June 2024 Board Meeting Minutes

Margaritaville Resort, Lake Tahoe, CA
June 23, 2024, 10:00 a.m.-3:00 p.m.

Notes: Votes taken by the board are highlighted in yellow.

Chair’s Comments
Mr. Gobler welcomed Lisa Foley and Tim Burnett (who was unable to attend) as new committee chairs. Tim Chaix announced he will be resigning from the Board of Directors at the end of October because he is moving out of the state. Mr. Gobler said Mr. Chaix was leaving big shoes to fill on the board and the Education Committee. He also announced that Terrence Villar had left the board as well. 

Special Announcement
Barbara Trumbly announced that the SLA had not only been named a Great Place to Work by the organization of the same name for the second straight year, but also one of the top 100 workplaces in the Bay Area by Fortune Magazine for the first time. 

CEO Report
Benjamin McKay said that the pivot meeting historically was a way to move money from one bucket to another, and that it was usually not necessary to ask for additional funds, except for last year. This year, the SLA is about $1.4 million under budget, and the pivot will once again just involve moving funds as needed. The amount of transactions has grown dramatically, and some of the surplus will be used to hire more data analysts. Mr. McKay also reported that the board voted electronically to accept the expenditure of $200,000 for the USC scholarship program. Additionally, he noted that the SLA has finalized setting up annuities for its pensioners and is now free of that obligation. 

Mr. McKay also discussed the triennial audit, which he described as a process audit and a review of whether the SLA is fulfilling its Plan of Operation—the delegated authority given to the SLA by the California Department of Insurance (CDI). He said the examination was complete and the examiners suggested that the SLA complete an IT penetration test, which has been completed satisfactorily; to manage its authorities—making sure only the right people can access the system; create a fraud hotline, which would involve working with the CDI’s consumer protection department; up-level its employee training—including doing a better job of letting employees know the educational opportunities that exist; and formalize its training goals. All in all, these recommendations make sense and involved nothing that is likely to raise any red flags with the CDI. 

Next, Mr. McKay discussed the California Insurance Emergency Response Association (CIERA), which the SLA helped create. Its purpose is to help the industry respond better to the next major earthquake. David Kodama is now the president of CIERA, which has been stood up and has an executive director, and is producing a white paper that will be made publicly available. Mr. Kodama reported that Abby Browning of the California Office of Emergency Services spoke to CIERA at its annual meeting in May. She said she had been waiting for an organization like this to be created for years, because she needs a contact person. Mr. Kodama said Ms. Browning emphasized that the State of California has serious budget issues, and travel is limited, but the governor’s office supported her attending the meeting because of its importance and the role CIERA can play in making California more earthquake-resilient. He thanked the SLA and its board for their support. 

Mr. McKay added that the Export List hearing has been set for July 16, 2024, and the highlight is the proposal to add cyber to the list. The SLA is reviewing the proposed categories for the department. Finally, Mr. McKay said the London business trip in 2025 is set for the week of May 18th. 

Intern Presentations
The 2024 interns presented on their experiences at the SLA and took questions from attendees. Vincent Nguyen of Cal State-Fullerton discussed how he went from a plan, upon starting college, of becoming a math teacher to exploring surplus lines, crediting Mr. Chaix and Ms. Trumbly for helping foster that interest. Mariana Siqueiros said that in high school in Mexico, she took an aptitude test that indicated she would make a good actuary. She initially planned to go to college in her hometown, but the local college did not have a risk management program, so she decided to attend the University of Texas at El Paso. She learned about the surplus lines industry and pursued an SLA internship. Ulises Roman of Cal State-Sacramento said his time at the SLA had helped him realize that he really likes the insurance industry and that personal connections are very important. He said that he had been recruited by a fellow Latino, and agreed with Mr. Gobler’s assessment that young, diverse industry ambassadors are the most effective recruiters for a young, diverse workforce. Ananya Rattani, a new graduate of Cal State-Fullerton, focused on information systems, but was exposed to the insurance industry through various insurance events that helped spark her curiosity. In three weeks at the SLA, she learned that one does not necessarily need a degree in insurance to succeed in the industry. Clark Didavi of Johns Hopkins University said that he has always enjoyed new experiences and opportunities, and “picking a lane” in college and specializing was a challenge for him. Eventually his pursuit of a new industry and a new world brought him to insurance—you can try different products, different companies. His goal as an intern is to explore the different facets of insurance, to align his career path with his personal journey and decide where he belongs. He believes the best way to get more young people into the industry is to make some kind of media content, like a movie—similar to “The Big Short.” Word of mouth is also very valuable. Ezel Masih of the University of Colorado at Denver said he was unsure about what he wanted to do when he started college. He became interested in a global risk management program in London and began taking insurance courses. He visited with Lloyd’s and has attended many conferences, learning from people in the industry. 

Staff Reports
Glenn Leung reported on the change in financial position of surplus line insurers. He said a trend that the SLA has noticed over the last two years involves some companies that have trended in a negative direction. Drivers of change include profitability, expansion, fronting/program, and thin capitalization. Recently, the SLA has seen some of the auto and property lines have had some substantial profitability issues. Some entities have expanded their business into the E&S space, while there has also been very big growth in MGA/MGU program business, and finding reputable program partners is crucial. Lastly, some companies have fairly small capitalization and are very reliant on external reinsurers; if reinsurers start charging more, they don’t have as much of a cushion. Interest rates are also impacting profitability. In 2023, nuclear verdicts reached a high, and even average verdicts have gone up meaningfully. 

The SLA’s response, if a company on the LASLI experiences financial difficulties, is to immediately contact the company, gauge the financial implications, and potentially ask the carrier to withdraw from the LASLI. The SLA works closely with the CDI on these issues. 

Mr. Leung said he does not know which companies might be next to face difficulties, but some current LASLI insurers are exhibiting similar characteristics to past insurers that experienced financial difficulties. 

Mr. McKay said that if a consumer cannot be made whole, the SLA will likely face tough questions from legislators. He asked whether the board had any concerns about the SLA promoting LASLI more. The upside would be that the SLA can tell legislators that it has made an effort to ensure that brokers utilize sound insurers. Case law exists—All Risks v. Wilson—finding that the company met the burden because the department reviewed the insurer. A broker is legally allowed to rely on the representations of the carrier. Mr. Gobler said the downside is that Lloyd’s and some others are not on LASLI. Hank Haldeman suggested that this may be a means of getting these carriers to get on LASLI. Mr. Kodama said that part of the pitch could be that an insurer is missing market value by not being on LASLI. 

Jane Ramirez reported on her new role as the leader of the Data Analysis Department. She introduced herself and gave a department status update. In 2023, 61 processing analysts maintained a baseline of less than five days. Experienced, senior team members either retired or transitioned to other departments or companies, and coupled with record-setting transactions, the baseline has increased. The ultimate goal is to stay below five days. Analysis and forecasting indicate 1.2 million transactions by the end of the year. The department is interviewing candidates to fill new roles necessitated by transaction growth. Concurrent training classes will be implemented using three trainers. This will allow for training and onboarding more analysts in a concurrent manner. These trainees need to be hired before 2025 to get ahead of the projected transaction increases. Structurally, the department will evolve by transforming its department structure. The first step was the creation of the Broker Account Teams (BAT) model. The department is reevaluating its processes and working with the Technology Department to refine the RAPID system. Finally, she announced department promotions, with three new senior analysts, three new managers, and a new assistant vice president. 

Key Analytics and Budget to Actuals
Mike Caturegli said there were three salient points regarding what is happening in the market. Most notably, transactions are way up, and most of that is new business, which is very anomalous for the surplus lines sector, and there may be economic drivers helping cause that. Total premium is going up as well, but it is not going up as sharply as the number of policies, reducing the average premium per policy, possibly indicating a soft market. Originally, the SLA estimated last fall that the market would produce $18 billion in premium, $32.4 million in stamping fees, and roughly 8.5% growth. But the sharp increase in transactions—likely 1.2 million as opposed to an original projection of 1.04 million—indicates $18.5 billion in premiums and $33.5 million in stamping fee revenue. In 2025, the models indicate $21 billion in premium, with 10% transaction growth and 1.32 million transactions. In the marketplace, Mr. Caturegli said that new business and renewals were inverting. During the recession that started in 2008, such an inversion also happened, and that inversion reversed as the economy recovered. The current inversion is much more dramatic than the inversion in 2008, which could indicate a looming recession. Mr. Gobler asked if there is a carrier change, does that constitute a new policy? Ms. Ramirez and Mr. Caturegli said that it does. Also, renewals are holding steady, so the new business spike is an attention-getter. Average premium per transaction is down about 15%, with a larger drop on the new business side and more stability on the renewal side. He attributed this to a sharp increase in homeowners’ policies. 

Elena Wealty discussed the Fiscal Year 2024 actuals through May plus the remaining months’ forecast vs. the Fiscal Year 2024 budget. The SLA is currently forecast to be $1.4 million under budget (on a budget of $32.7 million, representing 4% under budget.) Salary and benefits, employee relations, travel, events, and engagement are the five main areas causing the variance. Some expected positions have not been hired yet; the 401(k) match is lower than expected; and three significant retirements have reduced the payroll. The budget request is for completely new positions due to the transaction increase. Mr. McKay said the SLA wants to reallocate $150,000 for software support and maintenance to $75,000 for computing and network and $75,000 for software and support. He also said the SLA wants to move $50,000 from events to employee relations. The SLA will use the underage to hire an estimated 12 additional Data Analysis employees. 

Mr. Gobler asked for a motion to reallocate $150,000 for software support and maintenance to $75,000 for computing and network and $75,000 for software and support. Ms. Quilici moved to reallocate the funding, Ms. Moran seconded, and the motion passed without dissent. 

Mr. Gobler also asked for a motion to reallocate $50,000 from events to employee relations.  Ms. Quilici moved to reallocate the funding, Ms. Moran seconded, and the motion passed without dissent. 

Insurance Renewals Issue
Yusuf Mayet said the SLA recently renewed most of its corporate policies. R-T Specialty is the SLA’s wholesale broker. Two items to focus on are 1) E&O policies, which are new and were decided upon because the SLA does provide advice to members, and the SLA believes that creates exposure; and 2) cyber. The quotation was a curveball—the SLA had to implement new controls on e-mail accounts, etc., by August 13 in order to get coverage. Vani Ganti said multi-factor authentication on Paylocity and Quick Books is in place and RAPID is in progress. Mr. Caturegli said the multi-factor authentication should be completed by the end of June. For other policies, Mr. Mayet said he believes the SLA is getting the best deal it can get, given that the SLA’s employee count has gone up by 7% and payroll has gone up by 24%. Taking out the E&O policy, the rate is essentially flat as compared to last year. 

Committee Reports
Mr. Washington reported on the Diversity, Equity and Inclusion (DEI) Committee, which met in April. One of the things the committee was trying to determine was “DEI fatigue.” A lot of it has to do with how do you make it alive and consistent in your organization. The committee discussed how it could be a benefit to the SLA, who it is trying to educate and influence, and how to do it. The committee is still trying to figure that out. The vision is for the committee to advise the board, broaden awareness, look at new board members from a holistic standpoint—not just gender, not just ethnicity, but being able to articulate what this organization is all about. The SLA is a very diversified organization, and what the board promotes should be reflective of that. Mr. Washington said that Phaedra Jackson is talking with Vanessa Sims, who heads up DEI for the WSIA. Could the committee be a voice within WSIA? RIMS also has some sessions focusing on DEI. With DEI being a relevant topic, it isn’t addressed at any national meetings from a surplus lines perspective. Mr. Washington also said the committee had discussed a member survey, asking about whether companies have DEI programs, employee resource groups, etc. Possibly a DEI library could be launched as a resource for members. Jon Larson, a committee member, said the SLA is very diverse, and that this topic needs to be broadcast more externally. A survey could point to how other companies deal with this topic internally—most large corporations probably have programs, but smaller ones might not. Ms. Quilici said R-T Specialty has a very robust DEI program. Mr. Washington noted that Michael Blackshear, the chief compliance officer at R-T, was part of the SLA’s recent joint continuing education webinar with the Excess Line Association of New York (ELANY) on DEI, and Mr. Blackshear said that a challenge was getting corporate buy-in. Equity cannot be achieved if everyone does not have equal access. You can have diversity, but if people do not feel included, or as if they belong, it mutes the whole process to an extent. Mr. Washington suggested having an annual forum to invite companies in and have guest speakers. Mr. Gobler said there are two areas where the DEI Committee can have impact—1) within the SLA itself and 2) leading by getting any SLA DEI programs on all the board members’ companies radar screen. Mr. Haldeman said the Insurance Industry Charitable Foundation (IICF) does a national DEI conference every two years, and regional conferences in alternating years. Mr. Washington said it is no coincidence that the SLA was voted one of the top places to work, because when DEI is practiced, too often, companies look at “doing DEI” rather than living DEI. When it is something that is active, it will produce a great workplace. Being respected and acknowledged, and feeling a sense of belonging, is something a lot of organizations miss. Even when you just focus on humanity, just being considerate of your fellow colleagues, that is important. 

Lisa Foley reported on the Admitted Market Liaison Committee. In February, the committee went to Sacramento to meet with two admitted market organizations, the American Property Casualty Insurance Association (APCIA) and the Personal Insurance Federation of California (PIFC), as well as Michael Martinez, the deputy commissioner of the CDI. Mr. Martinez discussed key issues, including the commissioner’s Sustainable Insurance Strategy. Ms. Foley credited Cliston Brown with securing the appearance by Mr. Martinez, the first time the CDI had spoken to the committee. She said her view was that the CDI is looking for allies. She also said the committee met subsequently by video with the SLA’s contract lobbyist, John Norwood, for a legislative briefing. 

New Business
Mr. Gobler asked for new business for the next board meeting, and Ms. Moran noted that the board needs to appoint two more board members due to the resignations of Mr. Chaix and Mr. Villar. 

Adjournment
All business being concluded, Mr. Gobler adjourned the meeting at 2:44 p.m.