Jayne Gest

Has your succession planning come to a standstill and you don’t know why or how to fix it? Fear, confusion, uncertainty, an undefined action plan and/or dysfunction within the family or business can all be contributors.

“Not every business struggles with all five of these challenges, but I usually see a number of them in almost every situation when succession efforts have stalled,” says Ricci M. Victorio, CSP, CPCC, managing partner at Mosaic Family Business Center.

Smart Business spoke with Victorio about five reasons succession plans stall and ways to overcome them.

What causes succession planning to stall?

Succession is about transforming the entire organization, not just transitioning a business from one person to the next. Shareholders, family members and key managers need to buy-in to the transition plan or they may undermine your efforts.

Business owners dealing with multiple issues stalling a succession plan shouldn’t feel doomed. You are not alone and there are professionals who can help you get unstuck. A succession coach or adviser can help guide your company through the emotional issues of this transition and identify early warning signs to prevent a smoldering fire from becoming a five-alarm blaze.

What are the common hang-ups and how can they be overcome?

Fear appears in many forms. In a family business it can encompass the fear of failing your family’s expectations or uncertainty about sufficient leadership skills. Such fears can transform into overwhelming doubts. Parents may fear sharing financial information with their children because of worries over perceptions of inequality in their estate plan. When talking about money and careers, familial bickering and artificial harmony replace understanding and trust. A coach can provide guidance in discussing emotional topics without confrontation, how to stay open, asking questions and considering differing opinions without blowing up.

Confusion often comes from being afraid to communicate or commit to action. Without clear communication or an execution plan, key personnel and family will become anxious worrying what is going to happen, who is actually in charge and how it will affect their security, which creates the added stress of business productivity going flat. By creating a timetable, sharing it with family, employees, your vendors and clients, and working with them to make sure it is clearly understood, you can sidestep this challenge.

Uncertainty over the economy and the business’ success has hindered many plans. You may be worried about the business value or if your successor can manage a significant bank loan. For family members, consider using a stock redemption program rather than a straight buyout, lock in key managers with a vested retirement plan, make sure you have a successor development plan and hire the best talent possible for the transition.

An undefined action plan can lead to skipped steps or no follow-through. The succession plan should be integrated into your strategic plan with specific and documented expectations, a timeline, ways to measure success and regular checkups.

Dysfunction — infighting, jealousy, sibling rivalry, secrecy and entitlement will stall family business succession. When relationships are out of alignment, people need to be heard, acknowledged and feel like they are making a contribution in dealing with important issues. Afterward, it’s possible the succession plan may look different than parents originally intended, but you will most likely have everyone on board, moving together. Even in a non-family business, not addressing existing dysfunction could lead to a failed succession effort.

There is a plan for every situation, but there is no standard solution. When your plan stalls, don’t be embarrassed to get help. Succession requires a great team, which includes the transactional assistance from your attorney and CPA, advice from your financial planner and a succession coach who focuses on the transformational goal of achieving a successful business transition while preserving family harmony.

Ricci M. Victorio, CSP, CPCC, is managing partner at Mosaic Family Business Center. Reach her at (415) 788-1952 or ricci@mosaicfbc.com.

Website: More tips on how to have a successful succession transition.

Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners Inc.

 

 

All employers face a potential loss because of the hiring, employment and potential firing of employees. Therefore, employers should purchase employment practices liability (EPL) insurance to protect themselves against damages from workplace events and allegations of wrongdoing by employees.

Today, claims are increasing, the market is hardening and premiums are going up for this type of coverage, says Stephen Stromsborg, assistant vice president at Momentous Insurance Brokerage, Inc.

“It’s important for businesses and homeowners with domestic staff to partner with a broker who can represent them well to insurance companies and get them as many options as possible,” he says.

Smart Business spoke with Stromsborg about how EPL policies work and the market trends that make this type of coverage advantageous.

What claims does EPL insurance cover?

It covers such things as wrongful termination, harassment, discrimination, defamation, unfair hiring and firing practices, failure to promote, emotional distress, retaliation and invasion of privacy.

Who should consider EPL coverage?

Both businesses and households that employ domestic staff should strongly consider purchasing the coverage.

Businesses’ general liability policies either specifically exclude employment-related claims or are very restrictive and not adequate enough to respond to EPL matters. In particular, companies with large employee headcounts and high turnover are more susceptible.

As for households employing domestic staff, a homeowner’s policy won’t protect against allegations of wrongful termination or sexual harassment by domestic employees like nannies, gardeners and estate managers.

Any employee can allege he or she was wrongly terminated or harassed while employed, and an employer has a legal duty to respond, regardless of the claim’s merit. Even if it’s dismissed, not litigated or doesn’t go to trial, the high-cost of defense and/or settlement can have a significant impact on a company’s or family’s financial stability and reputation, especially without insurance.

What is impacting this coverage today?

Employment-related charges in 2012 were 20 percent higher than in 2007, according to the Equal Employment Opportunity Commission (EEOC). Many employment practices claims go straight to lawsuits and are not reported to the EEOC, so this number could be even higher. Unemployment rates are one contributing factor; California is tied now for the highest unemployment rate at 9.8 percent. With rising unemployment comes the decision to layoff employees or risk being put out of business. Unfortunately, workforce cuts can lead to disgruntled former employees suing for allegations of wrongful termination.

With the increased claim volume, insurance companies have been paying out more for both defense and settlements in the EPL arena. This results in most insurance companies transferring additional renewal and new business premium costs to employers. Companies are also increasing EPL policyholders’ retentions and deductibles. Several EPL coverages have been restricted, so it’s important to have an open dialog. The broker needs to articulate what is and is not covered in these policies for clear understanding on both ends.

What can be done to mitigate EPL losses?

Important preventative measures are:

• Maintaining adequate compliance with employment laws in the workplace.

• Establishing formal harassment training with employees.

Employers also can reduce turnover, which has a direct impact on claims.

Implementing compliance and harassment training will convey a proactive risk management work environment to underwriters, and working with a broker who can articulate those measures can lead to insurance companies being more comfortable in providing coverage.

Who can help with coverage decisions?

EPL is a very tough market. With premium increases on the rise, employers should partner with a broker who has the expertise and marketplace relationships to place the appropriate coverage.

Stephen Stromsborg is assistant vice president at Momentous Insurance Brokerage, Inc. Reach him at (818) 933-2722 or sstromsborg@mmibi.com.

Blog: Insurance strategies are constantly changing as the market evolves. To keep up, subscribe to our blog.

Insights Business Insurance is brought to you by Momentous Insurance Brokerage, Inc.

 

When your company sells a luxury product or service, it changes how you should approach the sale. Selling these items is less about price and more about the experience surrounding a luxury purchase.

“Customers at the highest luxury levels are more interested in having fun and enjoying spending their money while acquiring something they want, something that serves their own passion,” says Llewyn Jobe, Sales Manager at Bentley Beverly Hills. “We don’t sell anything anyone needs — basic transportation can be purchased anywhere. It’s about an experience.”

Smart Business spoke with Jobe about lessons he’s learned selling Bentley motor cars that apply to other luxury products and brands.

What are some challenges that come with selling luxury items?

It’s a challenge to make everything an indulgent, luxurious experience. Customers want to connect and feel at ease when they come in to spend a substantial amount of money, so the transaction needs to go seamlessly without too much anxiety over pricing and negotiating.

How can you produce good customer service, which is so central to success?

Without good customer service, there are no referrals or repeat business. The people selling the product drive the customer service experience. The sales staff needs to show passion and be informative when selling to clients; it should be fun and exciting for everyone involved. Stay in touch with your customers, or potential customers, and build a relationship by following up and staying current. Maintaining good customer follow-up comes from the productive use of a customer management database. Work through your database and keep clients and prospective clients up-to-date about upcoming new model premieres or special leasing promotions. That’s the best way to stay in touch — you’re not bothering people but informing them about something they’ve already expressed interest in. Additionally, giving appropriately branded gifts is a good marketing tactic and shows appreciation to the people spending their time with you, whether they buy or not.

What are some best practices?

Use marketing that’s clever and tasteful to both new and existing customers. It’s easy to reach out to previous customers, but how do you expand beyond your existing client base? The initial customer contact, whether through marketing or customer service, is critical. For us, part of our success derives from our location in Beverly Hills, where luxury is part of the community. However, you cannot take success for granted; you have to ask yourself, ‘How can we become better to surpass our own performance?’

Customers want to feel welcome in a comfortable setting. It’s an art to take people through the numbers of any particular transaction and get them to understand, without being too pushy. Then, it becomes more about sharing the experience and building the relationship.

If a customer asks, ‘Why should I pay so much money for X?’ What do you say?

Customers will say, ‘I can get this same car with similar miles for less.’ Well, yes, that’s commerce. But, here you get a relationship with your purchase that enhances your ownership experience. You may be able to buy this product for less somewhere else, but you’re not getting us with it.

And, that’s only comparing apples to apples. If you’re trying to bring in a new client from a lesser luxury brand, you can tell them, ‘You’re spending this kind of money because you want to be distinguished; you’re looking for an experience that’s above all experiences you’ve ever had.’

The relationship becomes more important the higher a luxury item is priced. People expect it.

How can businesses overcome post-recession hesitancy to spend money?

In 2009 and 2010, people were worried what others thought. There was caution about spending money and about what that stood for while so many had been hit by the recession. However, we’re pushing past that.

When it does come up, it’s important to let the customer know that it’s OK to spend the money, take action and enjoy their life. There’s nothing bad about it — that’s what luxury is all about.

Llewyn Jobe is sales manager at Bentley Beverly Hills, O’Gara Coach Company. Reach him at (310) 967-7124 or ljobe@ogaracoach.com.

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Insights Luxury Autos is brought to you by O’Gara Coach Company

 

 

 

Cloud computing may invoke images of an abstract technological force floating in the atmosphere, but the term itself is misleading. The term originated because on technical diagrams, a cloud was drawn around any mixture of resources that made a particular application work, says Pervez Delawalla, president and CEO of Net2EZ.

“Cloud computing means so many different things to so many people, and there is a lot of confusion,” says Delawalla.

Smart Business spoke with Delawalla about what cloud computing is and how to apply its advantages to your business.

How does cloud computing work?

You have to envision that the physical architecture itself is vast. Data centers all over the world house servers, and each server or set of servers is designated for a certain type of application or resource. Servers, routers, switches and security devices combine with network connectivity and an operating system to form the cloud. You could compare it to an electrical grid, in which power comes from substations and power generation points before electricity goes over wires to provide power to households or businesses.

The data center is then responsible for ensuring that all of the hardware pieces are working in harmony and have different versing capabilities within that physical layer.

A business may approach a data center for complete automation of its infrastructure but take care of the software itself.

What are the advantages?

A major advantage of cloud computing is time. As a startup business you can get up and running online reasonably quickly and with minimal investment because you are not buying servers, routing or switching equipment. Instead, you are plugging into a utility that doesn’t require any setup, that is already functioning, and you simply pay for it on a monthly basis.

Cloud computing offers more versatility and capacity. If your website is on a cloud computing platform, you can scale up and sustain a high volume of traffic quickly without having a performance degradation for users of your site.

Cloud computing can also improve your ability to be agile and nimble because the monthly fee for service includes taking care of your hardware and resources. As a user of the cloud, you don’t need an army of IT personnel or consultants, freeing you up both financially and staffing-wise to concentrate on your target business.

Additionally, a minimal amount of software is installed on the personal computer or path, so instead of downloading the entire Microsoft Office suite, for example, you can sign up for Microsoft Office 365, which allows you to subscribe to the cloud-based service on a month-to-month basis to access all Microsoft Office products.

What is the difference between public and private cloud services?

On a public cloud, you don’t know where your data is stored or who has access to it, but you can increase your capacity quickly.

A private cloud can be established for businesses that know their growth plans and that want extra security. The business can then control who has access to that data and knows that it is stored in a secure location.

How are security and privacy handled?

With a private cloud, you manage your environment so closely that the security is as good as with conventional computing. Because of privacy issues, Health Insurance Portability and Accountability Act-compliant and Payment Card Industry-compliant credit card companies will always have to use private cloud services.

For extra security, you can do an automation deployment with a private cloud, but that will result in higher costs because you have dedicated resources just for your company. For data that isn’t as sensitive, a public cloud is sufficient.

What should businesses think about when considering cloud computing? 

Ask yourself exactly what it is you want out of the cloud, what are your needs, what do you want to accomplish and what you will use it for. Then look for a data center company to meet those requirements.

Outsourcing to cloud computing can lower your costs and allow your company to focus on its strengths, knowing the rest is being taken care of up in the cloud.

Pervez Delawalla is president and CEO of Net2EZ. Reach him at (310) 426-6700 or pervez@net2ez.com.

Insights Technology is brought to you by Net2EZ

 

 

Over the past few years, employees have been trading in company-issued phones and bringing their own personal devices — phones and tablets — to connect to work servers. They want to carry a single device to access both work and personal material.

“Many companies have said there are enough people doing this that they no longer need to issue phones. They can just allow everyone to bring their own phones and connect them into the environment,” says Brian Thomas, partner in IT advisory services at Weaver.

However, the bring your own device (BYOD) trend comes with risks that companies need to recognize.

Smart Business spoke with Thomas about BYOD and practical steps to lessen risks.

How is the BYOD trend developing?

This is a strong trend among midsize businesses. As for the Fortune 500 organizations, it depends on the nature of the business. If a company has a lot of sensitive information, it will not necessarily adopt a pure BYOD strategy or will do so with an abundance of caution. Large corporations have information security departments that have been quick to identify the risks. In midsize organizations, there are simply not as many people to force a discussion about risk. Regardless, this is a broad trend that affects many businesses.

What are some of the risks?

The two primary areas of concern are physical access and the users themselves.

The No. 1 risk with mobile devices is that it’s not a matter of if they get lost, but when. If companies enable these devices to connect and receive company data, some of which will stay on the phone, then how do they protect that data when the device is lost and presumed to be in the hands of someone else? The primary methods for mitigating this risk are encrypting the phone’s contents, setting passwords to prevent unauthorized access and remote-wipe features that enable the company to delete the phone’s contents once lost. However, this is complicated in a BYOD scenario because users can connect a multitude of devices to the network, some of which will not support all of these features.

The reason users are a concern with BYOD is because they are often unaware of the risks associated with their mobile device activities. Because they own the phone, they may feel entitled to do with it as they please, including removing security features.

Do certain devices make companies more vulnerable to these risks?

In some ways, yes. The iPhone, for example, is a phone manufactured by one company with one operating system. There are multiple versions, but the uniformity of the product makes it simpler to manage and secure. In the Android world, vulnerabilities are more case-by-case. Similar to Windows PCs, anybody can manufacture the Android phones, and the operating system has to be reconfigured to work with different devices. As a result, updates to address vulnerabilities cannot always quickly be distributed by manufacturers and carriers.

What can be done to manage the risks?

A combination of training and technology can be used to reduce the risks associated with BYOD.

Companies must educate employees about the responsibility they bear when accessing company data on their personal devices. Employees must also be educated about the risks associated with disabling security features, jailbreaking their phone, downloading apps from unknown sources, using open wireless connections and other activities that can compromise security. Employees need to understand that using their personal devices for work purposes requires them to give up a certain amount of freedom. Companies can have employees sign a contract that outlines the rules and consequences for violations, along with the company’s right to remove company data from the phone at any time.

Companies should use technology to enforce a central policy that applies minimum security standards on devices. Many companies implement mobile device management solutions, which assist with enforcing security polices to address the risks associated with lost or stolen phones.

Finally, this is a fast-changing technology area, so companies should always keep an eye on what’s new and assess how it affects their organizations.

Brian Thomas is a partner in IT advisory services at Weaver. Reach him at (713) 800-1050 or brian.thomas@weaverllp.com.

Blog: To stay current on audit, tax and advisory issues that may impact your business, visit Weaver’s blog.

Insights Accounting is brought to you by Weaver

 

Interaction with an employee forms the basis for a customer’s perception about a company, which makes customer service a great opportunity to showcase the company’s brand, says Jo Ann Lofton, senior vice president, retail executive, Cadence Bank.

“It’s all about knowing your customer — they trust you and you trust them. That’s the basis of a good relationship,” she says.

Smart Business spoke with Lofton about best practices for good customer service.

What is the value of good customer service?

Good customer service creates loyalty, generates customer retention and ultimately brings in revenue. It also creates an avenue for referrals. Word-of-mouth endorsements are extremely important, especially when based on a strong and proven relationship. Creating that is an exception and people talk about exceptions.

What are the top elements of high-quality customer service?

Listen and get to know your customers and what’s important to them. It’s critical that you understand the customer’s concerns in order to offer help and solutions.

Employ people who like people, have good judgment skills and an innate desire to help others. Make sure employees have the attitude that you want projected. If there’s friction in the office, call the staff together, acknowledge it and find solutions to create a positive atmosphere. It’s amazing how a friendly and peaceful office will give energy to customers who call or walk in.

Train your people diligently. They need to know exactly what’s expected of them, both with external customers and co-workers. They must have the tools and the authority to bring about swift solutions to problems, and they should be acknowledged for good performance.

Be responsive, whether by email, phone or to a customer in front of you. It’s unacceptable not to respond. Even if you don’t have an answer or solution, you can thank them, tell them you’re looking into it and promise to get back in a timely manner.

Finally, honor what you promise the customer. Customer relationships are built on trust, respect and integrity. These qualities determine the strength of your relationship and give the customer confidence in the decisions that are being offered. You have to know when to be flexible to meet a need. Customers relate your resolve and decision-making ability to their overall impression of the company, and that can have a lasting impact.

How do you instill a culture of service excellence?

A service-centered culture begins with a leadership team committed to a philosophy that advocates exceptional service and employees who are deeply dedicated to fulfilling that promise.

It’s also essential to know your target market and how to respond to them. Different cultures, for example, have specific expectations that may call for distinctive interaction in certain situations. Understand the differences and what’s important to each culture, and see how you can meet the needs of those customers with the resources you have available.

What are some lessons you’ve learned from disgruntled clients?

The greatest lesson is to know that you can help resolve any issue by listening, staying calm, and using common sense and good judgment when offering solutions. And remember it’s not just what you say, but how you say it — your body language speaks volumes.

If what you’ve proposed does not work for the client, work with him or her to devise an agreeable and suitable solution that meets his or her needs, and then take action immediately. Most importantly, take the opportunity to learn from the experience and make improvements.

What would you consider an out-of-the-box convenience to offer customers?

It doesn’t have to be dramatic. If you have conference rooms, you can offer them to good customers. You can invite customers to have lunch with the chairman, and have an open discussion on the economy and what’s happening. It’s more than just taking on a little inconvenience in the hopes that maybe you’ll get something out of it. If you really want to help them they will sense that.

Jo Ann Lofton, is senior vice president, retail executive, at Cadence Bank. Reach her at (713) 807-1336 or joann.lofton@cadencebank.com.

Cadence Bank offers a host of resources for small businesses through all of its branches. Find the nearest location.

Insights Banking & Finance is brought to you by Cadence Bank

 

 

Businesses with 50 or more employees are weighing whether to continue offering health insurance in 2014, or not. Every situation is different, and companies are working to apply the required coverage provisions, or employer mandate, to determine its impact.

“I haven’t seen many companies finalize that decision yet. I think people are still processing it,” says Richard Croghan, tax partner at Moss Adams LLP. “It will take a few years to work itself out.”

However, he says it’d be surprising if many companies stopped offering health insurance, at least initially.

“Companies don’t want to be an outlier,” he says.

Smart Business spoke with Croghan about the impact of health care reform and how companies are deciding if they will continue to offer health insurance.

How do you know if you’re a small or large company, and why does it matter?

It has to do with the number of full-time equivalent employees, which is based upon the number of employees working more than 30 hours. If you have 50 or more full-time equivalent employees, then the pay or play provision will impact your company in 2014. You have to provide qualified coverage or be subject to certain penalties.

How is pay or play impacting large employers?

Companies currently are deciding whether it’s cheaper to pay the penalty rather than provide health insurance coverage. However, it’s not just a cost-benefit analysis of the penalty versus the cost of coverage; businesses need to consider the non-financial impacts, such as their ability to recruit and retain people. In San Francisco and the Bay Area, there is always competition for good employees, so companies are pretty cognizant of doing the right things to attract and retain personnel.

It also depends on the industry. Some, like retail, have thin profit margins, which may make the decision more focused on the economics.

How do the health care exchanges and the uncertainty surrounding them play into this?

That’s partially holding up some of the final decisions because people don’t know what the exchanges are going to look like and what will be the costs. In some situations, it may make sense not to offer health insurance, especially if the exchange cost-effectively offers good, comparable coverage. They’re also not sure how the overall cost of health insurance will be impacted once these exchanges are up and running, and if there will be more competition for health insurance coverage.

What challenges are accounting and HR departments facing?

There has been confusion with the full-time equivalent employee calculations. If you have people working 32 hours a week, you don’t have to count each as one full-time equivalent employee.

It’s even more complicated if you have someone working full-time and then part-time for a few months, before coming back to full-time. Perhaps your business has seasonal needs or this is necessary because of an individual’s specific situation. The detailed recordkeeping and administration is causing a lot of questions and headaches. Additionally, there are specific rules about when you need to start covering new hires.

How are businesses handling tracking these concurrent tests?

Large companies are better off because they usually have HR departments that are well versed in all the intricacies. However, midsize companies with more than 50 full-time employees that aren’t large enough to support a full HR department are getting squeezed. One solution to handling the complicated record requirements is investing in some of the outsourced HR solutions that are gearing up to assist these companies.

What about small employers that don’t need to worry about pay or play?

Some with 25 or fewer employees have been taking advantage of tax credits. These will continue in 2014 with the exchanges. For example, in 2014, employers with 10 or fewer employees receive a 50 percent tax credit for the employer contribution when employers purchase coverage for their employees.

Richard Croghan is a tax partner with Moss Adams LLP. Reach him at (415) 677-8282 or richard.croghan@mossadams.com.

In 2002, President George W. Bush signed the Terrorism Risk Insurance Act (TRIA) requiring insurance carriers and the federal government to establish a risk-sharing partnership for future losses. It was created as a result of 9/11 as a temporary measure to allow time for insurance carriers to develop their own solutions. Originally set to expire in 2005, the act has been extended twice, and will now expire in 2014.

“The private markets alone cannot and will not provide the level of terrorism insurance our economy demands,” says Shelley White, assistant vice president at SeibertKeck. “The threat of terrorism has become a greater concern for businesses in today’s uncertain and rapidly evolving global climate. It should continue to be part of a comprehensive risk management program.”

Smart Business spoke with White about terrorism coverage today and where problems still occur.

Why was the TRIA created and how does it work?

For property and casualty insurers, 9/11 losses paid out a reported $40 billion from property, business interruption, aviation, workers’ compensation, liability and life insurance lines. As the largest disaster in the industry’s history, carriers were reluctant to continue providing coverage. State regulators agreed to allow carriers to exclude terrorism from policies, and coverage was soon unavailable or extremely expensive.

The TRIA was created as a temporary federal program of shared public and private compensation for insured losses to allow the private market to stabilize, protect consumers by ensuring the availability and affordability of insurance for terrorism risks, and preserve state regulation of insurance. Carriers set the price of coverage within the limits imposed by regulations.

With the federal backstop in place, commercial lines policyholders could choose to purchase or reject terrorism coverage from existing insurance programs; the program doesn’t extend to personal lines policyholders. This offer continues today with most coverage lines, except workers’ compensation policies where insurers and qualified self-insured employers cannot exclude terrorism coverage because of lifetime medical care for on-the-job duties.

What changes were made when the program was extended?

In 2007, the government modified and extended the act through Dec. 31, 2014. Several provisions changed, including:

  • Revising the definition of a certified act of terrorism to eliminate the requirement that the individual(s) is acting on behalf of a foreign person or interest. Some property insurers add exclusionary language related to non-certified terrorism coverage.

  • Updating the payout cap to $100 billion per year for insured losses.

  • Requiring the Treasury Department to establish a procedure for allocation of pro-rata payments in the event that a terrorism loss exceeds the cap.

When purchasing terrorism coverage, how much do premiums increase?

The cost for the TRIA on an average risk is usually a single-digit percentage of the policy premium. Higher risk businesses such as financial institutions, real estate, health care and utility companies tend to be in the double-digit percentages.

Many policyholders, regardless of size, continue to decline terrorism coverage — not considering themselves targets. Larger risks often feel the coverage doesn’t provide enough to protect their exposures.

What are some of the continuing problems with terrorism coverage?

It is the insurance industry’s goal to work with Congress on creating terrorism insurance renewal past 2014. Terrorism coverage provides market stability.

There will be a significant effect on real estate lending if this backstop disappears.  Mortgage-backed securities, for example, will be in default. Private markets aren’t able to offer coverage without the federal backstop and cannot offer the level of insurance our economy demands.

The Government Accountability Office is working to assess options and review proposals, and Congress is encouraging greater private market participation. We’re optimistic that a long-term solution will be reached.

Shelley White is an assistant vice president at SeibertKeck. Reach her at (330) 865-6582 or swhite@seibertkeck.com.

 

WEBSITE: To keep up with the latest insurance news and how your company could be impacted, sign up to receive our newsletter.

 

Insights Business Insurance is brought to you by SeibertKeck

In 2002, President George W. Bush signed the Terrorism Risk Insurance Act (TRIA) requiring insurance carriers and the federal government to establish a risk-sharing partnership for future losses. It was created as a result of 9/11 as a temporary measure to allow time for insurance carriers to develop their own solutions. Originally set to expire in 2005, the act has been extended twice, and will now expire in 2014.

“The private markets alone cannot and will not provide the level of terrorism insurance our economy demands,” says Marc McTeague, president of Best Hoovler McTeague Insurance Services, a member of SeibertKeck. “The threat of terrorism has become a greater concern for businesses in today’s uncertain and rapidly evolving global climate. It should continue to be part of a comprehensive risk management program.”

Smart Business spoke with McTeague about terrorism coverage today and where problems still occur.

Why was the TRIA created and how does it work?

For property and casualty insurers, 9/11 losses paid out a reported $40 billion from property, business interruption, aviation, workers’ compensation, liability and life insurance lines. As the largest disaster in the industry’s history, carriers were reluctant to continue providing coverage. State regulators agreed to allow carriers to exclude terrorism from policies, and coverage was soon unavailable or extremely expensive.

The TRIA was created as a temporary federal program of shared public and private compensation for insured losses to allow the private market to stabilize, protect consumers by ensuring the availability and affordability of insurance for terrorism risks, and preserve state regulation of insurance. Carriers set the price of coverage within the limits imposed by regulations.

With the federal backstop in place, commercial lines policyholders could choose to purchase or reject terrorism coverage from existing insurance programs; the program doesn’t extend to personal lines policyholders. This offer continues today with most coverage lines, except workers’ compensation policies where insurers and qualified self-insured employers cannot exclude terrorism coverage because of lifetime medical care for on-the-job duties.

What changes were made when the program was extended?

In 2007, the government modified and extended the act through Dec. 31, 2014. Several provisions changed, including:

  • Revising the definition of a certified act of terrorism to eliminate the requirement that the individual(s) is acting on behalf of a foreign person or interest. Some property insurers add exclusionary language related to non-certified terrorism coverage.

  • Updating the payout cap to $100 billion per year for insured losses.

  • Requiring the Treasury Department to establish a procedure for allocation of pro-rata payments in the event that a terrorism loss exceeds the cap.

When purchasing terrorism coverage, how much do premiums increase?

The cost for the TRIA on an average risk is usually a single-digit percentage of the policy premium. Higher risk businesses such as financial institutions, real estate, health care and utility companies tend to be in the double-digit percentages.

Many policyholders, regardless of size, continue to decline terrorism coverage — not considering themselves targets. Larger risks often feel the coverage doesn’t provide enough to protect their exposures.

What are some of the continuing problems with terrorism coverage?

It is the insurance industry’s goal to work with Congress on creating terrorism insurance renewal past 2014. Terrorism coverage provides market stability.

There will be a significant effect on real estate lending if this backstop disappears.  Mortgage-backed securities, for example, will be in default. Private markets aren’t able to offer coverage without the federal backstop and cannot offer the level of insurance our economy demands.

The Government Accountability Office is working to assess options and review proposals, and Congress is encouraging greater private market participation. We’re optimistic that a long-term solution will be reached.

Marc McTeague is the president of Best Hoovler McTeague Insurance Services, a member of SeibertKeck. Reach him at (614) 246-RISK or mmcteague@bhmins.com.

 

WEBSITE: To keep up with the latest insurance news and how your company could be impacted, sign up to receive our newsletter.

 

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Two-thirds of businesses experienced some type of attempted or actual payment fraud in 2011, according to recent industry surveys, and more than 25 percent of banks are reporting a rise in attempted fraud incidents. Although not all attempts result in financial loss, when they do it’s typically around $20,000.

There’s also reputation risk and extra work when somebody gets account information and starts utilizing it in an inappropriate manner, says Ted Sheerer, Senior Vice President and Group Manager of Cash Management at First Commonwealth Bank.

“Companies need to understand the risks and take them seriously,” he says. “It may cost a little bit and make things slightly less convenient, but they need to do everything necessary to protect their financial assets. They need to take proactive steps and not wait until a loss occurs.”

Smart Business spoke with Sheerer about guarding against corporate financial fraud.

Why has financial fraud increased?

Fraud has increased primarily because of technology — from software that makes it easy to create authentic-looking checks to phishing scams, viruses and malware that can compromise a network and PCs. A company’s financial assets could be more vulnerable today than ever. However, there are ways to substantially reduce risk.

What are some examples of financial fraud?

If a company’s account and routing numbers get compromised, they can become exposed to individuals generating fraudulent checks.  Some businesses, through the utilization of Positive Pay, which matches check issue data, including payee line, with items presented to the bank, can catch this with no financial loss. The bank alerts the business regarding items that do not match, and offers the opportunity to pay or return those checks. Unfortunately, many others wait until they experience a loss before taking steps to implement Positive Pay.

A more current example is corporate account takeover, where a company’s network or specific PCs get infected with a virus or malware, somebody obtains access to the system and then performs keystroke logging. The fraudster can then sometimes capture the necessary credentials to get into the business’s online banking.

How should fraud education be handled?

You can educate employees, especially those conducting company financial transactions, by using the knowledge of your IT staff. If you don’t have an in-house IT staff or want to supplement this education, work with your bank to see if it offers any security or fraud seminars. You also can find local and regional fraud awareness seminars through professional organizations.

How can you prevent or mitigate fraud?

To minimize the potential of check fraud, companies can incorporate security features into their check stock, store checks and digital signatures in a secure environment, segregate financial duties, reconcile accounts regularly, and utilize Positive Pay with payee line protection. If something doesn’t match, the bank alerts the business customer who decides to pay or return it.

With increased electronic fraud, which includes Automated Clearing House (ACH) transactions and wire transfers, it’s important to have ACH block and filter. This stops unauthorized transactions from hitting accounts. Companies should also ask if their bank offers malware detection and/or account takeover detection software. This is sometimes provided for free.

Some other preventative measures are to:

  • Understand procedures around user authentication and limit users to those who absolutely need access.

  • Establish dual verification for any outbound electronic transactions.

  • Have dedicated PCs used only for online banking services.

  • Change passwords regularly, don’t share or write down logins, and routinely update anti-virus and malware protection software.

What’s the priority with fraud prevention?

The priorities should be Positive Pay, ACH block and filter, and then everything the organization can do to protect its network.

Many businesses don’t take the necessary preventative steps. Only when companies seriously understand the risks can they partner with their bank to combat financial fraud.

Ted Sheerer is a senior vice president, group manager of Cash Management at First Commonwealth Bank. Reach him at (412) 690-2213 or tsheerer@fcbanking.com.

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