American Modern on the scope of specialty writing

October 1, 2013 / 10 min read

Steven Cutforth sat down with John Cantwell, vice president, Verisk Underwriting, and Barbara Sohn, Visualize editor and senior manager, Verisk Marketing Communications, to discuss the expansion of American Modern’s distribution channels and strategic alliances and how specialty insurers differ from other insurers.

Visualize: The industry knows American Modern as a “specialty” writer. Can you explain just what that means and the type of items you insure?

Old timer

Steven Cutforth: A specialty writer provides coverage for risks that generally fall outside the underwriting appetite of standard insurance carriers or simply don’t fit into their core product offerings.

Many people tend to equate “specialty” with substandard risks, but that’s a misconception. While a specialty carrier certainly can provide a market for substandard risks, it’s more accurate to think of what we do as serving the unique insurance needs of a broad product category — such as manufactured homes, motorcycles, boats, collector vehicles, and snowmobiles — or of certain home occupancies, such as vacant homes, rental homes, and seasonal homes. American Modern offers insurance for all the specialty products I just mentioned, and we offer products and services to protect the collateral of financial institutions.

Visualize: Does that mean you don’t offer coverage for standard homes and cars?

Cutforth: We don’t offer coverage for homes and cars that meet the underwriting criteria of standard carriers. We do offer specialty coverage for collector vehicles, and we do insure standard homes — which we refer to as “site-built” homes — when they have special needs not met by standard carriers.

Visualize: What sales distribution channels do you use?

Cutforth: Our company is committed to making our products available through a variety of distribution channels so it’s as easy as possible for customers to find us. Early on, we relied heavily on point-of-sale distribution because licensed dealers and lenders sold our products at the same time they closed on the sale of manufactured homes.

Later, we used general agents, independent agents, and specialty agents; and in recent years, we’ve become a leader in strategic alliance distribution in partnership with other carriers who sell our products. We’re also using web-based direct marketing on a limited basis to support affinity relationships with key partners.

Visualize: Mobile home insurance is your largest product line. Tell us what defines a mobile home. What’s the range of coverages (Coverage A)? Are they typically used as primary residences or seasonal/vacation homes?

Cutforth: Mobile homes are a subset of manufactured homes. Anything built in a factory, transported to a site, and then set up or assembled on that site is a manufactured home — as opposed to homes built stick by stick on the site. Mobile homes get their name from the fact that they’re built on wheels, whereas modular homes aren’t. However, for many years the term “mobile home” has been something of a misnomer, because the homes seldom move once they’re on a site and are often on a permanent foundation.

As for Coverage A limits, the low end of the range is about $10,000 for homes 20 years old or more. There are new homes worth more than $100,000. The average hovers around $40,000. Most manufactured homes are primary residences, but about 10 percent are secondary residences and 15 percent are rental units.

Visualize: What are some of the unique challenges associated with underwriting mobile homes compared with standard homeowners risk?

Cutforth: Much like insuring any property risk, one of the biggest challenges is in underwriting insurance to value. Unlike other properties, manufactured homes depreciate at a faster rate. So it can be challenging for insurers to make sure that the home’s coverage limits stay on track with its changing value over time. As they age, mobile homes also tend to have a higher damageability rate than standard homes.

Specialty coverage includes varied risks

house — "We don’t offer coverage for homes that meet the underwriting criteria of standard carriers. We do insure standard homes — which we refer to as ‘site-built’ homes — when they have special needs not met by standard carriers."

manufactured mobile home — "Unlike other properties, manufactured homes depreciate at a faster rate. So it can be challenging for insurers to make sure that the home’s coverage limits stay on track with its changing value over time."

Collector Car — "The use and condition of the [collector car] vehicle are critical factors in determining eligibility and price — factors not easy to automate. There’s more emphasis on the valuation, authenticity, and security measures for the vehicle."

Sailboat — "Our claims team goes through rigorous hands-on training in a 36,000-square-foot facility so that they can break down and reassemble motorcycles and boats. Our focus can also translate into faster attention in some claim situations."

Visualize: Volatile weather and other hazards, including tornado, hail, wind, flood, and wildfire, seem to be the new normal. Has American Modern changed underwriting or claims practices to cope with those growing problems?

Cutforth: Exposure and accumulation risk management have always been important to American Modern but even more so in recent years with the dramatic increase in the frequency and severity of natural disasters. We’ve spent considerable effort ensuring a reasonable spread of risk and focusing growth strategies in areas less prone to catastrophes. I wouldn’t say we’ve made any appreciable changes in our claims practices, because, quite frankly, we’ve always excelled in the mobilization of special cat claims teams and in being one of the first companies to respond to customers affected by natural disasters.

Visualize: Your other products include various specialty lines, such as boats, recreational vehicles, and collector cars. How did the economic downturn in recent years affect the business?

Cutforth: Almost anyone who relied on the sale of new boats and motorcycles to make a living suffered during the economic downturn a few years ago. And as the repossession rate on recreational toys jumped, the market for insurance sales dipped. The collector vehicle market was somewhat insulated from the effects of the downturn, but even that market experienced some drop in the market values of vehicles. So, yes, the economic downturn did have a negative effect on our recreational lines of business, but we’re beginning to see a rebound in most of them. One exception is the motorcycle line, which is taking longer to recover.

Visualize: Collector cars seem very popular. Is there a typical customer in that market?

Cutforth: The typical customer is pretty much what you’d expect based on the high cost of this hobby. The specific demographics vary, but the usual profile is an older male with a high household income and net worth and a passion for older and exotic cars.

Visualize: How do underwriting and pricing collector cars differ from the standard auto market?

Cutforth: While standard auto programs are more segmented and more oriented toward pricing versus underwriting, collector car programs still have some subjectivity. The use and condition of the vehicle are critical factors in determining eligibility and price — factors not easy to automate.

Visualize: Is the underwriting process different for very expensive collectible cars?

Cutforth: Collector cars can range from a 1965 Mustang to a rare vintage Ferrari. A very expensive car requires additional underwriting consideration and review. There’s more emphasis on the valuation, authenticity, and security measures for the vehicle. We also look at the method of vehicle transport and whether there are special handlers or special needs, such as whether the vehicle leaves the country for shows and events.

Visualize: Without sharing any personal details, what’s the most expensive collector car you insure?

Cutforth: We currently insure a number of vehicles that exceed $10 million in value. Just recently, a vintage Mercedes race car sold for nearly $30 million, which is reportedly a record. Certain Ferrari models from the ’50s, Ford GTs from the ’40s, and luxury art deco vehicles from the ’30s are some examples of cars at the pinnacle from a valuation standpoint.

Visualize: American Modern competes with other specialty writers and with large national multiline writers that also insure specialty risks. What are the advantages that a specialty carrier like American Modern can offer agents and policyholders?

Cutforth: One of the biggest advantages is that we specialize. This means our product team becomes intimately familiar with the details of the unique coverage needs of specialty risks.

Our claims team goes through rigorous hands-on training in a 36,000-square-foot facility so that they know how to repair damaged homes and can break down and reassemble motorcycles and boats. In other words, the large national multiline carriers tend to concentrate more on standard auto and home needs, so they don’t place the same emphasis on specialty risks that we do. Our focus can also translate into faster attention in some claim situations.

Visualize: Are there any other interesting facts about American Modern that you’d like to share?

Cutforth: Just that we’re very fortunate to be part of Munich Re’s primary insurance operations in North America. We benefit from their risk assessment expertise and from the strong reputation they have for financial stability and solution-oriented relationships.

Introducing ISO’s new specialty program for motorcycles

Offering refined rating procedures, loss costs, and classification factors

According to the Motorcycle Industry Council (MIC), buyers purchased almost 363,000 motorcycles, scooters, and ATVs in the first half of 2013. While that was a slight dip compared with the units sold in the first half of 2012, sales for June 2013 were already up by almost 2 percent, with off-road sales up more than 10 percent compared with June 2012. The U.S. motorcycle market continues to be very strong. In fact, industry analysts cite several trends that will have a significant effect on motorcycle usage going forward: increases in female riders and motorcycle owners over the age of 50, a period of greater prosperity, “bagger” motorcycles that offer increased storage space, and the need for greater fuel efficiency.

The need for specialty writers and large multiline writers to insure those motorcycles will also increase. To answer the requirements of a growing market, ISO has launched the first standardized motorcycle program for the insurance industry.

Filings are now under way for ISO’s new Motorcycle Program. The program includes forms, rules, and loss costs tailored to the specific requirements for insuring a motorcycle. The policy provides liability, medical payments, uninsured motorists, and physical damage coverages and offers a wide array of endorsements.

The program includes a Motorcycle Rating Code supplement, which contains rating codes based on motorcycle type; engine size; manufacturer’s suggested retail price; vehicle identification number; and make, model, and trim level for each model year back to 2004. The manual includes classification factors that recognize various exposures, such as age of operator, number of accidents, major and minor violations, and years of riding experience. There are also discounts for motorcycle rider training, antitheft devices, and antilock braking systems.

“Whether they currently write their own motorcycle program or want to enter the motorcycle market, insurers and agents will now have the opportunity to use a standardized policy form. ISO has included refined rating procedures in the program, so insurers don’t have to spend time and money to develop their own. Insurers that do have their own rating procedures can also find value using the information provided in the Motorcycle Program,” said Kevin Thompson, president of ISO Insurance Programs and Analytic Services.

ISO is submitting the Motorcycle Program for review by state insurance regulators through the remainder of 2013. The program will be available for insurer use as part of ISO’s Personal Lines Specialty Programs, which also include Personal Liability, Umbrella, and Watercraft.

ISO is a member of the Verisk Insurance Solutions group at Verisk Analytics.