Here We Go Again

Across the country, the excess and specialty insurance business is at a historic turning point.

Will we repeat the catastrophic mistakes of the past? Or, can we learn from those past mistakes, and successfully fulfill our critical role as the economic safety net in a risk-based society? The issues facing us today—terrorism, toxic mold and workers’ comp, just to name a few—are big issues and they have left the eyes of the world focused on us.

In order for us to meet the huge challenges that lie ahead, it is useful to take a look back and see how we came to be where we are in 2002.

The roots of today’s marketplace can be directly traced back to the unprecedented hard market that struck our entire nation in 1985. Prior to that time, those of us who were in the excess and specialty business in California remember that we were a virtually unregulated segment of the industry who quietly and profitably went about our business, undisturbed by the government, and unnoticed by the public. It would be easy to wax nostalgic about those simpler times, however closer scrutiny of history reveals that there existed certain “irregularities” that caused much misunderstanding, waste and inefficiency.

For example, many thought it was a crime for a surplus line broker to type a policy on behalf of a non-admitted company.

I know of several shops that routinely shipped large boxes of completed policies out of state to Arizona or even to London so that they could be “executed” (signed) by the home office, in order to perpetuate the ruse that they had been typed in another jurisdiction. Then they were shipped back to California to be distributed to the retailer and the insured. Likewise, binding of coverage was often done in such a fashion as to give the appearance that it was done out of state. Advertising a product or program as a surplus line broker was also widely thought to be illegal. The whole question of charging policy, broker, or inspection fees as a wholesaler was up in the air. However, day to day business continued. Then came 1985.

Overnight, premiums doubled and, in some cases, even tripled. Wholesalers feared to hear the dreaded “M” word—moratorium—no new business until further notice from underwriters. Many companies who had been freely writing business in our state pulled out. Others simply ceased to exist. It is difficult for someone who was not in the business during this period to understand the frustration of having customers pounding the doors down to buy and not being able to meet their needs because the product they needed was not available, in some cases, at any price. It is suffice to say that the industry’s wounds were self-inflicted, and the same forces that caused the turn in 1985 are at work today.

By mid-1986, the situation had reached crisis proportions. Time magazine ran a cover story at this time entitled “America, Your Insurance is Canceled!” which stated that all across this country, many municipalities, contractors and manufacturers were going bare on their liability exposures because coverage was just unavailable. Many others were in sticker shock at the price of their renewals. But the biggest casualty of the last hard market was our credibility. The American insurance buying public is not as naive, uninformed or gullible as they are sometimes portrayed. Buyers of commercial insurance particularly knew at a gut level that the only reasonable explanation of what had happened was mismanagement at the highest levels.

It looked to all the world that we did not have a clue as to what we were doing, so the regulators and consumer advocates were happy to step in and show us how to properly conduct the business of insurance.

By 1988, heavy regulatory pressure was evident at all levels, and here in California a little-known social crusader by the name of Harvey Rosenfield managed to qualify ballot Proposition 103 for the November election. Prop. 103 was exactly what the industry and consumers didn’t need. The endless legal haranguing about the rebates and auto rate factors continued for over 10 years after the initiative went into effect.

A major aspect of the fallout from Prop. 103, for our part of the business, went almost unnoticed at the time. But soon, it was to have a staggering effect on the surplus line marketplace, and in my view, threaten us with near extinction.

I refer to the fact that for years, the large personal lines companies had been subsidizing the assigned risk auto rates on inner city drivers for political reasons. The theory was that as long as coverage was cheaply available for everyone, consumer backlash could be kept in check. But with the passage of Prop.103, the worst had already happened; the office of Insurance Commissioner had been politicized, 20 percent rebates were due on last year’s business, and most importantly a change from a “file and use” rate scheme to a “file and approve” one. The assigned risk board, dominated by the large personal lines writers, immediately decided to change inner-city auto rates from politically correct to actuarially sound. Because minimum auto liability limits required by California law were now unaffordable in the residual market, and the admitted companies were not interested in this class of business, the surplus line industry seized this opportunity to gain market share.

However, something went terribly wrong.

Due to the hundreds of millions of dollars worth of business available, and loopholes in California Surplus Line Law, evil and greedy criminals invaded our domain. We all remember Alan Teal and the “Pirates of the Caribbean.” Sham companies sprung up, grabbing gobs of premium, paying a few claims, and then disappearing within a matter of months, only to be replaced by others. It was like the Greek myth of the Hydra; for every head that was cut off, two more would grow back. For a while, the legitimate operators in our business watched with horror from the sidelines as this gigantic slow-motion train wreck took place. Meanwhile, California’s first elected Insurance Commissioner, John Garamendi, and his legal staff at the Department of Insurance tried to deal with this problem using archaic and inadequate surplus line laws. They simply did not have the right tools for the job.

It was at this critical moment, that the California Insurance Wholesalers Association (CIWA) was formed.

CIWA was the brainchild of Dave Anderson, Marvin Uritz and the late Norm Levine.

The association’s inaugural meeting took place at the NAPSLO convention in 1992 at the Century Plaza Hotel in Los Angeles. The founding fathers of CIWA had the vision to realize that those with an intimate knowledge of the day-to-day excess and specialty insurance marketplace would have to lend their support as well as be willing to work with the regulators in crafting new surplus line laws.

As mentioned, the Department of Insurance had had mixed success in their efforts to stop the phony surplus line company scams. The reason was simple. They were attempting to prosecute these cases one by one as they arose. But the difficulty in using this approach was that by the time the wrongdoing came to light, the perpetrators had already moved on to their next set of victims. What was needed was a change in the system.

A white list of pre-approved surplus line insurers was the best answer, and CIWA played a huge part in creating and supporting the legislation that made it happen. The Department of Insurance, the Surplus Line Association, along with the Surplus Line Coalition organized by Gerald Sullivan also deserve tremendous credit for helping to set up a prototype regulatory scheme for our end of the business, which today serves as a model for states all over our country.

CIWA leadership and members have gone on to serve on numerous Department of Insurance/Industry task forces and panels which have dealt with a host of extremely important regulatory and consumer issues. The association has also sponsored many pieces of legislation, which have been signed into law.

There is one other organization that deserves a large amount credit for the accomplishments that have been made in the legislature, and that is the Agents and Brokers Legislative Council.

This coalition of producer groups, of which CIWA is a member, has batted .1000 in advancing the legislative reforms that CIWA has sought through the diligent work of our lobbyist, John Norwood. The ABL has sponsored bills of behalf of CIWA which have defined the role of Surplus Line Brokers as wholesalers, set in statute the right of Surplus Line Brokers to type policies and restricted the ability of lenders to make unreasonable requirements on Insurer rating and size.

Now we have come full circle.

After the longest soft market in industry history, we are now facing all of the challenges of a hard market such as we had in 1985. The lessons of history dictate that we cannot sit on the sidelines from a regulatory and legislative standpoint during this critical time. We must communicate and cooperate with the regulators and our customers if we are to succeed and prosper.

Theodore Roosevelt said, “The credit belongs to the man who is actually in the arena, not to the critic who tells the doer of deeds how he could have done them better.”

Now that we have earned a seat at the table of power in Sacramento, let us strive to remain in the arena. Is this a difficult time in the insurance business? Yes, but it is also an exciting, dynamic time. I urge you all through such organizations as CIWA, to take part, get involved, and stay engaged.

Scott has worked at Trans Cal Associates since 1978. Scott graduated from high school in 1972, and attended American River College in Sacramento. He then served in the U.S. Army Medical Corps, including a tour of duty overseas in Korea, and received an honorable discharge in 1978. Since that time, Scott has served in a variety of positions with Trans Cal, including marketing manager, CFO, and his present position, CEO. Scott is licensed as an insurance agent, insurance broker, surplus lines broker, and insurance adjuster. He has also served as the president of the California Insurance Wholesaler’s Association (CIWA), and currently sits on their board of directors.