Congress: Let E&S Underwrite Unique Flood Risks
I strongly support revisions to the current federal definition of private flood insurance contained in the Flood Insurance Modernization and Market Parity Act of 2014 introduced in the 113th Congress. I believe it is necessary for Congress to amend the current definition to ensure that surplus lines insurers are eligible to offer private market solutions and alternatives to consumers with unique and complex flood risks.
The surplus lines market plays an important role in providing insurance for hard-to-place, unique or high capacity risks. Often called the “safety valve” of the insurance industry, surplus lines insurers fill a need for coverage in the marketplace by insuring risks that are declined by the standard underwriting and pricing processes of admitted insurance carriers.
Surplus lines insurance is used to cover risks that are difficult to place, where the standard market is unwilling or unable to provide the level of coverage needed, such as flood coverage in coastal areas.
The Biggert-Waters Flood Insurance Reform Act of 2012 sought to expand the ability of private insurers to offer flood insurance solutions as alternatives to the National Flood Insurance Program (NFIP). However, its definition of private flood insurance should be clarified to ensure that surplus lines insurers are part of the solution.
Any misinterpretation of the existing definition could unintentionally limit the surplus lines market’s historical effectiveness as a supplemental market for risks that exceed the capacity of the NFIP.
It is important to note that surplus lines insurers currently underwrite private insurance flood policies primarily in commercial lines and, to a very limited degree, in personal lines.
Well before the Biggert-Waters Act of 2012, surplus lines flood insurance policies were underwritten as a supplemental option for insureds seeking flood insurance coverages in excess of the capacity of the NFIP.
Often called the “safety valve” of the insurance industry, surplus lines insurers fill a need for coverage in the marketplace by insuring risks that are declined by the standard underwriting and pricing processes of admitted insurance carriers.
The Flood Insurance Modernization and Market Parity Act of 2014 intended to preserve the surplus lines market’s ability to provide the supplemental coverage it has historically provided and to provide insureds with coverage options for unique and complex risk that exceeds or differs from the options available through the NFIP or the standard market.
The purpose of the 2014 Act was to clarify that a surplus lines policy is an acceptable private flood insurance option. Its definition of private insurer includes any insurer that is licensed, admitted or otherwise “eligible” to engage in the business of insurance in the state or jurisdiction in which the insured property is located. Its use of the term “eligible” is important because of its consistency with the nationwide surplus lines insurer eligibility standards established by the Nonadmitted and Reinsurance Reform Act (NRRA) of 2010.
The Flood Insurance Modernization and Market Parity Act of 2014 continues to be the right solution. It preserves an effective supplemental market, provides options for insureds with unique and complex risks, and it provides mortgage lenders with more clarity regarding the acceptance of private flood insurance policies.
I therefore encourage Congress to enact legislation in 2015 to accomplish the goals of the 2014 Act.
Pros and Cons of Specialty Consolidation
Merger and acquisition activity is rife in the insurance space and in the specialty brokering market in particular. According to M&A advisory firm MarshBerry, there were 220 acquisitions in the U.S. broker sector in 2014, and 49 of them involved wholesale brokers and managing general agents and underwriters (MGAs and MGUs).
“Making this surprising is that specialty distributors are significantly outnumbered by retail insurance agencies,” the firm said, noting that there are approximately 1,250 specialty distributors in the U.S. compared to 25,000 retail agencies. In other words, specialty M&A accounted for 22 percent of all broker M&As despite specialty players being outnumbered 20 to 1.
According to Julie Herman, associate director of financial services ratings at Standard & Poor’s, consolidation in the specialty brokering space mirrors M&A activity among insurers, many of whom have been buying specialty teams as a way of managing their underwriting cycle in a low rate environment.
“Brokers follow the trends of insurers, so it makes sense they would follow them into specialty,” she said.
“Cheap debt, low interest rates and private equity capital entering the space, combined with competition driving up multiples, makes a plentiful M&A environment. And there are so many opportunities out there, especially in the U.S. broker markets — there are thousands of brokers and the market is very fragmented.”
Herman added that insurers are increasingly focusing on streamlining the number of distribution partners they do business with, exacerbating the broker consolidation trend.
“It is becoming harder for small brokers to compete against bigger players in a softening market in which there is a need to be more sophisticated. Most small players don’t have the resources to invest in big data and technology, so it often makes sense to sell,” she said.
“The losers are the specialty wholesalers who don’t want to sell but might not to be able to adapt to the marketplace and get left behind.”
RIMS board director Gordon Adams is chief risk officer for Tri-Marine International, a fishing company with specialty marine risks. He said he’s seen little evidence of contraction in the marine broking space, but in other areas such as credit insurance there are very few specialist brokers and there is consolidation.
“That is a concern as there are less competitors and therefore we have less ability to do an RFP. Insurance is a personal relationships industry. Companies may miss out on developing personal relationships with boutique brokers in favor of using the big brokers. The larger brokers try to be all things to all people, and that’s certainly not always successful.”
In September 2014, JLT — the world’s largest specialty brokerage — began a concerted push into the U.S. According to Doug Turk, chief marketing officer for JLT Specialty in the U.S., the broker may consider joining the M&A party.
“We’re very open and interested in seeing what’s out there, but we are going to be very selective to make sure any acquisition target fits within our specialty strategy and also with the culture of JLT,” he said.
Impact on Clients
However, Turk challenged the view that broker consolidation leads to less choice for the client. Large clients have had limited choice for some time, he said, while JLT’s move into the U.S. as a retail specialty broker has helped meet demand for more choice when it comes to specialty risk.
“[Consolidation] doesn’t change the markets we go to or the solutions we offer. Underwriting consolidation is something we have to deal with, but with most consolidations, teams remain largely intact. It’s a good time for clients because they can get more out of their relationships with brokers,” he said.
There is no doubt that if a small broker is bought out by a more sophisticated buyer, its clients should benefit from an array of value-adding services.
“There are always two sides to every coin but right now the positives outweigh the negatives for the insurance buyer, if successful operational and financial execution is in place,” said Herman.
Scott Burton, a partner with Sutherland, Asbill & Brennan in Atlanta, agreed.
“Ultimately, the effects of consolidation on resulting scale and the continued gains in efficiency and expertise should result in better rates and terms for many clients,” he said.
Larger brokers absorb the specialist expertise of small wholesalers but can then use their superior infrastructure to scale up these operations, bringing specialty capability to a wider audience. The key is of course to ensure the acquired teams are not dismantled, diluted or commoditized by the merger.
Companies that don’t sell up must capitalize on their ability to offer bespoke service.
“Smaller brokers can compete by differentiating and having a product,” said Herman.
“If they are able to maintain key relationships and use their niche expertise to design specialty programs, carriers will still want to do business with them.”
Turk agreed that while many of the largest brokers look at business in terms of yield and commodification, specialists use their industry expertise to create unique and innovative products for their chosen client bases. This is, he said, what makes specialty-focused JLT different than the likes of Marsh, Aon and Willis.
“There is an increasing role for true specialty brokers who have industry knowledge — an ability to understand business first and risk second, and the ability to translate that understanding into customized solutions,” he said.
Tri-Marine’s Adams is a strong believer in the value of working with the most specialized brokers out there.
“Having a department that is able to service a specialty area is not the same as specializing in a specialty area,” he said, contending that boutique brokers are more likely to have a closer relationship with the client and offer dedicated, individualized service than broad-brush broking houses.
“We want our broker to have expertise and a predilection to our areas of business. The broker we selected at our last RFP said ‘we are heavily focused on marine, and because of that we don’t offer the same abilities in property/casualty or workers’ compensation, so we’d like to partner with a very strong regional broker who can provide these areas.’ That’s the direction we went in, and together they provide what we need.”
For many companies, choosing a one-stop-shop broker may be equally, if not more appealing than using a patchwork of specialists. One area the large buyers have a clear advantage over their smaller target firms is in their ability to service a rapidly internationalizing corporate sector.
“Globalization is fundamentally changing the expectations of our clients. International clients today demand seamless global coverage,” said Turk. “There’s a growing requirement to comply with local regulations in international locations. The world is becoming so much more complex, and companies demand that the brokers they work with have the knowledge to make sure they are in compliance with local regulations when placing policies.
“I’ve been in the industry 44 years and I’ve seen expansion and contraction a number of times during my career.” — Doug Turk, chief marketing officer, JLT Specialty in the U.S.
“Smaller brokers don’t have a global umbrella capability. The problem for them is that virtually all large clients now require it. Even if you are a very niche specialty broker you have got to have that global capability,” he added.
Adams said that as long as a broker can access major insurance markets, the carriers can take care of the global program.
“We have offices across the globe, and buy insurance on a global basis through our corporate risk management program. What is important is to have a global insurance carrier that can address those needs, and a broker that can access the resources of that carrier,” he said.
“I don’t find it limiting to use a specialty broker with only two or three offices because they deal with the likes of Lloyd’s, ACE and AIG, who have boots on the ground all around the world. One call to the local broker means we can access those boots on the ground pretty much any place we have a need.”
Global brokers are, however, more likely to be able to access increasingly popular alternative risk transfer channels such as insurance-linked securities (ILS), as well as being able to offer far superior analytics than small independents.
According to Turk, “data analysis and insight is increasingly driving how insurance is procured and how companies assess their risk.”
Adams, however, said that there are still pockets of industry for which data is not yet a necessity.
He also said that while consolidation is rife among specialty brokers right now, it’s nothing new.
“I’ve been in the industry 44 years and I’ve seen expansion and contraction a number of times during my career. Every time there is a consolidation and the big brokers gobble up the specialty brokers, it’s not long before you see people peeling off and starting again, and the cycle starts over.”
For now, according to Herman, specialty M&A is set to continue.
“All the ingredients that made for an active M&A market in 2014 are still there and I don’t see why it would slow,” she said.
“The opportunities are still there and there are so many brokers that are ripe for being acquired.”
This could mean less choice for insurance buyers in an increasingly commoditized market. For those whose glasses are half full, the trend may mean specialty expertise is available to a wider audience.
Making the Marine Industry SAFE
When it comes to marine based businesses there is no one-size-fits-all safety approach. The challenges faced by operators are much more complex than land based businesses.
The most successful marine operators understand that success is dependent on developing custom safety programs and then continually monitoring, training and adapting.
After all, it’s not just dollars at stake but the lives of dedicated crew and employees.
The LIU SAFE Program: Flexible, Pragmatic and Results Driven
Given these high stakes, LIU Marine is launching a new initiative to help clients proactively identify and address potential safety risks. The LIU SAFE Program is offered to clients as a value added service.
“The LIU SAFE program goes beyond traditional loss control. Using specialized risk assessment tools, our risk engineers function as consultants who gather and analyze information to identify potential opportunities for improvement. We then make recommendations customized for the client’s business but that also leverage our knowledge of industry best practices,” said Richard Falcinelli, vice president, LIU Marine Risk Engineering.
It’s the combination of deep expertise, extensive industry knowledge and a global perspective that enables LIU Marine to uniquely address their client’s safety challenges. Long experience has shown the LIU Risk Engineering team that a rigid process will not be successful. The wide variety of operations and safety challenges faced by marine companies simply cannot be addressed with a one-size-fits-all approach.
Therefore, the LIU SAFE program is defined by five core principles that form the basis of each project.
“Our underwriters, risk engineers and claims professionals leverage their years spent as master mariners, surveyors and attorneys to utilize the best project approach to address each client’s unique challenges,” said Falcinelli.
The LIU SAFE Program in Action
When your primary business is transporting dry and liquid bulk cargo throughout the nation’s complex inland river system, safety is always a top concern.
The risks to crew, vessels and cargo are myriad and constantly changing due to weather, water conditions and many other factors.
SCF Marine, a St. Louis-based inland river tug and barge transportation company and part of the Inland River Services business unit of SEACOR Holdings Inc., understands what it takes to operate successfully in these conditions. The company strives for a zero incident operating environment and invests significant time and money in pursuit of that goal.
But when it comes to marine safety, all experienced mariners know that no one person or company has all the answers. So in an effort to continually find ways to improve, SCF management approached McGriff, Seibels & Williams, its marine broker, to see if LIU Marine would be willing to provide their input through an operational review and risk assessment.
The goal of the engagement was clear: SCF wanted to confirm that it was getting the best return possible on its significant investment in safety management.
Using the LIU SAFE framework, LIU’s Risk Engineers began by sending SCF a detailed document request. The requested information covered many aspects of the SCF operation, including recruiting and hiring practices, navigation standards, watch standing procedures, vessel maintenance standards and more.
Following several weeks of document review the LIU team drafted its preliminary report. Next, LIU organized a collaborative meeting at SCF’s headquarters with all of the latter’s senior staff, along with McGriff brokers and LIU underwriters. Each SCF manager gave an overview of their area of responsibility and LIU’s preliminary findings were reviewed in depth. The day ended with a site visit and vessel tour.
“We sent our follow-up report after the meeting and McGriff let us know that it was well received by SCF,” Falcinelli said. “SCF is so focused on safety; we are confident that they will use the information gained from this exercise to further benefit their employees and stakeholders.”
“It was probably one of the most comprehensive efforts that I’ve ever seen undertaken by a carrier’s loss control team,” said Baxter Southern, executive vice president at McGriff, which also is based in St. Louis. “Through the collaborative efforts of all three parties, it was determined that SCF had the right approach and implementation. The process generated some excellent new concepts for implementation as the company grows.”
In addition to the benefits of these new concepts, LIU gained a much deeper understanding of SCF’s operations and is better positioned to provide ongoing loss control support.
“Effective safety management is about being focused and continuously improving, which requires complete commitment from top management,” Falcinelli added. “SCF obviously is on a quest for safety excellence with zero incidents as the goal, and has passed that philosophy down to its entire workforce.”
“SCF’s commitment to the process along with LIU’s expertise was certainly impressive and a key reason for the successful outcome,” Southern concluded.
There are many other ways that the SAFE program can help clients address safety risks. To learn more about how your company could benefit, contact your broker or LIU Marine.
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.