By Laura Mazzuca Toops
The market for day care insurance is a classic example of perception versus reality. Ten or fifteen years ago, widespread media coverage of child abuse and molestation cases at day care centers fueled the perception among most major insurers that the coverage would generate potential exposures and high losses. The reality is that large losses from such claims are the exception rather than the rule. Day care centers have proven to be a lucrative niche--almost every insurer offers some form of day care coverage, and independent agents who got in on the ground floor are glad they did.
Six years ago, Block Insurance in Orlando, Florida, was a general lines agency. When owners Steven and Beth Block began looking for child care for their own son, they realized that day care centers were an untapped market. Today, as a Cigna key agency for Florida, Block Insurance exclusively writes day care centers and private schools, generating around $2 million in annual premium volume.
The day care niche has grown so popular that there are now niches within the niche, such as private schools, Head Start programs, and in-home day care centers. When the Minneapolis-based Hays Group first considered writing in-home day care centers 15 years ago, "we couldn't get two underwriters to listen to us," recalls Vice President Jim Bjorgan. The agency's risk purchasing group now covers more than 8,000 in-home centers in 32 states, through wholesaler Swett & Crawford. The specialty comprises about 10% of its total business.
Why the change? Insiders attribute it to the competition of the soft market, and the fact that regulated day care practitioners have become more conscientious about loss control. It's also a market that has simply grown too large to ignore: more than 100,000 licensed child-care centers and 250,000 licensed family day care homes nationwide.
"Many carriers just discovered that it's a good niche," says Eileen Hull, vice president and manager of the child care insurance division at Markel Insurance Co., Glen Allen, Virginia. Markel began writing day care centers in the early 1990s as an offshoot of its traditional camp and youth coverage. "Markel has had so many years in child-related field that it was just a natural for us," she says. In 1995, Markel established its child care business as a separate unit, which currently comprises about 10% of the total writings for Markel Insurance Co.
An overall increase in professionalism has also helped enhance the reputation of the child care field. "Twenty years ago, child care was a cottage industry" operating out of remodeled houses or businesses, says Greg Thompson, president of THOMCO, a wholesaler in Atlanta, Georgia, which has specialized in child care centers nationwide since 1987. Early centers were essentially baby-sitting facilities. Today's centers, frequently part of regional or national chains, are larger and more professionally run. Because parents want their children to get educational services, many centers require that their caregivers have early childhood education degrees.
This emphasis on professionalism, coupled with insurance market changes, makes it easier than ever for centers to find normal coverage terms, higher limits, a full range of endorsements, and moderate prices. "I don't see it as a problem anymore," says Paul McMillan, program manager for Cigna, which distributes its day care program through a network of about 28 licensed Cigna agents nationwide.
For insurers, the market has become downright competitive. Cigna is butting heads with big companies like Frontier, Reliance, Scottsdale and Great American, as well as smaller, regional companies. Nobody seems to be leading the pack right now; McMillan notes that each of the major players controls about 5%-6% of the day care market.
This is all good news for agents who want to develop a day-care niche. Still, experts caution agents to be aware of the exposures involved and the coverages available to mitigate them. A full range of coverage includes property, liability, and auto, if needed, typically included in a single package program.
Other endorsements can be added as needed. For example, buyers can customize Cigna's general liability program with special conditions like teachers' liability, abuse and molestation by separate endorsements. Markel's package policy is based on a standard general liability form, with endorsements as needed, including up to $1 million on child abuse.
The day care industry is regulated by state law, and sometimes also by county or city, and the regulations vary widely by state. Because of this conflict, underwriters typically develop their own guidelines that are sometimes more stringent than those of the customer's home state. Most insurers conduct safety inspections on every center they write, making the agent both a risk manager and loss control expert, says Cynthia Sanders, an account executive specializing in day-care centers for Hibbs-Hallmark & Co., an agency based in Tyler, Texas.
When scouting for customers, agents should consider a few basic areas, including:
* Staffing ratios. The National Association for the Education of Young Children established an acceptable ratio of caregivers to children, based on the age and number of children being supervised. Insurers including Cigna have adopted this ratio for their underwriting requirements, and agents should be aware of this when seeking new clients.
* Recruiting and hiring practices. Day-care centers should adhere to a formalized hiring program when hiring new employees. This includes having prospective employees sign applications and keeping them on file, checking the applicant's education and experience, verifying references, conducting criminal background checks, requiring pre-employment physicals and drug tests, maintaining a probationary employment period, and explaining the center's policies on corporal punishment and molestation issues. After hiring a new employee, the center should closely monitor them on the job to make sure they are following procedures.
* Size and condition of the physical plant. Most insurers prefer to underwrite centers that are built for the purpose--newer buildings rather than remodeled homes or businesses. Cigna, for example, will only underwrite freestanding commercial centers with capacity of 10 or more children, operating a minimum of 25 hours per week.
* Playground equipment and supervision. Although child abuse and molestation cases make headlines, it's the playground injuries that generate the losses. "The number one cause of injury at child care centers is playground falls," followed by little fingers getting caught in doors, Thompson says. Insurers give careful consideration to issues like height of equipment to the depth of ground cover, using Consumer Product Safety Division guidelines to determine whether or not a site is safe. Other variables to consider are whether or not the playground is segregated by age group, and how closely the caregivers supervise the children.
* Off-premises activities. This includes whether the center uses vans to transport children to and from the site, or if the center regularly features field trips offsite.
The day-care center industry has changed a lot over the past 15 years, and insiders predict it will change even more by the year 2000. Family-run centers seem to be holding their own--they're especially popular for infants and younger toddlers. However, the smaller commercial centers are disappearing, due to difficulties in meeting increased government regulation, and buyouts by regional or national chains, Thompson says.
Developing trends in the field include the growth of day care facilities for seniors. Several sources, including THOMCO and the Hays Group, are currently developing programs to address this need. And a frequently overlooked day-care area that can be extremely lucrative is the government-funded Head Start centers. These are not-for-profit businesses, not government entities, and as such are required by the government to retain high insurance liability limits. Observers predict that Head Start facilities will experience tremendous growth within the next several years, in part due to changes in the federal welfare laws requiring former welfare recipients to get a job.
Many agencies currently writing day-care coverage find that it's also an excellent springboard for getting into related lines of business. Hibbs-Hallmark, whose day-care business makes up 10% of its total volume, is now putting together a program for private schools.
Agents who take the time to learn the nuances of the day-care center industry find that doing their homework pays dividends. "You can't do everything," says Steven Block, whose agency left the general lines business to focus exclusively on day care. "The best thing to do is to learn what you like and be the best at it."
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About the author
Laura Mazzuca Toops, a freelance writer based in the Chicago area, is a former reporter for Business Insurance. She has been writing about the insurance industry for more than 10 years.