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Brokers

Agent and Broker Profitability Hits Milestone

Broker profitability due to contingent commissions reflects carrier profitability -- and P&C lines led the way.
By: | May 15, 2014 • 2 min read
BrokerEarnings

Major insurance brokers and independent insurance agents reached an earnings milestone during the first quarter of this year, according to Atlanta-based Reagan Consulting.

Profitability, as measured by earnings before interest, taxes, depreciation and amortization (EBITDA), jumped 200 basis points to reach 29.9 percent of revenue during the first quarter of 2014 — up from 27.9 percent during the same period last year, according to producers that were surveyed.

That is the highest margin reported in the six years since Reagan Consulting has been conducting its survey, said Kevin Stipe, president of the firm, which offers management consulting to independent agents and brokers.

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The primary driver of the improvement was a 15.2 percent median jump in contingent income, Reagan reported.

The figures reflect the fact that “insurance carriers really made money last year,” which they shared with top producers in the form of contingent commission, Stipe told Risk & Insurance Magazine.

“Those contingency bonuses are also driven in part in part by agents and brokers meeting their sales goals as well as providing profitable business for the carriers,” he said.

The survey results are based on the responses of roughly 140 mid-size and large agencies and brokerage firms with median revenue of roughly $15 million. About half of the industry’s 100 largest producers participated, Reagan said.

Agents and brokers surveyed were more optimistic about the future as well, projecting that organic commission and fee growth — excluding the impact of merger and acquisition activity — will be 7 percent during 2014, up from 6.1 percent projected by respondents at year-end 2013.

Commercial property and casualty growth was a major driver of performance for the third year running, Reagan said.

Other significant survey findings included:

• Median organic growth — excluding M&As — was 6.2 percent, nearly identical to 6.1 percent in Q1 2013.

• Commercial property and casualty growth led the way for the third consecutive year, with a first quarter growth rate of 8.4 percent — up from last year’s 6.8 percent.

• Benefits growth, at 5 percent, was up significantly from a 3.7 percent growth rate during the first quarter of 2013.

• Privately held brokers continue to grow faster than public brokers, who reported organic growth of just 3.6 percent, on average.

“Private companies tend to grow a little bit faster organically than the public brokers who are inclined to do more acquisitions,” said Stipe.

Not every firm will necessarily see the reported levels of improvement, said Tim Cunningham, managing director with insurance M&A consulting specialist OPTIS Partners in Chicago.

Still, most agents and brokers are experiencing revenue and profit margin growth, he agreed, noting that P&C rates are “broadly up” and, that insurance broker clients have experienced better sales and increasing payrolls.

“The economic climate is markedly better than in the 2008 and 2009 recession years,” he said.

Workers compensation and commercial auto insurance rates are up reflecting deteriorating loss experience, for instance.

“Coastal property capacity and rate continues to be an issue,” he said.  The same is true for many property exposures in the heartland states prone to hail and tornados,” Cunningham observed.

Janet Aschkenasy is a freelance financial writer based in New York. She can be reached at riskletters@lrp.com.
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Space Tourism

Forging into the Final Frontier

The space tourism industry presents substantial excitement and risk.
By: | May 1, 2014 • 8 min read
R5-14p32-34_03Space_RR.indd

Imagine if a flight from London to Sydney took a mere two hours instead of 21. And imagine that on that flight, passengers could experience the same breathtaking views and feeling of weightlessness usually reserved for astronauts. 

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These are the possibilities presented by suborbital space flight, in which an aircraft gets outside of the Earth’s atmosphere, traveling at speeds up to 5,600 miles per hour. At this altitude and speed, an aircraft would follow a parabolic flight pattern, eventually falling back through the atmosphere. By comparison, an aircraft in orbital space would have to maintain speeds of about 17,500 miles per hour at an altitude of at least 190 miles above sea level.

Imagine if the destination were space itself. Or the International Space Station (ISS) or the Russian space station Mir, or even a hotel suspended hundreds of miles above Earth. Private space tourism companies have been working toward launching such flights since the 1980s.

American businessman Dennis Tito became the first private citizen to take a tour of space, doling out a reported $20 million for a ticket to ISS in 2001. Others followed. Space Adventures, a Virginia-based space tourism company, has already flown seven tourists — including Tito — to ISS on eight different occasions.

While frequency of manned spaceflights dropped off in the mid-2000s, research and development has rekindled demand. Paid commercial flights are expected to be launching around the globe beginning as soon as the end of this year.

A New York Times report on space tourism.

NASA and the Federal Aviation Administration (FAA) also have a stake in this industry, as commercial space flights can be used to deliver cargo to space stations. The California-based company SpaceX is contracted with NASA to make 12 cargo resupply trips to ISS through 2016. They completed the first successfully in 2012.

These endeavors could be stalled, though, if space flight providers cannot obtain the right coverage to insure against third-party liability risks and property damage.

Third-Party Liability

The role of insurance in allowing the space tourism industry to grow is “huge,” according to Bill Behan, CEO of AirSure Ltd., an insurance and risk management consulting company for the aviation industry.

“The financing, investment, stability and future of the commercial space industry will depend on a strong and enduring partnership with the insurance industry,” he said.

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The federal government forged that relationship and fostered industry growth with the passage of the Commercial Space Launch Act of 1984 (CSLA). The CSLA provides a framework for the FAA to regulate companies by granting launch licenses as well as indemnifying launch providers from third-party claims. The indemnification provision requires companies to buy insurance coverage for third-party liability claims at a level calculated by the FAA, called the “maximum probable loss.”

Should an accident occur, the government would be liable for losses exceeding that level up to a limit of roughly $2.7 billion, though that limit is adjusted every year for inflation.

The Government Accountability Office (GAO), however, thinks that the FAA’s methodology for calculating maximum probable loss is flawed. Currently, the administration estimates the cost of a single casualty at $3 million, a figure that has not been updated since 1988. In calculating total loss value, the FAA adds 50 percent of the total cost of casualties for a given flight to account for potential property damage.

It arrives at an estimated number of third-party casualties by identifying areas that could be impacted by lethal debris, and then multiplying the size of the area by the probability of damage occurring there and the population density.

Risk modelers consulted for the GAO report “stated that FAA’s method might significantly understate the number of potential casualties, noting that an event that has a less than 1 in 10 million chance of occurring is likely to involve significantly more casualties than predicted under FAA’s approach.”

The FAA’s equation does not always consider details like an aircraft’s flight dynamics or the characteristics of its materials. Nor does it specifically analyze how many properties could be damaged by an event or what the value of that property might be.

If the FAA underestimates maximum probable loss, it means commercial space companies will purchase inadequate levels of insurance, exposing the government to more liability. The GAO recommended that the FAA regularly review its methodology and make amendments to the CSLA to better prepare for potential catastrophe, but so far no changes have been made.

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That could spell big trouble for the space industry, especially with the number of FAA-licensed space launches expected to grow substantially over the next few years. NASA expects to launch at least two cargo resupply trips to ISS per year from 2017 to 2020, and that doesn’t include the stargazing adventures in the works from Virgin Galactic and its competitors. A tragedy not adequately insured could have the potential to wipe out the sector, or at least set it back many years.

Informed Consent

Flight operators also need to worry about the safety of passengers and crew on board.

Companies and state legislatures require passengers to sign informed consent waivers, relieving companies from liability if an accident causes injury or death. But are the waivers strong enough to stand up in court?

“Informed consent is about giving the space flight participant enough technical knowledge to understand and appreciate the risks involved,” said Clive Smith, business unit leader with Aon’s International Space Brokers.

However, given the likely volume of space flight participants in the coming years, it’s safe to say that the protection of informed consent waivers remains to be tested.

There’s also no escaping the fact that a participant willing to pay a for trip to space can afford top lawyers and high legal fees in the event of a serious injury in the course of a flight.

“Stay tuned for creative plaintiffs’ lawyers who will challenge any contractual language laws because of the money involved.”

“Stay tuned for creative plaintiffs’ lawyers who will challenge any contractual language laws because of the money involved,” said Behan.

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The laws could, however, make it easier for space tourism companies to attract insurers.

“Any laws that might protect space companies or manufacturers may facilitate broader terms and lower premiums for liability insurance,” said Esequiel Nathal, an analyst with Charles Taylor Risk Consulting.

Several states have adopted informed consent laws — including New Mexico, Virginia, Texas, Florida, Colorado and California — but they vary in their levels of protection. For instance, most statutes protect only the launch company and not their suppliers or manufacturers.

Esequiel Nathal

Esequiel Nathal, analyst, Charles Taylor Risk Consulting

The lack of loss history in human spaceflight makes it difficult to determine the usefulness of the waivers, a problem that extends to all areas of space tourism.

Insurance and Risk Management

Insuring human spaceflight means navigating through lots of gray area, with little data and lots of faith. For instance, would a hull policy covering a spacecraft be dependent on whether it is bound for orbital or suborbital flight? Does it matter where in airspace an accident occurs? Would coverage fall under the realm of aviation or space flight insurance?

The answer to most of these questions: to be determined. Too few manned spaceflights have been launched and too few accidents have occurred to reveal weak spots in coverage.

“The debate really is whether the risks are covered under the aviation market or the space market, because they’re two different kinds of market although there’s some crossover in terms of the insurers,” Smith said.

“There will be lots of challenges as to whether the space market can pick up the aviation style of cover or whether part of it is placed in the aviation market and part in the space market.”

“This is specialized insurance normally requiring a specialized insurer and broker,” Nathal said. Underwriters must mostly rely on alternate data “in the form of successful private launch of satellites and other forms of transportation and safe operation.”

Luckily, space tourism companies are generally well-funded and can handle the high premiums that intrepid insurers will charge.

“More importantly, it is essential to conduct thorough risk assessments to understand what the risks are, their size and nature, and the best ways to mitigate the risks,” Nathal said.

“Insurance coverage is not a substitute for robust risk mitigation. Remember NASA’s motto: ‘Failure is not an option.’ ”

“Insurance coverage is not a substitute for robust risk mitigation. Remember NASA’s motto: ‘Failure is not an option.’ ”

Risk management includes not only educating passengers on flight risks, but also training them properly. While training for private citizens is nowhere near as rigorous as what astronauts receive, it should still include some time in “g-force” and exposure to a weightless environment. Again, only time and experience will show what level of training is best to ensure safety of passengers and crew alike.

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Sending more manned missions to space opens up a wealth of opportunities for scientific advancement and the development of a brand new industry. But the risks involved are literally sky high.

Moving safely ahead demands innovation, flexibility and cooperation from all involved, from the FAA to launch companies to insurers willing to underwrite the unknowns of the final frontier.

Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at ksiegel@lrp.com.
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Sponsored: Healthcare Solutions

Achieving More Fluid Case Management

Four tenured claims management professionals convene in a roundtable discussion.
By: | June 2, 2014 • 6 min read
SponsoredContent_HealthcSol

Risk management practitioners point to a number of factors that influence the outcome of workers’ compensation claims. But readily identifiable factors shouldn’t necessarily be managed in a box.

To identify and discuss the changing issues influencing workers’ compensation claim outcomes, Risk & Insurance®, in partnership with Duluth, Ga.-based Healthcare Solutions, convened an April roundtable discussion in Philadelphia.

The discussion, moderated by Dan Reynolds, editor-in-chief of Risk & Insurance®, featured participation from four tenured claims management professionals.

This roundtable was ruled by a pragmatic tone, characterized by declarations on solutions that are finding traction on many current workers’ compensation challenges.

The advantages of face-to-face case management visits with injured workers got some of the strongest support at the roundtable.

“What you can assess from somebody’s home environment, their motivation, their attitude, their desire to get well or not get well is easy to do when you are looking at somebody and sitting in their home,” participant Barb Ritz said, a workers’ compensation manager in the office of risk services at the Temple University Health System in Philadelphia.

Telephonic case management gradually replaced face-to-face visits in many organizations, but participants said the pendulum has swung back and face-to-face visits are again more widely valued.

In person visits are beneficial not only in assessing the claimant’s condition and attitude, but also in providing an objective ear to annotate the dialogue between doctors and patients.

RiskAllStars
“Oftentimes, injured workers who go to physician appointments only retain about 20 percent of what the doctor is telling them,” said Jean Chambers, a Lakeland, Fla.-based vice president of clinical services for Bunch CareSolutions. “When you have a nurse accompanying the claimant, the nurse can help educate the injured worker following the appointment and also provide an objective update to the employer on the injured worker’s condition related to the claim.”

“The relationship that the nurse develops with the claimant is very important,” added Christine Curtis, a manager of medical services in the workers’ compensation division of New Cumberland, Pa.-based School Claims Services.

“It’s also great for fraud detection. During a visit the nurse can see symptoms that don’t necessarily match actions, and oftentimes claimants will tell nurses things they shouldn’t if they want their claim to be accepted,” Curtis said.

For these reasons and others, Curtis said that she uses onsite nursing.

Roundtable participant Susan LaBar, a Yardley, Pa.-based risk manager for transportation company Coach USA, said when she first started her job there, she insisted that nurses be placed on all lost-time cases. But that didn’t happen until she convinced management that it would work.

“We did it and the indemnity dollars went down and it more than paid for the nurses,” she said. “That became our model. You have to prove that it works and that takes time, but it does come out at the end of the day,” she said.

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The ultimate outcome

Reducing costs is reason enough for implementing nurse case management, but many say safe return-to-work is the ultimate measure of a good outcome. An aging, heavier worker population plagued by diabetes, hypertension, and orthopedic problems and, in many cases, painkiller abuse is changing the very definition of safe return-to-work.

Roundtable members were unanimous in their belief that offering even the most undemanding forms of modified duty is preferable to having workers at home for extended periods of time.

“Return-to-work is the only way to control the workers’ comp cost. It’s the only way,” said Coach USA’s Susan LaBar.

Unhealthy households, family cultures in which workers’ compensation fraud can be a way of life and physical and mental atrophy are just some of the pitfalls that modified duty and return-to-work in general can help stave off.

“I take employees back in any capacity. So long as they can stand or sit or do something,” Ritz said. “The longer you’re sitting at home, the longer you’re disconnected. The next thing you know you’re isolated and angry with your employer.”

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“Return-to-work is the only way to control the workers’ comp cost. It’s the only way,” said Coach USA’s Susan LaBar.

Whose story is it?

Managing return-to-work and nurse supervision of workers’ compensation cases also play important roles in controlling communication around the case. Return-to-work and modified duty can more quickly break that negative communication chain, roundtable participants said.

There was some disagreement among participants in the area of fraud. Some felt that workers’ compensation fraud is not as prevalent as commonly believed.

On the other hand, Coach USA’s Susan LaBar said that many cases start out with a legitimate injury but become fraudulent through extension.

“I’m talking about a process where claimants drag out the claim, treatment continues and they never come back to work,” she said.

 

Social media, as in all aspects of insurance fraud, is also playing an important role. Roundtable participants said Facebook is the first place they visit when they get a claim. Unbridled posts of personal information have become a rich library for case managers looking for indications of fraud.

“What you can assess from somebody’s home environment, their motivation, their attitude, their desire to get well or not get well is easy to do when you are looking at somebody and sitting in their home,” said participant Barb Ritz.

As daunting as co-morbidities have become, roundtable participants said that data has become a useful tool. Information about tobacco use, weight, diabetes and other complicating factors is now being used by physicians and managed care vendors to educate patients and better manage treatment.

“Education is important after an injury occurs,” said Rich Leonardo, chief sales officer for Healthcare Solutions, who also sat in on the roundtable. “The nurse is not always delivering news the patient wants to hear, so providing education on how the process is going to work is helpful.”

“We’re trying to get people to ‘Know your number’, such as to know what your blood pressure and glucose levels are,” said SCS’s Christine Curtis. “If you have somebody who’s diabetic, hypertensive and overweight, that nurse can talk directly to the injured worker and say, ‘Look, I know this is a sensitive issue, but we want you to get better and we’ll work with you because improving your overall health is important to helping you recover.”

The costs of co-morbidities are pushing case managers to be more frank in patient dialogue. Information about smoking cessation programs and weight loss approaches is now more freely offered.

Managing constant change

Anyone responsible for workers’ compensation knows that medical costs have been rising for years. But medical cost is not the only factor in the case management equation that is in motion.

The pendulum swing between technology and the human touch in treating injured workers is ever in flux. Even within a single program, the decision on when it is best to apply nurse case management varies.

RiskAllStars
“It used to be that every claim went to a nurse and now the industry is more selective,” said Bunch CareSolutions’ Jean Chambers. “However, you have to be careful because sometimes it’s the ones that seem to be a simple injury that can end up being a million dollar claim.”

“Predictive analytics can be used to help organizations flag claims for case management, but the human element will never be replaced,” Leonardo concluded.

This article was produced by Healthcare Solutions and not the Risk & Insurance® editorial team.


Healthcare Solutions serves as a health services company delivering integrated solutions to the property and casualty markets, specializing in workers’ compensation and auto liability/PIP.
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