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Articles / White Papers
  Insurance Captives, Captive & Art Review, March 2006
 Workers' Compensation Costs, 2008 Business NH Magazine Health Care Handbook
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In The News
DataRisk recently hosted a reception at the 100 Club in Portsmouth, NH. Pictured here are Larry Gingrow, Rick Woodburn, Jill Johnstone, Sue Daigle, Mike Daigle, Tammy Grossman and Tony Andronaco. |
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State of the Market: February 2009 |
Is it Really a Soft Market?
By now, you may have heard some pundits assert how the insurance market is soft and that it will stay soft. While we agree with their assessment of the current market, we do not believe we will end the year in a soft market. We think there will be significant hardening.
The current soft market is the result of a better then expected hurricane season, intense insurer competition as competitors pursue AIG's market share and additional capacity that has entered the marketplace. In the short term we believe the market will remain soft. However, the current market dynamics are eerily similar to what we witnessed in Q3 2001 (prior to 9/11). Then, as now, insurers were willing to sacrifice underwriting income believing that investment income would be enough to turn a profit. However, today, like 2001, the investment portfolios of several large insurance companies have been severely damaged by the state of the stock market and the effect of other investment decisions. Include that re-insurance rates are climbing and the estimated 2008 combined ratio of the property/casualty industry is 103.2 and it is very easy to see that with both underwriting and investment income on the decline, insurers are going to have to raise rates. We believe there is a very good chance that the insurance market hardens by Q3 2009.
How Can You Take Advantage?
In a soft market it is easy to focus on driving down price. However, we believe that this is only 20% of the equation. In a soft market the real focus should be on negotiating coverage terms. It is in a soft market when underwriters, looking to differentiate themselves from the competition, will offer nuanced and specialized coverages. Start with addressing higher limits and lower deductibles, but also develop a list of "carve backs" you would like early in the renewal process. Items like punitive damage cover, limited pollution and several enhancing endorsements can be negotiated at little to no additional premium. Add the enhanced coverage now and you will find that you have an excellent chance of keeping them when the market turns hard (unless there is a catastrophic event).
The other strategy we recommend during a soft market that is trending to hard is considering multi-year deals that lock in a rate or offer a guaranteed rate reduction in future years, provided you maintain a certain loss ratio. This is an excellent way to hedge your downside potential without sacrificing current year rate reductions.
2009: The Year of Controlling Costs
Now in month 14 of the recession, you've undoubtedly looked to cut costs wherever possible. Your insurance program is a likely target.
Your first instinct might be to cut insurance coverage. However, doing so exposes the company to the risk of an uninsured or underinsured loss. This is because there is an inverse relationship between the economy and tort litigation. As the economy declines both the number and cost of claims increase as people attempt to recoup losses, or the fact that they don't have a job, via the court system. Further, cutting premium costs is not the most effective way to cut costs. Your focus should be on claim and ancillary cost control. Why? For those of our clients that operate an insurance program using a large deductible, your premium may be only 40% of your total cost while self insured losses represent 60%. You need to go after the controllable variable cost, which is the largest piece of your risk management pie. This is also true for our clients having a guaranteed cost program. Controlling claims reduces premium rates and keeps your experience modification rate low. Focus on items like safety, loss control, training and return to work programs.
Now is also the time to review and analyze your contingent commitments. Items ancillary to the insurance program like collateral (LOC's), loss deposits and escrow funds may be able to be negotiated down saving you significant money.
Lastly, as the market hardens you may be forced to make difficult decisions concerning where you put your risk management dollar. We recommend that you take an Enterprise Risk Management approach where you identify the risks to your organization and then systematically control those risks that have a high probability of occurring and a high financial impact to your firm.
Environmental / Pollution Coverage
Another trend we see is the development and sophistication of pollution insurance coverage. Because exposures such as mold, fungi, bacteria, EIFS (exterior insulation and finish systems) and other environmental exposures are typically excluded in standard property and casualty policies, pollution coverage will continue to evolve and become more price competitive. Once known as a specialty line of coverage, environmental insurance is now a core coverage, even for companies without traditional pollution liabilities. As your renewals come up you should be thinking about whether or not pollution coverage is something you need.
The Impact of AIG
No review of the market in 2009 would be complete without commentary on AIG. As we said in the fall, we continue to monitor the financial health of AIG but we are not panicked by their current situation. They are, in large part, a driving force keeping the market stable as they focus on pricing and policy holder retention/acquisition (though it was reported yesterday that the GAO may investigate their pricing practices). They are still very well capitalized, lead all insurers in net written premium and have $27 Billion in statutory surplus. Further, they have the Federal backs-stops and their insurance operations are walled off from the liabilities and obligations of their parent company.
Please do not hesitate to contact your DataRisk account representative with any questions.
Contact information:
DataRisk LLC
One New Hampshire Ave Suite 112
Portsmouth, NH 03801
Phone: 603-778-8985
Tony Andronaco - Vice-President & Account Executive
Rick Woodburn - Vice-President & Account Executive
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XL Capital: December 11, 2008 |
Yesterday, Bloomberg News reported that XL Capital Ltd., whose insurance subsidiary XL Capital Group still holds an AM Best rating of A XV (stable), is pursuing a buyer due to their deteriorating financial health. A year ago XL's stock traded at $62.80 per share, compared to yesterday's closing price of $3.90. With this decline in stock price comes a 90% reduction in market capitalization, from $20 Billion to $2 Billion, making it a prime candidate for take over.
As reported by Bloomberg, XL's financial difficulties stem from the CDO obligations of their prior subsidiary Security Capital Assurance, the acquisition of NAC Re and higher than expected claims from the 2005 hurricane season, including Hurricane Katrina.
Based on what we know today, it is our belief that the sale of XL may be the only viable option for the company. DataRisk is following this closely but cannot state whether a sale will be consummated, or who the buyer will be. However, it is being reported that Everest Re, Zurich and Ace are interested. If XL is sold, policy holders should have uninterrupted insurance coverage through the end of their policy term. While we have confidence in the financial strength of the three insurers mentioned above, DataRisk will monitor each closely until a deal is announced. If a sale of XL cannot be finalized and XL is forced into bankruptcy proceedings, we will quickly advise our clients how to proceed.
We will update you as the situation warrants.
Please do not hesitate to contact your DataRisk account representative with any questions.
Contact information:
DataRisk LLC
One New Hampshire Ave Suite 112
Portsmouth, NH 03801
Phone: 603-778-8985
Tony Andronaco - Vice-President & Account Executive
Rick Woodburn - Vice-President & Account Executive
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AIG UPDATE: September 18, 2008 |
Late Tuesday evening, the Federal Reserve ("The Fed") and AIG agreed on a deal where The Fed would loan AIG up to $85 Billion. In return, AIG has pledged all of its assets to collateralize the loan, must pay the loan back within 24 months and also granted The Fed warrants to purchase up to 79.9% of AIG's outstanding equity. It appears that this facility will operate as a revolving line of credit where AIG will borrow as needed up to the cap and pay LIBOR plus 850 bps on the outstanding balance. Details such as the following are still unclear:
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The warrant strike price.
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Are the warrants issued proportionally with the amount AIG borrows, or does The Fed receive warrants to obtain up to 79.9% of the equity regardless of the loan value?
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Are the warrants forfeited or equity returned to AIG as the loan is repaid?
Notwithstanding the uncertainty facing AIG shareholders, The Fed's action is clearly excellent news for AIG policyholders. With this move, in addition to AIG's already significant asset size and policy holder surplus, they should now have the liquidity they need to continue their insurance operations into the future. This move also negates AIG's need to execute the previously authorized asset swap between its insurance subsidiary and parent company.
Based on the above, it is our belief that AIG will keep its investment grade rating. It is also interesting to note that Edward Liddy, AIG's new CEO, was quoted today as saying "my intention is not to liquidate the company... Insurance operations are solid, capitalized and well funded." As such, our previously stated stance on AIG is essentially unchanged. For those clients that have their insurance renewal within the next three months, DataRisk will use its best efforts to obtain alternative quotes for our clients to consider. For those clients that are mid-term with AIG, our stance is to continue a wait and see position.
Please do not hesitate to contact your DataRisk account representative with any questions.
Contact information:
DataRisk LLC
One New Hampshire Ave Suite 112
Portsmouth, NH 03801
Phone: 603-778-8985
Tony Andronaco - Vice-President & Account Executive
Rick Woodburn - Vice-President & Account Executive
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AIG UPDATE: September 16, 2008 |
As you have undoubtedly heard, on Monday night, September 15, 2008, both Moody's and S&P further downgraded AIG's credit rating. This was in reaction to AIG's recent stock price decline, the continuing deterioration of the housing market and their increased cost of debt on credit spreads. Notwithstanding this, AIG's credit rating remains investment grade at A-. This downgrade now triggers a collateral call estimated to be between $8B and $16B. Yesterday, AIG saw a 61% decrease in their stock price, from $7.99 to $4.76 and a similar sell-off is expected today. Obviously, AIG has short term capital and liquidity concerns that need to be addressed for them to be a going concern.
The last we heard AIG was attempting to raise $40 Billion in capital to satisfy short term liquidity needs. We know that The State of New York allowed them to shift $20 Billion of liquid assets from subsidiary companies to their holding company in return for less liquid assets. This should satisfy the pending collateral call. The other avenues they are pursuing are:
- A $40 Billion bridge loan from the Federal Reserve. DataRisk does not think this is likely.
- Selling an equity stake to one or multiple private equity firms. However, this may be dead as the PE firms are offering a price substantially below market value.
- Selling strategic assets like their International Lease Finance Corporation, which has been a historic cash cow for the company.
Further, it is now being reported that the Federal Reserve has asked Goldman Sachs and JP Morgan Chase to offer AIG between $70 and $75 Billion in loans to stabilize the company.
This is clearly significant and DataRisk is tracking it closely. However, as noted above, AIG's rating is still investment grade. For those clients that have insurance through AIG we would like you to remember that:
- AIG has over $1 Trillion in total assets.
- AIG's insurance operations has $28 Billion in policy holder surplus that cannot be accessed by the holding company to satisfy non-insurance liabilities.
- In their announcement on September 12, S&P acknowledged that "AIG has sufficient capital and liquidity to meet its policy obligations and potential collateral requirements."
For those clients that have their insurance renewal within the next three months, DataRisk will use its best efforts to obtain alternative insurance placements for you. For those clients that are mid-term with AIG, we recommend no action at this time. However, if the situation deteriorates further for AIG we will be contacting you to discuss your strategic options, which may include a cancellation and rewrite with a different insurer.
The absence of AIG in the market place would put an enormous strain on insurance capacity and DataRisk doubts that the remainder of the market can absorb this capacity at current premium levels. Frankly, even if AIG survives, we believe the soft insurance market is coming to a close and that premium rate increases can be expected in the near term.
Do not hesitate to contact your DataRisk account representative with any questions.
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Contact information:
DataRisk LLC
One New Hampshire Ave Suite 112
Portsmouth, NH 03801
Phone: 603-778-8985
Tony Andronaco - Vice-President & Account Executive
Rick Woodburn - Vice-President & Account Executive
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INTERNATIONAL AUTO COMPONENT MANUFACTURER PARTNERS WITH DATARISK: June 10, 2008
Billion Dollar Supplier Chooses the Experience and Expertise of DataRisk
DataRisk LLC has been retained by one of the world's top auto component manufacturers to provide risk management consulting services. Due to client confidentiality protocol, the name of the manufacturer can not be released.
DataRisk LLC will provide their full slate of consulting services which includes operational exposure analysis, in depth insurance coverage review, retained loss optimization, claims handling and loss control management. All of these functions are directed at cost effectively isolating and reducing unknown or uninsured loss.
Mike Daigle notes, "DataRisk's value proposition for private equity portfolio companies is outstanding. Our costs are usually 50% less than a senior level headcount addition and we routinely create a 500% investment return on our fee during the first year."
Please do not hesitate to contact your DataRisk account representative with any questions.
Contact information:
DataRisk LLC
One New Hampshire Ave Suite 112
Portsmouth, NH 03801
Phone: 603-778-8985
Tony Andronaco - Vice-President & Account Executive
Rick Woodburn - Vice-President & Account Executive
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Testimonials
Late 2007 was a transformational period for MetroGroup Holding, LLC. We started the year as a $120 million revenue company with three unique operating segments. By September we were in the middle of a significant restructuring while completing the divestiture of two of our three operating companies. At the time, changing property/casualty insurance brokers was the last thing I wanted to do. However, I also knew that these changes presented both significant risks and significant opportunities for MetroGroup in the area of risk management.
Our incumbent broker preferred to deal with issues after the fact. They didn’t want to approach other insurers or change any of our policies even though MetroGroup would be a much different company in 2008 compared to 2007. I was frustrated with our existing programs, but after meeting with Tony Andronaco and Mike Daigle of DataRisk I was convinced that they had the experience and business savvy needed to get the job done.
DataRisk took a “clean sheet of paper” approach to our risk management needs. They took the time and asked the questions so they understood our business, our exposures, our clients’ expectations for insurance protection, and most importantly, they focused on our transition issues. With DataRisk, we got proposals from several different insurers, compared to my incumbent broker, who only approached the incumbent insurer on our behalf.
Moving our risk and insurance program to DataRisk has provided immediate hard dollar benefits. Their strategic guidance concerning our contemplated plant closings and divestitures resulted in us changing to a guaranteed cost workers’ compensation program, which has both saved us a substantial amount of money and has insulated MetroGroup from the liability associated with the claims for our divested subsidiaries. Further, they delivered several coverage terms and conditions improvements, including convincing our umbrella carrier to sit excess of our professional E&O policy, effectively doubling our coverage at no additional cost. DataRisk also formulated a claim handling and claim review protocol for our closed plants that has literally saved thousands of dollars. Their analytical view has also helped us with accrual analysis, IBNR reserving and collateral negotiation.
If your company is owned by a private equity firm, like we are, and you want a broker/consultant that can deliver results and articulately and concisely communicate insurance lingo to your board of directors, you want to be partnered with DataRisk.
Albert Strausser, CFO
MetroGroup Holding, LLC
“We are in a multi-faceted employment services business with a myriad of complicated risks. Our Company is 26 years old and we had been with our prior insurance broker for more than 15 years. We switched to DataRisk about a year ago because they were the first insurance broker or consultant that thoroughly evaluated and understood our business. Even better is the timely and thoughtful service they have provided since we switched. For us, they delivered what they promised, which in today’s business world separates them from almost everyone else!”
Steve Wood
President and CEO
Work Opportunities Unlimited/Leddy Group
"As the executive director of a non profit child education center, I know a lot about educating young children, but not a lot about business insurance! Our previous insurance brokers made sure we had the basic, off the shelf coverage, but did not take the time to explain the policies and what they actually mean for our employees and our company, or provide us with any options. When I first met with Tony Andronaco he took the time to understand the risks we face and then did a thorough review of our current insurance policies to be sure the insurance matched our exposures. As it turns out, Tony discovered that there were important pieces of insurance missing and was able to explain the importance of these pieces in a way that I could understand. He explained his role, the role of the underwriters and the entire process and took the time necessary to work and negotiate for the insurance coverage we need. Because of Tony, our organization is much better protected with no increase in cost! He and DataRisk have what's best for our company in mind. We couldn't be more pleased with the services Tony and DataRisk provide."
Susan Chase
Community Child Care Center
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