0001 1 2 3 4 5 6 7 8 NEW YORK STATE INSURANCE DEPARTMENT 9 PUBLIC HEARING 10 WHETHER TO EXPAND THE EXPORT LIST 11 25 BEAVER STREET 12 5TH FLOOR 13 AUGUST 20, 2010 14 10:00 A.M. 15 16 17 18 AMENDED TRANSCRIPT 19 20 21 22 23 24 25 0002 1 2 P R E S E N T: 3 4 EUGENE BIENSKIE, 5 Chief Executive, Property Bureau 6 MAURICE MORGENSTERN, 7 Deputy Bureau Chief, Property Bureau 8 MICHAEL MORIARTY, Deputy Superintendent, Property & Capital 9 Markets Bureau 10 JACK STEIN, Principal Examiner, Excess Line 11 NANCY YEE, 12 Supervising Examiner, Excess Line Unit 13 PAUL ZUCKERMAN, Assistant Deputy Superintendent & Counsel 14 ELLEN WENZ 15 16 Also Present: 17 Jeffrey Allen 18 Natalie Borneo 19 Marc Craw 20 TJ Garela 21 Daniel Maher 22 Tom Petersen 23 Lucas Snyder 24 Edmond Valente 25 0003 1 2 P R O C E E D I N G S 3 MR. MORIARTY: This is public hearing 4 regarding whether to expand the export list. I 5 apologize for the scheduling on an August summer 6 Friday. Nonetheless, this is an important issue. 7 As some of you are aware, this hearing 8 is being held pursuant to Section 2118 of the 9 Insurance Law, which authorizes the Superintendent 10 of Insurance to conduct a public hearing to amend 11 the number of declinations required to be obtained 12 prior to making an excess line placement, with 13 respect to particular coverage. We call it the 14 export list. 15 As many of you are aware, generally 16 speaking, an excess line broker must search the 17 insurance law declinations before placing 18 businesses with unlicensed companies; and exporters 19 provide exceptions to that in terms of requiring a 20 new search... declinations on the authorized... 21 also reducing the number of declinations... 22 Our panel today: My name is Michael 23 Moriarty, I'm the Deputy Superintendant in charge 24 of the Property Bureau and the Capital Markets 25 Bureau. 0004 1 Proceedings 2 MR. BIENSKIE: My name is Eugene 3 Bienskie. I'm the Chief Examiner of the Property 4 Bureau in the Insurance Department. 5 MR. ZUCKERMAN: Paul Zuckerman, 6 Department Superintendent, and of Counsel. 7 MR. MORGENSTERN: Maurice Morgenstern, 8 Department Bureau Chief, Property Bureau. 9 MS. YEE: Nancy Yee, Property Bureau, 10 Supervising Insurance Examiner, Line Unit. 11 MR. STEIN: Jack Stein, Principal 12 Insurance Examiner, Excess Line Unit, Property 13 Bureau. 14 MR. MORIARTY: Thanks. 15 You know the authorized market is 16 obviously the preferred market for consumers in New 17 York as they are for many other protections, all of 18 the protections in the Insurance Law and the 19 Regulations. But nevertheless, the excess line 20 market serves an important purpose in New York and 21 provides a safety valve for the coverages that are 22 not provided by the authorized market. 23 We work closely with the Excess Line 24 Association of New York in overseeing the oversight 25 of the unauthorized market and the excess line in 0005 1 Proceedings 2 New York. And Dan and his staff at ELANY do a very 3 good job in that, and coordinating, communicating 4 with the insurance industry. 5 The purpose, again, of this hearing, we 6 received an application from the Excess Line 7 Association of New York. The superintendent ran an 8 ad, items enumerated in the proposed extension to 9 the export list. That list was posted on the 10 Department's website. 11 There has been a change to that list. 12 One of the coverages that I understand -- they can 13 respond, expand on this is... included auto 14 physical damage for certain vehicles. My 15 understanding is that they will be pulling this 16 from the request to add it to the export list. 17 Dan can go into a little more detail 18 when he makes his statements. 19 Our last public hearing was held in 20 2008. As a result of that hearing, there were 21 various coverages that were added to the export 22 list. The statute does indicate that this hearing 23 should be held every year. As many of you know, 24 the hearing in 2008 was actually the first year. 25 I do think it is important the 0006 1 Proceedings 2 Department continue this hearing going forward. A 3 vote to add coverages to the export list, and 4 perhaps, take coverage to the extent there is... 5 the volunteer market provides access to the types 6 of coverages. 7 Again, the testimony and the evidence at 8 this hearing will help the Department make a 9 decision relative to revising the export list. 10 We have a number of speakers that are 11 slated to speak today. I would ask the speakers to 12 hold their comments to approximately 10 minutes. 13 In addition, we have received a number of written 14 comments which will go into the public record. 15 On our website it indicates that the 16 record will remain open for five business days for 17 additional written comments which will go into the 18 public record. I realized that it is the end of 19 the summer, and there are people on vacation and it 20 is a slower time of year. 21 So to the extent that we receive 22 comments after this 5-day period indicated on the 23 web, we can get those into the written record also. 24 Slated to speak today we have Dan Maher 25 from the Excess Line Association of New York. We 0007 1 Proceedings 2 have TJ Garela from TPIA. Slated is Natalie 3 Borneo, Justin Foa, president of Foa and Son 4 Corporation; Ed Valente from Dewy & LeBoeuf; Mark 5 Craw from the New York Insurance Association; Lucas 6 Snyder from the Professional Insurance Wholesalers 7 Association. 8 John Reiersen was slated to speak. He 9 submitted written comments. They basically were in 10 response to the addition of the auto... I think his 11 objection, again, may be mooted as a result of the 12 excess line association amendment. 13 In addition, Tom Petersen of Petersen 14 International... may speak on various topics or may 15 submit written comments. Again, all of this will 16 go into the record and will be available to all. 17 So let me start by offering the podium 18 to Dan. 19 (Discussion off the record.) 20 MR. MAHER: First, I want to thank the 21 Department and Superintendent for calling these 22 hearings. Back in June of 2008 we held the last 23 hearing. In fact, that was on June 13th, Friday 24 the 13th. So being here on an August day is 25 probably preferable to the 13th. Friday the 13th 0008 1 Proceedings 2 did work out for us. 3 Let me first talk a little about the 4 issue which is auto physical damage. One of the 5 concerns that the Department rightfully raises when 6 it comes to what goes on or does not go on the 7 export list, is the question of whether there is 8 creation or competition, direct competition, 9 between excess lines and the admitted market. 10 That's not the intent of the export list 11 and we don't want it to become the export list. In 12 fact, if you look at the last several years' excess 13 line statistics, what you will find is even 14 subsequent to the substantial broadening of the 15 export list from the hearings in June of 2008, our 16 business as an industry has continued to decline, 17 as it will in soft markets. 18 So I think it is important to note that 19 while the export list expanded, the excess line 20 market in New York actually contracted. 21 We were perhaps a bit surprised by some 22 of the opposition we received with respect to the 23 class of business, because we're looking for the 24 entire fiscal damage, auto glass would be added to 25 the list. 0009 1 Proceedings 2 Having said that, having received 3 opposition, that's something we feel that, if the 4 admitted market is objecting -- we can talk about 5 this for a while -- but suffice it to say that we 6 are withdrawing the physical damage classes we 7 submitted, because the admitted market is 8 suggesting that they have sufficient capacity. And 9 anything that doesn't work in the admitted market 10 or can't be placed in the admitted market will 11 continue to be placed in the excess line market, 12 but subject to the... of the market. 13 I'm going to try to keep my comments 14 brief. We submitted some written testimony that 15 were suggested by some of the witnesses here today. 16 I'm not going to read that testimony into the 17 record. I don't need to bore you that way. 18 I'm happy to talk about some of those 19 things broadly, but I think everybody will 20 summarize their testimony and let the panel ask 21 questions to the extent the panel wants 22 information. 23 We will be supplementing our testimony 24 with a couple of documents. One is a statistical 25 analysis from ELANY with respect to classes of 0010 1 Proceedings 2 business that remain on the proposed expansion of 3 the export list, so you'll have more data to look 4 at. And we also will submit a recent release by 5 the NAIC which is talking about vacant properties. 6 As many of you recall, we put vacant 7 property on the export list as a result of the 8 June 2008 hearings, but we only put the property 9 class on the export list. In fact, we probably 10 undershot that, because the liability class also is 11 a little bit hairier because of exposures that 12 exist on vacant properties. The NAIC paper 13 actually talked about additional exposures, so it 14 would be good to submit that for the record. 15 I think those are my opening comments. 16 If there's anything at the end that needs to be 17 clarified, I'm certainly happy to get up and speak 18 at the end. Again, thank you as a panel. We 19 appreciate the work. It may be a gratuitous thing, 20 but we've had a good working relationship with the 21 Department and we want to continue that. 22 Thank you for having this hearing today. 23 MR. MORIARTY: Thank you, Dan. 24 Do any members of the panel have opening 25 questions? 0011 1 Proceedings 2 MR. MORGENSTERN: Dan, can I ask a 3 couple of questions for clarification? The 4 proposal for physical damage for auto, commercial 5 auto; is that the entire class, or are you just 6 scaling it back? 7 MR. MAHER: We initially talked about 8 scaling it back, but when we saw what the volume of 9 taxi business alone, it was a smaller piece of the 10 entire package. We said, that may be because not 11 that many taxi companies buy physical damage. It's 12 probably pretty expensive to get physical damage on 13 taxis, given their use. 14 In any event, we're withdrawing all 15 subclasses of physical damage. So we're not asking 16 for any physical damage type coverages for 17 subclasses. 18 MR. MORGENSTERN: Does ELANY have stats 19 on placement of this business at all, with the 20 three declinations? 21 MR. MAHER: We can show our stats on 22 that. The stats I plan to supplement the record 23 with eliminate that class, because we're not asking 24 to put it on the export list any longer. I'll be 25 happy to share the details of that. 0012 1 Proceedings 2 MR. MORGENSTERN: Can I ask you, you 3 made a comment that there's been a decline in 4 excess line business generally. You mentioned the 5 soft market. Would you also say the economy is 6 perhaps a greater factor in that, a downturn in the 7 economy? 8 THE SPEAKER: I would say that. If you 9 look at our annual reports, they can actually graph 10 that for you. But 2005 was the peak year for the 11 excess line market in New York. In 2005 there was, 12 I think, off the top of my head -- $2.7 billion in 13 taxable premium in New York and almost $5 billion 14 of gross premium. 15 So since 2005, that number has been 16 declining. So to me, that is an indication that 17 that's a part of a capacity issue in the market and 18 part of the soft market cycle. I think the economy 19 probably exacerbated that in the last two years. 20 The trend has continued downward. 21 So clearly, the trend started largely on 22 the capacity issues and the softening of the market 23 and pricing in the property casualty market in 24 general. Again, the point was that, 25 notwithstanding the increased coverage in the 0013 1 Proceedings 2 export list, the PNSE&S market continued a downward 3 trend subsequent to that. 4 So I think you can take that, 5 statistically exactly what it is. I think it 6 demonstrates that businesses were gravitating to 7 the excess line markets, simply because we put 8 coverages on the export list. 9 MR. MORGENSTERN: One other question. 10 On the proposal, you have several lines of the 11 proposal that you still want to have considered by 12 the Department. I'm not sure if others are going 13 to comment on this. Maybe it's too soon in the 14 hearing for you to comment on this. 15 Could you give us a little idea as to 16 why the last line, excess... errors and omissions; 17 why what you are requesting now is to go to zero? 18 After the last hearing we went to two declinations. 19 Do you have any information as to how that's 20 proceeded over the last couple of years? We would 21 like to know that. Can you comment briefly on why 22 you want to go to zero on those? 23 MR. MAHER: Yes. That same group of 24 classes of business, the subclasses of 25 miscellaneous errors and omissions, was on the 0014 1 Proceedings 2 export list that we proposed back in June of 2008. 3 Those are classes. And let me talk about at least 4 one subclass of that, nursing homes. 5 We found that the lion's share of 6 nursing homes are in the surplus line market. Not 7 that you can't get, that there's no admitted market 8 for it. But again, their underwriting criteria is 9 very narrow. 10 In the litigation business they talk 11 about the fact that the plaintiff tends to be 12 eggshell plaintiffs, talking about elderly people 13 who -- if you and I slip and fall on the sidewalk 14 we might have a bruise. It somebody slips and 15 falls in the nursing home, it may be a fractured 16 hip and a hip replacement. 17 These things can snowball in terms of 18 the legal exposure. So you take nursing homes, 19 that's a tough class of business to place. 20 The reason we asked to have it put on in 21 June was that we recognized that a lot of this 22 business is in the non-admitted market. The risk 23 characteristics of those classes don't change that 24 much. It tends to be a continuing large class of 25 business in the nonbid market. 0015 1 Proceedings 2 When testimony was given in June, one of 3 our witnesses stood up, and I believe a question 4 from the panel to that witness was, "Don't you have 5 any admitted markets at all?" And the witness 6 said, "There are two admitted markets that will 7 consider some of these risks." 8 I believe, this is my conjecture, but I 9 believe the Department concluded that it should 10 require two declinations instead of three is 11 because of what was -- I'm not saying it was an off 12 the cuff comment -- I think the testimony was, 13 "Yes, we have admitted carriers that might cover 14 1 percent, 2 percent whatever small percentage of 15 that market is." And the Department picked up on 16 that and that's why they went to two declinations. 17 The reality in the marketplace is for 18 brokers having zero declinations or three 19 declinations that we can educate people on. But if 20 you have another class of two declinations, one we 21 think causes some confusion in the brokerage 22 market, getting two declinations when three are 23 required, or getting two when zero are required. 24 Our system itself really is built in 25 such a way, our software, to recognize that if 0016 1 Proceedings 2 somebody says they're on the export list they don't 3 have to have declinations. But if it's not on the 4 export list, you have to have three. We have to 5 rewrite our software. And it would be rewriting 6 the software for something the marketplace wouldn't 7 look at as a substantial gain. 8 What's happened subsequent to the 9 addition of that class of business for two 10 declinations, what's happened essentially is 11 everyone is looking at three declinations by and 12 large. 13 So from a practical marketing standpoint 14 for the brokers, the two declination process, as 15 much as I know it was intended to help them; from a 16 practical side was it didn't help them that much. 17 MR. MORGENSTERN: Okay. 18 MR. MORIARTY: I do have one question. 19 We're a little off point, but I know the Dodd Frank 20 bill will change the landscape for surplus lines 21 going forward, especially given next year in 2011. 22 Among other things, the state has the daunting task 23 of getting together... to allocate to pay taxes in 24 a more efficient manner... I know that ELANY, in 25 addition to various other stamping offices, has 0017 1 Proceedings 2 proposed SLIMPACT. I understand NCOIL has been a 3 -- national has endorsed it -- conference... 4 In terms of the export list, my 5 understanding is that it will exempt commercially 6 insured... only impact on to the declination 7 process and the export list? We have 8 consideration. 9 MR. MAHER: I think the short answer is 10 yes, that the exempt commercial purchase definition 11 for sophisticated buyers sets up a force something 12 akin to the export list. Sophisticated buyers 13 won't have to shop through the admitted market or 14 the broker's won't have to shop the admitted market 15 first. 16 So for exempt commercial purposes that 17 meet that definition, once it goes into effect, the 18 NRA goes into effect on July 21, 2011. One of the 19 other changes is that only the home state of the 20 insured will regulate the surplus line's placement. 21 So, to the extent that an insured may not be home 22 stated in New York, New York won't be overseeing 23 that. 24 That's a somewhat different issue than 25 the impact. One of the questions -- we actually 0018 1 Proceedings 2 did a webinar on that yesterday, and one of the 3 questions that was asked was: Will something like 4 an export list or other exemptions from the 5 declination process, diligent search process, be 6 affected by the federal bill? 7 And I think, by and large, the panelists 8 believed that the waiver or export list process can 9 sit side by side with the definition of commercial 10 purchaser. The only thing that might be affected 11 is if a state had an exempt commercial purchaser, 12 an exemption that perhaps was greater than the 13 federal one. The federal one would supplant that. 14 But essentially others have... should be set side 15 by side with the federal exemption, such as the 16 export list. 17 MR. MORIARTY: We'll have to work 18 together with you going forward on that. Thank 19 you. 20 The next speaker is Mr. Garela [sic]. 21 MR. GARELA: Thank you very much for the 22 opportunity. I'll tell you who I am. I know many 23 of you in the room and I know many of you up on the 24 panel. 25 My name is TJ Garela. I'm an insurance 0019 1 Proceedings 2 agent and broker in Kingston, New York. For those 3 of you who don't know where Kingston is, it's about 4 90 miles north of New York City on the west side of 5 the Hudson River. Also known as the first capital 6 of New York State, so we're very proud of that 7 fact. 8 I'm here wearing a couple of different 9 hats today. I'm primarily here to represent the 10 Professional Insurance Agents of New York. I'm a 11 past president of that association and I'm also the 12 national director from New York. 13 I also have the good fortune of this 14 year being the chairman of the Excess Line 15 Association of New York as well. So if I get into 16 an argument with myself right now on the dais I 17 apologize. I like to work together with myself, 18 but sometimes there's difficulty. 19 (Laughter.) 20 I guess a couple of brief comments. We 21 submitted testimony in writing on behalf of 22 Professional Insurance Agents, and Kevin Ryan, also 23 of Kingston, New York, who's our current president. 24 A couple of comments. The first one, 25 I'm pleased to be up here today because it's one of 0020 1 Proceedings 2 the unique opportunities in the marketplace where 3 we're actually working together as an agent and a 4 broker community. 5 It's very rare that we can get all 6 parties, the independent agents, the professional 7 insurance agents, the Excess Line Association, the 8 large brokerage houses, and even the carrier 9 associations on the same page. So for once a month 10 I'm not fighting against my brethren, I'm actually 11 up here to say we're working together entirely in 12 support of what's going on. 13 The person who's been the driving force 14 behind that is Dan Maher, the executive director of 15 the Excess Line Association. I want to take a 16 second to thank Dan for herding the cats, so to 17 speak, getting us all going in the same direction. 18 It's nice to be up here with one positive message. 19 The second thing is, as Dan previously 20 pointed out, there were some issues regarding 21 physical damage that were issues for some of our 22 members and also for some of the carriers. We 23 understand that. Our job isn't to eviscerate the 24 REG. Our job is to make the market proper, make 25 the market work effectively. 0021 1 Proceedings 2 So if the carrier believes that they 3 have an admitted market -- which may not be open to 4 me, by the way, even though it's in my home town -- 5 (Laughter.) 6 We're very, very happy. And it has a 7 very similar name to my agency; not that I'm 8 picking on John Reiersen, but he's not here. 9 (Laughter.) 10 It seems appropriate that we should be 11 able to take that off the list so we can work 12 together. I appreciate Dan doing that. 13 As I said before, I'm here representing 14 PIA. We have over two thousand members, 15 representing about 20,000 insurance agents in New 16 York State; and we insure roughly 750,000 17 businesses in the state. 18 And as Dan said earlier, the marketplace 19 is in the middle of what we consider a very soft 20 market cycle. I've been in the business now 21 23 years. And we've only experienced two hard 22 market cycles since I've been in it. They weren't 23 very long. 24 I believe right now that we are at the 25 softest of the soft point in the marketplace. 0022 1 Proceedings 2 Somebody asked a question earlier about, Where is 3 this business going and is the economy affecting 4 it? 5 I think very clearly that two things are 6 happening. One is that the admitted marketplace 7 decided that many of the risks that were written in 8 the nonadmitted marketplace are now attractive to 9 them. And they are effectively depopulating the 10 non-admitted marketplace. They are coming in and 11 writing that business aggressively. 12 And if you're a retail insurance agent 13 and you have those markets, certainly you're going 14 to try to put that business there in the admitted 15 marketplace. And that's one of the things that's 16 happening. 17 The other thing we're seeing is that the 18 economy is affecting businesses. Not necessarily 19 that they're going out, although we are seeing a 20 lot of businesses go out. But almost every one of 21 my clients is off roughly 30 percent in revenues. 22 That reflects in larger term premiums. 23 My core businesses are contractors, 24 restaurants and taverns. Every restaurant for the 25 most part is off 30 percent. Every tavern is off 0023 1 Proceedings 2 20 percent; people drink still. And every 3 contractor, obviously with the refinancing boom 4 failing, is seeing business dramatically affected. 5 How does that affect us? It affects us 6 in that we're seeing larger term premiums for our 7 customers for the audit process. And we're seeing 8 prices go from highs of 70 and 80 and 90 and 9 $100,000 to $30,000 in two market cycles. 10 So I'm here to say that the market is 11 working effectively. It's been very, very good for 12 the consumer. And that agents and brokers are 13 doing what they're supposed to be doing, which is 14 placing business in the best market the can for the 15 fairest price for that customer. 16 I guess my last comment is very simple, 17 that modifying the export list is something that's 18 good for pretty much everybody. I say this from 19 the point of view that the reality of the 20 marketplace is many of the classes of business that 21 are on the export list, those businesses are placed 22 in the excess lines market already. 23 So the idea of making the broker's life 24 easier and making it a diligent search requirement 25 less onerous on a business that's going to be there 0024 1 Proceedings 2 anyway, seems to make sense; which is why you have 3 all of these groups, from carriers on the admitted 4 side to agents and brokers on the association side, 5 working together. 6 As Dan pointed out the market, people 7 don't want to put their business in the excess line 8 marketplace. It's very rarely a choice by the 9 customer. They might have had losses, they've had 10 negative experience, they're in a class of business 11 that's not easily insurable. And retail brokers 12 don't want to come to wholesalers to split their 13 commissions, quite frankly. 14 They'd much rather put it in their own 15 marketplace, write the business in an effective 16 admitted marketplace and keep 100 percent of the 17 commissions. I understand. 18 But at the end of the day, the market is 19 serving the consumer and giving the best coverages 20 for the fairest possible prices in a market that's 21 being underserved by the voluntary market. 22 With that, I'd be glad to answer any 23 questions. I don't represent every company in the 24 universe. If you have a question that's specific, 25 I may not be able to give you a perfect answer, but 0025 1 Proceedings 2 I'd be glad to answer your questions. 3 At this time, any questions for me? 4 MR. MORIARTY: I just came back from 5 the NAIC and heard about problems with regulated... 6 Your points are well taken about the market 7 disincentives to place business in the excess 8 market. That in and of itself does serve as a 9 check on current potential abuses. 10 I'll open it up to any questions from 11 the panel. 12 MR. STEIN: I have a question. You 13 mentioned before about auto fiscal damage, 14 especially focusing on the yellow medallion taxis. 15 Are you aware of licensed insurers who write yellow 16 medallion taxis in the New York City area? 17 MR. GARELA: I'm aware of them, but I 18 presently do not represent any of them for physical 19 damage. I presently write voluntary physical 20 damage, largely for truckers in non-admitted 21 facilities. Because none of the facilities I have 22 presently offer physical damage for that class of 23 businesses. 24 I know Dan had some data about some of 25 the admitted markets, I think three or four, on 0026 1 Proceedings 2 cabs that were writing. Again, those three or four 3 markets are not represented by everybody in the 4 entire marketplace. 5 MR. STEIN: Thank you. 6 MR. ZUCKERMAN: I have one question. 7 You said there were certain coverages that were 8 being made more available in the admitted market, 9 that might be already on the export list? 10 MR. GARELA: That's an interesting 11 question. No, not that are on the export list. I 12 think when there was a piece of business that was 13 borderline, whether the admitted marketplace would 14 write it or the non-admitted marketplace would 15 write it. 16 When the market was harder, the admitted 17 marketplace said, "We're just going to pass on it." 18 It was a little gray on the risk, maybe it had a 19 $10,000 fire loss and nobody wanted to touch it. 20 We got declinations, they got placed. 21 Those borderline risks now have been 22 cycled back into the admitted marketplace. Could 23 be as simple as the risk is less in Brooklyn near 24 the coast, that somebody didn't want to write in 25 the past, that is not on the export list, by the 0027 1 Proceedings 2 way; that we might have to go out and get the 3 declination process. 4 Again, there are a lot of carriers that 5 don't like to write coastal business in Brooklyn. 6 Hard to believe so many hurricanes we've had in 7 Sheepshead Bay since I've grown up; again, the 8 marketplace. 9 MR. ZUCKERMAN: You don't see anything 10 in the Export List which is being made available in 11 the current market? 12 MR. GARELA: No. I think one we've 13 talked about in the past is contractors. The 14 reality of the marketplace, with the Labor Law in 15 New York, many companies have looked for ways to 16 avoid that coverage, either through an endorsement 17 excluding independent contractors, which many times 18 the Department hasn't approved. That means they're 19 cycled into the non-admitted marketplace. 20 The reality is that there's a lot of 21 business in the marketplace. But again, for 22 specific classes, primarily classes working in 23 heights -- and even those classes have gotten very 24 competitive within the nonadmitted marketplace. 25 So the consumer is benefiting. I don't 0028 1 Proceedings 2 think anybody can argue that the consumer is 3 benefiting from the soft market. I can tell you 4 that in the agent and broker community, it's not 5 been a lot of fun for me, personally. But we do 6 what we have to do to serve our customers the best. 7 The numbers ar showing. 8 Any other questions? 9 MR. MORGENSTERN: In terms of procedure, 10 do new members take Free Trade Zone into account... 11 buyers moving over to New York excess line market? 12 MR. GARELA: Yes. Obviously with any 13 free trade zone, the members are doing it. It's 14 particularly true on the excess liable umbrella 15 plan, where we see the Free Trade Zone... a fairly 16 good amount. But yes, they do. We like the Free 17 Trade Zone. 18 MR. MORIARTY: Other questions? 19 Thank you very much. 20 MR. GARELA: Thank you very much; 21 appreciate it. 22 MR. MORIARTY: Natalie Borneo, managing 23 director of Marsh USA. 24 MS. BORNEO: Good morning. I want to 25 start by thanking Dan for giving a large 0029 1 Proceedings 2 opportunity to speak about areas of concern that we 3 have when we are working to service clients in the 4 best way we know possible. 5 I'd like to introduce myself. I am 6 Natalie Borneo. I have been in the insurance 7 industry almost 30 years, exclusively on the broker 8 side, and have worked in our risk management 9 casualty department placing and brokering 10 insurance. I recently accepted a position, and 11 today I represent our compliance group, the 12 northeast zone. 13 In compliance, I am working very closely 14 with counterparts in other zones, some of who were 15 at the NAIC this past week. And what is refreshing 16 is to have the opportunity to move from the broker 17 side where we are exclusively focused on the 18 clients and markets we know, to segue into 19 compliance, which is a much broader view and 20 perspective, giving a better understanding of why 21 we impose certain requirements on our brokers. 22 My comments today are brief; but 23 basically, Marsh has, as you know, moved to an 24 environment of high disclosure transparency with 25 clients. The placements we do are highly 0030 1 Proceedings 2 collaborative. They are well thought out. Our 3 teams are engaged in the process. 4 And in my compliance role, my job is to 5 insure they observe all of the rules and 6 regulations from the regulatory as well as 7 operational end of the firm. That said, there's a 8 very dynamic environment; and the speaker before 9 touched on the fact that the marketplace changed 10 because of the economy. 11 We also see that a lot of our customers 12 now have former lives in the industry, whether they 13 were brokers or underwriters. They bring with them 14 a sophistication to the job of risk manager that 15 has changed the way that we dialog with them. So 16 we find in our discussions there is more of a 17 directive provided, because they are knowledgeable 18 because of their past experience about the industry 19 and how business should be transacted, the best 20 sense for them from an insurance perspective for 21 breath of coverage, as well as competitive pricing, 22 so that they can achieve their internal objectives. 23 That said, I do have a written document 24 which I will leave with you. As Dan has asked, I 25 will just highlight areas we think make sense for 0031 1 Proceedings 2 you to support the conclusion or request to 3 eliminate declinations for primary excess cover. 4 First and foremost, when we look at the 5 markets at hand, the status of filed forms in 6 excess are not as extensive as they could be. The 7 challenge there is the multiple jurisdictional 8 requirements. So where we may have some markets on 9 the primary side, lawyers, professionals, et 10 cetera; when we look at the excess, we do not see 11 the same players in that space. 12 In addition to that, those who are in 13 that space actually do not have strong desire to 14 write the cover that level, nor do they have the 15 ability to write the breadth of coverage that we 16 need. 17 This segues into the third point, which 18 is the high degree of manuscripting required to 19 create the filed form that we need for clients. 20 There are no fileds formed automatically as broad 21 and able to follow form. In our area, we are 22 actually building excess towers of 25, 50, 23 $100 million in limits for clients; which then 24 makes it very difficult to try to manuscript all 25 the way up. 0032 1 Proceedings 2 It's a difficult and elaborate process, 3 but it also creates then a concern about, on our 4 part, not manuscripting sufficiently. 5 As we build the towers, the multiple 6 layers, we find that we actually then have to get 7 declinations for every layer that we build. So if 8 we're going up a tower, we're going back and forth 9 several times to the same markets, to request again 10 a declination for the next layer up; it really is 11 counterproductive, as mentioned. 12 A lot of our clients have former lives 13 and understand which markets are best for them in 14 terms of their risk. And they've directed us to 15 work with them. They may have in the past had 16 multiple year agreements, and arrangements 17 inherited on broker records... and need to know 18 they can continue this relationship. 19 And in order to do that, in order to 20 work with these markets, we have to go through the 21 process as prescribed currently. 22 And so I won't stay much longer. This 23 is my first opportunity to address you as a body. 24 I do appreciate it. I will answer any questions 25 that I can. Again, I'm in the role in terms of 0033 1 Proceedings 2 compliance. If we get into highly technical 3 matters I will have to provide you with information 4 at a later date, which I'm happy to do. 5 MR. MORIARTY: Thank you very much. I 6 appreciate the large perspective. It's also 7 comforting that you have a new role in compliance. 8 It seems likes compliance is a more important part 9 of risk management at major companies, and although 10 it doesn't generate revenues in and of itself, it 11 is critical. 12 MS. BORNEO: A lot of the RFPs we're 13 looking at ask the first question, how do you 14 handle compliance and transparency? Is it becoming 15 a selling point, a point of leverage for us, which 16 is good. 17 MR. MORIARTY: Any questions? 18 MR. STEIN: When talking about excess 19 E&O, are you primarily speaking about liability? 20 Professional legal liability? 21 MS. BORNEO: Not just the liability; E&O 22 in general. Some of the clients are not only 23 lawyers, they may be large firms that have segments 24 or units or departments that need various types of 25 excess cover. 0034 1 Proceedings 2 Does that answer your question? 3 MR. STEIN: Yes. To follow-up, also, 4 especially with the legal liability, do you find 5 difficulty placing es, some primary coverage layer 6 also, in the authorized market? 7 MS. BORNEO: It does depend on the 8 degree of the coverage available. We have more 9 difficulty on the excess side clearly, because now 10 we're building layers of cover, not just the 11 primary chunk. So I would say it gets increasingly 12 complex. But there is an element of complexity 13 with initial covers. 14 MR. STEIN: How many authorized markets 15 would you say there would be with legal liability? 16 MS. BORNEO: I would have to find out. 17 I apologize. I'm not a broker by trade. 18 MR. STEIN: Thank you. 19 MR. MORIARTY: Thank you very much. 20 MS. BORNEO: Thank you. I appreciate 21 it. 22 MR. MORIARTY: The next speaker on the 23 list is Mr. Justin Foa, from the Foa and Son 24 Corporation. Is he here? 25 I don't see Justin. Again, we will 0035 1 Proceedings 2 accept written comments subsequent to the hearing. 3 Next is Edmond Valente. 4 MR. VALENTE: I will not be submitting 5 testimony, but I'd like to state for the record 6 that I concur with all statements made by Dan 7 Maher. 8 MR. MORIARTY: Okay, that's easy. 9 Next is Marc Craw from the New York 10 Insurance Association. 11 MR. CRAW: I join with Mr. Valente 12 saying the same thing; withdrawing my testimony 13 from presentation... 14 MR. MORIARTY: Next is Mr. Lucas 15 Snyder, President of the Professional Insurance 16 Wholesalers Association of New York. 17 MR. SNYDER: Good morning. I'm Lucas 18 Snyder, President of the Professional Insurance 19 Wholesalers Association of New York. My intention 20 is to provide written testimony. 21 On the record. I'll say that the most 22 important PIWA is in support of the expansion of 23 the export mortgage list. And I want to thank the 24 group for hearing us out. I'll skip my testimony. 25 MR. MORIARTY: Thank you. 0036 1 Proceedings 2 Any questions for Mr. Snyder? 3 Thank you very much. 4 MR. SNYDER: Thank you. 5 MR. MORIARTY: The next person on list 6 -- I don't see him here -- is John Reiersen, 7 president of Kingstone Insurance Company. My 8 understanding is John's main concern was with the 9 auto physical damage. Again, given that being 10 withdrawn, I don't anticipate he will have any 11 other issues. 12 I understand Mr. Jim Pfeiffer from 13 Turner Surety and Insurance Brokerage will be 14 submitting written comments. 15 Is Mr. Petersen here? 16 MR. PETERSEN: I am. Good morning. 17 I'm here to provided some written 18 testimony, as well. My notes are a brief summary. 19 Actually, it spans a couple of things first. I'd 20 like to thank the Department of Insurance for 21 allowing this class of business, which is excess 22 salary protection insurance, to come into fruition 23 a few years ago. 24 As a short background, New York was one 25 of three states that did not allow the export of 0037 1 Proceedings 2 this coverage. Only three in the U.S. And as 3 such, limited the markets to high income earners. 4 The admitted markets do address salary protection 5 in the vast majority of cases. 6 But there are significant numbers of 7 people whose salary is much higher than what the 8 admitted markets can allow for. And by allowing 9 exportation to exist in New York, it has provided 10 markets for providers or to have markets to help 11 clients, and at the same time for the citizens of 12 New York to have markets that previously weren't 13 available or they would obtain from other sources, 14 such as outside the State of New York, and New York 15 losing revenue. 16 At the same time, on behalf of Petersen 17 International Underwriting, we are providing 18 coverage in markets for excess salary protection 19 and the disability world, the Lloyd's market. We 20 have for the last 3 years provided $500,000 of tax 21 revenue back to New York, allowing these markets to 22 take place. 23 As I said before, the admitted markets 24 are in the world of disability insurance, 25 individual or group coverages, salary protection. 0038 1 Proceedings 2 To give perspective here, in the 1980s, there were 3 over 450 carriers that wrote coverages. Currently 4 there are about 27. So the market is substantially 5 imploded. 6 There are no carriers that write excess 7 disability coverage in the admitted markets. They 8 all cap out somewhere, usually around $15,000 a 9 month; which, again, serving the majority of people 10 very well. There are high income earners that have 11 a need for substantial coverages on top of that 12 $15,000. And that's where the line of coverage 13 comes in. 14 There are layers on top of that to bring 15 a person up to satisfactory, statistically 16 65 percent of income, what's needed for proper 17 financial protection there. 18 We also see that excess protection 19 available and there's a need for it in the world of 20 some business disability coverage; buy sells as an 21 example. Within the admitted markets 1 to $3 22 million is the maximum obtained for disability buy 23 sell policy. 24 Does anyone here know a company worth 25 more than $3 million? Quite a few out there. 0039 1 Proceedings 2 Again, the excess layer only comes into play on top 3 of admitted market levels there. 4 The purpose of the export list it to 5 address risks that are also written on a volume 6 basis, that are not designed for surplus line 7 cases. Just again, out of our office alone, we've 8 written about one thousand policies in the last 9 couple of years. It's a program that is needed and 10 utilized within New York. 11 Export list... address... clearly are 12 either limited or nonexistent in admitted excess 13 salary protection. This clearly falls into... The 14 beauty of the export list is when something is on 15 the export list, it's not stuck there forever. 16 Markets change drastically and the admitted markets 17 can come back in. Annually, we hold a hearing back 18 into where declinations are required. 19 The adding of this type of coverage to 20 the export list, Number 1, let alone a green thing, 21 eliminates a lot more paperwork. More importantly 22 is, the mixed markets will run smoother. Clearly, 23 it has to fall within the spirit and guidelines of 24 what surplus line is all about... adding the type 25 of coverages to the export list, it just makes the 0040 1 Proceedings 2 markets move better for buyers as well as 3 producers. 4 MR. MORIARTY: Okay. 5 MR. PETERSEN: Thank you. 6 MR. MORGENSTERN: A couple of questions. 7 One is, salary protection insurance, by definition 8 is not only... 9 MR. ZUCKERMAN: Actually... excess or 10 primary. 11 MR. PETERSEN: When we talk about 12 primary, it's a very narrow section of that type of 13 coverage. 14 THE SPEAKER: Technical list excess. 15 MR. PETERSEN: Only as excess, right. 16 MR. ZUCKERMAN: Second question. The 17 way the statute is written, it's unavailable in New 18 York is that an accurate statement... unavailable? 19 MR. PETERSEN: That is correct. 20 MR. ZUCKERMAN: No one writing? 21 THE SPEAKER: Not that I'm aware of. 22 MR. BIENSKIE: Is the reason because the 23 limits required for coverage are not available to 24 admitted carriers, who won't write that? 25 MR. PETERSEN: It has to do with the 0041 1 Proceedings 2 market issues in the world of disability insurance 3 carriers. There are, on the individual side, only 4 two reinsurers in the entire United States. As 5 such, they limit what admitted markets can do. 6 This is confirmed by... as well. In 7 discussions with them they were never opposed to 8 excess. They understand that they have certain 9 limitations they provide, as well. 10 MR. ZUCKERMAN: You said it's written on 11 a group basis, as well? 12 MR. PETERSEN: No. The reference was an 13 individual may be covered under a group plan; but 14 that group plan will have a cap on it somewhere. 15 Typically, group plans will say 60 percent of your 16 income up to $10,000 a month. For the rank and 17 file, that may be substantial. For the CEO, it's 18 way under. 19 MR. ZUCKERMAN: All policies written 20 were individual? 21 MR. PETERSEN: Correct. 22 MR. STEIN: Maybe I'm not understanding 23 this. But the description of excess salary 24 protection at the beginning says, "High disability 25 coverage and/or disability coverage which licensed 0042 1 Proceedings 2 insurers are unwilling to write, in part due to 3 moral hazards." 4 Why would a broker place a risk that's a 5 moral hazard? 6 MR. PETERSEN: I wasn't quite clear whey 7 the moral hazard came into place in the description 8 on there. I'd have to defer to someone else. I 9 didn't submit that description. I'd have to look 10 into that answer and get back to you. To my 11 knowledge, it's not based on the moral hazard as 12 much as the amounts. 13 MR. STEIN: Another question, something 14 about this coverage. You said that no authorized 15 companies are writing this risk currently, for 16 these amounts? 17 MR. PETERSEN: That's correct. They 18 currently go up to a certain level and then they 19 stop. Most carriers are about $15,000 a month 20 maximum, that they'll issue and/or participate. 21 MR. STEIN: How are brokers currently 22 obtaining declinations, since they should have a 23 reason to believe that the company is writing the 24 type of business? 25 MR. PETERSEN: What we have to do is go 0043 1 Proceedings 2 to the admitted markets and say, "This is what we 3 need." And if they say, "No, I won't write it," go 4 to the admitted markets, apparently get our 5 declination, even though we already know the 6 answer. 7 MR. ZUCKERMAN: You say the issue is a 8 dollar or... 9 MR. PETERSEN: It tends to be a little 10 of both. If you again -- I'll issue the individual 11 markets as example. People are much more familiar 12 with them. They tend to be sliding scale. They go 13 up to $15,000. What will happen, if you have an 14 income earner who makes about $75,000 a year and go 15 to a standard admitted carrier, a principal or 16 Guardian, whoever, and ask for coverage, you can 17 probably get 65 percent of your income, near to 18 that. 19 That's on a percentage-wise, a specific 20 person would have. When a person makes -- I'll go 21 to the far extreme now -- makes $50,000 a month of 22 income, $15,000 is way under that 65 percent, quite 23 a bit. 24 Now, there is a sliding scale that, as 25 income goes up, the percentage that the markets 0044 1 Proceedings 2 offer starts going down. So, it is excess of a 3 dollar amount. It could also be a percentage. It 4 depends where on the sliding scale they fall. 5 The bottom line is, we have to look to 6 the admitted markets, what their maximums are for 7 that particular case. In most cases, we are 8 talking about the substantially high income earner, 9 and not someone making $300,000 a year, where they 10 need a few thousand more, although that could 11 possibly be the case. Again, it's always in excess 12 of what we can get to the admitted markets. 13 MR. MORIARTY: Any other questions? 14 Thank you very much; very helpful. 15 MR. PETERSEN: Thank you. 16 MR. MORIARTY: Next Mr. Jeff Allen, 17 from... Willis. 18 MR. ALLEN: Good morning. I want to 19 thank the panel for this opportunity to comment; 20 and Dan for reaching out to us and inviting us to 21 participate. 22 I'm Jeffrey Allen, I'm national BNO of 23 key risk product review at... Willis. And I'd like 24 to thank my colleague from Marsh for the excellent 25 comments on the issues, and just expand on a few of 0045 1 Proceedings 2 the points, to help clarify the need for the export 3 list expansion. 4 Two points I'd like to make. One is the 5 importance of manuscripting for the large 6 BNO/professional liability risk. That occurs in 7 several components of the program. It's almost 8 always present on the primary layer; and that is 9 something that the admitted market is less capable 10 of doing by their restrictions, unless willing to 11 do when they have the opportunity. 12 We see a large placement for complex 13 businesses with 20, 30, 40 endorsements; something 14 that is a feature and something the excess market 15 is more attuned to providing. Now, we have two 16 other places where manuscripts becomes vital to 17 clients. 18 That is in a large program structure 19 with hundreds of millions of dollars of coverage. 20 You will have up to maybe 10, 20, 30, insurers 21 participating, both in terms of the layer of 22 coverage and within the layers of pro share basis. 23 Without the ability to create 24 appropriate following form wording, there could be 25 significant claims, A) problems for the insured in 0046 1 Proceedings 2 the event of large claims, in terms of 3 discontinuity of coverage, counselor representation 4 and the like; and also put the broker, frankly, at 5 considerable BNO risk. 6 So I think on those two points, having 7 access to, or quick access to the nonadmitted 8 market, will be helpful to deliver these complex 9 programs without any unnecessary upfront delay. 10 That is not to say, by the way, that the 11 admitted market does not participate in some of 12 these programs. But what you will often see is, 13 that you will have limited admitted market 14 participation, and some of the admitted insurers 15 use nonadmitted vehicles to participate in these 16 areas of business where they require an amount of 17 flexibility to be competitive in the market and 18 deliver the type of coverage that the client is in 19 need of. 20 The second area I'd like to quickly 21 point out is that, the BNO business is getting the 22 large buyer, it is getting more complex as we see a 23 blending of traditional service businesses or 24 technology businesses with sophisticated 25 information networks that run those businesses. 0047 1 Proceedings 2 Today it's very important to insure the 3 information infrastructure, the privacy issues, 4 both personal identifiable information and 5 protected health information, many of the 6 organizations that we and our broker colleagues 7 serve. 8 The so-called cyber risk market is a 9 relatively new market. I'd say it's been present 10 perhaps 10 years. It's really come into its own in 11 the past five years, and that's predominantly not 12 admitted insurers. Because of the fact that 13 insurers will try to understand the exposures, 14 they're changing rapidly; they need the flexibility 15 to find their way. 16 So we know from the outset that the very 17 large client, whether they need to buy cyber risk 18 or a standalone policy vehicle, a retailer who does 19 not have BNO coverage, we will be using a number of 20 admitted markets and a number of non-admitted 21 markets in order to provide a range of options to 22 the client. 23 And that will also be true for those 24 buyers and omissions who can have cyber risk added 25 to their policy... again, insurers can offer those. 0048 1 Proceedings 2 Modular products are often found for bigger clients 3 in the surplus market. 4 Thank you. Answer any questions. 5 MR. MORIARTY: Thank you very much. 6 Do we have any questions for Mr. Allen? 7 MR. MORGENSTERN: Cyber risk is an area 8 where... in flux. I don't think the industry as a 9 whole has settled on just what it is that ought to 10 be covered there, and even when they do at some 11 point, the market, the conditions change, so that 12 we've got to rewrite the policy. I'm talking about 13 that in terms our experience in dealing with the 14 admitted market... 15 I'd like to get comments from you as to 16 whether you can give some enlightenment on how the 17 market itself handles policy provisions, whether 18 you think that's a key area that drives the 19 business to the excess line market? Do you think 20 that you're able to come up with... in terms of 21 policy provisions that can be considered standard? 22 MR. ALLEN: That's a good question and 23 one we get asked by our clients often... and the 24 cyber risk market is changing. I think it will be 25 some time before a standard agreed... key insurers 0049 1 Proceedings 2 in that space -- what we're finding right now is 3 that insurers vary across quite a large range in 4 terms of how they address issues. 5 Though all may offer a generic core of 6 similar coverages, there are many, many 7 permutations, which at the end of the day make 8 offers very different; both in terms of critical 9 sublimits, scope of coverage, whether or not you 10 offer first or third party coverage. 11 We've all heard a lot about the cost to 12 notify those individuals involved in personal 13 identifying information breached... a piracy 14 incident. Every insurer has a different sub-limit, 15 and perhaps a different way to approach it, with a 16 panel of experts and so forth. 17 So I think it's going to be several year 18 before there is going to be enough understanding of 19 the risk issues, because they change with the 20 technology; enough understanding of the claims, the 21 cost of claims, such that the market will be able 22 to come up with a more standardized set of 23 opportunities. 24 I hope that's responsive. 25 MR. MORIARTY: Other questions? 0050 1 Proceedings 2 Thank you very much. 3 MR. ALLEN: Thank you. 4 MR. MORIARTY: Those are the only 5 speakers I have. Before asking Dan for concluding 6 comments, is there anybody else who would like to 7 speak? 8 I will tell you I have three other 9 written comments that I know about; one from the 10 Property Casualty Insurance Association of America; 11 another from Lander Insurance Companies, and they 12 were focused on the auto request; so their comments 13 may be moot. 14 I also have a written letter from Aon, a 15 large lawyer, that liability insurance be added to 16 the export list. And of course all will be 17 included in the public record as we make future 18 changes to the export list. 19 Dan, any final comments? 20 MR. MAHER: Yes, to clarify. I did want 21 to clarify, to make sure that some of the questions 22 are thoroughly answered. I'll start by picking up 23 on TJ's comment on the question of moral... 24 As TJ was talking about the current 25 state of the marketplace, perhaps the softest 0051 1 Proceedings 2 market we've seen since the early 80s. And yet we 3 still have, even though the BNS market has gone 4 down, it is depopulated to some degree, as TJ said; 5 certain risk is moving back because the admitted 6 markets are getting more competitive. 7 Having said that, we have to look at 8 there are core types of industries and businesses, 9 that for a variety of reasons, some of which we 10 have talked about today, just will not ever be able 11 to move out of the nonadmitted market. And some of 12 the comments pick up on the question to Jeff about 13 cyber liability. 14 I think the answer is yes, cyber 15 liability is clearly a developing product, much 16 like BNO was 20 years ago, or EPLI coverage 17 20 years ago. Those developments tend to take 18 place first in the nonadmitted market. I don't 19 know. Has the Department approved any cyber 20 liability forms? 21 MR. MORGENSTERN: We've had enforcements 22 to GH policy to address it. Again I don't know if 23 we have what we consider a generic policy form that 24 covers it. 25 MR. MAHER: I think you will find that 0052 1 Proceedings 2 it's similar to DNO and EPLI and other products 3 that really initially developed in the E&NS market. 4 I think you'll see that's the pattern that occurs 5 here. At some point in the future, just as DNO and 6 DLI gravitated into the admitted market, when there 7 became a more standard approach to it, I think 8 you'll find that with cyber liability. 9 I was talking about specifically, there 10 are core industries and types of risks that 11 generally do not come out of the nonadmitted 12 market. And let me tie that a little bit into the 13 list that's currently before this hearing panel. 14 By the way, let's start with the excess 15 salary protection. The excess salary protection is 16 only supposed to be the excess. I see that we have 17 separated codes for excess salary protection and 18 primary. We're only talking about the excess. The 19 language in the notice of hearing, I think was more 20 expansive. I don't know how that happened, but 21 we're only talking about the excess salary 22 protection. 23 And Tom would be happy, if you know of 24 any admitted markets that write the product, Tom 25 would be very happy. If it wasn't illegal he'd 0053 1 Proceedings 2 take you out to lunch and talk about it. 3 (Laughter.) 4 The next category is recreational 5 liability. Again, going to the issue of core 6 businesses that tend to stay in the nonadmitted 7 market. You talk about high hazard recreational 8 facilities, everything from bungee jumping. Some 9 of these stunt categories are already on the export 10 key list, like ski resorts and the like. 11 There's two issues with these types of 12 accounts. The first is, they're not like 13 Starbucks. They're not on every corner. You don't 14 have a bungee jumping or a parachuting facility. 15 I'll come down here, buy a Starbucks and take a 16 jump out of a plane. 17 There are two things: They're hazardous 18 and the insurers can't really use the law of big 19 numbers to help them with these type of risks. So 20 they're more often... and that's one of the reasons 21 they tend to be in the nonadmitted market. It's 22 not just the hazard. If I can write five of these, 23 how do I spread the risk? 24 And that's another reason the admitted 25 market shies away. 0054 1 Proceedings 2 Builders risk, you'll get written 3 testimony on that from our friends at Turner 4 Surety. Primary and excess liability for vacant 5 properties and unoccupied buildings. Two points 6 there. The first is that generally the admitted 7 product, the standard fire policy, has terms and 8 conditions which would allow the insurer to deny 9 coverage because the property is vacant. One of 10 the reasons. 11 It is a higher hazard risk, which is the 12 clause that a licensed carrier could use to say, 13 "I'm sorry, the property was vacant, I don't have 14 to pay your claim." That's one of the reasons why, 15 a big market that tends to stay, gravitate to and 16 stay in the nonadmitted market. 17 We talked quite a bit about the excess 18 professional and ENO classes. And again, very 19 quickly, supplement the testimony of the witnesses 20 from Marsh and Willis. A lot of times you're 21 looking at very manuscripted policies. By 22 definition, admitted carriers are not that nimble, 23 they can't move that quickly. 24 And if you're starting with manuscripted 25 policies and you need layers of coverage, you need 0055 1 Proceedings 2 to tie those layers together into a typed form, 3 otherwise you have gaps and there's omissions 4 exposure; another reason why those risks tend to 5 gravitate to that market. 6 I mentioned cyber liability. I did want 7 to get to those clarifications. Other than that, 8 I'm happy to answer any questions. Again, thank 9 you very much for giving us this time today and the 10 time to consider this modernization of the excess 11 line procedure. 12 MR. MORIARTY: Thanks, Dan. I thank 13 you and the other speakers and the letters. It has 14 given us a lot to think about. I do agree with 15 your comments about emerging types of risks, either 16 a lot of people haven't thought about or they just 17 have, as far as the liability... a whole host of 18 other issues that may not have gotten on our radar, 19 yet do want to show some flexibility in terms of 20 allowing companies to provide coverage there. 21 As I indicated at the beginning, 22 although the website says the record will be open 23 for 5 business days, I'll extend it to 10 business 24 days, another two weeks, to September 3rd, then 25 close the record. 0056 1 Proceedings 2 Does anybody have any comments or other 3 questions? 4 MR. MORGENSTERN: Can I ask to clarify a 5 couple of comments, classes that you made comments 6 on just now? 7 On the excess salary protection 8 insurance, I'm not sure if we really settled that 9 question about moral hazards. Does anybody, not 10 just you, Dan, but can anybody elaborate on what 11 was intended by that? 12 THE SPEAKER: I can. That's actually 13 part of the phrase on the primary coverage, which 14 we're not looking to put on the export list. Let 15 me clarify that for you. 16 Most people can buy first dollar 17 disability coverage, but they may not be able to 18 buy if they have a history of drug use, criminal 19 activity, certain things; maybe even certain types 20 of sports car racing or something like that would 21 be exclusions. 22 That would be a moral hazard very often. 23 Tom concurs with that. That's really what that 24 moral hazard clause is. That really ties more to 25 the primary. Generally, if you are an average 0057 1 Proceedings 2 citizen, you'll be able to buy primary disability 3 coverage up to the salary caps Tom discussed. 4 MR. MORGENSTERN: I think once you 5 really are talking more about adverse selection as 6 opposed to moral hazard on the part of policy 7 holders? 8 THE SPEAKER: I suppose if I'm somebody 9 who had a history of addiction, and I've been in 10 and out of clinics and my medical records show 11 this, and I apply for a disability policy, I have a 12 risk exposure that many of the licensed carriers 13 won't write. The class will likely be denied in 14 the admitted market because of an underwriting 15 factor. 16 MR. MORGENSTERN: On recreational 17 liability, you were talking about high limits 18 there, you were talking about layers of coverage, 19 what is it exactly that you feel is the key issue 20 in moving that to the export list? 21 THE SPEAKER: We are talking about 22 primary liability, and what we're saying there is: 23 You already have subclasses of recreational 24 liability on the export list. This was on the 25 export list since 1996. Such things as ski 0058 1 Proceedings 2 resorts, snowmobile clubs. 3 In fact, several year ago, the 4 Department of Parks and Recreation asked me to 5 visit Albany to help them, because the market for 6 snowmobile clubs, horseback riding facilities, et 7 cetera, were that thin in New York that they really 8 needed some help. 9 Those classes, since we put some 10 subclasses on and they are thin; you don't have 11 40,000 ski resorts. You have less than 100 ski 12 resorts. How many parachuting places, bungee 13 jumping? It's a very thin book of business, and 14 that is unattractive. 15 You've got high hazard and you don't 16 have the ability to use the law of big numbers in 17 your favor. It's not something that the admitted 18 market tends to gravitate towards. But it is 19 primary liability, we're not talking high excess. 20 MR. ZUCKERMAN: The items you mentioned, 21 are they exclusive or other types of recreational, 22 too? 23 THE SPEAKER: We really want to get into 24 recreational liability for all types of 25 recreational liability. 0059 1 Proceedings 2 MR. ZUCKERMAN: Golf courses, too. I 3 think the term is very broad, what we're focused 4 on. 5 MR. MORGENSTERN: Specifically spell out 6 each one, separate classes... 7 THE SPEAKER: Perhaps what we can do is 8 work on that together after the hearing. Because I 9 understand what you are saying. The idea isn't to 10 get miniature golf outings. 11 MR. GARELA: There are miniature golf 12 courses in nonadmitted, in many cases. 13 MR. ZUCKERMAN: There are other 14 examples. 15 MR. GARELA: Give my 9 year-old a golf 16 club and watch out. 17 THE SPEAKER: They're big on backswings. 18 MR. MORGENSTERN: We have to consider, 19 perhaps, the lack of sophistication of some of the 20 insurers involved in this. 21 THE SPEAKER: I understand what you are 22 saying, but they are businesses and businesses 23 generally can't find coverage in the admitted 24 market. That's why we are here. I understand the 25 need to not have a definition that everything is 0060 1 Proceedings 2 inclusive. 3 But part of the problem we have is that 4 you have brokers who say, "Ski resort yes, but 5 bungee jumping no." The more they have to figure 6 out what we are talking about, the less valuable 7 putting it on the export list is. We need to -- I 8 think there's ways for us to define this, make the 9 Department comfortable. I think we can work 10 together on that. 11 MR. MORIARTY: Other questions? 12 MR. STEIN: I have a question on auto 13 physical damage, I'm talking about medallion taxis. 14 Are you aware of the number of authorized markets 15 that write in New York City? 16 THE SPEAKER: In New York City 17 specifically, no. I have been informed that there 18 are several markets that will write medallion cabs, 19 but I don't know whether that includes New York 20 City or excludes New York City. That's one of the 21 problems that we do have. A lot of times, the 22 markets say, "We write that." But that might mean, 23 "We write it, but we don't write it in the five 24 boroughs of New York City." 25 What's the percentage of cabs in New 0061 1 Proceedings 2 York City versus the cabs in New York State? So 3 the answer is, I'm not sure in response to that. I 4 can talk a little bit more about that, but I'm not 5 sure it's pertinent to the hearing. 6 MR. ZUCKERMAN: Tickets... 7 MR. GARELA: Many of them are 8 self-insured, by the way, on the physical damage, 9 especially medallions in the boroughs. They have 10 their own garages that do the repairs. Physical 11 damage is not driver covered, generally. 12 THE SPEAKER: In other words, they can 13 drive with dents. 14 (Laughter.) 15 MR. MORIARTY: Any other questions? 16 The record will be open until 17 September 3rd. I appreciate your comments and 18 attendance. The hearing is adjourned. Have a 19 great weekend. Thanks. 20 (Time noted: 11:30 a.m.) 21 (Matter concluded.) 22 23 24 25 0062 1 2 C E R T I F I C A T I O N 3 4 I, Jeffrey Shapiro, a Shorthand Reporter and 5 Notary Public, within and for the State of New York, 6 do hereby certify that I reported the proceedings in 7 the within-entitled matter, on Friday, August 20, 2010, 8 at the offices of the NEW YORK STATE INSURANCE DEPARTMENT, 9 25 Beaver Street, New York, New York, and that this is 10 an accurate transcription of these proceedings. 11 12 IN WITNESS WHEREOF, I have hereunto set my hand 13 this _____ day of _____________, 2010. 14 15 16 _______________________ 17 JEFFREY SHAPIRO 18 19 20 21 22 23 24 25