When it comes to risk and managing risk, successful CEOs understand the importance of thorough planning and solid insurance with up-to-date information on the latest rules and regulations. While the commercial insurance industry in Nevada has overall remained relatively static, some new trends have emerged and are growing. Those are highlighted here along with an overview of the foundation on which to build a company’s coverage.
Mandatory Insurance
Statutorily, companies must have two types of insurance coverage.
“If you don’t insure for them, they could create significant financial harm and potentially bankrupt your business,” said Nick Rossi, president, LP Insurance Services Inc., an insurance brokerage and risk management services company with Nevada offices in Reno, Las Vegas and Elko.
One is workers’ compensation insurance, to cover lost wages and medical costs for employees injured on the job. Some business owners who think they’re exempt, for various reasons such as they erroneously believe their workers are subcontractors rather than employees, really aren’t.
“The Nevada Department of Business and Industry is cracking down. They will shut you down within 24 hours if you don’t provide workers’ compensation,” said Francie Stocking, CEO, Western Risk Insurance Agency, a Las Vegas-based independent agency and brokerage firm.
Criminal penalties are also a possibility. Auto liability insurance, too, is a must if the company owns and uses automobiles.
A common commercial package, Rossi said, typically includes those two required coverages along with property insurance to protect a company’s physical assets and general liability, in the event the business is held liable for causing property damage or personal injury.
Other non-universal mandates might be required by contract, said William Allen Kaercher, president, Kaercher Insurance, a brokerage in Las Vegas that offers risk management and financial products and services. If a financial institution, for example, has given a company a loan, as a condition, the company might have to have certain types of insurance coverage. Sometimes commercial landlords will require they be added as an additional insured onto a tenant’s property and liability insurance policy.
Optional Insurance
Various other types of insurance coverage are optional. The type of business and its inherent risks dictate what other policies a company might need, Rossi said. Some coverages available are:
Professional liability: This type of insurance includes directors and officers (D&O) for company executives and board members of homeowners associations and nonprofit organizations. Errors and omissions (E&O) coverage, for certain professionals, is another.
Employment practices liability: This protects against employee claims of discrimination, wrongful termination, harassment and other employment-related issues.
Contingency liability: This is for businesses that depend on other companies for their products.
Crime: This protects against numerous types of employee crime, such as dishonesty, embezzlement, forgery or alteration, computer and funds transfer fraud.
Business life: This provides funds to keep a business going should a key business partner or shareholder pass away.
Terrorism: Some companies may want specific coverage in the event of a terrorist attack. This insurance is particularly important if the company has operations overseas or is located in a high-profile area like the Strip, venue or building. Additionally, it’s sometimes required by, say, a lender. Carriers typically include terrorism coverage in a property and liability package. In some cases, it’s optional while others are not. Some insurers specifically cover liability for workplace shootings.
“If you don’t have insurance, you’ve decided to self-insure,” Stocking said. “Insurance is a financial tool to negotiate the risk that you’re taking on yourself.”
Because insurance and risk management are complex areas, companies should meet with a broker initially and annually to review, reassess and update its needs and coverage, the experts said.
Stagnant Rates
In general, rates for commercial insurance products have been relatively flat or decreasing slightly, adjusted for inflation, said Kaercher, whose firm specializes in construction, bonds, gaming and hospitality, employee benefits, medical malpractice, technology and business.
Exceptions exist, however. For instance, due to the large number of lawsuits involving homeowners associations in Nevada over the last two decades, premiums for D&O insurance for board members have increased, as have the deductibles on those policies, said Stocking, whose brokerage targets habitational (HOAs, apartments) and commercial property. Similarly, deductibles have risen on property insurance policies that include theft and vandalism, due to the rampant stealing of copper and other materials from construction sites the state has experienced.
Cyber Insurance
Cyber liability insurance is one of the fastest-growing areas of commercial insurance coverage, Rossi said. Any company that’s handling personal data and/or credit card information is at risk. Whether due to an attack, a system malfunction or a negligent employee, a cyber breach can damage a company’s reputation and balance sheet.
Companies of all sizes are vulnerable. According to Internet Security Threat Report 2016 by Symantec which produces Norton security products, 43 percent of targeted businesses are small, 22 percent are medium-sized and 35 percent are large.
Generally, cyber insurance acts as a liability-type coverage should a financial or personal loss occur from a system breach and private data are accessed. Also, it covers the extra expense involved in informing customers about the event, enhancing security and other preventive measures.
Several insurers offer cyber liability, each with its own coverage applications, from identity theft to website extortion, within these two broad groups.
One newer application, though, is called business email fraud or corporate account takeover. Typically, the criminal, posing as an existing client, vendor or even co-worker, sends an email to an individual at a company or hacks into the company’s email system and sends it internally and requests a certain dollar amount be wired to them or claims they never received payment on an order. The unsuspecting employee sends the money.
Few carriers cover this as a component of cyber insurance. It’s not covered either by crime insurance because an executive or employee voluntarily takes the action that causes the loss.
“The goal is to put together a customized cyber liability package that is in line with the particular business activities,” Rossi said.
Cyber insurance is considered a management liability product. Others include D&O, E&O, employment practices and crime. These are the areas in which the small and mid-sized markets are growing in terms of new, emerging offerings, Rossi added. Therefore, a number of carriers are bundling them so companies get them all under one management liability policy.
Captive Insurance
A trend gaining ground in Nevada is captive insurance, a regulated form of self-insurance. Whereas onshore captives have been around since the 1980s, it wasn’t until the early 2000s that the federal government officially recognized them as legitimate insurance arrangements, and more and more states began passing legislation to become captive insurance domiciles.
Nevada is one of the 29 captive domiciles in the U.S. Among those, The Silver State ranks fourth in the number of captives it has — 202 in 2015, according to the Insurance Information Institute. In 2014, the state had 160, representing a 26 percent year-over-year jump to 2015. These numbers compare to those of Vermont, at the top with 596.
“As the economy has been increasing, we are seeing more clients looking to do this. The more people that became aware of it, as long as they’re aware of it for the correct reason, the industry is going to grow,” said Keith Langlands, co-managing member of Synergy Insurance, a Las Vegas commercial insurance agency that specializes in captives.
Captives still, however, aren’t a well-known risk management strategy. Langlands, who heads his firm’s captive division, spends much of his time educating companies about them.
Here’s how a captive works. A company can create their own captive (single captive), band with other companies to create one (group captive) or join a group captive that already exists.
With a single captive, a parent company creates its own insurance company as a subsidiary according to the regulations and paying the requisite fees. The newly formed insurer, or captive, a C corporation and licensed in its domicile, issues an insurance policy and administers whatever insurance elements the parent company delineates.
A company may use a captive simply for its deductible or retention, for coverage that’s difficult to get or is excluded from most traditional policies, for partial coverage or for all of a certain type of coverage. Workers’ comp is an example.
Whatever insurance components are in the captive are risks the parent company is taking on itself, unlike with traditional insurance products where the carrier assumes the risk.
The parent company pays premiums to that captive and deals with it just as it would an external insurer. The captive can invest the money in various ways. Should claims arise, monies from the captive are used to cover them.
Say a medium-sized company has cyber insurance through a traditional insurer that’s expensive. If they deem their risk to be minimal and they project having the revenue to cover any potential claims, they could create a captive for either so it routinely would transfer money for the monthly premium for the cyber coverage into the captive. Ten years later, assuming no claims have been made, those funds remain the possession of the parent company. If a few small claims have been made, the difference remains that of the parent company.
“Our goal is to surround their commercial insurance and fill in the gaps,” said Langlands, who primarily works with companies with gross revenue between $20 and $150 million.
Captives might be an option for residential contractors for their home warranties, physicians for their medical malpractice, manufacturers for their product liability, import companies for supply chain interruptions and more, Langlands said. A new application is doctors using a captive to cover penalties should Medicare or private insurance company auditors find errors in the medical coding associated with their practice.
Larger companies are different because they have more revenue. Most use a captive for their property and casualty insurance. They still, however, often have some type of traditional coverage as well, like for catastrophic, Langlands said.
Captives can provide better risk management, peace of mind and, potentially, money savings.
“If you have good [few to none and low dollar figure] claims and your captive is invested and doing well, you could probably make some money on it,” Kaercher said.
Other benefits involve taxes. Nevada offers a tax credit of up to $5,000 applicable to the first year of a captive’s acquisition of a Certificate of Authority.
In addition, companies that write up to $1.2 million a year in captive insurance can deduct it on their federal tax returns. Money they pay into their captive isn’t taxed. Any dividends they earn from investment of the captive monies are taxable at the C corporation level. When the parent company terminates its captive, it pays capital gains taxes at whatever the rates are then.
“It’s just a tremendous way to plan for that rainy day,” Langlands said. “If it doesn’t rain, then you really win. You get out and you win.”
However, captive insurance isn’t ideal for every company. Businesses are best served by discussing with a broker or expert the options, pros and cons for their specific entity and type of business.
Captives cost money to open and must meet a lot of criteria, Kaercher added. They must be set up correctly or tax deductions could be forfeited and even penalties assessed. Companies who opt for a captive must really commit to it and understand what it is and how it works, especially that they’re taking on the risk. Captive funds, for instance, are not monies that can be dipped into for, say, emergencies.
Other Trends
Now that medical marijuana is legal in Nevada, insurance products have emerged that cover all parties involved in the supply chain, such as growers, processors and dispensaries, Rossi said. Should Nevadans vote this month to legalize recreational marijuana through Question 2, it likely would bolster the trend and grow that segment of insurance.
A notable industry shift, Rossi said, is brokers today are required to do more and more of the transaction process with existing and prospective clients than ever before, which he calls an opportunity. Not only must they develop an insurance program for a client that might encompass multiple carriers, but they’re also asked to develop a risk management program that complements and supports that insurance program. Consequently, LP Insurance, for instance, along with traditional insurance brokerage services, provides extras like OSHA training and certification, work comp claims analysis and advocacy and contract risk management assessment.
At the same time, finding qualified talent is challenging for brokers, especially since it’s a learn-on-the-job type field.
“As agency owners, we’re looking for younger people to come in, to groom and train them and to keep [the business] growing,” Stocking said.
Looking Ahead
Overall, insurance executives agreed that their firms were growing, although some more than others. LP Insurance, for example, has grown 20 percent per year for the past six and a half years, Rossi said. The health of commercial insurance in Nevada should mirror that of the strength of the state’s economy, he added.
With an improving and diversifying economy come new risks, Kaercher said, such as those related to unmanned aerial vehicles, and new insurance types.
“The rates are stable,” Rossi added. “Market capacity is good. But most importantly, our clients and prospective clients seem to be growing and prospering. At least my crystal ball, over the next 12 to 24 months, looks pretty sunny.”