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Dr. Jack Nordhaus – News of the Day

Latest insurance industry news, with commentary.

NEWS OF THE DAY April 18, 2014

Jack Nordhaus Jack Nordhaus , 4/18/2014
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“We make a living by what we get, but we make a life by what we give.”

Winston Churchill



 Insurance Journal

By Andrew G. Simpson 

 April 16, 2014

The middle-aged white woman told the audience of mostly older white male businessowners that much of the country and many of their future customers don’t look like them or necessarily share all their values.

While whites make up 64% of the U.S. population today, by 2041 whites will be a minority in the country, [REALITY CHECK] multicultural marketing expert Kelly McDonald told agents at the recent legislative conference of the Independent Insurance Agents and Brokers of America (Big “I”) in Washington.

The numbers of minorities and women owners in the agency system are low. The 2010 Big “I” Agency Universe Study found that the number of agencies with principals who are women, Hispanic and/or African-American had increased since 2008. The proportion of independent agencies with African-American principals grew from 1% in 2008 to just over 4% in 2010.
There has been more progress for women. More than a third of new small and medium small agencies have women as principals, according to the Big “I.” New agencies appear to be the main driver of this change, according to Quincy Branch, chairman of the Independent Insurance Agents & Brokers of America’s National Young Agents Committee, writing for Insurance Journal recently.

But McDonald was not in Washington to lecture agents on increasing minority ownership. She was there to help them learn to market to diverse populations so that they have an agency fit for the future.

Communities, customers and the workforce are changing and independent agents need to know this and lead, she said in her presentation titled, “How to Market to People NOT Like You.”

“You will have minority customers,” McDonald said.

She said America is “no longer homogenized.”

“We are no longer a melting pot, we are a salad,” she said. “The tomato doesn’t look like the radish.”

McDonald, president of New Mexico-based McDonald Marketing, works with IIABA and its Diversity Task Force that is trying to increase diversity within the agency ranks and improve agencies’ capacity to serve diverse populations.

McDonald had plenty of figures at her fingertips to drive home her point that America has changed and will continue to change:

One in three Americans is not white, although this varies by state. Four states and the District of           Columbia have majority minority populations and across every major market, the majority child               population is non-white.

The country’s multi-racial population is growing three times faster than the overall population

The biggest shift is the “browning” of America—the rise of Hispanic population.

One in six Americans is Hispanic, and one in four children is Hispanic.

Even rural areas are growing in their diversity.

“These are your future customers and workers,” she said.

 Generation Y’s Values

In addition to recognizing that America is changing color, agencies need to learn to understand the younger generation — Generation Y or Millennials (born between 1982 and 2004).

Agents might want to start by bringing some young people into the agency business, suggested Tom Minkler, Big “I” chairman. Minkler said the independent insurance agency force is one of the oldest industries in the country. “Look around,” he told attendees. “Fifty % of people in the system will not be here in five to seven years.”

The younger generation has different attitudes about family and marriage than the older agents may, according to McDonald.

We need to redefine family,” McDonald said, noting that Generation Y has been raised by a variety of different families including unmarried parents, divorced parents, single parents, gay parents and grandparents.

“They value parenthood over marriage,” she said.

“It’s not just Hollywood liberals either,” she said, citing Sarah Palin’s pregnant unwed daughter Bristol as an example.

Implications for Agents

As America changes so does the customer base for agencies. So how should agents relate to their new customers?

For one, McDonald said agencies should know there will be more women owning businesses. Women are more about customer service than men and they tend to place trust in other women, she said.

As for members of the younger generation, they don’t need more information—they can get that on the Internet, according to McDonald. “But they will want advice, guidance, counsel,” she said.

“Helping beats selling” when it comes to appealing to Generation Y, she said.

How the younger generation builds relationships is different “but they still believe in relationships,” said McDonald. Agents have always valued face-to-face contact whereas younger people prefer to use social media to build relationships.

Millennial’s relationships regarding family are different. Younger people define family more broadly and they expect their insurance policies to do this as well, McDonald said.

In terms of recruiting, the younger generation likes cities and likes a progressive work environment. They like “green and community values” in the businesses they patronize — which she said is a reason they should also like independent agencies that are involved in their communities.

Regarding marketing, customers respond to images that look like them, she said, pointing out that 40% of 18 to 35 year-olds have multiple tattoos. [A TELLING STATISTIC]

Minkler reminded agents how much of today’s insurance shopping experience takes place online as opposed to in the agency or over the phone.

Minkler said 75 % of Personal Lines buyers started their purchase online. Online shopping is the “new normal,” he said. [CYBERGENERATION]

He said online shoppers like “customization and choice” —which he said is exactly what independent agents have to offer. “That is the independent agent’s value proposition,” Minkler said.

However, individual agencies can’t conquer the internet alone; to do so requires a collective approach, Minkler said, putting in a plug for the updated website that provides customers with comparative quotes and agencies with leads.

The independent agency force has about 30% of the Personal Lies market, which means there is 70 % out there for agents to get, Minkler told the Big “I” crowd.




Insurance Journal


By Prashant Gopal, Christopher Condon and Jack Fairweather 

For landlord Peter Zagorianakos, Terrorism insurance wasn’t a necessity until the bombs went off last April at the Boston Marathon and revealed a frightening pattern.

Two buildings he owns stand within a half-mile of the race’s finish line on Boston’s Boylston Street where two explosions killed three and injured 264. Another is within blocks of the Cambridge, Massachusetts, home of the two brothers suspected of plotting the attack. 

He also owns an industrial property in Watertown, about 100 feet from the boat where the younger suspect, Dzhokhar Tsarnaev, was found hiding after a police manhunt.

“They circled us,” Zagorianakos said of the suspects. It didn’t take long for the 50-year-old commercial developer, like thousands of others, to pony up for the extra protection.

Terrorism insurance, designed for large businesses and corporations, suddenly seemed wise for more midsized and smaller firms. Broken windows and a 10-day closure at restaurants and mom-and-pop businesses spurred owners of similar operations across the U.S. to think, “hey, this could happen to me,” said Philip Edmundson, co-founder of William Gallagher Associates, a Boston-based national brokerage firm. [THE HEART OF THE MATTER]

New Calculus

Eighty percent of Edmundson’s 5,000 small and midsized customers now have terrorism coverage compared with 50 % before the blasts. Next week, Marsh & McLennan Cos. will report an increase in sales to midsized and large companies. Tarique Nageer, a senior vice president for the insurance broker, attributes part of the gain to businesses responding to Boston.

“The Marathon attack changed the calculus,” Edmundson said. “It taught us terrorism is a risk to businesses of every scale and size.”

Before 2001, damage from terrorism was typically covered in policies without additional charges because the possibility of an attack seemed remote. The insurance industry paid $31.6 billion after that year’s Sept. 11 attacks, and providers began excluding acts of terror from commercial contracts. Coverage became expensive if it was offered at all, according to a March report from the Congressional Research Service.

In the next 14 months, $15.5 billion of real estate projects in 17 states were stalled or canceled as lenders shunned assets that lacked terrorism coverage, according to a Real Estate Roundtable survey. Enter the federal government and the Terrorism Risk Insurance Act (TRIA)=_, which provides a U.S. backstop for insurers after a major attack.

Temporary Fix

TRIA, enacted by Congress in 2002 as a temporary fix, was reauthorized in 2005 and 2007. Last week, a bipartisan group of senators agreed after months of debate on a third renewal, a seven-year extension. A House subcommittee is expected to draw up its own version in May.

“I don’t like TRIA,” Massachusetts Representative Michael Capuano said in an interview. The eight-term Democrat’s district includes the Marathon bombings site, and he was a House co- sponsor of TRIA’s latest renewal. “I just don’t know any other way around it.”

Absent the government commitment, Capuano said, the cost of coverage would skyrocket and the U.S. economy would falter. Fellow Massachusetts Democrat, Senator Elizabeth Warren, labeled TRIA a “giveaway” to insurers at a February Senate hearing, pointing out that providers pay no up-front fees for the federal backing that keeps their prices attractive.

‘Free Lunch’

In Europe, countries facing terrorist threats have created government-backed reinsurance bodies that charge insurers a premium. The U.S. should do the same, said Erwann Michel-Kerjan, a professor who studies risk at the University of Pennsylvania’s Wharton School.

“That way we stop having the debate about the insurance industry getting a free lunch,” he said.

Robert Hartwig, president of the Insurance Information Institute, an industry group, said the program counters a key goal of terrorists, which is to disrupt commerce. TRIA also establishes limits on what the government will pay, he said.

“There’s no question the program is clearly part of the national economic security of the country,” he said. “What the terrorists want to do is debilitate the U.S. economy.”

Under TRIA, insurers cover losses up to $100 million for a single attack. U.S. reimbursement begins after that threshold is met and individual companies pay a deductible of 20 % of the previous year’s commercial insurance premiums.

The federal annual liability is capped at $100 billion and the government is required to recoup losses of as much as $27.5 billion through a surcharge on commercial policies.

Property Coverage

The average cost that an insurance buyer pays for Property Terrorism coverage ranges from $19 to $49 per million of insured value, depending on the size of the company, according to a 2013 report from Marsh & McLennan, the largest insurance broker by market value. Companies in the U.S. Northeast pay the highest rates. The expense generally represents 3% to 5 % of a company’s Property insurance bill, according to the report.

Zagorianakos, the Boston landlord, pays about 1 % more to add terror protection for existing buildings and 2.8 % for projects in development, according to his agent, Michael Regan of Regan Cleary Insurance in Boston. Regan said most clients turned down the coverage before Boston. “Now everybody is saying, ‘I think I need it,’” he said.

For some of those in Boston who had purchased coverage before the Marathon bombings, seeking reimbursement was an exercise in confusion. One hundred and sixty companies near the explosions submitted claims for property damage or business losses. Just 14 % had coverage for terrorism, according to the state’s insurance regulator.

Candy Shop

As it turns out, they didn’t need it. The Boston attack was never officially labeled by the U.S. Treasury Department as an act of terrorism, even though President Barack Obama described it as such in a press briefing.

Under the law, an incident can be defined as an act of terror for insurance purposes only if it causes at least $5 million in total covered losses. Payout on $2.5 million in claims filed after the attack reached $1.9 million near the end of January, according to Massachusetts Division of Insurance data.

The fact that most businesses didn’t have the terrorism coverage turns out to have worked for them. If claims were high enough to trigger payments the law, businesses without the extra coverage would have lost out.

Recording Studio

Robin Helfand, 54, who had the Terrorism protection, wasn’t able to benefit from it. The owner of a high-end candy shop on Boston’s Newbury Street, a block over from the blasts, she had lived through Sept. 11 in New York. Moving to Boston and opening her store, Helfand figured the insurance would give her peace of mind. She said she had to throw away merchandise when streets were closed by the shop for 10 days, and it took months for business to return to normal.

Perry Geyer, owner of Cybersound recording studio on Newbury Street, said he had $9,000 in losses and was so frustrated by the denial of his claim that he canceled his terrorism coverage.

Even though Terrorism insurance didn’t help Helfand or Geyer, the lawyer who worked with them said he’d still advise business owners to buy the coverage.

“It’s not that expensive and it might make a difference,” said Jon C. Cowen of Posternak, Blankstein & Lund LLP.

Tightened security and global surveillance make large-scale attacks less likely, said Gordon Woo, catastrophist for Newark, California-based Risk Management Solutions Inc. And while plots involving a lone wolf, or a pair like the Tsarnaev brothers accused in Boston, have the best chance of succeeding, they are also unlikely to cause large insurance payouts, he said.

Meg Mainzer Cohen, of the Back Bay Association, a business support group, said her members were confused about whether they had adequate protection.

“The lesson from Boston bombing is you need to sit down with an informed carrier and work out whether you’re covered,” she said.



Insurance Journal

By Kimberly Tallon 

 April 16, 2014

Privatization of the National Flood Insurance Program (NFIP) would present a huge growth opportunity to the Property/Casualty market, allowing insurers to tap into about $3.3 billion of yearly premiums. But the Flood insurance market has a long way to go before it becomes viable for profit-driven carriers and investors, says Deloitte in its newest white paper.

The Deloitte report, “The Potential for Flood Insurance Privatization in the U.S.: Could Carriers Keep Their Heads Above Water?”,  concludes that despite the opportunities flood insurance presents, most insurers will likely pass on taking a piece of the risk unless the obstacles that undermined the NFIP’s solvency and put it $30 billion in debt are dealt with first.

Among those obstacles:

FEMA estimates that 20% of insured property owners pay subsidized premiums, and many of those         properties are in high-risk areas. Underpricing of flood insurance to make coverage affordable                 might actually be encouraging construction in high-hazard areas.

Repetitive loss properties account for a large share of all flood insurance exposures.

Convincing property owners to purchase flood insurance remains a challenge. Indeed, only 18% of         properties in flood zones are believed to have coverage.

Many homeowners believe recently updated flood maps might be overstating their flood risks.

Property owners with lower flood exposure often pass on the coverage, while those in flood-prone          areas  might assume that federal disaster assistance will help them if a major flood event occurs.


Congress tried to address many of these issues with the Biggert-Waters Flood Insurance Reform Act of 2012, which reauthorized the NFIP for five additional years. The act included measures to gradually increase rates to match risk as well as to update flood maps, but both the rate increases and revised flood maps have already been challenged by consumers.

Exposure to flood losses across the United States is expected to increase due to climate change, according to FEMA. Having the private market take on some of the risk could be a win-win for taxpayers as well as the insurance industry, Deloitte says, but the challenge is ensuring that any public-private partnership in flood risk is mutually beneficial.

Deloitte suggests some solutions:

Private carriers could write a certain level of primary coverage while reinsuring catastrophic levels           with the ]federal government.

The NFIP could purchase reinsurance from the private sector, spreading the risk and limiting                    ]exposure in high-catastrophe years.

The capital markets could help spread risks through the sale of catastrophe bonds.

Private insurers could combine their resources and diversify risk through a flood insurance pool.

Private insurers could pick up more moderate flood risks, leaving the NFIP in place as the insurer of          last resort.

No matter which privatization option is adopted, most industry leaders queried by Deloitte believe the government should retain a role in flood-hazard assessment and mitigation, including mapping flood zones, as well as enforcing zoning laws and building codes to limit flood-related exposures.