Tuesday Morning Insurance Tidbit - Standard Vs. E&S

[InsuranceMan]

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

insuranceman2.0@yahoo.com

307-752-5961

[Julius]

So this cyclical nature explains why I have had insurance underwriters around year?

[InsuranceMan]

@Julius, more than likely!  Could you expound upon this at all?  What have they been asking, or imposing on you?  I would be interested to know who the insurance carrier is and what they have been after you about.  I look forward to hearing more!

[Julius]

Have been insured by this company for four years. I will PM you specifics. 

99% of it involves questions about compliance with the NFPA. Our building was built well above and beyond code, and we haven’t changed anything since the start of the policy. After multiple onsite visits, and we thought they were pacified, there will be another site visit about construction and compliance in a non production area of the building. 

It is just incredibly strange that these questions are being asked 4 years after the fact. 

[Patio29Dadio]

8 hours ago, Julius said:

It is just incredibly strange that these questions are being asked 4 years after the fact.  

More than likely they had some claim that has caused them to evaluate their client portfolio and attempt some risk management. 

I had one carrier quote that would only cover us if we promised to move our barrels to another building.  Even though the barrel room is a separate, sprinkled, control room.  The rep admitted that he was getting this handed him from underwriters because of a previous claim where a still fire took out the barrel stock stored RIGHT NEXT TO THE STILL IN THE SAME ROOM!  But they could not accept barrels in another control room away from the production area.   They are reactive that way. 

[Julius]

12 hours ago, Patio29Dadio said:

More than likely they had some claim that has caused them to evaluate their client portfolio and attempt some risk management. 

I had one carrier quote that would only cover us if we promised to move our barrels to another building.  Even though the barrel room is a separate, sprinkled, control room.  The rep admitted that he was getting this handed him from underwriters because of a previous claim where a still fire took out the barrel stock stored RIGHT NEXT TO THE STILL IN THE SAME ROOM!  But they could not accept barrels in another control room away from the production area.   They are reactive that way. 

Makes sense. 

I’m just glad our building has exceeded requirements for all of their questions. 

[InsuranceMan]

@Julius,

     Exactly!  Reactive and knee-jerk based off of one possible bad apple.  This is right on the money with what I am saying.  Many, if not most of the standardized carriers are becoming more and more reactionary to distilleries and are now wanting to see them as a "high-risk" classification of business.  I do not see this changing any time soon, so it is time to buckle up and hang on.  Again, I am working on educating them more, and looking at several other carriers/programs at this point in time.  Currently there are still options, but they are becoming tighter and imposing many more requirements that they had not required in the past.

Stay Vigilant!!!!!!