregivers and businesses acting in compliance with state medical marijuana laws. The 9th Circuit Court of Appeals ruled in 2016 the amendment protects patients and providers acting in accordance with state medical marijuana laws, despite DOJ’s arguments to the contrary.

The Department’s guidance in this memorandum rests on its expectation that states and local governments that have enacted laws authorizing marijuana-related conduct will implement strong and effective regulatory enforcement mechanisms that will address the threat those state laws could pose to public safety, public health, and other law enforcement interests.

Guidance Regarding Marijuana Enforcement (the Cole Memorandum), U.S. Department of Justice

The Treasury’s Financial Crimes Enforcement Network (FinCEN) issued guidance on how federally insured banks can service marijuana businesses, which are legal under state law and in compliance with the Bank Secrecy Act—a law they would otherwise violate.

The FinCEN guidance says that, in assessing the risk of providing services to a marijuana-related business, a financial institution should conduct customer due diligence that involves evaluating several factors, including:

  • Verifying with the appropriate state authorities that the business is duly licensed and registered
  • Reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business
  • Requesting from state licensing and enforcement authorities available information about the business and related parties
  • Developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers)
  • Ongoing monitoring of publicly available sources for adverse information about the business and related parties
  • Ongoing monitoring for suspicious activity
  • Refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.

A financial institution that provides financial services to a marijuana-related business would be required to automatically file a suspicious activity report (SAR) every time it receives funds from the business. The depth of the report would depend on whether the business is violating state law or engaging in more threatening conduct (such as distributing marijuana to minors, allowing revenue to go to criminal enterprises, and trafficking).

New Administration, New Policy?

Attorney General Jeff Sessions has a jaundiced view on marijuana. Since being sworn in, he has been quoted as saying:

  • “Good people don’t smoke marijuana.”
  •  “Medical marijuana has been hyped, maybe too much.”
  • Marijuana is a “life-wrecking dependency” that is “only slightly less awful than heroin.”

And he has issued a memorandum directing the Task Force on Crime Reduction and Public Safety to undertake a “review of existing policies in the areas of charging, sentencing and marijuana to ensure consistency with the Department’s overall strategy on reducing violent crime and with Administration goals and priorities.”

In May, Congress reenacted the Rohrabacher-Blumenauer Amendment (a requirement with each new budget year) barring the DOJ and DEA from using any funds to prosecute those acting in accordance with state marijuana legalization regimes. In signing that bill into law, President Trump said it “provides that the Department of Justice may not use any funds to prevent implementation of medical marijuana laws by various states and territories. I will treat this provision consistently with my constitutional responsibility to take care that the laws be faithfully executed.”

The pundits are split on whether that is a positive or negative statement and how it bodes for future treatment of the issue in the Trump administration. White House chief of staff John Kelly may offer some contrary evidence. In a widely quoted Washington Post piece, General Kelly said marijuana was “not a factor in the drug war” and “arresting a lot of users” is not the right solution for the country’s drug problem. “Whether it’s veterans or anyone else, if it helps those people, then fine,” he said.

In September, however, following a written recommendation from the Department of Justice, the House Rules Committee blocked a floor vote for the Rohrabacher-Blumenauer Amendment. The amendment was deemed “out of order” for the 2018 House Appropriations bill, despite its inclusion in appropriations bills since 2014. Nevertheless, after President Trump struck a three-month deal with the Democratic leadership to extend the current federal budget and debt ceiling until December 2017, the amendment was granted a temporary extension by proxy. Whether it survives the December budget debates remains to be seen.

Congress Attempts Federal Legalization

In August, Sen. Cory Booker, D-New Jersey, introduced the Marijuana Justice Act, the first congressional bill ever introduced to fully legalize marijuana under federal law and encourage state legalization. The Marijuana Justice Act would:

  • Remove marijuana from the Controlled Substance Act schedules (thereby overriding the DEA and FDA determinations)
  • Resolve some of the outstanding issues regarding federal law and the marijuana business (such as access to banking services)
  • Prevent deportations predicated on marijuana offenses
  • Provide expungement and resentencing for marijuana offenses at the federal level
  • Create a “Community Reinvestment Fund” of $500 million for programs such as job training, reentry and community centers.

Although the prospects for the bill are thin in the current political climate, legalization of medical marijuana at the federal level may be within closer reach. Senators Brian Schatz, D-Hawaii, and Orrin Hatch, R-Utah, are co-sponsoring the Marijuana Effective Drug Study Act (MEDS Act), introduced in September. The MEDS Act would take steps to remove barriers impeding research into the benefits of medical marijuana. Hatch says the MEDS Act will “encourage more research on medical marijuana by streamlining the research registration process” without forcing the DEA to reschedule marijuana. It would “make marijuana more available for legitimate scientific and medical research,” Hatch says, and “protect against diversion or abuse of the controlled marijuana substances.”

The Banking Issue

About 70% of cannabis businesses have no bank accounts. Despite FinCEN guidance, no major U.S. bank appears willing to fund marijuana businesses. That may be understandable. If they do, the FinCEN guidance requires filing of a Suspicious Activity Report, which could be read as an admission by the filing bank that it is violating federal laws. In a moment in which the administration’s final marijuana policy is unclear, creating such an evidentiary record may not be that appealing to the compliance-focused banking sector.

In response to the shortage of available banking services, Colorado (which became one of the first two states, with Washington, to legalize recreational marijuana in 2012) created a new class of financial institution called a “cannabis credit cooperative.” The Los Angeles Times reported no such institutions have been formed, partly because the Federal Reserve is unlikely to approve them. Colorado also has authorized the creation of a credit union for the cannabis industry, but the Federal Reserve denied the credit union access to a master account and the National Credit Union Administration refused to insure its deposits.

The only two markets currently offering effective product liability coverage for the recreational markets as required under Washington state law are United Specialty Insurance, through a program offered by Next Wave, and James River.

Norm Ives, cannabis program manager, Mosaic Insurance Alliance

In Washington state, some banks purportedly have been willing to open accounts for state-licensed marijuana businesses, but they do not appear to have made any loans to marijuana businesses and they are not expected to do so any time soon.

In the emerging world of crypto currencies, some issuers are looking at filling the banking void by using the blockchain system. Tokken, for example, offers one such online platform that purports to enable credit card payments for the legal marijuana industry through use of blockchain technology.

What About Us?

So, does insurance coverage exist? If so, from whom? And is it worth the paper it’s written on?

To date, there have been very few cases evaluating whether insurers must pay claims that are illegal under federal law. In a 2012 case in Hawaii, the federal district court ruled in favor of USAA’s denial of a homeowner’s claim based on the theft of marijuana plants. The plaintiff had contended the theft fell squarely within the clause covering “trees, shrubs and other plants.” The court refused to enforce this provision because “the plaintiff’s possession and cultivation of marijuana, even for state-authorized medical use, clearly violates federal law.”

In a more recent federal case in Colorado, the court found a marijuana dispensary and cultivation facility may be entitled to coverage for harvested plants damaged by smoke and ash from a wildfire, rejecting the insurer’s argument that the products were uninsurable because of federal law’s classification of marijuana as a Schedule I drug. The court ruled the insurer’s argument that it could not be required to pay claims related to illegal activities under federal law was not valid because the insurer had elected to issue the policy with the “mutual intention” that the marijuana inventory be covered.

The emerging view in the legal community is “there should be coverage under policies sold specifically to marijuana-related businesses operating legally in their home states,” says Jeff Sistrunk in Law360.

Bob Morgan with Much Shelist, an Illinois law firm, chairs its Cannabis Industry Practice. He previously served as the coordinator for the medical cannabis program in Illinois and oversaw development of the state’s medical cannabis regulations.

“I’m not sure I would say insurance is a top-three challenge for the industry, but it definitely is in the top 10,” Morgan says. “My clients and others in the industry think of insurance as a secondary problem right now, but it ordinarily would be much higher on the list.”

That is because mainstream insurers and brokerage firms largely appear to be steering clear of the growing industry. Until two years ago, Lloyd’s had offered some coverages, but it subsequently withdrew them, explaining at the time:

Based upon a thorough review of all positions, unless and until the sale of either medicinal or recreational marijuana is formally recognized by the Federal government as legal (as opposed to subject to non-enforcement directives), Lloyd’s has asked that underwriters should not insure such operations in any form (including crop, property or liability cover for those who grow, distribute or sell any form of marijuana or cover for the provision of banking or related services to these operations) in the United States.

Instead, the gap left by these players has created a specialized industry of cannabis insurance brokers, covering everything from “seed to sale” in a piecemeal approach. Two examples: Colorado All Green Insurance, which “has been supplying Cannabis Insurance Solutions since 2009,” and Cleveland-based Cannasure Insurance Services, which “offers marijuana business insurance for growers, physicians, dispensaries, collectives and more in medical and recreational marijuana states.”

Norm Ives, the cannabis program manager for Mosaic Insurance Alliance, says that, in Washington state, “the only two markets currently offering effective product liability coverage for the recreational markets as required under Washington state law are United Specialty Insurance, through a program offered by Next Wave, and James River.” He also says Attorney General Sessions’ comments critical of the industry “have dramatically shrunk coverage supply.”

Mike Aberle, senior VP at Next Wave Insurance Services, is a California-based managing general underwriter and program administrator who runs the firm’s CannGen subsidiary. It offers specialized cannabis insurance programs in any state that has legalized the business. He says the biggest challenges are the regulatory uncertainty combined with underwriters’ general lack of knowledge of the industry.

There is a constant need, Aberle says, “to educate both the retail insurance broker and policyholders.” This can be difficult given the constantly shifting nature of the regulatory regimes and the players in the space. He says these factors make it “challenging to maintain and support a constantly evolving industry.”

Cash management is just never as good as electronic financial management.

Bob Morgan, chair of Cannabis Industry Practice, Much Shelist

Coverage for What?

While Morgan says violent crime is lower in marijuana businesses than in other similar businesses, “primarily because of all the cameras and other security that the businesses have in place, which discourage crime both for the facilities and the general area,” there are a host of unique, industry-specific issues that present risk.

Perhaps most importantly, Morgan focuses on the banking issues that have created cash orientation for the industry. This arrangement, Morgan says, “creates both increased theft exposure and records that are not as good. Cash management is just never as good as electronic financial management.” The constantly shifting regulatory landscape also makes risk identification more difficult he says. And, as Ives notes, those requirements vary radically from state to state, magnifying the insurance complexity.

Perhaps the single most significant exposure is product liability. The state of Washington requires marijuana licensees to maintain product liability insurance as a condition of licensure. In a Bloomberg report on the industry, one attorney asserted marijuana-related product liability litigation “is likely to include suits for physical injury arising from intoxication and suits for physical injury arising from long-term effects including addiction. It also will include consumer suits alleging deceptive and improper marketing, such as campaigns targeting minors… Companies selling marijuana for medical use could be subject to the same sorts of claims asserted against makers of conventional prescription drugs, such as failing to warn about side effects.”

At a recent Colorado murder trial, a man who murdered his spouse faulted the manufacturer of the cannabis edibles he had ingested. He said he had not been warned ingestion “could lead to paranoia, psychosis and hallucinations.” This seemingly supports this conjecture. (The court rejected the defense, and the defendant pleaded guilty and was sentenced to a 30-year term. The defendant’s family filed a civil suit in 2016 against the manufacturer of the cannabis candy.)

Other coverages are what you would expect: crop, theft, fire, business interruption and employment practices liability insurance. Aberle says even in more traditional coverage areas “the products are new and there are many unknowns,” which exacerbates the underwriting challenges.

Morgan says traditional coverages like D&O and EPLI can be difficult to obtain for a stand-alone cannabis business. “To evade some of the restrictions on marijuana businesses,” he says, “some operators are dividing their operations into separate companies, typically putting all of the real estate and hard assets into one company, paraphernalia sales into a second company, and the [illegal under federal law] cannabis dispensary into a third separate company…If the cannabis business is a subsidiary of a larger holding company that includes non-cannabis businesses, these types of coverages are often obtainable.”

Ives says the biggest problem he sees is “carriers purport to offer the coverage but include exclusions for any products that contain cannabinoids, essentially negating the value of any such coverage in the marijuana space.”

Similarly, Aberle cites a competing product liability policy “knowingly sold to a marijuana business that excluded ‘psychoanalytics that cause mental or physical impairment,’ which seems to exclude from the scope of the coverage the primary product they were seeking to insure.”

Aberle stresses the coverage you are buying “is all what the form says,” and he believes Next Wave has built the better mousetrap. He says it’s “the oldest and largest program in the industry” based on modified ISO forms and is “dominating the market.”

Good people don’t smoke marijuana.

Jeff Sessions, U.S. Attorney General

Ives agrees it’s “critical that the insured understand the precise scope of the coverage they are purchasing. The devil is in the details here.” At the end of the day, he says, the old adage applies in spades: “Buyer beware.”

Sinder is The Council’s chief legal officer.
Gold is a Steptoe and Johnson associate.

An earthquake in Mexico toppled buildings and killed more than 200. Just one day later, Hurricane Maria devastated Puerto Rico (see our sidebar on this topic) and left it with what has been described as an “apocalyptic” humanitarian crisis. And as of this writing, the latest catastrophe is in California, where wildfires have burned nearly 200,000 acres across the state, destroyed thousands of homes and businesses, and killed more than 200 people. Hundreds are still missing.

These catastrophes highlight the unfortunate fact that disasters happen every day, everywhere, and there’s no telling what’s around the corner. It is during these events however, that our industry shines the brightest.

Our industry spends millions of dollars each year on advertising, promoting what we cover and why. Now is the time for us to put our dollars where our advertising is and make our clients’ lives whole again and get businesses back on their feet. The angels in this business are the claims adjusters on the ground, helping you talk with your customers, making sure the pieces are working the way they are supposed to. This is no small feat and happens from the moment the water begins to recede and the fires smolder.

We just came off our annual Insurance Leadership Forum in Colorado Springs. Time and again, we heard the same message from industry peers and keynote speakers alike: the foundation of our business is built on community, collaboration and helping people rebuild. We are there to answer the call and to help our clients and their businesses along the road to recovery. And it is a long road in many cases, that begins long before the storm actually hits (see our article on Hurricane Irma claims).

We mobilize our people, take the lead and get down to the very core of our business, providing support that is critical to both short-term and long-term recovery. Oftentimes, as you will read in our feature, “Angles in My Lifetime,” insurance professionals put their own concerns aside to offer aid and answers not only to their reeling clients but also to others in need who just happen to be there. Despite the unpredictability and severity of risks around the world, our industry’s service and focus never wanes. It is a profession unlike most others, one that requires tremendous humility and professionalism, and that is the story we all need to tell.

Inevitability, technology has and will continue to transform our business models by enhancing our intelligence with data in real time. It creates efficiencies and helps us serve our customers in a more informed way. When the rubber meets the road however, and our clients face a catastrophe, computers alone can’t make them whole. Technology won’t show up on their doorstep to guide them through a difficult and sometimes painful process. Forging ahead with new tools is part of any business, but having a human touch cannot be underestimated.

This account from our Houston feature sums it up:

“Everyone worked hard and did things that we definitely do not do during the course of our normal business day. I had one lady pull me aside and say, ‘I never thought I would meet real angels in my lifetime, and then y’all showed up.’”

Enjoy this month’s issue, and thank you for your service to your clients and to our industry.

To paraphrase Lana Bortolot in her recent Wine Enthusiast article, “Raising Arizona: Outsider Wines Travel to New Heights,” as producers in the sun-drenched state push the envelope with high-elevation wines, it’s time to take a serious look at Arizona.

While Arizona is a relative newcomer to wine production—Gordon Dutt opened the state’s first commercial winery in Sonoita in 1979—Spanish Jesuit priests actually planted the first grapes in Arizona soil when they came to the area as missionaries in the 16th century. Dutt, a scientist at the University of Arizona, conducted early research on the soils and climate zones of Sonoita, a high-altitude basin surrounded by the Santa Rita, Huachuca and Whetstone Mountains, and found them to be similar to Burgundy’s conditions. Most of the more than 90 wineries in Arizona produce grape varietals from France, Italy and Spain. But Arizona wines are not “fruit forward,” says Kent Callaghan, whose award-winning wines have been served at the White House. “They are dense, burly wines that age well and, in our case, need age,” Callaghan. “The wines tend to be distinctive and tend to be high quality.”

If you love wine and are visiting Scottsdale, you should tack on a couple of days to explore the vineyards and wineries in the Sonoita and Willcox American Viticultural Areas, most of which are just a three-hour drive from Scottsdale (see below for three more quintessential Arizona side trips you can take in three hours). But you don’t need to leave the city to taste Arizona’s innovative wines. The five wineries that have tasting rooms in Old Town have recently launched the “Scottsdale Wine Trail.” You can download a map at Also raising Scottsdale’s profile as a wine destination is FnB, one of the city’s top restaurants. Co-owner Pavle Milic’s curated wine list, which includes some of Arizona’s best vintages, helped FnB earn a James Beard Award nomination for Outstanding Wine Program.

In other news, Scottsdale’s reputation as the posh place to stay in the Sonoran Desert is aging well. The Phoenician has completed its largest refurbishment since opening in 1988. The lobby, shops and restaurants have been remodeled, and a complete rebuild of the spa is on track to be finished by the end of December. Hotel Valley Ho just upgraded its swanky mid-century modern rooms and suites. And the Andaz Scottsdale Resort & Spa, which opened in December 2016, garnered a spot on the Condé Nast Traveler 2017 Hot List.

What’s to love
Prague’s strategic position in the middle of Europe makes traveling across the continent fast and easy. The historical city center is beautiful, and there are areas where modern architecture is emerging, like the Hotel Josef, designed by the famous Czech architect Eva Jiricna.

New and exciting
Visit the Letná District to see the new generation of Prague citizens. It has become the hipster quarter with a lot of cafés, fashion boutiques and bookshops.

Dining scene
A new generation of chefs with international experience has emerged over the last 10 years. You can get anything from high-quality banh mi to typical Czech food. We have three Michelin restaurants—La Degustation Bohême Bourgeoise, Alcron and Field. Kalina Cuisine & Vins in the Old Town lacks a Michelin star, but it can compete with any of these restaurants.

Favorite new restaurant
Momoichi Coffetearia. I like the steampunk coffee and Japanese and Middle Eastern fusion dishes.

Favorite Czech restaurant
The first Lokál opened in 2009, and now there are many around the city. If you want to eat high-quality, typical Czech cuisine, this is the restaurant. They serve traditional dishes like fried cheese with tartar sauce, goulash and roast sirloin in sour cream sauce with dumplings.

The best places for cocktails are La Casa de la Havana vieja and Hemingway Bar, which are famous for their innovative drinks, including many Cuban classics. As for beer, Lokál serves our famous Pilsner Urquell from huge tanks.

The Golden Well Hotel near the Prague Castle is expensive, but it has terrific views over the whole of Prague. It also has an award-winning restaurant by chef Pavel Sapík, whose family has a heritage of hospitality dating back to the 17th century.

Thing to do
Even though it’s touristy, you should walk over the Charles Bridge, which opened at the beginning of the 15th century. It is decorated with baroque-style statues and leads to Prague Castle, connecting Old Town with New Town. Be sure to try Trdelník, a traditional sweet from Transylvania, at one of the street stalls.

Hidden gem
If I could recommend one off-the-beaten-path place to visit, it would be Vrtbovská Garden under the Prague Castle. The baroque-style garden was built during the beginning of the 18th century and is on the UNESCO World Heritage List.

In fact, they’re a bit of an odd couple in terms of the forces they packed and the territory they covered, and that means they will have different impacts on different types of insurers.

After Harvey made landfall in a relatively remote part of South Texas, largely sparing Corpus Christi, it quickly became a rainfall event. “We’re going to look back upon Harvey as a rainstorm that coincidentally had a hurricane associated with it—it was just a coincidence,” says Tom Larsen, principal of industry solutions at CoreLogic.

The storm system sat on the Texas coast, bringing with it “a significant amount of rainfall way beyond what you’d see with a typical storm…. The level of flooding in Houston was a surprise,” says Larsen. “Surprises are never good.” The record rainfall meant a lot of bayous overflowed, which added to the flooding.

“The very interesting thing about Harvey, which is very unusual, is the bulk of the private insured loss is commercial and industrial…because those are the properties that are likely to have private flood insurance,” says Karen Clark, president of Boston-based catastrophe modeler Karen Clark and Co. The next highest is auto. Residential is third.

We're going to look back upon Harvey as a rainstorm that coincidentally had a hurricane associated with it-it was just a coincidence.

Tom Larsen, principal of industry solutions, CoreLogic

Irma moved faster than Harvey, Larsen says, and the levels of flood in Florida didn’t approach the surprise of Harvey. “The extreme flooding from Irma was up in the Jacksonville area,” he says. “It was geographically constrained.”

As far as auto claims, Clark says, Florida likely experienced less auto loss because autos are more susceptible to flooding. “Irma will be more typical for a wind event in terms of losses, with residential claims first, then commercial, then auto,” Clark says.

Mark Dwelle, an insurance analyst with RBC Capital Markets, says offshore losses caused by Irma comprised a sizable portion of the loss on top of the domestic loss.

“Given the structure of the Florida market, with so many monoline insurers, there will be a much higher reinsurance component to the overall loss,” Dwelle says. “Our sense is that commercial pricing could firm up a little, but in the loss-affected lines, mainly property and reinsurance rates will probably rise in the loss-impacted zones, Florida and Gulf. The hard part to gauge is whether that will be enough to move the needle globally for reinsurance rates. Definitely the comments coming out of the Monte Carlo Rendez-Vous were not overly bullish relative to what we’ve heard from other big events.”

The possibility of more significant hurricanes this season could portend a shift in market conditions after years of a soft market, says Evan Taylor, a risk consultant with NFP. “If you had a few really awful hurricanes, that would really do it,” he says. “If you stack several hurricanes and get a lot of property loss, it could definitely change the renewal cycle for the next several years.”

In the aftermath of disaster, people look for ways to help those who are suffering. There are many options, from on-the-ground aid to sending supplies. One of those behind-the-scenes efforts is being carried out by the Los Angeles-based Insurance Industry Charitable Foundation.

According to the IICF, by mid-September more than $410,000 was raised through the IICF Hurricane Harvey Disaster Relief Fund. By that time, the Harvey relief effort had received contributions from more than 1,000 individuals as well as insurers, agent and broker groups, and others.

The foundation also established the IICF Hurricane Irma Disaster Relief Fund in mid-September to respond to the needs of victims of that hurricane.

The foundation said $7.4 million in initial relief fund support for Hurricane Harvey had been committed by IICF board companies and supporters. The amount is expected to increase as giving and matching campaigns continue. Taking into account donations from companies not involved with IICF, the initial minimum collective insurance industry support exceeded $15 million.

“With Hurricane Irma following so closely behind Harvey, there is unprecedented need for support of the community at large, and those involved with the IICF have answered the call without hesitation,” said Bill Ross, CEO of the IICF.

Fallen trees, railing damage. It struck hard, she says.

She wasted no time calling Laura Ambrose, the Brown & Brown agent who handles her account. “She answered the phone, and she was right there for me,” Richichi says. “Ambrose is not just an insurance agent; she is a really caring, open person. It isn’t just about the job. There’s definitely a personal touch…. She’s just an easy person to talk to. She answers every question without hesitation.”

Richichi rode out the storm on the property, an experience she describes as tough and scary. In addition to enduring the hurricane, she brings to light the many difficulties that arise in the aftermath of a natural catastrophe. The lack of electrical power, for example, meant no relief from the heat of Florida in September. It also meant her neighbor was temporarily stranded in her ninth-floor apartment because there was no working elevator to transport her child, who has a disability and can’t walk down the nine flights.


Mobilizing Ahead


Ambrose is part of the Brown & Brown team in Naples that powered up the day after the storm and worked with a skeleton crew to respond to clients such as Richichi. She and other agents working through natural catastrophes must be able to respond immediately after an event to help clients with claims issues, and their work often starts long before a storm makes landfall.

A storm that size, that effectively covered the entire state, every office from Coral Gables to Tallahassee was affected.

Chris Gardner, president, Hub Florida

“I look at myself as partnering with them,” says Ambrose, who has many condo association clients. “I had reached out to Kathy before and let her know that I would be in touch with her after the storm.”

Ambrose says there was no power but they communicated via cell phone. (All of her association clients have her cell number.) The storm hit in mid-afternoon and lasted several hours, closing some streets, Ambrose says. “She was sending me pictures and calling me. We’ve had a relationship for five years. I don’t mind going the extra mile.

“I reached out to her as I did with all my associations. I walked her through the process—what the association’s responsibilities are, what the owners’ are. I explained to her to mitigate the damages. Do everything you can to prevent that damage from getting worse.

“As an insurance agent, this is what I am trained for. Having the support of Brown & Brown and the head of the southwest Florida office, Jason Cloar, made it easy to get out and start helping clients faster. It freed me up and allowed me to get out into the field and assist people in need, which is where I was really needed.”

Insurance professionals, especially those in storm-prone areas like Florida, often take painstaking efforts to ensure they are ready to respond to an emergency. But even those plans don’t always go according to script. The sheer size of Irma, for example, was a differentiator.

“We have eight offices in Florida, and virtually all were affected,” says Chris Gardner, president of Hub Florida. “Normally, we’re relying on other offices in the state in the case of a catastrophe. In this case, it wasn’t really an option…. A storm that size, that effectively covered the entire state, every office from Coral Gables to Tallahassee was affected.”

But longer-term strategic thinking meant that Hub Florida had backup for its backup. The company’s hurricane crisis resource center in Chicago was there to help deal with the situation. Hub’s Risk Services Division worked with corporate communications to launch a preparedness and claims information support process out of the center for Hurricane Irma (as well as for Hurricanes Maria and Harvey). A national operations team, led by Todd Macumber, president and CEO of Hub’s Risk Services Division, mobilized to deliver daily storm-tracking analyses, preparedness and recovery resources, office closures, contact information, and claims resources and information.

This response, begun before the storm hit, carried on throughout the storm and for days after. The team used email and social media to ensure clients were fully aware of office openings and closings, claims resources, and information and support they would need.

A national operations team…mobilized to deliver daily storm-tracking analyses, preparedness and recovery resources, office closures, contact information, and claims resources and information.

“We began preparation calls with Risk Services. We were going through rehearsal and contingency plans four days out,” Gardner says. “Our troops on the ground were prepared to cope with the storm. Our team in Chicago did a great job.”

Brown & Brown of Southwest Florida was able to power up both its Naples and Fort Myers offices the day after the storm, though working slimly. “Those who could return to work did,” says Cloar. The company began proactively filing claims and sending agents out to properties as soon as clients could be reached. “Leading up to this event, there was a lot of anxiety,” Cloar says. “We wanted to make sure we were prepared as an organization.”

Each Policy Is Different

Every storm leaves in its wake a litany of questions, and these can become complicated because policies differ. Cloar cites the many questions about deductibles. Hurricane deductibles are a percentage of the total insured value, he notes. Answering such questions involves reminding people of what their percentage is, how deductibles ultimately work and how they might apply in their circumstances.

Another policy issue Irma raised was coverage for losses stemming from the actions of civil authorities, such as evacuation orders, says Natalie Dominguez, assistant vice president and claims manager at AmWINS Brokerage of Georgia, who handled Irma claims. “Does it take damage to trigger that coverage? Every policy is different, so you really can’t give a blanket answer.”

There are also questions about process. “We emphasize to people that they have the right to make the necessary repairs to their property to preserve the property prior to an adjuster showing up,” Cloar says. In addition, they have to take steps to document the damages, such as taking pictures of the damaged areas.

Cloar says Brown & Brown representatives have also attended condo association board meetings to answer questions about association responsibility versus unit owner responsibilities and have gone into the field with adjusters. Although southwestern Florida did not sustain the catastrophic damage suffered in parts of the Florida Keys, the storm ripped off roofs, flooded the ground floors of some buildings and caused power outages.


Leading up to this event, there was a lot of anxiety. We wanted to make sure we were prepared as an organization.

Jason Cloar, EVP, Brown & Brown of Southwest Florida

The Tally So Far

As far as actual claims go, Gardner says intake has been surprisingly low for what it could have been. “We’re probably about 35% to 40% of what had been expected,” he says. “Folks are really focused on business-interruption claims and off-premises power interruption.” He says they also have questions about flood sublimits and windstorm deductibles.

Although the numbers are still being tallied, Boston-based catastrophe modeler Karen Clark and Co. estimates Irma caused $25 billion in privately insured property damage, including $7 billion in the Caribbean. Modeler AIR Worldwide offered even higher insured estimates, with Irma causing $25 billion to $35 billion in the United States and an additional $7 billion to $15 billion in the Caribbean.

Hurricane Maria, which devastated Puerto Rico as well as other smaller Caribbean islands, will only swell that total.

But despite the destructiveness of Harvey, Irma and Maria, 2017 doesn’t appear likely to overtake 2005 as the costliest in terms of insured property damage. That year saw three of the 10 costliest hurricanes in history. In fact, the most destructive—Hurricane Katrina—caused an estimated $49.79 billion in insured damage in 2016 dollars. Hurricane Wilma, sixth on the list, caused an estimated $12.48 billion in 2016 dollars while Hurricane Rita, ninth on the list, caused an estimated $6.82 billion. That, of course, could all change when the insured damages of Hurricane Maria, which plunged Puerto Rico into a darkness that could last months, are tallied. Estimates of Maria’s damages are only beginning to emerge, but a preliminary projection from AIR puts them as high as $80 billion.

Speaking in late September, before damages from Hurricane Maria were tallied, Eric Uhlhorn, principal scientist at AIR, said the numbers still lag behind 2005 figures. But at the same time that year, Uhlhorn said, “we were dealing with Hurricane Rita, an ‘R’ storm, and we’re just on the ‘N’ storm right now. The indications are that the activity in terms of hurricane development should remain elevated into the second half of the season. Things should start tailing off, but by no means are we done yet.”

Hofmann is a contributing writer.

“It depends on how deep it is,” says Smith. “Certainly if it’s gotten up into the dash, for sure, the car should not be repaired. If it’s something like water in the floorboard and they haven’t driven it, it’s just rising water, the chances are you can fix it if you fix it right.

“But I’m going to give you a caveat: when water gets into a car, the carpet that you normally see in a car can be cleaned. It’s nylon. It doesn’t hold the moisture. You can put it outside in the sun and let it dry. But it’s what underneath—the padding, the jute if you will—that is like a sponge that holds the moisture. In short order, a couple of days, the odor will be horrific. So, your first clue on a flooded car after a few days is the smell.”

What happens to individual car owners’ vehicles? Once owners who have comprehensive insurance report that their cars have been flood damaged, the insurance companies will send adjusters out to inspect the cars on a first-come, first-served basis. If the adjuster declares the vehicle a total loss, it will be transferred to an auction facility managed by one of the two major salvage auctions, either Copart or Insurance Auto Auctions.

It’s the cars that did not have comprehensive coverage that consumers need to be on the lookout for. Because insurance companies and auction houses never see these vehicles, there won’t be any record of the vehicles’ having been flooded. Unscrupulous car owners will dry them out and repair them without reporting they were flooded. These are usually going to be older, paid-off cars since most banks require a comprehensive policy when writing a loan.

“One of the things that worries me an awful lot about cars, is under the seat on these GM cars there is a wire that runs from the tensioners on the seat belts,” says Smith. “Anytime you have an accident when a seatbelt is detonated, there is a signal to the tensioner in your seatbelt that tightens and locks that seatbelt so that when you go forward you don’t go that far forward. We replace those tensioners anytime airbags have been deployed. There is a connector under the seats that you plug in, and if a car has been underwater and someone doesn’t take the proper steps to protect and clean that connector, the chances are not whether it’s going to fail, it’s when.”

Flood-damaged vehicles typically are sold for scrap or recycling but can in some cases find their way into the market for sale to unsuspecting buyers. Buyers should demand to see the vehicle’s title. If an insurance company has been involved in paying for any repairs, it will have the title marked to indicate that is has been in a flood or even totaled. But there is a 40-day window for such a notification to take place.

While there is no sure way to know if a vehicle has been damaged by a flood, the National Automobile Dealers Association offers these tips to prospective buyers to spot flood-damaged vehicles:

  • Check a vehicle’s title history using the National Insurance Crime Bureau’s VinCheck, the National Motor Vehicle Title Information System or a commercially available vehicle history report service, such as Experian or Carfax, etc. Reports may state whether a vehicle has been flood damaged.
  • Examine the interior and the engine compartment for evidence of water and grit from suspected submersion.
  • Check for recently shampooed carpeting.
  • Look under the carpeting for water residue or stain marks from evaporated water not related to air-conditioning pan leaks.
  • Inspect for interior rust and under the carpeting, and inspect upholstery and door panels for evidence of fading.
  • Check under the dash for dried mud and residue, and note any mold or a musty odor in the upholstery, carpet or trunk.
  • Check for rust on screws in the console and in other areas water would normally not reach unless the vehicle was submerged.
  • Look for mud or grit in alternator crevices, behind wiring harnesses and around the small recesses of starter motors, power steering pumps and relays.
  • Inspect electrical wiring for rusted components, water residue or suspicious corrosion.
  • Inspect other components for rust or flaking metal not normally found in late-model vehicles.

Initial estimates say Harvey destroyed between 500,000 and one million vehicles as it stalled for days over the area this summer, dumping an unprecedented 51 inches of rain before moving farther inland and dying off. The 640,000 vehicles flooded in Hurricane Katrina more than a decade ago could seem a pittance by comparison when the destruction is all finally tolled.
Several area automobile dealers took a direct hit from the flooding spawned by Harvey.

“If I had to guess, I’d say it was $52 million in new car inventory in the greater Houston area alone,” says Steven Wolf, chairman of the Houston Automobile Dealers Association and principal of Helfman Dodge Chrysler Jeep Ram and Helfman Fiat Alfa Romeo Maserati in Houston. The association comprises about 175 franchised new car and truck dealers and more than 100 associate members that work directly with auto dealers.

“I know one store lost 400 cars, another store lost 300 cars. Let’s say 2,000 new and used. I know there are some Ford stores down south that lost their inventory,” says Wolf.

McRee Ford in the Houston suburb of Dickinson apparently was hit the worst, losing its entire inventory of new and used cars, rental cars and customer cars in the shop for repairs. Mitchell Dale, grandson of founder Frank McRee, currently runs the dealership and says he expects insured losses of $33 million and another $1.2 to $1.5 million in uninsured losses. Ironically, the dealership had just built a new facility 28 inches higher off the ground to protect against flooding. The extra 28 inches was no match for floodwater that reached four feet and submerged vehicles stored outside.

“We had eight inches of water in the new facility and we had four feet in some of our other areas like our body shop,” says Dale. “All the vehicles on our lot were flooded. The rising water is what got them, so they were flooded inside.”

Dale says he knew the storm was going to dump a lot of water on his dealership but had no idea it would be 22 inches in an eight-hour period and as many as 51 inches total during the five-day rain.

“If you look at the forecast for this storm, we knew it wasn’t going to be a major wind event,” says Dale. “The problem was going to be a water event. They anticipated the water issue to be pretty substantial, but what do you do with 1,100 vehicles? Where do you go? How do you take them? Maybe we could set some of the computers on top of desks. We could have probably done a little to try to save some of it. We just built this brand-new facility…about 28 inches higher than our old building, so we took into consideration our experience in the past with some flooding and we felt like we were going to be OK.”

Insurers’ Response

Carroll Smith, chairman of the Texas Automobile Dealers Association, the statewide trade association representing more than 1,300 franchised automobile dealerships in nearly 300 communities throughout Texas, says he’s heard nothing but positive feedback from dealers working with their insurance carriers.

In Harvey, there was more than $400 million in vehicles moved that we insure. The $400 million represents how many vehicles were moved that were in that storm’s way. Maybe they were moved inside, maybe they moved to higher ground on the dealership lot, but that helps gives the magnitude of just how much work was done to prep for the upcoming storm.

Doug Timmerman, president, Ally Insurance

McRee works with insurer American Road, which was on-site as fast as Dale was. “Insurance companies were on the scene immediately,” says Smith. “The first day that [Dale] could even get in, his property insurer had 50 people there to remediate. I’m hearing nothing but good news about the way everybody handled it.”

Harvey made landfall near Houston on Friday, Aug. 25, but it wasn’t until the hours between Saturday night and Sunday morning that its full wrath was realized. It was then that Dickinson received 22 inches of rain in an eight-hour window. Yet less than 48 hours later, insurance adjusters had arrived to inventory McRee’s damages. By Thursday, American Road had already moved two thirds of the totaled vehicles off the lot to make room for new cars. One week later, McRee was back in business and selling new cars again.

A similar story played out across the street at the Gay Buick GMC Dealership, which estimates it lost 900 new, used and customer cars.

Doug Timmerman, president of Ally Insurance, which handles the majority of insurance for General Motors dealers, wouldn’t provide an estimate of Ally’s losses but says Ally was able to work with area dealers to get a substantial amount of inventory moved out of harm’s way before the storm hit.

“This is going to sound like a crazy high number, but it’s going to put things in perspective,” Timmerman says. “In Harvey, there was more than $400 million in vehicles moved that we insure. The $400 million represents how many vehicles were moved that were in that storm’s way. Maybe they were moved inside, maybe they moved to higher ground on the dealership lot, but that helps gives the magnitude of just how much work was done to prep for the upcoming storm. Obviously, it was substantial storm, but we feel very good with what we did in combination with our dealers to reduce our exposure.”

Wolf says other insurers also have reason to feel good about their response. “I gotta tell you, the insurance companies are unbelievable,” he says. “The good ones—the Chubbs, the Pures, Farmers, State Farm, USAA, Allstate—many of them are totaling the cars just with pictures. You send them a picture of a car underwater, they’re totaling it. My understanding is even if it’s close, even if it’s just in the carpet, they’re totaling it. It expedites, and it protects against future risk down the road if there’s an electronics problem.”

Insurers have also offered special discounted pricing for their claimants who need to replace flooded vehicles.

“I’m really happy with what these insurance companies do,” says Wolf. “The flood damage victims get special pricing on the new cars from the manufacturer. The manufacturer requires a letter from the insurance company saying the vehicle had a claim as a direct result of the hurricane, and we’re not having any issue getting that paperwork from the insurance companies. They get employee pricing which is significant. This is the real deal. The customer presents a letter saying they had a claim from the hurricane, they get employee pricing, which is 6% behind cost.”

Wild West of Cars

What will become of the totaled vehicles? Royal Purple Raceway, site of the annual NHRA Spring Nationals, suspended all drag racing activities through the end of the year to help store as many as 100,000 of the damaged vehicles. Using its 400-acre footprint in the Houston suburb of Baytown, Royal Purple Raceway has become a temporary storage facility for cars, trucks, boats and construction equipment destroyed by the storm. The track will resume its regular racing schedule in the new year.

“Some things transcend racing, and when you see half of our city underwater, you obviously have to prioritize your energies and resources,” says vice president and general manager Seth Angel. “The destruction created by this storm can only be described as biblical. It will take quite a bit of time for things to return to normal, and considering this city has done so much for the Angel family over the last three decades, we very much want to be part of the recovery.”

Meanwhile, a steady stream of tow trucks brings more destroyed vehicles to the Royal Purple lot daily.

“It’s like the wild west of cars down there,” says Smith. “It’s incredible. In Houston when you drive around, you might say, ‘Well, what happened? I don’t see any signs.’ There’s not flooded cars by the side of the road, there’s not buildings blown down. The only indication when you ride around is there might be sheetrock and carpet that’s stacked out by curb. But other than that, it looks like absolutely nothing has happened here.”

Sales Up

Meanwhile, the flooding’s effect on such a large number of vehicles has created a mini-boom for car dealers as people rush to replace lost vehicles.

Some things transcend racing, and when you see half of our city underwater, you obviously have to prioritize your energies and resources…It will take quite a bit of time for things to return to normal, and considering this city has done so much for the Angel family over the last three decades, we very much want to be part of the recovery.

Seth Angel, vice president and general manager, Royal Purple Raceway

“People have to get to their jobs,” says Smith. “They have to get around. They have to get supplies. They have to take kids to school. The sales that we are seeing thus far typically are people who can afford a new car without the benefit of a settlement from an insurance claim yet.”

Wolf cautions that, while sales may be up, profit margins are not.

“We’re selling a lot of cars, but our margins aren’t what they usually are because of this employee pricing,” says Wolf. “There’s a lot people who had 2015, 2016 vehicles who are buying cars, and they normally wouldn’t be buying cars. We’ve got customers who bought just about a month ago, and they are buying another car because that car flooded.”

“Business is very brisk now,” Dale says. “People out of necessity replaced the vehicles that they lost. The majority of the vehicles that we’re selling now are people replacing vehicles that were totaled. We had a family in here yesterday that lost three vehicles, and they were in here buying three vehicles.”

Patten is a contributing writer.

In its wake, it left more than 70 people dead, billions of dollars of damage, and hundreds of stories of strangers helping strangers. Several of those stories involve insurance professionals who were scrambling as early as Sunday to rescue customers from flooded homes and begin processing claims.

Randy King, a partner in Avalon Insurance Agency, an affiliate of Wright Flood Insurance, was keeping constant vigil on the rising water in his central Houston neighborhood, worrying not only about the clients he expected would have a tough time in the storm but also about a home he had just closed on but not moved into.

Nearby, one of his personal lines clients, Claude “Lee” Martin, a respected community leader and elder at the Westbury Church of Christ, was monitoring the storm from his two-story home, thinking Harvey just might spare his neighborhood. It stopped raining in his neighborhood Saturday afternoon, and he even spent some of the day swimming in his backyard pool.

But Saturday evening, rain started falling everywhere—in record amounts. Martin’s daughter and her family came to stay at his house because he has a second floor. They moved what they could upstairs, including a small air conditioner.

Some estimate Harvey dumped 27 trillion gallons on land, or enough to fill the Astrodome 86,000 times.

“I checked at 3 a.m., and it hadn’t stopped raining,” says Martin. “It just appeared to hit and stay here. Water was coming in under the doors. By 6 a.m., it was a foot and half deep in here. I walked down the street a bit, but the current was real strong and it could pull you into a storm drain if you didn’t know where they were.”

By Sunday afternoon the power had gone out, and he was fashioning a raft out of pool toys to evacuate his grandchildren from the waist deep floodwater that had by then engulfed his house.

Meanwhile, in the Houston suburb of Sugar Land, Westbury Church of Christ teacher LeeAnn Moody had thought she too would be safe. “I was sure that I could stay home and not be affected,” says Moody. “We’d had hurricanes before with no damage. My son kept asking me to come to Katy and stay with them.”

The storm was so long and so intense that the days seemed to run together, Moody says. She knows her son Kyle drove from Katy, Texas, to rescue her but cannot recall if that was Sunday or Monday. “It rained several days before he came to get me,” she says. “The last time Kyle called me to say, ‘I’m coming to get you,’ I finally said, ‘Yes, I’ll go.’ I was getting scared, and the waters were rising up the driveway quickly.
“With roads being closed by the minute, there was no guarantee that he’d get to me, but he did. Kyle and I walked through 18-inch-deep water with my frightened dog, one suitcase and whatever else I could carry.”

Hometown Hero

This one really opened my eyes. It ruined everything…Now we start from scratch and do it over. This type of event really takes people under. But I feel pretty good about staying here. I like this area, and I’m ecstatic that Wright did everything that should allow me to rebuild myself…I really feel like I’m going to be able to get out of this OK.

Claude “Lee” Martin, Houston community leader and elder at the Westbury Church of Christ

Randy King’s roots are in Westbury. The Avalon partner is a member of the Westbury Christian School board and married his wife at the Westbury Church of Christ. “I’m really tuned in to what the school is about and what the people are like. They were my first priority,” he says. When King discovered the extent of Moody’s flooding, he reached out to help her, offering up the house he had just closed on as a place for her to live while he helped rebuild her home, which included tearing out the wet sheetrock and insulation, rebuilding the walls, re-flooring and painting the interior.

King is delaying moving into the new home until he can get Moody back into hers, which he expected to have accomplished by the end of October.

Moody says King is “a little like a comic hero. Randy is always joking and funny but the first one to offer help.” Along with King’s help, the Westbury Christian faculty helped Moody pack up her house. And the football team and coach helped demo the damaged areas of the house. “Some of my own anatomy students were right there with me in the mess helping to demo, throw wet items out and pack my things up in boxes to move,” Moody says.

Martin echoes the response from King and from Wright Flood. Not only were the adjuster’s estimated damages exactly what Martin was expecting, but the communication and swift action were crucial.

“I’ve known Randy for years,” says Martin. “On Monday, he got my claim filed. On Wednesday, the adjuster called to say he was trying to come to Houston from Florida but the airport was closed. He got out here Thursday and said he was sorry it took so long. He was really professional. To me, the communication took a lot off my mind. I’m quite happy. The process has been handled extremely well.”

You look for people who look like they need help. You may get inside and find people who had too many other volunteers already. Maybe they just needed something like a fan or a dehumidifier to dry things out. But many needed all the help we could give.

Brett Herrington, president of Marsh & McLennan Agency Southwest

This comes in the face of losing a great deal. “This one really opened my eyes,” says Martin. “It ruined everything. All our memorabilia—that’s just stuff. Now we start from scratch and do it over. This type of event really takes people under. But I feel pretty good about staying here. I like this area, and I’m ecstatic that Wright did everything that should allow me to rebuild myself. It will probably take about a year to get the house back to where it was. I really feel like I’m going to be able to get out of this OK.”

All the Help We Could Give

According to the National Weather Service, Harvey dropped a total 51.88 inches of rain near Mont Belvieu, just east of Houston, making it the biggest rain-producing storm in U.S. history. Some estimate Harvey dumped 27 trillion gallons on land, or enough to fill the Astrodome 86,000 times. For perspective, Houston’s highest annual rainfall recorded at George Bush Intercontinental Airport north of downtown Houston was 49.77 inches.

Harvey affected far more homeowners than businesses. Richard Blades, chairman of Houston-based Wortham, said he expects 85% of Harvey claims to be residential and 15% to be commercial. Some 185,149 homes were damaged or destroyed, according to data from the Texas Division of Emergency Management. An estimated eight million cubic yards of trash from flooded homes—soaked drywall, flooring, furniture, clothing and toys—was generated by the storm in Houston alone. If stacked together in one pile, it would be enough to fill the Houston Texans’ football stadium two times over.

King admits to being scared as the rain started pounding his neighborhood Saturday night. “Saturday night through Sunday morning I was worried it was going to come in. It was just raining, raining, raining. Just constant pouring rain…. I had everything I needed upstairs, and I wanted to stay and ride it out. I never went to bed. I stayed up and watched the radar. At 2 a.m. Sunday, the water in the street was starting to get pretty high so I started putting everything upstairs.

I am crying because I don’t know any of you and you all have been working all day in my home helping me. I have seven strangers in my home getting me through the worst time of my life.

Harvey victim to Denise Douglas, senior account executive at Ally Financial

While both of King’s houses were spared, it wasn’t until Tuesday that water in the street receded enough for him drive his car. “I came into the office on Tuesday to help man the phones,” he says. “My partners work from their houses, but only one of them was answering phones, because the other got flooded and didn’t have any electricity.” The partner who was on the phone also had six inches of water in her house, but because her electricity never went off, she handled calls along with several other employees who were able to work out of their homes.

Other brokers and industry professionals heeded the call, showing their desire to help beyond just assisting with claims.

Reinsurance brokerage and risk/capital management advisor TigerRisk Partners sent a volunteer force of employees led by a former Navy SEAL to aid in rescue and recovery. Staging in San Antonio, the team assembled from several TigerRisk offices and embarked for Houston with a truck loaded with a flat-bottomed boat, tools, provisions, supplies, several ATVs and several four-wheel drive trucks.

“While we’re dealing with the economic aspects of the disaster, there are Americans in real need. In the face of so much suffering, we feel compelled to help,” says Rod Fox, CEO of TigerRisk.

The volunteer team was led by David Fernandez, an operations specialist at TigerRisk and former Navy SEAL. “The situation is a lot worse than people understand,” said Fernandez from a truck ferrying supplies from San Antonio.

Brett Herrington, president of Marsh & McLennan Agency Southwest, says several employee teams rallied to help displaced colleagues with tear down and removal of water-soaked items but they also stopped to help others in their area who needed it.

“You look for people who look like they need help,” says Herrington. “You may get inside and find people who had too many other volunteers already. Maybe they just needed something like a fan or a dehumidifier to dry things out. But many needed all the help we could give.

“Between sales and support, our people spent more time worrying about their colleagues than they did themselves,” he adds. “And it wasn’t just their colleagues. Many stopped wherever it looked like people were in need of assistance.”

Ally Financial senior account executive Denise Douglas had to be rescued from her flooded home on Monday and within days was volunteering time to help customers and even an elderly neighbor of one of Ally’s customers because she had no one else to help her.

“As we were helping one of the ladies gut her home and throw out all her belongings, she started crying,” says Douglas. “I walked up to her and put my arms around her and said, ‘I can’t imagine what you are going through watching years and years of memories be thrown to the curb.’ She turned to me and said, ‘That is not why I am crying. I am crying because I don’t know any of you and you all have been working all day in my home helping me. I have seven strangers in my home getting me through the worst time of my life.’”

Everyone worked hard and did things that we definitely do not do during the course of our normal business day. I had one lady pull me aside and say, ‘I never thought I would meet real angels in my lifetime, and then y’all showed up.

David Cullins, an Ally Financial account executive

Richard Beatty, an Ally Financial commercial product specialist, spent Tuesday rescuing as many as 25 people from the Blackhorse neighborhood in a friend’s boat.

“We heard a rescue boat had capsized in the Blackhorse neighborhood and people were missing, so we headed to Blackhorse,” Beatty says. “En route, a sheriff’s deputy pulled us over and requested that we follow them to the Bear Creek subdivision where a paraplegic needed to be rescued. When we arrived and launched the boat, the two deputies asked my son and me to stay on shore, as the boat was not big enough. As we were waiting we figured we could launch my boat there as well. The National Guard helped push the boat off the trailer, and we began rescuing people.”

“The experience is one that I would not wish upon anyone, but if I had to go through any type of disaster again, I would want these people with me,” says David Cullins, an Ally Financial account executive. “Everyone worked hard and did things that we definitely do not do during the course of our normal business day. I had one lady pull me aside and say, ‘I never thought I would meet real angels in my lifetime, and then y’all showed up.’”

Patten is a contributing writer.

Your office is in San Francisco. Do you live in the city?
I work out of San Francisco, but I actually live outside Salt Lake City. We also have a home in Houston.

How did your Houston home fare in Hurricane Harvey?
Thanks for asking. We had water come up to the top of the foundation, but it didn’t come into the house. We have lots of friends who weren’t so fortunate. Eighty-five percent of people in Harris County didn’t have any type of flood insurance.

Wow. And you’re probably looking at months of recovery.
It is going to take years to fully recover. The city of Houston has experienced three 100-year floods in the last 10 years.

What do you hear from your friends and neighbors?
Although it was catastrophic in nature, you saw the best of people in helping each other. So some good came out of the devastation.

Did you grow up in Houston?
Yes, Houston is my home. I went to school at Texas A&M. I had the fortune to coach baseball at Texas A&M.

While you were still a student?
I was a student coach, then a graduate assistant, then a full-time coach and recruiting coordinator out of school.

And you were a political science major. Did you ever want to go into politics?
I worked on two presidential campaigns. In 1988, I worked for the George H.W. Bush campaign. In 1990, when Bush was in office, I interned with the Treasury Department, in the Office of Legislative Affairs.

What’s your recollection of President Bush?
I think he’s one of the greatest citizens of the United States. He’s just a guy who, in my opinion, always had the country’s best interest at heart.

What have you learned from your experience in a campaign and in government that you have applied to your business career?
You move quickly, and you have to adjust your approach based on how others react. It’s a great life-learning experience regardless of which side of the aisle you sit on.

Were you always interested in politics?
I was. I was involved in student council and other leadership groups growing up. I had the honor of being president of my class at Kingwood High School.

Tell me about your volunteer work with disabled veterans.
I became involved with a project called Entrepreneurship for Veterans about 10 years ago. Every other summer, I go back to Texas A&M to speak with a group of disabled veterans who are starting their own businesses. It’s an intensive time where veterans interact with professors and business leaders. We are also involved with the National Ability Center. Both organizations perform a great role for our veterans.

What’s made you so passionate about the insurance industry?
Insurance for many of us is nothing more than a promise. It’s an awesome responsibility to help individuals and companies plan for events they hope will never happen and to be there to deliver, to help.

If you hadn’t gone into insurance, what would you have done?
I was either going to become a professional baseball scout or go into the insurance business.

What’s the most surprising thing about Salt Lake City?
It’s a unique place to live and work. Downtown is like most metropolitan cities, but you’re within 20 minutes of the very best hiking and world-class skiing around. I think the biggest thing that people would find surprising is that Salt Lake is quite diverse.

Have you had one mentor who’s been most influential in your career?
Mark Johnson, the longtime baseball coach at Texas A&M. He’s been a great mentor to me. He’s a legendary baseball coach—he’s in the College Baseball Hall of Fame and the Texas A&M Hall of Fame. You learn a lot from someone when you compete 60 to 70 times in a season. He’s still one of my closest friends, which is a bit odd given he’s my father’s age and he has kids my age.

What is something your co-workers would be surprised to learn about you?
Probably that I’ve been involved in politics. You don’t really advertise things when you know that 50% of the population doesn’t share your thoughts or beliefs. And they’d probably be surprised to know I still enjoy a Harley ride up and down the mountain.

If you could change one thing about the insurance industry, what would it be?
Perhaps being more innovative; we need to embrace change and technology to forge ahead.

What gives you your leader’s edge? I work with a lot of good people who work tirelessly to improve their clients’ situation, and that’s fun.




Vacation Spot
Maui, Hawaii

“Anything that has Chevy Chase in it.”

Reo Speedwagon and Train

Last Book Read
House of Nails: A Memoir of Life on the Edge, by Lenny Dykstra

Business Leaders
Warren Buffett and Jack Welch

Audi SQ5

The iPhone was introduced in 2007, and it would be another seven years before the FAA approved the use of a commercial drone over land.

Today, more than three quarters of American adults use a smart phone, and drones fly everywhere. That’s dramatically changing how insurers—and insurtech startups—handle claims after the widespread damage caused by Hurricanes Harvey and Irma in Texas and Florida.

“Going back 12 years, it’s changed tremendously,” says Jim Wucherpfennig, vice president of property claims at Travelers. Years ago, adjusters would carry separate equipment to do tasks such as measuring distances and roof slopes, record audio and take pictures. “It’s a big leap forward. We’re able to do a lot more with just smart phones.”

To expedite claims after this year’s hurricanes, insurers such as Travelers, Farmers and Chubb are flying drones while insurtech firm Snapsheet is putting mobile phones to work and Esurance is using predictive analytics and aerial images.

Travelers has deployed about 85 drone-certified claims professionals to assess damage to residential and commercial customers’ property in Texas and Florida. The company now has about 300 claims professionals trained to use drones and expects that number to climb to 600 in the first quarter of next year.

“The drones help us adjust the claims more rapidly and really enhance the customer experience when we can go out and see all the damage on that first visit with a drone flight, write the estimate and give the customer a check for the damages so they can start the repairs and get their lives back in order,” Wucherpfennig says. “The drones help us streamline the entire process.”

It’s also safer for adjusters who don’t have to climb dangerous roofs. There’s another attraction for customers who agree to drone surveys: they can see the damage in real time as the drone takes video and photos of their roofs.

Farmers has deployed drones for the first time in a major catastrophe in Texas. Drone cameras capture higher-resolution, 3-D images that detail physical damage and generate analytic reports in minutes. Farmers is also using geocoded mapping software to overlay its policies and post-hurricane aerial imagery to help triage claims electronically. Smart phones play a role, as Farmers’ customers can file claims from anywhere they have a connection.

Smart phones are revolutionizing hurricane auto claims. Chicago-based Snapsheet says it handled thousands of auto claims for its insurer clients in the first week after Harvey. Snapsheet provides the technology and support for carrier-branded apps that enable customers to take pictures of their damaged vehicles with their phones and submit those with their claims. Snapsheet employees write the estimates, enabling insurers to pay claims more quickly.

“From the time we receive the assignment, we’re processing and estimating these claims in a little over a day on average,” says Andy Cohen, Snapsheet’s chief operating officer.

“The traditional claims process requires physical resources on the job site, maybe driving around to inspect vehicles,” Cohen says. “Our ability to ingest a claim, estimate it accurately, and enable the carrier to pay it, allows the individual to replace an asset faster, whether that’s Houston, Galveston, Florida or South Carolina.”

While the customer doesn’t see what goes on behind the scenes, Snapsheet says its virtual claims model enables it to match its workflows to the demands of the disaster to sort hurricane-related claims from everyday ones.

“That allowed us to process thousands of claims before a standard insurance carrier would even be able to get to the scene,” Cohen says. “Speed really does matter in this. Getting the customer paid out, that’s why the insurance is there. That’s the moment of truth in the customer experience.”

People tend to connect blockchain with cyber currencies like bitcoin, but in what other ways is the distributed ledger technology being put to work today?
In situations where there are multiple parties involved in a transaction, distributed ledger technology (DLT) can help create a single “truth.” For example, processing a trade in the financial industry involves multiple parties, their IT systems and multiple departments across those trade participants. Processing the transaction over distributed ledger technology offers significant efficiencies over current practices. Instead of copying the data and storing it in multiple databases, processing with DLT can be validated and time stamped to confirm that all parties are recording the same messages. That saves significant amounts of duplication of effort as well as errors and reconciliation. We’re looking at that as at least one of the uses.

For insurers and reinsurers, are we still in the testing phase for the technology?
Absolutely. I haven’t come across any full application that’s in production or being used across a specific type of business. However, there are pilot projects under way. The R3 consortium is in the process of working on three or four pilot projects in insurance. There are a couple of other examples. AIG and Standard Chartered did a project using a specific type of distributed ledger technology called hyper ledger fabric, working with IBM to create a commercial insurance master policy. Allianz did a pilot project to create a smart contract using distributed ledger technology for catastrophe swap contracts. All of these are pilot projects. I’m not sure there’s anything that’s in production or being widely used.

How do you see distributed ledger technology being used in insurance going forward?
My personal perspective is that the low-hanging fruit is back-office efficiency gains.

When a transaction gets executed in insurance and reinsurance, there are multiple parties—especially in reinsurance, it is usually a multiparty transaction. By using distributed ledger technology, we can avoid counterparties’ recording their own version of “the truth” on their systems and then having to deal with the inefficiencies and complexities and reconciliation. All that can be eliminated if distributed ledger technology is used to recall the transaction; that then can be used by multiple parties. That is the near-term application of this technology.

How will the technology impact areas such as claims?
Claims follow contracts. When a contract is executed between different parties using a DLT framework, then all parties that are involved now have access to that, and only authorized parties can make a change. As soon as a change is made, then every party that is on that distributed ledger gets notified of that change. In theory, you could put claims as one of the nodes on that distributed ledger, and as soon as a claim occurs, it triggers a payment that then gets notified to everybody that’s on the ledger. That may be a little far out. One way that may happen soon is a claim gets notified to the ledger by the party experiencing the claim and as soon as that happens everybody on that distributed ledger gets notified that there was a claim. Ultimately, that’s connected to payment systems or banks. If DLT verifies that it is a legitimate claim, and all parties on the network agree to that, then that claim can be paid directly as well without any manual intervention, without any duplicate data entry.

Can those claims be tied to a parametric trigger?
That’s a lot easier. Those are what’s called self-executing smart contracts. Once you agree to that smart contract, as soon as an index triggers, like the PCS Catastrophe Loss Index or another index like what New Paradigm is doing with wind, then the entire process happens through the ledger automatically in terms of payments and everything.

Can you tell us about your participation in the R3 Centre of Excellence and how this will expedite the spread of distributed ledger technology in the industry?
At TigerRisk, we are focused on staying on top of technological developments. There are a couple of different aspects to our participation in R3’s Centre of Excellence. First, we can stay abreast of the developments in the DLT world through the R3 consortium. As a member of the consortium, we have access to all the projects that are done by the consortium, all the research materials and other information.

Second, we can work with R3 to solve some specific issues, such as bringing efficiency to the back-office process. R3 has a DLT platform called Corda, and we are working on a prototype using that platform to see if we can create this DLT framework to improve back-office efficiency. That is a two-pronged approach from our perspective. It’s staying on top of the developments—and R3 is a great resource for that because the consortium includes many banks and insurance companies—and then doing this private project work with them to create efficiency in the back-office processes.

How will DLT affect brokers going forward?
In the near term, I’ll come back to these efficiency gains. There is a significant amount of pressure on brokers to improve efficiency in their back office that creates significant savings with a direct impact on the bottom line. It creates a very efficient and trusted process where you don’t have any of this reconciliation or any errors. From a client perspective, that’s a great thing. If a client is working with a broker that’s using this technology, that’s in the best interest of the client. Now, the process is safe; it’s secure; it’s trusted and it happens quick. Clients become part of that distributed ledger. They have visibility and can see what is going on rather than having to wait to hear from a broker.

Is there a wider impact?
Everybody at TigerRisk is excited about this technology and its impact. Technology is an enabler for innovation. If we can take away mundane tasks from humans, they can focus on innovating new products and new ideas. Technology like this can replace that very easily, and that’s one of the key reasons for us to be involved.

In his book Unlimited Power, Tony Robbins calls this type of event a mental scotoma, which he defines as a mental blind spot. According to Webster, a scotoma is actually “a spot in the visual field in which vision is absent or deficient.” Robbins uses the term to underscore how these mental blind spots can keep us from seeing things that are right in front of us.

I hear examples of this all the time. I will be talking with someone about sending an emerging leader to a Broker Smackdown, a Council program designed to build business acumen in emerging leaders, and they will respond, “I don’t know who I would send. I don’t think I have anyone.” According to Robbins, the way to overcome a scotoma is to look at things in a different way, to reframe the way you see something.

Russell Conwell, the founder of Temple University, used the parable of Acres of Diamonds in the early 1900s to help people see things differently. The parable tells the tale of Ali Hafed, who travels the world looking for something that is in his own backyard. Conwell reminds us that to see things differently we must be open to the possibilities around us. We overlook the value of something because we believe we already know it. We must learn to look at the familiar in new ways—some of the best inventions (snaps, the cotton gin, the lawn mower) were created when people found a new approach to an everyday thing.

I believe, as an industry, we may suffer from a mental scotoma when we think about who the emerging leaders are in our firms. I contend you have diamonds in your backyard that you might not be seeing. So, let’s talk about different ways to identify emerging leaders.

Stephen Blandino, in his blog “Signs of an Emerging Leader,” suggests the following guidelines:

  1.  Look for the people in your firm who have influence, the folks who have the respect of others. Be sure to look beyond big personality.
  2.  Who takes initiative in your office? The first sign of a potential leader is demonstrating an ability to lead oneself. Identify the people who seek responsibility—not accept it, but seek it—looking for projects to take on.
  3.  People who possess forward-thinking ability, who think with innovation and creativity, could be the people to move things in the right direction. They see the world as it can be. They want to disrupt the status quo. They will not be confined to what is. They see better ways to get the job done.
  4.  Who in your office has strong people skills? Those who know how to work with other people will know how to influence people. This is a sure sign of an emerging leader.
  5.  Is there someone on your team who has the ability to motivate and mobilize others? The ability to see the need is only half the job. Knowing how to respond to that need and get others to help shows the potential to progress toward a higher leadership level.
  6.  Look at your problem solvers. True leaders are the ones who, instead of whining, wrap their head around the problem and work to solve it.
  7.  Emerging leaders are teachable, with a desire to grow, improve and be excellent in all they do.

In a Forbes article titled “The Best Talent You Have May Be Right Under Your Nose,” contributor John Baldoni, international author on leadership, tells us that sometimes our most talented leaders get overlooked because their supervisors have them in positions of low visibility. To spot this hidden talent, he tells us, look at teams that meet their deadlines and do it in ways that other teams envy. Engage these teams in conversation and listen for those who talk about the effort and skills of the people on their team. These are the people to consider for roles of higher responsibility.

Tony Richards of Clear Vision Development Group, in his blog “How to Identify Emerging Leaders,” writes that the following characteristics and traits are present in the folks who are your future leaders: (1) mental toughness—they rise to the occasion when things get difficult; (2) resiliency—they recover quickly from adversity, have a great ability to handle criticism and “eat critical feedback for breakfast”; and (3) strong communication skills—they write, speak and listen well.

While it is important to bring new talent into our industry, let’s be sure we are also developing the talent we already have, the emerging leaders who are sitting right under our noses, on the shelf, next to the mustard.

McDaid is The Council’s SVP of Leadership & Management Resources.

Recent developments with the CEBE board reminded me of the importance of keeping our most experienced, seasoned colleagues (including yours truly) engaged in fulfilling work that leverages our acquired knowledge. We veterans are a bit fatigued by years with clients on the reform roller coaster. A deep frustration has bubbled up over the lack of progress we’ve made as a country solving the drivers of healthcare costs. We’re not a group that is acquainted with so many roadblocks. We’ve built our careers around getting things done, and we have a bias toward action.

Specifically, Council members have grown increasingly frustrated at the lack of attention paid during the never-ending ACA repeal-and-replace debate to the underlying problem—cost. Some CEBE board members have voiced a desire to drive initiatives that go far beyond our traditional scope at The Council. They passionately agree that, absent enhanced engagement, nothing of significance will change. Not only will this jeopardize our industry, but our country will continue to suffer the consequences of an unsustainable healthcare system.

At the risk of stating the obvious, this problem is much larger than we. We are just one of many important stakeholders, including patients, providers, payers and regulators. We cannot lose sight of the entire equation as we strive to improve the system for our clients.

In that vein, the CEBE board has established a task force to explore how The Council can acknowledge this core issue of cost and appropriately engage in a larger dialogue. We all know partisan politics is at a high point in Washington. Gaining consensus on any issue—much less the hot button healthcare conversation—is extremely difficult. We must find a way to balance our noble, aspirational goals with practicality and with the charter of the CEBE board.

Over the last few months, this task force has had a spirited debate about our mission and options for tackling this challenge. We’ve nailed that radical candor thing, by the way. I had the opportunity to have one-on-one conversations to augment our group discussions; after each interaction, I’d think of the old saying that goes something like, “If you’re the smartest person in the room, you’re in the wrong room.”

I learned something new each time I spoke with someone about this. And therein lies the nexus of our role. We have a great deal to add to the ongoing healthcare conversation in our country. And the more we can disseminate our ideas backed by real data and case studies, the more we can influence the outcomes of this debate.

With this in mind, we have decided to make our priority producing thought-provoking educational pieces from differing perspectives on the underlying problem, the price of health services (medical and Rx). We’ll focus on pricing transparency, “legitimate” pricing and alternative payment models. By highlighting the different components in the complicated “price of health services” equation, we’ll educate legislative stakeholders and inspire informed questions back to Council members.

The Council is in education mode on this issue versus actively lobbying at this time. A 360-degree dialogue is needed to understand the challenges from the perspective of all involved, and brokers are uniquely positioned to educate on this topic given their expertise in local healthcare markets.

Over the coming months, you will begin to see more focus on these topics in The Council’s content. In fact, I hope you will take a look at one of our first offerings in this area—the Vital Signs spotlight section in this issue. In it, you’ll find a deeper dive into the topic of reference-based pricing.

How can you help? I’m glad you asked. You and your colleagues are critical to content development. Please consider the approach we’ve outlined and think about who within your firms has expertise and/or passion for these topics. The Council is prepared to dedicate time and effort to this, but our collaboration is necessary for this to be successful.

You might be wondering how you and your colleagues can fit anything else into your often overscheduled workweek. While that struggle is real, I believe there is a way to run our businesses while devoting some time and energy to our macro environment. I’d like to thank all of the members who have been actively engaged and invested time in very thoughtful dialogue on this serious issue. And I look forward to more to come.

Walsh is SVP and partner at Woodruff, Sawyer & Co.

To take part in this work, please reach out to Cheryl Matochik.

CEBE Cost Task Force

Jenn Walsh (Woodruff-Sawyer)
Kerry Finnegan (Mercer)
Maria Harshbarger (Aon Hewitt)
Jon Trevisan (BB&T)
Nancy Mellard (CBIZ Benefits & Insurance Services Division)
Brad Plummer (Cottingham & Butler)
Austin Madison (The Crichton Group)
Brian Robertson (Fringe Benefit Group)
Den Bishop (Holmes Murphy)
John Kirke (IMA)
Rod Cruickshank (The Partners Group)
Mitch Andrews (Plexus)
Dan Gowen (Wells Fargo Insurance)

This is why the world’s economic losses from natural hazards are 70% uninsured—more than 90% uninsured in many low-income countries.

The business of cat risk modeling has grown during the past few decades as insurers increasingly demanded predictability in return for underwriting risk in places like Florida. As a result, when a series of hurricanes struck the U.S. in August and September, insurers were able to tap into a staggering wealth of real-time information about possible losses under various scenarios.
Multiple times a day, as Tropical Storm Harvey and Hurricane Irma advanced toward Texas and Florida, the community of cat-risk analysts embedded in the leading insurers ran and reran detailed loss models based on enormous amounts of data about property values, weather behavior and flooding—all data that in the modern era help insurers price risk and decide whether to expose their capital to it.

But data about property value and exposures don’t exist for most of the world. Where data are scarce, so is insurance. And the same is true of effective interventions to reduce exposure and build resilience.

Underscoring this point is the recent devastation and loss of life from monsoon flooding that left more than 1,200 dead in Bangladesh, India and Nepal. By contrast, the massive flooding from Harvey, which hit Texas around the same time, cost some 60 lives. The death toll from Irma was north of 50. The reason the U.S. death toll was much lower than it was in Asia is preparedness informed by years of data and analysis that has led to better building standards and emergency response systems.

Modelers, and the data they collect and analyze, have become the critical foundation for building resilience in cat-prone regions rich and poor. Even in strong economies, the proportion of insured risk can be low, as Harvey demonstrated in Texas, where flood losses dominated. But at least in those markets, a mature insurance industry is able to fund investments in the practical application of data, science and analytics.

In low-income nations, by contrast, the work of cat modelers is largely philanthropic. The commercial incentive to invest is minimal. Lack of commercial motive isn’t the only obstacle to developing cat models. Numerous academic organizations build models but not generally of a type that has utility outside of research.

The issues of commercial incentives, transparency and standardization in cat modeling were the subject of a discussion with members of the Insurance Development Forum (IDF) at the Global Insurance Forum in London in July. On the dais were representatives of the largest professional cat modelers—Risk Management Solutions (RMS) and AIR Worldwide—and the nonprofit Oasis Loss Modeling Framework. The mission of Oasis, which gets most of its funding from the insurance industry, is to increase the availability of models by encouraging all manner of modelers to use its open source code and providing free access to nations most in need.

The notion of giving away all this valuable information might pose a threat to the for-profit sellers of proprietary models in the market. The founding organizers of the IDF—including more than a dozen global insurers and brokers and the United Nations and World Bank—recognized this. That’s why the IDF established a working group charged with finding a way to bring the ability to measure and price risk to vulnerable, underinsured markets in a way that is commercially viable for all stakeholders.

“The next big phase of activity for the [IDF’s] risk mapping and modeling group…is looking at interoperability,” Dickie Whitaker, Oasis CEO, says. “It’s fantastic…that RMS and AIR relish the opportunity to have that conversation, because if they’re not part of that conversation and they’re not part of the solution, there won’t actually be a solution.”

Or at least not an optimal solution.

Oasis is working with local academics and national and regional governments not only to build models—for example, for flood in the Philippines and for cyclone in Bangladesh—but to teach people in those countries how to do it themselves and to give them all the necessary tools for free, Whitaker said. When the Philippine and Bangladesh projects are completed, “We’re going to be able to see how we can replicate that around the world. It’s ‘modeling for the masses.’”

The for-profit firms, rather than resisting this effort, have in fact joined it. RMS, for example, has been funded by the U.K. and Germany to help the governments of the world’s 70 poorest countries close the so-called protection gap. And AIR has listed its models on the Oasis online marketplace, OasisHub.

RMS global managing director Daniel Stander cites his firm’s commitment to transparency. The company discloses its model methodologies to its clients. This doesn’t just help insurers refine their underwriting practices. It also helps insurers demonstrate to regulators and rating agencies that they truly understand their risk and are adequately capitalized.

Cat risk models do much more than help insurers manage their exposures, Stander says. “Models make markets,” he says. “Risk and capital cannot find each other unless there is a common language to describe what is being transferred. And the commercial models are that reference view for that trade, the standard around which a market can form and function.”

The markets that need to be made today, though, aren’t in Miami or Houston. They are in Bangladesh, the Philippines and scores of other at-risk, underinsured nations.

Daniel Kaniewski, AIR Worldwide vice president, says: “Simply understanding your risk would be a huge benefit regardless of when that mature insurance market comes along.”

Winans is principal of Chris Winans Consulting.

The second was the 2013 Target breach involving the theft of credit card and personal data on 110 million Americans. And the third was this September, when Equifax, one of the country’s largest credit bureaus, announced that data on 143 million people had been stolen, including names, addresses, Social Security numbers and birthdates. The theft also involved 209,000 credit card numbers and 182,000 credit dispute documents.

Although there were plenty of major cyber incidents in between these events—such as the multi-pronged attack on Sony in 2014—ChoicePoint and Target rang alarm bells and moved the needle on the cyber-security market. We can expect the same from the Equifax incident.

The Equifax breach finally may advance federal legislation regarding breach notification and spur other regulatory agencies, such as the Securities and Exchange Commission (which recently announced, it too, was breached), to mandate certain activities in cyber-security programs and reporting on cyber attacks.

Like a tsunami, insurance markets will be affected by resulting claims and increased risk and compliance costs flowing from the breach and any forthcoming regulatory actions.

The Equifax breach particularly highlights the risks associated with unauthorized access to large databases of personally identifiable information (PII) and the impact these breaches can have on ordinary individuals whose data may be used in fraudulent schemes, identity theft, or other crimes. The ugly truth underlying all of these incidents is not how much money it costs the company that was breached; it is how much it costs everyday people who have to keep their jobs and personal lives intact while trying to clear their credit report and resolve claims for accounts or loans they did not apply for.

A 2013 Bureau of Justice Statistics report found that identity theft cost victims $24.7 billion in 2012—more than all other property claims combined. More recently, the 2017 Identity Fraud Study released by Javelin Strategy & Research said 15.4 million people were identify fraud victims in 2016, an all-time high, with losses of $16 billion. Now, with identity theft protection as a popular employee benefit, expect increased claims on behalf of individuals if the Equifax data are used for nefarious purposes.

A little-known aspect of the whole data breach lifecycle is the role the credit bureaus have played and how breach notification has boosted their business. When any company’s PII is breached, it has to hire one of the three major credit bureaus—Equifax, TransUnion or Experian—to send out required notifications to the people whose data have been compromised because they are the only organizations with current contact information for everyone, including former employees who may be living elsewhere. Depending on the size of the breach, the fees charged by the credit bureaus for this notification service can be sizeable. But Equifax is spared this expense; it can simply send its own notifications.

The cost savings in notification, however, will do little to offset Equifax’s legal bills. The company already faces at least 23 potential class action lawsuits. The Federal Trade Commission has confirmed it is investigating the breach. New York Attorney General Eric Schneiderman says he is investigating the incident. Two congressional committees have announced hearings. The Senate Finance Committee has asked the company to respond to a request for information. And the Massachusetts attorney general has filed a lawsuit against the company for failure to protect consumers’ PII.

The Equifax breach appears likely to affect the company’s bottom line. Credit bureaus have built up quite a business selling identity theft services, such as credit monitoring and alerts, credit score reporting and lost wallet assistance. They used to refuse to put a permanent fraud alert or a credit freeze on accounts until state breach laws required them to do so. Why? The more breaches there were, the more money they made. In fact, Equifax CEO Richard Smith made his mark at the company by focusing on acquiring new sources of personal data, such as employment records, and on mining and selling various data reports. This strategy added employers and insurance companies to the firm’s client list and revenue to its financial statements.

The impact of the Equifax breach, however, will not be limited to the company and affected individuals. The incident also will cost businesses and the federal government. The information stolen in the Equifax breach is the precise information that is used in the authentication procedures of financial institutions, the Social Security Administration, and the Centers for Medicare & Medicaid Services.

“One important impact of a breach of this size is that it can be a systemic shock to established procedures of authentication,” says Paul Bond, co-leader of ReedSmith’s Information Technology, Privacy & Data Security Group. Indeed, banks and lending institutions are reportedly examining their authentication procedures and reconsidering doing business with Equifax.

The Wall Street Journal reported Equifax’s 2015-16 lobbying disclosure forms indicate the company spent more than its counterparts in lobbying Congress to limit liability regarding “data security breach notification” and “cybersecurity threat information sharing”—perhaps in anticipation that such a breach could occur. In addition, Equifax made political contributions to 13 members of the Financial Services Committee in the 2016 elections and lobbied to trim the power of regulators. This now will likely have a snapback effect as legislators and regulators feel the pressure to take action to protect individuals whose data was not adequately protected and was disclosed in the breach.

Equifax struggled to be forthcoming with information about the breach to assist companies using its services or individuals whose data had been stolen. It delayed announcing the breach for six weeks after it was discovered, and its lack of transparency will likely prove to be a costly mistake for Equifax and everyone affected.

Equifax is certain to remain in the cross hairs for some time to come, and insurance agents and brokers need to stay informed and prepared to help clients with claims and questions.

Westby is CEO of Global Cyber Risk.

Are you good? Or are you great?

We all want to think that our agencies are great and will fetch the highest value in the market. After all, we started the business and grew it, and it’s likely supporting a comfortable lifestyle. So most owners believe they deserve an attractive asking price when they go to market. And, in our opinion, there’s nothing wrong with wanting a high value for the business.

But is that what the business deserves?

Are you doing the work to generate at least 20% new business written as a percent of your prior year’s commissions and fees and growing organically by 15% annually? Our proprietary benchmarking suggests that most firms write around 12% new and grow in the low to mid-single digits. Very few have figured out how to run a sustainable, high-performing business.

Even in the most robust mergers and acquisitions market the insurance industry has ever seen—with multiples at an all-time high—there is a misconception about what price a seller will get. Many believe that, because of high demand, good and below-average firms still deserve the highest market value. But that’s not the case—not in any market.

Are you good, great or just hanging on to a really good lifestyle business?

If you want to take advantage of today’s active M&A market and truly maximize your value, there’s work to be done. Despite the high multiples being offered in the insurance industry M&A market, not every agency is worth 9 times EBITDA (earnings before interest, tax, depreciation and amortization). We can approach the market with optimism, surely. But we should not be overconfident about what value the market “should” bring our businesses because of buyer demand. Buyers still want to acquire organizations that are worth the investment, and they are willing to “pay up” for high quality.

Sellers ultimately express that, while money plays into the ultimate decision of which acquirer they’ll partner with, it’s not everything. They want better opportunities for their people and clients. They’re looking for opportunity to grow their post-closing income. They want to know that their people, organization and community will be taken care of after they’re gone. There needs to be a balance between maximizing value and finding a good partner that will fulfill these goals.

At the end of the day, it’s natural to want to maximize the selling price of your organization. But wanting the highest value for your business without having the growth and profitability track record to back that up can create an appearance of greed that turns off most buyers. It is a delicate balance. When you take a step back and consider what you really value—beyond dollars and cents—and what a buyer needs to realize to make the deal attractive, then you may just strike that value-partnership balance. The key is to know where you fit into the market. Be honest about where your organization stands today and how you could improve.

Recognize that, while valuation is certainly at an all-time high, there are still some companies that are good and some that are great. Your multiple will reflect performance and future capabilities. High tide raises all ships, but some boats are just nicer than others.

Now, it’s your decision—will you be good or great?

Market Update

Deal activity in September 2017 was consistent with the prior month, at 29 deal announcements. Year-to-date activity through September is up from last year roughly 7%, at 357 total announcements versus 334 announced transactions through September 2016. Nearly half the transactions announced so far this year have been acquisitions of property-casualty agencies, and more than 85% of all announcements have been traditional retail brokerages.
Acrisure remains the most active buyer in the marketplace, having announced 30 transactions so far year to date. Hub International is a close second at 27 announcements, with BroadStreet Partners and Arthur J. Gallagher at third and fourth with 23 and 21 deal announcements respectively.

During the month, it was announced that private equity firm KKR was selling its minority interest in Alliant Insurance Services to company management. It is estimated that KKR made 2.5 times its original investment in 2012 on the sale, with the original value of the business at $1.8 billion and current valuation at $4.5 billion. Private equity company Stone Point Capital continues to have a stake in Alliant.

It was also announced this month that OneDigital Health and Benefits will be taking over as broker of record on an estimated 8,700 Zenefits insurance accounts, following several years of controversy at Zenefits regarding investigation into its insurance brokerage activity, among other internal disruptions. Zenefits is confident this will create less channel conflict with brokerages in the insurance space and allow it to better serve its brokerage customers.

Trem is SVP at MarshBerry.
Securities offered through MarshBerry Capital, member FINRA and SIPC. Send M&A announcements to M&

[Editor’s note: If you missed our conversation with Mike Sullivan, chief growth officer of OneDigital, check it out.]

Leader’s Edge: Tell us what is behind this shift in your strategy.

Rogers: Everything starts with the client experience and should tie back to that. Some time ago we began thinking about how we optimize that experience not just across the HCM [human capital management] platform and payroll but also across benefits. However, benefits is a little bit of a unique situation in that this idea of remote, digitally enhanced brokering hadn’t really penetrated the small group segment. Zenefits was really good at catalyzing the acceleration of that in small group.

As we started to serve larger companies, we found that the relationship aspect of brokering was a critical component that our model just didn’t address well. When you move above the 50- or 100-employee mark, depending upon which state you’re in, there is more back and forth in terms of carrier negotiating based on the client’s needs, and there were some gaps that couldn’t fully be incorporated into the technology. We began to understand that if we really wanted to continue to serve [our clients] in the best possible way, we would eventually have to work with local brokers.

We still believe strongly in this model, but experience has taught us that we need to be flexible and adapt to what customers are telling us. We evolved from the anti-broker sentiment of the early days to focus on what is the absolute best client experience, which is the combination of our leading technology and local presence of experienced brokers—that is what the market really wants, especially outside of the small group segment.

We began looking at progressive, national footprint brokerages who had some like-minded thinking around how technology could accelerate and enhance the client experience and who were very rooted in the local presence and knowledge. Looking at the challenge through that lens, one organization quickly stood out, OneDigital.

Small groups have always been difficult for commercial brokers to make any profit on. What do you do differently with your software that makes this efficient and profitable?

At a high level, our platform reduces the manual process, busy work and paper involved with HR, benefits and payroll. The result is a much more streamlined, transparent and enjoyable experience for the company and its employees. If you think about the lifecycle of an enrollment, the employer goes through carrier selection and plan selection, then the employee goes through carrier and plan selection, and then there’s a bunch of paperwork completed and it’s submitted.  And if it’s wrong, it gets pushed back out to the broker before it finally gets entered at the carrier, and the whole process is dependent on paper and passing these gates. Employer to employee, employee to broker, broker to carrier…. I think fundamentally what Zenefits brought to bear was, we’re going to take all of that, we’re going to digitize it from the quote through enrollment…and then, to the extent possible, push that data electronically to carriers.

So under 50, how much interaction are they going to have with a broker? Is that still more of a technology play in your business model?

It’s actually segmented even further than just under 50. If you think about the way OneDigital approaches the marketplace, they have a certain brokering setup for the 1-10 market, they have another for the 11-25 and then 25-50. OneDigital will service all of those groups in a face-to-face manner if required, but the 1-10 and 11-25 for the most part can be handled telephonically and OneDigital does a great job of that…they’ve really figured that out over the last 15 years. For the 25 and up segment, there will be a lot more face-to-face activity with the brokers because it’s necessary as those groups get larger.

What are your plans to go upstream in the marketplace?

We already have a number of clients in that segment; it’s just continuing to build the technology to offer the flexibility that clients with larger groups require. So that trajectory has never really changed that dramatically. I think what accelerates it now is the capability to bring deep, local brokering experience into that equation. The plan is what the plan has been, which is thoughtfully continue to progress up market with the right ingredients to serve the client, and I think this relationship with OneDigital really fast forwards one of the ingredients we think we need to go do that.

What are you going to do with the 10,000 other cases that you haven’t handed over to OneDigital? Are you going to continue to act as a broker for them?

There are two pieces to this puzzle. One is servicing of the existing book, which is the 7,000 clients that OneDigital is going to manage moving forward. OneDigital is the best in the business at managing small groups at scale through their back office in terms of conventional brokerage. So, they were the natural fit to take over that existing book of business, and we’re going to work closely with them to continue to service those clients. And the clients will have an enhanced experience because they’re going to have someone locally to support them.

The second piece of the equation is the go-forward approach, driven by our Certified Broker program, of which OneDigital is the first partner. The approach is to combine best-in-class technology and best-in-class local knowledge and brokering experience and being able to say to a client, “Hey, we’re in a position now where we can offer you the software, we can offer you the local presence that our previous model didn’t necessarily support, and we can bring that to you flexibly depending on your geography and what size group you are. And in the future, we will expand that channel beyond just OneDigital. There will be potentially a selection of partners based on whatever MSA [metropolitan statistical area] you happen to reside in as a small or mid-size business.

When you talk about your Certified Broker program and having a local presence, is the vision to have one broker per region?

The vision is to have more than one, but it will be very targeted. In every MSA, frankly, there are several brokerages that are dominant, and those usually don’t number in more than two or three. So the idea is to really find who those key partners are, and it doesn’t always have to be the biggest brokers in the area. It’s got to be the right, progressive nature of the brokerage, and there’s got to be some synergy in terms of culture and willing to invest.

Can you give us any insights into what your data contracts with brokers will look like? Are they going to gain more access to the data that is collected through this?

Yes, that’s the hope. Because we are a system of record, we obviously have significant amounts of data. We do a lot of benchmarking now across that data that we can surface in an anonymized, aggregate manner through all of the gates of security. But we certainly think that’s a huge potential value prop for the broker. The intent here is to optimize the client experience. If we can educate them on what companies like theirs are buying across markets, segments and industries, and that makes the broker more valuable to the client, we want to do that. We’ve started down that path, and we have some of that benchmarking data available. We certainly look to enhance it within all the confines of how we treat data to make sure it’s valuable to brokers in a growing fashion as we roll this out.

What is it about the culture of both of your company and that of OneDigital that fits so well together?

Culture obviously starts with people, and I think we noticed early on in our conversations that we are very well aligned on providing a better experience for customers—Zenefits through our technology and automation and OneDigital through the back-office processes and local, experienced brokering. Some elements of our cultures are very different, but we are perfectly aligned on the critical priorities, and both companies feel like we are changing the marketplace and doing better things for the consumer and driving better access to care.

We don’t think anyone has optimized this experience between broker and tech anywhere in the 50 to 500 marketplace and that is what we are trying to deliver by partnering with progressive brokers like OneDigital.

And while we saw how remiss we would be in leaving the devastating effects of this storm out of our hurricane coverage, we know that digging into the details of Hurricane Maria’s effects is going to take time.

Recently, some modelers have issued notably different estimates for Maria insured losses. Reports show RMS estimates between $15 billion and $30 billion for total insured losses, and Karen Clark & Co.’s reported estimate is nearly $30 billion in insured losses, with roughly $28 billion coming from Puerto Rico. However, AIR Worldwide has estimated Maria insured losses from Puerto Rico alone could range from $35 billion to $75 billion.

Clearly, there is still a great deal of uncertainty around the effects of this storm, and we will continue to monitor the developments. However, in an effort to gain some initial insights into Maria and, in particular the effect in Puerto Rico, we spoke with Sean Kevelighan, CEO of the Insurance Information Institute, onsite at The Council’s annual Insurance Leadership Forum in October.

“We’re still in the middle of a very active hurricane season and we are seeing the impacts through Hurricanes Harvey, Irma and now Maria,” he says. “And these are all different events in a lot of ways. You saw with Harvey a flood event, with Irma a wind event, and what’s most different for Maria and the insurance market is there was a significant amount of industry built in Puerto Rico, with the likes of pharmaceuticals and others. That’s why we’re seeing a pretty broad spectrum in terms of the amount of costs that the industry could incur, especially on the commercial side, you really saw a spike in those estimates.”

Kevelighan echoes some of the thoughts behind RMS’ estimate. The modeler notes that “roughly 60% of the AIR modeled losses are generated by the industrial line of business. Unlike many islands in the Caribbean, whose economies rely heavily on tourism, the economy of Puerto Rico is largely driven by manufacturing—primarily by pharmaceuticals, petrochemicals, electronics, and textiles within that sector. (It is estimated, for example, that there are more than 80 pharmaceutical manufacturing plants in the territory.)”

RMS notes that some of the uncertainties that come into play in Puerto Rico have to do with the potential effects of things like demand surge—increases in the price of labor and materials following a natural catastrophe—business interruption losses and business continuity planning, and infrastructure challenges during recovery. “The slow and extended restoration can lead to higher levels of damage to insured properties as building envelopes remain open to the elements.”

Kevelighan noted that the possibility exists for rises in reinsurance and commercial rates, coming out of Maria, but exactly what and how, remains to be seen. On a larger note, he says that the trend in extreme weather is on the rise, but presents opportunity for the insurance industry.

“You can go back to 1980… and you’ll see a significant increase in terms of frequency and severity, most of which are in the meteorological or hydrological—storms and flood type events. What I think is important for the industry to focus on is less about… the politics of what’s going on and more about how we get to the solutions. And that’s a real opportunity for the insurance industry…let’s see how we can mitigate the risk and make our communities more resilient. This is what we do as an industry and I think we’re well poised and have a really good opportunity to do that.”

He brings up reauthorization of the National Flood Insurance Program at this crucial time. Multiple experts have noted that there is the potential for large uninsured flood losses with all of these storms, as it’s often not covered in the policies people have. “Flood has impacted 90% of every major catastrophe. There’ s a flood issue in every one,” says Kevelighan. “We’ve got to increase our education about that. It’s unfortunate that our customers are not as educated [about flood] as they could be, and honestly the reason is the private market’s not there. If you think about what we could do with flood if the private market was in there and it was able to market itself like we see in other areas like auto insurance and home insurance, and we’re able to educate people…not just to help people appreciate why insurance helps but also appreciate what it’s going to take to mitigate the risk because honestly the insurer and the customer don’t want to suffer the risk.”

Kevelighan also discusses the importance of ensuring infrastructure is rebuilt with resilience in mind. “We hear a lot about infrastructure spending—we’re going to spend a trillion dollars potentially on infrastructure. Can the industry help? And educate people? If we’re going to spend money on infrastructure [let’s] make sure that it is ready to withstand what we’re seeing in terms of natural catastrophes.

“I think there’s going to be a good a case study that comes out of the difference between Irma’s impact and Harvey’s impact. In the state of Florida, after Hurricane Andrew, you saw building codes go up and get more solid in a a lot of ways…And then you look at Harvey, in that area of Houston where building codes are virtually non-existent. So you’re going to see an illustration and a comparison of communities and what resilience does. And as an industry we need to be helping our customers understand the value of that. If catastrophe strikes, how can you build forward instead of just building back to the way it was?”

For more of our conversation with Sean Kevelighan, listen below.

What’s to love
Hamburg is a dynamic, open-minded metropolis with all its qualities but still preserves a laid-back attitude and neighborly charm. Parks, green spaces, forests and waters make up almost 50% of the city. But Hamburg also has cosmopolitan charm. We are always open to new trends, and internationality forms a part of everyday life here. That’s why the start-up scene is continuously growing.

New and exciting
The Elbphilharmonie concert hall, which we fondly call Elphi, is a wave made out of glass, steel and concrete that rises into the sky. It’s worth a visit not only for the spectacular architecture but also for the exceptional acoustics.

Hamburg is famous for seafood. Fresh catches from the North Sea arrive daily at the harbor, where the restaurants offer excellent seafood and commanding views of the port.

Favorite new restaurant
Definitely The Table, run by Germany’s youngest holder of three Michelin stars. There is just one, single, large table made of cherry wood. From here, you can take a look at the open kitchen and observe how unique flavor experiences are made.

Classic eats
I love eating at Tarantella, especially in summer. They have a spacious terrace, which has a nice view of our city park. The restaurant serves a varied range of international food. I’m a friend of seafood; therefore, I always go for something fishy.

Because of the ambience, I prefer to take clients to any of the places around Alster Lake, such as the Anglo-German Club e.V. Another beautiful spot is the rooftop bar Clouds. It’s at the heart of the Reeperbahn and the top of the famous building called Dancing Towers.

I usually recommend the Fairmont Hotel Vier Jahreszeiten or Hotel Atlantic Kempinski, but in October, Hamburg is going to have a new luxury hotel: The Fontenay. It is an architectural wonder, and a Michelin-starred chef will run the restaurant.

Thing to do
Explore our gateway to the world—our harbor. Take the ferry or book a cruise on the Elbe River. You can sail on Hamburg’s so called “green lung,” Alster Lake. But Hamburg also has numerous theaters, museums, operas and galleries that make it a pure cultural pleasure.

Side trip
Hamburg is close to the coast. Visiting the islands is worth a trip. They are blessed with gloriously long beaches and unique natural surroundings. Sylt, Föhr and Amrum—just to name a few of them—are also the poshest places to be.

Editor’s Note: One day before we released the October digital issue of Leader’s Edge, the mass shooting occurred at the Route 91 Harvest Festival in Las Vegas. While we had planned to extol the virtues of the re-energized classics and new entrants on the Vegas scene (and we still will), we could not write about this resilient city without acknowledging the horrific event it has just endured. Our thoughts are with everyone affected by this tragedy and we hope to take part in the healing and hope the city needs.

Caesars Palace Las Vegas celebrated its 50th anniversary last year with a night jump by the Red Bull Air Force skydiving team. Wearing illuminated wingsuits equipped with red, white and blue LED lights, they landed on Las Vegas Strip right in front of the hotel. The stunt was a nod to daredevil Evel Knievel, who in 1967 attempted to jump the resort’s towering row of fountains on his red, white and blue motorcycle, a feat that was successfully completed years later by his son Robbie Knievel.

Caesars Palace will be work and party central for InsureTech Connect 2017, which is held this month. Attendees can be assured that this icon on The Strip is not resting on its laurels 50 years later. The resort recently completed a $75 million renovation of the original Roman Tower (now the Julius Tower), the latest piece of a $1 billion investment that also includes the addition of new villas on the 29th floor of the Palace Tower and 800 renovated suites. Accessed by a private elevator, Mr. Chow opened at Caesars Palace in 2015, making a splash with its Beijing duck and champagne trolley. The hotel is also home to Absinthe, deemed “The #1 greatest show in Las Vegas history” by Las Vegas Weekly.

Other upscale hotels and restaurants on and off The Strip are keeping up. Wynn Encore Resort and The Venetian first upped the ante on swanky new places to catch a few winks when they upgraded their suites in 2015. The Cosmopolitan has added 21 expansive penthouse suites to the formerly empty top four floors of the Boulevard Tower. Targeting high rollers, there is a minimum buy-in of $1 million at the Reserve to enjoy a balcony overlooking the Bellagio fountains, a $56,000 bottle of Louis XIII Black Pearl cognac, and a white grand piano. At the north end, The W Hotel Las Vegas has opened its first hotel inside the SLS Las Vegas.

As for new celebrity chef restaurants, Blue Ribbon at The Cosmopolitan offers signature dishes from the SoHo original (beef marrow with oxtail marmalade) as well as new ones (a tower of shellfish and caviar that comes with bottle of champagne). West of The Strip, chef Brian Howard is dishing up eclectic offerings at his upscale Chinese restaurant, Sparrow + Wolf, which specializes in live-fire cooking. At The Mirage, Otoro Robata Grill & Sushi features inventive skewers and dishes prepared in a Japanese robata grill.

Now that we’re all comfortable talking to machines, more insurers are adding digital voice assistants and texting chatbots to help consumers. Farmers Insurance customers who own an Amazon Echo can now ask Alexa, the virtual assistant, to access their policy and claims information just using their voice. Farmers follows Liberty Mutual, which last year enabled customers to seek auto insurance quotes and answers to questions about home and auto using Alexa. Allstate added Alexa voice assistant capabilities earlier this year.

Nationwide’s Alexa capabilities include enabling users of its SmartRide usage-based insurance program to ask about their personal driving habits to help them drive more safely, and reduce their premiums. Noting that insurance can be complex for customers, Aviva launched an Alexa “skill” that allows customers to ask questions about hundreds of insurance terms. Progressive customers with a Google Assistant can ask the device a variety of questions about their personal insurance.

Since more people are typing rather than talking on their phones, chatbots are getting bigger as well. Among the big insurers, Geico’s chatbot Kate answers questions including those on policies and billing.

But startups are really making their mark with chatbots. Massachusetts-based Insurify provides auto quote comparisons with a Facebook Messenger chatbot. Palo Alto-based Next Insurance offers full insurance signup via Facebook Messenger for small business owners, such as personal trainers, photographers and construction tradespeople.

Lemonade’s chatbot helps customers buy homeowners and renters insurance, and it also settles and pays claims. On-demand insurer Trov enables users to buy insurance for personal items using a mobile app and to settle claims using an in-app chatbot.

Chicago startup HealthJoy provides a healthcare concierge chatbot, called Joy, that helps users navigate care and benefits. And then there’s the Woebot, designed by a Stanford researcher along with psychologists. If you’d like to chat with an automated therapist who’s always ready to listen, check up on you and offer a little insight, Woebot is waiting.


What opportunity did you see when you were deciding to start Trov?
Trov was started with the idea that there is enormous value in the information about the things people own, and Trov exists to help people unlock that value for their own benefit. This remains the heart of the business today and is how we’re able to offer an innovative, data-driven insurance product.

Early on, we figured if we could keep people in contact with, and in control of, the information about their things, we could potentially disrupt multiple big markets: insurance, e-commerce, the sharing economy, retail, advertising, finance and credit. That is what we initially set out to do; we wanted to help people collect information that had previously been hard to gather and then solve the corresponding problems people face when trying to collect this type of information (while also keeping this process fresh, of course).

Recently, there has been a huge change in the attitudes toward and behaviors of one of the most difficult demographics to market to: millennials. We identified a gap in the insurance market here. Most millennials are very unlikely to have any type of content insurance, and yet no one in the insurance space was tapping into this demographic. No one was innovating or thinking outside the traditional box of the industry.

The key opportunity for us was to provide a new, transparent and simple insurance that resonated with this audience. Enabling people, through their smartphone, to protect what they want, when they want, for whatever duration they need, was unheard of in the market. Ultimately, the product had to be ready for the various demands of the tech-savvy, time-poor consumer. It had to be accessible on a mobile device and harness the “nowness” of people’s lives. It couldn’t bog them down with 24-month contracts or archaic customs.

The traditional insurance model means insurers engage with a consumer twice in one year: once when they’ve sold the insurance and again when they ask the consumer to renew. These consumers might engage in the meantime by putting forward a claim, but there are millions of people paying for insurance for time periods when they just don’t need it. Ultimately, it had to be on-demand and it had to be “micro-duration.”

Our policies combined with the technology that supports the app allow us to measure and run a price risk analysis, meaning you pay only for what you use, literally up to the second. This is specifically for the generation that says, “Don’t lock me into any long periods of time; give it to me when I need it. I have to be able to engage with insurance only when it suits me and through my mobile device.”

The on-demand aspect is what we’re especially proud of. It is one of the most important features of our platform and the key opportunity we harnessed and delivered on.

Thankfully, Trov is now at a stage where people can insure an item for just a few minutes with the functionality of the on/off button, which allows insurance to be turned active or inactive. This provides so many possibilities. It removes the restraints of long contracts and the necessity for printed documents; something that’s becoming ever more redundant in the digital age.

How is on-demand insurance changing the industry? How will it?
The ability to effectively switch on and off insurance for any item at will has disrupted the industry in its own way by allowing freedom and accessibility on a platform that’s reliable, simple and attractive for our audience. It provides a level of assurance that is easy to understand and access. The insurance industry was always perceived to be lagging behind. It seemed complicated and inaccessible, and we wanted to change that.

Most millennials are put off by lengthy contracts and “signing their lives away.” They will continue to be unless the industry evolves and keeps up with today’s technological advancements. The ability to simply grab an app and switch insurance on and off for any item at will is exactly what people should want and expect from an insurance product.

The big change, which is of particular relevance, is the meta-narrative under which this all fits: that life and risk hasn’t changed over the last 300 years. People still get up in the morning and care about their things and not losing them. They want to have resilience and know that they can recover from financial or catastrophic loss.

What has changed is the ability to measure life in ever smaller increments. This is only the beginning of what will certainly be a massive disruption.

Are there challenges that make the U.S. more difficult than Australia and the U.K.?
The common challenge with launching any app in the U.S. is the process of going through each state’s submission procedure and sign-off. Every state in the U.S. now has a different set of requirements before you are approved, which can be extremely time consuming. We are making great progress though, working closely with each state regulator.

The U.K. and Australia were much simpler. There is just a single national regulatory body.

In how many U.S. states do you anticipate launching this year? Next year? Where?

We’ve already been approved in 23 states and hope to raise that number significantly by the end of 2017. We’re also looking to launch in Canada and Germany in 2018. We actually have an interactive map at, where you can follow the launch state-by-state and be notified when it is approved.

Cedar Rapids suffered some serious flooding a year ago, with the Cedar River cresting at six feet above major flood stage. What was that like for you and your business?
On Sept. 22, 2016, we were implementing our emergency plans, sandbagging and evacuating our building. At the same time, we were working to service clients and helping other members of the community prepare for floodwaters. Just one week prior, we were celebrating the open house of a new 13-story building in Cedar Rapids and reflecting on the resurgence of our community following the floods of 2008.

What lessons did you learn from that experience?
It was a real test of your commitment, your values, your work ethic. We were just doing everything we could to keep business operating for all those clients who entrusted their personal lives and their businesses to us. At the same time, we were trying to protect our building and trying to help families that were part of our company.

You’ve described yourself as passionate about “things with wheels.” How did that happen?
I like to say you’re born with that. My grandparents still tease me. When I was three years old, I’d stand between the two front seats of their Chevy van, and I could identify the make and model of every car and truck on the road.

Tell me about your car collection.
I’m a European-sports-car guy. My car of choice is Porsche, so the preponderance of what I have are air-cooled Porsches.

Why Porsches?
I’ve always appreciated the engineering, the racing pedigree and their practicality. The great thing about a Porsche 356 or a Porsche 911 is you can put a family of four in that car and go for ice cream. Family is extremely important to me, so enjoying the cars with my family is very special.

Is there such a thing as your favorite car?
For my 40th birthday last year, I found and bought a 1976 Porsche 930 turbo. It’s a pretty special car to me. That car was my poster-on-the-wall car as a kid. It’s the same vintage as me, so we have both picked up a few bumps and bruises along the journey.

It sounds like your father, Duane Smith, shares your passion for all things wheels.
My dad and I always shared a love for cars. In Iowa, you can get your driver’s permit when you’re 14. On my 14th birthday, my dad and I went to the DOT office and waited for them to open up. I took the test and got my permit, and he threw me the keys.

Your dad is also one of the founders of TrueNorth, and he remains the CEO. What’s the best thing about working with your father?
His willingness to take the time to mentor, to play a part in solving problems, and then seeing the results of that over 20-plus years is just awesome. The respect we have for each other, and the energy we get from each other, is pretty awesome for us and our families and the more than 300 employees at TrueNorth.

Was it expected you would work with your father?
No. When I got my driver’s permit, I would drive my father to appointments during the summer. I got to spend a lot of time with him. I really got an understanding from the word “go” of what risk management means to a business.

What would you have done if you hadn’t gone into insurance?
The only thing I’d rather be doing—and I say this with a smile on my face—is be a racecar driver.

If you could change one thing about the insurance industry, what would it be?
That it’s respected as a critical component of security for people and for businesses. I want the industry to be respected, but I also know that respect is earned, so we’ve got to work at that every day.

What gives you your leader’s edge?
My willingness to identify problems of any shape and size and engage with teams in solving them. I’m very much a person who enjoys the thrill of accomplishing things as a team.




Vacation Spot
Grand Cayman Seven Mile Beach and Deer Valley in Park City, Utah

Favorite Musician
U2 (“I just saw them at the Rose Bowl in Pasadena. They did the Joshua Tree tour. It was incredible.”)

Last Book Read
The Leadership Journey by Gary Burnison

Porsche Cayenne SUV

Stephen Catlin, Special Advisor to the CEO, XL Catlin

Helen Clark, Administrator, United Nations Development Program
Joaquim Levy, Managing Director & CFO, World Bank Group

Committee Members:
Inga Beale, CEO, Lloyd’s
Albert Benchimol, President & CEO, AXIS Capital
Gregory Case, President & CEO, Aon
Jean-Louis Davet, CEO, MGEN
Denis Duverne, Chairman, Axa
Daniel Glaser, President & CEO, Marsh & McLennan
John Haley, CEO, Willis Towers Watson
Torsten Jeworrek, CEO Reinsurance, Munich Re
Denis Kessler, Chairman & CEO, SCOR SE
Christian Mumenthaler, CEO, Swiss Re
Christopher Swift, Chairman & CEO, The Hartford
Maurice Tulloch, Chairman, Aviva Global Insurance
Rob Wesseling, President & CEO, The Co-operators Group
Mark Carney, Governor, Bank of England, and Chair, Financial Stability Board
Robert Glasser, Special Representative of the Secretary-General, UNISDR
David Nabarro, Special Advisor to the Secretary-General, United Nations
Stephen O’Brien, Under-Secretary-General and Emergency Relief Coordinator, Office for the Coordination of Humanitarian Affairs, United Nations

Risk & Reward is a valuable and thoroughly enjoyable book penned by a legendary underwriter. In effect, it is three short, distinct and very readable books bound into one, although the sections hang together very well.

The first section colorfully explains how the international wholesale insurance market—and especially Lloyd’s—actually works and is chockablock with anecdotes and examples from Catlin’s 45 years in the market. Never before has the global commercial insurance industry been explained (and laid bare) with such coherent simplicity and candor.

The second section is a brief history of Catlin, the author’s Lloyd’s business (now part of the global giant XL Catlin). It begins when Stephen Catlin entered the market in 1973. “I spent the first five years figuring out if it was the most famous insurance marketplace in the world or just a gambling casino,” he writes. This section covers the growth of Catlin from a business employing two people to one employing 2,500, then its acquisitions, and ultimately its merger with XL in 2015.

Alongside the corporate history, Risk & Reward tells fascinating stories about the action and shenanigans at Lloyd’s over the decades. It includes, for example, details of a secret meeting between senior people from Lloyd’s and Marsh in the wake of the World Trade Center attack, when the underwriters successfully convinced the brokers that Lloyd’s was not about to collapse. “If Marsh had decided to stop placing business with Lloyd’s syndicates so soon after 9/11…it could have tipped Lloyd’s over the edge,” Catlin admits.

The third section comprises the author’s personal musings on successful management—Catlin is an extremely credible source—and on the future of the insurance sector. Catlin’s uncanny ability to see around the corner is proven by his track record.

“No one has ever explained our industry’s value proposition. That’s what the book is about,” the author told Leader’s Edge. “This book shows how the parts come together. I hope it helps people who sit outside the industry, work alongside it, or are looking to join it to understand the big picture.”

No doubt it will. But it’s industry insiders who will be most fascinated of all.

Adrian Leonard

Leader’s Edge readers can purchase hardbound copies of Risk & Reward for the discounted price of £19.99 (equivalent to about $26) plus £9.99 ($13) shipping and handling, by ordering directly from the publisher, Iskaboo Publishing Ltd. ( Please enter Coupon Code LE01. All major credit cards and PayPal are accepted.

Stephen Catlin was first approached to chair the new Insurance Development Forum nearly three years ago. His recruiter was Rowan Douglas, CEO of Willis Towers Watson’s Capital, Science, and Policy division.

“Why me?” Catlin asked.

“We need a heavy hitter,” Douglas replied.

“My question stands!” Catlin retorted. “I think it is a worthwhile cause, but can I add value?”

Catlin was an employee then, following the sale of his Lloyd’s business to XL Group. He had to ask his CEO, Mike McGavick. The boss was emphatically on board.

“Stephen, it is absolutely a worthwhile cause, and I would love us to be associated,” McGavick told Catlin, “and you have the time and the network to do it, so I would like you to do it.”

“I thought about what came next and how I, as an individual, had set up a company from scratch,” Catlin recalls. “When you do that, your first goal is to try to survive, to pay the mortgage. I’d had 10 years of that when I set up the syndicate. Beyond that, for me, adding value and making a difference became much more important. If you do that, making money is a byproduct.”

On the basis that he could add value, Catlin said he would give it a go. “The test was the steering committee,” he admits. “I got it together myself in two weeks. It speaks to the importance of the subject matter to the individuals. They bought into the IDF, and I am fortunate to have their support.”

Even his wife wondered what he could possibly have to say that would interest a room packed with 232 defense players from 42 nations, most in uniform and bemedaled. But invite him they did, and Catlin, not a man to shirk from risk, accepted. “I was the only one in the room with insurance knowledge,” he told Leader’s Edge.

NATO, he explains, had figured out that the world’s resilient nations cause the military alliance fewer troubles than its less resilient ones. “The insurance community is as good as it gets in terms of knowledge of risk mitigation and management, so we add value to their debate,” he says.

Adding value for the less resilient is the underwriter’s main mission these days. “That is my primary objective: to talk about risk mitigation and management. They are the best forms of protection,” Catlin says. “You may want to buy some cover for a tail event, if it is a good value, but mitigation and management must come first.”


That is one of the principles behind a new international body called the Insurance Development Forum, or IDF, which Catlin has led as chairman since shortly after its birth in 2015. It is a unique animal: a tripartite public/private partnership between the global insurance industry, the United Nations and the World Bank. The organization aims to optimize and extend the use of risk management and insurance to build greater resilience among those who are particularly vulnerable when disaster strikes.

Launched at the UN Climate Change Conference in Paris, the IDF is much more than a talking shop. Already it has attracted more than $65 million of state funds to its cause and prompted the announcement of the new Centre for Global Disaster Protection in London.

The IDF has two goals. One is to harness the power of micro-insurance to extend cover to 400 million uninsured people in the developing world against the negative effects of climate-related disasters. The IDF has embraced this challenge, set by the leaders of the G7 nations at their 2015 Summit in Germany and dubbed the “G7 InsuResilience” target.

The protection gap is massive, 70% globally. It ranges from Haiti, where just 1% of risks were covered after the 2010 earthquake, to New Zealand, where comfortably two fifths of losses from the Christchurch earthquake were insured.

Stephen Catlin, chairman, Insurance Development Forum

“It sounds daunting, getting insurance for 400 million people,” Catlin admits, “but the number isn’t so large compared to the global population.”

Micro-insurance is cover you can buy on your cell phone for all sorts of products, from crop insurance to medical expenses to liability cover. Since coverage triggers are parametric, claimants are paid a predetermined amount based on predefined terms, so the payout typically occurs very quickly. “There is a retained basis risk, of course,” Catlin says, “but the trick is to minimize that basis risk” through the use of parametric triggers.

By their nature, such triggers do not anticipate all possible scenarios, but they can be continually refined as insurers build experience.

An IDF working party is going flat-out on the 400 million goal, driven by Shaun Tarbuck, CEO of the International Cooperative and Mutual Insurance Federation, and Joan Lamm-Tennant, CEO of Blue Marble Microinsurance, a for-profit consortium comprising seven international insurance players (including XL Catlin and Marsh & McLennan). They have come together to create and provide socially impactful, commercially viable insurance protection to the underserved through micro-insurance and to build awareness of its possibilities. For example, they are piloting drought protection for small-holder maize farmers in Zimbabwe and climate risk cover for small-holder coffee growers in Latin America. The program uses point-sensor technology to measure rainfall and plant health throughout the growing season, which complements traditional grid remote-sensing data to create a higher-resolution parametric insurance cover.

The IDF’s second goal is all about filling the “protection gap” through state-level schemes. The gap is the uninsured distance between actual economic losses arising from natural catastrophes and other cataclysmic events and the level of insurance in place to cover them. “The protection gap is massive, 70% globally,” Catlin says. “It ranges from Haiti, where just 1% of risks were covered after the 2010 earthquake, to New Zealand, where comfortably two fifths of losses from the Christchurch earthquake were insured.” Eliminating the protection gap in developing nations through state-backed initiatives is Catlin’s main focus. “Our objective,” he says, “is to help countries and communities move from vulnerability to driving resilience and reducing risk by leveraging insurance and its related capabilities.”

Essentially, the higher the share of assets that are insured, the quicker the recovery and the lower the cost to the taxpayer. And it isn’t just a developing world problem—in California, less than 10% of property is covered for quake—but the IDF is focused on emerging countries, where the general understanding of risk mitigation, risk management and insurance is less developed and collecting risk data is a major challenge.

“That is where we always start,” Catlin reiterates. “The IDF is about helping people, organizations, municipalities and governments to understand how to improve risk data, helping them with risk mitigation and then management, and only ultimately asking if risk transfer and the insurance sector can add value. If we cannot, we shouldn’t be there. I say emphatically that this initiative does add societal value and we can do it more economically than governments can by trying to take on the risks themselves.”

One of the powerful benefits delivered by the IDF is that it makes this approach feasible by uniting the world’s leading insurance, reinsurance and broking firms with respected international institutions in a common purpose. From the insurance side, Catlin’s handpicked steering group includes the chief executives of the world’s top three brokerages and 12 of its largest global property-casualty insurers, plus dozens more individuals who sit on the IDF’s various working parties. “These are alpha people,” Catlin says. “They have come to the table because they see a common purpose. All the men and women sitting around it are looking for where they agree, not where they disagree.”

I say emphatically that this initiative does add societal value and we can do it more economically than governments can by trying to take on the risks themselves.

Stephen Catlin

When an individual brokerage or carrier goes to a government, Catlin says, their hosts automatically assume their pockets will be picked. “When we go collectively,” he says, “it is much easier to open the door.”

Already this dream team has had political successes after passing through some very rarefied doors. At the G20 conference in Hamburg in July, U.K. Prime Minister Theresa May announced a commitment to provide £30 million (the equivalent of $39 million) for resilience risk transfer protection for emerging nations and to fund the proposed Centre for Global Disaster Protection.

The United Kingdom’s Department for International Development (DFID) reported that the center will help the poorest countries strengthen their disaster planning and get finances in place before disaster strikes so they can better manage the economic impact of emergencies. It will provide neutral advice, innovation and cutting-edge science to help build cheaper, faster and reliable finance in emergencies.

“We were surprised that Theresa May said what she said when she said it,” Catlin admits, “because it came before any announcement by DFID.” He says the main driver of the commitment was the relationship between the IDF and the DFID.

Members of the IDF team spent the better part of two years designing the center. “It was highly complex,” Catlin says. Meanwhile, Germany’s DFID equivalent, the Ministry for Economic Cooperation and Development, has pledged to put in €20 million ($23.6 million) and to work with the United Kingdom and the World Bank to create a “Global Partnership for Climate and Disaster Risk Finance and Insurance Solutions.” It aims to leverage the synergies of governments, international organizations, civil society and the private sector working together to close the protection gap.

Catlin is enthusiastic about these achievements. “I have to believe that with two leading countries on board, more people from established economies will be taking the same view,” he says. The IDF does not plan to set the agenda but instead will attempt to deliver solutions that help donor nations reach their chosen objectives. The United Kingdom’s DFID, for one, is expected to state its priorities before the end of the year.

Politicians haven’t always been the easiest of partners to recruit, Catlin admits. Elections are bad for global resilience. “One of the biggest global challenges is that, on average, politicians have five years in office, so they care only about what might happen in the next five years,” Catlin says. “When you speak to them about something that might happen in the first five years, they listen. If it is a 10-year event, they pay less attention. Talk about a one-in-25 year event, and their eyes glaze over. If it is one-in-100, they fall asleep.” That, he says, is why it has been difficult to get politicians to think about climate change.

But Catlin wants more commitments from states, and he is working on them, attempting to convince politicians they have a fiscal responsibility that extends over a longer period than their terms of office. He says he is not hesitant to “name and shame” politicians who do not recognize their fiscal responsibilities and believes that, by discussing issues—and their possible ramifications—with politicians, he can “broaden horizons.”

If you believe that established economies have a duty of care to support emerging economies—those nations coming through—then developed-world governments should be thinking about contributing.

Stephen Catlin

He and his teams are also working with other nations’ international development bodies to build support. “I am personally very keen for this not to be seen as a U.K.-German initiative,” he says, stressing that the IDF project, its participants and its targets are international. “We are at the beginning of the story, not the end of it.”

Conversations are going on with other countries, Catlin says, but lobbying the United States is off the agenda for now, given the disarray in many executive-branch agencies. Still, he remains optimistic about a potential American commitment. “Trump has stepped back from completely reneging on the Paris Accord,” he says. “Over time, I believe, he will have to join the debates on climate change and sustainability.”

Catlin is clear in his convictions about who should pay for those who cannot pay. “If you believe that established economies have a duty of care to support emerging economies—those nations coming through—then developed-world governments should be thinking about contributing,” he says. They will do so one way or another, he insists. “If they don’t contribute before the event, then they will afterwards, through disaster relief. But that kind of disaster funding is widely realized to be incredibly inefficient, and the support doesn’t always get to the point of need.”

Catlin returns to the theme of resilience-building. “We need to help the emerging nations understand risk mitigation and risk management,” he says, “then help them to buy risk transfer, through support from established nations.”

Such financial support is given for the good of the target nation, the region and the world, he says. They are a lofty set of goals. “Can we achieve this vision?” Catlin asks, rhetorically. “I don’t know, but if we don’t try, we will never know.”

Leonard heads the foreign desk.

Insurance brokerages certainly recognize the value of cognitive computing, but they’re taking a gradual approach to its use. The experimentation makes sense, proving the value of the tools and serving as a springboard for their wider future use.

“The toughest part in deploying new technologies is making the business case for them,” says Stewart Gibson, senior vice president and chief information officer at USI Insurance Services, which recently agreed to purchase Wells Fargo Insurance Services USA. “Early adopters bear the bulk of the cost of a new technology’s implementation. We’re more interested in being a fast follower, tiptoeing into these new solutions as their value becomes clearer.”

Here’s a brief look at some of the new technologies being deployed at a few large brokerages.

“RPA is probably the most prevalent of the new cognitive tools we’ve been using,” Gibson says. “We’ve deployed an RPA tool from Cisco to perceive threats within our network infrastructure.”

Like other large brokerages, USI’s network overflows with millions of transactions daily. Any one of these interactions can cause havoc if the data being transmitted are infected with malware.

“We’d need an army of network engineers watching all the end points inside the network to discern trouble spots,” Gibson says. “The RPA tool provides this vigilance with little manpower. It’s smart enough to identify what might happen or something that is about to happen right now. Network traffic is then automatically rerouted over backup circuits to limit the potential downtime.”

The brokerage also has implemented a matching tool using machine learning to assist salespeople in configuring risk transfer solutions covering customer risks in the middle market. Called Omni, the tool draws insights from USI’s comprehensive database containing risk-based information on more than 100,000 clients over the past 100 years.

“A rules-based engine populated with algorithms, decision trees and linear regressions helps pinpoint the specific insurance coverages and financial limits of protection a client may need,” Gibson says. “It analyzes clients in a similar industry that had chosen to cover their risks in a specific way and then presents the financial outcomes of these decisions—did the insurance fully protect them or just partly protect them? It then configures a suite of customized insurance solutions for the client.”

USI built Omni from scratch using spreadsheets six years ago. The tool has evolved in the intervening years and has recently been turned into a web application. “All it takes is one button to generate a client-ready presentation,” Gibson says. “Since this is a machine-learning solution, each time we bind new coverages for a client, the tool incorporates this new knowledge in future presentations.”

USI is just starting to evaluate artificial intelligence solutions using natural language processing. “We like the idea of processing simple customer requests without having to be on the phone,” Gibson says. “And we also like solutions that pick up inferences from a customer’s words to fix a problem without having a human involved. We may explore a proof-of-concept of these self-service tools down the line but are not yet ready to go mainstream.”

Like other brokerages, Hub International keeps a vigilant eye on developments in the bustling insurtech sector, where hundreds of innovative startups are developing novel cognitive computing solutions for the insurance industry.

“They’re constantly coming up with new ideas that are challenging the status quo in the (insurance) ecosystem, forcing us all to think about doing things in more efficient, cost-effective and customer-centric ways,” explains Carla Moradi, Hub executive vice president of operations and technology.

One way Hub is utilizing machine learning is to compare its insurance policy submissions on behalf of clients with the actual policies that are issued. Brokers typically rely on people to perform such comparisons, which absorbs time and effort that can better be devoted to customer needs. “The process now takes seconds,” Moradi says. “If an error is identified, humans take it from there.”

Hub also is studying the use of RPA to further streamline workflows. “We haven’t deployed anything yet, but we’ve identified several key areas where there are repeatable processes involving the same keystrokes,” Moradi says. “RPA can be used to do these keystrokes, increasing the amount of time our people spend with customers.”

Down the line, Moradi predicts that brokerages will collect and analyze risk-based information generated by their clients’ gradual embrace of the internet of things. “This is yet a great opportunity for us to provide another high-value client service,” she says.

Few lines of insurance are more data intensive than workers compensation, given the voluminous data produced by hospitals, physicians, nurse case managers, pharmacies, physical therapists, insurance carriers, claims adjusters, and other parties engaged in returning an injured employee to work. Using data mining, natural language processing and machine learning, Lockton is accessing and analyzing workers compensation claims to improve the employee’s experience.

“One of the most common cost drivers of workers compensation is a lack of communication with the claimant, which increases their fear and the possibility that they may hire a workers compensation attorney,” says Mark Moitoso, Lockton’s senior vice president and analytics practice leader. “To better understand how a claimant is feeling, we’re relying on text mining and machine-learning technology.”

Much of the data in the workers compensation claims process, such as the notes taken by claims adjusters, is unstructured. By digitizing this information, it can be easily searched using text mining. “We can look for words and phrases indicating a claimant’s apprehension with his or her progress toward the return-to-work objective,” says Moitoso. “Once there appears to be a problem, our people can step in with compassion and empathy to help solve the dilemma.”

This blissful scene is not at all farfetched. In fact, technology can take on the monotonous functions of broking, freeing brokers to provide the value-added services their clients crave.

The need for these technologies is dire. “Brokers are awash in information, taking in and passing out an enormous volume of data,” says David Bassi, an executive director in consulting firm EY’s insurance practice. “Automating this exchange of information liberates brokers from having to manually key in all this structured and unstructured data.”

RPA Gateway?

The value and range of new technologies spreads across a wide swath of a broker’s business—more to come on artificial intelligence and the like—but it seems like right now brokerages are more readily focusing on back-office automation, where the administrative work of the business is carried out. Software known as RPA, or robotic process automation, can carry out simpler, more repetitive human tasks (such as data entry) that don’t necessarily take knowledge or insight to perform. Consider the tedious work performed by company accountants to close the books. Using RPA tools, these data can be easily extracted from a brokerage’s myriad systems and applications to ensure accuracy and a faster close.

This is good news for accountants. “Smart accountants get to do what they yearn to do anyway—study the numbers to learn where the firm is growing business or losing it,” says Therese Tucker, founder and CEO of publicly traded BlackLine, a financial and accounting software firm that provides RPA tools. “This important value-added activity is lost if they’re hunkering down in the trenches tallying up the numbers.”

RPA also can be employed to fulfill a broker’s legal and compliance obligations. “We’re seeing growing interest in the technology to make sure a broker’s various contracts, reports and disclosures are correct and compliant from a regulatory standpoint,” says Dimitris Papageorgiou, a principal in EY’s people advisory services practice. “We know that some brokers are in a pilot stage with the tool.”

The back-office opportunities presented by RPA are both strategic and tactical. As human workflows decrease, people are able to work more efficiently, giving them more time to build relationships with clients.

“When these technologies work very well, they take out about 80% of the effort for 20 people, meaning that these 20 people now have 20% of the work left to do,” says David Kuder, the Robotics & Cognitive Automation leader at Deloitte Consulting. “Extrapolating from this metric, this means you need just four people to do the work that 20 people previously did. The additional 16 people can now apply their intellect to more strategic uses, working more closely with clients to identify and reduce their losses.”

Other insurance and technology experts agree this value is hard to ignore. “RPA allows a broker to really optimize and improve the efficiency of its back office, particularly if the firm is interacting with different carriers’ legacy technology,” says Ted Stuckey, head of the global innovation lab at insurer QBE in Sun Prairie, Wisconsin.

RPA represents a huge opportunity. You’re able to push people to higher-value work, such as dealing with the more complex transactions where brokers shine.

Ted Stuckey, head of the global innovation lab, QBE

Stuckey describes a recent visit to a midsize insurance brokerage in Los Angeles. “I walked through bullpens of people doing mind-numbing data entry tasks,” he says. “They were working with upwards of 20 different carriers’ legacy systems. From a process automation perspective, in addition to an auditability and integrity standpoint, RPA represents a huge opportunity. You’re able to push people to higher-value work, such as dealing with the more complex transactions where brokers shine.”

These many advantages add up to enrich the relationship with clients. “In our industry, who has the best opportunity to improve the relationship with the end customer? The broker, of course,” Stuckey says. “These technologies present a vital opportunity to improve customer engagement. Right now, the book of business for many midsize and larger brokers is so substantial that it’s extremely hard to stay front and center in the customer’s eyes. These tools give brokers the ability to be there when clients need them most.”

To illustrate the point, Stuckey provided the example of another midsize brokerage partner. “The firm had a team of people whose sole job was to make calls to customers prior to the [policy] renewals,” he says. “Most of the calls went to voicemail. Imagine if they used a chatbot tool using natural language processing to simulate conversations with customers? You’ve just freed up that team of salespeople and account executives to be available every minute for customers’ questions and concerns.”

Moving Past Automation

Automation is one thing, but it’s just a start. Many large insurers are investing heavily in cognitive computing, building state-of-the-art solutions internally or purchasing them from the growing ranks of insurtech startups. Cognitive computing is more than just automation. It uses machine learning to perform human tasks in an intelligent way, incorporating things such as natural language processing, text mining and image recognition.

Most insurance brokerages are said to be just nibbling at the edges of these types of opportunities. “Many brokers are still in the very early days of assessing the benefits of cognitive computing,” says Anand Rao, global artificial intelligence lead at consulting firm PwC. “They’re using a few of these tools but have not yet made truly substantial investments.”

Other consultants agree brokerages are comfortable sitting on the fence for now, waiting to see how the market shakes out. “Unlike large global banks and insurers, many insurance brokers are in a proof-of-concept stage with these technologies,” Kuder says. “There’s been a lot of talk and a lot of hype, and a few brokers will say they’re doing this and that. But only 10 to 15% of brokers are doing much of anything.

“No firm wants to be the first headline replacing a ton of labor with robotics or cognitive automation. But everyone is absolutely experimenting with these technologies or has it on their radar screens.”

Time will tell if this experimentation leads to fuller deployment. For now, the pace is slow. According to a recent survey by consulting firm Accenture, 37% of insurance executives say their companies plan to “extensively” invest in machine learning over the next three years, and another 44% predict “moderate” investment. In another study by the IBM Institute for Business Value, 90% of insurance respondents predict cognitive computing will “strongly impact” their revenue models.

“Both insurers and brokers are closely examining artificial intelligence and machine learning, realizing the significant opportunities they present,” says Ashish Umre, a partner on insurer XL Catlin’s Accelerate disruption and innovation team. “The key for brokers is to identify those strategic areas where the technology will make the most difference in adding value for their clients.”

There’s been a lot of talk and a lot of hype, and a few brokers will say they’re doing this and that. But only 10 to 15% of brokers are doing much of anything.

David Kuder, Robotics & Cognitive Automation leader, Deloitte Consulting

It’s Better Risk Management

While the importance of a strategic, patient approach cannot be overstated, some maintain brokers need to pay attention to what carriers are doing so the playing field does not change around them while they sit on the fence.

“What do all customers large and small want from their broker? They want their risks managed more efficiently and coherently,” says Michael Maicher, head of global broker management at Allianz. “They want convenience, transparency, trust and the knowledge that they are gaining value for the money they’re spending. These technologies help do just that.”

According to Lori Sherer, partner and insurance leader in Bain & Company’s advanced data and analytics practice, “As the carriers collect client risk data in a better format than brokers currently do, they’ll be able to help them better understand these risks, resulting in more accurate and affordable coverages. Brokers are getting paid beaucoup dollars to place the risk today. The more digital this becomes, the less relevant they will be unless they’re investing in the same tools.” Bain & Company’s insurance company clients all have innovation labs and corporate venture arms investing in insurtech startups and have presented the firm with written proposals to use a greater variety of cognitive computing solutions in the future, she says.

Maicher predicts the simple placement of the risk will become less valuable and cheaper. “Consequently,” he says, “brokers need to improve their knowledge of clients’ risks and preferences, accessing relevant data to achieve deeper insights. Clients will pay for this more sophisticated risk advice.”

Insurers are just as vulnerable to these technological forces as brokerages. “Several reinsurers are investing heavily in cognitive computing to do more risk management and loss control with the idea of working closely with the brokers to essentially displace the carriers,” Rao says. “There’s a lot of friction in the marketplace.”

This friction is good for corporate clients, as it ultimately will produce less expensive insurance products with coverages customized to actual needs.

“With lower transactional costs, risk transfer will become more attractive to clients,” says Maicher. “This will result in a higher demand for a greater range of insurance products, increasing the overall size of the market.”

New products also will emerge from the industry, as brokerages and carriers develop a better understanding of client risks. “As more companies leverage the IoT and put their data in the cloud, the related risks are sure to grow,” Sherer says. “The industry is only beginning to understand how to effectively transfer these risks. The opportunities are huge.”

The Labor Question

The key for brokers is to identify those strategic areas where the technology will make the most difference in adding value for their clients.

Ashish Umre, partner, XL Catlin’s Accelerate disruption and innovation team 

If brokerages continue to gradually employ more cognitive computing technologies, their actions are unlikely to result in the mass displacement of labor. The tools are intended to free employees from rote tasks so they can provide more personalized services to clients, meaning little labor displacement, if any, for the time being. Even better, the use of these technologies creates a need for new skills in a brokerage’s workforce.

“Since people will be working more directly with technology on a daily basis, the workforce needs to reflect these skills, either through recruitment or training,” Kuder says. “Different people will be doing different things in the future, repurposed to provide value-added activities that lead to better client services.”

These workforce changes are already occurring. “We’re definitely seeing movement in the market for hiring or reskilling individuals in the automation space,” Papageorgiou says. “This demand for talent actually exceeds the supply, which may be a factor in why some brokers are slow to adopt cognitive computing.”

Thanks to cognitive computing technologies, the services provided by the brokers of the future will become more important as the brokers shift toward more sophisticated advice. In this progression, mergers and acquisitions are likely, both among brokerages and with specific insurtech startups.

“These are exciting times for brokers to innovate and experiment,” Kuder says. “There’s a lot more degrees of freedom to choose where and how you want to play.”

Banham is a financial journalist and author.

The answer is not long at all. The internet is as essential to commerce today as are people. Without a connection, employees might as well stay home and watch Netflix. Oops, can’t do that either.

“If the internet tips over for just 24 hours, it would cause a global economic crisis because all transactions would grind to a halt,” says Stephen Catlin, executive deputy chairman of XL Group. “If the internet tips over for seven days, it would be cataclysmic.”

He’s right for an important reason: there is no insurance policy whatsoever that absorbs the risk of the world wide web grinding to a sudden halt. A company might have a policy covering the business interruption caused by a loss of access to its ISP (internet service provider) or cloud providers. But insurance covering the cessation of the internet itself is just too big a risk for the industry to bear.

“It would be like asking us to find insurance just in case there was no electricity in the world,” says Robert Parisi, managing director and cyber product leader at Marsh. “That’s a cool movie, but no carrier will cover you for that.”

The reason is that insurance policies absorbing business interruption losses typically contain an exclusion for the general failure of “utilities,” which in this case would be the internet. “If the internet goes kaput, there would be big problems for affected companies and the global economy, but it wouldn’t have an impact on the insurance marketplace,” Parisi says.

Could It Shut Down?

Although the internet has never experienced a complete breakdown, parts of it have shut down in the past. In October 2016, for instance, hackers launched a successful distributed denial of service attack (DDoS) against Dyn, a managed DNS (domain name system) provider of internet services to Twitter, Reddit, CNN, Spotify and thousands of other websites, shutting them down. DNS providers translate website names into IP (internet protocol) addresses.

“Approximately 500 companies that relied exclusively on Dyn for their web services suffered extensive downtimes and lost sales,” says Stephen Boyer, co-founder and chief technology officer of BitSight, an internet security firm. “This represented about 8% of Dyn’s customer base. Other companies relied on a variety of DNS providers, making the impact less severe.”

A more recent internet outage occurred for customers of Amazon Web Services (AWS), a provider of on-demand cloud computing platforms to companies such as Airbnb, Time and Netflix. The outage affected countless websites and web services on the U.S. East Coast for several hours in February. The culprit was human error, Amazon later reported.

The financial impact of the Dyn and AWS outages has yet to be tallied. But other internet interruptions provide some sense of the financial cost. In July 2017, a severed undersea cable off the coast of Somalia resulted in a three-week-plus internet outage in the country, costing its economy an estimated $10 million a day. When the prior government of Egypt pulled the plug on the internet for five days in 2011 to restrict communications among anti-government activists, its economy suffered losses estimated at $18 million per day.

Altogether, there were 81 separate instances of sporadic internet outages in 19 countries across the world in 2016. The collective cost of these interruptions was $2.8 billion in global GDP, according to a study by the Brookings Institution’s Center for Technology Innovation.

The center has also projected the cost of an outage across the entire United States: “A national internet outage for one week…would reduce economic activity by at least $54.1 billion. And if that outage lasted an entire year, the economic costs would be at least $2.8 trillion.”

It would be like asking us to find insurance just in case there was no electricity in the world. That’s a cool movie, but no carrier will cover you for that.

Robert Parisi, managing director and cyber product leader, Marsh

These costs would be uninsured—not that companies wouldn’t file claims anyway. “The likelihood is that insurers would deny them, resulting in protracted litigation,” Parisi says. “A lot of subrogation would occur, with one party blaming another party, and so on.”

Could the entire web grind to a halt on a national or global basis? It’s possible. In 2002, an attack occurred against all 13 of the internet’s root name servers—the crucial components that map domain names to IP addresses.

“The attack lasted for an hour,” recalls Jody Westby, CEO of Global Cyber Risk, a provider of cyber-risk advisory services. “The hackers used a botnet to send a flood of messages to each of the servers, which were protected by packet filters. This helped to limit the damage, causing little impact on users.”

The import of the attack is distressing. “The internet was designed with resiliency and not security in mind, meaning if one part went down there would be other parts still left standing,” Westby says. “The fact that all 13 root name servers were attacked was a wake-up call, resulting in replicating the root name servers at a dozen other locations globally. Despite this failsafe, two of the 13 root name servers were attacked in 2007, shutting each of them down for about 24 hours.”

Still, the replication of the root name servers after the 2002 attack enabled the requests to be sent to the “mirror imaged” root name servers and thus minimized the impact of the attack.

The Problem Is Risk Aggregation

The internet’s importance to the smooth functioning of global economies is obvious. Without a connection, businesses would be in a lurch. While insurers and reinsurers consider cyber insurance to be the industry’s most promising market, they are stymied in offering broader coverages.

“It’s just not possible to have a level of confidence in the potential risks,” says Mark Synnott, senior broker and global cyber practice leader at Willis Re. “Right now, it is difficult to test how bad the insured loss could be.”

The problem is risk aggregation. Insurers and reinsurers are unable to gauge with a fair degree of certainty the aggregation of cyber-related business interruption exposures they may be absorbing across multiple lines of coverage, including property, casualty, marine, aviation and transport.

“A well-coordinated attack could result in the simultaneous occurrence of many different types of cyber losses,” says Robert Hartwig, associate professor and co-director of the Risk and Uncertainty Management Center at the University of South Carolina’s Darla Moore School of Business. “Right now, it is difficult to identify, assess and quantify what types of cyber losses might occur in association with other types of cyber losses.”

Minus this ability, the total losses could be unbearable. “It’s not like a natural disaster, where you can offset the risk of an earthquake in Japan with Florida windstorm exposures and Chilean earthquake risks,” Synnott says.

Catlin shares this perspective. “Every other catastrophic risk—terrorism, wind, earthquake and even a pandemic—are all regional or local risks,” he says. “The collapse of the internet is the only event I can think of where the whole globe would be affected in a nanosecond.”

Breaking Down the Risk

It’s just not possible to have a level of confidence in the potential risks. Right now, it is difficult to test how bad the insured loss could be.

Mark Synnott, senior broker and global cyber practice leader, Willis Re

Serious efforts are under way to paint a clearer picture of cyber risks. Traditional property catastrophe modeling firms like RMS and AIR Worldwide and newer cyber-risk rating vendors like BitSight and Cyence are partnering to develop robust cyber-risk models for underwriting purposes.

“We’re trying to break down cyber risk into its constituent parts to identify the key drivers of systemic risk to the insurance industry and then quantify these risks,” says Tom Harvey, senior product manager at RMS. “For instance, we’re looking closely at the various components that make up the backbone of the internet. We’re identifying the different pinch points, whether or not they could realistically suffer a disruption, and what the financial impact would be if it occurred.”

Still, both Harvey and Boyer affirm that modeling cyber risks is a steep uphill climb. “The biggest wrinkle is the adversary, which, unlike the weather, deliberately adapts and changes to get around current defenses,” Boyer says. “There’s always something new that can come up, whereas it’s very unlikely we will have a new kind of windstorm or earthquake. It’s these new vulnerabilities that give pause.”

But he is optimistic that a solution is forthcoming. “We’re just starting to get quantifiable data on the usage of web services through internet telemetry and other means, learning who really is relying on Dyn and AWS and other parties and providers in different regions,” he says. “The next piece is determining the key interdependencies if one or the other is knocked offline.”

The Cyber Insurance Market

As these efforts continue, the industry is confident that cyber-risk insurance will become a major contributor to premium volume in the future. In 2016, U.S. property-casualty insurers wrote $1.3 billion in direct written premiums for cyber insurance, a 35% increase from the prior year, according to A.M. Best.

A study by Allied Market Research tallies total gross premiums globally for cyber insurance at $3 billion today, estimating this figure will skyrocket to $14 billion by 2022. Most of the cyber-risk policies sold over this period will be underwritten differently. Unlike many other types of insurance, there is no standard ISO form for cyber insurance. “No two cyber policies are alike,” says Paul King, national cyber practice head at USI Insurance Services.

Other cyber risk experts agree. “Cyber policies are scattered all over the place,” says Sam Friedman, insurance research leader at Deloitte Center for Financial Services. “Insurers have an innate fear of writing cyber risks, which compels them to put in a failsafe. For instance, the policy might not cover business interruption losses caused when a third party, like a website hosting service, has an outage.”

Hartwig confirms this challenge. “If the company itself is hacked and shut down, this would likely be covered,” he says, “but if it is simply the victim of an attack that occurs to its ISP or cloud provider, chances are it might not be covered.”

While such coverage can be purchased, only a few carriers offer it. Even these coverages require careful reading of the policy language to ensure full protection. “A major issue is if the provider of a company’s network services is interrupted by a factor outside its control—the case with the AWS outage,” King says. “The terms and conditions in the marketplace are not standard across the board on this issue, although the industry is working hard to clarify the language.”

For now, Friedman advises insureds, “Do not assume you have coverage under existing policies. I don’t care if the policy says it covers ‘business interruption.’ The question is will it cover a business interruption if you can’t access your cloud provider or ISP for any reason.”

Brokers Addressing Gaps

Many brokers are confident they can put together an insurance program addressing the various coverage gaps for clients. However, such coverages are likely to have stringent terms and conditions, including tight financial limits, sub-limits, large deductibles and coverage triggers based on the length of the outage. The trigger condition alone can stand in the way of a company’s receiving full coverage.

If the company itself is hacked and shut down, this would likely be covered, but if it is simply the victim of an attack that occurs to its ISP or cloud provider, chances are it might not be covered.

Robert Hartwig, co-director, Risk and Uncertainty Management Center, University of South Carolina

“Many triggers are set at six hours, meaning six hours have to pass after the outage begins for the insurance to kick in,” King says. “The recent AWS failure was 5 hours and 45 minutes, meaning those affected that had insurance couldn’t collect for the loss caused by the interruption in business. At the same time, the industry was a mere 15 minutes from hitting a major potential payout.”

Carriers also want brokers to schedule a client’s cloud-computing providers in the insurance submission to obtain a clearer sense of the risk. “The carriers want to be sure, if a company’s current ISP or cloud service providers are attacked, there’s a backup plan in place to keep the business going,” says Michelle Lopilato, senior vice president and director of cyber and technology solutions at Hub International. “That’s where we as brokers can help our clients do what’s needed.”

Such help will become increasingly crucial. Catlin says, “We’re facing a risk that is growing exponentially [and] need to give real cover to an industry or a company against a cyber exposure that is specific to them.”

Banham is a financial journalist and author.

The result: The team-based lottery prompted 64% of employees to complete the HRA, compared to 44% who were offered the grocery gift certificate and 40% of those offered the basic cash incentive. Even though the base amount was the same for those offered the original amount and those offered the lottery, the possibility of “more” moved people to action.

The HRA scenario played out as part of a study posted at the Behavioral Evidence Hub. B-HUB, as it’s known, is an open, online repository of scientifically tested, real-world strategies developed from insights about human behavior. The scenario used group incentives to harness the power of caring what others think. It also uses micro-lotteries, which encourage people to take an action by offering the chance to win a prize through lottery or raffle. These work because people are tempted by the prize and tend to overestimate their chances of winning. Both strategies are time-tested types of behavioral science interventions. They join a range of activities that demonstrate a deeper understanding of the way people think and, therefore, how they respond. Other examples are comparing one group’s behavior to that of its peers and employing enhanced active choice, in which the decision maker is reminded of the consequences of all available options before being required to make a choice.

Real-World Decision Making

In recent years, a smattering of books, studies and projects in the field of behavioral economics have taken a closer look at the ways people think and act, sometimes using the complexities of the insurance industry as an example. Behavioral economics considers how a variety of factors influence the way people make decisions. The concept has been around for decades, but it’s only recently that these understandings have been applied to real-world challenges.

Grasping what behavioral economics is begins with understanding what it’s not. There’s a misconception that it’s simply understanding the way people think just so you can pressure them to do what you want them to do. Those in the field, however, argue it’s more about understanding natural biases and reworking processes so people can make decisions with logic and intent rather than just emotional or environmental reactions.

As we tend to learn over time, logical and intentional decisions often bring a much more positive result than emotional ones. The less logical choice of not going to the doctor because of a potential rise in premiums, for example, increases risk for everyone involved: the patient bears the risk of a serious health problem going untreated, and the system bears the risk of more expensive treatment later when the issue finally is addressed.

Behavioral economics, then, investigates possible interventions for better outcomes. These interventions might consider the way people choose between options and nudge them in a certain direction. Or they might help people sustain behaviors and form habits, navigate processes, become more engaged or increase understanding. In commercial insurance, brokers who grasp these concepts might be able to overcome, say, status quo bias, in which their clients naturally tend toward inaction. They might also be able to overcome choice overload by streamlining and simplifying options for their clients. Too many choices—especially complex ones—can also lead to immobility.

A paper produced by global investment bank Houlihan Lokey, “Behavioral Economics: A New Frontier for Insurance?” includes recommendations for carriers, but the concepts could work for brokers, too.

Understanding loss aversion, for example, means recognizing premium increases upset insurance customers more than reductions please them. “Customers whose rates fluctuate—down as well as up—are likely to be less happy than those with steady premiums,” the paper notes. 

In commercial insurance, brokers who grasp these concepts might be able to overcome, say, status quo bias, in which their clients naturally tend toward inaction.

The book Nudge: Improving Decisions About Health, Wealth, and Happiness, by Richard Thaler and Cass Sunstein, is chock-full of stories of behavioral economics interventions. In one program, participants quit smoking by regularly depositing money that otherwise would have been used on cigarettes into an account. After six months, if a drug test shows they haven’t smoked, they get the money back. If they’ve smoked, the money goes to charity. Those who take part are 53% more likely to reach their quitting goal.

B-HUB, meanwhile, includes interventions that range from the way default choices affect advance directives in healthcare to the experience of a municipal government in Costa Rica that sent postcards to residents comparing their water consumption to nearby neighbors’ along with usage-reducing tips. The residents receiving the postcards reduced their rates by 4.5% more than those who had received a standard utility bill.
“I think there’s more and more realization that the way humans define and interact with products, policies and programs is critical to those things’ being successful,” says Josh Wright, executive director of ideas42, a nonprofit design and research lab—and partner in B-HUB—that aims to use behavioral science to design scalable solutions to some of society’s most difficult problems.

Highly publicized insurance startup Lemonade is one company that has generated a lot of PR for itself by touting its behavioral science-based business model. Founded in 2015, Lemonade has set out to remake insurance “as a social good rather than a necessary evil,” according to its own materials. Customers are asked to choose a cause they care about, ultimately forming a like-minded virtual group. The company uses premiums to pay claims, and whatever money is left is given back to the shared cause.

Wright is quick to say he’s no expert on Lemonade or its processes. All the same, he notes, “They do have a behavioral scientist on their team, and they’re thinking about the customer experience in a very behaviorally informed way.” They’re also doing some interesting work around trust and honesty, he says, helping customers be more honest about their claims by first helping them be part of a larger community.

“If you end up lying or cheating in some way, you’re not cheating some big insurance company,” he says. “You’re cheating a cause you care about.” Greater honesty means less fraud and more efficiency for Lemonade. Meanwhile, in this win/win scenario, worthy causes also receive the support they need. And while Lemonade currently sells only personal lines insurance, a lot of industry executives are examining its methods to see if the business model might one day be applied to the commercial side.

Behavioral Economics in Insurance

So how can the larger insurance industry employ behavioral economics? Howard Kunreuther, PhD and co-director of the Wharton Risk Management and Decision Processes Center at the University of Pennsylvania, believes one way is changing how the industry frames risk, benefit, cost and losses to policyholders.

“One of my favorite examples is that people buy insurance only after a disaster and then cancel their policies several years later if they haven’t suffered a loss,” says Kunreuther, who also co-authored The Ostrich Complex: Why We Underprepare for Disasters. “They think, ‘What a bad investment. What could I have done with all that money?’ It’s very hard to get the message across that the best return on an insurance policy is no return at all. People should celebrate not suffering damage rather than feeling their premium has been wasted.”

Kunreuther says the most important challenge the insurance industry faces is explaining the role insurance can play in reducing future risks. People need to understand, he says, that insurance protects their property and assets, has an important role to play in helping us understand the risks we face, and can encourage investment in cost-effective loss reduction measures via risk-based premiums. As a protective mechanism, then, insurance is worth spending money on.

Framing risks in a way that helps people pay attention is a start. The book Scarcity: Why Having Too Little Means So Much, by Sendhil Mullainathan and Eldar Shafir, echoes the sentiment: many farmers in poor countries—in some cases, more than 90%—might not purchase insurance, whether related to health or to their crops, believing it’s too expensive. In reality, the authors write, they cannot afford not to be insured, but the message isn’t getting across.

I think there’s more and more realization that the way humans define and interact with products, policies and programs is critical to those things being successful.

Josh Wright, executive director, ideas42

“I was living in Austria a number of years ago, and they had an interesting way of presenting information about not wearing seat belts,” Kunreuther says. “It was, ‘We want you to wear your seat belt, and if you don’t wear your seat belt, we will not pay for your medical expenses should you be in a car accident.’ By framing the problem in that way, people focus on the consequences of not buckling up and will voluntarily wear a seat belt.”

The Wharton Risk Center, for one, would like to see the insurance industry get more creative and innovative in designing new products. “In this regard, the Risk Center has proposed insurers consider selling policies that extend three to five years rather than just the standard one-year policy,” Kunreuther says. “An advantage to consumers of purchasing longer-term insurance is that their premiums would not increase after a loss, nor would they have their policy canceled, thus providing them with the stability they want. Insurers would also have a financial incentive in offering long-term policies. They could reduce their marketing costs, as customers would remain with the firm for a longer time period. And insurers would reduce the variance in their potential losses by spreading the risk for each of their policyholders over several years rather than just one.”

Wright says behavioral thinking might also be used to improve the insurance customer experience. Little things—such as offering a “here’s where you are in the process” meter for a customer filling out an online form—can make the experience infinitely more enjoyable. It’s also important to end well, he notes, as customers are more likely to rate an entire experience as positive if it ends on a good note (regardless of what has happened along the way).

Internally, Wright believes behavioral science could help encourage more appropriate use of algorithms in underwriting. Part of that means understanding the benefits of humans and machines working together. “There’s a huge amount of work in the area of how you get humans to use the algorithms,” he notes, and those tend to be correct “the vast majority of the time.”

Whenever possible, behavioral scientists say, it’s important to observe people as they actually use the product or service being offered, taking note of bottlenecks or problems that might create a bad experience.

When that product or service isn’t working or being used as it should be, “it’s not that there’s something wrong with the people using it,” Wright says. “The reality is that these psychologies are pretty universal. We all have challenges, and our minds work in similar ways. We all have biases or cognitive capacity limitations…. We need to design things effectively for how humans really are.”

Soltes is a contributing writer.

When it comes to catastrophe loss estimates from events like Hurricanes Harvey and Irma, odds are insurers and others will have to wait quite a while before the true cost of the event is known.

Catastrophe models generated a wide range of estimates of insured damage in the immediate aftermath of Harvey, all of which are sure to be revised and revised again. While the models often differed, all indicated Harvey’s toll would fall considerably short of those caused by the three costliest hurricanes in recent U.S. history.

The Insurance Information Institute, citing research conducted by Property Claim Services, a Verisk Analytics business, puts 2005’s Hurricane Katrina at the top of the list, with $49.79 billion in insured damage in 2016 dollars. The next costliest, 1992’s Hurricane Andrew, caused less than half as much, with $24.48 billion in insured damage in 2016 dollars, while 2012’s Superstorm Sandy came in at $19.86 billion.

The highest initial insured-damage estimate for Hurricane Harvey came from Karen Clark & Co., which put total insured loss—not including losses covered by the National Flood Insurance Program—at roughly $15 billion. This included about $2.5 billion in wind damage, $500 million in storm surge and more than $12 billion in inland flooding in Texas and Louisiana.

Modeler AIR Worldwide estimated insured losses—again excluding properties covered by NFIP—would exceed $10 billion, with $3 billion stemming from wind and storm surge. But the insured losses amount to only a fraction of total property losses, which AIR estimates could hit the $65 billion to $75 billion range.

CoreLogic, another modeler, estimated private insurers would sustain less than $500 million in insured flood losses, while wind losses would range in the $1 billion to $2 billion range. Uninsured flood loss could reach $27 billion.

Damage to private and commercial automobiles as a result of Harvey is expected to be relatively high. A spokesman for the Insurance Council of Texas said insurers faced an estimated $2 billion in losses from private automobiles and an additional $1 billion from commercial auto, including mobile homes and trailers.

One critical question is how big a loss the nation’s largest flood insurer—the federal government’s NFIP—will ultimately take. The program was already more than $24 billion in debt when Harvey struck. The program enjoys—if that is the right word given the potential losses—a virtual monopoly on residential property flood insurance and underwrites commercial properties as well. Yet both CoreLogic and modeler Risk Management Services provide remarkably similar answers, with CoreLogic estimating losses of $6 billion to $7 billion and RMS estimating $7 billion to $10 billion. As of mid-September, NFIP had not released its own estimate.

RBC Capital Markets issued an analysis that looks at the historical pattern of loss estimates from catastrophes in general since the terrorist attack on 9/11. “They start a little too low, then they seesaw to being a little too high and often end up towards the higher end of the gap in between,” RBC says.

The company uses as an example the course 9/11 loss estimates took. Initial loss estimates were in the $10 billion to $20 billion range, but “conventional wisdom quickly adopted $50 billion as the going rate.” The final tally was closer to $30 billion. Estimates for Hurricane Katrina followed a similar pattern.

“In our experience, this is the ‘normal’ reaction—to favor the high end of the range until information crystallizes,” says RBC. “As one client commented, ‘taking the over’ on loss estimates has always been the safe play.”

National Flood Insurance Act of 1968 creates National Flood Insurance Program.

Flood Disaster Protection Act of 1973 mandates flood insurance purchase in Special Flood Hazard Zones.

Government launches Write-Your-Own insurance program, where private insurers and producers market and service NFIP policies in an effort to encourage participation in the program. The federal government remains the NFIP underwriter.

Hurricane Katrina and others plunge NFIP into billions of dollars of debt.

Superstorm Sandy continues to add to NFIP’s growing debt. Biggert-Waters Flood Insurance Reform Act becomes law, requiring, among other things, that premiums better reflect the risk insured.

Homeowners Flood Insurance Affordability Act of 2014 delays implementation of some Biggert-Waters reforms and repeals others.

NFIP makes its first purchase of private reinsurance to bolster the program.

NFIP’s debt has ballooned to more than $24 billion. Congress begins debate over reforming and reauthorizing NFIP, which is set to expire Sept. 30. In late August, Hurricane Harvey devastates Houston and other areas along the Texas Gulf Coast, and Hurricane Irma slams Florida in September, ensuring NFIP’s deficit will grow.

Virtually everybody agrees the National Flood Insurance Program is broken. After all, the program is about $24 billion in debt, courtesy of a series of natural disasters starting with 2005’s Hurricane Katrina and exacerbated by years of actuarially inadequate rates propped up by subsidized premiums.

Yet consensus on reform has proven quite hard to achieve, as have congressional reauthorizations of the program. A few years ago, there was even an attempt to expand the already debt-ridden program to include windstorm coverage. As opponents of the proposed expansion pointed out, the private insurance market already provided windstorm coverage, albeit at a price some policyholders might balk at.

The failure to come to terms with reform has led to brief lapses in the program, which didn’t do any wonders for the real estate market, as federally backed loans in flood-prone areas must be backed by NFIP coverage. A significant reform in 2012, which among other things opened the way for actuarially based rating, was partially rolled back two years later after NFIP policyholders facing meaningful rate hikes let their members of Congress know their displeasure.

Why is reform so difficult?

One reason is that the reform debate is philosophical as well as economic, says Joel Kopperud, The Council’s vice president of government affairs.

“This debate falls into the philosophical debate of what the role of the federal government is,” he says. “Some are focused on budget issues and actuarial soundness; others are focused on making sure Americans are covered.”

Another reason is that the debate over the scope and cost of the program doesn’t break down neatly along party lines, says Frank Nutter, president of the Reinsurance Association of America. Instead, regional issues come into play, which is hardly surprising given more than half of the policies are issued in three states—Florida, Louisiana and Texas. “You get strong support from Democrats and Republicans [in coastal states] for continuing a program that has subsidies built into it.”

Don Griffin, vice president of personal lines for the Property Casualty Insurers Association of America, agrees NFIP is “more a coastal and riverine issue.” He says many of the areas that have lots of subsidies are in populous states.

“Subsidized insurance for those who live in flood-prone areas—including wealthy property and business owners—should be viewed as entitlements that have been around just about as long as Medicare and Medicaid,” says Robert Hartwig, co-director of the Center for Risk and Uncertainty Management at the University of South Carolina’s Darla Moore School of Business.

“As the current healthcare debate and debacle illustrate, once an entitlement genie is out of the bottle, it’s almost impossible to get it back in.”

In between, Congress stuck with National Flood Insurance Program precedent and kicked the can down the road once again, giving it three more months on life support.
Insurers are known for coverage innovation. There’s insurance for everything, right? Except for the one area that, especially now, seems conspicuously absent—flood insurance for high-hazard areas.

Whereas countries such as the United Kingdom rely on private insurers to underwrite flood insurance, albeit with government backing, in the United States, Uncle Sam is the underwriter—in the form of NFIP.

That isn’t because insurers don’t want to underwrite flood insurance—they’re almost always looking for new opportunities. Part of the problem is that NFIP actively discourages private insurers from getting into the market. The result has been a debt-ridden public operation that seems to receive public attention only in the wake of catastrophes or when it periodically comes up for reauthorization, as is the case this year. With the program already about $24 billion in debt—a deficit that’s sure to swell as claims from Hurricanes Harvey and Irma are paid—expanded private participation in flood insurance is certain to draw renewed consideration.

The Council supports long-term reauthorization accompanied by reform, including expansion of the private role in the flood insurance market.

“We absolutely believe in a greater private role,” says Joel Kopperud, The Council’s vice president of government affairs. “The challenge is the private market needs access to NFIP data to truly function—it’s important that the private market has access to data that only the Federal Emergency Management Agency has.” FEMA oversees NFIP.

Kopperud says everyone involved in the debate should be concerned about increasing uptake of flood insurance. “It ought not to be partisan—people need to purchase insurance,” he says. “The goal should be expanding the market and broadening the base regardless of whether it’s public or private.”

The challenge is the private market needs access to NFIP data to truly function—it’s important that the private market has access to data that only the Federal Emergency Management Agency has.

Joel Kopperud, VP of government affairs, The Council

Reauthorizing NFIP

NFIP provides federally backed insurance in communities that agree to enforce floodplain management plans that meet federal requirements. Flood insurance is required for owners of property in high-risk areas if they have a mortgage from a federally regulated or insured lender.

Somewhat ironically, NFIP came into existence nearly 50 years ago because private insurers said they could not underwrite flood insurance, partly because they found the risk too unpredictable and they lacked the modeling capabilities to better understand it. But technological advances and other factors, not the least of which is a mountain of capital, have whetted their appetite, provided they can generate an adequate return.

NFIP doesn’t work like traditional private insurance. Policyholder premiums are based on the experience of properties within the larger flood risk zones, which are defined by floodplain maps. A constant criticism of the program has been that the federal floodplain maps often don’t reflect reality, because they’re out of date. The program involves subsidies and premium levels that don’t accurately reflect exposure. It even pays for rebuilding properties in areas that contend with repeated serious flooding.

A series of catastrophes—notably 2005’s Hurricane Katrina—plunged NFIP deeply into debt, which now totals more than $24 billion. At press time, claims stemming from Hurricane Harvey were still being tallied, and estimates of Irma hadn’t even begun. The program appears almost certain to overrun its $30 billion borrowing limit.

The debt burden led Congress to approve major reforms in the Biggert-Waters Flood Insurance Reform Act of 2012, reforms that included allowing the program to charge risk-based premiums, removing discounts to some policies that were not actuarially sound, and eliminating “grandfathering” of older, lower rates. The act also included language that signaled Congress’s desire to open the flood insurance market to surplus lines insurers. Apparently the language wasn’t strong enough, however, as some lenders have still refused to accept policies from surplus lines insurers, saying the language doesn’t specifically say private insurance can be accepted as an alternative to NFIP coverage. 

The reforms took another blow after outcry from some lawmakers (particularly those in coastal areas), the public and others led to the Homeowners Insurance Affordability Act of 2014. Among other things, this act reinstated grandfathering of the older, lower rates and repealed some of the rate increases.

If I’m looking to diversify some risk and not have the reputational issues that have come with being a WYO, the biggest stumbling block is the mandatory purchase requirement—you have to buy a flood policy if you have a federally based mortgage and are in the floodplain. And the way the law reads, it needs to be an NFIP policy.

Don Griffin, VP of personal lines, Property Casualty Insurers Association of America

Reform once again received a boost as Congress considered a series of bills earlier this year, including the Repeatedly Flooded Communities Preparation Act, which would ensure community accountability for areas repetitively damaged by floods; the Flood Insurance Market Parity and Modernization Act, which spells out that flood insurance policies written by private insurers must satisfy the mandatory purchase requirement; and the Taxpayer Exposure Mitigation Act, which would repeal the mandatory flood insurance coverage requirement for properties located in flood hazard areas and provide for greater transfer of risk under NFIP to private capital and reinsurance markets.

Neither the House nor the Senate, however, voted on these bills before the September 8 temporary NFIP reauthorization, which came as part of a congressional continuing resolution that also raised the debt limit, funded the U.S. government until Dec. 8, and authorized emergency funding for hurricane disaster relief.

Private Insurance Proponents

Private insurers have become increasingly interested in participating in the overall flood insurance market beyond the role some have accepted as “Write-Your-Own” companies that service NFIP policies but leave the underwriting to NFIP.

Don Griffin, vice president of personal lines at the Property Casualty Insurers Association of America (PCI), notes that some insurers left the Write-Your-Own (WYO) program because of the reputational problems it presented as policyholders complained about claims handling in the wake of Katrina and other storms.

“If I’m looking to diversify some risk and not have the reputational issues that have come with being a WYO, the biggest stumbling block is the mandatory purchase requirement—you have to buy a flood policy if you have a federally based mortgage and are in the floodplain. And the way the law reads, it needs to be an NFIP policy,” he says.

That lack of choice has led risk managers to also support a larger private role in the market. The Risk & Insurance Management Society supports reauthorization of the program.

We believe that policies purchased on the surplus lines market will satisfy lender requirements. That’s our top priority in reform after long-term reauthorization.

Joel Kopperud, VP of government affairs, The Council

Watt Companies, a commercial real estate firm in California, owns and manages assets invested in office buildings and shopping centers with numerous locations in flood zones.

“We have full flood coverage with the exception of these high-risk zones. These are high deductibles, and there’s really nothing we can get out there other than NFIP. The problem is that our lenders require us to purchase NFIP—it's not NFIP or equivalent,” says Mark Humphreys, Watt Companies’ vice president of litigation and risk management and a member of RIMS’s external affairs committee.

“I would like to see a larger role for private insurers, and I think it’s possible. It’s not going to be a quick process. I can’t see privatization happening overnight. There has to be some way to lead people and lead the lending community into it,” he says.

Joel Kopperud agrees. “We believe that policies purchased on the surplus lines market will satisfy lender requirements. That’s our top priority in reform after long-term reauthorization,” he says.

Support for greater private participation in flood insurance spans the political spectrum.
As might be expected, the free-market R Street Institute is among the many pro-business advocates of a greater private market, as R Street’s R.J. Lehmann and Steve Ellis of Taxpayers for Common Sense wrote in a letter to the House Financial Services Committee earlier this year.

“Because the National Flood Insurance Program historically has charged subsidized or otherwise distorted rates for coverage, it has failed to convey accurate information to property owners and developers about the true risks they face, which can have and has had disastrous consequences,” they wrote. “We do not believe encouraging private insurance would result in ‘cherry-picking’ of only the lowest-risk properties. Shrinking an already broken and unsustainable program can only benefit taxpayers.”

And support came from an unexpected source in a letter to the Senate Banking Committee. Longtime industry critic Bob Hunter, director of insurance for the Consumer Federation of America, wrote that the CFA “strongly supports Congress taking steps during this reauthorization process to allow private insurers to assume a significant amount of flood risk.” The support came, of course, with a caveat. “However, involving the private insurance market on flood insurance requires careful planning since some proposals we have seen would expose consumers to extremely unfair practices and expose taxpayers to more risk…. Any increase in the role of private insurers must be accompanied with robust consumer protections.”

The reinsurers and the modeling companies have improved their risk analysis capability, such as with catastrophe modeling related to flood, so they have more confidence in understanding what the risk is.

Frank Nutter, president, Reinsurance Association of America

But Is It Profitable?

Despite the interest in and support for private insurance in the flood market, uptake has been limited, and there are multiple reasons why—beyond the ambiguous language in the Biggert-Waters Act. Much of it comes down to determining whether this can actually be a profitable market.

“The largest obstacle in recent years…[is] the fact that private insurers must compete against a government-subsidized entity that does not charge rates that are actuarially sound,” says Robert Hartwig, co-director of the Center for Risk and Uncertainty Management at the University of South Carolina’s Darla Moore School of Business in Columbia. 

And charging those same low rates wouldn’t help. In fact, concern that state regulators will too heavily regulate premium pricing has also steered private insurers away, says Jim Auden, managing director with Fitch Ratings in Chicago. Hartwig agrees. He says there is fear that any new flood product would be subject to rate suppression by state regulators, potentially rendering it a perpetual money loser. Under such circumstances, “this is not a business in which an insurer would be willing to allocate much, if any, capital,” he says.

Auden also notes that people outside flood-prone areas aren’t willing to buy the product. “If you’re only selling to the folks who inevitably would be flooded out, you couldn’t make a profit.”

Then there’s the lack of data. According to Ken Evans, senior vice president and chief risk officer of Willis Towers Watson’s Loan Protector Insurance Services, NFIP has closely held its premium and loss ratio information. Because private insurers haven’t had access to the information, they haven’t been able to determine whether the market would be profitable.

Even with these barriers, however, it is important to note that private reinsurers have become involved with NFIP recently and their ability to use data has played a role in this. The program initially ceded some risk to private reinsurance in October 2016 and then transferred a larger book of business to 25 reinsurers earlier this year.

“Reinsurers have a robust capital position, and they’ve been looking for new areas of growth. Government programs such as the flood insurance program offer them that opportunity,” says Frank Nutter, president of the Reinsurance Association of America. He says flood is a diversifying risk so reinsurers have an opportunity to write more than windstorm or earthquake, for example.

The reality is…you’re never going to have a private market that’s interested in insuring repetitive flood areas. To what degree do you mitigate flooding? That’s a question Congress will have to answer.

Ken Evans, SVP and chief risk officer, Willis Towers Watson’s Loan Protector Insurance Services

“The reinsurers and the modeling companies have improved their risk analysis capability, such as with catastrophe modeling related to flood, so they have more confidence in understanding what the risk is,” Nutter says.

Flood Is Growing

Despite increasing support for greater private participation in the flood insurance marketplace, observers agree that NFIP isn’t likely to disappear any time soon.

The program needs to be reauthorized on a long-term basis to encourage the development of a private solution, says the PCI’s Griffin. “We want to see the program continue, we need a long-term reauthorization, companies need to know where they can go.” A long-term reauthorization is “a market stabilization signal to the industry because it says we’re going to stay the course.”

“I believe there will continue to be a need for NFIP for the foreseeable future, particularly for homeowners in high-hazard flood zones,” says Martha Bane, managing director of the property practice at Arthur J. Gallagher in Glendale, California. “There will be continued pressure to offer subsidized rates that don’t adequately cover long-term losses and expenses for private insurers, so the private flood market could be somewhat limited.”

Evans takes a similar stance. “The reality is…you’re never going to have a private market that’s interested in insuring repetitive flood areas,” he says. “To what degree do you mitigate flooding? That’s a question Congress will have to answer.”

The largest obstacle in recent years…[is] the fact that private insurers must compete against a government-subsidized entity that does not charge rates that are actuarially sound.

Robert Hartwig, co-director, Center for Risk and Uncertainty Management, University of South Carolina’s Darla Moore School of Business

The flood peril isn’t going away, and in fact it may be growing, notes Evans. “We’re seeing more everyday occurrences than we have in the past. Is it climate change? Is it Mother Nature taking a different path? More and more, everyday flooding is happening. Brokers are finding more people are becoming more aware of flooding—it’s no longer just coastal areas affected.

“If a broker has more choices, the broker will be able to use these choices to better serve the consumer,” he says. “But no matter how you cut it, flood is very difficult and convoluted to understand, because it’s not the same as hazard insurance. Flood has nuances that are particular to flood insurance.”

Hofmann is a contributing writer.

They’re frustrated and looking for some kind of guarantee that the reward for years of hard work, networking and premier sales numbers will be protected. That kind of guarantee isn’t going to happen under the traditional compensation model most commercial brokerages use. It requires a fresh look at how we incentivize our best brokers.

When a brokerage is purchased, often the buyer wants to see a return on investment as soon as possible. For the insurance broker, this may mean a shifting of accounts and changing commissions. In fact, brokerage commission decreases are occurring across the industry. What was once a fairly predictable financial future has become one of uncertainty, and the pressure to secure new clients continues to intensify at a relentless pace.

Some acquirers are creative in their attempts to motivate new growth. For example, one of the largest brokerages in the industry ties broker commissions to a schedule of new business appointments over the first few years after acquisition. If brokers do not meet the demands for new growth by setting up those appointments, they do not receive a percentage of their commissions.

An Accenture survey found that the top two priorities of brokerages are retaining existing customers and creating a better, more consistent overall customer experience. However, the mandate for brokers to focus on new business flies in the face of those strategic imperatives.

Additionally, most brokerages have compensation models where new business commissions are higher than renewal commissions. New accounts are compensated at 40% or higher while renewals are paid at an average of 20% to 30%, with some going even lower than 20%. This model does not incentivize brokers to be true advisors to their clients. In some firms, the pressure to procure new business is so intense (particularly right after an acquisition) that brokers rarely interact with their clients once the policy is bound. While this may have been historically acceptable, we live in a world where client expectations are rapidly changing, so this approach increasingly presents a new risk—the inability to keep clients.

“The key variables driving overall commercial insurance customer satisfaction are insurer profitability and broker expertise,” according to the J.D. Power 2016 Large Commercial Insurance Study. J.D. Power notes the correlation between customer satisfaction and insurer profitability suggests that “the most profitable insurers are able to support more flexible underwriting standards to meet customer needs more effectively.” As far as brokers go, “The single most critical touch point between a customer and an insurance broker is the quality of advice/guidance provided,” J.D. Power says. Clients want the attention of, access to and expert advice from their brokers. When a brokerage’s model does not support that, people will go to one that will.

The Entrepreneurial Model

We have found that a different model—an entrepreneurial model—more closely aligns with evolving client expectations. This model encourages brokers to look at their book of business as if it is their own brokerage firm. As business owners, we get paid by the carriers the same for new and renewal business (for the most part) while we are building an asset. Brokers want the same thing the owners get: consistent commission levels, equity in their client base and ownership in the firm. The entrepreneurial model mimics the benefits of being a brokerage owner by paying the same new and renewal commissions, providing a contractual equity for brokers’ individual clients and offering the ability to buy stock in the overall firm.

In the entrepreneurial model, customer service reps, account managers, account executives, claims advocates and other key players remain critical to the client experience. Having best-in-class subject matter experts and customer service teams is just as critical as having an ongoing relationship with a broker/advisor. However, unless the broker is leading the strategy, directing teammates and executing the game plan, clients often feel they are missing a critical piece of their overall engagement with their brokerage.

It may seem scary to revamp your compensation approach and give brokers greater ownership over their book of business. There are some definite downsides to this model that need to be taken into consideration. For example, selling the company becomes more complicated since broker equity in the client base would have to be taken into account if the firm is sold. There will be a compression of the EBITDA percentage when renewal commission levels are increased. But in time, the higher retention levels of both clients and brokers should more than offset those dollars. The focus of an entrepreneurial model has to be on building a better company and seamlessly serving clients, not on short-term EBITDA.

While this type of plan might appear to cause brokers to rest on their existing book, we actually have found the opposite to be true. Equity and ownership builds a sense of pride in their book that causes brokers to want to see it grow. They are building something that has value; they don’t want to see that asset dwindle.

And it affords them an opportunity to generate income upon retirement. This is accomplished by paying retiring brokers a lesser percentage of the commission as it renews than what they are paid while working. The difference between the active commission level and the retirement commission level is paid to a new broker, who has the responsibility for servicing those accounts. When retired brokers are paid out for their equity in that client base, the equity position transfers to the new broker, and the cycle continues. This allows for a seamless perpetuation plan without further erosion of EBITDA.

When I speak with brokers about our model, there is immediate disbelief followed by a lot of questions. The difference in their ability to pursue and retain clients, the quality of tools at their disposal, the increase in their compensation, the option to own and the retirement path all seem too good to be true. It’s not, but there is a catch. As is true for all successful business owners, they must be entrepreneurial with the internal drive to build something for themselves.

The traditional brokerage is all about the shareholders, so profits by definition have to be their first priority. In the entrepreneurial model, the owners are brokers, so the interests of the two parties are the same and, therefore, aligned. The result is that it creates a place to build a career and a life.

Jeff Lagos is president of Insurance Office of America.

Insurers have been using big data for years to select their underwriting risk appetite, even helping to price major catastrophes such as earthquakes and wind exposures.

But in today’s new era of insurance-driven data, middle market and larger businesses can use their own analytical data—coupled with industry trends—to make sound business decisions on the potential risks to their organization. Too few organizations are effectively harnessing their data, and many brokers continue to sell on price alone, especially in the middle market and large account space. 

In an ideal scenario, you and your clients should work together using their own data on a micro-focused basis to develop their corporate risk management and insurance program. The data can help confirm many earlier decisions and develop a well-thought-out map to navigate your way through other complex risk management issues. The data will highlight deficiencies in such things as insurance placement and carrier programs, collateral programs, claims programs, risk control programs or a combination of these.

The keys to effectively using an analytics process to navigate an individual company are:

  • Keep it simple and allow the data to talk.
  • Accept that the data will pinpoint issues that may require a change in risk management fundamentals.
  • Establish a corporate commitment to a continuous risk management improvement process.

We use four simple insurance analytics tools that break information down into small parts to enable us to examine the roots of each factor. This lets you better understand the bigger picture. Each tool peels back another layer of information to identify trends and a root cause (or multiple root causes).

Total Cost of Risk (TCOR) is the first and easiest of the four insurance analytics reports to run. Simply, it is a process of taking your annual insurance spend and breaking it down into its individual components. Whether your insurance program is written on a first-dollar, guaranteed-cost, program, or deductible or retention basis, the TCOR report will direct you to where you need to focus your attention—insurance premiums, actual losses, administrative expense and/or collateral.

For instance, if 62% of the insurance spend is in losses, that is a good place to begin to peel back the layers of information to determine the cause. Solving the loss equation in this instance will have multiple positive effects on improving risk, reducing collateral and creating better underwriting terms.

Historical loss data and related information are increasingly being used by financial and insurance professionals to identify macro- and micro-level trends and patterns to help make strategic decisions regarding pre-loss (risk control) and post-loss (claims) programs. Taking the time to look at the various aspects of qualitative loss data allows us to take a deeper dive into historical information to find trends and to determine the root of a problem. The more years of loss history data you use, the better trend and root cause analysis you will obtain.

Charting out trends in data provides the opportunity to sort information into many meaningful ways that align with an organization’s strategic goals. For example, you can chart by types of losses, by division, by location, by state, etc. These charts later become dashboard reports for tracking progress against a baseline or correcting an issue. They help identify and create priorities for initiatives. And they guide you and your clients as you develop goals to support risk management and internal key performance objectives.

Financial analytics take a different snapshot of the same information to project losses into ultimate loss costs—meaning predicting the value of a loss that occurred today by the time the loss is finally paid in the future. This involves examining four different points of information:

  • Retention analysis and loss forecast
  •  Accrual and loss reserve
  • Program comparison and cash flow modeling
  • Collateral requirements.

Understanding the financial implications to your company of any risk retention or deductible program is critical to selecting the most appropriate solution.

Property analytics are an equally important bridge to a comprehensive look at the entire risk management and insurance program. A top-down analysis of a property program begins with proper valuation of assets to ensure the organization has the appropriate insurance limits. This entails a look at the valuation and also a careful look at the construction, occupancy, protection and exposure (COPE), such as the following:

  • Appropriate replacement cost values
  • Construction of the building as well as the building materials used to construct a property
  •  Occupancy of the property (office, industrial, retail or residential)
  •  Protection(s) in place to prevent or mitigate loss
  •  Exposure to the types of risks the property is susceptible to. 

Due to the unique characteristics of each property, it’s important that an organization understand the value of this information to not only help control potential hazards of loss but also to showcase the portfolio in the most favorable light to the underwriting community. There are also many advanced technology systems today that can help in this analysis.

Importance of Risk Assessment

While the use of analytics in risk management and insurance will point your clients in the right direction, it’s important to follow up each analysis with a general risk assessment. The risk assessment process takes the what and how of an event one step further to understand the reason why the event occurred, identifying opportunities to further reduce exposure and costs associated with a claim. Completing this process will allow your clients to take corrective action and change behavior to prevent the loss from occurring again—getting your clients back in line with their organization’s commitment to a continuous risk management improvement process.

Meder is Wells Fargo Insurance’s EVP and head of its Risk Advisory Practice.

In his final manipulative act, Little Finger talked about how he would “play a little game” to determine someone’s motivations for a certain act or series of actions. He would think of the absolute worst possible reason someone could be doing or saying a certain thing. This perspective helped him either eliminate potential alternatives or protect himself from a potential self-serving act.

An interesting perspective from a fictional character. I am not suggesting you should assume the worst possible outcome of every situation you encounter. However, it is typically useful to try to understand someone’s motives during a particular exchange. Have you ever tried to analyze someone else’s motives—putting yourself in their shoes—during a negotiation or sales process?

If considering a sale of your business, it is wise to look at those approaching you from this vantage point. I truly believe most of those who approach you have good intentions. But one person’s good intentions are not necessarily in the best interest of another person—that being you, the seller.

In general, two main groups are coming after you: the M&A advisor and the buyer segment. The boiler room approach that some M&A advisors in the marketplace are using to get your attention can be enticing.

Most of you have likely been called by a “bird dog” telling you about the unbelievable multiple and value they can command for you in today’s hot market. Ironically, the person you are speaking with likely doesn’t know anything about you or your firm. How could they possibly know what your market value could be? Is it really that easy, or do they have an ulterior motive masked behind a great sales pitch? Don’t get caught up in the momentum. Stop and understand whether this message is really the right approach for your firm.


The second group is the buyer field—a group of roughly 35 firms trying to convince other firms to sell to them. Buyers will approach you in multiple ways—via employees who are also M&A reps, outsourced cold callers, local representatives and potentially even M&A advisors trying to represent the sole interests of a specific buyer. Sounds like a lot of activity!

Some buyers will encourage you to talk to others in the marketplace. They want to make sure you are comfortable, that they are the right fit for the next stage in your career. Others may try to convince you they are the only firm out there for you, that you should not hire an advisor, not talk to other firms. They want you to think the valuation they are offering you is very competitive in the marketplace.

Both sales tactics are likely coming from a good place. But the latter is trying to convince you to narrow your focus on what is likely the most important decision of your professional career. Understand what they have to gain from the approach. Of course, it is better for the buyer if you don’t talk to other firms. Competition not only has the potential to drive up the price but also to create a scenario where the buyer (or their advisors) won’t get the deal done.

The bottom line is to be diligent. Understand the motivations of any firm calling on you. Can you create a scenario where you get value from the advisor you choose or the buyer you select and still have a win-win outcome? Of course you can. But make sure you don’t get sold on something that might be well intentioned but doesn’t give you the absolute best outcome.

Market Update

Deal activity in August 2017 slowed to 25 announced deals in the month, down from 35 in July and from the peak of 56 announcements in June. Year-to-date activity through August is up from last year, however, at 321 total announcements compared to 289 through August 2016. California, Texas and Florida have been the most targeted states so far this year.

Acrisure continues to be the most active buyer in the field through August, announcing 29 deals. Broadstreet Partners and Hub International have each announced 23 deals year to date through August.

Notably during August, Seeman Holtz Property and Casualty announced three acquisitions, bringing the total for June, July and August to six, with eight announcements for the year through August compared to only two in all of 2016. Seeman Holtz is based in Florida and has its largest presence there and in Texas and California. It also has locations in New Jersey and Illinois.

Brown & Brown also announced three acquisitions in the month of August, in addition to two announcements earlier in 2017. Historically a very active acquirer, Brown & Brown has announced fewer than 10 acquisitions since the beginning of 2016 (through August 2017).

Trem is SVP at MarshBerry.

A May 2014 Center for Insurance Policy and Research survey of 47 state regulators showed all but five with insurers offering telematics UBI policies and 23 with more than five carriers offering UBI.

UBI costs are dependent upon the vehicle and are measured against time, distance, behavior and place. While UBI is now concentrated in personal automobile insurance and is not yet receiving the same adoption in the commercial auto market, its possibilities there are numerous.

Telematics is an effective tool in validating certain rating factors used by underwriters in pricing commercial auto insurance. It captures important usage data like hours driven per day, annual mileage, time of day driven, radius of vehicle travel and garaging location. 

Today most carriers depend solely on the vehicle garaging and radius that is provided to them on the accord application. Telematics data can tell you that along with secondary garaging locations and a more granular breakdown of radius to provide an even better insight into the risk.

Studies show there is a strong correlation between claim and loss costs and mileage driven. One national carrier said time of day a vehicle is driven can be twice as predictive as traditional insurance rating variables. The number of hours per day the vehicle is driven can reflect if it is being driven multiple shifts per day, which increases the accident frequency and severity potential.

Many telematics providers use supplemental software applications that provide road speed limits, road types, traffic density and weather. This allows insurers to calculate speeding, miles driven off road, types of roads being traversed and number of hours driven during high traffic density periods—which have been shown to be a predictor of crash patterns.

The Insurance Services Offices (ISO) has rating for telematics embedded in the Commercial Lines Manual under Rule 114 Vehicle Telematics Rating. The GeoMetric rating procedure provides a premium discount to certain vehicle types and coverages based on the percentage of time driven in a green zone. A green zone is a set of all locations with lower loss cost bands than the ones of the principle garaging territory. There is a Safety Scoring Rating Procedure in the rule that provides a premium discount to certain vehicle types and coverage based on driving behavior. The safety score is a numbering system that represents the driving behavior risk using qualifying telematics.

Changing Behavior

Behavior identification can provide great value to commercial auto insurance. It can identify key driving behaviors that include hard braking, rapid acceleration, speeding and hard cornering. These behaviors can be used in scoring models to determine risk selection and pricing along with proactive loss control. Pinpointing real-time or near real-time driver behaviors lends itself to a more proactive approach in seeking immediate cures to prevent accidents. In fact, there is telematics technology available today that will immediately notify the driver of unacceptable driving behaviors.

A survey by the Insurance Research Council revealed more than half of drivers changed their driving habits after owners installed a telematics device provided by their insurer. A total of 36% said they made small changes and 18% said they made significant changes. A Federal Motor Carrier Safety Administration evaluation of onboard telematics effectiveness found a 37% reduction in speeding violations per 1,000 miles.

Monitoring driver behavior alone does not solve the problem, but coaching and feedback have shown to make measurable improvements. Some companies are using gamification with telematics to help change driving behaviors. This typically involves drivers competing either head-to-head or in teams against other driver colleagues to see who demonstrates the best driving behaviors. 

Telematics can also have an important role in claims handling. It can provide driving events and driver behaviors immediately after an accident. These include acceleration, hard breaking and steering, direction of travel, date and time, weather details, location of accident, speed and air bag deployment.

The insurer can immediately deploy resources to an accident scene to address the client’s needs. This can mitigate costs of unnecessary emergency response equipment and high towing and storage charges, which adds to the cost of the claim.  Telematics data in claims is quickly moving to more predictive analytics solutions.  Point of impact and severity of crash information derived from accelerometer data can be an early predictor of trauma and the probability of injury.  

Scoring models are commonly used with telematics. They analyze the usage and driving behavior telematics data and provide a numerical score to reflect the risk level.  This score is typically used in the risk selection and pricing process. The models vary from basic event counting and weighting to very complex models that perform analytics on telematics data along with various contextual data. The majority of the scoring models are proprietary and the exact calculations are difficult to determine.

The telematics industry is growing rapidly. What and how data are being used varies by company and is ever-changing as the industry grows. Results have shown telematics can improve risk selection and claim handling, provide proactive loss control, and improve overall book results, both in the short and long term.

Kevin Seth is president of  E-Technology Services.

As millions of people work to put their houses, businesses and lives back together following hurricanes Harvey and Irma, it only makes sense to highlight the topic—and the critical role brokers play—once again. The following is a personal account of Richard Blades, chairman of Wortham Insurance in Houston. We’ve outlined his experience during Hurricane Harvey to bring to light your own processes and preparation before, during and after a loss event. There are always lessons to be learned, and as you read along, take a moment to remember what our industry is all about: customer service, customer experience, relationships and trust.


The message on the homepage of Wortham’s website is simple: Our Houston office has been affected by the flooding brought on by Tropical Storm Harvey. We have activated our Business Continuity Plan and our staff are fully prepared to assist our clients via normal email, fax or telephone methods.

As the city of Houston and the surrounding region reeled in the immediate aftermath of Hurricane Harvey, Wortham Insurance operated in a “business as usual” mindset. And that’s by design, according to Blades: “The most important thing we do is rehearse our disaster recovery plan. Based on where we’re located and where a lot of our clients are located, you have to realize that something like this is a possibility.”

Wortham’s “rehearsal” is actually physical practice. At least once a year, Wortham’s IT department tests the equipment and operating systems inside of a state-of-the-art Mobile Recovery Unit, and employees are required to spend a full day working on a disaster recovery virtual desktop. Each MRU, essentially a giant mobile communication trailer, has space for 36 workstations. When Wortham saw the storm approaching, they took steps to make sure all team members could work remotely and triggered the reservation of two MRUs, which were located out of harm’s way in College Station. They arrived on location on Wednesday night to augment Wortham’s remote capabilities, which use an offsite data center. “When things get hectic, it’s not the time to be making decisions. You need to just execute your plan. Especially during a CAT loss—that’s the most important time to be assisting clients. You can’t be down.”

“We were without email and phones for just a short period of time on Saturday night and we were back up and running in a matter of hours. It was a real team effort. Our employees were able to access files, take calls, field emails and communicate with clients quickly and efficiently,” says Blades.

Still, Wortham Tower took on significant water and at the time of this writing, Blades had no timeline for the building. “We’re operating on the basis that it’ll be at least a couple of months before we’re back.”

That just shows the complexity of dealing with an unprecedented CAT event. In addition to helping clients and the community, you have to take care of your own. “We reached out to everybody through our phone trees, trying to get their statuses quickly,” Blades says. “We’re offering any assistance that we can…. You’ve got to take care of your people first.” About 20 Wortham employees were seriously affected by the storm.

Wortham’s other offices around the state offered support, providing additional team members to process claims and offices for some employees who evacuated Houston to work. And the larger insurance community has also reached out. “It was very heartwarming…to know you have that many associates around the country who were thinking about you and willing to help with genuine offers of assistance. It makes you appreciate the people in our industry,” Blades says.

As Houston’s clean-up efforts continue, stories of the human spirit abound. “You just would be amazed. There are wonderful stories about people helping people. That’s just the Texan Way.”

While it’s still unclear how many Wortham clients were affected (they’re taking in volumes of both personal lines and commercial claims), the storm has made clear how critical flood insurance has become. “There were two stages to the flooding in Houston,” Blades explains. “One was from the initial rain and the second was from the release of the reservoirs. Nobody anticipated that the reservoirs would be breached the way they were. With Houston’s development over the last couple of decades, the city has to do a better job of flood control. People are going to be in unique circumstances and will need federal help. I think more people will buy flood coverage going forward.” (For more on the current state of the NFIP, check out the feature “Under Water” in this issue.) 


We are proud of how our industry has and continues to respond to both Hurricanes Harvey and Irma. Your support and commitment to serving your clients is what makes our industry so special. Our thoughts continue to be with our member firms, their teams, clients, families and communities in Texas and Florida as they rebuild.

Cyber insurance is a growing market, but it’s not the only place to look for coverage from a cyber attack. Robert Parisi, managing director for Marsh’s FinPro practice, says, “As losses get larger, people are examining their coverage and often taking a shotgun approach to claims and notifying everyone they can if they don’t have express cyber coverage.” Parisi says, “The best approach is not to view a cyber event in isolation but to look at all policies—property, E&O, general liability, terrorism, kidnap and ransom, and fidelity—and see where aspects of a cyber event may be covered.”

Cyber Claim History

In the early days of cyber attacks, companies made claims under their property and commercial general liability policies. Coverage questions initially revolved around whether the loss of data could constitute a direct physical loss or damage under a property policy.

One of the first property policy disputes, Home Indemnity Co. v. Hyplains Beef, was based on a claim for business interruption losses arising from a disrupted computer system. In 1995, the federal district court dodged the question of whether the loss of data was a direct physical loss and focused on actual language of the business income section of the policy. The policy required a “suspension of operations.” The trial court denied the claim because, although the disruption made the computer system less efficient, the “suspension” of plant operations had not occurred. The Tenth Circuit affirmed.

However, a case in 2000, American Guarantee & Liability Insurance Company v. Ingram Micro, did find that the loss of data constituted physical damage under the company’s business interruption policy. The court noted, “Lawmakers around the country have determined that when a computer’s data is unavailable, there is damage; when a computer’s services are interrupted, there is damage; and when a computer’s software or network is altered, there is damage.”

The insurance industry scrambled to clarify the issue by specifically excluding electronic data from property coverage. Indeed, the current Insurance Services Office’s Building and Personal Property Coverage Form excludes “The cost to research, replace or restore the information on valuable papers and records, including those which exist on electronic or magnetic media, except as provided in the Coverage Extensions.” The current form’s coverage extensions provision limits recovery to $1,000 at each location.

Bucking the Trend

Some insurance companies, however, are turning away from the ISO language and pursuing the cyber insurance market by including cyber coverage in property policies. FM Global, Affiliated, Liberty, AIG and Zurich all include elements of cyber coverage in their company-issued property policy, while XL Catlin and Allianz have cyber extension endorsements available. FM Global’s website states that its Global Advantage policy covers:

  • Damage to data, programs or software created by harmful viruses or other malware
  • Computer network service interruption due to malicious cyber activity
  •  Third-party data services interruption (cloud outage) leading to business interruption and/or property damage
  •  Resulting property damage and business interruption on an all-risk basis.

This type of property coverage can be particularly important when malware infestations require expensive and time-consuming eradication measures, which may involve replacing equipment.

John Dempsey, founder of Terrabella Risk Consultants, says that as attacks increasingly impair system operations, rather than steal data, companies should pay close attention to how an attack impacts the company’s computer systems. “Multipronged attacks are driving multiple claims,” he says. Dempsey’s expertise in quantifying the impact of cyber attacks and supporting business interruption claims has enabled him to understand where other types of coverage may come into play after a cyber event. “If the nature of the IT hardware changes and a client can show loss of functionality, a credible argument can be made that the loss of use of the equipment supports a property claim that the equipment was damaged.”

The recent attack of NotPetya malware is a good example. The malware was a combination of powerful malware tools that deeply infiltrated systems to destroy data and take over file systems. NotPetya created massive business interruptions at large corporations such as Maersk, Federal Express, and Reckitt Benckiser. Maersk’s CEO has estimated the attack will hit the company’s third quarter financial results by $200 million-$300 million. Shipping company TNT, a subsidiary of FedEx, was still feeling the impact of NotPetya three weeks after the attack, with manual processes still in place and widespread delays in service and invoicing.

Mike Andler, property practice leader at Lockton, has been carefully monitoring the cyber coverage extensions in the property insurance market. “We will have to wait and see the result of recent first-party cyber claim activity and its ultimate effect on the marketplace, especially with respect to terms and conditions, price and available limits.” Referring to that shotgun approach he currently sees, Parisi cautions that insurance companies may begin specifically excluding cyber from those traditional policy products that aren’t necessarily intended to cover cyber events.

Accordingly, organizations have to carefully monitor their cyber coverage. The simple data breaches that required only notification to authorities and victims have given way to complex attacks that require a comprehensive approach to cyber risk management. Today, boards and executives must delve deeper when managing cyber risks and examine the interdependencies between business units and IT operations.

They need to determine:

  • What types of cyber attacks are possible
  • What the impact on operations would be
  • What insurance coverage is needed
  • What financial limits are required.

Understanding the potential impact of cyber attacks is a difficult exercise that requires technical, operational, legal and insurance expertise. Brokers and agents can assist by helping clients view cyber risks as enterprise risks and examining all their policies to identify possible coverage areas for cyber claims. They also can help identify experienced forensic, technical and legal resources that can assist clients in the event of an incident and, perhaps most importantly, help manage the post-event claims process.

Westby is CEO of Global Cyber Risk.

Outside of the ACA the president was unable to make any legislative changes. Instead, the Department of Labor and the Equal Employment Opportunity Commission became the conduits for implementing the president’s policies.

Senior Labor official Phyllis Borzi addressed this explicitly