June 16, 2023: Board Meeting Minutes

Board of Directors Meeting

Westin Times Square, New York, NY

June 16, 2023, 9:00 a.m. – 1:00 p.m. 

NOTE: Votes taken by the board are highlighted in yellow.
An asterisk (*) indicates attendance via telephone.

Opening Business

Janet Beaver called the meeting to order at 9:27 a.m. and outlined the agenda. Dan Brown reminded all participants in the meeting of their obligations under the SLA’s antitrust resolution.

John Washington certified that the minutes of the October 2022 board meeting were accurate and correct. Terri Moran moved to accept the minutes as presented, Hank Haldeman seconded, and the motion passed unanimously.

Report of the CEO

Benjamin McKay welcomed Elana Wealty, the SLA’s new vice president of accounting and finance. He also noted that two years ago, Michael Caturegli gave a presentation on predictive analytics and suggested 2023 would be the year when the market would start to flatten. Because of that, the SLA decided to lower the stamping fee in advance of what might be a recession. That was good timing and good management, to raise the stamping fee when times are good and lower it when times are bad, showing empathy with the marketplace. It appears the SLA has hit the nail on the head. The board advised that it should not be lowered too far, and given the flattening, it was good advice. The SLA is now at the inflection point where revenues will begin to decline. Mr. McKay said he appreciated the board’s advice tremendously. He also said there will be some budget pivot items with travel and overlaps due to turnover and added positions.

Mr. McKay noted that SLA staff had flagged Assembly Bill 571. Cliston Brown said the bill would prohibit insurers from refusing to provide professional liability coverage to health care providers, or increasing premiums or imposing surcharges on them, if they provide abortion, contraception or “gender-affirming care,” and provides no carve-out for surplus lines’ insurers’ freedom of form. Mr. Brown noted that on the merits, it would be appropriate to ask for a carve-out, but that the politics of the bill were tricky and it would be dangerous for the SLA to be perceived as opposing the bill, which only the Right-To-Life League is on record opposing. From a practical level, Hank Haldeman asked whether there is a way the SLA can state a need for technical correction via staff as opposed to an amendment. David Kodama, Jr., said the SLA would seek a very narrow change to the bill. The challenge is that there is another preceding section that just says it applies to any insurer. Rich Gobler and Mr. Haldeman said the bill could present a slippery slope. Mr. Haldeman said overlooking this issue could compromise what the legislation is trying to do; proponents do not want to provide legal grounds to challenge the bill once enacted. It was the consensus of the board that the SLA should go to staff and ask for a technical correction.

Mr. McKay mentioned a trend over the last 12 months—953 new individual surplus lines license have been issued, and two-thirds of them are for out-of-state brokers. Also, 144 new entity licenses have been issued, and three-fourths of them have been for out-of-state brokerages.

Lastly, Mr. McKay reminded the board that at its previous meeting, it was noted that a third-party filer had gone rogue, and on Markel letterhead, that third party has issued language noting that it provided the tax and fee numbers rather than stating that it was the brokers’ responsibility. Internal discussions are ongoing about third-party filers and who is ultimately responsible. They are basically saying that they can file on behalf of an entity, but the people endorsed to the entity license are ultimately responsible and may have no idea that the third-party filer has been given permission to file for them. It raises the question of whether all brokers are responsible if there is a bad actor on the third-party side. Mr. Haldeman said the signatory has to be one of the endorsed licensees. A third-party filer may use one of those licensees who may or may not be aware. Mr. McKay said this is becoming more of an issue because more people are using third-party filers. Mr. McKay also noted that the SLA followed up with the CRC Group, which had a similar issue, and CRC immediately ceased and desisted, and the word was clearly received throughout the company, because a CRC employee at an Insurance Day event in San Diego brought it up to Cliston Brown just a few days later. Mr. Kodama asked ELANY what controls they have in place regarding third-party filers and they are basically nonexistent. Mr. McKay said there is not a lot of guidance available on this issue.

Budget to Actuals and Key Analytics

Mr. Caturegli reported that the forecast is not as discouraging as the results for the first half of Fiscal Year 2023 appeared. The market is down about 3% as compared to projections from last year. FY 2022 was historically the best year the market in California had ever had, both in terms of premium and transactions. Everything that goes up must come down, and currently, there is flattening in a lot of industry sectors, across the board. Quarters three and four are usually significantly better than the first half of the year, with 65% of premiums generally coming in over the last six months of the fiscal year. Over the first six months of FY 2023, premiums were down 3%, but transactions up 3%, and premiums per transaction down 5%. Compared to the prior six months, premiums were down 5%, transactions were up 1%, and premiums per transaction were down 6%. Monthly premiums at this point are going up, albeit not as much as in recent years when record growth was recorded several years in a row. This year will be favorable but not as favorable as expected. While the SLA projected 11% growth for FY 2023, it appears that 5% is more likely at this point. Transactions were expected to be up 10% and that appears to be on track, with more than 1 million transactions expected this year. Average premium per transaction is expected to be down 5% for the fiscal year. Calendar year projections look more promising, because the SLA’s fiscal year ends November 30, and December is typically a significant month for surplus lines business in California.

Going into the NAICS codes, mining, oil and gas have increased 35% in the first half of FY 2023 as compared to the same period in 2022. Education and public administration are also up significantly. Agriculture, forestry, fishing and hunting are also up, because this is typically tied to food services. Personal lines are up 6%, which not only includes homeowners but also other areas as well. Health care is flat, construction is down by 7%, but specialty trades are all up. Arts and entertainment are down from last year, but that may be because the previous year’s numbers were unusually high as people emerged from COVID, so this probably just represents stabilization. Ditto for accommodations and food services. Retail and utilities are down. There was a big decline in premium in transportation and warehousing, but volume went up. Finance and insurance went down 35%, but there was an upward spike in May during the banking crisis.

Real estate increased from 13% of market share to 15%, and construction is also up, from 12% to 14% of market share. There have been slight decreases in transportation and warehousing, finance and insurance, but a notable increase in health care and social assistance (from 3% to 6% of the surplus lines market) and in personal lines (from 3% to 4% of the surplus lines). Cyber liability led in terms of premium change, up 54% as compared to the first half of FY 2022. Homeowners’ multi-peril went up significantly in premium as well, as did difference in conditions.

Directors and officers, inland marine, commercial auto liability, auto physical damage, and environmental liability all saw notable decreases. Mr. Washington reported that the directors and officers market at this time is really soft. More players are in the space, pushing down rates.

Average premium is up in all lines, particularly homeowners’ basic form. Commercial property, stand-alone earthquake, cyber liability and difference in conditions saw significant upward average premium changes as well. Combined auto liability saw a substantial decrease in average premium change from the same period in FY 2022.

Excess liability increased from 11% of premium market share to 16%. General liability increased from 12% to 13%. Other lines remained mostly flat, though directors and officers decreased from 5% to 3%. Homeowners’ coverage remained flat at 2%. Cyber liability doubled from 1% to 2% of premium market share, and excess liability ticked up from 5% to 6%. Earthquake is trending down, but models indicate homeowners will go up. Commercial property looks like it will recover later this year and tick back up slightly. Terri Moran said her company is seeing significant increases in property. Rich Gobler said reinsurance costs have been a “bloodbath” this year. Jody Black said board members may be seeing trends faster than the SLA is getting them due to filing lags. Mr. Caturegli said that in good times, renewals exceed new business, and in bad times, renewals drop. It seems counterintuitive, but that tends to be the normal trend. The two are almost equal now but appear likely to invert soon in a good way.

SL-2 Modernization Committee Update

Yusuf Mayet reported that the committee had met in April and suggested changes to the existing SL-2 form. The committee, chaired by Mr. Mayet. included representatives from R-T Specialty, Amwins, Marsh, Specialty Programs and CRC, as well as Mr. Kodama, Mr. Black, Mr. Brown, Theresa Fitzgerald and Brittany Delaney from the SLA staff. The committee agreed to some changes that would not necessitate changes to statute, which would stretch the process into 2024. The new form will only have four questions that filers will need to answer. In part 1, the committee combined items A&B; eliminated item C, which is not required by statute; and moved item D to the top of the form. In section 2, the committee eliminated item B and D, which are only required by statute in the SL-1 form. Sections 3 and 4, which are required by statute, were moved to the second page. Most filers do not need to fill those out, effectively reducing the form to one page for almost all filers. Section 5, which is not required by statute, was removed. Sections 6, 7 and 8 were combined into one item. The new form, therefore, goes from eight sections to four. One box, NAICS code, was added in Section 4 because it is believed that this will reduce the number of tags issued.

Mr. McKay said the project would involve three phases. Phase 1, which has been completed, is the redesign of the form. Phase 2 is that the form gets put into cyberspace, with prepopulation, dropdowns, etc. Phase 3 is a DocuSign form that can be sent to the retailer. Mr. Mayet said the next step is to talk to the CDI about whether it is open to the changes that the SLA is proposing. The last update to the form was in 2004, which Ms. Moran pointed out was a time without the level of automation that exists today. Mr. Haldeman said that any changes can be tracked to statute, and that this has always been an SLA form, not a CDI form. Mr. Gobler asked about implementation and whether there would be a transition period. Mr. Black said his department still receives forms that predated the last changes in 2024 and that these are met with “informational tags” asking filers to update to the newer form. Mr. Mayet said that because these changes will make filers’ jobs simpler, high levels of adoption are likely. Mr. Gobler said that when this is rolled out, it will get the “eyes and ears” of the entire industry. Mr. Kodama said that the in-person conversations showed the value of such meetings and how much more can get accomplished due to the greater synergies involved in the discussions. Mr. Mayet said the committee included a COO, a head of compliance, and a head of the retail agency side who suggested creating a late fee. Ms. Beaver suggested marketing this as a member benefit: here’s what the SLA does for you.

Mr. McKay said that the SLA had some unbudgeted items in addition to 8% inflation, creating an 8% bump in costs, as well as a new compliance position. Mr. Kodama noted the increase in licenses, and more frequent and complex member questions, required an increase in compliance staff, to provide more technical and advisory services to the SLA membership. Rather than bringing in a mid-level person, the SLA hired someone with the technical expertise and legal credentials to provide high-level advice, Ms. Fitzgerald, an experienced attorney and former CDI employee who came at a higher salary than a mid-level staffer would. Mr. McKay said the SLA has made two great hires, with Ms. Fitzgerald and Ms. Wealty, as well as two new trips for the board and staff. The bottom line is an adjustment of $448,000 as forecast through the end of the fiscal year. Mr. Mayet said there also is increased cost due to the in-person meetings of the SL-2 committee. Mr. Haldeman moved to accept the budget pivot of $448,000, Ms. Moran seconded, and the motion passed unanimously.

Overview of Board Members’ Legal Obligations

Dan Brown discussed board members’ legal obligations, including a fiduciary obligation to behave as a reasonably prudent person. Members have a duty of care and a duty of loyalty. Not everything can be delegated to staff; members have a duty to fully participate. The duty of loyalty involves board members behaving in the best interests of the SLA, not themselves or their companies. A member cannot go back to their office and begin moving their book of business based on information they learned in a board meeting. If an SLA staff member was terminated and applies at a board member’s company, the board member should not take that information back to the company. Sarah Nichols asked if there is any reason why board members should not sign a conflict-of-interest statement. Mr. Brown said the duty of loyalty is inherent, but having that formalized would be a good idea. Mr. Haldeman suggested using the WSIA’s conflict-of-interest statement. Robert Gilbert asked how to respond if a person terminated for cause at the SLA applied to his company and he was asked by his human resources department whether the person should be hired, and Mr. Brown suggested simply declining to answer. Mr. Haldeman suggested that in such a situation, the board member should reference his or her duty of loyalty as a member of the board as the reason why they are declining to answer. Mr. Caturegli said there is a new opportunity for the SLA with the turnover taking place in a number of other states’ SLAs to build relationships with new, enthusiastic individuals taking over there, sharing NAICS codes, other resources, and best practices. James Greene said the SLA’s Marketing and Communications Department will produce some content that can be shared with other SLAs. Mr. Gobler suggested board workshops could be offered. Mr. Haldeman cautioned that it should not become a trade conference.

New Business

Ms. Moran asked for an update on personal lines at the next board meeting, given the decisions by several major admitted carriers to stop writing homeowners insurance in California. Mr. McKay said Congresswoman Maxine Waters (D-California) had sent a letter to the Federal Insurance Office to produce a report on the health of the insurance industry. Mr. Kodama said that the NAIC usually provides those services, so this is a departure from the usual state-based system. Also, the U.S. Senate Budget Committee, chaired by Senator Sheldon Whitehouse (D-Rhode Island), has written letters to seven major insurers challenging their investment in the fossil fuel industry. Jerry Sullivan said Allstate has been granted a 4% rate increase in the wake of its decision to stop writing new homeowners’ business in California. Mr. Gobler said if the FAIR Plan gets the rate it wants, more homeowners’ business will flow into surplus lines. Mr. Kodama said that as more business goes to the FAIR Plan, difference-in-conditions numbers will go up. Tim Chaix said that the Independent Agents and Brokers of California (IIABCal) are asking for a lot of political action commission donations to pressure the insurance commissioner on rates. Dan Brown said an attempt was made to get a California state legislator to sponsor a bill amending Proposition 103 and not a single legislator was willing to author it. Cliston Brown said this was likely the result of the failed effort former Assembly Insurance Committee Chair Tom Daly (D-Anaheim) to push through a rate-reform bill that the California Department of Insurance (CDI) blocked.

Adjournment

All business being concluded, Ms. Beaver adjourned the meeting at 12:12 p.m.