Volume 63, March 2013

BOATS, MANUFACTURED HOMES AND WORKERS COMPENSATION

What makes a home a home? This month's cybercast looks at two unique types of homes. The first article examines the market for boat and yacht owners, especially after the severe damage that Superstorm Sandy caused. The second looks at owners of manufactured housing and mobile homes. This type of housing has experienced decreased demand over the past five years but is beginning to stabilize. The article explains that the decrease may have less to do with consumer demand and more to do with purchasers' inability to receive the financial benefits and incentives available to other types of homeownership.

Hear from the market experts who explain that insurance markets are extremely interested in both of types of properties. Those markets and their clients want to work with agents who understand the unique features of these exposures and appreciate their long term stability.

BOATING INSURANCE IN THE WAKE OF SANDY

Knowing "niches within niches" in order to educate the client

It's nearly impossible to talk with boating insurance experts these days without the topic of Sandy—hurricane, tropical storm, super storm or however you want to describe her—coming up, and coming up early on in the discussion. Tom Conroy, marine managing director for Markel American Insurance Company, pretty much sums up the conversations when he says, "Nothing compares to the long-term impact to the Northeast stemming from Sandy." However, he's quick to add, "While it will take time to rebuild, boaters in the area are tough and resilient."

Michael Terrier, senior yacht underwriter and yacht department manager, Maritime Program Group, says Sandy's effects have yet to be fully realized, "but they have made—and will continue to make—a huge dent in carriers' bottom lines." He says an estimated 65,000 boats were damaged by the storm, many of them beyond repair. "We will have to see how many boats are replaced," he adds, "and how many boat owners will choose not to purchase a new boat."

The storm also caused damage that reaches beyond boats, per se. "Many marinas, boat yards and repair facilities were heavily damaged," Terrier explains. "Unfortunately, many were improperly or inadequately insured, and rebuilding will be a time-consuming process with very limited resources." Side effects will include fewer slips and less service available, coupled with increased labor rates.

Gordy Fitch, vice president of specialty programs at Hagerty Insurance, notes that classic boats insured by his firm are "highly collectible and no longer produced, so they're not easily replaceable. With Sandy still fresh in everyone's minds, it is a good opportunity to evaluate how to take advantage of modern technology and work with clients in advance of future storms, to prevent losses from occurring."

Sandy and storm damage aren't the only factors influencing the boating marketplace. "The rising cost of petroleum has had a major impact on new boat production costs," Terrier observes.

Low water levels in a number of areas, including the Great Lakes, the Mississippi River and elsewhere across the United States, are also having an effect. "When water levels reach historic lows, the entire marine industry is affected," explains Tim Lucas, recreational marine industry program manager at Harbor Risk Underwriters. "The cost of dredging most harbors will put a heavy burden on marina owners, management companies and boat owners. These costs are generally passed on to slip holders, increasing their cost of ownership."

In some cases, he adds, it will be impossible to re-launch vessels after winter storage. "This delays usage, along with the need for fuel and repairs," he explains. "In extreme situations, facilities will permanently close; this adds to the problem of public access to our waterways."

Lack of water at residential slips and public launch facilities can discourage use and, in some cases, ownership of a recreational vessel, Lucas says. "It is very difficult to get some of these customers back once they've been lost to another activity."

Despite the challenges, some bright spots exist. "Small-boat dealers—for instance, those selling aluminum pontoon and fishing boats—have enjoyed an uptick in units sold over the last year," explains Conroy. "They expect similar growth in 2013, while those in the sterndrive and mid-sized yacht segment are still feeling the pinch."

In the classic boating market, Fitch is seeing increased desirability of vintage vessels, especially the classic wooden runabouts. "Based on early sales in 2013, values are on the rise," he says. "Fifties, '60s and '70s-era fiberglass boats are also growing in popularity; they can be found relatively easily, they're less expensive to restore than similar wooden boats and they provide a low-cost entry into boat collecting."

Insuring boats

Sandy and other factors are leading to market changes in the boating arena. "There are many signs of a hardening market that will continue in 2013," says Lucas. "With Sandy, we are seeing increases in hull rates, which is a result of reinsurance costs." He also expects to see companies exiting certain regions or the marine market altogether. For those that remain, appetites will change and it could be more difficult to place certain vessels, including those in coastal markets and covered docks exposed to wind, snow and ice.

Terrier also anticipates some rate hardening. "In the wake of Sandy and an extremely soft market for the past seven or eight years, we have seen some carriers increase new business and renewal rates," he explains. "That said, there is excess capacity in the marketplace, which will slow the inevitable hardening cycle. I would expect carriers to rely more on catastrophe modeling than they have in the past, specifically in the Northeast."

Despite back-to-back years of storm activity in the Atlantic, Conroy says the marine insurance industry remains strong. "With the significant decline in new boat sales over the last few years, the universe of recreational boats is now at an all-time high of 21 years of age," he explains. "While some carriers shy away from insuring older boats, Markel can provide desirable coverage options and flexibility for owners of older and newer boats."

Agents and brokers can best serve clients in the market by building—and demonstrating—expertise. "Within the marine segment, there are niches within niches," explains Conroy. "Being successful requires knowledge of your local market—what is selling and by whom." He points out that coverage for boats can be as diverse as the boats themselves. "For example," he says, "a pontoon boat owner will have different needs than a trawler owner who is living aboard and doing the Great Loop" circumnavigation of Eastern North America.

Conroy says it's important to fully interview the owner and understand how he or she will be using the boat, so this can be relayed to the carrier. Fitch concurs. "Agents should fully understand exactly what their clients own and how to provide the best possible coverage for them," he explains. "Asking questions about the boat's history and its intended use can help determine if it is collectible and requires a specialized policy to properly protect it."

Fitch says he frequently encounters people with the misconception that a homeowners policy will suffice in the event of a claim. "That is not typically the case, especially when it comes to vintage boats," he notes. "A specialty insurance provider understands the unique coverage needs and value associated with classic boats."

Success in the boating insurance arena requires diligence. "Gone are the days when a broker can sit in the office and wait for the phone to ring," explains Terrier. "Competition for an insured's premium dollar is greater than ever."

Terrier says knowledgeable brokers can advise prospects and insureds that coverage is as important as the bottom-line price. "They will know the details and nuances of each company's policy form," he explains. "Remember, yacht insurance is generally not an ISO product; every carrier has its own policy form; and there are vast coverage differences from carrier to carrier."

Some policy forms will depreciate machinery, gel coat or paint finishes and may exclude mechanical breakdown of machinery altogether or liability to any paid crew, he notes. "This could result in an uncovered loss and leave an insured with a hefty bill to pay out of pocket that another carrier would have covered under the terms and conditions of its policy form," he adds. "This type of claim can lead to an E&O suit."

Damon Hostetter, senior vice president at ACE Recreational Marine Insurance, believes that understanding and advising customers on the numerous yacht and boat products in the market and educating buyers so they have a basic understanding of what is and isn't covered—before a loss occurs—are key differentiating factors for specialist agents and brokers.

"As boats and their related equipment have become more complex and more expensive, boat insurance policies have kept up," he explains. "They now extend coverage to items such as sports equipment, fishing tackle, navigation and communication equipment, along with coverage for computers and personal electronics.

"Coverage also is available to boat owners for liabilities arising from marine environmental damage and pollution and uninsured boaters," Hostetter adds, "and marinas, yacht clubs and similar facilities can also be added as additional insureds—something they often request along with proof of insurance." He points out that cost-saving alternatives exist, such as "actual cash value" coverage for older vessels or those with lower values, which boat owners may want to consider, as well.

According to Lucas, education and communication are critically important. "Agents and brokers need to stay up to date on carrier interests and procedures," he explains. "They should call their underwriters and find out what they and their clients can expect in the near future. Ask about rate increases and appetite changes."

Hostetter suggests that specialty agents and brokers educate customers on the expertise and personalized service they provide. "Boat owners and potential customers need to understand that licensed insurance agents and brokers are experts in their field, and that they can provide knowledgeable counsel," he explains. He says such counsel covers everything from types of coverage needed and various cost-saving alternatives available to which companies offer the most comprehensive policies, superior claims service and overall best long-standing market reputation.

He believes market reputation, stability and strength are differentiators that should be addressed. "Both agents and boat owners should seek out insurance companies with longevity in the boat insurance industry, as these are the companies that will likely offer the most reliable claims-paying capabilities," Hostetter explains. "Insurance companies that have withstood the weather catastrophes of the past decade and remained strong throughout the economic downtown over the past few years are the ones likely to be there for their agents and customers in the future."

Hostetter also encourages agents to look to carriers that support agencies in other ways. "Working with an insurance company that provides an abundance of sales materials for producers and product brochures for customers is a significant benefit," he explains. "It helps the producer promote, educate and sell, and can save the agency time and money."

Lucas stresses the value of regular communication and interaction. "It's important to work way ahead of your renewal schedule," he advises. "Regularly inform your clients about what the industry has experienced, what they can expect and, most important, how they can use the latest events to better prepare for a potential loss.

"One of the most frequent comments we hear an insured make about his or her agent is, 'I never see or hear from him until it's time to renew,'" Lucas adds. "This isn't a good business practice in any market, but it most certainly does not work when the market starts to harden. It is more important now than ever to stay in touch with your clients and show them you care.

"E-mail can actually make this very easy and affordable," he notes. "It can be something as simple as sending along an interesting article that relates to preparing for and dealing with the aftermath of a storm." Lucas also encourages agents to let insureds know they're willing to speak to their yacht club or dock owners association. "That's an extra value you can provide, which can help generate more business," he says.

Going the extra mile—nautical or statute—will yield positive results. "Agents and brokers who understand their market and provide exceptional service will retain their clients," notes Conroy. "More than that, they'll surely get many word of mouth referrals."

STABLE MANUFACTURED HOUSING MARKET
OFFERS AGENTS OPPORTUNITIES

Carriers have developed products to serve this evolving niche

The manufactured home/mobile home market is just a shadow of what it was in its heyday. "This segment of the real estate market has been in a decline for more than 10 years," explains Darleen Fritz, president of Aegis Security Insurance Company. "Shipments of new manufactured homes in 1999 totaled nearly 350,000 homes. In 2012, the number shipped was just a little over 50,000."

Data from The Market Facts, a report outlining the results of an annual study done by Farmers Insurance Group's Foremost Insurance Company, show the decline has slowed or stopped. "Results from our most recent survey indicate that the manufactured home/mobile home market has stabilized," says Mike Cok, vice president-specialty property products at Farmers. "While industry new shipments continue to be significantly below long-term annual averages, we did see some growth in the first part of 2012." That said, second-half 2012 numbers reflected additional weakness, he continues.

"We are not expecting significant change in those levels in the near future," Cok adds.

Lending restrictions are helping to keep the numbers down. "A primary factor affecting this industry is the lack of available financing," explains Fritz. "As we know, the standard home market has had its share of financing issues. The manufactured housing sector has faced similar—if not worse—challenges."

Lack of government housing money for the sector is compounding the problem. "There is certainly a need for affordable housing, given today's economic situation," Fritz notes, "but the government agency that supports such housing—HUD—does not include manufactured housing in its 'affordable' category. That makes it impossible for individuals to make use of any of the billions of dollars in housing subsidies and grants to pay for manufactured homes, even though some 22 million Americans currently live in them."

With shipment levels a fraction of what they were years ago, the inventory of homes is aging. "We're seeing a sizeable number of older manufactured homes in the market," explains Cok. "Our 2013 Market Facts report estimates that nearly 40% of the units are 28 years or older."

Fritz sees this, too. "With the reduction in new manufactured homes, the percentage of older mobile homes is growing," she explains. "We consider that market sector—homes that are older than seven years old—to be an attractive, stable one."

It's likely that factors impacting the broader housing markets will affect manufactured and mobile home insurance for the balance of 2013. "Unprecedented hail, wind and tornadoes have ravaged site-built homes, as well as manufactured homes, in many areas in recent years," Fritz notes. "We expect to see an increase in overall premiums in those states where weather-related losses occurred in 2011 and 2012."

Adds Cok, "It will continue to be a challenge to insure property, including manufactured and mobile homes, in coastal and other higher-risk areas. Increased losses associated with severe weather patterns throughout the U.S. continue to force changes in risk assessment for property insurance in general. The insurance marketplace for manufactured homes is not immune to these pressures."

Understanding the niche

"Manufactured and mobile homes are excellent housing choices," Cok says, "and consumers who choose these housing options deserve excellent insurance products and customer care, just like those who opt for traditional homes with standard homeowners insurance. We insure one-quarter of all owner-occupied mobile homes, and we take great pride in serving this important market."

Over time, the manufactured housing marketplace has changed. "It has grown from single-wide mobile homes to double-wides and multi-sectionals," explains Fritz. "This led to development of insurance products to satisfy this more diverse customer base."

In some ways, the market is similar to more traditional residential coverage. "We look at a lot of the same things as standard homeowners insurance companies, such as loss history, occupancy, liability issues and location," she adds.

A key difference involves the manner in which value is assigned to the manufactured home, Fritz notes. "The value of a standard site-built home is largely influenced by the average market value of similar homes in the same neighborhood," she explains. "On the other hand, manufactured homes have a tendency to depreciate in value over time. Because of this, insurance for manufactured homes converts from replacement cost to an actual cash value (ACV) as one of the major differences from a standard home."

Cok says differences in the nature of risk and appropriate coverage for the needs of today's manufactured-home owner have led to products designed specifically for the segment. "Several additional coverages exist to address the unique needs of this customer group," he explains. "Agreed amount of loss with optional replacement cost, replacement cost on contents, named exclusion, and coverages needed for those located in mobile home parks or communities are just a few examples."

Serving the market

There are a number of reasons why retail agents and brokers should consider incorporating manufactured housing insurance into their product mix. One is the segment's traditionally high retention rates. "For many manufactured home owners, the house is their largest, if not only, major asset," Fritz explains. "They understand the value of the asset, and they not only continue to protect it, but they maintain it as well. That's why older manufactured homes are a very good segment of the market."

Growth opportunities are significant, too. "We have many successful agents who have used their professional counsel and expertise to target and grow these markets," Cok explains. He says online tools can help agents grow their book.

He encourages agents to understand products and markets—and product and market differences—as they look to grow their business. "Excellent agents don't let themselves or their customers get caught in the 'all insurance is the same' myth," Cok notes. "In addition to unique coverages, agents should look for tools and support that increase value and make it easier to do business. Plus, they should make sure the carrier has highly-trained claims professionals that don't serve this segment as an afterthought."

Fritz and Cok offer a handful of tips that can help agents build and maintain a strong presence in the manufactured housing/mobile homes marketplace.

First, says Cok, "Use successful target markets like manufactured housing and mobile homes to distinguish your agency. As we all know, standing out in a crowded industry requires special focus.

"Partner with a market leader that has the resources, tools, products and services that make the difference in your agency's success," he adds.

"Establish a relationship with the local mobile home communities and dealers in your area," advises Fritz. "They're good resources to find buyers of old and new manufactured homes.

"Promote the customer service capabilities of your agency and of the carrier you represent," she adds, "and focus on the carrier's excellence in claims handling as you talk to prospective clients."

"Make sure you provide a product that addresses the needs of the manufactured home owner," Fritz suggests. "This would include payment options that let the home owner pay over time."

Finally, advises Cok, "Build on your success. Professional agents who provide outstanding counsel and are partnered with a market leader can lead to growing customer counts and cross-sell opportunities."

AMID TURMOIL, AGENTS AND BROKERS
CAN FIND WORKERS COMP SUCCESS

Experts stress need to help clients navigate through
market changes, monitor safety issues

A number of factors are converging to drive substantive changes in the workers compensation arena. Agents who recognize these factors and can respond to them will be well positioned to grow their business and hold on to existing customers.

According to Tony Ciofani, executive vice president and chief underwriting officer at PMA Companies, economic and cost factors are creating a push-pull effect on the market. "The workers compensation industry is seeing a dramatic increase in prescription drug costs and, at the same time, a deflating economic impact on results," he explains. "The increase in prescription drug costs, led by spending on opioids and other narcotics, has driven and will continue to drive medical costs higher, while continued low payroll growth and historically low interest yields will stunt premium growth and limit investment income."

Marshall Kornblatt, executive vice president of insurance operations at GUARD Insurance Group, a Berkshire Hathaway company, adds, "An industry performing at a 115% or 117% combined ratio cannot be sustained. Compounding the problem is an investment environment that is far from lucrative and far from stable. These factors create pressure to return to an underwriting profit model featuring more restrictive underwriting acceptability criteria, a narrowing of appetite, and less use of aggressive pricing tools like 'preferred carriers' and credits."

The changes in the workers comp market are not across the board, according to Geoff Pratt, CPCU, ARM, ARP, director of workers compensation at NSM Insurance Group. "A lot of people say the market is hardening," he remarks. "A term we use in our office to describe it is 'schizophrenic.' Yes, the marketplace is changing, but it's very spotty." He notes that certain classes—transportation, for example—are seeing what he calls "a definite hardening and contracting of the market." In some classes, geography plays a role as well.

Actions by the National Council on Compensation Insurance (NCCI) will affect the market in the coming years, according to Todd Kurz, marketing specialist with MidAtlantic Insurance Services, a wholesaler that operates in 38 states. "NCCI is making a change to its experience rating plan, and it is increasing the split point between primary and excess losses from $5,000 to $15,000 over the next three years," he explains. "The split point will jump to $10,000 in 2013, $13,500 in 2014, and to $15,000 in 2015."

Kurz notes that the shift could have a major effect on the experience modification factors for a number of employers. "Thousands of businesses can expect potentially significant increases in their workers compensation premiums if they have had multiple losses in excess of $5,000," he comments.

As the market evolves, retail agents and brokers can help their clients navigate the changes. But they may need to shift their approach. Enhanced interaction with clients is a good first step. "This challenging market will require agents to engage in constant communication with clients, particularly those who have seen significant price decreases over the last several years due to payroll declines from a lagging economy and a very soft insurance cycle," explains Kornblatt. "Agents will need to prepare their clients for the likelihood of higher prices."

"As the effects of increased prescription drug costs and a prolonged economic downturn play out, agents and brokers need to educate their clients on underlying cost drivers and the impact of the economy," Ciofani says. "This market provides an ideal opportunity for agents and brokers to strengthen client relationships—and retention—by demonstrating their value and expertise."

Communication with carriers and MGAs also is important. "In a difficult market—and especially when they're dealing with difficult classes—agents and brokers need to keep up with all of the changes taking place," Pratt notes. "As an MGA, I probably talk to 25 to 30 agents a day on the phone. Many times, the conversation starts with a specific risk issue and evolves into the broader state of the market. Their clients are hearing from other agents, so they need to be up to date on what's going on with their markets."

Retaining business

Enhanced communication can help drive greater retention. "It's not enough to just call a client two or three months before renewal," Pratt points out. "Agents and brokers need to stay in touch and keep insureds apprised of what's going on in the marketplace. If there's big news in a particular state, or if a certain class is seeing unusually large price increases or market shifts, that's something a client needs to know well in advance of renewal time."

Ciofani concurs. "Agents and brokers should do their absolute best to avoid surprising their clients," he asserts. "We receive a significant number of new business opportunities each year because the incumbent carrier was late with a renewal quotation or because the broker and client were not prepared for the significant price or program adjustments requested.

"Sound communication is critical throughout the year," he adds. "The client's loss experience should be discussed, along with any possible price and program changes, well ahead of the renewal deadline. This sounds pretty basic, but we have seen, time and time again in this industry, how a renewal can be jeopardized with inadequate communication and poor timing."

A prospective look at the account can help reduce the element of surprise. "Agents and brokers should be projecting their clients' upcoming experience mod, and should review their NCCI Mod Worksheet for accuracy," Kurz advises. "Show the client the impact that each loss is having on his mod and premium."

A consultative approach can help set an agent or broker apart, notes Dave Simmons, vice president of regional sales at GUARD Insurance Group. "If you are not bringing value beyond delivering a proposal, your business is at risk," he explains. "If you are educating clients, informing them about the insurance marketplace, and making recommendations to improve their results—in terms of both insurance cost and workplace safety—you are likely to be considered an asset."

He also encourages agents and brokers to talk about carrier strength and stability. "Discuss why you recommend one carrier over another," he says. "Address the importance of financial stability and ratings from respected rating organizations, as well as consistency in writing policies in both hard and soft market cycles. This will help you create an environment where clients are less swayed by lower-priced competitors with less attractive financials."

Improving performance

An effective way to retain clients is to help them reduce losses and improve safety. "Without a doubt, agents and brokers should guide their clients to focus on the total cost of risk," Ciofani asserts. "Remember, premium is just one component." He says agents and brokers should consider how they can partner with clients and insurance carriers to craft solutions that will prevent and mitigate losses.

He encourages asking—and answering—specific questions, including: What loss drivers have been identified? What tailored risk prevention plans can be deployed? If a claim occurs, how can the loss be mitigated? Are modified return-to-work positions available? "In short," Ciofani says, "a total-cost-of-risk approach includes working with a client and the carrier to maximize workforce productivity by maintaining a safe and healthy work environment."

When accounts perform poorly, Simmons remarks, agents and brokers should review the performance and work closely with clients to reduce future losses. "For instance, with larger risks, agents need to make sure the policyholder has a drug testing program in place," he explains. "They also should use stringent hiring practices, have a defined and active safety program, and use the carrier's loss control services."

Pratt concurs. "To keep costs down, agents and brokers should encourage their customers to take advantage of any and all loss control elements offered by the carrier," he says. "Make use of everything—from surveys to lock-out tag-out training to other loss control services. Not only does this help the client, but it also builds a stronger client-carrier relationship, which can help with retention. Clients who get more value are less likely to switch."

According to Kurz, "Agents should review their clients' loss history and identify those clients whose mod will be negatively impacted by the upcoming NCCI changes. They should meet with the client and review all open claims in an effort to close the claims prior to the next mod promulgation." He notes that clients with good experience can actually lower their mod because of an increase in the discount ratio.

Agents and brokers can also help when claims happen. "Fast reporting has proved to produce better claims results," Simmons observes. "Return to work is also a critical component in helping reduce ultimate claims costs. That needs to be supported. Policyholders that provide light-duty options for injured workers have significantly better outcomes than those who don't."

Attracting new accounts

Some of the approaches that help agents retain business can also help them find new customers. "Attracting new business, again, involves keeping on top of what's going on in the marketplace," Pratt says. "For example, if you find a niche that is having some problems, use your market knowledge to find a solution."

Such knowledge can help agents and brokers identify sectors where strong non-comp programs exist. "For instance, there's a large national carrier that writes social service organizations, but doesn't offer comp," he explains. "That's a tough comp market. Carriers aren't particularly fond of it; they don't want to get into it, and some are actually getting out. Finding a solution for social service workers can yield good results. If you've been a generalist producer your entire career, find niches where there are difficulties and target them with a solution."

Kornblatt agrees. "Given anticipated workers comp premium increases, gaining a reputation for being a specialist can only help," he comments. "The same goes for classes of business. Focus on a few, and target geographic areas that have concentrations. Then develop relationships with prospects.

"Be sure to educate clients about the impact of experience mods," he adds, "using one of the available software applications to actually show clients the effect of a reduced mod on their premium. This can be very effective." Adds Kurz: "Explain upcoming NCCI changes to your prospects and offer to review their loss runs and experience mod worksheet."

Agents and brokers should try to build on success. "Ask for referrals," says Kornblatt. "If you have satisfied clients, ask them to point you to others you could serve. Get testimonials and use them in advertisements and on social media. Nothing is more powerful than a prospect realizing that a business associate, friend or competitor uses an agency and likes the sales and service."

Kurz advises agents and brokers to "never sell workers comp on price only. Emphasize the importance of having a carrier that offers aggressive claims management and proactive loss control services."

As Ciofani puts it: "One person's challenge is another's opportunity. Significant turmoil continues not only in the workers compensation arena, but also in the P&C industry as a whole. While prices are rising overall, absolute pricing and pricing methodology differ from carrier to carrier. What's more, mergers, organizational changes and restructuring have affected some industry players, impeding their ability to effectively serve clients.

"Many brokers and agents are well versed in identifying these challenges," he remarks, "and they are prepared to recommend the right solution and carrier partner for their clients. The most successful ones are able to present clients the total cost of risk—the big picture, if you will—so they fully understand the overall cost and loss drivers."