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Risk Insider: Peter Taffae

A Wholesale Insurance Broker Speaks Out on Product Commoditization

By: | August 16, 2018 • 2 min read
Peter R. Taffae, is managing director of ExecutivePerils, a national wholesale broker. He can be reached at [email protected]

Most people in my space (D&O, E&O, EPL, Cyber, etc.) have started to realize the market has begun to change. Granted, some coverages more than others, such as public D&O, Employment Practices, Legal Malpractice, Health care and real estate being the most obvious.

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My feelings on the arriving “hard” market are mixed. I have compassion for the claims frequency and severity that has had a negative effect on underwriters. But I am also frustrated with the underwriters for taking us to a bad place. I feel the same way about the brokerage community, and — to some extent — the buyer/insured. Let me explain.

The brokers (retail and wholesale) and underwriters share responsibility for where we are today. And, to my displeasure, the products that were unique to each carrier have been copied and commoditized.

I give recognition to the early “innovators” of commoditization of superior insurance products, but I will also call them out for their greed and the tremendous negative impact that has had on the marketplace.

Placing efficiency (profit) and high volume over broad coverage and risk underwriting has gotten us to this point. Restricting coverage and “cookie cutter” coverage has encouraged the commoditization thinking.

To illustrate my point, I will use the D&O policy as an example. The D&O policy dates back over 50 years. It started as two policies stapled together. One, for what we now call Side A, and the other, for what we now call Side B.

It was written as an “All Risk” policy with named exclusions. That in itself is amazing due to the fact that the coverage is for allegations naming the D&Os for “mismanagement.”

Price, everyone understands and doing so really doesn’t take any expertise. So, after years of driving price down, we are now paying the penalty. However, the penalty is not solely that insureds will be paying more, but underwriters will be quoting less and become even less likely to bend the coverage to meet the needs of insureds.

Here are just a few examples of coverage for major events (because it was not excluded): the savings and loan crisis, junk bond meltdown, greenmail/hostile takeovers and director litigating against director(s), subprime crisis, etc.

It even covered litigation for not buying enough insurance (i.e.: Union Carbide explosion). The product, not unlike the other coverages such as E&O, EPL, etc. were “flexible”; meaning an underwriter or broker who had the skill could mold it to fit a particular need. We called it “underwriting.”

Then things started to change, for many reasons, but the outcome was “commoditization” of the product(s). There are and hopefully always be exceptions but those have become rare and usually only for the Fortune 50.

Why has the product become commoditized? One reason is brokers and underwriters have moved from VALUE to price. It is harder to articulate value than price and requires an appreciation of the coverage.

I believe that if one truly understands the ability/potential comprehensiveness of this coverage, contractual wording, underwriting, and the exposures D&Os face, they would object to its commoditization and want to shift the conversation from price to value. Otherwise, what value as underwriters and brokers do we bring?

Price, everyone understands and doing so really doesn’t take any expertise. So, after years of driving price down, we are now paying the penalty. However, the penalty is not solely that insureds will be paying more, but underwriters will be quoting less and become even less likely to bend the coverage to meet the needs of insureds.

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Many brokers (retailers and wholesalers) who never had to explain increases and restricted coverage are going to have a hard time. They will also have a hard time “brokering” challenging risks.

I believe that if one truly understands the ability/potential comprehensiveness of this coverage, contractual wording, underwriting, and the exposures D&Os face, they would object to its commoditization and want to shift the conversation from price to value. Otherwise, what value as underwriters and brokers do we bring?

If the market were to really become “hard,” which I know will never be like 1978, 1985, or 2000, I would hope it would be a turning point and bring back the art of underwriting and brokering.

By allowing the products to be standardized or at least perceived to be standardized, we have diminished the value that we (underwriters and brokers) bring to the process and have not lived up to our fiduciary duties.

I believe this coverage and its potential to provide comprehensive and innovative solutions is too great to be left to automation alone.

More from Risk & Insurance

More from Risk & Insurance

2018 Risk All Stars

Stop Mitigating Risk. Start Conquering It Like These 2018 Risk All Stars

The concept of risk mastery and ownership, as displayed by the 2018 Risk All Stars, includes not simply seeking to control outcomes but taking full responsibility for them.
By: | September 14, 2018 • 3 min read

People talk a lot about how risk managers can get a seat at the table. The discussion implies that the risk manager is an outsider, striving to get the ear or the attention of an insider, the CEO or CFO.

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But there are risk managers who go about things in a different way. And the 2018 Risk All Stars are prime examples of that.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Goodyear’s Craig Melnick had only been with the global tire maker a few months when Hurricane Harvey dumped a record amount of rainfall on Houston.

Brilliant communication between Melnick and his new teammates gave him timely and valuable updates on the condition of manufacturing locations. Melnick remained in Akron, mastering the situation by moving inventory out of the storm’s path and making sure remediation crews were lined up ahead of time to give Goodyear its best leg up once the storm passed and the flood waters receded.

Goodyear’s resiliency in the face of the storm gave it credibility when it went to the insurance markets later that year for renewals. And here is where we hear a key phrase, produced by Kevin Garvey, one of Goodyear’s brokers at Aon.

“The markets always appreciate a risk manager who demonstrates ownership,” Garvey said, in what may be something of an understatement.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Dianne Howard, a 2018 Risk All Star and the director of benefits and risk management for the Palm Beach County School District, achieved ownership of $50 million in property storm exposures for the district.

With FEMA saying it wouldn’t pay again for district storm losses it had already paid for, Howard went to the London markets and was successful in getting coverage. She also hammered out a deal in London that would partially reimburse the district if it suffered a mass shooting and needed to demolish a building, like what happened at Sandy Hook in Connecticut.

2018 Risk All Star Jim Cunningham was well-versed enough to know what traditional risk management theories would say when hospitality workers were suffering too many kitchen cuts. “Put a cut-prevention plan in place,” is the traditional wisdom.

But Cunningham, the vice president of risk management for the gaming company Pinnacle Entertainment, wasn’t satisfied with what looked to him like a Band-Aid approach.

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Instead, he used predictive analytics, depending on his own team to assemble company-specific data, to determine which safety measures should be used company wide. The result? Claims frequency at the company dropped 60 percent in the first year of his program.

Alumine Bellone, a 2018 Risk All Star and the vice president of risk management for Ardent Health Services, faced an overwhelming task: Create a uniform risk management program when her hospital group grew from 14 hospitals in three states to 31 hospitals in seven.

Bellone owned the situation by visiting each facility right before the acquisition and again right after, to make sure each caregiving population was ready to integrate into a standardized risk management system.

After consolidating insurance policies, Bellone achieved $893,000 in synergies.

In each of these cases, and in more on the following pages, we see examples of risk managers who weren’t just knocking on the door; they were owning the room. &

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Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, clarity of vision and passion.

See the complete list of 2018 Risk All Stars.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]