October 30, 2019 – Minutes

Minutes: October 30, 2019

Location

LeMeridien Hotel
San Francisco, CA
10:30 a.m. – 3:00 p.m.

Board Members/Committee Chairs Present

Robert Gilbert, Chair, Audit Chair
Markel West Insurance Services

Terri Moran, Vice Chair, Stamping Chair
Paul Hanson Partners

Janet Beaver, Secretary-Treasurer
Tokio Marine HCC

Gerald Sullivan, Member Emeritus
GJS Re

Tim Chaix, Member, Education & Compliance Chair
R.E. Chaix and Associates

Jim Faley, Member
Vela Insurance Services, LLC

Rich Gobler, Member
Burns & Wilcox

Hank Haldeman, Member, Legislative Chair
Worldwide Facilities, LLC

Cameron Kelly, Member, Technology Chair
Worldwide Facilities, LLC

Charlie Rosson, Member, Stamping Member
R-T Specialty, LLC

Kathy Schroeder, Member, Stamping Member
Sierra Specialty Services, Inc.

John Washington, Member
Arch Insurance Group

Susan Atkins, Admitted Market Liaison Chair
Golden Bear Insurance Company

Others Present

Benjamin McKay, CEO & Executive Director
Surplus Line Association of California

Joy Erven, Chief Operating Officer and Director
Surplus Line Association of California

Susan Bryant, Senior Vice President, Financial Analysis
Surplus Line Association of California

Michael Caturegli, Senior Vice President, Data Analysis and Technology
Surplus Line Association of California

Cliston Brown, Vice President, Public Affairs
Surplus Line Association of California

James Greene, Vice President, Digital Communications
Surplus Line Association of California

Annie McFate, Liaison, Education & Compliance
Surplus Line Association of California

Dan Brown, Partner
McDermott, Will & Emery

Jeff Pearson, Partner
Burr, Pilger, Mayer

Board Members Absent

Pam Quilici, Member, Next Gen Chair
Crouse & Associates

Terrence Villar, Member
AmWINS

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

Call To Order

A quorum being present, Robert Gilbert, chair, convened the meeting at 10:22 a.m.

Antitrust Resolution and Legal Report

Dan Brown pointed out the antitrust resolution and reminded participants of their obligations under that resolution and applicable laws. He also gave an update on the California Consumer Privacy Act (CCPA). Two things that companies need to think about: whether they are subject to the CCPA and whether they have $25 million of gross revenue. If an insurer texts you to get personal information on someone, you become a service provider with obligations under the CCPA. This only happens if someone is acting more or less as an agent. The regulations are not yet implemented and on pace to take effect in June 2020. Mr. Brown also advised to be careful on cancellations and nonrenewals.

Hank Haldeman brought up the issue of workers’ compensation embedded in homeowners’ policies. If done on a nonadmitted basis, this could impact the “exclusive remedy” provided by workers compensation insurance. Mr. Brown noted the SLA guidance of November 2018 advising that surplus lines carriers cannot legally issue workers’ compensation coverage as part of homeowners’ policies. Workers compensation is the exclusive remedy; workers cannot sue the homeowner, who is not personally liable. But under the current situation, there is a loophole; a homeowner covered by surplus lines does not have workers’ compensation insurance and can be held legally liable in a lawsuit. There is a current case which has not been adjudicated, demonstrating that the plaintiffs’ bar is figuring out this loophole. California Insurance Code Section 11590 does not apply because a surplus line policy is not “issued or renewed” in California. Surplus lines policies are delivered in California.

Approval of Previous Meeting’s Minutes

Janet Beaver, secretary/treasurer, presented the minutes from the June 23, 2019 joint meeting of the Board of Directors and Stamping Committee. Ms. Beaver moved to accept the minutes as presented, Jim Faley seconded, and the motion carried.

Report of the Chair

Mr. Gilbert discussed the goals he had set upon becoming chair and the SLA’s progress on those goals.

  • Education: The SLA has expanded course offerings to other communities besides Los Angeles and San Francisco, and has begun utilizing member offices; Mr. Gilbert’s company, Markel, hosted the first member-office CE course. The SLA also launched its online Learning Center.
  • Member Outreach: The SLA has made tremendous strides under Ben McKay’s leadership toward becoming a full-service member organization and has hired an outreach coordinator to ensure it is providing the level of service that members should expect.
  • Presence in Los Angeles area: Having an L.A. presence will enable the SLA to spend more time among its southern California members and build those connections. These relationships help the SLA learn what it needs to do to properly advocate for the industry, and also effectively advocate and compel compliance.

Also, Mr. Gilbert announced the backlog was down to a baseline of less than 10 days, a monumental accomplishment by the SLA and, in particular, Michael Caturegli and the Data Analysis Department.

Technology Committee and Data Analysis and Technology Departments Report

Mr. Caturegli thanked committee chair Cameron Kelly, who is leaving the industry, for all of his help and mentorship and providing a lot of guidance in the operational aspects of technology as the SLA worked to eliminate the backlog.

Mr. Kelly noted there were a lot of changes to reorder the department since the beginning of the year, releasing six admins and cleaning up the network. This was a good success. The other change was on the programming side. Of 159 bug enhancements, 65 were done by SLA developers, saving a lot of money. There is a plan to hire two tech personnel, one to replace desktop support and another internal developer. The idea is to use less consulting and have employees do more of it themselves.

Progress on 2019 projects included:

  • 100% mandatory SLIP filing got shot down, but we are now at 3% paper filers.
  • Efficiency improvements on the OCR have led us currently to about 95% accuracy.
  • The Learning Center was completed, and the collecting of the NAICS codes has been done—over 5 million records dating back to 2010.
  • The website reports are in process. Mr. Kelly said it was great to have these reports, but people aren’t using them, and suggested finding out why.
  • The Emerging Exposures Bulletin Board is in process. Mr. Kelly doesn’t see it as a Technology Department issue going forward—Communications needs to figure that out, and one person needs to be in charge of it for accountability purposes.
  • Master policies and tag process reengineering is in process. A lot of the tags are a waste of time; let’s focus on what’s important.
  • Network redesign is in process and is mostly done.

In 2020, the department will work on data analytics (data warehouse), reengineering coverage codes, tracking policy limits (total insured value). Phase II of the NAICS codes is to clean up older, erroneous codes. Expansion of OCR to add additional documents and enhancements to education and financial CAS, improvement of RAPID. On the broker-facing technology side, multiple SLIP improvements need to be made. Also coming: the Learning Center mobile application and Learning Center Phase II, which involves additional courses and improvements. The Website 3.0 prototype is coming as well.

The board also saw a video recapping the 2019 SLA intern program. Tim Chaix asked if there was a plan to follow up with the interns next year and possibly see if any of them could be brought on. Mr. Caturegli said there would be with interns who demonstrated aptitude.

CEO Report

SLA CEO Benjamin McKay thanked the board for its commitment to making the SLA what it is today and for helping to ensure a fair, healthy, competitive and growing surplus lines marketplace. He said he hoped members felt intrinsic reward, and that the SLA will be looking at board enrichment activities. The board retreat next spring will focus on board development.

The SLA is at another transition period. Having eliminated the backlog was a big goal starting many years ago. Development of the California Automation Suite (CAS or RAPID) replaced a paper-based system that required buying a million sheets of paper a year. This system was designed to eliminate paper and help analyze and understand the data and the market. The SLA was under the delusion that the backlog was 12 days. It was actually 242 days. It was enough of a crisis that the SLA discussed self-reporting to the department how negligent that was. Mr. McKay met with the CDI and arrived at the conclusion that more people had to be hired to shrink the backlog.

On staffing, there are some people in the senior management structure that had seven or eight internal reports and seven or eight vendor reports. The SLA is changing its structure very soon. There is a controller candidate and a candidate that would oversee other operations, such that no senior manager would have more than four direct reports. Two senior employees are retiring in 2020 (Susan Bryant, senior vice president of Financial Analysis, and Pat McAuley, senior vice president of Education and Compliance), which the SLA needs to plan for. In Ms. Bryant’s case, there is an outstanding internal candidate who has been with the SLA for 14 years, with an ASLI and a CPCU. For Education and Compliance, to replace Ms. McAuley, the SLA has brought in a candidate on a test basis. These positions need to be approved by the California Department of Insurance.

Mr. McKay then transitioned to discussing the economic outlook and the potential for a recession, rooted in the trade war with China. Roughly 22 months after the yield curve inverts, on average, there is a recession. The yield curve inverted in March 2019. On average, we can expect a recession in January 2021. But California’s economy is different and insurance is somewhat resistant to recessions. Going back to 1950, on average, it takes about a year before insurance is affected. January of 2022 is when SLA revenues might be expected to decline. Between now and then, the SLA needs to retire bad debts (pension liability of about $15 million, with carrying costs of $700,000 a year) and its construction loan for the new office ($1 million). The SLA also needs some staffing, as the market is continuing to shoot up (22% over the first nine months of 2019), as well as more space to accommodate the staffing.

When PG&E shut the power down, the next day is when the backlog hit 10 days. The culmination of seven years of process and technological improvements made it possible for the SLA to be effective with many, or even all, of its data analysts telecommuting. But about 20 of those employees don’t actually want to telecommute, and the SLA needs to think about expanding its space. A 5,000-square-foot space, fully built out next to the SLA’s Bishop Ranch office, is now available and, if acquired, will save the SLA more than $1 million in construction costs.

If the recession doesn’t happen, the SLA can continue building contingency funds or reduce the stamping fee, neither of which is a bad solution. The $8.4 million the SLA could net by January 2022 could help pay off the pension and boost contingency funds.

Admitted Market Liaison Committee and Financial Analysis Department Report

Ms. Bryant briefly reported on changes to the List of Approved Surplus Line Insurers (LASLI) and discussed James River’s decision to cancel the Uber policy as well as adverse development in its commercial auto line that caused a significant decrease in its stock price. She alerted senior management and the CDI upon learning of this decision. They have grown 72% in their non-commercial-auto business. Vice Chair Terri Moran said the adverse development problems in commercial auto are not to do with frequency, but severity resulting from large jury verdicts. Mr. Gilbert said that many of the jurors are younger and do not fully understand the magnitude or implications of large cash rewards. Ms. Bryant said Uber and Lyft are looking at forming captive insurers.

Committee Chair Susan Atkins said the committee is looking at a January date for its annual meeting with the admitted trades, and she is looking forward to having three new committee members. The committee is also reaching out to CPCU chapters, with Ms. Atkins recently installed as the new chair for the Sacramento Valley CPCU chapter. She asked for recommendations for topics or speakers. She also said the CPCU chapter is having an evening meeting on Wednesday, November 13, at Sacramento State University.

Legislative Committee and Public Affairs Department Report

Mr. Haldeman, the Legislative Committee chair, renewed his call for board members to join the SLA Grassroots Program, citing current conditions that make it vital for the SLA to have grassroots support on issues that may come before the legislature carrying potential impacts on the industry. He noted the increased interest of legislators, regulators and news media in our industry’s role in insuring homes in fire-prone areas. He mentioned that Mr. McKay and Cliston Brown had both been called to testify before the Assembly and Senate insurance committees in Sacramento in 2019, and that the industry could be facing a much higher level of scrutiny. There is nothing more persuasive to a legislator than to hear from a constituent. He said Mr. McKay and Mr. Brown had done an outstanding job of getting the SLA in front of the key legislators and the CDI, but there is substantially increased attention being paid to our sector of the market. If our legislators start to get the impression that it’s consumers vs. industry, the trust we have built could begin to evaporate. The creation of the grassroots program was for this purpose, but it needs to be proactive, not reactive. Mr. Haldeman asked every board member to join and to reach out to their industry colleagues and ask them to join as well. In our communications, we need to explain that not everybody needs to be a well-versed advocate; the SLA can provide coaching and scripting as needed. He referenced the fundraising structure that PACs have as a model—ask the leadership of our largest members to ask their staffs to join up and get in our database.

In other issues:

  • The National Flood Insurance Program (NFIP) has been extended again, and the expectation is another short-term extension. None of the bills being considered contain the private flood language our industry wanted, but the new regulations reference that.
  • The Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) expires at the end of next year. The effort is ongoing now because policies being written starting January 1 would go beyond the program’s extension date.
  • There still are not nominees from the Trump Administration for the board of the National Association of Registered Agents and Brokers (NARAB).
  • There need to be more effective communications to SLA members and insurers regarding workers’ compensation in homeowners, particularly regarding risks to SLA members. Mr. Haldeman asked that input be given to him, Mr. McKay, Cliston Brown or Dan Brown.

Education and Compliance Committee Report

Committee chair Tim Chaix said the committee is looking at new places for continuing education courses to get more participation: member offices, colleges and universities (as a twofold solution to draw in students). He noted there are now close to 6,000 licensees, a large increase. Mr. Chaix said the SLA had put together instructions on how to obtain a bond for the Learning Center, with another one coming on how to get into the surplus lines business in California. Also, the D1 form is being revised, with CDI approval awaited.

Fiscal Year Overview and Compiled Financials

COO Joy Erven said the forecast to actuals projection is on track. Funds from contingencies used as a smoothing fund earlier in the year have been returned to contingencies. She reviewed certain areas of the budget that were somewhat over budget and explained the reasons for the overages. There were a number of key successes, as the SLA reduced the backlog; Data Analysis staff analyzed the workflow; the Technology Department’s outsourcing kept departures for a minimum and helped operate during contingencies; the intern program was a huge success. Going forward, a better analysis of attrition is needed, drilling down to see who is being retained and why people are leaving. Mr. Chaix asked where apparent excess income of $2 million would be used, and Mr. McKay said that funding would go to contingency funds, ultimately to be used to help pay off the pension.

Next Generation Committee Report

The SLA’s Annie McFate reported that throughout 2019, committee members have focused on bringing more young people into the industry. She recounted SLA efforts such as booths at college insurance days. Upcoming projects include working with the Education and Compliance Committee on the possibility of hosting continuing education courses at universities in various parts of the state. There may also be videos such as one on a typical workday, another showcasing specific jobs, and more. The committee is looking for young people who are interested in taking entry-level jobs in the industry.

In 2019, $135,000 was set aside for contributions, with $155,000 being set aside in 2020. Mr. McKay said the SLA had discussed and debated many times where to contribute and it is time to think about whether the SLA has a giving philosophy, in terms of how funds are allocated, and how much. Nevada spent $6 million endowing chairs at the University of Nevada-Reno and the University of Nevada-Las Vegas. Arizona routinely donates about $500,000 a year. The SLA supports the University of Colorado-Denver as well as California universities. The SLA being a participant in college risk-management programs helps, because it helps drive the curriculum. The SLA is in for $10,000 a year for the University of Southern California, which is asking for $30,000 a year. The American Property Casualty Insurance Association does a general counsel conference, which includes CDI staff and relevant legislators and staff; contributing to this conference could be useful for the SLA to get to know some of the people it gets to know.

The SLA has not contributed at the same level of some other states. It has been intentionally lean, not raising the stamping fee in over seven years, even with staffing needs increasing dramatically. The Excess Line Association of New York has $32 million in cash assets.

Mr. Kelly suggested that donations could be made to college business programs, not just insurance programs.

Stamping Committee Report and 2020 Budget Recommendation

Ms. Moran said the Stamping Committee met on September 12, 2019. She noted that the reason for the board’s decision to raise the stamping fee was to pay off liabilities and raise contingency funds in the event of a recession. After review of all pertinent information, the committee projected 8% growth in 2020, which was a conservative estimate. Any additional revenues over and above expected income would go toward paying off liabilities and contingencies. The committee also recommended a fiscally responsible budget. The filed premium for Fiscal Year 2020 is estimated to be $9.7 billion based on 8% market growth, with SLA revenues of $22.6 million.

Another discussion item was an Employee Assistance Program for employees with severe hardships. SLA staff is still working on this program and will present at the next board meeting. There is a lot of work to be done regarding tax implications and criteria for how it can be used. Mr. McKay said the money in the budget ($50,000) is a placeholder that would not be appropriated without board consent.

Mr. Kelly said his company sometimes let employees take an advance on a bonus as a means of helping them through hardships. He suggested putting the $50,000 in a bonus fund.

Ms. Erven ran through the 2020 budget. Projected expenses and capital expenditures are a total of $19,998,232. This is 14% higher than last year. The majority of the variance is in salaries and benefits. This reflects a staff increase from 100 to 120, with additions being made in almost every department. Two administrative positions are high-level, as directed by the board. Additionally, the cost of health benefits are increasing 15%. Salaries include a 3% merit increase pool, and the pension contribution is up to $550,000 this year.

Mr. Haldeman suggested a follow-up discussion on travel, events and member engagement, given that the funding for these areas is increasing significantly.

Mr. Kelly suggested streamlining budget categories so that it could all fit on one page.

Mr. Haldeman moved to approve the $19,998,232 budget as submitted, along with an estimated premium change of 8%. Ms. Beaver seconded, and the motion carried.

Old Business

Mr. Gilbert said the Western States Surplus Lines Conference (WSSLC) would again take place in Monterey in 2020 and once again will be hosted by the California Insurance Wholesalers Association (CIWA). This year, the SLA will work to create a more SLA-oriented event. Mr. Gilbert asked whether the board had any issues with a block of rooms at the InterContinental Hotel.

Mr. Haldeman suggested there would be value in composing a specific critique of last year’s event, to be provided to CIWA for advisement. Kathy Schroeder said she thought CIWA would be open to the SLA adding to the program, but it would be up to the SLA. From CIWA’s point of view, this was a CIWA event and they were providing space. She doesn’t expect the SLA would get much more out of CIWA. She said there needed to be a convention committee. Mr. Gilbert said out-of-state SLAs said they would be willing to donate but would like some input. Mr. McKay suggested there could be a WSSLC event on the night when there are no events planned. Mr. Haldeman noted there had been discussion about having an extra full day for WSSLC that would be non-overlapping with CIWA. The program (including educational content) would be up to the surplus lines community. Mr. Gilbert agreed to be on a committee and it was suggested that executive directors from other states might also be on it.

Mr. Gilbert also said the 2020 board retreat was tentatively planned for the third week of April in San Diego and asked if anybody had any issues with that plan.

New Business

Mr. Gilbert asked if there was a motion to appropriate anywhere from 0 to 3 percent in discretionary contributions to the SLA staff 401(k) funds. Mr. Haldeman moved that 3 percent be contributed. Ms. Moran seconded, and discussion ensued. Mr. McKay explained that when the pension was frozen, the board agreed to vote each year on a discretionary contribution. Employees get 3% as part of the safe harbor, and 0 to 3 percent in discretionary contributions. The motion carried.

Additionally, Mr. Gilbert noted that he and Ms. Moran had created a nominating committee to nominate the slate for the 2020 Board of Directors and mediator.

Adjournment

Hearing no further business, Mr. Gilbert adjourned the meeting at 2:19 p.m.