October 19, 2022: Board Meeting Minutes

Board of Directors Meeting

Terranea Resort, Rancho Palos Verdes, CA

October 19, 2022, 10:30 a.m. – 12:30 p.m. 

An asterisk (*) indicates participation via telephone.

All votes or decisions taken by the committee during the meeting are highlighted in yellow for easy reference.

Opening Business

A quorum being present, Janet Beaver called the meeting to order at 10:35 a.m., and Dan Brown advised participants of their obligations and responsibilities under the SLA Antitrust Resolution.

John Washington, secretary/treasurer, certified that the minutes of the October, 2021 board meeting were true and correct. Rich Gobler moved to approve the minutes as presented, Terri Moran seconded, and the motion carried without dissent.

CEO Report

Benjamin McKay posed the question of why the SLA does what it does. The SLA is charged with creating a healthy, fair and competitive surplus lines marketplace. Legislators create frameworks that create markets. If policymakers make the wrong decisions, such as passing a regulation that ensures cannabis, toxic waste dumps, rental scooters and the like cannot be insured in the surplus lines marketplace, and the SLA doesn’t show up to change that, the industry will lose that market. The SLA creates a healthy, fair and competitive marketplace by keeping that from happening. The rules of the game come from lots of places—sources of law. Sources of law are a pecking order—federal law (Dodd-Frank Act); state law—generally the main rules for a state-regulated industry; regulations make sense of the laws; court decisions, where the law is unclear; rules made by courts (including administrative law courts); it even gets to the point where history and tradition matter, when there is no law governing—which is why the SLA keeps minutes and has veteran members of the marketplace on this board to help understand the history and tradition. It is a massive role for the SLA, which fulfills that role by creating an awesome culture full of great people committed to the task and by ensuring the laws are followed. The SLA also achieves that through its budget—the foundation for all the activities that are necessary for the SLA to be a modern, credible leader, money for the right staff and projects to do these things. The budget is how it gets done.

Financial Analysis Department Report

David Kodama, Jr. reported that from January to August, premiums are increasing significantly. LASLI insurers, of which there are 134, saw premiums increase 29.3%, compared to non-LASLI insurers increasing 46.7%. Market share is 71% LASLI, 28% non-LASLI. The stability and financial strength of surplus lines markets insuring in California, 95% have a stable outlook from AM Best. The strength of the market is something the SLA can be proud of. A lot of it goes to relationships and conversations the SLA and its members have with the surplus lines markets. Lloyd’s makes up most of the non-LASLI insurers; their market share went from 15.7% to 14.1%, possibly some lingering effects of their underwriting reforms. In the Lloyd’s sector, the SLA is doing more work to do further monitoring of its activity so it can advise of developments and trends in that market. Beasley represents 14.1% of the Lloyd’s market share, with a lot of cyber insurance policies. LASLI is still showing a lot of activity, nine applications in the queue, two before CDI and seven being reviewed by SLA staff. One was withdrawn at the request of the CDI and recommendations of the Financial Analysis staff.

Glenn Leung said one of the hot topics that Financial Analysis is paying close attention to is Hallmark Specialty, which recently sold its E&S book to Core Specialty. Hallmark has an A-minus rating with a negative outlook, with a 137% combined ratio for the first seven months of 2022, and it burned through its limits on its loss transfer agreement and has dispute with the reinsurer. Core Specialty bought the book of business, but the policies and loss reserves are still with Hallmark Specialty, so Financial Analysis is closely monitoring those developments. Also, Catlin Specialty is being purchased by Applied Underwriters, the group having issues with the CDI currently. Mr. Kodama noted that Applied Underwriters was trying to redomesticate a California work comp company to New Mexico without prior approval from the CDI. Commissioner Lara filed an injunction to stop it which is still in the process of being litigated.

Mr. Kodama praised the relationship of the Financial Analysis Department with the CDI, saying that the CDI tries to resolve issues with the Financial Analysis Department before sending a letter to the insurer.

The NAIC Surplus Lines Task Force is looking to update its nonadmitted insurance model and impose a definition for an unaffiliated member group. The question is whether there is a single home state for risk purchasing groups, or multiple home states, and whether one state should have authority. The NAIC wants to make it all 50 states, but the industry and the CDI believe this should not be part of the model act, and that the home state of the risk purchasing group should be the home state for all its policies. Mr. Kodama praised Mr. Leung and Cliston Brown for working with him to build relationships with the CDI, ultimately resulting in a stronger relationship between the SLA and the CDI.

Rich Gobler reported that the Stamping Committee recommended a premium forecast of $18 billion and a budget of $25,663,724 for Fiscal Year 2023.

Mr. McKay presented the 2022 market analytics, reporting that the board predicted the SLA would bring in $38 million in revenue last year. It looks like it will end up between $40 million and $41 million. There was a 5% transaction increase, to 860,000 transactions. Jody Black reported there were 80,000 transactions in August and 73,000 in September. Mr. McKay also detailed some of the top lines, and noted that personal lines is up and gets a lot more scrutiny from regulators, advising that anyone writing homeowners obey the directives of the department regarding nonrenewals and cancellations. The bottom line is that the market is incredibly healthy and that 2022 remains a hard market in terms of premium per item.

Ivan Morse presented the 2022 budget to actuals, reporting that after the first nine months, revenues were at $30.3 million. The board approved a $23 million budget, and the SLA is going to spend $23 million.

Mr. McKay presented the 2023 premium forecast, reporting that $38.7 million in revenues are expected in 2023, with approximately $12 million flowing into the SLA’s contingency funds. It represents an expected 10% increase in premium and a 14% increase in transactions, which would mean more than a million transactions for the first time in the SLA’s history. He reported that Mr. Black is ensuring staffing needs will be met.

Average premium is down this year 1%, which still indicates a hard market, but a little less hard.

Mr. McKay also noted a new development: In the middle of 2022, there was an inversion between new policies and renewals. Usually 48% are new policies and 46% are renewals, but for the first time in at least 20 years, there were more renewals than new policies (49%-45%).

Robert Gilbert asked if this was due to construction, and Ms. Beaver suggested that this could be the case. Mr. Washington suggested this could be why the average premium was down slightly.

Mr. Morse presented the proposed 2023 budget, reporting that the biggest category jump is in salaries and benefits, approximately $3 million, due to 11 new hires in several departments. Health benefits have increased by 12%, as well as PTO and payroll taxes. Wages for existing employees are recommended to increase by 6%. Rent has decreased considerably due to closing the SLA’s San Francisco office. Telecom is down because of new and renewed contracts and getting rid of products that were no longer needed. Supplies are up because of new people being hired and the SLA is now a work-from-home first organization, which requires setting employees up in their homes. Computing and network is up because of the CRM license and an offsite disaster recovery system that the SLA is setting up.

Discussion ensued about staffing, and Mr. McKay said the SLA is confident that it can avoid layoffs in a downturn.

Terri Moran moved to accept the premium forecast of $18 billion and the proposed budget of $25,663,724 for Fiscal Year 2023 as presented. Tim Chaix seconded, and the motion passed without dissent.

Adjournment

Hearing no further business, Ms. Beaver adjourned the meeting at 11:44 a.m.