Producer Protection Against Surprises

With turmoil in the financial markets dominating the headlines throughout the fourth quarter of 2008, the need for insurance companies to protect their reputations and address any issues related to their financial stability became necessary. Equally important, yet largely overlooked, was the need for producers to establish or sustain their relationships with reliable, dependable specialty markets-carriers dedicated to a niche or specialty regardless of whether the insurance cycle is in the hard or soft phase. Carriers that jump in and out of markets based upon pricing are part of the problem. To grow and prosper, agencies must have ongoing relationships with carriers that are focused on solutions.

Stable markets that utilize consistent underwriting and pricing, provide responsive claim service, possess intrinsic knowledge of the niche and have a long-term history or commitment to a niche can be the bread and butter of a successful retail agency. When everything else is stripped away from a producer's relationship with a client, an independent producer's identity and strength are based upon a variety of carrier relationships.

Ironically, for all involved-producers, carriers and insureds-many of the carriers providing insurance agent E&O insurance are eroding these relationships. For the past several years, many insurance agent E&O insurers have begun to restrict coverage in the event of the insolvency of insurers. In most E&O policies, carriers must be rated B+ or better, sometimes A- or better, etc. by A. M. Best if the E&O insurer is to extend coverage to the producer in the event of the insolvency of the carrier.

This arbitrary condition precedent and the existence of potential exposure to insolvency can strain existing carrier-producer relationships. From a producer's perspective, it can also limit the amount, and perhaps the quality, of new business available for placement with non-conforming insurers. In addition, producers might not be willing to avail themselves of the capacity and capabilities of relatively new carriers, solely because the carriers did not qualify for a particular rating from a specific service.

Even before the developments that led to the recent economic meltdown, the exclusion created problems for independent producers with long and established relationships with carriers. Similarly, producers that had invested their time and talent designing and developing coverage and underwriting criteria for a specialty program might have found those efforts futile rather than fertile.

Demotech has identified this impediment to the growth and prosperity of independent agencies and worked with Century Surety Co.to respond to the need with an insolvency gap legal defense policy to provide legal defense coverage when an insolvency exclusion in an E&O policy created a barrier to a business relationship.

To identify financially stable insurance companies capable of providing the long-term stability necessary to sustain a relationship, only those qualifying for a Financial Stability Rating of A or better from Demotech are eligible to offer insolvency gap legal defense insurance to their producers. Consistent with its own commitment to the independent agency system, Century Surety Co.'s insolvency gap legal defense insurance policy permits a designated insurance company to extend legal defense coverage to each of its duly appointed and licensed producers.

In an insurance and financial services environment where internationally known property and casualty and life insurance companies are receiving bailouts or capital infusions of unprecedented dollar amounts, financially stable insurance companies must be able to offer their producers protection against exposure to insolvency.

The process for doing so is simple and straightforward. An eligible insurance company purchases a policy to provide legal defense coverage to its agents. Protection is provided to producers in the unlikely event of the liquidation of the designated insurance company. The coverage is first dollar, with no deductible or coinsurance. Pricing is company-specific. The premium is paid by the designated insurance company. A limit of liability up to $2,000,000 can be purchased. There is no cost to producers.

Although Demotech introduced this specialty coverage last June to address a specific exclusion that had been inserted into insurance agent E&O insurance policies over the past several years, its applicability and utility during this period of financial stress are apparent.

When insurance industry icons receive substantial capital infusions, when there is confusion and uncertainty in the marketplace, every producer-carrier relationship becomes stressed, even the good ones. In this economic environment, every financially stable insurer should help its producers protect the client relationships they have developed.

Leveling the playing field for every financially stable insurance company is critically important to the top line and bottom line growth of independent agents and brokers as well as the stabilization of markets. An independent producer's identity and strength are based upon a variety of carrier relationships. The relationships a producer depends upon should be based upon the judgment of the producer, the needs of the producer's clients and the capabilities of knowledgeable specialty markets, not an exclusion in an E&O policy.

Joseph L. Petrelli is president and founder of Demotech, Inc., a Columbus, Ohio-based financial analysis and actuarial services company providing services to regional insurance companies, title underwriters and specialty insurance markets. Petrelli is a member of the Casualty Actuarial Society, American Academy of Actuaries and the Conference of Consulting Actuaries. Visit www.demotech.com for additional information.