Editor’s Note:—Insurance is a major concern for ski areas, and providing stability in the insurance marketplace was one of the original purposes in founding National Ski Areas Association. Author Brian Derouin, a well-known, independent specialist in the field, was asked by SAM to find a way to explore some of the basic issues in a non-confrontational and generic way. The first of his series starts here in the form of 10 questions put to three insurance providers with long experience in the field: K&K Insurance Co., Pettit-Morry Co. and Willis Corroon. (Following receipt of the questions, Willis Corroon asked to be excused due to time constraints.) Other insurance providers will be involved in subsequent features, as well as other subject matter related to the whole risk management and insurance field — Americans With Disabilities Act, underground storage tanks and the proposed standards for skiing helmets, for instance. SAM invites your suggestions which can be addressed to Derouin care of SAM.
Introduction
Over the years, the insurance marketplace has gone through periods of contraction and expansion, the cycles usually coinciding with the broader insurance industry trends. However, specific incidents, such as the Sunday vs. Stratton decision, could increase the impact of a hardening market on the ski area industry.
The cyclical nature of the insurance industry, the proportion of a ski area’s budget devoted to insurance and the ever-changing legal environment have not necessarily contributed to a harmonious partnership. This stems both from attitudes towards the insurance industry in general, and also from the feeling of helplessness in impacting these costs.
I have found that questions directed to me and others who sit on the various panels on insurance issues have been either confrontational (most common), resulting in typically defensive answer, or so specific that little, if any, useful information is communicated to the audience. This is obvious to the audience and only reinforces the perception that the “insurance industry” is not being candid. Furthermore, the questions over the years have remained much the same. Obviously, the communication flow has not been very effective.
With this in mind, the following questions, purged of confrontation and specificity, were asked of some prominent insurance providers. The questions were asked from a ski area operator perspective and were designed to reflect their comments and concerns. Each participant was asked to respond as succinctly as possible without sacrificing information. The answers are intended to be general in nature and not applicable to specific situations. Answering are K&K Insurance Co. and Pettit-Morry Co.
— B.D.
1. We had a bad accident last winter but there is no liability on our part. The insurance carrier just put up a huge reserve. Isn’t that going to hurt my rate on renewal?
(K & K) The K & K Ski Program does consider reserved losses when determining a rate for either new business or renewals. However, if there truly is no liability on the part of the insured, K&K would be reluctant to post a large reserve. Not only does a large reserve adversely affect an insured’s loss experience, but it also affects the financial results of the insurance carrier.
(P-M) While a number of these types of incidents are predictable, it is nearly impossible to determine during initial investigation which of these incidents will become claims. Statistics do, however, make it clear that between one-third and one-half of such incidents will eventually develop into litigation.
Therefore, insurers must anticipate and reserve for the claim cost. However, since it may be impossible to determine exactly which accidents should carry the reserves, we have selected to use the approach of putting a “precautionary investigation only reserve” on each of these incidents. It is anticipated that the total amount of monies reserved within the program will be sufficient to deal with the claims that eventually result.
As the facts indicate that a given accident will not become a claim, or the statute of limitations expires, we eliminate the reserves. We substantially discount these “investigation only” reserves and do not treat them as if they were real claims for the purpose of rating. This methodology makes the impact on renewal very limited.
2. It seems the insurance companies settle claims rather than fight them. Doesn’t that set precedent and just make it harder to fight the next time?
(K & K) We look at each claim on a case by case basis utilizing many factors to determine whether a case should be settled or litigated such as: what percent chance do we have to win the case? What cost will be associated with litigating the case? What is the volatility of the venue in which the case will be tried?
(P-M) The belief that we would rather settle than fight is a myth. Nearly all of the participants in the Pettit-Morry/Arlberg Program have a significant self-insured layer, thus making them a partner in the handling of the claim. We commit not to settle or compromise a claim without discussion, and an understanding of the approach to be used in dealing with the claim. Claims managers and attorneys would suggest that settling a specific claim will not set a precedent. However, if an area or insurance carrier regularly settles all or some questionable claims, the word will spread through both the skiing clientele of the area as well as the legal community that the area and/or its insurer are a “soft touch”.
3. How is the amount of a liability reserve established? Is there any way that I can check to see if it is reasonable?
(K & K) The factors that K & K considers when establishing reserves consists of what chance the case has to be successfully defended, the type of injury and permanency associated with it, input from the defense counsel, and K & K’s Claim Department’s past experience in litigating cases of a similar nature.
(P-M) A reserve is established as a result of the facts surrounding a given situation. It may also involve consideration of such factors as an assessment of the tenacity of the injured party and their attorney; an evaluation as to the effectiveness of the incident investigation; defense posture when measured against the legal environment (state) in which the ski area operates.
We believe the best overall test regarding the adequacy of the reserves is to review, on an annual basis, the cases that have been disposed of in the past 12 months, then compare these reserve values against the ultimate cost.
In reviewing reserves, it should be remembered that each reserve is merely an estimate. Every reserve in a given program is either too high or too low. The ultimate test is “in total did they represent the true value.”
4. We have to report a summary of our accidents each week. Is that what is used to determine our liability rates? If not, how are they established?
(K & K) The Accident Report Forms submitted to K & K are reviewed individually to determine which accidents need to be documented or investigated further to help minimize any liability exposure.
(P-M) The weekly accident summaries are a critical part of the system that is designed to provide the required notice to underwriters and to serve as a useful tool for area risk managers. The weekly summary incident reports do not play a part in the rating of coverages in our program.
5. When a claim is settled, we just get one bill for the deductible. How can we find out the cost of the legal expense and what it included?
(K & K) When K & K settles a claim, a loss run is generated which shows our insured what payments have been made to the claimant, expenses such as attorney fees, investigative costs and any outstanding reserves.
(P-M) In our program, we reserve legal costs and related expenses as one item and the losses as another item with the sum of the two representing the reserve for the loss. These numbers are reviewed with each client on a periodic basis. Copies of all bills or expenditures are either periodically provided to program participants or available upon request. The resultant costs should not come as a surprise but rather be an expense that the ski area is actively managing as part of its business plan and claims budget.
6. I have a deductible and the insurance carrier wants me to post a letter of credit. I’ve always paid my bills on time; why won’t they trust me now?
(K & K) The K & K Ski Program does not require insureds to provide a “Letter of Credit.”
(P-M) Insurance regulators have always held that insurance companies are responsible for payment of claims within the deductible. Therefore, it is the insurance company’s responsibility to handle the claims covered under the policy including the payment of the deductible as part of any judgment or settlement. The insurance company then seeks reimbursement for the deductible from its policyholder.
There are many examples of ski areas having gone out of business, changing ownership, or encountering unexpected financial difficulties before a claim is reimbursed. Therefore, a letter of credit or other financial guarantee may be used to protect an insurer from this unintended exposure.
7. What is the difference between a deductible and a retention? I’ve heard that I would have more control over my claims with a retention. Is that true? Is one more expensive to administer than the other?
(K & K) The retention levels for K & K’s Ski Program are normally set at a higher dollar amount than standard deductibles. The ability of an insured or third party administrator to handle claims properly would determine any cost savings.
(P-M) The self-insured retention may be offered to substantial insureds but require that the client have demonstrated ability to investigate, defend, and handle the claims that would fall in the self-insured retained layer.
In these cases, the insurance company executes a contract with the insured regarding the responsibilities, authorities, and roles of each other in the claims handling process. However, these situations are limited to very large accounts. This approach is intended to mitigate the requirements of LOCs or other financial guarantees.
8. Will the losses from the recent hurricane, and the problems that you hear about at Lloyd’s, have any impact on my insurance program?
(K & K) Losses from the hurricanes will not have an immediate effect for the K & K Ski Program as no claims were reported. However, the insurance industry as a whole could see a firming in the marketplace where rates remain at their current levels.
(P-M) Insurance experts are struggling to determine the impact that hurricanes Iniki and Andrew will have upon the industry. Undoubtedly, they will have an impact upon the financial statements of those insurance companies that were insurers or reinsurers in the hurricane areas. However, we do not believe that these particular incidents will have a major impact upon the property and liability coverages in our program.
9. I’m getting calls from a number of different companies wanting to write my coverage. What are the key things that I need to look for when I talk to them?
(K & K) Determine what insurance carrier is providing the coverage and how they are categorized by A.M. Best, an independent rating bureau of insurance companies. The K & K Ski Program is written by Transamerica Insurance Group. Determine who is providing the loss control and claims handling services. K & K has provided these services for the past 40 years. Determine what other resorts the Company provides coverage for in your region so that a reference call can be made.
(P-M) Typically in a soft market, many insurance companies are actively and aggressively seeking to expand their insurance underwriting in an effort to maintain a premium volume or cash flow.
We believe that the most important consideration is to determine an insurer’s financial strength and their historical stability in the marketplace. Given the number of underwriters who have failed in recent years, ski area operators should realize that our industry is not immune to this concern. Transit Casualty, London United, and the Mission were three failed insurers who were active in the ski business.
Being licensed or admitted in a given state, is not a guarantee of an insurance company’s financial condition. It merely allows the policy holder to participate in a state insolvency fund (usually between $50,000 and $300,000). It should be remembered that both the Mission and Transit Casualty were licensed insurers.
After satisfying oneself regarding a company’s financial security, it is imperative that a careful assessment be made of the claims handling experience and procedures, legal defense commitment, and risk management knowledge of the proposed insurer. The ski industry has witnesses a number of examples of insurance companies who actively and aggressively entered the business only to discover after two or three years that they did not understand the business, could not provide the necessary services, and then withdrew from a particular class of business.
10. What, in your opinion, is going to happen to rates and the insurance marketplace in the next eighteen (18) months? What signs or signals will help me anticipate a change?
(K & K) We believe the market will slowly begin to tighten over the next 18 months and that rates and premiums will remain fairly constant.
(P-M) We agree with the assessment of many experts that a substantial number of the conditions that existed in 1983 and 1984, the period immediately preceding the last hard market, again are emerging. We also agree with their predictions that these conditions will bring about a hardening in the insurance marketplace, probably sooner rather than later. We are not bold enough to offer a prediction as to when it will exactly manifest itself.
It is because of the cyclical nature of the insurance marketplace and the conditions that appear to be emerging, that the ski areas in the Pettit-Morry/Arlberg program created their own insurance company. Arlberg is a reinsurer to GenRe, and its goal is to make certain that a substantial portion of the insurance program not be subject to the pricing whims of changing management of insurance conglomerates, not the victim of hurricanes or other natural disasters throughout the world, and that the availability and predictability of pricing would be driven by ski area experience and that of their insurance company. As such, we believe that the owners of the Arlberg are well positioned to deal with a changing marketplace with predictability and limited volatility while participating in the company’s investment income.
