IRMI Update—Issue #88
An E-mail Newsletter for Risk and Insurance Professionals
ISSN: 1530-7948
May 11, 2004
In This Issue
Colleague,
Last week I had the pleasure of attending our first "Captives Built to Last"
seminar, and I was impressed. Kate Westover and Gordon Cook really know their
stuff when it comes to captives. If you already know the basics of captives
and would like to attend an intermediate-level program and network with other
people who work with or around captives, this seminar is for you. We still have
seats in both New Orleans (5/19-5/20) and Philadelphia (6/2-6/3). You can learn
more by visiting the seminar section of IRMI.com.
You may notice some changes in the appearance of articles on IRMI.com. Late
last year we began a substantial project to improve the Web site, and we have
just implemented the first of these improvements. If you are one of the many
readers who have asked for a more user-friendly print interface, you will immediately
appreciate the new "print" function at the bottom of each article. While the
other changes are fairly subtle, an entirely new Web technology underlies them,
and this paves the way for more substantial improvements later this year.
My last editorial suggesting guidelines for
selecting liability limits drew some interesting responses. You can read some
of them below. Thank you for subscribing to IRMI Update and for recommending
it to your business associates.
Have a great day.
Jack
Jack P. Gibson
President
IRMI
Consider Alternative Primary Limits to Control Umbrella
Costs.—As the insurance market progresses through its cycles, the umbrella
and primary insurance markets develop ever-changing attitudes to the intermediate
risk layer, which might be defined as the $250,000 to $1 million layer immediately
above the working layer (where the insured's normal average losses fall). For
instance, in a hard, seller's market, umbrella insurers will pull back and provide
coverage only in excess of higher underlying limits. While some umbrella insurers
may agree to provide the intermediate layer, the pricing will often be substantially
higher than primary insurers charge for higher limits. At the same time the
primary insurers normally pursue a more stable pricing approach, and their pricing
will be much more competitive than the umbrella markets.
On the other hand, as the market evolves into a buyer's market, umbrella
insurers have historically developed an aggressive pricing posture for this
risk layer as compared to primary markets. As a result, a general rule is that
umbrella insurers will be more competitive in this risk layer than the standard
primary insurers in softer markets.
Only time will tell if this historic pattern will be repeated, if the market
begins to soften. However, if you found it necessary to increase your primary
limits in the hard market, it may be a good idea to plan to obtain quotes for
alternative primary limits from the primary insurer, as well as for varying
attachment points from umbrella insurers, to see which market segment will be
more competitive in the intermediate risk layer.
Source: Derived from recommendation #32 from 101 Ways To Cut Business Insurance Costs.
Suggest a Risk Tip. 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
acknowledge your contribution.
There are now 535 risk management and insurance articles on IRMI.com. Below
you'll find summaries of some recent additions with links to the articles.
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.
TRIA's Sunset: The Dawn
of a New Workers Compensation Crisis?—IRMI President Jack Gibson
forewarns of impending challenges in renewing or placing workers compensation
insurance beginning as early as this September because of TRIA's sunset in December
of 2005.
"Captives Built To Last: How To Structure and Operate a Captive Insurance
Program That Withstands Market Cycles" is a new seminar to be held in three
cities this spring. This workshop is for anyone with an interest in captives,
who understands the basics of how and why captives are formed, and who wants
to look at the practical realities of owning and operating an insurance company.
It will deepen your understanding of the operational and financial issues that
arise in different types of captives, explain how to set expectations for the
captive management and service team, and suggest ways to quantify captive "value
added." Mark your calendar and plan to attend in one of the remaining cities:
New Orleans on May 19-20, and Philadelphia on June 2-3. Call (800) 827-4242
to request a brochure or see the seminars
section of IRMI.com for more information.
In the last edition of IRMI Update, Jack Gibson
suggested some guidelines to help select umbrella limits and asked readers for
suggested additions to the list. The most common suggestions were to also consider
assets and net worth. Below are some of the responses we received.
- In our studies that provide commentary on client's limits, we first
qualify the question by making a distinction between adequacy and reasonableness
of limits. In our opinion, to tell a client their limits are adequate is
not responsible. It is always possible for a serious unforeseen incident
or incidents (class action) to result in huge verdicts that far exceed just
about any limits that may be purchased by the large majority of policyholders.
Every year for the last 6 or 7 years, juries have awarded judgments of over
$100 million, a limit purchased by only the largest of organizations.
Instead, we consider the exposure presented by the client, their past
claims history, their size (measured in several ways), and their tolerance
for risk (a soft measurement at best). With this, we endeavor to determine
if their limits are reasonable, but not attempt to assure them their limits
are adequate (and that they cannot have a loss that exceeds the limit).
In our studies, we approach the process almost exactly as you outlined—using
outside benchmark resources (although the benchmarking surveys often are
too large or well outside the client's peer group) as well as the most recent
Jury Verdict Research data, to arrive at a conclusion. Absent a limit that
is unusually low (below the minimum limits your referred to) or unusually
high (which is, in part, a matter of weighing against the peer groups),
we understand reasonableness as a range and not an exact limit.
There certainly is no "right" answer to this very important question.
It should be noted that affordability is a major factor when considering
limits above a minimum. As you know, policyholders tend to increase limits
when excess layers are relatively inexpensive and decrease limits when excess
limits become more expensive.
—Craig F. Stanovich, CPCU, CIC, AU, Principal & Consultant,
Austin & Stanovich Risk Managers LLC, Douglas, MA
- There is an old analogy that matches this concern. The amount of liability
to buy is a monkey that belongs to your client. It is their monkey not yours.
If pressed to make a recommendation say first, please tell me the worst
event you will ever have and I can then tell you how much liability to purchase.
Always end the discussion reinforcing that additional limits and amounts
are available and are always recommended.
—Bill Ford, CPCU, JD, CLU, CIC, ARM, AAI, Regional Account
Executive, ProAssurance Group
- After many moons in this biz, I feel it is a "no-win situation" for
an agent to make liability limits decisions for a client. I am not even
sure why, in your message, that you recommend $1 million umbrella minimum
with a caveat of $5 million. Do you have a crystal ball? I wonder what the
asbestos folks or the September 11 folks think the limits should have been?
I think the best an insurance agent can do is to have a discussion of
the potential costs of claims and litigation and what the usual exposures
might be for the client's particular industry. I will have my "soapbox"
discussion where I suggest that the amount of a liability claim may be nothing
more than "luck or unlucky," i.e., one person can fall and get up and wipe
themselves off while the next person, in the identical accident, might be
a paraplegic. I will advise the buyer that higher limits are generally available,
and that costs for additional limits are typically not "straight line,"
and it may not cost as much as they think for more limits (usually have
costs options available or ask if they would like optional quotes). Of course,
I may not need to have this discussion with a sophisticated buyer/risk manager
type. I also suggest that they may want to speak with their legal department/counsel
and ask their opinion (one more E&O policy on the hook).
My experience is most claims are settled based on the amount of insurance
available. Does that mean that the more insurance limits available, the
higher the cost of the settlement? Probably. And you can bet if there is
a claim that exceeds limits, someone will try and blame the insurance agent
in an effort to bring E&O dollars into the settlement. And yes, the E&O
adjuster will typically throw dollars in the pot to make a claim go away.
The reality is no one can predict precisely how much limits to purchase
and that the final decision rests with the client. Believe it or not, my
experience is that premium is most often the deciding factor on the amount
of coverage purchased. That is why, during a hard market, when the costs
for limits increase, buyers will reduce limits.
—Jim Sammons, VP, Guaranty Insurance Services, Inc.,
Austin, TX
- Good points. Would inject into the mix the consideration of "How much
do I have to lose?", i.e. assets, net worth, etc. One poor way, which is
a real gamble, operates on the philosophy of the more limits one carries,
the more exposure one has as to amounts for which one is sued. In other
words, carry only $5 million, regardless of exposure, as that is what the
plaintiff attorneys will focus on as a sure source of funding, as most litigation
is settled not pushed through trial. Incredibly, I've seen this work more
than once for smaller and midsized clients, with significant products exposure.
—Daniel P. Hughes, McGriff, Seibels & Williams of Texas,
Inc., Dallas
- I definitely agree that the "buy as much limits as you can afford" answer
is a cop-out, and I think the list you offered of factors to consider in
thinking about limits is very helpful. One frequent reaction to a recommendation
to purchase higher liability coverage limits is the argument that, "If we
have big limits, it just invites someone to make a big claim." I'd be interested
in hearing others' reactions to that argument. Leaving aside the ethics
of that approach to doing business, it seems to me that this argument really
makes sense only in the case of a relatively small business with minimal
assets, where the owner is prepared to simply declare bankruptcy and walk
away if s/he gets sued. (One area where it's not uncommon to see this approach,
by the way, is with small bars on the liquor liability risk.)
—Pete Tritz, League of Minnesota Cities Insurance Trust
-
Your suggested guidelines are quite valid and a good starting point in
my opinion. ... But I believe the issues of availability and affordability
must also be included in any discussion about how much liability insurance
to buy. What limits are available and how much will it cost will always
be part of the discussion.
I also believe a thorough analysis of a client's exposures is required
so those that create the most exposure are thoroughly understood and incorporated
in the "how much to buy" discussion. For example, a client with a fleet
of vehicles on the road daily in a metropolitan area with minimal premises
liability exposure requires a thorough review the types of liability losses
the fleet presents.
I also think we need to factor into the discussion senior management's
tolerance for risk as it relates to the preservation of assets and protection
of the revenue stream.
—William C. Gilmartin, CPCU, ARM, Senior Vice President,
Counselman, Michaels and Downes, Inc., Towson, MD
- Best suggestion I've heard on what umbrella limit an insured should
purchase—have the insured pull out their financials, look at the amount
under the total company assets, and pick a limit based on that. If the insured
chooses less, that is their choice; either way, get a signature on your
proposal from the insured acknowledging their umbrella amount choice.
—Steve Annen, Director of Marketing, Independent Insurance
Group Inc., Dallas
- Consider the net income of the entity. In cases of severe injury or
death, an argument may be made that no amount of money is really adequate.
Some may relate the damages to the amount of profit the offending organization
is making per day/week/year. Playing the deep pocket theory, and the idea
that some profit may have been forgone to take stronger preventative measures,
may impact a jury's decision on damages. However, I also believe that limits
available often influence the requested damages. Firms need to balance what
they can afford with what's reasonable, based on the earlier points made.
—Elizabeth L. Good, CPCU, Assistant Vice President, Victor
O. Schinnerer & Company, Inc., Chevy Chase, MD
- I was interested in your comments regarding what limits of liability
to recommend. One item that might be added is "What is the insured's net
worth?" Many underwriters ask that question these days when they receive
requests for what they perceive are high limits of liability.
—Bill Fleming, The Doctors Company, Napa, CA
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