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Risk Management Fit for Alabama’s Middle Market

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Valent Group CEO Paul Barber; Allen Baker, senior vice president of property and casualty; Cooper Johnson, benefits leader, and Hawkins Tatum, member of the benefits team. Photo by Art Meripol

The insurance industry has undergone massive consolidation in recent years, resulting in fewer companies fighting for bigger chunks of the pie, big corporate clients.

The trend is worth paying attention to even if you are one of the small-to-middle sized companies that mainly populate the Alabama economy.

Mergers and acquisitions in the insurance industry hit an historic peak in 2017, modified some in 2018 and regained momentum in 2019. The second quarter report on M&A activity by specialist MarshBerry, says first half of 2019 reclaimed a “record setting pace,” with 280 deals in the U.S.

“The M&A activity is actually slowing down now, because it was so active the multiples became outrageous. The prices don’t make sense financially,” says Paul Barber, CEO of The Valent Group, an insurance broker headquartered in Birmingham that caters to midsized companies.

Being in the middle, Valent Group exemplifies a type of broker that emerged out of the consolidation flurry, as described by Andrew Holderness, global head of Clyde and Co.’s Corporate Insurance Group, talking to Insurance Business in February. “What we’ve got now is three big brokers, we’ve got Marsh, we’ve got JLT and we’ve got Willis,” said Holderness. “Then we have the next tier of brokerages size-wise, and they are looking at those big boys and thinking that it actually creates opportunity for them being smaller.

“Basically, they think they are more flexible, nimbler, more agile, more customer-focused — they’re much more in-touch with their customer relationships. A lot of them do not strive to be the size of the big three, they see it as a unique selling feature that they’re not. And some of them are fiercely independent.”

The “next tier” Holderness is talking about is comprised of companies larger than any headquartered in Alabama, but Alabama-based Valent fervently claims the same customer-focused advantage in the wake of the M&A tsunami.

“The private equity firms, when the prices are so high, it accelerates their need to do the financial engineering, cut costs, and it doesn’t make the work environment attractive,” says Barber. “Customer service goes down and people have to do more with less.”

In the words of a third party observer, consolidation “limits choice and has not delivered on its intended promise to be more efficient, more cost-effective and to result in less expensive care for consumers,” concluded analyst Greg Andrews, with Corporate Synergies.

“We work for a fee for clients who are in the small to middle market sector,” says Barber, whose company stakes Alabama as its territory, with offices in Birmingham, Huntsville, Decatur and Mobile. “In that sector, we feel they expected far too little from their insurance brokers. With most of the smaller agencies, their business model is they try to win on price. Brokers in the midsize market like us realize that trying to win on price is an exhausting experience. That’s why the consultant approach is so proper, a much better business model.”

Valent Group, says Barber, is a broker of insurance, but the consulting service for which it charges fees is risk management.

“There is very good positive pressure in the middle market, where we play, where companies are too big for the off-the-shelf products and need more consultation and specialization,” says Allen Baker, senior vice president of Valent’s property and casualty practice. “These are companies spending $100K to $500K a year and who still need to talk with someone who will help them drive down their cost.

“From a real estate perspective, we are in a hardening marketplace, where it’s not beyond the pale to have 25 to 40 percent increases on property insurance,” says Baker. “To drive down cost, you have to restructure your insurance in terms of its policies, perhaps raise deductible levels, look for ways to self insure.”

But the biggest insurance costs facing a company often come in the area of employee benefits, especially health.

“With the rise in the cost of premiums in the last 10 years, what we hear from most companies is that health care spending is the second largest cost behind payroll,” says Cooper Johnson, Valent’s benefits practice leader.

Before the Affordable Care Act, says Johnson, “Companies delegated the benefits world to the HR department. After ACA, with its tax implications and penalties, that decision floated up to the C suite, to the CFO.

“The conversation now is not just health insurance, but about long-term objectives and strategy, and most of the time health insurance companies don’t have the time to have this conversation,” says Johnson.

Along with the discussion of objectives, a risk management consultant, says Johnson, must have the capacity for analytics. “You determine the drivers of the cost of health care by looking under the hood. It starts with the data, and without the data, you’re shooting blind.”

Investment in information technology is one of the factors, say industry analysts, driving the consolidations in the insurance.

For analytics technology, says CEO Barber, Valent has the benefit of being a subsidiary of a major IT company, 75-year-old, privately owned EBSCO, also based in Birmingham.

“EBSCO is a big investor in technology, says Barber. “EBSCO Information Services is driven by technology, and we feel that we have more access to technology than other agencies our size, because of their commitment to technology.”

“We are data driven and want to identify the underlying health conditions driving a plan’s annual cost,” says Hawkins Tatum, a member of Valent’s benefits practice team. “Once identified, we deploy strategies to help clients through wellness programs, plan design improvements — for example, offering free generic drugs or diabetic supplies — and employee advocacy.”

Among the options to consider in such a conversation with a CFO about health benefits, says Johnson, are tax deferred health savings accounts, cost shifting from premiums to out-of-pocket costs and reduction of out of pocket costs with employer operated primary care clinics. Employer clinics require a threshold of about 1,500 workers but that can be networked among smaller companies.

“If you don’t have 1,500, you can use the shared clinic concept, a central location,” Johnson says. “We started one in in Huntsville and two in Birmingham. They are trying to spend more on primary care, getting people to take care of themselves, by providing easy access at a fixed cost.”

“We want to learn about your business and not just quote you insurance,” says Barber. We want to know what is driving your health care cost spend, and we have access to the data and the technology to do that.”

Chris McFadyen is the editorial director of Business Alabama.

Waves of Relief

A recent photo of erosion on Dauphin Island taken by researchers at the Dauphin Island Sea Lab. Photo supplied by Dr. George Crozier

About 30 miles south of Mobile sits a tiny sliver of land that has become just as significant to the debate over American disaster policy and the National Flood Insurance Program as any other storm-battered metropolis in the continental United States.

Perhaps this has something to do with the fact that, despite boasting an incredible labyrinth of natural and manmade sand dunes, the 14-mile drumstick-shaped mass known as Dauphin Island floods repeatedly, even when there’s not a single hurricane in sight.

The barrier island’s naturally occurring phenomenon of beach erosion, in which sand is stirred up and shifted around, also presents the occasional possibility of disaster, particularly in areas of property lines, buildings and infrastructure. So, whether it’s rainstorms, hurricanes or shifting sands, local residents are forced to repair and rebuild their homes and businesses over and over again — often at the expense of taxpayers.

In 1968, the National Flood Insurance Program was established to assist homeowners in flood-prone areas like Dauphin Island. But with more than five million homes now under its belt and surges in coastal development, the program is buckling under the weight of a $25 billion debt. This has left Congress with no option but to restructure the program as a means of helping people who live in high-risk sectors.

Hurricanes aren’t just catastrophic — they’re costly. These monstrous tropical cyclones have wreaked havoc across the U.S. in recent years to the tune of more than $500 billion. And, for whatever reason, many U.S. homeowners seem determined to continue to build in harm’s way. Dauphin Island is no different in this regard.

“Last year alone there were about 80 new builds on the island,” says La Donna Douglas, owner and lead agent at Coastal Professional Insurance in Mobile. “More people are coming here, purchasing property [on the island] and putting it into rental programs, which is boosting the economy.” And she works with them, advocating purchase of flood insurance.

“You really want to buy it before the flood maps change and you end up in a higher zone and a higher rating and a higher premium. Most people know the risk is real. And yet, there are still some people who choose not to buy it.

“The people who self-insure are betting against Mother Nature that they’re not going to sustain a total loss. If they do have a total loss, nobody pays them anything. They’re just left without a house and terrible luck.”

Dauphin Island mayor and longtime resident Jeff Collier says that although his office strives to keep people aware of potential changes, residents are also encouraged to remain updated on the latest developments with policies.

“We do try to watch out for changes in the flood insurance, but we should all be mindful and practice good responsibility,” Collier says.

Policy ratings are based on three factors: the age of the dwelling, the elevation of the home or building and the type of flood zone in which it is located. These are all unique aspects of the risk assessment procedure, particularly in a situation like that of Tricia Kerr, president of the Dauphin Island Chamber of Commerce and owner of the Sand Box Gift Shop.

“My business is a bit of an unusual case,” she says, grandfathered in though it’s flat on the ground. “This structure has been here since 1950 and it’s the original structure. The additions that we made were not conducive to the flood laws we have now or even the flood laws from 20 years ago. My mom and dad started the Sand Box in 1974, and now we rent the complex out to three other businesses. We’ve had issues with flooding and hurricanes in the past, with Ivan and Katrina, but to be honest, with the new hurricane boards and strips, we don’t have the problem of water surging anymore. Now, when we built the other portion of the complex, they had to go up to a slightly higher elevation, but it was just a little step.”

Currently, there are three flood zones on Dauphin Island: AE (low-risk), VE (high-risk) and X (non-hazard zone, low-risk). The AE Zone specifically refers to an area inundated by a one percent annual chance of flooding, for which base flood elevation (BFE) has been determined. The VE Zone is an area inundated by a one percent annual chance of flooding where velocity hazards like waves can occur. Zone X typically refers to an area that has been determined to be outside of the 500-year floodplain and outside of the one percent chance for annual flooding.

Most of Dauphin Island’s coastal community is located in Zone X as it is a non-hazard zone and flood insurance is optional. However, any residents living in AE or VE zones have to have flood insurance to acquire a loan on the property and to protect personal assets. Island resident Charles Moses, whose east end home was built in 2016, feels his policy and requirements are about average for his location.

“In an AE Zone, you have to be at least eight feet to the bottom of your first living floor,” he says. “That’s FEMA’s national requirement. Dauphin Island requires an additional two feet. My house is about 18 feet top to bottom. Interestingly, the house next door to me is on the ground and it’s only flooded twice in the last couple major hurricanes. If they were to be totally wiped out though, they would have to rebuild to the new and current elevation standards. When you finance a house like I did, you’re required to purchase flood and homeowners insurance. My flood insurance is $690 annually through Assurant, which is about right in terms of cost from what I’ve discussed with everyone else around here. It’s a pretty average policy and covers all the basics. You couldn’t pay me to live on the west end of the island though.”

Assuming that President Donald Trump doesn’t make any drastic changes in regard to the NFIP, most policies like Moses’ should be fine. But, as many coastal residents will testify, flood insurance is never predictable. Thankfully, Gold Fortified home standards were introduced as a requirement for the Dauphin Island community in 2018 and now almost every structure is built to better specifications in regard to wind resistance and elevation.

“I have a certified Gold standard on my house,” says Moses. “But that’s mostly wind and doesn’t have anything to do with flood. You have to buy the flood separate from regular insurance. Gold Fortified means it’s effective [and protected] against hurricane winds up to 200 mph. I hired an architect to come out and oversee that. All the beams had to be stainless steel, the nail pattern and tins had to be so many nails and a certain pattern and he checked all that. When it was done, it cost me a little bit of money, but he said ‘You’ll be the one standing on your front porch waving at the news helicopters after a major hurricane. This house isn’t going anywhere.’ My house is also registered with FEMA, and I have an official certificate now, so I get a break on my regular homeowners insurance. If you don’t have that Gold standard, your insurance will be crazy.”

For someone like Moses, it’s this level of security that provides a blanket of relief so that he can enjoy living in what he and many other locals fondly refer to as “The Mayberry By The Sea.”

“As a regular resident on the east end, I chose to live here because, although I’m in a flood zone, I like the small town feel of this place. You’re sort of living in a resort atmosphere. It’s also very family-oriented. People are out with their kids all the time, riding their bikes, and there’s virtually no crime. Everybody knows everybody in the community and there’s a lot to do on the island. They have movies on the west end on Friday nights, and there’s the art gallery on the last Friday of every month. Sometimes there are live bands, and of course there’s the beach and boating. I like the water, and fishing and being around the water. And in the wintertime, it’s so quiet you can hear a pin drop down here.”

Joshua Givens is a freelance contributor to Business Alabama. He is based in Mobile.

Weathering the Storm: Insurance Coverage For Risks Posed By Natural Disasters

Alabama businesses face significant risks posed by weather-related natural disasters, including physical losses to property, business interruptions and loss of income. Though Alabama was mostly unaffected by the devastating natural disasters suffered throughout the country last year, these events resulted in more than $330 billion in losses according to some insurance industry estimates.

While the full economic impact of the 2017 natural disasters is not fully realized, a 2013 study by the American Sustainable Business Council revealed natural disasters are particularly devastating to small- and mid-size businesses. According to the study, one-quarter of small and mid-size businesses hit by a catastrophic storm do not reopen. The researchers also estimated small businesses lose an average of $3, 000 per day after closing caused by a major storm event.

The impact of last year’s extreme natural disasters, as well as those other disasters of the past decade, demonstrate how important insurance is for businesses in absorbing resulting financial losses. Thus, Alabama businesses should take proactive measures to ensure their insurance policies meet their particular risks and expectations.

Insurance coverage for damage caused by a natural disaster is available through a variety of common insurance products generally referred to as “property” insurance policies, but they come under other names, such as “inland marine, ” “fire, ” or “multi-peril” or “all risk” insurance policies. Depending on the circumstances of the loss, the following coverages are available to insure damages caused by natural disasters:

Physical Loss or Property Damage

Property damage coverage generally provides coverage for physical loss or damage to business property, such as buildings, machinery, equipment, inventory and raw materials. The typical property insurance policy provides coverage for the cost to repair, replace or rebuild property that suffers physical damage. However, the cause of the loss is often crucial to determining whether coverage is afforded under the typical property insurance policy. For example, most property policies cover damages caused by fire, windstorms, hail, riots and explosions. However, many property insurance policies contain exclusions for flood damages, but flood insurance is generally available either as stand-alone products or as endorsements to other policies. Thus, Alabama businesses vulnerable to flood damages should review their insurance programs to ensure insurance is available to provide coverage for flood risks.

Debris Removal

Debris removal coverage is a common additional coverage to most property insurance policies. It covers expenses incurred in the removal of debris of covered property damaged by an insured peril, such as a tornado or hurricane. Debris removal coverage can be particularly valuable for businesses needing to dispose of hazardous materials following a natural disaster due to the high costs associated with the disposal of such materials. However, debris removal coverage may be limited to a percentage of the total loss and may exclude trees, shrubs and plants.

Extra Expense Coverage

Natural disasters often cause businesses to incur additional expenses beyond repairing or replacing damaged property. The cost of operating a business often increases during the aftermath of a natural disaster. Extra expense coverage is intended to cover the insured for such extra expenses. Extra expense coverage may include the cost of generators when electricity is lost in the aftermath of a storm, costs of security guards to prevent looting or costs associated with the usage of a temporary business location during the restoration period.

Business Interruption Coverage

In the aftermath of a natural disaster, businesses likely suffer lost income and profits from the suspension of their operations. Business interruption coverage is designed to cover lost income and profits. This coverage is typically limited, however, to the loss of income sustained during a “necessary suspension” of operations. Depending on the policy, this may require a total cessation of operations or a partial cessation. Additionally, most policies include a 72-hour waiting period after the damage occurs before business interruption will be covered. Thus, business owners are advised to read this coverage closely and determine whether their needs are being met for potential business interruption risks.

Contingent Business Interruption Coverage

Even if your business is not directly impacted by a natural disaster, you could still suffer losses if your business relies on an affected party. Contingent business interruption coverage provides coverage for loss of income due to physical loss or damage to property of a third party, such as a supplier, customer or logistics company your business relies on to operate your business. For example, a manufacturer can purchase contingent business interruption coverage to protect it if its sole supplier of a key component suffers destruction of its factory and that causes the manufacturer to suffer a business income loss from its inability to complete manufacture of its product. Accordingly, a business that has a close relationship with a supplier physically located in a destroyed building may be able to recover for losses suffered in the wake of the destruction of that supplier’s physical plant. Similar to business interruption coverage, contingent business interruption coverage is often subject to a waiting period and does not incept until after the specified waiting period has elapsed.

Civil Authority Coverage

Civil authority coverage is designed to provide coverage for business income losses incurred as a result of an order by a civil authority preventing access to the insured’s place of business. For example, this coverage applies if an evacuation order, roadblock or forced power outage prohibits access to your business.

Service and Utilities Interruption Coverage

This coverage is designed to provide coverage for business income losses attributable to interruption of utility or telecommunications service. Income losses from such outages should be covered under most property insurance policies. As with contingent extra expenses, a policyholder’s expenses in minimizing the loss caused by service interruption should be covered. For instance, the policy may cover the purchase of cell phones for employees to use while the company’s phone service is out of order.

Builders Risk Insurance Coverage

This coverage is designed to protect construction sites from loss and damages. Businesses in the construction industry should consider builders risk insurance products to protect against damages caused by natural disasters. Like traditional property insurance, builders risk insurance generally provides coverage for damage caused by fire, lightning and wind. However, damages caused by floods are frequently excluded on most builders risk policies. If your business is working in an area where you have a high risk of flooding, you may need to add supplemental coverage to your builders risk policy to cover it.

Summary

Each business faces unique obstacles and challenges, and it is critical to develop a plan to prepare for potential impact arising from natural disasters. As we have all been reminded over the past decade, disasters will happen. With this realization, Alabama businesses should consult with their insurance and legal advisors to identify the most appropriate insurance products for their business risks.

Brandon J. Clapp is an attorney in the Birmingham office of Swift, Currie, McGhee & Hiers, LLP. He is a member of the firm’s coverage and commercial litigation section, where he counsels clients in a broad variety of litigation matters, including insurance coverage, construction, commercial disputes, professional liability and personal injury. He may be reached at brandon.clapp@swiftcurrie.com.

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