Tag Archives: insurance professional

marijuana

Medical Marijuana’s Growing Pains

Since California led the way in 1996, 23 states and the District of Columbia have legalized medical or recreational marijuana sale and use. In 2016, several states are considering bills that would legalize medical marijuana, reduce jail time or fines for possession and amend existing marijuana laws. In 2014, Congress even put its support toward medical marijuana and hemp growers in the omnibus bill.

As the medical marijuana (MMJ) industry grows beyond infancy, so does the scrutiny of its business liabilities. It seems every week brings a new growing pain for the industry. Here are three important liability concerns that you and your clients should be considering.

Product Liability

Product liability insurance is typically excluded from general liability policies for MMJ dispensaries and grow operations. This is for a couple of reasons: (1) the illegality of the product on a federal level and (2) lack of FDA approval for marijuana for consumption.

Product liability is an essential coverage for MMJ operations as it protects them in the event of claims because of illness or injury from cannabis products. These claims are on the rise as more individuals are exposed to MMJ, particularly when those individuals experiment with various ways of consuming THC.

A class action filed in Colorado in 2014 (Coombs v. Beyond Broadway) alleges that people became ill after eating THC-infused chocolate samples at an event. The class action is open to all attendees who may have been served at the event, so the demand and settlement could be dramatic.

This claim would be handled under the product liability policy. This coverage is available as a stand-alone product, though some carriers may be willing to package it back in with the general liability and rate it separately.

Product Recall

In the Wild West that is the cannabis industry right now, a trend is emerging: product recall.

Cannabis products are being recalled at an alarming rate. Denver alone has recalled 13 products in 13 weeks, including a vape pen oil containing a dangerous, banned pesticide. In October 2015, a number of products were recalled because of banned pesticide content.

Product recall is expensive, and none of those expenses are covered by product liability insurance. In fact, in nearly all of the product recall cases in Denver, no one was sickened by the pesticide-laden products. Cannabis purchased to make the products was independently tested by the manufacturer and voluntarily recalled.

Independent third-party testing is important for quality control, especially in the marijuana industry. When every media outlet and government organization has their eyes on your clients, they need to be one step ahead, so testing product before shipment or sale should be part of any risk management plan.

Product recall insurance is becoming essential. This coverage is written on a manuscript basis to fit the needs of your client and can cover everything from retrieval and shipping costs to destruction costs and even provide public relations help to rebuild and maintain the insured’s reputation.

Professional Liability

With medical cannabis, the dispensary takes on the responsibility of a highly regulated pharmacy. Insureds may be compliant with all state and local rules and regulations, but mistakes do occur. The most common are:

  • Failing to give the correct product to the patient or an authorized caregiver.
  • Failing to confirm the identity of the patient or caregiver before dispensing.
  • Failing to protect patient privacy.

All of the above and more can be covered with a properly written professional liability or E&O policy. Protecting patient privacy can also fall under cyber liability, which your clients should also be concerned about.

MMJ business owners have the same concerns as any other business: profitability, legality, providing a valuable service to the community. As insurance professionals, not only must we look beyond the nature of the business to see the similarities, but also the industry-specific concerns.

Solving the Insurance Talent Crisis

A lot of ink has been devoted to the looming talent crisis in insurance, bemoaning the difficulty of attracting qualified young people to careers in an industry that is a cornerstone of commerce and one that helps countless people and businesses around the globe recover when the worst occurs. And one need not look far to see the cause of the problem. More often than not, we –insurance professionals — are the cause.

How many of us have felt a twinge of embarrassment when strangers at cocktail parties ask what we do? How many of us have worried about being perceived as leading boring, little lives?

Yet, we in insurance get to spend our days thinking about hurricanes, tornadoes, wildfires, earthquakes, car crashes, cyber crime, fraud, pandemics, terrorism and a host of other equally exciting risks affecting people in all walks of life and businesses in every field of endeavor. And we are increasingly using cutting-edge technology, big data and predictive analytics to enhance risk assessment, pricing, loss adjudication and every other aspect of insurance operations. Moreover, insurers are intimately involved in capital markets, managing billions upon billions in investments, not to mention that insurers’ very reason for being is to provide vital help when people and businesses need it the most.

Bottom line, if you’re concerned about the amount of grey hair you see in the insurance business and the difficulty of enticing budding data scientists, technologists, entrepreneurial spirits and the best and brightest of tomorrow’s leaders to consider careers in insurance, please allow me to suggest that you become an ambassador in service to the cause.

All it takes is talking with pride about the problems we solve, the good that we do and the fun that we have along the way.

A Word With Shefi: Carbone at Bain

This is part of a series of interviews by Shefi Ben Hutta with insurance practitioners who bring an interesting perspective to their work and to the industry as a whole. Here, she speaks with Matteo Carbone, with Bain Financial Services in Italy, who says the Internet of Things “has introduced more changes than the sector has seen in the last 100 years.”

To see more of the “A Word With Shefi” series, visit her thought leader profile. To subscribe to her free newsletter, Insurance Entertainment, click here.

Describe what you do in 50 words or less:

I advise financial services groups mainly on innovation within their business models. My field is insurance, and I’ve spent the last couple of years handling digitalization of traditional channels: inventing technology-based value propositions, generating customer experience strategies and bringing the omni-channel approach into the insurance business.

Name an emerging technology you are most excited about:

Internet of Things – it’s a game changer! From connected cars to “domotics,” to wearables to connected machines; all the things that are creating tremendous opportunities to price risk, handle claims differently and deliver new services. In the last couple of years, this technology has introduced more changes than the sector has seen in the last 100 years.

Name one similarity and one difference between American and Italian insurance shoppers:

The customer preference for human interaction at the purchase stage within the customer journey is the same in both countries, and so is the digitalization wave, which is obliging insurers to create an omni-channel customer journey around their traditional, physical point of sale.

One important difference is the role of banks in insurance distribution. In Italy, bancassurance accounts not only for more than 80% of the life market but also for 16% of the P&C personal lines market, excluding auto. Currently, banks are looking to play a more relevant role in the auto insurance distribution.

Name a challenge you have faced working in insurance:

You have to really know the intimacy of this strange industry to be able to innovate it. It’s a technical business, so you cannot advise an insurer without knowing the deep aspects of the industry.

A memorable consulting gig:

Without a doubt, it was two years ago advising Renova Group on the acquisition of Octo Telematics, a global leader in insurance telematics solutions. It was amazing to help Renova discover the value of telematics for the insurance business.

Your favorite news source:

As for me, LinkedIn is the primary source. Each day, I check five to 10 insurance news websites yet the best insights come from my LinkedIn network of insurance professionals around the world. I consider the daily sharing of ideas with them an incredible asset.

When you are not working for Bain & Company you are most likely…

My work is my hobby. I enjoy my work, and it is normal for me to think about work even when I am doing other things. However, if I have to identify my main hobby, it is fitness. I am definitely addicted to the gym.

If you weren’t working in insurance consulting, what profession would you be in?

I would probably be managing my family’s historical winery.

Prosecco or Champagne?

Champagne! I’m in love with Krug Clos Du Mesnil; their first vintage was produced the year I was born.

Favorite quote:

“Work hard, play harder.”

Which term best describes you…

  • Driverless or in control? In control
  • Elon Musk (dreamer) or Warren Buffett (doer)? Warren Buffett
  • Risk-averse or risk-taker? Risk-taker

Digital Is Not Enough; Nor Is Paperless

The service of risk management within insurance companies needs to innovate. Today, a small fraction of commercial customers take advantage of risk management services provided by insurance agencies. And insurance companies are fine with this, as they have limited supply — or people — that can provide risk management services.

But what if the same high level of risk management services could be offered to all customers of an insurance company?

How would an insurance company go about offering widespread, and high-quality, risk management services?

The Solution to Better Risk Management Is Your People (Plus Technology)

Insurance agencies currently engaged in risk management services have a distinct advantage: the accumulated knowledge of its people that provide contract reviews for customers.

I had this epiphany as I was reading through a slidedeck titled “Innovation is almost impossible for older companies,” which states:

“People have acquired skills that, at moments, have given significant advantages to companies in order to prosper.”

Insurance agencies now must figure out how to harness the risk management skills of its people in new ways. The alternative is scary for my insurance professional friends, because someone else — someone with new technology and a new supply of risk management knowledge — will figure it out instead. Insurance companies could quickly be out-innovated, as occurred to the taxi industry.

For some time, the taxi industry had skills that allowed it to prosper. Taxi companies used technology and money to set up phone numbers that could be called to request a ride; these companies also stockpiled just enough cars and drivers to meet the minimum level of demand. But then Uber came along and created a better technology that connected riders to a different (and bigger) pool of drivers. The taxi industry got out-innovated.

Insurance agencies are composed of people who have acquired risk management skills. My friends in the industry can review contracts with the best of them. But each of them has a limited capacity to complete contract reviews based on hours in the day. So not all customers get risk management services (either because they don’t know about them or don’t want to pay for them).

A technology will come along that will expand the supply of risk management services. One insurance consultant thinks that technology will be a computer avatar that analyzes and predicts risks independently.

I think the idea of an independently functioning risk management avatar is misguided. I am reminded of a quote from Zero to One, written by the founder of Paypal, Peter Thiel:

“Better technology in law, medicine and education won’t replace professionals; it will allow them to do even more.”

Better Technology Will Allow Insurance Professionals to Do More

I continue to be drawn to the word “collaboration” as I envision the future of insurance technology. Recently, I spent time evaluating software solutions in the insurance industry. All of the solutions I reviewed are focused on step one, what I call “Make it Digital.” Only within the last five to 10 years have insurance carriers and agencies gone paperless, and the insurance software companies are filling this need.

Digital is not enough. Paperless is not enough. Insurance technology must connect people and the knowledge that they create. Don’t think about just connecting to your customers. Think about connecting your team.

Imagine if your entire risk management team could work as a living, breathing entity to assess and evaluate risk. When Agent Jim in Kansas City has a question about liquidated damages in Texas, he should be able to quickly identify work completed by Agent Bob in Dallas dealing with this exact issue. He can then evaluate the work and bring Bob in on any follow-up questions.

I have yet to find an insurance carrier or agency that has figured this out.

This is where the opportunity lies in insurance technology: collaboration.

How to Prevent IRS Issues for Captives

A regulator of captive insurance is responsible for many aspects of the business of captive insurance companies. He or she must coordinate the application process for obtaining a license, including the financial analysis and financial examination of each captive insurance company. The regulator is also a key marketing person in promoting the domicile as a favorable place to do business, thus fostering economic development for the state.

The captive regulator is not, however, a tax adviser. No statute and regulation in any domestic domicile requires an analysis of the potential tax status of the captives under consideration or under regulation. If the application complies with the stated statutory and regulatory requirements, the regulator must favorably consider the application and allow the new company to be licensed as an insurance company under state law.

That new insurance company may not, however, be considered an insurance company under federal tax law. The Internal Revenue Service recently listed captives as one of their annual “Dirty Dozen” tax scams, citing “esoteric or improbable risks for exorbitant premiums.” And at least seven captive managers (and therefore their clients) have been targeted for “promoter” audits, for allegedly promoting abusive tax transactions.

Yet all of these captives received a license from a regulator, mostly in the U.S. Obviously these regulators did not consider the pricing of the risks to be transferred to the captive, except perhaps at the macro level.

Should the domicile care about the potential tax status of licensed captives? David Provost, Vermont’s Deputy Commissioner of Captive Insurance, has said, “We do not license Section 831(b) captives; we license insurance companies.” While that statement is technically correct, this paper argues that, with respect to small captives, regulators should care about the tax implications of licenses in extreme cases, consistent, of course, with the laws and regulations under which it operates.

Small captives, i.e. those with annual premiums of no more than $1.2 million, can elect under section 831(b) of the Internal Revenue Code to have their insurance income exempt from federal taxation. This provision, combined with certain revenue rulings and case law, creates a strong tax and financial planning incentive to form such a captive insurance company.

This incentive can lead to an “over-pricing” of premiums being paid to the new captive, to maximize the tax benefits on offer. The premiums may be “over-priced” relative to market rates, even after being adjusted for the breadth of policy form, size and age of the insurance company and, in some cases, the uniqueness of the risk being insured by the captive. But “over-priced” in whose eyes?

Insurance regulators are usually more concerned with whether enough premium is being paid to a captive to meet its policy obligations. From that perspective, “too much” premium can never be a bad thing. Indeed, captive statutes and regulations generally use the standard of being “able to meet policy obligations” as the basis of evaluating captive applications or conducting financial reviews. And actuarial studies provided with captive applications generally conclude that “…the level of capitalization plus premiums will provide sufficient funds to cover expected underwriting results.”

These actuarial studies do not usually include a rate analysis, by risk, because none is required by captive statute or regulation.

Small “831(b)” captives, therefore, may easily satisfy the financial requirements set forth in captive statutes and regulations. If, however, the Internal Revenue Service finds on audit that the premiums paid to that captive are “unreasonable,” then the insured and the captive manager may face additional taxes and penalties, and the captive may be dissolved, to the loss of the domicile.

And, as has happened recently, the IRS may believe that a particular captive manager has consistently over-priced the risk being transferred to its captives and may initiate a “promoter” audit, covering all of those captives. Such an action could result in unfavorable publicity to the domiciles that approved those captive applications, regardless of the fact that the regulators were following their own rules and regulations to the letter.

It is that risk of broad bad publicity that should encourage regulators to temper the rush to license as many captives as possible. There should be some level of concern for the “reasonableness” of the premiums being paid to the captives.

One helpful step would be to change captive statutes or regulations to require that actuarial feasibility studies include a detailed rate analysis. Such an analysis would compare proposed premium rates with those of the marketplace and offer specific justifications for any large deviations from market. (Given the competition among jurisdictions for captive business, such a change would only be possible if every domicile acted together, eliminating the fear that a domicile would lose its competitive edge by acting alone.)

Absent such a change, however, regulators still have the power to stop applications that do not pass the “smell test.” Most captive statutes require each applicant to file evidence of the “overall soundness” of its plan of operation, which would logically include its proposed premiums. If the premiums seem unreasonably high for the risks being assumed, the plan of operation may not be “sound,” in that it might face adverse results upon an IRS audit.

Regulators are not actuaries and often have had little or no underwriting experience. They, therefore, could not and should not “nit-pick” a particular premium or coverage. But some applications may be so egregious on their face that even non-insurance people can legitimately question the efficacy of the captive’s business plan.

Insurance professionals know from both experience and nationally published studies that the cost of risk for most companies is less than 2% of revenue. “Cost of risk” includes losses not covered by traditional third-party insurance, which are generally the type of losses covered by “small” captive insurance companies.

If a captive regulator receives an application in which the “cost” of coverage by that captive is, say, 10% to 12% or more of the revenue of the insured, alarm bells should go off. That captive certainly would have plenty of assets to cover its policy obligations! But in the overall scheme of things, including the real world of taxation, that business plan is not likely “sound.”

At that point, the regulator has a choice of rejecting the applicant, requiring a change in the business plan/premiums or demanding additional support for the proposed plan. We are aware of one case in which the captive regulator required the applicant to provide a rate analysis from an independent actuary when he received an application whose premiums did not appear reasonable.

A rate analysis is not, of course, a guarantee that the IRS will find the premiums acceptable on audit. No one can expect guarantees, but a properly done rate analysis has a better chance of assuring all the parties that the captive has been properly formed as a real insurance company and not simply as a way to reduce the taxable income of the insured and its owners.

Captive insurance regulators have a big job, particularly as the pace of captive formations increases. To protect the domicile from appearing on the front page of the Wall Street Journal, the regulator must consider all aspects of the proposed captive’s business, including, in extreme cases, its vulnerability to adverse federal tax rulings.