You Can’t Handle the Truth!
We all remember the famous court scene from “A Few Good Men” when Tom Cruise and Jack Nicholson come to a highly emotional face off on Code Red. Let’s pretend the case is about excess follow form policies; think of Cruise as the Insured and Nicholson as an excess underwriter. It would go like this:
Insured (Cruise): Is your “excess follow form” policy really follow form?
Judge: You DON’T have to answer that question!
Underwriter (Nicholson): I’ll answer that question (looking at Cruise). You want answers?
Insured: I think I’m entitled to…
Underwriter: You want answers?
Insured: I want the truth!
Son, we live in a world that has many excess follow form policies, and those policies come off shelves and are used for all types of insureds. We don’t have the time or the aspiration to match underlying wordings. . Who’s gonna to do it? You, Mr. or Ms. Insured?
I have a greater responsibility to my shareholders than you could possibly fathom. You weep for generic excess policies that have their own terms and conditions. You have the luxury of not knowing what I know. That the death of generic “excess follow form” policies, while fortunate, will result in a lot more claim payments and less litigation between Insureds and insurance companies.
My so-called excess follow form policy, while totally misleading and grotesque, pays my dividends. You don’t want the truth, because deep down in places you don’t talk about you are too busy, and lose interest when it comes to excess policies.
We use words like “exhaustion,” and “arbitration,” that are different than the same words used in the primary policy. We use these words as the backbone of a lifetime denying claims.
I have neither the time nor the inclination to explain myself to a buyer that questions the status quo. Or questions the quote I provide. I would rather you just look the other way like the industry has done for decades and go on your way.
Otherwise, I suggest you get someone who really knows what they are doing. Either way, I do not give a damn what you think you are entitled to.
Insured: Do you bind excess policies with different terms?
Underwriter: I prefer to quote on my own excess follow form wording…
Insured: Do you bind excess policies with different terms?
Underwriter: You’re [email protected] right I do!!!!
A humorous approach to the dialogue that currently has started in the excess D&O, E&O, EPL, Cyber, etc. community.
In Part One- The Problem, we cited the challenges and often devastating results of having different contractual wordings on each layer of a multi-layer program. Qualcomm litigation was an example of a real situation that lead to an unfavorable outcome to the Insured.
Today, we want to share the solution we have developed, and over 15 insurance companies have approved. The policy is called PurX® as in pure excess.
We’re not selling this. PurX is being offered on an open source which will allow all insureds and insurers access to the same wording.
It is a policy that is only 435 words versus the average 1,345-word “excess follow form” policies traditionally used on excess. PurX is a template that allows each underwriter to utilize their Declarations page (this is necessary due to the requirement of listing underlying insurers, claims notification addresses, limit of liability, etc.). PurX leaves the Item number as a fill in.
Most of the underwriting community sees this not only as an opportunity to avoid conflict, but the logical next step in bringing value to its excess layer. It might mean more underwriting, but is a differentiator. It should be noted that not all insureds may qualify for a pure excess.
Top 5 Challenges and Opportunities for E&S
Thousands of attendees converged on Atlanta, Ga., from Sept. 25 to 28 for NAPSLO’s Annual Convention. From the many conversations among brokers, carriers and underwriters, a few common challenges and opportunities facing the excess and surplus market emerged.
1. Soft Market Conditions
Overwhelmingly, convention attendees cited the continuing soft market as their primary challenge.
Excess capital and low investment income are making organic growth difficult, and most see no end in sight to that dynamic. The boost in M&A activity driven by these conditions is also emboldening primary insurers to take on new risks with expanded resources that typically are better suited to the E&S market.
“More standard carriers are entering into the Allied Health marketplace and driving prices down, which makes me less confident that the hard market will come again any time soon,” said Jennifer Schoenthal, a health care underwriter with Beazley.
“E&S shines where the standard market won’t go. There will always be opportunities for E&S as technology advances.” — Hank Watkins, president, Lloyd’s North America.
“E&S brokers used to be the brokers of last resort because there was no participation from standard insurers, but small agent consolidation makes standard insurers more inclined to place coverage themselves in new areas and forego E&S,” said Jon Starck, divisional vice president of marketing for the executive liability division of Great American Insurance Group.
“They are expanding their appetites.”
Some, however, took a more positive view, noting that some segments are performing better than others, forming “hard pockets” within the overall soft market.
“I think, though, there is a blurring between the soft and hard market. Non-admitted forms and products have improved, and there is a demand for specialized expertise,” Starck said.
2. New Risks Present New Opportunities
Despite movement from the primary market into E&S territory, opportunities remain in emerging risks like cyber, drones and driverless cars.
“E&S shines where the standard market won’t go. There will always be opportunities for E&S as technology advances,” said Hank Watkins, president of Lloyd’s North America.
One risk the primary market is hesitant to tackle is flood exposure. After the Senate vote earlier this year to allow the private market to provide flood insurance, many underwriters have approached with caution, but E&S insurers are already writing primary coverage.
“I don’t think there is enough investment in new technologies, but it’s tough to find the extra pennies in a challenging business environment when you’re trying to manage headcount and expenses.” — Ron Beauregard, head of U.S. E&S property, Beazley
“The NFIP is $25 billion in debt,” Watkins said. “There is a place for E&S to step in.”
Schoenthal of Beazley also noted that the specialty underwriter is adding value by participating in several health care-related risks that prove too tricky for the primary market, including telemedicine, clinical trials, implantable devices, nutraceuticals, and military medicine.
3. Technology and Pace of Change
To achieve growth in a soft market – other than through merger or acquisition – carriers, underwriters and brokers have to innovate. But that’s easier said than done.
“It’s imperative that we figure out how to create new products,” said David Nelson, senior vice president, E&S and specialty contract underwriting, Nationwide Insurance.
While many companies have idea-gathering mechanisms, they tend to fall short on the technology needed to turn those ideas to reality.
Younger generations communicate and build relationships differently, and there is increasing customer demand for greater ease of doing business. But industry leaders question whether they can keep up with the pace of technological change occurring in other sectors.
“We are an industry not used to rapid change,” said Craig Kliethermes, president and COO, RLI Insurance Co.
“I don’t think there is enough investment in new technologies,” said Ron Beauregard, head of U.S. E&S property, Beazley, “but it’s tough to find the extra pennies in a challenging business environment when you’re trying to manage headcount and expenses.”
In addition to servicing younger customers, updating technology will also be critical to attracting younger workers to the industry, many attendees agreed.
4. Talent Pipelines
Perspectives on recruiting and retaining talent varied widely. Some felt the issue was critical. With baby boomers preparing to retire, some executives were concerned about how to best transfer their knowledge and skills to incoming talent who — because of changes in technology — do business very differently.
Others were more optimistic. The more upbeat companies were those that had developed formal partnerships and internship programs with universities, or had robust training programs that gave new recruits face time with their older, experienced counterparts.
“We are an industry not used to rapid change.” –Craig Kliethermes, president and COO, RLI Insurance Co.
“People can always be trained,” said Schoenthal.
“You have to be willing to look outside the mold and look at other skill sets to find the person best able to do the job.”
5. Other Trends to Watch
Looking forward, attendees noted some new risks that present underwriting challenges and that need close attention.
Cyber and the Internet of Things as they relate to property risk remains a difficult exposure to identify and quantify, but will evolve rapidly as more devices become “connected.”
The marijuana market, set to expand as more states legalize possession of the drug, could offer abundant opportunities for insurers, but that expansion for now is stalled by prohibitive federal law.
Watkins of Lloyd’s said that market pulled its products for marijuana purveyors last year due to incongruities between state and federal laws, and is watching developments closely to determine when, if ever, it would be wise to re-enter the market.
Kliethermes of RLI also highlighted the emerging trend of funded litigation — when a third party essentially “invests” in a lawsuit, hoping to make a profit from the settlement or eventual award. This outside funding makes plaintiffs’ attorneys less willing to settle, or more inclined to demand larger settlements.
Some of these third parties focus specifically on cases stemming from auto accidents, covering the defendant’s medical and living expenses in exchange for a piece of the final compensation.
Given the increasing severity of commercial auto claims, E&S insurers could have an opportunity to step in and provide coverage for this new risk.
Hot Hacks That Leave You Cold
Thousands of dollars lost at the blink of an eye, and systems shut down for weeks. It might sound like something out of a movie, but it’s becoming more and more of a reality thanks to modern hackers. As technology evolves and becomes more sophisticated, so do the occurrence of cyber breaches.
“The more we rely on technology, the more everything becomes interconnected,” said Jackie Lee, associate vice president, Cyber Liability at Nationwide. “We are in an age where our car is a giant computer, and we can turn on our air conditioners with our phones. Everyone holds data. It’s everywhere.”
Phishing Out Fraud
According to Lee, phishing is on the rise as one of the most common forms of cyber attacks. What used to be easy to identify as fraudulent has become harder to distinguish. Gone are the days of the emails from the Nigerian prince, which have been replaced with much more sophisticated—and tricky—techniques that could extort millions.
“A typical phishing email is much more legitimate and plausible,” Lee said. “It could be an email appearing to be from human resources at annual benefits enrollment or it could be a seemingly authentic message from the CFO asking to release an invoice.”
According to Lee, the root of phishing is behavior and analytics. “Hackers can pick out so much from a person’s behavior, whether it’s a key word in an engagement survey or certain times when they are logging onto VPN.”
On the flip side, behavior also helps determine the best course of action to prevent phishing.
“When we send an exercise email to test how associates respond to phishing, we monitor who has clicked the first round, then a second round,” she said. “We look at repeat offenders and also determine if there is one exercise that is more susceptible. Once we understand that, we can take the right steps to make sure employees are trained to be more aware and recognize a potentially fraudulent email.”
Lee stressed that phishing can affect employees at all levels.
“When the exercise is sent out, we find that 20 percent of the opens are from employees at the executive level,” she said. “It’s just as important they are taking the right steps to ensure they are practicing what they are preaching.”
Locking Down Ransomware
Another hot hacking ploy is ransomware, a type of property-related cyber attack that prevents or limits users from accessing their system unless a ransom is paid. The average ransom request for a business is around $10,000. According to the FBI, there were 2,400 ransomware complaints in 2015, resulting in total estimated losses of more than $24 million. These threats are expected to increase by 300% this year alone.
“These events are happening, and businesses aren’t reporting them,” Lee said.
In the last five years, government entities saw the largest amount of ransomware attacks. Lee added that another popular target is hospitals.
After a recent cyber attack, a hospital in Los Angeles was without its crucial computer programs until it paid the hackers $17,000 to restore its systems.
Lee said there is beginning to be more industry-wide awareness around ransomware, and many healthcare organizations are starting to buy cyber insurance and are taking steps to safeguard their electronic files.
“A hospital holds an enormous amount of data, but there is so much more at stake than just the computer systems,” Lee said. “All their medical systems are technology-based. To lose those would be catastrophic.”
And though not all situations are life-or-death, Lee does emphasize that any kind of property loss could be crippling. “On a granular scale, you look at everything from your car to your security system. All data storage points could be controlled and compromised at some point.”
The Future of Cyber Liability
According to Lee, the Cyber product, which is still in its infancy, is poised to affect every line of business. She foresees underwriting offering more expertise in crime and becoming more segmented into areas of engineering, property, and automotive to address ongoing growing concerns.”
“Cyber coverage will become more than a one-dimensional product,” she said. “I see a large gap in coverage. Consistency is evolving, and as technology evolves, we are beginning to touch other lines. It’s no longer about if a breach will happen. It’s when.”
About Nationwide’s Cyber Solutions
Nationwide’s cyber liability coverage includes a service-based solution that helps mitigate losses. Whether it’s loss prevention resources, breach response and remediation expertise, or an experienced claim team, Nationwide’s comprehensive package of services will complement and enhance an organization’s cyber risk profile.
Nationwide currently offers up to $15 million in limits for Network Security, Data Privacy, Technology E&O, and First Party Business Interruption.
Products underwritten by Nationwide Mutual Insurance Company and Affiliated Companies. Not all Nationwide affiliated companies are mutual companies, and not all Nationwide members are insured by a mutual company. Subject to underwriting guidelines, review, and approval. Products and discounts not available to all persons in all states. Home Office: One Nationwide Plaza, Columbus, OH. Nationwide, the Nationwide N and Eagle, and other marks displayed on this page are service marks of Nationwide Mutual Insurance Company, unless otherwise disclosed. © 2016 Nationwide Mutual Insurance Company.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Nationwide. The editorial staff of Risk & Insurance had no role in its preparation.