Financial Loss · Insurance · Video

What Happens When the Lights Go Out?

The first question on our “What’s In My Insurance Policy?” addresses what happens when you lose power (electric, gas, etc.) and can’t operate your business.

As you will see, this is a big coverage gap, coverage is rarely what we think it is.  In most cases it is is pretty much non-existent since the most likely loss of power, downed power lines, are usually excluded or have a very low sub-limit.

The “What’s In My Insurance Policy?” is a video series to help insurance buyers better understand what their insurance policy covers and doesn’t cover.  We take questions from you, our viewers, so please feel free to ask a question in the comments section or send an email and we will address it in a future episode.

Financial Loss · Insurance

D&O Lessons From Snapchat

If you haven’t heard Snap, better known as Snapchat, is being investigated for its disclosures leading up to its IPO in 2017. You can find a good overview at TheStreet about the ins and outs of the case, but here are the two major allegations:

  • Snap withheld information regarding the level of competition it faced from Instagram.
  • A former worker alleged that it was inaccurately calculating and reporting daily active users (DAU), a key metric investors use for social media companies.

Snap is an example of why D&O insurance is more challenging for companies with the three year window of their public offering, and that can be summed up in one phrase – “failure to disclose.” “Failure to disclose” is one of the most common claims we see and when the stock doesn’t perform well the odds of a claim are exacerbated. Whether these allegations end up being true or not, it will be costly for Snap to defend themselves and could very well exceed their retention (deductible), meaning the insurance company will be need to contribute.

The Snap story brings up another important issue with D&O insurance and that is investigative costs. Investigative costs should be covered by your D&O policy, but if your broker isn’t paying attention then investigative costs could very well be excluded or limited. We will assume that you have coverage for investigative costs, but what typically happens before the SEC initiates a formal investigation? The SEC will informally ask that you provide documents and information, otherwies known as an informal investigation. These requests cost money and can be lengthy, but technically you are not being formally investigated so the D&O insurer will look to exclude coverage until there is a formal investigation.

This does not have to be the case. Informal investigation costs can be covered by the policy but insurance companies aren’t excited to offer the coverage so your broker needs to ask for them to be covered. If the insurance company will not offer full coverage for informal investigations that does not mean it is a lost cause. At the very least, your broker should be able to secure a sub-limit for informal investigation costs, this is not optimum but it is better than nothing.

Informal investigations are nothing new and I am sure at some point insurance carriers got stuck paying them so they changed the policy language to better protect themselves so they would not have to pay them in the future. Now carriers are more willing offer coverage or they will at least offer a sublimit, and as I always say, when a carrier provides a sublimit it is a sign for the insured/broker to be cautious, as it means the insurance company knows the probability of a claim for that risk of is higher.

By the way, in case you were wondering you can find me on Snapchat, my handle or screen name is mattcorc1, and here is proof.

Image-1

Financial Loss · Insurance · Investment

Cost is the Most Important Consideration When it Comes to Investments – It Always has been in the Insurance World

I read an intriguing blog post today on The Reformed Broker titled – “Two Thirds of Advisors Care Most About a Fund’s Cost.” The article is about financial advisors, not insurance advisors, I think if it was talking about insurance advisors the number would be even higher. The article seems to allude that cost is being driven by the client and not the advisor, the advisor is simply trying to provide for what the client is asking for which makes sense when the goal for most advisors is to increase AUM.

To me, this is a mildly surprising stat. Fees, and their potential impact on returns have been hammered home by the likes of Vanguard and Warren Buffett so they are at the front of everyone’s minds. That being said, performance should matter. Most of our purchases in life aren’t simply figuring out what we need and then buying the cheapest version of that product, but it appears that is what we are doing with our investments.

When it comes to insurance price is even more important for consumers. Does the consumer care about coverage details or will price drive the decision as long as coverage is somewhat similar? My experience shows that price will be the driver because brokers do not do a good enough job of demonstrating the differences in coverage in a policy that appear similar but are vastly different. If you buy an S&P 500 ETF cost is very important because the products are the same, they track the S&P so every additional basis point that ETF charges will lower your performance compared to that index; price matters in this case. If, on the other hand, you have ever looked at your insurance policy you realize the language is archaic, there are endorsements and exclusions added to the policy, policy sections refer to other parts of the policy, definitions that might differ from everyday use, and so forth and so on. This is why insurance is bought more on price, it is hard and tedious to go through a policy and figure out what the differences are. The buyer will usually ask if there are any “major” coverage differences and if the answer is no then the consumer will buy on price. The problem becomes we often don’t know what a “major” difference between policies is until after a loss that is either covered or excluded. What we thought was a minor coverage difference turns out to be the reason why a loss was covered or not covered.

Price should and will always be a factor when buying insurance, but coverage should play a more integral part. I understand that insurance is not something people are excited to buy as it has no upside, it is designed only to make you whole after a loss so there is no ROI on an insurance policy. All too often though, the insurance policy does not make insureds whole after a loss because what was once considered a minor policy difference has now caused a major issue in the coverage. The loss is either excluded or the coverage limit is not adequate so the insured is left making up the difference.

Insurance · Financial Loss

How CFOs are Protecting Themselves From Manufacturing Disruptions as Gene Therapy and Immunotherapy Manufacting is Being Stretched Thin

Today there was an article in STAT about the shortage of manufacturing capacity for gene therapy companies (find the article here). The article goes on to talk about how the problem might only get worse as companies pursue indications in larger patient populations and the trial sizes get bigger and bigger. There was also a comment about by the CEO of an immunotherapy company pointing out that immunotherapy companies are dealing with the same issue.

When I see articles on this subject I automatically think of supply chain risk, particularly for companies that are sole sourced, which is pretty much all gene therapy and immunotherapy companies. Some of these companies are trying to bring the manufacturing in-house as early as possible which alleviates some supply chain issues but not all. Companies that manufacture in-house or outsource manufacturing have the same risk if manufacturing is disrupted; if there is a fire or some other type of event that shuts manufacturing down companies will be negatively impacted, resulting in lower revenue or delayed clinical trials.

Insurance can alleviate this risk, but unfortunately companies do not usually have their policies setup correctly to protect against these losses. Most companies mistakenly believe that their business income will provide coverage, but this would only be true if a company manufactures in-house. If a company outsources their manufacturing then business income would not respond, dependent or contingent business income coverage would be needed to have protection. I talk to countless CFOs who incorrectly believe these two coverages are one in the same, but they are not. The CFO will point out that they have blanket business income, but that will only cover losses that occur at your locations and not third party locations.

If you are dual-sourced company or have a contingent manufacturing plan in place then dependent business income insurance is not nearly as important for you as a company that is sole-sourced but still something to be considered. If, on the other hand, you are sole-sourced (either manufacturing yourself our using a single CMO) you need to pay special attention to this coverage in your property policy or you could be putting your company at risk.

Financial Loss · Insurance

How Thinking in the First-Order Could be putting your Company at Risk.

Have you ever heard of “second-order” thinking?  It seems like an idea I am hearing more and more frequently as of late.  I became much more aware of the concept after I read Ray Dalio’s book Principles, although he uses the phrase second order consequences. For those of you that don’t know who Ray Dalio is, he runs the largest hedge fund in the world – Bridgewater Capital – and his market returns speak for themselves.  Another investor who is known for this thinking is Howard Marks who talks about it in his book The Most Important Thing and whose investing track record, again, also speaks for itself.

“Second-order” thinking has traditionally been most associated with the investment world but it can and should be applied to most of the decisions we make.  Second-order thinking is basically looking beyond the obvious or assuming that all decisions are binary.  It is recognizing that a multitude of variables could impact a decision and that a decision can manifest itself into something that was unexpected.  Basically it is foregoing the immediate ease or satisfaction of a decision because you understand there are long term implications that could be unintended or harmful.  An extreme example is being offered a cookie.  Most people would go through an instinctive decision making process where all that mattered was whether they were A) hungry and B) like cookies.  Second-order thinking would contemplate those two inputs but the decision making process would go beyond that and ask what happens after the cookie is consumed. Maybe it would lead to diabetes down the road, maybe you feel overwhelming guilt that outweighed the pleasure from eating the cookie leading you to be in a funk for the rest of the day, maybe you would feel you needed to go to them gym an extra day that week giving up precious time with your family, and so forth and so on.  As you can see, second-order thinking is looking beyond the immediate consequence of a decision and instead at the domino effect of that decision.

A real life example of a second-order thinking would be a professional quarterback.  A QB goes to the line of scrimmage with a pre-determined play call and the offense lines up accordingly, but then he reads the defense and recognizes that the play they were going to run has a low probability of success against the defense so he changes the play to something he believes has a higher probability of success.  He might call a play where one of his receivers does a short crossing pattern that forces the safety to come up which in turn creates one on one coverage (a favorable matchup) for the receiver going deep.  As you can see, the QB not only needs to recognize what type of defensive scheme is being used, but how the defense would respond to certain offensive plays, call the play that is best suited to be successful against that defense, identify where the weakness will be against that defense, and finally execute and exploit that weakness.  He has just a few seconds to process this information and execute.  A great professional QB needs to not only be a great athlete but be a second-order thinker.

First-order thinking, on the other hand, is the path of least resistance.  It is looking no further than the immediate consequences of a decision we might make.  With first-order thinking we try to make things binary and we look at the immediate consequences of that decision which are typically either good or bad.  When we use first-order thinking we don’t look at root causes or try to ascertain why something is what it is, a rudimentary example would be buying solely off of price.  The second-order thinker might instead try to figure out why the products are priced so differently – is it quality, brand-name, type of warranty, backend customer service?  Once that information is collected they can make a better decision for what suites their needs.

In insurance, first-order thinking is the predominant way of thinking for both the buyer and the seller.  The seller or broker understands that a lot of buyers think of insurance as a commodity, there is not much difference between policies, so they push price or service.  The broker also recognizes that most buyers do not really understand insurance so they might use their brand name recognition and position themselves as an “expert.”  A few of the phrases that I have heard that signal a buyer is a first-order thinker are:

  • CFO (buyer): We have always purchased insurance this way.
  • Risk Manager (buyer): We’ve been with our broker for four years and never had a problem.
  • CFO (buyer): Our broker just saved us a bunch or money.
  • CFO (buyer): They insurance XX% of the Fortune 500 companies.

I could go on and on, but the point is that in insurance it is easy and definitely the path of least resistance to be a first-order thinker.  Most buyers, and brokers, do not want to get into the weeds of a policy and ask the “what if” questions.  An incumbent broker will seldom say this to a client, “X is not in your current property policy, should it be?”  They might say you should like at adding cyber coverage or employment practices liability coverage, but rarely will they tell you something is not in your policy unless you as the buyer bring it up.  Unless you are a company that is fortunate enough to have a risk manager, it is hard to become a second-order thinker when it comes to buying insurance, CFOs or whoever is in charge of insurance, have too many other things that they are responsible for.  Really the only way I know for a company to think on the second-order when it comes to insurance is having a third party review your program and ask you the questions your current broker either doesn’t know to ask or is afraid to ask because they are afraid of how that might make them look.

Financial Loss · Insurance

Common Question Friday- Why Do I Need Cyber Coverage?

This week’s common question is – “Why do I need cyber insurance if I don’t sell anything and therefore don’t take personal information from clients?”

In the past this was asked by pretty much every company that did not sell directly to consumers but the tide is definitely shifting where almost every company needs some cyber coverage.  Cyber coverage is unique in that covers losses you incur (first party) and losses to third parties do to your negligence.  Some of the coverages include:

  • Notification Costs (1st party)
  • Extra Expense and Business Income (1st party)
  • Cyber Extortion Costs (1st party)
  • Forensic Costs (1st party)
  • Settlements and Damages related to a breach (3rd party)
  • PCI fines (3rd party)
  • Legal Defense (3rd party)

This is just sample of what a cyber policy covers and is not inclusive.  Some claims examples:

  • If you have employee information you have what is referred to as personal identifiable information and if that is compromised you would need to notify those possibly impacted and pay for credit monitoring.
  • A malicious party could use you as a gateway into hacking into a larger organization, much like what happened with the Target breach. Here the hackers got into Target’s system through the HVAC contractor.
  • If you have trade secrets a hacker could steal those secrets and then extort you. Your supply chain could be disrupted causing a business income loss much like we saw with Merck last year.

These are a few examples of claims that could happen to any company regardless if they have a commercial product or not.  Cyber insurance is relatively inexpensive and the risk is there for everyone.  If you are not at least getting quotes I strongly suggest you do as every day the world becomes more dependent on IT.

Financial Loss · Insurance · Property Insurance

How We Helped a Client After Their Product Was Condemned

I am going to share with you a story about a new client that left their prior insurance broker because of a bad loss they suffered that could and should have been covered.  I am going to explain why they choose us but I want to be clear, getting a new client because they suffered an uncovered loss is not a good way to win clients and not something we prefer.  We would much rather work with a client prior to a loss and uncover coverage gaps so that if they are unfortunate and have a loss and least it is covered by insurance.

The loss involved a fire at their premise that destroyed roughly 25% of their product.  The remaining 75% of the product was condemned even though it appeared not to be damaged.  The insurance company covered the 25% that was damaged but not the 75% that was condemned.  The condemned property should have been covered and could have for a very little amount of additional premium.

After the loss the client decided it was time to move on from their large fortune 500 broker that had a team dedicated to life science clients.  The client did an informal RFQ and asked the competing brokers to analyze their current coverage, current pricing, and coverages they might be missing.

What we found was pretty staggering.  From a pricing standpoint, they were in good shape, and they had most of the same coverages that we would have recommended.  The problem was that the coverage terms within those policies left the client significantly more exposed than they realized.  In addition to the condemned property coverage gap, we found a handful of other six and seven figure coverage gaps that the prior broker had missed and which our competition had failed to point out.  It is never pleasant when a loss uncovers a coverage gap and that is what we strive to avoid with our clients and prospects.  At the end of the day, our deep dive coverage analysis is what won us the business.  We had equal capabilities to the other brokers when it came to pricing and placement expertise, but we shined when it came to correctly identifying what their current coverage lacked and how to fix it.

If you are a life science company and would be interested in learning more about our coverage audit please email me at matt.corcoran@alliant.com.  We spend our time and resources doing this analysis, not yours.