After a decade in the wings, the insurance market for ski areas is again in the spotlight. The reason, however, is not what you’d expect—a multi-million dollar liability verdict or onerous legislation. Instead, the renewed focus is being caused by competition, a large insurance company invading the turf of longtime ski insurance program managers Willis, Acordia and K&K Insurance and their respective insurers AIG, TIG and Genesis. This in turn may be triggering what are currently rumored to be impending mergers and acquisitions in the field.
CNA Excess & Surplus, a New York-based insurer (represented by Hartford broker, Tennant Risk Services) entered the market for ski area insurance at the end of last year, and has since underwritten three accounts: Taos, Red River and White Caps. The insurer acknowledges offering lower prices than the areas’ previous insurers. While this may seem to bode well for the ski industry, old-line insurance brokers contend otherwise. “We’ve done a very good job developing very broad levels of coverage for the ski industry, charging appropriate prices to deal with expected claims,” says Carl Neu, senior vice president of Acordia Inc., in Seattle.
“For a company to displace us, then, requires them to underprice the product below what would be considered feasible,” Neu explains. “Clients may think, the more competition the merrier. That’s only true if the insurers involved are willing to stick with the business and not pull out when times get tough. History has taught us a different lesson, however.”
Indeed, the ski insurance market is littered with insurers that jumped into the business for a short period only to pull out abruptly. While CNA E&S insists it is in the ski area insurance business for the long haul, its entry in the market is untimely, observers claim. The relatively small size of the ski insurance market (premium volume generated for the entire ski industry is less than that generated by an average-size manufacturer) does not necessarily beg for more insurance participants than existing competitors, they argue.
Nor do the property/casualty industry’s current market conditions, among the softest (read: cheap) in its history, seem the most opportune time for entering the market. And, although the frequency and severity of ski-related injury claims have been stagnant the last 10 years, the prospect of very large claims never ceases. In short, can a new insurer charge less than the competition, make enough profit to pay future claims and continue to provide service well into the future?
The thorny answer is maybe. One thing for certain is that the competitive fires of the dormant ski insurance market will burn brightly in 2000. Since several individuals on CNA’s ski insurance squad got their starts with the three major insurance programs, emotions are running high. “They’re trying to buy talent to create credibility,” says David Hampson, president and CEO of Willis of New Hampshire, Inc. “Time will tell if it works.”
Another cloud hovering around CNA concerns a relatively recent acquisition, New York-based Continental Insurance Co., which is remembered none too fondly among ski areas as a “hit-and-run” ski insurer in the early 90s. “Continental came in with a low-priced product for a couple years, took some market share, had a few losses and then pulled out,” says a competing insurer off the record. “Clients were in chaos. Now some of these same people are at CNA.”
The criticism is not unexpected, given the traditional ski insurers’ decades-long commitment to the industry (the antecedents for both Acordia and Willis date back to the early 60s), and their steadfastness during tough times, i.e. sustaining several large insured losses without deserting the market. “We owned Sunday v. Stratton, the first multi-million dollar verdict against a ski area,” Hampson says.
“Peer v. Aspen? That was our claim, too—more than $7 million after pre-judgment interest was added. And we just got nailed with Mendez v. Bear Mountain, another big jury verdict ($9.8 million). Yet, we have endured. Clients should not forget that AIG has weathered many storms for this industry.” Willis manages its ski program on behalf of New York-based insurer, American International Group, Inc.
The major ski insurance markets also extol their role as an industry partner—helping to develop state-by-state legislation to reduce ski area liability and create industry-wide standards governing lift equipment and slope markings. “Hubris is an issue here,” another major ski underwriter says.
But so is good old American capitalism. “We see an opportunity to provide a first-class program and make some money,” says Tony Hirsch, director of ski claims at CNA E&S. “We’re in this for the long haul, no matter what the competition says.”
There are now four insurance programs competing for ski area business: Willis/AIG; K&K/TIG; Acordia/Genesis (complemented by roughly 20 other insurers and reinsurers absorbing different layers of risk exposure); and CNA, the newcomer writing business through Tennant Risk Services, a Hartford, Conn.-based managing general agency.
For ski areas, the competition has created an unprecedented buyer’s market. “Thanks to the competition and protracted soft insurance market, this is a good time for members,” National Ski Areas Association’s (NSAA) president, Michael Berry, brims.
While the three major ski insurance carriers and brokers disparage CNA’s timing—entering the business at a market downturn—the strategy is not without supporters. “The property/casualty insurance cycle is at bottom or near bottom,” explains Jay Cohen, an insurance stock analyst at Merrill Lynch in New York. “Eventually, prices must rise, with the likelihood being sooner than later.”
In other words, by joining the market now, CNA can underprice the competition, take away market share and, theoretically, when the insurance cycle shifts gears, raise prices accordingly. Given that liability insurance is a long-tail business, meaning it takes many years for claims and lawsuits to wend their way toward fruition, CNA can bank these early premium dollars (minus mandated reserves) and build them via investments in what is undeniably a prosperous climate. Basically, while CNA collects premiums and builds revenues, its competitors are paying off past years’ losses.
The company also is the beneficiary of legislation in 27 states hampering litigation against ski areas. “Since Sunday v. Stratton, states have followed a trend of making skiers responsible for their own safety,” says Brian Derouin, president of Derouin Associates, a Salt Lake City-based insurance brokerage. Neu agrees: “We’re inching closer back to the way things were in the 60s, when people naturally assumed if you engage in a risky sport, you are responsible for controlling your risk of injury.”
The new laws are working. Since Colorado drafted a tougher law in 1990 spelling out the inherent dangers and risks of skiing and capping damages at $1 million, negligence lawsuits against the state’s ski areas have fallen by some 50 percent. “Still, one must never underestimate the ingenuity or tenacity of the plaintiff bar,” Derouin concedes.
Another plus for CNA is the wider appreciation of loss prevention and risk management in the ski industry, the ironic consequence of its competitors’ diligent consultation and advice to the industry (not to diminish the industry’s own initiatives, such as NSAA’s “Head’s Up” program). “The insurance crisis of the eighties had a silver lining, encouraging ski areas to become more proactive about managing their risks to reduce claims and, thus, their cost of insurance,” says Chris Stoddard, president of Mountain Management Services Inc., an Arden Hills, Minn.-based consultancy.
As Peter D. Gilpatric, program manager for ski areas at Boston-based AIG Specialty Programs, says, “AIG and Willis made the ski industry a lot safer, which is why both K&K and CNA have come into the market. Our good work has aroused their attention and competition.”
Finally, although competing ski insurers maintain their wares are markedly different, the reality is they’re only marginally dissimilar. They each offer very high limits of insurance protection, as much as $100 million (though few if any ski areas would need such comprehensive coverage) and the full spectrum of typical insurance terms and conditions. “Really, the big selling factor is price, which scares the bejesus out of the older ski insurers,” says Felix Kloman, a ski insurance veteran.
There is, however, one significant differentiating factor between CNA and the older markets. “They’re writing business on non-admitted paper, through the surplus lines insurance market, which should give ski areas pause,” says Hampson from Willis. “Surplus lines insurers are not subject to the same stringent laws and regulations as those of us writing the business in the admitted market.”
Hampson has a point. Excess and surplus lines insurers typically are considered a market of last resort, providing coverages where none exist in the standard marketplace or are otherwise deemed too expensive. This “fireman” role encourages insurance regulators to narrow their scrutiny of such insurers’ solvency, although data indicates surplus lines insurers have roughly comparable solvency metrics vis a vis standard insurers. “If you examine the history, there were two other non-admitted insurers writing ski area business—the Weavers Syndicate at Lloyd’s of London, which tanked, and Transit Casualty, another bankrupt insurer,” Hampson notes. “Transit Casualty left a handful of unpaid claims (from ski areas) subject to state insolvency funds.”
Hirsch brushes aside the criticism, pointing to the A-plus rating of CNA E&S’ parent company, Chicago-based insurer CNA Insurance Co., and the expertise of the staff assembled to write the business. As mentioned, several CNA E&S executives previously worked for AIG, Acordia, K&K and Willis (Hirsch is an ex-Willis exec himself). Meanwhile, Robert Sargent, president of Tennant Risk Services, CNA’s managing general agent, formerly was a consultant to Arlberg.
Hirsch says CNA has applied for and received permission from several states to offer its ski insurance program on an admitted basis. “We want to make everyone’s life easier, but it takes time to prepare and execute all the necessary filings,” he explains. Asked if CNA eventually will write the business only on admitted paper, Hirsch fudges a bit. “Let me just say our intent is to do this on an admitted basis, if it makes sense for the client,” he says. “It will be a few years to get everything up and running. But we are in this for the long haul. Period.”
In the interim, the veteran ski insurance programs, fearful of losing market share, are vaunting their long-term service to the industry. “The cost of insurance should not be the determining factor why you purchase insurance from us,” says Gilpatric. “What we’re selling is far more than just insurance. Our value proposition includes loss control, carrier stability and a dedicated claims team (at Willis) that goes on-site within 24 hours of a catastrophic incident to assist in investigation and claims handling. We’ve invested a lot over many decades into this market,” Gilpatric adds, summing up “and you can count on us when the chips are down.”
K&K’s Wild concurs. “This is more than just lower prices,” he explains. “We’re at the fair market price right now. If someone writes business for less than that, insureds must recognize they’re underpricing the business below what is sound. Someday (losses) will bite them. Will they stick around, then?”
NSAA’s Berry voices a more pragmatic concern. “I’m not taking a swipe at CNA or even K&K, which 10 years ago incurred much of the same criticism now greeting CNA,” he says. “But the fact is that this is a relationship business. While there is short-term bottom line sense to always get the best possible insurance rate, it is the enduring relationship through thick and thin that is the most important commodity here. This is something this industry must keep in mind as we endure potentially more complex times.”
Russ Banham ([email protected]) is a Pulitzer-nominated business journalist who writes frequently on insurance and finance for Forbes, The Economist Group and The Journal of Commerce.
A Brief History of Ski Area Insurance
The insurance and ski industries may seem strange bedfellows, but they have, in fact, enjoyed a rather long and, for the most part, acrimony-free marriage. The 38 years covered here is a narrative, not a detailed history with all the complex twists and turns of all the key figures and their companies.
The insurance market for ski areas prior to 1962 was “virtual chaos,” according to Rufus Barringer, then a partner in the Philadelphia brokerage firm of Lukens, Savage & Washburn (LS&W), pointing out that no program existed that recognized the industry’s unique exposures. “Very few insurance companies had even the foggiest idea what skiing was all about,” explains Felix Kloman, Barringer’s partner in the early 1960s.
NSAA Sets Insurance Agenda
When the Eastern Ski Area Operators Association and other regional industry representatives met and formed the National Ski Areas Association in 1962, a top priority was to bring stability to the ski area insurance market. To this end, several brokerage firms were interviewed, among them LS&W, whose Barringer and Kloman made their pitch for an NSAA-sponsored insurance program. “We figured if we could get the NSAA to encourage better risk management at members’ areas and get things like in-depth lift inspections by professional, independent engineers, it would enhance the insurability of accounts and make for a stable, profitable market,” Kloman says. The idea was approved by the NSAA in 1963.
American International Group (AIG), given its singular knowledge of the ski business, (for starters, its founder, Neil Starr, owned the Mt. Mansfield Co. at Stowe, Vt.) signed on to insure the program and has been on tap every year since. Barringer and Kloman were to go their separate ways, with the former hooking up with Dick Williams—whose father, Perry, was an NSAA founder—to form Barringer & Williams. The firm took over management of the NSAA-sponsored insurance program, begetting, via a progression of mergers and acquisitions, today’s Willis of New Hampshire insurance program.
Competition from the West
Three thousand miles to the West, Graham Anderson, head of the Pettit-Morry Co., a Seattle-based managing general agency, became the western representative for the NSAA Insurance Program in the mid-sixties. But in 1973, Anderson injected a dose of competition into the business by breaking away and starting Western Areas Ski Insurance Program (WASIP), with underwriting from Lloyd’s of London. It thrived. Five years ago, Acordia Inc. acquired Pettit-Morry.
The people who ran the ski insurance industry during this period knew each other well. For a while, it was one happy family. Then Dick Williams broke away from Kendall Insurance (the successor to Barringer & Williams) to team up with Chuck Lewis, a founder of Vail and Copper Mountain, and formed LWP Services. The new company went into competition with the industry’s two stalwarts, but soon threw in the towel and became an affiliate of Pettit-Morry.
In 1990, Anderson, Lewis and Williams were instrumental in forming Arlberg Insurance Co., with Pettit-Morry acting as the managing broker. Arlberg, a stock insurance company, was owned by participating ski areas. “The rationale was to give the client base more control over pricing, at a time when the insurance markets were in crisis,” says Acordia’s Carl “Cappy” Neu.
The late-eighties had been a period of gargantuan increases in the cost of liability insurance policies, including those sold to ski areas. Some resorts experienced 50 percent hikes overnight in the premium they paid to insurers. Major insurers also reduced the amount of insurance capacity or risk coverage they would extend, barely meeting industry demand. Acordia, for example, had to layer its program among 40 separate insurers to provide adequate insurance limits.
Sunday v. Stratton Sets Back Assumption of Risk
Meanwhile, the liability situation worsened for the ski industry. A $1.5 million verdict against Stratton Mountain in Vermont (Sunday v. Stratton, 1978) held the operator liable for improper grooming of trails. The long-held notion of skiing at one’s own peril (individual assumption of risk) was under attack. “Ski areas had significant losses for the first time,” says Michael Berry, NSAA president. “With the economy in dire straits and insurers pressured by a hard market, the cost of insurance (for ski areas) skyrocketed.” Studies indicate premiums for liability insurance shot up from an average of one percent of ski area revenues in 1978 to as much as 15 percent by 1991.
When times are tough, tough companies rise to the rescue. A long-time insurer of amusement parks and motorcar races, K&K Insurance Group in Fort Wayne, Ind., saw opportunity amidst the chaos. “We believed we could make a profit on ski business, so long as we could encourage customers to buy into significant loss control and claims handling,” says Steven Wild, K&K managing director. The broker manages its ski program on behalf of Dallas-based insurer, TIG Holdings, focusing predominantly on mid-size and smaller ski areas.
“We went after the family-owned enterprises and not the big corporates that Willis and Acordia were carving up,” Wild says. “We believed their special needs were being overlooked.” K&K joined the market with very attractive pricing, 30 to 50 percent less than the competition. “Our position was that the other two carriers were charging way too much from a premium standpoint, using the smaller accounts to subsidize the premium they charged to the big resorts,” Wild alleges.
Other carriers also joined the fray, including Continental, Allied Specialty Insurance, Transit Casualty and General Eastern Ski Insurance, a small Vermont-based captive insurer owned by a handful of ski areas. While the latter remains, the first two lost interest and pulled out, and Transit Casualty went bankrupt. At roughly the same time, Arlberg ran into trouble. “The insurance market softened considerably in the 1990s for all lines of business, putting Arlberg at a competitive disadvantage from both a pricing and investment perspective,” Neu says.
Arlberg’s surplus was “too small” to diversify its investments, he explains, prompting its dissolution last year. “We paid investors for their stock in the company, but have kept (Arlberg’s) licenses alive just in case the insurance market spins the other way,” says Neu. Stamford, Conn.-based insurer Genesis, a subsidiary of General Re Corp., now underwrites the business formerly insured by Arlberg. —R.B.
