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EVEN THE ENLIGHTENED CAN FALL PREY
By John Garrison, CPCU
You ride a desk on the inside of the insurance industry. However, just like every victim out there, the simple act of trust can get you every time. From the top of the food chain, when multi-millions are processed every day, to the smallest little screws that can still stick you straight into a wall. Knowledge is definitely a plus, however there are never any guarantees that the (im)perfect storm can gather around you and overcome your defenses.
It happens on every level. Let’s start at the very top. We’ll call our guy AA.
A Best’s B+ rated company in the northwest had performed honorably and thrived for many years under the strong and extensively experienced hand of its major stockholder. This gentleman’s gentleman was liked and respected by all, the kind of a man whose handshake meant exactly what his father and grandfather’s handshakes had meant. The company stuck to selling lines of coverage well within its areas of expertise. Combining an effective marketing program with excellent service, prompt claims handling and a knowledgeable and well-trained staff equated to many years of good P& L.results
AA, with strong and consistently profitable casualty experience in the auto market, believed that limited expansion was in order. He’d been watching the California liability and physical damage market with interest; there was room for controlled growth and manageable risk assumption. After making application to the state, rate filings, etc., the next hurdle was marketing. With a shortage of markets, the product would sell itself, however a delivery and processing system was necessary so he signed contracts with two established Managing General Agencies. Each was duly appointed to sell and countersign policies, and each was authorized to market $3 million in premium volume. At three months, after AA had been given a multitude of “system problem” excuses explaining why the records of volume sold were not being transmitted to the company, he learned that the MGA’s had not cut off sales at $3 million (and with it their intake of commissions), but had continued in their authority to sell as much as they could and as fast as they could. The resultant $40 million of new California premium caused serious regulatory affect and resulted in the company being thrown into receivership..
All the kings horses and all the kings men, couldn’t. Or wouldn’t?….
A lifetime of work and fair dealing by an honorable man … stolen by two commission hungry hand-shaking agents and a regulatory agency that continues to sit on $23 million in cash assets and another $20+ million in collections that have never been followed up upon — even after all outstanding claims were fully settled and the remaining outstanding reserves are easily double the exposure. Glaring errors, all made by the state regulators, erupt like so many volcanoes throughout this burgeoning file. It’s not over yet; an active FFA investigation is underway.
Our next guy is BB, the main stockholder in a multi-state personal lines Midwest MGA. BB unexpectedly succumbed to heart failure before his 60th birthday — there one day, gone the next — and his widow had to hire a CEO to take over the day-to-day running of the business. While officially a Managing General Agency, the MGA (under the direction of the confidence inspiring BB) had been cash heavy enough to enter into a contractual arrangement with a larger admitted insurer wherein the latter would front (for an “off the top” percentage) for the former. The MGA did, in essence, act as a company — performing all policy issuance, underwriting, claims functions, filings, etc. Three years into the relationship, one that somewhat resembled reinsurance, the careful handling of the book of business was producing an ongoing profit for all. The newly hired CEO talked a good game and wedged himself into the center of the business immediately after the untimely death of BB. Within six months, the loss ratio more that doubled and the previously healthy company was facing a financial shortfall. The kindly CEO offered to buy out the widow, for pennies on the dollar, so that she did not lose everything. Alone, frightened, and uninformed about the inner workings of the large machine that BB had built, she was “rescued” with a small cash buyout. The large fully paid office building was gone, having been part of the contractual indemnification with the large admitted insurer. So were the company vehicles, the office furnishings, the pencils and the coat rack.
The CEO went into instant 5th gear overdrive to “clean up the book of business.” The first thing he did was reduce the phony and/or exaggerated reserves he had placed on almost every outstanding claim … and the loss ration came tumbling down. Down to the same level it was at when BB passed from this earthly realm. He next began “letting people go.” Those whose loyalty was to the family were shown the door and new positions — high-paying positions — were created for the CEO’s friends and relatives. Finally the CEO got to the real business at hand — by stripping the company of its assets and absconding with the cash and everything else of value. The long time family attorney advised that although the crime was clear, catching and prosecuting the culprit (who was long gone) would involve more legal fees than worthwhile and more years than the widow probably had remaining. He was correct; she died a few years later.
This second case is over, but the lessons learned serve as fuel in the efforts of those affected. Good can even come out of bad.
The insurance business is like any other. It is peppered by both crooks and heroes.The real problem is that it’s difficult to tell the difference. In too many cases, those who are charged with the duty of being the good guys, the protectors, may be anything but.
The beasts of greed do not sort their prey.