Insurance for Young ‘Art’ Lovers
Editor’s note — Long-time Risk & Insurance contributor Steve Yahn passed away on June 28. Throughout his tenure with this magazine, Steve displayed passion and curiosity for the business segment we cover. He was also a friend whose absence will be felt for years to come. This was his last piece for the magazine. We’ve added links to a few other examples of his recent work at the end of this piece.
— Dan Reynolds, editor-in-chef, Risk & Insurance.
A life style-oriented insurance coverage initially aimed at younger, art loving customers in New York will eventually seek a broader customer base, its sponsors said.
XL Catlin and A.J. Gallagher & Co. in June launched a unique New York-only joint venture aimed at insuring and advising Millennials and new-to-the-scene collectors of all ages.
Called “Five for Five,” the lifestyle-oriented insurance will offer a package of specialized insurance coverage for fine art, jewelry, wine and cyber theft and identity theft on one policy.
Millennials are the fastest-growing consumers in the U.S.” — Ellen Ross, managing director for fine arts and risk management insurance, Arthur.J. Gallagher & Co.
The annual premium for this coverage is $500, with a $500 deductible.
“Millennials are the fastest-growing consumers in the U.S.,” noted New York-based Ellen Ross, managing director for fine arts and risk management insurance at Arthur J. Gallagher & Co.
“They are sophisticated collectors who are actively engaged in the traditional New York art scene, embrace online purchasing and converge on the international art markets and fairs.”
The specialty carrier and the brokerage worked together on many projects over the years and will participate in efforts to attract the target audience. But Gallagher will be primarily responsible for recruiting new clients through its network and is currently accepting submissions.
“To start, the ‘Five for Five’ program is geared toward Millennials and new collectors in the New York City market only,” said Kyle McGrath, New York-based underwriter, fine art & specie at XL Catlin.
“However, as it grows we expect the program’s availability to expand to other U.S. cities with established and emerging art scenes.”
A soft launch of “Five for Five” was hosted by the New York Academy of Art, which brought together 70 or so young artists and new collectors for an evening meet-and-greet gathering. This event, in addition to others to come, was supported by XL Catlin’s Twitter account.
Both McGrath and Ross foresee similar events being held at various museums and art galleries throughout the city, as well as at appropriate professional organizations.
“We are definitely looking at doing these types of events,” said Ross.
“But the goal will be to make them educational and not social.”
Ross noted that XL Catlin’s nationwide “Luxury Lines” program, introduced in August, 2014, was an important part of the inspiration for the “Five for Five” offering.
“There are so many phenomenal young collectors and artists in New York City.” — Jennifer Schipf, fine art & specie senior underwriter, XL Catlin
The existing XL Catlin “Luxury Lines” program offers specialty coverage for fine art and collectibles, aviation, equine and livestock, yacht and kidnap, ransom and extortion.
“Our idea was to take the ‘Luxury Lines’ program and rejigger it to specifically meet the needs of a new generation of collectors, which is why we added coverage for cyber and identity theft to appeal to their lifestyle,” noted Ross.
“At some point, the new ‘Five for Five’ participants are going to outgrow our product and then they can transition into a more robust ‘Luxury Lines’ program.
“It’s a natural progression for the two products to work together,” added Ross.
“Whenever possible, we would partner on any of these products.”
“What we’ve done for ‘Five for Five’ clients, from a marketing standpoint, is to provide them with the opportunity to submit an application for ‘Luxury Lines’ products as well,” noted XL Catlin’s McGrath.
The development of the “Luxury Lines” coverage and XL Catlin’s participation in the “Five for Five” program were both led by New York-based Jennifer Schipf, the company’s fine art & specie senior underwriter, with Kyle McGrath handling the day-to-day activities of the Millennials and new collectors program.
“There are so many phenomenal young collectors and artists in New York City,” observed Schipf.
“Our partnership with A.J. Gallagher and our long-standing relationship with the New York Academy of Art provide the perfect network to link new collectors with artists and provide them with a tool to protect their growing collections.”
Meanwhile, Ellen Ross oversees A.J. Gallagher’s participation in “Five for Five,” with New York-based Kyle Amanda Stites, an area assistant vice president in the fine arts & jewelry practice, handling the day-to-day operations of the new venture.
“We purposely made ‘Five for Five’ a relatively inexpensive policy,” said Stites.
“As young people are investing in these treasures, they may not have the income to shell out a lot of money for premiums. So a $500 premium is very reasonable.
“A lot of times even though the values of the ‘Five for Five’ insured objects may not be that high, there is still a need among this target group for coverage,” noted Stites.
“So it’s really a lifestyle insurance product. We wanted to include coverages that would not be on a simple homeowner’s or renter’s policy.”
The development of the new cyber and identity theft products was spearheaded at XL Catlin by John Coletti, senior vice president, chief underwriting officer cyber, and Elissa Doroff, underwriting and product manager cyber.
Here are some of the other stories Steve Yahn wrote recently for Risk & Insurance:
The resources aligned to remediate acid mine drainage are minimal compared to the cost; up to $72 billion.
Leaked documents shed light on mysteries surrounding numerous masterpieces.
Legionella remains a costly and deadly foe in real estate, hospitality and other sectors of the economy.
Start-ups and established insurers are focusing on online, direct sales of insurance to small and medium-sized businesses.
Investments in Online Insurance Sales Booming
There is a gold rush going on among both start-ups and established insurers to stake a claim in the booming market for online, direct sales of insurance to small and medium-sized businesses.
“We’ve seen the rest of the old economy disrupted over the past decade, first by the internet, then by mobile, while traditional insurance business has marched along largely unchanged, protected by complexity, regulation and inertia,” said Josh Stirling, Boston-based managing director and senior vice president, U.S. insurance, Sanford C. Bernstein & Co.
But with the inexorable advance of technology unlocking the power of big data and inspiring a new wave of customer-centric insurance, he said, many entrepreneurs are looking to disrupt the $250 billion-plus commercial insurance industry market.
Many industry titans, not wanting to be left behind, are pouring money into R&D and big data and deploying capital through strategic venture funds in an attempt to catch up in this market.
“Insurance companies are up against serious existential challenges as increased market disruption continues,” wrote the authors of a new Deloitte Center for Financial Services report.
“If insurers don’t re-invent themselves in fundamental ways, they stand to lose significant market share to new players.”
Sabitha Majukumar, UK-based senior research analyst, worldwide insurance strategies at IDC Financial Insights, said, “Third-platform technologies — mobile, social, cloud and big-data — are paving the way for small-business insurers to establish a direct connection with consumers in a market once exclusively dominated by intermediaries.
“With a clear shift in consumer preferences to buy online, insurers are presented with a great opportunity to complement their existing distribution system with online sales.”
IDC’s recent report, “MaturityScape: Digital Transformation in Insurance” noted that success in such ventures “depends on offering an omni-channel model where simple, transparent and configurable products are sold through company websites, mobile channels or aggregator sites with an option to also connect to an insurer’s contact center or agent for after-sales queries and service.”
New Companies Sprouting Up
As a sign of changing times, an impressive amount of new capital is invested in start-ups in this space: $13 million in venture funds going to Next Insurance in March, $2 million in start-up money from a number of angel investors for New York-based CoverWallet also in March, and $2 million in seed money for just-launched Bunker of San Francisco.
Add to this investments in their own operations by such big players as Berkshire Hathaway, The Hartford, and AIG (as part of a joint venture).
That’s in addition to those from the initial pioneers of selling insurance to small businesses in the U.S., Insureon (which attracted $31 million in venture money last October) and Hiscox USA.
“We continue to see small businesses, especially those with fewer than five employees, turning to online resources to research and purchase insurance.” –Stephanie Bush, executive vice president of small commercial insurance, The Hartford
The joint venture announced in late April by AIG, Hamilton Insurance Group Ltd. and affiliates of Two Sigma Investments LP seeks to establish a technology-enabled, customer-centric insurance platform to serve the market for small and medium enterprises (SME).
It is banking on Two Sigma’s data science and technology platform, Hamilton’s technology and underwriting expertise in the SME market, and AIG’s SME expertise and reach to make its mark.
At The Hartford, the goal is to combine new online capabilities with its traditional agent-focused resources to serve the small business sector.
“We continue to see small businesses, especially those with fewer than five employees, turning to online resources to research and purchase insurance,” said Stephanie Bush, executive vice president of small commercial insurance at The Hartford.
“We provide these customers with the option to obtain a quote from an agent or through our internal sales team.”
Online quoting is available for the group’s Business Owner’s Policy (BOP), workers’ compensation and commercial auto insurance, Bush said.
“The product features and pricing are the same whether they decide to purchase insurance through one of The Hartford’s independent agents or our internal sales team,” Bush said.
“With both options the customer can make a purchase with the live advice from a licensed agent.”
“Cover Your Business,” a new division of Berkshire Hathaway serving the small business market, was launched in February, offering BOP, workers’ compensation and commercial auto by way of an online, direct platform, said Pete Shelley, recently promoted to president of the group.
“We plan to eventually add umbrella and professional lines,” said Shelley.
The rise of a tech-savvy millennial generation is playing a significantly growing role in the rise of the SME market.
“Much of today’s investment in technology start-ups is targeted at millennials, who would rather access insurance online than meet with an insurance broker,” said Peter Breitstone, former EVP, sales, programs and facilities at Insureon, and now CEO of Breitstone & Co. Ltd., a New York-based firm that advises technology companies, insurance carriers and brokers in the SME markets.
“The assumption is millennials will want to buy insurance online the same way they buy financial services and other products,” Breitstone said.
This growing phenomenon to market insurance via online, direct channels to small and medium-sized businesses was set in motion in the U.S. when New York-based Hiscox USA launched a version of its current model in 2010 under the direction of Kevin Kerridge, who led the launch of a similar service in Great Britain prior to that.
Hiscox launched its service with professional liability, said Kerridge, executive vice president of the direct and partnership division at Hiscox USA.
“Since then the program has expanded to offer BOP and general liability coverage through our online coverage,” he said.
“We have expanded to 49 states and D.C. and later this year we will make our Artisans Contractor [plumbers and electricians] product available.”
Since its launch, Hiscox USA has invested $200 million in its operations, all coming from internal funding by its Bermuda-based parent company, Hiscox Insurance Co., Kerridge said.
Another early entrant in this now-rapidly developing space was Chicago-based Insureon, which launched its online, direct service to sell insurance to small businesses five years ago. The company is growing at a pace of about 30 percent a year, according to CEO Ted Devine.
Devine said that at its launch, Insureon offered three products: BOP, workers’ compensation and general liability. Since then it has added commercial auto, homeowners, farm and ranch, and cyber.
Insureon got a major venture capital boost last October when it received $31 million in new funding from a group led by Oak HC/FT, a venture capital fund investing in financial technology companies.
Also participating in that round of financing was Accretive, a private investment firm specializing in funding disruptive technology companies, which built Insureon and led the company’s previous rounds of financing.
“The financing will enable Insureon to increase its technology development and enhance its sales and marketing activities targeting small business,” said Devine.
For most of its existence, Insureon marketed its services strictly online. But recently the company has expanded into television advertising and the use of billboards.
But Devine, like Kerridge, stressed that traditional agents will always be part of the insurance sales proposition. He noted that it took online sales of auto insurance, driven by companies like GEICO, 10 years to reach a tipping point at which more sales were consummated online.
“Given the complexity of the commercial product, it’s always going to have to be delivered with a lot of advice,” Devine said.
“Whoever delivers the best advice will win.”
“Venture Capital-focused Bets”
In the past three months or so, three venture capital-supported tech start-ups have emerged in this space.
First, in early March, there was CoverWallet, which received $2 million in seed money to launch a software platform that will offer risk analysis, coverage recommendations, claims support and data analytics.
Then in early June, Bunker also received $2 million in venture capital to launch what it claims is the first-ever contract-related marketplace aimed at offering insurance tailored specifically to freelance workers.
“We were able to get up and running very quickly by teaming up with Hiscox as a carrier. Getting our platform out there and getting customers on board is allowing us to develop with real-time customer feedback.” — Lacey Pevey, vice president of insurance, Next
The start-up’s first product, scheduled to launch sometime this summer, will focus on the increasingly widespread “gig” economy, in which organizations contract with independent workers for short-term engagements.
But perhaps the most compelling start-up model to emerge recently to serve the small business market is Palo Alto, Calif.-based Next Insurance.
First came deeply rooted technology expertise from the company’s three top officers, CEO Guy Goldstein and his co-founders, Nissim Tapiro and Alon Huri.
The trio worked together at mobile payments company Check until it was acquired by Intuit for $400 million in 2014.
Then, in late May, the company received $13 million in venture seed money from another trio, Rabbit Capital, TLV Partners and Zeev Ventures.
But there was one more essential wave needed to pull it all together. Enter Lacey Pevey, recruited from AIG where she was chief underwriting officer for its financial institutions group, to become VP of insurance for Next.
“Next-insurance.com is live and we are already offering general liability and professional liability for many different classes of business,” Pevey said.
“We were able to get up and running very quickly by teaming up with Hiscox as a carrier. Getting our platform out there and getting customers on board is allowing us to develop with real-time customer feedback.”
Breitstone, a veteran of senior executive positions at Aon and Zurich North America, said the recent developments in the North American SME sector are “a race to make venture capital-focused bets, believing that InsurTech is the logical next frontier after FinTech.”
“In the FinTech arena, many start-ups focused on building the technology platform first and then only after that factored in ‘domain’ or specific subject expertise.”
Breitstone questions that approach.
“What the tech-oriented start-ups are beginning to discover is that insurance is different than finance,” he said.
“In insurance there are other drivers which suggest that they need to be much more mindful of the vagaries of insurance or the uniqueness of insurance so they can factor that into how they build their platform from the outset.
“If you are going to offer choice, you have to make sure you are satisfying each market’s unique requirements, while at the same time offering a streamlined experience that allows users to answer fewer questions and therefore make the buying experience much less challenging.”
Brokers: A Buyer’s Market for Captives
Today’s market offers captive insurance companies a particularly advantageous time to upgrade their investment portfolios. However, they must be willing to give up unrewarding practices in favor of more ambitious opportunities.
“Simply put, it’s a buyer’s market,” said Boston-based Josh Stirling, managing director and senior vice president, U.S. insurance, Sanford C. Bernstein & Co. “If you’re a captive owner, it’s probably a good time to buy more reinsurance or buy down your deductible or self-insured retention.”
In this environment, Stirling said, captive buyers are seeing more competition from reinsurers and primary companies that want to help them manage their risks, offering them favorable coverage at lower prices.
“With pressure from carriers and reinsurers to compete for business, this provides captive buyers and their brokers substantial leverage to negotiate for better value with their risk-taking partners,” Stirling said.
“If you’re a captive owner, it’s probably a good time to buy more reinsurance or buy down your deductible or self-insured retention.” — Josh Stirling, managing director and senior vice president, U.S. insurance, Sanford C. Bernstein & Co.
“This will lead to more opportunities for brokers to create value by partnering with carriers and reinsurers to design new coverages to better protect captives,” he said.
Added Gary Greene, Franklin, Tenn.-based Raymond James & Associates senior vice president-investments and managing director: “Captives of all sizes need to have an asset strategy, and ‘parking’ cash in the bank is not an asset strategy.
“Captive owners tend to hyper-focus on their liabilities and miss the opportunities with their assets. In doing so, they run the risk that their assets are misaligned and may increase overall risk.”
Greene noted that, overall, he believed prospects for captive growth remain favorable.
But given that interest rates have remained subdued since 2008, many captives have experienced an interest income shortfall from their actuarial forecast, Greene said.
“As these shortfalls have persisted,” Greene said, “captives found themselves recognizing the importance of developing an appropriate asset investment strategy that complements their liabilities.”
Captive owners generally remain cautious about accepting investment risk, yet they find the option of sitting in cash unpalatable, Greene said.
“So we see captives moving cash away from bank accounts and into low-to-moderate-risk investments,” he said. “Things like government and corporate bonds, with some captives venturing into diversified equities portfolios.”
Tim DePriest, Glendale, Calif.-based managing director for Arthur J. Gallagher & Co., noted that a captive should have in place an appropriate level of excess insurance to protect the group should a large catastrophic loss occur, or if over the course of the year the aggregate dollar amount of losses exhausts the premium that has been collected.
“Transparency is very important in running a captive effectively,” DePriest said. “Members should be privy to the inner workings of the captive, such as service costs and the revenue that is derived by the administrator or broker, as well as regulatory requirements.
“Members are essentially ‘owners’ of the captive and therefore should understand their investment.”
DePriest also offered some advice on domiciles.
“Vermont and Bermuda in particular are attractive because of their favorable regulatory and tax environment,” he said.
“While other states in the U.S. are exploring ways to make themselves more attractive for captives, they do not see captive programs as a growth area.”
Sanford C. Bernstein’s Stirling said that one area for captives to explore in today’s market is working closely with brokers to take advantage of new sources of capital.
“For example,” Stirling said, “captives might consider going to the alternative markets and issuing a CAT bond, such as that issued by New York’s MTA after Hurricane Sandy, and captives with long-tailed reserves might look to partner with alternative managers offering reserve financings that allow the captive owner to profit from the alternative manager’s lower cost of capital.”
Stirling emphasized that, with the market in such a changing environment, it’s a very important time for someone who runs a large captive with a lot of money at risk, to optimize their product to take advantage of the low cost of capital that’s coming into the industry.
Bespoke Cyber Coverage
Raymond James’ Greene said that, “As our world expands, companies are being exposed to new kinds of risk that the commercial market doesn’t have the history to price efficiently.”
He cited cyber risk as a prime example.
“Cyber risk insurance is tremendously expensive to purchase, so very few companies, captives among them, are fully covered,” Greene said. “New technological developments are changing the way we live. Driverless cars, 3D printing, nanotechnology all promise an exciting future, but they also alter the environment for risk.
“But a captive insurance company can be a great vehicle to finance cyber risk,” Greene added. “Since the captive is a private insurance company insuring risk only for the parent company, the captive can structure a bespoke coverage that specifically fits the parent company and charge an appropriate premium based upon the company’s actual risk mitigation policies.”
“As our world expands, companies are being exposed to new kinds of risk that the commercial market doesn’t have the history to price efficiently.” — Gary Greene, senior vice president-investments and managing director, Raymond James & Associates.
Additionally, if the parent does a good job managing the risk, they can potentially see return of those premiums back to the parent, Greene said.
He also noted that there is one major hurdle on the near-term horizon that will significantly change the way many captives operate.
That hurdle, said Greene, has a date: Oct. 14, 2016.
“As we have seen, captives have a propensity to avoid investment risk by maintaining very high levels of cash-type investments,” he said. “A favorite cash alternative investment has been money market funds. Captives have long used these funds because of their perceived stability and safety.”
But on Oct. 14, new regulations will go into effect that will significantly change the way money market funds operate, and in turn how many captives handle their investments, Greene said.
“These changes include requiring money market funds’ values to float like any other mutual fund,” he said.
“Additionally, money market funds may impose redemption fees or so-called ‘liquidity gates’ that could be triggered if the liquidity levels of a specific fund fell to specified levels.
“Developing a strategy to deal with these events is going to be a challenge for many captives.” &