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 website, 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:
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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