A look ahead: Emerging products and markets for 2013
From carbon to contracts … from fuel to fun, new products mean new opportunities
By Dave Willis
As 2012 comes to an end, agents and brokers are putting together strategies and tactics to build revenue, control costs and expand their practice. As they look to next year, they will want to consider how new risks, products, features and markets, along with those that are finding increased buyer acceptance, might fit into their plans.
One product that is gaining increased acceptance and traction is cyber liability insurance. Almost daily, we learn of another company that experienced a data breach that exposed confidential customer information. Recovering from such events can be expensive and time consuming.
"Determining the cause and extent of the breach, complying with the notice laws, correcting damage, handling public relations issues, and responding to potential lawsuits can truly drain a business," explains Jake Kouns, director of cyber security and technology risks underwriting at Markel Corporation.
Kouns says the cyber liability market has matured to the point where excellent coverage is available at affordable premium levels. "Agents and brokers should understand the coverage so they can explain it to clients," he notes. "It's important to make sure clients know clearly that a typical general liability or professional liability policy probably won't respond in the event of a breach."
There's also a potential E&O exposure. "We have seen a case filed against a broker for 'failing to procure adequate insurance,' when a client had a data breach and its insurance policy did not respond," says Kouns, whose firm offers DataBreach, a surplus lines data privacy and security liability policy.
A number of resources exist to help educate agents and brokers about cyber liability. "If agents and brokers want to see real examples, they can visit the Web site of the nonprofit Open Security Foundation, DataLossDB.org, to understand what's occurring today," Kouns says. "It's a great resource to use when meeting with clients who believe 'a data breach could never happen to us.' "
Cyber liability insurance is estimated to be a $1 billion market in the United States, Kouns notes, "and it's growing at a rapid pace. It's an exposure nearly every organization faces. In fact, we've seen more small and medium-sized organizations targeted by hackers lately."
Consequences can be severe. "Small businesses have had to file for bankruptcy because they were unprepared to deal with the financial impacts," he comments.
Another tech-related risk—less prevalent than cyber liability but potentially as costly—arises when a business engages an IT specialist to upgrade its computer system. When a company undertakes a large hardware infrastructure or software development project, it often hires a large IT firm to do the work. According to John Parente, chief innovation officer at Lexington Insurance Company, these big tech firms often have enough market clout that they can negotiate much potential liability out of their contracts. In this case, Parente comments, "If they actually make a mistake, their first-party and third-party liability can be very low."
If a hospital, for example, has a project go awry, and as a result can't comply with federal or state mandates or needs to hire a replacement firm to finish the job, what happens? Lexington's technology contract risk policy, Parity, responds and provides resources that help the insured move forward.
"The policy covers business interruption losses, what might be owed to the insured's clients, costs to fix the error, and expenses required to do the due diligence to find a new IT vendor to complete the project, if needed," Parente explains. "It actually fills a gap many people are unaware exists."
The policy is written on a project basis. "We look at each contract and create a policy to fill in what needs to be covered." Parente says the product is appropriate for health care facilities that are dealing with the new Patient Protection and Affordable Care Act, banks and other financial institutions that rely on IT systems to handle records and transactions, and a number of other businesses and nonprofit organizations.
Lexington is also bringing out products related to environmental concerns. Parente sees growth and opportunity in the carbon market. "A key driver is California legislation enacted several years ago that aims to take all emissions of energy-producing and carbon-emitting businesses back to 1990 levels," he explains.
One way that businesses can achieve compliance is by purchasing carbon offset credits.
"There are a couple of different ways that insurance fits in," says Chuck Hasselback, product development manager at Lexington. "If you have property—several thousand acres of forest land, for example—you can have that land assessed by a carbon verifier and receive a certain number of carbon credits that you can then sell as a compliance tool through the carbon offset credit market."
Carbon market regulators have the right and duty to audit carbon credit producing projects. In most cases the regulators have an eight-year window from the time the credits were approved to conduct an audit. "If, during that time, it turns out an error was made and instead of having 100 credits—which may already have been sold—there are only 50, there's a potential financial risk," Hasselback explains.
Insurance can cover losses sustained by the carbon verifier, the carbon credit seller, and the organization that bought the carbon credits. "If an organization is lacking credits due to an error, we will consider the value of the credits as part of our loss valuation," Hasselback says.
"We feel the future market potential is much bigger than it is right now," says Parente. "While the legislation only applies to California, credits can be generated elsewhere. Also, it's not unreasonable to expect that other states—and perhaps the federal government—will follow California's lead and pass legislation that affects originators, carbon offset credit buyers, developers and verifiers."
A related Lexington product covers ozone-depleting substances (ODS) such as methane gas and Freon. "There are businesses that collect products that contain these—old air conditioners or refrigerators, for example—and then arrange to dispose of them in a safe manner," Hasselback explains. "Destruction of ODS is desirable due to their known adverse impacts on the atmosphere. Projects that destroy ODS are eligible to receive carbon credits, which then can be sold in the carbon offset credit market."
Lexington's CarbonCover ODS policy covers entities that collect old appliances that contain ODs. "If a truck carrying the items or gases has an accident and gas is released, you've just lost a lot of money for credits, along with a lot of ozone-depleting substance," Hasselback says. "Our policy covers the product you're collecting until it has been properly disposed of."
Amid concerns about global warming and climate change, carbon emissions and ozone-depleting substances are hot topics today. Attracting less publicity, but unquestionably a vital part of the economy, are dealers in gas and other forms of petroleum, whose risks and coverage needs are changing as technology advances.
Much of the fuel dealer business is currently written by a national direct writer and by smaller regional carriers. Philadelphia Insurance Companies, a niche market insurer, sees strong growth potential and is focusing resources on creating a nationwide market for petroleum dealers.
"We are really excited about entering the fuel dealer market," says Steve Jennings, CPCU, assistant vice president at Philadelphia Insurance Companies. "It's a great opportunity for us, and it fits in with our way of doing things—find an underserved market and provide a product that our network of independent agents can use to serve it."
Several hundred fuel dealers operate in each state, Jennings says. "They perform the important task of getting gasoline or diesel or other fuel from terminals, which are run by the big oil companies, to the local gas station or factory or other business that needs to use it," he explains.
Philadelphia Insurance writes a fuel dealers package policy on A+ paper on an admitted basis. "There's a lot of pent-up demand for an option like this," Jennings remarks, "and fuel dealers represent a great opportunity for local agents and brokers, since they can be found nearly everywhere in the country."
He encourages interested agents to learn more about the business online or through state fuel dealer associations, many of which use the term "oilmen's" in their name. "This is truly a great group of business owners—a lot of family-owned, second- and third-generation operations," Jennings notes. "It's a relationship business, and agents and brokers would do well to meet the owners and learn more about their issues and needs."
Like many other industries, he points out, the fuel dealer business is "changing all the time. Margins are tight, but the companies are adapting. They are always looking for opportunities. For example, 30 years ago, fuel dealers never dreamed they would one day own convenience stores, but now that is a common practice. They are always looking for ways to increase their margins."
On a more personal level, home owners are always looking for ways to reduce their unexpected repair and replacement expenses. This is true among owners of manufactured homes, as the folks at American Modern Insurance Group (American Modern) know. They took this fact into account when they added a "Breakdown Protection" endorsement to their property and manufactured home programs.
"As we've worked to keep up with changing consumer interests and needs, we've found a gap existed when it came to mechanical and electrical components of a home," explains Sally Kressin, American Modern assistant vice president, Residential Property Products. "With this endorsement, agents and brokers can help clients fill that gap." The endorsement is available as a low cost option in the company's manufactured homes programs.
It covers what the carrier describes as "the sudden and accidental failure of a home's mechanical and electrical components," including: air conditioning and central heating; pool equipment; electrical panels; electronics, including PCs and TVs; appliances; wells or sump pumps; and more. "Basically, if it's plugged in, it's likely covered," Kressin notes.
"The breakdown coverage means home owners may not need to purchase separate warranties for covered items," she adds. "That can save money, since these individual warranties can be quite expensive. It's also easier to manage your premium payments because billing is through one company," she says.
The added coverage can offer extra benefits after a loss. "If covered repairs force a family to relocate temporarily, the policy provides extra expense benefits," Kressin explains. "Food spoilage coverage and pollutant cleanup are included, too. Plus, when possible, we repair or replace equipment with a "greener" energy efficient model or material."
While insurance carriers are responding to new and expanding environmental, commercial, property and cyber risks, they're also finding their way into less serious areas. Just ask Greg Thompson, CPCU, ARM, president of Markel Specialty, a unit of Markel Corp. Thompson co-founded THOMCO (now part of Markel), a company which actually has a unit with "fun" in its name. "We're seeing considerable growth—and expecting more next year—in the area of inflatables," Thompson says.
Inflatables—moonwalks, slides, obstacle courses and more—are becoming increasingly popular devices for entertainment, he says. "They come in virtually all shapes and sizes and types, and they're popular for one-day events, ranging from birthday parties to school or church fairs and even corporate events," says Thompson, whose firm insures these and related products through its Fun Pro unit.
The inflatables industry began in the 1990s and enjoyed immediate popularity. By the early 2000s, losses led to a market contraction, including a large surplus lines carrier's withdrawal from the market. "When inflatables first came out, they were very cheap," Thompson notes. "There was some slipshod manufacturing and there were safety issues, which led to claims."
In 2005 he was approached by a retail agent who knew the business. "He really understood who had it together from a manufacturing point of view and who didn't," Thompson recalls. "He knew which kinds of inflatables were well made and which weren't." Using this information, THOMCO created a program for inflatable operations that now covers a wide range of products, including portable climbing walls, Euro-Bungees and other equipment. The program is written on A rated paper and includes liability, property, and accident and health coverage.
Under the Fun Pro program, rates are based on the kind and number of equipment to be insured. "Even though it's a liability policy, we charge according to how many moonwalks or portable climbing walls you have," Thompson explains. "It's almost like you would rate an inland marine policy."
A key element of the program is contract language. "We review customer contracts and, while we don't specify actual wording because state laws may change, we require certain elements, like an exculpatory clause," Thompson says. "We have our insureds work with local attorneys to make sure the contracts protect them."
THOMCO works with manufacturers and insureds on safety issues. "We have a strategic partnership with Ninja Jump, the largest manufacturer of inflatables in the country," Thompson says. "We are constantly looking at new designs and new products. The inflatables industry is always evolving because the public's tastes change; they like new and different stuff on a regular basis.
"The inflatables business has grown substantially over the past several years, and it hasn't been affected negatively by the economic downturn," Thompson remarks. "In fact, it's often a less costly alternative than a party at the pizza place that caters to kids.
"Inflatables is a really fun business to be in," he declares. "It isn't the biggest thing we do at THOMCO, but it's by far the most fun." And let's face it: fun is something every agent and broker needs from time to time.
Dave Willis is a New Hampshire-based insurance and technology writer and a regular contributor to Rough Notes.