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 of denying claims.
I have neither the time nor the inclination to explain myself to a buyer that questions the status quo; or who 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.
Mind the Gap in Global Logistics
Manufacturers and shippers are going global.
As inventories grow, shippers need sophisticated systems to manage it all, and many companies choose to outsource significant chunks of their supply chain management to contracted providers. A recent survey by market research firm Transport Intelligence reveals that outsourcing outnumbers nearshoring in the logistics industry by 2:1. In addition, only 16.7 percent of respondents stated they are outsourcing fewer logistics processes today than they were three years ago.
Those providers in turn take more responsibilities through each step of the bailment process, from processing, packaging and labeling to transportation and storage. Spending in the U.S. logistics and transportation industry totaled $1.45 trillion in 2014 and represented 8.3 percent of annual gross domestic product, according to the International Trade Administration.
“Traditionally these outside parties provided one phase of the supply chain process, perhaps transportation, or just warehousing. Today many of these companies are extending their services and product offerings to many phases of supply chain management,” said Mike Perrotti, Senior Vice President, Inland Marine, XL Catlin.
Such companies are known as third-party logistics (3PL) providers, or even fourth-party logistics (4PL) providers. They could provide transportation, storage, pick-n-pack, processing or consolidation/deconsolidation.
As the provider’s logistics responsibilities widen, their insurance needs grow.
“In the past, the underwriters would piecemeal together different coverages for these logistics providers. For instance, they might take a motor truck cargo policy, and attach a warehouse form, a bailee’s form, other inland marine products, and an ocean cargo form. You would have most of the exposures covered, but when you start taking different products and bolting them together, you end up with gaps,” said Alexander McGinley, Vice President, US Marine, XL Catlin.
A comprehensive logistics form can close those gaps, and demand for such a product has been on the rise over the past decade as logistics providers search for a better way to manage their range of exposures.
“Traditionally these outside parties provided one phase of the supply chain process, perhaps transportation, or just warehousing. Today many of these companies are extending their services and product offerings to many phases of supply chain management.”
–Mike Perrotti, Senior Vice President, Inland Marine, XL Catlin
A Complementary Package
XL Catlin’s Logistics Services Coverage Solutions takes a holistic approach to the legal liability that 3PL providers face while a manufacturer’s stock is in their care, custody and control.
“A 3PL’s legal liability for loss or damage from a covered cause of loss to the covered property during storage, packaging, consolidation, shipping and related services would be insured under this comprehensive policy,” McGinley said. “It provides piece of mind to both the owner of the goods and the logistics provider that they are protected if something goes wrong.”
In addition to coverage for physical damage, the logistics solution also provides protection from cyber risks, employee theft and contract penalties, and from emerging exposures created by the FDA Food Modernization Act.
This coverage form, however, only protects 3PL companies’ operations within the U.S., its territories and possessions, and Canada. Many large shippers also have an international arm that needs the same protection.
XL Catlin’s Ocean Cargo Coverage Solutions product rounds out the logistics solution with international coverage.
While Ocean Cargo coverage typically serves the owner of a shipment or their customers, it can also be provided to the internationally exposed logistics provider to cover the cargo of others while in their care, custody, and control.
“This covers a client’s shipment that they’re buying from or selling to another party while it’s in transit, by any type of conveyance, anywhere in the world,” said Andrew D’Alessio, National Ocean Cargo Product Leader, XL Catlin. “When provided to the logistics company, they in turn insure the shipment on behalf of the owner of the cargo.”
The international component provided by ocean cargo coverage can also eliminate clients’ fears over non-compliance if admitted insurance coverage is purchased. Through its global network, XL Catlin is uniquely positioned as a multi-national insurer to offer locally admitted coverages in over 200 countries.
“In the past, the underwriters would piecemeal together different coverages for these logistics providers. For instance, they might take a motor truck cargo policy, and attach a warehouse form, a bailee’s form, other inland marine products, and an ocean cargo form. You would have most of the exposures covered, but when you start taking different products and bolting them together, you end up with gaps.”
–Alexander McGinley, Vice President, US Marine, XL Catlin
A Developing Need
The approaching holiday season demonstrates the need for an insurance product that manages both domestic and international logistics exposures.
In the final months of the year, lots of goods will be shipped to the U.S. from major manufacturing nations in Asia. Transportation providers responsible for importing these goods may require two policies: ocean cargo coverage to address risks to shipments outside North America, and a logistics solution to cover risks once goods arrive in the United States or Canada.
“These transportation providers are expanding globally while also shipping throughout the U.S. That’s how the need for both domestic and international logistics coverage evolved. Until now there have been few solutions to holistically manage their exposures,” D’Alessio said.
In another example, D’Alessio described one major paper provider that expanded its business from manufacturing to include logistics management. In this case, the paper company needed coverage as a primary owner of a product and as the bailee managing the goods their clients own in transit.
“That manufacturer has a significant market share of the world’s paper, producing everything from copy paper to Bible paper, wrapping paper, magazine paper, anything you can think of. Because they were so dominant, their customers started asking them to arrange freight for their products as well,” he said.
“These transportation providers are expanding globally while also shipping throughout the U.S. That’s how the need for both domestic and international logistics coverage evolved. Until now there have been few solutions to holistically manage their exposures.”
–Andrew D’Alessio, National Ocean Cargo Product Leader, XL Catlin
The global, multi-national paper company essentially launched a second business, serving as a transportation and logistics provider for their own customers. As the paper shipments changed ownership through the bailment process, the company required two totally different types of insurance coverage: an ocean cargo policy to cover their interests as the owner and producer of the product, and logistics coverage to address their exposures as a transportation provider while they move the products of others.
“As a bailee, they no longer own the products, but they have the care, custody, and control for another party. They need to make sure that they have the appropriate insurance coverage to address those specific risks,” McGinley said.
“From a coverage standpoint, this is slowly but surely becoming the new standard. A logistics form on the inland marine side, combined with an international component, is becoming something that a sophisticated client as well as a sophisticated broker should really be asking for,” McGinley said.
The old status quo method of bolting on coverage forms or additional coverages as needed won’t suffice as global shipping needs become more complex.
With one underwriting solution, the marine team at XL Catlin can insure 3PL clients’ risks from both a domestic and international standpoint.
“The two products, Ocean Cargo Coverage Solutions and Logistics Service Coverage Solutions, can be provided to the same customer to really round out all of their bailment, shipping, transportation, and storage needs domestically and around the globe,” D’Alessio said.
The information contained herein is intended for informational purposes only. Insurance coverage in any particular case will depend upon the type of policy in effect, the terms, conditions and exclusions in any such policy, and the facts of each unique situation. No representation is made that any specific insurance coverage would apply in the circumstances outlined herein. Please refer to the individual policy forms for specific coverage details. XL Catlin, the XL Catlin logo and Make Your World Go are trademarks of XL Group Ltd companies. XL Catlin is the global brand used by XL Group Ltd’s (re)insurance subsidiaries. In the US, the insurance companies of XL Group Ltd are: Catlin Indemnity Company, Catlin Insurance Company, Inc., Catlin Specialty Insurance Company, Greenwich Insurance Company, Indian Harbor Insurance Company, XL Insurance America, Inc., and XL Specialty Insurance Company. Not all of the insurers do business in all jurisdictions nor is coverage available in all jurisdictions. Information accurate as of December 2016.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with XL Catlin. The editorial staff of Risk & Insurance had no role in its preparation.