Privatizing Flood Insurance in the U.S.
Any serious gambler always understands the odds before he makes a bet. He studies the risks, puts up the collateral, and hopes for a win. If the stakes are too great, he holds on to his capital and waits for a more attractive wager.
We, as American homeowners, do the same when it comes to setting down our roots. We do our best to understand risks in our neighborhoods. Is there substantial crime? How are the schools? Are property taxes high? But do we know enough about the risks that threaten to destroy our homes and desecrate our treasured possessions?
When it comes to understanding exposure to flooding in the United States, the answer is ‘no.’
Flood maps put together by FEMA are a good start, but many questions remain. Both homeowners and insurers alike find themselves without the tools they need to fix the gap in flood coverage, leaving the bulk of flood insurance to be paid out by the federal government.
While not much is known about the elusive X-zone, this is probably where the private insurance market should first look for clues on how to get flood policies out of the NFIP.
So what can be done to help unveil the elusive nature of flood risk?
FEMA designates several types of flood zones; the most widely known are the A and V zones used in the 1-in-100 year flood areas.
The X-zones, however, are much less understood. While flood insurance isn’t compulsory in the X-zones, flood risk still exists. It is in these zones that up to 20 percent of governmental National Flood Insurance Program (NFIP) policies exist. But how much do we really know about X-zone risk? What compels homeowners to buy insurance in these zones when it is not required?
While not much is known about the elusive X-zone, this is probably where the private insurance market should first look for clues on how to get flood policies out of the NFIP.
While we can get information on the number of policies in the X-zone by state, there is more work to be done to understand the types of properties being underwritten. X-zones may be attractive to private insurers because the risk is much lower than in the A and V zones, and the pricing may also be competitive with FEMA.
This will allow the industry to understand how to navigate the process of expanding their flood portfolios, and prepare them for the more daunting task of depopulating the A and V zones.
To start this process, the industry needs a way to understand more about the potential market in the X-zone. Catastrophe modelers have the capability to help with this endeavor, as they have with identifying and categorizing exposure in developing insurance markets across the world.
These modelers will be needed to initiate the process of quantifying risk in these areas, allowing the market to better understand how they can expand into this largely untapped market.
As private insurers search for strategies on where to look to start their flood programs, they may want to heed the age-old saying that “X marks the spot.”
Some Surprising States Lead in Employment Litigation Lawsuits
Small and mid-sized businesses continue to get hit with employment practices lawsuits – with hot spots scattered across the country, according to the “2015 Hiscox Guide to Employee Lawsuits” report released last month by the Bermuda-based specialist insurer.
Companies based in New Mexico face the greatest risk nationwide, with a 66 percent higher chance of facing an employee charge than the national average, according to Hiscox’s analysis of data on employment charge activity from the U.S. Equal Employment Opportunity Commission and its state counterparts.
Other states and jurisdictions where employers are at a high risk of employee charges include Washington, D.C. (65 percent above the national average), Nevada (47 percent), Alabama (41 percent), California (40 percent), Mississippi (39 percent), Delaware (35 percent), Illinois (34 percent), Arkansas (22 percent) and Tennessee (20 percent).
Natalie Douglass, senior managing director, management liability practice at Arthur J. Gallagher & Co. in St. Louis, said the study results were “interesting and a little bit surprising.”
“When we think about employment risk, we tend to focus on severity of litigation to come up with hot spots like California or Florida. It’s a little surprising to see states like New Mexico or Alabama when we focus on charge frequency.” — Natalie Douglass, senior managing director, management liability practice, Arthur J. Gallagher & Co.
“When we think about employment risk, we tend to focus on severity of litigation to come up with hot spots like California or Florida,” Douglass said. “It’s a little surprising to see states like New Mexico or Alabama when we focus on charge frequency.”
The reason was that Hiscox adjusted the EEOC data for employer population, she said. For example, states like New Mexico and Alabama have between 1 percent and 3 percent of the total charges in 2014, but adjusting for the states’ employer population, “the data is shown in a new light.”
“From an insurance perspective, larger employers aren’t going to be as affected by increased charge frequency, as their retentions are likely large enough to address those claims,” Douglass said.
“The bigger impact will be with small employers, increasing their need for insurance, and also loss prevention measures in that segment.”
Laws Difficult to Navigate
Bertrand Spunberg, practice leader, executive risks at Hiscox USA, said that “some states … can be very difficult to navigate because their fairness laws are often broader than the federal law, so employers must commit themselves to comply with these state laws to a higher standard.
“Every business should expect a very real exposure from these lawsuits.” — Bertrand Spunberg, practice leader, executive risks, Hiscox USA
“But that’s a tall order for smaller companies that don’t have the resources and expertise to keep track and comply with changes in state laws; insurance can help protect them so they won’t be caught off guard,” Spunberg said.
Indeed, one in five small and mid-sized businesses will face employment charges with an average cost to defend of $125,000, which includes expenses such as attorney’s fees and settlement costs, according to Hiscox claims data for firms with under 500 employees.
For those that did have insurance coverage, the average deductible was $35,000, compared to the $90,000 balance paid out by their insurance company.
The median judgment for cases that go to trial was approximately $200,000 for employment lawsuits adjudicated by the courts, while one in four cases resulted in a judgment of $500,000 or more.
“Every business should expect a very real exposure from these lawsuits,” Spunberg said.
Robert Hale, a partner at Goodwin Proctor LP in Boston, said that there was no one explanation for why certain states have a spike in employment litigation, compared to the rest of the country “as it is clear that there are significant differences in both the legal landscape and the cultural and employment settings among these different states.”
“Bottom line, the reality is that we’re living in a time of transition in employment law, and if you are not paying attention, you’re going to get into trouble.” — Karl Lindegren, partner, Fisher & Phillips LLP
“If it were simply a matter of the degree to which there’s protective legislation for employees, then some of the Northeastern states would be in the mix,” Hale said.
Class-Action Litigation Risks
Of particular concern are cases involving independent contractors and classification of employees for overtime pay eligibility, he said.
Unlike most other areas of employment law risk, these create a risk of class-action litigation. Because of the number of employees affected, the costs associated with making a determination in those areas is potentially much greater than the cost for an employer that makes an individual employee termination decision.
Hale said there has been a “sea change” in the past 15 to 20 years regarding the purchase of employment practices liability insurance to cover the risks of employment litigation. It was a rare product for many years, he said, but now it’s a common part of any business insurance portfolio.
“The result is that the insurance companies have created a significant amount of market pressure on the employment litigation defense bar and, frankly, insurers have been able to use that market power to decrease rates charged by defense practitioners,” he said.
“That has affected the market for those legal services even for matters that are not covered by insurance.”
Tom Hams, managing director with Aon’s financial services group in Chicago, said his firm continues to see a real focus on disability claims, “which is the hardest charging area right now and the focus of the EEOC.”
“Employers have to be very sensitive around the issue of accommodations and when taking employment actions involving employees who are perceived to have disabilities.” — Tom Hams, managing director, Aon financial services group
“Employers have to be very sensitive around the issue of accommodations and when taking employment actions involving employees who are perceived to have disabilities,” Hams said.
There is also a “huge trend” of lawsuits alleging violations of the Fair Credit Reporting Act, and “if an attorney can find one job application with any kind of flaw, they can turn it into a mass or class-action suit,” he said.
Moreover, “ban the box” — eliminating questions about criminal background in job applications — has become a hot topic because of changes in federal, state and local laws challenging the practice.
“As a result of the ‘ban the box’ and FCRA activity, employers should make sure they have their job applications reviewed by their counsel to make sure they are doing the right thing,” Hams said.
Training is a Necessity
Brian Weiss, vice president, regional leader, FINEX claims at Willis in New York City, said there has been an overall slight downward moment in employment practice claims – it’s “certainly not as high as right around the financial crash, but still elevated.”
“It’s going to take some time before we get to pre-crash numbers, but slowly and steadily we may get there,” Weiss said. “I’ll be curious after this study if we’ll see carriers seek sublimits and sub-retentions in those jurisdictions.”
For Wiess’ clients that have high concentrations in high-risk areas, he recommended they make a special point to train both managers and employees. Many law firms, he said, offer conduct training at employer sites.
He noted that some state laws may lead to higher claims or particular claim trends. For example, in Alabama, there has been from a 1 percent to 5 percent spike of total EEOC color discrimination claims over the past 5 years, as well as a spike in religion discrimination claims, from 2 percent to 5 percent of total national claims over the same time period.
“So if you have a high number of employers in one of these states, you need to train to the laws and standards of that state,” Weiss said. “At the very least, managers need to have a thorough understanding of the applicable laws in these jurisdictions.”
“Bottom line,” said Karl Lindegren, a partner of Fisher & Phillips LLP in California, “the reality is that we’re living in a time of transition in employment law, and if you are not paying attention, you’re going to get into trouble.
“If you continue to do what you thought you were always able to do regarding the Fair Credit Reporting Act and background checks, then you will get into trouble. What I tell my clients is that if they do the right thing and treat people the right way, it will go a long way to winning a lawsuit, and even avoiding a lawsuit.”
When the Going Gets Rough, the Smart Come to Aspen Insurance
Sometimes, renewals don’t go as expected.
Perhaps your company experienced a particularly costly claim last year. Or maybe it was just one too many smaller incidents that added to a long claims history.
No matter the cause, few words are scarier to hear this time of year than, “Renewal denied.”
But new options are now emerging for companies that are willing to tackle their product liability challenges head-on.
Aspen Insurance’s products liability team – underwriters, loss control engineers and claims professionals – welcome clients who have been denied coverage from other, more traditional carriers.
“For our team, we view our best opportunities to be with clients who have specific problems to solve. In these cases, we leverage our deep expertise and integrated team approach to help the client identify root causes and fix issues,” said Roxanne Mitchell, Aspen U.S. Insurance’s executive vice president and chief casualty officer.
“The result is a much improved product or manufacturing process and the start of a new business relationship that we can grow for many years to come.”
“We want to work with insureds as partners, long after a problem has been resolved. We seek clients who are going to stick with us, just as we will with them. As the insured’s experience improves over time, pricing will improve with it.”
— Roxanne Mitchell, Executive Vice President, Chief Casualty Officer, Aspen Insurance
Of course, this specialized approach is not applicable to all situations and clients. Aspen Insurance only offers coverage if the team is confident the problems can be solved and that the client genuinely wants to engage in improving their business and moving forward.
“Our robust and detailed problem-solving approach quickly identifies pressing issues. Once we know what it will take to rectify the problem, it’s up to the client to make the investments and take the necessary actions,” added Mitchell. “As a specialty carrier operating within the E&S market, we have the ability to develop custom-tailored solutions to unique and complex problems.”
For clients who are eager to learn from managing through a unique, pressing issue, and apply the consequential lessons to improve, Aspen Insurance can be their best, and sometimes only, insurance friend.
The Strategy: Collaboration from Underwriting, Claims and Loss Control
Aspen offers a proven combination of experienced underwriting professionals collaborating with the company’s outstanding loss control/risk engineering and seasoned claims experts.
“We deliver experts who understand the industries in which they work, which is another critical differentiator for us,” Mitchell said.
Mitchell described the Aspen underwriting process as a team approach. In diagnosing the causes of a specific problem, the Aspen team thoroughly vets the client’s claims history, talks to the broker about the exposures and circumstances, peruses user manuals and manufacturing processes, evaluates the supply chain structure – whatever needs to be done to get to the root of a problem.
“Aspen pulls from every resource we have in our arsenal,” she said.
After the Aspen team explores the underlying reason(s) and root cause(s) producing the client’s problem in the first place, it will offer a solution along with corresponding price and coverage specifics.
“We have a very specific business appetite and approach,” Mitchell said. “We don’t treat products liability as a commodity.”
As noted, a major component of Aspen’s approach is that they seek to work with clients who are equally interested in solving their problems and put in the work required to reach that end.
Mitchell cited two recent client examples of manufacturers of expensive products that could endure large claim losses but had some serious problems that needed to be solved.
A conveyor systems manufacturer had a few unexpected large claims and lost its coverage in the traditional insurance market. The manufacturer never managed a product recall in the past, and Aspen’s loss control engineers dug into why several systems failed. Aspen also helped the company alert customers about the impending repairs.
Another company that manufactured firetrucks had three or four large losses, when telescoping ladders collapsed, resulting in serious injuries. The company’s claim history was clean until this particular product defect. When Aspen researched the issue, it found that the specific metal and welding used to make the telescoping ladders didn’t have the required torque to keep the ladders from collapsing.
Both companies worked with Aspen to correct the issues. Problem solved.
“It is so important that our clients are willing to actively engage in finding out what is causing their losses so they can learn from the experience,” Mitchell said.
Apart from the company’s problem-solving philosophy, Mitchell said, the willingness to allow qualified clients to manage their own claims is the second biggest reason companies come to Aspen.
“We are willing to work with clients who have demonstrated the expertise to handle their own claims — with our monitoring — rather than hiring a TPA,” she said. “It is a useful option that can save them money.”
Mitchell explained that customers who stay with Aspen for the long-term can be confident that Aspen will help them – whatever the challenge. For instance, if they need a coverage modification for a new product that they bring to market, Aspen can help make it happen. Mitchell noted, “We pride ourselves on the ability to develop custom-tailored solutions to address the complex and challenging risks that our clients face.”
Aspen’s desire to help solve difficult client problems comes with a caveat, but one that benefits both Aspen and the insured: It wants to move forward as a true partner – one with clear long-term relationship potential.
In a nutshell, Aspen’s products liability worldview is to partner with a manufacturer who is facing a difficult situation with claims or coverage, help them solve that problem, and then, engage in a long-term, committed relationship with the client.
“We want to work with insureds as partners, long after a problem has been resolved,” she said. “We seek clients who are going to stick with us, just as we will with them. As the insured’s experience improves over time, pricing will improve with it. This partnership approach can be a clear win-win.”
This article is provided for news and information purposes only and does not necessarily represent Aspen’s views and does constitute legal advice. This article reflects the opinion of the author at the time it was written taking into account market, regulatory and other conditions at the time of writing which may change over time. Aspen does not undertake a duty to update the article.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Aspen Insurance. The editorial staff of Risk & Insurance had no role in its preparation.