Status & Future of Binding
Authorities in the US
PRESENTED AT THE:
NORTH AMERICAN BINDING
AUTHORITIES CONFERENCE
SEPTEMBER 25, 2014
BY:
BERND G. HEINZE, ESQ.
AAMGA EXECUTIVE DIRECTOR
Agenda
 State of the Surplus Lines Market
 Events Impacting Wholesale Insurance Professionals
 Federal & State regulatory developments
 Overview of US excess and surplus lines market
 Issues and Opportunities
 Open discussion
North American Binding Authorities 2014
External Market Environment
Current Market Conditions
 E&S Market Outperformed P&C Market in 2013
 92.4% combined vs. 95.8%
 Doubled net income over 2012
19 of top 25 markets grew by more than 10%
 Top 25 produce 75% DWP
 Lloyd’s & AIG = 30%
 Berkshire Hathaway = 39% growth
 Berkley moves from 5th to 4th ahead of Zurich




Premium increased => sustainable (?)
Return to underwriting profitability
Low interest rates
Current Market Conditions
 E&S Market Outperformed P&C Market in 2013
 Adequate pricing and underwriting integrity
 Growth in unique and creative product lines
 Stable for now…but caution on diminishing average rate
increases
 A/Y reserve development more favorable than P&C market


Gap shrinking:
 excess capacity
 low interest rates and
 capital outlays to enhance operational efficiencies
Transformative phase of consolidation and specialization
Largest E&S Premiums by State (Top 5)
State
2013 (US$)
2012 (US$)
2011 (US$)
% from
2012
California
$5,305,996,906 $5,057,111,503
$4,998,686,446
4.9%
Texas
$4,883,847,632 $4,339,279,902
$4,220,187,772
12.5%
Florida
$4,592,462,577
$4,204,711,182
$3,730,727,071
9.2%
New York
$2,911,263,983
$2,625,552,790
$2,883,087,795
10.9%
$1,250,000,000
$1,096,107,216
16.7%
New Jersey $1,458,333,300
Largest growth State (2013): North Carolina $822.3 million – increase of 42.8%
2013 S/L Stamping Office Premium
State
2013 Prem ($M) 2012 Prem (M) % Chg
AZ
$406.8
$339.8
19.7%
CA
$5,187.8
$4,851.9
6.9%
FL
$4,592.5
$4,116.9
11.6%
ID
$76.9
$60.2
27.2%
IL
$1,160.1
$1,075.4
7.9%
MN
$418.8
$356.8
17.4%
MS
$345.3
$307.1
12.4%
$22,467
$19,449.3
15.5%
Total*
* Total of all 14 State Stamping and Surplus Lines Offices
2013 S/L Stamping Office Premium
State
2013 Prem ($M) 2012 Prem (M) % Chg
NV
$249.2
$232.1
7.4%
NY
$2,944.2
$2,047.6
43.8%
OR
$253.8
$227.1
11.8%
PA
$1,267.4
$981.7
30.0%
TX
$4,706.3
$4,015.9
17.2%
UT
$179.6
$170.3
5.5%
WA
$669.3
$666.5
0.4%
Total*
$22.467
$19.449.3
15.5%
US S/L
$37.72
$34,808
8.4%
* Total of all 14 State Stamping and Surplus Lines Offices
2013 S/L Stamping Office Premium
State
2013 Prem ($M) 2012 Prem (M) % Chg
Total*
$22,467
$19,449.3
15.5%
US S/L
$37.72
$34.81
8.4%
51.7% of all US S/L Premium written in 14 states with stamping offices
* Total of all 14 State Stamping and Surplus Lines Offices
Largest US MGA’s/Wholesale Broker/Lloyd’s
Coverholders
Company
2013 Prem
(US$)
Variance
%
Risk Placement Services
$2.34 billion
14.1%
$201 million
12.9%
60%
$1.1 billion
29.4%
$265 million
20.5%
70%
AmRisc, L.P.
$850 million
14.1%
$106 million
2.7%
65%
The Shinnerer Group
$685 million
0.1%
$85.1 million
(1.3)%
5.0%
Appalachian
Underwriters
$410 million
2.0%
$39.2 million
0%
15%
Gresham & Associates
$399 million
15.8%
$40 million
12.7%
50%
Program Brokerage
$340 million
22.1%
$32.6 million
20.7%
21.4%
Markel Midwest
$336 million
17.7%
$59.2 million
121.3%
82%
K&K Insurance Group
$282 million
17.3%
$58.2 million
15.9%
5.0%
The Sullivan Group
$189 million
4.6%
$20.7 million
3.2%
32%
Burns & Wilcox
2013 Gross
Rev (US$)
Variance
%
E&S %
Premium Volume of 10 Largest US MGA’s
Year
Premium (US$)
2004
$4.66 billion
2005
$4.16 billion
2006
$3.24 billion
2007
$5.25 billion
2008
$4.50 billion
2009
$4.35 billion
2010
$5.16 billion
2011
$5.45 billion
2012
$6.14 billion
2013
$7.02 billion
US MGA’s Most Common Classes of Business
 General Liability:
 Commercial Property:
 Professional Liability:
 Commercial Auto:
 Employment Practices:
 Directors & Officers:
92%
92%
86%
86%
83%
83%
Largest US Property & Casualty Wholesalers
Company
AmWINS Group
2013 Prem
(US$)
Variance
%
2013 Gross
Rev (US$)
Variance
%
E&S %
$8.1 billion
21.6%
$668 million
14.9%
66%
$4.99 billion
10.2%
658 million
7.6%
30%
Cooper Gay Swett &
Crawford
$4.8 billion
11.6%
$380 million
9.5%
55%
Ryan Specialty Group
$3.7 billion
55.7%
$304 million
44.4%
83%
All Risks, Ltd.
$1.1 billion
27.8%
$96 million
23.9%
67%
US Risk Insurance
$575 million
43.8%
$55 million
11.7%
90%
ARC Excess & Surplus
$575 million
4.5%
$53 million
17.8%
25%
Brown & Riding
$481 million
61.9%
$40 million
52.6%
68%
Worldwide Facilities
$481 million
16.2%
$41 million
13.6%
--%
Partners Specialty
$434 million
8.6%
$32.8 million
8.2%
70%
CRC/Crump
Premium Volume of 10 Largest P&C Wholesalers
Year
Premium (US$)
2005
$12.87 billion
2006
$17.32 billion
2007
$12.79 billion
2008
$12.39 billion
2009
$12.73 billion
2010
$12.05 billion
2011
$17.12 billion
2012
$20.82 billion
2013
$25.20 billion
US P&C Wholesalers Most Common Classes of
Business
 General Liability:
 Inland Marine:
 Umbrella/Excess:
 Commercial Auto:
 Commercial Liability:
 Employment Practices:
 Directors & Officers:
 Product Liability:
90%
86%
86%
86%
83%
80%
80%
80%
AAMGA Membership Composition - 2014
 258 Wholesale Insurance members
 132 US and international risk bearing (80%) and





non-risk bearing (20%) Associate members
59 Business service members
14 US State Stamping & Surplus Lines Offices
463 Total Corporate Members
38,511 employees
407 Under Forty Organisation Members
The Present
 258 Wholesale Insurance/Coverholder members
 78% transact business as wholesale MGA/MGU with binding
authority
 29% transact business as Program Administrators/Managers
with binding authority
 22.5% transact business as Aggregators with binding authority
 20% transact business as Broker Producers without binding
authority
The Present
 258 Wholesale Insurance/Coverholder members
 70 members each with 20 or less employees
 81 members each with between 21 and 50 employees
 35 members each with between 51 and 125 employees
 72 members each with > 126 employees
 21,877 employees
 227 branch offices
AAMGA Membership Composition
 258 Wholesale Insurance member demographics
 31.2% are 20 – 30 years old
 26.7% are 31 – 40 years old
 28.4% are 41 – 50 years old
 13.7% are over 50 years old
 57.9% are under the age of 40 years old
The Present
 258 Wholesale Insurance members
 Underwriting facilities with delegated binding authority
 Total AWP:
2013:
 2012:
 2011:
 2010:


US$22.4 billion
US$20.6 billion
US$19.2 billion
US$16.4 billion
AWP Broked into Lloyd’s:
2013:
 2012:

US$3.26 billion
US$2.73 billion
AAMGA Member AWP Broked Into Lloyd’s



Risks placed through Lloyd’s Brokers
2013:
US$3.26 billion
2012:
US$2.73 billion
3,500,000,000.00
3,000,000,000.00
2,500,000,000.00
2,000,000,000.00
Weighted
Average
1,500,000,000.00
1,000,000,000.00
500,000,000.00
2010
2011
2012
2013
AAMGA Coverholders AWP vs.
Total Lloyd's US AWP
8,000,000,000.00
7,000,000,000.00
6,000,000,000.00
5,000,000,000.00
Total
4,000,000,000.00
AAMGA
3,000,000,000.00
2,000,000,000.00
1,000,000,000.00
2010
2011
2012
2013
E&S Market Rates and Movements
 Data – Data – Data
 Those who are not up-to-date with automation will have
increasing difficulties
 Harmonization of:
 Predictive analytics and risk models, and
 underwriting discipline
 Coverholder Audits
 Regulatory compliance and guidance
 Big data and large scale aggregation of information
 Disintermediation
E&S Market Rates and Movements
 Standard markets will back out of accounts that are hard to






price and service
Succession & Disaster Plans
Business Plans by line of business
Continuing Education and professional development
Increasing need for new talent, enhanced training and
retaining existing professionals
 AAMGA’s 2015 Gamma Iota Sigma Presentation:
“Welcome to the New E&S”
Differentiation & Remaining Relevant
M&A
Current Forces Impacting S/L Insurance
 Continued mergers and acquisitions /
consolidation

M&A deals of P&C entities
 2014:
141 YTD
 2013:
62
 Aggregate deal value: $6.4 billion
 Small to Medium-sized deals
 2012:
73
 Aggregate deal value: $7.4 billion
 Various-sized deals
 Influx of non-traditional sources of capital
increases competition and adds pressure on rates
Current Forces Impacting S/L Insurance
 Continued mergers and acquisitions /
consolidation
Appetite is still strong
 More players in the M&A space, especially for MGA and
Program operations
 Still lots of potential candidates

Aging owners
 Many do not have good succession plans
 Size matters more than ever to markets.

Current Forces Impacting S/L Insurance
 Continued mergers and acquisitions /
consolidation



Technology and data are expensive and critical
Many of the smaller firms cannot afford to keep up
Value is driven by:
Specialization
 Profit margin
 Market and territorial access
 Talent within the operation

Industries Poised for Growth Next 10 Years
 Health Care
 Natural Resources
 Health Sciences
 Tech & Bio Tech
 Energy (Traditional)
 Light Manufacturing
 Alternative Energy
 Insourced manufacturing
 Petrochemical
 Export-Oriented
 Agriculture
Industries
 Shipping (Rail, Marine,
Trucking & Pipeline)
 Construction
Insurers’ ability to capitalize on these industries varies widely
Current Forces Impacting S/L Insurance
 Increasing volatility in US investment market, political
atmosphere of dissention and stagnation
 Increasing regulatory environment



Federal
State
International
 Increasing proliferation of regulatory activities across
borders


Risk-based capital standards
Cooperation & Competition among regulators


Global capital standards
Implementation of enforcement standards
US Federal & State Regulatory
Developments Impacting
Wholesale Insurance Business
FIO Report 24 September 2014
 “…the insurance industry showed increasing
resilience through 2013, with strong financial
performance and expanded overall growth. While the
insurance market is becoming ever-more global, the
U.S. domestic market remains highly competitive
and an important cornerstone of the national
economy.”
Michael McRaith, FIO Director
Regulatory Developments
 Reauthorization of TRIA/NARAB II
 Legislation to allow E&S market to write private
flood cover
 NAIC uniform eligibility standards for surplus line
carriers
 NRRA implementation
US Legislative & Regulatory Activity
 Post Dodd-Frank Era of Insurer Regulation
 Non-Admitted & Reinsurance Reform Act (NRRA)



Home State Retention of 100% of Surplus Lines Premium
Increased accuracy of premium and tax revenue
Non-Admitted Insurance Multistate Act (NIMA)
Five States Participating:
 Florida, Louisiana, Utah, South Dakota and Wyoming + Puerto
Rico
 Florida Clearinghouse



Surplus Lines Insurance Multistate Compact (SLIMPACT)
“Uniform” Eligibility Standards & Market Security
Joint Industry Letters
 NAIC International Insurers Department (IID) List
 State White Lists

S/L Premium Tax Pre - NRRA
Policyholder
Home State:
22.8%
A: 1.7%
Broker
B: 13.5%
L: 15.47%
Surplus Lines
Premium tax
allocated by state
by share of risk
proportionately
calculated to
reside in each
state
K: 11.9%
J: 6.9%
I: 7.1
C: 2.87%
D: 6.4%
E: 0.46%
F: 5.37%
H: 1.6%
G: 3.9%
S/L Premium Tax Post - NRRA
Policyholder
Broker/MGA
Surplus Lines
Premium tax
calculated at
and paid to
Home State’s
based on tax
rate and rules
Home State:
100%
Legislative & Regulatory Activity
 OFAC, FATCA, COI & AML Regulations

Impact on domestic vs. Lloyd’s market placements
 Forced Place Insurance
 National Association of Insurance Commissioners


Transparency & Regulatory Issues
Surplus Lines Task Force
 NCOIL International Regulatory Task Force
 Regular liaising with US House & Senate, and all
governmental agencies
US Litigation, Regulatory & Amicus Curiae
Activity
 Hull & Company v. Superior Court of CA
 Gold & Silver v. Lexington Insurance Company
 Essex Insurance Company v. Zota
 WA Department of Transportation v. James River
Insurance Company
 WI, CO, NJ, NY, MA, FL, OK, CA challenges to
freedom of rate and form
US Litigation, Regulatory & Amicus Curiae
Activity
Faulty workmanship” constituting a covered
“occurrence” under CGL policies - cases and
regulations in CO, GA, SC & HI
 Delaware retroactive increase to surplus lines tax
 Utah premium audit law
 Illinois increase in surplus lines tax
 “
Legislation & Regulatory Affairs
 International:
Lloyd’s Audit Scope
 Central Services Refresh
 Tribunalization process of new coverholders
 Coverholder guidance
 TCF Standards & Policyholder Complaint Procedures
 AML/Conflict of Interest Guidance
 Lloyd’s Meet the Market: Boston, Chicago, Toronto
 Canadian MGA’s

Collaborative Efforts with Lloyd’s
 Regular communications / joint
presentations with Lloyd’s and Lloyd’s US
on matters impacting Coverholders and
domestic wholesale market
 LMA, LiiBA, MGAA reciprocal membership in
AAMGA
10th February 2014 LMA Presentation at Lloyd’s
North American Binding Authorities 2014
Internal Market Developments
Automation & Technology
 Increasing investment in automation
 Agency management systems to drive efficiencies
 Excess & Surplus Lines Working Group
 Vision for straight through processing
 Web service
 ACORD XML – Property & G/L


ER3001 Reporting standard for XML with some modifications
Validation at time of processing
Automation & Technology
 Benefits:
 Validation completed at time transaction is processed
 Time saved preparing month-end bordereaux
 Access to data is in real-time
 Themes:
Faster:
 Real time XML exposure reporting
 Smarter:
 Built-in rules and validation
 Together:
 Keeping respective interests harmonized and synchronized

Automation & Technology
 AAMGA Automation Conference
 21-23 March 2015 – Seattle, WA
 AAMGA Automation Committee
 Monthly conference calls
 Working group
 Liaising with other industry automation entities
IIABA Agent’s Council on Technology
 E&S Joint Working Group
 Lloyd’s Automation Conference

Emerging Risks, Issues & Trends
Foresight and knowledge sharing are
essential to navigate a future in which
change is the only constant
AAMGA Initiatives
 Emerging Risks Committee
 Drones
 Autonomous cars
 3-D Printers
 CME’s
AAMGA Initiatives
 Outreach to entire wholesale market and related
affinity groups






Latin American Association of Insurance Agents
Chinese American Insurance Agents Association
National African American Insurance Agents
Lloyd’s Market Association
Managing General Agents Association (UK)
London & International Insurance Brokers Association
 Bringing wholesale insurance network under
common umbrella
Issues & Opportunities
Issues & Opportunities
 Balancing:


Lloyd's objectives in establishing model Wordings that will protect the
franchise and ensure uniform interpretation and application of
compliance standards, with
Coverholders in the United States being afforded the opportunity to
access the Lloyd's trading platform without burdensome/non-essential
regulations that do not add to the operational transfer of risk or the
quality of underwriting
Issues & Opportunities
 The consistency of inconsistencies:
 Varying Interpretation(s) of Lloyd’s Guidance
 Hurricane Sandy coverage declination letters and claim
practices
 Time and process required to renew and approve new
Coverholder Contracts

Prospect for expedited procedures or a form of Continuous
Contracts
The Way Forward
 Standardized audit scope and the performance of auditors
 Mutually beneficial solutions to enhance affordability,
efficiencies and expediency of placing business into Lloyd’s
 Continued expediting of tribunalization of new
Coverholders
 Partnering on provision of technology solutions to afford
greater access and efficiencies
Issues & Opportunities
 Temper proportionate and consistent application of
balanced regulatory and claims requirements
 Prospect of regulatory compliance and enforcement of
sanctions impeding creative solutions to specialized risks
and the freedom of rate and form
The Way Forward
 Coverholders remain committed to the Lloyd’s trading
platform and franchise

Improve market modernisation, access, intelligence and support
 Fostering of relationship and efforts with London Brokers
and Lloyd’s
 Embracing the principles articulated in Vision 2025
 Enhancing diversity and inclusion initiatives to better
represent the entire wholesale underwriting community
Open Discussion
Thank You
Bernd G. Heinze, Esq.
610 Freedom Business Center
Suite 110
King of Prussia, PA 19406
610.992.0022 (o)
610.992.0021 (fax)
bernie@aamga.org
www.aamga.org