Excess and Surplus
If your goal is to increase revenue in 2014, you should consider the Excess and Surplus (E&S) lines market. It experienced double-digit growth in 2012, continued to grow in 2013, and projects continued growth in 2014. The E&S market has significant capacity and finding a new niche within it could be very profitable.
This month’s newsletter examines three emerging market needs. Cyber liability continues to be a major concern so coverage continues to evolve to meet clients’ needs. You should offer this vital coverage to every one of your commercial client.
Health care facility construction and sober living homes are two growing classifications that have unique exposures. Maybe one could be a new niche for your agency.
Emerging Specialty Products: From Cyber to Sober
New risks demand new coverages, and carriers are responding
By Dave Willis
As 2014 approaches, certain insurance coverages, products and niches may offer new or expanded opportunities for retail agents and brokers. Topping the list, perhaps, is cyber liability.
"Cyber continues to gain more traction in the market, with additional carriers releasing products and with brokers and risk managers becoming more aware of the risks," explains Ziad Kubursi, senior vice president of management and professional liability underwriting at Philadelphia Insurance Companies. "We are seeing brokers and risk managers educating their clients' management teams on the far-reaching impact a cyber event might have.
"The implications for a company go well beyond the bottom line and extend to its reputation," he adds. "An event can also impact internal processes having to do with compliantly managing a breach and coordinating notification in multiple states without being penalized."
Kubursi's company is seeing shorter sales cycles for cyber liability insurance. "Increased media coverage on various exposures resulting from cyber breaches, network shutdowns, and theft of personal data is helping boost awareness," he notes. "The extent of cyber continues to broaden as coverage continues to expand and more companies are looking to manage their exposures."
A new trend he's seeing is the combining of cyber liability and technology E&O in one policy. "This seems to be a natural progression for the product, but it should be managed accordingly because the risk factors associated with each don't converge," Kubursi explains. "This can result in aggregation of risk under one policy, leaving insureds with not enough limits to manage a multiple loss scenario."
He notes that the combination provides an entry into cyber products by pooling risks within a product and providing a more complete solution for someone who is not currently committed to buying a stand-alone cyber liability policy.
Kubursi calls the cyber policy "a perfect complement to any risk management solution. It's one that should be discussed with all businesses in any industry. It's not a question of who should buy cyber but rather, 'Who doesn't have a cyber exposure?'"
Because cyber risks run the gamut from theft of personal information and documents to business interruption to information left on unsecured laptops, virtually all entities are exposed.
"Any company that keeps a database of personal information on clients, operates a loyalty programs or runs a credit card as a form of payment has some exposure that can be addressed by a cyber policy today," he notes. "Brokers and agents can differentiate themselves by understanding client risks and how policies respond."
Health care facility construction
As the general economy rebounds, construction is again picking up. So are the risks associated with it. "We have seen a marked increase in 2013 in construction insurance and risk management opportunities across all sectors," remarks Craig Richardson, senior vice president at ACE Environmental Risk. "Changes brought on by the Affordable Care Act are leading to increased health care construction activity, as providers work to build facilities in which they can deliver new and enhanced services."
When considering construction or renovation projects, health care organizations must take special care to address the environmental risks posed by such work. "Risks associated with construction projects are amplified for health care facilities because of health issues patients may be facing," explains Gerry Rojewski, ACE Environmental Risk vice president. "For example, construction- or renovation-related indoor air quality problems may pose a modest risk for healthy people, but could be life-threatening to patients with compromised immune systems."
To help address the exposures, ACE USA launched a new policy for health care construction and renovation projects that is designed to help minimize pollution liability. "We developed a Healthcare Contractors Pollution Liability (CPL) Owner-Controlled Insurance Program (OCIP) to meet the specific needs of health care facility owners," Richardson notes. The policy provides coverage for hospitals, outpatient facilities, clinics and assisted living operations as well as general contractors and construction managers serving health care organizations. Coverage includes:
• Sudden, accidental and gradual pollution from covered operations; pollution conditions to include fungi and bacteria, including legionella, on an occurrence basis
• Bodily injury, property damage and remediation costs with limits of up to $50 million
• Blanket non-owned disposal sites and supplementary payments
"The Healthcare CPL OCIP policy addresses specific concerns and exposures agents' and brokers' health care customers have during construction activities," explains Rojewski. "This allows brokers to stay in tune with client capital improvement projects that are on the horizon and structure their insurance and risk management projects to meet their business needs."
Agents and brokers also can market the industry-specific product to health care prospects. "Doing so also can serve as an educational refresher for agents and brokers," says Richardson. "Since construction activity has picked up, it's especially important to provide opportunities to educate agents and brokers on key industry-specific insurance products and risk management services. This will serve them well as the number of capital construction projects continues to grow."
Sober living homes
Richard Willetts, CPCU, ARM, program director for NSM's Addiction Treatment Providers Program, says his firm developed a program for what he calls "a niche within a niche … within a niche." The "sober living" or "transitional housing" market is a sub-segment of an addiction treatment program that falls under the company's overall behavioral health care program.
Sober living or transitional housing facilities are supportive environments for people who are getting ready to return to their previous—or a new—living situation. Often they've just finished a residential treatment program; in transitional housing, they benefit from the support of peers who also are early in their recovery.
"It's an industry that's in its infancy," Willets explains. "It's a little bit of the wild, wild West because there are very few barriers to entry. Often you don't need a license to open such a facility.
"Residents often continue with outpatient counseling at a separate location, and many work or go to school at the same time, but they come home at night, where they're around others who are in recovery," he adds. "They're drug-tested and don't have the same rights as a typical rental tenant. If they drug-test positive, they are out."
The number of these facilities is growing, but often they operate under the radar. "You find treatment centers in the Yellow Pages," Willetts explains. "Sober living homes are in the White Pages." The company is working with the National Association for Recovery Residences, which is trying to bring standards and self-regulation to the business. "We are helping them develop guidelines," he says.
Willetts say his company's product for transitional living facilities addresses their specific exposures. "Many of these homes are insured under personal lines policies," he explains. "They hope they don't have a claim because once the insurer gets wind of what's going on, it could cancel the policy or, worse yet, deny a claim based on misrepresentation of the risk."
He describes his company's sober living policy as "a general liability product with some enhanced coverages. For instance, it includes some sub-limited sexual and physical abuse coverage that could address roommate-on-roommate abuse or sexual or other abuse by a resident manager. A homeowners policy wouldn't know where to begin with something like that." The program also can cover property for these facilities.
Agents and brokers can use the policy, which has an online application, to cover local transitional living homes. "They are in virtually every community in the country," Willetts notes. "We insure more than 1,000 of them after just starting the program within the last two years. We take calls daily from folks interested in getting legitimate business insurance."
To find prospects, agents and brokers can search online, check with local zoning or other government officials, and make contact with treatment facilities. "These facilities refer clients to sober living homes," Willetts explains. "Working with treatment facilities and sober living homes can be a win-win for agents and brokers. Interestingly, the treatment centers have certain vicarious liability when they refer folks to these homes, so they want to know they're well run and that they have insurance that is designed for their operations."
Finding Your Niche
Specialization could drive greater success in 2014
By Dave Willis
As 2013 winds down, the P&C business continues to deal with issues—many ongoing, some new. "Concurrent challenges for our industry include climate change, low investment yields, unstable economic conditions and regulatory uncertainty," says David Kaufman, president and CEO of The Motorists Insurance Group. "These factors have been a concern for the last several years.
"Weather-related claims add some volatility to the industry's financial results," Kaufman explains. "Low investment yields place more emphasis on underwriting profitability. And a slow economic recovery impacts commercial clients and contributes to more property losses and an increase in the number and duration of workers compensation claims."
On the other hand, many market factors remain relatively stable. Rick Dennen, founder and CEO at Oak Street Funding, says, "The broad P&C commercial market is seeing small to moderate rate increases, personal lines is at a point of equilibrium, and the reinsurance market is generally favorable.
"Aggregators continue to grow and succeed in the general P&C marketplace," he adds. "This is a good model and a solution for smaller independent agents and those desiring an administrative back room."
The specialty lines segment is growing, according to Jeff Bair, CIC, head of merchandising and business development at Foremost Insurance Group. "There's a reduced appetite among standard lines carriers, either related to geography, property age or even elements like customer credit," he explains. "Another indicator of specialty lines growth is increased agency use of market access providers, as reported in IIABA's last Agency Universe Study.
Some specialty lines sectors are doing better than others. "Economic improvements, especially in key segments like construction, are driving growth, and lower unemployment bodes well for payroll-based accounts," explains Anthony Washington, president of Western Heritage Insurance Company. "Still, an economy that is not at full capacity continues to slow growth and puts a damper on new ventures, an E&S staple."
He notes that the non-admitted surplus lines segment saw double-digit premium growth in 2012, outpacing the broader P&C market. "This indicates standard lines markets are turning down more traditional E&S risks to focus on their core business," he explains. "At the same time, many surplus lines insurers posted their worst profitability years in recent memory."
Performance varies from line to line. "Limits are tightening in employment practices liability," says Andrew Robinson, president of specialty insurance and executive vice president of corporate development and strategy at The Hanover Insurance Group. "We see aggressive moves on wage-and-hour and considerably less capacity around that. In other segments, like D&O, we're seeing upward rate movement, generally speaking, on the small account side."
Across the spectrum of the E&O market, the biggest changes are in the lawyers market, he adds. "Several carriers have taken rate across the board," Robinson says. "That's a good indication for that market." Demand for cyber cover is increasing. "It's still a challenging and evolving segment," he notes. "Customers are buying more, but are still probably overexposed."
Health care, he adds, "has been a very interesting market, especially with the Affordable Care Act. Some segments have shown positive activity. For example, opportunities exist in the elder care segments, which traditionally have been underpriced. Health care has experienced liquidation of some risk retention groups, which is creating some opportunity in the market." Allied health has seen increased activity as well.
Susan Preston, founder and president of Professional Program Insurance Brokerage, says health care offers interesting possibilities. "Many people are debating issues and problems around Obamacare," she says. "We're more interested in the insurance industry opportunities growing out of reform and we want to be first in line to seize them."
A growing doctor shortage means many practitioners will no longer spend all of their time in direct patient care. "That creates a need for consultant coverage, medical director coverage and administrative coverage," she explains.
"In addition, new products and services targeting a growing population bring with them increased need for products liability cover," Preston adds. "For example, placenta harvesting, stem cells and foot detox units require innovation to properly insure," she explains. "Also, as cannabis becomes legal in more states, we're seeing development of marijuana-infused items."
Other opportunities exist around weight loss and health care products—everything from colon cleansing to nutritional and weight loss supplements. "All of these require innovative brokers and carriers," she notes. "Most of the new products and services require the non-admitted market to jump in."
Dennen sees what he calls "timing opportunities" in certain specialty lines sectors. "Rating issues at certain carriers have created market disruption and opportunities in several lines," he explains. "Competitors are cherry picking the opportunities and getting strong rate levels."
Looking ahead
Kaufman anticipates continued premium growth in the broad P&C market for 2014. "Pricing across all lines will continue to be more granular," he explains, "and technological enhancements will give us the ability to continue to dial in pricing for each account."
He expects general economic conditions to persist. "While there's been some improvement in the housing market and some lift in manufacturing, the slow pace of hiring continues to be a drag on the economy," Kaufman notes.
Dennen says 2014 specialty lines prospects vary by market and line. "For example, we're seeing new product development in technology coverages and financial coverages," he explains. "M&A activity in specialty lines continues to be steadily increasing, albeit slowly. Seller pricing expectations and buyer economics sometimes make it tough to find 'win-win' transaction prices and structures."
Workers comp capacity is limited and selective, he adds, "and property capacity in CAT regions continues to be challenging. Product changes and coverage restrictions have partially addressed some CAT concerns and rate levels continue to be strong."
Washington expects double-digit surplus lines premium growth to continue. "Growth will come from a combination of pricing increases and exposure increases," he explains.
Bair suspects there will be more standard lines tightening in 2014. "However, as the industry bottom-line results improve, pressure for more top-line growth will increase," he explains. "That could mean expanded underwriting in the standard lines market, potentially limiting opportunities for some specialty programs."
Preston sees interest in—and opportunities for—new or expanded specialty products. "Privacy and medical billing issues are two categories that are getting more interest, and therefore more players," she explains. She sees the same for increased limits. "There's a growing need for higher limits of liability," she says. "People used to be happy with million-dollar limits for their businesses, but we're getting more requests for something higher. Not enough carriers seem willing to offer excess limits for specialty programs."
Meeting challenges
Moving forward, agents and brokers will have to deal with a number of issues, as will insurance providers. "Everyone is looking for markets where growth opportunities exist and risk characteristics are favorable," explains Kaufman. "The challenge will be to differentiate in order to attract and retain the best-performing accounts."
Dennen says staffing issues will affect agents and brokers. "Talent continues to be a significant challenge," he says. "Finding qualified producers and key staff employees is time-consuming and competitive." Succession also is an issue. "Many agency owners and their staff are nearing retirement age and do not have perpetuation plans in place," says Washington.
Marketing presents challenges, as well. "Certain niches are very competitive and require constant evaluation of the best marketing approach," Dennen says. "It's a challenge to prioritize the right blend of marketing from print ads to social media. Agents need to really understand what is most effective and what will drive the greatest return."
Generational differences come into play—in marketing and in other facets of agency operations. "Five generations are in the agency workforce," notes Washington. "They have significantly different expectations about everything from work to how they engage with customers and insurance providers."
Bair sees a two-fold challenge. "First is making sure that agents and brokers have the markets available to meet not only the changing appetites of their core carriers, but also the changing needs of different customer segments," he says.
"Second," Bair notes, "agents need to do a good job of consultative selling—learning customer needs from a lifestyle and asset ownership standpoint—and not just price quoting."
Preston encourages retailers to "understand the industries they want to insure and think outside the box—something often not done in the insurance industry. If you don't bring something special to the table or seek out something different, someone will get in ahead of you.
"Information is easy to find," she adds. "Good brokers have an edge if they can help clients understand risk and how to handle it. Plenty of people still buy on price, but it's up to the retail broker to explain his or her value and the value of the program."
Robinson concurs. "As industries evolve and become more complex, business owners need specialized insurance solutions," he says. "They want to work with agents and brokers who offer unique knowledge and customized products and who can lead broader business conversations about trends and emerging exposures their businesses face."
He says the best agents and brokers are very close to their markets and really understand what's happening in those markets. "They know the risks their clients face and work with specialized carriers to find and offer the best possible solutions," he explains. "Agencies that commit to and invest in specialty markets are winning. In fact, a recent Reagan study found that agents who specialize grow more quickly than those who don't."
Washington points out that some wholesale agents face increased competition from standard market producers and direct channels. "Many wholesale channels are challenged to remain relevant in the value chain, causing carriers to re-examine their value proposition," he says. "The bottom line is markets need to be easy to do business with."
Finding and keeping clients
More and more, specialization drives agent and broker success. "Specializing is a great way for agents to not only serve their existing customers going forward, but also to help grow their business," says Bair. "Specialists clearly have more insight into specific areas of coverage their customers might need."
"The best agents and brokers leverage and showcase their expertise and stay close to customers and prospects," explains Robinson. "They educate customers about risks and how to help mitigate them." He also shares a path to specialization: "Winning agents and brokers often leverage areas in which some segmentation or concentration already exists," he says, "and then they focus small, dedicated teams on those segments."
Preston encourages agents and brokers to make use of partner relationships to bolster expertise and market success. "We treat our Lloyd's people as partners," she says, "and they treat us the same way. Many brokers consider carriers to be 'the enemy.' That doesn't help either group succeed. Find outlets you enjoy working with and understand how to place the business with them."
Washington suggests that retail agents and brokers work with wholesalers to find a home in the specialty lines market. "While retailers may not be comfortable writing the more difficult risks, wholesalers are extremely knowledgeable and we pride ourselves on having technically sound underwriters on the wholesale and company side," he explains.
Robinson says agents and brokers should plan for specialty lines success. "Take the time now during the planning season to strategically assess where you are and where you want to be in the next three years," he says. "Then work with a handful of partner carriers to build plans that advance your specialization and penetration into your chosen specialty markets."
"Continue to do a good job of consultative selling," adds Bair. "Keep the notion of cross-selling specialty products top of mind and align yourselves with specialty companies that are leaders in their field, so you can keep providing customers with the best combination of products and service."
"Don't just learn about the insurance you are seeking to sell," advises Preston. "Learn about the needs and issues that relate to the clients you're trying to work with. Just knowing insurance is not enough."
Dennen encourages agents and brokers to manage renewals and rate expectations so they can keep good business on the books. "Customers appreciate communication on possible rate increases, coverage changes and other market issues," he explains.
Kaufman notes, "We are in the people business and we sell a value proposition. Agents and brokers who understand the value of strong relationships and who can differentiate themselves will ultimately be more successful. Carriers will need to collaborate with agents to create a special customer value proposition, a trusted experience for personal lines and commercial lines consumers.
"We believe that strong books of business are built on strong relationships," he adds. "Business growth will be built by looking for ways to deepen relationships with existing clients, maximizing the revenue stream and looking for opportunities to add to their existing book."
The author
Dave Willis is a New Hampshire-based insurance freelance writer and regular contributor to Rough Notes.
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