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Looking to Purchase an Insurance Agency? These 5 Mistakes Could Ruin Your Acquisition.

While mergers & acquisitions offer scale and expanded reach to brokers battling a competitive market, overlooked professional liability risk could blow up any deal.
By: | October 31, 2018 • 7 min read

2017 was a record-breaking year for insurance broker mergers and acquisitions. At 537 total transactions, there were 25 percent more deals compared to 2016, and seven of them were valued at $1 billion or more, according to the Deloitte report, “2018 Insurance M&A Outlook.” The report also states that activity will abate somewhat in 2018, but not by much. The first quarter of 2018 still produced the third-highest number of M&A transactions.

A number of trends are driving the ongoing consolidation in the broker market, most prominent among them is the continuing soft market due largely to excess private equity capital that shows no signs of dissipating. For brokers, consolidation has offered an opportunity to bring a greater breadth of services to clients and diversify books of business to insulate themselves from shrinking profit margins.

However, every merger or acquisition presents risk.

Blending two sets of operational policies and procedures, two distinct workflows, two information technology systems — and sometimes most importantly — two different cultures, creates plenty of opportunity for errors and omissions. Ultimately, this exposure impacts both the buyer’s and seller’s insurance agents’ professional liability (IAE&O) policies.

“With so much to focus on, one critical aspect that gets frequently overlooked is the impact of purchase and sale of IAE&S policies,” said Michelle Girardin Freimuth, Insurance Agent E&O Practice Lead, Allied World North American E&O Division. “Insurance agency buyers that fail to properly vet the structure of another broker’s IAE&O policies could find themselves lacking coverage when they need it most.”

Before closing the deal on an acquisition, here are five key professional liability coverage points brokers should review:

1. Exceeding an E&O policy’s acquisition threshold could result in additional premium charges.

Michelle Freimuth, Insurance Agent E&O Practice Lead, Allied World North American E&O Division

Many policies establish an acquisition threshold of 15 to 20 percent of the buyer’s revenue per their most recent financial statements.  Under this threshold, acquisitions generally are covered by the policy without any changes in the terms and conditions. Above the threshold, however, carriers take on additional risk that warrants adjustments to the underwriting and could result either in a premium increase or more restricted coverage.

Checking the threshold proactively can avoid unpleasant surprises later in the due diligence phase or even after the acquisition is completed.

2. Failure to identify all of an acquired company’s professional services could preclude coverage.

Brokers typically provide additional services beyond binding policies, including everything from risk consulting, data and analytics capabilities, captive management and custom program development. Insurance agents’ E&O policies specifically name which individual professional services are covered.

In order for all exposures related to these services to be covered under a buyer’s going-forward policy, they must be explicitly named. Again, adding services could require changes to coverage that result in premium increases. The acquiring broker should consider whether they want to retain all the services offered by the acquired company, and how any additional services impact their risk profile.

3. Assuming additional liabilities impacts coverage needs.

An acquired company’s E&O policy might include coverage for their subsidiaries or other additional insureds. If the purchasing organization chooses not to take on those subsidiaries in the transaction, it should ensure its own policies are not providing coverage for those entities’ exposures.

“It is imperative that the purchase agreement is specific as to which entities’ liabilities will be the responsibility of the buyer versus the seller going forward,” Freimuth said.

4. Not checking coverage for prior acts can lead to unexpected claims.

Errors or omissions committed by a company prior to acquisition could come back to the buyer if the seller has not purchased an extended reporting period (ERP) on their IAE&O policy. The purchase agreement should state who will be held liable for prior acts before and after the acquisition date.

“Most policies offer an automatic extended reporting period for 60 days after the acquisition, with additional options for purchase. The terms can extend anywhere from one year to six years,” Freimuth said. “The coverage provided and the length of the ERP can have a direct impact on the buyer’s IAE&O exposure.”

Most IAE&O policies are written on a claims-made basis, so if a claim is made against the seller after the ERP has expired, the buyer will ultimately be held responsible for acts it did not commit because it will be the only entity with applicable coverage at the time.

Buyers should ask the acquisition target to purchase an ERP, and conduct a thorough review of the seller’s claims history to gain a sense of their exposure to future E&O claims. A high frequency or severity of claims could impact the buyer’s IAE&O exposure going forward and negatively impact an underwriter’s view of its professional liability risk.

5. Inattentiveness to cultural differences in risk management approaches could increase liability exposure.

A successful acquisition hinges on a seamless integration of cultures. A buyer should consider the seller’s policies and procedures around hiring, firing and workplace conduct, how it approaches cyber security, how diligently it maintains its records and how thoroughly it trains employees.

An acquired entity that was lax about its risk management controls increases exposure for the buyer that, if not addressed quickly, could lead to costly claims.

“During the transitional period when the acquired entity is integrating with the buyer and adopting its risk management behaviors, the buyer needs to pay careful attention to how the acquired staff is reacting and how well they comply,” Freimuth said. “Once they become more comfortable, that oversight can relax a little bit, but companies should still be doing periodic audits to make sure policies are being followed.”

Securing Comprehensive Professional Liability Protection

Both buyers and sellers have much to gain from a smooth and successful transaction, however, buyers bear significant exposure to E&O claims.  Failure to address how this exposure will be distributed and insured can completely derail a deal.

Proactively addressing changing liabilities and coverage needs is critical to minimizing a buyer’s or seller’s risk exposure.

“Every M&A transaction is different. Any time you enter into a sale, either as a buyer or a seller, it’s paramount to reach out to your carrier as early as possible to involve them in the process,” Freimuth said.

Allied World’s underwriters are experienced with the unique challenges of brokerage mergers and acquisitions. Says Freimuth: “They combine consistency with reliability in order to eliminate the hurdles and provide comprehensive coverage to ensure that our policyholders are protected against risks endemic to their profession.”

To learn more, visit https://www.alliedworldinsurance.com/usa-professional-liability-insurance-agents.

This information is provided as a general overview for agents and brokers. Coverage will be underwritten by an insurance subsidiary of Allied World Assurance Company Holdings, GmbH, a Fairfax company (“Allied World”). Such subsidiaries currently carry an A.M. Best rating of “A” (Excellent), a Moody’s rating of “A3” (Good) and a Standard & Poor’s rating of “A-” (Strong), as applicable. Coverage is offered only through licensed agents and brokers. Actual coverage may vary and is subject to policy language as issued. Coverage may not be available in all jurisdictions. FrameWRXSM services are provided by third-party vendors via a platform maintained in Farmington, CT by Allied World Insurance Company, a member company of Allied World. © 2018 Allied World Assurance Company Holdings, GmbH. All rights reserved.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Allied World. The editorial staff of Risk & Insurance had no role in its preparation.




Allied World is a global provider of innovative property, casualty and specialty insurance and reinsurance solutions.

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]