MAIA 2015 – A Good Time Had By All

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Earlier this week, it was my pleasure to attend the 2015 Michigan Association of Insurance Agents (MAIA) annual convention in Mt. Pleasant, Michigan.  The accompanying photo captured Ferris students Jay Miller, Corey Bledsoe, and Cody Simons, along with yours truly, Dr. David Allen Brown in front of the Ferris State University booth in the exhibit hall.

The educational and experiential benefit for the students in attendance was very apparent, and all three students shared with me how valuable this conference was to them.  They were able to network with many industry professionals (many of whom are eager to hire them upon graduation!), and also with fellow students from the Olivet College insurance and risk management program.  The convention offered educational sessions on topics that included ethics, certificates of insurance, and the new insurance challenges posed by developing 21st century business models such as Airbnb and Uber.

For me personally, I enjoyed the opportunity to see many industry friends and colleagues again.  The insurance industry is truly a relationship business, and it is never more apparent than when everyone gathers for conventions such as this one.  The MAIA membership and its supporters who attend this convention are the best of the best, and I hope that students are inspired to devote themselves to this industry based on the fine people they met this week.

Insurance is Doomed

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When I was a kid, I remember that the world worried about the coming ice age.  As a young adult, the major extinction threat was global warming.  More recently, the subject of great concern is the rather non-specific threat of climate change.  One symptom common to all of these concerns was the presumption that they each brought about significant increases in meteorological activity.  More hurricanes, more droughts, more tornadoes, more blizzards, more polar vortexes, more scorching heat, more melting polar ice, more floods, more wildfires.

I must confess that I am a climate change agnostic.  Some say that the science is settled… I say, on what?  Is it cooling?  Is it warming?  Is it man-made or natural?  The only constant that I’ve seen in my lifetime is that we have some wild weather swings in both directions.  If you listen to the ice age/global warming/climate change doomsayers that these wild swings are only going to get worse, then the insurance industry is doomed.

As I write this with the outside temperature predicted to threaten record lows this weekend, I find it difficult to fear for the existence of the polar ice cap.  And I think the insurance industry will manage to get by just fine.

Certificates of Insurance – Devices of Good or Evil?

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There has been a quiet (or not so quiet, depending on your vantage point*) battle within the risk management and insurance field for decades.  In any business relationship of consequence, there is a prudent risk management interest in requiring and verifying that proper insurance is in place.  The purchaser of products or services has a valid risk management interest in verifying that the provider of said products/services has sufficient and proper insurance, and perhaps even add the purchaser as an additional insured on that insurance policy.

Here’s why: Suppose I am a retailer buying products from a manufacturer to sell in my store.  If those products were to injure a customer or customer’s property, I want to be assured that the manufacturer has adequate insurance to address such claims, and that it will also protect me as the reseller of the manufacturer’s product.  Likewise, if I hire a contractor to plow the snow out my retail store’s parking lot, I need to know that they are insured (and that the insurance will protect and defend me) if that snowplower accidently runs over a customer or damages a customer’s vehicle.

Enter the venerable certificate of liability insurance.  Good ol’ ACORD Form 25 (let’s just call it the COI).  Its job is to convey to an interested third-party (e.g., me and my retail store) that the firm I am doing business with has certain types and amounts of insurance.  Insurance agents and brokers have traditionally issued these documents as a favor to their insured customers for decades.  Agents and brokers don’t particularly like this non-revenue generating activity, but many realize that it is part of the customer service they provide.  Some even view it as a valuable touch point to strengthen the relationship with their customers.  But there is a darker side to the COI…

Sophisticated risk managers and corporate legal departments have become more and more aggressive about demanding that the COI contain certain phrases and text.  For example, they want it to state that “ABC Corporation, its directors, officers, employees, and agents are additional insureds” – and that is a brief example of some required additional insured language which can drag on to paragraph length in some contracts.  They also demand at least 30 days written notice of cancellation or material change of any of the insurance policies represented on the COI.  These are both very prudent risk management demands intended to protect the assets of the buying firm in the relationship.  There are more, but these two examples are common demands.

However, the COI is not a contract.  It’s just a snapshot in time that reflects certain attributes of insurance at that moment in time.  The limits on the certificate may be exhausted by other claims just a few days after the COI is issued.  The disclaimers on the COI make very clear that nothing on the COI itself can amend or alter the contract terms of the actual insurance policies represented on the COI.  And yet, there have been legal cases where information on the COI was relied upon by the third-party, and thus the insurers or their agents (through their E&O coverage) have been held to the information on the COI.

So now on to the latest front in this battle… several states (roughly half of the 50 states at this writing) have passed laws that make it illegal to issue a COI that does not accurately reflect the actual insurance policy terms, and in some states, make it illegal to request that a COI contain information that is counter to the actual policy.  So now, what was previously an obvious ethical breach is now an illegal act.  Progress?  Only for the legal profession.  The real objective of these laws is to give the agents/brokers and insurers a statute that they can point to when receiving demands for COIs from risk managers, and allow them to say, “See, what you’re asking me to do is break the law – and actually you’re breaking the law by even asking for all this garbage on the certificate in the first place.” I call BS on that.

Here’s the dirty little secret.  Except for a few unscrupulous characters, no professional risk manager wants an agent/broker to issue a COI that does not reflect the actual policy terms.  The implied (if not contractually stipulated) requirement behind a risk manager’s “unreasonable requests” for the COI (as one supporter of the Massachusetts COI law characterized them) is that the insurance policy will be amended or altered so that it meets the insurance requirements that the agent’s customer (e.g., the manufacturer or snowplower from my earlier example) agreed to in the contract for the business relationship.   Then the agent can legally (and ethically) issue a COI that stipulates to the additional insured language because the policy has indeed been endorsed to add the additional insured as requested.  Ditto for the cancellation requirements.  In the case of the cancellation notice requirements, the industry is loath to agree to this because it creates significant logistical and operational burdens that frankly, the industry is fearful that it cannot live up to.  So the industry lobbyists go to work and convince legislators that great atrocities are being committed by those pesky risk managers and their crazy COI demands.

Let’s take a deep breath.  The insurance industry is in the business of financing risk, and risk managers are in the business of managing risk.  The kerfuffle over COIs and new statutes intended to “curb their abuse” is misguided, in my humble opinion.  The problem lies further upstream.  The problem is that risk managers want as much protection as possible in any business relationship their firm happens to form.  But there is risk in any business activity and sometimes, in the interest of accomplishing the larger mission (i.e., having products on the shelf of the retail store or the parking lot clear of snow) compromise must be made and some risk accepted.  The problem is in the negotiations of these business relationships.  If the insurance industry absolutely cannot abide by strict requirements to provide cancellation or “material change” notifications, then the industry (i.e., the agents) must educate their customers not to agree to such things in their contracts with customers. Once the contract has been signed, the train has left the station.  The new statutes which purport to curb the abuse of COIs only serves to give the insurance industry an excuse for contributing to their customer’s breach of contract.  In short, risk managers need to lighten up and curb their demands, and the insurance industry needs to stop running to the legislature to create laws that protect themselves from their own operational weaknesses.

And so the battle rages on…

[* Full disclosure: The author formerly owned a service company that provided business process outsourcing related to certificates of insurance.  So the battle has been far from quiet in my ears.]

Congratulations Corey

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This is perhaps one of the most gratifying parts of my job as a collegiate educator.  Recognizing student accomplishments and achievements is the payoff after observing the intellectual growth of students over time.  As the father of three adult daughters, I am very familiar with the sense of pride that comes with recognizing the early successes of young people.

The subject of my pride and congratulations today is Ferris State University student Corey Bledsoe who just learned that he has been selected as an Anita Benedetti Scholar for the upcoming RIMS annual conference in New Orleans.  Corey is a dual major in actuarial science and also risk management and insurance, and he is President of the Gamma Iota Sigma-Upsilon Chapter at Ferris State.  Corey is now making plans to attend the RIMS conference with his costs covered by RIMS and he will participate in a special program track designed for the Anita Benedetti Scholars.

This RIMS program is very competitive and Corey should be very proud of his selection, as am I.  He will represent Ferris State’s Risk Management and Insurance academic programs very well, and I know that he will make some valuable contacts and learn a great deal through his participation in this program.  Well done Corey! Congratulations!

Selling Insurance

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Sales.  Insurance.  For some, these two words used in close proximity will send them running far, far away.  Let me be clear about one thing – A career in insurance is not restricted only to selling.  Risk and insurance careers are as wide and varied as one can imagine.  The industry needs underwriters, customer service reps, information technology experts, business analysts, claim adjusters, premium auditors, risk managers, finance and accounting, loss control reps, just to name a few.  And yes, sales.

Every business and every industry has a sales function.  For whatever reason, insurance sales gets a bad rap, right up there with used car sales.  To be sure, it is a challenge selling an intangible product that is basically a contract full of promises based only on the remote possibility of bad stuff happening.  But here’s the thing… everyone needs this product in some fashion or form.

I was meeting with a group of insurance professionals earlier this week and the irrational fear of a career selling insurance came up.  One of the esteemed insurance professionals offered a very astute observation about insurance sales.  Businesses must have insurance of various types to comply with bank requirements, contract stipulations, and just to secure their own survival.  Individuals must have insurance if they drive a car, get a mortgage to buy a home, or act responsibly toward their dependents.  His point was that businesses and individuals will write a check to someone for insurance, and all you have to do as a seller of insurance is convince them that they should write that check to you.

This is not to say that selling any product or service is easy, but when you consider the open-ended, long sales cycle challenges that face many sales professionals for other products, the insurance product/service has an advantage.  In my former life, I owned a firm that provided risk management services which certainly provided value to my customers, but they were rarely mandated by any legal or contractual conditions.  Consequently, my sales team found that many prospective customers kept putting our services on the “back burner” as more pressing issues grabbed their attention.  We had prospects who never did “pull the trigger” and sign up for our services, and others took 2-3 years before they finally decided that they would buy our services.  Long sales cycles like that are not fun.

Insurance protection for most consumers and businesses is not something they can put on the back burner, at least not for long.  They are going to write a check.  Become an insurance sales professional and convince them to write that check to you.  It’s a good life and a good career.  Honest, I’m not kidding.

Scholarships aplenty

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Providing yet another bit of evidence that the risk and insurance industry is encouraging young people to consider insurance careers, it has been a busy week in terms of scholarship news.  Business Insurance just reported that the Griffith Insurance Education Foundation awarded over $100,000 in scholarships last year.   Locally, there are several scholarships offered by insurance agencies and professional organizations.  Just this week, I had a conversation with a representative of the Muskegon Adjusters Association, a professional organization of West Michigan claim adjusters.  This organization wants to begin awarding annual scholarships to Ferris State students of risk management and insurance.

From my perspective, there is no more clear statement that the industry wishes to attract talented, young professionals than the multitude of industry organizations who are willing to pay for students to gain an education in the field.  I keep a list (which seems to be getting longer and longer) of scholarship opportunities on my desk, ready to share with students.  So come and get it.  The money for your risk and insurance education is out there – just waiting for deserving and dedicated students to claim it

TRIA Extended – Is that a good thing?

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In recent weeks, the renewal/extension of the Terrorism Risk Insurance Act (TRIA) has been a very hot topic.  I’ve written about it a few times myself, here and here.  To the relief of many, the newly convened 114th Congress has now extended TRIA to 2020.  The House vote was 416 to five, in a rare display of unfettered bipartisanship.

But not everyone is happy about TRIA’s extension.  The Wall Street Journal’s Opinion Page called the measure’s renewal a “vast corporate welfare handout.”  Though this may be blasphemy among my risk management and insurance colleagues, I must confess to my libertarian leanings and admit that I am sympathetic to the WSJ editorial board’s disappointment.  On the other hand, I do take issue with some of the WSJ’s assertions.  In particular, the WSJ stated that “The private [insurance] market has healed [since the 9/11 attacks] and could price in and model the danger of terror attacks, but the permanent Washington backstop interferes with such commercial evolution.”  I’m not so sure I buy that.

Terrorism risk, particularly anything on the scale of the 9/11 attacks, is very difficult to price and model.  Among the textbook concepts that my students learn are the characteristics of insurable risks, and two such characteristics are that the loss potential should not be catastrophic, and the chance of loss must be calculable.  House fires and slip/fall liabilities meet all of the criteria for insurable losses, but using commercial airliners as weapons of mass destruction or detonating dirty bombs most definitely do not meet the aforementioned criteria.

The plain truth is that 9/11 changed everything.  Before that catastrophic event, terrorism exclusions were rare.  After 9/11, terrorism exclusions are all but certain in the absence of the federal backstop known as TRIA.  My libertarian economic philosophy is conflicted over this reality, but I would not characterize TRIA as a “vast corporate welfare handout” as the WSJ did yesterday.