Brokers List Legislative Priorities
You don’t have to spend your days watching C-SPAN to know that insurance issues are taking a prominent role on Capitol Hill lately.
“I don’t think I’ve ever seen the parochial interest [the insurance industry] holds having risen to the national priority that is the current environment,” said Joel Wood, senior vice president of government affairs for The Council of Insurance Agents & Brokers. “Agents have a lot of skin in the game.”
With the passage of the flood insurance bill, many agents are breathing a sigh of relief that the specter of massive rate increases won’t become a reality. However, several other pending issues could have weighty consequences for the insurance industry at large, and agents in particular.
The Affordable Care Act
“The independent agents are small business owners that are being impacted greatly by the implementation of health care reform,” said Mike Becker, executive vice president and CEO of the National Association of Professional Insurance Agents (PIA).
“We’ve been incredibly loud advocates for the agent, ensuring that they’re able to participate, should they desire to do so, and they’re fairly and justly compensated for doing so, whether they’re participating in the traditional market or through an exchange,” he said.
PIA is currently asking members to find cosponsors for H.R. 2328, the Access to Professional Health Insurance Advisors Act, introduced by U.S. Reps. Mike Rogers (R-MI) and John Barrow (D-GA), to ensure that agent compensation is not disadvantaged by implementation of the ACA.
Wood pointed out that the current political climate during mid-year elections may make it difficult to achieve much change on the legislative end, so the CIAB is focusing more on regulatory issues related to health care.
“The pieces we’ve been engaged on are with respect to issues that impact ERISA [Employee Retirement Income Security Act] with the Department of Labor, to testifying on the wellness provisions, to working with the various agencies on trying to develop the right kind of nondiscrimination rule that has yet to come forward and the auto-enrollment rules that have yet to come forward.
“There are a million moving parts on the Affordable Care Act, and we try to engage on all of that impact our clients,” Wood said.
Another issue that is top of mind for agents is renewal of the Terrorism Risk Insurance Act (TRIA), which is set to expire at the end of the year.
“Almost every major commercial policy today has a rider on it that says that post-Dec. 31st 2014, terrorism coverage will not be in place depending upon the outcome of this debate,” Wood stated.
“It’s a product that’s not easily accessible in the private market without the terrorism risk and insurance program,” said Becker. “We support those programs and we’re going to be advocating for its passage.”
The CIAB is also focusing on the Foreign Account Tax Compliance Act, which is designed to prevent tax evasion in transactions with offshore companies.
“We have unsuccessfully argued to the IRS that we should be exempted from implementation and reporting requirements on commercial insurance transactions,” Wood said. “Now, we’re moving to the implementation side and it’s going to be a burden both on the brokers and on their clients.
“Theoretically this sounds pretty simple, but there are unanswered questions. What is Lloyd’s of London, for example? Is that one insurance company or is it 200 companies, or is it 20,000 syndicates?”
To that end, CIAB is seeking clarification within the rules so that it can become a clearinghouse to help international insurers to comply with FATCA.
One of PIA’s biggest concerns involves federal regulation of insurance.
“We don’t think that there’s any further reason for federal regulation in this sphere,” said Jon Gentile, PIA national director of federal affairs.
“The insurance industry historically has been regulated at the state level. One of the things that came out of the financial crisis was that state regulation did, in fact, work and it worked well. We just want to make sure that our members are up on the Hill letting members of Congress know that state-based regulation does work well and has been for some time.”
However, the CIAB views this issue through a different lens.
“We think that it’s almost an embarrassment that our industry’s regulation is so fragmented when it comes to international trade,” said Wood. “We’re surprised at the degree to which some state insurance regulators have taken umbrage at the obvious role, as asserted in Dodd Frank for the Federal Insurance Office, to participate in reflecting U.S. goals in global talks.
“It’s a national business,” he said. “There has been a huge amount of consolidation. All the trend lines are going further in that direction.”
Wood also said that CIAB is advocating for passage of the National Association of Registered Agents and Brokers Reform Act that is designed to streamline interstate insurance licensing.
“It was big disappointment on not getting it [added as a rider to] the flood legislation. Shame on us, if we can’t get that to the finish line this year,” he said.
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A Renaissance In U.S. Energy
America’s energy resurgence is one of the biggest economic game-changers in modern global history. Current technologies are extracting more oil and gas from shale, oil sands and beneath the ocean floor.
Domestic manufacturers once clamoring for more affordable fuels now have them. Breaking from its past role as a hungry energy importer, the U.S. is moving toward potentially becoming a major energy exporter.
“As the surge in domestic energy production becomes a game-changer, it’s time to change the game when it comes to both midstream and downstream energy risk management and risk transfer,” said Rob Rokicki, a New York-based senior vice president with Liberty International Underwriters (LIU) with 25 years of experience underwriting energy property risks around the globe.
Given the domino effect, whereby critical issues impact each other, today’s businesses and insurers can no longer look at challenges in isolation one issue at a time. A holistic, collaborative and integrated approach to minimizing risk and improving outcomes is called for instead.
Aging Infrastructure, Aging Personnel
The irony of the domestic energy surge is that just as the industry is poised to capitalize on the bonanza, its infrastructure is in serious need of improvement. Ten years ago, the domestic refining industry was declining, with much of the industry moving overseas. That decline was exacerbated by the Great Recession, meaning even less investment went into the domestic energy infrastructure, which is now facing a sudden upsurge in the volume of gas and oil it’s being called on to handle and process.
“We are in a renaissance for energy’s midstream and downstream business leading us to a critical point that no one predicted,” Rokicki said. “Plants that were once stranded assets have become diamonds based on their location. Plus, there was not a lot of new talent coming into the industry during that fallow period.”
In fact, according to a 2014 Manpower Inc. study, an aging workforce along with a lack of new talent and skills coming in is one of the largest threats facing the energy sector today. Other estimates show that during the next decade, approximately 50 percent of those working in the energy industry will be retiring. “So risk managers can now add concerns about an aging workforce to concerns about the aging infrastructure,” he said.
Increasing Frequency of Severity
Current financial factors have also contributed to a marked increase in frequency of severity losses in both the midstream and downstream energy sector. The costs associated with upgrades, debottlenecking and replacement of equipment, have increased significantly,” Rokicki said. For example, a small loss 10 years ago in the $1 million to $5 million ranges, is now increasing rapidly and could readily develop into a $20 million to $30 million loss.
Man-made disasters, such as fires and explosions that are linked to aging infrastructure and the decrease in experienced staff due to the aging workforce, play a big part. The location of energy midstream and downstream facilities has added to the underwriting risk.
“When you look at energy plants, they tend to be located around rivers, near ports, or near a harbor. These assets are susceptible to flood and storm surge exposure from a natural catastrophe standpoint. We are seeing greater concentrations of assets located in areas that are highly exposed to natural catastrophe perils,” Rokicki explained.
“A hurricane thirty years ago would affect fewer installations then a storm does today. This increases aggregation and the magnitude for potential loss.”
On its own, the domestic energy bonanza presents complex risk management challenges.
However, gradual changes to insurance coverage for both midstream and downstream energy have complicated the situation further. Broadening coverage over the decades by downstream energy carriers has led to greater uncertainty in adjusting claims.
A combination of the downturn in domestic energy production, the recession and soft insurance market cycles meant greatly increased competition from carriers and resulted in the writing of untested policy language.
In effect, the industry went from an environment of tested policy language and structure to vague and ambiguous policy language.
Keep in mind that no one carrier has the capacity to underwrite a $3 billion oil refinery. Each insurance program has many carriers that subscribe and share the risk, with each carrier potentially participating on differential terms.
“Achieving clarity in the policy language is getting very complicated and potentially detrimental,” Rokicki said.
Back to Basics
Has the time come for a reset?
Rokicki proposes getting back to basics with both midstream and downstream energy risk management and risk transfer.
He recommends that the insured, the broker, and the carrier’s underwriter, engineer and claims executive sit down and make sure they are all on the same page about coverage terms and conditions.
It’s something the industry used to do and got away from, but needs to get back to.
“Having a claims person involved with policy wording before a loss is of the utmost importance,” Rokicki said, “because that claims executive can best explain to the insured what they can expect from policy coverage prior to any loss, eliminating the frustration of interpreting today’s policy wording.”
As well, having an engineer and underwriter working on the team with dual accountability and responsibility can be invaluable, often leading to innovative coverage solutions for clients as a result of close collaboration.
According to Rokicki, the best time to have this collaborative discussion is at the mid-point in a policy year. For a property policy that runs from July 1 through June 30, for example, the meeting should happen in December or January. If underwriters try to discuss policy-wording concerns during the renewal period on their own, the process tends to get overshadowed by the negotiations centered around premiums.
After a loss occurs is not the best time to find out everyone was thinking differently about the coverage,” he said.
Changes in both the energy and insurance markets require a new approach to minimizing risk. A more holistic, less siloed approach is called for in today’s climate. Carriers need to conduct more complex analysis across multiple measures and have in-depth conversations with brokers and insureds to create a better understanding and collectively develop the best solutions. LIU’s integrated business approach utilizing underwriters, engineers and claims executives provides a solid platform for realizing success in this new and ever-changing energy environment.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.