Mind the Gap
By Marc McNulty, CIC, CRM
NONTRADITIONAL FACTORS CREATING COVERAGE GAPS
Educate your clients, from social inflation to nuclear verdicts
It’s hard enough for new producers to learn all of the available coverages that are in the marketplace for their clients and prospects. It will often take years before a producer is truly confident in his or her ability to discover, dissect, and analyze the exposures of an account and then design an insurance program that addresses each exposure.
It’s even harder to keep up with outside influences that directly or indirectly affect coverage you have already put into place or—worse yet—affect your ability to find coverage for new accounts.
It’s much easier to justify a premium increase to a client when you have knowledge to back up why the increase is occurring.
This month’s Mind the Gap column examines some of the current factors that influence insurers and in turn are starting to affect agents and brokers. Let’s ignore some of the traditional factors such as catastrophic losses, stock market performance, and so on, and look at some nontraditional factors that are emerging as key influences in the insurance marketplace.
“Social inflation” is a key influence on the ever-changing insurance landscape. The term refers to increases in what injured parties believe they are owed and an increase in their desire to pursue damages via legal means.
In a December 2019 article in The Wall Street Journal, Travelers CEO Alan Schnitzer referred to changes in the legal landscape, saying that the “tort environment has deteriorated beyond our elevated expectation.”
W. Robert Berkley Jr., chief executive officer of W.R. Berkley Corp., shared his thoughts on social inflation’s impact on the industry in an October 2019 Carrier Management newsletter, saying “Society-wise, as we can clearly see in the political process, we’re really seeing a group of people [have-nots] who are fomenting resentment of those who have. We’re seeing in court decisions that make no economic sense that courts [are] trying to punish people.” Berkley added, “That’s going to continue until people realize that the people who really get punished are the people who ultimately have to buy insurance.”
Multiple lines affected
Social movements like #MeToo are bringing long-overdue awareness to issues that have permeated the workplace for far too long. These movements have taken the insurance industry by surprise, as claims are becoming more frequent and payouts are becoming larger—in part because of savvy attorneys who are structuring claims so that multiple lines of coverage are triggered by a single event.
In the “olden days,” meaning only a few years ago, a data breach would trigger a response from a cyber/privacy liability policy. Now the industry is seeing cyber claims where directors and officers liability and professional liability are being brought into play because management oversight is alleged with regard to data security.
Lines between coverages are being blurred and payouts are growing because the pool of money is becoming larger whenever multiple lines of coverage are involved in a single claim.
Berkley’s remarks regarding court decisions that “make no economic sense” are backed up by data that supports the increase in “nuclear verdicts,” or verdicts that are significantly larger than traditional ones involving similar claims situations. Today’s juries are awarding staggering verdicts at an increased rate.
The average of the 50 largest U.S. verdicts doubled between 2014 and 2018, and the frequency of verdicts over $20 million rose over 300% when compared with the annual average from 2001 through 2010.
What does this mean for insurers? Some are spreading out their risk more carefully. In recent years, carriers were willing to take on large excess casualty exposures, providing $25 million, $50 million, or even $100 million of coverage excess of the primary underlying policies. Now they are beginning to split their exposures into smaller pieces to control exposures.
At this point, you’re probably thinking, “This information is great, but what does it have to do with me?” Short answer: It’s creating new coverage gaps and potentially the ability to find coverage. And in some cases, the cost of coverage will start to increase.
Let’s circle back to social inflation. Do all of your clients have employment practices liability in their insurance programs? Of course not. Do all of them need it? Maybe.
We’ve all heard smaller employers say they don’t need employment practices liability because one of the benefits of having a smaller operation is having greater oversight of daily operations and a more sensitive finger on the pulse of the business. While that may be true, can business owners know what their business partners and/or employees are saying and doing to all parties at all times? Of course not. And that is where the coverage gap arises.
All it takes is an accusation by a third party—be it a vendor, customer, delivery driver, or anyone else—to create a third-party employment practices liability issue.
Do your clients have all the kinds of liability coverage they could possibly need? Probably not.
Finally, do all of your clients have umbrella or excess liability policies that will provide adequate limits of coverage in the event they face a nuclear verdict? No business can predict when it might be sued and for how much.
Your job is to is educate your clients and prospects about the kinds of liability coverage that are available to them and the associated premium rates.
A good way to separate yourself from your competition is to incorporate education into your proposals and account reviews. Give your clients and prospects real-world examples of claims situations that apply to their businesses. You can find examples in this magazine as well as in your carriers’ marketing materials.
Tell your clients and prospects what is going on in the overall insurance marketplace. It’s much easier to justify a premium increase to a client when you have knowledge to back up why the increase is occurring.
Arm your clients with this knowledge and then allow them to make their own decisions. After all, you’re an insurance agent and not a magician, so you’re not going to make potential problems disappear for your clients. However, by making them aware of potential issues, providing insurance-based solutions, and keeping them informed, you’ll be doing much more than many of your competitors who are vying for their business.
Marc McNulty, CIC, CRM, is a principal at The Uhl Agency in Dayton, Ohio, and has been with the agency since 2001.He divides his time among sales, marketing, technology and operational duties. You can reach Marc at email@example.com