The Uncertainty of Certificates
Brokers and agents are often asked by their clients seeking to win bids for business to certify coverages that aren’t in their policies, strike language in the standard certificate form to comply with contractual requirements or issue certificates that include additional insureds that are not named on their policies.
As these issues continue to simmer in the marketplace, a majority of states have enacted laws and regulations to limit problems arising from excessive demands, and making it illegal for agents and brokers to list verbiage on certificates of insurance that does not accurately represent what the policy covers.
Certificates of insurance are merely “snapshots” of policies, and should never be relied upon in the same manner as the actual policy.
The new state requirements are due in large part to extensive lobbying efforts by groups like the Independent Insurance Agents & Brokers of America Inc. in Alexandria, Va., said Bill Wilson, the group’s associate vice president of education and research.
“We didn’t do it to be punitive to agents, but rather to give them a reason why they can’t put certain wording on a COI if it misrepresents the policy terms,” Wilson said.
“It’s illegal for them to do so, and that’s why they have to refuse,” he said.
Problems often arise when “savvy” landlords, lenders, contractors and rental companies dictate specific insurance requirements that some agents and brokers “are just not familiar with, or are paying much attention to,” said Susan McCaffrey, area vice president, senior client service manager at Arthur J. Gallagher & Co. in Kansas City, Mo.
She said she has encountered such problems when taking over accounts from other brokerage firms.
For example, a property owner might require a client to provide a workers’ compensation alternate employer endorsement to protect the owner if one of the client’s employees is injured on their property, McCaffrey said.
Most national carriers are willing to provide the required forms, but smaller or regional insurance companies are not as willing to provide the required forms or will charge a premium.
Barb Wurst, a client executive in the Minneapolis office of Marsh, said her team sometimes encounters outdated wording or erroneous requirements that need to be clarified.
“Reviewing contracts and the certificate of insurance requirements before the contracts are signed is critical to being able to negotiate with carriers,” Wurst said.
“If we can review them before our clients sign the contract, it makes everything down the road go smoother.”
Certificates of insurance are merely “snapshots” of policies, and should never be relied upon in the same manner as the actual policy, said Bryson Popham, managing partner in the Annapolis, Md., law firm of Popham & Andryszak.
Moreover, certificates can be rendered obsolete immediately following issuance, because the policies they describe can be cancelled the next day.
Brokers Cheer NARAB Passage
The law streamlines the national licensing process for brokers, but it may take two years to be operational.
After many years of intense lobbying, insurance agents and brokers finally have a national licensing clearinghouse.
Legislation signed into law by President Obama on Jan. 12 as part of the extension of the Terrorism Risk Insurance Act (TRIA) established the National Association of Registered Agents and Brokers (NARAB II) to make it easier for brokers to sell insurance on a nationwide basis.
NARAB II, commonly known as NARAB, was established as a permanent organization.
“This board will have to meet and develop the bylaws for exactly how NARAB is going to work. So we anticipate that NARAB probably won’t go live for about two years.” — John Prible, vice president of federal government affairs, Independent Insurance Agents & Brokers of America
Proponents of NARAB, a nonprofit membership organization to be governed by state insurance commissioners and insurance market representatives, say the group will preserve the best of the state regulatory system while adding a more effective licensing system.
“NARAB means a much more efficient and streamlined licensing process for agents and brokers operating in multiple states,” said Brady Kelley, executive director of the National Association of Professional Surplus Lines Offices (NAPSLO).
Keri Kish, NAPSLO’s director of government relations, added that currently its members, or any broker or agent, has to be licensed in their home state, but if they do business in other states they have to obtain a separate license in each of those states as well.
“With NARAB, what they’ll be able to do is get their license in their home state and then apply to NARAB,” said Kish. “If they’re approved for NARAB membership, then they would be able to operate on a national basis.”
Kish said it would be “a huge reduction in the amount of time and ease of being able to operate on a national basis and not having to administer 50 separate licenses.”
“There will still be stringent requirements to become a NARAB member,” Kelley added. “But once those requirements are met, it’s just a much more simple online, one-stop shop to get licensed nationally.”
John Prible, Washington, D.C.-based vice president of federal government affairs for the Independent Insurance Agents & Brokers of America (IIABA), said NARAB will help companies by increasing their distribution force across the country and it will help consumers by increasing competition.
He stressed that NARAB will not be up and running overnight.
“The president is going to have to appoint a board of directors,” Prible said.
“This board will have to meet and develop the bylaws for exactly how NARAB is going to work. So we anticipate that NARAB probably won’t go live for about two years,” he said. “We want to make sure we get it right.”
2015 General Liability Renewal Outlook
There was a time, not too long ago, when prices for general liability (GL) insurance would fluctuate significantly.
Prices would decrease as new markets offered additional capacity and wanted to gain a foothold by winning business with attractive rates. Conversely, prices could be driven higher by decreases in capacity — caused by either significant losses or departing markets.
This “insurance cycle” was driven mostly by market forces of supply and demand instead of the underlying cost of the risk. The result was unstable markets — challenging buyers, brokers and carriers.
However, as risk managers and their brokers work on 2015 renewals, they’ll undoubtedly recognize that prices are relatively stable. In fact, prices have been stable for the last several years in spite of many events and developments that might have caused fluctuations in the past.
Mark Moitoso discusses general liability pricing and the flattening of the insurance cycle.
Flattening the GL insurance cycle
Any discussion of today’s stable GL market has to start with data and analytics.
These powerful new capabilities offer deeper insight into trends and uncover new information about risks. As a result, buyers, brokers and insurers are increasingly mining data, monitoring trends and building in-house analytical staff.
“The increased focus on analytics is what’s kept pricing fairly stable in the casualty world,” said Mark Moitoso, executive vice president and general manager, National Accounts Casualty at Liberty Mutual Insurance.
With the increased use of analytics, all parties have a better understanding of trends and cost drivers. It’s made buyers, brokers and carriers much more sophisticated and helped pricing reflect actual risk and costs, rather than market cycle.
The stability of the GL market also reflects many new sources of capital that have entered the market over the past few years. In fact, today, there are roughly three times as many insurers competing for a GL risk than three years ago.
Unlike past fluctuations in capacity, this appears to be a fundamental shift in the competitive landscape.
“The current risk environment underscores the value of the insurer, broker and buyer getting together to figure out the exposures they have, and the best ways to manage them, through risk control, claims management and a strategic risk management program.”
— David Perez, executive vice president and general manager, Commercial Insurance Specialty, Liberty Mutual
Dynamic risks lurking
The proliferation of new insurance companies has not been matched by an influx of new underwriting talent.
The result is the potential dilution of existing talent, creating an opportunity for insurers and brokers with talent and expertise to add even greater value to buyers by helping them understand the new and continuing risks impacting GL.
And today’s business environment presents many of these risks:
- Mass torts and class-action lawsuits: Understanding complex cases, exhausting subrogation opportunities, and wrangling with multiple plaintiffs to settle a case requires significant expertise and skill.
- Medical cost inflation: A 2014 PricewaterhouseCoopers report predicts a medical cost inflation rate of 6.8 percent. That’s had an immediate impact in increasing loss costs per commercial auto claim and it will eventually extend to longer-tail casualty businesses like GL.
- Legal costs: Hourly rates as well as award and settlement costs are all increasing.
- Industry and geographic factors: A few examples include the energy sector struggling with growing auto losses and construction companies working in New York state contending with the antiquated New York Labor Law
David Perez outlines the risks general liability buyers and brokers currently face.
Managing GL costs in a flat market
While the flattening of the GL insurance cycle removes a key source of expense volatility for risk managers, emerging risks present many challenges.
With the stable market creating general price parity among insurers, it’s more important than ever to select underwriting partners based on their expertise, experience and claims handling record – in short, their ability to help better manage the total cost of GL.
And the key word is indeed “partners.”
“The current risk environment underscores the value of the insurer, broker and buyer getting together to figure out the exposures they have, and the best ways to manage them — through risk control, claims management and a strategic risk management program,” said David Perez, executive vice president and general manager, Commercial Insurance Specialty at Liberty Mutual.
While analytics and data are key drivers to the underwriting process, the complete picture of a company’s risk profile is never fully painted by numbers alone. This perspective is not universally understood and is a key differentiator between an experienced underwriter and a simple analyst.
“We have the ability to influence underwriting decisions based on experience with the customer, knowledge of that customer, and knowledge of how they handle their own risks — things that aren’t necessarily captured in the analytical environment,” said Moitoso.
Mark Moitoso suggests looking at GL spend like one would look at total cost of risk.
Several other factors are critical in choosing an insurance partner that can help manage the total cost of your GL program:
Clear, concise contracts: The policy contract language often determines the outcome of a GL case. Investing time up-front to strategically address risk transfer through contractual language can control GL claim costs.
“A lot of the efficacy we find in claims is driven by the clear intent that’s delivered by the policy,” said Perez.
Legal cost management: Two other key drivers of GL claim outcomes are settlement and trial. The best GL programs include sophisticated legal management approaches that aggressively contain legal costs while also maximizing success factors.
“Buyers and brokers must understand the value an insurer can provide in managing legal outcomes and spending,” noted Perez. “Explore if and how the insurer evaluates potential providers in light of the specific jurisdiction and injury; reviews legal bills; and offers data-driven tools that help negotiations by tracking the range of settlements for similar cases.”
David Perez on managing legal costs.
Specialized claims approach: Resolving claims quickly and fairly is best accomplished by knowledgeable professionals. Working with an insurer whose claims organization is comprised of professionals with deep expertise in specific industries or risk categories is vital.
“We have the ability to influence underwriting decisions based on experience with the customer, knowledge of that customer, and knowledge of how they handle their own risks, things that aren’t necessarily captured in the analytical environment.”
— Mark Moitoso, executive vice president and general manager, National Accounts Casualty, Liberty Mutual
“When a claim comes in the door, we assess the situation and determine whether it can be handled as a general claim, or whether it’s a complex case,” said Moitoso. “If it’s a complex case, we make sure it goes to the right professional who understands the industry segment and territory. Having that depth and ability to access so many points of expertise and institutional knowledge is a big differentiator for us.”
While the GL insurance market cycle appears to be flattening, basic risk management continues to be essential in managing total GL costs. Close partnership between buyer, broker and insurer is critical to identifying all the GL risks faced by a company and developing a strategic risk management program to effectively mitigate and manage them.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.