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PAR-EXCELLENCE Agents E&O captive prospers thanks to strong loss control that emphasizes quality customer service By Michael J. Moody, MBA, ARM
It’s ironic that the insurance industry was designed to remove uncertainty and risk for the world’s business people, yet the industry continues to provide businesses with some of the most uncertain situations they face. The cyclical nature of the property/casualty business has been the bane of many business owners over the last 30 or 40 years. The ebb and flow of pricing has led many insureds to find innovative ways to deal with insurance market uncertainty. Over this time period, a number of group solutions (mostly captives) have been formed; however, it is rare to find a group captive that has been able to remain true to its original goals. There is no doubt that the insurance market for any errors and omissions liability (E&O) coverage in 1986 was lacking. Affordability and availability issues throughout the entire liability sector were a huge problem. Nowhere was this more evident than in the insurance industry’s own backyard—agent’s and broker’s E&O coverage was in total disarray. Most agents and brokers were faced with escalating premiums, reduced terms and conditions, lower limits or worse. While much of the general insurance market was bad, the agents and brokers E&O market could trace its condition to heavy adverse loss experience incurred by several large international brokers. And, unfortunately, one of the few remaining markets for the coverage, Lloyd’s of London, had painted all brokers with the same brush. As a result, many groups and associations of agents and brokers were actively reviewing the available alternatives. Such was the case with Assurex Global, the large, privately held commercial insurance brokerage group. According to Albert “Skip” Counselman, president and CEO of Riggs, Counselman, Michaels & Downes, Inc., of Baltimore, Maryland, Assurex had completed a captive feasibility study in 1985 and was beginning to develop a strategic plan to implement it. Assurex realized that one of the most critical issues was the ability to attract a reinsurer. Originally, Assurex decided to present its vision to 10 reinsurers and ask each to take a 10% quota share of the reinsurance. In the end, it took 13 reinsurers to complete the deal; but, for the most part, the reinsurance program was completed as designed. PAR basics From the start, Counselman says, “One of the most enthusiastic supporters of the program was Fireman’s Fund Insurance Company (FFIC).” But FFIC’s support was not limited to the reinsurance issue alone, says Counselman. “They were active participants in many aspects of the captive’s development as well,” he notes. “They offered invaluable legal, underwriting, and claims expertise during the formation stage of the captive.” FFIC also assisted in developing a unique strategy, which provided the initial surplus that allowed the captive, Professional Agencies Reinsurance, Ltd. (PAR) to open its doors on January 1, 1986. “We signed on early and have remained ever since,” observes Bruce Friedberg, FFIC senior vice president and chief actuary, and PAR board member. And FFIC remained despite leaving the captive insurance market in the late 1990s. Friedberg notes that FFIC has stayed involved with PAR because it is a profitable account, but more importantly, “the original insureds are still here and we appreciate their commitment.” Another vital partner in PAR’s success is the Council of Insurance Agents and Brokers (CIAB). It had also completed a captive feasibility study, which was favorable. However, Assurex approached CIAB and suggested that both organizations would be better served by combining their efforts. In this way, the captive could gain a better spread of risk and also provide more credible loss experience. Since that time, both organizations have actively marketed and supported the PAR program. Despite the involvement of both groups, it should be pointed out that membership in neither organization is required to become a PAR insured. Membership is open to any midsize, regional agent or broker who is interested in obtaining E&O coverage. PAR specifics The initial challenge for PAR was to provide a stable insurance market with adequate limits for its owners/insureds. As a result, over time the PAR insurance policy has matured into one of the most comprehensive policy forms in the industry. Among the significant policy enhancements that are available in the PAR program are: • It automatically defends claims alleging fraudulent or criminal acts • It improves and reduces issues of policy interpretation by removing several key policy exclusions • It can extend coverage to apply specifically to employed legal counsel; claims adjusting and administration; sales of mutual funds, variable life and annuities; excess and surplus lines and managing general agents; and engineering and risk management services • Defense costs are in addition to the policy limits • No claim is ever settled without the insured’s consent Providing a comprehensive E&O policy with adequate limits was the first order of business for PAR. However, from the start, the coverage was just the tip of the iceberg. The real success factor with PAR is the quality management program. The organizers of PAR knew that it would be important for their insureds to distinguish themselves from other brokers, in order to have any chance of securing the initial reinsurance coverage. While they had 5-plus years of good loss experience to help make their case, Counselman, who has been a PAR board member from the start, says, “We needed a quality program that was second to none.” The quality management program, which was designed by the agents themselves, was unique in the industry. The focus of PAR’s quality management is not on reducing losses—it’s on eliminating losses. Counselman points out, “We wanted to design something of more consequence than just an E&O policy.” Based on its research, the PAR developers knew that “outstanding client service was the way to prevent E&O claims,” Counselman says. PAR also knew that by solving the client service issues it would gain a significant competitive advantage. So far, history has proven PAR right on both counts. In addition to the comprehensive quality management program that all 68 PAR insureds must adopt, PAR has a number of other elements that have helped it achieve its current level of success. Important elements include careful underwriting, industry specific claims management arrangements that include a network of PAR/FFIC approved legal counsels, and a pre-approved profit sharing formula. Additionally, PAR was established as a long-term solution to the E&O problems and it has been led by a “well-educated board of directors that helps influence the direction of all aspects of the captive,” says Friedberg. The board is special, says Jim Hackbarth, president and CEO of Assurex Global and PAR board member. “They are very experienced professionals and represent some of the best minds in the insurance industry.” Final analysis Since 1986, the insurance industry has gone through several market cycles, yet PAR continues to provide a viable, stable market for its owner’s E&O coverage. As has been outlined above, there are a number of reasons why PAR has succeeded in reaching this goal when other group captives have fallen by the way during that 19-year period. However, the thing that one comes back to with regards to PAR is commitment. In fact, that one word, commitment, is really the signature of the PAR program. Whether it is the owner/insured’s commitment to the captive and the quality management program; the commitment and support from the two sponsoring organizations, Assurex International or the Council of Insurance Agents and Brokers; or the commitment of the reinsurer, Fireman’s Fund; they are all actively working to making PAR the best agent’s and broker’s E&O program available. Does it work? Hackbarth says, “I have a chance to visit agencies throughout the country, and I can tell as soon as I walk in the front door if it is a PAR insured.” It is the commitment to client service that separates PAR insureds from other agents, according to Hackbarth. This is a formula that has allowed PAR to survive—no, flourish—over the past 19 years, and there is reason to believe it will do so for another 19 years. * |
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