NAVIGATOR

THE

Spring 2018

The Energy Industry’s ResurgenceCo-Authors:

Russ Stein, ERISBrokerRPS So. Cal.

Over the last decade, the energy industry has encountered some of the most volatile market conditions in its history. Think back to July 2008, where prices swelled to around $160 per barrel, compared to today, where, if not for the recent surge in US production, oil is currently trading around $65 per barrel.

In 2008, with gas prices near record highs, a ripple effect cascaded throughout the US economy. It saw many new oil and energy production companies being started, clocking in record-high payrolls and revenues for companies in their infancy. With this came the expansion of new insurance carriers into the marketplace, all trying to grab their share of energy-related premium.

This sudden influx of markets led to more capacity in the marketplace, which was followed by fierce competition. Carriers started to differentiate themselves by offering broader terms to keep

up with the more expansive MSA (Master Service Agreements), requirements by energy-producing companies. As the price per barrel started declining, premiums and exposures for insureds within the industry decreased, causing carriers to do everything necessary to hold onto their market share. Shortly thereafter, carriers began exiting the marketplace and those that remained continued to expand coverage and offer more aggressive terms and pricing on their insurance policies.

Oil Prices Per Barrel Over the Last 10 Years

Pric

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r Bar

rel

Year

Daniel WardAssoc. BrokerRPS Atlanta

Blake SwearenginArea VPRPS Dallas

Source: macrotrends.net

product. The same example can be used for energy contractors who have a testing or surveying exposure, as there are numerous Excess and Surplus Lines carriers willing to offer General Liability paired with Professional Liability and even pollution coverages all on the same primary form, with dedicated per occurrence limits for each coverage offered.

With the capacity available and sheer number of carriers offering these products, a broker can sometimes even negotiate competitive rates and premiums to rival that of a standard carrier. By expanding coverage and offering comparable pricing, Excess and Surplus Lines markets offering energy-specific products have started to win against standard markets writing within the energy sector.

As oil prices continue to rise and America attempts to assert itself as a self-sufficient energy producer, brokers need to continue to improve their market knowledge and coverage expertise to be able to provide their clients with robust and improved insurance packages. Not only will this mitigate against future claims, it will also allow the insured to enter into larger and more lucrative contracts with the marquee companies such as Halliburton, Total, British Petroleum, Exxon and Kinder Morgan. The coming increase in exposures for companies within the energy industry needs to be recognized and brokers need to start preparing themselves and their clients for the potential gaps that may be uncovered if their current packages aren’t retooled and revamped. With the US currently producing over 10 million barrels of oil per day, the highest production since the 1970s, and prices nudging the $70 per barrel mark, the energy industry looks to be doing everything it can to wake from its slumber. Insurance packages need to adapt and adjust accordingly to provide an optimal solution for each client.

It is no secret that over the course of oil’s downturn, many companies within the industry found themselves cash-strapped due to the vast fluctuation of their annual revenues. With oil prices swinging from almost $160 per barrel to nearly $30 per barrel over the course of eight or so years, business owners were thinking about how to survive and turn a profit, rather than improve and even maintain their current insurance programs. Extra capital that was once available and used to broaden insurance coverages and purchase higher limits was gone, and companies scaled back their insurance programs accordingly.

Fast forward to today’s market. Oil prices continue to climb while companies are starting to see revenues increase. As retailers begin to work through their renewals and prospect new business, they must be cognizant of coverage deficiencies within current packages, which more than likely reflect a time when revenues were dwindling and robust insurance programs were trimmed in order to save money and keep businesses afloat. By constantly reviewing a current client’s coverage as well as offering to analyze a prospect’s policies, astute agents will find themselves adding value to transactions and providing services some of their competitors may not be. Coverage comparison templates and program structure graphics are just some ways to go above and beyond for your insureds, while also showing them the specifically tailored coverages available in the current marketplace, which they may not be getting in their current policies. The insurance landscape has changed over the eight year downfall and resurgence of oil, and clients need to be briefed on the changes taking place.

As the insurance market looks to stay soft for the predictable future, standard carriers have made a push to jump into the Energy industry by offering competitively-priced, primary package options, along with supported Excess limits. Coupled with the fact that Auto Liability continues to be a pain point for most brokers and carriers offering monoline Auto Liability continue to pull out of the sector, standard market package products become that much more attractive to insureds and brokers alike. While these products are cost effective and may meet some contractual obligation and MSA requirements, not all standard carrier package products can offer the necessary coverages an insured needs to truly mitigate against potential claims. Coverages like Contractors Pollution Liability on an Occurrence coverage trigger, Products Pollution coverage, Gulf of Mexico coverage territory amendments or Additional Insured endorsements for ongoing and completed operations without sole negligence wording are just some of the nuances that brokers need to be aware of as they review current clients’ packages and prospect future business.

Armed with expertise and knowledge of these specific coverage enhancements, a broker in today’s marketplace can significantly improve the General Liability and Excess Liability coverage offered by a standard market carrier, as most do not have the ability to offer a combined form General Liability and Pollution

Takeaway: Incidents are on the rise. Even the best network security defenses cannot stop human error 100% of the time. Clients need a 360-degree approach to managing this risk that includes Cyber risk insurance.

Trend 2: Ransomware is Everywhere and it is Often Indiscriminate of Industry

Surely you have insureds who feel that their small business doesn’t have enough high value information to warrant being a target for cyber criminals. They don’t take credit cards, don’t have a significant web presence and don’t house what they deem to be enough personally identifiable information to justify purchasing Cyber insurance. Ransomware has changed the threat landscape significantly and it often doesn’t care about the information your clients have, it just assumes they rely on their networks to do business and will pay to access their data once it has been encrypted.

2018 promises to see increases in ransomware activity and we at RPS are witnessing this every week with new incidents being reported by insureds. While mass-scale ransomware attacks can indeed be indiscriminate of industry, if your insured houses high-value medical, legal or financial data, there should also be concerns as we have seen an increase in more sophisticated, targeted attacks as well. In 2017, one of our insureds, a small municipality, experienced a targeted attack on systems housing their judicial records. What’s more, the attack also found its way to their backup, encrypting highly valuable information affecting active court cases. This insured needed expertise fast to mitigate the financial, operational and reputational damage that would ensue. Their Cyber insurance policy provided these critical resources in a timely manner.

Why Cyber Insurance Matters: A Look at 2018 TrendsBy Steve RobinsonArea PresidentRPS Technology & Cyber

Trend 1: 2017 Was the “Worst Year on Record” With Over 5,200 Breaches Exposing 7.8 Billion Records

This, according to the “Data Breach QuickView Report” published at year-end by RiskBased Security, and sponsored by RPS. If your clients have been sitting on the sidelines waiting to incorporate a Cyber risk insurance package into their risk management strategy, numbers like this should be particularly alarming. The number of reported breaches was up more than 24% over 2016 and the number of exposed records increased by a similar percentage. While the high-profile hacks capture the headlines (and represented the leading cause of breaches in 2017), it was the inadvertent online disclosure of information that represented the leading cause of records compromised.

Takeaway: Your client might not be a high-profile target, but everyone is now a target. Having the right resources and response team aligned ahead of time can mean the difference between inconvenience and insolvency. Cyber risk insurance provides these resources by way of a pre-selected panel of experts at the ready, when incidents such as these cannot be prevented.

Trend 3: Regulatory Requirements Continue to Evolve

As the definition of “Personally Identifiable Information” expands, so do your client’s responsibilities. The GDPR (General Data Protection Regulation) rules will go into effect May 25th, 2018. These rules govern how U.S. businesses collect, use and share data from European citizens. While many U.S. small businesses may not see this bring significant changes to how they operate, it is the broader conversation surrounding data security requirements, the handling of customer data, and, perhaps as importantly, what is considered private information, that will have real impacts on insureds. Multiple states in the US have already expanded their definition of “Personal Information” and other states are implementing or deliberating similar changes.

Takeaway: More and more information that your insureds collect is now considered “private.” Laws are changing rapidly and they are imposing more responsibilities on the holders of this information. The responsibilities (and associated expenses) your clients assume when this information gets into the wrong hands is expanding significantly. Cyber risk insurance provides legal assistance and breach response resources to help your clients navigate the complex and constantly changing regulatory landscape surrounding information security.

When discussing this important coverage with your clients, you no longer have to rely on what-ifs and breach scenarios affecting large public companies to which your insureds cannot relate as the frequency of claims for small and medium-sized businesses is increasing. The Cyber risk insurance discussion should be a two-way conversation incorporated into every renewal at your agency.

Testing the Waters: Insurance Brokerage and Blockchain By Max NardSolutions SpecialistRPS E-Commerce

Mutually distributed ledger technology, more commonly known as blockchain, offers an immense value proposition to the insurance industry. Perhaps the most famous iteration of blockchain is Bitcoin. Known mostly for its role in illicit transactions and in the Cyber Liability space for its ubiquitous use as payment in ransomware attacks, Bitcoin’s rapid price growth has brought blockchain to the mainstream. What blockchain technology offers is immutability in cyberspace, and RPS E-Commerce stands uniquely positioned to take advantage of its innovations.

Think of blockchain technology as a perfect timestamp for any piece of digital information. Beneath the nuances of its cryptographic functions, blockchain is essentially a system that can guarantee this happened then. For Bitcoin, a digital currency, its blockchain is able to guarantee that a payment happened at the time the owner pressed send.

Now, a global scramble has begun to find use cases for this technology. San Francisco based Ripple Labs, Inc. has created a blockchain designed to facilitate interbank monetary transfers; Omise, a payment processor moving billions of dollars across southeast Asia, has turned to blockchain to facilitate the process; and the Chinese government has begun sponsoring blockchain ventures in an attempt to disrupt the supply chain logistics industry. Insurance brokerage is no exception.

Great benefits stand to be reaped from the adoption of blockchain. Where multiple parties share data, where multiple parties need to update data, where verification is a requirement, where interactions are time sensitive, or where transactions created by different participants depend on each other, blockchain

technology stands to serve a purpose. Consider the submission process. Information in the form of quotations, applications, affidavits, and endorsements must travel from the insured, to retail broker, to RPS, to underwriter, and back down the line. Traditionally, these transactions take the form of a pdf attached to an email, and in some cases paper documents are still mailed. A chance for error exists in every exchange, the wrong affidavits or subjectivities may be sent, an email might be forwarded to the wrong address, or a policy can get lost in the mail. These errors create overhead in the form of time wasted, money lost, and relationships damaged. The promise of blockchain is to eliminate this overhead. Instead of files being transferred from owner to owner, all contract documents can be preserved on one ledger, accessible by participants of the transaction. This would ensure that files remain consistent across multiple modifications, as documents and their history are both visible and verified.

This is just one potential use-case for blockchain in our industry, but adoption remains in the experimental stage and progress faces a myriad of obstacles. Perhaps the biggest problem is simply institutional inertia. Here, RPS E-Commerce finds a unique opportunity. For several years now, this department has been challenging both carriers and itself to rethink insurance, and has been attempting to increase efficiency and reduce overhead in a process that has remained largely unchanged. Overcoming this key obstacle is vital in an industry frequently skeptical of change.

The E-Commerce platform checks all the boxes for potential use cases. In an online platform allowing retail and wholesale producers access to instant, bindable quotes, data must be shared and contingently updated across multiple parties, and above all speed is the name of the game. We are rapidly approaching the moment where adoption of blockchain technology is a real possibility. In an effort to stay ahead of the curve, RPS E-Commerce will certainly be keeping a close eye on the development of potential blockchain solutions.

Transportation and the Misunderstood MCS-90 Endorsement By Kyle RickettsUnderwriter/BrokerRPS Transportation

The MCS-90 endorsement is a very complicated and confusing endorsement with many interpretations that has been repeatedly litigated for over 20 years. It would take a novel to address every item related to the endorsement and its challenges, but I will address some of the common issues that we see on a day to day basis.

One of the most common questions that arises is in regards to the removal of units from a policy or quote. This topic usually comes up when we get a request to remove a vehicle from the policy or quote without a bill of sale or lease termination. When the insurance provider will not allow the removal of the unit without a bill of sale or lease termination, it causes confusion for the agent and insured. The typical question is “why does he need to pay for coverage when he isn’t even using it?” So why do insurance companies have such big concerns regarding this scenario? What is the big deal with the MCS-90 endorsement?

To answer that, we need to go back to the late 1970s. The trucking industry was deregulated by the Federal Government and that created some concerns due to non-conformance with trucking regulations. After brief DOT study and a result of congressional debate, congress passed the Motor Carrier Act of 1980.

So what does that mean? The Motor Carrier Act of 1980 imposed a higher level of financial responsibility on motor carriers operating under federal permit and intrastate carriers operating under state authority. In order to enforce compliance with the Motor Carrier Act of 1980’s mandated levels of financial responsibility, Congress created the MCS-90 endorsement. The Motor Carrier Act of 1980 requires the MCS-90 endorsement be attached to any liability policy issued to a motor carrier operating in interstate or intrastate commerce as well as foreign commerce. The levels of financial responsibility are as follows:

1. For-hire (in interstate or foreign commerce, with a grossvehicle weight rating of 10,000 or more pounds)transporting non-hazardous property - $750,000

2. For-hire and private (in interstate, foreign, or intrastatecommerce, with a gross vehicle weight rating of 10,000or more pounds) transporting hazardous substances asdefined in 49 CFR 171.8, transported in cargo tanks, orhopper-type vehicles with capacities in excess of 3,500water gallons - $5,000,000

Special thanks to Tommy Ruke from the Motor Carrier Insurance Education Foundation (MCIEF) for providing education and up to date information to the transpor-tation insurance community. RPS is a proud partner of the MCIEF.

3. For-hire and private (in interstate or foreign commerce:in any quantity, or in intrastate commerce, in bulk only;with a gross vehicle weight rating of 10,000 pounds)– transporting oil listed in 49 CFR 172.101; hazardouswaste, hazardous materials, and hazardous substancesdefined in 49 CFR 171.8 and listed in 49 CFR172.101, but not mentioned in (2) above or (4) below- $1,000,000.

4. For-hire and private (in interstate or foreign commerce, witha gross vehicle wheel rating of less than 10,000 pounds)Any quantity of Division 1.1, 1.2, or 1.3 material; anyquantity of Division 2.3, Hazard Zone A, or Division 6.1,Packing Group I, Hazard Zone A material; of highwayroute controlled quantities of Class 7 material as definedin 49 CFR 173.403 - $5,000,000.

The purpose of the endorsement is to ensure adequate levels of insurance coverage in the event of a trucking accident involving a member of the public or the environment. The endorsement attached to the policy basically makes a promise to the public that the claim will be paid. The FMCSA (Federal Motor Carrier Safety Administration) doesn’t care who pays the claim, just as long as someone pays. The MCS-90 endorsement only comes into play when someone is forced to pay.

So why would an insurance company be concerned about the removal of power units from a policy without bills of sale or lease terminations? The wording in the MCS-90 endorsement answers that question. “In consideration of the premium stated in the policy to which this endorsement is attached, the insurer (the company) agrees to pay, within the limits of liability described herein, any final judgement recovered against the insured for public liability resulting from negligence in the operation, maintenance or use of motor vehicles subject to the financial responsibility requirements of Sections 29 and 30 of the Motor Carrier Act of 1980 regardless of weather or not each motor vehicle is specifically described in the policy and weather or not such negligence occurs on any route or in any territory authorized to be served by the insured or elsewhere.”

The wording “regardless of whether or not each motor vehicle is specifically described in the policy” basically opens up the insurance company to pay claims involving equipment operated by the motor carrier regardless if the unit is scheduled on the policy or not. Like I mentioned before, the FMCSA doesn’t care who pays, as long as someone pays.

Since insurance companies will be responsible for any actions of the insured whether or not the units are scheduled, they want to be sure they are collecting premiums and are accounting for all owned and operated units. Only through legal documents such as bills of sale or lease terminations will most carriers allow the removal of power units from a policy or quote.

Keep in mind this endorsement is not considered coverage and

only comes into play when there is no coverage in place or when the motor carrier is forced to pay the claim. In order to become a for-hire motor carrier with your own MC number, the FMCSA requires that you make a promise to the public that all owned and operated equipment will be insured with Primary Auto Liability. This applies to owned units and owner operator units. When the insured purchases a policy, the coverage listed is what pays the claim. However, the MCS-90 endorsement modifies the policy and makes a promise to the public that the claim will be paid. The BMC 91X filing states that a MCS-90 or similar endorsement is attached to the policy that the filing was based on.

This endorsement also pertains to environmental damage that may occur when the underlying policy does not provide coverage for pollution caused by cargo. In most cases the carrier will be forced to pay this claim. However, the MCS-90 contains a subrogation clause that states “the insured agrees to reimburse the company for any payment made by the company on account of any accident, claim or suit involving a breach of the terms of said policy and for any payment that the company would not have been obligated to make under the provisions of the policy except for the agreement contained in the endorsement.” Basically, if the motor carrier is sued and loses, the insurance carrier is forced to pay the claim. The motor carrier (insured) must then pay back the insurance carrier who paid the claim. This is the promise to the public.

Coverages for Growing Religious Institutions: A PrimerBy Jason Diffner Senior Underwriter RPS PNP

The religious institution niche typically includes churches, synagogues, religious-based private schools, and other various religious-based organizations. The smaller of these organizations face a common challenge: risk management and insurance are typically not high on their priority list. In addition, they do not have the resources to assign a team member to give these business matters the robust attention they deserve.

Religious institutions like these that are also growing or expanding their services face an additional challenge in that they often take on new, uncovered exposures without fully realizing it. It is incumbent upon retailers who serve these organizations to recognize that their de facto risk management role is much more critical as they need to be aggressively proactive in addressing any coverage gaps.

Let’s take a look at a typical small church exposure and imagine how its evolution might impact its insurance needs. The church is going to start off with basic Property and General Liability at a minimum. Even churches renting their facilities are going to have a small amount of business personal property that will need coverage.

Small churches watching every penny are often reluctant to buy what they feel are extra coverages, hoping their smallness will help them elude such losses. But even small churches should be encouraged to incorporate Abuse coverage into their policies.

While the staff and congregation might feel like they all know each other, they are probably not taking into consideration scenarios such as hiring an intern for six months, for example.

As a church grows its staff is going to grow and its insurance needs will evolve. Assuming there is an employee benefits plan in place, and because a small church typically doesn’t have dedicated staff paying attention to these business details, it is at higher risk for a benefits administration mistake. Does the church have Employment Benefits Liability? Do all those new staff members running errands for the church really want to have that exposure on their personal Auto policies? It’s probably time this church considers Hired & Non-owned Auto as well. And sadly, in this day and age, we hear about public shootings and other violent events with increasing frequency. Does the package being offered to the church include the option of Crisis Management Expense coverage?

Several years later this growing church starts its own private school. Is their current Liability policy able to cover this new exposure? While the church may have already had a D&O/EPLI policy, those typically do not address the unique exposures of a school that an Educators Management Policy would cover. Will this now medium-sized church open a homeless shelter or crisis counseling ministry? Do they have ready access to the Professional Liability coverage that is needed?

We could go on with additional examples of important coverages such as Cyber Liability, Workers’ Compensation, Business Auto, and Excess Liability. The point, however, is the same–a growing religious institution’s exposure will be more dependent than many other segments on its insurance professional to guide them as they expand.

Agribusiness Update: Unique Needs for an Evolving SegmentBy Kim Mayer Senior Underwriter RPS Eau Claire

Today’s Farm and Equine accounts present unique challenges due to the personal and commercial exposures present in each one. As a result, many retail agents choose to specialize exclusively in the Farm and Equine market segment in order to project their expertise to the client. It’s important for a retail agent to know the terminology associated with the industry as insureds can spot a city slicker a mile away. Farmers and ranchers want to work with individuals who understand the specific needs of their market segment from an insurance perspective, but who are also familiar with and respect the rural lifestyle. That said, even though farmers and ranchers live in rural areas, many have embraced cutting-edge technology and are entrepreneurs seeking to expand their operations through creative “agritainment” activities. Let’s take a look at some of this segment’s unique coverage challenges.

Technological advances in farming equipment have become important, as insurance professionals need to make sure they are providing proper levels of coverage. Farmers now have GPS systems, self-steer capabilities, yield monitors, moisture sensors, and other high-tech devices on their equipment. Drones are being used by large farm and farm management companies to monitor crops and farmland. All of these new electronic devices create exposures that need to be addressed when writing a Farm policy.

Additionally, these advances have driven up the cost of equipment. A large combine can cost upward of $550,000 today, whereas it may have been in the $250,000-$300,000 range a decade ago. It is important to be sure the policy covers foreign objects/ingestion losses as these are very expensive to repair.

Changes have come to the small dairy market, which has diminished in some areas of the country due to smaller dairy farms selling to larger commercial dairy parlors or going out of business altogether. Some dairy farmers have sold the cows and are now strictly doing row crop farming, as the rate of return has been very favorable over the last few years for crop farmers.

As a result of these shifts in the Ag market, many farms are choosing to diversify their businesses by adding additional activities to their farm to generate supplemental income. Doing so typically brings customers on site, which increases their Liability exposures. Examples include bed and breakfasts, retail stores, agribusiness tours, pumpkin patches, corn mazes, petting zoos, or leasing land out for recreational activities. Many farm and ranch insurers are not comfortable with these additional exposures, and in fact, exclude them completely from the policy. These coverage gaps can be addressed with a separate policy from another specialty market.

Farm co-ops are becoming prevalent in some areas. One type is where individuals can buy into a farm to share in the produce that is harvested. For example, twice a week each member of the co-op receives an equal share of the harvest delivered to them. Another type of co-op offers more hands-on experience where members can actually participate in planting, weeding, fertilizing and harvesting the crop.

One suggestion regarding loss control is in relation to recreational vehicles. Many very nice farm accounts have incurred claims from recreational-use vehicles (i.e. boats, snowmobiles, ATVs), making it difficult to obtain Farm coverage. Insuring recreational use vehicles on a Farm policy may not be in the best interest of the insured. An alternative is to write a mono-line policy to cover the recreational use vehicles. Then, if there is a claim with that boat, snowmobile, or ATV, it won’t adversely affect the pricing or coverage option for the Farm policy. Unfortunately, we have seen claims where a personal recreational vehicle has threatened an account’s insurability which, in turn, can jeopardize their business and livelihood.

Equine activities and their varied functions pose unique liability exposures which need specially designed products. Protection for commercial stable activities is vital for stable owners, trainers, instructors and others in the equine business.

There has been a trend toward owners offering horse training, giving riding lessons, providing therapeutic and handicapped riding to clients, as well as offering massage therapy to the horse itself. Additionally, values on certain horses can be substantial depending on their breed and skills, and therefore an Equine Mortality policy including major medical coverage should be discussed with the insured. Also, there may be care, custody and control exposures for non-owned horses if boarding, instruction or training are taking place.

Another growing market segment in the Ag arena is wineries. From boutiques to big-name estate wineries, it is important to have protection for every stage of the winemaking process from grapes to glass. Small wineries are popping up across the country, not just in California. Some of these smaller wineries may be supplementing their income with additional special event exposures such as weddings, corporate gatherings and hands on participation in wine-making.

It is important to work with experts in the Farm and Ranch market segment. The combination of business and personal exposure along with the vast scope of many operations can be tricky to navigate for even the most seasoned professional.

Title and Escrow Agents Wire Transfer Fraud: A Billion Dollar SchemeBy Adrienne Woodhull Area President RPS Plus Companies

It doesn’t matter the size of the agency when it comes to Title and Escrow Agents wire transfer fraud. Small, medium or large, fraudsters find their way into transactions. According to an FBI press release in 2017, over $5 billion dollars have been stolen in the past five years. Anyone related to a real estate transaction, from the buyer, real estate agent, lawyer, title agent or seller, is an entrance point. The scheme that most closely relates to title agents is email compromise.

In email compromise, a fraudster gains access to an email and is then able to change the transfer information with ease. They follow a transaction from the beginning to understand the players involved. They will then change where the wire transfer should go at the last minute, making the email appear to come from the same person that originally sent the instructions. Unfortunately not every single scheme is the same as the perpetrators know they need to change tactics regularly in order to continue to gain access. Most recently, I’ve see email compromise happen more to the buyer than to our insureds.

Coverage for this type of exposure varies by company. It can be covered under Crime, Cyber and in some cases under Errors & Omissions. For this type of transaction, retailers need to make sure that the coverage will cover the client’s money while it is in your insured’s care.

The best way to protect your clients is to follow some simple guidelines:

1. Make sure that your clients are educated regarding the different ways that fraudsters are gaining access to their systems.

2. Ensure that every transaction done via email is followed up by a phone call to confirm the instructions.

3. Before every wire transfer, have two authorized employees approve the transaction.

4. If it doesn’t seem right, question it.

If, despite best efforts, your clients fall victim to wire transfer fraud, they must notify all parties involved immediately.

State of the Property Market: 1st Quarter 2018By James Rozzi, CPCU, ASLIArea Executive Vice PresidentRPS San Francisco

Welcome to 2018! It has been an interesting but good start to the year and I hope it’s off to the races for all of you.

Since Q4 of 2017, we have all been trying to figure out if a hard market is coming or how the market would transition after 16 straight quarters of double-digit rate reductions in almost every major asset class in the E&S property insurance space. After the first three months of 2018, I don’t think we are any closer to figuring out the market direction then we were right after Hurricanes Harvey, Irma, and Maria (HIM) wreaked havoc in the Gulf Coast and Caribbean. The best analogy I can come up with today is that we are in our own little insurance purgatory, and depending on what side of the equation you are on, the outlook isn’t all roses and butterflies. Some clients are seeing massive increases as a result of bad loss experience or the type of business they are in (i.e. multi-family apartment owners). Some carriers are pushing for rate using a more broad-brush approach and finding that they are not getting the rate they so desperately say they need. As a result, they are losing good business and maintaining a book of bad business.

Some are calling this market a slow transitioning market, while others are indicating that it is a sign of the future in that a truly hard market (like what we saw after Katrina, Rita, and Wilma) that causes a capital drain may be unlikely regardless of the

circumstances. I, for one, find the market very frustrating because of the inconsistency it is bringing to clients and carriers alike. With all the data and technology we have at our fingertips, the market is truly disorganized and the models we are using seem to be a day late and a few dollars short of what the industry really needs to better price risk at effective levels. Whether you are on Main Street or Wall Street, everyone knows businesses need to make a profit to survive and stay in business. The insurance industry is struggling to make a profit on high risk, CAT exposed, E&S business. There is a lot of finger pointing these days, but the fact of the matter is that carriers continue to support and utilize ILS vehicles, master insurance programs, and MGAs that supplement capacity shortfalls and hold pricing down. Over the last few years, we’ve consistently seen an approach that reminds me of commercial fish trawling. Carriers have cast out large nets using various distribution vehicles and are scraping the bottom to pick up whatever they can to grow the top line. Carriers want to blame clients for their lack of relationship when a client leaves, but I think they are forgetting that their clients, the insureds, are running businesses of their own. Finding the most effective way to transfer their risk is smart business. I do think it is important for insureds to be pragmatic and recognize the fair trade of claims payment and premium increases, but the carriers need to remind themselves that they can’t say one thing and do another. Partnerships that last a long time are not formed out of convenience but rather by choice and through commitment. Of late, it seems that in our business, people are talking about partnerships because it is convenient and not recognizing that partnerships need to be a two-way street.

As we move forward through the rest of 2018, I think the

market will correct itself but very slowly and rather inconsistently. 2017 will go on record as the costliest insurance year ever. It was marked by $150B+ worth of global insured losses that were largely made up of the following:

• Colorado hail storms• Texas hail storms• Louisiana flood losses• California wildfires• California mudslides• Hurricane Harvey• Hurricane Irma• Hurricane Maria• Mexico earthquakes• Cyclone Debbie in Australia • Southeast Asia typhoons

I am sure I have missed a few market events but no matter how you slice and dice it, 2017 was a very bad year for insurance carriers. All of them are reeling from the above events and trying to find the right path forward. Lloyds in particular seems to be among the capacity channels that have been hit the hardest. As a result of poor underwriting results, some major players—Argo and Markel to name two—have closed down their North American operations in London and will focus on alternate distribution channels stateside. Other Lloyds syndicates and some domestic markets are withdrawing from certain asset classes and pulling back their books of business in order to right the ship. What is unique about this market is that the events of 2017 should have caused a hard market. Carriers should have been able to get the 20% rate increases they need on their books across the board in order to bolster their underwriting results and start banking money for future years, but the market has not yielded these kinds of across-the-board rate increases and a lot of people are wondering why. The easy and simple answer that I alluded to above is capacity. Below are a few rhetorical questions that I think sum up some of the problems facing the disconnect between carriers and customers in our business today (many of the below are questions I have actually asked carriers over the past few months and I still haven’t received sensible answers).

1. If your Hab book is underperforming and you want double-digit rate increases and better terms on Hab, why would you continue to give your capacity away to programs like REAPA, Quantum, CIBA, PRIMA, etc.?

2. If you are frustrated with CA EQ pricing and the fact that the CA DIC Market continues to be very competitive, then why would you supplement CA DIC MGA’s with capacity and capital on the binding side that your brokerage operation could use at a higher rate of return?

3. If you want to see Hospitality business in the Gulf achieve rates that better line up with CAT modeling, then why would you continue to write Resort Hospitality Association which has been a loss leader for three years straight?

As mentioned, these are rhetorical questions that don’t really need to be answered but certainly make you think that there must be some fundamental flaw in our business that mirrors the debt crisis in 2008. If you take a bunch of bad business that is under-priced and under-performing and then consolidate it all into a “program” then all you have is a program loaded with bad business and sub-market rates. Yes, you may have a massive pot of premium but thinking that bad business at bad rates in a program paying lots of premium will generate a good result is pure naiveté. Carriers also shouldn’t be surprised when their open market renewal paying a healthy rate doesn’t get renewed because the entire risk went into one of these programs. One would have to be ignorant or clueless if you really thought consumers would pay more for the same product time and time again because of some made-up level of loyalty. If you are a carrier and you want the market to change, stop writing programs that are costing you business written at a higher margin that ends up back on your book at a lower price under a different program name. The debt crisis occurred because home prices stopped going up and banks suddenly realized they purchased large blocks of sub-prime debt all pooled together to make the dollars look more attractive. Doesn’t that seem a bit too familiar with the way some of these large national programs and MGAs are run in the insurance world today? Don’t get me wrong, there are lots of great programs and great MGAs that operate in our business in a positive and realistic way. If they all disappeared, the industry would be short the entrepreneurial and forward-thinking approach that makes our business unique and ever-changing. I do think carriers need to be more disciplined and take a hard look at the various ways they are deploying capital to write risk and stop the fish trawling approach. When I talk to our customers about what they want, the first thing they all say is consistency—but the only thing we have right now are consistent bad business decisions that have created a market in flux built on relationships of convenience.

To narrow it down a bit, the market has certainly firmed and there is no denying that fact. Flat renewals are the new rate reduction and even though it is not the hard market carriers dreamed of, it is also not the buyers’ market that characterized the last five years. The market seems to be getting more realistic with itself and with changes that need to happen on certain types of business for carriers to afford to operate in certain spaces and geographies. Multi-family has been hit hardest by this market. Greystar, with over 400,000 units under management, sent out letters to various property owners prepping them for up to 100% rate increases. You could look at this two ways, both of which are likely true. One, Greystar is one of those large programs whose rates are below market and two, the market in Hab is in fact hardening because renewal retentions in the program were strong despite the level of increase some clients took. On my own business, I have seen clean Hab renew flat to 25% up and Hab with claims renew 10% to 40% up. By and large, carriers have

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pulled back in the Hab market and rate increases, larger W/H deductibles, and tighter terms and conditions have become all the new norm.

The next asset class affected the most severely has been the hospitality sector. This has been primarily driven by the fact that HIM (Hurricanes Harvey, Irma, and Maria) played a significant role in the losses that hit the hospitality sector. Average rate increases on hospitality seems to be 5% to 10% on clean accounts and 10% to 25% on loss-driven risks. Outside of apartment and hotel risks, the market is flat to 10% up depending on the geography of the risk. In general, business on the West Coast (CA, OR, WA, NV, UT, AZ) seems be relatively flat with the exception of CA EQ driven risks that have been negatively effected by the new RMS 17 model. In some cases, older masonry structures have caused PMLs to spike 100%+ and have caused some headaches for what used to be relatively easy long term DIC renewals in the CA EQ market. Business in the Midwest is 5% to 10% up and the major change we are seeing in places like CO, TX, OK, NE is that carriers are mandating percentage wind and hail deductibles or they will simply not write the business. The Gulf Coast and Southeast are being hit a bit harder and average rate increases have been around 10%, which is primarily driven by the need to get back some of the CAT rate that was lost the last few years.

If I had a crystal ball I would say that we should all be prepared for 5% to 10% rate increases on quality risks that have not been abusers of partnerships created through convenience. What I mean by that is that if you have been a trusted client of a similar panel of insurance carriers for the last few years, then be prepared to give back some of the rate you have gotten from them when buying conditions were better. If you don’t fit that mold, and you have had some adverse claims, be prepared for 10% to 20%+ depending on the nature of the claims and your asset class makeup. All things being considered, I do expect the loss figures from 2017’s major events to continue to trickle in and negatively impact major E&S carriers. I think the market will continue to slowly firm through much of 2018 and perhaps even a bit into 2019. Another major CAT year in 2018 could further drive the market in a direction that raises rates even quicker. When all is said and done, you don’t need a crystal ball to know that you can’t lose money forever and not go broke. My advice in this market is more or less the same as what it has been in the past and that is to communicate expectations early and honestly with your costumers and as things get tougher, remind your customers the value you bring to the table. Do your best to not form partnerships out of convenience because partnerships built through commitment will yield better results for all involved and will endure all sorts of market conditions.