yIRMI Update—Issue #78
An E-mail Newsletter for Risk and Insurance Professionals
ISSN: 1530-7948
December 2, 2003
In This Issue
Colleague,
I am proud to announce that our Web site, IRMI.com, was recently recognized
for the second time in the annual Business Insurance Best of the Web awards.
You may remember that IRMI.com was a recipient of the award in BI's first competition
in 2001. Last year our paid subscription site, IRMI Online, won best of show
in the risk management category.
This year the award selection process was changed. Instead of having a panel
of judges review sites that nominated themselves, BI's editors scoured the Web
to find the best risk and insurance sites in a number of categories. Subscription-based
sites, such as IRMI Online,
are no longer eligible—only public-access sites, such as IRMI.com, can be recognized.
I'm happy to say that IRMI.com was one of 15 sites recognized in the risk management
information category. While we were not one of the top two risk management sites
singled out for a descriptive article in BI's November 3 issue, just being recognized
2 out of the 3 years the award has been in existence makes my colleagues and
our Expert Commentators proud.
This recognition also inspires us to do an even better job for you in 2004
with the hope of earning the top award in the risk management information category—so
stay tuned. IRMI Update will keep you posted on the changes we make to the site
and new articles we're adding.
On behalf of our 50+ Expert Commentators, my 48 colleagues at IRMI, and myself,
let me extend heartfelt good wishes for peace, happiness, and good health during
the holiday season. Thank you for choosing to be part of the IRMI family.
All the best,
Jack
Jack P. Gibson
President
IRMI
Renewal Considerations—In Canada we have similar
problems to you in the United States in respect to the current insurance marketplace
and its attitude to the roofing industry and other high hazard classes of construction
operations. Digging deeper produces better results. At your next renewal, be
sure to consider the following:
- Workers Comp experience modifier—good
comp experience usually means a greater likelihood of good casualty experience
due to safe operations.
- List of work on hand/in progress and list of
occupancy type—gives an idea to insurers as to the potential loss
of use exposure.
- Good old detail—obtain the loss experience
AND the premium for each of the past 5 years and do a good thorough loss
analysis, including updates on all open claims.
- Avoid claims-made coverage—This has been
emerging as a trend again for some classes. The majority of owners and contractors
employing roofers are still looking for occurrence coverage. Currently,
if you look hard enough, occurrence coverage is still available. This being
the case, the roofer that buys the claims-made policy stands a chance of
losing business to the one that bought occurrence. Brokers beware: this
is a huge potential E&O exposure.
By: Simon J. Fenn, CIP
President
Fenn & Fenn Insurance Practice Inc.
Newmarket, Ontario
E-mail: simon@fenninsurance.com
Suggest a Risk Tip. Future issues of IRMI Update will include more risk tips from our readers. Send
us a practical tip (less than 300 words) for identifying and managing risks,
buying insurance, managing claims, or filling gaps in insurance coverages. We'll
give you credit for your contribution.
There are now 477 articles on IRMI.com, and many more are in production.
Below you'll find summaries of some recent additions with links to the articles.
-
Tech E&O Insurance—A
Primer for Risk Managers—Michael Rossi answers some commonly
asked questions by many risk managers about Tech Errors & Omissions insurance:
What is it? Why do I need it? How does it work?
-
The Doomsayer—Does
fear of failure keep you from picking up the phone to make a sales call?
Frank Lee examines "The Doomsayer" Sales Call Reluctance and how to recognize
and deal with it.
What's New
With IRMI Online—We have recently updated IRMI Online to include the latest issues of our newsletters, The Risk Report, Captive Insurance Company Reports,
and Financing Risk & Reinsurance, as well as supplements to a number
of the reference manuals. Please use this
link to go directly to a summary of the new issues and information with
direct links into the publications.
Horizon and WOW Awards
Bestowed—Brian Clarke, CSP, corporate safety director of the Hoffman
Corporation, was honored at the 23rd IRMI Construction Risk Conference with
the Gary E. Bird Horizon Award. Mr. Clarke was chosen for his design and implementation
of a safety program for an owner controlled insurance program that greatly reduced
incident rates and workers compensation costs. The award is presented annually
by IRMI to recognize the implementation of innovative, cost-effective, and efficient
risk management techniques. For details see this link.
J. William Ernstrom, a valued IRMI Construction Risk Conference speaker who
is founding partner of the Ernstrom & Dreste, LLP, law firm, was honored with
the Words of Wisdom (WOW) Award. This recognizes his outstanding presentations
at the last five IRMI Construction Risk Conferences. Read more about Mr. Ernstrom.
Time Is Running
Out to Get 2003 CE—If you're still scrambling to fulfill your continuing
education (CE) requirement for 2003, IRMI has the answer with online courses
that are easy to take and informative as well. One new course is IRMI on Commercial Auto Insurance, which
provides an introduction to commercial auto insurance, focusing on the standard
coverage forms developed for this line by Insurance Services Office, Inc. (ISO).
It examines some of the motor vehicle statutes, the public policy issues behind
them, and their effect statutes on various types of commercial auto coverages.
For more information or to order one of these or other CE self-study courses,
see the Training and Education section of IRMI.com.
In IRMI Update 77, Jack Gibson asked readers about
insurer insolvency and what insureds can and should do to avoid the problem.
Many responded with stories of how they handled the risk. Some of the replies
are provided below.
- One of the more recent trends in risk management is requiring business
partners to monitor the solvency of their insurer. Oftentimes, this is accomplished
through insurer rating language in a contract. A downgrading of an insurer's
credit rating can therefore lead to a breach of contract. For building/equipment
leases, this may allow the lessor to place coverage and bill the lessee
for that coverage until such time that the lessee can demonstrate that the
default has been cured, thus creating additional expenses to the company.
Risk managers need to have a complete understanding of their insurer/prospective
insurers credit rating, short-term goals, long-term goals, and how the plan
affects the credit rating of the insurer in the long and short-term.
—Fred E. Weimer III, Senior Risk Analyst, Risk Management,
FedEx Custom Critical, Inc. & FedEx Supply Chain Services, Inc.
- Despite proclamations to the contrary, price is often the main (if not
only) factor in insurance or risk financing buying decisions. CFOs and risk
managers often go right to the "back page" to compare price—and agents,
brokers, and insurers market respond to this and market/sell based on price.
Telemarketers or producers frequently lead on a cold call by inquiring "What
if I can reduce your premiums by 25 to 30 percent?" Until we as an industry
minimize this marketing and sales tactic, and reinforce the buyer's preconceived
(and strongly held) perception that insurance is a commodity and all insurers
are alike, the financial strength of an insurer is a secondary consideration
(if considered at all).
Moreover, although there has always been much talk about "branding" and
other competitive differentiation, few meaningful distinctions can be made
among insurers who offer essentially the same products and the same underwriting
approach.
We recommend that the first consideration in selecting an insurer is
its financial strength—if this does not measure up, keep looking. Once an
insurer demonstrates financial strength, the second most important factor,
rarely considered by most buyers, is the quality of claims service provided.
We recommend the buyer meet with the insurer's senior claim personnel as
well as the line claims representatives—before an order of coverage is given.
How they will handle your claims should be something of a litmus test: Do
and will they listen to your concerns? Will they respond in a meaningful
and cooperative way?
The clear implication is that how an insurer keeps its promise to the
buyer should be of prime importance—more important than the price. As the
Seinfeld episode amusingly illustrates, anyone can make a promise (or make
a rental car reservation). What makes the episode entertaining is that many
businesses (including or maybe, especially, insurers) often behave as in
the sitcom. They are often indifferent to their express obligations. Can
and how will your insurer keep its promises? Elevating the significance
of this question may help alleviate some of the solvency problems the industry
is facing.
—Craig F. Stanovich, CPCU, CIC, AU, Principal & Consultant,
Austin & Stanovich Risk Managers LLC, Douglas, MA
- Having been with Kemper during the downward spiral, I have a lot of
appreciation for the dilemma producers face. On one hand, they wanted to
stick with Kemper, and help ensure the success of the attempted "Newco"
to avoid losing another good insurer. On the other hand, producers were
faced with protecting their client and their own E&O. Many agents and brokers
have risk management policies that require placements with carriers that
are A- or better; some even have insolvency exclusions on their E&O coverage
when coverage is placed with carriers below A-. Umbrella carriers wouldn't
accept Kemper paper as an underlyer, and some contract requirements precluded
acceptance of carriers below an A- when certificates of insurance were required.
Once Kemper slid below an A-, the feared failure became a self-fulfilling
prophecy, as business was moved midterm or not renewed. The A.M. Best downgrade
was announced on 12/24/02. By 4/26/03, Kemper announced the cessation of
underwriting operations. In 4 months, a major P&C company and one of the
largest WC writers ceased to exist.
—Elizabeth L. Good, CPCU, Underwriting Manager, Program
Development Manager, Schinnerer & Company, Inc., Chevy Chase, MD
- My agency recently had to face a carrier insolvency issue. When the
carrier rating was downgraded to a B, we notified all policyholders in writing
and continued to monitor the carrier on a regular basis. When the rating
downgraded to a C, we again notified the policyholders in writing and began
immediately marketing each risk with other carriers. Once we had obtained
new quotes, we provided our insureds the choice of moving coverages or "riding
out the storm." We made sure we kept our insureds informed of all issues,
i.e., short-rate cancellations, higher premiums, financing issues, etc.
We also negotiated premium financing options with the finance companies
to address balances still owed and replacement policy premium financing.
In the end, over 90 percent of our insureds opted to "ride out the storm,"
which we made sure was documented in writing for our files. Fortunately,
this was an admitted carrier and was covered under our state's guarantee
fund. Our main concerns were to keep the insureds informed, and to document,
document, document. Needless to say, this was an extremely time consuming
effort and not one we relish repeating.
—Linda Ray, Ray & Ray Insurance Services, Inc., Temecula,
CA.
- Your inquiry as to whether "business executives should be prepared to
pay a higher premium to have their coverage provided by a financially solvent
insurer?" seems to be rhetorical in nature. When the decision to shift the
risk of catastrophic loss to another party is made, the question of that
insurer's financial solvency is of paramount importance. Taking a chance
on a less solvent carrier, for the sake of premium savings, is the ultimate
example of cutting off your nose to spite your face.
—Bill Robert, St. Paul
This issue has been developing for a few years now and will continue to be
a serious concern for both insurance brokers and buyers. Brokers should continue
to monitor not only the financial condition of the insurers, but also the future
business plans of the companies they are placing their clients with. Many insurers
are restructuring their plans to withdraw from or severely restrict coverages
in various property and casualty lines. When meeting with the underwriters for
midterm or pre-renewal meetings, besides discussing the client's business plan
moving forward, the underwriter should be required to discuss the insurer's
future plans.
- Brokers and insurance buyers must work together to select the markets
that best fit their needs. Short-term cancellation should be given consideration
if financial failure of the insurer is relatively clear. With all the changes
companies are going through to meet expectations, communications are always
one of the first to fall off. It is critical that the insurance buyer and
broker remain in frequent communication as to market conditions and industry
changes. I think the message in today's market is clear: you can't just
buy insurance any longer. You must consider alternative programs and financial
vehicles available to shield your company or your client from risk.
—Bill Horner, SCLA, VP Risk Management Services/Broker,
Bowen, Miclette & Britt, Inc., Houston, TX
- Determining insurer solvency is a skill belonging to those in the financial
side of our business. National and regional brokers have someone on staff
who is responsible for monitoring carrier performance and for notifying
its firm of impending failures or downgraded A.M. Best ratings. From my
own experience, these conditions do not arise until it is usually late in
the process. I do not know of any forecasting models or other analytical
techniques that could give us an "early warning" of impending problems,
ahead of the rating agencies.
To react too early would be alarmist, considering that very few, if any,
in our business would know of a financial failure until it happened. In
the case of Reliance, we knew early enough that failure was a certainty.
Kemper, on the other hand, was a surprise. The best we can do is rely on
the professional rating services to keep us currently advised. They are
supposed to be the experts. We also have an obligation to our clients to
provide them with financially sound carriers. For me, this means a minimum
Best rating of A-. For main stream service intensive coverages, this means
a minimum size of XI. For specialty lines, the threshold will be lower.
What we need is a contingency plan in the event a carrier is downgraded
and a book of business must be moved. It involves what I knew as agency
reinsurance, where you go to another carrier and arrange to move the entire
book as it expires. The broker then negotiates underwriting and pricing
terms at that point. Some accounts may have to be placed elsewhere, if they
do not meet the accepting carrier's guidelines. The process provides advance
notice to the broker and gives ample time to replace the account(s). If
a broker has a heavy concentration of its book with one carrier, it is incumbent
on them to be currently advised of that carrier's financial condition. Failure
to do so is not only a disservice to the client, but a disservice to the
agency, as well.
This contingency plan would be implemented at the earliest possible knowledge
of the carrier's problems, such as downgrading, cease and desist orders,
watch list. Unfortunately, other conditions, such as under-reserving or
poor normative ratios, while noted by rating agencies, do not necessarily
produce a rating change until it is too late.
There are no easy answers to this problem. The best we can do is to be
as vigilant as possible.
—Bob Menninger, Commercial Insurance Research, LLC
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