Natural disasters, man-made events and technology advances are driving changes in exposures—and in the products that respond to them
Traditionally, property/casualty insurance products have been developed to address the violence of nature and the negligence of humans.
That tendency still holds as we move from 2016 into 2017. A renewed market for private flood insurance is emerging in the United States, and the public sector is looking to stimulate similar interest and innovation in earthquake insurance. More on those developments below.
Among the most striking recent developments in P-C insurance, however, has been the emergence of products to address losses arising from willful human violence.
In 2016, Southern Mutual Church Insurance Co., Columbia, South Carolina, paid the first claims made under a “violent acts” coverage part it developed in the mid-2000s. The payments went toward expenditures for security, counseling, and additional costs incurred by Emanuel AME Church in the wake of the June 2015 shooting of nine church members in a Bible study group.
That coverage was something of a trailblazer, providing coverage up to a $50,000 limit for various costs that houses of worship incur when they and their congregants are victimized by a violent act, but distinct from any defense or indemnity coverage.
This year also saw the launch of at least three new “active shooter” insurance products for U.S. risks:
The “Active Shooter Insurance Program,” from GDP Advisors, McKinney, Texas
“Active Shooter Insurance,” from McGowan Program Administrators, Fairview Park, Ohio
“Active Shooter Protection,” from Southern Insurance Underwriters, Alpharetta, Georgia
These products each test an assumption long held among insurers that intentionally violent acts are uninsurable because willful actors don’t act randomly. If they are intent on doing harm, they can evade or thwart efforts at “loss control,” to use insurance parlance.
But, just as the nation has developed a means for insuring against terrorist attacks, shootings that do not fall within the official definition of an act of terrorism are seen to occur often enough and randomly enough to be insurable with a sufficient spread of risk.
McGowan’s Active Shooter Insurance illustrates how comprehensive such coverage can be.
The McGowan policy can provide up to $25 million in defense and indemnity coverage for third-party claims, plus up to $25 million in first-party business interruption expense coverage. The business interruption coverage extends to “loss of attraction,” meaning the income lost when patrons avoid or are barred from an area after a shooting incident in the vicinity (and not necessarily on the insured’s premises).
In addition, the Active Shooter Insurance policy provides $500,000 in first-party incidental property damage coverage, plus $250,000 limits each for crisis management, counseling, and funeral services. From the time coverage is bound, loss control and employee training services are available from Firestorm, a nationally known crisis management firm based in Roswell, Georgia.
The McGowan program is a Lloyd’s-backed revision and re-launch of an earlier Lloyd’s attempt at active shooter coverage that proved to be too costly and too narrowly focused, according to Paul Marshall, managing director of McGowan’s Active Shooter Program.
“We wanted a program Main Street could buy,” Marshall says. “Our Active Shooter Insurance is available and affordable to every individual risk, whether it’s a day care center, assisted living facility, or shopping mall. We can deliver a policy for as little as $500.”
Marshall relates how the owner of a local deli in New Jersey inquired about coverage following the recent bombings in New York City. “That deli could be out of business if an attack occurred in that area,” Marshall says. “These businesses tell me, ‘That could be the end of my business.’”
As with all policies, but even more so for one that will be triggered by a traumatic event, agents need to understand the breadth and limitations of active shooter coverage. According to Marshall, some policies may require a minimum number of casualties before coverage kicks in; others may exclude coverage for an event where casualties exceed a given number.
“Buyer beware, seller beware,” he says.
Turning now from the violence of humans to the violence of nature, a market for private flood insurance continues to develop slowly but steadily in the United States.
In April, the U.S. House of Representatives unanimously passed legislation that would, in effect, allow federally backed secondary mortgage market agencies to accept private flood insurance from admitted and surplus lines carriers to satisfy collateral requirements. The bill awaits action in the Senate.
The same month, Nationwide Insurance announced that it was abandoning its “Write Your Own” program under the National Flood Insurance Program (NFIP) and would instead direct its agents and policyholders to Assurant’s Specialty Property business segment.
Under the arrangement, policyholders can renew their NFIP policies or, if eligible, select one of two private alternatives through Assurant:
“Assurant Primary Flood,” which provides up to $800,000 in building property coverage, plus $250,000 for contents and $500 for food spoilage
“EZ Flood,” described as a “simplified alternative” to NFIP residential policies, which provides up to $750,000 in building property and $200,000 in contents coverage, requires no elevation certification, and can be implemented without a waiting period if purchased at the same time as a homeowners policy
EZ Flood is available from NFS Edge Insurance Agency, Inc., a unit of Aon National Flood Services, Inc. NFS Edge has recently announced a private marketflood alternative for condominium associations. In December 2015, the agency introduced a private flood product designed for associations up to $50 million in value that are located in high risk and coastal areas. The policy offers up to $5 million in coverage, more than its NFIP counterpart, with options for excess limits.
For agents, these developments are some of many steps in the process of developing private market flood products that will complement or compete with the NFIP in the years to come. Agents who best understand the alternatives will add the most value for consumers seeking solutions for America’s most common and costly disasters.
In the meantime, the public sector is seeking ways to encourage more property owners to purchase insurance for earth-quakes, which, like floods, are catastrophic events typically excluded from residential and commercial property coverage.
This year opened with a significant expansion of coverage available in earthquake policies sold through the California Earthquake Authority (CEA). The CEA is a quasi-public agency that seeks to facilitate transfer of California earthquake risk to reinsurers and capital markets; it is not a risk-bearing entity.
Starting in January, the CEA implemented a statewide average rate reduction of 10%, while doubling the level of personal property coverage up to $200,000, quadrupling loss of use coverage up to $100,000, implementing five different deductible options ranging from 5% to 25% of a loss, and implementing risk mitigation discounts of 5%, 10%, or 25% of premium.
In Oklahoma, where there are reports of more frequent and severe earthquakes, perhaps connected to hydraulic fracturing(“fracking”) activity, a state senate committee passed a bill to establish a CEA type of authority in the event that insurers abandoned Oklahoma earthquake exposures, but the bill did not move beyond that.
Nonetheless, toward the end of the year, the CEA and its industry supporters were disappointed in the “take-up” rate for coverage, and Oklahoma’s insurance commissioner declared the state’s market for earthquake insurance to be uncompetitive.
More public action may be needed before agents see the emergence of new earthquake markets and products that they are now seeing in flood insurance.
As insurers seek to find new ways to address old perils on the earth, they have prepared to address a new exposure in the skies: unmanned aerial vehicles (UAVs, aka “drones”). This year saw several significant milestones in the drone insurance market.
In August, the Federal Aviation Administration’s (FAA’s) final regulations took effect for the commercial use of small UAVs (those less than 55 pounds, including equipment and cargo). Businesses and other organizations can now tap the potential for drones to conduct surveillance, download information, deliver supplies and cargo, and carry out tasks that are difficult or hazardous for humans.
In anticipation of the FAA action, the Insurance Services Office (ISO), the most widely used P-C bureau in the U.S., expanded its filings of standardized policy forms and rating information for insuring losses arising from drones.
Following on the filing of drone liability endorsements in 2015, ISO announced in March 2016 the release of non-filed inland marine policy language for providing property coverage for scheduled drones and their cargo, including cargo of others in the insured’s custody as a carrier for hire. Also, on Dec. 1, endorsements addressing drones took effect under ISO’s Businessowners and Commercial Property programs.
As ISO makes standardized approaches to drones available to insurers, proprietary drone insurance programs are moving ahead, developing the experience that will inform product design and pricing in the future.
An AIG drone policy released in 2015 provides liability coverage under a per-person, per-occurrence, and/or single-limit basis for bodily injury and property damage, plus medical payments coverage for the “crew” operating a drone, and coverage for “other liability” to be specified.
For first-party coverage, the AIG product offers three alternatives. A drone can be covered for “all risks” while on the ground or in the air, while on the ground but not in flight, or while on the ground but not in motion.
Another drone insurer offers a product that is conceptually similar to inland marine “trip transit” cargo coverages, which can be written on a temporary basis for as little as a single shipment. Global Aerospace, a 15-year-old company born of the merger of U.K.- and U.S.-based aviation insurers, has developed an app-delivered program for covering drone flights on an “on-demand” basis. Starting at a rate of $10 an hour, the program provides $1 million of liability insurance for operating a drone less than 15 pounds within a quarter-square-mile area.
Using the “Internet of Things”
Apart from being new forms of risk, drones will play a role for insurers as a means to monitor and mitigate risks and loss recovery. Since they carry automated equipment connected to computer networks, drones can be considered part of the “Internet of Things” (IoT) poised to extend networked information from computers into devices of almost every kind.
The Hartford Steam Boiler Inspection and Insurance Company (HSB), a leading provider of equipment breakdown insurance, views IoT as a major “disruptive force” in insurance, according to Robin Luo, CPCU, ARe, HSB vice president of risk consulting, who adds that the company is looking to capitalize on IoT’s capabilities to add new forms of value to insurance products and those who sell them.
HSB and Church Mutual Insurance Co. instituted the service as a pilot program on 200 churches in 2015; they plan to have it in 2,000 religious institutions by the end of 2017 and 10,000 by the end of 2018.
Under the program, sensors are installed at insured locations to detect ambient air and pipe temperatures, conditions that can lead to frozen pipes and water damage. The sensors can also detect ground water seepage and equipment shutdowns.
When hazardous conditions are detected, HSB issues risk alerts to policyholders by text, email, or phone so insureds can take corrective action immediately. According to Church Mutual, 10% of the participants prevented an actual loss through their actions from the alerts they received.
“Many houses of worship do not have staff on site 24-7,” says Cheryl Kryshak, CPCU, Church Mutual’s vice president of risk control. “Sensors are remotely monitored and alert ministries to take action before damage can occur. By providing an innovative tool to prevent loss, we are changing the idea that insurance is only useful after damage has occurred.”
“IoT technology allows us to expand growth through the development of current and compatible markets,” says Rich Poirier, JD, president and CEO of Church Mutual. “It allows us to provide innovative value-added solutions to our policyholders.”
And it’s only the beginning of the use of IoT for HSB and the entire industry.
For agents, Luo says that the program provides them with a value-added loss prevention service for both new and renewal customers, a service that will strengthen relations with clients and help with retention. “HSB is acquiring, investing in, and forming strategic partnerships with IoT companies to make our IoT strategy operational,” he says. “Our new IoT Advisory Services business practice offers IoT solutions encompassing consulting, technology, support services, and back-end analytics.”
Disruption has arrived. It’s time to take advantage of it.
For more information:
Southern Mutual Church Insurance
McGowan Program Administrators
EZ Flood Insurance
Hartford Steam Boiler
Church Mutual Insurance
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P-C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.