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Happy Tuesday my ADI friends, In today's installment of the “Tidbit”, we are going to discuss something you are going to need to know about shortly. The difference between a “Standard Market”, and an “Excess and Surplus Lines (E&S)” market. This is also commonly referred to as “Admitted”, or “Non-Admitted” markets. First of all, why are we even talking about this?!?!?!? What does this have to do with anything?!?!?!?! It’s OK, breathe … you are lucky I am here to save the day … I will explain everything. In the spirit of transparency, I wanted to make you aware of what is happening in Insuranceopolis! In a nutshell, or if you prefer, in a reader’s digest version … well … actually … that just does not exist as the nuances of these definitions is rather deep, complicated, and convoluted to say the least. But fear not dear reader, I will do my best to break it down in a succinct manner for you here. To be honest, the easiest way to thing of this is “lower premiums vs. higher premiums”. Well, that is what many believe, although in some cases that may not be true. But for us here, for the ease of discussion, it will hold true here. A “Standard Market” or “Admitted Carrier” is an insurance company that is licensed to do business in the state that it is operating in (so if they are writing coverage in 50 states, they hold 50 licenses, one in each state). They must conform to various regulations and filed rates for each individual state and classification of business, and a big difference is that they pay into what is known as a “State Guaranty Fund”. “OH DEAR SWEET INSURANCE TERMINOLOGY!!!!!!!!! WHAT IS InsuranceMan 2.0 TALKING ABOUT!?!?!?!?”, you may be thinking. Hold on to your snifter (or glass of choice) and relax, I will explain. A state guaranty fund is basically a fund set up in each state to protect insureds from defaults on payments of claims in the case that an insurance company becomes insolvent. Basically, it protects the insureds of any carrier licensed to do business in the state in the case of catastrophic loss whereby the carrier may throw up its hands, declare bankruptcy, and say, “So sorry, we are teary on the inside, but you get no money for your claims, we are all out of funds.” NOPE!!!!! The “fund” makes sure that money is available to pay the claims in a situation such as this. OK, now that that is over, lets talk about another big difference, MONEY. Admitted carriers, or “Standard” carriers take on risk, don’t get me wrong. They just do it in a way that allows them to assess lower risk, higher reward business that makes them quite profitable. The ability to assess the amount and level of risk, weighed against the premium charged, allows these carriers to still take on legitimate risk, but at a much lower level. These carriers are kind of like the nerdy kid in class that would assess every possible outcome of a situation and only get involved if they knew that they were almost 99.99999999999999% to come out on the winning or “not getting hurt” side of things. With that said, “Excess & Surplus Lines”, or “Non-Admitted” carriers are quite the opposite. These folks are like the cool risk-taker kids we all knew growing up. These are the folks who still fully assess the risks associated, but look at it and say, “Y’all hold my bourbon and watch this!” These are the folks who understand risk fully as well but understand that there are riskier business out there that still need insurance. These folks fill that void. A big difference is that the E&S folks are usually only licensed in one state but operate in many or all of them. Heck, they don’t even have to be licensed in the US. Ever heard of Lloyd’s of London?!?!?! Another big difference, these Maverick types don’t pay into any kind of guaranty fund. “Guaranty Fund … We don’t need no stinking Guaranty Funds!!!” Man, who doesn’t like hanging out with these folks as opposed to the nerdy “Admitted” folks?!?!?! Well … just like in real life, hanging out the nerdy safe folks is just that, pretty safe. Hanging out with the risk takers, well, sooner or later its gonna cost you! So, what do I mean?!?!?! I have no idea, I lost my superhero train of thought, dagnabit! HA, JOKING, InsuranceMan 2.0 never losses his super-mind! What I mean is that the nerdy admitted carriers do take lower risk clients on so they can afford to charge lower premiums and still remain profitable come the end of the year. The Super cool risk-taker non-admitted kids take on cool well assessed risks, but if something goes wrong, and things associated with higher risks can go wrong in bigger ways and more often, so they have to make you pay more so that they too are profitable at the end of the year. Also, since they don’t pay into the guaranty fund, if things go real bad and they become insolvent, there may not be money to pay your claims. I will say though, I have personally never seen this happen, but it could. Think of it this way, your “Farm”-insurance companies do homes, autos, some little businesses, etc. Pretty innocuous stuff. They will not insure things like a running-back’s legs for $12.4 million, or a distillery for that matter. Yes, car accidents happen, and fires do happen, but surprisingly very rarely. Again, low risk, high reward for the nerdy kids. Football players however, they get hurt all the time on the field. AH, here comes the cool risk-taker kid! Again though, the “Farm’s” won’t even consider something like this, so those that will (like Lloyd’s), know there is a need, but they are going to charge a much higher premium due to the amount of risk, and slightly due to the fact that they know no one else will take on the risk. FINE!!!! I will get to the point of all of this, trust me, the build up is worth the wait. As you know if you read my post, “The Times, They Are a-Changin’”, the times are truly a-changin’, over the past several weeks there has been a shift in the insurance marketplace. Standard carriers that would look at and write distillery insurance have been pulling back. They have been strengthening underwriting requirements and guidelines that they did not have before. Basically, the insurance market is cyclical and always has been. Standard carriers will consider certain risks and be aggressive and seek them out for a period of 4-7 years, but then “IT” happens. “IT” being that there is a pullback, a reduction of risk that can last for 4-7 years as well. “IT” happens with hotels, contractors, and on and on the list goes. We are seeing this shift now as well with distilleries and the standard carriers available that are wanting to actively write the insurance for them. Many (most) are now looking at distilleries as a “riskier” risk and pulling back on providing insurance for them. So, what does that mean for those of us in Insuranceopolis??!?!?! It means that we must start preparing. It means that we are going to see this shift start to affect all of us in regard to premiums and availability of coverage with standard carriers. Fear not though fine citizens! It is InsuranceMan 2.0 to the rescue, and I have the “cool risk-taker” kids in tow! I will continue to approach the standard nerdy kids with distillery business, but I wanted to prepare you in advance that these opportunities may be fewer and further between. Out of 22 distilleries submitted in the last few weeks, the nerdy kids have declined all of them. That is too bad for them, because this is not a risky business. Distilleries are so highly regulated, by not only local/state/and federal authorities, but by yourselves as well! These businesses are you heart and soul and you would never do anything “risky” that puts your work and business at risk. The nerdy kids don’t see this currently, they think it is a risky risk that they don’t want to take a risk on. That’s ok, I am here with the cool risk-taker kids who will take a risk on you risk, it just may cost a bit more for a time. I will continue to do the very best job and obtain the lowest premiums for all of you, fine citizens! Again, in the spirit of transparency, I just wanted you all to know where things are and where they appear to be headed, so you are not blindsided. I will always advocate for you and we will prevail!!!!!!!! We will make them see that this is a good risk, and we will win them over. If you don’t believe me, y’all hold my bourbon and watch me do it!!!!!!!!!!!!!!!! Stay Vigilant, Aaron Linden a.k.a. InsuranceMan 2.0 firstname.lastname@example.org 307-752-5961
Happy 11/11 everyone!!! It has been a little while since I have posted anything new here on the forums and I thank you all for that based on the fact that ADI members have been keeping me VERY busy with insurance and bonding needs. Speaking of bonds, what a segue into the hot topic of the day. On 11/7/17 the TTB released new information in regards to the "Information for Alcohol Excise Taxpayers and Applicants for Permits and Brewers’ Notices Regarding Internal Revenue Code Amendments Affecting Excise Tax Due Dates and Bond Requirements". Specifically they cite the "Protecting Americans from Tax Hikes Act of 2015 (“the PATH Act”) (Public Law 114-113). Section 332 of the PATH Act amends the Internal Revenue Code of 1986 (IRC) to change excise tax due dates and remove bond requirements for certain eligible taxpayers (see 26 U.S.C. 5061 and 5551)." Are you sleeping yet? Still with me????? OK ............ This bulletin they released specifies new "Excise Tax Due Dates" that basically say that if you were not liable for more than $50,000 of taxable liability for the calendar year prior, and you don't think you will be above that amount this year, then you can pay your taxes on a quarterly basis beginning 1/1/17. That's cool. It also says that if you reasonably (can someone define what that may mean?? "reasonably" according to who???) expect to not be liable for more than $1,000 in taxes this year as well as in the prior year, you can now pay those taxes annually rather than quarterly. No offense here, but if you have less than $1,000 in taxable liability as a distiller, you have to be quite small as that is only about 463 bottles a year, or in other words, just under 40 bottles a month. Ok, on to the "beefier" subject of this information and what you are really wanting to know; who is exempt and no longer needs this pesky bond stuff anyway!??!!?!? Well, staring as of 1/1/17 it says, " ..... taxpayers who pay taxes annually (so anyone paying less than $1,000 a year, my words here, not theirs) or quarterly (so those folks doing less than an $50,000 a year in taxable liability) will be exempt from the requirements to file bonds covering operations or withdrawals of distilled spirits or wines for nonindustrial use, or beer." Based on the fact that taxable liability only comes into play when spirits are withdrawn (yes, in some cases destroyed, but lets not focus on the negative here people) for distribution/sale (not a transfer in bond, I know my stuff), then as long as you will have less than $50,000 in taxable liability you are good to go without a bond. So is this as clear as mud yet!?!?!?! Basically what is being said here is that if you are going to have less than $50,000 in taxable liability this year (and you had less than that last year) you do not have to have a bond any longer. "BONDS!??! WE DON'T NEED NO STINKING BONDS!!!!!!!!!!" WooHoo, right!?!?!? Well ................... not so fast there speedy. There are a few things to consider before making the call to your agent and telling them to cancel that money sucking bond (actually, my bonds are the lowest in the country so they are not "money sucking" at all). First off, are you close to that bond limit of $50,000? If you are close, or expect to be "reasonably" (hahahaha) close, you may want to leave it in place, just in case. You do not want to cancel the bond only to have to turn around a few months or a few quarters later because you have increased your sales/distribution which equates to withdrawal, and now need to be bonded again. Another aspect to consider is this, when does your bond term come due? I have a lot of folks who will fit the requirements to cancel their bond, however their bond terms renew in November or December. According to the stipulations, they need to renew and keep their bond up until 1/1/17, so they MUST renew it. Here is another caveat to that, depending on the surety carrier that issues the bond, the premium may be pro-rated (you can get money back for the unused portion of the term once you cancel) but they may keep a minimum of $100 service fee ............ or ............. if the premium is 100% full earned, you may not get anything back. Well, why cancel the bond at that point?!?!?! The other issue is that the TTB will not allow you to cancel the bond until all unpaid taxes are rectified from 2016. Once they are you can file for a bond exemption with the TTB through the PONL system but they never specify how long that process will take. So here again is something to watch out for. What if your bond term is after the 1/1/17 date and you file for the exemption but it takes them 6 months (for whatever reason) to process it. Do you need to renew your bond while this is in process? At this point in time I would suggest that you do renew it since you do not want to be out of compliance during the processing time. See, this is not as simplistic as it is made to sound. Obviously, these scenarios are all in regards to existing DSP proprietors. So what about new applicants. Well, for new applicants, since the current processing time for a permit is over 200 days, you should be able to apply for your permit and ask for the exemption during the permitting process. That part actually does sound simplistic and appears to be pretty straightforward. There is a first time for everything!!! So what does this all mean, in real facts and figures and how do you know if you will be below the magical $50,000 mark? Well here is a quick mathematical computation for you (keep in mind these numbers are rounded for simplistic purposes): Current excise tax liability = $13.50 per proof gallon (proof gallon defined as 50% ABV or 100 proof) Taxes are only due when spirits leave the plant, so anything in holding/process does not count against this amount Most spirits go out the door at 80 proof, so the tax rate then would be $13.50 x .8 = $10.80 per gallon (since it is proofed down) Therefore, $50,000 / $10.80 = 4,629 gallons a year or roughly 23,000 bottles of booze, or nearly 2,000 bottles a month Here are pretty much the same numbers but done in actual proof gallons (not rounded): $50,000/$13.50 = 3,703.7 p.g. One case of 12-750’s at 80 proof = 1.902 p.g. per case 3703.7 p.g./1.902 p.g = 1,947 cases or 23,364 bottles per year (cases rounded down to full case) 1947/12 = 162.25 cases per month 23,364/12 = 1947 bottles per month So there you have it folks. A long run for a short slide as it were. The just of all of this is that some of you may not need a bond if you are just getting going and some of you may not need a bond even if you are operating, however make sure you understand where you stand and when the bond term comes due before cancelling you bond. As always, if you have any questions please feel free to reach out to me with any questions. I can be reached here on the forums, via email at email@example.com , or give me a call or shoot me a text at 307-752-5961. I am always more than happy to assist you with your bonding questions and do keep in mind ***** I OFFER A FULL LINE OF ALL DISTILLERY INSURANCE NEEDS, AS WELL, I HAVE THE BEST RATES IN THE COUNTRY. ***** Just sayin'. Best, Aaron